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