-----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, MfzWCbpAj7zlJhtrp7QBS+yIRHqpFMqEF11u4uz/61h5z5CBMXROuQhBP5lfL9pj nTSvDdGPfoQSF0aXo4jDFw== 0000912057-00-014405.txt : 20000411 0000912057-00-014405.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014405 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEORX CORP CENTRAL INDEX KEY: 0000755806 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 911261311 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16614 FILM NUMBER: 583035 BUSINESS ADDRESS: STREET 1: 410 W HARRISON ST CITY: SEATTLE STATE: WA ZIP: 98119 BUSINESS PHONE: 206-286-25 MAIL ADDRESS: STREET 1: 410 W. HARRISON STREET 2: 410 W. HARRISON CITY: SEATTLE STATE: WA ZIP: 98119 10-K 1 10-K - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 0-16614 NEORX CORPORATION (Exact name of Registrant as specified in its charter) WASHINGTON 91-1261311 ( State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 410 WEST HARRISON STREET, SEATTLE, WASHINGTON 98119-4007 (Address of principal executive offices) Registrant's telephone number, including area code: (206) 281-7001 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.02 PAR VALUE 9 3/4% CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2014 $2.4375 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, SERIES 1 ---------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the Registrant as of February 28, 2000 was approximately $337.1 million (based on the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market for the last trading date prior to that date). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2000, approximately 21.4 million shares of the Registrant's Common Stock, $.02 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's 2000 Notice of Annual Meeting and Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held on May 25, 2000 are incorporated by reference in Part III of this Form 10-K. - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS FORWARD-LOOKING STATEMENTS This annual report on Form 10-K contains forward-looking statements. These statements relate to future events or future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may, will, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the "Factors Affecting Forward Looking Statements" below. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our expectations. PRODUCTS NeoRx Corporation ("NeoRx" or the "Company") is developing innovative biopharmaceuticals for the treatment of cancer with the twin goals of improving efficacy and reducing toxicities compared to currently available therapies. NeoRx has completed enrollment of Phase I and Phase II trials of its Skeletal Targeted Radiation ("STR") product combined with chemotherapy in patients with multiple myeloma. NeoRx is also developing a proprietary PRETARGET-Registered Trademark- platform for the delivery of therapeutic products to tumor sites. The Company completed a pilot Phase I trial in 1999 using its PRETARGET-Registered Trademark- technology for the treatment of lymphoma. Despite encouraging data that study was curtailed to focus resources on engineering the Company's proprietary fusion protein to be used in its PRETARGET lymphoma product. The Company is currently making additional fusion proteins that may potentially be used to treat cancers other than lymphoma. CANCER AND ITS TREATMENT Cancer is second only to cardiovascular disease as a cause of death in the United States. The American Cancer Society estimates that approximately 1,220,000 new cases of cancer will be diagnosed in the United States in 2000, of which 50% are expected to be tumors of the lung, colon, breast and prostate. Cancer is a large group of diseases characterized by uncontrolled cell proliferation. Cancer cells have the tendency to dislodge from the sites where the tumors originate and metastasize, spreading to other parts of the body, and invading and destroying the organs in which they are growing. 1 Current regimens for the treatment of cancer include surgery, external-beam radiation, chemotherapy, hormone therapy for some tumors and, more recently, certain biological agents such as interferons and antibodies. With some exceptions, chemotherapy is the primary therapy for tumors that have spread throughout the body. However, chemotherapy provides only modest benefits to patients with the most frequently occurring malignancies, such as lung, colon and breast cancers. Generally, relatively low efficacy and considerable toxicity characterize existing cancer therapy for these high-incidence tumors. Chemotherapy drugs are usually administered intravenously so that the drug can circulate throughout the body to reach the metastases. As chemotherapy drugs circulate, they kill cancer cells, but are also toxic to normal cells. Consequently, cancer patients receiving chemotherapy often suffer severe, sometimes life-threatening side effects, such as damage to bone marrow, lungs, heart, kidneys and nerves. Therefore, the optimal drug dose for killing cancer cells must often be reduced to avoid intolerable toxicities. NeoRx believes that improved cancer therapies will arise from one of two approaches: inhibiting a process that is both unique AND critical to the tumor or targeting more generally toxic agents preferentially to tumors. NeoRx focuses on the second approach. Over the course of its history, the Company's scientists have developed expertise and technologies that permit radiation, and other toxic molecules, to be targeted preferentially to tumor cells. SKELETAL TARGETED RADIOTHERAPY (STR) Multiple myeloma is a cancer involving the malignancy of plasma cells, which are found in the bone marrow. Current treatments for this disease have had limited success. With conventional chemotherapy dosing regimens, the complete response rate is about 15% and the median survival about 2-3 years. Over the last decade, high-dose chemotherapy ("HDC") with stem cell transplantation has been shown to be superior to conventional chemotherapy therapy for multiple myeloma. Modern HDC regimens, with or without additional total body external beam radiation ("TBI"), increase the complete response rate to about 30% with a median survival approaching 5 years. TBI reduces the tolerable dose of chemotherapy and increases toxicity, and its role in this disease is currently controversial. STR uses a targeting principle to deliver a beta-emitting radionuclide, holmium-166, to bone where it is designed to destroy both tumor cells and normal cells in the marrow. Prior to therapy the patients' bone marrow cells are harvested, so they can be reinfused following treatment. The Company believes that STR represents the first opportunity in cancer therapy to deliver a high dose of a toxic agent to the bone and marrow cavity without simultaneously causing non-hematologic organ toxicities. The advent of peripheral blood stem cells as a viable, indeed preferred, source for hematologic reconstitution has simplified and reduced the costs of such therapies. The short half-life and high energy of holmium permit rapid stem cell reinfusion and rapid hematologic recovery. In mid-1998 NeoRx began a Phase I study of STR combined with standard therapies in patients with multiple myeloma. In late 1999 the Company conducted a Phase II study combining the top STR dose tested, 40Gy to the marrow, with high dose (200mg/m2) melphalan, a chemotherapy drug. The safety profile appeared promising. There was no toxicity greater than grade II (Bearman scale) in organs outside the bone. Complete ablation of the bone marrow was a goal of the therapy, and was achieved without re-engraftment delay in these patients. The side effects observed were those noted with high dose melphalan alone. There did not appear to be significant toxicity that can, at this point, be ascribed to the addition of STR to high dose melphalan. That result has potential significance for therapy: the ability to add high doses of another therapy without increasing toxicity is one of the interim goals of oncology drug development. Although efficacy was not an endpoint in the Phase I study, patients have also been followed for response. As of the end of 1999, 12 of 27 patients who have been evaluated achieved complete remissions, 2 as defined by the absence of cancer cells in the bone marrow and the elimination of all signs of the characteristic myeloma protein as assessed by sensitive biochemical techniques. Because approximately 6-9 months are required to elapse before a patient's response status can be determined, the efficacy results from Phase II will not be available until mid-2000. The STR Phase III study is expected to be a multi-center, randomized open-label trial, and is targeted to begin later this year. The study has been designed to demonstrate if the addition of STR to high dose therapy will increase the number of complete responses without adding significant toxicity. The goal is to improve patient responses without increasing the side effects associated with high dose therapy. The safety profile from the Phase I-II studies has led researchers to raise the age limit of study participants in the Phase III study. In January 2000, the Company entered into an agreement for Pharmaceutical Product Development, Inc. ("PPD") to monitor the Phase III clinical studies for NeoRx's STR. As part of the agreement, PPD will provide a $5 million credit line to NeoRx to help fund the Phase III pivotal trial. NeoRx will repay any principal and interest for the credit drawn, but it is under no obligation to use the credit line. If the credit line is used, principal and interest is not due until the STR product is approved by the FDA or abandoned by NeoRx. In return for the line of credit, PPD was issued a warrant to purchase NeoRx common stock at a premium to the price on the date of issue. No royalties are included. In February 2000, the Company engaged International Isotopes, Inc. to build a manufacturing facility for its STR product to be used for Phase III clinical trials. As part of the agreement, NeoRx will provide $1.3 million for pilot plant development to International Isotopes to fund the design and construction. International Isotopes will be responsible for all aspects of the manufacturing of STR, including process qualification, quality control, packaging, and shipping, from its Denton, Texas radiopharmaceutical facility. During 2000, the Company intends to explore additional uses for STR in cancer therapy. Most patients with metastatic prostate cancer, for example, have most of their tumor in the bone. For those patients in whom standard therapies with hormones no longer work, tumor in the bone results in pain, declining performance status, and death. The Company believes that administering STR, with or without additional chemotherapy, might cause a regression of the prostate cancer in the bone. A pilot Phase I study to determine the feasibility of this approach is planned for 2000. MARKET OPPORTUNITY There are approximately 15,000 new cases of multiple myeloma annually in North America, and an equal number in Europe. The Company estimates that about half these patients will be inappropriate for its therapy due to overall health status. The Company believes that, at the Multiple Myeloma Workshop that occurred in Stockholm (Sweden) in 1999, the consensus of the experts was that high-dose therapy requiring reinfusion of bone marrow stem cells is the preferred treatment for those multiple myeloma patients who can tolerate it. STR will principally be used in clinical centers conducting stem cell transplants. In North America, the majority of the transplants are performed at approximately 80 transplant centers. NeoRx anticipates that 25% (or twenty) of these centers will participate in the pivotal clinical trials. Thus multiple myeloma represents a concentrated market, allowing a small sales force and focused marketing effort to reach the eighty major transplant centers in the United States. PRETARGET-Registered Trademark- NEORX'S PROPRIETARY DRUG DELIVERY PLATFORM FOR CANCER THERAPIES 3 NeoRx's other cancer therapy program employs proprietary monoclonal antibody-based technology for delivering radiation therapy, and potentially other anti-cancer agents such as drugs, cytokines, etc. Antibodies are proteins produced by certain white blood cells in the body's immune system in response to antigens (foreign substances) such as viruses, bacteria, toxins and specific types of cancer cells. An antibody will recognize and bind specifically only to a single type of antigen. This quality makes antibodies potentially useful as "targeting vehicles" for the delivery of imaging and therapeutic products to disease sites. Radiation is known to kill cancer cells that are exposed to sufficiently large doses. In the conventional approach to radioimmunotherapy ("RIT"), the radiation is linked to the antibody that is then administered to patients. Because the antibody is a large molecule, the antibody and the linked radiation circulate for a long time through the bloodstream before eventually reaching the tumors. This prolonged circulation can cause "innocent bystander" toxicity to normal organs such as the bone marrow. NeoRx's PRETARGET-Registered Trademark- technology takes advantage of the high binding affinity of two molecules: biotin and streptavidin. Since biotin is a small molecule, it travels rapidly through the bloodstream and penetrates the tumor site much faster than a large molecule such as an antibody. As a small molecule it also exits the body rapidly. The problem is that biotin does not bind at the tumor site. If streptavidin could be "targeted" to the surface of a tumor, then the biotin molecules would bind to the streptavidin on the tumor's surface and thus deliver whatever therapeutic molecule it was carrying. With PRETARGET-Registered Trademark- technology, an antibody that will bind to antigen markers on the surface of particular tumor cells is linked to streptavidin. This antibody-streptavidin conjugate (the "conjugate") is then administered to the patient and over a 24-48 hour period will accumulate on the surface of the tumor cells. Since no radiation is attached to the conjugate, there is no "innocent bystander" toxicity during this period of circulation. Depending on the antibody, different tumors will be targeted in different amounts. Because almost all antibodies also bind to some normal tissues, the display of streptavidin on normal tissues will also depend on the particular antibody. Because conjugate continues to circulate, an injection of biotin linked to radiation could first bind to the conjugate in the circulation before reaching the tumor. To reduce the conjugate in the circulation, a "clearing agent" is injected to clear most of the conjugate from the bloodstream to the liver where it is metabolized. The therapy (e.g., radiation) linked to biotin, is then administered to the patient. The biotin-radiation molecule rapidly passes through the bloodstream and attaches primarily to the pre-localized antibody-streptavidin conjugate. The remainder that does not bind to the streptavidin is rapidly eliminated through the kidneys, thereby reducing the radiation dose to the bone marrow and other normal organs resulting from circulating radioactivity. Thus the PRETARGET-Registered Trademark- technology more efficiently locates the radiation on the tumor, reduces "innocent bystander" toxicity, and has allowed higher radiation doses to be safely administered than with conventional RIT. LYMPHOMA: Lymphomas are cancers of the lymph cells in the body, and represent a variety of different disease entities. In general, lymphomas may be divided into Hodgkins Disease and Non-Hodgkins Lymphoma ("NHL"), with the latter further divided into T-cell and B-cell NHL depending on the cell of origin and can form solid tumor masses of the cancerous lymph cells. Most NHLs are derived from B-cells, and thus referred to as B-cell lymphomas. The incidence of B-cell lymphomas is rising (50% in the last fifteen years) due in part to the improved longevity of patients with AIDS and to the aging of the population. There is common consensus that the low and intermediate-grade lymphomas are generally responsive to chemotherapy and that these diseases represent the majority of the lymphoma cases. However, while responsive to chemotherapy, low-grade lymphomas are rarely cured and intermediate-grade lymphomas that are not cured by intensive chemotherapy (~50%) are also rarely cured. Therefore the need exists for additional and improved therapies. 4 Patients with recurrent low-grade lymphoma treated at the Fred Hutchinson Cancer Research Center and the University of Washington using conventional radioimmunotherapy (RIT) at doses requiring a bone marrow transplant demonstrated a very high complete response rate (~80%) with long median duration of response. The Company believes its PRETARGET-Registered Trademark- technology might be able to deliver high tumor doses without requiring a bone marrow transplant. If so, this would constitute a major improvement in both the treatment and cost of treatment for this disease. The Company began a project to create a product for the treatment of lymphoma. The first study aimed to establish proof of concept in the clinic by employing a known antibody and comparing results with literature reports of the conventional approach. Company scientists constructed a conjugate using an approved lymphoma antibody marketed by another company, and, began accruing patients for dosimetry. Dosimetry, while not providing a therapeutic benefit, allows the estimation of how much radiation is delivered to tumor and normal organs using weak forms of radiation that can be counted by cameras but do not usually result in tumor regressions or side effects (imaging radionuclides). The results thus far have been encouraging, with most patients demonstrating improved tumor:normal organ ratios compared to the conventional approach as reported in the literature. Better tumor:normal organ ratios are believed to correlate with the ability to deliver higher doses safely. Because of these results, the Food and Drug Administration granted permission to administer therapeutic radiation doses along with the imaging radionuclides used in the dosimetry study. Because NeoRx did not own the antibody portion of this product, the intent was only to demonstrate that the PRETARGET-Registered Trademark- technology permitted the safe administration of higher radiation doses, and that tumor regressions could be achieved. The Company completed its treatment of a cohort of 7 patients. All those patients received higher doses than a major competitor's product's maximum tolerated dose using the same radionuclide. Despite these high doses, the toxicity profile suggested that the treatments were well-tolerated. Six of the patients showed some evidence of tumor regression, and 3 of those patients were judged to have achieved a complete remission. Two of those 3 patients had previously failed high dose therapy and bone marrow transplantation. In February 2000, NeoRx Corporation was awarded a Small Business Innovative Research ("SBIR") grant from the National Cancer Institute. The grant, which could be for as much as $950,000, will be used to bring to trial NeoRx's PRETARGET-Registered Trademark--Lymphoma product. In Phase I of the grant, titled "Pretargeted Radioimunotherapy to Treat Non-Hodgkin's Lymphoma (NHL)" NeoRx will demonstrate the use of a genetically engineered protein to target a radionuclide to a human lymphoma tumor growing in a mouse. Funding of Phase II portion of the grant, which provides for clinical studies, is expected to begin in the second or third quarter of 2000, pending successful completion of Phase I. 5 APPLYING THE PRETARGET-Registered Trademark- TECHNOLOGY TO CARCINOMAS Carcinomas (cancers of organs such as lung, colon, breast, prostate, pancreas, etc.) comprise the vast majority of invasive cancers, although they are less sensitive to radiation than lymphoma. The Company began its application of PRETARGET-Registered Trademark- technology by using an antibody directed at these tumors with the AVICIDIN-Registered Trademark- product. AVICIDIN-Registered Trademark- completed the Phase I clinical trials in 1997. Previous preclinical and clinical trials have demonstrated that, compared to conventional RIT, the maximum tolerated dose ("MTD") for AVICIDIN-Registered Trademark- is more than 5-fold what the Company believes to be the MTD of conventional therapy using yttrium-90. It is generally held that the more radiation to which the tumor is exposed, the more likely the tumor is to regress and the longer that the tumor regression will last. In the Phase I trials tumor regression was observed in some patients following a single AVICIDIN-Registered Trademark- dose, including patients with advanced, bulky tumors. The dose-limiting toxicity determined in the Phase I trials was exhibited by diarrhea that the Company believes is caused by binding of some of the antibody to the large intestine. This toxicity was found to be dose-limiting in the Phase II trials that were then halted. The Company believes, however, that the "Pretarget principle" was demonstrated in these patients with carcinomas, just as it has been in the lymphoma patients, so that antibodies that did not target the intestine, for example, would have an improved safety profile that might enable higher doses to be administered safely. During 1999 the Company began acquiring a library of antibodies to select a more appropriate targeting agent, or agents, to treat these carcinomas. These AVICIDIN-Registered Trademark- trials were conducted with a murine antibody. During these trials the product evoked an immune response. Because human anti-mouse antibodies ("HAMA") are usually created when a murine antibody is used, only one dose of AVICIDIN-Registered Trademark- was administered to each patient. The Company believes that a product that can be administered more than once to each patient is more likely to achieve a greater rate of response as well as more significant responses than a product that is given only once. The Company is currently studying means of reducing the immune response to streptavidin so that multiple doses might be administered. During 1998, NeoRx scientists developed a genetically engineered targeting molecule ("fusion protein") with two functional binding capacities, one for tumor and the other for biotin. During 1999 Company scientists refined and further developed this technology to make it more generally applicable and commercially feasible. A fusion protein of a proprietary lymphoma antibody has been constructed, and the Company received an SBIR grant from the National Cancer Institute to develop and move that molecule into clinical trials. NeoRx has also tested the delivery of additional therapeutic products such as other forms of radiation and immune response modifiers (e.g., tumor necrosis factor). The PRETARGET-Registered Trademark- platform may offer the first practical opportunity to deliver alpha emitters, a form of radiation significantly more potent than yttrium-90, effectively and safely to solid tumors. OTHER PROGRAMS Scientists at University of Cambridge in the United Kingdom ("Cambridge"), working with NeoRx, discovered that patients with advanced coronary artery disease have low levels of active TGF(beta), a protein that regulates the growth of certain cell types such as those found in the lining of arteries. They have reported that segments of arteries prone to atherosclerosis are low in active TGF(beta) and that agents that elevate active TGF(beta) can prevent the development of lesions in arteries of a mouse animal model that express the human 6 apo(a) gene associated with atherosclerosis lesions in humans. NeoRx is the exclusive assignee of the rights of its Cambridge collaborators to this technology. A Phase I dosing study has been conducted to determine the safety and the appropriate dose of a drug molecule of this class in patients with advanced coronary artery disease. Results of the study demonstrated improvements in a number of parameters believed to be risk factors for coronary artery disease. This drug had been provisionally licensed from a third party with each party retaining the right to cease development after the study. The Company is discussing with that third party a suitable arrangement under which further development of the drug for cardiovascular indications might be undertaken. There can be no guarantee, however, that that discussion will be successful. NeoRx explored in 1999 a program to develop chemokine inhibitors (Chemotides-TM- technology). The goal was to demonstrate sufficiently compelling data to attract a commercial partner. Although some of the early data appeared to be exciting, no commercial partner was secured, and NeoRx decided to cease its activities in this field to focus on its later stage oncology programs. PATENTS AND PROPRIETARY RIGHTS The Company's policy is to protect its proprietary technology aggressively. It has filed applications for U.S. and foreign patents issued in its portfolio, covering numerous aspects of its technology. The Company currently has in excess of 100 issued and allowed U.S. patents. NeoRx has been awarded 24 U.S. patents related to its PRETARGET-Registered Trademark- technology, and has additional U.S. and foreign applications pending. The Company also is the exclusive licensee of Stanford University patents issued in the U.S., Europe and Japan related to the underlying technology used in NeoRx's PRETARGET-Registered Trademark- products. NeoRx holds 8 issued U.S. patents, with additional U.S. and foreign applications pending, relating to the use of a class of compounds and TGF(beta) elevating agents to treat cardiovascular indications. NeoRx is also the exclusive assignee of the rights of its Cambridge collaborators to this technology. There can be no assurance that any of the pending or future applications of the Company or its collaborators will result in issued patents. Moreover, there can be no assurance that the patents owned by or licensed to the Company will provide substantial protection or commercial benefit. In addition to patent protection, the Company relies upon trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive position. There can be no assurance that others will not acquire or independently develop the same or similar technology, or that the Company's issued patents or those it has licensed will not be circumvented, invalidated or rendered obsolete by new technology. Moreover, there can be no assurance that others will not gain access to the Company's proprietary technology, or disclose such technology, or that the Company can meaningfully protect its rights in such unpatented proprietary technology. The rapid rate of development and the intense research efforts throughout the world in biotechnology, the significant lag time between the filing of a patent application and its review by appropriate authorities and the lack of significant legal precedent involving biotechnology inventions make it difficult to predict accurately the breadth or degree of protection that patents will afford the Company's or its licensees' biotechnology products or their underlying technology. It is also difficult to predict whether valid patents will be granted based on biotechnology patent applications or, if such patents are granted, to predict the nature and scope of the claims of such patents or the extent to which they may be enforceable. 7 Under U.S. law, although a patent has a statutory presumption of validity, the issuance of a patent is not conclusive as to validity or as to the enforceable scope of its claims. Accordingly, there can be no assurance that the patents owned or licensed by the Company will not be infringed or designed around by others or that others will not obtain patents that the Company would need to license or design around. It is the Company's policy to respect the valid patent rights of others. NeoRx has obtained patent licenses from various parties covering technologies relating to its products. The Company expects to enter into additional license agreements in the future with third parties for technologies that may be useful or necessary for the development and or manufacture of the Company's products. The Company anticipates that such licenses, if any, will be available on commercially reasonable terms. However, there can be no assurance that such licenses, if required, will be available on acceptable terms, if at all. If such licenses are not available, there can be no assurance that the Company will be able to design around necessary technology patented by others in a cost-effective manner, if at all, or that such design will not infringe the rights held by others to the patented technology. COMPETITON NeoRx faces significant competition from emerging companies and established biotechnology, pharmaceutical and chemical companies. Many emerging companies have corporate partnership arrangements with large, established companies to support research, development and commercialization efforts of products that may be competitive with those being developed by the Company. In addition, a number of established pharmaceutical companies are developing proprietary technologies or have enhanced their capabilities by entering into arrangements with, or acquiring, companies with proprietary monoclonal antibody-based technology or other technologies applicable to cancer therapy. Many of the Company's existing or potential competitors have or have access to substantially greater financial, research and development, marketing and production resources than those of the Company. The Company's cancer therapy products under development are designed for the treatment of metastatic cancer or where there is a very high statistical risk that the cancer has spread. The Company anticipates that the principal competition in this type of cancer treatment will come from existing chemotherapy, hormone therapy and biological therapies that are designed to treat the same cancer stage. Other companies may develop and introduce products and processes competitive with or superior to those of the Company. Further, the development by others of new cancer treatment. Disease treatment products or prevention products could render the Company's technology and products under development less competitive, uneconomical or obsolete. Timing of market introduction and health care reform, both uncertainties, will affect the competitive position of the Company's products. The Company believes that competition among products approved for sale will be based, among other things, on product safety, efficacy, reliability, availability, third party reimbursement, price, and patent protection. GOVERNMENT REGULATION AND PRODUCT TESTING The manufacture and marketing of the Company's proposed products and its research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and other countries. In the United States, drugs and biologics 8 are subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act of 1976, as amended, and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. Product development and approval within this regulatory framework take a number of years to accomplish and involve the expenditure of substantial resources. The steps required before a pharmaceutical product may be marketed in the United States include (i) preclinical laboratory tests, IN VIVO preclinical studies and formulation studies, (ii) the submission to the FDA of an Investigational New Drug Application ("IND"), which must become effective before clinical trials can commence, (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug, (iv) the submission of a Biologic License Application ("BLA") or New Drug Application ("NDA") to the FDA, and (v) FDA approval of the BLA or NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug-manufacturing establishment must be registered with, and inspected by, the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with current Good Manufacturing Practice ("cGMP") regulations enforced by the FDA through its facilities inspection program for biologics, drugs and devices. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in such countries under reciprocal agreements with the FDA. Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as animal studies, to assess the potential safety and efficacy of the product. Laboratories that comply with the FDA regulations regarding Good Laboratory Practice must conduct preclinical safety tests. The results of the preclinical studies are submitted to the FDA as part of an IND and are reviewed by the FDA prior to commencement of clinical trials. Unless the FDA provides comments to an IND, the IND will become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in the FDA authorization to commence clinical trials. Clinical trials involve the administration of the investigational new drug to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with the FDA's Protection of Human Subjects regulations and Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent Institutional Review Board ("IRB") at the institution where the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Clinical trials are typically conducted in three sequential Phases, but the Phases may overlap. In Phase I, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited patient population to (i) determine the efficacy of the drug for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) identify possible adverse effects and safety risks. When a compound is found to have potential efficacy and to have an acceptable safety profile in Phase II clinical trials, Phase III clinical trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites. With respect to any of the Company's products subject to such trials, there can be no assurance that Phase I, Phase II or Phase III clinical trials will be completed successfully within any specific time period, if at all. Furthermore, the Company or the FDA may suspend clinical trials at any time if it is determined that the subjects or patients are being exposed to an unacceptable health risk. 9 The results of the pharmaceutical development, preclinical studies and clinical trials are submitted to the FDA in the form of a BLA or NDA for approval of the marketing and commercial shipment of the drug. The testing and approval processes are likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny a BLA or NDA if applicable regulatory criteria are not satisfied, may require additional testing or information, or may require postmarketing testing and surveillance to monitor the safety of the Company's products if it does not view the BLA or NDA as containing adequate evidence of the safety and efficacy of the drug. Notwithstanding the submission of such data, the FDA may ultimately decide that the application does not satisfy its regulatory criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for BLA or NDA approval is the requirement that the prospective manufacturers' quality control and manufacturing procedures conform to cGMP. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance. EMPLOYEES As of February 19, 2000, the Company had 56 full-time employees and 11 part-time employees, 13 of whom hold Ph.D. degrees and 4 of whom hold M.D. degrees. Of this number, 42 employees were engaged in research, development and manufacturing activities and 14 were employed in general administration. The Company considers its relations with its employees to be good. None of the Company's employees is covered by a collective bargaining agreement. FACTORS AFFECTING FORWARD LOOKING STATEMENTS NEED FOR ADDITIONAL FINANCING The Company has been unprofitable since inception and expects to incur additional operating losses over the next several years. Based on the Company's current operating plan, the Company believes that its working capital will be sufficient to satisfy its capital requirements through at least the second quarter of 2001. This belief is based on certain assumptions and there can be no assurance that such assumptions will prove to be correct. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Substantial additional capital will be required for the Company's operations. The Company intends to seek additional financing, which may take the form of public or private financings, including equity financings, which would be dilutive to existing shareholders, and through other arrangements, including relationships with corporate partners for the development of certain of the Company's products. There can be no assurance that the Company will be able to obtain such additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. If adequate funds are not available, the Company may be required to 10 delay, reduce or eliminate expenditures for certain of its programs or products or to enter into relationships with corporate partners to develop or commercialize products or technologies that the Company would otherwise seek to develop or commercialize itself. NO ASSURANCE THAT PRODUCTS WILL BE SUCCESSFULLY DEVELOPED The Company's realization of its long-term potential will be dependent upon the successful development and commercialization of products currently under development. There can be no assurance that these products will be developed successfully or receive regulatory approval. Furthermore, there can be no assurance that these products, if developed and approved, can be successfully manufactured in quantities necessary for commercialization or that such products will receive market acceptance. UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING Before obtaining regulatory approvals for the commercial sale of any of the Company's potential products, the products will be subjected to extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. Results of initial preclinical and clinical testing of products under development by the Company are not necessarily indicative of results that will be obtained from subsequent or more extensive preclinical and clinical testing. Furthermore, there can be no assurance that clinical trials of products under development will be completed or will demonstrate the safety and efficacy of such products at all, or to the extent necessary to obtain regulatory approvals. Companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of such products. The rate of completion of clinical trials depends on, among other factors, the enrollment of patients. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study, and the existence of competitive clinical trials. Delays in planned patient enrollment in the Company's current clinical trials or future clinical trials may result in increased costs, program delays or both. GOVERNMENTAL REGULATIONS: NO ASSURANCE OF PRODUCT APPROVAL The manufacture and marketing of the Company's proposed products and its research and development activities are subject to regulation for safety, efficacy and quality by numerous government authorities in the United States and other countries. Clinical trials, manufacturing, and marketing are subject to the rigorous testing and approval processes of the FDA and equivalent foreign regulatory authorities. Clinical trials and regulatory approval can take a number of years to accomplish and require the expenditure of substantial resources. There can be no assurance that clinical trials will be started or completed successfully within any specified time period. Delays in approval can occur for a number of reasons, including the Company's failure to obtain necessary supplies of finished products, monoclonal antibodies or other materials or to obtain a sufficient number of available patients to support the claims necessary for regulatory approval. There can be no assurance that requisite FDA approvals will be obtained on a timely basis, if at all, or that any approvals granted will cover all the clinical indications for which the Company may seek approval. Delays or failure to obtain regulatory approval would adversely affect or prevent the marketing of products developed by the Company and its ability to receive royalty or other product revenues. The manufacture and marketing of drugs are subject to continuing FDA review and later discovery of previously unknown problems with a product; manufacturer or facility may result 11 in restrictions, including withdrawal of the product from the market. Marketing the Company's products abroad will require similar regulatory approvals and is subject to similar risks. In addition, federal and state agencies and congressional committees have expressed interest in further regulation of biotechnology. The Company is unable to estimate the extent and impact of regulation in the biotechnology field resulting from any future federal, state or local legislation or administrative action. For clinical investigation and marketing outside the United States, the Company or its collaborative partners also are subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely for European countries both within and outside the European Community. DEPENDENCE ON OTHERS FOR COMMERCIAL MANUFACTURING AND MARKETING In February 2000, the Company engaged International Isotopes, Inc. to build a manufacturing facility for its STR product for Phase III clinical trials. International Isotopes will be responsible for all aspects of the manufacturing of STR, including process qualification, quality control, packaging, and shipping, from its Denton, Texas radiopharmaceutical facility. There can be no assurance that International Isotopes, Inc. will be able to perform its contractual responsibilities successfully. There can be no assurance that the Company will be able to negotiate additional manufacturing or collaborative arrangements in the future. The Company also has no experience in commercial manufacturing, sales, marketing or distribution. In most cases, the Company's strategy for commercialization of its potential products requires entering into various arrangements with corporate collaborators, licensors, licensees and others to manufacture, distribute and market such products; the Company will depend on the successful performance of these third parties. Although the Company believes that parties to its existing and any future arrangements will have an economic incentive to perform their contractual responsibilities successfully, these activities will not be within the Company's control. There can be no assurance that such parties will perform their obligations, that the Company will derive any revenues from such arrangements, or that the Company's reliance on others for manufacturing products will not result in unforeseen problems with product supply. DEPENDENCE ON SUPPLIERS The Company depends on the timely delivery from suppliers of certain materials and services. In connection with its research, preclinical studies and clinical trials, the Company has periodically experienced interruption in the supply of monoclonal antibodies. Interruptions in these and other supplies could occur in the future. The Company, or its partners, will need to develop sources for commercial quantities of Holmium-166 and Yttrium-90, the radionuclides used in its proposed cancer therapeutic products, for the bone seeking agent used in its STR product, for the antibody, streptavidin and clearing agent used in its PRETARGET-Registered Trademark- products and for a drug molecule suitable for TGF(beta) activation. There is no assurance that the Company or its partners will be able to develop such sources. VOLATILITY OF COMMON STOCK PRICE There has been a history of significant volatility in the market prices of securities of pharmaceutical and biotechnology companies, including the common stock of the Company, and it is likely that the market price of the common stock will continue to be highly volatile. Announcements by the Company or its competitors concerning acquisitions, technological innovations or new commercial products, results of 12 clinical trials, developments concerning patents, proprietary rights and potential infringement, and the expense and time associated with obtaining government approvals for marketing of its products may have a significant effect on the Company's business and on the relative market price of the Company's common stock. In addition, public concern as to the safety of products developed by the Company or others, comments by securities analysts and general market conditions may have a significant effect on the market price of the common stock. The realization of any of these risks could have a material adverse impact on the market price. RISKS ASSOCIATED WITH RELATIONSHIPS WITH CORPORATE PARTNERS The Company has, in the past, entered into relationships with corporate partners for the development, marketing, manufacture and distribution of products under development and intends to enter into additional relationships with corporate partners for the development of certain of the Company's products. These relationships may also include the performance by these corporate partners of marketing, manufacture or distribution obligations for these products, among other things. These relationships involve certain risks. These relationships depend on the achievement of research and clinical objectives by the Company and these corporate partners, as well as the financial, competitive, marketing and strategic considerations of these corporate partners, which are beyond the Company's control. These considerations may include the relative advantages of alternative products being marketed or developed by others, including relevant patent and proprietary positions. As such, these relationships may be terminated prior to the successful development of any of the Company's products that are the subject of these relationships. In addition, there can be no assurance that the interest and motivations of the Company's corporate partners are, or will remain, consistent with those of the Company, that such corporate partners will successfully perform their development, marketing, manufacturing or distribution obligations or that such current or future relationships with corporate partners will continue. The Company has received payments under these relationships from these corporate partners, which the Company has used to fund its operations. There can be no assurance that the Company will be able to attract and successfully negotiate additional relationships with corporate partners in the future, that these relationships will be acceptable or advantageous to the Company or that any of the current or future relationships will be successful. The absence, suspension or termination of current or future relationships with corporate partners could have a material adverse effect on the development of the Company's products and could result in the loss of material revenues to the Company, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. TECHNOLOGICAL CHANGE AND COMPETITION The competition for development of cancer therapies is intense. There are numerous competitors developing products to treat each of the diseases for which the Company is seeking to develop products. Some competitors have adopted product development strategies targeting cancer cells with monoclonal antibodies. Many emerging companies have corporate partnership arrangements with large, established companies to support research, development and commercialization efforts of products that may be competitive with those being developed by the Company. In addition, a number of established pharmaceutical companies are developing proprietary technologies or have enhanced their capabilities by entering into arrangements with, or acquiring, companies with proprietary monoclonal antibody-based technology or other technologies applicable to the treatment of cancer. Many of the Company's existing or potential competitors have or have access to substantially greater financial, research and development, marketing and production resources than those of the Company and may be better equipped than NeoRx to develop, manufacture and market competing products. The Company's competitors may have, or may 13 develop and introduce, new products that would render the Company's technology and products under development less competitive, uneconomical or obsolete. TECHNOLOGICAL UNCERTAINTIES REGARDING HUMAN IMMUNE RESPONSE TO FOREIGN PROTEINS The Company plans to use monoclonal antibodies coupled to streptavidin (a protein of bacterial origin) in its PRETARTET-Registered Trademark- cancer therapy products. These molecules appear as foreign proteins to the human immune system that develops its own antibody in response. The Company plans to use humanized antibodies, where needed, to minimize the "human anti-mouse antibody" (HAMA) response which otherwise might restrict the number of doses that can be safely or effectively administered, thus limiting the product's efficacy. The "human anti-streptavidin antibody" (HASA) response may also limit the number of doses. The Company believes that modifying streptavidin may reduce HASA. Although the Company may utilize humanized antibodies and is modifying streptavidin, there can be no assurance that either would reduce the extent to which HASA and HAMA may limit the effectiveness of the Company's cancer therapy products. The Company believes that its fusion protein may reduce the immune response to streptavidin. UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS The patent position of biotechnology firms is generally highly uncertain and involves complex legal and factual questions. Currently, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology patents. Products and processes important to NeoRx are subject to this uncertainty. Accordingly, there can be no assurance that the Company's patent applications will result in additional patents being issued or that, if issued, patents will afford protection against competitors with similar technology. There can also be no assurance that any patents issued to the Company will not be infringed by or designed around by others or that others will not obtain patents that the Company would need to license or design around. Moreover, the technology applicable to the Company's products is developing rapidly. Research institutes, universities and biotechnology companies, including the Company's competitors, have filed applications for, or have been issued, numerous patents and may obtain additional patents and proprietary rights relating to products or processes competitive with or relating to those of the Company. The scope and validity of such patents, the extent to which the Company may be required to obtain licenses thereunder or under other proprietary rights and the cost and availability of licenses, are unknown. To the extent licenses are required, there can be no assurance that they will be available on commercially reasonable terms, if at all. The Company also relies on unpatented proprietary technology. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques, that others will not otherwise gain access to the Company's proprietary technology or disclose such technology, or that the Company can meaningfully protect its rights in such unpatented proprietary technology. RISK OF PRODUCT LIABILITY The testing, manufacturing, marketing and sale of human healthcare products under development by the Company entail an inherent risk that product liability claims will be asserted against the Company. Although the Company is insured against such risks up to a $10 million annual aggregate limit in connection with clinical trials and commercial sales of its products under development, there can be no assurance that the Company's present product liability insurance is adequate. A product liability claim in excess of the Company's insurance coverage could have a material adverse effect on the Company and 14 may prevent the Company from obtaining product liability insurance in the future on affordable terms. In addition, there can be no assurance that product liability coverage will continue to be available in sufficient amounts or at an acceptable cost. UNCERTAINTY OF PHARMACEUTICAL PRICING, HEALTHCARE REFORM AND REIMBURSEMENT The levels of revenues and profitability of pharmaceutical companies may be affected by the continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various means. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to governmental control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar governmental control. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for healthcare goods and services may take in response to any healthcare reform proposals or legislation. Even in the absence of statutory change, market forces are changing the healthcare sector. The Company cannot predict the effect healthcare reforms may have on its business, and there can be no assurance that any such reforms will not have a material adverse effect on the Company. Further, to the extent that such proposals or reforms have a material adverse effect on the business, financial condition and profitability of other pharmaceutical companies that are prospective collaborators for certain of the Company's potential products, the Company's ability to commercialize its products under development may be adversely affected. In addition, both in the United States and elsewhere, sales of prescription pharmaceuticals depend in part on the availability of reimbursement to the consumer from third-party payors, such as governmental and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services. If the Company succeeds in bringing one or more products to market, there can be no assurance that these products will be considered cost-effective and that reimbursement to the consumer will be available or will be sufficient to allow the Company to sell its products on a competitive basis. RELIANCE ON KEY PERSONNEL The Company's success will depend in part on the efforts of certain key scientists and management personnel. Because of the specialized nature of the Company's business, the Company's ability to maintain its competitive position will depend in part on its ability to attract and retain qualified personnel. Competition for such personnel is intense. There can be no assurance that the Company will be able to hire sufficient qualified personnel on a timely basis or retain such personnel. The loss of key management or scientific personnel could have a material adverse effect on the Company's business. The Company does not maintain key person insurance on any of its scientists or management personnel. COMPLIANCE WITH ENVIRONMENTAL REGULATIONS- HAZARDOUS MATERIALS The Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes in connection with its research and development activities and its manufacturing of clinical trial materials. Although the Company believes that it has complied with these laws and regulations in all material respects, there can be no assurance that it will not be required to incur significant costs to comply with environmental and health and safety regulations in the future. 15 The Company's research and development and clinical manufacturing processes involve the controlled use of small amounts of hazardous and radioactive materials. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and 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 resulting damages, and any such liability could exceed the Company's resources. ITEM 2. PROPERTIES The Company occupies approximately 36,000 square feet of office, laboratory and manufacturing space at 410 West Harrison Street, Seattle, Washington, under a lease that expires May 31, 2001. The lease is renewable through May 31, 2006. NeoRx believes its facilities are in good condition and are adequate for all present uses. A portion of its facilities is used for pilot manufacturing to produce certain of its products under development for clinical trials. The Company believes that the production capacity of its pilot facility is adequate to satisfy the Company's Phase I clinical trial requirements, and it passed an FDA inspection for these purposes in 1993 and a Washington State Board of Pharmacy inspection in 1996. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings pending against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol NERX. The following table sets forth, for the periods indicated, the high and low sales price for Common Stock as reported by Nasdaq. These quotations reflect inter-dealer prices without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.
HIGH LOW 1999 First Quarter...................... $2.75 $1.34 Second Quarter..................... 2.38 1.00 Third Quarter...................... 2.19 1.50 Fourth Quarter..................... 4.88 1.13 1998 First Quarter...................... $6.06 $5.06 Second Quarter..................... 9.00 4.63 Third Quarter...................... 4.94 1.91 Fourth Quarter..................... 2.00 1.13
There were approximately 959 shareholders of record as of February 28, 2000. This figure does not include the number of shareholders whose shares are held on record by a broker or clearing agency, but includes such a brokerage house or clearing agency as one holder of record. The Company has not paid any cash dividends on the Common Stock since its inception and does not intend to pay cash dividends on the Common Stock in the foreseeable future. 17 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues .................... $ 591 $ 9,087 $ 10,352 $ 4,784 $ 307 Operating expenses .......... 15,354 15,378 14,647 14,763 13,343 Loss from operations ........ (14,763) (6,291) (4,295) (9,979) (13,036) Net loss .................... (11,951) (4,449) (2,550) (9,001) (12,271) Net loss applicable to common shareholders ............. (12,459) (4,975) (5,619) (10,685) (12,868) Net loss per common share - basic and diluted ........ $ (.59) $ (0.24) $ (0.31) $ (0.68) $ (0.98) Weighted average common shares outstanding - basic and diluted ........ 21,009 20,907 18,065 15,604 13,142 BALANCE SHEET DATA: Cash and cash equivalents ... $ 3,752 $ 1,910 $ 1,949 $ 2,945 $ 7,182 Investment securities ....... 15,289 28,242 31,760 15,322 8,937 Working capital ............. 16,664 28,807 33,775 17,523 15,245 Total assets ................ 20,765 32,441 36,321 20,510 18,518 Long-term debt .............. -- 1,195 1,199 1,242 1,283 Shareholders' equity ........ $ 17,822 $ 29,044 $ 33,368 $ 17,079 $ 14,892
- ---------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion of results of operations, liquidity and capital resources includes certain forward-looking statements. The words "believe", "expect", "intend", "anticipate" and similar expressions are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. Certain risk factors have been identified under "Risk Factors Affecting Forward-Looking Statements," which, among other factors, could cause results to differ materially from those presently anticipated by the Company. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED WITH DECEMBER 31, 1998 The Company's revenues for 1999 totaled $0.6 million, and primarily consisted of license fees of $0.6 million from Theseus LTD. The Company's revenues for 1998 totaled $9.1 million, and consisted primarily of a milestone payment of $7.0 million from Janssen Pharmaceutica NV ("Janssen"), a wholly 18 owned subsidiary of Johnson & Johnson Inc., reflecting Janssen's decision to begin Phase II trials of AVICIDIN-Registered Trademark-, and license fees paid in the form of $1.4 million in cash and $0.7 million in stock and warrants from Nycomed Imaging AS, Theseus LTD, and Angiotech Pharmaceuticals, Inc. for the license of parts of NeoRx's non-strategic technology. The Company does not have any significant revenue sources that will continue into 2000. The Company's total operating expenses for both years 1999 and 1998 were $15.4 million. In 1999, research and development expenses increased 11% from $10.3 million in 1998 to $11.5 million. The increase in research and development expenses was primarily due to increased costs for clinical trials for STR. Research and development expenses are shown net of reimbursements received under collaborative agreements for payments made by NeoRx to third parties. During 1999 the Company received $0.3 million in reimbursements. In 1998, reimbursements from collaborative agreements totaled $2.2 million. The decrease in reimbursements from collaborative agreements was caused by the termination of the Janssen agreement in the fourth quarter of 1998. General and administrative expenses decreased 11% to $3.9 million in 1999 compared to 1998. The decrease in general and administrative expenses is principally due to lower costs for recruiting and administrative personnel as a result of the Company's restructuring effort during the fourth quarter of 1998. Other income for 1999 consisted of $1.9 million from final payments under a prior agreement. Interest income for 1999 was $1.0 million compared to $2.0 million in 1998. The decrease in interest income was primarily due to lower average cash balances. The Company's 1999 net loss increased 169% to $12.0 million compared to a net loss of $4.4 million in 1998. The increase in the net loss was primarily due to lower revenues. Preferred dividends were $0.5 million in 1999 and 1998. Preferred dividends in 1999 and 1998 are related to payment of dividends primarily on Series 1 preferred stock. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997 The Company's revenues for 1998 totaled $9.1 million, and consisted primarily of a milestone payment of $7.0 million from Janssen reflecting Janssen's decision to begin Phase II trials of AVICIDIN-Registered Trademark- , and license fees paid in the form of $1.4 million in cash and $0.7 million in stock and warrants from Nycomed Imaging AS, Theseus LTD, and Angiotech Pharmaceuticals, Inc. for the license of parts of NeoRx's non-strategic technology. Revenue for 1997 totaled $10.4 million and consisted almost entirely of payments received from the Company's agreements with Janssen and Schwarz Pharma. The Company's total operating expenses for 1998 increased 5% to $15.4 million from $14.6 million in 1997. In 1998, research and development expenses decreased 6% from $11.0 million in 1997 to $10.3 million. The decrease in research and development expenses was primarily due to decreased costs for clinical trials for AVICIDIN-Registered Trademark- cancer therapy product and a license payment in 1997 for technology relating to the PRETARGET-Registered Trademark- project. Research and development expenses are shown net of reimbursements received under collaborative agreements for payments made by NeoRx to third parties. During 1998 the Company received $2.2 million in reimbursements. In 1997, reimbursements from collaborative agreements totaled $3.4 million. The decrease in reimbursements from collaborative agreements was caused by the transfer of the AVICIDIN-Registered Trademark- product development activity to Janssen, as well as the ultimate termination of the Janssen agreement in the fourth quarter of 1998. General and administrative expenses increased 19% to $4.4 million in 1998. The increase in general and administrative expenses was principally due to higher costs for outside consulting, financing advisory 19 services, recruiting and personnel costs added to support research and product development activities. During the fourth quarter of 1998, the Company restructured its operations to conserve cash by reducing its workforce by 25%. A restructuring charge of $0.7 million was incurred relating to the severance benefits; $0.2 million of the severance benefits were paid in 1998, $0.5 million of the severance benefits were paid in 1999. Interest income for 1998 was $2.0 million compared to $1.9 million in 1997. The Company's 1998 net loss increased 74% to $4.4 million compared to a net loss of $2.6 million in 1997. The increase in the net loss was primarily due to lower revenues, higher general and administrative expenses and the restructuring expense. Preferred dividends were $0.5 million in 1998 compared to $3.1 million in 1997. Preferred dividends in 1998 are related to payment of dividends primarily on Series 1 preferred stock. In 1997 dividend payments also included a non-cash dividend of $2.1 million recorded upon the sale of NeoRx Series 3 Preferred Stock with discounted conversion features and dividend payments for Series 2 and 4 Preferred Stock. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and investment securities totaled $19.0 million at December 31, 1999. Cash used in operating activities for 1999 totaled $10.8 million. Revenues and other income sources were not sufficient in 1999 to cover operating expenses. Cash provided by investing activities for 1999 totaled $13.1 million. The Company invests excess cash in investment securities that will be used to fund future operating costs. During 1999 the Company also invested $0.2 million in equipment, furniture and leasehold improvements, primarily to support its research activities. As of December 31, 1999, the Company was committed to spending approximately $0.7 million pursuant to operating lease obligations through 2004. In February 2000, the Company sold the majority of its investment in Angiotech Pharmaceuticals, Inc. for $4.0 million. The carrying value of the investment was $1.1 million at December 31, 1999. The Company also entered into an agreement with PPD, Inc. to provide a $5 million credit line to the Company to help fund the STR Phase III pivotal trial. The Company expects that its capital resources and interest income will be sufficient to finance its currently anticipated working capital and capital requirements through at least the second quarter of 2001. The Company's actual capital requirements will depend on numerous factors, including results of research and development activities, clinical trials, the levels of resources that the Company devotes to establishing and expanding marketing and manufacturing capabilities, competitive and technological developments and the timing of revenues and expense reimbursements resulting from relationships with parties or collaborative agreements. The Company intends to seek additional funding through arrangements with corporate partners, public or private equity financing, or other sources. There can be no assurance that the Company will be able to obtain such additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, reduce or eliminate expenditures for certain of its programs or products or enter into relationships with corporate partners to develop or commercialize products or technologies that the Company would otherwise seek to develop or commercialize itself. IMPACT OF THE YEAR 2000 20 The Company experienced no problems related to the Year 2000 rollover internally nor with key third-party suppliers. The issue was whether computer systems would have properly recognized date sensitive information when the year changed to 2000. Systems that did not properly recognize date sensitive information could have generated erroneous data or caused a system to fail. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends existing accounting standards and is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivatives be recognized in the balance sheet at their fair market value, and the corresponding derivative gains or loses be either reported in the statement of operations or as a component of other comprehensive income depending on the type of hedge relationship that exists with respect to such derivative. NeoRx Corporation does not expect the adoption of SFAS 133 to have a material impact on its financial statements. In December 1999, the United States Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," which must be applied in the Company's first fiscal quarter of 2000. SAB 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. The interpretation of SAB 101 is currently uncertain as it relates to biotechnology companies and, consequently, the impact on the Company's financial statements is unknown. The Company is in the process of determining the potential impact on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of interest rate changes and changes in the market values of its investments. INTEREST RATE RISK The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's debt securities included in its investment portfolio. The Company does not have any derivative financial instruments. The Company invests in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. At December 31, 1999, the Company owns government debt instruments in the amount of $8.0 million and corporate debt securities in the amount of $6.2 million. The Company's exposure to losses as a result of interest rate changes is managed through investing in securities with maturities of one year or less. INVESTMENT RISK 21 The Company has received equity instruments under licensing agreements. These instruments are included in investment securities and are accounted for at fair value with unrealized gains and losses reported as a component of comprehensive loss and classified as accumulated other comprehensive income unrealized gain on investment securities in shareholders' equity. Such investments are subject to significant fluctuations in fair market value due to the volatility of the stock market. At December 31, 1999, the Company owned such corporate equity securities in the amount of $1.1 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE NUMBER REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS...................................... 22 BALANCE SHEETS - DECEMBER 31, 1999 AND 1998................................... 23 STATEMENTS OF OPERATIONS - FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997......................................... 24 STATEMENTS OF SHAREHOLDERS' EQUITY - FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.......................................... 25 STATEMENTS OF CASH FLOWS - FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.......................................... 26 NOTES TO FINANCIAL STATEMENTS................................................. 27 - 36
ALL FINANCIAL SCHEDULES ARE OMITTED SINCE THE REQUIRED INFORMATION IS NOT APPLICABLE OR HAS BEEN PRESENTED IN THE FINANCIAL STATEMENTS AND THE NOTES THERETO. 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Shareholders NeoRx Corporation We have audited the accompanying balance sheets of NeoRx Corporation as of December 31, 1999 and 1998, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NeoRx Corporation as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Seattle, Washington February 4, 2000 23 NEORX CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ----------------------- ASSETS 1999 1998 --------- --------- CURRENT ASSETS: Cash and cash equivalents ................................................... $ 3,752 $ 1,910 Investment securities ....................................................... 15,289 28,242 Prepaid expenses and other current assets ................................... 566 857 --------- --------- Total current assets ............................................... 19,607 31,009 --------- --------- FACILITIES AND EQUIPMENT, AT COST: Leasehold improvements ...................................................... 3,283 3,283 Equipment and furniture ..................................................... 5,040 4,886 --------- --------- 8,323 8,169 Less: accumulated depreciation and amortization ............................. (7,405) (7,049) --------- --------- Facilities and equipment, net .......................................... 918 1,120 --------- --------- OTHER ASSETS, NET ........................................................... 240 312 --------- --------- TOTAL ASSETS ....................................................... $ 20,765 $ 32,441 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................................ $ 819 $ 756 Accrued liabilities ......................................................... 929 1,192 Deferred revenue ............................................................ -- 250 Current portion of convertible subordinated debentures ...................... 1,195 -- Capital leases .............................................................. -- 4 --------- --------- Total current liabilities .......................................... 2,943 2,202 --------- --------- LONG-TERM LIABILITIES: Convertible subordinated debentures, net of current portion ................. -- 1,195 --------- --------- TOTAL LIABILITIES .................................................. 2,943 3,397 --------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.02 par value, 3,000,000 shares authorized: Convertible exchangeable preferred stock, Series 1, 208,240 shares issued and outstanding (entitled in liquidation to $5,248) .................. 4 4 Common stock, $.02 par value, 60,000,000 shares authorized, 21,073,235 and 21,006,964 shares issued and outstanding, at December 31, 1999 and 1998, respectively .............................. 421 420 Additional paid-in capital .................................................. 164,151 163,189 Accumulated deficit ......................................................... (147,096) (134,637) Accumulated other comprehensive income - unrealized gain on investment securities ......................................................... 342 68 --------- --------- Total shareholders' equity ......................................... 17,822 29,044 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $ 20,765 $ 32,441 ========= =========
See accompanying notes to the financial statements. 24 NEORX CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1999 1998 1997 -------- -------- -------- REVENUES ............................. $ 591 $ 9,087 $ 10,352 -------- -------- -------- OPERATING EXPENSES: Research and development ............. 11,462 10,325 10,961 General and administrative ........... 3,892 4,394 3,686 Restructuring expense ................ -- 659 -- -------- -------- -------- Total operating expenses ... 15,354 15,378 14,647 -------- -------- -------- Loss from operations ................. (14,763) (6,291) (4,295) OTHER INCOME (EXPENSE): Other income ...................... 1,900 -- -- Interest income ................... 1,029 1,972 1,881 Interest expense .................. (117) (130) (136) -------- -------- -------- Net loss ............................. $(11,951) $ (4,449) $ (2,550) Preferred stock dividends ............ (508) (526) (3,069) -------- -------- -------- Net loss applicable to common shares . $(12,459) $ (4,975) $ (5,619) ======== ======== ======== Net loss per common share - basic and diluted ............. $ (.59) $ (.24) $ (.31) ======== ======== ======== Weighted average common shares outstanding - basic and diluted 21,009 20,907 18,065 ======== ======== ========
See accompanying notes to the financial statements. 25 NEORX CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK --------------- ------------ Accumulated Total Number Number Additional Other Share- of Par of Par Paid-In Accumulated Comprehensive holders' Shares Value Shares Value Capital Deficit Income EQUITY ------ ----- ------ ----- ------- ------- ------ ------ BALANCE, DECEMBER 31, 1996 .......... 215 4 16,451 329 140,789 (124,043) -- 17,079 Sale of common stock ................ -- -- 699 14 2,633 -- -- 2,647 Sale of preferred stock ............. 121 2 -- -- 16,396 -- -- 16,398 Exercise of stock options ........... -- -- 114 2 376 -- -- 378 Issuance of common stock in Payment of expenses ............... -- -- 22 1 100 -- -- 101 Exchange of preferred stock for Common stock ...................... (122) (2) 3,366 67 (65) -- -- -- Net and total comprehensive loss..... -- -- -- -- -- (2,550) -- (2,550) Preferred stock dividends ........... -- -- 55 1 2,383 (3,069) -- (685) --- -- ------ --- ------- ------- -- ------ BALANCE, DECEMBER 31, 1997 .......... 214 4 20,707 414 162,612 (129,662) -- 33,368 Exercise of stock options and Warrants .......................... -- -- 141 3 479 -- -- 482 Exchange of preferred stock for Common stock ...................... (6) -- 138 3 (3) -- -- -- Comprehensive loss: Net loss .......................... -- -- -- -- -- (4,449) -- (4,449) Unrealized gain on Investment securities ......... -- -- -- -- -- -- 68 68 Total comprehensive loss ............ -- -- -- -- -- -- -- (4,381) Preferred stock dividends ........... -- -- 21 -- 101 (526) -- (425) --- -- ------ --- ------- ------- -- ------ BALANCE, DECEMBER 31, 1998 .......... 208 4 21,007 420 163,189 (134,637) 68 29,044 Exercise of stock options ........... -- -- 66 1 105 -- -- 106 Stock warrants issued for services ......................... -- -- -- -- 450 -- -- 450 Compensation expense on stock options........................... -- -- -- -- 407 -- -- 407 Comprehensive loss: Net loss .......................... -- -- -- -- -- (11,951) -- (11,951) Unrealized gain on Investment securities .......... -- -- -- -- -- -- 274 274 Total comprehensive loss ............ -- -- -- -- -- -- -- (11,677) Preferred stock dividends ........... -- -- -- -- -- (508) -- (508) --- -- ------ --- ------- ------- -- ------ BALANCE, DECEMBER 31, 1999 .......... 208 $ 4 21,073 $ 421 $ 164,151 $(147,096) $ 342 $ 17,822 --- -- ------ --- ------- ------- --- ------
See accompanying notes to the financial statements. 26 NEORX CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1999 1998 1997 --------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................... $ (11,951) $ (4,449) $ (2,550) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................... 356 427 348 Stock and warrants received as license fees ....... -- (690) -- Common stock issued for services................... -- -- 101 Stock warrants issued for services................ 450 -- -- Compensation expense on stock options.............. 407 -- -- (Increase) decrease in prepaid expenses and other assets........................................... 363 762 (375) Increase (decrease) in accounts payable ........... 63 (44) (435) Increase (decrease) in accrued liabilities......... (263) 281 (38) Increase (decrease) in deferred revenue........... (250) 250 -- --------- ---------- ---------- Net cash used in operating activities.............. (10,825) (3,463) (2,949) --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales and maturities of investment securities........................ 27,662 70,820 59,987 Purchases of investment securities................. (14,435) (66,544) (76,425) Facilities and equipment purchases................. (154) (866) (343) --------- ---------- ---------- Net cash provided by (used in) investing activities 13,073 3,410 (16,781) --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of capital lease obligation.............. (4) (43) (44) Proceeds from stock options and warrants exercised. 106 482 378 Preferred stock dividends.......................... (508) (425) (645) Proceeds from sale of common stock and warrants.... -- -- 2,647 Proceeds from sale of preferred stock.............. -- -- 16,398 --------- ---------- ---------- Net cash provided by (used in) financing activities (406) 14 18,734 --------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 1,842 (39) (996) CASH AND CASH EQUIVALENTS: Beginning of year.................................. 1,910 1,949 2,945 --------- ---------- ---------- End of year........................................ $ 3,752 $ 1,910 $ 1,949 ========= ======== ========
See the accompanying notes to the financial statements. 27 28 NOTE 1. THE COMPANY NeoRx Corporation (the "Company") develops biopharmaceutical products primarily for the treatment of cancer. The Company operates in a highly regulated and competitive environment. The development and manufacturing of pharmaceutical products requires approval from, and is subject to, ongoing oversight by the Food and Drug Administration (FDA) in the United States and by comparable agencies in other countries. Obtaining approval for a new therapeutic product is never certain and may take several years and involves the expenditure of substantial resources. Competition in researching, developing and marketing pharmaceutical products is intense. Any of the technologies covering the Company's existing products or products under development could become obsolete or diminished in value by the discoveries and developments of other organizations. The Company's development activities involve inherent risks. These risks include, among others, dependence on key personnel, availability of raw materials, determination of the patentability of the Company's products and processes and approval by the FDA before the Company's products may be sold domestically. Successful future operations depend upon the Company's ability to develop, obtain regulatory approval for, and commercialize its products. The Company will require a substantial amount of additional funds to complete the development of most of its products and to fund additional operating losses, which the Company expects to incur during the next several years. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS. All highly liquid investments with a remaining maturity of three months or less when purchased, are considered to be cash equivalents. ESTIMATES AND UNCERTAINTIES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES. Revenues from collaborative agreements are recognized as earned as the Company performs research activities under the terms of each agreement. Billings in excess of amounts earned are classified as deferred revenue. License fees earned are recognized as revenue unless subject to a contingency, which results in a deferral of revenue until the contingency is satisfied. Research and development costs are expensed as incurred. It is the Company's practice to offset third party collaborative reimbursements received as a reduction of research and development expenses. Third party reimbursements for 1999, 1998 and 1997 were $276,127, $2,186,616 and $3,448,286, respectively. INCOME TAXES. The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and for operating loss and tax credit carryforwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount, if any, which is more likely than not expected to be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company has financial instruments consisting of cash, cash equivalents, investment securities, note from officer, accounts payable and convertible subordinated debentures. All of the Company's financial instruments, based on current market indicators or quotes 29 from brokers, approximate their carrying amount. INVESTMENT SECURITIES. The Company considers all investment securities as available-for-sale. All securites are carried at fair value. The Company does not invest in derivative financial instruments. Unrealized gains and losses on investment securities are reported as a component of comprehensive income and classified as accumulated other comprehensive income - unrealized gain on investment securities in shareholders' equity. SEGMENT REPORTING. The Company has one operating business segment. Revenues consist almost entirely of fees received under license agreements. Expenses incurred are reported according to their nature. No further segment segregation is considered meaningful. COMPREHENSIVE LOSS. The Company's comprehensive loss for 1999 and 1998 consisted of net loss and unrealized gain on investment securities. Comprehensive loss for 1997 consisted of net loss. FACILITIES AND EQUIPMENT. Facilities and equipment are stated at cost. Depreciation is provided using the straight-line method over an estimated useful life of five years for equipment and furniture and three years for computer equipment and software. Leasehold improvements are amortized using the straight-line method over the shorter of the assets' estimated useful lives or the terms of the leases. NET LOSS PER COMMON SHARE. Basic and diluted loss per share is based on net loss applicable to common shares, which is comprised of net loss and preferred stock dividends in all periods presented. Basic loss per share is based on the weighted average number of common shares outstanding during the period. Diluted loss per share is based on the potential dilution that would occur upon the exercise or conversion of securities into common stock using the treasury stock method. Calculations of basic and diluted loss per share for 1999, 1998 and 1997 were the same, because including the effect of potential common shares would have been antidilutive. Outstanding options to purchase 3,629,133, 3,334,916 and 3,148,474 shares of common stock at December 31, 1999, 1998 and 1997, respectively, and outstanding warrants to purchase 150,000 and 408,727 shares of common stock at December 31, 1999 and 1997, respectively, were excluded from the calculation. In addition, 283,712, 283,712 and 423,553 aggregate shares issuable upon conversion of the Company's convertible subordinated debentures and its preferred stock are not included in the calculation of diluted loss per share for 1999, 1998 and 1997 because the effect of including such shares would have been antidilutive. STOCK ISSUED TO EMPLOYEES. The Company accounts for its stock option plans for employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Compensation expense related to employee stock options is recorded if, on the date of grant, the fair value of the underlying stock exceeds the exercise price. The Company applies the disclosure-only requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma net income and pro forma earnings per share disclosures as if the fair-value based method of accounting in SFAS No. 123 had been applied to employee stock option grants made in 1995 and subsequent years. NEW ACCOUNTING PRONOUNCEMENTS. In December 1999, the United States Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," which must be applied in the Company's first fiscal quarter of 2000. SAB 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. The interpretation of SAB 101 is 30 currently uncertain as it relates to biotechnology companies and, consequently, the impact on the Company's financial statements is unknown. The Company is in the process of determining the potential impact on its financial statements. 31 NOTE 3. INVESTMENT SECURITIES Investment securities consisted of the following (in thousands):
DECEMBER 31, 1999 1998 Federal government and agency securities ... $ 7,985 $ 4,016 Corporate debt securities .................. 6,227 23,492 Corporate equity securities ................ 1,077 734 ------- ------- $15,289 $28,242 ======= =======
Unrealized gains and losses at December 31, 1999 are as follows (in thousands):
AMORTIZED FAIR MARKET UNREALIZED UNREALIZED COST BASIS VALUE GAINS LOSSES ---------- ---------- ---------- --------- Federal government and agency securities $ 8,012 $ 7,985 $ -- $ (27) Corporate debt securities .............. 6,244 6,227 -- (17) Corporate equity securities ............ 691 1,077 386 -- ------- ------- ------- ------- $14,947 $15,289 $ 386 $ (44) ======= ======= ======= ======= Net Unrealized Gains ................... $ 342 =======
Unrealized gains and losses at December 31, 1998 are as follows (in thousands):
AMORTIZED FAIR MARKET UNREALIZED UNREALIZED COST BASIS VALUE GAINS LOSSES ---------- ----------- ---------- ---------- Federal government and agency securities $ 4,022 $ 4,016 $ -- $ 6 Corporate debt securities .............. 23,461 23,492 33 2 Corporate equity securities ............ 691 734 43 -- ------- ------- ------- ------- $28,174 $28,242 $ 76 $ 8 ======= ======= ======= ======= Net Unrealized Gains ................... $ 68 =======
All debt securities mature within one year of the date of issuance. NOTE 4. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
DECEMBER 31, 1999 1998 ------ ------ Compensation $ 529 $ 601 Severance .. 312 504 Other ...... 88 87 ------ ------ $ 929 $1,192 ====== ======
32 NOTE 5. LEASES The lease for the Company's principal location expires in 2001 and contains one five-year renewal option. Total rent expense under operating leases was approximately $591,000, $555,000, and $536,000 for 1999, 1998 and 1997, respectively. Minimum lease payments as of December 31, 1999, are as follows (in thousands):
OPERATING YEAR LEASES - ---- --------- 2000 $446 2001 210 2002 24 2003 24 2004 29 ---- Total minimum lease payments $733 ====
NOTE 6. CONVERTIBLE SUBORDINATED DEBENTURES The Company has $1,195,000 in principal of convertible subordinated debentures (the "Debentures") outstanding, that will be retired in June 2000. The Debentures are convertible at the option of the holder into the Company's Common Stock at a conversion price of $25.80 per share (par), subject to adjustment under certain conditions. Interest at 93/4% is payable semi-annually on June 1 and December 1. The Debentures are redeemable, in whole or in part, at any time, at the option of the Company at par, together with accrued interest. The Debentures are subordinated in right of payment to any outstanding senior indebtedness of the Company, as defined in the indenture. NOTE 7. SHAREHOLDERS' EQUITY COMMON STOCK TRANSACTIONS. During 1998, the Company issued 138,422 shares of common stock in exchange for 5,167 shares of Series 2 Convertible Preferred Stock ("Series 2 Preferred Stock") and 1,000 shares of Series 3 Convertible Preferred Stock ("Series 3 Preferred Stock"). Dividends of $101,240 were also paid on the Series 2 Preferred Stock by issuing 21,038 shares of common stock. As of December 31, 1998, no Series 2 Preferred Stock or Series 3 Preferred Stock remained outstanding. During 1997, the Company issued 720,862 shares of common stock and received net proceeds and services valued at $2,748,542. Also during 1997, the Company issued 3,366,000 shares of common stock in exchange for 1,500 shares of Series 2 Convertible Preferred Stock ("Series 2 Preferred Stock"), 119,000 shares of Series 3 Convertible Preferred Stock ("Series 3 Preferred Stock") and 1,000 shares of Series 4 Convertible Preferred Stock ("Series 4 Preferred Stock"). Dividends of $266,448 were also paid on the Series 2 Preferred Shares by issuing 54,769 shares of common stock. PREFERRED STOCK TRANSACTIONS. Holders of Series 1 Convertible Preferred Stock ("Series 1 Preferred Stock") are entitled to receive an annual cash dividend of $2.4375 per share if declared by the Board of Directors (the "Board"), payable semi-annually on June 1 and December 1. Dividends are cumulative. Each share of Series 1 Preferred Stock is convertible into approximately 1.14 shares of common stock, subject to adjustment in certain events. The Series 1 Preferred Stock is redeemable at the option of the Company at $25.00 per share. Holders of Series 1 Preferred Stock have no voting rights, except in limited circumstances. 33 During 1998, 5,167 shares of Series 2 Preferred Stock were converted into 115,747 shares of Common Stock. As of December 31, 1998, no Series 2 Preferred Stock remains outstanding. During 1997, 1,500 shares of Series 2 Preferred Stock were converted to 32,934 shares of common stock. During 1997, the Company sold 120,000 shares of Series 3 Preferred Stock in private transactions and received net proceeds of $11,441,012. During 1998, 1,000 shares of Series 3 Preferred Stock were converted into 22,675 shares of common stock. As of December 31, 1998, no Series 3 Preferred Stock remains outstanding. During 1997, 119,000 shares of Series 3 Preferred Stock were converted into 2,500,423 shares of common stock. In connection with a 1997 agreement with Janssen Pharmaceutica NV ("Janssen"), a subsidiary of Johnson & Johnson, Inc, Johnson & Johnson Development Corporation ("JJDC"), also a subsidiary of Johnson & Johnson, purchased 1,000 shares of Series 4 Preferred Stock, $.02 par value per share, at a stated value of $5,000 per share with a dividend rate of 7% per annum. In September 1997, the Series 4 Preferred Stock automatically converted into 833,333 shares of common stock, in accordance with the JJDC agreement, when the common stock attained an average closing price of $6.00 per share. As of December 31, 1997, none of the Series 4 Preferred Stock remained outstanding. SHAREHOLDERS' RIGHTS PLAN. The Company has adopted a Shareholders' Rights Plan intended to protect the rights of shareholders by deterring coercive or unfair takeover tactics. The Board declared a dividend to holders of the Company's common stock, payable on April 19, 1996, to shareholders of record on that date, of one preferred share purchase right (the "Right") for each outstanding share of the common stock. The Right is exercisable 10 days following the offer to purchase or the acquisition of a beneficial ownership of 20% of the outstanding common stock by a person or group of affiliated persons. Each Right entitles the registered holder, other than the acquiring person or group, to purchase from the Company one-hundredth of one share of Series A Junior Participating Preferred Stock ("Series A Preferred Stock") at a price of $40, subject to adjustment. The Rights expire in 2006. The Series A Preferred Stock will be entitled to a minimum preferential quarterly dividend of $1 per share and has liquidation provisions. Each share of Series A Preferred Stock has 100 votes, and will vote with the common stock. Prior to the acquisition by a person or group of 20% of the outstanding common stock, the Board may redeem each Right at a price of $.001. In lieu of exercising the Right by purchasing one one-hundredth of one share of Series A Preferred Stock, the holder of the Right, other than the acquiring person or group, may purchase for $40, that number of the Company's common stock having a market value of twice that price. The Board may, without further action by the shareholders of the Company, issue preferred stock in one or more series and fix the rights and preferences thereof, including dividend rights, dividend rates, conversion rates, voting rights, terms of redemption, redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such series. STOCK OPTIONS. The Company has two stock option plans with options available for grant: the 1994 Stock Option Plan (the "1994 Plan") and the 1991 Stock Option Plan for Non-Employee Directors (the "Directors Plan"). The 1994 Plan, as amended, authorizes the Board or an Option Committee appointed by the Board to grant options to purchase a maximum of 4,000,000 shares of common stock. The 1994 Plan allows for the issuance of incentive stock options and nonqualified stock options to employees, officers, Directors, agents, consultants, advisors and independent contractors of the Company, subject to certain 34 restrictions. All option grants expire ten years from the date of grant. In general, two-thirds of the option grants become exercisable in increments at a rate of 25% per year over a four-year period from the grant date, and the remaining one-third becomes exercisable over a period of one to six years from the grant date at the discretion of the Option Committee. As of December 31, 1999, there were 548,340 shares of common stock available for grant under the 1994 Plan. On December 14, 1998, the Company canceled and reissued 1,904,927 employee stock options at a price of $1.60 per share, which was greater than the fair market value of $1.25 per share of the common stock on the reissue date. Except for the exercise price, the options had terms identical to the cancelled options. Employees agreed to a one-year moratorium on exercise of these options to qualify for the exchange. During this "black-out period" any employee resigning from the Company was not able to exercise these options. The exercise price of the cancelled options ranged from $2.94 - $12.25. In December 1999, the Company extended the term of 211,000 vested stock options for certain employees. At the time of the extension of the term, the fair value of the Company's common stock was greater than the exercise price of the stock options. The Company recorded $407,000 in compensation expense for the difference between the fair value of the Company's common stock on the date the exercise period was extended and the exercise price of the stock options. The Directors Plan authorizes the grant of stock options to non-employee Directors to purchase a maximum of 250,000 shares of Common Stock. Under the terms of the amended plan, each eligible Director receives annually, concurrent with the annual election of Directors, an option to purchase 10,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. The options become exercisable in two equal annual installments beginning with the first annual meeting of shareholders after the date of grant. In addition, each newly appointed non-employee Director receives a one-time initial option to purchase 20,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. Options expire on the earlier of ten years from the date of grant or five years after the Director's termination of service as a Director. As of December 31, 1999, there were 20,000 shares of Common Stock available for grant under the Directors Plan. Information relating to activity under the Company's stock option plans is as follows (in thousands, except per share data):
1999 1998 1997 ----- ----- ---- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE --------- -------------- --------- -------------- --------- --------------- Outstanding at beginning of year ... 3,335 $2.81 3,148 $5.14 2,809 $5.11 Granted ............................ 598 1.49 2,589 1.97 600 5.09 Exercised .......................... (66) 1.60 (127) 3.25 (114) 3.32 Cancelled .......................... (238) 3.70 (2,275) 5.06 (147) 5.87 ----- ----- ----- Outstanding at end of year ......... 3,629 $2.56 3,335 $2.81 3,148 $5.14 ===== ===== ===== ===== ===== ===== Exercisable at end of year ......... 2,118 $3.22 887 $5.31 1,679 $5.54 ===== ===== ===== ===== ===== =====
35 Information relating to stock options outstanding and exercisable at December 31, 1999 is as follows (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF EXERCISE PRICES OF SHARES LIFE IN YEARS EXERCISE PRICE OF SHARES EXERCISE PRICE - ------------------------ --------- ------------- -------------- --------- -------------- $1.25 - $1.50 ............. 762 8.36 $1.38 145 $1.39 $1.60 ............. 1,677 5.93 1.60 1,037 1.60 $1.63 - $6.00 ............. 951 5.81 3.45 742 4.05 $6.25 - $21.75............. 239 5.53 9.57 194 10.05 ----- ----- 3,629 6.38 $2.56 2,118 $3.22 ===== ==== ===== ===== =====
The fair value of each stock option granted is valued on the date of grant using the Black-Scholes option-pricing model. During 1999, the weighted average grant-date fair value of stock options granted was $1.16 per share using assumptions of expected volatility of 112%, expected option lives of four years and a risk-free rate of interest of 6.6%. During 1998, the weighted average grant-date fair value of stock options granted with an exercise price equal to the fair market value of the common stock was $2.01 per share using assumptions of expected volatility of 105%, expected option lives of four to six years and a risk-free rate of interest of 4.7%. The weighted average grant-date fair value of repriced stock options in 1998 was $.89 per share using assumptions of expected volatility of 105%, expected option lives of four to five years and a risk-free rate of interest of 4.7%. The weighted average grant-date fair value of stock options granted during 1997 was $3.73 per share using the assumptions of expected volatility of 66%, expected option lives of five to ten years and risk-free rates of interest of 5.7 - 6.8%. The Company assumed a dividend yield of zero for all years. Had compensation cost for these stock option plans been determined in accordance with SFAS 123, the Company's "Net Loss", "Net Loss Applicable to Common Shares" and "Net Loss Per Common Share" would have increased to the following pro forma amounts for 1999, 1998 and 1997 (in thousands, except per share data):
1999 1998 1997 ---- ---- ---- NET LOSS......................... AS REPORTED................ $(11,951) $(4,449) $(2,550) PRO FORMA.................. (13,967) (5,819) (3,777) NET LOSS APPLICABLE TO AS REPORTED................ $(12,459) $(4,975) $(5,619) COMMON SHARES ............... PRO FORMA.................. (14,475) (6,345) (6,846) NET LOSS PER COMMON SHARE, AS REPORTED................ $ (.59) $ (.24) $ (.31) BASIC AND DILUTED............ PRO FORMA.................. (.69) (.30) (.39)
Because the SFAS 123 method of accounting has not been applied to stock options granted before January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. RESTRICTED STOCK. The Company also has a Restricted Stock Plan (the "Restricted Stock Plan") under which restricted stock may be granted or sold to selected employees, officers, agents, consultants, advisors and independent contractors of the Company. Under the Restricted Stock Plan, adopted in 1991, 250,000 shares are authorized for grant, of which 194,000 remain available for grant at December 31, 1999. No restricted shares were granted in 1999, 1998 and 1997. 36 WARRANTS. In connection with an agreement with a company in 1999 for investor relations services, the Company issued one five-year warrant to purchase 150,000 shares of Common Stock at an exercise price of $1.6875. The Company recorded an expense in the amount of $450,000 for the fair value of the warrant on the date the services were completed. The grant-date fair value of the warrant was $1.22 per share using assumptions of expected volatility of 112%, expected warrant life of five years and a risk-free rate of interest of 6.6%. The warrant expires in 2004. In connection with financing transactions in 1995, the Company issued 1,634,907 three-year warrants to purchase 408,727 shares of Common Stock, exercisable at a price of $5.31 per share. During 1998, 52,812 warrants were exercised for 13,203 shares of Common Stock, the Company received net proceeds of $70,141. The remaining warrants expired in 1998. NOTE 8. REVENUES The Company entered into an agreement in August 1997 with Janssen Pharmaceutica NV ("Janssen"), a wholly owned subsidiary of Johnson & Johnson Inc., for the worldwide development, manufacture and distribution of NeoRx's AVICIDIN-Registered Trademark- cancer therapy product. The Company received a $5,000,000 license fee in 1997, which was recorded as revenue in 1997, and rights to potential future milestone payments and royalties on product sales. In January 1998, the Company received a $7,000,000 milestone payment from Janssen, reflecting Janssen's decision to begin Phase II trials of AVICIDIN-Registered Trademark- cancer therapy as part of the agreement entered into with Janssen in 1997. This agreement was terminated by Janssen on December 29, 1998. Also in 1997, the Company received a $4,000,000 license fee from Schwarz Pharma AG ("Schwarz Pharma") for marketing rights to NeoRx's BIOSTENT-Registered Trademark- product in North America and Europe and $4,000,000 for 699,000 unregistered shares of NeoRx common stock representing a 50% premium over the fair value of the stock. The $4,000,000 license fee and the excess amount received over the fair market value of the common stock ($1,333,334) were recorded as revenue. In November 1998, Schwarz Pharma informed NeoRx that it was ceasing the development of the product and intending to terminate the agreement. The Company received $1,900,000 in 1999 from final payments under this agreement, which was recorded as other income. NOTE 9. CASH FLOWS Interest paid by the Company was $117,000, $130,000, and $136,000 for 1999, 1998 and 1997, respectively. 37 NOTE 10. FEDERAL INCOME TAXES Temporary differences and carryforwards giving rise to deferred tax assets were as follows (in thousands):
DECEMBER 31, ------------------------- 1999 1998 ------- ------- Net operating loss carryforwards .................................. $23,318 $21,744 Research and experimentation credit carryforwards.................. 5,814 4,985 Capitalized research and development............................... 1,725 332 Depreciation and amortization...................................... 503 558 Other ............................................................. 727 468 ------- ------- Deferred tax assets .......................................... 32,087 28,087 Deferred tax asset valuation allowance ............................ (32,087) (28,087) ------- ------- Net deferred taxes ........................................... $ - $ - ======= =======
The Company has established a valuation allowance equal to the amount of deferred tax assets because the Company has not had taxable income since its inception and significant uncertainty exists regarding the ultimate realization of the deferred tax assets. Accordingly, no tax benefits have been recorded in the accompanying statements of operations. The valuation allowance increased by $4,000,000, $5,617,000 and $1,570,000 in 1999, 1998 and 1997, respectively. The Company has net operating loss carryforwards of approximately $68,600,000 which expire from 2000 through 2019. Research and experimentation credits expire from 2000 to 2019. As a result of changes in ownership, the utilization of the Company's net operating loss carryforwards may be limited. NOTE 11. RELATED PARTY TRANSACTIONS The Company's Chairman of the Board of Directors, Dr. Fred Craves, has a consulting agreement with the Company that provides that he shall be retained as a general advisor and consultant to the Company's management on all matters pertaining to the Company's business. In exchange for such services, he is compensated $30,000 for each calendar quarter of services, plus reasonable travel and other expenses. Dr. Fred Craves is the chairman of Bay City Capital, Ltd., ("BCC") a merchant bank focused on the life sciences industry. Mr. Jack Bowman, a NeoRx director, is on the business advisory board of BCC. In January 1999, NeoRx Corporation and BCC entered into an agreement whereby BCC will act as the Company's advisor for the purpose of identifying opportunities to enter into strategic alliances. The Company paid a retainer fee of $50,000 in cash. The agreement also includes a percentage of consideration, depending on the ultimate amount of consideration raised. The Company has a demand note receivable from an officer with a balance of $82,338 and $91,981 at December 31, 1999 and 1998, respectively. 38 NOTE 12. RESTRUCTURING EXPENSE In December 1998, the Company restructured its operations and reduced its workforce in all departments by 20 employees. The Company incurred a severance charge of $659,000 as a result of the restructuring. The accrued severance payable at December 31, 1998 was $504,000, which was paid in 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) DIRECTORS. The information required by this item is incorporated herein by reference to the section captioned "Election of Directors" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 2000, filed with the Securities and Exchange Commission (the "Commission") pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) EXECUTIVE OFFICERS. Information with respect to the Company's executive officers is set forth below.
NAME AGE POSITION WITH THE COMPANY Paul G. Abrams, M.D., J.D. 52 Chief Executive Officer and Director Richard L. Anderson 60 President and Chief Operating Officer Karen Auditore-Hargreaves, Ph.D. 47 Vice President, Research and Development Becky J. Bottino 51 Vice President, Operations Robert F. Caspari, M.D. 53 Vice President, Medical and Regulatory Affairs
BUSINESS EXPERIENCE DR. PAUL G. ABRAMS is a co-founder of the Company, has been a Director since January 1985 and has been Chief Executive Officer since May 1990. Dr. Abrams holds M.D., J.D. and B.A. degrees from Yale University. He is a board-certified internist and medical oncologist and is an Affiliate Associate Professor in the Department of Radiology at the University of Washington. RICHARD L. ANDERSON was promoted to President and COO in December 1998. He held the position of Senior Vice President, Finance and Operations and Chief Financial Officer from September 1997 to December 1998. He was Senior Vice President and Chief Financial Officer from January 1996 to August 1997. From November 1994 to January 1997, Mr. Anderson was Vice President and Controller at Mosaix Inc., a provider of computer telephony integration products and services. From September 1993 to October 1994, Mr. Anderson was Vice President of Finance, Chief Financial Officer and Secretary of Merix Corporation (formerly a division of Tektronix), a manufacturer of printed circuit boards. Mr. Anderson holds an M.S. degree in Management from Johns Hopkins University, a M.S. degree in Solid State Physics from the University of Maryland, a B.S. in Physics from Bucknell University and is a Certified Public Accountant. KAREN AUDITORE-HARGREAVES joined the Company in May 1999 from CellPro, Inc. where she was Vice President of Research, and responsible for the development of products for the selection, activation and expansion of human hematopoietic cells. Prior to joining CellPro, Dr. Hargreaves held research management positions with Oculon Corporation, PATH and Genetic Systems Corporation. Dr. Hargreaves holds a Ph.D. in Genetics from the University of California, Davis and received her post doctoral training at the Massachusetts Institute of Technology Center for Cancer Research. Her twenty years experience in the biotechnology industry includes drug and device development as well as in vitro diagnostics. BECKY J. BOTTINO has been Vice President of Operations since September 1997. She was the Company's Director of Manufacturing and Product Development from October 1996 through September 40 1997, Director of Product Development from 1992 to 1994 and Manager of Product Development from 1989 to 1992. Ms. Bottino joined NeoRx in 1985 as a Research Technologist. She holds a M.S. degree in Chemistry from the University of Washington and a B.S. degree from the University of Utah. ROBERT F. CASPARI joined the Company in May 1999 from Baxter International, Inc., where he was Vice President for Medical and Clinical Affairs at Baxter's Hemoglobin Therapeutics Division. Prior to joining Baxter International, Inc., Dr. Caspari was Senior Vice President Medical & Regulatory Affairs at Somatogen. Dr. Caspari entered the pharmaceutical industry in 1982 after practicing internal medicine and has held positions in marketing, business development and clinical research at several companies, including Lederle Laboratories, Schering Plough and Boehringer Mannheim. Dr. Caspari received a BA in psychology from UCLA and obtained his medical degree from Georgetown. He has more than eighteen years experience in drug development. (c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The information required by this item is incorporated herein by reference to the section captioned "Compliance With Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 2000, filed with the Commission pursuant to Section 14(a) of the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the sections captioned "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 2000, filed with the Commission pursuant to Section 14(a) of the Exchange Act. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 2000, filed with the Commission pursuant to Section 14(a) of the Exchange Act. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is detailed in the Notes to Financial Statements contained herein in the section captioned "Related Party Transactions". 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) (1) FINANCIAL STATEMENTS -- SEE INDEX TO FINANCIAL STATEMENTS. (A) (2) FINANCIAL STATEMENT SCHEDULES -- NOT APPLICABLE. (A) (3) EXHIBITS -- SEE EXHIBIT INDEX FILED HEREWITH. (B) REPORTS ON FORM 8-K -- NOT APPLICABLE. (C) EXHIBITS -- SEE EXHIBIT INDEX FILED HEREWITH. 42 SIGNATURES Pursuant to the requirements of Section 13 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. NEORX CORPORATION (Registrant) /s/ RICHARD L. ANDERSON ------------------------------------------------ Richard L. Anderson President and Chief Operating Officer, Secretary (Principal Financial and Accounting Officer) Date: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ PAUL G. ABRAMS Chief Executive Officer and March 29, 2000 - ----------------------------------------- Paul G. Abrams Director (Principal Executive Officer) /s/ RICHARD L. ANDERSON President, Chief Operating March 29, 2000 - ----------------------------------------- Richard L. Anderson Officer, Secretary /s/ FRED B. CRAVES Chairman of the Board of March 29, 2000 - ----------------------------------------- Fred B. Craves Directors /s/ JACK L. BOWMAN Director March 29, 2000 - ----------------------------------------- Jack L. Bowman /s/ E. ROLLAND DICKSON Director March 29, 2000 - ----------------------------------------- E. Rolland Dickson /s/ CARL S. GOLDFISCHER Director March 29, 2000 - ----------------------------------------- Carl S. Goldfischer /s/ ALAN A.STEIGROD Director March 29, 2000 - ----------------------------------------- Alan A. Steigrod
EXHIBIT INDEX
INCORPORATION EXHIBIT DESCRIPTION BY REFERENCE TO ------- ----------- --------------- 3.1(a) Restated Articles of Incorporation, dated April 29, 1996 * 3.1(b) Articles of Amendment, dated March 31, 1997, to Restated Articles of Incorporation ** 3.1(c) Articles of Amendment, dated August 8, 1997, to Restated Articles of Incorporation XXXXX 3.2 Bylaws, as amended, of the registrant XXXXX 4.1 Form of Indenture, dated as of June 1, 1989, between NeoRx Corporation and First Interstate Bank of Washington, N.A., as Trustee *** 4.2 Specimen Warrant Certificate +++ 4.3 Form of Purchase Agreements dated as of April 18, 1995 between NeoRx Corporation and the Purchasers +++ 4.4 Form of Purchase Agreements dated as of January 30, 1996 between NeoRx Corporation and the Purchasers ++++ 4.5 Rights Agreement, dated April 10, 1996, between NeoRx Corporation and First Interstate Bank of Washington, N.A. ++++++ 10.1 Restated 1994 Stock Option Plan (++) + 10.2 Lease Agreement for 410 West Harrison facility, dated February 15, 1996, between NeoRx Corporation and Diamond Parking, Inc # 10.3 1991 Stock Option Plan for Non-Employee Directors, as amended (++) ++ 10.4 1991 Restricted Stock Option Plan (++) ****** 10.5 Stock and Warrant Purchase Agreement, dated as of September 11, 1992, between NeoRx Corporation and Boehringer Ingelheim International GmbH **** 10.6 Amendment to Stock and Warrant Purchase Agreement, dated as of September 17, 1992, between NeoRx Corporation and Boehringer Ingelheim International GmbH + 10.7 Second Amendment to Stock and Warrant Purchase Agreement, dated as of September 29, 1993, between NeoRx Corporation and Boehringer Ingelheim International GmbH + 10.8 Development and License Agreement, dated as of September 11, 1992, between NeoRx Corporation and Boehringer Ingelheim International GmbH **** 10.9 First Amendment to Development and License Agreement, dated September 22, 1994, between NeoRx Corporation and Boehringer Ingelheim International GmbH ++ 10.10 Second Amendment to Development and License Agreement, dated October 31, 1994, between NeoRx Corporation and Boehringer Ingelheim International GmbH ++ 10.11 Technology License Agreement, dated as of September 11, 1992, between NeoRx Corporation and Boehringer Ingelheim International GmbH **** 10.12 License Agreement, dated as of September 18, 1992, between NeoRx Corporation and Sterling Winthrop Inc **** 10.13 Agreement, dated as of December 15, 1995 +++++ 10.14 License Option Agreement, dated June 1, 1991, between NeoRx Corporation and the UAB Research Foundation + 10.15 Research Agreement (With Option to License), dated February 8, 1993, between NeoRx Corporation and Southern Research Institute + 10.16 Consulting Agreement, effective March 15, 1993, between NeoRx Corporation and Oxford Molecular Inc + 10.17 Agreement, dated as of August 1, 1993, between NeoRx Corporation and Avalon Medical Partners + 10.18 Registration Rights Agreement, dated September 1993, between NeoRx Corporation and Avalon Medical Partners + 10.19 Consulting Agreement, dated as of July 7, 1993, between NeoRx Corporation and Dr. Fred Craves (++) + Amendment to consulting agreement, dated May 9,1995 between NeoRx 10.20 Corporation and Dr. Fred Craves (++) +++++ 10.21 Engagement letter, dated as of June 22, 1993, between NeoRx Corporation and the Placement Agents ***** i INCORPORATION EXHIBIT DESCRIPTION BY REFERENCE TO ------- ----------- --------------- 10.22 Purchase Agreements, dated May 19, 1993, between NeoRx Corporation and the Purchasers or representatives thereof ***** 10.23 Stock Purchase Agreement, dated as of October 5, 1994, between NeoRx Corporation and The DuPont Merck Pharmaceutical Company ++ 10.24 License Agreement, dated as of October 5, 1994, between NeoRx Corporation and The DuPont Merck Pharmaceutical Company ++ 10.25 Supply Agreement, dated November 10, 1994, between Cordis Corporation and NeoRx Corporation ++ 10.26 License Agreement, effective as of October 12, 1994, between Indiana University Foundation and NeoRx Corporation, as amended ++ 10.27 Agreement, dated as of June 1, 1987, between NeoRx Corporation and the Board of Trustees of the Leland Stanford Junior University, as amended ++ 10.28 Amendment No. 3, dated November 15, 1995, to Contract between NeoRx Corporation and the Board of Trustees of the Leland Stanford Junior University +++++ 10.29 Form of Registration Rights Agreement, dated January 30, 1996, by and among NeoRx Corporation and Grace Brothers, Ltd., Genesee Fund, Ltd. and SBSF Biotechnology Partners ++++ 10.30 Indemnification Agreement (++) # 10.31 Change of Control Agreement (++) ## 10.32 Form of Key Executive Severance Agreement (++) ## 10.33 Development, Distribution and Supply Agreement between NeoRx Corporation and Schwarz Pharma AG, dated March 31, 1997 X 10.34 Stock Purchase Agreement, dated May 24, 1997, between Schwarz Pharma AG and NeoRx Corporation XXX 10.35 Preferred Stock Purchase Agreement, dated August 8, 1997, between Johnson & Johnson Development Corporation and NeoRx Corporation XXXX 10.36 Agreement, entered into as of July 1, 1997, between Janssen Pharmaceutica, N.V. and NeoRx Corporation XXXX 10.37 Officer Change in Control Agreement ++ 10.38 Key Executive Severance Agreement ++ 10.39 License Agreement Between NeoRx and The Dow Chemical Company (DELTA) 16.1 Letter Regarding Change in Certifying Accountants XX 23.1 Consent of KPMG LLP XXXXX 27.1 Financial Data Schedules XXXXX
- -------------- * Filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference. ** Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-25161), filed April 14, 1997 and incorporated herein by reference. *** Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-28545) effective May 31, 1989 and incorporated herein by reference. **** Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference. ***** Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 33-64992) effective August 25, 1993 and incorporated herein by reference. ****** Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1991 and incorporated herein by reference. + Filed as an exhibit to the Company's Registration Statement on Form S-2 (Registration No. 33-71164) effective December 13, 1993 and incorporated herein by reference. ++ Filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. +++ Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 33-60029) effective August 8, 1995 and incorporated herein by reference. ++++ Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-00785) effective February 7, 1996 and incorporated herein by reference. +++++ Filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference.
ii ++++++ Filed as an exhibit to the Company's Registration Statement on Form 8-A, dated April 15, 1996 and incorporated herein by reference. + Filed as an exhibit to the Company's Registration Statement on Form S-8, filed July 31, 1997 and incorporated herein by reference. # Filed as an exhibit to the Company's Form 10-Q for the quarterly period ended March 31, 1996 and incorporated herein by reference. ## Filed as an exhibit to the Company's Form 10-Q for the quarterly period ended June 30, 1996 and incorporated herein by reference. X Filed as an exhibit to the Company's Form 10-Q for the quarterly period ended March 31, 1997 and incorporated herein by reference. XX Filed as an exhibit to the Company's Form 8-K dated April 11, 1997 and incorporated herein by reference. XXX Filed as an exhibit to the Company's Form 8-K dated June 11, 1997 and incorporated herein by reference. XXXX Filed as an exhibit to the Company's Form 8-K dated October 7, 1997 and incorporated herein by reference. XXXXX Filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1999 (DELTA) Filed as an exhibit to the Company's Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. Certain portions of the agreement have been omitted pursuant to a grant of confidential treatment. ++ Management contract or compensatory plan.
iii EX-23.1 2 EX-23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors NeoRx Corporation: We consent to incorporation by reference in the registration statements (Nos. 33-60029, 33-64992, 33-63169, 333-05661, 333-00785 and 333-25161) on Form S-3 and in the registration statements (Nos. 33-43860, 33-46317, 33-87108 and 333-32583) on Form S-8 of NeoRx Corporation, of our report dated February 4, 2000, relating to the balance sheets of NeoRx Corporation as of December 31, 1999 and 1998, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of NeoRx Corporation. KPMG LLP Seattle, Washington March 27, 2000 EX-27.1 3 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,752 15,289 0 0 0 19,607 8,323 7,405 20,765 1,748 1,195 0 4 421 17,397 20,765 0 591 0 0 15,354 0 117 (11,951) 0 (11,951) 0 0 0 (11,951) (.59) (.59)
-----END PRIVACY-ENHANCED MESSAGE-----