-----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, Chc52POkvt5zuiopYaNlfkJggAN2jUr3AURxeO4xlIT1aIIhdJZ7BXgTP5csUWLm THXXtNggLO+FKUnqBiwkWQ== 0000950123-99-010377.txt : 19991122 0000950123-99-010377.hdr.sgml : 19991122 ACCESSION NUMBER: 0000950123-99-010377 CONFORMED SUBMISSION TYPE: 424B4 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19991119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMCLONE SYSTEMS INC/DE CENTRAL INDEX KEY: 0000765258 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 042834797 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B4 SEC ACT: SEC FILE NUMBER: 333-87489 FILM NUMBER: 99760746 BUSINESS ADDRESS: STREET 1: 180 VARICK ST CITY: NEW YORK STATE: NY ZIP: 10014 BUSINESS PHONE: 2126451405 MAIL ADDRESS: STREET 1: 180 VARICK ST CITY: NEW YORK STATE: NY ZIP: 10014 424B4 1 IMCLONE SYSTEMS INCORPORATED 1 Filed pursuant to Rule 424(b)(2) Registration No. 333-87489 PROSPECTUS 2,750,000 Shares [IMCLONE LOGO] ImClone Systems Incorporated COMMON STOCK ------------------------ IMCLONE SYSTEMS INCORPORATED IS OFFERING 2,750,000 SHARES OF ITS COMMON STOCK. ------------------------ OUR COMMON STOCK IS LISTED FOR TRADING ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "IMCL." ON NOVEMBER 18, 1999, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $34 1/2 PER SHARE. ------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 10. ------------------------ PRICE $32 A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY ----------- ------------- ----------- Per Share.......................................... $32.00 $1.92 $30.08 Total.............................................. $88,000,000 $5,280,000 $82,720,000
We have granted the underwriters the right to purchase up to an additional 412,500 shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on November 24, 1999. ------------------------ MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO. PRUDENTIAL VECTOR HEALTHCARE WARBURG DILLON READ LLC a unit of Prudential Securities November 18, 1999 2 TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................... 5 Risk Factors............................ 10 Use of Proceeds......................... 20 Price Range of Common Stock............. 20 Dividend Policy......................... 20 Capitalization.......................... 21 Dilution................................ 22 Selected Consolidated Financial Data.... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 24 Business................................ 33 Management.............................. 50 Principal Stockholders.................. 55 Description of Capital Stock............ 57 Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock................................. 62 Underwriters............................ 64 Legal Matters........................... 65 Experts................................. 65 Where You Can Find More Information..... 66 Index to Financial Statements........... F-1
------------------------ In this prospectus, "ImClone," the "company," "we," "us" and "our" refer to ImClone Systems Incorporated. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. ------------------------ FORWARD-LOOKING STATEMENTS The statements incorporated by reference or contained in this prospectus discuss our future expectations, contain projections of our results of operations or financial condition, and include other "forward-looking" information within the meaning of Section 27A of the Securities Act of 1933, as amended. Our actual results may differ materially from those expressed in forward-looking statements made or incorporated by reference in this prospectus. Forward-looking statements that express our beliefs, plans, objectives, assumptions or future events or performance may involve estimates, assumptions, risks and uncertainties. Therefore, our actual results and performance may differ materially from those expressed in the forward-looking statements. Forward-looking statements often, although not always, include words or phrases such as the following: - "will likely result" - "are expected to" - "will continue" - "is anticipated" - "estimate" - "intends" - "plans" - "projection" - "outlook" 2 3 You should not unduly rely on forward-looking statements contained or incorporated by reference in this prospectus. Actual results or outcomes may differ materially from those predicted in our forward-looking statements due to the risks and uncertainties inherent in our business, including risks and uncertainties in: - clinical trial results - obtaining and maintaining regulatory approval - market acceptance of and continuing demand for our products - the impact of competitive products and pricing - our ability to obtain additional financing to support our operations - factors discussed in the documents listed below You should read and interpret any forward-looking statements together with the following documents: - our most recent Annual Report on Form 10-K - our Quarterly Reports on Form 10-Q - the risk factors contained in this prospectus under the caption "Risk Factors" - our other filings with the Securities and Exchange Commission Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made. ------------------------ ImClone was incorporated in Delaware in 1984 and began its principal research and development operations in March 1986. Our principal executive offices and laboratories are located at 180 Varick Street, New York, New York 10014, and our telephone number is (212) 645-1405. 3 4 (This page intentionally left blank) 4 5 PROSPECTUS SUMMARY This summary highlights information contained elsewhere or incorporated by reference in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully, including the "Risk Factors" section, the financial statements and the notes to those statements, and the documents incorporated by reference in this prospectus. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' overallotment option. IMCLONE OVERVIEW ImClone is a biopharmaceutical company engaged in the research and development of novel cancer treatments. We are currently pursuing three research and development programs that we believe show promise for treating cancer: growth factor inhibitors, cancer vaccines and angiogenesis inhibitors. Our lead product candidate, C225, is a therapeutic antibody that inhibits stimulation of a receptor found on the cells of certain solid tumors. C225 has been shown in several Phase I/II trials to have an acceptable safety profile, to be well tolerated and, when administered in conjunction with either radiation therapy or chemotherapy, to enhance tumor reduction. We are currently testing C225 in pivotal trials for treating head and neck cancer and in a Phase II clinical trial for colorectal cancer. Our next most advanced product candidate, BEC2, is a cancer vaccine. We and our partner Merck KGaA are testing BEC2 for preventing recurrence or progression of small-cell lung cancer in a multinational pivotal Phase III trial. We are also developing inhibitors of angiogenesis, or the growth of new blood vessels, to treat various kinds of cancer and other diseases. We have identified an antibody for angiogenesis inhibition, c-p1C11, and we plan to file an application with the FDA in the fourth quarter of 1999 in order to commence clinical trials. C225 CANCER THERAPEUTIC C225 is a monoclonal antibody that binds to a receptor, known as the Epidermal Growth Factor, or EGF, receptor. The EGF receptor is overexpressed on the cells of approximately one-third of all types of solid tumors. For these tumor types, the percentage of EGF receptor positive patients varies. For example, 90% of all head and neck cancer patients are positive for the EGF receptor, as well as a majority of colorectal and non small-cell lung cancer patients. The activation of the EGF receptor is believed to play a critical role in the proliferation of these types of tumor cells. C225 attaches to the EGF receptor and blocks this activation, thereby inhibiting cell proliferation. We are developing C225 as a therapeutic for treating, in conjunction with conventional radiation therapy or chemotherapy, those cancer types characterized by high levels of, and dependence upon, the EGF receptor. Completed Clinical Trials Since December 1994, we have completed several Phase I/II clinical trials to evaluate the safety and potential efficacy of C225. In these studies, we have given C225 to approximately 200 patients intravenously, both alone and in combination with conventional cancer therapies. In June 1999, we completed a Phase I/II trial in which 12 patients with advanced head and neck cancer were treated with C225 in combination with cisplatin, a widely used chemotherapeutic drug. At the completion of the trial, two of the nine evaluable patients had achieved a complete response (meaning that the tumor was reduced beyond measurable size) and four had achieved a partial response (meaning that the tumor was reduced by at least 50%). Most of the patients had previously received treatment, including standard chemotherapy, radiation therapy or experimental treatments, and either did not respond or thereafter relapsed. In particular, three of the six responders (including the two complete responders) had previously been treated with a regimen containing cisplatin and relapsed following such treatment. 5 6 In January 1999, we completed a Phase I/II trial in which 16 patients with advanced head and neck cancer were treated with C225 in combination with radiation therapy. At the completion of the trial, all 15 evaluable patients had responded to therapy; 13 of the patients had achieved a complete response and two had achieved a partial response. This compares with historical response rates of approximately 40% in similar patients treated with radiation alone. In all trials to date, while most patients have experienced skin rashes and three of the approximately 200 patients treated have experienced anaphylactic reactions, C225 has otherwise been generally well tolerated by patients. While encouraging, the results from these trials are not sufficient to establish that C225 is safe or effective in treating cancer. Ongoing Clinical Trials We have initiated two pivotal Phase III trials of C225 in treating head and neck cancer. One trial is evaluating the administration of C225 in combination with radiation as first-line therapy for advanced head and neck cancer that has not metastasized, or spread to other parts of the body. Enrollment commenced in April 1999, and we expect the study to take approximately two-and-one-half years to complete. The other Phase III trial is examining the effects of administration of C225 in combination with cisplatin as first-line therapy for metastatic or recurrent head and neck cancer. Patient treatment is expected to commence in November 1999, and we expect the study to take one-and-one-half years to complete. We have also initiated two additional Phase II C225 trials in patients who have not responded to conventional therapies. In the first trial, we are testing C225 in combination with cisplatin in patients with refractory head and neck cancer. In the second trial, we are testing C225 in combination with irinotecan, another commonly used chemotherapeutic agent, in patients with EGF receptor-positive refractory colorectal cancer. We expect that enough information may be available from these studies during the first half of 2000 to determine whether the data are sufficient to support an application for FDA approval of C225. In addition, we expect to conduct several additional Phase II clinical trials to continue to determine other types of cancer on which C225 may be effective. These may include pancreatic, lung and renal cancer. We also expect to conduct C225 clinical trials with Merck KGaA in Europe. Marketing and Development We have entered into a development and marketing agreement with Merck KGaA relating to C225. We have retained the right to market C225 within the United States and Canada, for which we are building our own sales force. Merck KGaA has the right to market C225 internationally; however, in Japan we will co-develop and co-market C225 with Merck KGaA. In addition, we will manufacture C225 for any and all commercial sales. Merck KGaA is required to pay us fees for various milestone achievements as well as royalties on all C225 sold by them. Merck KGaA has also agreed to provide a guaranty of our credit agreement obligations relating to the construction of our new C225 commercial manufacturing facility. BEC2 CANCER VACCINE BEC2 is a monoclonal antibody that we are developing as a cancer vaccine. This vaccine is given to a patient following successful treatment of a tumor and is intended to activate the patient's immune responses to protect against spread or recurrence of the tumor. BEC2 mimics GD3, a molecule expressed on the surface of several types of cancer cells. By mimicking GD3, BEC2 stimulates an immune response against cells expressing GD3. We have tested BEC2 in Phase I clinical trials against certain forms of cancer, including both small-cell lung cancer and melanoma. In one such trial, 15 patients with small-cell lung cancer who had previously received chemotherapy and radiation therapy and achieved a partial or complete response were treated with BEC2. At the time the results were analyzed, approximately 27% of the patients had survived nearly five years following diagnosis. These survival rates are longer than historical survival rates for similar patients receiving 6 7 conventional therapy and formed the basis for going forward with Phase III studies. This trial is not sufficient to establish that BEC2 is safe or effective in treating cancer. In conjunction with and funded primarily by Merck KGaA, we have initiated a 570-patient Phase III multinational clinical trial for BEC2 in the treatment of limited disease small-cell lung cancer. The trial will examine patient survival two years after a course of therapy. We expect to complete enrollment in the trial during 2001. We have entered into a development and marketing agreement with Merck KGaA relating to BEC2. Under this agreement, we have retained the right to co-promote BEC2 with Merck KGaA within North America, and we have granted Merck KGaA exclusive rights to develop and market BEC2 outside of North America. In addition, we intend to be the worldwide manufacturer of BEC2. MONOCLONAL ANTIBODY INHIBITOR OF ANGIOGENESIS Our lead anti-angiogenesis product candidate, c-p1C11, is an antibody that targets KDR, a principal receptor for a growth factor known as Vascular Endothelial Growth Factor, or VEGF. By blocking the binding of VEGF to KDR, c-p1C11 is designed to inhibit or eliminate tumor growth. We expect to file an application with the FDA by the end of 1999 in order to commence clinical trials of c-p1C11. OTHER RESEARCH In addition to the development of our lead product candidates, we continue to conduct research, both independently and in collaboration with academic and commercial partners, in a number of areas related to our core focus of growth factor inhibitors, cancer vaccines and angiogenesis inhibitors. 7 8 THE OFFERING Common stock offered................ 2,750,000 shares Common stock to be outstanding after the offering........................ 28,379,007 shares Over-allotment option............... 412,500 shares Use of proceeds..................... We intend to use the proceeds from this offering: - to fund the expansion of clinical trials - to fund a portion of the costs of our new manufacturing facilities - to develop a sales force in the United States - for general corporate purposes, including research and development expenses, and other working capital Dividend policy..................... We have never declared cash dividends on our common stock and have no present intention of declaring such cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors deems relevant. Nasdaq National Market Symbol....... IMCL The number of shares of our common stock to be outstanding after the offering does not take into account 7,675,550 shares of our common stock issuable upon exercise of outstanding options and warrants, having a weighted average exercise price of $9.65 per share, as of October 27, 1999. This number also does not include the 400,000 shares of series A preferred stock currently held by Merck KGaA, of which 100,000 shares are currently convertible into 800,000 shares of our common stock. This number also does not include common stock that will be issued for cash to Merck KGaA upon the achievement of certain milestones set forth in our agreement with Merck KGaA relating to C225. 8 9 SUMMARY FINANCIAL DATA The following financial data should be read in conjunction with, and are qualified by reference to, "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes included elsewhere in this prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues.................................... $ 600 $ 5,348 $ 4,193 $ 3,434 $ 1,021 Operating expenses: Research and development.................. 11,482 16,455 21,049 15,269 22,131 General and administrative................ 3,961 5,356 7,145 4,174 5,784 Net interest and other income(1)............ (95) (972) (2,619) (2,062) (529) -------- -------- -------- -------- -------- Loss before extraordinary item.............. (14,748) (15,491) (21,382) (13,947) (26,365) Extraordinary loss on extinguishment of debt...................................... 1,267 -- -- -- -- -------- -------- -------- -------- -------- Net loss.................................... (16,015) (15,491) (21,382) (13,947) (26,365) Preferred dividends......................... -- 163 3,668 2,747 2,800 -------- -------- -------- -------- -------- Net loss to common stockholders............. $(16,015) $(15,654) $(25,050) $(16,694) $(29,165) ======== ======== ======== ======== ======== Basic and diluted net loss per common share..................................... $ (0.83) $ (0.67) $ (1.03) $ (0.69) $ (1.17) ======== ======== ======== ======== ======== Weighted average shares outstanding......... 19,371 23,457 24,301 24,277 24,947
AS OF SEPTEMBER 30, 1999 --------------------------- ACTUAL AS ADJUSTED(2) --------- -------------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and securities....................... $ 34,263 $ 116,108 Working capital............................................. 12,061 93,906 Total assets................................................ 53,594 134,939 Long-term obligations, less current portion................. 3,563 3,563 Accumulated deficit......................................... (165,211) (165,211) Stockholders' equity........................................ 26,062 107,907
- ------------ (1) Net interest and other income is presented net of interest income, interest expense and realized gains and losses on securities available for sale. (2) As adjusted to reflect receipt of the estimated net proceeds from the sale of 2,750,000 shares of common stock at a public offering price of $32 per share. See "Use of Proceeds" and "Capitalization." 9 10 RISK FACTORS You should carefully consider each of the following risks and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. Some of the following risks relate principally to our business and the industry in which we operate. Other risks relate principally to the securities market and ownership of our common stock. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently believe to be immaterial may also adversely affect our business. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. OUR LEAD PRODUCT CANDIDATES ARE IN DEVELOPMENT, AND WE CANNOT BE CERTAIN THAT ANY OF OUR PRODUCTS WILL BE COMMERCIALIZED Our lead product candidates, C225 and BEC2, are in clinical trials. Before we can commercialize any of our product candidates and begin to sell them to generate revenues, we will need to demonstrate in pivotal clinical trials that they are safe and effective and obtain the necessary approvals from the United States Food and Drug Administration and similar foreign regulatory agencies. It is not certain that clinical trials will demonstrate that our products are safe and effective, or that we can obtain the required regulatory approvals to commercialize them. With respect to C225, there can be no assurance that, even if we were to ultimately receive regulatory approval, we would be able to receive such approval based on the results of our ongoing Phase II clinical trials. Further, even if we successfully develop a product, there is no assurance that we will be able to successfully manufacture or market that product. If we are unable to successfully commercialize C225 and BEC2, our liquidity and financial condition could be materially negatively affected. WE HAVE BEEN OPERATING AT A LOSS AND EXPECT TO INCUR SIGNIFICANT FUTURE LOSSES We have had significant operating losses in each year and have not earned a profit in any year since we formed ImClone. These operating losses and failure to be profitable have been due mainly to the significant amount of money that we have had to spend on research and development. As of September 30, 1999, we had an accumulated deficit of approximately $165 million. We expect to continue to have significant additional operating losses as we continue to expand our product development and clinical trials and initiate marketing efforts. We may never commercialize any of our products or achieve profitability. WE MAY NOT BE ABLE TO OBTAIN THE EXTENSIVE GOVERNMENT APPROVALS REQUIRED TO BRING OUR PRODUCTS TO MARKET The research, pre-clinical development, clinical trials, manufacturing and marketing of our products are all subject to extensive regulation by U.S. and foreign governmental authorities. Although we intend to seek expedited approval for certain of our products, including C225, there can be no assurance that the FDA will grant us expedited review status for any of our potential filings. Failure to receive regulatory approvals for our product candidates and operations in our expected timeframes could have a material negative effect on our liquidity and financial condition. The FDA and similar foreign regulatory authorities regulate our clinical trials as well as our manufacturing and marketing operations. They require us to comply with product-specific testing and approval processes. It may take many years and cost a significant amount of money to obtain the required regulatory approvals for our products. Once we begin clinical trials for a new biologic therapeutic or vaccine product, it may take five or more years to receive the required FDA approval to commercialize that product and begin to sell and market it to the public. It may also take several years to develop a new in vitro diagnostic product, depending upon the clinical data requirements or approval process specified by the FDA for the approval of the product. The FDA may also request additional data which could substantially extend these approval processes. We cannot be certain that any of our products will be shown to be safe and effective or that we will ultimately receive FDA approval at the end of these approval processes. In addition, even if granted, product approvals may be withdrawn or limited at a later time if products do not comply with regulatory standards or if unexpected problems occur following initial marketing. Since our product candidates are still in clinical trials, we have not yet sought or received regulatory approval for the commercial sale of any of our products or for any manufacturing techniques or facilities. We and our licensees may experience long delays or excessive costs when we do attempt to get necessary approvals or licenses. Future federal, state, local or foreign legislative or administrative acts could also prevent or delay 10 11 regulatory approval of our products or the products of our licensees. We cannot be certain that we or our corporate partners will be able to get the necessary approvals for clinical testing, manufacturing or marketing of our products, or that we will meet our expected timeframes for any such approvals. Any of the following events, if they were to occur, could delay or preclude us from further developing, marketing or realizing full commercial use of our products, which in turn would have a material adverse effect on our business, financial condition and results of operations: - failure to obtain or maintain requisite governmental approvals - failure to obtain approvals of clinically intended use of our products under development - identification of serious and unanticipated adverse side effects from our products under development Manufacturers of drugs also must comply with the applicable FDA good manufacturing practice regulations, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed as part of the product approval process before they can be used in commercial manufacturing. We or our present or future suppliers may be unable to comply with the applicable good manufacturing practice regulations and other FDA regulatory requirements. OUR SUCCESS DEPENDS UPON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND OUR PROPRIETARY TECHNOLOGY The patent position of ImClone, like that of other biopharmaceutical companies, is generally very uncertain and involves complex legal and factual questions. Our success will depend, in part, on whether we can: - obtain patents to protect our own products - obtain licences to use certain technologies of third parties, which may be protected by patents - protect our trade secrets and know-how - operate without infringing the intellectual property and proprietary rights of others We may not be able to obtain patents that adequately protect our own products. Also, our proprietary technologies could conflict with the rights of others. Our ability to commercialize and market our products using any such technologies could be materially and negatively affected. We have exclusive licenses or assignments to 63 issued patents worldwide. Thirty-seven of those are issued U.S. patents. We have exclusive licenses or assignments to approximately 43 families of patent applications that relate to our proprietary technology in the U.S. and in foreign countries. We cannot be certain that patents will be issued as a result of any of these pending applications. Nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid. In addition, under many of the agreements under which we have licenses to the patents or patent applications of others, we are required to meet specified milestone or diligence requirements in order to keep our licenses. We cannot be certain that we will satisfy any of these requirements. We know that others have filed patent applications in various countries that relate to several areas in which we are developing products. Some of these patent applications have already been issued as patents and some are still pending. The pending patent applications may issue as patents. Issued patents are entitled to a rebuttable presumption of validity under the laws of the U.S. and certain other countries. These issued patents may therefore limit our ability to develop commercial products. If we need licenses to such patents to permit us to develop or market our products, we cannot be certain that we would be able to get such licenses on acceptable terms. Proprietary trade secrets and unpatented know-how are important to our research and development activities. We cannot be certain that others will not develop the same or similar technologies on their own. 11 12 Although we have taken steps, including entering into confidentiality agreements with our employees and third parties, to protect our trade secrets and unpatented know-how and keep them secret, third parties may still obtain such information. The following are some of the specific areas in which we may be negatively affected by the patents and patent applications of others: We have an exclusive license to an issued U.S. patent for the murine form of C225, our EGF receptor antibody product. We believe that this patent covers C225 under the patent law doctrine of equivalents. Under this doctrine, the subject matter of a claim is deemed to cover variations that do substantially the same thing, in substantially the same way, to achieve the same result, especially if the variation is known and routine. We believe, in this instance, the doctrine of equivalents would extend protection to C225. Our licensor of this patent did not obtain patent protection outside the U.S. for this antibody. While this patent covers only our antibody and would not block third parties from obtaining patents covering other antibodies to the EGF receptor, we are pursuing additional patent protection for the use of any antibody that inhibits the EGF receptor in combination with chemotherapy or radiation therapy, or when used to treat refractory patients. We have exclusively licensed, from Rhone-Poulenc Rorer, a family of patent applications seeking to cover the use of antibodies to the EGF receptor in conjunction with chemotherapeutic agents. A Canadian patent was issued in this family, and the patent examiner in Europe has indicated an intent to issue a European patent. U.S. prosecution continues. We are also currently prosecuting additional patent applications in the U.S. and elsewhere. We cannot be certain that patents will ever be issued in respect of these patent applications or that we will have sufficient protection for C225. We are aware of a U.S. patent issued to a third party that includes claims covering the use, subject to certain restrictions, of antibodies to the EGF receptor and cytotoxic factors to inhibit tumor growth. We have retained special patent counsel, Kenyon & Kenyon, which has advised us that in its opinion, subject to the assumptions and qualifications set forth in such opinion, no valid claim of this third party patent is infringed by reason of our manufacture or sale, or medical professionals' use, of C225 alone or in combination with chemotherapy or radiation therapy and, therefore, in the event of litigation for infringement of this third party patent, a court should find that no valid claim of this third party patent is infringed. We have also received an opinion from our regular patent counsel, Hoffmann & Baron, LLP, that we do not infringe this third party patent. Based upon these opinions, as well as our review, in conjunction with our regular patent counsel, of other relevant patents, we believe that we will be able to commercialize C225 alone and in combination with chemotherapy and radiation therapy provided we successfully complete our clinical trials and receive the necessary FDA approvals. These opinions of counsel, however, are not binding on any court or the U.S. Patent and Trademark Office. In addition, there can be no assurance that we will not in the future, in the U.S. or any other country, be subject to patent infringement claims, patent interference proceedings or adverse judgments in patent litigation. The C225 monoclonal antibody is chimerized, meaning that it is made of antibody fragments derived from more than one type of animal (specifically, in the case of C225, mouse and human). Patents have been issued to other biotechnology companies that cover the chimerization of antibodies. Therefore, we may be required to obtain licenses under these patents, some of which have already been obtained, before we can commercialize our own chimerized monoclonal antibodies, including C225. We cannot be certain that we will be able to obtain such licenses in the territories where we want to commercialize, or how much such licenses would cost. We know that others have been issued patents in the U.S. and Europe covering anti-idiotypic antibodies or their use for the treatment of tumors. These patents, if valid, could be interpreted to cover our BEC2 monoclonal antibody and certain uses of BEC2. Merck KGaA, our worldwide licensee of BEC2, has informed us that it has obtained non-exclusive, worldwide licenses to these patents in order to market BEC2 in its territory. We are entitled to co-promote BEC2 in North America. However, we cannot be certain that we can obtain the necessary licenses on commercially acceptable terms, if at all. We have patents and have filed patent applications to protect our proprietary rights to anti-angiogenic therapeutics, as well as therapeutic methods of treating angiogenic disease. We are aware that others have 12 13 filed patent applications that could affect our ability to commercialize some of our anti-angiogenic therapeutics or therapeutic treatments. We are aware that third parties have filed patent applications in areas that could affect our ability or Abbott Laboratories's ability to commercialize our diagnostic products. These areas could include target amplification technology and signal amplification technology. Third party patents have already been issued in the field of target amplification such as polymerase chain reaction technology. There has been significant litigation in the biopharmaceutical industry over patents and other proprietary rights. The defense and prosecution of intellectual property suits and related legal and administrative proceedings can be both costly and time consuming. Litigation and interference proceedings could result in substantial expense to us and significant diversion of effort by our technical and management personnel. An adverse determination in any such interference or litigation, particularly with respect to C225, to which we may become a party could subject us to significant liabilities to third parties or require us to seek licenses from third parties. If required, the necessary licenses may not be available on acceptable terms or at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us, in whole or in part, from commercializing our products, which could have a material adverse effect on our business, financial condition and results of operations. WE CURRENTLY HAVE LIMITED MANUFACTURING CAPACITY AND WILL NEED TO ENTER INTO ARRANGEMENTS WITH THIRD PARTY MANUFACTURERS So far, we have manufactured only small quantities of our products in the laboratory and our pilot-scale manufacturing facility. In some cases, we have produced enough for pre-clinical animal trials and early-stage clinical trials. We can only be profitable if our products are manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. However, it may be difficult for us to produce large enough quantities for late-stage clinical trials or for more than one product candidate. Production in commercial quantities will require us to expand our manufacturing capabilities significantly and hire and train additional personnel. We have limited experience in clinical-scale manufacturing and no experience in commercial-scale manufacturing. To date, C225 has been manufactured at a 2,000 liter scale. We expect that the commercial supply of C225 will be manufactured at the 10,000 liter scale. There can be no assurance, however, that we will be successful in scaling up the production process for C225 to the 10,000 liter scale. Therefore, we cannot be certain that we will be able to make the transition to late-stage clinical or commercial production of C225 or any other of our products successfully. In addition, we cannot be certain that our production costs will not be higher than expected. We are in the process of acquiring land adjacent to our current facility in New Jersey on which we plan to build a commercial-scale manufacturing plant for our products. The cost to build such a facility will be high and the construction process will take several years. We have completed plans for, and will begin construction of the plant before we have received FDA approval for any of our product candidates. If we do not obtain FDA approval for these product candidates, the financing and other costs associated with the new manufacturing facility could have an adverse effect on our liquidity and financial condition. Alternatively, if any of our products are approved for sale, and we encounter difficulty or delays in completing the new manufacturing facility, obtaining the required FDA approval of the facility or in manufacturing commercial quantities of our products, such difficulties or delays could have a material adverse effect on our business, financial condition or results of operations. If we obtain FDA approval of C225 prior to FDA approval of our proposed manufacturing facility, we will need to obtain commercial-scale quantities of C225 from one or more contract manufacturers in order to have sufficient quantities of C225 for product launch. In any event, we intend to seek to enter into arrangements with contract manufacturers in order to provide a second source for our products as well as additional capacity for the manufacture of our products. To date, we have entered into an agreement with Boehringer Ingelheim Pharmaceuticals KG ("BI") under which BI has manufactured C225 in relatively small quantities to supplement the quantities of C225 that we produce and use in clinical trials. We may pursue an agreement with another third party relating to the manufacture of C225 for both clinical trials and commercial sale. We 13 14 cannot be certain that we will be able to enter into this agreement or any other agreements with third party manufacturers on terms acceptable to us or at all. Even if we are able to enter into such agreements, we cannot be certain that we will be able to produce or obtain sufficient quantities for the commercial sale of our products. Any delays in producing or obtaining commercial quantities of our products could have a material adverse effect on our business, financial condition and results of operations. We are also dependent upon a sole supplier of a component of the media used in the production of C225. If this supply were to cease, it could hinder our ability to manufacture C225 in the quantities required. OUR BUSINESS DEPENDS UPON OUR CORPORATE PARTNERS So far, we have earned almost all of our revenues from research and development funding and license fees and royalties paid to us under agreements with our corporate partners. We expect this to continue over the next several years. License fees may be payable to us either when we first enter into an agreement or when and if we or our corporate partners, depending on the agreement, reach agreed-upon research, regulatory and commercialization milestones, or both. We do not receive any of these payments at regular intervals; the amounts have fluctuated in the past and we expect them to continue to fluctuate in the future. In most cases, our corporate partners can terminate these arrangements, including their payment obligations, on relatively short notice under specified circumstances. We cannot be certain that we will continue to receive revenues from these arrangements, or that we will enter into any new similar agreements. The successful development, marketing and sale of our products worldwide is subject to the risk of financial or other difficulties with respect to our relationships with our corporate partners. The amount and timing of payments we receive under our arrangements with these parties depend upon variables that are out of our control. In addition, our corporate partners or their affiliates may be developing their own products or technologies which may directly compete with products that are the subject of their arrangements with us. While we believe that our corporate partners are or will be economically motivated to work toward successful arrangements with us, we cannot be certain that their corporate interests and motivations will remain consistent with ours. In December 1998, we entered into an agreement with Merck KGaA, a German-based drug company, relating to the development, marketing and sale of C225. Under this agreement: - we have retained the rights to develop and market C225 within the United States and Canada - we have granted Merck KGaA exclusive rights, except in Japan, to develop and market C225 outside of the United States and Canada - we have agreed to supply Merck KGaA, and Merck KGaA has agreed to purchase, C225 for the conduct of clinical trials and the commercialization of the product outside the United States and Canada - we will co-develop and co-market C225 in Japan with Merck KGaA - we have granted Merck KGaA an exclusive license outside of the United States and Canada, without the right to sublicense, to apply certain of our patents to a humanized EGF receptor antibody on which Merck KGaA has performed preclinical studies In return, Merck KGaA agreed to pay up-front fees and to make cash payments and equity investments in our business if specific milestones are achieved. Merck KGaA will also pay us royalties on any sales of C225 outside the United States and Canada. In addition, Merck KGaA has agreed to provide a guaranty of our obligations under a credit agreement relating to the construction of our new C225 manufacturing facility. We have also granted Merck KGaA a license to develop and market BEC2 worldwide. We have retained the right to co-promote BEC2 with Merck KGaA within North America and it is intended that we will be the bulk manufacturer of BEC2 for worldwide production. In return, Merck KGaA has agreed to pay up-front 14 15 fees, to make cash milestone payments and to make royalty payments to us on all sales of BEC2 outside North America. If Merck KGaA fails to complete development of or does not commence commercialization of C225 and BEC2, we would not receive any royalties on sales by Merck KGaA, although the product rights would revert to us. Merck KGaA can terminate its relationship with us under the agreement with respect to C225 at its discretion on any milestone payment date. If Merck KGaA were to terminate that agreement or we failed to meet certain requirements of that agreement, we would lose one of our primary sources of funding and would have to look elsewhere for financing. As well as losing future payments, if Merck KGaA were to terminate the agreement because it determined that commercialization of C225 was economically unfeasible, we would have to pay back up to 50% of the cash-based milestone payments made to date out of revenues, if any, based upon a royalty rate applied to the gross profit from C225 sales or C225 license fees in the United States and Canada. Additionally, the termination of the agreement due to Merck KGaA's failure to provide the guaranty of our credit agreement obligations with respect to our new C225 manufacturing facility, or our failure to obtain the necessary collateral license agreements, would require us to return all milestone payments made to date. Finally, upon termination we would be required to use our reasonable best efforts to have Merck KGaA released from its guaranty of our credit agreement obligations with respect to our new C225 manufacturing facility. This release of Merck KGaA would likely cause the acceleration of our obligations under this credit agreement. Thus, termination of the agreement with Merck KGaA relating to C225 could have a material adverse effect on our business, financial condition and results of operations. WE WILL CONTINUE TO NEED SIGNIFICANT AMOUNTS OF ADDITIONAL CASH AND WE CANNOT BE SURE THAT ADDITIONAL CASH WILL BE AVAILABLE TO US At this time and for the foreseeable future, we will need to spend a significant amount of money for, among others, the following purposes: - ongoing pre-clinical and clinical trials of our product candidates - research and development of new products - establishing both clinical-scale and commercial-scale manufacturing capability in our own facilities and/or in the facilities of others - marketing our products if we receive necessary regulatory approvals - payment of dividends on our convertible series A preferred stock We believe that our existing cash on hand and amounts expected to be available under our credit facilities, together with net proceeds from this offering, will be sufficient to fund ImClone through at least 2001. We are also entitled to reimbursement from our corporate partners for certain research and development expenditures and to certain milestone payments. However, we will only receive future milestone payments from our corporate partners if we meet specified research and development milestones. We have not yet achieved some of those milestones and we cannot be certain that we will ever do so. Our C225 agreement with Merck KGaA is subject to termination at Merck's discretion on certain dates and so we cannot be certain of the level of future payments, if any, under this agreement. The cash available from our existing corporate partners may be insufficient to meet our needs. We may also need to seek additional capital through equity or debt financings or from other sources. We cannot be certain that we will successfully complete any such arrangements or financings. If adequate funds are not available from operations or additional sources of financing, we may have to delay, reduce the scope of or eliminate one or more of our research or development programs, which would materially and adversely affect our business, financial conditions and operations. 15 16 ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN, AND FAILURE TO ACHIEVE MARKET ACCEPTANCE WILL HARM OUR BUSINESS Even if approved for marketing, our products may not achieve market acceptance. The degree of market acceptance of our products will depend upon a number of factors, including: - the receipt of regulatory approvals for the uses that we are studying - the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products - pricing and reimbursement policies of government and third-party payors such as insurance companies, health maintenance organizations and other plan administrators Physicians, patients, payors or the medical community in general may be unwilling to accept, utilize or recommend any of our products. WE NEED TO ESTABLISH OUR SALES, MARKETING AND DISTRIBUTION CAPABILITY To date, we have had no experience in selling, marketing or distributing new products. If we are successful in developing and obtaining regulatory approval for our products under development, we will need to establish our sales, marketing and distribution capability. Under our agreement with Merck KGaA for C225, we have the exclusive right to market C225 in the United States and Canada if it is approved for sale there. We also will co-develop and co-market C225 with Merck KGaA in Japan. Under our agreement with Merck KGaA for BEC2, we have the right to co-promote BEC2 in North America if it is approved for sale there. If and when we want to market a new product on our own, we will need expertise in sales and marketing. We currently plan to build our own sales force to market and sell C225 in the United States and Canada. However, we cannot be certain that we will be able to hire and train qualified or experienced sales and marketing personnel or that any marketing or sales efforts by such personnel will be successful. If we are unable to recruit or retain suitable sales and marketing personnel, it could have a material adverse effect on our business, financial condition and results of operations. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE Our products are now in research and various stages of development or clinical studies. Accordingly, we do not sell or receive any revenues from sales of these products. At this time, most of our revenues come from payments we receive from our corporate partners under license and research arrangements. Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to be subject to quarterly fluctuations. The level of our revenues and results of operations at any given time is based primarily on the following factors: - the status of development of our various products - the time at which we enter into research and license agreements with corporate partners that provide for payments to us, and the timing and accounting treatment of payments to us under those agreements - whether or not we achieve specified research or commercialization milestones - timely payment by our corporate partners of amounts payable to us - the addition or termination of research programs or funding support - variations in the level of expenses related to our proprietary products during any given period We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. These fluctuations may cause the price of our stock to fluctuate, perhaps substantially. 16 17 OUR SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS Our ability to successfully develop marketable products and to maintain a competitive position will depend in large part on our ability to attract and retain highly qualified scientific and management personnel. We will also need to develop and maintain relationships with leading research institutions and consultants. Our success is also very dependent upon the principal members of our management, scientific staff and scientific advisory board, many of whom have special expertise and would be difficult to replace. Competition for such personnel and relationships is intense, and we cannot be certain that we will be able to continue to attract and retain such personnel and maintain such relationships. WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGE OR WITH THE ADVANCES OF OUR COMPETITORS The biopharmaceutical industry is subject to rapid and significant technological change. We have many competitors, including major drug and chemical companies, specialized biotechnology firms, universities and other research institutions. These competitors may develop technologies and products that are more effective than our products or which would make our technology and products obsolete and non-competitive. Many of these competitors have much greater financial and technical resources and production and marketing capabilities than we do. In addition, many of our competitors have much more experience than we do in pre-clinical testing and human clinical trials of new or improved drugs, as well as in obtaining FDA and other regulatory approvals. We know that competitors are developing or manufacturing various products that are used for the prevention, diagnosis or treatment of diseases that we have targeted for product development. Some of these competitive products use therapeutic approaches that compete directly with certain of our product candidates. Our competitors may succeed in obtaining FDA approval for their competitive products sooner than we do for ours. This could hurt our ability to further develop and market our products. Also, if we do begin significant commercial sales of our products, we will have to compete with the established manufacturing and marketing capabilities of our competitors. Manufacturing and marketing are areas in which we have limited or no experience. WE MAY HAVE PRODUCT LIABILITY EXPOSURE Because our product candidates are new treatments for diseases, with limited, if any, past use on humans, their use during testing or after approval could expose us to product liability claims. We cannot be certain that we would have enough money available to satisfy any liability that might result from any such claims. We try to obtain indemnification from our corporate partners against certain of these types of claims. However, we cannot be certain that these parties would honor any such indemnity obligations. Although we carry product liability insurance, we cannot be certain that this coverage will be adequate to protect us in the event of a successful product liability claim or that the insurance will continue to be available on commercially reasonable terms. HEALTH CARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS, OR MAY IMPOSE LIMITS ON REIMBURSEMENTS The continuing efforts of government and insurance companies, health maintenance organizations and other payors of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers and collaborative partners and the availability of capital. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a material adverse effect on our business, financial condition and results of operations. 17 18 Our ability to commercialize our products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of our products and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially adversely affect our ability to operate profitably. OUR COMPUTER SYSTEMS, AND OTHER COMPUTER SYSTEMS THAT AFFECT OUR BUSINESS, MAY EXPERIENCE PROBLEMS WHEN THE CALENDAR YEAR CHANGES FROM 1999 TO 2000 We have completed a review of our internal computer systems, and we are in the process of making inquiries of groups with which we do business with respect to their computer systems, to determine whether these systems will experience a "Year 2000 problem." A Year 2000 problem would result from a computer system recognizing the first two digits of a year after the year 1999 as "19" instead of "20," thereby reading the wrong year. We cannot be certain that we will be able to successfully do this, or that the groups with which we do business will identify and replace their computer systems which would cause a Year 2000 problem. The failure to identify and remedy Year 2000 problems could disrupt important operations which could affect the development and ultimate marketing of potential products as well as put us at a competitive disadvantage relative to companies that have corrected such problems. OUR STOCK PRICE MAY BE VOLATILE The market price for our common stock could decline below the past or current public offering prices. We believe that the following factors, among others, have caused the market price of our common stock to fluctuate substantially, and that they will continue to do so in the future: - the results of preclinical testing and clinical trials by us or our competitors - the formation or termination of our corporate alliances - determinations regarding our patent applications and those of others - variations in our quarterly operating results The stock market has recently experienced extreme price and volume fluctuations. These fluctuations have especially affected the market price of the stock of many high technology and healthcare-related companies. Such fluctuations have often been unrelated to the operating performance of these companies. Nonetheless, these broad market fluctuations may negatively affect the market price of our common stock. EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE Sales of substantial amounts of our common stock in the open market, or the availability of such shares for sale, could adversely affect the price of our common stock. Upon completion of this offering, we expect to have 28,379,007 shares of common stock outstanding, excluding shares reserved for issuance upon the exercise of outstanding stock options, warrants and preferred stock (or 28,791,507 shares of common stock outstanding if the underwriters' over-allotment option is exercised in full). The following securities that may be exercised for, or are convertible into, shares of our common stock were issued and outstanding as of October 27, 1999: - Warrants. Various warrants to purchase 1,791,590 shares of our common stock, all of which are currently exercisable, at an average exercise price of approximately $2.96 per share (subject to adjustment in certain circumstances). - Options. Stock options to purchase 5,883,960 shares of our common stock at an average exercise price of approximately $11.68 per share (subject to adjustment in certain circumstances); of this total, 2,526,669 are currently exercisable at an average exercise price of approximately $7.06 per share. 18 19 - Series A Preferred Stock. 400,000 shares of our Series A Preferred Stock are outstanding, of which 100,000 shares are currently convertible into 800,000 shares of our common stock, at a conversion price of $12.50 per share. These shares are held by Merck KGaA. The shares of our common stock that may be issued under the warrants and options are either currently registered with the SEC, or will be registered with the SEC before the shares are purchased by the holders of the warrants and options. Under our license agreement with Merck KGaA for C225, we are entitled to receive from Merck KGaA up to $60 million upon our achievement of various milestones in the development of C225. In connection with making the final $30 million of these milestone payments, Merck KGaA is entitled to receive milestone shares from us, which, if issued, will be shares of our common stock (or other capital stock convertible into our common stock). The number of milestone shares issued will be determined based on premiums to then-market prices of our common stock at the time the milestones are achieved. As of October 27, 1999, Merck KGaA has not acquired any milestone shares convertible into common stock. We have granted Merck KGaA certain registration rights regarding the shares of common stock that they may acquire upon conversion of the series A preferred shares and upon receipt of milestone shares. Specifically, Merck KGaA has the right to require us to register, at our expense, the number of shares of common stock into which the shares of series A preferred stock are converted according to their terms and the number of milestone shares that are issued. Merck KGaA may also exercise rights to have such registrable common stock registered at any time that we file a registration statement for other shares of our common stock. Merck KGaA may exercise these rights at any time after conversion of its shares of series A preferred stock into shares of common stock or receipt of milestone shares. As of October 27, 1999, Merck KGaA has not converted any series A preferred stock into common stock. We, our directors, our officers and certain other stockholders have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, none of us will, during the period ending 90 days after the date of this prospectus, sell or otherwise dispose of any shares of our common stock, subject to certain exceptions. 19 20 USE OF PROCEEDS We will receive net proceeds from this offering of about $81.8 million at a public offering price of $32 per share after deducting the underwriting discounts and estimated expenses ($94.3 million if the underwriters exercise their over-allotment option in full). We intend to use such proceeds: - to fund the expansion of clinical trials - to fund a portion of the costs of our new manufacturing facilities - to develop a sales force in the United States - for general corporate purposes, including research and development expenses, and other working capital Pending the use of the net proceeds of this offering, we will invest the funds in short-term, interest-bearing, investment-grade securities. PRICE RANGE OF COMMON STOCK Our common stock is quoted on the Nasdaq National Market under the symbol "IMCL." The following table sets forth, for the periods indicated, the range of high and low sale prices for our common stock. On November 18, 1999, the reported last sale price for our common stock was $34 1/2 per share.
COMMON STOCK PRICE -------------- HIGH LOW ---- ---- YEAR ENDED DECEMBER 31, 1997 First Quarter............................................... $10 1/8 $ 5 3/4 Second Quarter............................................ 7 7/8 4 5/8 Third Quarter............................................. 8 1/8 4 5/8 Fourth Quarter............................................ 8 1/2 5 21/32 YEAR ENDED DECEMBER 31, 1998 First Quarter............................................. 8 7/16 5 5/8 Second Quarter............................................ 13 7/8 7 5/8 Third Quarter............................................. 13 7/8 8 1/4 Fourth Quarter............................................ 12 1/8 5 9/16 YEAR ENDED DECEMBER 31, 1999 First Quarter............................................. 16 15/16 8 3/4 Second Quarter............................................ 26 15 1/2 Third Quarter............................................. 39 1/2 21 5/16 Fourth Quarter (through November 18, 1999)................ 34 9/16 16 1/4
DIVIDEND POLICY We have never declared cash dividends on our common stock and have no present intention of declaring such cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors our board of directors deems relevant. In addition, the terms of our Series A Convertible Preferred Stock (the "series A preferred stock") restrict our ability to pay dividends on our common stock. See "Description of Capital Stock." 20 21 CAPITALIZATION The following table sets forth the total capitalization of our company at September 30, 1999 and as adjusted to reflect our receipt of the estimated net proceeds from our sale of 2,750,000 shares of common stock pursuant to this offering at a public offering price of $32 per share. This table should be read in conjunction with the Selected Consolidated Financial Data appearing on page 23 in this prospectus.
AS OF SEPTEMBER 30, 1999 ------------------------ ACTUAL AS ADJUSTED --------- ----------- (UNAUDITED) (IN THOUSANDS) Long-term debt.............................................. $ 2,200 $ 2,200 Other long-term liabilities, less current portion........... 1,363 1,363 Stockholders' equity: Preferred stock, $1.00 par value; 4,000,000 shares authorized; series A preferred stock: 400,000 shares authorized, issued and outstanding, actual and 400,000 as adjusted (preference in liquidation $44,307,000).... 400 400 Common stock, $.001 par value; 60,000,000 shares authorized; 25,671,324 shares issued and 25,620,507 shares outstanding, actual; 28,421,324 shares issued and 28,370,507 shares outstanding, as adjusted......... 26 28 Additional paid-in capital................................ 191,094 272,937 Accumulated deficit....................................... (165,211) (165,211) Treasury stock, at cost; 50,817 shares actual and 50,817 as adjusted............................................ (492) (492) Note receivable--officer and stockholder.................. (139) (139) Accumulated other comprehensive income.................... 384 384 --------- --------- Total stockholders' equity............................. 26,062 107,907 --------- --------- Total capitalization.............................. $ 29,625 $ 111,470 ========= =========
The number of shares of our common stock to be outstanding after the offering does not take into account 7,675,550 shares of our common stock issuable upon exercise of outstanding options and warrants, having a weighted average exercise price of $9.65 per share, as of October 27, 1999. This number also does not include the 400,000 shares of series A preferred stock currently held by Merck KGaA, of which 100,000 shares are currently convertible into 800,000 shares of our common stock. This number also does not include common stock that will be issued for cash to Merck KGaA upon the achievement of certain milestones set forth in our agreement with Merck KGaA relating to C225. 21 22 DILUTION Our net tangible book deficit on September 30, 1999 was $(14.9) million or $(0.58) per common share. Net tangible book deficit per common share is determined by dividing our tangible net worth, which equals total tangible assets less total liabilities less the liquidation value of the series A preferred stock, excluding accrued dividends, by the aggregate number of shares of our common stock outstanding. After giving effect to the sale by us of the 2,750,000 shares of common stock in this offering, at a public offering price of $32 per share, our net tangible book value at September 30, 1999 would have been $67.0 million, or $2.36 per common share. This represents an immediate increase in net tangible book value to existing stockholders of $2.94 per common share and an immediate dilution to new investors of $29.64 per common share. The following table illustrates this per share dilution: Assumed public offering price per common share.............. $32.00 Net tangible book deficit per common share as of September 30, 1999.................................................... $(0.58) Increase per share attributable to new investors.......... 2.94 ------ Net tangible book value per common share after offering..... 2.36 ------ Dilution per share to new investors......................... $29.64 ======
Dilution is determined by subtracting net tangible book value per common share after the offering from the public offering price per common share. 22 23 SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data of ImClone should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the balance sheet data as of December 31, 1997 and 1998 are derived from, and qualified by reference to, the audited financial statements included elsewhere in this prospectus, and should be read in conjunction with those financial statements and notes thereto. The statement of operations data for the nine-month periods ended September 30, 1998 and 1999 and the balance sheet data as of September 30, 1999 are derived from our unaudited financial statements included elsewhere in this prospectus, and which, in our opinion, have been prepared on a basis consistent with the audited financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. Results for the nine months ended September 30, 1999 are not necessarily indicative of results that may be expected for the entire year.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 -------- ------- -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues.............................................. $ 950 $ 800 $ 600 $ 5,348 $ 4,193 $ 3,434 $ 1,021 Operating expenses: Research and development............................ 11,816 8,768 11,482 16,455 21,049 15,269 22,131 General and administrative.......................... 3,348 3,739 3,961 5,356 7,145 4,174 5,784 Net interest and other income(1)...................... (2,365) (2,066) (95) (972) (2,619) (2,062) (529) Equity in loss of affiliate........................... 342 -- -- -- -- -- -- -------- ------- -------- -------- -------- -------- -------- Loss before extraordinary item........................ (12,191) (9,641) (14,748) (15,491) (21,382) (13,947) (26,365) Extraordinary loss on extinguishment of debt............................................. -- -- 1,267 -- -- -- -- -------- ------- -------- -------- -------- -------- -------- Net loss.............................................. (12,191) (9,641) (16,015) (15,491) (21,382) (13,947) (26,365) Preferred dividends (including assumed incremental yield of $51 in 1997, $1,268 in 1998, $952 in 3Q98 and $1,005 in 3Q99)................................. -- -- -- 163 3,668 2,747 2,800 -------- ------- -------- -------- -------- -------- -------- Net loss to common stockholders....................... $(12,191) $(9,641) $(16,015) $(15,654) $(25,050) $(16,694) $(29,165) ======== ======= ======== ======== ======== ======== ======== Basic and diluted net loss per common share: Loss before extraordinary item...................... $ (1.12) $ (0.72) $ (0.76) $ (0.67) $ (1.03) $ (0.69) $ (1.17) Extraordinary loss on extinguishment of debt........ -- -- (0.07) -- -- -- -- -------- ------- -------- -------- -------- -------- -------- Net loss per share.................................... $ (1.12) $ (0.72) $ (0.83) $ (0.67) $ (1.03) $ (0.69) $ (1.17) ======== ======= ======== ======== ======== ======== ======== Weighted average shares outstanding................... 10,903 13,311 19,371 23,457 24,301 24,277 24,947
AS OF DECEMBER 31, AS OF SEPTEMBER 30, ----------------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1999 -------- -------- --------- --------- --------- ------------------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and securities............................. $ 3,032 $ 10,207 $ 13,514 $ 59,610 $ 46,739 $ 34,263 Working capital........................ (1,470) 3,735 7,695 56,671 35,073 12,061 Total assets........................... 17,467 22,803 25,885 75,780 62,252 53,594 Long-term obligations, less current portion.............................. 4,487 4,235 2,775 3,430 3,746 3,563 Accumulated deficit.................... (76,317) (85,958) (101,973) (117,464) (138,846) (165,211) Stockholders' equity................... 8,176 11,823 16,589 68,226 45,174 26,062
- ------------ (1) Net interest expense and other income is presented net of interest income, interest expense and realized gains and losses on securities available for sale. 23 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis by our management is provided to identify certain significant factors which affected our financial position and operating results during the periods included in the accompanying financial statements. OVERVIEW We are a biopharmaceutical company engaged in the research and development of novel cancer treatments. We are currently pursuing three research and development programs that we believe show promise for treating cancer: growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. Since our inception in April 1984, we have devoted substantially all of our efforts and resources to research and development conducted on our own behalf and through collaborations with corporate partners and academic research and clinical institutions. We have not derived any commercial revenue from product sales. As a result of our substantial research and development costs, we have incurred significant operating losses and we have generated a cumulative net loss of approximately $165 million for the period from our inception to September 30, 1999. We expect to incur significant additional operating losses. Substantially all of our revenues were generated from license and research arrangements with collaborative partners. Such revenues, as well as our results of operations, have fluctuated and are expected to continue to fluctuate significantly from period to period due to: - the status of development of our various products - the time at which we enter into research and license agreements with corporate partners that provide for payments to us, and the timing and accounting treatment of payments to us under these agreements - whether or not we achieve specified research or commercialization milestones - timely payment by our corporate partners of amounts payable to us - the addition or termination of research programs or funding support - variations in the level of expenses related to our proprietary products during any given period Before we can commercialize our products and begin to sell them to generate revenues, they will need additional development and clinical testing, which will cost a lot of money. Generally, to make a profit we will need to successfully develop, test, introduce and market our products. It is not certain that any of our products will be successfully developed or that required regulatory approvals to commercialize them can be obtained. Further, even if we successfully develop a product, there is no assurance that we will be able to successfully manufacture or market that product or that customers will buy it. See "Risk Factors -- Our lead product candidates are in development, and we cannot be certain that any of our products will be commercialized." In December 1998, we entered into an agreement with Merck KGaA, a German-based drug company, relating to the development, marketing and sale of C225. Under this agreement: we have retained the rights to develop and market C225 within the United States and Canada; we have granted Merck KGaA exclusive rights, except in Japan, to develop and market C225 outside of the United States and Canada; we have agreed to supply Merck KGaA, and Merck KGaA will purchase from us, C225 for the conduct of clinical trials and the commercialization of the product outside of the United States and Canada; we will co-develop and co- market C225 in Japan with Merck KGaA; and we have granted Merck KGaA an exclusive license outside of the United States and Canada, without the right to sublicense, to certain of our patents to apply to a humanized antibody to the EGF receptor on which Merck KGaA has performed preclinical studies. In return, Merck KGaA has agreed, subject to the terms of the agreement, to (1) pay us $30 million in up-front fees and early cash-based milestone payments based upon our achievement of the milestones set forth in the agreement, (2) pay us an additional $30 million if further milestones are achieved for which Merck KGaA will receive equity in ImClone which will be priced at varying premiums to the then-market price of the common stock depending upon the timing of the achievement of the respective milestones, (3) provide us, subject to certain terms, a guaranty of our obligations under a $30 million credit facility relating to the 24 25 construction of a new C225 commercial manufacturing facility, (4) fund clinical development of C225 outside of the United States and Canada and (5) pay us royalties on future sales of C225 in its territory, if any. This agreement may be terminated by Merck KGaA in various instances, including (1) at its discretion on any date on which a milestone is achieved (in which case no milestone payment will be made), (2) for a one-year period after first commercial sale of C225 in Merck KGaA's territory, upon Merck KGaA's reasonable determination that the product is economically unfeasible (in which case Merck KGaA is entitled to receive back 50% of the cash-based milestone payments then paid to date, but only out of revenues received, if any, based upon a royalty rate applied to the gross profit from C225 sales or C225 license fees in the United States and Canada), or (3) in the event we do not obtain certain collateral license agreements, in which case Merck KGaA also is entitled to a return of all cash milestone payments to date, plus liquidated damages of $500,000. Upon termination of the agreement, we would also be required to use our best reasonable efforts to cause the release of Merck KGaA as guarantor of the credit facility for our new manufacturing facility. Through October 27, 1999, Merck KGaA has paid us $14 million in up-front and milestone fees and has confirmed that we have achieved milestones with respect to which we are entitled to receive an additional $6 million in payments. As of September 30, 1999, $14 million had been received and recorded as fees potentially refundable from a corporate partner and will be recognized as revenues upon Merck KGaA's agreeing on the production concept for the new C225 manufacturing facility and our obtaining the necessary collateral license agreements. In April 1999, the parties agreed on the production concept for the manufacturing facility and are currently working toward securing Merck KGaA's guaranty of our obligations under a $30 million credit facility. We are also in the process of negotiating the necessary collateral license agreements. We have also granted Merck KGaA a license to develop and market BEC2 worldwide. We have retained the right to co-promote BEC2 with Merck KGaA within North America and it is intended that we will be the bulk manufacturer of BEC2 for worldwide production. In return, Merck KGaA has agreed to pay up-front fees, to make cash milestone payments and to make royalty payments to us on all sales of BEC2 outside North America. In return, Merck KGaA has made research support payments to us totaling $4.7 million and is required to make milestone payments to us of up to $22.5 million, of which $3 million has been received through October 27, 1999. In addition, Merck KGaA is required to make royalty payments to us on any sales of BEC2 outside North America, with a portion of the milestone and research support payments received under the agreement being creditable against the amount of royalties due. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Revenues. Revenues for the nine months ended September 30, 1999 and 1998 were $1,021,000 and $3,434,000, respectively, a decrease of $2,413,000, or 70%. Revenues for the nine months ended September 30, 1999 primarily consisted of (1) $225,000 in research support from our partnership with American Home Products Corporation ("American Home") in infectious disease vaccines, (2) $533,000 in research and support payments from our research and license agreement with Merck KGaA for our principal cancer vaccine product candidate, BEC2, and (3) $258,000 in royalty revenue from our strategic alliance with Abbott Laboratories ("Abbott") in diagnostics. Revenues for the nine months ended September 30, 1998 consisted of (1) $225,000 in research support from our partnership with American Home in infectious disease vaccines, (2) $1,000,000 in milestone revenue and $1,875,000 in research and support payments from our research and license agreement with Merck for BEC2, (3) $236,000 in royalty revenue from our strategic alliance with Abbott in diagnostics and (4) $98,000 from a Phase I Small Business Innovation Research grant from the National Cancer Institute (the "NCI") for a program in cancer-related angiogenesis. The decrease in revenues for the nine months ended September 30, 1999 was primarily attributable to (1) the decrease in research and support revenue as a result of the completion of all research and support payments due from our research and license agreement with Merck KGaA for BEC2 and (2) a decrease in milestone revenue which can vary widely from period to period depending upon the timing of the achievement of various research and development milestones for products under development. Operating Expenses: Research and Development. Total operating expenses for the nine months ended September 30, 1999 and 1998 were $27,915,000 and $19,443,000, respectively, an increase of $8,472,000, or 25 26 44%. Research and development expenses for the nine months ended September 30, 1999 and 1998 were $22,131,000 and $15,269,000, respectively, an increase of $6,862,000 or 45%. Such amounts for the nine months ended September 30, 1999 and 1998 represented 79% of total operating expenses in both years. The increase in research and development expenses for the nine months ended September 30, 1999 was primarily attributable to (1) the costs associated with the initiation of a pivotal Phase III clinical trial of C225 in treating head and neck cancer in combination with radiation, (2) the costs associated with the initiation of two additional Phase II clinical trials of C225, one in refractory head and neck cancer in combination with cisplatin and one in refractory colorectal cancer in combination with irinotecan, (3) expenditures in the functional areas of product development, manufacturing, clinical and regulatory affairs associated with C225, (4) expenses recognized in connection with the issuance of options granted to scientific consultants and collaborators and (5) expenditures associated with additional staffing in the area of discovery research. We expect research and development costs to increase in future periods as we continue to expand our efforts in product development and clinical trials. General and Administrative Expenses. General and administrative expenses include administrative personnel costs, costs incurred in connection with pursuing arrangements with corporate partners and technology licensors, and expenses associated with applying for patent protection for our technology and products. Such expenses for the nine months ended September 30, 1999 and 1998 were $5,784,000 and $4,174,000, respectively, an increase of $1,610,000, or 39%. The increase in general and administrative expenses primarily reflected (1) additional support staffing for expanding our research, development, clinical, manufacturing and marketing efforts, particularly with respect to C225 and (2) expenses associated with the pursuit of strategic corporate alliances and other corporate development expenses. We expect general and administrative expenses to increase in future periods to support our planned increases in research, development, clinical and manufacturing efforts. Interest and Other Income or Loss and Interest Expense. Interest income was $1,757,000 for the nine months ended September 30, 1999 compared with $2,348,000 for the nine months ended September 30, 1998, a decrease of $591,000, or 25%. The decrease was primarily attributable to the decrease in our investment portfolio as a result of funding our operations. Interest expense was $375,000 and $320,000 for the nine months ended September 30, 1999 and 1998, respectively, an increase of $55,000 or 17%. Interest expense for both periods primarily included (1) interest on an outstanding Industrial Development Revenue Bond issued in 1990 (the "1990 IDA Bond") with a principal amount of $2,200,000 and (2) interest recorded on various capital lease obligations under a December 1996 Financing Agreement (the "1996 Financing Agreement") and an April 1998 Financing Agreement (the "1998 Financing Agreement") with Finova Technology Finance, Inc. ("Finova"). The increase was primarily attributable to entering into additional capital leases. We recorded losses on securities available for sale for the nine months ended September 30, 1999 in the amount of $853,000 as compared to gains of $34,000 for the nine months ended September 30, 1998. The loss for the nine months ended September 30, 1999 is primarily attributable to the $828,000 write-down of our investment in CombiChem Inc. ("CombiChem") as a result of an other than temporary decline. In October 1999, CombiChem announced that it is being acquired and holders of its shares will receive cash consideration of approximately $6.75 per share, subject to completion of the acquisition, which would represent a financial reporting gain with respect to the CombiChem shares of approximately $937,000, after considering the aforementioned write-down. See "-- Liquidity and Capital Resources." Net Losses. We had net losses to common stockholders of $29,165,000 or $1.17 per share for the nine months ended September 30, 1999 compared with $16,694,000 or $0.69 per share for the nine months ended September 30, 1998. The increase in the net losses and per share net loss to common stockholders was due primarily to the factors noted above. YEARS ENDED DECEMBER 31, 1998 AND 1997 Revenues. Revenues for the years ended December 31, 1998 and 1997 were $4,193,000 and $5,348,000, respectively, a decrease of $1,155,000, or 22%. Revenues for the year ended December 31, 1998 consisted of (1) $300,000 in research support from our partnership with American Home in infectious disease vaccines, 26 27 (2) $1 million in milestone revenue and $2.5 million in research and support payments from our agreement with Merck KGaA for BEC2, (3) $295,000 in royalty revenue from our strategic alliance with Abbott in diagnostics and (4) $98,000 from a Phase I Small Business Innovation Research grant from the NCI for a program in cancer-related angiogenesis. Revenues for the year ended December 31, 1997 consisted of (1) $300,000 in research support from our partnership with American Home in infectious disease vaccines, (2) $2 million in milestone revenue and $1.7 million in research and support payments from our agreement with Merck KGaA for BEC2 and (3) $1 million in milestone revenue and $381,000 in royalty revenue from our strategic alliance with Abbott in diagnostics. The decrease in revenues for the year ended December 31, 1998 was primarily attributable to a decrease in milestone revenue which can vary widely from period to period depending upon the timing of the achievement of various research and development milestones for products under development. Operating Expenses: Research and Development. Total operating expenses for the years ended December 31, 1998 and 1997 were $28,194,000 and $21,811,000, respectively, an increase of $6,383,000, or 29%. Research and development expenses for the years ended December 31, 1998 and 1997 were $21,049,000 and $16,455,000, respectively, an increase of $4,594,000 or 28%. Such amounts for both years ended December 31, 1998 and 1997 represented 75% of total operating expenses. The increase in research and development expenses for the year ended December 31, 1998 was partially attributable to (1) the costs associated with an agreement in principle for the supplemental further development and manufacture of clinical grade C225 to support ongoing and future human clinical trials, (2) expenditures associated with additional staffing in the area of discovery research, (3) the initiation of new supported research programs with academic institutions, (4) the establishment of corporate in-licensing arrangements and (5) expenditures in the functional areas of product development, manufacturing, clinical and regulatory affairs associated with C225. This increase was partially offset by the one-time $2.2 million non-cash compensation expense recorded for the year ended December 31, 1997 in connection with the extension of the term of an officer's warrant to purchase 397,000 shares of common stock. General and Administrative Expenses. General and administrative expenses include administrative personnel costs, costs incurred in connection with pursuing arrangements with corporate partners and technology licensors, and expenses associated with applying for patent protection for our technology and products. Such expenses for the years ended December 31, 1998 and 1997 were $7,145,000 and $5,356,000, respectively, an increase of $1,789,000, or 33%. The increase in general and administrative expenses primarily reflected (1) additional support staffing for expanding our research, development, clinical and manufacturing efforts, particularly with respect to C225 and (2) expenses associated with the pursuit of strategic corporate alliances and other corporate development expenses. We expect general and administrative expenses to increase in future periods to support our planned increases in research, development, clinical and manufacturing efforts. Interest and Other Income and Interest Expense. Interest and other income was $3,054,000 for the year ended December 31, 1998 compared to $1,523,000 for the year ended December 31, 1997, an increase of $1,531,000, or 101%. The increase was primarily attributable to the increased interest income earned from higher cash balances in our investment portfolio resulting from the private placement of series A preferred stock completed in December 1997. Interest expense was $435,000 and $551,000 for the years ended December 31, 1998 and 1997, respectively, a decrease of $116,000, or 21%. Interest expense for both periods primarily included (1) interest on the 1990 IDA Bond, which has a principal amount of $2.2 million, (2) interest recorded on capital lease obligations and (3) interest recorded on a liability to Pharmacia and Upjohn Inc. ("Pharmacia"), for the reacquisition of the worldwide rights to a recombinant mutein form of Interleukin-6 ("IL-6m") as well as clinical material manufactured and supplied to us by Pharmacia. The decrease was primarily attributable to the (1) December 1997 repayment of an IDA Bond issued in 1986 (the "1986 IDA Bond") with a principal amount of $2.1 million and (2) February 1998 repayment of the remaining liability to Pharmacia. Net Losses. We had net losses to common stockholders of $25,050,000, or $1.03 per share, for the year ended December 31, 1998 compared with $15,654,000, or $0.67 per share, for the year ended December 31, 1997. The increase in the net losses and per share net loss to common stockholders was due primarily to the factors noted above and the accrued dividends and incremental yield on the series A preferred stock. 27 28 YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 Revenues. Revenues for the years ended December 31, 1997 and 1996 were $5,348,000 and $600,000 respectively, an increase of $4,748,000. Revenue for the year ended December 31, 1997 consisted of (1) $300,000 in research support from our partnership with American Home in infectious disease vaccines, (2) $2 million in milestone revenue and $1.7 million in research and support payments from our agreement with Merck KGaA for BEC2, and (3) $1 million in milestone payments and $381,000 in royalty revenue from our strategic alliance with Abbott in diagnostics. Revenues for the year ended December 31, 1996 consisted of (1) $300,000 in research support from our partnership with American Home in infectious disease vaccines, (2) $225,000 in royalty revenue from our strategic alliance with Abbott in diagnostics, and (3) $75,000 in license fees from our cross-licensing agreement with Immunex Corporation ("Immunex") for novel hematopoietic growth factors. The increase in revenues for the year ended December 31, 1997 was primarily attributable to (1) our having achieved development milestones under our agreement with Merck KGaA for BEC2, and (2) our strategic alliance with Abbott. Milestone revenue can vary widely from period to period depending upon the timing of the achievement of various research and development milestones for products under development. Operating Expenses: Research and Development. Total operating expenses for the years ended December 31, 1997 and 1996 were $21,811,000 and $15,443,000, respectively, an increase of $6,368,000 or 41%. Research and development expenses for the years ended December 31, 1997 and 1996 were $16,455,000 and $11,482,000, respectively, an increase of $4,973,000 or 43%. Such amounts for the years ended December 31, 1997 and December 31, 1996 represented 75% and 74%, respectively, of total operating expenses. The increase in research and development expenses for the year ended December 31, 1997 was partly attributable to (1) a one-time $2.2 million non-cash compensation expense recorded in connection with the extension of the term of an officer's warrant to purchase 397,000 shares of our common stock, and (2) costs associated with additional staffing, contract manufacturing and testing, and expenditures in the functional areas of product development, manufacturing and clinical and regulatory affairs associated with C225, and (3) growth in the area of discovery research for future product candidates. General and Administrative Expenses. General and administrative expenses include administrative personnel costs, costs incurred in connection with pursuing arrangements with corporate partners and technology licensors, and expenses associated with applying for patent protection for our technology and products. Such expenses for the years ended December 31, 1997 and 1996 were $5,356,000 and $3,961,000, respectively, an increase of $1,395,000 or 35%. The increase in general and administrative expenses primarily reflects (1) $279,000 non-cash compensation expense recorded in connection with an option grant to one of our officers, and (2) additional support staffing for our expanding research, development, clinical and manufacturing efforts, particularly with respect to C225. We expect general and administrative expenses to increase in future periods to support planned increases in research and development. Interest and Other Income and Interest Expense. Interest and other income was $1,523,000 for the year ended December 31, 1997 compared to $918,000 for the year ended December 31, 1996, an increase of $605,000, or 66%. The increase was primarily attributable to the increased interest income earned from higher cash balances in our investment portfolio resulting from the proceeds received from a public offering of our common stock completed in March 1997 and a private placement of series A preferred stock completed in December 1997. Interest expenses was $551,000 and $823,000 for the years ended December 31, 1997 and 1996, respectively, a decrease of $272,000, or 33%. Interest expense for both periods primarily included (1) interest on two then outstanding IDA Bonds with an aggregate principal amount of $4,313,000 ($2,113,000 of which was repaid in December 1997), and (2) interest recorded on the liability to Pharmacia, for the reacquisition of the worldwide rights to IL-6m as well as clinical material manufactured and supplied to us by Pharmacia. The decrease was primarily attributable to the May 1996 exchange of debt for our common stock with the Oracle Group and one of our directors. Net Losses. We had net losses to common stockholders of $15,654,000, or $0.67 per share, for the year ended December 31, 1997, compared with $16,015,000, or $0.83 per share, for the year ended December 31, 1996. The year ended December 31, 1996 included a $1,267,000 or $0.07 per share extraordinary loss on early 28 29 extinguishment of debt. This extraordinary loss resulted from the issuance of our common stock in lieu of cash repayment of a $2.5 million loan due the Oracle Group and a $180,000 long-term note owed to one of our directors. The decrease in the per share net loss to common stockholders is due primarily to the increased number of shares of our common stock outstanding as a result of the March 1997 public offering of our common stock. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, our principal sources of liquidity consisted of cash and cash equivalents and short-term securities available for sale of approximately $34.3 million. Since inception we have financed our operations through the following means: - Public and private sales of equity securities in financing transactions have raised approximately $163.8 million in net proceeds. - We have earned approximately $33,876,000 from license fees, contract research and development fees and royalties from collaborative partners, including approximately $1,021,000 earned during the nine months ended September 30, 1999. Additionally, we have received $14,000,000 in potentially refundable fees from our C225 development and license agreement with Merck KGaA. And, as of October 27, 1999, Merck KGaA has confirmed that we have achieved milestones, with respect to which we are entitled to receive an additional $6,000,000 in payments. The amounts from Merck KGaA with respect to C225 have yet to be recognized as revenue. - We have earned approximately $10.2 million in interest income, including approximately $1.8 million earned during the nine months ended September 30, 1999. - The sale of the IDA Bonds in each of 1985, 1986 and 1990 raised an aggregate of $6.3 million, the proceeds of which have been used for the acquisition, construction and installation of our research and development facility in New York City, and of which $2.2 million is outstanding as of September 30, 1999. The 1990 IDA Bond in the outstanding principal amount of $2.2 million becomes due in 2004. We will incur annual interest on the 1990 IDA Bond aggregating approximately $250,000. In order to secure our obligations to the New York Industrial Development Agency ("NYIDA") under the 1990 IDA Bond, we have granted the NYIDA a security interest in facility equipment purchased with the bond proceeds. We signed a definitive agreement in April 1999 with BI for the further development, production scale-up and manufacture of our lead therapeutic product candidate, C225, for use in human clinical trials. Services pursuant to this agreement commenced in April 1998 pursuant to an agreement in principle. We estimate that the total cost under the agreement, including the cost of additional amounts of material we had the right to request, will be DM12,100,000 or $6,636,000 as of September 30, 1999. As of September 30, 1999, we had incurred approximately DM3,940,000, of which DM3,720,000 has been paid, for services provided under this agreement. We do not currently hedge our exposure to the foreign currency risk associated with this agreement. We may pursue an agreement with another third party relating to the manufacture of C225 for both clinical trials and commercial sale. Any such agreement would likely require us to expend substantial funds over the next several years for process development and for supply of C225. We have obligations under various capital leases for certain laboratory, office and computer equipment and also certain building improvements primarily under the 1996 Financing Agreement and the 1998 Financing Agreement with Finova. The 1996 Financing Agreement allowed us to finance the lease of equipment and make certain building and leasehold improvements to existing facilities involving amounts totaling approximately $2.5 million. Each lease has a fair market value purchase option at the expiration of a 42-month term. Pursuant to the 1996 Financing Agreement, we issued to Finova a warrant expiring December 31, 1999 to purchase 23,220 shares of our common stock at an exercise price of $9.69 per share. We recorded a non-cash debt discount of approximately $125,000 in connection with this financing, which 29 30 discount is being amortized over the 42-month term of the first lease. The 1996 Financing Agreement with Finova expired in December 1997 and we utilized only $1.7 million of the full $2.5 million under the agreement. In April 1998, we entered into the 1998 Financing Agreement with Finova totaling approximately $2 million. The terms of the 1998 Financing Agreement are substantially similar to the now expired 1996 Financing Agreement except that each lease has a 48-month term. As of September 30, 1999, we had entered into twelve individual leases under both the 1996 Financing Agreement and the 1998 Financing Agreement aggregating a total cost of $3.7 million. The 1998 Financing Agreement expired in May 1999. We rent our New York City facility under a lease which was scheduled to expire in March 1999. We renewed the entire lease for a term commencing as of January 1, 1999 through December 2004 and have begun to retrofit the facility to better suit our needs at an expected cost of approximately $2 million. Under our agreement with Merck KGaA for C225, we developed, in consultation with Merck KGaA, a production concept for a new manufacturing facility for the commercial production of C225. Merck KGaA is to provide us, subject to certain conditions, with a guaranty under a $30 million credit facility for the build-out of this facility. We have determined to erect this facility adjacent to our current manufacturing facility in New Jersey, which supplies C225 to support our clinical trials. We plan to begin construction on this facility in the first half of 2000 and estimate that the total cost will be approximately $45 million. We are currently in the process of finalizing the terms of the loan agreement and guaranty. We expect to fund the remaining cost of this facility through a combination of cash on hand and equipment financing transactions. Total capital expenditures made during the nine months ended September 30, 1999 were $4,628,000, of which $532,000 have been reimbursed in accordance with the terms of the 1998 Financing Agreement with Finova. Of the total capital expenditures made during the nine months ended September 30, 1999, $1,788,000 related to the purchase of equipment for and costs associated with the retrofit of our corporate office and research laboratories in New York. The balance of capital additions include $1,821,000 in engineering and other pre-construction costs associated with the build-out of the commercial manufacturing facility to be erected adjacent to our current manufacturing facility in New Jersey. The remaining $1,019,000 related to improving and equipping our existing manufacturing facility. The holders of the 400,000 shares of series A preferred stock are entitled to receive cumulative dividends at an annual rate of $6.00 per share. Dividends accrue as of the issuance date of the series A preferred stock and are payable on the outstanding series A preferred stock in cash on December 31 of each year beginning December 31, 1999 or at the time of conversion or redemption of the series A preferred stock on which the dividend is to be paid, whichever is sooner. Accrued dividends were $4,307,000 at September 30, 1999. We believe that our existing cash on hand and amounts expected to be available under our credit facilities, together with the net proceeds from this offering, should enable us to maintain our current and planned operations through at least 2001. We are also entitled to reimbursement for certain research and development expenditures and to certain milestone payments, including $16 million in cash-based milestone payments and $30 million in equity-based milestone payments from our C225 development and license agreement with Merck KGaA, which are to be paid subject to our attaining research and development milestones, certain of which have recently been attained, and certain other conditions. There can be no assurance that we will achieve the unachieved milestones. Additionally, the termination of the agreement due to our failure to obtain the necessary collateral license agreements would require us to return all milestone payments made to date, plus $500,000 in liquidated damages. Our future working capital and capital requirements will depend upon numerous factors, including, but not limited to: - progress of our research and development programs, pre-clinical testing and clinical trials - our corporate partners fulfilling their obligations to us - timing and cost of seeking and obtaining regulatory approvals - timing and cost of manufacturing scale-up and effective commercialization activities and arrangements - level of resources that we devote to the development of marketing and sales capabilities - costs involved in filing, prosecuting and enforcing patent claims - technological advances 30 31 - status of competitors - our ability to maintain existing and establish new collaborative arrangements with other companies to provide funding to support these activities - costs of establishing both clinical scale and commercial scale manufacturing capacity in our facility and those of others In order to fund our capital needs after 2001, we will require significant levels of additional capital and we intend to raise the capital through additional arrangements with corporate partners, equity or debt financings, or from other sources including the proceeds of product sales, if any. There is no assurance that we will be successful in consummating any such arrangements. If adequate funds are not available, we may be required to significantly curtail our planned operations. At December 31, 1998, we had net operating loss carryforwards for United States federal income tax purposes of approximately $131 million, which expire at various dates from 2000 through 2018. At December 31, 1998 we had research credit carryforwards of approximately $4.7 million, which expire at various dates from 2009 through 2018. Under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation's ability to use net operating loss and research credit carryforwards may be limited if the corporation experiences a change in ownership of more than 50 percentage points within a three-year period. Since 1986, we have experienced two such ownership changes. As a result, we are only permitted to use in any one year approximately $5.2 million of our available net operating loss carryforwards that relate to periods before these ownership changes. Similarly, we are limited in using our research credit carryforwards. It has not been determined whether the offering described in this prospectus will result in additional ownership changes that would further limit the use of our net operating losses and research credit carryforwards. MARKET RISK Our holdings of financial instruments are comprised of a mix of any of U.S. corporate debt, foreign corporate debt, U.S. government debt, foreign government/agency guaranteed debt and commercial paper. All such instruments are classified as securities available for sale. Generally, we do not invest in portfolio equity securities or commodities or use financial derivatives for trading purposes. Our debt security portfolio represents funds held temporarily pending use in our business and operations. We manage these funds accordingly. We seek reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. We typically invest in the shorter-end of the maturity spectrum, or if longer, in highly liquid debt instruments with periodic interest rate adjustments. We also have certain foreign exchange currency risk. See footnote 4 of the unaudited financial statements. The table below presents the principal amounts and related weighted average interest rates by year of maturity for our investment portfolio as of September 30, 1999:
2004 AND 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE ---- ---------- ---- ---- ---- ----------- ----------- ----------- Fixed Rate................. -- $2,844,000 -- -- -- -- $ 2,844,000 $ 2,843,000 Average Interest Rate...... -- 5.10% -- -- -- -- 5.10% -- Variable Rate.............. -- -- -- -- -- $30,214,000(1) $30,214,000 $30,209,000 Average Interest Rate...... -- -- -- -- -- 5.59% 5.59% -- -- ---------- --- -- -- ----------- ----------- ----------- -- $2,844,000 -- -- -- $30,214,000(1) $33,058,000 $33,052,000 == ========== === == == =========== =========== ===========
- ------------ (1) These holdings consist of U.S. corporate and foreign corporate floating rate notes. Interest on the securities are adjusted at fixed dates using prevailing interest rates. These holdings are highly liquid and we consider the potential for loss of principal to be minimal. 31 32 YEAR 2000 The "Year 2000 problem" involves mainly the inability of certain computer programs and microprocessing devices to differentiate between the year 1900 and the year 2000 because two-digit rather than four-digit fields were used to identify the year. There are a variety of related "date" problems, including the use by older programs and devices of algorithms that will fail to correctly identify the year 2000 and certain other years in the twenty-first century as leap years. A Year 2000 problem could cause a computer system or microprocessor that is date sensitive to malfunction, resulting in system failures. Such failures could cause disruptions of our operations, including, without limitation, the systems in place at our Somerville, New Jersey clinical-scale manufacturing facility, computers, communication devices and laboratory instrumentation and systems which use date-based information in our research and development and scientific testing or, possibly, in our pre-clinical or clinical trials. To deal with the Year 2000 problem we have developed a Year 2000 program that has three main phases: (1) review of information technology and non-information-technology systems for the purposes of assessing the potential impact of Year 2000 on our business and identifying non-Year 2000 compliant systems; (2) remediation and development of contingency plans; and (3) testing. These phases are not necessarily sequential. We have a Year 2000 team to coordinate and carry out the various phases and Reporting Responsible Persons in each critical area, including computer hardware, software, other hardware, laboratory equipment, collaborators and process/clinical development. While we believe that our program is and will be adequate to address Year 2000 problems, there can be no assurance that our operations will not be adversely affected. While we have devoted significant resources to dealing with the Year 2000 problem, our efforts to date have not caused the deferral of any other significant information technology projects. We have reviewed the potential impact of the "Y2K" bug on our research and development, product development, manufacturing, financial, communication and administrative operations. We determined which systems are critical to our business. We also determined which systems were non-Year 2000 compliant. We are in the process of remediating through corrective programming modifications or system replacement all mission critical systems that we identified as non-compliant. We believe that this process is substantially completed. In addition, for systems that we have identified as non-mission critical, we also intend to either correct them through programming changes or replace them with compliant software and any necessary hardware or, possibly, simply discontinue using the system. We have incurred approximately $350,000 on our Year 2000 program through September 30, 1999. This includes the purchase of third-party software and required hardware to run such software as well as the cost of modifying software. We estimate that any additional costs incurred to complete our remediation plan will not be material. In addition to the review of internal systems, we are making inquiries of our critical suppliers, corporate partners, manufacturers, clinical study sites, service suppliers, communications providers, lessors, utilities, and banks whose system failures or non-compliant products could have an adverse impact on our operations. While we are not currently aware of any material Year 2000 problems involving such entities that are likely to adversely affect us, there can be no assurance that there will not be such problems or that, if discovered, they will be timely remediated. We have developed contingency plans to deal with possible disruptions of important operations such as discovery research, product development, manufacturing and ongoing clinical trials. Such disruptions could affect the development and ultimate marketing of potential products as well as put us at a competitive disadvantage relative to companies that have corrected such problems. These contingency plans may need to be refined as more information becomes available. 32 33 BUSINESS OVERVIEW We are a biopharmaceutical company engaged in the research and development of novel cancer treatments. We focus on what we believe are three promising strategies for treating cancer: growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. Our lead product candidate, C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. C225 has been shown in several Phase I/II trials to have an acceptable safety profile, to be well tolerated and, when administered with either radiation therapy or chemotherapy, to enhance tumor reduction. C225 is currently in pivotal trials for treating head and neck cancer. Upon the receipt of regulatory approval, we intend to market C225 in the United States and Canada. We will rely on our development and marketing partner, Merck KGaA, to market C225 outside the United States and Canada and to pay us a royalty on all such sales. We are responsible for the manufacture and supply of C225 for all clinical trials and eventual commercial sales. Our next most advanced product candidate, BEC2, is a cancer vaccine. In partnership with Merck KGaA, we are testing BEC2 for preventing recurrence or progression of small-cell lung cancer in a Phase III pivotal trial. Upon the receipt of regulatory approval, we intend to co-promote BEC2 with Merck KGaA in North America. Merck KGaA will be responsible for developing and marketing BEC2 outside North America and will be obligated to pay us royalties on all such sales. In addition, we intend to be the worldwide manufacturer of BEC2. We are also developing inhibitors of angiogenesis, which could be used to treat various kinds of cancer and other diseases. We have identified c-p1C11 as our lead clinical candidate for angiogenesis inhibition. c-p1C11 is an antibody that binds selectively and with high affinity to KDR, a principal VEGF receptor, thereby inhibiting angiogenesis. We plan to file an application with the FDA in the fourth quarter of 1999 in order to commence clinical trials of c-p1C11. In addition to the development of our lead product candidates, we continue to conduct research, both independently and in collaboration with academic and corporate partners, in a number of areas related to our core focus of growth factor inhibitors, cancer vaccines and angiogenesis inhibitors. We have also developed diagnostic products and vaccines for certain infectious diseases, and we have licensed the rights to these products and vaccines to corporate partners. DEVELOPMENT PROGRAMS C225 CANCER THERAPEUTIC The activation of the EGF receptor is believed to play a critical role in the rapid proliferation of certain types of tumor cells and select normal cells. Certain cancer types are characterized by the overexpression of the EGF receptor. For example, according to the NCI, more than 61,000 cases of head and neck cancer are diagnosed in the United States each year. More than 90% of head and neck cancer cases have been shown to overexpress the EGF receptor on the surface of the tumor cells. Similarly, according to the NCI, there are approximately 132,000 cases of colorectal cancer diagnosed in the United States each year, and in roughly half of these cases, the tumor cells have an overexpression of the EGF receptor. Other types of cancer are also characterized, in certain patients, by overexpression of the EGF receptor including lung, renal and pancreatic cancer. By preventing the binding of critical growth factors to the EGF receptor, we believe it is possible to inhibit the growth of these tumors. C225 is a chimerized (part human, part mouse) monoclonal antibody that selectively binds to the EGF receptor and thereby inhibits growth of cells dependent upon activation of the EGF receptor for replication. We have tested C225 in numerous clinical trials, including several Phase I/II trials at Sloan-Kettering, Yale Cancer Center, University of Virginia, MD Anderson Cancer Center and the University of Alabama. In these studies, we have given C225 intravenously at selected doses, both alone and in combination with radiation 33 34 therapy or chemotherapy. To date, we have tested C225 in approximately 200 patients with various solid cancers, such as head and neck, colorectal, lung, renal, breast and prostate cancers. In June 1999, we completed a Phase I/II trial in which 12 patients with advanced head and neck cancer were treated with C225 in combination with cisplatin, a widely used chemotherapeutic drug. At the completion of the trial, two of the nine evaluable patients had achieved a complete response and four had achieved a partial response. Most of the patients had previously received treatment, including standard chemotherapy, radiation therapy or experimental treatments, and either did not respond or thereafter relapsed. In particular, three of the six responders (including the two complete responders) had previously been treated with a regimen containing cisplatin and relapsed following such treatment. In January 1999, we completed a Phase I/II trial in which 16 patients with advanced head and neck cancer were treated with C225 in combination with radiation therapy. At the completion of the trial, all 15 evaluable patients had responded to therapy; 13 of the patients had achieved a complete response and two had achieved a partial response. This compares to historical response rates of approximately 40% in similar patients treated with radiation alone. We believe these trials have established an appropriate dosing regimen and have provided preliminary evidence of efficacy. The primary side effect observed in these trials has been a folliculitis skin rash, similar in appearance to acne, that has varied in severity depending on the patient. The rash subsides following completion of therapy. Additionally, of the approximately 200 patients who have received C225 to date, three have experienced an anaphylactic reaction to the drug. For that reason, we have established protocols for the initiation of therapy in any patient whereby an initial dose of limited quantity is administered in the presence of a physician. If an anaphylactic reaction is experienced, dosing is terminated immediately and appropriate measures are taken to mollify the symptoms. While the data from the C225 clinical trials conducted to date have been encouraging, the results from these trials are not sufficient to establish that C225 is safe or effective in treating cancer. 34 35 In order to establish whether C225 is safe and effective in treating cancer in a large patient population and to continue to determine the types of tumors on which C225 is most effective, we have begun the Phase II and Phase III clinical trials summarized below. In each of these trials, C225 is being used in combination with standard cancer therapies.
NUMBER OF PATIENTS TO BE ENROLLED TRIAL/INDICATION TREATMENT IN STUDY COMMENTS - -------------------- ------------------ ----------- --------------------------------------- PHASE III - C225 + radiation 416 - open-label, stratified, randomized head and neck (vs. radiation study cancer alone) - study initiated February 1999 - 8-week course of - patient treatment commenced April treatment 1999 - 50+ sites expected - primary endpoint: local regional disease control at one year PHASE III - C225 + cisplatin 114 - double-blinded, placebo-controlled, head and neck (vs. placebo + randomized study cancer cisplatin) - conducted in cooperation with the - 8-week course of Eastern Cooperative Oncology Group treatment - study initiated June 1999 - patient treatment expected to commence November 1999 - 50+ sites expected - primary endpoint: progression-free survival PHASE II - C225 + cisplatin 175 - open-label, stratified, refractory head - 6-week course of non-randomized study and neck cancer treatment - 98 patients expected to be treated (patients with C225 previously failed - patients are stratified by disease regimen containing progression or stable disease cisplatin) - study initiated June 1999 - patient treatment commenced September 1999 - 40+ sites expected - primary endpoint: response rate PHASE II - C225 + 98 - open-label, stratified, refractory irinotecan non-randomized study colorectal cancer - 6-week course of - patients are stratified by disease (patients treatment progression or stable disease previously failed - study initiated July 1999 regimen containing - patient treatment commenced October irinotecan) 1999 - 20+ sites expected - primary endpoint: response rate
We expect that results will be available from the two Phase III studies described above during 2001. We expect that enough information may be available from the two Phase II studies described above during the first half of 2000 to determine whether the data are sufficient to support an application for FDA approval of C225. We expect to conduct several additional Phase II clinical trials to continue to determine whether C225 may be effective in treating other types of cancer. These may include pancreatic, lung and renal cancer. We also expect to conduct C225 clinical trials with Merck KGaA in Europe. There can be no assurance that we will receive regulatory approval for C225 based on the results of our ongoing Phase II clinical trials or any of our other ongoing or anticipated C225 clinical trials. We have entered into a development and marketing agreement with Merck KGaA relating to C225. Under this agreement, we have retained the right to develop and market C225 within the United States and Canada, and we have granted Merck KGaA the exclusive right, except in Japan (where we will co-develop 35 36 and co-market C225 with Merck KGaA), to develop and market C225 outside of the United States and Canada. Under the agreement, we will manufacture C225. In return, Merck KGaA has agreed to pay up-front fees and to make cash milestone payments and equity investments in our business if specific milestones are achieved. Merck KGaA will also pay us royalties on any sales of C225 outside of the United States and Canada. Through October 27, 1999, we have received $14 million in up-front fees and milestone payments from Merck KGaA and Merck KGaA has confirmed that we have achieved milestones with respect to which we are entitled to receive an additional $6 million in payments under this agreement. In addition, Merck KGaA has agreed to provide a guaranty of our credit agreement obligations relating to the construction of our new C225 commercial manufacturing facility. As described above, we are testing C225 in several different types of cancer. While in certain cancer types, like head and neck cancer, the EGF receptor is overexpressed in nearly every patient with such cancer, in others, like colorectal cancer, many patients will not be positive for the EGF receptor. Currently, for the purpose of testing of patients in the colorectal cancer trial, a diagnostic assay must be used to determine which patients are positive for the EGF receptor. Patients must be positive for the EGF receptor to be included in this trial. Currently, such diagnostic tests are being performed in a laboratory setting as there are no commercialized assays available for such purpose. If C225 is approved for treating particular cancer types, standard diagnostic kits will need to be available commercially. We are in late stage discussions with several different companies capable of developing, obtaining regulatory approval for and commercializing such an assay in a timely fashion so that it will be readily available both for our ongoing clinical trials and for commercialization. BEC2 CANCER VACCINE A cancer vaccine works by the administration of an antigen or the mimic of an antigen that is found on the surface of certain types of cancer cells and which activates immune responses to protect against metastasis or recurrence of the tumor. A cancer vaccine will generally be given after the tumor has responded to initial treatment. Often, an antigen mimic can produce a stronger immune response than that produced by the original antigen that it resembles. BEC2 is a monoclonal antibody that we are developing as a cancer vaccine. BEC2 mimics GD3, a molecule expressed on the surface of several types of cancer cells. By mimicking GD3, BEC2 stimulates an immune response against cells expressing GD3. We have tested BEC2 in Phase I clinical trials at Sloan-Kettering against certain forms of cancer, including both limited disease and extensive disease small-cell lung carcinoma and melanoma (skin cancer). Limited disease small-cell lung carcinoma is limited to the lungs. Extensive disease small-cell lung carcinoma means that the disease has migrated to other parts of the body. In one such trial, 15 patients with small-cell lung carcinoma who had previously received chemotherapy and radiation therapy and achieved a partial or complete response were treated with BEC2. At the time the results were analyzed, approximately 27% of the patients had survived nearly five years following diagnosis. These survival rates are longer than historical survival rates for similar patients receiving conventional therapy and formed the basis for going forward with Phase III studies. This trial is not sufficient to establish that BEC2 is safe or effective in treating cancer. In conjunction with Merck KGaA, we have initiated a 570-patient multinational pivotal Phase III trial for BEC2 in the treatment of limited disease small-cell lung cancer. The trial will examine patient survival two years after course of therapy. We expect to complete enrollment in the trial during 2001. We have entered into a development and marketing agreement with Merck KGaA relating to BEC2. We have retained the right to co-promote BEC2 with Merck KGaA within North America, and we have granted Merck KGaA exclusive rights to develop and market BEC2 outside of North America. Under the agreement, Merck KGaA is also funding the Phase III pivotal trial. In addition, we intend to be the worldwide manufacturer of BEC2. 36 37 MONOCLONAL ANTIBODY INHIBITOR OF ANGIOGENESIS Our general experience with growth factors, particularly the use of C225 to block the EGF receptor, has enabled us to pursue another promising approach for the treatment of cancer, the inhibition of angiogenesis. Angiogenesis is the natural process of new blood vessel growth. VEGF is one of a group of molecules that helps regulate angiogenesis. Tumor cells as well as normal cells produce VEGF. Once produced by the tumor cells, VEGF stimulates the production of new blood vessels and ensures an adequate blood supply to the tumor, enabling the tumor to grow. KDR is a growth factor receptor found almost exclusively on the surface of human endothelial cells, which are the cells that line all blood vessels. VEGF must recognize and bind to this KDR receptor in order to stimulate the endothelial cells to grow and cause new blood vessels to form. We believe that interference with the binding of VEGF to the KDR receptor inhibits angiogenesis, and can potentially be used to slow or halt tumor growth. c-p1C11 is a chimerized monoclonal antibody, which specifically binds to the KDR receptor. By doing so, it prevents VEGF from binding to that receptor, which, in turn, blocks endothelial cell growth and inhibits angiogenesis. c-p1C11 therefore helps inhibit or eliminate cancer by preventing the growth of new blood vessels and depriving the tumor of the blood supply that it requires to grow. We expect to file an IND application with the FDA by the end of 1999 in order to commence clinical trials of c-p1C11. We believe c-p1C11 will be effective in treating many solid tumors and that it may also be useful in treating other diseases such as diabetic retinopathy, age-related macular degeneration, and rheumatoid arthritis that, like cancer, depend on the growth of new blood vessels. IMCLONE'S RESEARCH PROGRAMS GENERAL In addition to concentrating on our products in development, we perform ongoing research, including research in each of the areas of our ongoing clinical programs of growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. We have assembled a scientific staff with expertise in a variety of disciplines, including oncology, immunology, molecular and cellular biology, antibody engineering, protein and synthetic chemistry and high-throughput screening. In addition to pursuing research programs in-house, we collaborate with academic institutions and corporations to support our research and development efforts. RESEARCH ON GROWTH FACTOR INHIBITORS We are conducting a research program to develop inhibitors to the cell-signal transduction pathways of a class of enzymes referred to as tyrosine kinases. These pathways have been shown to be involved in the rapid proliferation of tumor cells. We are developing monoclonal antibodies to inhibit the binding of growth factors to cellular receptors that trigger these pathways, thereby potentially inhibiting cell division and tumor growth. We are also developing small molecule inhibitors to the tyrosine kinase pathways. In October 1997, we entered into an agreement with CombiChem, a combinational chemistry company, to utilize their library of structures of chemical compounds to help us identify and synthesize novel small molecule candidates that interfere with the function of growth factor receptors. Performance under this agreement is substantially complete but for the transfer to us of small molecule candidates and related information. We have also entered into an agreement with the Institute for Molecular Medicine in Freiburg, Germany, which permits us to test small molecules as therapeutic candidates to see if they are effective in inhibiting various tyrosine kinase receptors. RESEARCH ON CANCER VACCINES We are conducting research to discover possible cancer vaccines as another route to cancer treatment. Cancer vaccines would activate immune responses to tumors to protect against metastasis or recurrence of cancer. We are focusing our cancer-vaccine research efforts on developing melanoma vaccines. 37 38 In addition to the development of BEC2, we are conducting research on a possible melanoma vaccine based on the melanoma antigen gp75. A melanoma is a tumor or cancerous growth of the skin. Animal studies have shown that a gp75 cancer vaccine is very effective in creating an immune response in the body against melanoma cells, and may prevent or inhibit growth of experimental melanoma tumors in mice. Additionally, we are investigating the use of other melanoma antigens to be used in conjunction with gp75 for the development of an effective vaccine. We are also investigating various modes of enhancing the capacity of the vaccine to elicit an immune response. We have retained North American marketing and manufacturing rights for gp75 and have licensed to Merck KGaA the rights to manufacture and market gp75 outside North America. RESEARCH ON ANGIOGENESIS INHIBITORS We are conducting research on small molecules to develop inhibitors of enzymes important in angiogenesis. In addition, we are continuing to work with DC101 in animal models. DC101 is an antibody that neutralizes the FLK-1 receptor, which is the mouse receptor to VEGF that corresponds to KDR in humans. Such models have shown that DC101 inhibits tumor growth, and we are now focusing on establishing protocols for combination therapies of DC101 with radiation therapy or chemotherapy. Preliminary studies have shown that such combination results in better efficacy than with the DC-101 antibody alone. We are supporting research in this area at Sunnybrook Health Science Center, University of Toronto ("Sunnybrook Health Science Center"). In connection with our anti-angiogenesis research program, we are also doing research to see whether antibodies that inhibit vascular-specific cadherin ("VE-cadherin") also inhibit angiogenesis. Cadherins are a family of cell surface molecules that help organize tissue structures. Researchers believe that VE-cadherin plays an important role in angiogenesis by organizing endothelial cells into vascular tubes, which is a necessary step in the formation of new blood vessels. As we stated above, advanced tumor growth is dependent on the formation of a capillary blood vessel network in the tumor to ensure an adequate blood supply to the tumor. Therefore, antibodies that inhibit VE-cadherin may inhibit such capillary formation in tumors, and help fight cancer by cutting-off an adequate blood supply to the tumor. We intend to test various monoclonal antibodies against VE-cadherin to see if they are effective in inhibiting the function of the VE-cadherin, and the growth of blood vessels. In connection with our VE-cadherin research program, we have been assigned the exclusive rights to VE-cadherin-2, a recently developed form of VE-cadherin, and to antibodies that inhibit VE-cadherins. We also collaborate with the Mario Negri Institute for Pharmacological Research, Milan, Italy (the "Mario Negri Institute"), to do pharmacological research to better determine the role of VE-cadherin in angiogenesis. MISCELLANEOUS RESEARCH AREAS We are conducting additional research outside of our three principal areas of clinical focus. These include: (1) a means to induce apoptosis (programmed cell-death) in order to enhance tumor cell killing, including looking for small molecules that enhance the apoptosic process; (2) efforts to isolate endothelial stem cells and to determine the utility of such isolated cells, possibly in stimulation of wound healing, muscle regeneration or repair of damage to blood-deprived tissues; and (3) development of a panel of genes potentially useful for the maintenance and stimulation of stem cells. RESEARCH COLLABORATIONS AND CLINICAL COLLABORATIONS We engage in collaborations with academic institutions and private industry in the course of conducting our research and clinical studies. We are collaborating with CombiChem to discover and develop novel small molecules for use against selected targets for the treatment of cancer utilizing high throughput screening techniques. We support research at the Mario Negri Institute to explore the role that a family of proteins, called VE-cadherins, plays in angiogenesis. At the University of Texas, Southwestern Medical Center we are further studying the role VE-cadherins play in angiogenesis by studying VE-cadherin-2, a type of VE- 38 39 cadherin, in animal models. At the Sunnybrook Health Science Center, we are supporting research to evaluate whether chemotherapy combined with neutralizing antibodies to the FLK-1/VEGF receptor will result in a synergistic anti-angiogenic response. At Princeton University and the University of Pennsylvania, we are collaborating in the development of an extensive panel of stem cell and stromal cell genes, toward the identification of genes critical to stem cell maintenance and stimulation. In the clinical area, at the University of Wisconsin-Madison Medical School, we are conducting additional studies of C225 in head and neck cancers in combination with radiation therapy. The European Organization for Research and Treatment of Cancer is involved in managing the worldwide data for the BEC2 Phase III study. At Sloan Kettering, we collaborate both in the research area and clinical area. We support research on both potential cancer vaccine products BEC2 and gp75. We have been testing BEC2 in Phase I clinical trials at Sloan-Kettering against certain forms of cancer, including small cell lung carcinoma and melanoma. Our collaborations with Merck KGaA in developing our C225 and BEC2 products are described in the following section. COLLABORATIONS WITH MERCK KGAA C225 License and Development Agreement. In December 1998, we entered into an agreement with Merck KGaA relating to the development and commercialization of C225. Under this agreement: - we have retained the rights to market C225 within the United States and Canada - we have granted Merck KGaA exclusive rights, except in Japan, to market C225 outside of the United States and Canada - we have agreed to supply Merck KGaA, and Merck KGaA has agreed to purchase, C225 for the conduct of clinical trials and the commercialization of the product outside the United States and Canada - we will co-develop and co-market C225 in Japan with Merck KGaA - we have granted Merck KGaA an exclusive license outside of the United States and Canada, without the right to sublicense, to apply certain of our patents to a humanized EGF receptor antibody on which Merck KGaA has performed preclinical studies In return, Merck KGaA is: - paying to us $30 million in up-front fees and early cash-based milestone payments based upon achievement of certain milestones set forth in the agreement, of which $14 million has been received through October 27, 1999 and Merck KGaA has confirmed that we have achieved milestones with respect to which we are entitled to receive an additional $6 million in payments - paying to us an additional $30 million assuming achievement of further milestones for which Merck KGaA will receive equity (the "milestone shares") in our company, which will be at prices at varying premiums to the then market price of the common stock depending upon the timing of the achievement of the respective milestones - providing to us, subject to certain terms, a $30 million guaranty for the construction of a manufacturing facility by us for the commercial production of C225 - funding clinical development of C225 outside of the United States and Canada - required to pay us royalties on its future sales of C225 outside of the United States and Canada, if any The milestone shares, if issued, will be shares of our common stock (or a non-voting security convertible into our common stock). The number of shares issued to Merck KGaA will be determined by dividing the particular milestone payment due by the purchase price of the common stock when the milestone is achieved. The purchase price will relate to the then market price of our common stock, plus a premium which varies, 39 40 depending upon whether the milestone is achieved early, on-time or late. The milestone shares will be a non-voting preferred stock, or other non-voting stock convertible into our common stock if issuing shares of common stock to Merck KGaA would result in Merck KGaA owning greater than 19.9% of our common stock. These convertible securities will not have voting rights. They will be convertible at a price determined in the same manner as the purchase price for shares of our common stock if shares of common stock were to be issued. They will not be convertible into common stock if, as a result of the conversion, Merck KGaA would own greater than 19.9% of our common stock. This 19.9% limitation is in place through December 2002. After this date, Merck KGaA must sell shares it receives as a result of conversion to the extent such shares result in Merck KGaA's owning in excess of 19.9% of our common stock. We have granted Merck KGaA certain registration rights regarding the shares of common stock that it may acquire upon conversion of the series A preferred stock and milestone shares. This agreement may be terminated by Merck KGaA in various instances, including (1) at its discretion on any date on which a milestone is achieved (in which case no milestone payment will be made), (2) for a one-year period after first commercial sale of C225 in Merck KGaA's territory, upon Merck KGaA's reasonable determination that the product is economically unfeasible (in which case Merck KGaA is entitled to receive back 50% of the cash-based milestone payments then paid to date, but only out of revenues received, if any, based upon a royalty rate applied to the gross profit from C225 sales or C225 license fees in the United States and Canada), or (3) in the event we do not obtain certain collateral license agreements in which case Merck KGaA also is entitled to a return of all cash amounts with respect to milestone payments to date, plus liquidated damages of $500,000. In April 1999, the parties agreed on the production concept for the manufacturing facility and are currently working toward securing Merck KGaA's guaranty of our obligations under a $30 million credit facility relating to the construction of the manufacturing facility. In the event of termination of the agreement, we will be required to use our best reasonable efforts to cause the release of Merck KGaA as guarantor. In the year ended December 31, 1998, we recorded $4 million as a fee potentially refundable from our corporate partner under this agreement and in the nine months ended September 30, 1999, we recorded an additional $10 million as a fee potentially refundable from our corporate partner under this agreement. BEC2 Research and License Agreement. Effective April 1990, we entered into an agreement with Merck KGaA relating to the development and commercialization of BEC2 and the recombinant gp75 antigen. Under this agreement: - we have granted Merck KGaA a license to develop and market BEC2 worldwide - we have retained the right to co-promote BEC2 within North America - it is intended that we will be the bulk product manufacturer of BEC2 to support worldwide sales - we are required to give Merck KGaA the opportunity to negotiate a license in North America to gp75 before granting such a license to any third party In return, Merck KGaA: - has made research support payments to us totaling $4.7 million - is required to make milestone payments to us of up to $22.5 million, of which $3 million has been received through October 27, 1999, based on milestones achieved in the product development of BEC2 - is required to make royalty payments to us on all sales of the licensed products outside North America, if any, with a portion of the earlier funding received under the agreement being creditable against the amount of royalties due Merck KGaA is responsible for conducting the clinical trials and regulatory submissions outside North America, and we are responsible for conducting those within North America. Costs worldwide to conduct a multi-site, multinational Phase III clinical trial to obtain approval for the indication of the treatment of limited disease small-cell lung carcinoma for BEC2 are the responsibility of Merck KGaA. These include our 40 41 out-of-pocket costs (but do not include costs of establishing a manufacturing facility) for manufacturing materials for clinical trials, conduct of clinical trials and regulatory submissions (other than drug approval fees which are the responsibility of Merck KGaA or ourselves in our respective territories). If these expenses, including such expenses of Merck KGaA, exceed DM17 million, such excess expenses will be shared 60% by Merck KGaA and 40% by us. As of October 27, 1999, this expense level had not yet been reached. We will negotiate, with Merck KGaA, the allocation of costs for the conduct of additional clinical trials for other indications. We are responsible for providing the supply of the active agent outside of North America at the expense of Merck KGaA, and the parties intend that the cost of goods sold in North America be paid out of gross sales of any licensed product in North America in accordance with a co-promotion agreement to be negotiated. The agreement terminates upon the later of (1) the last to expire of any patents issued and covered by the technology (2) or fifteen years from the date of the first commercial sale. After termination, the license will survive without further royalty payment and is irrevocable. The agreement may be terminated earlier by us in the event Merck KGaA fails to pursue in a timely fashion regulatory approval or sale of a licensed product in a country in which it has the right to do so. It also may be terminated earlier by Merck KGaA if milestones are not achieved. In the year ended December 31, 1998, we recorded $3.5 million, in revenue from Merck KGaA under this agreement, which consisted of milestone and research and support payments, and for the nine-month period ended September 30, 1999 we recorded $533,000 in revenue from Merck KGaA under this agreement, which consisted of research and support payments. In connection with the December 1997 amendment to the agreement with Merck KGaA for BEC2, Merck KGaA purchased from us 400,000 shares of our series A preferred stock for a total price of approximately $40 million. See "Description of Capital Stock." In addition, Merck KGaA may nominate one member to our board of directors. OTHER CORPORATE COLLABORATIONS ABBOTT LABORATORIES We have licensed some of our diagnostic products and techniques to Abbott on a worldwide basis. In mid-1995, Abbott launched its first DNA-based diagnostic test in Europe, using our Repair Chain Reaction ("RCR") DNA probe technology. Abbott's test is used to diagnose the sexually transmitted diseases chlamydia and gonorrhea, as well as mycobacteria. The RCR DNA probe technology uses DNA amplification techniques to detect the presence of DNA or RNA in biological samples thereby indicating the presence of disease. In December 1996, we amended our agreement with Abbott to allow Abbott to exclusively license our patented DNA signal amplification technology, AMPLIPROBE, to Chiron Diagnostics. DNA signal amplification technology such as AMPLIPROBE also uses DNA signal amplification techniques in detecting the presence of DNA or RNA in biological samples, thereby indicating the presence of disease. Abbott receives a royalty payment from Chiron on all sales of Chiron branched DNA diagnostic probe technology in countries covered by our patents. Abbott, in turn, pays any such royalties it receives to us. The Chiron branched DNA diagnostic probe technology has recently been sold to Bayer Pharmaceutical Corporation. Under the agreement Abbott has paid us up-front fees and research support, and is obligated to pay milestone fees and royalties on sales. In June 1997, we received two milestone payments from Abbott totaling $1 million, as a result of a patent issuance in Europe for our RCR technology. This is partially creditable against royalties as described below. The issuance of the patent also entitles us to receive royalty payments on sales in covered European countries for products using our RCR technology. Abbott will be entitled to deduct from royalties otherwise due, 25% of such royalties due for a two-year period and 50% thereafter until a total of $500,000 has been deducted. In March 1999, we received a notice of allowance from the U.S. Patent Office for our RCR technology. The patent issuance upon this notice of allowance will entitle us to a $500,000 milestone payment from Abbott and royalties on sales for a two-year period from initiation of U.S. sales by 41 42 Abbott for products using our RCR technology. The agreement terminates upon the later of (1) the last to expire of any patents issued covered by the technology or (2), if no patents are granted, twenty years, subject to certain earlier termination provisions contained in the agreement. For the year ended December 31, 1998 we received a total of $295,000, and in the nine-month period ended September 30, 1999 we received a total of $258,000, in royalty fees pursuant to our strategic alliance with Abbott. AMERICAN HOME PRODUCTS In December 1987, we entered into a vaccine development and licensing agreement with American Cyanamid Company ("Cyanamid") that provided Cyanamid an exclusive worldwide license to manufacture and sell vaccines developed during the research period of the agreement. In connection with the agreement, Cyanamid purchased 410,001 shares of our common stock. During the three-year research period of the agreement, which period expired in December 1990, we were engaged in the development of two vaccine candidates, the first of which was for N. gonorrhea based on recombinant proteins, and the second of which was for Herpes Simplex Virus based on recombinant glycoproteins B and D. In September 1993, Cyanamid's Lederle-Praxis Biologicals division and ImClone entered into a research collaboration agreement, which by its terms supersedes the earlier agreement as to N. gonorrhea vaccine candidates, but not as to Herpes Simplex Virus vaccine candidates. The successor to Cyanamid, American Home, has the responsibility under this agreement to pay research support to us, as well as milestone fees and royalties on sales of any N. gonorrhea vaccine that might arise from the collaboration. In January 1998, this agreement was extended to continue annual research funding payable to us in the amount of $300,000 through September 1999 and to extend the period by which American Home was required to have filed an IND application to initiate clinical trials with a vaccine candidate. In October 1999, this milestone was achieved, requiring American Home to make a $500,000 payment to us. American Home has the responsibility under both agreements for conducting pre-clinical and clinical trials of the vaccine candidates, obtaining regulatory approval, and manufacturing and marketing the vaccines. American Home is required to pay royalties to us in connection with sales of the vaccines, if any. In the year ended December 31, 1998 we recorded revenues of $300,000, and in the nine-month period ended September 30, 1999 we recorded revenues of $225,000, under the American Home agreements. IMMUNEX CORPORATION We are the exclusive licensees of a family of patents and patent applications covering the FLK-2/FLT-3 receptor. FLK-2/FLT-3 growth factor is a protein that binds to and activates the FLK-2/FLT-3 receptor. The FLK-2/FLT-3 growth factor is owned by Immunex. In December 1996, we entered into a non-exclusive license and supply agreement with Immunex under which we granted Immunex an exclusive worldwide license to the FLK-2/FLT-3 receptor for the limited use of the manufacture of the FLK-2/FLT-3 growth factor. Immunex is currently testing the growth factor in human trials for stem cell stimulation and for tumor inhibition. Under this agreement, we receive royalty and licensing fees from Immunex, and Immunex has granted us a license to use the FLK-2/FLT-3 growth factor for use in our ex vivo research on stem cells. In addition, Immunex has granted us a world-wide non-exclusive license to use and sell the FLK-2/FLT-3 growth factor, manufactured by Immunex, for ex-vivo stem cell expansion, together with an exclusive license to distribute the growth factor with our own proprietary products for ex-vivo expansion. Immunex will also supply FLK-2/FLT-3 growth factor to us. Subject to earlier termination provisions contained in the agreements, our license terminates in December 2001, subject to a five-year renewal period, and Immunex's license terminates thirteen years after the first commercial sale of the product. In the year ended December 31, 1998, and in the nine-month period ended September 30, 1999, we recorded no revenue from Immunex under this agreement. 42 43 MANUFACTURING Under each of our C225 and BEC2 agreements with Merck KGaA we are required to supply to Merck KGaA and Merck KGaA is required to obtain from us C225 and BEC2, respectively, for clinical trials and commercial supply. We own and operate a manufacturing facility for biologics in Somerville, New Jersey for the manufacture of clinical trial materials. At this facility we manufacture a portion of the C225 utilized for clinical trials and are developing the purification process for c-p1C11 and are in the early stages of its production for clinical trials. This facility is operated in accordance with Good Manufacturing Practices (GMP) which is a requirement for product manufactured for use in clinical trials and for commercial sale. We intend to build a new manufacturing facility adjacent to our current manufacturing facility in Somerville, New Jersey. This new facility will contain three 10,000 liter fermentors and will be dedicated to the commercial production of C225. Under our agreement with Merck KGaA for C225, Merck KGaA is providing us, subject to certain terms, with a $30 million guaranty to apply toward the build-out of this new facility. In April 1999, we agreed on the production concept for this facility with Merck KGaA and expect to break ground during the first half of 2000, subject to obtaining the necessary permits from the local authority. The facility will cost approximately $45 million and will be built on a lot adjacent to our Somerville, New Jersey facility, which we are in the process of purchasing for approximately $700,000. The facility will be dedicated to the production of C225 and will have an area of approximately 85,000 square feet with 20,000 square feet remaining for expansion. BI is supplying us with quantities of C225 required for our clinical trials that exceed the capacity of our current facility under an April 1999 development agreement. The total cost under this agreement, including amounts of additional C225 we had the right to request, will be approximately DM12,100,000 (or $6,636,000 as of September 30, 1999), of which approximately DM3,940,000 had been incurred and DM3,720,000 had been paid as of September 30, 1999. We intend to continue to utilize the services of a contract manufacturer to provide a supplemental supply of C225 for both clinical trials and commercial supply. If we obtain FDA approval of C225 prior to FDA approval of our proposed manufacturing facility, we will need to obtain commercial-scale quantities of C225 from contract manufacturers in order to have sufficient quantities of C225 for product launch. We may pursue an agreement with another third party relating to the manufacture of C225 for both clinical trials and commercial sale. Under our development agreement with BI we demonstrated our ability to successfully transfer the technology necessary for the production and purification of C225. The stable manufacturing process for C225 has been duplicated in both BI's manufacturing facility and ours. This process has been performed in a number of different sized fermentors, including 1,200 liter scale in our facility and 2,000 liter scale in BI's facility. This prior successful scale-up makes us confident that we will be successful in scaling up to 10,000 liters in our new facility and that the process can be successfully transferred to a contract manufacturer for supplemental supply. MARKETING We intend to develop the capacity to market our cancer therapeutic products directly in the U.S. and Canada. As part of this strategy, in our agreement with Merck KGaA for C225, we have retained all rights to commercialize C225 in the U.S. and Canada. We also have co-promotion rights for commercialization of our BEC2 cancer vaccine in North America pursuant to our BEC2 agreement with Merck KGaA. We intend to build an internal sales force and establish the appropriate promotional campaigns and infrastructure. In November 1998, we hired a Vice-President of Marketing with experience in the commercial launch of a monoclonal antibody cancer therapeutic to develop our internal marketing capabilities. As we prepare for the marketing of C225 in the U.S. and Canada, we will be hiring directors of field sales and sales operations in 1999, regional sales managers in the first quarter of 2000 and approximately 40 sales people prior to the commencement of C225 sales. We believe that a sales force of this size can adequately address the North 43 44 American oncology market for this drug, because a manageable number of oncologists are responsible for prescribing most of the cancer therapeutics in North America. Other functions related to commercialization will be outsourced, especially those requiring considerable manpower and infrastructure resources such as inventory control, distribution, accounts receivable and reimbursement. We are currently designing our campaign to elicit the active involvement of leaders in the oncology field to broaden the knowledge of the potential significance of C225. We intend that the sales capability we will build for C225 will allow us to directly market other cancer therapeutics that we may develop, including c-p1C11, when and if we receive such regulatory approval. We expect that with respect to other cancer therapeutics that we may develop, we may enter into development agreements with third parties that may include co-marketing or co-promotion arrangements. In the alternative, we may grant exclusive marketing rights to our corporate partners in return for up-front fees, milestone payments, and royalties on sales. PATENTS AND TRADE SECRETS GENERALLY We seek patent protection for our proprietary technology and products in the United States and abroad. Patent applications have been submitted and are pending in the United States, Canada, Europe and Japan as well as other countries. The patent position of biopharmaceutical firms generally is highly uncertain and involves complex legal and factual questions. Our success will depend, in part, on whether we can: - obtain patents to protect our own products - obtain licenses to use the technologies of third parties, which may be protected by patents - protect our trade secrets and know-how - operate without infringing the intellectual property and proprietary rights of others For a discussion of the risks and uncertainties associated with our intellectual property position, see "Risk Factors -- Our success depends upon our ability to protect our intellectual property and our proprietary technology." PATENT RIGHTS; LICENSES We currently have exclusive licenses or assignments to 63 issued patents worldwide that relate to our proprietary technology in the United States and foreign countries, 37 of which are issued United States patents. In addition, we currently have exclusive licenses or assignments to approximately 43 families of patent applications. C225. We have an exclusive license from the University of California at San Diego to an issued U.S. patent for the murine form of C225, our EGF receptor antibody product. We believe that this patent covers C225 under the patent law doctrine of equivalents. Under this doctrine, the subject matter of a claim is deemed to cover variations that do substantially the same thing, in substantially the same way, to achieve the same result, especially if the variation is known and routine. We believe, in this instance, the doctrine of equivalents would extend protection to C225. Our licensor did not obtain patent protection outside the U.S. for this antibody. While this patent covers only our antibody and would not block third parties from obtaining patents covering other antibodies to the EGF receptor, we are pursuing additional patent protection that may limit the ability of third parties to commercialize EGF receptor antibodies for the treatment of cancer. Specifically, we are pursuing patent protection for the use of any antibody that inhibits the EGF receptor in combination with chemotherapy or radiation therapy. We have exclusively licensed, from Rhone-Poulenc Rorer, a family of patent applications seeking to cover the use of antibodies to the EGF receptor in conjunction with chemotherapeutic agents. A Canadian patent was issued in this family, and the patent examiner in Europe has indicated an intent to issue a European patent. U.S. prosecution continues. We have filed additional patent applications based on our own research that would cover the use of C225 or any other 44 45 EGF receptor inhibitor in conjunction with radiation therapy, and the use of C225 or any other EGF receptor inhibitor in refractory patients, either alone or in combination with chemotherapy or radiation therapy. We have patent applications pending that include claims on (1) the use of C225 to significantly inhibit the growth of tumor cells, (2) humanized forms of the antibody and antibody fragments and (3) chimeric and humanized forms of the antibody and fragments of the antibody used with other drugs, including chemotherapeutic agents. Our exclusive license agreements with the University of California, San Diego and Rhone-Poulenc Rorer require us to pay royalties on sales of C225 that are covered by these licenses. We are aware of a U.S. patent issued to a third party that includes claims covering the use, subject to certain restrictions, of antibodies to the EGF receptor and cytotoxic factors to inhibit tumor growth. We have retained special patent counsel, Kenyon & Kenyon, which has advised us that in its opinion, subject to the assumptions and qualifications set forth in such opinion, no valid claim of this third party patent is infringed by reason of our manufacture or sale, or medical professionals' use, of C225 alone or in combination with chemotherapy or radiation therapy and, therefore, in the event of litigation for infringement of this third party patent, a court should find that no valid claim of this third party patent is infringed. We have also received an opinion from our regular patent counsel, Hoffmann & Baron, LLP, that we do not infringe this third party patent. Based upon these opinions, as well as our review, in conjunction with our regular patent counsel, of other relevant patents, we believe that we will be able to commercialize C225 alone and in combination with chemotherapy and radiation therapy provided we successfully complete our clinical trials and receive the necessary FDA approvals. These opinions of counsel, however, are not binding on any court or the U.S. Patent and Trademark Office. In addition, there can be no assurance that we will not in the future, in the U.S. or any other country, be subject to patent infringement claims, patent interference proceedings or adverse judgments in patent litigation. C225 is a "chimerized" monoclonal antibody, which means it is made of antibody fragments derived from more than one type of animal. Patents have been issued to other biotechnology companies that cover the chimerization of antibodies. Therefore, we may be required to obtain licenses under these patents before we can commercialize our own chimerized monoclonal antibodies, including C225. Some of these licenses have already been obtained. We cannot be certain that we will be able to obtain the rest of such licenses in the territories where we want to commercialize C225, or how much such licenses would cost. BEC2. We have exclusively licensed from Sloan-Kettering a family of patents and patent applications relating to our BEC2 monoclonal anti-idiotypic antibody. We know that others have been issued patents in the U.S. and Europe covering anti-idiotypic antibodies or their use for the treatment of tumors. These patents, if valid, could be interpreted to cover our BEC2 monoclonal antibody and certain uses of BEC2. Merck KGaA, our licensee of BEC2, has informed us that it has obtained non-exclusive, worldwide licenses to these patents in order to market BEC2 in its territory. We are entitled to co-promote BEC2 in North America with Merck KGaA, however, we cannot be certain that we could obtain such licenses on commercially acceptable terms, if at all. Our license from Sloan-Kettering requires us to pay royalties on sales of BEC2. Angiogenesis Inhibitors. With respect to our research on inhibitors to angiogenesis based on the FLK-1 receptor, we are the exclusive licensee from Princeton University of a family of patents and patent applications covering the FLK-1 receptor and antibodies to the receptor and its human homolog, KDR. We are also the assignee of a family of patents and patent applications filed by our scientists covering angiogenesis-inhibiting antibodies to receptors that bind VEGF. One of the patents licensed from Princeton claims the use of FLK-1/KDR receptor antibodies to isolate cells expressing the FLK-1/KDR receptor on their cell surfaces. Additionally, we are a co-owner of a recently filed patent application claiming the use of FLK-1/KDR receptor antibodies to isolate endothelial progenitor cells that express FLK-1/KDR on their cell surfaces. At present, we are seeking exclusive rights to this invention from the co-owners. Our license from Princeton University requires us to pay royalties on sales that would otherwise infringe the licensed patents, which cover antibodies to the FLK-1/KDR receptor including c-p1C11. 45 46 VE Cadherin. We have an assignment of a family of patent applications covering novel cadherin molecules that are involved in endothelial cell interactions. These interactions are believed to be involved in angiogenic processes. The subject patent applications also cover antibodies that bind to, and affect, the cadherin molecules. Diagnostics. Our diagnostics program has been licensed for commercial development to Abbott Laboratories. The program includes target amplification technology and detection methods, such as RCR technology, signal amplification technology, such as AMPLIPROBE, and p53 mutation detection for assisting in cancer diagnosis. Our proprietary position with respect to our diagnostics program is based on numerous families of patents and patent applications. We have either an assignment from our own scientists or exclusive license from academic institutions to these families of patents and patent applications. We have an exclusive license to an issued patent assigned to Princeton University related to the underlying technology for our AMPLIPROBE signal amplification and detection system. We are aware that patent applications have been filed by, and that patents have been issued to, third parties in the field of DNA amplification technology. This could affect Abbott's ability to commercialize our diagnostic products, and our ability to collect royalties for such commercialization. There has been significant litigation in the biopharmaceutical industry over patents and other proprietary rights. The defense and prosecution of intellectual property suits and related legal and administrative proceedings can be both costly and time consuming. Litigation and interference proceedings could result in substantial expense to us and significant diversion of effort by our technical and management personnel. An adverse determination in any such interference or litigation, particularly with respect to C225, to which we may become a party could subject us to significant liabilities to third parties or require us to seek licenses from third parties. If required, the necessary licenses may not be available on acceptable terms or at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us, in whole or in part, from commercializing our products, which could have a material adverse effect on our business, financial condition and results of operations. Trade Secrets. With respect to certain aspects of our technology, we rely, and intend to continue to rely, on trade secrets, unpatented proprietary know-how and continuing technological innovation to protect our competitive position. Such aspects of our technology include methods of isolating and purifying antibodies and other proteins, collections of plasmids in viable host systems, and antibodies that are specific for proteins that are of interest to us. We cannot be certain that others will not independently develop substantially equivalent proprietary information or techniques. Relationships between us and our employees, scientific consultants and collaborators provide these persons with access to our trade secrets, know-how and technological innovation under confidentiality agreements with the parties involved. Similarly, our employees and consultants enter into agreements with us that require that they do not disclose confidential information of ours and they assign to us all rights to any inventions made while in our employ relating to our activities. We seek patent protection for our proprietary technology and products, in the United States and abroad. Patent applications have been submitted and are pending in the United States, Canada, Europe and Japan as well as other countries. GOVERNMENT REGULATION The research and development, manufacture and marketing of human therapeutic and diagnostic products are subject to regulation primarily by the FDA in the United States and by comparable authorities in other countries. These national agencies and other federal, state and local entities regulate, among other things, research and development activities (including testing in animals and in humans) and the testing, manufacturing, handling, labeling, storage, record keeping, approval, advertising and promotion of the products that we are developing. Noncompliance with applicable requirements can result in refusal to approve product licenses or other applications, or revocation of approvals previously granted. Noncompliance also can result in fines, criminal prosecution, recall or seizure of products, total or partial suspension of production or refusal to allow a company to enter into governmental supply contracts. 46 47 The process of obtaining requisite FDA approval has historically been costly and time consuming. Current FDA requirements before a new human drug or biological product may be marketed in the United States include (1) the successful conclusion of pre-clinical laboratory and animal tests, if appropriate, to gain preliminary information on the product's safety, (2) filing with the FDA of an IND application to conduct human clinical trials for drugs or biologics, (3) the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use and (4) filing by a company and approval by the FDA of a New Drug Application ("NDA") for a drug product or a Biological License Application ("BLA") for a biological product to allow commercial distribution of the drug or biologic. Pre-clinical tests include the evaluation of the product in the laboratory and in animal studies to assess the potential safety and efficacy of the product and its formulation. The results of the pre-clinical tests are submitted to the FDA as part of an IND application to support the evaluation of the product in human subjects or patients. Clinical trials involve administration of the product to patients under supervision of a qualified principal investigator. Such trials are typically conducted in three sequential phases, although the phases may overlap. In Phase I, the initial introduction of the drug into human subjects, the product is tested for safety, dosage tolerance, absorption, metabolism, distribution, and excretion. Phase II involves studies in a limited patient population to (1) determine the biological or clinical activity of the product for specific, targeted indications, (2) determine dosage tolerance and optimal dosage, and (3) identify possible adverse effects and safety risks. If Phase II evaluations indicate that a product is effective and has an acceptable benefit-to-risk relationship, Phase III trials may be undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population. The FDA reviews the results of the clinical trials and may order the temporary or permanent discontinuation of clinical trials at any time if it believes the product candidate exposes clinical subjects to an unacceptable health risk. Investigational products used in clinical studies must be produced in compliance with GMP pursuant to FDA regulations. On November 21, 1997, President Clinton signed into law the Food and Drug Administration Modernization Act. That act codified the FDA's policy of granting "fast track" approval for cancer therapies and other therapies intended to treat severe or life threatening diseases and having potential to address unmet medical needs. Previously, the FDA approved cancer therapies primarily based on patient survival rates or data on improved quality of life. The FDA considered evidence of partial tumor shrinkage, while often part of the data relied on for approval, insufficient by itself to warrant approval of a cancer therapy, except in limited situations. Under the FDA's new policy, which became effective on February 19, 1998, the FDA has broadened authority to consider evidence of partial tumor shrinkage or other clinical outcomes for approval. This new policy is intended to facilitate the study of cancer therapies and shorten the total time for marketing approvals. We intend to take advantage of this policy; however, it is too early to tell what effect, if any, these provisions may have on the approval of our product candidates. Some of our cancer treatments require the use of in vitro diagnostic products to test patients for particular traits. In vitro diagnostic products are generally regulated by the FDA as medical devices. In general, the FDA must approve a new diagnostic product that is not "substantially equivalent" to a legally marketable product much in the way it must approve drugs and biological products. Specifically, the device must be tested under an investigational device exemption ("IDE") and receive FDA approval under a premarket approval application ("PMA") before it can be commercially marketed. Substantially equivalent devices go through a clearance process at the FDA that is generally less onerous than the PMA process but also can require data submission and other rigorous review. Under current law, each domestic and foreign drug and device product-manufacturing establishment must be registered with the FDA before product approval. Domestic and foreign manufacturing establishments must meet strict standards for compliance with GMP regulations and licensing specifications after the FDA has approved an NDA, BLA or PMA. The FDA and foreign regulatory authorities periodically inspect domestic and foreign manufacturing facilities where applicable. 47 48 Sales outside the United States of products we develop will also be subject to regulatory requirements governing human clinical trials and marketing for drugs and biological products and devices. The requirements vary widely from country to country, but typically the registration and approval process takes several years and requires significant resources. In most cases, if the FDA has not approved a product for sale in the United States the product may be exported for sale outside of the United States only if it has been approved in any one of the following countries: the European Union, Canada, Australia, New Zealand, Japan, Israel, Switzerland and South Africa. There are specific FDA regulations that govern this process. Our ability to earn sufficient returns on our products may depend in part on the extent to which government health administration authorities, private health coverage insurers and other organizations will provide reimbursement for the costs of such products and related treatments. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available. ENVIRONMENTAL AND SAFETY MATTERS We use hazardous materials, chemicals, viruses and various radioactive compounds in our research and development activities. Accordingly, we are subject to regulations under federal, state and local laws regarding work force safety, environmental protection and hazardous substance control, and to other present and possible future federal, state and local regulations. We have in place safety procedures for storing, handling and disposing of these materials. However, we cannot completely eliminate the risk of contamination or injury. We could be held liable for any resulting damages, injuries or civil penalties, and our trials could be suspended. In addition, environmental laws or regulations may impose liability for the clean-up of contamination at properties we own or operate, regardless of fault. These environmental laws and regulations do not currently materially adversely affect our operations, business or assets. However, these laws may become more stringent, other facts may emerge, and our processes may change, and therefore the amount and timing of expenditures in the future may vary substantially from those currently anticipated. COMPETITION Competition in the biopharmaceutical industry is intense and based significantly on scientific and technological factors. These factors include the availability of patent and other protection for technology and products, the ability to commercialize technological developments and the ability to obtain governmental approval for testing, manufacturing and marketing. We compete with specialized biopharmaceutical firms in the United States, Europe and elsewhere, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations. Many biopharmaceutical companies have focused their development efforts in the human therapeutics area, including cancer. Many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, governmental agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical field will also depend to a considerable degree on the continuing availability of capital to us. We are aware of certain products under development or manufactured by competitors that are used for the prevention, diagnosis, or treatment of certain diseases we have targeted for product development. Various companies are developing biopharmaceutical products that potentially directly compete with our product candidates. These include areas such as (1) the use of small molecules to the receptor or antibodies to those receptors to treat cancer, (2) the use of anti-idiotypic antibody or recombinant antigen approaches to cancer vaccine therapy, (3) the development of inhibitors to angiogenesis, (4) and the use of hematopoietic growth factors to treat blood system disorders to or for stem cell or gene therapy. Some of these product candidates are in advanced stages of clinical trials. We expect that our products under development and in clinical trials will address major markets within the cancer sector. Our competition will be determined in part by the potential indications for which drugs are 48 49 developed and ultimately approved by regulatory authorities. Additionally, the timing of market introduction of some of our potential products or of competitors' products may be an important competitive factor. Accordingly, the relative speed with which we can develop products, complete pre-clinical testing, clinical trials and approval processes and supply commercial quantities to market are expected to be important competitive factors. We expect that competition among products approved for sale will be based on various factors, including product efficacy, safety, reliability, availability, price, and patent position. HUMAN RESOURCES We initiated our in-house research and development in 1986. We have assembled a scientific staff with a variety of complementary skills in a broad base of advanced research technologies, including oncology, immunology, molecular and cell biology, antibody engineering, protein and synthetic chemistry and high-throughput screening. We have also recruited a staff of technical and professional employees to carry out manufacturing of clinical trial materials at our Somerville, New Jersey facility. Of our 165 full-time personnel on October 15, 1999, 69 were employed in our product development, clinical and manufacturing programs, 50 in research, and 46 in administration. Our staff includes 20 persons with Ph.D.s and three with M.D.s. PROPERTIES RESEARCH FACILITY -- NEW YORK, NEW YORK We have occupied two contiguous leased floors at 180 Varick Street in New York City since 1986. The current lease for the two floors was effective as of January 1, 1999 and expires in December 2004. The annual rent under the lease for 1999 is $720,000, which increases by 3% per year for subsequent years. Rent expense for the New York facility, prior to our recent lease renewal, was approximately $574,000, $554,000, and $508,000 for the years ended December 31, 1998, 1997 and 1996, respectively. We have completed a design concept and are in the process of renovating the facility to better fit our needs. The renovation is expected to cost approximately $2.0 million and is expected to be completed by November 1999. The original acquisition, construction and installation of our New York research and development facilities were financed principally through the sale of IDA Bonds issued by the NYIDA. Equipment at these facilities purchased with the proceeds of the bond secure the payment of debt service on the outstanding IDA Bond. MANUFACTURING FACILITY -- SOMERVILLE, NEW JERSEY In June 1992, we acquired certain property and a building in Somerville, New Jersey at a cost to us of approximately $4,665,000, including expenses. We have retrofitted the building to serve as our clinical-grade manufacturing facility. When purchased, the facility had in place various features, including clean rooms, air handling, electricity, and water for injection systems and administrative offices. The cost for completion of facility modifications was approximately $5.4 million. We currently operate the facility to develop and manufacture materials for our clinical trials. Under certain circumstances, we also may use the facility for the manufacturing of commercial products. The timing and any additional costs of adapting the facility for commercial manufacturing depend on several factors, including the progress of products through clinical trials. In January 1998, we completed the construction and commissioning of a new 1,750 square foot process development center at this facility dedicated to manufacturing process optimization for existing products and the pre-clinical and Phase I development of new biological therapeutics. We are in the process of purchasing, for approximately $700,000, a lot adjacent to our Somerville, New Jersey facility. We intend to build a new manufacturing facility on this site for commercial supply of C225, which we estimate will cost approximately $45 million. LEGAL PROCEEDINGS There are currently no material legal proceedings pending against us or any of our property. 49 50 MANAGEMENT SENIOR OFFICERS AND DIRECTORS The following table lists the senior officers and directors of ImClone as of October 27, 1999. Below the table is information about the business experience of each person listed.
NAME AGE POSITION - ---- --- -------- Robert F. Goldhammer............. 68 Chairman of the Board and Director(1)(2)(3) Samuel D. Waksal, Ph.D. ......... 53 President, Chief Executive Officer and Director(2)(4) Harlan W. Waksal, M.D. .......... 46 Executive Vice President, Chief Operating Officer and Director(2)(3)(4) Carl Goldfischer................. 41 Vice President and Chief Financial Officer John B. Landes................... 51 Vice President, Business Development and General Counsel Peter Bohlen, Ph.D. ............. 56 Vice President, Research Michael Feldman, Ph.D. .......... 73 Vice President, Discovery Research Ronald A. Martell................ 37 Vice President, Marketing S. Joseph Tarnowski, Ph.D. ...... 46 Vice President, Product and Process Development Michael A. Trapani............... 44 Vice President, Regulatory Affairs and Quality Assurance Jean Carvais, M.D. .............. 72 Director Vincent T. DeVita, Jr., M.D. .... 64 Director(5)(4) Paul B. Kopperl.................. 66 Director(5)(1)(3) William R. Miller................ 71 Director(5)(3) David M. Kies.................... 55 Director(1)(3) John Mendelsohn, M.D. ........... 63 Director(3)(4) Richard Barth.................... 68 Director(5)(1)
- ------------ (1) Member of Compensation and Stock Option Committee (2) Member of Executive Committee (3) Member of Nominating and Corporate Governance Committee (4) Member of Research Oversight Committee (5) Member of Audit Committee Robert F. Goldhammer has served as ImClone's Chairman of the Board since February 1991 and has been a Director of ImClone since October 1984. Mr. Goldhammer has been a partner of Concord International Investment Group, L.P. since 1991. He was a partner of Rohammer Corporation, a private investment company, from 1989 to 1991. He was a managing director of Kidder, Peabody Group Inc., an investment banking firm, from May 1988 to January 1989. He is a director of Esterline Technologies Corporation. Samuel D. Waksal, Ph.D., President of ImClone, is a founder of ImClone and has been its Chief Executive Officer and a Director since August 1985 and President since March 1987. From 1982 to 1985, Dr. Waksal was a member of the faculty of Mt. Sinai School of Medicine as Associate Professor of Pathology and Director of the Division of Immunotherapy within the Department of Pathology. He has served as visiting Investigator of the National Cancer Institute, Immunology Branch, Research Associate of the Department of Genetics, Stanford University Medical School, Assistant Professor of Pathology at Tufts University School of Medicine and Senior Scientist for the Tufts Cancer Research Center. Dr. Waksal was a scholar of the Leukemia Society of America from 1979 to 1984. Dr. Waksal currently serves on the Executive Committee of the New York Biotechnology Association, the Board of Directors of Cadus Pharmaceutical Corporation and is Chairman of the New York Council for the Humanities. Dr. Samuel Waksal and Dr. Harlan Waksal are brothers. Harlan W. Waksal, M.D. is a founder of ImClone and has been a Director since April 1984. He has directed ImClone's research and development since April 1985, and has served as ImClone's Executive Vice 50 51 President and Chief Operating Officer since March 1987. From 1985 to March 1987, Dr. Waksal served as ImClone's President. Dr. Waksal received his training in Internal Medicine from Tufts-New England Medical Center Hospital and in Pathology from Kings County Hospital in Brooklyn, New York from 1982 to 1987. From 1984 to 1985, Dr. Waksal was Chief Resident in Pathology at Kings County Hospital. He received his Medical Degree from Tufts University School of Medicine in 1979. He is currently Adjunct Assistant Professor in the Department of Pathology at Downstate Medical Center, New York. Dr. Harlan Waksal and Dr. Samuel Waksal are brothers. Carl S. Goldfischer, M.D. has served as Vice President, Finance and Chief Financial Officer since May 1996. From June 1994 until joining ImClone, Dr. Goldfischer served as a healthcare analyst with Reliance Insurance Company. From June 1991 until June 1994, Dr. Goldfischer was Director of Research for D. Blech & Co., an investment banking firm. Dr. Goldfischer received a doctorate of medicine from Albert Einstein College of Medicine in 1988 and served as a resident in radiation oncology at Montefiore Hospital of the Albert Einstein College of Medicine until 1991. Dr. Goldfischer is a director of Immulogic Pharmaceutical Corporation. Dr. Goldfischer has indicated that he intends to resign from ImClone to resume his career in investment banking in the near future. John B. Landes has served as Vice President, Business Development and General Counsel since November 1992. Prior thereto, he was Vice President, Administration and Legal since December 1984. He also has been Secretary of ImClone since April 1985 and served as its Treasurer from April 1984 through September 1991, except for an interim period from December 1988 to February 1991. From 1978 to 1984, Mr. Landes was an associate attorney with the Boston law firm of Mahoney, Hawkes and Goldings. Peter Bohlen, Ph.D. has been Vice President, Research of ImClone since September 1996. From November 1995 to July 1996 he was Senior Director of Ixsys, a privately-held biotechnology company. From October 1987 to June 1996 he was department head of the Molecular Biology Section of American Cyanamid Company's Medical Research Division and director of the company's angiogenesis program. He also has held academic positions at the Salk Institute, San Diego and the University of Zurich, Switzerland. Dr. Bohlen received his Ph.D. in chemistry from the University of Berne in Switzerland. In 1983, he received the Cloetta Award in Switzerland for his contributions in the field of protein analysis. Michael Feldman, Ph.D. became Vice President, Discovery Research for ImClone in May 1995. Prior thereto he served as Director of Basic Research for ImClone since 1993. Dr. Feldman is former head of the Department of Cell Biology at the Weizmann Institute of Science in Rehovot, Israel, and a former dean of its graduate school. He has done pioneering work in the areas of transplantation immunology, differentiation of lymphocytes and cancer immunology. In 1984, he received the Griffuel Award in France for his work in cancer metastasis, and in 1986 received the Rothschild Award for his work in immunology. Dr. Feldman is a member of the Israeli Academy of Sciences and Humanities and the World Academy of Arts and Sciences. Dr. Feldman is currently on long-term disability. Ronald A. Martell has served as ImClone's Vice President, Marketing since November 1998. Prior to joining ImClone he worked at Genentech, Inc. for ten years where he held various positions. Most recently, from 1996 until joining ImClone, he served as Genentech's Group Manager of Oncology Products where he directed the launch of Herceptin, Genentech's monoclonal antibody product approved to treat breast cancer. From 1995 to 1996 he served as Senior Product Manager where he launched Pulmozyme for cystic fibrosis in Europe. From 1994 through 1995 he served as Manager of Genentech's Piedmont Sales Division. Prior to that, he served from 1993 as Associate Product Manager for Genentech's Pulmozyme. S. Joseph Tarnowski, Ph.D. has served as ImClone's Vice President, Product and Process Development since January 1999. Prior to joining ImClone, he held various positions with CellPro Inc., the principal business of which was the development, manufacture and marketing of automated systems that utilize monoclonal antibodies to purify large quantities of specific cells for therapeutic and diagnostic applications. He joined CellPro in June 1992 as Vice President of Operations and was appointed to the position of Vice President of Research and Development in June 1995 and became Senior Vice President and Chief Technical Officer in December 1996. From November 1986 to May 1992, Dr. Tarnowski was Director, Process and Product Development of Scios Nova Inc. (formerly California Biotechnology Inc.), a company that develops 51 52 recombinant human proteins for therapeutic uses. Dr. Tarnowski received a Ph.D. in Biochemistry from the University of Tennessee in 1979 and was a Postdoctoral Fellow at the Roche Institute of Molecular Biology from 1979 through 1981. Michael A. Trapani has served as ImClone's Vice President, Regulatory Affairs & Quality Assurance since June 1999. He has more than 20 years' experience in the pharmaceutical industry, with the majority of his experience in the drug approval area. From January 1996 through May 1999, he held various positions at Cytogen Corp., Princeton, New Jersey, most recently as its Vice President, Regulatory Affairs & Quality Assurance. Prior to that, he served from September 1993 until January 1996 as Senior Director, Regulatory Affairs for Pharmacia Adria, Columbus, Ohio. From 1981 through 1993 he served in various positions at Kabi Pharmacia, Piscataway, New Jersey, ending as its Executive Director, Regulatory Affairs. Mr. Trapani began his career in 1977 with the Food and Drug Administration. Mr. Trapani received a B.S. degree in Biology from Brooklyn College and an MBA degree from Seton Hall Graduate School of Business. Jean Carvais, M.D. has been a Director of ImClone since July 1993, and has since 1984 been an independent consultant to companies in the pharmaceutical industry. Prior to that time, Dr. Carvais was President of The Research Institute of Roger Bellon, S.A., now a division of Rhone-Poulenc. As such, he was involved in the development of a line of anti-cancer drugs, including Bleomycin and Adriamycin, as well as a new line of antibiotics and quinolones. Following the acquisition of Roger Bellon, S.A. by Rhone-Poulenc, Dr. Carvais became a member of Rhone-Poulenc's central research committee which directs the company's worldwide research and development activities. Dr. Carvais has served as a director of Columbia Laboratories, Inc. since 1996. Vincent T. DeVita, Jr., M.D. has been a Director of ImClone since February 1992. Since 1995 Dr. DeVita has served as Director of the Yale Cancer Center as well as Professor of Medicine and Professor of Epidemiology and Public Health at Yale University School of Medicine, New Haven, Connecticut. From September 1988 through June 1995, Dr. DeVita served as Attending Physician at Sloan-Kettering, New York, and through June 1991 as Physician-in-Chief. From 1980 to 1988, he served under Presidential appointment as Director of the National Cancer Institute, where he had held various positions since 1966. During his years with the National Cancer Institute, Dr. DeVita was instrumental in developing the first successful combination cancer chemotherapy program. This work ultimately led to effective regimens of curative chemotherapy for a variety of cancers. Dr. DeVita's numerous awards include the 1990 Armand Hammer Cancer Prize and the 1982 Albert and Mary Lasker Medical Research Award for his contribution to the cure of Hodgkin's disease. Dr. DeVita received his M.D. from the George Washington University School of Medicine, Washington, DC, in 1961. Paul B. Kopperl has served as a Director of ImClone since December 1993. He is President of Pegasus Investments, Inc., Boston, a private investment management firm established in 1994. He has served as President of Delano & Kopperl, Inc., a private business strategy and venture investing firm in Boston and its predecessor firms from 1976 to the present. From 1967 through 1975 he was Vice President and a principal of Kidder, Peabody & Co. Incorporated, New York, an investment banking firm. From 1959 to 1967 he was an associate with Goldman, Sachs & Co., New York. Mr. Kopperl is a Trustee and Governor of the Dana-Farber Cancer Institute, Boston, and over the years has served as a trustee or director of numerous not-for-profit educational, performing arts and social welfare organizations and businesses. William R. Miller has been a Director of ImClone since June 1996. Mr. Miller served as Vice Chairman of the Board of Directors of the Bristol-Myers Squibb Company from 1985 until 1991, at which time he retired. Mr. Miller is a director of Isis Pharmaceuticals, Inc., Transkaryotic Therapies, Inc., Westvaco Corporation and Xomed Surgical Products, Inc. He is Chairman of the Board of Vion Pharmaceuticals, Inc. and SIBIA Neurosciences, Inc. He is Chairman of the Board of Trustees of the Cold Spring Harbor Laboratory and is a past Chairman of the Board of the Pharmaceutical Manufacturers Association. Mr. Miller is a Trustee of the Manhattan School of Music, Metropolitan Opera Association and Opera Orchestra of New York. He is a member of Oxford University Chancellor's Court of Benefactors, Honorary Fellow of St. Edmund Hall and Chairman of the English-Speaking Union of the United States. 52 53 David M. Kies has been a Director of ImClone since June 1996. Mr. Kies is a Partner of the New York based law firm Sullivan & Cromwell, specializing in mergers and acquisitions, securities and general corporate matters. Mr. Kies joined Sullivan & Cromwell in 1968, and was elected a partner of the firm in 1976. From 1991 until 1995, he was the managing partner of the firm's London office. John Mendelsohn, M.D. has been a Director of ImClone since February 1998. He has served as the President of M.D. Anderson Cancer Center, University of Texas, where he has also been Professor of Medicine since 1996. From 1985 to 1996 he was Chairman of the Department of Medicine at Sloan-Kettering, New York, as well as holder of the Winthrop Rockefeller Chair in Medical Oncology at Sloan-Kettering. He was also Professor and Vice-Chairman of Medicine at Cornell University Medical College and an attending physician at both Memorial and New York Hospitals. Dr. Mendelsohn served on the faculty of the University of California, San Diego and was instrumental in the creation of the University's Cancer Center, where he served as Director from 1976 to 1985. Dr. Mendelsohn's work has focused on growth factors and their role in regulating the proliferation of cancer cells through cell surface receptors. Dr. Mendelsohn was responsible for developing specific monoclonal antibodies that block receptors, including epidermal growth factor receptors, which mediate growth factor activation of cell and growth and division. Dr. Mendelsohn is currently a board member of Enron Corp., the Richard Lounsbery Foundation and the Greater Houston Partnership, and a fellow of the New York Academy of Medicine. In 1997, Dr. Mendelsohn was elected to the Institute of Medicine of the National Academy of Sciences. Richard Barth has been a Director of ImClone since October 1996. Mr. Barth served as Chairman of the Board of Ciba-Geigy Corporation, United States from 1990 until December 1996, and was President and Chief Executive Officer of Ciba-Geigy Corporation from 1986 until April 1996. Mr. Barth is a member of the Board of Directors of numerous organizations, including Novartis Corporation, United States, The Bank of New York, Bowater, Inc., and New York Medical College. 53 54 SCIENTIFIC ADVISORY BOARD The following table lists the members of ImClone's Scientific Advisory Board as of October 27, 1999 and their primary professional affiliations.
NAME PROFESSIONAL AFFILIATION(S) - ---- --------------------------- Thomas Deuel, M.D............. Professor of Medicine, Director of the Division of Growth Regulation, Harvard Medical School Charles A. Dinarello, M.D..... Professor of Medicine, University of Colorado School of Medicine Michael Feldman, Ph.D. ....... Vice President, Discovery Research, ImClone Systems Incorporated; Member of the Israeli Academy of Sciences and Humanities and the World Academy of Arts and Sciences Zvi Fuks, M.D................. Chairman of the Department of Radiation Oncology, Memorial Sloan-Kettering Cancer Center Gerald T. Keusch, M.D. ....... Professor and the Head of the Division of Geographic Medicine and Infectious Disease, Tufts University School of Medicine Arnold Levine, Ph.D........... President, Rockefeller University John Mendelsohn, M.D.......... President, MD Anderson Cancer Center, University of Texas Malcolm Moore, Ph.D........... Enid A. Haupt Professor of Cell Biology, Head of the James Ewing Laboratory of Development Hematopoiesis at Memorial Sloan-Kettering Cancer Center Richard C. Mulligan, Ph.D..... Mallinckrodt Professor of Genetics, Harvard Medical School; Investigator, Howard Hughes Medical Institute, Children's Hospital, Boston Robert Schneider, Ph.D........ Associate Professor, Department of Biochemistry, New York University Medical Center Thomas Shenk, Ph.D............ Professor of Molecular Biology, Princeton University; (Chairman, Scientific Advisory American Cancer Society Professor, Howard Hughes Medical Board) Institute P. Frederick Sparling, M.D.... Professor and Chairman of the Department of Medicine and Professor of Microbiology and Immunology, University of North Carolina School of Medicine Samuel D. Waksal, Ph.D. ...... President and Chief Executive Officer, ImClone Systems Incorporated
54 55 PRINCIPAL STOCKHOLDERS The following table sets forth certain information that we know about the beneficial ownership of our common stock as of October 27, 1999, except as otherwise indicated, by (1) each of our directors, (2) each of our officers who beneficially owns our common stock and (3) all of our directors and executive officers as a group. Except as otherwise indicated, the persons or entities listed below have sole voting and investment power with respect to all shares owned by them.
NUMBER OF SHARES PERCENTAGE OF SHARES BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)(2) - ---------------- ------------------ ------------------------ Samuel D. Waksal, Ph.D. ....................... 1,302,583(3) 4.9% Harlan W. Waksal, M.D. ........................ 1,065,780(4) 4.1% Robert F. Goldhammer........................... 855,390(5) 3.3% John B. Landes................................. 241,000(6) * John Mendelsohn, M.D. ......................... 183,476(7) * Carl S. Goldfischer, M.D. ..................... 179,400 * Michael Feldman, Ph.D. ........................ 165,500(8) * David M. Kies.................................. 158,450(9) * Peter Bohlen, Ph.D. ........................... 80,315(10) * Paul B. Kopperl................................ 69,460(11) * Vincent T. DeVita, Jr., M.D. .................. 69,092(12) * Jean Carvais, M.D. ............................ 48,542(13) * William R. Miller.............................. 36,147 * Richard Barth.................................. 35,250(14) * All directors and executive officers as a group (11 persons)(15)............................. 4,003,570 14.4%
- ------------ * Less than 1%. (1) Unless otherwise noted, each person's address is in care of ImClone Systems Incorporated, 180 Varick Street, Seventh Floor, New York, New York 10014. (2) The percentage of voting stock owned by each stockholder is calculated by dividing (1) the number of shares deemed to be beneficially held by such stockholder as of October 27, 1999, as determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), by (2) the sum of (A) 25,629,007 which is the number of shares of common stock outstanding as of October 27, 1999 plus (B) the number of shares of common stock issuable upon exercise of currently exercisable options and warrants held by such stockholder. For purposes of this security ownership table "currently exercisable options" and "currently exercisable warrants" consist of options and warrants exercisable as of October 27, 1999 or within 60 days after October 27, 1999. Shares of our series A preferred stock are not included in the denominator because they do not have voting rights. (3) Includes 350,000 shares issuable upon the exercise of currently exercisable warrants and 415,000 shares issuable upon the exercise of currently exercisable options. Does not include an additional 1,000,000 shares issuable upon the exercise of an option, 200,000 shares of which will become exercisable on May 24, 2000, subject only to Dr. Waksal's continued employment with ImClone. (4) Includes 240,000 shares issuable upon the exercise of currently exercisable options; 310,680 shares issuable upon the exercise of currently exercisable warrants; and 2,600 shares owned by Dr. Waksal's sons. Does not include an additional 650,000 shares issuable upon the exercise of an option, 130,000 shares of which will become exercisable on May 24, 2000, subject only to Dr. Waksal's continued employment with ImClone. (5) Includes 113,542 shares issuable upon the exercise of currently exercisable options; 379,990 shares issuable upon the exercise of currently exercisable warrants; and 13,314 shares held in trust as to which Mr. Goldhammer disclaims beneficial ownership. (6) Includes 101,500 shares issuable upon the exercise of currently exercisable options and 104,000 shares issuable upon the exercise of currently exercisable warrants. (7) Consists of 183,476 shares issuable upon the exercise of currently exercisable options. (8) Includes 105,000 shares issuable upon the exercise of currently exercisable options. (9) Includes 18,750 shares issuable upon the exercise of currently exercisable options and 8,200 shares held by Mr. Kies as custodian for his son. (10) Includes 79,500 shares issuable upon the exercise of currently exercisable options. (11) Includes 42,500 shares issuable upon the exercise of currently exercisable options and 500 shares held by Mr. Kopperl's spouse as to which Mr. Kopperl disclaims beneficial ownership. (12) Includes 68,792 shares issuable upon the exercise of currently exercisable options. (13) Consists of 48,542 shares issuable upon the exercise of currently exercisable options. (14) Includes 33,750 shares issuable upon exercise of currently exercisable options. 55 56 (15) Includes an aggregate of (1) 2,205,022 shares issuable upon the exercise of currently exercisable options and warrants and (2) 13,814 shares as to which beneficial ownership is disclaimed. Shares held by Mr. Landes, Dr. Feldman and Dr. Bohlen have not been included as they are not considered to be executive officers of ImClone. In addition, each of Messrs. Martell and Trapani and Dr. Tarnowski, none of whom is considered to be an executive officer of ImClone, beneficially owns a de minimus number of shares of our common stock, which are not reflected in the table. On October 18, 1999, a Schedule 13D filing under the Securities Exchange Act of 1934 was made jointly by High River Limited Partnership, Riverdale LLC and Carl C. Icahn disclosing that their beneficial ownership had increased to 5.1% of ImClone's common stock, based on the number of shares outstanding as of September 1, 1999. According to the Schedule 13D, Riverdale LLC is the general partner of High River Limited Partnership and is wholly owned by Carl C. Icahn. The Schedule 13D states that the shares of ImClone's common stock were acquired for investment purposes. According to the Schedule 13D filing, the principal business address of High River Limited Partnership and Riverdale LLP is 100 South Bedford Road, Mount Kisco, New York 10549 and the principal business address of Carl C. Icahn is c/o Icahn Associates Corp., 767 Fifth Avenue, 47th Floor, New York, New York 10153. 56 57 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 60,000,000 shares of common stock, par value $.001 per share ("common stock"), and 4,000,000 shares of preferred stock, par value $1.00 per share. As of October 27, 1999, there were 25,629,007 shares of common stock outstanding held of record by approximately 372 stockholders and there were 400,000 shares of series A preferred stock outstanding, which are all held by Merck KGaA. The registrar and transfer agent for the common stock is Equiserve. COMMON STOCK Holders of shares of common stock are entitled to one vote per share on matters to be voted upon by our stockholders. Holders of shares of common stock do not have cumulative voting rights. Therefore, the holders of more than 50% of the shares of the common stock will have the ability to select all of our directors. Holders of shares of common stock will be entitled to receive dividends when, as and if declared by our board of directors. In the event of a liquidation, dissolution or winding up of ImClone, holders of common stock have the right to share ratably in all assets remaining after the payment of all liabilities, subject to preference in liquidation of any outstanding preferred stock. Holders of common stock have neither preemptive rights nor rights to convert their common stock into any other securities and are not subject to future calls or assessments by ImClone. There are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of the series A preferred stock, as well as any additional preferred stock that ImClone may designate and issue in the future. PREFERRED STOCK Our board of directors has the authority to issue preferred stock in one or more series, and to fix the rights, preferences, privileges and restrictions, including the dividend, conversion, voting, redemption (including sinking fund provisions) and other rights, liquidation preferences and the number of shares constituting any series and the designations of such series, without any further vote or action by our stockholders. The provisions of any preferred stock could adversely affect the voting power of the holders of common stock and could, among other things, have the effect of delaying, deferring or preventing a change in control of ImClone. SERIES A PREFERRED STOCK In December 1997, in connection with an amendment to our research and license agreement with Merck KGaA for BEC2, Merck KGaA purchased from us 400,000 shares of series A preferred stock for total consideration of $40 million. Holders of series A preferred stock generally have no voting rights, except: - that two-thirds of the outstanding shares must consent to changes in the terms of the series A preferred stock - in certain cases, if we default in the timely payment of dividends on the series A preferred stock, the holders will have the right to elect a nominee to our board of directors - as otherwise required by law The holders of the series A preferred stock are entitled to receive annual cumulative dividends of $6.00 per share. Dividends on the outstanding series A preferred stock accrue as of their issuance date and are payable in cash annually on or the earlier of - December 31st of each year beginning December 31, 1999 or - at the time of conversion or redemption of the series A preferred stock on which the dividend is to be paid Up to 100,000 shares of series A preferred stock as of December 31, 1998 were convertible into 800,000 shares of common stock and an additional 100,000 shares will become convertible, into a number of shares of 57 58 common stock based on the applicable conversion price, on each of January 1, 2000, January 1, 2001 and January 1, 2002. During the period from issuance through December 31, 1999, the series A preferred stock is convertible at a price of $12.50 per share. During the period from January 1, 2000 through December 31, 2000 the series A preferred stock is convertible at a price equal to the average of the closing prices for the common stock for the five trading days ending one trading day prior to December 31, 1999. During the period from January 1, 2001 through December 31, 2001 the series A preferred stock is convertible at a price equal to the average of the closing prices for the common stock for the five trading days ending one trading day prior to December 31, 2000. During the period from January 1, 2002 through December 31, 2002 the series A preferred stock is convertible at a price equal to 88% of the average of the closing prices for the common stock for the five trading days ending one trading day prior to December 31, 2001 (the "beneficial conversion feature"). Anytime after January 1, 2003 the series A preferred stock is convertible at a price equal to the average of the closing prices for the common stock for the five trading days ending one trading day prior to the receipt by us of the notice of conversion. The conversion price is subject to adjustment in the case of certain dilutive events. Further, in the event the average market price of the common stock for the five consecutive trading days ending one trading day prior to any trading day during which any series A preferred stock is outstanding exceeds 150% of the conversion price then in effect, we have the right, as long as such price exceeds 150% of the conversion price, to require the holder of the series A preferred stock to convert all its series A preferred stock as may then be convertible. We may also redeem in whole or any part of the series A preferred stock then outstanding at a redemption price of $120 per share, plus accrued and unpaid dividends thereon. In the event of our liquidation, dissolution or winding up, holders of the series A preferred stock are entitled to receive in cash out of our assets available for distribution to our stockholders an amount equal to the stated value of $100 per share outstanding, plus accrued and unpaid dividends. Such payments will be made before any amount will be paid to the holders of the common stock or holders of other classes or series of our capital stock or if the assets are insufficient to pay the full amount due to the holders of series A preferred stock such holders will receive a pro rata portion thereof. In accordance with the terms of the series A preferred stock, we are required to recognize an assumed incremental yield of $5,455,000 (calculated at the date of issuance and based on the beneficial conversion feature noted above). This amount is being amortized as a preferred stock dividend over a four-year period beginning with the day of issuance. Accrued dividends payable were $4,307,000 or $10.77 per share at September 30, 1999. Additionally, we have recognized a cumulative incremental yield attributable to a beneficial conversion feature of $2,324,000 through September 30, 1999. MILESTONE SHARES Under our license agreement with Merck KGaA for C225, we are entitled to receive from Merck KGaA up to $60 million upon our achievement of various milestones in the development of C225. In connection with making the final $30 million of these milestone payments, Merck KGaA is entitled to receive milestone shares from us, which, if issued, will be shares of our common stock (or other capital stock convertible into our common stock). We describe the milestone shares more fully under the heading "Business -- Collaborations with Merck KGaA -- C225 License and Development Agreement." OPTIONS AND WARRANTS OPTIONS In February 1986, our board of directors adopted an incentive stock option plan and a non-qualified stock option plan (the "86 Plans"). In February 1996, we adopted an additional incentive stock option plan and non-qualified stock option plan (the "96 Plans"). In May 1998, we adopted an additional non-qualified stock option plan (the "98 Plan"). Combined the 86 Plans, the 96 Plans, as amended, and the 98 Plan, as amended, provide for the granting of options to purchase up to 6,500,000 shares of common stock to our key employees, 58 59 directors, consultants and advisors. Incentive stock options may not be granted at a price less than the fair market value of the stock at the date of grant and may not be granted to non-employees. Options may not be granted under the 98 Plan to officers or directors. Options under all the plans, unless earlier terminated, expire ten years from the date of grant. Certain options granted under these plans vest over one-to-five-year periods. At October 27, 1999, options to purchase 3,663,960 shares of common stock were outstanding under the 86 Plans, the 96 Plans and the 98 Plan, and 1,046,490 shares were available for grant under the 96 Plans and the 98 Plan. Options may no longer be granted under the 86 Plans pursuant to the terms of the 86 Plans. In September 1998 and January 1999, we granted to both our Vice President of Marketing and Vice President of Product and Process Development options to purchase 60,000 shares of common stock each. These options were not granted under any of the above mentioned incentive stock option or non-qualified stock option plans. The terms of these options are substantially similar to those granted under the 98 Plan. In May 1999, our stockholders approved the grant of an option to our President and Chief Executive Officer and Executive Vice President and Chief Operating Officer to purchase 1,000,000 and 650,000 shares, respectively, of common stock at a per share exercise price equal to $18.25, the last reported sale price of the common stock on the date shareholder approval was obtained. The options will vest no later than seven years from the grant date and specified amounts are subject to earlier vesting if specified common stock price thresholds are met. During April 1995, we completed the sale of the remaining one-half of our shares of capital stock of Cadus Pharmaceutical Corporation, a Delaware corporation, for $3.0 million to High River LP, a Delaware limited partnership. In exchange for receiving a now-expired right to repurchase all outstanding shares of capital stock of Cadus held by High River, ImClone granted to High River two options to purchase shares of common stock. One option is for 150,000 shares at an exercise price per share equal to $2.00, subject to certain adjustments and the other option is for 300,000 shares at an exercise price per share equal to $0.69, subject to certain adjustments. Both options expire on April 26, 2000. The 450,000 options have a weighted average exercise price of $1.13. WARRANTS As of October 27, 1999, a total of 1,791,590 shares of common stock were issuable upon exercise of outstanding warrants. Such warrants have been issued to our officers, directors, other employees, certain scientific advisory board members, as well as certain investors and certain credit providers. The warrants, all of which are currently exercisable, have exercise prices ranging from $.0625 to $13.33 per share, with an average exercise price of approximately $2.96. The warrants have standard anti-dilution provisions including adjustments for stock splits, reverse stock splits and stock dividends as well as adjustments for capital reorganizations. REGISTRATION RIGHTS We have granted Merck KGaA certain registration rights regarding the shares of common stock that it may acquire upon conversion of the series A preferred shares and upon receipt of milestone shares. Specifically, Merck KGaA has the right to require us to register upon its request once during any 12-month period, up to a total of four times, at our expense, the number of shares of common stock into which the shares of series A preferred stock are converted according to their terms and the number of milestone shares that are issued. Merck KGaA may also exercise rights to have such registrable common stock registered at any time that we file a registration statement for other shares of our common stock. Merck KGaA may exercise these rights at any time after conversion of its shares of series A preferred stock into shares of common stock or receipt of milestone shares. However, Merck KGaA has waived its rights to exercise these registration rights in connection with this offering and during the period ending 90 days after the date of this prospectus. As of October 27, 1999, Merck KGaA has not converted any series A preferred stock into common stock and has not acquired any milestone shares. 59 60 LIMITATION OF LIABILITY As permitted by the Delaware General Corporation Law, our certificate of incorporation provides that our directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to ImClone or its stockholders - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law - under Section 174 of the Delaware General Corporation Law, relating to prohibited dividends or distributions or the repurchase or redemption of stock or - for any transaction from which the director derives an improper personal benefit As a result of this provision, we and our stockholders may be unable to obtain monetary damages from a director for breach of his duty of care. Although stockholders may continue to seek injunctive or other equitable relief for an alleged breach of fiduciary duty by a director, stockholders may not have any effective remedy against the challenged conduct if equitable remedies are unavailable. We have obtained directors and officers liability insurance against claims made in the aggregate amount of $13 million per loss and per year. In addition, our by-laws provide for indemnification of all officers and directors against liabilities or expenses incurred in connection with any action, suit or proceeding if the director or officer acted in good faith and in a manner he reasonably believed to be in, or not opposed to, our best interests, unless the action, suit or proceeding involved liability by the director or officer to us and no court determines that such director or officer is entitled to indemnification. Our by-laws also provide that expenses incurred by a director or officer in defending any such action may be advanced by us if the director or officer agrees to repay such amount if it is subsequently determined that he is not entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers or persons controlling ImClone pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy and is therefore unenforceable. BUSINESS COMBINATION PROVISIONS The business combination provision contained in Section 203 of the Delaware General Corporation Law ("Section 203") defines an interested stockholder as any person that - owns, directly or indirectly 15% or more of the outstanding voting stock of a corporation or - is an affiliate or associate of a corporation and was the owner of 15% or more of the outstanding voting stock at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and the associates of such person Under Section 203, a resident domestic corporation may not engage in any business combination with any interested stockholder for a period of three years following the date such stockholder became an interested stockholder, unless - prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding, for determining the number of shares outstanding, (a) shares owned by persons who are directors and officers and (b) employee stock plans, in certain instances) or 60 61 - on or subsequent to such date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder The restrictions imposed by Section 203 will not apply to a corporation if - the corporation's original certificate of incorporation contains a provision expressly electing not to be governed by Section 203 and - the corporation by the action of its stockholders holding a majority of outstanding stock adopts an amendment to its certificate of incorporation or by-laws expressly electing not to be governed by Section 203 Such amendment will not be effective until 12 months after adoption and shall not apply to any business combination between such corporation and any person that became an interested stockholder of such corporation on or prior to such adoption. We have not elected out of the statute and therefore the restrictions imposed by Section 203 will apply to us. 61 62 MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of common stock by a beneficial owner that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a person or entity that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership, or a foreign estate or trust. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), and administrative interpretations as of the date of this prospectus, all of which are subject to change, including changes with retroactive effect. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to Non-U.S. Holders in light of their particular circumstances and does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction. Prospective holders should consult their tax advisors with respect to the particular tax consequences to them of owning and disposing of common stock, including the consequences under the laws of any state, local or foreign jurisdiction. DIVIDENDS Dividends paid to a Non-U.S. Holder of common stock generally will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty. For purposes of determining whether tax is to be withheld at a reduced rate under an income tax treaty, ImClone will presume that dividends paid on or before December 31, 2000 to an address in a foreign country are paid to a resident of that country unless it has knowledge that the presumption is not warranted. In order to obtain a reduced rate of withholding for dividends paid after December 31, 2000, a Non-U.S. Holder will be required to provide an Internal Revenue Service Form W-8BEN certifying its entitlement to benefits under a treaty. In addition, in certain cases where dividends are paid to a Non-U.S. Holder that is a partnership or other pass-through entity, persons holding an interest in the entity may need to provide the required certification. The withholding tax does not apply to dividends paid to a Non-U.S. Holder that provides a Form 4224 or, after December 31, 2000, a Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder's conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the Non-U.S. Holder were a U.S. resident. A non-U.S. corporation receiving effectively connected dividends may also be subject to an additional "branch profits tax" imposed at a rate of 30% (or a lower treaty rate) on an earnings amount that is net of the regular tax. GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to U.S. federal income tax on gain realized on a sale or other disposition of common stock unless: - the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States - in the case of certain Non-U.S. Holders who are non-resident alien individuals and hold the common stock as a capital asset, the individuals are present in the United States for 183 or more days in the taxable year of the disposition - the Non-U.S. Holder is subject to tax under the provisions of the Code regarding the taxation of U.S. expatriates or - ImClone is or has been a U.S. real property holding corporation at any time within the five-year period preceding the disposition or the Non-U.S. Holder's holding period, whichever period is shorter The tax relating to stock in a U.S. real property holding corporation does not apply to a Non-U.S. Holder whose holdings, actual and constructive, at all times during the applicable period, amount to 5% or less of the common stock of a U.S. real property holding corporation, provided that the common stock is regularly traded 62 63 on an established securities market. Generally, a corporation is a U.S. real property holding corporation if the fair market value of its U.S. real property interests, as defined in the Code and applicable regulations, equals or exceeds 50% of the aggregate fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. ImClone may be, or may prior to a Non-U.S. Holder's disposition of common stock become, a U.S. real property holding corporation. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ImClone must report to the IRS the amount of dividends paid, the name and address of the recipient, and the amount of any tax withheld. A similar report is sent to the Non-U.S. Holder. Under tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient's country of residence. Dividends paid on or before December 31, 2000 at an address outside the United States are not subject to backup withholding, unless the payor has knowledge that the payee is a U.S. person. However, a Non-U.S. Holder may need to certify its non-U.S. status in order to avoid backup withholding at a 31% rate on dividends paid after December 31, 2000 or dividends paid on or before that date at an address inside the United States. U.S. information reporting and backup withholding generally will not apply to a payment of proceeds of a disposition of common stock where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. However, a Non-U.S. Holder may need to certify its non-U.S. status in order to avoid information reporting and backup withholding at a 31% rate on disposition proceeds where the transaction is effected by or through a U.S. office of a broker. In addition, U.S. information reporting requirements may apply to the proceeds of a disposition effected by or through a non-U.S. office of a U.S. broker, or by a non-U.S. broker with specified connections to the United States. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. When withholding results in an overpayment of taxes, a refund may be obtained if the required information is furnished to the IRS. FEDERAL ESTATE TAX An individual Non-U.S. Holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in the common stock will be required to include the value of the stock in his gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise. 63 64 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Prudential Securities Incorporated and Warburg Dillon Read LLC are acting as representatives, have severally agreed to purchase, and the company has agreed to sell to them, severally, the respective number of shares of common stock set forth opposite the names of such underwriters below:
NUMBER OF NAME SHARES - ---- --------- Morgan Stanley & Co. Incorporated........................... 743,325 Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... 743,325 Prudential Securities Incorporated.......................... 371,675 Warburg Dillon Read LLC..................................... 371,675 BancBoston Robertson Stephens Inc. ......................... 40,000 M.R. Beal & Company......................................... 40,000 CIBC World Markets Corp. ................................... 40,000 First Union Securities, Inc. ............................... 40,000 Hambrecht & Quist LLC....................................... 40,000 Janney Montgomery Scott LLC................................. 40,000 Edward D. Jones & Co., L.P. ................................ 40,000 Lehman Brothers Inc. ....................................... 40,000 Moors & Cabot, Inc. ........................................ 40,000 J.P. Morgan Securities Inc. ................................ 40,000 Neuberger & Berman, LLC..................................... 40,000 PaineWebber Incorporated.................................... 40,000 Suntrust Equitable Securities Corporation................... 40,000 --------- Total.................................................. 2,750,000 =========
The Underwriting Agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered hereby (other than those covered by the underwriters' over-allotment option described below) if any such shares are taken. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $1.15 a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $0.10 a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. The company has granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 412,500 additional shares of common stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered hereby. To the extent such option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such underwriter's name in the table above bears to the total number of shares of common stock set forth next to the names of all underwriters in the table above. If the underwriters' option is exercised in full, the total price to the public would be $101.2 million, the total underwriters' discounts and commission would be $6.1 million and total proceeds to the company would be $95.1 million. 64 65 Each of the company and the directors, officers and certain other stockholders of the company has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not during the period ending 90 days after the date of this prospectus: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The restrictions described above do not apply to: - the sale of shares to the underwriters - the issuance by the company of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing or - transactions by any person other than the company relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. The underwriters and dealers may engage in passive market making transactions in the common stock in accordance with Rule 103 of Regulation M promulgated by the SEC. In general, a passive market maker may not bid for, or purchase, the common stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the common stock during a specified two month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such or maintain the market price of the common stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. The company and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters relating to the issuance of the shares of common stock offered hereby will be passed upon for ImClone by Davis Polk & Wardwell, New York, New York, and for the underwriters by Ropes & Gray, Boston, Massachusetts. EXPERTS The statements in this prospectus under the captions "Risk Factors -- Our success depends upon our ability to protect our intellectual property and our proprietary technology" and "Business -- Patents and Trade Secrets" on matters of U.S. intellectual property law other than references in such sections to the opinion of Kenyon & Kenyon, have been reviewed and approved by Hoffmann & Baron, LLP, intellectual property counsel for ImClone, as experts in U.S. intellectual property law, and are included herein in reliance upon 65 66 such review and approval. The statements in this prospectus in the second sentence of each of the eighth paragraph under the caption "Risk Factors -- Our success depends upon our ability to protect our intellectual property and our proprietary technology" and in the third paragraph under the caption "Business -- Patents and Trade Secrets -- Patent Rights; Licenses -- C225" on matters of U.S. intellectual property law that refer to the opinion of Kenyon & Kenyon, have been reviewed and approved by Kenyon & Kenyon, special intellectual property counsel for ImClone, as experts in U.S. intellectual property law, and are included herein in reliance upon such review and approval. The consolidated financial statements of ImClone Systems Incorporated and its subsidiary as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Commission. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further information on these public reference rooms. Our filings with the SEC are also available to the public from the SEC's web site at http://www.sec.gov. Our common stock is traded on the NASDAQ National Market under the ticker symbol "IMCL." You may also read and copy our filings with the SEC at the NASDAQ National Market offices located in Washington, D.C. We filed a registration statement on Form S-3 to register the shares offered by this prospectus with the Commission. As allowed by SEC rules, this prospectus does not contain all the information that you can find in the registration statement or the exhibits to the registration statement. The SEC allows us to "incorporate by reference" the information we file with them. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, except if it is superseded by information in this prospectus or by later information that we file with the Commission. Information that we file with the SEC after the date of this prospectus will automatically update and supersede the information contained or incorporated by reference in this prospectus. We incorporate by reference the documents listed below, as well as any future filings we may make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, before the time that all of the shares offered by this prospectus have been sold or de-registered. These documents contain important information about our company and its financial condition. - our Annual Report on Form 10-K for the fiscal year ended December 31, 1998 - our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1999, June 30, 1999 and September 30, 1999 - our Proxy Statement dated April 21, 1999 filed in connection with our May 24, 1999 Annual Meeting of Stockholders - our Current Report on Form 8-K filed on October 7, 1999 You may request a copy of these filings, excluding all exhibits unless we have specifically incorporated by reference an exhibit, at no cost, by writing or telephoning us at: ImClone Systems Incorporated 180 Varick Street New York, New York 10014 (212) 645-1405 Attention: Catherine M. Vaczy, Associate General Counsel When you are deciding whether to purchase the shares being offered by this prospectus, you should rely only on the information incorporated by reference or provided in this prospectus or any supplement. We have not authorized anyone else to provide you with different information. We are not making any offer of the shares in any state where the offer is not permitted. You should not assume that the information in this prospectus or any supplement is accurate as of any date other than the date on the front of those documents. 66 67 INDEX TO FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS: Independent Auditors' Report................................ F-2 Consolidated Balance Sheets at December 31, 1998 and 1997... F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1998, 1997, and 1996..... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996............. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996......................... F-7 Notes to Consolidated Financial Statements.................. F-8 UNAUDITED FINANCIAL STATEMENTS: Unaudited Consolidated Balance Sheet at September 30, 1999...................................................... F-27 Unaudited Consolidated Statements of Operations for the Nine Months Ended September 30, 1999 and 1998.................. F-28 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998.................. F-29 Unaudited Notes to Consolidated Financial Statements........ F-30
F-1 68 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders ImClone Systems Incorporated: We have audited the consolidated financial statements of ImClone Systems Incorporated and subsidiary as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of ImClone Systems Incorporated and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Princeton, New Jersey February 19, 1999 F-2 69 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, DECEMBER 31, 1998 1997 ASSETS ------------ ------------ Current assets: Cash and cash equivalents................................. $ 3,888 $ 2,558 Securities available for sale............................. 42,851 57,052 Prepaid expenses.......................................... 470 596 Other current assets...................................... 1,196 589 -------- --------- Total current assets................................ 48,405 60,795 -------- --------- Property and equipment: Land...................................................... 340 340 Building and building improvements........................ 10,519 8,969 Leasehold improvements.................................... 4,846 4,832 Machinery and equipment................................... 7,834 6,315 Furniture and fixtures.................................... 640 550 Construction in progress.................................. 115 2,159 -------- --------- Total cost.......................................... 24,294 23,165 Less accumulated depreciation and amortization............ (12,877) (11,294) -------- --------- Property and equipment, net............................. 11,417 11,871 -------- --------- Patent costs, net........................................... 860 944 Deferred financing costs, net............................... 46 55 Other assets................................................ 1,524 2,115 -------- --------- $ 62,252 $ 75,780 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,109 $ 1,731 Accrued expenses and other................................ 4,847 1,440 Interest payable.......................................... 45 68 Deferred revenue.......................................... 75 208 Fee potentially refundable from corporate partner......... 4,000 -- Current portion of long-term liabilities.................. 744 677 Preferred stock dividends payable......................... 2,512 -- -------- --------- Total current liabilities........................... 13,332 4,124 -------- --------- Long-term debt.............................................. 2,200 2,200 Other long-term liabilities, less current portion........... 1,546 1,118 Preferred stock dividends payable........................... -- 112 -------- --------- Total liabilities................................... 17,078 7,554 -------- --------- Commitments and contingencies Stockholders' equity:
Preferred stock, $1.00 par value; authorized 4,000,000 shares; issued and outstanding Series A Convertible Preferred Stock: 400,000 at December 31, 1998 and December 31, 1997 (preference in liquidation $42,512 and $40,112, respectively). 400 400 Common stock, $.001 par value; authorized 45,000,000 shares; issued 24,567,312 and 24,265,072 at December 31, 1998 and December 31, 1997, respectively; outstanding 24,516,495, and 24,214,255 at December 31, 1998 and December 31, 1997, respectively........................................................ 25 24 Additional paid-in capital............................................ 184,853 185,706 Accumulated deficit................................................... (138,846) (117,464) Treasury stock, at cost; 50,817 shares at December 31, 1998 and December 31, 1997................................................................ (492) (492) Note receivable--officer and stockholder.............................. (142) -- Accumulated other comprehensive income (loss): Unrealized (loss) gain on securities available for sale............. (624) 52 -------- --------- Total stockholders' equity...................................... 45,174 68,226 -------- --------- $ 62,252 $ 75,780 ======== =========
See accompanying notes to financial statements. F-3 70 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Revenues: License fees from third parties.......................... $ 1,000 $ 3,000 $ 75 Research and development funding from third parties and other................................................. 3,193 2,348 525 -------- -------- -------- Total revenues................................... 4,193 5,348 600 -------- -------- -------- Operating expenses: Research and development................................. 21,049 16,455 11,482 General and administrative............................... 7,145 5,356 3,961 -------- -------- -------- Total operating expenses......................... 28,194 21,811 15,443 -------- -------- -------- Operating loss............................................. (24,001) (16,463) (14,843) -------- -------- -------- Other: Interest and other income................................ (3,054) (1,523) (918) Interest expense......................................... 435 551 823 -------- -------- -------- Net interest and other income.................... (2,619) (972) (95) -------- -------- -------- Loss before extraordinary item............................. (21,382) (15,491) (14,748) Extraordinary loss on extinguishment of debt............... -- -- 1,267 -------- -------- -------- Net loss................................................... (21,382) (15,491) (16,015) Preferred dividends (including assumed incremental yield attributable to beneficial conversion feature of $1,268 and $51 for the years ended December 31, 1998 and 1997, respectively)............................................ 3,668 163 -- -------- -------- -------- Net loss to common stockholders............................ $(25,050) $(15,654) $(16,015) ======== ======== ======== Net loss per common share: Basic and diluted: Loss before extraordinary item........................ $ (1.03) $ (0.67) $ (0.76) Extraordinary loss on extinguishment of debt.......... -- -- (0.07) -------- -------- -------- Net loss................................................. $ (1.03) $ (0.67) $ (0.83) ======== ======== ======== Weighted average shares outstanding........................ 24,301 23,457 19,371 ======== ======== ======== Comprehensive loss: Net loss................................................... $(21,382) $(15,491) $(16,015) Other comprehensive income (loss): Unrealized gain on securities available for sale: Unrealized holding gain (loss) arising during the period.............................................. (638) 99 (49) Less: Reclassification adjustment for realized gain (loss) included in net loss......................... 38 (2) -- -------- -------- -------- Total other comprehensive income (loss).......... (676) 101 (49) -------- -------- -------- Total comprehensive loss......................... $(22,058) $(15,390) $(16,064) ======== ======== ========
See accompanying notes to financial statements. F-4 71 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------- ------------------- PAID-IN ACCUMULATED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK -------- ------ ---------- ------ ---------- ----------- -------- Balance at December 31, 1995... -- $ -- 16,819,622 $17 $ 97,914 $ (85,958) $(150) -------- ---- ---------- --- -------- --------- ----- Issuance of common stock....... 2,200,000 2 13,560 Options exercised.............. 266,275 846 Warrants exercised............. 604,892 1 2,960 Options granted to non-employees................ 95 Extinguishment of debt......... 357,333 3,260 Debt discount.................. 125 Treasury shares................ (19) Changes in unrealized loss on securities available for sale......................... Net loss....................... (16,015) -------- ---- ---------- --- -------- --------- ----- Balance at December 31, 1996... -- -- 20,248,122 20 118,760 (101,973) (169) -------- ---- ---------- --- -------- --------- ----- Issuance of preferred stock.... 400,000 400 39,597 Issuance of common stock....... 3,000,000 3 23,152 Options exercised.............. 147,450 223 Warrants exercised............. 869,500 1 1,385 Options granted to non-employees................ 189 Options/warrants granted to employees.................... 2,512 Treasury shares................ (323) Changes in unrealized loss on securities available for sale......................... Preferred stock dividends...... (112) Net loss....................... (15,491) -------- ---- ---------- --- -------- --------- ----- Balance at December 31, 1997... 400,000 400 24,265,072 24 185,706 (117,464) (492) -------- ---- ---------- --- -------- --------- ----- Options exercised.............. 154,097 1 613 Warrants exercised............. 143,755 200 Issuance of shares through employee stock purchase plan......................... 4,388 33 Options granted to non-employees................ 540 Options granted to employees... 150 Changes in unrealized gain on securities available for sale......................... Note receivable--officer and stockholder.................. Interest on note receivable--officer and stockholder.................. 11 Preferred stock dividends...... (2,400) Net loss....................... (21,382) -------- ---- ---------- --- -------- --------- ----- Balance at December 31, 1998... 400,000 $400 24,567,312 $25 $184,853 $(138,846) $(492) ======== ==== ========== === ======== ========= =====
See accompanying notes to financial statements. F-5 72 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
NOTE ACCUMULATED RECEIVABLE OTHER OFFICER AND COMPREHENSIVE STOCKHOLDER LOSS TOTAL ----------- ------------- -------- Balance at December 31, 1995........................ $ -- $ -- $ 11,823 ----- ----- -------- Issuance of common stock............................ 13,562 Options exercised................................... 846 Warrants exercised.................................. 2,961 Options granted to non-employees.................... 95 Extinguishment of debt.............................. 3,260 Debt discount....................................... 125 Treasury shares..................................... (19) Changes in unrealized loss on securities available for sale.......................................... (49) (49) Net loss............................................ (16,015) ----- ----- -------- Balance at December 31, 1996........................ -- (49) 16,589 ----- ----- -------- Issuance of preferred stock......................... 39,997 Issuance of common stock............................ 23,155 Options exercised................................... 223 Warrants exercised.................................. 1,386 Options granted to non-employees.................... 189 Options/warrants granted to employees............... 2,512 Treasury shares..................................... (323) Changes in unrealized loss on securities available for sale.......................................... 101 101 Preferred stock dividends........................... (112) Net loss............................................ (15,491) ----- ----- -------- Balance at December 31, 1997........................ -- 52 68,226 ----- ----- -------- Options exercised................................... 614 Warrants exercised.................................. 200 Issuance of shares through employee stock purchase plan.............................................. 33 Options granted to non-employees.................... 540 Options granted to employees........................ 150 Changes in unrealized gain on securities available for sale.......................................... (676) (676) Note receivable--officer and stockholder............ (131) (131) Interest on note receivable--officer and stockholder....................................... (11) -- Preferred stock dividends........................... (2,400) Net loss............................................ (21,382) ----- ----- -------- Balance at December 31, 1998........................ $(142) $(624) $ 45,174 ===== ===== ========
See accompanying notes to financial statements. F-6 73 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 -------- --------- -------- Cash flows from operating activities: Net loss.................................................. $(21,382) $ (15,491) $(16,015) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 1,769 1,797 1,704 Expense associated with issuance of options and warrants............................................. 690 2,729 95 Extraordinary loss on extinguishment of debt............ -- -- 1,267 Discounted interest amortization........................ -- -- 156 Write-off of patent costs............................... 235 146 -- (Gain) loss on sale of investments...................... (38) 2 -- Changes in: Prepaid expenses..................................... 126 (474) (7) Other current assets................................. (607) (110) (453) Due from officer and stockholder..................... -- 101 31 Other assets......................................... (62) (37) (14) Interest payable..................................... (23) (170) (105) Accounts payable..................................... (622) 672 67 Accrued expenses and other........................... 3,407 75 540 Deferred revenue..................................... (133) 208 -- Fee potentially refundable from corporate partner.... 4,000 -- -- -------- --------- -------- Net cash used in operating activities.............. (12,640) (10,552) (12,734) -------- --------- -------- Cash flows from investing activities: Acquisitions of property and equipment.................... (472) (1,657) (272) Purchases of securities available for sale................ (62,779) (241,623) (32,665) Sales and maturities of securities available for sale..... 76,996 195,450 21,836 Investment in CombiChem, Inc. ............................ -- (2,000) -- Additions to patents...................................... (254) (212) (343) -------- --------- -------- Net cash provided by (used in) investing activities....................................... 13,491 (50,042) (11,444) -------- --------- -------- Cash flows from financing activities: Net proceeds from issuance of preferred stock............. -- 39,997 -- Net proceeds from issuance of common stock................ -- 23,154 13,562 Proceeds from exercise of stock options and warrants...... 682 1,581 3,807 Proceeds from issuance of common stock under the employee stock purchase plan..................................... 33 -- -- Purchase of treasury stock................................ -- (323) (19) Proceeds from equipment and building improvement financings.............................................. 594 -- -- Repayment of long-term debt............................... -- (2,113) -- Payments of other liabilities............................. (830) (1,878) (645) -------- --------- -------- Net cash provided by financing activities.......... 479 60,418 16,705 -------- --------- -------- Net increase (decrease) in cash and cash equivalents........ 1,330 (176) (7,473) Cash and cash equivalents at beginning of period............ 2,558 2,734 10,207 -------- --------- -------- Cash and cash equivalents at end of period.................. $ 3,888 $ 2,558 $ 2,734 ======== ========= ========
See accompanying notes to financial statements. F-7 74 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BASIS OF PREPARATION ImClone Systems Incorporated (the "Company") is a biopharmaceutical company engaged primarily in the research and development of therapeutic products for the treatment of cancer and cancer related disorders. The Company employs accounting policies that are in accordance with generally accepted accounting principles in the United States. The biopharmaceutical industry is subject to rapid and significant technological change. The Company has numerous competitors, including major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. These competitors may succeed in developing technologies and products that are more effective than any that are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company. In addition, many of the Company's competitors have significantly greater experience than the Company in pre-clinical testing and human clinical trials of new or improved pharmaceutical products and in obtaining Food and Drug Administration ("FDA") and other regulatory approvals on products for use in health care. The Company is aware of various products under development or manufactured by competitors that are used for the prevention, diagnosis or treatment of certain diseases the Company has targeted for product development, some of which use therapeutic approaches that compete directly with certain of the Company's product candidates. The Company has limited experience in conducting and managing pre-clinical testing necessary to enter clinical trials required to obtain government approvals and has limited experience in conducting clinical trials. Accordingly, the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company, which could adversely affect the Company's ability to further develop and market its products. If the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which the Company has limited or no experience. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of ImClone Systems Incorporated and its wholly-owned subsidiary EndoClone Incorporated. All significant intercompany balances and transactions have been eliminated in consolidation. (B) CASH EQUIVALENTS Cash equivalents consist primarily of U.S. Government instruments, commercial paper, master notes and other readily marketable debt instruments. The Company considers all highly liquid debt instruments with original maturities not exceeding three months to be cash equivalents. (C) INVESTMENTS IN SECURITIES The Company classifies its investment in debt and equity securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate F-8 75 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) component of accumulated comprehensive loss until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned. At December 31, 1998 and 1997, all investments in securities were classified as available-for-sale. (D) LONG-LIVED ASSETS Property and equipment are stated at cost. Equipment under capital leases are stated at the present value of minimum lease payments. Depreciation of fixed assets is provided by straight-line methods over estimated useful lives of three to twelve years, and leasehold improvements are being amortized over the related lease term or the service lives of the improvements, whichever is shorter. Patent and patent application costs are capitalized and amortized on a straight-line basis over their respective expected useful lives, up to a 15-year period. The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recovered. Assets are considered to be impaired and written down to fair value if expected associated cash flows are less than the carrying amounts. Fair value is generally the present value of the expected associated cash flows. (E) DEFERRED FINANCING COSTS Costs incurred in obtaining the Industrial Development Revenue Bonds (Note 6) are amortized using the straight-line method over the terms of the related bonds. (F) REVENUE RECOGNITION License fees are recognized if the Company enters into license agreements with third parties that provide for the payment of non-refundable fees when the agreement is signed or when all parties concur that specified goals are achieved. These fees are recognized as license fee revenues in accordance with the terms of the particular agreement. Research and development funding revenue is derived from collaborative agreements with third parties and is recognized in accordance with the terms of the respective contracts. Royalty revenue is recognized when earned and collection is probable. Royalty revenue is derived from sales of products by corporate partners using licensed Company technology. Revenue recognized in the accompanying statements of operations is not subject to repayment. Amounts received that are subject to repayment if certain specified goals are not met are classified as fees potentially refundable and recognized as revenue upon the achievement of such specified goals. Revenue received that is related to future performance is classified as deferred revenue and recognized when the revenue is earned. (G) STOCK-BASED COMPENSATION PLANS The Company has two types of stock-based compensation plans, stock option plans and a stock purchase plan. The Company accounts for its stock-based compensation plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the F-9 76 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) market price on the date of grant of the underlying stock exceeded the exercise price. The Company provides the pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in Statement of Financial Accounting Standards ("SFAS") No. 123 had been applied. (H) RESEARCH AND DEVELOPMENT Research and development expenditures made pursuant to certain research and development contracts with academic institutions, and other research and development costs, are expensed as incurred. (I) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (J) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (K) NET LOSS PER COMMON SHARE Basic and diluted loss per common share is based on the net loss for the relevant period, adjusted for cumulative Series A Preferred Stock dividends and the assumed incremental yield attributable to beneficial conversion feature of $3,668,000, $163,000 and none for the years ended December 31, 1998, 1997 and 1996, respectively, divided by the weighted average number of shares issued and outstanding during the period. For purposes of the diluted loss per share calculation, the exercise or conversion of all potential common shares is not included since their effect would be anti-dilutive for all years presented. As of December 31, 1998, 1997 and 1996, the Company had approximately 10,933,000, 9,444,000 and 5,380,000, respectively, potential common shares outstanding including convertible preferred stock, stock options and stock warrants. The potential shares of Common Stock to which the Series A Preferred Stock is convertible is based on the future market price of the Company's Common Stock. The potential Common Stock outstanding relating to Preferred Stock conversion for the years ended December 31, 1998 and 1997 has been estimated based on the respective closing prices of the Common Stock at December 31, 1998 and December 31, 1997. (L) COMPREHENSIVE INCOME (LOSS) On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income (loss) consists of net income (loss) and net unrealized gains (losses) on securities and is presented in the consolidated statements of operations and comprehensive loss. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. (M) RECLASSIFICATION Certain amounts previously reported have been reclassified to conform to the current year's presentation. F-10 77 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (3) SECURITIES AVAILABLE FOR SALE The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities by major security type at December 31, 1998 and 1997, were as follows: At December 31, 1998:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE ----------- ------------- -------------- ----------- Commercial paper................ $ 4,738,000 $ -- $ -- $ 4,738,000 U.S. government debt............ 2,000,000 2,000 -- 2,002,000 U.S. corporate debt............. 21,633,000 69,000 (48,000) 21,654,000 Foreign corporate debt.......... 14,150,000 44,000 (42,000) 14,152,000 Foreign government/agency guaranteed debt............... 302,000 3,000 -- 305,000 ----------- -------- -------- ----------- $42,823,000 $118,000 $(90,000) $42,851,000 =========== ======== ======== ===========
At December 31, 1997:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE ----------- ------------- -------------- ----------- Commercial paper................ $12,104,000 $ 4,000 $ -- $12,108,000 U.S. government debt............ 23,568,000 24,000 (5,000) 23,587,000 U.S. corporate debt............. 3,992,000 4,000 -- 3,996,000 Foreign corporate debt.......... 4,719,000 7,000 -- 4,726,000 Foreign government/agency guaranteed debt............... 12,617,000 18,000 -- 12,635,000 ----------- -------- -------- ----------- $57,000,000 $ 57,000 $ (5,000) $57,052,000 =========== ======== ======== ===========
Maturities of debt securities classified as available-for-sale were as follows at December 31, 1998: Years ended December 31,
AMORTIZED FAIR COST VALUE ----------- ----------- 1999.............................................. $11,257,000 $11,260,000 2000.............................................. 7,151,000 7,198,000 2001.............................................. 1,764,000 1,757,000 2002.............................................. -- -- 2003.............................................. -- -- 2004 and thereafter............................... 22,651,000 22,636,000 ----------- ----------- $42,823,000 $42,851,000 =========== ===========
Proceeds from the sale of investment securities available-for-sale were $35,604,000, $9,115,000 and $2,596,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Gross realized gains included in income in 1998 and 1997 were $41,000 and $1,000, respectively and gross realized losses included in income in 1998 and 1997 were $3,000 in both years. There were no realized gains or losses in 1996. F-11 78 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (4) OTHER ASSETS The following items are included in other assets:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Deposits...................................... $ 176,000 $ 115,000 Investment in CombiChem, Inc.................. 1,348,000 2,000,000 ---------- ---------- $1,524,000 $2,115,000 ========== ==========
In October 1997, the Company entered into a Collaborative Research and License Agreement with CombiChem, Inc. ("CombiChem") to discover and develop novel small molecules for use against selected targets for the treatment of cancer. The companies are utilizing CombiChem's Discovery Engine(TM) and Universal Informer Library(TM) to generate small molecules for screening in the Company's assays for identification of lead candidates. The Company is providing CombiChem with research funding through October 1999 in the amount of $500,000 annually and milestone payments and royalties on marketed products, if any, resulting from the collaboration. Concurrent with the execution of the Collaborative Research and License Agreement, the Company entered into a Stock Purchase Agreement pursuant to which the Company purchased 312,500 shares of common stock of CombiChem, as adjusted, for aggregate consideration of $2,000,000. The Company recorded an unrealized loss of $652,000 and none as of December 31, 1998 and 1997, respectively, on this investment due to a reduction in the market value of the stock. The Company deems this reduction in market value to be temporary and therefore this unrealized loss was recorded as a component of accumulated other comprehensive loss. (5) ACCRUED EXPENSES AND OTHER The following items are included in accrued expenses and other:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Salaries and other payroll related expenses... $1,256,000 $ 773,000 Legal and accounting fees..................... 484,000 169,000 Research and development contract services.... 2,032,000 -- Other......................................... 1,075,000 498,000 ---------- ---------- $4,847,000 $1,440,000 ========== ==========
(6) LONG-TERM DEBT On December 31, 1986, the New York City Industrial Development Agency (the "NYIDA") issued on behalf of the Company an Industrial Development Revenue Bond (the "1986 Bond") bearing annual interest at 10.75% in the amount of $2,113,000 with a maturity date of December 15, 1994. The proceeds from the sale of the 1986 Bond were used by the Company for the acquisition, construction and installation of the Company's research and development facility in New York City. During December 1994, the 1986 Bond's original maturity date of December 15, 1994 was extended to June 15, 1996. During June 1996, the Company and the NYIDA extended the maturity date an additional eighteen months to December 15, 1997. The Company repaid the obligation on December 15, 1997. In August 1990, the NYIDA issued another Industrial Development Revenue Bond (the "1990 Bond") bearing annual interest at 11.25% in the amount of $2,200,000. The 1990 Bond is due May 1, 2004. The 1990 Bond includes a provision that if the Company terminates its lease on its New York City facility, a portion of F-12 79 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) which was scheduled to expire in March 1999, the 1990 Bond will become due 60 days prior to such date. The Company renewed the entire lease for the New York City facility effective as of January 1, 1999 through December 2004. The proceeds from the sale of the 1990 Bond were used by the Company for the acquisition, construction and installation of the Company's research and development facility in New York City. The Company has granted a security interest in substantially all equipment located in its New York City facility to secure the obligation of the Company to the NYIDA relating to the 1990 Bond. Interest expense on the 1986 and 1990 Bonds was approximately $248,000 for the year ended December 31, 1998, and $465,000 for each of the years ended December 31, 1997 and 1996, respectively. (7) OTHER LONG-TERM LIABILITIES Other long-term liabilities are comprised of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Liability to reacquire IL-6m rights........... $ -- $ 283,000 Liability under capital lease obligations..... 2,253,000 1,469,000 Liability under license agreement............. 37,000 43,000 ---------- ---------- 2,290,000 1,795,000 Less current portion.......................... (744,000) (677,000) ---------- ---------- $1,546,000 $1,118,000 ========== ==========
In July 1993, the Company entered into an agreement with Erbamont, Inc., now a subsidiary of Pharmacia and Upjohn, Inc. ("Pharmacia"), to acquire the worldwide rights to IL-6m, a blood cell growth factor, which had been licensed to Pharmacia pursuant to a development and licensing agreement. In consideration of the return of rights and the transfer of certain material and information, the Company had paid $1,400,000 and entered into a repayment agreement for an additional $2,400,000 payable over 24 months commencing March 1996. At December 31, 1998, all amounts due Pharmacia under the repayment agreement were paid in full. Additionally, the Company is required to pay Pharmacia up to $2,700,000 in royalties on eventual sales of IL-6m, if any. The Company is obligated under various capital leases for certain laboratory, office and computer equipment and also certain building improvements primarily under a December 1996 financing agreement (the "1996 Financing Agreement") and an April 1998 financing agreement (the "1998 Financing Agreement") with Finova Technology Finance, Inc. ("Finova"). The 1996 Financing Agreement allowed the Company to finance the lease of equipment and make certain building and leasehold improvements to existing facilities involving amounts aggregating approximately $2,500,000. Each lease has a fair market value purchase option at the expiration of a 42-month term. Pursuant to the 1996 Financing Agreement, the Company issued to Finova a warrant expiring December 31, 1999 to purchase 23,220 shares of Common Stock at an exercise price of $9.69 per share. The Company recorded a non-cash debt discount of approximately $125,000 in connection with this financing, which discount is being amortized over the 42-month term of the first lease. The 1996 Financing Agreement with Finova expired in December 1997 and the Company did not utilize the full $2,500,000 under the agreement. In April 1998, the Company entered into the 1998 Financing Agreement with Finova aggregating approximately $2,000,000. The terms of the 1998 Financing Agreement are substantially similar to the now expired 1996 Financing Agreement except that each lease has a 48-month term and no warrants were issued. As of December 31, 1998, the Company had entered into ten individual leases under both the 1996 Financing Agreement and the 1998 Financing Agreement aggregating a total cost of $3,069,000 and had $676,000 available under the 1998 Financing Agreement. The 1998 Financing Agreement terminates March 31, 1999 and the Company is in discussions regarding its F-13 80 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) extension for an additional 60 days. There are no financial covenants associated with these financing agreements. See Notes 13 and 15. At December 31, 1998 and 1997, the gross amount of laboratory equipment, office equipment, building improvements and furniture and fixtures and the related accumulated depreciation and amortization recorded under all capital leases were as follows:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Laboratory, office and computer equipment..... $2,407,000 $1,204,000 Building improvements......................... 861,000 831,000 Furniture and fixtures........................ 92,000 -- ---------- ---------- 3,360,000 2,035,000 Less accumulated depreciation and amortization................................ (643,000) (291,000) ---------- ---------- $2,717,000 $1,744,000 ========== ==========
In connection with the Company's production and eventual marketing of certain products, the Company entered into a license agreement that requires minimum annual royalty payments throughout the term of the agreement. The agreement expires in 2004 and calls for minimum annual payments of $10,000, which are creditable against royalties that may be due from sales. To the extent the minimum annual royalties are not expected to be offset by sales, the Company has charged the net present value of these payments to operations. An interest rate of 10% was used to discount the cash flows. In July 1995, a director loaned the Company $180,000 in exchange for a long-term note due two years from issuance at an annual interest rate of 8%. As part of the transaction, the director was granted 36,000 warrants to purchase Company Common Stock at $1.50 per share and an additional 36,000 warrants to purchase Common Stock at $3.00 per share. In May 1996, the Company and the director exchanged the note for 24,000 shares of Common Stock and the Company paid the accrued and unpaid interest on the note in the amount of $10,000 in cash. The Company recorded an extraordinary loss of $39,000 on the extinguishment of the debt. The Company has registered such shares of Common Stock with the Securities and Exchange Commission (the "Commission") under a registration statement in accordance with the provisions of the Securities Act of 1933, as amended (the "1933 Act"). On August 11, 1995, the Oracle Group purchased 1,000,000 shares of Common Stock for a purchase price of $1.5 million and made a loan to the Company in the aggregate amount of $2.5 million with a two-year maturity, but subject to mandatory prepayment, in whole or in part, upon the occurrence of certain events, including the raising of certain additional funds. The loan carried an annual interest rate of 8%. The Oracle Group includes Oracle Partners, LP, Quasar International Partners C.V., Oracle Institutional Partners LP, Sam Oracle Fund, Inc. and Warren B. Kanders. The Oracle Group also received warrants exercisable at any time until August 10, 2000 entitling the holders thereof to purchase 500,000 shares of Common Stock at a price of $1.50 per share and 500,000 shares of Common Stock at a price of $3.00 per share. As a result of the Company's offerings of shares of its Common Stock in November 1995 and February 1996, the Oracle Group was entitled to require the Company to apply 20 percent of the gross proceeds of the sale of the shares of Common Stock from the offerings to repay the loan. In May 1996, the Company and the Oracle Group exchanged the notes in the aggregate outstanding principal amount of $2.5 million for 333,333 shares of Common Stock and the Company paid the accrued and unpaid interest on the notes in the amount of $143,000 in cash. The Company recorded an extraordinary loss of $1,228,000 on the extinguishment of the debt. The Company has registered such shares of Common Stock with the Commission under a registration statement in accordance with the provisions of the 1933 Act. F-14 81 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) COLLABORATIVE AGREEMENTS In December 1990, the Company entered into a development and commercialization agreement with Merck KGaA ("Merck KGaA") with respect to its principal cancer vaccine product candidate, BEC2 and the recombinant gp75 antigen (collectively "BEC2"). The agreement has been amended a number of times, most recently in December 1997. The agreement grants Merck KGaA a license, with the right to sublicense, to manufacture and market BEC2 for all indications outside of North America. Merck KGaA has also been granted a license, without the right to sublicense, to market but not manufacture BEC2 in North America. The Company has the right to co-promote BEC2 in North America. In return, the Company is entitled to $4,700,000, of which $4,167,000 has been recognized as of December 31, 1998, in research support payments. Merck KGaA is also required to make milestone payments up to $22,500,000, of which $3,000,000 has been recognized as of December 31, 1998, based on milestones achieved in the licensed products' development. Merck KGaA is also required to pay royalties on the eventual sales of BEC2 outside of North America, if any. Revenues arising from sales of BEC2 in North America will be distributed in accordance with the terms of a co-promotion agreement to be negotiated by the parties. In December 1998, the Company entered into a development and license agreement with Merck KGaA with respect to its lead interventional therapeutic product candidate for cancer, C225. In exchange for exclusive rights to market C225 outside of North America and co-development rights in Japan, the Company can receive $30,000,000, of which $4,000,000 has been received as of December 31, 1998, in up-front fees and early cash-based milestone payments assuming achievement of defined milestones. An additional $30,000,000 can be received assuming the achievement of further milestones for which Merck KGaA will receive equity in the Company. The equity underlying these milestone payments will be priced at varying premiums to the then market price of the Common Stock depending upon the timing of the achievement of the respective milestones. Additionally, Merck KGaA will, subject to certain terms, provide the Company a $30,000,000 secured line of credit or guaranty for the build-out of a manufacturing facility for the commercial development of C225. Merck KGaA will pay the Company a royalty on future sales of C225 outside of North America, if any. Merck KGaA has also agreed not to own greater than 19.9% of the Company's voting securities through December 3, 2002. The agreement may be terminated by Merck KGaA on any date on which a milestone is achieved (in which case no milestone payment will be made) or for a one year period after the first commercial sale of C225 in Merck KGaA's territory, upon Merck KGaA's reasonable determination that the product is economically unfeasible (in which case Merck KGaA is entitled to receive back 50% of the cash based milestones then paid to date, but only based upon a royalty rate applied to the Company's sales in North America, if any). In the event of termination of the agreement, the due date for the payment of the line of credit for the manufacturing facility will be accelerated, or in the event of a guaranty, the Company will be required to use its best efforts to release Merck KGaA as guarantor. In the event by April 15, 1999 the Company and Merck KGaA fail to agree on a concept for the manufacturing facility or Merck KGaA fails to provide the Company with the credit facility or guaranty then the agreement may be terminated by either party, in which case Merck KGaA is entitled to receive back all milestone payments made to date. Additionally, the Company must timely obtain certain collateral license agreements and the failure to do so will also entitle Merck KGaA to receive back all milestone payments made to date. The $4,000,000 milestone payment received in December 1998 has been recorded as a fee potentially refundable from corporate partner and will be recognized as revenue upon the parties mutual agreement of the manufacturing facility concept and obtaining the defined collateral license agreements. Revenues for the years ended December 31, 1998, 1997 and 1996 were $4,193,000, $5,348,000 and $600,000 respectively. Revenues for the year ended December 31, 1998 consisted of (i) $300,000 in research support from the Company's partnership with the Wyeth/Lederle Vaccine and Pediatrics Division of American Home in infectious disease vaccines, (ii) $1,000,000 in milestone revenue and $2,500,000 in research and support payments from the Company's research and license agreement with Merck KGaA with respect to the Company's BEC2 product candidate, (iii) $295,000 in royalty revenue from the Company's F-15 82 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) strategic alliance with Abbott in diagnostics, and (iv) $98,000 from a Phase I Small Business Innovation Research grant from the National Cancer Institute for a program in cancer-related angiogenesis. Revenues for the year ended December 31, 1997 consisted of (i) $300,000 in research support from the Company's partnership with American Home in infectious disease vaccines, (ii) $2,000,000 in milestone revenue and $1,667,000 in research and support payments from the Company's research and license agreement with Merck KGaA with respect to the Company's BEC2 product candidate, and (iii) $1,000,000 in milestone revenue and $381,000 in royalty revenue from the Company's strategic alliance with Abbott in diagnostics. Revenues for the year ended December 31, 1996 consisted of (i) $300,000 in research support from the Company's partnership with American Home in infectious diseases, (ii) $225,000 in royalty revenue from the Company's strategic alliance with Abbott in diagnostics, and (iii) $75,000 in license fees from the Company's cross-licensing agreement with Immunex Corporation for novel hematopoietic growth factors. Revenues were derived from the following geographic areas:
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- -------- United States................................... $ 693,000 $1,681,000 $600,000 Germany......................................... 3,500,000 3,667,000 -- ---------- ---------- -------- $4,193,000 $5,348,000 $600,000 ========== ========== ========
(9) PREFERRED STOCK In connection with the December 1997 amendment to the Company's research and license agreement with Merck KGaA, Merck KGaA purchased from the Company in December 1997 400,000 shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Shares" or "Series A Preferred Stock") for total consideration of $40,000,000. The holders of the Series A Preferred Shares are entitled to receive annual cumulative dividends of $6.00 per share. Dividends accrue as of the issuance date of the Series A Preferred Shares and are payable on the outstanding Series A Preferred Shares in cash annually on December 31 of each year beginning December 31, 1999 or at the time of conversion or redemption of the Series A Preferred Shares on which the dividend is to be paid, whichever is sooner. Up to 100,000 Series A Preferred Shares as of December 31, 1998 were convertible and an additional 100,000 Series A Preferred Shares will become convertible on each of January 1, 2000, January 1, 2001 and January 1, 2002. During the period from issuance through December 31, 1999, the Series A Preferred Shares are convertible at a price equal to $12.50 per share; during the period from January 1, 2000 through December 31, 2000 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 1999; during the period from January 1, 2001 through December 31, 2001 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2000; during the period from January 1, 2002 through December 31, 2002 the Series A Preferred Shares are convertible at a beneficial conversion price equal to 88% of the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2001; and anytime after January 1, 2003 the Series A Preferred Shares are convertible at a price equal to the average of the closing prices for the Common Stock for the five trading days ending on December 31, 2002. The conversion price is subject to adjustment in the case of certain dilutive events. Further, in the event the average market price of the Common Stock for the five consecutive trading days ending one trading day prior to any trading day during which any Series A Preferred Shares are outstanding exceeds 150% of the conversion price then in effect, the Company has the right to require the holder of the Series A Preferred Shares to convert all such shares that may be convertible. The Company may also redeem in whole or any part of the Series A Preferred Shares then outstanding at a redemption price of $120 per Preferred Share, plus accrued and unpaid dividends thereon. In the event of any voluntary or F-16 83 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings, available for distribution to its stockholders, before any amount shall be paid the holders of the Common Stock or holders of other classes or series of capital stock of the Company, an amount equal to the preference in liquidation; provided that, if the assets are insufficient to pay the full amount due to the holders of Series A Preferred Shares, such holders will receive a pro rata portion thereof. In accordance with the terms of the Series A Preferred Stock, the Company is required to recognize an assumed incremental yield of $5,455,000 (calculated at the date of issuance and based on the beneficial conversion feature noted above). Such amount is being amortized as a preferred stock dividend over a four-year period beginning with the day of issuance. Accrued dividends payable were $2,512,000 or $6.28 per share at December 31, 1998. Additionally, the Company has recognized an incremental yield attributable to a beneficial conversion feature of $1,319,000 at December 31, 1998. (10) STOCK OPTIONS AND WARRANTS (A) STOCK OPTION PLANS: In February 1986, the Company adopted and the shareholders thereafter approved an Incentive Stock Option Plan and a Non-Qualified Stock Option Plan (the "86 Plans"). In February 1996, the Company's Board of Directors adopted and the shareholders thereafter approved an additional Incentive Stock Option Plan and Non-Qualified Stock Option Plan (the "96 Plans"). In May 1998, the Company's Board of Directors adopted an additional Non-Qualified Stock Option Plan (the "98 Plan") which shareholders are not required to approve. Combined, the 86 Plans, the 96 Plans, as amended, and the 98 Plan provide for the granting of options to purchase up to 5,500,000 shares of Common Stock to key employees, directors, consultants and advisors of the Company. Incentive stock options may not be granted at a price less than the fair market value of the stock at the date of grant and may not be granted to non-employees. Options may not be granted under the 98 Plan to officers or directors. Options under all the plans, unless earlier terminated, expire ten years from the date of grant. Certain options granted under these plans vest over one-to-five-year periods. At December 31, 1998, options to purchase 4,409,124 shares of Common Stock were outstanding and 453,405 shares were available for grant. Options may no longer be granted under the 86 Plans pursuant to the terms of the 86 Plans. F-17 84 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of stock option activity follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE --------- ---------------- Balance at December 31, 1995......................... 1,366,954 $2.34 1996 activity: Granted............................................ 1,077,875 9.32 Exercised.......................................... (266,275) 3.18 Canceled........................................... (74,977) 2.58 --------- Balance at December 31, 1996......................... 2,103,577 5.80 1997 activity: Granted............................................ 456,194 6.62 Exercised.......................................... (147,450) 1.51 Canceled........................................... (35,226) 8.60 --------- Balance at December 31, 1997......................... 2,377,095 6.19 1998 activity: Granted............................................ 2,432,976 10.19 Exercised.......................................... (154,097) 3.98 Canceled........................................... (246,850) 11.04 --------- Balance at December 31, 1998......................... 4,409,124 $8.20 =========
In May 1996, the Company granted an officer an option to purchase 225,000 shares of the Company's Common Stock at an exercise price below the market price of the stock on the date of grant. The Company is recognizing compensation expense as prescribed under APB Opinion No. 25. In September 1998 and January 1999, the Company granted options to its Vice President of Marketing and Vice President of Product and Process Development to respectively purchase 60,000 shares of Common Stock. These options were not granted under any of the above mentioned Incentive Stock Option or Non- Qualified Stock Option Plans. The terms of these options are substantially similar to those granted under the 98 Plan. During the years ended December 31, 1998, 1997 and 1996, the Company granted options to purchase 124,000, 32,000 and 116,000 shares, respectively, of its Common Stock to certain Scientific Advisory Board members and outside consultants in consideration for future services. The fair value of these grants was calculated using the Black-Scholes option pricing model. See Note 10(c) for weighted average assumptions used. During the years ended December 31, 1998, 1997 and 1996, the Company recognized approximately $540,000, $189,000 and $95,000, respectively, in compensation expense relating to the options granted to Scientific Advisory Board members and outside consultants. During the years ended December 31, 1998, 1997 and 1996, the Company granted options to outside members of its Board of Directors to purchase approximately 44,000, 153,000 and 158,000 shares, respectively, of its Common Stock. During April 1995, the Company completed the sale of the remaining one-half of its shares of capital stock of Cadus for $3.0 million to High River. In exchange for receiving a now-expired right to repurchase all outstanding shares of capital stock of Cadus held by High River, the Company granted to High River two options to purchase shares of Common Stock. One option if for 150,000 shares at an exercise price per share equal to $2.00, subject to adjustment under certain circumstances, and the other option is for 300,000 shares at an exercise price per share equal to $0.69, subject to adjustment under certain circumstances. Both options will expire on April 26, 2000. The 450,000 options have a weighted average exercise price of $1.13. F-18 85 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (B) WARRANTS As of December 31, 1998, a total of 2,263,590 shares of Common Stock were issuable upon exercise of outstanding warrants. Such warrants have been issued to certain officers, directors and other employees of the Company, certain Scientific Advisory Board members, certain investors and certain credit providers and investors. A summary of warrant activity follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE --------- ---------------- Balance at December 31, 1995......................... 3,891,567 $ 3.15 1996 activity: Granted............................................ 23,220 9.69 Exercised.......................................... (604,892) 4.89 Canceled........................................... (33,050) 12.92 --------- Balance at December 31, 1996......................... 3,276,845 2.41 1997 activity: Granted............................................ 397,000 1.50 Exercised.......................................... (869,500) 1.56 Canceled........................................... (397,000) 1.50 --------- Balance at December 31, 1997......................... 2,407,345 2.71 1998 activity: Granted............................................ -- -- Exercised.......................................... (143,755) 1.39 Canceled........................................... -- -- --------- Balance at December 31, 1998......................... 2,263,590 $ 2.80 =========
In March 1997, the Company extended for a two-year period the term of an officer's warrant to purchase 397,000 shares of the Company's Common Stock at a per share exercise price equal to $1.50. In connection with this transaction, the Company recognized non-cash compensation expense of approximately $2,233,000. During September 1996, the Company repriced certain warrants held by investors to purchase 80,700 shares of Common Stock in order to promote their exercise prior to pending expiration. The warrants were repriced to an amount which was ten percent less than the average closing price for the Common Stock for the thirty days leading up to and including the day prior to the date of exercise. The fair market value of the warrants was reflected as a cost of capital. During November 1996, the Company repriced certain warrants held by investors to purchase 130,000 shares of Common Stock in order to promote their exercise prior to pending expiration. The warrants were repriced to an amount which was ten percent less than the average closing price for the Common Stock for the thirty days leading up to and including the day prior to the date of exercise. The fair market value of the warrants was reflected as a cost of capital. F-19 86 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The outstanding warrants (which are all currently exercisable) expire and are exercisable for the number of shares of Common Stock as shown below: December 1999............................................. 35,520 March 2000................................................ 6,150 July 2000................................................. 72,000 August 2000............................................... 925,000 November 2000............................................. 12,720 March 2001................................................ 2,500 May 2001.................................................. 847,700 June 2003................................................. 12,000 December 2005............................................. 350,000 --------- Total................................................ 2,263,590 =========
(C) SFAS NO. 123 DISCLOSURES: The following tables summarize the weighted average fair value of stock options and warrants granted to employees and directors during the years ended December 31, 1998, 1997 and 1996:
OPTION PLANS ---------------------------------------------------------- 1998 1997 1996 ------------------ ---------------- ---------------- SHARES $ SHARES $ SHARES $ --------- ----- ------- ----- ------- ----- Exercise price is less than market value at date of grant........... -- $ -- -- $ -- 225,000 $6.36 Exercise price equals market value at date of grant................... 900,476(1) $5.52 424,194(1) $4.29 736,875(1) $5.31 Exercise price exceeds market value at date of grant................. 1,408,500 $6.28 -- $ -- -- $ --
- ------------ (1) Does not include 124,000 shares in 1998, 32,000 shares in 1997 and 116,000 shares in 1996 under options granted to non-employees. The fair value of these non-employee grants has been recorded as compensation expense as prescribed by SFAS No. 123.
WARRANTS -------------------------------------------------------- 1998 1997 1996 --------------- ----------------- ---------------- SHARES $ SHARES $ SHARES $ ------ ----- -------- ----- ------- ----- Exercise price is less than market value at date of grant............ -- $ -- 397,000(1) $5.91 -- -- Exercise price equals market value at date of grant.................... -- $ -- -- $ -- 23,220 $5.39 Exercise price exceeds market value at date of grant.................. -- $ -- -- $ -- -- $ --
- ------------ (1) The only grant of warrants during 1997 was the extension of an officer's warrant to purchase 397,000 shares of Common Stock. The extension has been considered a cancellation of the original grant and the issuance of a new below market grant. Accordingly, the Company recognized compensation expense consistent with APB Opinion No. 25. The fair value of stock options and warrants was estimated using the Black-Scholes option pricing model. The Black-Scholes model considers a number of variables including the exercise price and the expected life of the option, the current price of the Common Stock, the expected volatility and the dividend yield of the F-20 87 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) underlying Common Stock, and the risk-free interest rate during the expected term of the option. The following summarizes the weighted average assumptions used:
OPTION PLANS WARRANTS ----------------------- ---------------------- 1998 1997 1996 1998 1997 1996 ----- ----- ----- ---- ----- ----- Expected life (years)...................... 5.3 5.0 3.5 -- 2.0 2.0(1) Interest rate.............................. 5.58% 6.00% 5.00% -- 6.00% 5.00% Volatility................................. 76.03% 72.29% 85.13% -- 72.29% 85.13% Dividend yield............................. 0% 0% 0% -- 0% 0%
- ------------ (1) The weighted average expected life does not include the warrants repriced in 1996 as they were exercised simultaneously. The following table summarizes information concerning stock options outstanding at December 31, 1998:
WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/98 TERM PRICE AT 12/31/98 PRICE - ----------------------------- ----------- ----------- -------- ------------- -------- $0.563 - 2.00................ 665,825 2.36 $ 1.13 637,575 $ 1.14 3.75 - 6.00................. 510,125 8.38 5.71 396,751 5.73 6.063 - 7.875............... 602,727 8.76 6.44 66,003 7.08 8.125 - 10.625.............. 492,300 8.13 8.95 257,092 8.57 10.875 - 11.33............... 504,147 7.40 10.88 300,602 10.88 11.375....................... 1,319,000 9.42 11.38 -- -- 11.50 - 13.33................ 315,000 9.23 11.84 14,250 13.03 --------- --------- 4,409,124 7.76 $ 8.20 1,672,273 $ 5.46 ========= =========
As of December 31, 1998, the outstanding warrants to purchase 2,263,590 common shares were all exercisable and have a weighted average remaining contractual term of 2.9 years. The weighted average remaining contractual term at December 31, 1998 for the 6,150, outstanding warrants exercisable at $.63 per share is 1.2 years, the 12,300 exercisable at $.69 per share is 1.0 year, the 1,313,420 exercisable at $1.50 per share is 2.1 years, the 498,500 exercisable at $3.00 per share is 1.6 years, the 350,000 exercisable at $5.50 per share is 7.0 years, the 12,000 exercisable at $7.00 per share is 4.5 years, the 23,220 exercisable at $9.69 per share is 1.0 year, the 6,000 exercisable at $10.00 per share is 1.9 years, and the 42,000 exercisable at $13.33 per share is 2.3 years. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its options and warrants. Except as previously indicated, no compensation cost has been recognized for its stock option and warrant grants. Had compensation cost for the Company's stock option grants been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company's net loss and loss per share would have been increased or decreased to the pro forma amounts indicated below. F-21 88 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net loss to common stockholders As reported........................ $(25,050,000) $(15,654,000) $(16,015,000) Pro forma.......................... (32,306,000) (17,283,000) (19,653,000) Loss per share Basic and diluted: As reported........................ $ (1.03) $ (0.67) $ (0.83) Pro forma.......................... (1.33) (0.74) (1.01)
The pro forma effect on the loss for the years ended December 31, 1998, 1997, and 1996 is not necessarily indicative of the pro forma effect on future years' operating results since it does not take into effect the pro forma compensation expense related to grants made prior to January 1, 1995. (11) EMPLOYEE STOCK PURCHASE PLAN In April 1998, the Company's Board of Directors adopted the ImClone Systems Incorporated 1998 Employee Stock Purchase Plan (the "ESPP"), subject to shareholders' approval which was received in May 1998. The ESPP allows eligible employees to purchase shares of the Company's Common Stock through payroll deductions at the end of quarterly purchase periods. To be eligible, an individual must be employed for a period of not less than six months, he or she is required to work more than 20 hours per week for at least five months per calendar year and he or she may not own greater than 5% of the Company's Common Stock. Pursuant to the ESPP, the Company has reserved 500,000 shares of Common Stock for issuance. On the first day of each quarterly purchase period, each eligible employee participating in such quarterly purchase period will be granted an option to purchase a number of shares of Common Stock determined by dividing such employee's contributions accumulated prior to the last day of the quarterly period by the purchase price. The purchase price is equal to 85% of the market price per share on the last day of each quarterly purchase period. An employee may purchase stock from the accumulation of payroll deductions of up to a maximum of 15% of his or her compensation, limited to $25,000 per year. As of December 31, 1998, participating employees have purchased 4,388 shares of Common Stock at an aggregate purchase price of approximately $33,000 and 495,612 shares were available for future purchases. No compensation expense has been recorded in connection with the ESPP. F-22 89 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (12) INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and December 31, 1997 are presented below.
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Deferred tax assets: Liability to reacquire IL-6m rights and materials... $ -- $ 262,000 Research and development carryforward............... 3,642,000 2,303,000 Compensation relating to the issuance of stock options and warrants............................. 376,000 189,000 Net operating loss carryforwards.................... 57,169,000 52,408,000 Other............................................... 3,424,000 1,116,000 ------------ ------------ Total gross deferred tax assets....................... 64,611,000 56,278,000 Less valuation allowance............................ (64,611,000) (56,278,000) ------------ ------------ Net deferred tax assets............................. -- -- ------------ ------------ Deferred tax liabilities: Total gross deferred tax liabilities................ -- -- ------------ ------------ Net deferred tax.................................... $ -- $ -- ============ ============
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The net change in the total valuation allowance for the years ended December 31, 1998 and 1997 was an increase of $8,333,000 and $5,460,000, respectively. The tax benefit assumed using the Federal statutory tax rate of 34% has been reduced to an actual benefit of zero due principally to the aforementioned valuation allowance. At December 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $129,485,000 which expire at various dates from 2000 through 2018. At December 31, 1998, the Company had research credit carryforwards of approximately $3,642,000 which expire at various dates between years 2009 and 2018. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the annual utilization of a company's net operating loss and research credit carryforwards may be limited if the Company experiences a change in ownership of more than 50 percentage points within a three-year period. Since 1986, the Company experienced two such ownership changes. Accordingly, the Company's net operating loss carryforwards available to offset future federal taxable income arising before such ownership changes are limited to $5,159,000 annually. Similarly, the Company is restricted in using its research credit carryforwards arising before such ownership changes to offset future federal income tax expense. (13) COMMITMENTS LEASES The Company leases its New York City facility under an operating lease, a portion of which was scheduled to expire in March 1999. The Company renewed the entire lease effective as of January 1, 1999 through December 2004. The annual minimum rent for 1999 is $720,000 and increases 3% annually for each year thereafter. Rent expense for the New York City facility was approximately $574,000, $554,000, and $508,000 for the years ended December 31, 1998, 1997 and 1996, respectively. See also Note 6. F-23 90 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Future minimum lease payments under the capital and operating leases are as follows:
CAPITAL OPERATING LEASES LEASES ---------- ---------- Years ending December 31, 1999.............................................. $ 900,000 $ 769,000 2000.............................................. 889,000 780,000 2001.............................................. 520,000 794,000 2002.............................................. 248,000 815,000 2003.............................................. -- 823,000 2004.............................................. -- 835,000 ---------- ---------- 2,557,000 4,816,000 Less interest expense............................... (304,000) -- ---------- ---------- $2,253,000 $4,816,000 ========== ==========
SUPPORTED RESEARCH The Company has entered into various research and license agreements with certain academic institutions and others to supplement the Company's research activities and to obtain for the Company rights to certain technology. The agreements generally require the Company to fund the research and to pay royalties based upon percentages of revenues, if any, on sales of products developed from technology arising under these agreements. CONSULTING AGREEMENTS The Company has consulting agreements with several of its Scientific Advisory Board members and other consultants. These agreements generally are for a term of one year or are terminable at the Company's option. CONTRACT SERVICES In April, 1998, the Company entered into an agreement in principle with a pharmaceutical manufacturer for the supplemental further development, production scale-up and manufacture of its lead therapeutic product candidate, C225, for use in human clinical trials. Services pursuant to this agreement commenced in April 1998 and are anticipated to conclude in October 1999. The total project cost is DM8,950,000, or as of December 31, 1998, approximately $5,424,000. As of December 31, 1998, the Company had incurred a liability of approximately $1,897,000 (U.S. dollar equivalent) for services provided to date under this agreement. (14) RETIREMENT PLANS The Company maintains a 401(k) retirement plan available to all full-time, eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make certain contributions to the plan. The Company contributed approximately $47,000 to the plan for the year ended December 31, 1998. No such contributions were made to the plan during the years ended December 31, 1997 and 1996. F-24 91 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (15) SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING Activities are as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Cash paid during the year for: Interest............................................. $ 422,000 $ 707,000 $ 817,000 ========== ========== ========== Non-cash investing and finance activities: Finova capital asset and lease obligations additions......................................... 731,000 1,324,000 421,000 ========== ========== ========== Fair value of Finova warrant......................... -- -- 125,000 ========== ========== ========== Other capital lease obligations...................... -- 28,000 -- ========== ========== ========== Unrealized gain (loss) on securities available-for-sale................................ (676,000) 101,000 (49,000) ========== ========== ========== Extinguishment of Oracle Group debt for stock........ -- -- 2,500,000 ========== ========== ========== Extinguishment of director debt for stock............ -- -- 180,000 ========== ========== ========== Preferred Stock dividend............................. 2,400,000 163,000 -- ========== ========== ========== Warrant exercise paid with a note, including accrued interest.......................................... 142,000 -- -- ========== ========== ==========
(16) RELATED PARTY TRANSACTIONS The Company has scientific consulting agreements with two members of the Board of Directors. Expenses relating to these agreements were $112,000 for each of the years ended December 31, 1998, 1997 and 1996. Through March 1995, the Company made miscellaneous non interest bearing cash advances to the President and CEO of the Company totaling approximately $156,000. The officer provided the Company with a demand promissory note pursuant to which the officer was obligated to repay the debt over a twenty-four month period ending April 30, 1997. In March 1997, the Company accepted a new promissory note (the "new promissory note") in the aggregate amount of $110,000 from the officer. The new promissory note was payable as to $15,000 no later than May 15, 1997 and the remainder upon the earlier of on demand by the Company or December 31, 1997 and bore interest at the rate of 5% compounded quarterly. The new promissory note covered the remaining balance of the original note, interest thereon and additional miscellaneous cash advances made since the date of the original note totaling $15,000. At December 31, 1997, the new promissory note was paid in full by the officer. In January 1996, the Company paid Concord International Investment Group, LP, approximately $163,000 for services rendered by it to the Company in connection with structuring a contemplated product related financing for C225. Mr. Robert F. Goldhammer, Chairman of the Board of Directors, is a limited partner of Concord International Investment Group, LP. In August 1995 and January 1996, the Company paid Delano & Kopperl Financial Advisors, Inc. a total of approximately $69,000 for services rendered by it to the Company in connection with structuring a contemplated product related financing for C225. Paul B. Kopperl, a director of the Company, is President, director, and 25% shareholder of Delano & Kopperl Financial Advisors, Inc. In January 1998, the Company accepted a promissory note totaling approximately $131,000 from its President and CEO in connection with the exercise of a warrant to purchase 87,305 shares of the Company's F-25 92 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) common stock. The note is due no later than two years from issuance and is full recourse. Interest is payable on the first anniversary date of the promissory note and on the stated maturity or any accelerated maturity at the annual rate of 8.5%. At December 31, 1998, the total amount due the Company, including interest, was approximately $142,000 and is classified in the stockholders' equity section of the balance sheet as a note receivable from officer and stockholder. In October 1998, the Company accepted an unsecured promissory note totaling $100,000 from its Executive Vice President and COO. The note is payable on demand including interest at the annual rate of 8.25% for the period that the loan is outstanding. At December 31, 1998, the total amount due the Company, including interest, is approximately $102,000. In August 1998, the Company entered into a utilization agreement with a company to provide certain support services. This company is considered a related party because of common management. The Company is being reimbursed $2,000 per month for providing laboratory space and related support. (17) FAIR VALUE OF FINANCIAL INSTRUMENTS For the years ended December 31, 1998 and 1997, the following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS, ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES The carrying amounts approximate fair value because of the short maturity of those instruments. LONG-TERM DEBT Discounted cash flow analyses were used to determine the fair value of long-term debt because quoted market prices on these instruments were unavailable. The fair value of these instruments approximated the carrying amount. F-26 93 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
SEPTEMBER 30, 1999 ASSETS ------------- Current assets: Cash and cash equivalents................................... $ 1,211 Securities available for sale............................. 33,052 Prepaid expenses.......................................... 239 Other current assets...................................... 1,528 --------- Total current assets................................ 36,030 --------- Property and equipment: Land...................................................... 340 Building and building improvements........................ 10,708 Leasehold improvements.................................... 4,878 Machinery and equipment................................... 8,619 Furniture and fixtures.................................... 653 Construction in progress.................................. 3,724 --------- Total cost.......................................... 28,922 Less accumulated depreciation and amortization............ (14,162) --------- Property and equipment, net......................... 14,760 --------- Patent costs, net........................................... 897 Deferred financing costs, net............................... 39 Other assets................................................ 1,868 --------- $ 53,594 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,948 Accrued expenses and other................................ 2,695 Interest payable.......................................... 106 Deferred revenue.......................................... -- Fees potentially refundable from corporate partner........ 14,000 Current portion of long-term liabilities.................. 913 Preferred stock dividends payable......................... 4,307 --------- Total current liabilities........................... 23,969 --------- Long-term debt.............................................. 2,200 Other long-term liabilities, less current portion........... 1,363 --------- Total liabilities................................... 27,532 --------- Commitments and contingencies Stockholders' equity: Preferred stock, $1.00 par value; authorized 4,000,000 shares; issued and outstanding Series A Convertible: 400,000 at September 30, 1999 (preference in liquidation of $44,307)............................................. 400 Common stock, $.001 par value; authorized 60,000,000 shares; issued 25,671,324 at September 30, 1999; outstanding 25,620,507, at September 30, 1999........... 26 Additional paid-in capital................................ 191,094 Accumulated deficit....................................... (165,211) Treasury stock, at cost; 50,817 shares at September 30, 1999.................................................... (492) Note receivable -- officer and stockholder................ (139) Accumulated other comprehensive income (loss): Unrealized gain on securities available for sale, net... 384 --------- Total stockholders' equity.......................... 26,062 --------- $ 53,594 =========
See accompanying notes to consolidated financial statements. F-27 94 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1999 1998 -------- -------- Revenues: Product development milestone revenues.................... $ -- $ 1,000 Research and development funding from third parties and other.................................................. 1,021 2,434 -------- -------- Total revenues.................................... 1,021 3,434 -------- -------- Operating expenses: Research and development.................................. 22,131 15,269 General and administrative................................ 5,784 4,174 -------- -------- Total operating expenses.......................... 27,915 19,443 -------- -------- Operating loss.............................................. (26,894) (16,009) -------- -------- Other: Interest income........................................... (1,757) (2,348) Interest expense.......................................... 375 320 Loss (gain) on securities available for sale.............. 853 (34) -------- -------- Net interest and other income..................... (529) (2,062) -------- -------- Net loss.................................................... (26,365) (13,947) Preferred dividends (including assumed incremental yield attributable to beneficial conversion feature of $1,005 and $952 for the nine months ended September 30, 1999 and 1998, respectively)....................................... 2,800 2,747 -------- -------- Net loss to common stockholders............................. $(29,165) $(16,694) ======== ======== Basic and diluted net loss per common share................. $ (1.17) $ (0.69) ======== ======== Weighted average shares outstanding......................... 24,947 24,277 ======== ========
See accompanying notes to consolidated financial statements. F-28 95 IMCLONE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net loss.................................................. $(26,365) $(13,947) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 1,374 1,341 Expense associated with issuance of options and warrants.............................................. 1,979 416 Loss (gain) or securities available for sale............ 853 (34) Changes in: Prepaid expenses..................................... 231 382 Other current assets................................. (332) (320) Other assets......................................... (130) (47) Interest payable..................................... 61 38 Accounts payable..................................... 839 (429) Accrued expenses and other........................... (2,152) 1,023 Deferred revenue..................................... (75) 150 Fees potentially refundable from corporate partner... 10,000 -- -------- -------- Net cash used in operating activities.............. (13,717) (11,427) -------- -------- Cash flows from investing activities: Acquisitions of property and equipment.................. (4,096) (812) Purchases of securities available for sale.............. (19,378) (38,322) Sales and maturities of securities available for sale... 29,117 50,503 Additions to patents.................................... (118) (248) -------- -------- Net cash provided by investing activities.......... 5,525 11,121 -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options and warrants.... 5,936 404 Proceeds from issuance of common stock under the employee stock purchase plan.......................... 114 12 Proceeds from equipment and building improvement financings............................................ 94 593 Payments of other liabilities........................... (640) (662) Interest received on note receivable -- officer and stockholder........................................... 11 -- -------- -------- Net cash provided by financing activities.......... 5,515 347 -------- -------- Net (decrease) increase in cash and cash equivalents........ (2,677) 41 Cash and cash equivalents at beginning of period............ 3,888 2,558 -------- -------- Cash and cash equivalents at end of period.................. $ 1,211 $ 2,599 ======== ========
See accompanying notes to consolidated financial statements. F-29 96 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The consolidated financial statements of ImClone Systems Incorporated ("ImClone" or the "Company") as of September 30, 1999 and for the nine months ended September 30, 1999 and 1998 are unaudited. In the opinion of management, these unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission. Results for the interim periods are not necessarily indicative of results for the full years. (2) SEGMENT INFORMATION The Company is a biopharmaceutical company engaged in the research and development of novel cancer treatments. The Company is currently pursuing three research and development programs that it believes show promise for treating cancer: growth factor inhibitors, cancer vaccines and angiogenesis inhibitors. A substantial portion of the Company's efforts and resources are devoted to research and development conducted on its own behalf and through collaborations with corporate partners and academic research and clinical institutions. The Company has not derived any commercial revenue from product sales. The Company is managed and operated as one business. The entire business is comprehensively managed by a single management team that reports to the Chief Operating Officer. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. In addition, the Company does not directly conduct any of its operations outside of the United States. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas or by location and does not have separately reportable segments as defined by SFAS No. 131. (3) FOREIGN CURRENCY TRANSACTIONS Gains and losses from foreign currency transactions, such as those resulting from the translation and settlement of receivables and payables denominated in foreign currencies, are included in the consolidated statement of operations. The Company does not currently use derivative financial instruments to manage the risks associated with foreign currency fluctuations. The Company recorded gains on foreign currency transactions of approximately $9,000 for the nine months ended September 30, 1999 and losses on foreign currency transactions of approximately $131,000 for the nine months ended September 30, 1998. (4) COMMITMENTS The Company signed a definitive agreement in April 1999 with Boehringer Ingelheim Pharmaceuticals KG ("BI Pharmaceuticals") for the further development, production scale-up and manufacture of the Company's lead therapeutic product candidate, C225, for use in human clinical trials. Services pursuant to this agreement commenced in April 1998 pursuant to an agreement in principle. The Company estimates that the total cost under the agreement, including the cost of additional amounts of material the Company had the right to request, will be DM12,100,000 or $6,636,000 as of September 30, 1999. As of September 30, 1999, the Company has incurred approximately DM3,940,000, of which DM3,720,000 has been paid, for services provided under this agreement. F-30 97 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (5) RELATED PARTY TRANSACTIONS In January 1998, the Company accepted a promissory note totaling approximately $131,000 from its President and CEO in connection with the exercise of a warrant to purchase 87,305 shares of the Company's common stock, $.001 par value (the "Common Stock"). The note is due no later than two years from issuance and is full recourse. Interest was paid on the first anniversary date of the promissory note at an annual rate of 8.5% and is payable on the stated maturity or any accelerated maturity at the annual rate of 8.5%. At September 30, 1999, the total amount due the Company, including interest, was approximately $139,000 and is classified in the stockholders' equity section of the balance sheet as a note receivable from officer and stockholder. (6) EARNINGS PER SHARE Basic and diluted Earnings Per Share ("EPS") are computed based on the net loss for the relevant period, adjusted for cumulative Series A Convertible Preferred Stock (the "Series A Preferred Stock" or "Series A Preferred Shares") dividends and the assumed incremental yield attributable to the beneficial conversion feature in the preferred stock, divided by the weighted average number of shares outstanding during the period. Potentially dilutive securities, including convertible preferred stock, options and warrants, have not been included in the diluted EPS computation because they are anti-dilutive. (7) COMPREHENSIVE INCOME (LOSS) The following table reconciles net loss to comprehensive loss:
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1999 1998 ------------ ------------ Net loss.................................................... $(26,365,000) $(13,947,000) Other comprehensive income: Unrealized holding gain arising during the period......... 155,000 (704,000) Less: Reclassification adjustment for realized gain (loss) included in net loss................................ (853,000) 34,000 ------------ ------------ Total other comprehensive income....................... 1,008,000 (738,000) Total comprehensive loss.................................... $(25,357,000) $(14,685,000) ============ ============
(8) LOSS ON SECURITIES AVAILABLE FOR SALE In October 1997, the Company entered into a Collaborative Research and License Agreement with CombiChem Inc. ("CombiChem"). Concurrent with this agreement, the Company entered into a Stock Purchase Agreement pursuant to which the Company purchased 312,500 shares of common stock of CombiChem, as adjusted, for a total purchase price of $2,000,000. The investment has been classified as available for sale and a long-term asset. The market value of the investment in CombiChem has declined substantially from the date of original investment and the Company has deemed this decline in market value to be other than temporary. Accordingly, the cost basis in the investment in CombiChem has been adjusted and a loss on securities available for sale of $828,000 was recorded in March 1999. These securities have not been sold by the Company. In October 1999, CombiChem announced that it is being acquired and holders of its shares will receive cash consideration of approximately $6.75 per share, subject to completion of the acquisition, which would represent a financial reporting gain with respect to the CombiChem shares of approximately $937,000, after considering the aforementioned write-down. F-31 98 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (9) COMMON STOCK On May 24, 1999, the date of the annual shareholders meeting, the stockholders approved the amendment of the Company's certificate of incorporation to increase the total number of shares of Common Stock the Company is authorized to issue from 45,000,000 shares to 60,000,000 shares. In September 1999, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-3 relating to the public offering and sale of up to 2,875,000 shares of its common stock. There can be no assurance that the Company will consummate the sale of any of these shares of common stock. (10) STOCK OPTIONS AND WARRANTS On May 24, 1999, the date of the annual shareholders meeting, the stockholders approved an amendment to the Company's 1996 Incentive Stock Option Plan (the "1996 ISO Plan") to increase the total number of shares of Common Stock that may be issued pursuant to options that may be granted under the 1996 ISO Plan from 3,000,000 to 4,000,000, which number shall be reduced by the number of shares of Common Stock that have been or may be issued pursuant to options granted under the Company's 1996 Non-Qualified Stock Option Plan (the "1996 Non-Qualified Plan"). The stockholders also approved amendments to the Company's 1996 Non-Qualified Plan to (i) increase the total number of shares of Common Stock that may be issued pursuant to options that may be granted under the 1996 Non-Qualified Plan from 3,000,000 to 4,000,000, which number shall be reduced by the number of shares of common stock that have been or may be issued pursuant to options granted under the Company's 1996 ISO Plan, and (ii) increase the annual option grant made to members of the Board of Directors and the Chairman who are not full-time employees of the Company under the 1996 Non-Qualified Plan. The annual option grant to non-employee members of the Board of Directors increased from 2,500 to 15,000 and the annual option grant to the Chairman increased from 2,500 to 30,000. The stockholders approved the grant of an option to the Company's President and Chief Executive Officer to purchase 1,000,000 shares of Common Stock at a per share exercise price equal to $18.25, the last reported sale price of the Common Stock on the date shareholder approval was obtained at the annual shareholders meeting. The options will vest no later than six years from the grant date and specified amounts are subject to earlier vesting if specified Company Common Stock price thresholds are met. The stockholders approved the grant of an option to the Company's Executive Vice President and Chief Operating Officer to purchase 650,000 shares of Common Stock at a per share exercise price equal to $18.25, the last reported sale price of the Common Stock on the date shareholder approval was obtained at the annual shareholders meeting. The options will vest no later than six years from the grant date and specified amounts are subject to earlier vesting if specified Company Common Stock price thresholds are met. (11) RECLASSIFICATION Certain amounts previously reported have been reclassified to conform to the current year's presentation. (12) COLLABORATIVE AGREEMENTS The Company has a development and license agreement with Merck KGaA with respect to C225, its lead interventional therapeutic product for the treatment of cancer. In exchange for certain marketing and development rights, the Company can receive up to $60,000,000 in milestone payments ($30,000,000 of which are equity based) assuming the achievement of certain milestones and a $30,000,000 secured line of credit or guaranty for the build-out of a manufacturing facility for the commercial production of C225. This agreement F-32 99 IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) may be terminated by Merck KGaA in various instances, including (i) at its discretion on any date on which a milestone is achieved (in which case no milestone payment will be made), (ii) for a one-year period after first commercial sale of C225 in Merck KGaA's territory, upon Merck KGaA's reasonable determination that the product is economically unfeasible (in which case Merck KGaA is entitled to receive back 50% of the cash-based milestone payments then paid to date, but only out of revenues received, if any, based upon a royalty rate applied to the gross profit from C225 sales or C225 license fees in the United States and Canada), or (iii) in the event the Company does not obtain certain collateral license agreements in which case Merck KGaA also is entitled to a return of all cash amounts with respect to milestone payments to date, plus liquidated damages of $500,000. In April 1999, the parties agreed on the production concept for the manufacturing facility and are currently working toward securing Merck KGaA's guaranty of the Company's obligations under a $30,000,000 credit facility relating to the construction of the manufacturing facility. In the event of termination of the agreement, the Company will be required to use its best reasonable efforts to cause the release of Merck KGaA as guarantor. As of September 30, 1999, the Company has received $14,000,000 in milestone payments. And, as of October 27, 1999, Merck KGaA has confirmed the Company has achieved milestones, with respect to which the Company is entitled to receive an additional $6,000,000 in payments. These payments have been recorded as fees potentially refundable from corporate partner and will be recognized as revenue upon Merck's providing the credit facility or guaranty and the Company's obtaining the defined collateral license agreements. 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