-----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, Gc88JDl8h4WkbIkcuqgLdseBpqegaX+K5pVNZYBeb0/MyAl0FKwup+6LZ57QQHoP BbqpKoK+9ALBl0rbp1G+Dg== 0001047469-98-019204.txt : 19980512 0001047469-98-019204.hdr.sgml : 19980512 ACCESSION NUMBER: 0001047469-98-019204 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980511 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMMUNE RESPONSE CORP CENTRAL INDEX KEY: 0000817785 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 330255679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18006 FILM NUMBER: 98615634 BUSINESS ADDRESS: STREET 1: 5935 DARWIN COURT CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 6194317080 MAIL ADDRESS: STREET 1: 5935 DARWIN COURT CITY: CARLSBAD STATE: CA ZIP: 92008 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934. For the quarterly period ended MARCH 31, 1998 -------------- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934. For the transition period from ________________ to ______________ Commission file number 0-18006 ------- THE IMMUNE RESPONSE CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 33-0255679 (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 5935 DARWIN COURT, CARLSBAD, CA 92008 (Address of Principal Executive Offices) (Zip Code) TELEPHONE (760) 431-7080 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. As of May 5, 1998, 22,868,512 shares of common stock were outstanding. THE IMMUNE RESPONSE CORPORATION FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 Signature 16 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 31, 1998 December 31, (unaudited) 1997 ------------ ------------- Assets Current Assets: Cash and cash equivalents $ 2,553 $ 4,872 Marketable securities-available-for-sale 20,931 25,567 Other current assets 486 773 ------------ ------------- Total current assets 23,970 31,212 Property and equipment, net 5,529 5,810 Deposits and other assets 954 353 ------------ ------------- $ 30,453 $ 37,375 ------------ ------------- ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,372 $ 1,356 Other accrued expenses 851 917 ------------ ------------- Total current liabilities 3,223 2,273 Stockholders' equity: Preferred stock, 5,000,000 shares authorized; none issued -- -- Common stock, $.0025 par value, 40,000,000 shares authorized, 22,833,715 and 22,815,054 shares issued and outstanding at March 31, 1998 and December 31, 1997, respectively 57 57 Warrants 2,144 2,144 Additional paid-in capital 186,441 186,374 Cumulative comprehensive income 37 27 Accumulated deficit (161,449) (153,500) ------------ ------------- Total stockholders' equity 27,230 35,102 ------------ ------------- $ 30,453 $ 37,375 ------------ ------------- ------------ -------------
See accompanying notes. 3 THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data) (unaudited)
Three months ended March 31, ----------------------------- 1998 1997 ------------- ------------- Contract research revenue $ 1,000 $ 1,000 Expenses: Research and development 8,261 8,598 General and administrative 999 994 ------------- ------------- 9,260 9,592 Other revenue: Investment income 311 609 ------------- ------------- Net loss $ (7,949) $ (7,983) ------------- ------------- ------------- ------------- Net loss per share - basic and diluted $ (0.35) $ (0.39) ------------- ------------- ------------- ------------- Weighted average number of shares outstanding 22,824,397 20,259,837 ------------- ------------- ------------- -------------
See accompanying notes. 4 THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31, ----------------------------- 1998 1997 ------------- ------------- Operating activities: Net loss $ (7,949) $ (7,983) Adjustments to reconcile net loss to net cash provided from (used by) operating activities: Depreciation and amortization 371 239 Deferred rent expense (22) (15) Changes in operating assets and liabilities: Other current assets 287 46 Accounts payable 1,016 150 Accrued expenses (44) (117) ------------- ------------- Net cash used by operating activities (6,341) (7,680) Investing activities: Purchase/sale of marketable securities, net 4,645 8,195 Purchase of property and equipment (89) (678) Deposits and other assets (601) (68) ------------- ------------- Net cash provided from investing activities 3,955 7,449 Financing activities: Net proceeds from exercise of stock options 67 206 ------------- ------------- Net cash provided from financing activities 67 206 ------------- ------------- Net decrease in cash and cash equivalents (2,319) (25) Cash and cash equivalents at beginning of period 4,872 3,785 ------------- ------------- Cash and cash equivalents at end of period $ 2,553 $ 3,760 ------------- ------------- ------------- -------------
See accompanying notes. 5 THE IMMUNE RESPONSE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 1. BASIS OF PRESENTATION The condensed consolidated financial statements of The Immune Response Corporation (the "Company") for the three months ended March 31, 1998 and 1997 are unaudited. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary to fairly present the consolidated financial position as of March 31, 1998, and the consolidated results of operations for the three months ended March 31, 1998 and 1997. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the year ended December 31, 1998. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 1997 included in the Company's Form 10-K filed with the Securities and Exchange Commission. 2. NET LOSS PER SHARE Net loss per share for the three months ended March 31, 1998 and 1997 is computed using the weighted average number of common shares outstanding during the period. Outstanding stock options and warrants are not included in the calculation of earnings per share because as their effect would be antidilutive. Therefore, there is no difference between basic and diluted net loss per share. 3. COMPREHENSIVE INCOME In January 1998, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income." The components of comprehensive income are as follows:
Three Months Ended ------------------------------ March 31, March 31, 1998 1997 ----------- ---------- Net loss $ (7,949) $ (7,983) Net unrealized gain (loss) on marketable securities 10 (113) ----------- --------- Comprehensive loss $ (7,939) $ (8,096) ----------- --------- ----------- ---------
All prior periods have been restated to reflect the adoption of this statement. 4. SUBSEQUENT EVENT During April 1998, the Company sold 200 shares of its Series F Convertible Preferred Stock ("Series F Stock") in return for gross proceeds of $10 million. The Series F Stock is convertible into common stock initially at a conversion price of $14.07 per share of common stock. If the Company's common stock does not trade at prices higher than $14.07 per share over a period of time, the conversion price will be adjusted downward on April 24, 1999 (or sooner if the Company issues common stock at less than $14.07 per share) and quarterly thereafter. The Series F Stock bears a dividend of 7.5% per annum. In general, the dividend is payable in shares of common stock. The Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the common stock issuable upon conversion of the Series F Stock. Further, the Company has the option for one year to sell up to $10 million more of the Series F Stock if certain conditions are met. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS SUMMARY The Immune Response Corporation (the "Company") is a biopharmaceutical company developing immune-based therapies to induce specific T cell responses for the treatment of HIV, autoimmune diseases and cancer. The Company is conducting clinical trials for its immune-based therapies for HIV, rheumatoid arthritis, psoriasis, multiple sclerosis, colon cancer and brain cancer and preclinical studies for prostate cancer. In addition, the Company is developing a targeted delivery technology for gene therapy which is designed to enable the intravenous injection of genes for delivery directly to the liver. The Company's gene therapy program is currently focused on diseases of the liver and is in preclinical studies for the treatment of hemophilia and hepatitis. The Company's strategy is to retain ownership of these proprietary technologies and to seek corporate collaborations or joint ventures for certain disease-specific applications. This discussion contains forward-looking statements concerning the Company's operating results and timing of anticipated expenditures. Such statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. For a further description of potential risks and uncertainties involved related to the Company, this document should be read in conjunction with the Company's 1997 Form 10-K filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. During April 1998, the Company sold 200 shares of its Series F Convertible Preferred Stock ("Series F Stock") in return for gross proceeds of $10 million. The Series F Stock is convertible into common stock initially at a conversion price of $14.07 per share of common stock. If the Company's common stock does not trade at prices higher than $14.07 per share over a period of time, the conversion price will be adjusted downward on April 24, 1999 (or sooner if the Company issues common stock at less than $14.07 per share) and quarterly thereafter. The Series F Stock bears a dividend of 7.5% per annum. In general, the dividend is payable in shares of common stock. The Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the common stock issuable upon conversion of the Series F Stock. Further, the Company has the option for one year to sell up to $10 million more of the Series F Stock if certain conditions are met. The Company has not been profitable since inception and had an accumulated deficit of $161 million as of March 31, 1998. To date, the Company has not recorded any revenues from the sale of products. Revenues recorded through March 31,1998 were earned in connection with contract research and investment income. There can be no assurance that the Company will be able to generate sufficient product revenue to become profitable at all or on a sustained basis. RESULTS OF OPERATIONS The Company had $1 million in contract research revenue during the quarters ended March 31, 1998 and 1997. Contract research revenue was received from Bayer Corporation related to a research collaboration for a potential therapy for hemophilia. The Company has not received any revenue from the commercial sale of products and does not expect to derive revenue from the sale of products for the foreseeable future. Investment income decreased to $310,000 for the quarter ended March 31, 1998, from $609,000 during the same period in 1997. The decrease in investment income in 1998 compared to 1997, was due primarily to a decrease in the Company's cash position from the first quarter of 1997 compared to 1998. Research and development expenditures of $8.3 million during the first quarter of 1998 decreased from $8.6 million during the same period in 1997. This decrease in costs from 1997 was due primarily to the initial costs incurred to enroll the final clinical trial sites related to the Phase III clinical endpoint trial for HIV infection using REMUNE during the first quarter of 1997. The Company expects research and development 7 expenditures to rise as it continues its Phase IIb rheumatoid arthritis clinical trial, expected to be completed by year-end 1998, and its Phase II psoriasis clinical trial, expected to be completed during the third quarter of 1998. Research and development expenditures should also continue to rise in the foreseeable future due to expanding preclinical and clinical testing of the Company's proposed gene therapy and cancer treatments. Research and development expenses related to advancing REMUNE are also expected to increase due to the continuance of the Company's ongoing large scale Phase III clinical endpoint trial with REMUNE and to pre-marketing activities as the Company approaches possible commercialization of REMUNE. There can be no assurance that REMUNE will be successfully developed or commercialized. General and administrative expenses for the first quarter of 1998 were $999,000 as compared to $994,000 for the same period in 1997. General and administrative expenses for the remainder of 1998 necessary to support the Company's expanded research and development activities are expected to remain consistent with first quarter levels. For the quarter ended March 31, 1998, the Company's net loss was $7.9 million, or $.35 per share, as compared to a net loss of $8.0 million, or $.39 per share, for the same period in 1997. The change in the earnings per share in 1998 from 1997, despite comparable net loss results, was primarily due to the additional shares issued in a private stock offering in April 1997. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1998, the Company had working capital of $21.6 million, including $23.5 million of cash, cash equivalents and marketable securities. This compares with working capital at December 31, 1997, of $28.9 million, including $30.4 million of cash, cash equivalents and marketable securities. The decrease in working capital was due to the costs of operating the business. In April 1998, the sale of 200 shares of Series F Stock resulted in net proceeds to the Company of approximately $9 million. The Company will need to raise additional funds to conduct research and development, preclinical studies and clinical trials necessary to bring its potential products to market and establish manufacturing and marketing capabilities. The Company anticipates that in 1998, the REMUNE clinical trials will continue to represent a significant portion of the Company's overall expenditures. The Company also anticipates that costs related to the development of REMUNE will continue to increase as the Company approaches possible commercialization. The anticipated costs with respect to REMUNE will depend on many factors, including the results of interim analyses of the data from the Phase III clinical endpoint trial, the potential for accelerated approval and certain other factors which will influence the Company's determination of the appropriate continued investment of the Company's financial resources in this program. The Company's future capital requirements will depend on many factors, including continued scientific progress in its research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the cost of manufacturing scale-up, effective commercialization activities and arrangements and other factors not within the Company's control. The Company intends to seek additional funding, in addition to the recently completed Series F Stock transaction, through public or private financings, arrangements with corporate collaborators or other sources. If funds are acquired through collaborations, the Company will likely be required to relinquish some or all rights to products that the Company may have otherwise developed itself. Adequate funds may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company to scale back or eliminate some or all of its research and development programs or license to third parties products or technologies that the Company would otherwise seek to develop itself. The Company believes that its existing resources, the resources received from the Series F Stock transaction completed in April 1998, and interest thereon, will enable the Company to maintain its current and planned operations beyond 1998. YEAR 2000 The Company is conducting a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and has created a plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or 8 miscalculations. The Company presently believes that the Year 2000 problem will not pose significant operational problems for the Company's computer systems. CERTAIN RISK FACTORS (For a discussion of additional Risk Factors applicable to the Company, see the Company's Annual Report on Form 10-K for the year ended December 31, 1997.) UNCERTAINTY OF PRODUCT DEVELOPMENT AND CLINICAL TESTING. The Company has not completed the development of any products and there can be no assurance any products will be successfully developed. The Company has been in existence since 1986, and to date only six of its product candidates have entered clinical trials. The Company's potential immune-based therapies for HIV, autoimmune disease, cancer and gene therapy products currently under development will require significant additional research and development efforts and regulatory approvals prior to potential commercialization. To achieve profitable operations, the Company must successfully develop, manufacture, introduce and market products. There can be no assurance that any of the Company's potential products will prove to be safe and effective in clinical trials, that Food and Drug Administration ("FDA") or other regulatory approvals will be obtained or that such products will achieve market acceptance. The Company's potential HIV immune-based therapy, REMUNE, is in a Phase III clinical endpoint trial designed to provide evidence of efficacy based on clinical endpoints. There can be no assurance that the results of such clinical trial will demonstrate that REMUNE is safe and efficacious or, that even if the results of the clinical trial are considered successful by the Company, that the Food and Drug Administration ("FDA") will not require the Company to conduct additional large scale clinical trials with REMUNE before the FDA will consider approving REMUNE for commercial sale. Failure to successfully complete the Phase III clinical endpoint trial in a timely fashion and a failure to obtain FDA approval of REMUNE will materially and adversely affect the Company. There can be no assurance that the results of the Phase III trial will be consistent with Phase II results. Even if results of the Phase III trial are consistent with the Phase II trial results, there can be no assurance that the FDA would approve REMUNE for marketing. In addition, REMUNE is being tested in a Phase II clinical trial in Thailand, in a pediatric Phase I clinical trial in the United States and in combination trials with approved HIV therapies in the United States, Spain, Switzerland and Great Britain. Failure of these trials to demonstrate the safety and effectiveness of REMUNE could have a material adverse effect on the regulatory approval process for this potential product. The Company's other potential immune-based therapies and gene therapy technologies are at a much earlier stage of development than REMUNE. The Company's gene therapy technology and certain of its technologies for the treatment of cancer have not yet been tested in humans and there can be no assurance that human testing of potential products based on such technologies will be permitted by regulatory authorities or, that even if human testing is permitted, that products based on such technologies will be developed and shown to be safe or efficacious. Potential immune-based therapies based on certain of the Company's autoimmune technology and certain of its cancer technologies are at an early stage of clinical testing and there can be no assurance that such products will be shown to be safe, efficacious or receive regulatory approval. There can be no assurance that the results of the Company's preclinical studies and clinical trials will be indicative of future clinical trial results. A commitment of substantial resources to conduct time-consuming research, preclinical studies and clinical trials, including the REMUNE Phase III clinical endpoint trial will be required if the Company is to develop any products. Delays in planned patient enrollment in the Company's current clinical trials or future clinical trials may result in increased costs, program delays or both. There can be no assurance that any of the Company's potential products will prove to be safe and effective in clinical trials, that FDA or other regulatory approvals will be obtained or that such products will achieve market acceptance. Any products resulting from these programs are not expected to be successfully developed or commercially available for a number of years, if at all. There can be no assurance that unacceptable toxicities or side effects will not occur at any time in the course of human clinical trials or, if any products are successfully developed and approved for marketing, during commercial use of the Company's products. The appearance of any such unacceptable toxicities or side effects could interrupt, limit, delay or abort the development of any of the Company's products or, if previously approved, necessitate their withdrawal from the market. Furthermore, there can be no assurance that disease resistance will not limit the efficacy of potential products. 9 ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL. The Company will need to raise additional funds to conduct research and development, preclinical studies and clinical trials necessary to bring its potential products to market and establish manufacturing and marketing capabilities. The Company anticipates that in 1998, the REMUNE clinical trials will continue to represent a significant portion of the Company's overall expenditures. The Company also anticipates that costs related to the development of REMUNE will continue to increase as the Company approaches possible commercialization. The anticipated costs with respect to REMUNE will depend on many factors, including the results of interim analyses of the data from the Phase III clinical endpoint trial, the potential for accelerated approval and certain other factors which will influence the Company's determination of the appropriate continued investment of the Company's financial resources in this program. The Company's future capital requirements will depend on many factors, including continued scientific progress in its research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the cost of manufacturing scale-up, effective commercialization activities and arrangements and other factors not within the Company's control. The Company intends to seek additional funding, in addition to the recently completed Series F Stock transaction, through public or private financings, arrangements with corporate collaborators or other sources. If funds are acquired through collaborations, the Company will likely be required to relinquish some or all rights to products that the Company may have otherwise developed itself. Adequate funds may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company to scale back or eliminate some or all of its research and development programs or license to third parties products or technologies that the Company would otherwise seek to develop itself. The Company believes that its existing resources, the resources received from the Series F Stock transaction completed in April 1998, and interest thereon, will enable the Company to maintain its current and planned operations beyond 1998. PATENTS AND PROPRIETARY TECHNOLOGY. The Company has filed, or participated as licensee, in the filing of a number of patent applications in the United States and many international countries. The Company files applications as appropriate for patents covering its products and processes. The Company has been issued patents, or has licensed patents, covering certain aspects of its proposed immune-based therapies for HIV, autoimmune disease, cancer and gene therapy technologies. The Company's success may depend in part on its ability to obtain patent protection for its products and processes. The Company is aware that a group working with Connetics Corporation has received a United States patent related to autoimmune disease research that covers technology similar to that used by the Company There can be no assurance that the Company will be able to negotiate any necessary cross licenses, and if not successful, failure to do so could have a negative impact on the Company. There can be no assurance that the Company's patent applications will be issued as patents or that any of its issued patents, or any patent that may be issued in the future, will provide the Company with adequate protection for the covered products, processes or technology. The patent positions of biotechnology and pharmaceutical companies can be highly uncertain, and involve complex legal and factual questions. Therefore, the breadth of claims allowed in biotechnology and pharmaceutical patents cannot be predicted. The Company also relies upon unpatented trade secrets and know how, and no assurance can be given that others will not independently develop substantially equivalent trade secrets or know how. In addition, whether or not the Company's patents are issued, or issued with limited coverage, others may receive patents which contain claims applicable to the Company's product. There can be no assurance that any of the Company's patents, or any patents issued to the Company in the future, will afford meaningful protection against competitors. Defending any such patent could be costly to the Company, and there can be no assurance that the patent would be held valid by a court of competent jurisdiction. The Company also relies on protecting its proprietary technology in part through confidentiality agreements with its corporate collaborators, employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or independently discovered by its competitors. 10 It is possible that the Company's products or processes will infringe, or will be found to infringe, patents not owned or controlled by the Company, such as the patent owned by Connetics Corporation. If any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses or redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available at all or on terms commercially reasonable to the Company or that the Company could redesign its products or processes to avoid infringement. Litigation may be necessary to defend against claims of infringement, to enforce patents issued to the Company or to protect trade secrets. Such litigation could result in substantial costs and diversion of management efforts regardless of the results of such litigation and an adverse result could subject the Company to significant liabilities to third parties, require disputed rights to be licensed or require the Company to cease using such technology. LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS. Clinical testing, manufacture, promotion and sale of the Company's drug products are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state and foreign regulatory agencies. The Company believes that REMUNE and most of its other potential immune-based therapies will be regulated by the FDA as biological drug products under current regulations of the FDA. Biological products must be shown to be safe, pure and potent (i.e., effective) and are subject to the same regulatory requirements as nonbiological products under the Food and Drug Administration Act, as amended by the FDA Modernization Act, except that a biological product licensed under the Public Health Services Act ("PHS Act") is not required to have an approved New Drug Application under the Federal Food, Drug and Cosmetic Act ("FDC Act"). The FDA Modernization Act directed the FDA to take measures to minimize the differences in the review and approval of marketing applications for biological and nonbiological products. The FDA Modernization Act also made significant revisions to the statutory requirements with regard to the approval of new biological and nonbiological products. Among other things, the FDA Modernization Act established a new statutory program for the approval of fast track drugs, streamlined clinical research, and revised the content of product approval applications and the FDA review process. The FDA is required to issue regulations and guidelines in order to implement certain of these new requirements. Until the FDA implements these regulations and guidelines, it is impossible to predict the impact of the FDA Modernization Act on the review and approval of any marketing applications that the Company may submit to the FDA. The FDC Act, the PHS Act and other federal and state statutes and regulations govern or influence the testing, manufacture, safety, effectiveness, labeling, storage, recordkeeping, approval, advertising, distribution and promotion of biological prescription drug products. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, seizure of products, total or partial suspension of product marketing, failure of the government to grant premarket approval, withdrawal of marketing approvals and criminal prosecution. The regulatory process for new therapeutic drug products, including the required preclinical studies and clinical testing, is lengthy and expensive and there can be no assurance that necessary FDA clearances will be obtained in a timely manner, if at all. There can be no assurance as to the length of the clinical trial period or the number of patients the FDA will require to be enrolled in the clinical trials in order to establish the safety and efficacy of the Company's products. The Company may encounter significant delays or excessive costs in its efforts to secure necessary approvals, and regulatory requirements are evolving and uncertain. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of the Company's products. There can be no assurance that the Company will be able to obtain the necessary approvals for clinical trials, manufacturing or marketing of any of its products under development. Even if commercial regulatory approvals are obtained, they may include significant limitations on the indicated uses for which a product may be marketed. In addition, a marketed product is subject to continual FDA review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions. The steps required before a biological drug product may be marketed in the United States generally include preclinical studies and the filing of an Investigational New Drug application with the FDA. Reports of results of preclinical studies and clinical trials for biological drug products are submitted to the FDA in the form of a Biologics Licensing Application ("BLA") for approval for marketing and commercial shipment. Submission of a BLA does not assure FDA approval for marketing. The BLA review process may take a 11 number of years to complete, although reviews of applications for treatments of AIDS, cancer and other life-threatening diseases may be accelerated or expedited. Failure of the Company to receive FDA marketing approval for REMUNE or any of its other products under development on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. In addition to obtaining approval for each biological drug product, an Establishment License Application usually must be filed and approved by the FDA. Among the other requirements for BLA approval is the requirement that prospective manufacturers conform to the FDA's Good Manufacturing Practices ("GMP") requirements specifically for biological drugs, as well as for other drugs. In complying with the FDA's GMP requirements, manufacturers must continue to expend time, money and effort in production, recordkeeping and quality control to assure that the product meets applicable specifications and other requirements. Failure to comply with the FDA's drug GMP requirements subjects the manufacturer to possible FDA regulatory action. There can be no assurance that the Company or its contract manufacturers, if any, will be able to maintain compliance with the FDA's drug GMP requirements on a continuing basis. Failure to maintain such compliance could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes its proprietary GeneDrug and cancer treatment therapies will likely be regulated as biological products. As with the Company's other potential products, the gene therapy and cancer products will be subject to extensive FDA regulation throughout the product development process, and there can be no assurance that any of these products will be successful at securing the requisite FDA marketing approval on a timely basis, if at all. The FDA Modernization Act also amended the FDC Act to permit expanded access to individuals and larger groups to unapproved new therapeutic and diagnostic products. Although the new law largely codifies existing FDA regulations in this area, it expands access to all investigational therapies under certain conditions. Although the FDA has granted expanded access to REMUNE for those patients who are ineligible to enroll in the Phase III clinical endpoint trial, the FDA has to date not designated expanded access protocols for REMUNE as "treatment" protocols. Either expanded access or a treatment protocol designation might permit third party reimbursement of some of the costs associated with making REMUNE available to patients in such an expanded access context. There can be no assurance that the FDA will determine that REMUNE meets all of the FDA's criteria for use of an investigational drug for treatment use or that, even if the product is allowed for treatment use, that third party payers will provide reimbursement for any of the costs of treatment with REMUNE . The FDA also has issued regulations to accelerate the approval of or to expedite the review of new biological drug products for serious or life-threatening illnesses that provide meaningful therapeutic benefit to patients over existing treatments. Under the accelerated approval program, the FDA may grant marketing approval for a biological or nonbiological drug product earlier than would normally be the case. In addition to the accelerated approval process, the FDA has established procedures designed to expedite the development, evaluation and marketing of new therapies intended to treat persons with life-threatening and severely-debilitating illnesses, especially when no satisfactory alternative therapy exists. In addition, the FDA Modernization Act established a new statutory program for the approval of fast track drugs, including biological products. There can be no assurance that the FDA will consider REMUNE or any other of the Company's products under development to be an appropriate candidate for accelerated approval, expedited review or fast track designation. To market any drug products outside of the United States, the Company is also subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country. TECHNOLOGICAL CHANGE AND COMPETITION. The biotechnology industry continues to undergo rapid change and competition is intense in the fields of HIV, autoimmune disease, cancer and gene therapy, and such 12 competition is expected to increase. The Company will compete with fully integrated pharmaceutical companies, small biotechnology companies, universities and research organizations. There can be no assurance that competitors have not or will not succeed in developing technologies and products that are more effective than any which have been or are being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive. Many of the Company's competitors have substantially greater experience, financial and technical resources and production, marketing and development capabilities than the Company. Accordingly, certain of the Company's competitors may succeed in obtaining regulatory approval for products more rapidly or effectively than the Company. If the Company commences commercial sales of its products, it will also be competing with respect to manufacturing efficiency and sales and marketing capabilities, areas in which it currently has no experience. There can be no assurance that competitors will not develop and commercialize more effective or affordable products. DEPENDENCE ON THIRD PARTIES. The Company's strategy for the research, development and commercialization of its products requires entering into various arrangements with corporate collaborators, licensors, licensees and others, and the Company's commercial success is dependent upon these outside parties performing their respective contractual responsibilities, including the analysis of the data generated in the Company's clinical trials. The amount and timing of resources such third parties will devote to these activities may not be within the control of the Company. There can be no assurance that such parties will perform their obligations as expected and the failure of third parties to perform their obligations would have a material adverse effect on the Company. Although the Company has collaborative agreements with several universities and research institutions, the Company's agreement with Bayer is the only collaborative agreement that provides the Company with contract revenue. There can be no assurance that these collaborations will result in the development of any commercial products. Immune Response intends to seek additional collaborative arrangements to develop and commercialize certain of its products. There can be no assurance that the Company will be able to negotiate collaborative arrangements on favorable terms, or at all, in the future, or that its current or future collaborative arrangements will be successful. LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE. The Company has a manufacturing facility for REMUNE located in King of Prussia, Pennsylvania, and a pilot manufacturing facility in Carlsbad, California for its other products. The Company has not yet manufactured its product candidates in commercial quantities. No assurance can be given that the Company, on a timely basis, will be able to make the transition from manufacturing clinical trial quantities to commercial production quantities successfully or be able to arrange for contract manufacturing. The Company believes it will be able to manufacture REMUNE for initial commercialization, if the product obtains FDA approval, but it has not yet demonstrated the capability to manufacture REMUNE in commercial quantities, or its autoimmune disease, cancer and gene therapy treatments in large-scale clinical or commercial quantities. The Company has no experience in the sales, marketing and distribution of pharmaceutical products. There can be no assurance that the Company will be able to establish sales, marketing and distribution capabilities or make arrangements with its collaborators, licensees or others to perform such activities or that such efforts will be successful. There can be no assurance of market acceptance of the Company's products, if they are developed and approved for commercialization. The manufacture of the Company's products involves a number of steps and requires compliance with stringent quality control specifications imposed by the Company itself and by the FDA. Moreover, the Company's products can only be manufactured in a facility that has undergone a satisfactory inspection by the FDA. For these reasons, the Company would not be able quickly to replace its manufacturing capacity if it were unable to use its manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure or other difficulty, or if such facilities are deemed not in compliance with the FDA's drug GMP requirements and the non-compliance could not be rapidly rectified. The Company's inability or reduced capacity to manufacture its products would have a material adverse effect on the Company's business and results of operations. The Company may enter into arrangements with contract manufacturing companies to expand its own production capacity in order to meet requirements for its products, or to attempt to improve manufacturing efficiency. If the Company chooses to contract for manufacturing services and encounters delays or difficulties in establishing relationships with manufacturers to produce, package and distribute its finished 13 products, clinical trials, market introduction and subsequent sales of such products would be adversely affected. Further, contract manufacturers must also operate in compliance with the FDA's drug GMP requirements; failure to do so could result in, among other things, the disruption of product supplies. Until recently, biologic product licenses could not be held by any company unless it performed significant manufacturing operations. The FDA recently amended its regulations in this regard, and the Company believes that under these new regulations it can now hold licenses for its biological products without performing significant manufacturing steps. Nonetheless, the Company's potential dependence upon third parties for the manufacture of its products may adversely affect the Company's profit margins and its ability to develop and deliver such products on a timely and competitive basis. UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS. The Company's ability to earn sufficient returns on its products will depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health coverage insurers, managed care organizations and other organizations. Third party payors are increasingly challenging the price of medical products and services. If purchasers or users of the Company's products are not able to obtain adequate reimbursement for the cost of using such products, they may forego or reduce such use. 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. Failure to obtain appropriate reimbursement would have a material adverse effect on the Company. VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS. The market price of the Company's common stock, like that of the common stock of many other biopharmaceutical companies, has been and is likely to be highly volatile. Factors such as the results of preclinical studies and clinical trials by the Company, its collaborators or its competitors, other evidence of the safety or efficacy of products of the Company or its competitors, announcements of technological innovations or new products by the Company or its competitors, governmental regulatory actions, changes or announcements in reimbursement policies, developments with the Company's collaborators, developments concerning patent or other proprietary rights of the Company or its competitors (including litigation), concern as to the safety of the Company's products, period-to-period fluctuations in the Company's operating results, changes in estimates of the Company's performance by securities analysts, market conditions for biopharmaceutical stocks in general and other factors not within the control of the Company could have a significant adverse impact on the market price of the common stock. The Company has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. 14 PART II. OTHER INFORMATION ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 27.1 Financial Data Schedule b) Reports on Form 8-K Not applicable 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE IMMUNE RESPONSE CORPORATION 5/8/98 /s/ Charles J. Cashion Date: ____________________________ ______________________________________ Charles J. Cashion Sr. Vice President Secretary and Treasurer 16 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATE STATEMENTS OF OPERATIONS EXTRACTED FROM ITEM 1 OF 10-Q FOR THE PERIOD ENDED MARCH 31, 1998, FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 2,553 20,931 0 0 0 23,970 11,101 5,572 30,453 3,223 0 0 0 57 27,173 27,230 0 1,311 0 9,260 0 0 0 (7,949) 0 (7,949) 0 0 0 (7,949) (.35) (.35)
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