Immunomedics 10-K 2015
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Certain information required in Part III of this Annual Report on Form 10-K will be set forth in, and incorporated from the registrants Proxy Statement for the 2015 Annual Meeting of Stockholders, which will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrants fiscal year ended June 30, 2015.
In this Form 10-K, we use the words Immunomedics, Inc. to refer to Immunomedics, Inc., a Delaware corporation, and we use the words Company, Immunomedics, Immunomedics, Inc., we, us and our to refer to Immunomedics, Inc. and its subsidiaries.
Immunomedics is a clinical-stage biopharmaceutical company developing monoclonal antibody-based products for the targeted treatment of cancer, autoimmune disorders and other serious diseases. Our advanced proprietary technologies allow us to create humanized antibodies that can be used either alone in unlabeled or naked form, or conjugated with radioactive isotopes, chemotherapeutics, cytokines or toxins. Using these technologies, we have built a pipeline of nine clinical-stage product candidates.
Our most advanced product candidate, to which we retain worldwide rights for all indications, is 90Y-clivatuzumab tetraxetan. The radiolabeled antibody is in a Phase 3 registration trial in patients with advanced pancreatic cancer. We expect patient enrollment to be completed in calendar year 2016. Our portfolio of investigational products also includes antibody-drug conjugates (ADCs) that are designed to deliver a specific payload of a chemotherapeutic directly to the tumor while reducing overall toxic effects that are usually found with conventional administration of these chemotherapy agents. Our most advanced ADCs are sacituzumab govitecan (IMMU-132) and labetuzumab govitecan (IMMU-130), which are in Phase 2 trials for a number of solid tumors and metastatic colorectal cancer (mCRC), respectively. We recently presented updated data for both programs at the 2015 Annual Meeting of the American Society of Clinical Oncology (ASCO). These two ADCs facilitate targeted delivery of SN-38, the active metabolite of irinotecan, an effective, yet toxic chemotherapeutic, directly to tumor cells. While sacituzumab govitecan and labetuzumab govitecan are circulating in the blood stream, our novel and proprietary ADC linking system keeps SN-38 conjugated to the antibody and in an inactive form, thereby reducing toxicity to normal tissues. The clinical safety and efficacy results obtained with sacituzumab govitecan and labetuzumab govitecan suggest that this half-life is long enough for the ADCs to reach their targets on the surface of tumor cells, without causing significant harm to the rest of the body. More importantly, the pH-sensitive nature of the linker allows the continuous release of SN-38 from the tumor-bound ADCs, regardless of whether the ADC is internalized or remains on the surface of the tumor cell and without the requirement of an enzyme, leading to a locally enhanced concentration of SN-38 within or near the tumor. We believe this selective delivery enhances SN-38s bioavailability at the tumor, which may improve efficacy while also reducing toxicity.
We have licensed epratuzumab to UCB, S.A., (UCB) for the treatment of all autoimmune disease indications worldwide. On July 28, 2015, UCB announced that the two Phase 3 EMBODY clinical trials for epratuzumab in systemic lupus erythematosus (SLE) did not meet the primary clinical efficacy endpoints in either dose in both studies. Treatment response in patients who received epratuzumab in addition to standard therapy was not statistically significant when compared to those who received placebo in addition to standard therapy. UCB is in the process of analyzing the full set of data from both studies. A high level review of the safety data did not identify any new safety concerns. In oncology, we have a research collaboration with Bayer to study epratuzumab as a thorium-227 labeled antibody. We have other ongoing collaborations in oncology with independent study groups. The IntreALL Inter-European study group is conducting a large, randomized, Phase 3 trial combining epratuzumab with chemotherapy in children with relapsed acute lymphoblastic leukemia (ALL) at clinical sites in Australia, Europe, and Israel.
We also have a number of other product candidates that target solid tumors and hematologic malignancies, as well as other diseases, in various stages of clinical and pre-clinical development. These include bispecific antibodies targeting cancers as T-cell redirecting immunotherapies, as well as bispecific antibodies for next-generation cancer and autoimmune disease therapies, created using our patented DOCK-AND-LOCK® (DNL®) protein conjugation technology. The following discussion is a brief summary of our principal research and development programs as of July 31, 2015.
Broad Pipeline of Late-Stage Antibody-Based Therapies
Our foremost clinical goals for fiscal year 2016 are the following:
Our Clinical Programs
We believe that each of our antibodies has therapeutic potential either when administered as a naked antibody or when conjugated with therapeutic radioisotopes (radiolabeled), chemotherapeutics, cytokines or other toxins to create unique and potentially more effective treatment options. The attachment of various
compounds to antibodies is intended to allow the delivery of these therapeutic agents to tumor sites with better specificity than conventional radiation therapy or chemotherapy approaches. This treatment method is designed to reduce the total exposure of the patient to the therapeutic agents, which ideally minimizes debilitating side effects. We are currently focusing our efforts on unlabeled, or naked antibodies and antibodies conjugated with drugs, cytokines, or toxins, and on the use of radioisotopes, such as such as yttrium-90 (90Y).
Yttrium-90-Labeled Clivatuzumab Tetraxetan
90Y-clivatuzumab tetraxetan is our therapeutic product candidate for patients with pancreatic cancer. Clivatuzumab tetraxetan is the conjugation of hPAM4, an antibody that targets a mucin antigen found on pancreatic cancer cells, with a linker that can be easily radiolabeled with 90Y and other radioisotopes. This product candidate utilizes radioimmunotherapy, which combines the targeting power of monoclonal antibodies with the cell-damaging ability of localized radiation. When infused into a patient, these radiation-carrying antibodies circulate in the body until they locate and bind to the surface of specific cancer cells and then deliver their cytotoxic radiation directly to the cells. Due to its selectivity, we believe that radioimmunotherapy may have fewer side effects than chemotherapy or conventional radiation therapy.
We have begun patient enrollment into our Phase 3 registration study (PANcreatic Cancer RadioImmunotherapy Trial-1: PANCRIT-1) in patients with metastatic pancreatic cancer who have received at least two prior therapies, one of which must have been a gemcitabine-containing regimen. The study is evaluating the safety and overall survival of clivatuzumab tetraxetan labeled with 90Y plus low-dose gemcitabine and best supportive care compared to placebo plus low-dose gemcitabine and best supportive care. This study is being conducted in the United States and Western Europe. We expect patient enrollment to be completed in calendar year 2016.
Antibody-Drug Conjugates (ADCs)
The targeted delivery of drug by an antibody is an exciting approach in cancer treatment that has gained significant interest over the past few years. We believe our ADC programs differ from those of other companies, because we do not use supertoxic drugs, such as calicheamicin. Instead, we specifically look for moderately-toxic drugs, such as SN-38. We believe the use of a less-toxic drug, conjugated to the appropriate tumor-targeting antibody, will permit greater delivery of the drug over repeated cycles of therapy, thereby improving the therapeutic index, which is the ratio of efficacy to toxicity.
We have two product candidates from our proprietary ADC program that are in clinical development, focusing on the treatment of patients with metastatic solid tumors. The first ADC program, sacituzumab govitecan, is an anti-TROP-2-SN-38 ADC currently being evaluated in patients with a variety of solid tumors. Labetuzumab govitecan is an anti-CEACAM5-SN-38 ADC currently in development for the treatment of mCRC.
Sacituzumab govitecan or IMMU-132
Sacituzumab govitecan is an ADC that contains SN-38, the active metabolite of irinotecan, approved by many Health Authorities, including the U.S. Food and Drug Administration (FDA), as a chemotherapeutic for patients with cancer. SN-38 cannot be given directly to patients because of its toxicity and poor solubility. Sacituzumab govitecan was created at Immunomedics by conjugating SN-38 site-specifically and at a high ratio of drug to hRS7, our anti-TROP-2 antibody. TROP-2 is a cell-surface receptor that while over-expressed by many human tumors, including cancers of the breast, colon and lung, has limited expression in normal human tissues. hRS7 internalizes into cancer cells following binding to TROP-2, making it a suitable candidate for the delivery of cytotoxic drugs.
Sacituzumab govitecan has received Fast Track designation from FDA for the treatment of patients with TNBC who have failed prior therapies for metastatic disease and for patients with small-cell lung cancer (SCLC), or non-small-cell lung cancer (NSCLC). Fast Track designation is designed to expedite the
development and review of applications for products intended for the treatment of a serious or life-threatening disease or condition. This ADC has also been designated an orphan drug by FDA for the treatment of patients with SCLC or pancreatic cancer in the U.S. and by the European Medicines Agency (EMA) for the treatment of patients with pancreatic cancer in the European Union.
At the 2015 Annual Meeting of ASCO, updated Phase 2 results with sacituzumab govitecan in patients with metastatic solid cancers were presented. Sacituzumab govitecan was administered to patients once a week for 2 weeks in 21-day cycles. Responses were assessed by computed tomography (CT), in accordance with the rules set by the Response Evaluation Criteria In Solid Tumors (RECIST 1.1).
In TNBC, among the 49 patients evaluated for a response, 31%, or 15 patients, showed a reduction in tumor size of 30% or more. They included 2 patients with complete response. Adding the 22 patients with responses between less than 30% tumor shrinkage and less than 20% tumor increase, the disease control rate was 76%. The ADC also produced significant duration of response in these responding patients. Measured as the time it takes from the beginning of sacituzumab govitecan treatments to when the cancer progresses, the interim median progression-free survival (PFS) for the 48 patients who received the optimal doses of 8 or 10 mg/kg was 6.0 months. Importantly, 63% of patients (22 of 35) had a time-to-progression longer than their last therapy, notwithstanding disease progression has not yet happened in 56% of patients at the time of analysis. The median prior therapies for this group of patients was 4 (range, 1-11).
Sacituzumab govitecan also produced promising anti-tumor activity in patients with metastatic lung cancer. In NSCLC, treatment with sacituzumab govitecan produced tumor shrinkage of 30% or more in 6 of 19 patients, or 32%. The disease control rate was 74%. An interim analysis of the length of time patients were living without their cancer progressing showed a median of 5.4 months, with 44% of patients still enjoying this survival benefit. For SCLC, despite the aggressive nature of the disease, 30% of 20 patients with advanced SCLC responded to sacituzumab govitecan treatments with 30% or more tumor reduction. The disease control rate in this group of lung cancer patients was 55%. With 70% of patients having had their disease progressed, the interim median PFS was 2.4 months. For the 25 patients who responded to sacituzumab govitecan, all 11 SCLC patients and 12 of 14 NSCLC patients, or 86%, had a time to progression that was longer than their last therapy. These patients had previously failed a median of 2.5 (range, 1-7) and 3 (range, 1-8) cancer treatments, respectively.
Also reported at ASCO were results in patients with heavily-pretreated, metastatic gastrointestinal cancers. Even in this late-stage setting, the overall disease control rate for all 60 assessable patients was 57%, including 2 esophageal cancer patients and 1 colorectal cancer patient with a partial response. Best responses from assessable patients who received 8 or 10 mg/kg doses of sacituzumab govitecan are summarized below:
While patient follow-up is continuing, interim analysis of survival data revealed a favorable outcome in both PFS and overall survival (OS).
Sacituzumab govitecan has a tolerable safety profile in these patients with diverse, advanced, heavily-pretreated solid cancers. Grades 3 and 4 adverse events at the doses of 8 and 10 mg/kg include dose-limiting neutropenia (24%), followed by diarrhea (4%), and febrile neutropenia (4%).
Certain patents relating to the protein sequence of the hRS7 antibody used in sacituzumab govitecan have a 2017 expiration in the U.S. and 2023 overseas. Other patents relating to use of hRS7 for cancer therapy, including the SN-38 conjugated form of hRS7 used in sacituzumab govitecan, extend to 2033.
Labetuzumab Govitecan or IMMU-130
Our second investigational solid-tumor ADC involves our anti-CEACAN5 antibody, labetuzumab, conjugated to SN-38. The agent is currently being studied in patients with mCRC who had received at least one prior irinotecan-containing regimen and had an elevated blood titer of carcinoembryonic antigen (CEA). Several dosing schedules were evaluated in three Phase 1 studies. Labetuzumab govitecan showed therapeutic activity in all three trials, but a more frequent dosing schedule, with administrations of the ADC once or twice-weekly for two weeks followed by a week off, appeared to be more active in patients with mCRC than when administered every other week.
In the expanded Phase 2 study, patients were being treated in 3-week cycles, receiving labetuzumab govitecan either once or twice weekly for the first two weeks followed by one week of rest. Interim results were reported at the 2015 ASCO Annual Meeting. For the 33 patients who received the ADC once a week at the 8 or 10 mg/kg dose levels, the interim median PFS was 4.4 months, with 22% of these patients still benefiting from their cancer not progressing. In terms of treatment response, in 32 patients with at least one evaluation following treatments with labetuzumab govitecan at the 8 or 10 mg/kg level, 1 patient had a partial response and 24 patients reported stable disease as their best response, to give a combined disease control rate of 78%. Treatment response was evaluated based on RECIST 1.1 criteria using CT as the imaging tool for tumor size measurements.
In addition to the 8 and 10 mg/kg once-weekly dose, other dosing levels and schedule evaluated included 4, 6, 9, and 12 mg/kg, each at a frequency of twice a week. Despite repeated dosing, no antibody against labetuzumab or its SN-38 conjugate was detected in blood samples from 74 patients over a 16-month period. Labetuzumab govitecan was well tolerated by patients. At the optimal once-a-week doses of 8 and 10 mg/kg, grades 3 and 4 adverse events with occurrence of 5% or more included neutropenia (5% for both dose levels), and mild diarrhea (5% in the 8 mg/kg group only).
Certain patents relating to labetuzumab used in labetuzumab govitecan expire in 2014-2016. Other patents relating to use of labetuzumab for cancer therapy, including the SN-38 conjugated form of labetuzumab used in labetuzumab govitecan, extend to 2033.
Epratuzumab is a humanized antibody which targets CD22, an antigen found on the surface of B lymphocytes, a type of white blood cell critical to proper immune system function. Elevated expression of CD22 and other B-cell receptor-associated (BCR) proteins on B lymphocytes has been associated with SLE, chronic autoimmune diseases and also with certain cancers. Current therapies for SLE seek to minimize CD22 expression by destroying B cells, compromising the immune system. Epratuzumab, on the other hand, transfers these BCR-proteins to helper cells called effector cells in order to reduce B-cell destruction and epratuzumabs impact on the immune system. We believe epratuzumab is the only antibody in development targeting the reduction of these proteins without severely depleting B-cells through a process known as trogocytosis.
As noted above, we have licensed epratuzumab to UCB for the treatment of all autoimmune disease indications worldwide. On July 28, 2015, UCB announced that the two Phase 3 EMBODY clinical trials for epratuzumab in SLE did not meet the primary clinical efficacy endpoints in either dose in both studies. Treatment
response in patients who received epratuzumab in addition to standard therapy was not statistically significant when compared to those who received placebo in addition to standard therapy. UCB is in the process of analyzing the full set of data from both studies. A high level review of the safety data did not identify any new safety concerns.
We have retained the rights to epratuzumab in oncology. We have a research collaboration with Bayer to study epratuzumab as a thorium-227 labeled antibody. We also have some other collaborations ongoing in oncology with independent study groups. The IntreALL Inter-European study group is conducting a large, randomized, Phase 3 trial combining epratuzumab with chemotherapy in children with relapsed ALL at clinical sites in Australia, Europe, and Israel. This Phase 3 study, which is partially funded by the European Commission, assesses the efficacy and safety of this combination therapy using event-free survival as the surrogate for survival, the primary endpoint. For adult patients with ALL, there is one ongoing clinical trial. The CheprALL study, sponsored by the French GRAALL study group, is a multicenter Phase 2 trial of epratuzumab combined with chemotherapy also in adult patients with relapsed ALL.
Although certain patents to the epratuzumab protein sequence expired in 2014 in the U.S. or will expire in 2015 overseas, other issued patents to therapeutic use of epratuzumab extend to 2018-2023 for cancer and 2020 for autoimmune disease. The method of preparing concentrated epratuzumab for subcutaneous administration is covered by another patent family with an expiration in 2032.
We have additional potential products for the treatment of cancer and autoimmune diseases including veltuzumab, our anti-CD20 antibody, and milatuzumab, our anti-CD74 antibody. Veltuzumab is being evaluated in a Phase 2 study in combination with 90Y-epratuzumab tetraxetan in patients with aggressive NHL, funded by a grant from the Small Business Innovation Research (SBIR) program of the National Cancer Institute (NCI). Milatuzumab has received a Department of Defense grant for a clinical study in patients with lupus. Other programs include IMMU-114, a humanized anti-HLA-DR antibody being investigated as a monotherapy for NHL and CLL.
We also collaborate with the University Hospital in Nantes, France, which is conducting a multicenter study testing our bispecific pretargeting technology, co-developed with our majority-owned subsidiary, IBC Pharmaceuticals, Inc., as a potentially improved method of detecting and locating sites of metastatic breast cancer. Interim results were presented at the 2015 ASCO meeting. The bispecific antibody targets CEACAM5 expressed on breast cancer cells, and the peptide delivered in a second step carries the positron-emitting radionuclide, gallium-68. This project is funded by a grant to the French study group.
Veltuzumab is a humanized monoclonal antibody targeting CD20 receptors on B lymphocytes currently under development for the treatment of NHL and autoimmune diseases. In autoimmune diseases, we are studying the subcutaneous formulation of veltuzumab in patients with immune thrombocytopenia (ITP), in a Phase 1/2 trial. This trial, designed to evaluate different dosing schedules, has completed patient accrual and patients are being followed for up to 5 years. On July 28, 2015 the Office of Orphan Products Development of FDA granted orphan status for the use of veltuzumab for the treatment of ITP.
In oncology, a NCI-funded Phase 1/2 study in patients with aggressive NHL in combination with 90Y-epratuzumab tetraxetan has completed patient enrollment, with patient follow-up continuing.
We are currently evaluating various options for further clinical development of veltuzumab in ITP and other autoimmune disease indications, including pemphigus, as well as in oncology, including licensing arrangements and collaborations with outside study groups.
Milatuzumab is a humanized monoclonal antibody targeting tumors that express the CD74 antigen, which is present on a variety of hematological tumors and even on some solid cancers, with restricted expression by normal tissues. It has received orphan drug designation from the FDA for the treatment of patients with multiple myeloma or CLL. Milatuzumab is the first anti-CD74 antibody that has entered into human testing and we have completed initial Phase 1 studies in patients with relapsed multiple myeloma, NHL or CLL.
The anti-CD74 antibody is also being studied subcutaneously in a Phase 1b study in patients with active SLE. The SLE study is supported by a three-year research grant from the Department of Defense with a potential funding of $1.6 million.
Our interest in pursuing milatuzumab in immune diseases is driven by the observations that implicated CD74 in antigen presentation particularly by dendritic and other immune cells and as a survival factor for rapidly proliferating malignant cells. Recent findings have determined that CD74 is a receptor for the pro-inflammatory chemokine, macrophage migration-inhibitory factor, and that binding of the factor to CD74 initiates a signaling cascade resulting in proliferation and survival of normal and malignant B cells, such as in CLL. Migration-inhibitory factor is widely expressed by immune cells, particularly macrophages, and is known to play a role in autoimmune disease. Thus, we believe that milatuzumab, by blocking the function of CD74, could be useful in the management of immune diseases either alone or in combination with other agents including other B-cell antibodies, such as epratuzumab and veltuzumab.
Yttrium-90-Labeled Epratuzumab Tetraxetan
90Y-epratuzumab tetraxetan is our radiolabeled anti-CD22 investigational product for patients with NHL or ALL. As noted above, the radiolabeled antibody is currently being studied in a combination with veltuzumab in a Phase 2 clinical trial for the therapy of patients with aggressive NHL, supported by an NCI-SBIR grant. In ALL, a team from the University of Nantes, Nantes, France, is sponsoring a Phase 1/2 study to evaluate the safety and efficacy of 90Y-epratuzumab tetraxetan in patients with relapsed or refractory ALL.
IMMU-114 is a novel humanized antibody directed against an immune response target, HLA-DR, under development for the treatment of patients with B-cell cancers. HLA-DR is a receptor located on the cell surface of leukocytes, whose role is to present foreign objects to the immune system for the purpose of eliciting an immune response. Increased presence of HLA-DR in hematologic cancers has made it a prime target for antibody therapy.
Although other anti-HLA-DR antibodies have been developed, IMMU-114 is distinguished by having a different immunoglobulin class, IgG4, which does not function by the usual effector-cell activities of antibodies, such as complement-dependent cytotoxicity (CDC) and antibody-dependent cellular cytotoxicity (ADCC). As a result, IMMU-114 does not rely on an intact immune system in the patient to kill tumor cells. Furthermore, because ADCC and CDC are believed to play a major role in causing the side effects of antibody therapy, we expect IMMU-114 to be less toxic to patients.
By targeting HLA-DR, a receptor that is different from the antigen targeted by rituximab or other antibodies in development for NHL and other B-cell malignancies, IMMU-114 may represent a new tool in the arsenal to combat these cancers. The anti-HLA-DR antibody is being evaluated as a subcutaneously administered monotherapy for patients with NHL or CLL in a Phase 1 study.
The Phase 1 study enrolling patients with relapsed NHL and CLL continues to progress, with 10 patients having been enrolled to-date. In half of 8 patients assessable for response, objective responses have been observed in patients with CLL and NHL who relapsed to prior therapies, all including rituximab. In order to extend the
durability of these responses, the therapy schedule is being extended. We plan to present interim results at a medical conference toward the end of the calendar year.
Diagnostic Imaging Products
We have continued to transition our focus away from the development and commercialization of new diagnostic imaging products in order to accelerate the development of our therapeutic product candidates, although we continue to manufacture and commercialize LeukoScan® (sulesomab) in territories where regulatory approvals have previously been granted. LeukoScan® is indicated for diagnostic imaging to determine the location and extent of infection/inflammation in bone in patients with suspected osteomyelitis, including patients with diabetic foot ulcers.
Our Research Programs
In our drive to improve targeted therapies of diseases, we have assembled significant expertise in antibody engineering, particularly proprietary CDR-grafting methods, antibody production and formulation, immunochemistry, molecular biology, antibody conjugation, peptide chemistry, synthetic organic chemistry, and protein engineering.
Beginning with our unique grafting technique to produce humanized antibodies, our antibody humanization platform has produced a diverse portfolio of therapeutic agents that are in multiple stages of clinical trials for the therapy of cancer and autoimmune diseases, as detailed above. These humanized antibodies are well tolerated and also have a low incidence of immunogenicity.
With the successful humanized antibody platform as a foundation, we have built a robust ADC program using our own proprietary ADC linker technology. Linking a drug directly to a targeting agent such as an antibody is but one way of drug delivery. Together with our majority-owned subsidiary, IBC Pharmaceuticals, Inc., (IBC), we have also pioneered a novel delivery method called pretargeting, in which the therapeutic agent and the antibody are administered to the patient in two separate steps. This delivery method has been shown in preclinical studies to produce very high tumor/normal tissue ratios of uptake. More importantly, with pretargeting, we believe we can apply both imaging and therapy in the same patient, first to qualify the patient for our targeted therapy, and then to monitor the patients response and progress. We believe strongly that pretargeting has the potential to bring us closer to personalized medicine.
Pretargeting requires the use of bispecific antibodies that recognize two targets. These antibodies are produced by our new protein engineering platform technology called DOCK-AND-LOCK® (DNL®), that combines conjugation chemistry and genetic engineering. Finally, we have invented a novel and facile method of labeling peptides with fluorine-18 (18F) for use in the imaging of diseases using position-emission tomography (PET), and are working toward developing a single-vial kit that can be validated for commercial use. This method also permits the use of other PET radionuclides, such as gallium-68 (Ga-68).
ADC Linker Technology
We have developed a novel ADC platform using our proprietary linker, CL2A, which was designed with targeted delivery of SN-38 in mind. SN-38 is about 3 orders of magnitude more potent than irinotecan, its parent drug, but it cannot be administered systemically to patients because of its poor solubility and toxicity. The linker, CL2A, allows us to produce SN-38 conjugates that are soluble in water with excellent yields and preserves antibody binding and drug activity.
CL2A contains an antibody coupling group on one end and a chemical group on the other for binding with a drug. We have also added a short polyethylene glycol to improve the solubility of CL2A. Furthermore, because SN-38 can be converted from its active lactone form to the inactive carboxylate form, CL2A was designed to attach close to the lactone ring to prevent it from opening up, thereby maintaining the activity of SN-38. Another
key feature of our ADC platform is that the linkage between CL2A and SN-38 is sensitive to both acidic and alkaline conditions and will allow the detachment of SN-38 at a rate of about 50% per day in vivo.
What differentiates our ADC platform from other companies is the high drug-to-antibody ratio of about seven to eight molecules of drug per antibody. That is to say, when our ADCs bind to their targets on cancer cells, they are delivering up to eight molecules of SN-38 per antibody molecule into the blood or at the vicinity of the tumor, which may explain why our ADCs can deliver more than 120-times the amount of SN-38 to the tumor when studied in an animal model, as compared to when irinotecan, the parent compound, is given. We can deliver this drug concentration because our drug is not supertoxic, thus permitting us to give higher antibody doses, in repeated therapy cycles, that we believe provide a better therapeutic index.
Our majority-owned subsidiary, IBC has been working on the development of novel cancer therapeutics, including radioimmunotherapeutics, using patented pretargeting technologies with proprietary, bispecific antibodies. They include tumor-targeting antibodies with multiple binding-arms and new carrier peptides that allow attachment of different kinds of therapeutic and diagnostic isotopes.
One of the new bispecific antibodies is TF2. It targets CEA (specifically CEACAM5) expressed in many human cancers, including colorectal cancer. Unlike conventional antibodies which can only attach to the receptor, TF2 has been modified to contain an additional binding site that recognizes a radioisotope-carrying peptide. This allows the separate administration of TF2 before the delivery of radioisotope, a concept known as pretargeting.
TF2 is currently being studied in four investigator-sponsored clinical trials in France for pretargeted radioimmunotherapy of patients with metastatic CEA-expressing SCLC and for pretargeted immunoPET imaging of patients with breast cancer and medullary thyroid cancer.
The ultimate goal of IBC is to offer cancer patients a more personalized treatment by combining improved molecular imaging with targeted therapy. Demonstrated tumor localization in imaging studies may predict a more appropriate group of patients that would respond to the subsequent therapy.
Harnessing the patients own immune system to control metastatic disease has become a recent and exciting approach in cancer therapy, particularly inhibitors of programmed cell death, such as PD-1. The approval of two such agents, as well as an antibody that inhibits T lymphocyte-associated antigen 4 (CTLA4), has spurred interest in their combination with other therapies in order to achieve a synergism, whereby superior effects are achieved. We have begun to develop our own PD-1 antibody to evaluate its use in combination with our other anticancer agents in preclinical studies, such as the ADCs described above.
Another immunotherapy of current interest is utilizing chimeric antigen receptors (CARs) to direct T cells or natural killer cells. The engineering of chimeric antigen receptors on the surface of such cells combines the potent functions of the effector cells with the tumor-targeting properties of the antibodies. To-date, clinical results using CAR-redirected immunotherapy have appeared to be more successful in liquid (hematological) tumors than in solid cancers. Using our own genetic engineering technology, our scientists have begun work on a more universal approach to direct effector cells to a variety of cancer types by a next-generation targeting model. Preclinical studies are in progress while patents to protect the intellectual property are being prosecuted.
Finally, as described below under DOCK-AND-LOCK® platform technology, we are developing an investigational T-cell redirected bispecific antibody that takes advantage of our TROP-2 antibody targeting, and has shown biological activity in our preclinical animal studies. We have now begun work to develop the constructs needed for translation into candidates for human clinical trials.
DOCK-AND-LOCK® Platform Technology
Together with IBC, we have developed a platform technology, called the DOCK-AND-LOCK® method, which has the potential for making a considerable number of bioactive molecules of increasing complexity. DNL® utilizes the natural interaction between two human proteins, cyclic AMP-dependent protein kinase (PKA) and A-kinase anchoring proteins (AKAPs). The region that is involved in such interaction for PKA is called the dimerization and docking domain, (DDD), which always is produced in pairs. Its binding partner in AKAPs is the anchoring domain (AD). When mixed together, DDD and AD will bind with each other spontaneously to form a binary complex, a process termed docking. Once docked, certain amino acid residues incorporated into DDD and AD will react with each other to lock them into a stably-tethered structure. The outcome of the DNL® method is the exclusive generation of a stable complex, in a quantitative manner that retains the full biological activities of its individual components.
DNL® combines conjugation chemistry and genetic engineering to enable the creation of novel human therapeutics, and the potential construction of improved recombinant products over those currently on the market. Diverse drugs, chemical polymers, proteins, peptides, and nucleic acids are among suitable components that can be linked to either DDD or AD. Since the invention of DNL®, we have created multivalent, mono- or multi-specific antibodies; DNL-PEGylated cytokines; and cytokine-antibody conjugates.
An immunocytokine, named 20-2b, comprising veltuzumab and four copies of interferon-alpha (IFNa) was developed using DNL®. 20-2b potently kills NHL cells in vitro and has exhibited in-vivo activity in human NHL xenograft animal models. This novel immunocytokine is being developed as a biologic therapeutic agent for NHL with funding of a Phase 2 SBIR grant from the NCI.
DNL® is also being used particularly to make bispecific antibodies targeting cancers as a T-cell redirecting immunotherapy. This is one of several new methods of cancer immunotherapy being studied both clinically and preclinically by many other commercial and academic groups. In contrast to hematological tumors, little progress has been made in this approach to treat the more challenging solid cancers, including pancreatic and gastric cancers, two malignancies with very high rates of mortality.
In this regard, we are developing a novel investigational T-cell redirecting bispecific antibody, (E1)-3s, created using DNL® for the potential treatment of pancreatic and gastric cancers. These and various other solid cancers express high-levels of TROP-2, a target recognized by the bispecific (E1)-3s, which also binds to the CD3 antigen on T cells. (E1)-3s effectively induced a potent and specific T-cell-mediated killing of human pancreatic and gastric cancer cell lines. Furthermore, in animal models of human pancreatic or gastric cancer, treatment with (E1)-3s significantly inhibited tumor growth, which resulted in improved survival compared with the control groups. Adding IFNa enhanced the tumor-growth-inhibition activity of (E1)-3s.
As with all candidate therapeutic molecules developed by us, the safety and potential efficacy cannot be predicted until sufficient trials in humans have been conducted.
Peptides and Fluorine-18 (18F) Labeling
Since the pretargeting methods jointly developed with IBC, as mentioned above, are producing very high tumor/normal tissue ratios, we have been working on developing a facile method for the radiolabeling of peptides with 18F via a conjugate with aluminum or other metals.
In the new labeling method, 18F was first allowed to react with aluminum in solution, which occurred instantaneously and in a quantitative manner to form an aluminum 18F complex. The complex was then bound or chelated to a chemical group attached to a peptide. By manipulating the chemical structure of the group that the aluminum-18F complex attaches to in the peptide, we were able to improve the yield of the reaction to 87%. The entire process is rapid, requiring only 15-20 minutes. This is the first method of binding 18F to peptides via an aluminum conjugate.
The method has since been successfully applied to a bispecific antibody pretargeting study in animals injected with human colon cancer cells. Moreover, 18F-labeled peptides were shown to be stable enough to produce exceptional PET images of receptor-expressing tumors in animals by labeling of specific peptides binding such receptors. Scientists at the National Institutes of Health and outside third parties have also successfully applied the new 18F labeling method for the PET imaging of tumor angiogenesis in mice, angiogenesis imaging in a myocardial infarction/reperfusion animal model, hypoxia imaging, and the imaging of growth factor receptors in animal models of gastrointestinal and ovarian cancers.
PET is one of the most prominent imaging tools in diagnostic medicine. 18F is a positron-emitting radioisotope usually given to patients as 18F fluoro-2-deoxyglucose (18F-FDG), a sugar analog. Increased glucose metabolism, which leads to higher uptake of 18F-FDG, is the premise of 18F-FDG PET imaging. 18F-FDG is the most widely used radiopharmaceutical in PET to determine abnormal glucose metabolism. In the U.S., 18F-FDG has been approved for use in detecting certain tumors, coronary artery disease, and epilepsy. However, 18F-FDG uptake is also enhanced during inflammatory processes and in rapidly-proliferating normal cells (such as bone marrow), which may lead to false-positive results and lower specificity.
Our goal is to improve the labeling process to the point where we will be capable of radiolabeling these peptides at clinical-scale using single-vial kits, then license the platform technology to companies on a product-by-product basis. To that end, we have improved the labeling method such that commercial 18F in saline solution can be used and the labeling of temperature-sensitive and insensitive peptides or proteins, including antibodies, were achieved. In order to further simplify the procedure and make the process more consistent and for broader use, we have formulated and published a lyophilized kit that could be validated and manufactured under Good Manufacturing Practice conditions.
The kit, which contains aluminum, a radioprotectant, a non-volatile buffer, and a bulking agent, was able to 18F-label a peptide with approximately 70% yield under non-optimized condition using a semi-automated machine. With a fully automated microfluidics machine, the reaction time was reduced to 1.5 minutes. More importantly, 18F-labeled peptide was produced in amounts that are in the range of a single-patient dose. We are also pursuing the commercial development of radiopharmacy manufacturing to prepare multi-dose 18F-labeled peptides and proteins based on the new labeling method through a corporate partnership.
In related work, similar synthetic methods have also been used to prepare peptides that can be radiolabeled with technetium-99m, gallium-68, indium-111, lutetium-177, and yttrium-90, which are being applied to the bispecific pretargeting technology that is being developed through IBC.
Research and Development Expense
We have historically invested heavily in our research and development programs, spending approximately $41.7 million for these programs during the fiscal year ended June 30, 2015, $33.7 million for these programs during the fiscal year ended 2014 and $28.4 million for these programs during the fiscal year ended June 30, 2013. The expense increases during the 2015 and 2014 fiscal years resulted primarily from higher spending for clinical trials, particularly for the pancreatic cancer and the ADC clinical trials.
Patents and Proprietary Rights
We have accumulated a sizeable portfolio of patents and patent applications in the course of our research, which we believe constitutes a very valuable business asset. The major patents relate primarily to our therapeutic product candidates as well as our technologies and other discoveries for which no product candidate has yet been identified. As of August 15, 2015, our portfolio included approximately 267 active U.S. patents. In addition, as of such date, the portfolio included more than 400 foreign patents, with a number of U.S. and foreign patent applications pending.
The chart below highlights our material patents and product groups as of June 30, 2015, the major jurisdictions, and relevant expiration periods. Additional patents have been filed to extend the patent life on some of these products, but there can be no assurance that these will be issued as filed.
We have obtained licenses from various parties for rights to use, develop and commercialize proprietary technologies and compounds. Currently, we have the following licenses:
Medical Research Council (MRC) We entered into a license agreement with MRC in May 1994, whereby we have obtained a license for certain patent rights with respect to the genetic engineering on monoclonal antibodies. Our agreement does not require any milestone payments, nor have we made any payments to MRC to date. Our agreement with MRC, which expires at the expiration of the last of the licensed patents in 2020, provides for future royalty payments to be made based on a percentage of product sales.
Center for Molecular Medicine and Immunology (CMMI) We entered into a license agreement with CMMI in December 2004, whereby we have licensed certain rights with respect to patents and patent applications owned by CMMI. Dr. Goldenberg, our Chairman of our Board of Directors, Chief Scientific Officer, and Chief Patent Officer, is the founder, President and member of the Board of Trustees of CMMI. No license or milestone payments are required under this agreement. Under the license agreement, which expires at the expiration of the last of the licensed patents in 2023, CMMI will receive future royalty payments in the low single digits based on a percentage of sales of products that are derived from the CMMI patents. Under the license agreement, we are able to decide which patent related expenses we will support. For the fiscal years ended June 30, 2015, 2014 and 2013, we have made payments for CMMI legal expenses regarding patent-related matters of $33 thousand, $26 thousand and $60 thousand, respectively; however any inventions made independently of us by CMMI are the property of CMMI. Please see the section entitled Other Collaborations for a description of the current status of the relationship.
The mark IMMUNOMEDICS is registered in the U.S. and 19 foreign countries and a European Community Trademark has been granted. Our logo is also registered in the U.S. and in two foreign countries. The mark IMMUSTRIP is registered in the U.S. and Canada. The mark LEUKOSCAN is registered in the U.S. and nine foreign countries, and a European Community Trademark has been granted. In addition, we have applied for registration in the U.S. for several other trademarks for use on products now in development or testing, and for corresponding foreign and/or European Community Trademarks for certain of those marks. The
marks EPRATUCYN, VELTUCYN, CLIVATUCYN and MILATUCYN have been registered in the U.S. International Trademark Registrations and Canadian applications which claim priority to the respective U.S. applications have been filed for EPRATUCYN and VELTUCYN. The International Registrations request registration in China, Japan and the European Union. The marks DOCK-AND-LOCK, DNL, and PANCRIT have been registered in the U.S.
Our Trade Secrets
We also rely upon unpatented trade secrets, and there is no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that such rights can be meaningfully protected. We require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisers to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individuals relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreement provides that all inventions conceived by such employees shall be our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.
Third Party Rights
Our success also depends in part on our ability to gain access to third party patent and proprietary rights and to operate our business without infringing on third party patent rights. We may be required to obtain licenses to patents or other proprietary rights from third parties to develop, manufacture and commercialize our product candidates. Licenses required under third-party patents or proprietary rights may not be available on terms acceptable to us, if at all. If we do not obtain the required licenses, we could encounter delays in product development while we attempt to redesign products or methods or we could be unable to develop, manufacture or sell products requiring these licenses at all.
In January 2013, we entered into a collaboration agreement with Algeta ASA, (subsequently acquired by The Bayer Group Bayer), for the development of epratuzumab conjugated with Algetas proprietary thorium-227 alpha-pharmaceutical payload. Under the terms of this agreement, we have manufactured and supplied clinical-grade epratuzumab to Bayer, which has rights to evaluate the potential of a conjugated thorium-227 epratuzumab for the treatment of cancer. Bayer will fund all nonclinical and clinical development costs up to the end of Phase 1 clinical testing. Upon successful completion of Phase 1 clinical testing, the parties shall negotiate terms for a license agreement at Bayers request. We have agreed with Bayer to certain parameters to be included in the license agreement.
We have exclusively licensed our product candidate, epratuzumab, to UCB for the treatment of all autoimmune disease indications worldwide. Under the terms of the Development, Collaboration and License Agreement with UCB, (the UCB Agreement), UCB is solely responsible for the development, manufacturing and commercialization of epratuzumab for the treatment of all autoimmune disease indications and for the clinical trials in SLE. Initially, we were responsible for supplying epratuzumab for the completion of clinical trials relating to SLE, the Sjögrens Phase 2 Clinical Trial and the SLE Open Label Study as defined in the UCB Agreement. In August 2009, UCB relieved us of our remaining obligation to supply UCB with any further supplies.
In December 2011, we entered into an Amendment Agreement with UCB (the UCB Amendment Agreement), providing UCB the right to sublicense epratuzumab to a third party for North America and certain other territories, subject to our consent of the sublicensee and sublicensing agreement. Under the terms of the
UCB Amendment Agreement, we received a cash payment of $30 million and issued to UCB a 5-year warrant to purchase one million (1,000,000) shares of our common stock at an exercise price of $8.00 per share. Further, UCB has returned to us its buy-in option in the field of oncology. Collectively, pursuant to the UCB Agreement and the UCB Amendment Agreement, we are entitled to receive (i) up to $130.0 million in cash payments and $20.0 million in equity investments in regulatory milestone payments and (ii) up to $260.0 million related to the achievement of specified product sales milestones. We are also entitled to product royalties ranging from mid-teen to mid-twenty percentage of aggregate annual net sales under the UCB Agreement during the product royalty term. No development milestone, commercialization milestone or royalty payments were achieved through the date of this Annual Report on Form 10-K. On July 28, 2015, UCB announced that the two Phase 3 EMBODY clinical trials for epratuzumab in SLE did not meet the primary clinical efficacy endpoints in either dose in both studies. Treatment response in patients who received epratuzumab in addition to standard therapy was not statistically significant when compared to those who received placebo in addition to standard therapy. UCB is in the process of analyzing the full set of data from both studies. A high level review of the safety data did not identify any new safety concerns. Our agreement with UCB is still in effect. At this time, it is unclear if any milestones will be achieved.
In previous years we conducted research on a number of our programs in collaboration with CMMI and its clinical unit, the Garden State Cancer Center. CMMI performed contracted pilot and pre-clinical trials in scientific areas of importance to us and also conducted basic research and pre-clinical evaluations in a number of areas of potential interest to us. Dr. David M. Goldenberg, our Chairman of the Board, Chief Scientific Officer, and Chief Patent Officer, is the President and a Member of the Board of Trustees of CMMI. CMMI is currently in the process of dissolving.
We also collaborate with numerous other academic and research centers. Our academic collaborators have included such institutions as the Erasme University Hospital, Brussels, Belgium; University of Nijmegen, The Netherlands; Institut National de la Sante et de la Recherche Medicale, Nantes, France; University Medical Center Göttingen, Germany; Karolinska Institutet, Stockholm, Sweden; New York Presbyterian Hospital Weill Cornell Medical College; University of Ohio Cancer Center; M.D. Anderson Cancer Center; and Roswell Park Cancer Institute. We believe such academic research collaboration may identify new and improved products and techniques for diagnosing and treating various cancers, autoimmune and infectious diseases.
Our research and development activities, including testing in laboratory animals and in humans, our manufacture of antibodies, as well as the design, manufacturing, safety, efficacy, handling, labeling, storage, record-keeping, advertising, promotion and marketing of the product candidates that we are developing and our marketed products, are all subject to stringent regulation, primarily by the FDA in the U.S. under the Federal Food, Drug, and Cosmetic Act, or FFDCA, and its implementing regulations, and the Public Health Service Act, or PHSA, and its implementing regulations, and by comparable authorities under similar laws and regulations in other countries. If for any reason we do not comply with applicable requirements, such noncompliance can result in various adverse consequences, including one or more delays in approval of, or even the refusal to approve, product licenses or other applications, the suspension or termination of clinical investigations, the revocation of approvals previously granted, as well as fines, criminal prosecution, recall or seizure of products, injunctions against shipping products and total or partial suspension of production and/or refusal to allow us to enter into governmental supply contracts.
In the United States, our product candidates are regulated as biologic pharmaceuticals, or biologics. The process required by the FDA before biologic product candidates may be marketed in the United States generally involves the following:
Preclinical tests assess the potential safety and efficacy of a product candidate in animal models. Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with current Good Clinical Practices, or cGCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. Additionally, approval must also be obtained from each clinical trial sites IRB before the trials may be initiated, and the IRB must monitor the study until completed. There are also requirements governing the reporting of ongoing clinical trials and clinical trial results to public registries.
The clinical investigation of a pharmaceutical, including a biologic, is generally divided into three phases. Although the phases are usually conducted sequentially, they may overlap or be combined.
The FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by IRBs, which must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede or prevent marketing authorization.
The results of the preclinical and clinical testing, along with information regarding the manufacturing of the product and proposed product labeling, are evaluated and, if determined appropriate, submitted to the FDA through a BLA. The application includes all relevant data available from pertinent preclinical and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the products chemistry, manufacturing, controls and proposed labeling, among other things. Once the BLA submission has been accepted for filing, the FDAs standard goal is to review applications within ten months of the filing date or, if the application relates to an unmet medical need in a serious or life-threatening indication, six months from the filing date. The review process is often significantly extended by FDA requests for additional information or clarification. FDA offers certain programs, such as Fast Track designation, designed to expedite the development and review of applications for products intended for the treatment of a serious or life-threatening disease or condition. If Fast Track designation is obtained, the FDA may initiate review of sections of a BLA before the application is complete, and the product may be eligible for accelerate approval. However, receipt of Fast Track designation for a product candidate does not ensure that a product will be developed or approved on an expedited basis, and such designation may be rescinded if the product candidate is found to no longer meet the qualifying criteria.
The FDA reviews the BLA to determine, among other things, whether the proposed product is safe, pure and potent, which includes determining whether it is effective for its intended use, and whether the product is being manufactured in accordance with cGMP, to assure and preserve the products identity, strength, quality, potency and purity. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it typically follows such recommendations.
After the FDA evaluates the BLA and conducts inspections of manufacturing facilities, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the biologic with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Even if such additional information is submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. The FDA could approve the BLA with a Risk Evaluation and Mitigation Strategy, or REMS, plan to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling, development of adequate controls and specifications, or a commitment to conduct one or more post-market studies or clinical trials. Such post-market testing may include Phase 4 clinical trials and surveillance to further assess and monitor the products safety and effectiveness after commercialization.
The Biologics Price Competition and Innovation Act of 2009, or BPCIA, created an abbreviated pathway for the approval of biosimilar and interchangeable biologic products. The abbreviated pathway establishes legal authority for FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as interchangeable based on its similarity to an existing brand product. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product was approved under a BLA. In March 2015, the FDA approved Novartiss Zarxio as a biosimilar product to Amgens Neupogen. The approval, the first biosimilar product approved for distribution in the United States, could usher in lower prices for biologic products from increased competition.
Any products manufactured or distributed by us or on our behalf pursuant to FDA approvals are subject to continuing regulation by the FDA and certain state agencies, including requirements for record-keeping, reporting of adverse experiences with the biologic, submitting biological product deviation reports to notify the
FDA of unanticipated changes in distributed products, establishment registration, compliance with cGMP standards (including investigation and correction of any deviations from cGMP), and certain state chain of distribution pedigree requirements. Additionally, any significant change in the approved product or in how it is manufactured, including changes in formulation or the site of manufacture, generally require prior FDA approval. The packaging and labeling of all products developed by us are also subject to FDA approval and ongoing regulation. Noncompliance with any regulatory requirements can result in, among other things, issuance of warning letters, civil and criminal penalties, seizures, and injunctive action. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
Orphan Drug Act
To date, we have successfully obtained Orphan Drug designation by the FDA under the Orphan Drug Act of 1983 for epratuzumab for NHL, yttrium-90-labeled clivatuzumab tetraxetan for pancreatic cancer, sacituzumab govitecan for SCLC and pancreatic cancer, labetuzumab for ovarian, pancreatic and SCLCs, milatuzumab for multiple myeloma and CLL, and veltuzumab for ITP and pemphigus. Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally defined as a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting a BLA. In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-fee waivers. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first BLA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period in the United States for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications to market the same drug for the same orphan indication, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or where the manufacturer of the approved product cannot assure sufficient quantities. As a result, there can be no assurance that our competitors will not receive approval of drugs or biologics that have a different active ingredient for treatment of the diseases for which our products and product candidates are targeted.
In addition to regulations in the United States, we are subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our product candidates being developed, and products being marketed outside of the United States. We must obtain approval by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of our products in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required by the FDA for BLA licensure. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. As in the United States, we are subject to post-approval regulatory requirements, such as those regarding product manufacturing, marketing, or distribution.
Other Regulatory Considerations
We are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, The Clean Air Act, New Jersey Department of Environmental Protection and other current and potential future federal, state, or local regulations. Our research and development activities involve the controlled use of hazardous materials, chemicals, biological materials and various radioactive compounds. We believe that our procedures comply with the standards prescribed by state and federal regulations; however, the risk of injury or accidental contamination cannot be completely eliminated.
We may also be subject to healthcare regulation and enforcement by the federal government and the states and foreign governments where we may market our products and product candidates, if approved. These laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy, and security and physician sunshine laws and regulations.
The federal Anti-Kickback Statute prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. The Anti-Kickback Statute is subject to evolving interpretations. In the past, the government has enforced the Anti-Kickback Statute to reach large settlements with healthcare companies, based on sham consulting and other financial arrangements with physicians. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim, including items or services resulting from a violation of the federal Anti-Kickback Statute, constitutes a false or fraudulent claim for purposes of the federal False Claims Act. The majority of states also have anti-kickback laws, which establish similar prohibitions and, in some cases, may apply to items or services reimbursed by any third-party payor, including commercial insurers.
Additionally, the civil False Claims Act prohibits knowingly presenting or causing the presentation of a false, fictitious or fraudulent claim for payment to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the False Claims Act, and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical and biotechnology companies throughout the U.S., for example, in connection with the promotion of products for unapproved uses and other sales and marketing practices. The government has obtained multi-million and multi-billion dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating compliance of healthcare providers and manufacturers with applicable fraud and abuse laws.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created new federal criminal statutes that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
There has also been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The ACA, among other things, imposes new reporting requirements on drug manufacturers for payments made by them to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for knowing failures), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Drug manufacturers were required to begin collecting data on August 1, 2013 and submit reports to the government by March 31, 2014 and June 30, 2014, and the 90th day of each subsequent calendar year. Certain states also mandate implementation of compliance programs, impose restrictions on drug manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians.
We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and their respective implementing regulations, including the final omnibus rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAAs privacy and security standards directly applicable to business associates, defined as independent contractors or agents of
covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts.
We are subject to the U.S. Foreign Corrupt Practices Act, which prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. Under this act, it is illegal to pay, offer to pay, or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Our present and future business has been and will continue to be subject to various other laws and regulations.
The levels of revenues and profitability of biopharmaceutical companies may be affected by the continuing efforts of government and third party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing reimbursement or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the U. S., there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability.
Third Party Coverage and Reimbursement
In addition, in the U.S. and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability of reimbursement to the consumer from third party payers such as government and private insurance plans. Third party payers are increasingly challenging the prices charged for medical products and services. We cannot assure you that any of our products will be considered cost effective and that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive and profitable basis.
Competition in the biopharmaceutical industry is intense and based significantly on scientific and technological factors such as the availability of patent and other protection for technology and products, the ability to commercialize technological developments and the ability to obtain governmental approval for testing, manufacturing and marketing. We compete with specialized biopharmaceutical firms in the U.S., Europe and elsewhere, as well as a growing number of large pharmaceutical companies. A number of companies, including Biogen Idec, Roche, GlaxoSmithKline, Seattle Genetics, ImmunoGen Merck Serono, Genmab, Celgene, Amgen, Bristol-Myers Squibb, Bayer Healthcare Pharmaceuticals, Pfizer, AstraZeneca and Eli Lilly, are engaged in the development of therapeutic autoimmune and oncology products. Many of these companies have significantly greater financial, technical and marketing resources than we do. Many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, governmental agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific, technical and professional personnel and consultants. Our ability to compete successfully with other companies in the biopharmaceutical field will also depend to a considerable degree on the continuing availability of capital to us.
Marketing, Sales and Distribution
At present, we have only limited marketing and sales capabilities as we focus our efforts on developing our therapeutic product candidates. We will continue to manufacture and market LeukoScan® with our sales force and provide technical support directly to customers. We also have agreements with third parties to market LeukoScan® that provide customer support and distribution of the products.
Our European operations are headquartered in Darmstadt, Germany. We have a distribution agreement with Logosys Logistik GmbH, whereby Logosys packages and distributes LeukoScan® in the EU.
We operate a bioreactor facility at our Morris Plains, New Jersey, location. This facility is used for the production of all of our therapeutic product candidates for clinical trials, and potentially for commercial quantities as well.
We manufacture LeukoScan® for commercial sale at our facility in Morris Plains, New Jersey. The Committee on Proprietary Medicinal Products of the European Commission approved the manufacturing facility and product manufacturing processes for LeukoScan® in May 1998. We also perform antibody processing and purification of all our therapeutic product candidates at this facility. We scaled-up our antibody purification and fragmentation manufacturing processes for our diagnostic imaging agent to permit us to produce commercial levels of product. We have an agreement with BAG GmbH, Lich, Germany for the final formulation, fill and lyophilization of Leukoscan®.
Manufacturing Regulatory Considerations
In addition to regulating and auditing human clinical trials, FDA regulates and inspects equipment, facilities and processes used in the manufacturing of such products prior to providing approval to market a product. If after receiving clearance from FDA, a material change is made in manufacturing equipment, location, or process, additional regulatory review may be required. We must also adhere to current Good Manufacturing Practice and product-specific regulations enforced by FDA through its facilities inspection program. FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval. If, as a result of these inspections, FDA determines that our equipment, facilities or processes do not comply with applicable FDA regulations and conditions of product approval, FDA may seek civil, criminal or administrative sanctions and/or remedies against us, including the suspension of our manufacturing operations.
LeukoScan® is derived from the fluids produced in mice. Regulatory authorities, particularly in Europe, have expressed concerns about the use of these fluids for the production of monoclonal antibodies. These regulatory authorities may determine that our quality control procedures for these products are inadequate. In the event we have to discontinue the use of mouse fluids, we may not have the resources at the time to acquire the necessary manufacturing equipment and expertise that we will need to make the changes in our development programs.
As of August 15, 2015, we employed 123 persons on a full-time basis, of whom 19 were in research and development departments, 19 of whom were engaged in clinical research and regulatory affairs, 62 of whom were engaged in operations and manufacturing and quality control, and 23 of whom were engaged in finance, administration, sales and marketing. Of these employees, 54 hold M.D., Ph.D. or other advanced degrees. We believe that while we have been successful to date in attracting skilled and experienced scientific personnel, competition for such personnel continues to be intense and there can be no assurance that we will continue to be able to attract and retain the professionals we will need to grow our business. Our employees are not covered by a collective bargaining agreement and we believe that our relationship with our employees is excellent.
We were incorporated in Delaware in 1982. Our principal offices are located at 300 The American Road, Morris Plains, New Jersey 07950. Our telephone number is (973) 605-8200. In addition to our majority-owned subsidiary, IBC, we also have two foreign subsidiaries, Immunomedics B.V. in The Netherlands and Immunomedics GmbH in Darmstadt, Germany, to assist us in managing sales and marketing efforts and coordinating clinical trials in Europe. Our web address is www.immunomedics.com. We have not incorporated by reference into this Annual Report on Form 10-K the information on our website and you should not consider it to be a part of this document.
Our reports that have been filed with the Securities and Exchange Commission (SEC), are available on our website free of charge, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Copies of this Annual Report on Form 10-K may also be obtained without charge electronically or by paper by contacting Investor Relations, Immunomedics, Inc., 300 The American Road, Morris Plains, New Jersey 07950 or by calling (973) 605-8200.
In addition, we make available on our website (i) the charters for the committees of the Board of Directors, including the Audit Committee, Compensation Committee and Governance and Nominating Committee, and (ii) the Companys Code of Business Conduct (the Code of Conduct) governing its directors, officers and employees. Within the time period required by the SEC, we will post on our website any modifications to the Code of Conduct, as required by the Sarbanes-Oxley Act of 2002, (Sarbanes-Oxley Act).
The public may also read and copy the materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC.
Factors That May Affect Our Business and Results of Operations
Our business is subject to certain risks and uncertainties, each of which could materially and adversely affect our business, financial condition, cash flows and results of operations.
Risks Relating to Our Business, Operations and Product Development
We have a long history of operating losses and it is likely that our operating expenses will continue to exceed our revenues for the foreseeable future.
We have incurred significant operating losses since our formation in 1982. As of June 30, 2015, we had an accumulated deficit of approximately $309.5 million. We continue to spend our cash resources to fund our research and development programs and, subject to adequate funding, we expect these expenses to increase for the foreseeable future. Our only significant sources of revenue in recent years have been derived from our existing licensing agreement with UCB and the collaboration agreement with Bayer (Algeta). The timing of when we are able to record licensing fee revenue from such agreements has varied historically and may result in quarterly or annual profits or losses that are not necessarily reflective of our business operations or related cash flows. There can be no assurance that we will be profitable in future quarters or other periods. Additionally, the only product sales we have earned to date have come from the limited sales of our diagnostic imaging product for which our patent protection has recently expired (which may leave us vulnerable to increased competition, for example, from generic manufacturers). In addition, we have made the strategic decision to de-emphasize sales of
our diagnostic product and focus on our therapeutic pipeline. We have never had product sales of any therapeutic product. Although we may have net income from time to time based on the timing and amount of proceeds received under collaborative agreements, we expect to experience significant operating losses as we invest further in our research and development activities while simultaneously attempting to develop and commercialize our other therapeutic product candidates. If we are unable to develop commercially viable therapeutic products or to license them to third parties, it is likely that we will never achieve significant revenues or become profitable, either of which would jeopardize our ability to continue as a going concern.
We have significant future capital needs and may be unable to raise capital when needed, which could force us to delay or reduce our clinical development efforts.
We believe we have adequate cash at our current expected spending level to fund our clinical development programs through the next twelve months. However, we will require additional financial resources after we utilize our current liquid assets in order to continue our clinical development programs as is currently forecasted beyond fiscal year 2016. We are actively pursuing various financing alternatives as market conditions permit through licensing and collaborative agreements or additional potential equity or debt financings, if necessary. We continue to evaluate various programs to raise additional capital and to seek additional revenues from the licensing of our proprietary technologies. At the present time, we are unable to determine whether any of these future activities will be successful and, if so, the terms and timing of any definitive agreements.
Our most advanced therapeutic product candidates are still only in the clinical development stage, and will require us to raise capital in the future in order to fund further expensive and time-consuming studies before they can even be submitted for final regulatory approval. A failure of a clinical trial could severely harm our business and results of operations.
Clinical trials involve the administration of a product candidate to patients who are already extremely ill, making patient enrollment often difficult and expensive. Moreover, even in ideal circumstances where the patients can be enrolled and then followed for the several months or more required to complete the study, the trials can be suspended, terminated, delayed or otherwise fail for any number of reasons, including:
On July 28, 2015, UCB announced that the two Phase 3 EMBODY clinical trials for epratuzumab in systemic lupus erythematosus did not meet the primary clinical efficacy endpoints in either dose in both studies. This announcement or substantial delay in successfully completing clinical trials for our other product candidates, sacituzumab govitecan and yttrium-90-labeled clivatuzumab tetraxetan, could severely harm our business and results of operations.
Moreover, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, the Company may be required to report some of these relationships to FDA. FDA may conclude that a financial relationship between the company and a principal investigator has created a conflict of interest or otherwise affected interpretation of the study. FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by FDA and may ultimately lead to the denial of regulatory approval of one or more of our product candidates.
Our clinical trials may not adequately show that our drugs are safe or effective, or a failure to achieve the planned endpoints could result in termination of product development.
Progression of our drug products through the clinical development process is dependent upon our trials indicating our drugs have adequate safety and efficacy in the patients being treated by achieving pre-determined safety and efficacy endpoints according to the trial protocols. Failure to achieve either of these endpoints could result in delays in our trials, require the performance of additional unplanned trials or termination of any further development of the product for the intended indication. For example, with epratuzumab in SLE, the results did not meet the primary clinical efficacy endpoints in either dose in both studies. Treatment response in patients who received epratuzumab in addition to standard therapy was not statistically significant when compared to those who received placebo in addition to standard therapy.
These factors could result in delays in the development of our product candidates and could result in significant unexpected costs or the termination of programs.
Should the clinical development process be successfully completed, our ability to derive revenues from the sale of therapeutics will depend upon our first obtaining FDA as well as foreign regulatory approvals, all of which are subject to a number of unique risks and uncertainties.
Even if we are able to demonstrate the safety and efficacy of our product candidates in clinical trials, if we fail to gain timely approval to commercialize our product candidates from FDA and other foreign regulatory authorities, we will be unable to generate the revenues we will need to build our business. These approvals may not be granted on a timely basis, if at all, and even if and when they are granted, they may not cover all the indications for which we seek approval. For example, while we may develop a product candidate with the intention of addressing a large, unmet medical need, FDA may only approve the use of the drug for indications affecting a relatively small number of patients, thus greatly reducing the market size and our potential revenues. The approvals may also contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use, which could further narrow the size of the market. In certain countries, even if the health regulatory authorities approve a drug, it cannot be marketed until pricing for the drug is also approved. Finally, even after approval can be obtained, we may be required to recall or withdraw a product as a result of newly discovered safety or efficacy concerns, either of which would have a materially adverse effect on our business and results of operations.
In order to fund future operations, we will need to raise significant amounts of additional capital. Because it can be difficult for a small-cap company like ours to raise equity capital on acceptable terms, we cannot assure you that we will be able to obtain the necessary capital when we need it, or on acceptable terms, if at all.
Even if our technologies and product candidates are superior, if we lack the capital needed to bring our future products to market, we will never be successful. We have obtained the capital necessary to fund our research and development programs to date primarily from the following sources:
Our budgeted cash requirements in fiscal year 2016 are expected to be in the range of $52.0 to $54.0 million, including interest costs of $4.8 million for the outstanding Convertible Senior Notes issued in February 2015. Based on our cash flow projections, we believe we have sufficient funds to continue our operations and research and development programs for at least the next twelve months. Future financial demands include ongoing operating expenses, Phase 3 and Phase 2 clinical trials, and further development of various clinical trial programs in fiscal 2017 and beyond. We will continue to require additional funding in order to fund our operations and programs. As of June 30, 2015, we have approximately $100.0 million of cash, cash equivalents and marketable securities.
We continue to pursue business development and licensing arrangements as a potential source of financing. These activities include potential payments from partners, such as The Bayer Group (Bayer), as well as any new parties who may be interested in clinical programs as well as any licenses to our intellectual property estate. State and Federal Grants, along with potential debt and equity financing may also be other sources of financing.
Over the long term, we expect research and development activities to continue to expand and we do not believe we will have adequate cash to continue to complete development of product candidates in line with our pipeline included in our long term corporate strategy. Our capital requirements are dependent on numerous factors, including:
There may be additional cash requirements for many reasons, including, but not limited to, changes in our research and development plans, the need for unexpected capital expenditures or costs associated with any acquisitions of other businesses, assets or technologies that we may choose to undertake. If we deplete our existing capital resources, we will be required to either obtain additional capital quickly, or else significantly reduce our operating expenses and capital expenditures, either of which could have a material adverse effect on us.
Until we can generate significant cash from our operations, we expect to continue to fund our operations with our available financial resources. These financial resources may not be adequate to sustain our operations and we will be required to finance future cash needs through strategic collaboration agreements, the sale of additional equity or debt securities. However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. The capital markets have experienced volatility in recent years, which has resulted in uncertainties with respect to availability of capital and hence the timing to meet an entitys liquidity needs. Having insufficient funds may require us to delay, scale-back or eliminate some or all of our programs or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern. Additionally, if we raise funds by issuing equity securities, dilution to existing stockholders would result; and if we raise funds by incurring additional debt financing, the terms of the debt may involve future cash payment obligations and/or conversion to equity as well as restrictions that may limit our ability to operate our business.
If we, or our collaboration partners, cannot successfully and efficiently manufacture the compounds that make up our products and product candidates, our ability, and the ability of our collaboration partners, to sell products and conduct clinical trials will be impaired.
Our ability to conduct our pre-clinical and clinical research and development programs depends, in large part, upon our ability to manufacture our proprietary compounds in accordance with FDA and other regulatory requirements. We have limited historical experience in manufacturing these compounds in significant quantities, and we may not be able to do so in the quantities required to commercialize these products. Any interruption in manufacturing at this site, whether by natural acts or otherwise, could significantly and adversely affect our operations, and delay our research and development programs.
We and our collaboration partners also depend on third parties to provide certain raw materials, manufacturing and processing services. All manufacturers of pharmaceutical products must comply with current Good Manufacturing Practice regulations (cGMPs), required by FDA and other regulatory agencies. Such regulations address, among other matters, controls in manufacturing processes, quality control and quality assurance requirements and the maintenance of proper records and documentation. FDA and other regulatory agencies routinely inspect manufacturing facilities. FDA generally will issue a notice on Form 483 if it finds issues with respect to its inspections. If our manufacturing facility or those facilities of our partners and our respective contract manufacturers or processors do not comply with applicable cGMPs and other regulatory requirements, we may be subject to product liability claims, we may be unable to meet clinical demand for our products, and we could suffer delays in the progress of clinical trials for products under development.
We are dependent upon UCB for the final development and commercialization of epratuzumab for the treatment of all autoimmune disease indications worldwide, and they may not be successful.
We have licensed the exclusive worldwide rights for the treatment of all autoimmune disease indications to one of our most advanced therapeutic compounds, epratuzumab to UCB. As a result, UCB is solely responsible, and we are depending upon them, for completing the clinical development of this compound, obtaining all necessary regulatory approvals, and then commercializing and manufacturing the compounds for sale. On July 28, 2015, UCB announced that the two Phase 3 EMBODY clinical trials for epratuzumab in SLE did not meet the primary clinical efficacy endpoints in either dose in both studies. As a result, their ability to commercialize this product candidate in the future, as well as our ability to commercialize other product candidates we have in development which are closely related to them, could be severely jeopardized. In such event, it is likely we could never receive any additional milestone payments or royalties that we are eligible to receive under our agreement with UCB, and our ability to fund the development and testing of our other product candidates could be adversely affected.
We may not successfully establish and maintain collaborative and licensing arrangements, which could adversely affect our ability to develop and commercialize our product candidates. Our future collaboration partners may not adequately perform their responsibilities under our agreement, which could adversely affect our development and commercialization program.
A key element of our business strategy is to develop, market and commercialize our product candidates through collaborations with more established pharmaceutical companies. We may not be able to maintain or expand these licenses and collaborations or establish additional licensing and collaboration arrangements necessary to develop and commercialize our product candidates. Even if we are able to maintain or establish licensing or collaboration arrangements, these arrangements may not be on favorable terms and may contain provisions that will restrict our ability to develop, test and market our product candidates. Any failure to maintain or establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize our product candidates.
We expect to rely at least in part on third party collaborators to perform a number of activities relating to the development and commercialization of our product candidates, including the manufacturing of product materials, the design and conduct of clinical trials for our product candidates, and potentially the obtaining of regulatory approvals and marketing and distribution of any successfully developed products. Our collaborative partners may also have or acquire rights to control aspects of our product development and clinical programs. As a result, we may not be able to conduct these programs in the manner or on the time schedule we currently contemplate. In addition, if any of these collaborative partners withdraw support for our programs or product candidates or otherwise impair their development, our business could be negatively affected. To the extent we undertake any of these activities internally, our expenses may increase.
In addition, our success depends on the performance of our collaborators of their responsibilities under these arrangements. Some potential collaborators may not perform their obligations in a timely fashion or in a manner satisfactory to us. Because such agreements may be exclusive, we may not be able to enter into a collaboration agreement with any other company covering the same product field during the applicable collaborative period. In addition, our collaborators competitors may not wish to do business with us at all due to our relationship with our collaborators. If we are unable to enter into additional product discovery and development collaborations, our ability to sustain or expand our business will be significantly diminished.
Our future success will depend upon our ability to first obtain and then adequately protect our patent and other intellectual property rights, as well as avoiding the infringement of the rights of others.
Our future success will be highly dependent upon our ability to first obtain and then defend the patent and other intellectual property rights necessary for the commercialization of our product candidates. We have filed numerous patent applications on the technologies and processes that we use in the U.S. and certain foreign countries. Although we have obtained a number of issued U.S. patents to date, the patent applications owned or licensed by us may not result in additional patents being issued. Moreover, these patents may not afford us the protection we need against competitors with similar technologies or products. A number of jurisdictions where we have sought, or may in future choose to seek, intellectual property protection, have intellectual property laws and patent offices which are still developing. Accordingly, we may have difficulty obtaining intellectual property protection in these markets, and any intellectual property protections which we do obtain may be less protective than in the U.S., which could have an adverse effect on our operations and financial prospects.
The successful development of therapeutic products frequently requires the application of multiple technologies that may be subject to the patent or other intellectual property rights of third parties. Although we believe it is likely we will need to license technologies and processes from third parties in the ordinary course of our business, we are not currently aware of any material conflict involving our technologies and processes with any valid patents or other intellectual property rights owned or licensed by others. In the event that a third party was to claim such a conflict existed, they could sue us for damages as well as seek to prevent us from commercializing our product candidates. It is possible that a third party could successfully claim that our
products infringe on their intellectual property rights. Uncertainties resulting from the litigation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Any patent litigation or other proceeding, even if resolved in our favor, would require significant financial resources and management time.
Some of our competitors may be able to sustain these costs more effectively than we can because of their substantially greater financial and managerial resources. If a patent litigation or other proceeding is resolved unfavorably to us, we may be enjoined from manufacturing or selling our products without a license from the other party, in addition to being held liable for significant damages. We may not be able to obtain any such license on commercially acceptable terms, if at all.
In addition to our reliance on patents, we attempt to protect our proprietary technologies and processes by relying on trade secret laws, nondisclosure and confidentiality agreements and licensing arrangements with our employees and other persons who have access to our proprietary information. These agreements and arrangements may not provide meaningful protection for our proprietary technologies and processes in the event of unauthorized use or disclosure of such information. In addition, our competitors may independently develop substantially equivalent technologies and processes or otherwise gain access to our trade secrets or technology, either of which could materially and adversely affect our competitive position.
Expiry of our intellectual property rights could lead to increased competition
Even where we are able to obtain and then defend patent and other intellectual property rights necessary for research, development and commercialization of our product candidates, such intellectual property rights will be for a limited term. Where patents which we own or license expire, the technology the subject of the patent may be utilized by third parties in research and development or competing products (for example, generic versions of a patented product may be manufactured by third parties once the patent expires). While we endeavor to maintain robust intellectual property protection, as our existing issued patents expire it may materially and adversely affect our competitive position.
We face substantial competition in the biotechnology industry and may not be able to compete successfully against one or more of our competitors.
The biotechnology industry is highly competitive, particularly in the area of diagnostic and therapeutic oncology and autoimmune disease products. In recent years, there have been extensive technological innovations achieved in short periods of time, and it is possible that future technological changes and discoveries by others could result in our products and product candidates quickly becoming uncompetitive or obsolete. A number of companies, including Biogen Idec, Roche, GlaxoSmithKline, Seattle Genetics, ImmunoGen, Merck Serono, Genmab, Celgene, Amgen, Bristol-Myers Squibb, Bayer Healthcare Pharmaceuticals, Pfizer, AstraZeneca and Eli Lilly, are engaged in the development of therapeutic autoimmune and oncology products. Many of these companies have significantly greater financial, technical and marketing resources than we do. In addition, many of these companies have more established positions in the pharmaceutical industry and are therefore better equipped to develop, commercialize and market oncology and autoimmune disease products. Even some smaller competitors may obtain a significant competitive advantage over us if they are able to discover or otherwise acquire patentable inventions, form collaborative arrangements or merge with larger pharmaceutical companies. Further, even if we are able to successfully develop and commercialize products, other manufacturers operating in emerging markets may also have a competitive advantage over us with respect to competing products due to their ability to manufacture with a lower cost base.
We expect to face increasing competition from universities and other non-profit research organizations. These institutions carry out a significant amount of research and development in the field of antibody-based technologies and they are increasingly aware of the commercial value of their findings. As a result, they are demanding greater patent and other proprietary rights, as well as licensing and future royalty revenues. It is
possible that such competition could come from universities with which we have, or have previously had, collaborative research and development relationships, notwithstanding our efforts to protect our intellectual property in the course of such relationships.
We may be liable for contamination or other harm caused by hazardous materials that we use in the operations of our business.
In addition to laws and regulations enforced by FDA, we are also subject to regulation under various other foreign, federal, state and local laws and regulations. Our manufacturing and research and development programs involve the controlled use of viruses, hazardous materials, chemicals and various radioactive compounds. The risk of accidental contamination or injury from these materials can never be completely eliminated, and if an accident occurs we could be held liable for any damages that result, which could exceed our available resources.
The nature of our business exposes us to significant liability claims, and our insurance coverage may not be adequate to cover any future claims.
The use of our compounds in clinical trials and any future sale exposes us to liability claims that could be substantial. These claims might be made directly by healthcare providers, medical personnel, patients, consumers, pharmaceutical companies, and others selling or distributing our compounds. While we currently have product liability insurance that we consider adequate for our current needs, we may not be able to continue to obtain comparable insurance in the future at an acceptable cost, if at all. If for any reason we cannot maintain our existing or comparable liability insurance, our ability to clinically test and market products could be significantly impaired. Moreover, the amount and scope of our insurance coverage, as well as the indemnification arrangements with third parties upon which we rely, may be inadequate to protect us in the event of a successful product liability claim. Any successful claim in excess of our insurance coverage could materially and adversely affect our financial condition and operating results.
The loss of any of our key employees could adversely affect our operations.
We are heavily dependent upon the talents of Dr. David M. Goldenberg, our Chairman of the Board, Chief Scientific Officer, and Chief Patent Officer, and Ms. Cynthia L. Sullivan, our President and Chief Executive Officer, as well as certain other key personnel. If Dr. Goldenberg, Ms. Sullivan or any of our other key personnel were to unexpectedly leave our Company, our business and results of operations could be materially and adversely affected. In addition, as our business grows we will need to continue to attract additional management and scientific personnel. Competition for qualified personnel in the biotechnology and pharmaceutical industries is intense and we may not be successful in our recruitment efforts. If we are unable to attract, motivate and retain qualified professionals, our operations could be materially and adversely affected.
Certain potential for conflicts of interest, both real and perceived, exist which could result in expensive and time-consuming litigation.
Certain members of our senior management and Board of Directors have relationships and agreements, both with us as well as among themselves and their respective affiliates, which create the potential for both real, as well as perceived, conflicts of interest. These include Dr. David M. Goldenberg, our Chairman, Chief Scientific Officer, and Chief Patent Officer, Ms. Cynthia L. Sullivan, our President and Chief Executive Officer (who is also the wife of Dr. Goldenberg), and certain companies with which we do business, including the Center for Molecular Medicine and Immunology and the Garden State Cancer Center (which operates as the clinical arm of CMMI to facilitate the translation of CMMIs research efforts in the treatment of patients), collectively defined as CMMI. For example, Dr. Goldenberg is the President and a Trustee of CMMI, a not-for-profit cancer research center that we used to conduct certain research activities. CMMI is currently in the process of dissolving. Dr. Goldenberg is also a minority stockholder, director and officer of our majority-owned subsidiary, IBC Pharmaceuticals, Inc. Dr. Goldenberg is the primary inventor of new intellectual property for Immunomedics and
IBC and is largely responsible for allocating ownership between the two companies. Dr. Goldenberg also has primary responsibility for monitoring the market for incidences of potential infringement of the Companys intellectual property by third parties.
As a result of these and other relationships, the potential for both real and perceived conflicts of interest exists and disputes could arise over the allocation of funds, research projects and ownership of intellectual property rights. In addition, in the event that we become involved in stockholder litigation regarding these potential conflicts, we might be required to devote significant resources and management time defending the company from these claims, which could adversely affect our results of operations.
Given that autoimmune and cancer therapeutics such as the ones we are developing can cost upwards of $30,000 per treatment (or more), even if our product candidates become available for sale it is likely that federal and state governments, insurance companies and other payers of health care costs will try to first limit the use of these drugs to certain patients, and may be reluctant to provide a level of reimbursement that permits us to earn a significant profit on our investment, if any.
Our ability to successfully commercialize therapeutic products will depend, in significant part, on the extent to which hospitals and physicians can obtain appropriate reimbursement levels for the cost of our products and related treatment. Third-party payers are increasingly challenging the prices charged for diagnostic and therapeutic products and related services. In addition, legislative proposals to reform health care or reduce government insurance programs may result in lower prices or the actual inability of prospective customers to purchase our products. Furthermore, even if reimbursement is available, it may not be available at price levels sufficient for us to realize a positive return on our investment.
A portion of our funding has come from federal government grants and research contracts. Due to reductions in funding, we may not be able to rely on these grants or contracts as a continuing source of funds.
During the last few years, we have generated revenues from awards made to us by the National Institutes of Health and the Department of Defense to partially fund some of our programs. We cannot rely on grants or additional contracts as a continuing source of funds. Funds available under these grants and contracts must be applied by us toward the research and development programs specified by the government rather than for all our programs generally. The governments obligation to make payments under these grants and contracts is subject to appropriation by the U.S. Congress for funding in each year. It is possible that Congress or the government agencies that administer these government research programs will continue to scale back these programs or terminate them due to their own budgetary constraints, as they have recently been doing. Additionally, these grants and research contracts are subject to adjustment based upon the results of periodic audits performed on behalf of the granting authority. Consequently, the government may not award grants or research contracts to us in the future, and any amounts that we derive from existing awards may be less than those received to date. In those circumstances, we would need to provide funding on our own, obtain other funding, or scale back or terminate the affected program. In particular, we cannot assure you that any currently-contemplated or future efforts to obtain funding for our product candidate programs through government grants or contracts will be successful, or that any such arrangements which we do conclude will supply us with sufficient funds to complete our development programs without providing additional funding on our own or obtaining other funding. Where funding is obtained from government agencies or research bodies, our intellectual property rights in the research or technology funded by the grant are typically subject to certain licenses to such agencies or bodies, which could have an impact on our utilization of such intellectual property in future.
We face a number of risks relating to the maintenance of our information systems and our use of information relating to clinical trials.
In managing our operations, we rely on computer systems and electronic communications, including systems relating to record keeping, financial information, sourcing, and back-up and the internet (Information Systems). Our Information Systems include the electronic storage of financial, operational, research, patient and
other data. Our Information Systems may be subject to interruption or damage from a variety of causes, including power outages, computer and communications failures, system capacity constraints, catastrophic events (such as fires, tornadoes and other natural disasters), cyber risks, computer viruses and security breaches. If our Information Systems cease to function properly, are damaged or are subject to unauthorized access, we may suffer interruptions in our operations, be required to make significant investments to fix or replace systems and/or be subject to fines, penalties, lawsuits, or government action. The realization of any of these risks could have a material adverse effect on our business, financial condition and results of operations. Our clinical trials information and patient data (which may include personally identifiable information) is part of our Information Systems and is therefore subject to all of the risks set forth above, notwithstanding our efforts to code and protect such information.
Risks Related to Government Regulation of our Industry
Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.
In both the U.S. and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to sell our future products and profitability. On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, PPACA), which includes a number of health care reform provisions and requires most U.S. citizens to have health insurance. The new law, among other things, imposes a significant annual fee on companies that manufacture or import branded prescription drug products, addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations, and establishes a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturers outpatient drugs to be covered under Medicare Part D. Substantial new provisions affecting compliance also have been added, which may require modification of business practices with health care practitioners.
The reforms imposed by the law will significantly impact the pharmaceutical industry; however, the full effects of PPACA cannot be known until these provisions are implemented and the Centers for Medicare & Medicaid Services and other federal and state agencies issue applicable regulations or guidance. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our future products, and we could be adversely affected by current and future health care reforms.
Our industry and we are subject to intense regulation from the U.S. Government and such other governments and quasi-official regulatory bodies where our products are and product candidates may be sold.
Both before and after regulatory approval to market a particular product candidate, including our biologic product candidates, the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and record keeping related to the product are subject to extensive, ongoing regulatory requirements, including, without limitation, submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practice, or cGMP, requirements and good clinical practice requirements for any clinical trials that we conduct post-approval. As a result, we are subject to a number of governmental and other regulatory risks, which include:
In addition, our operations are also subject to various federal and state fraud and abuse, physician payment transparency and privacy and security laws, including, without limitation:
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including certain sales and marketing practices and financial arrangements with physicians, could be subject to challenge under one or more of such laws. Any action against us, even if we successfully defend against it, could result in the commencement of civil and/or criminal proceedings, exclusion from governmental health care programs, substantial fines, penalties, and/or administrative remedies, any of which could have an adverse effect on our financial condition and results of operations.
Risks Related to Our Securities
Conversion of the 4.75% Convertible Senior Notes will dilute the ownership interest of existing stockholders and could adversely affect the market price of our common stock.
The conversion of some or all of the 4.75% Convertible Senior Notes (Notes) will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion and exercise could adversely affect prevailing market prices of our common stock. In addition, the existence of the 4.75% Convertible Senior Notes may encourage short selling by market participants.
Our indebtedness and debt service obligations may adversely affect our cash flow.
As of June 30, 2015, our total consolidated indebtedness was $110.3 million, including our obligations under our 4.75% Convertible Senior Notes. We intend to fulfill our current debt service obligations, including repayment of the principal from our existing cash and investments, as well as the proceeds from potential licensing agreements and any additional financing from equity or debt transactions. However, our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow to meet these obligations, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive, or delaying or curtailing research and development programs. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Our common stock may be delisted from the NASDAQ Global Market, or NASDAQ.
If the bid price of our common stock falls below $1.00 for an extended period, or we are unable to continue to meet NASDAQs listing maintenance standards for any other reason, our common stock could be delisted from NASDAQ.
If our stock is delisted from NASDAQ, we will make every possible effort to have it listed on the Over the Counter Bulletin Board (the OTC Bulletin Board). If our common stock was to be traded on the OTC Bulletin Board, the Securities Exchange Act of 1934, as amended, and related SEC rules would impose additional sales practice requirements on broker-dealers that sell our securities. These rules may adversely affect the ability of stockholders to sell our common stock and otherwise negatively affect the liquidity, trading market and price of our common stock.
If our common stock would not be able to be traded on the OTC Bulletin Board, we would make every effort to have it available for trading on the National Quotation Bureaus Pink Sheets, or the Pink Sheets. The Pink Sheets market consists of security firms who act as market makers in the stocks, usually, of very small companies. The bid and asked prices are not quoted electronically, but are quoted daily in hard copy which is delivered to firms that subscribe. Stocks that trade in the Pink Sheets are usually not as liquid as those that trade in electronic markets and, often time, the difference between the bid and the asked prices are substantial. As a result, if our common stock were traded on the Pink Sheets, there would likely be a further negative affect on the liquidity, trading market and price of our common stock even compared to what we might suffer if we were traded on the OTC Bulletin Board.
As a result of the above, we cannot assure you that our common stock will be listed on a national securities exchange, a national quotation service, the OTC Bulletin Board or the Pink Sheets; or if it is to be listed, whether or not there would be an interruption in the trading of our common stock. We believe that the listing of our stock on a recognized national trading market, such as NASDAQ, is an important part of our business and strategy. Such a listing helps our stockholders by providing a readily available trading market with current quotations. Without that, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock would likely decline. The absence of such a listing may adversely affect the acceptance of our common stock as currency or the value accorded it by other parties. In that regard, listing on a recognized national trading market will also affect our ability to benefit from the use of its operations and expansion plans, including for use in licensing agreements, joint ventures, the development of strategic relationships and acquisitions, which are critical to our business and strategy and none of which is currently the subject of any agreement, arrangement or understanding, with respect to any future financing or strategic relationship it may undertake. The delisting from NASDAQ would result in negative publicity and would negatively impact our ability to raise capital in the future.
If we were delisted from NASDAQ, we may become subject to the trading complications experienced by Penny Stocks in the over-the-counter market.
Delisting from NASDAQ may depress the price of our common stock such that we may become a penny stock. The SEC generally defines a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. We continue to be listed on NASDAQ. Penny Stock rules require, among other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document; (ii) disclosure of market quotations, if any; (iii) disclosure of the compensation of the broker and its salespersons in the transaction; and (iv) monthly account statements showing the market values of our securities held in the customers accounts.
A broker would be required to provide the bid and offer quotations and compensation information before effecting the transaction. This information must be contained on the customers confirmation. Generally, brokers are less willing to effect transactions in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for stockholders to purchase or sell our common stock. Because the broker, not us, prepares this information, we would not be able to assure that such information is accurate, complete or current.
We may add lease lines to finance capital expenditures and may obtain additional long-term debt and lines of credit. If we issue other debt securities in the future, our debt service obligations will increase further.
Our indebtedness could have significant additional negative consequences, including, but not limited to:
We may not have the ability to raise funds necessary to purchase the Convertible Senior Notes upon a fundamental change and our future debt may contain limitations on our ability to repurchase the 4.75% Convertible Senior Notes.
Following a fundamental change as described in the indenture, holders of Notes will have the right to require the Company to purchase their Notes for cash. A fundamental change may also constitute an event of default or require prepayment under, and result in the acceleration of the maturity of, our other than existing indebtedness. We cannot assure you that we will have sufficient financial resources, or will be able to arrange financing, to pay the fundamental change purchase price in cash with respect to any Notes surrendered by holders for purchase upon a fundamental change. In addition, restrictions in the agreements governing our then-outstanding indebtedness, if any, may not allow us to purchase the Notes upon a fundamental change. Our failure to purchase the Notes upon a fundamental change when required would result in an event of default with respect to the Notes which could, in turn, constitute a default under the terms of our other indebtedness, if any. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Notes, which could have a material and adverse impact on our financial condition and results of operations.
Shares eligible for future sale may adversely affect our ability to sell equity securities.
Sales of our common stock (including the issuance of shares upon conversion of convertible debt) in the public market could materially and adversely affect the market price of shares. We have outstanding $100 million principal amount of 4.75% Convertible Senior Notes that convert to common stock at prices equivalent to $5.11 (subject to adjustment for certain dilutive events). Our obligation to convert the 4.75% Notes upon demand by the holders may depress the price of our common stock and also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate.
As of June 30, 2015 we had 94,511,853 shares of common stock outstanding, plus (1) $100 million of principal amount of 4.75% Notes convertible into up to approximately 19,583,360 shares of common stock at the conversion rate of $5.11 subject to adjustment as described in the indenture, (2) 4,525,340 options to purchase shares of common stock with a weighted-average exercise price of $3.48 per share, (3) 706,881 restricted stock units to purchase shares of common stock as they are vested, (4) 12,119,108 options to purchase shares of common stock under the Plan and (5) warrants to purchase 1,000,000 shares of common stock with an exercise price of $8.00. Effective July 1, 2015 with the Amended and Restated Employment Agreement with Dr. Goldenberg, an additional 1,500,000 of restricted stock units were issued to Dr. Goldenberg. All of the remaining 21,053,458 shares of common stock are freely tradable without restriction.
Our outstanding Convertible Senior Notes, options and warrants may adversely affect our ability to consummate future equity-based financings due to the dilution potential to future investors.
Due to the number of shares of common stock we are obligated to issue pursuant to outstanding Convertible Senior Notes, options and warrants, potential investors may not purchase our future equity offerings at market price because of the potential dilution such investors may suffer as a result of the exercise of the outstanding Convertible Senior Notes, options and warrants.
Our outstanding 4.75% Convertible Senior Notes may adversely affect our ability to consummate future equity-based financings due to the restrictive covenants contained in the Indenture pursuant to which the 4.75% Notes were issued.
Holders of our 4.75% Notes have certain rights that may inhibit our ability to raise additional capital. Those rights include (a) full-ratchet anti-dilution protection in the event we sell securities at a price lower than the applicable conversion or exercise price of the 4.75% Notes and (b) the right to pro rata participation in any future financing.
The market price of our common stock has fluctuated widely in the past, and is likely to continue to fluctuate widely based on a number of factors, many of which are beyond our control.
The market price of our common stock has been, and is likely to continue to be, highly volatile. Furthermore, the stock market and the market for stocks of relatively small biopharmaceutical companies like ours have from time to time experienced, and likely will again experience, significant price and volume fluctuations that are unrelated to actual operating performance.
From time to time, stock market analysts publish research reports or otherwise comment upon our business and future prospects. Due to a number of factors, we may fail to meet the expectations of securities analysts or investors and our stock price would likely decline as a result. These factors include:
In addition, Internet chat rooms have provided forums where investors make predictions about our business and prospects, oftentimes without any real basis in fact, that readers may trade on.
In the past, following periods of volatility in the market prices of the securities of companies in our industry, securities class action litigation has often been instituted against those companies. Please see Item 3 (Legal Proceedings) for a description of such litigation. If we face such litigation in the future, it would result in substantial costs and a diversion of managements attention and resources, which could negatively impact our business.
Our principal stockholder can significantly influence all matters requiring the approval by our stockholders.
As of June 30, 2015, Dr. David M. Goldenberg, our Chairman of the Board, Chief Scientific Officer and Chief Patent Officer, together with certain members of his family, including Ms. Cynthia L. Sullivan, our President and Chief Executive Officer, who is Dr. Goldenbergs wife, and other affiliates, controlled the right to vote approximately 8% of our outstanding common stock and 7% of our fully diluted common stock. As a result of this voting power, Dr. Goldenberg has the ability to significantly influence the outcome of substantially all matters that may be put to a vote of our stockholders, including the election of our directors.
There are limitations on the liability of our directors, and we may have to indemnify our officers and directors in certain instances.
Our certificate of incorporation limits, to the maximum extent permitted under Delaware law, the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors. Our bylaws provide that we will indemnify our officers and directors and may indemnify our employees and other agents to the fullest extent permitted by law. These provisions may be in some respects broader than the specific indemnification provisions under Delaware law. The indemnification provisions may require us, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors and officers insurance. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify a director, officer, employee or agent made or threatened to be made a party to an action by reason of the fact that he or she was a director, officer, employee or agent of the corporation or was serving at the request of the corporation, against expenses actually and reasonably incurred in connection with such action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Delaware law does not permit a corporation to eliminate a directors duty of care and the provisions of our certificate of incorporation have no effect on the availability of equitable remedies, such as injunction or rescission, for a directors breach of the duty of care.
We believe that our limitation of officer and director liability assists us to attract and retain qualified employees and directors. However, in the event an officer, a director or the board of directors commits an act that may legally be indemnified under Delaware law, we will be responsible to pay for such officer(s) or director(s) legal defense and potentially any damages resulting there from. Furthermore, the limitation on director liability
may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders from instituting litigation against directors for breach of their fiduciary duties, even though such an action, if successful, might benefit our stockholders and us. Given the difficult environment and potential for incurring liabilities currently facing directors of publicly-held corporations, we believe that director indemnification is in our and our stockholders best interests because it enhances our ability to attract and retain highly qualified directors and reduce a possible deterrent to entrepreneurial decision-making.
Nevertheless, limitations of director liability may be viewed as limiting the rights of stockholders, and the broad scope of the indemnification provisions contained in our certificate of incorporation and bylaws could result in increased expenses. Our board of directors believes, however, that these provisions will provide a better balancing of the legal obligations of, and protections for, directors and will contribute positively to the quality and stability of our corporate governance. Our board of directors has concluded that the benefit to stockholders of improved corporate governance outweighs any possible adverse effects on stockholders of reducing the exposure of directors to liability and broadened indemnification rights.
We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act requires that we maintain effective internal controls over financial reporting and disclosure controls and procedures. Among other things, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act (Section 404). Compliance with Section 404 requires substantial accounting expense and significant management efforts. Our testing, or the subsequent review by our independent registered public accounting firm, may reveal deficiencies in our internal controls that would require us to remediate in a timely manner so as to be able to comply with the requirements of Section 404 each year. If we are not able to comply with the requirements of Section 404 in a timely manner each year, we could be subject to sanctions or investigations by the SEC, the NASDAQ GMS or other regulatory authorities that would require additional financial and management resources and could adversely affect the market price of our common stock.
We do not intend to pay dividends on our common stock. Until such time as we pay cash dividends our stockholders, must rely on increases in our stock price for appreciation.
We have never declared or paid dividends on our common stock. We intend to retain future earnings to develop and commercialize our product candidates and therefore we do not intend to pay cash dividends in the foreseeable future. Until such time as we determine to pay cash dividends on our common stock, our stockholders must rely on increases in the market price of our common stock for appreciation.
Our headquarters is located at 300 The American Road, Morris Plains, New Jersey 07950, where we lease approximately 85,000 square feet of commercial office space, pursuant to a lease which is scheduled to expire in October 2031. The current base annual rate is $0.8 million, which is a fixed rate through October 2016 and increases thereafter every five years. Our manufacturing, regulatory, medical, research and development laboratories, and our finance, marketing and executive offices are currently located in this facility. We operate a 7,500 square-foot manufacturing facility within our Morris Plains headquarters, which consists of four independent antibody manufacturing suites, several support areas, and a quality control laboratory. See Item 1 Business, Manufacturing. In addition, our European subsidiary, Immunomedics GmbH, leases executive office space in Darmstadt, Germany.
During the fiscal year ended June 30, 2014, two separate shareholder derivative complaints were filed against the Company. First, on March 24, 2014, a complaint styled Kops v. Goldenberg, et al., was filed in the Superior Court of New Jersey, Chancery Division, General Equity Part, Morris County. Second, on April 18, 2014, a complaint styled Breitman v. Sullivan, et al., was filed in the United States District Court for the District of New Jersey. The complaints alleged, among other things, that the Company and certain directors and officers breached their fiduciary duties for disseminating false and misleading information relating to the termination of the Nycomed Agreement. In particular, the complaints alleged that defendants failed to make timely disclosure concerning a dispute concerning a delay in the development of veltuzumab. On October 9, 2013, the Company announced that the Nycomed Agreement was terminated. The complaints alleged that the breaches in fiduciary duties by the directors and officers caused damages to the Company and stockholders, including a decline in value of the Companys common stock, increased investigatory and litigation costs, and exposure to civil liability as a result of a pending securities fraud class action suit. Plaintiffs brought the derivative actions to recover damages against the directors and officers for the benefit of the Company, and to require the Company to reform and improve its corporate governance and internal procedures. On February 13, 2015, the Kops matter was dismissed without prejudice pursuant to a stipulation entered into by the parties. The Breitman matter is presently stayed pending the outcome of a motion to dismiss in a related putative class action lawsuit, described below. The defendants believe that the allegations in the derivative complaints are without merit and intend to defend the lawsuits vigorously; however, there can be no assurance regarding the ultimate outcome of these lawsuits.
A putative class action lawsuit, styled Nasyrova v. Immunomedics, Inc., was filed on February 27, 2014, in the United States District Court for the District of New Jersey. The lawsuit alleged that the Company and certain of its current and former officers and directors failed to disclose and/or made material misstatements in the Companys public filings relating to the termination of the Nycomed Agreement. In particular, the complaint alleged that defendants failed to make timely disclosure concerning a dispute concerning a delay in the development of veltuzumab. On October 9, 2013, the Company announced that the Nycomed Agreement was terminated. The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On June 24, 2014 the District Court entered an order appointing John Neff as lead plaintiff and The Rosen Law Firm, P.A. as lead counsel. Lead plaintiff and lead counsel thereafter filed an Amended Class Action Complaint on August 8, 2014. The defendants believed that the allegations in the class action complaint were without merit and intended to defend the lawsuit vigorously. Defendants moved to dismiss the complaint on September 22, 2014. On January 29, 2015 the United States District Court for the District of New Jersey granted the Companys motion to dismiss the complaint in its entirety. The Courts opinion concluded that Immunomedics had no duty to disclose issues raised with Takeda-Nycomed prior to the termination of the Nycomed Agreement. The Court granted Plaintiffs thirty days from the date of the opinion in order to file an amended complaint. On February 27, 2015 a second amended complaint was filed by the plaintiff alleging failure to disclose information related to the status of the agreement. The Company filed a motion to dismiss the second amended complaint on April 13, 2015. On July 15, 2015, the Court granted the motion to dismiss the second amended complaint with prejudice, concluding that the Company had no duty to make the disclosure of information concerning the agreement at an earlier time and that there was no misstatement or omission sufficient to support the claim. The Court ordered this action closed.
On June 26, 2015, Immunomedics filed a complaint in the United State District Court for the District of New Jersey, against The Board of Directors of Roger Williams Medical Center (RWMC), Richard P. Junghans, M.D., Ph.D., Steven C. Katz, M.D., and the Office of the Board of Advisors of Tufts University School of Medicine. The complaint alleges that RWMC and Dr. Junghans breached a Material Transfer Agreement (MTA) through which it provided to them a monoclonal antibody known as MN-14 and related materials. Those parties are alleged to have breached the MTA and to have been negligent by, among other
things, using the materials beyond the agreed Research Project, sharing confidential information, failing to notify Immunomedics of intended publications prior to publishing, and refusing to return the materials upon request. Immunomedics also asserts against all defendants claims of intentional interference with perspective economic gain and contracts, misappropriation, conversion, bailment, and several copyright violations.
Immunomedics is also a party to various claims and litigation arising in the normal course of business, which includes some or all of certain of its patents. While it is not possible to determine the outcome of these matters, the Company believes that the resolution of all such matters will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to its consolidated results of operations in any one accounting period.
Market Price and Dividend Information
Our common stock is quoted on the NASDAQ Global Market under the symbol IMMU. The following table sets forth, for the last two fiscal years, the high and low sales prices for our common stock, as reported by the NASDAQ Global Market:
As of August 18, 2015, the closing sales price of our common stock on the NASDAQ Global Market was $1.91. As of August 18, 2015, there were approximately 406 stockholders of record of our common stock and, according to our estimates, approximately 15,168 beneficial owners of our common stock. We have not paid dividends on our common stock since inception and do not plan to pay cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to our compensation plans under which equity compensation is authorized as of June 30, 2015.
STOCK PERFORMANCE GRAPH
This graph is not soliciting material, and is not deemed filed with the SEC and not to be incorporated by reference in any filing by our Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. The total return values data is prepared by the NASDAQ OMX Global Index Group. Total Return Indexes are posted on NASDAQ Online on a monthly basis.
The following graph compares the yearly change in cumulative total stockholder return on the Companys common stock for the prior five fiscal years with the total cumulative return of the NASDAQ Composite Index and the NASDAQ Pharmaceutical Index. The returns are indexed to a value of $100 at June 30, 2010.
The following table sets forth our consolidated financial data as of and for each of the five fiscal years ended June 30, 2015. The selected consolidated financial data as of and for each of the five fiscal years ended June 30, 2015, has been derived from our audited consolidated financial statements. The audited consolidated financial statements as of June 30, 2015 and 2014 and for the years ended June 30, 2015, 2014 and 2013 are included elsewhere in this Annual Report on Form 10-K. The information below should be read in conjunction with the consolidated financial statements (and notes thereon) and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
The SEC encourages companies to disclose forward-looking information so that investors can better understand a companys future prospects and make informed investment decisions. This Annual Report on Form 10-K contains such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this Annual Report, and they may also be made a part of this Annual Report on Form 10-K by reference to other documents filed with the SEC, which is known as incorporation by reference.
Words such as may, anticipate, estimate, expects, projects, intends, plans, believes and words and terms of similar substance used in connection with any discussion of future operating or financial performance, are intended to identify forward-looking statements. All forward-looking statements are managements present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, among other things: our inability to further identify, develop and achieve commercial success for new products and technologies; the possibility of delays in the research and development necessary to select drug development candidates and delays in clinical trials; the risk that clinical trials may not result in marketable products; the risk that we may be unable to obtain additional capital through strategic collaborations, licensing, issuance of convertible debt securities or equity financing in order to continue our research and development programs as well as secure regulatory approval of and market our drug candidates; our dependence upon pharmaceutical and biotechnology collaborations; the levels and timing of payments under our collaborative agreements; uncertainties about our ability to obtain new corporate collaborations and acquire new technologies on satisfactory terms, if at all; the development of competing products; our ability to protect our proprietary technologies; patent-infringement claims; and risks of new, changing and competitive technologies and regulations in the United States and internationally. Please also see the discussion of risks and uncertainties under Item 1A. Risk Factors Factors That May Affect Our Business and Results of Operations in this Annual Report on Form 10-K.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report on Form 10-K or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or the date of the document incorporated by reference in this Annual Report on Form 10-K, as applicable. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by applicable law. All subsequent forward-looking statements attributable to the Company or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
We are a biopharmaceutical company primarily focused on the development of monoclonal, antibody-based products for the targeted treatment of cancer, autoimmune and other serious diseases. We have developed a number of advanced proprietary technologies that allow us to create humanized antibodies that can be used either alone in unlabeled, or naked, form, or conjugated with radioactive isotopes, chemotherapeutics, cytokines or toxins, in each case to create highly targeted agents. Using these technologies, we have built a broad pipeline of therapeutic product candidates that utilize several different mechanisms of action. In oncology, we have launched a Phase 3 pivotal trial for clivatuzumab tetraxetan labeled with a radioisotope in pancreatic cancer patients. Other solid tumor therapeutics in Phase 2 clinical development includes 2 antibody-drug conjugates, sacituzumab govitecan (IMMU-132) and labetuzumab govitecan (IMMU-130). We also have a majority ownership in IBC Pharmaceuticals, Inc., which is developing a novel DOCK-AND-LOCK® (DNL®) method with us for making fusion proteins and multifunctional antibodies. DNL® is being used particularly to make bispecific antibodies targeting cancers and infectious diseases as a T-cell redirecting immunotherapy, as well as bispecific antibodies for next-generation cancer and autoimmune disease therapies.
We have also been one of the first companies to test antibody combinations as a possibly improved method of cancer therapy, and, as a result, have also embarked on the development of bispecific (bifunctional) monoclonal antibodies targeting two distinct antigens on the same cancer cells. We believe that our portfolio of intellectual property, which includes approximately 267 active patents in the U.S. and more than 400 other issued patents worldwide, protects our product candidates and technologies.
We have continued to transition our focus away from the development and commercialization of diagnostic imaging products in order to accelerate the development of our therapeutic product candidates, although we manufacture and commercialize our LeukoScan® product in territories where regulatory approvals have previously been granted. LeukoScan® is indicated for diagnostic imaging for determining the location and extent of infection/inflammation in bone in patients with suspected osteomyelitis, including patients with diabetic foot ulcers.
From inception in 1982 through June 30, 2015, we had an accumulated deficit of approximately $309.5 million. In the absence of increased revenues from the sale of current or future products and licensing activities (the amount, timing, nature or source of which cannot be predicted), our losses will continue as we conduct our research and development activities. These activities are budgeted to expand over time and will require further resources if we are to be successful. As a result, our operating losses are likely to be substantial over the next several years.
The development and commercialization of successful therapeutic products is subject to numerous risks and uncertainties including, without limitation, the following:
Critical Accounting Policies and Accounting Estimates
A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
For a description of our significant accounting policies, see Notes to Consolidated Financial Statements Note 2 Summary of Significant Accounting Policies. Of these policies, the following are considered critical to an understanding of the Companys Consolidated Financial Statements as they require the application of the most difficult, subjective and complex judgments; (i) Marketable securities, (ii) Revenue recognition, (iii) Research and development costs, and (iv) Reimbursement of research and development costs and (v) Stock-based compensation.
The Companys critical accounting estimates and assumptions impacting the consolidated financial statements relate to stock compensation expenses. See Note 2 Summary of Significant Accounting Policies for the basis of related assumptions.
Results of Operations
Fiscal Year 2015 compared to Fiscal Year 2014
Revenues for the fiscal year ended June 30, 2015 were $5.7 million as compared to $9.0 million for the fiscal year ended June 30, 2014, representing a decrease of $3.3 million or 37%. The decrease was primarily due to $4.6 million of license fee and other revenue during fiscal 2014 resulting from revenue earned upon fulfilling our obligations in the Bayer Collaboration Agreement, as amended, partially offset by the agreements $1.0 million clinical milestone payment in fiscal year 2015. Product sales of LeukoScan® in Europe for the years ended June 30, 2015 and 2014 were $2.6 million and $3.1 million, respectively, representing a decrease of $0.5 million, or 16%, due to unfavorable fluctuations in the currency rates in Europe and sales volume decline of LeukoScan® in Europe principally due to timing. Research and development revenues for the year ended June 30, 2015 were $1.8 million as compared to $1.3 million for the same period in 2014, representing an increase of $0.5 million, or 38%, due primarily to an increase in the number of grant programs and level of activity during the current year.
Costs and Expenses
Total costs and expenses for the fiscal year ended June 30, 2015 were $51.9 million as compared to $44.6 million in the fiscal year ended June 30, 2014, representing an increase of $7.3 million, or 16%. Research and development expenses for the fiscal year ended June 30, 2015 increased by $8.0 million, or 24%, to $41.7 million from $33.7 million in fiscal year ended June 30, 2014. The increase in research and development expenses resulted primarily from the continuing efforts of the clivatuzumab tetraxetan Phase 3 clinical trial for the treatment of patients with pancreatic cancer and increased clinical trial expenses and manufacturing costs for the antibody-drug conjugates clinical trials. This growth of research and development spending is expected to continue with the increased costs associated with the Phase 3 clinical trial as well as the expanding antibody-drug conjugates clinical trials.
Cost of goods sold was $0.3 million in both fiscal years ended June 30, 2015 and 2014. Gross profit margins were 90% and 89% for fiscal years 2015 and 2014, respectively. Cost of license fee and other revenues of $1.2 million resulted from the recognition of manufacturing costs related to the Bayer Collaboration Agreement which was completed during fiscal 2014.
Sales and marketing expenses decreased from $1.1 million for the 2014 fiscal year to $0.8 million for the 2015 fiscal year. The decrease of $0.3 million, or 27%, was primarily due to the European regulatory fees for the sale of LeukoScan® product in Europe in the prior year. There were no such charges for the current fiscal year. General and administrative expenses for fiscal year 2015 increased by $0.8 million, or 10%, from $8.3 million in fiscal year 2014 to $9.1 million in fiscal year 2015. This increase is primarily attributable to approximately $0.9 million of increased legal and professional fees, (principally increased legal fees regarding the arbitration proceedings with Takeda-Nycomed, a former licensing partner which agreement was terminated during the 2014 fiscal year).
Interest expense for the year ended June 30, 2015 was $2.1 million, which related to the issuance in February 2015 of $100.0 million of 4.75% Convertible Senior Notes, due in February 2020 and included amortization of debt issuance costs of $0.3 million. There was no interest expense for the year ended June 30, 2014.
Income Tax Expense
Income tax expense was $58 thousand and $8 thousand for the fiscal years ended June 30, 2015 and 2014, respectively. Income tax expense in 2015 was higher than in 2014 due to increased profitability in foreign operations in fiscal year 2015. There was no federal income tax expense for both periods for domestic operations due to losses in both fiscal years.
Net Loss Attributable to Immunomedics, Inc. Stockholders
Net loss attributable to Immunomedics, Inc., common stockholders for fiscal year 2015 is $48.0 million, or $0.51 per share, as compared to net loss of $35.4 million, or $0.42 per share in fiscal year 2014, representing an increase in net loss of $12.6 million. The increase in net loss attributable to Immunomedics, Inc. resulted primarily due to increased research and development costs related to clinical trials, increased legal and professional fees, interest expense and the decrease in other revenues received in the prior period that related to the Collaboration Agreement.
Fiscal Year 2014 compared to Fiscal Year 2013
Revenues for the fiscal year ended June 30, 2014 were $9.0 million as compared to $5.0 million for the fiscal year ended June 30, 2013, representing an increase of $4.0 million or 80%. The increase was primarily due to $4.6 million of license fee and other revenue during fiscal 2014 resulting from revenue earned upon fulfilling our obligations in the Bayer Collaboration Agreement, as amended. Product sales of LeukoScan® in Europe for the years ended June 30, 2014 and 2013 were $3.1 million and $3.0 million, respectively, representing an increase of $0.1 million, or 3%. Research and development revenues for the year ended June 30, 2014 were $1.3 million as compared to $1.8 million for the same period in 2013, representing a decrease of $0.5 million, or 28%, due to lower levels of grant program activity during the 2014 fiscal year.
Costs and Expenses
Total costs and expenses for the fiscal year ended June 30, 2014 were $44.6 million as compared to $35.8 million in the fiscal year ended June 30, 2013, representing an increase of $8.8 million, or 25%. Research and development expenses for the fiscal year ended June 30, 2014 increased by $5.3 million, or 19%, to $33.7 million from $28.4 million in fiscal year ended June 30, 2013. The increase in research and development expenses resulted primarily from increased manufacturing costs for material used for the antibody-drug conjugates clinical trial related expenses and the initiation of the clivatuzumab tetraxetan Phase 3 clinical trial, for the treatment of patients with pancreatic cancer.
Cost of goods sold was $0.3 million in the fiscal year ended June 30, 2014 and $0.4 in the fiscal year ended June 30, 2013. Gross profit margins were 89% and 87% for fiscal years 2014 and 2013, respectively. Cost of license fee and other revenues of $1.2 million resulted from the recognition of manufacturing costs related to the Algeta service agreement which was completed during fiscal 2014.
Sales and marketing expenses increased from $0.8 million for the 2013 fiscal year to $1.1 million for the 2014 fiscal year. This increase of 38% was primarily due to the increased European regulatory fees required for the sale of LeukoScan® product in Europe in the 2014 fiscal year. General and administrative expenses for fiscal year 2014 increased by $2.1 million, or 34%, from $6.2 million in fiscal year 2013 to $8.3 million in fiscal year 2014. This increase was primarily attributable to approximately $2.0 million of increased legal and professional fees, (principally increased legal fees regarding the arbitration proceedings with Takeda-Nycomed).
Arbitration Settlement, net
On April 15, 2009, we initiated an arbitration proceeding before FINRA against our former investment advisor/broker-dealer, Banc of America Investment Services, Inc., and Banc of America Securities, LLC, relating to our prior investment in certain securities. On March 27, 2013 we reached a settlement in such matter. Pursuant to the settlement, we received a gross settlement amount of $18.0 million, the proceeding was dismissed with prejudice, and together with the broker-dealer, the parties released each other from all claims and liabilities arising out of the arbitration. We received the net amount of approximately $16.7 million after payment of expenses and legal fees.
Insurance proceeds totaling $2.6 million were received during the year ended June 30, 2013, as a result of insurance claims for an equipment failure during the 2011 fiscal year. A cash payment for a business interruption insurance claim of $2.5 million was received in October 2012, which had resulted from the equipment failure that had limited the production of materials necessary for certain research and product development. There was no such claim for the 2014 fiscal year. In addition, proceeds of $0.1 million were also received in September 2012 for a property claim regarding the same equipment failure.
Income Tax Expense
Income tax expense was $8 thousand and $44 thousand for the fiscal years ended June 30, 2014 and 2013, respectively. Income tax expense in 2014 was lower than in 2013 due to reduced profitability in foreign operations in fiscal year 2014. There was no federal income tax expense for both periods for domestic operations due to losses in both fiscal years.
Net Loss Attributable to Immunomedics, Inc., Stockholders
Net loss attributable to Immunomedics, Inc. common stockholders for fiscal year 2014 was $35.4 million, or $0.42 per share, as compared to net loss of $11.4 million, or $0.15 per share in fiscal year 2013, representing an increase in net loss of $24.0 million. The increase in net loss attributable to Immunomedics, Inc. for the same period in 2013 resulted primarily from the $16.7 million arbitration settlement, $2.6 million in insurance proceeds received during the previous year which were not repeated in the current fiscal year, and $5.3 million of increased research and development spending in fiscal year 2014.
Research and Development Expenses
Research and development expenses for our product candidates in development were $41.7 million for fiscal year ended 2015, $33.7 million for fiscal year ended June 30, 2014 and $28.4 million for fiscal year ended June 30, 2013. Research and development expenses increased $8.0 million in fiscal year 2015, or 24%, as compared to 2014. Research and development expenses increased by $5.3 million in fiscal year 2014, or 19%, as compared to fiscal year 2013.
We do not track expenses on the basis of each individual compound under investigation or through clinical trials and therefore we do not provide a breakdown of such historical information in that format. We evaluate projects under development from an operational perspective, including such factors as results of individual compounds from laboratory/animal testing, patient results and enrollment statistics in clinical trials. It is important to note that multiple product candidates are often tested simultaneously. It is not possible to calculate each antibodys supply costs. There are many different development processes and test methods that examine multiple product candidates at the same time. We have, historically, tracked our costs in the categories discussed below, specifically research costs and product development costs and by the types of costs outlined below.
Our research costs consist of outside costs associated with animal studies and costs associated with research and testing of our product candidates prior to reaching the clinical stage. Such research costs primarily include personnel costs, facilities, including depreciation, lab supplies, funding of outside contracted research and license fees. Our product development costs consist of costs from preclinical development (including manufacturing), conducting and administering clinical trials and patent expenses.
The following table sets forth a breakdown of our research and development expenses by those associated with research and those associated with product development for the periods indicated.
Research costs decreased by $0.8 million, or 12%, for the year ended June 30, 2015 compared to June 30, 2014. Research costs increased by $0.8 million, or 13%, for the year ended June 30, 2014 compared to 2013. The changes in research costs primarily relate to the following:
The primary reason for the decrease in fiscal year 2015 was the reduction of outside research and testing services utilized, from $0.9 million in fiscal 2014 to $0.4 million in fiscal 2015, a decrease of $0.5 million, or 56%. The use of outside research and testing services in fiscal 2014 was $0.9 million representing an increase of $0.6 million, or 200%, from $0.3 million in fiscal 2013. This increase was primarily due to outside services required for certain federal grant research projects.
Indirect administrative and support services that are allocated to research based on research spending levels for fiscal 2015 were $0.7 million as compared to $1.1 million in 2014. This decrease was a result of greater emphasis on spending in the product development area as compared to the research area and therefore a lower level of indirect spending to be absorbed into the research category. Indirect administrative and support services that are allocated to research based on research spending levels for fiscal 2014 were $1.1 million as compared to $0.9 million in 2013, primarily as a result of increased employee-related costs.
Product Development Costs
Product development costs for the year ended June 30, 2015 in total increased by $8.9 million, or 33%, to $35.8 million as compared to 2014. Product development costs for the year ended June 30, 2014 in total increased by $4.5 million, or 20%, to $26.9 million as compared to 2013. The changes in product development costs primarily relate to the following:
Clinical trial expenses in fiscal year 2015 were $12.6 million as compared to $5.8 million in fiscal year 2014, and increase of $6.8 million was primarily due to continuing efforts of the clivatuzumab tetraxetan Phase 3 clinical trial for the treatment of patients with pancreatic cancer. Clinical trial expenses in fiscal year 2014 were $5.8 million as compared to $3.3 million in fiscal year 2013, an increase of $2.5 million largely driven by the initiation of the clivatuzumab tetraxetan Phase 3 clinical trial in fiscal 2014, as well as additional antibody-drug conjugates clinical trials during the 2014 fiscal year.
Personnel costs in fiscal 2015 were $7.6 million, an increase of $0.3 million, or 4%, as compared to 2014, primarily due to salary and benefit increases. Personnel costs in fiscal 2014 were $7.3 million, an increase of $0.5 million, or 7%, as compared to 2013, primarily due to salary and benefit increases.
Lab supplies and chemical reagent costs were $3.3 million for fiscal 2015, an increase of $0.7 million, or 27%, from 2014. This increase was primarily a result of increased manufacturing costs for material used for the antibody-drug conjugates clinical trial related expenses and the clivatuzumab tetraxetan Phase 3 clinical trial. Lab supplies and chemical reagent costs were $2.6 million in fiscal 2014, a decrease of $0.2 million, or 7%, from 2013.
Expenses for outside testing were $2.4 million in fiscal 2015, an increase of $0.6 million, or 33%, from fiscal 2014. This increase was the result of increased material testing for process validation and offsite lyophilization relating to product development for manufacturing of material used for the antibody-drug conjugates. Expenses for outside testing were $1.8 million in fiscal 2014, a decrease of $0.3 million or 14%, from fiscal 2013. The decrease was due to higher levels of material testing for process validation and offsite lyophilization relating to product development for manufacturing and grant program requirements during the 2013 fiscal year.
Indirect administrative and support services that are allocated to development based on spending levels increased by $0.2 million, or 5%, to $4.2 million in fiscal year 2015, due primarily to a greater emphasis on spending in the product development area as compared to the research area. For fiscal 2014 indirect administrative and support services increased by $0.6 million, or 18%, to $4.0 million in fiscal year 2014 over fiscal year 2013. The increases in both years was driven primarily by increased clinical trial related expenses for the clivatuzumab tetraxetan Phase III clinical trial for the treatment of patients with pancreatic cancer, and additional activities for antibody-drug conjugates clinical trials.
Completion of clinical trials may take several years or more. The length of time varies according to the type, complexity and the disease indication of the product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the following periods:
The duration and cost of clinical trials through each of the clinical phases may vary significantly over the life of a particular project as a result of, among other things, the following factors:
Liquidity and Capital Resources
As of June 30, 2015 we have $99.6 million of cash, cash equivalents and marketable securities. In February, 2015 we issued $100 million of 4.75% Convertible Senior Notes due 2020 (the Convertible Notes) in the aggregate. After deducting the initial purchasers fees and offering expenses, we received net proceeds of $96.3 million.
Since its inception in 1982, Immunomedics principal sources of funds have been the private and public sale of debt and equity securities and revenues from licensing agreements, which could provide up-front and milestone payments, as well as funding of development costs and other licensing possibilities.
Our budgeted cash requirements in fiscal year 2016 includes expenses related to the clivatuzumab tetraxetan Phase 3 clinical trial for the treatment of patients with pancreatic cancer, as well as for expenses for the ongoing Phase 2 expansion ADC clinical trials (sacituzumab govitecan and labetuzumab govitecan). The budgeted cash requirements in fiscal year 2016 are expected to be in the range of $52.0 to $54.0 million, including interest costs of $4.8 million for the outstanding Convertible Senior Notes as issued in February 2015. Based on our cash flow projections, we believe we have sufficient funds to continue our operations and research and development programs for at least the next twelve months.
Future financial demands include ongoing operating expenses, Phase 3 clinical trials, the Phase 2 clinical trials and further development of various clinical trial programs in fiscal 2016 and 2017. We will continue to require additional funding in order to fund our operations and programs.
We continue to pursue business development and licensing arrangements as a potential source of financing. These activities include any new parties who may be interested in our clinical programs as well as any licenses to our intellectual property estate, including our current partner, Bayer, State and Federal Grants, along with potential debt and equity financing may also be other sources of financing.
Until we can generate significant cash from our operations, we expect to continue to fund our operations with our currently available financial resources. These financial resources may not be adequate to sustain our operations, and we will be required to finance future cash needs through strategic licensing or collaboration agreements, the sale of additional equity and/or debt securities. However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. The capital markets have experienced volatility in recent years, which has resulted in uncertainty with respect to availability of capital and hence the timing to meet an entitys liquidity needs. Having insufficient funds may require us to delay, scale-back or eliminate some or all of our programs or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern. Additionally, if we raise funds by issuing equity securities, dilution to existing stockholders would result; and if we raise funds by incurring additional debt financing, the terms of the debt may involve future cash payment obligations and/or conversion to equity as well as restrictions that may limit our ability to operate our business.
Actual results could differ materially from our expectations as a result of a number of risks and uncertainties, including the risks described in Item 1A Risk Factors, Factors That May Affect Our Business and Results of Operations, and elsewhere in this Annual Report on Form 10-K. Our working capital and working capital requirements are affected by numerous factors and such factors may have a negative impact on our liquidity. Principal among these are the success of product commercialization and marketing products, the technological advantages and pricing of our products, the impact of the regulatory requirements applicable to us, and access to capital markets that can provide us with the resources, when necessary, to fund our strategic priorities.
Discussion of Cash Flows
Cash flows from operating activities. Net cash used in operating activities for the year ended June 30, 2015 was $39.0 million, compared to cash used in operations of $30.7 million for the year ended June 30, 2014 representing an increase of $8.3 million. The increase in the current fiscal years cash flow used in operations principally is due to higher net loss of $12.6 million offset by an increase in accounts payable.
Net cash used in operating activities for the year ended June 30, 2014 was $30.7 million, compared to cash used in operations of $5.9 million for the year ended June 30, 2013. The increase in the 2014 fiscal years cash flow used in operations was primarily due to the receipt of $16.7 million of proceeds from the arbitration settlement and $2.6 million in insurance proceeds received during the 2013 fiscal year.
Cash flows from investing activities. Net cash used in investing activities was $52.7 million in fiscal 2015, as compared to $35.1 million net cash used in investing activities for fiscal 2014. The increase in cash used in investing activities of $17.6 million for the 2015 fiscal year is primarily due to $42.2 million of increased purchases of marketable securities in the current year, partially offset by higher maturities or sales of approximately $25.5 million of these securities.
Net cash used in investing activities of $35.1 million in fiscal 2014, as compared to $0.5 million net cash used in investing activities for the 2013 fiscal year. The increase in cash used in investing activities for the 2014 fiscal year is primarily due to $44.1 million of purchases of marketable securities in the during fiscal 2014, partially offset by maturities or sales of approximately $9.0 million of these securities.
Cash flows from financing activities. Net cash provided by financing activities for the year ended June 30, 2015 was $98.7 million, resulting primarily from the $96.3 million of net cash proceeds received from the issuance in February 2015 of $100.0 million of 4.75% Convertible Senior Notes, partially offset by the payment of $3.7 million of debt issuance costs related to the Notes. Net cash provided by financing activities for the year ended June 30, 2014 was $31.3 million, resulting primarily from approximately $29.8 million of net cash proceeds received from the sale of 9,546,474 shares of common stock at $3.35 per share in the current fiscal year. Net cash provided by financing activities for the year ended June 30, 2013 was $14.8 million, resulting primarily from approximately $14.8 million of cash proceeds received from the sale of 7,000,000 shares of common stock at $2.30 per share in the 2013 fiscal year.
At June 30, 2015, we had working capital of $91.4 million, representing an increase of $53.1 million from the $38.3 million in working capital that we had at June 30, 2014. The increase was primarily the result from the proceeds received from the sale in February 2015 of $100.0 million of 4.75% Convertible Senior Notes, (partially offset by the payment of $3.7 million of debt issuance costs), offset in part by our operating loss incurred in the normal course of business less $4.9 million increase in accounts payable and accrued expenses. At June 30, 2014, we had working capital of $38.3 million, representing a decrease of $0.2 million from the $38.5 million in working capital that we had at June 30, 2013. The proceeds received from the sale of 9,546,474 shares of common stock during fiscal year 2014 were offset by the loss on operations for the year.
Total cash, cash equivalents and marketable securities as of June 30, 2015 was $99.6 million, an increase of $57.8 million as of June 30, 2014. The increase was primarily the result from the proceeds received from issuance in February 2015 of $100.0 million of 4.75% Convertible Senior Notes partially offset by the payment of $3.7 million of debt issuance costs during the current fiscal year.
Total cash, cash equivalents and marketable securities as of June 30, 2014 was $41.8 million, an increase of $0.5 million as of June 30, 2013. The net cash proceeds received from the sale of 9,546,474 shares of common stock during the 2014 fiscal year was used to fund the net cash used in operating activities.
Our major contractual obligations relate to an operating lease for our facility and employment contracts in effect for David M. Goldenberg, our Chairman of the Board, Chief Scientific Officer and Chief Patent Officer, and Cynthia L. Sullivan, the President and Chief Executive Officer. We have quantified the significant commitments in the following table for the fiscal years ended June 30:
Recently Issued Accounting Pronouncements
In April 2015, the FASB issued Accounting Standard Update (ASU) 2015-03, Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. Under the new ASU, debt issuance costs will be reported in the balance sheet as a direct deduction from the related debt liability rather than as a separate asset. Amortization of the costs is reported as interest expense. The amendments in this update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted for financial statements that have not been previously issued. The Company has adopted this standard in the current fiscal year and have presented the debt issuance costs related to the Convertible Notes as a direct deduction from the related face value in the accompanying consolidated balance sheet.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern: Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. This guidance clarifies that an entitys management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments in this update are effective for annual reporting periods ending after December 15, 2016, and annual and interim periods thereafter, and early application is permitted. The Company is assessing ASU 2014-15s impact and will adopt it when effective.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is assessing ASU 2014-09s impact and will adopt it when effective.
The following discussion about our exposure to market risk of financial instruments contains forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those described due to a number of factors, including uncertainties associated with general economic conditions and conditions impacting our industry.
We have not entered into and do not expect to enter into, financial instruments for trading or hedging purposes. We do not currently anticipate entering into interest rate swaps and/or similar instruments. One of our primary market risk exposure with regard to financial instruments is to changes in interest rates, which would impact interest income earned on such instruments. A one percent change (100 basis points) in interest rates on our investments would have impacted interest income by a nominal amount for the year ended June 30, 2015.
We also may be exposed to fluctuations in foreign currencies with regard to certain agreements with service providers relating to certain clinical trials that are in process. Depending on the strengthening or weakening of the U.S. dollar, realized and unrealized currency fluctuations could be significant.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of Immunomedics, Inc. and subsidiaries as of June 30, 2015 and 2014, and the related consolidated statements of comprehensive loss, changes in stockholders (deficit) equity and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Immunomedics, Inc. and subsidiaries as of June 30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Immunomedics Inc.s internal control over financial reporting as of June 30, 2015, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 19, 2015 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
August 19, 2015
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
We have audited the consolidated statement of comprehensive loss, changes in stockholders equity and cash flows of Immunomedics, Inc. and subsidiaries for the year ended June 30, 2013. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of Immunomedics, Inc.s operations and its cash flows for the year ended June 30, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Iselin, New Jersey
August 22, 2013,
except for the effects on the consolidated financial statements
described in Note 14 and the disclosure in Note 10 with respect to UCB
as filed in Immunomedics, Inc.s Form 10-K/A on March 18, 2014,
as to which the date is March 18, 2014
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
See accompanying notes to consolidated financial statements.
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS (DEFICIT) EQUITY
See accompanying notes to consolidated financial statements.
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Immunomedics, Inc., a Delaware corporation (Immunomedics or the Company) is a clinical-stage biopharmaceutical company developing monoclonal antibody-based products for the targeted treatment of cancer, autoimmune and other serious diseases. The Company has continued to transition its focus away from the development and commercialization of diagnostic imaging products in order to accelerate the development of its therapeutic product candidates, although the Company manufactures and commercializes its one product, LeukoScan®, in territories where regulatory approvals have previously been granted in Europe, Canada and in certain other markets outside the U.S. LeukoScan® is indicated for diagnostic imaging for determining the location and extent of infection/inflammation in bone in patients with suspected osteomyelitis, including patients with diabetic foot ulcers.
The Company has two foreign subsidiaries, Immunomedics B.V. in the Netherlands and Immunomedics GmbH in Darmstadt, Germany, to assist the Company in managing sales efforts and coordinating clinical trials in Europe. In addition, included in the accompanying financial statements is the majority-owned U.S. subsidiary, IBC Pharmaceuticals, Inc. (IBC), which has been working since 1999 on the development of novel cancer radiotherapeutics using patented pretargeting technologies with proprietary, bispecific antibodies.
Immunomedics is subject to significant risks and uncertainties, including, without limitation, the risk that the Company may be unable to further identify, develop and achieve commercial success for new products and technologies; the possibility of delays in the research and development necessary to select drug development candidates and delays in clinical trials; the risk that clinical trials may not result in marketable products; the risk that the Company may be unable to successfully finance and secure regulatory approval of and market its drug candidates; its dependence upon pharmaceutical and biotechnology collaborations; the levels and timing of payments under its collaborative agreements; uncertainties about the Companys ability to obtain new corporate collaborations and acquire new technologies on satisfactory terms, if at all; the development of competing products; its ability to protect its proprietary technologies; patent-infringement claims; and risks of new, changing and competitive technologies and regulations in the United States and internationally.
As of June 30, 2015 the Company has $99.6 million of cash, cash equivalents and marketable securities. In February, 2015 the Company issued $100 million of 4.75% Convertible Senior Notes due 2020 (the Convertible Notes) in the aggregate. After deducting the initial purchasers fees and offering expenses, the Company received net proceeds of $96.3 million, (see Note 4 to the consolidated financial statements).
Since its inception in 1982, Immunomedics principal sources of funds have been the private and public sale of debt and equity securities and revenues from licensing agreements, which could provide up-front and milestone payments, as well as funding of development costs and other licensing possibilities.
The Companys budgeted cash requirements in fiscal year 2016 includes expenses related to the clivatuzumab tetraxetan Phase 3 clinical trial for the treatment of patients with pancreatic cancer, as well as for expenses for the ongoing Phase 2 expansion ADC clinical trials (sacituzumab govitecan and labetuzumab govitecan). Based on the Companys cash flow projections, it believes it has sufficient funds to continue its operations and research and development programs for at least the next twelve months.
Future financial demands include ongoing operating expenses, Phase 3 and Phase 2 clinical trials, and further development of various clinical trial programs in fiscal 2017 and beyond. Until the Company can generate significant cash from its operations, the Company expects to continue to fund its operations with its available financial resources. These financial resources may not be adequate to sustain its operations and the Company will be required to finance future cash needs through strategic collaboration agreements, or the sale of additional equity or debt securities. However, the Company cannot be certain that additional financing will be available
when needed or that, if available, financing will be obtained on terms favorable to the Company or its stockholders. The capital markets have experienced volatility in recent years, which has resulted in uncertainties with respect to availability of capital and hence the timing to meet an entitys liquidity needs. Having insufficient funds may require the Company to delay, scale-back or eliminate some or all of its programs or renegotiate less favorable terms than it would otherwise choose. Failure to obtain adequate financing also may adversely affect its ability to operate as a going concern.
The Company continues to pursue business development and licensing arrangements as a potential source of financing. These activities include any new parties who may be interested in the Companys clinical programs as well as any licenses to the Companys intellectual property estate, including the Companys current partner, The Bayer Group (Bayer), State and Federal Grants, along with potential debt and equity financing may also be other sources of financing.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Immunomedics and its majority-owned subsidiaries. Noncontrolling interests in consolidated subsidiaries in the Consolidated Balance Sheets represent minority stockholders proportionate share of the (deficit) equity in such subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 reported period. Actual results could differ from those estimates. The Companys significant estimates and assumptions relate to revenue recognition, allowance for doubtful accounts, valuation of inventory and property and equipment, useful lives of property and equipment, accrued liabilities, stock compensation expenses, income tax uncertainties and other contingencies.
For subsidiaries outside of the United States that operate in a local currency environment, income and expense items are translated to United States dollars at the monthly average rates of exchange prevailing during the year, assets and liabilities are translated at year-end exchange rates and equity accounts are translated at historical exchange rates. Translation adjustments are accumulated in a separate component of stockholders equity in the Consolidated Balance Sheets and the Consolidated Statements of Changes in Stockholders (Deficit) Equity and are included in the determination of comprehensive (loss) income in the Consolidated Statements of Comprehensive Loss. Transaction gains and losses are included in the determination of net loss in the Consolidated Statements of Comprehensive Loss. As of June 30, 2015 and 2014, the cumulative unrealized foreign currency translation (loss) gain included in accumulated other comprehensive (loss) income was approximately ($0.2) million as compared to $0.3 million, respectively.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with an original maturity of three months or less to be cash equivalents and all investments with maturities of greater than three months from date of purchase are classified as marketable securities available-for-sale.
Marketable securities, all of which are available-for-sale, consist of corporate debt securities, U.S. bonds, U.S. sponsored agencies and municipal bonds. Marketable securities are carried at fair value, with unrealized
gains and losses, net of related income taxes, reported as accumulated other comprehensive (loss) income, except for losses from impairments which are determined to be other-than-temporary. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in the determination of net loss and are included in interest and other income (net), at which time the average cost basis of these securities are adjusted to fair value. Fair values are based on quoted market prices at the reporting date. Interest and dividends on available-for-sale securities are included interest and other income (net).
Credit is extended to customers based upon an evaluation of the customers financial condition. Accounts receivable are recorded at net realizable value. The Company utilizes a specific identification accounts receivable reserve methodology based on a review of outstanding balances and previous activities to determine the allowance for doubtful accounts. The Company charges off uncollectible receivables at the time the Company determines the receivable is no longer collectible. The Company does not require collateral or other security to support financial instruments subject to credit risk.
Concentration of Credit Risk
Cash, cash equivalents and marketable securities are financial instruments that potentially subject the Company to concentration of credit risk. Immunomedics periodically invests its cash in corporate debt securities, U.S. bonds, U.S. sponsored agencies and municipal bonds with strong credit ratings. Immunomedics has established guidelines relative to diversification and maturities that are designed to help ensure safety and liquidity. These guidelines are periodically reviewed to take advantage of trends in yields and interest rates.
Inventory, which consists of the finished product of LeukoScan®, is stated at the lower of cost (on a first-in, first-out basis) or market, and includes materials, labor and manufacturing overhead.
Property and Equipment and Impairment of Assets
Property and equipment are stated at cost and are depreciated on a straight-line basis over the estimated useful lives (5-10 years) of the respective assets. Leasehold improvements are capitalized and amortized over the lesser of the remaining life of the lease or the estimated useful life of the asset. Immunomedics reviews long-lived assets for impairment whenever events or changes in business circumstances occur that indicate that the carrying amount of the assets may not be recoverable. Immunomedics assesses the recoverability of long-lived assets held and to be used based on undiscounted cash flows, and measures the impairment, if any, using discounted cash flows. To date the Company has not taken any impairment charges on property and equipment.
Life Insurance Policies
The Company has life insurance policies on Dr. David M. Goldenberg, the Companys Chairman of the Board of Directors, Chief Scientific Officer, and Chief Patent Officer, which are for the benefit of the Company. When the Company is the beneficiary of the policy, and there are no other contractual arrangements between the Company and Dr. Goldenberg, the Company recognizes the amount that could be realized under the insurance arrangement as an asset in the Consolidated Balance Sheets.
The Company has accounted for revenue arrangements that include multiple deliverables as a separate unit of accounting if both of the following criteria are met: a) the delivered item has value to the customer on a standalone basis, and b) if the right of return exists, delivery of the undelivered items is considered probable and substantially in the control of the vendor. If these criteria are not met, the revenue elements must be considered a
single unit of accounting for purposes of revenue recognition. The Company allocates revenue consideration, excluding contingent consideration, based on the relative selling prices of the separate units of accounting contained within an arrangement containing multiple deliverables. Relative selling prices are determined using vendor specific objective evidence, if it exists; otherwise third-party evidence or the Companys best estimate of selling price is used for each deliverable.
Payments received under contracts to fund certain research activities are recognized as revenue in the period in which the research activities are performed. Payments received in advance that are related to future performance are deferred and recognized as revenue when the research projects are performed. Upfront nonrefundable fees associated with license and development agreements where the Company has continuing involvement in the agreement are recorded as deferred revenue and recognized over the estimated service period. The Company estimates the period of continuing involvement based on the best evidential matter available at each reporting period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis.
In order to determine the revenue recognition for contingent milestones, the Company evaluates the contingent milestones using the criteria as provided by the Financial Accounting Standards Boards (FASB) guidance on the milestone method of revenue recognition, as explained in ASU 2010-17, Milestone Method of Revenue Recognition, at the inception of a collaboration agreement. The criteria requires that (i) the Company determines if the milestone is commensurate with either its performance to achieve the milestone or the enhancement of value resulting from the Companys activities to achieve the milestone, (ii) the milestone be related to past performance, and (iii) the milestone be reasonable relative to all deliverable and payment terms of the collaboration arrangement. If these criteria are met then the contingent milestones can be considered as substantive milestones and will be recognized as revenue in the period that the milestone is achieved. Royalties are recognized as earned in accordance with the terms of various research and collaboration agreements.
Revenue from the sale of diagnostic products is recorded when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable or collectability is reasonably assured. Allowances, if any, are established for uncollectible amounts, estimated product returns and discounts. Since allowances are recorded based on managements estimates, actual amounts may be different in the future.
Research and Development Costs
Research and development costs are expensed as incurred. Costs incurred for clinical trials for patients and investigators are expensed as services are performed in accordance with the agreements in place with the institutions.
Reimbursement of Research and Development Costs
Reimbursement toward research and development costs under collaboration agreements are included as a reduction of research and development expenses. The Company records these reimbursements as a reduction of research and development expenses as the Companys partner in the collaboration agreement has the financial risks and responsibility for conducting these research and development activities.
Manufacturing costs incurred in relation to the development of materials produced in order to fulfill contractual obligations are deferred and are recorded in other current assets until the product is delivered in accordance with the terms of the agreement.
The Company uses the asset and liability method to account for income taxes, including the recognition of deferred tax assets and deferred tax liabilities for the anticipated future tax consequences attributable to
differences between financial statements amounts and their respective tax bases. The Company reviews its deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Companys tax provision in the period of change.
The Company does not have an accrual for uncertain tax positions as of June 30, 2015 or 2014. The U.S. Federal statute of limitation remains open for the fiscal years 2010 onward. The Companys tax returns filed in foreign jurisdictions remain open for the fiscal years 2011 onward. State income tax returns are generally subject to examination for a period of 3-5 years after filing of the respective return. The Company conducts business and files tax returns in New Jersey.
Net Loss Per Share Allocable to Common Stockholders
Basic net loss per share is calculated using the weighted average number of shares of common stock and vested restricted shares outstanding. Diluted net income per share is based upon the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding. During fiscal years 2015, 2014 and 2013, no potential shares of common stock were included in the calculation since their affect would be anti-dilutive due to the operating losses. The common stock equivalents excluded from the earnings per share calculation are 25,815,581, 7,096,981 and 7,215,449 for the fiscal years ended June 2015, 2014 and 2013, respectively.
The Company utilizes stock-based compensation in the form of stock options, stock appreciation rights, stock awards, stock unit awards, performance shares, cash-based performance units and other stock-based awards, each of which may be granted separately or in tandem with other awards.
The grant-date fair value of stock awards is based upon the underlying price of the stock on the date of grant. The grant-date fair value of stock option awards must be determined using an option pricing model. Option pricing models require the use of estimates and assumptions as to (a) the expected term of the option, (b) the expected volatility of the price of the underlying stock and (c) the risk-free interest rate for the expected term of the option. The Company uses the Black-Scholes-Merton option pricing formula for determining the grant-date fair value of such awards.
The expected term of the option is based upon the contractual term and expected employee exercise and expected post-vesting employment termination behavior. The expected volatility of the price of the underlying stock is based upon the historical volatility of the Companys stock computed over a period of time equal to the expected term of the option. The risk free interest rate is based upon the implied yields currently available from the U.S. Treasury yield curve in effect at the time of the grant. Pre-vesting forfeiture rates are estimated based upon past voluntary termination behavior and past option forfeitures.
The fair value of each option granted during the years ended June 30, 2015, 2014 and 2013 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions in the following table:
The Company uses historical data to estimate forfeitures. The expected term of options granted represents the period of time that options granted are expected to be outstanding. Expected stock price volatility was calculated based on the Companys daily stock trading history. The weighted average of the expected option term increased to 5.07 years for year ended June 30, 2015 over the previous year as a result of the issuance of short-term options in fiscal year 2014 to the former chief financial officer. Aside from these stock options to the former chief financial officer the expected option term for other stock options granted during the year ended June 30, 2014 was 5.1 years. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The lower risk-free interest rate for the fiscal year ended June 30, 2014 resulted from the short-term rate for the stock options granted to the former chief financial officer in that year.
The carrying amounts of cash and cash equivalents, other current assets and current liabilities approximate fair value due to the short-term maturity of these instruments. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Certain prior period balances have been reclassified to conform to the current period presentation.
Recently Issued Accounting Pronouncements
In April 2015, the FASB issued Accounting Standard Update (ASU) 2015-03, Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. Under the new ASU, debt issuance costs will be reported in the balance sheet as a direct deduction from the related debt liability rather than as a separate asset. Amortization of the costs is reported as interest expense. The amendments in this update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted for financial statements that have not been previously issued. The Company has adopted this standard in the current fiscal year and has presented the debt issuance costs related to the Convertible Notes as a direct deduction from the related face value in the accompanying consolidated balance sheet.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern: Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. This guidance clarifies that an entitys management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments in this update are effective for annual reporting periods ending after December 15, 2016, and annual and interim periods thereafter, and early application is permitted. The Company is assessing ASU 2014-15s impact and will adopt it when effective.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is assessing ASU 2014-09s impact and will adopt it when effective.
Immunomedics considers all of its current investments to be available-for-sale. Marketable securities at June 30, 2015 and 2014 consist of the following (in thousands):
Maturities of debt securities classified as available-for-sale were as follows at June 30, 2015 (in thousands):
In February 2015, the Company issued $100.0 million of Convertible Notes (net proceeds of $96.3 million after deducting the initial purchasers fees and offering expenses) in a private offering exempt from registration under the Securities Act of 1933, as amended (the Securities Act), in reliance upon Rule 144A under the Securities Act. The Convertible Notes will mature on February 15, 2020, unless earlier purchased or converted. The debt issuance costs of approximately $3.7 million, primarily consisting of underwriting, legal and other professional fees, will be amortized over the term of the Convertible Notes. The Convertible Notes are senior unsecured obligations of the Company. Interest at 4.75% will be payable semiannually on February 15 and August 15 of each year, beginning on August 15, 2015. The effective interest rate on the Convertible Note was 5.48% for the period from the date of issuance through June 30, 2015.
The Convertible Notes are convertible at the option of holders into approximately 19.6 million shares of Immunomedics common stock at any time prior to the close of business on the day immediately preceding the maturity date. The conversion rate will initially be 195.8336 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $5.11 per share of Immunomedics common stock).
If the Company undergoes a fundamental change (as defined in the indenture governing the Convertible Notes), holders may require Immunomedics to purchase for cash all or part of the Convertible Notes at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest, if any, but excluding, the fundamental change purchase date, subject to certain exceptions. In
addition, if certain make-whole fundamental changes (as defined in the indenture governing the Convertible Notes) occur, Immunomedics will, in certain circumstances, increase the conversion rate for any Convertible Note converted in connection with such make-whole fundamental change.
The indenture does not limit the amount of debt which may be issued by the Company under the indenture or otherwise, does not contain any financial covenants or restrict the Company from paying dividends or issuing or repurchasing its other securities. The indenture contains customary terms and covenants and events of default.
If an event of default with respect to the Convertible Notes occurs, holders may, upon satisfaction of certain conditions, accelerate the principal amount of the Convertible Notes plus premium, if any, and accrued and unpaid interest, if any. In addition, the principal amount of the Convertible Notes plus premium, if any, and accrued and unpaid interest, if any, will automatically become due and payable in the case of certain types of bankruptcy or insolvency events of default involving the Company.
Total interest expense for the Convertible Notes was $2.1 million for the fiscal year ended June 30, 2015, including amortization of debt issuance costs of $0.3 million.
The Companys financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses, and Convertible Notes. The carrying amount of accounts receivable, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments as of June 30, 2015 and 2014.
The Company has categorized its other financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial instruments recorded on the consolidated balance sheets as of June 30, 2015 and 2014 are categorized based on the inputs to the valuation techniques as follows (in thousands):
Cash equivalents and marketable securities:
The money market funds noted above are included in cash and cash equivalents.
Convertible Senior Notes
The carrying amounts and estimated fair values (Level 2) of debt instruments are as follows (in thousands):
The fair value of the Convertible Senior Notes, which differs from their carrying values, is influenced by interest rates, the Companys stock price and stock price volatility and is determined by prices for the Convertible Senior Notes observed in market trading which are Level 2 inputs.
Property and equipment consisted of the following at June 30 (in thousands):
Depreciation and amortization expense for the years ended June 30, 2015, 2014 and 2013 was $0.6 million, $0.6 million and $1.0 million, respectively.
Accounts payable and accrued expenses consisted of the following at June 30 (in thousands):
The Certificate of Incorporation of the Company authorizes 10,000,000 shares of preferred stock, $.01 par value per share. The preferred stock may be issued from time to time in one or more series, with such distinctive serial designations, rights and preferences as shall be determined by the Board of Directors. For each of the fiscal years ended June 30, 2015, 2014 and 2013 the Company has had no preferred stock outstanding.
At the Annual Stockholder Meeting on December 3, 2014, the Companys stockholders approved the amendment and restatement of the Companys Certificate of Incorporation to increase the maximum number of shares of the Companys stock authorized up to 165,000,000 shares of stock consisting of 155,000,000 shares of common stock and 10,000,000 shares of preferred stock. Previously the Companys Certificate of Incorporation authorized up to 145,000,000 shares of stock consisting of 135,000,000 shares of common stock and 10,000,000 shares of preferred stock.
On October 1, 2014, the Companys registration statement on Form S-3, as filed with the U.S. Securities and Exchange Commission, (the SEC) on September 16, 2014, was deemed effective, using a shelf registration process. Under this shelf registration statement, the Company may issue, in one or more offerings, any combination of common stock, preferred stock senior or subordinated debt securities, warrants, or units, up to a total dollar amount of $130.0 million.
In May 2014, the Company sold 9,546,474 shares of its common stock, composed of 9,000,000 shares of common stock initially offered and an additional 546,474 shares of common stock sold pursuant to the exercise of the underwriters over-allotment option. The public offering price of $3.35 per share of common stock resulted in net proceeds to the Company of approximately $29.8 million. The shares of common stock were sold pursuant to an effective shelf registration statement filed with the Securities and Exchange Commission.
In February 2013, the Company sold 7,000,000 shares of its common stock, composed of 6,086,956 shares of common stock initially offered and an additional 913,044 shares of common stock sold pursuant to the full exercise of the underwriters over-allotment option. The public offering price of $2.30 per share of common stock resulted in net proceeds to the Company of approximately $14.8 million. The shares of common stock were sold pursuant to an effective shelf registration statement filed with the Securities and Exchange Commission.
Stock Incentive Plans
At the Annual Stockholder Meeting on December 3, 2014, the Companys stockholders approved the Immunomedics, Inc. 2014 Long-Term Incentive Plan (the Plan). The Plan replaced the Companys 2006 Stock Incentive Plan (the 2006 Plan), which terminated on December 3, 2014. The Plan was established to promote
the interests of the Company, by providing eligible persons with the opportunity to acquire a proprietary interest in the Company as an incentive to remain with the organization and to align the employees interest with our stockholders. The approval authorized issuance of 9,000,000 shares plus the number of unallocated share available for issuance as of the effective date under the 2006 Plan that were not subject to outstanding awards.
As under the 2006 Plan, option awards under the Plan are generally granted with an exercise price equal to the market price of the Plan, the Companys common stock at the date of grant; those option awards generally vest based on four years of continuous service and have seven year contractual terms. Option awards that are granted to non-employee Board members under the annual option grant program are granted with an exercise price equal to the market price of the Companys common stock at the date of grant, are vested immediately and have seven year contractual terms. Certain options provide for accelerated vesting if there is a change in control (as defined in the Plan). At June 30, 2015, there were 17,351,329 shares of common stock reserved for possible future issuance under the Plan, both currently outstanding (5,232,221 shares) and which were available to be issued for future grants (12,119,108 shares).
The Plan is divided into three separate equity incentive programs. These incentive programs consist of:
Each of the Companys outside Directors who had been a Director prior to July 1st of each year is granted, at the annual shareholder meeting of each year, options to purchase shares of the Companys common stock at fair market value on the grant date. The number of options to be issued is at the discretion of the Companys Board of Directors. For fiscal years 2015, 2014 and 2013, stock options were granted to these outside directors to purchase an aggregate of 89,204 shares, 66,348 shares and 128,000 shares, respectively. The values of the granted options were $180 thousand, $180 thousand and $225 thousand for fiscal years ended 2015, 2014 and 2013, respectively. Stock options granted to outside directors are vested when granted. When an outside Director is elected to the Board of Directors, they are awarded options for 22,500 shares of the Companys common stock. The Company recorded $180 thousand, $246 thousand and $230 thousand for stock-based compensation expense for these non-employee Board members stock options for the years ended June 30, 2015, 2014 and 2013, respectively.
Non-employee Board members who continue to serve shall receive on the date of the annual stockholders meeting an annual grant of non-qualified stock options and restricted stock units, equal in value to $45 thousand. For fiscal years 2015, 2014 and 2013, restricted stock units were granted to these outside directors in an aggregate of 42,656 units, 38,216 units and 74,750 units, respectively. The value of the units granted were $180 thousand, $180 thousand and $225 thousand for fiscal years 2015, 2014 and 2013, respectively. Restricted stock units granted to outside directors become vested within one year of grant date. The Company recorded $180 thousand, $204 thousand and $154 thousand for stock-based compensation expense for these non-employee Board members restricted stock units for the years ended June 30, 2015, 2014 and 2013, respectively.
Information concerning options for the years ended June 30, 2015, 2014 and 2013 is summarized as follows:
The weighted average fair value at the date of grant for options granted during the years ended June 30, 2015, 2014 and 2013 were $1.91, $1.91 and $2.12 per share, respectively.
The aggregate intrinsic value of the outstanding and exercisable stock options as of June 30, 2015 and 2014 is $3.3 million and $3.0 million, respectively. The aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Companys common stock exceeded the exercise price of the options at June 30, 2015, for those options for which the quoted market price was in excess of the exercise price. The total intrinsic value of options exercised during the 2015, 2014 and 2013 fiscal years was $1.8 million, $0.8 million and $0.1 million, respectively. Included in research and development and general and administrative expense categories the Company has recorded $1.4 million, $1.5 million and $1.5 million for stock-based compensation expense related to these stock options during the 2015, 2014 and 2013 fiscal years, respectively.
The following table summarizes information concerning options outstanding under the Plan at June 30, 2015:
At the Compensation Committee meeting held on August 16, 2013, the Company awarded an additional 136,452 restricted stock units to certain executive officers of the Company at the closing market price on that date ($5.13 per share). At the Compensation Committee meeting held on August 14, 2014, the Company awarded an additional 226,657 restricted stock units to certain executive officers of the Company at the closing market price on that date ($3.32 per share). As of June 30, 2015 there was $1.2 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan for these executive officers, excluding performance stock units. That cost is being recognized over a weighted-average period of 2.39 years. The Company recorded $0.8 million, $0.7 million and $0.6 million for stock-based compensation expense for these executive officers for the fiscal years ended June 30, 2015, 2014 and 2013, respectively.
On August 16, 2013, the Company also awarded certain executive officers Performance Units of up to 389,864 of restricted stock units which are subject to attainment of certain performance milestones as well as certain continued service requirements. All or a portion of the Performance Units shall vest based upon the level of achievement of the milestones set forth in each agreement, which is expected to be achieved within five years
of the grant date. The Performance Units that vest based upon attainment of the Performance milestone will be exercised based on a percentage basis on the attainment of anniversary dates. As of June 30, 2015, 116,959 of these Performance Units have vested and 272,905 are available if all performances are achieved within five years of grant date. The Company recorded $0.4 million and $1.1 million for the stock-based compensation for the fiscal years ended June 30, 2015 and 2014, respectively. As of June 30, 2015, total unrecognized compensation cost related to these non-vested Performance Units granted aggregates $0.5 million which is being recognized over a weighted-average period of 2.5 years. The unrecognized compensation cost is subject to modification on a quarterly basis based on review of performance probability and requisite achievement periods.
A summary of the Companys non-vested restricted stock units at June 30, 2015, and changes during the year ended June 30, 2015 is presented below:
The non-vested restricted stock units included above had a weighted-average remaining contractual life of approximately 5.4 years at June 30, 2015.
As of June 30, 2015, the Company has 2,116,423 non-vested options, restricted stock shares and performance units outstanding. As of June 30, 2015, 2014 and 2013 there was $4.5 million, $5.0 million and $3.6 million, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is being recognized over a weighted-average period of 2.63 years. The weighted average remaining contractual terms of the exercisable shares is 2.79 years and 2.73 years as of June 30, 2015 and 2014, respectively.
The following table summarizes the stock-based compensation expense by the consolidated statements of comprehensive loss line items for the fiscal years ended June 30, 2015, 2014 and 2013 (in thousands):
Accumulated Other Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income were as follows: