**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**Form 10-Q**

 

| ý     | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                          |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|       | ** ** | ** **                                                                                                                           |
| ** ** | ** ** | **For the Quarterly Period Ended March 31, 2005**                                                                               |
| ** ** | ** ** | ** **                                                                                                                           |
| o          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                         |
|       | ** ** | ** **                                                                                                                           |
| ** ** | ** ** | **For the Transition period from         to       ** |

 

**Commission file number 0-19612**

 

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**ImClone Systems Incorporated**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **04-2834797**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of incorporation or  organization) |       | (IRS  Employer Identification No.) |
|                                                             |       |                               |
| **180 Varick Street, New York, NY**                              | ** ** | **10014**                          |
| (Address  of principal executive offices)                        |       | (Zip  Code)                        |
|                                                             |       |                               |

**(212) 645-1405**

(Registrant’stelephone number, including area code)

** **

**Not Applicable**

(Formername, former address and former fiscal year, if changed since last report)

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý     No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). Yes ý    No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                      | ** ** | **Outstanding as of May 4, 2005** |
|--------------------------------|------------|-----------------------------------|
| Common Stock, par value  $.001 |       | 83,637,034  Shares                |

 

 

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**IMCLONESYSTEMS INCORPORATED**

**INDEX**

 
| PART I—FINANCIAL  INFORMATION |                                                                                                                              |
|------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                            | Financial Statements                                                                                                              |   |
|                               | Unaudited Consolidated  Balance Sheets—March 31, 2005 and December 31, 2004                                        |   |
|                               | Unaudited  Consolidated Statements of Operations—Three months ended March 31, 2005  and 2004                       |   |
|                               | Unaudited  Consolidated Statement of Stockholders’ Equity and Comprehensive Income –  Three months ended March 31, 2005 |   |
|                               | Unaudited Consolidated  Statements of Cash Flows—Three months ended March 31, 2005 and 2004                        |   |
|                               | Notes  to Unaudited Consolidated Financial Statements                                                                             |   |
| Item  2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       |   |
| Item  3.                           | Quantitative  and Qualitative Disclosures About Market Risk                                                                       |   |
| Item  4.                           | Controls  and Procedures                                                                                                          |   |
| PART  II—OTHER INFORMATION    |                                                                                                                              |
| Item 1.                            | Legal Proceedings                                                                                                                 |   |
| Item  2.                           | Unregistered  Sales of Equity Securities and Uses of Proceeds                                                                     |   |
| Item 3.                            | Defaults upon  Senior Securities                                                                                                  |   |
| Item  4.                           | Submission  of Matters to a Vote of Security Holders                                                                              |   |
| Item 5.                            | Other Information                                                                                                                 |   |
| Item 6.                            | Exhibits                                                                                                                          |   |
| Signatures                         |                                                                                                                              |   |

 

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**PARTI.  FINANCIAL INFORMATION**

**Item1.  *FinancialStatements***

 

**IMCLONE SYSTEMS INCORPORATED**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share and share data)**

**(Unaudited)**
| ** **                                                                                                                                                                                                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                           | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                                                                                                      |       |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                            |       | $                   | 16,388     |                   | $          | 79,321 |   |
| Securities available for sale                                                                                                                                                                                                                        |       | 808,015             |       | 840,451                |       |
| Prepaid expenses                                                                                                                                                                                                                                     |       | 2,507               |       | 4,054                  |       |
| Amounts due from corporate partners less  allowances of $388 and $430 at March 31, 2005 and December 31, 2004,  respectively                                                                                                                         |       | 47,041              |       | 69,753                 |       |
| Inventories                                                                                                                                                                                                                                          |       | 55,331              |       | 40,618                 |       |
| Other current assets                                                                                                                                                                                                                                 |       | 28,444              |       | 28,240                 |       |
| Total current assets                                                                                                                                                                                                                                 |       | 957,726             |       | 1,062,437              |       |
| Property, plant and equipment, net                                                                                                                                                                                                                   |       | 361,050             |       | 339,293                |       |
| Deferred financing costs, net                                                                                                                                                                                                                        |       | 15,316              |       | 16,244                 |       |
| Other assets                                                                                                                                                                                                                                         |       | 16,032              |       | 16,802                 |       |
| Total Assets                                                                                                                                                                                                                                         |       | $                   | 1,350,124  |                   | $          | 1,434,776 |   |
| **LIABILITES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                        |       |                |       |                   |       |
| Current liabilities:                                                                                                                                                                                                                                 |       |                |       |                   |       |
| Accounts payable (including $0 and $2,535  due Bristol-Myers Squibb Company (“BMS”) at March 31, 2005 and December 31,  2004, respectively)                                                                                                |       | $                   | 26,025     |                   | $          | 38,492 |   |
| Accrued expenses (including $5,812 and  $3,187 due BMS at March 31, 2005 and December 31, 2004, respectively)                                                                                                                                        |       | 36,182              |       | 61,177                 |       |
| Litigation settlement                                                                                                                                                                                                                                |       | 25,875              |       | 75,900                 |       |
| Withholding tax liability                                                                                                                                                                                                                            |       | 18,096              |       | 18,096                 |       |
| Current portion of deferred revenue                                                                                                                                                                                                                  |       | 108,249             |       | 108,994                |       |
| Other current liabilities                                                                                                                                                                                                                            |       | 3,094               |       | 1,031                  |       |
| Total current liabilities                                                                                                                                                                                                                            |       | 217,521             |       | 303,690                |       |
| Deferred revenue, less current portion                                                                                                                                                                                                               |       | 323,481             |       | 348,814                |       |
| Long-term debt                                                                                                                                                                                                                                       |       | 600,000             |       | 600,000                |       |
| Deferred rent, less current portion                                                                                                                                                                                                                  |       | 1,915               |       | 3,434                  |       |
| Total liabilities                                                                                                                                                                                                                                    |       | 1,142,917           |       | 1,255,938              |       |
| Commitments and contingencies                                                                                                                                                                                                                        |       |                |       |                   |       |
| Stockholders’ equity:                                                                                                                                                                                                                           |       |                |       |                   |       |
| Preferred stock, $1.00 par value;  authorized 4,000,000 shares; reserved 1,200,000 series B participating  cumulative preferred stock, none issued or outstanding                                                                                    |       | —              |       | —                 |       |
| Common stock, $.001 par value; authorized  200,000,000 shares; issued 83,602,988 and 83,250,146 at March 31, 2005 and  December 31, 2004, respectively; outstanding 83,409,730 and 83,056,888 at  March 31, 2005 and December 31, 2004, respectively |       | 84                  |       | 83                     |       |
| Additional paid-in capital                                                                                                                                                                                                                           |       | 719,435             |       | 712,819                |       |
| Accumulated deficit                                                                                                                                                                                                                                  |       | (500,135            | )          | (528,955               | )          |
| Treasury stock, at cost; 193,258 at March  31, 2005 and December 31, 2004                                                                                                                                                                            |       | (4,300              | )          | (4,300                 | )          |
| Accumulated other comprehensive income:                                                                                                                                                                                                              |       |                |       |                   |       |
| Net unrealized loss on securities available  for sale                                                                                                                                                                                                |       | (7,877              | )          | (809                   | )          |
| Total stockholders’ equity                                                                                                                                                                                                                      |       | 207,207             |       | 178,838                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                      |       | $                   | 1,350,124  |                   | $          | 1,434,776 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

1

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**IMCLONE SYSTEMS INCORPORATED**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

**(Unaudited)**

 
| ** **                                              | ** ** | **Three Months   Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Revenues:                                               |       |                               |       |   |   |
|                                                    |       |                               |       |   |   |
| License fees and milestone revenue                      |       | $                                  | 24,534     |   | $ | 67,498 |   |
| Manufacturing revenue                                   |       | 11,019                             |       | 25,504 |   |
| Royalty revenue                                         |       | 36,372                             |       | 7,145 |   |
| Collaborative agreement revenue                         |       | 13,846                             |       | 10,017 |   |
| Total revenues                                          |       | 85,771                             |       | 110,164 |   |
| Operating expenses:                                     |       |                               |       |   |   |
| Research and development                                |       | 21,173                             |       | 20,211 |   |
| Clinical and regulatory                                 |       | 9,398                              |       | 7,062 |   |
| Marketing, general and administrative                   |       | 17,623                             |       | 11,628 |   |
| Royalty expense                                         |       | 12,566                             |       | 2,043 |   |
| Cost of manufacturing revenue                           |       | 743                                |       | 213 |   |
| Other                                                   |       | —                             |       | (1,815 | ) |
| Total operating expenses                                |       | 61,503                             |       | 39,342 |   |
| Operating income                                        |       | 24,268                             |       | 70,822 |   |
| Other:                                                  |       |                               |       |   |   |
| Interest income                                         |       | (6,757                             | )          | (451 | ) |
| Interest expense                                        |       | 1,809                              |       | 1,677 |   |
| Loss (gain) on sale of securities                       |       | 16                                 |       | (111 | ) |
| Net other                                               |       | (4,932                             | )          | 1,115 |   |
| Income before income taxes                              |       | 29,200                             |       | 69,707 |   |
| Provision for income taxes                              |       | 380                                |       | 6,971 |   |
| Net income                                              |       | $                                  | 28,820     |   | $ | 62,736 |   |
| Income per common share:                                |       |                               |       |   |   |
| Basic                                                   |       | $                                  | 0.35       |   | $ | 0.83 |   |
| Diluted                                                 |       | $                                  | 0.33       |   | $ | 0.76 |   |
| Shares used in calculation of income per  common share: |       |                               |       |   |   |
| Basic                                                   |       | 83,278                             |       | 75,259 |   |
| Diluted                                                 |       | 92,648                             |       | 84,833 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

2

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**IMCLONE SYSTEMS INCORPORATED**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME**

**For the Three Months Ended March 31, 2005**

**(in thousands, except share data)**

 

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Accumulated    Other   Comprehensive** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|------------------------------------------|------------|------------|------------|
| ** **                                                                  | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**              | ** ** | **Amount**      | ** ** | **Capital**  | ** ** | **Deficit**                              | ** ** | **Stock**  | ** ** | **Loss** | ** ** | **Total** | ** ** |
| ** **                                                                  | ** ** | ** **           | ** ** | ** **        | ** ** | ** **              | ** ** | ** **      | ** ** | ** **   | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004                                               |       | —               |       | $                 | —     |                    | 83,250,146 |            | $          | 83           |       | $                                        | 712,819    |       | $          | (528,955 | ) | $ | (4,300 | ) | $ | (809 | ) | $ | 178,838 |   |
|                                                                        |       |                 |       |              |       |                    |       |            |       |         |       |                                     |       |       |       |   |   |   |   |
| Options exercised                                                           |       |                 |       |              |       | 344,655                 |       | 1               |       | 6,376        |       |                                     |       |       |       |   |   | 6,377 |   |
| Issuance of  shares through employee stock purchase plan                    |       |                 |       |              |       | 8,187                   |       | —          |       | 240          |       |                                     |       |       |       |   |   | 240 |   |
| Comprehensive  income:                                                      |       |                 |       |              |       |                    |       |            |       |         |       |                                     |       |       |       |   |   |   |   |
| Net income                                                                  |       |                 |       |              |       |                    |       |            |       |         |       | 28,820                                   |       |       |       |   |   | 28,820 |   |
| Other  comprehensive loss                                                   |       |                 |       |              |       |                    |       |            |       |         |       |                                     |       |       |       |   |   |   |   |
| Unrealized  holding loss arising during the period                          |       |                 |       |              |       |                    |       |            |       |         |       |                                     |       |       |       | (7,084 | ) | (7,084 | ) |
| Less:  Reclassification adjustment for realized loss included in net income |       |                 |       |              |       |                    |       |            |       |         |       |                                     |       |       |       | (16 | ) | (16 | ) |
| Total other  comprehensive loss                                             |       |                 |       |              |       |                    |       |            |       |         |       |                                     |       |       |       | (7,068 | ) | (7,068 | ) |
| Comprehensive  income                                                       |       |                 |       |              |       |                    |       |            |       |         |       |                                     |       |       |       |   |   | 21,752 |   |
| Balance at March  31, 2005                                                  |       | —               |       | $                 | —     |                    | 83,602,988 |            | $          | 84           |       | $                                        | 719,435    |       | $          | (500,135 | ) | $ | (4,300 | ) | $ | (7,877 | ) | $ | 207,207 |   |
|                                                                             |            |                      |            |                   |            |                         |            |                 |            |              |            |                                          |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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**IMCLONE SYSTEMS INCORPORATED**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                        |       |                              |       |   |   |
| Net income                                                                                   |       | $                                 | 28,820     |   | $ | 62,736 |   |
| Adjustments to reconcile net income to net  cash (used in) provided by operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                                |       | 3,182                             |       | 3,073 |   |
| Amortization of deferred financing costs                                                     |       | 928                               |       | 424 |   |
| Expense associated with stock options                                                        |       | —                            |       | 2,012 |   |
| Other                                                                                        |       | —                            |       | (1,815 | ) |
| Loss (gain) on securities available for  sale, net                                           |       | 16                                |       | (111 | ) |
| Changes in:                                                                                  |       |                              |       |   |   |
| Prepaid expenses                                                                             |       | 1,547                             |       | 1,381 |   |
| Amounts due from corporate partners                                                          |       | 22,712                            |       | (37,617 | ) |
| Inventories                                                                                  |       | (14,713                           | )          | (5,207 | ) |
| Other current assets                                                                         |       | (204                              | )          | 638 |   |
| Other assets                                                                                 |       | 729                               |       | (382 | ) |
| Accounts payable                                                                             |       | (12,467                           | )          | (11,087 | ) |
| Accrued expenses                                                                             |       | (24,995                           | )          | 2,019 |   |
| Litigation settlement                                                                        |       | (50,025                           | )          | — |   |
| Withholding tax liability                                                                    |       | —                            |       | (1,074 | ) |
| Other current liabilities                                                                    |       | 2,063                             |       | (3,300 | ) |
| Deferred revenue                                                                             |       | (26,078                           | )          | 182,560 |   |
| Deferred rent, less current portion                                                          |       | (1,519                            | )          | 126 |   |
| Net cash (used in) provided by operating  activities                                         |       | (70,004                           | )          | 194,376 |   |
| Cash flows from investing activities:                                                        |       |                              |       |   |   |
| Acquisitions of property, plant and  equipment                                               |       | (24,898                           | )          | (22,139 | ) |
| Purchases of securities available for sale                                                   |       | (186,449                          | )          | (98,058 | ) |
| Sales of securities available for sale                                                       |       | 159,584                           |       | 61,558 |   |
| Maturities of securities available for sale                                                  |       | 52,217                            |       | 3,918 |   |
| Other                                                                                        |       | —                            |       | (8 | ) |
| Net cash used in provided by (used in)  investing activities                                 |       | 454                               |       | (54,729 | ) |
| Cash flows from financing activities:                                                        |       |                              |       |   |   |
| Proceeds from exercise of stock options                                                      |       | 6,377                             |       | 8,243 |   |
| Proceeds from issuance of common stock  under the employee stock purchase plan               |       | 240                               |       | 169 |   |
| Other                                                                                        |       | —                            |       | (13 | ) |
| Net cash provided by financing activities                                                    |       | 6,617                             |       | 8,399 |   |
| Net (decrease) increase in cash and cash  equivalents                                        |       | (62,933                           | )          | 148,046 |   |
| Cash and cash equivalents at beginning of  period                                            |       | 79,321                            |       | 30,865 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                 | 16,388     |   | $ | 178,911 |   |
| Supplemental cash flow information:                                                          |       |                              |       |   |   |
| Cash paid for:                                                                               |       |                              |       |   |   |
| Interest, net of amounts capitalized                                                         |       | $                                 | —     |   | $ | 4,554 |   |
| Taxes                                                                                        |       | $                                 | 200        |   | $ | 150 |   |
| Non-cash investing and financing activity:                                                   |       |                              |       |   |   |
| Change in net unrealized loss (gain) in  securities available-for-sale                       |       | $                                 | 7,068      |   | $ | 145 |   |
| Options exercised in exchange for mature  shares of common stock                             |       | $                                 | —     |   | $ | 200 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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**IMCLONE SYSTEMS INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

 

**(1)****          ****Business Overview and Basis of Presentation**

 

The accompanyingconsolidated financial statements of ImClone Systems Incorporated (“ImCloneSystems” or the “Company”) as of March 31, 2005 and for the three monthsended March 31, 2005 and 2004 are unaudited. The accompanying unauditedconsolidated balance sheets, statements of operations, consolidated statementof stockholders’ equity and comprehensive income and consolidated statements ofcash flows have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”) for interim financial information and in conjunction withthe rules and regulations of the Securities and Exchange Commission (“SEC”).Accordingly, they do not include all of the disclosures required by GAAP forcomplete financial statements. The financial statements reflect alladjustments, consisting only of normal, recurring adjustments, which are in theopinion of management, necessary for a fair presentation for the interimperiods. Management of the Company has made a number of estimates andassumptions relating to the reporting of assets and liabilities and relatedrevenue and expense accounts and the disclosure of contingent assets andliabilities to prepare these consolidated financial statements in conformitywith U.S. generally accepted accounting principles. Actual results could differmaterially from those estimates.  Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2004, as filed with the SEC.

 

The results of operations for the interim periods are not necessarilyindicative of results to be expected for the entire fiscal year or any otherperiod. Certain amounts previously reported have been reclassified to conformto the current year’s presentation.  Forexample, in the Consolidated Statement of Cash Flows, the Company has reclassifiedmaster notes and other investments of approximately $15.7 million as of March 31,2004, from cash and cash equivalents to securities available for sale.  In addition, the Company has reclassifiedCollaborative agreement revenue and Royalty expense in 2004 to reflect thereimbursed portion of royalties for agreements that were finalized in Januaryof 2005.

 

The Company is a biopharmaceutical company whose mission is to advanceoncology care by developing and commercializing a portfolio of targetedtreatments designed to address the medical needs of patients with cancer. Asubstantial portion of the Company’s efforts and resources are devoted toresearch and development conducted on its own behalf and through collaborationswith corporate partners and academic research and clinical institutions. TheCompany does not operate separate lines of business or separate businessentities and does not conduct any of its operations outside of the UnitedStates. Accordingly, the Company does not prepare discrete financialinformation with respect to separate product areas or by location and does nothave separately reportable segments.

 

On February 12, 2004, the United States Food and DrugAdministration (“FDA”) approved ERBITUX® (Cetuximab) Injection for use incombination with irinotecan in the treatment of patients with EGFR-expressing,metastatic colorectal cancer who are refractory to irinotecan-basedchemotherapy and for use as a single agent in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are intolerant to irinotecan-basedchemotherapy. On June 18, 2004 the FDA approved the Company’s ChemistryManufacturing and Controls (CMC) supplemental Biologics License Application(sBLA) for licensure of its manufacturing facility, referred to as BB36.

 

On December 1, 2003, Swissmedic, the Swiss agency for therapeuticproducts, approved ERBITUX in Switzerland for the treatment of patients withcolorectal cancer who no longer respond to standard chemotherapy treatment withirinotecan. Merck KGaA licensed the right to market ERBITUX outside the UnitedStates and Canada from the Company in 1998. In Japan, Merck KGaA has marketingrights to ERBITUX, which are co-exclusive to the co-development rights of theCompany and BMS. On June 30, 2004 Merck KGaA received marketing approvalby the European Commission to sell ERBITUX for use in combination withirinotecan for the treatment of patients with EGFR-expressing metastaticcolorectal cancer after failure of irinotecan including cytotoxic therapy inall 25 member states of the newly expanded European Union, as well as Icelandand Norway in accordance with local legal regulations.  In addition, ERBITUX has been approved inArgentina, Australia, Croatia, Peru, Singapore, Chile and Mexico.

 

5

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**Impact ofRecent Accounting Pronouncements**

 

On November 24, 2004 the Financial Accounting Standards Board (“FASB”)issued FASB Statement No. 151*,Inventory Costs*, an amendment of ARB No. 43. This Statementamends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage). The provisions of thisStatement are effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The adoption of this accountingpronouncement is not expected to have a material effect on the Company’sconsolidated financial statements.

 

On December 16, 2004 the FASB issued Statement No. 123(revised 2004),*Share-Based Payment*(“Statement 123R”). This Statementrequires that the cost resulting from all share-based payment transactions berecognized in the financial statements and establishes fair value as themeasurement objective in accounting for all share-based payment arrangements.On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107, *Share-Based Payment,* which summarizes the views of the staffregarding the interaction between Statement 123R and certain SEC rules andregulations and provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies.  Statement 123R was originally effective as ofthe beginning of the first interim or annual reporting period that begins afterJune 15, 2005.  However, on April14, 2005 the SEC announced a new rule that allows companies to implementStatement 123R at the beginning of their fiscal year, beginning after June 15,2005.  As such, the Company will adoptStatement 123R in the first quarter of 2006. The adoption of this Statement is expected to have a material effect onthe Company’s consolidated financial statements.

 

**Stock BasedCompensation Plans**

 

The Company has two types of stock-basedcompensation plans: a stock option plan and a stock purchase plan. The Companyaccounts for its stock-based compensation plans in accordance with theprovisions of APB Opinion No. 25, and related interpretations includingStatement of Financial Accounting Standards Board Interpretation No. 44, “Accountingfor Certain Transactions Involving Stock Compensation—An Interpretation of APBOpinion No. 25” (“Interpretation No. 44”). Accordingly, compensationexpense would be recorded on the date of grant of an option to an employee ormember of the Board of Directors (the “Board”) only if the market price of theunderlying stock on the date of grant exceeds the exercise price. Historically,the Company’s stock option grants have been based on the closing market priceof its stock on the date of grant.

 

The fair value of stock options was estimatedusing the Black-Scholes option-pricing model. The Black-Scholes model considersa number of variables, including the exercise price and the expected life ofthe option, the current price of the common stock, the expected volatility andthe dividend yield of the underlying common stock, and the risk-free interestrate during the expected term of the option. The following table summarizes theweighted average assumptions used:

 
| ** **              | ** ** | **Three Months   Ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Expected life (years)   |       | 4.17                               |       | 4.06 |   |
| Risk free interest rate |       | 3.49                               | %          | 2.16 | % |
| Expected volatility     |       | 83.48                              | %          | 87.00 | % |
| Dividend yield          |       | 0.00                               | %          | 0.00 | % |

 

6

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The following table illustrates the effect onnet income and net income per common share if the compensation cost for theCompany’s stock option grants had been determined based on the fair value atthe grant dates for awards consistent with the fair value method of Statementof Financial Accounting Standards No. 123 “Accounting for Stock-BasedCompensation (“SFAS 123”): (in thousands, except per share amounts)

 
| ** **                                                                                                      | ** ** | **Three Months   Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Net income as reported                                                                                          |       | $                                  | 28,820     |   | $ | 62,736 |   |
| Add: Stock-based employee compensation  expense included in net income, tax effected                            |       | —                             |       | 1,172 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method, tax effected |       | (15,949                            | )          | (12,843 | ) |
| Pro forma net income                                                                                            |       | $                                  | 12,871     |   | $ | 51,065 |   |
| Net income per common share:                                                                                    |       |                               |       |   |   |
| Basic, as reported                                                                                              |       | $                                  | 0.35       |   | $ | 0.83 |   |
| Basic, pro forma                                                                                                |       | $                                  | 0.15       |   | $ | 0.68 |   |
| Diluted, as reported                                                                                            |       | $                                  | 0.33       |   | $ | 0.76 |   |
| Diluted, pro forma                                                                                              |       | $                                  | 0.15       |   | $ | 0.63 |   |

 

The calculation of diluted pro forma income percommon share for the three months ended March 31, 2005 excludes the effect ofthe 1 3/8% convertible notes because their inclusion would have had ananti-dilutive effect. The pro forma effect on the net income for the threemonths ended March 31, 2005 and 2004 is not necessarily indicative of thepro forma effect on future periods’ operating results.

 

Inthe quarter ended March 31, 2005 the Company granted stock options to purchase100,000 shares of the Company’s stock to Dr. Frost and 75,000 shares to Dr.Rowinsky on their respective dates of commencement of employment. These stockoptions will vest over a four year period, and had an exercise price equal tothe closing price of ImClone Systems’ common stock on the date of grant. Thestock options had other terms commensurate with options granted under ImCloneSystems’ 2002 Stock Option Plan.  Theoptions grants to Drs. Frost and Rowinsky were approved by the Compensation andStock Option Committee of ImClone Systems’ Board of Directors.

 

**Comprehensive Income**

 

The tax benefit on the items included in Other comprehensive lossassuming they were recognized in income would be approximately $92,000 and$15,000 for the three months ended March 31, 2005 and 2004, respectively.

 

**Fair Valueof Financial Instruments**

 

The fair value of theCompany’s 1 3/8% convertible senior notes of $600,000,000 was approximately$499,500,000 at March 31, 2005.

 

**(2) ****        ****Inventories**

 

Inventories are stated at the lower of cost,determined on the first-in-first-out method, or market. Inventories consist ofthe following: (in thousands)

 
| ** **                 | ** ** | **March 31,   2005** | ** ** | **December 31,   2004** | ** ** |
|----------------------------|------------|----------------------|------------|-------------------------|------------|
| Raw materials and supplies |       | $                    | 10,284     |                    | $          | 9,536 |   |
| Work in process            |       | 38,263               |       | 30,082                  |       |
| Finished goods             |       | 6,784                |       | 1,000                   |       |
| Total                      |       | $                    | 55,331     |                    | $          | 40,618 |   |

 

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Prior to receipt of approval of ERBITUX forcommercial sale on February 12, 2004, the Company had expensed all costsassociated with the production of ERBITUX to research and development expense.Effective February 13, 2004, the Company began to capitalize the cost ofmanufacturing ERBITUX as inventories, including the cost to label, package,fill and ship previously manufactured bulk inventory whose costs had alreadybeen expensed as research and development. Although it is the Company’s policyto state inventories reflecting full absorption costs, until the Company sellsall of its existing inventories for which all or a portion of the costs werepreviously expensed, inventories will reflect costs incurred to process intofinished goods previously expensed raw materials and work in process as well ascosts to manufacture inventory subsequent to February 12, 2004. As theCompany continues to process the inventory that was partially produced andexpensed prior to February 13, 2004, the Company will continue to reflectin inventory only those incremental costs incurred to complete such inventoryinto finished goods.

 

**(3)****          ****Property, Plant and Equipment**

 

Property, plant and equipment are recorded at cost and consist of thefollowing: (in thousands)

 
| ** **                                      | ** ** | **March 31,   2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| Land                                            |       | $                    | 4,899      |                   | $          | 4,899 |   |
| Building                                        |       | 67,252               |       | 67,083                 |       |
| Leasehold improvements                          |       | 17,249               |       | 15,518                 |       |
| Machinery and equipment                         |       | 56,914               |       | 55,430                 |       |
| Furniture and fixtures                          |       | 4,600                |       | 4,265                  |       |
| Construction in progress                        |       | 269,915              |       | 248,736                |       |
| Total cost                                      |       | 420,829              |       | 395,931                |       |
| Less accumulated depreciation and  amortization |       | (59,779              | )          | (56,638                | )          |
| Property, plant and equipment, net              |       | $                    | 361,050    |                   | $          | 339,293 |   |

 

The Company is building amultiple product manufacturing facility (“BB50”) in Branchburg, New Jersey withcapacity of up to 110,000 liters (production volume). Management estimates thatthe 250,000 square foot facility will cost approximately $290,000,000. Theactual cost of the new facility may change depending upon various factors.  The Company has incurred approximately$244,988,000 in conceptual design, engineering, pre-construction, constructionand start up costs (which are included in construction in progress in thepreceding table), excluding capitalized interest of approximately $15,938,000,through March 31, 2005. As of March 31, 2005, committed purchase orders totalingapproximately $185,193,000 have been placed with subcontractors for equipmentrelated to this project and $69,231,000 for engineering, procurement,construction management and validation costs. Through March 31, 2005,$240,011,000 has been paid relating to these committed purchase orders.  All outstanding committed purchase orders asof March 31, 2005 require payment in 2005.

 

The process of preparingconsolidated financial statements in accordance with U.S. generally acceptedaccounting principles requires the Company to evaluate the carrying values ofits long-lived assets. The recoverability of the carrying values of long-livedassets depends on the Company’s ability to earn sufficient returns on ERBITUX.Based on management’s current estimates, the Company expects to recover thecarrying value of such assets.

 

**(4)****          ****Contract Services**

 

On March 17, 2005, theCompany entered into a five year multi-product supply agreement (the “Agreement”)with Lonza Biologics PLC (“Lonza”) for the manufacture of biological material atthe 5,000 liter scale. The Company has discretion over which products tomanufacture, which may include later-stage clinical production of the Company’santibodies currently in Phase I clinical testing and those nearing Phase Itesting.  The notional value of producingall batches allocated under the Agreement is approximately $68 million, unlessterminated earlier.  The Agreementprovides that the Company can cancel any batches at any time; however,depending on how much notice the Company provides Lonza, the Company couldincur a cancellation fee that varies based on timing of the cancellation.  This cancellation fee is only applicable ifLonza does not resell the slots reserved for the cancelled batches.

 

8

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**(5)****          ****Withholding Tax Assets and Liability**

 

Federal and applicable statetax law requires an employer to withhold income taxes at the time of anemployee’s exercise of non-qualified stock options or warrants issued inconnection with the performance of services by the employee. An employer thatdoes not do so is liable for the taxes not withheld if the employee fails topay his or her taxes for the year in which the non-qualified stock options orwarrants are exercised. In 2000 and prior years, the Company generally did notrequire the withholding of federal, state or local income taxes and, in certainyears, employment payroll taxes at the time of the exercise of non-qualifiedstock options or warrants. Prior to 1996, the Company did not comply with taxreporting requirements with respect to the exercise of non-qualified stockoptions or warrants.

 

In January 2003, theNew York State Department of Taxation and Finance (“New York State”) notifiedthe Company that it was liable for the New York State and City income taxesthat were not withheld because one or more of the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payNew York State and City income taxes for those years. On March 13, 2003,the Company entered into a closing agreement with New York State, paying$4,500,000 by March 31, 2003, to settle the matter. On June 17, 2003,New York State notified the Company that based on the warrant issue identifiedbelow, it was continuing a previously conducted audit of the Company and wasevaluating the terms of the closing agreement to determine whether or not itshould be re-opened. On March 31, 2004, the Company entered into a newclosing agreement pursuant to which the Company paid New York State anadditional $1,000,000 in full satisfaction of all the deficiencies anddeterminations of withholding taxes for the years 1999-2001. The Company had anestimated liability related to this contingency of $2,815,000 as ofDecember 31, 2003. Therefore the Company has eliminated such liability andhas recognized a benefit of $1,815,000 as a recovery in the ConsolidatedStatements of Operations in the first quarter of 2004.

 

On March 13, 2003, theCompany initiated discussions with the Internal Revenue Service (the “IRS”)relating to federal income taxes on the exercise of non-qualified stock optionson which income tax was not properly withheld. Although the IRS has not yetasserted that the Company is required to make a payment with respect to suchfailure to withhold, the IRS may assert that such a liability exists, and mayfurther assert that the Company is liable for interest and penalties. TheCompany has determined that all but an insignificant amount of the potentialliability for withholding taxes with respect to exercises of non-qualifiedstock options in 1999 and 2000 is attributable to those amounts related toDr. Samuel D. Waksal, the Company’s former Chief Executive Officer. Inaddition, in the course of the Company’s investigation into its potentialliability in respect of the non-qualified stock options described above, theCompany identified certain warrants that were granted in 1991 and prior yearsto then current and former officers, directors and advisors that the Companypreviously treated as non-compensatory warrants and thus not subject to taxwithholding and information reporting requirements upon exercise. Accordingly,when exercised in 2001 and prior years, the Company did not deduct income andpayroll taxes upon exercise or report applicable information to the taxingauthorities. The Company now believes that such treatment was incorrect, andthat the exercise of such warrants by current and former officers of theCompany should have been treated in the same manner for withholding and reportingpurposes as the exercise of non-qualified stock options. The Company hasinformed the relevant authorities, including the IRS, of this matter andintends to resolve its liability, in conjunction with its resolution of thematter described above.

 

The Company has recognizedassets at the time of exercise relating to certain individuals. These assetsare based on the fact that individuals are required by law to pay theirpersonal income taxes, which relieves the Company of its liability for suchwithholding taxes, but not interest and penalties, as well as the Company’sdetermination that these individuals had the means and intention to satisfytheir tax liabilities, and legal claims the Company has against theseindividuals both during and after their employment with the Company. As ofMarch 31, 2005 and December 31, 2004 the Company had recorded $274,000 ofwithholding tax assets in its Consolidated Balance Sheets.

 

One former officer anddirector to whom warrants were issued and previously treated as non-compensatorywarrants was the Company’s former Chief Executive Officer, Dr. Samuel D.Waksal. The Company has made demands on Dr. Samuel D. Waksal to pay thetaxes associated with the exercise of these warrants and certain non-qualifiedstock options and to indemnify the Company against any liability that it mayincur to taxing authorities in respect of the warrants or non-qualified stockoptions that were previously exercised. The Company determined that subsequentto the Company’s receipt of a “refusal to file” letter from the FDA onDecember 28, 2001, with respect to its rolling Biologics LicenseApplication for ERBITUX, Dr. Samuel D. Waksal’s financial conditiondeteriorated and therefore the recoverability of the asset became doubtful. TheCompany has recorded $18,096,000 of withholding tax liability related toexercise of stock options and warrants and fringe benefits in its ConsolidatedBalance Sheets as of March 31, 2005 and December 31, 2004.

 

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**(6)****          ****Income Per Common Share**

 

Basic income per commonshare is computed by dividing net income by the weighted-average number ofcommon shares outstanding during the period. Diluted income per common share iscomputed by dividing net income by the weighted-average number of common sharesoutstanding during the period increased to include all additional common sharesthat would have been outstanding assuming potentially dilutive common shareshad been issued 1) on the exercise of stock options and any proceeds thereofused to repurchase common stock at the average market price during the periodand 2) on conversion of convertible debt. In addition, in computing thedilutive effect of convertible debt, the numerator is adjusted to add back theafter-tax amount of interest recognized in the period.   At March 31, 2005 and 2004, there were10,975,346 and 9,840,040, respectively, potential common shares excluded fromthe diluted income per common share computation because their inclusion wouldhave had an anti-dilutive effect.

 

Basic and diluted income percommon share (EPS) were computed using the following: (in thousands, except pershare data)

 
| ** **                                                                 | ** ** | **Three Months   Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| EPS Numerator—Basic:                                                  |       |                               |       |   |   |
| Net income                                                                 |       | $                                  | 28,820     |   | $ | 62,736 |   |
| EPS Denominator—Basic:                                                |       |                               |       |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 83,278                             |       | 75,259 |   |
| EPS Numerator—Diluted:                                                |       |                               |       |   |   |
| Net income                                                                 |       | $                                  | 28,820     |   | $ | 62,736 |   |
| Adjustment for interest, net of amounts  capitalized and income tax effect |       | 1,785                              |       | 1,509 |   |
| Net income, adjusted                                                       |       | $                                  | 30,605     |   | $ | 64,245 |   |
| EPS Denominator—Diluted:                                              |       |                               |       |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 83,278                             |       | 75,259 |   |
| Effect of dilutive securities:                                             |       |                               |       |   |   |
| Stock options                                                              |       | 3,034                              |       | 5,217 |   |
| Convertible subordinated notes                                             |       | 6,336                              |       | 4,357 |   |
| Dilutive potential common shares                                           |       | 9,370                              |       | 9,574 |   |
| Weighted-average common shares and dilutive  potential common shares       |       | 92,648                             |       | 84,833 |   |
| Basic income per common share                                              |       | $                                  | 0.35       |   | $ | 0.83 |   |
| Diluted income per common share                                            |       | $                                  | 0.33       |   | $ | 0.76 |   |

 

** (7)****         ****Taxes**

 

The Company’s estimated effective income tax rate for 2005 is 1.3%,which is less than the federal statutory rate of 35% due primarily to the expectedutilization of fully reserved deferred tax assets. As of March 31, 2005 the Companyhas provided a valuation allowance against its total net deferred tax assetsbecause, more likely than not, its net deferred tax assets will not berealized.

 

**(8)****          ****Collaborative Agreements**

 

***(A) Merck KGaA***

 

In April 1990, theCompany entered into a development and commercialization agreement with MerckKGaA with respect to BEC2 and the recombinant gp75 antigen product candidate.The agreement has been amended a number of times, most recently inDecember 1997. The agreement grants Merck KGaA a license, with the rightto sublicense, to make, have made, use, sell, or have sold BEC2 and gp75antigen outside North America. The agreement also grants Merck KGaA a license,without the right to sublicense, to use, sell, or have sold, but not to makeBEC2 within North America in conjunction with the Company. Pursuant to theterms of the agreement the Company has retained the rights, (1) withoutthe right to sublicense, to make, have made, use, sell, or have sold BEC2 inNorth America in conjunction with Merck KGaA and 

 

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(2) with the right to sublicense, tomake, have made, use, sell, or have sold gp75 antigen in North America. Inreturn, the Company has recognized research support payments totaling$4,700,000 and is not entitled to any further research support payments underthe agreement. Merck KGaA is also required to make payments of up to$22,500,000, of which $4,000,000 has been received through March 31, 2005,based on milestones achieved in the licensed products’ development. During thethree months ended March 31, 2005, the Company earned and recorded a $1,000,000milestone payment related to this agreement, which was received in April2005.  The Company does not anticipateany additional milestone payments regarding BEC2.  Merck KGaA is also responsible for worldwidecosts of up to DM17,000,000 associated with a multi-site, multinational PhaseIII clinical trial for BEC2 in limited disease small-cell lung carcinoma. Thisexpense level was reached during the fourth quarter of 2000 and all expensesincurred from that point forward are being shared 60% by Merck KGaA and 40% bythe Company. The Company incurred approximately $21,000 and $71,000 in thethree months ended March 31, 2005 and 2004, respectively, associated withthis agreement. Merck KGaA is also required to pay royalties on the eventualsales of BEC2 outside of North America, if any. Revenues from sales, if any, ofBEC2 in North America will be distributed in accordance with the terms of aco-promotion agreement to be negotiated by the parties.

 

On June 7, 2004, the Companyand Merck KGaA announced that the international, randomized Phase III clinicaltrial of the Companies’ BEC2 cancer vaccine did not meet its primary endpointof survival. Following the analysis of the Phase III data in small cell lungcancer, the Company and Merck KGaA agreed to discontinue further development ofBEC2.

 

In December 1998, theCompany entered into a development and license agreement with Merck KGaA withrespect to ERBITUX. In exchange for granting Merck KGaA exclusive rights tomarket ERBITUX outside of the United States and Canada and co-exclusivedevelopment rights in Japan, the Company has received $30,000,000 throughMarch 31, 2005 in up-front cash fees and early cash payments based on theachievement of defined milestones. An additional $30,000,000 has been receivedthrough March 31, 2005 based upon the achievement of further milestonesfor which Merck KGaA received equity in the Company. All amounts received in2004 and 2003 were recorded as equity transactions.

 

The equity interests underlying the milestone payments were priced atvarying premiums to the then-market price of the common stock depending uponthe timing of the achievement of the respective milestones. Merck KGaA pays theCompany a royalty on sales of ERBITUX outside of the United States and Canada.In August 2001, the Company and Merck KGaA amended this agreement toprovide, among other things, that Merck KGaA may manufacture ERBITUX for supplyin its territory and may utilize a third party to do so upon the Company’sreasonable acceptance. The amendment further released Merck KGaA from itsobligations under the agreement relating to providing a guaranty under a$30,000,000 credit facility relating to the build-out of BB36. In addition, theamendment provides that the companies have co-exclusive rights to ERBITUX inJapan, including the right to sublicense and Merck KGaA waived its right offirst offer in the case of a proposed sublicense by the Company of ERBITUX inthe Company’s territory. In consideration for the amendment, the Company agreedto a reduction in royalties’ payable by Merck KGaA on sales of ERBITUX in MerckKGaA’s territory.

 

In September 2002, theCompany entered into a binding term sheet, effective as of April 15, 2002,for the supply of ERBITUX to Merck KGaA, which replaces previous supplyarrangements. The term sheet provides for Merck KGaA to purchase bulk andfinished ERBITUX ordered from the Company during the term of the December 1998development and license agreement at a price equal to the Company’s fullyloaded cost of goods. The term sheet also provided for Merck KGaA to usereasonable efforts to enter into its own contract manufacturing agreements forsupply of ERBITUX and obligates Merck KGaA to reimburse the Company for costsassociated with transferring technology and any other services requested byMerck KGaA relating to establishing its own manufacturing or contractmanufacturing capacity. Amounts due from Merck KGaA related to thesearrangements totaled approximately $5,989,000 and $8,096,000 at March 31, 2005and December 31, 2004, respectively, and are included in amounts due fromcorporate partners in the Consolidated Balance Sheets. The Company recordedcollaborative agreement revenue related to these arrangements in theConsolidated Statements of Operations totaling approximately $4,282,000 and$2,163,000 for the three months ended March 31, 2005 and 2004, respectively. Ofthese amounts, $3,007,000 and $1,544,000 for the three months ended March 31,2005 and 2004, respectively, related to reimbursable costs associated withsupplying ERBITUX to Merck KGaA for use in clinical trials.  The related manufacturing costs, (or aportion thereof) of the ERBITUX sold to Merck KGaA was produced in priorperiods and have been expensed in prior periods when the related raw materialswere purchased and the associated direct labor and overhead was consumed.Reimbursable clinical and regulatory expenses were incurred and totaledapproximately $672,000 and $396,000 for the three months ended March 31, 2005and 2004, respectively. These amounts have been recorded as clinical andregulatory expenses, and also as collaborative agreement revenue in theConsolidated Statements of Operations. Reimbursable general and administrativeexpenses and royalty expenses were incurred and totaled approximately $603,000and $222,000 for the three months ended March 31, 2005 and 2004, respectively.These amounts have been recorded as marketing, general and administrativeexpenses, royalty expense, and also as collaborative agreement revenue in the 

 

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Consolidated Statements of Operations.  The Company has a liability due Merck KGaA ofapproximately $1,921,000, and $2,059,000 as of March 31, 2005 and December 31,2004, respectively.

 

In June 2003, the Company agreed to supply a fixed quantity ofERBITUX for use in Merck KGaA’s medical affairs program on different orderingand pricing terms than those provided in the binding term sheet, includingprepayment by Merck KGaA for a portion of such supply. The Company recordedthis prepayment as deferred revenue on the Consolidated Balance Sheet untilsuch time as the product was shipped to Merck KGaA As of March 31, 2005, all ofthis inventory has been shipped to Merck KGaA.

 

***(B) Bristol-Myers Squibb Company***

 

On September 19, 2001,the Company entered into an acquisition agreement (the “Acquisition Agreement”)with BMS and Bristol-Myers Squibb Biologics Company, a Delaware corporation (“BMSBiologics”), which is a wholly-owned subsidiary of BMS, providing for thetender offer by BMS Biologics to purchase up to 14,392,003 shares of theCompany’s common stock for $70.00 per share, net to the seller in cash. Inconnection with the Acquisition Agreement, the Company entered into astockholder agreement with BMS and BMS Biologics, dated as ofSeptember 19, 2001 (the “Stockholder Agreement”), pursuant to which allparties agreed to various arrangements regarding the respective rights andobligations of each party with respect to, among other things, the ownership ofshares of the Company’s common stock by BMS and BMS Biologics. Concurrent withthe execution of the Acquisition Agreement and the Stockholder Agreement, theCompany entered into the Commercial Agreement with BMS and E.R. Squibb,relating to ERBITUX, pursuant to which, among other things, BMS and E.R. Squibbare co-developing and co-promoting ERBITUX in the United States and Canada withthe Company, and are co-developing and co-promoting ERBITUX in Japan with theCompany and either together or co-exclusively with Merck KGaA.

 

On March 5, 2002, theCompany amended the Commercial Agreement with E.R. Squibb and BMS. Theamendment changed certain economics of the Commercial Agreement and expandedthe clinical and strategic roles of BMS in the ERBITUX development program. Oneof the principal economic changes to the Commercial Agreement is that theCompany received payments of $140,000,000 on March 7, 2002 and $60,000,000on March 5, 2003. Such payments are in lieu of the $300,000,000 milestonepayment the Company would have received upon acceptance by the FDA of theERBITUX BLA under the original terms of the Commercial Agreement. In addition,the Company agreed to resume and has resumed construction of BB50. The terms ofthe Commercial Agreement, as amended on March 5, 2002, are set forth inmore detail below.

 

***Commercial Agreement***

 

*Rights Granted to E.R. Squibb*—Pursuant to the Commercial Agreement, asamended on March 5, 2002, the Company granted to E.R. Squibb (1) theexclusive right to distribute, and the co-exclusive right to develop andpromote (together with the Company) any prescription pharmaceutical productusing the compound ERBITUX (the “product”) in the United States and Canada,(2) the co-exclusive right to develop, distribute and promote (togetherwith the Company and together or co-exclusively with Merck KGaA and itsaffiliates) the product in Japan, and (3) the non-exclusive right to usethe Company’s registered trademarks for the product in the United States,Canada and Japan (collectively, the “territory”) in connection with theforegoing. In addition, the Company agreed not to grant any right or license toany third party, or otherwise permit any third party, to develop ERBITUX foranimal health or any other application outside the human health field withoutthe prior consent of E.R. Squibb (which consent may not be unreasonablywithheld).

 

*Rights Granted to the Company*—Pursuant to the Commercial Agreement, E.R. Squibbhas granted to the Company and the Company’s affiliates a license, without theright to grant sublicenses (other than to Merck KGaA and its affiliates for usein Japan and to any third party for use outside the territory), to use solelyfor the purpose of developing, using, manufacturing, promoting, distributingand selling ERBITUX or the product, any process, know-how or other inventiondeveloped solely by E.R. Squibb or BMS that has general utility in connectionwith other products or compounds in addition to ERBITUX or the product (“E.R.Squibb Inventions”).

 

*Up-Front and Milestone Payments*—The Commercial Agreement provides forup-front and milestone payments by E.R. Squibb to us of $900,000,000 in theaggregate, of which $200,000,000 was paid on September 19, 2001,$140,000,000 was paid on March 7, 2002, $60,000,000 was paid onMarch 5, 2003, and $250,000,000 was paid on March 12, 2004. An additional$250,000,000 would become payable upon receipt of marketing approval from theFDA with respect to a second tumor type for ERBITUX. All such payments arenon-refundable and non-creditable.

 

12

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*Distribution Fees*—The Commercial Agreement provides that E.R.Squibb shall pay the Company distribution fees based on a percentage of “annualnet sales” of the product (as defined in the Commercial Agreement) by E.R.Squibb in the United States and Canada. The distribution fee is 39% of netsales in the United States and Canada. During the three months endedMarch 31, 2005 and 2004, the Company has recorded royalty revenues of$33,981,000 and $6,824,000, respectively, representing 39% of net sales ofERBITUX by BMS.

 

The Commercial Agreement also provides that the distribution fees forthe sale of the product in Japan by E.R. Squibb or ImClone Systems shall beequal to 50% of operating profit or loss with respect to such sales for anycalendar month. In the event of an operating profit, E.R. Squibb shall pay theCompany the amount of such distribution fee, and in the event of an operatingloss, the Company shall credit E.R. Squibb the amount of such distribution fee.

 

*Development of the Product*— Responsibilities associated with clinicaland other ongoing studies are apportioned between the parties as determined bythe product development committee described below. The Commercial Agreementprovides for the establishment of clinical development plans setting forth theactivities to be undertaken by the parties for the purpose of obtainingmarketing approvals, providing market support and developing new indicationsand formulations of the product. After transition of responsibilities forcertain clinical and other studies, each party is primarily responsible forperforming the studies designated to it in the clinical development plans. Inthe United States and Canada, the Commercial Agreement provides that E.R.Squibb is responsible for 100% of the cost of all clinical studies other thanthose studies undertaken post-launch which are not pursuant to an IND (e.g.Phase IV studies), the cost of which is shared equally between E.R. Squibb andImClone Systems. As between E.R. Squibb and ImClone Systems, each isresponsible for 50% of the costs of all studies in Japan. The Company has alsoagreed, and may agree in the future, to share with E.R. Squibb, on terms otherthan the foregoing, costs of clinical trials that the Company believes are notpotentially registrational but should be undertaken prior to launch in theUnited States, Canada or Japan. The Company has incurred $2,830,000 and$1,502,000 pursuant to such cost sharing for the three months endedMarch 31, 2005 and 2004, respectively. In addition, to the extent that in2005 the Company and BMS exceed the contractual maximum registrational costsfor clinical development, the Company has agreed to share such cost with BMS.The Company has also incurred $319,000 and $344,000 for the three months endedMarch 31, 2005 and 2004, respectively, related to the agreement withrespect to development in Japan. Except as otherwise agreed upon by theparties, the Company will own all registrations for the product and isprimarily responsible for the regulatory activities leading to registration ineach country. E.R. Squibb will be primarily responsible for the regulatoryactivities in each country after the product has been registered in thatcountry. Pursuant to the terms of the Commercial Agreement, as amended, AndrewG. Bodnar, M.D., J.D., Senior Vice President, Strategy and Medical &External Affairs of BMS, and a member of the Company’s Board of Directors, isentitled to oversee the implementation of the clinical and regulatory plan forERBITUX.

 

*Distribution and Promotion of the Product*—Pursuant to the Commercial Agreement, E.R.Squibb has agreed to use all commercially reasonable efforts to launch, promoteand sell the product in the territory with the objective of maximizing thesales potential of the product and promoting the therapeutic profile andbenefits of the product in the most commercially beneficial manner. Inconnection with its responsibilities for distribution, marketing and sales ofthe product in the territory, E.R. Squibb is performing all relevant functions,including but not limited to the provision of sales force personnel, marketing,warehousing and physical distribution of the product.

 

However, the Company has theright, at its election and sole expense, to co-promote with E.R. Squibb theproduct in the territory. Pursuant to this co-promotion option, which theCompany has exercised, the Company is entitled on and after April 11, 2002(at the Company’s sole expense) to have the Company’s field organizationparticipate in the promotion of the product consistent with the marketing planagreed upon by the parties, provided that E.R. Squibb retains the exclusiverights to sell and distribute the product. Except for the Company’s expensesincurred pursuant to the co-promotion option, E.R. Squibb is responsible for100% of the distribution, sales and marketing costs in the United States andCanada, and as between E.R. Squibb and ImClone Systems, each is responsible for50% of the distribution, sales, marketing costs and other related costs andexpenses in Japan. During the third quarter of 2004, the Company decided toestablish a sales force to maximize the potential commercial opportunities forERBITUX and to serve as a foundation for the marketing of future productsderived either from within the Company’s pipeline or through businessdevelopment opportunities.

 

*Manufacture and Supply*—The Commercial Agreement provides that theCompany is responsible for the manufacture and supply of all requirements ofERBITUX in bulk form (“API”) for clinical and commercial use in the territory,and that E.R. Squibb will purchase all of its requirements of API forcommercial 

 

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usefrom the Company. The Company supplies API for clinical use at the Company’sfully burdened manufacturing cost, and supplies API for commercial use at theCompany’s fully burdened manufacturing cost plus a mark-up of 10%. Upon theexpiration, termination or assignment of any existing agreements betweenImClone Systems and third party manufacturers, E.R. Squibb will be responsiblefor processing API into the finished form of the product.

 

*               **Management*—The parties have formed the followingcommittees for purposes of managing their relationship and their respectiverights and obligations under the Commercial Agreement:

 

•      a Joint Executive Committee (the “JEC”), which consists of certainsenior officers of each party. The JEC is co-chaired by a representative ofeach of BMS and the Company. The JEC is responsible for, among other things,managing and overseeing the development and commercialization of ERBITUXpursuant to the terms of the Commercial Agreement, approving the annual budgetsand multi-year expense forecasts, and resolving disputes, disagreements anddeadlocks arising in the other committees;

 

•      a Product Development Committee (the “PDC”), which consists of membersof senior management of each party with expertise in pharmaceutical drugdevelopment and/or marketing. The PDC is chaired by the Company’srepresentative. The PDC is responsible for, among other things, managing andoverseeing the development and implementation of the clinical developmentplans, comparing actual versus budgeted clinical development and regulatoryexpenses, and reviewing the progress of the registrational studies;

 

•      a Joint Commercialization Committee (the “JCC”), which consists ofmembers of senior management of each party with clinical experience andexpertise in marketing and sales. The JCC is chaired by a representative ofBMS. The JCC is responsible for, among other things, overseeing the preparationand implementation of the marketing plans, coordinating the sales efforts ofE.R. Squibb and the Company, and reviewing and approving the marketing andpromotional plans for the product in the territory; and

 

•      a Joint Manufacturing Committee (the “JMC”), which consists of membersof senior management of each party with expertise in manufacturing. The JMC ischaired by the Company’s representative (unless a determination is made that along-term inability to supply API exists, in which case the JMC will beco-chaired by representatives of E.R. Squibb and the Company). The JMC isresponsible for, among other things, overseeing and coordinating themanufacturing and supply of API and the product, and formulating and directingthe manufacturing strategy for the product.

 

Any matter that is thesubject of a deadlock (i.e., no consensus decision) in the PDC, the JCC or theJMC will be referred to the JEC for resolution. Subject to certain exceptions,deadlocks in the JEC will be resolved as follows: (1) if the matter wasalso the subject of a deadlock in the PDC, by the co-chairperson of the JECdesignated by the Company, (2) if the matter was also the subject of adeadlock in the JCC, by the co-chairperson of the JEC designated by BMS, or(3) if the matter was also the subject of a deadlock in the JMC, by theco-chairperson of the JEC designated by the Company. All other deadlocks in theJEC will be resolved by arbitration.

 

*Right of First Offer*—E.R. Squibb has a right of first offer withrespect to the Company’s investigational KDR monoclonal antibodies (such as1121B) should the Company decide to enter into a partnering arrangement with athird party with respect to IMC-KDR antibodies at any time prior to the earlierto occur of September 19, 2006 and the first anniversary of the date whichis 45 days after any date on which BMS’s ownership interest in ImCloneSystems is less than 5%. If the Company decides to enter into a partneringarrangement during such period, the Company must notify E.R. Squibb. If E.R.Squibb notifies the Company that it is interested in such an arrangement, theCompany will provide its proposed terms to E.R. Squibb and the parties willnegotiate in good faith for 90 days to attempt to agree on the terms andconditions of such an arrangement. If the parties do not reach agreement duringthis period, E.R. Squibb must propose the terms of an arrangement which it iswilling to enter into, and if the Company rejects such terms the Company mayenter into an agreement with a third party with respect to such a partneringarrangement (provided that the terms of any such agreement may not be morefavorable to the third party than the terms proposed by E.R. Squibb).

 

*Right of First Negotiation*—If at any time during the restricted period(as defined below), the Company is interested in establishing a partneringrelationship with a third party involving certain compounds or products notrelated to IMC-KDR antibodies, the Company must notify E.R. Squibb and E.R.Squibb will have 90 days to enter into a non-binding agreement with theCompany with respect to such a partnering relationship. In the event that E.R.Squibb and ImClone Systems do not enter into a non-binding agreement, theCompany is free to negotiate with third parties without further obligation toE.R. Squibb. The “restricted period” means the period from September 19, 2001until the earliest to occur of (1) September 19, 2006, 

 

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(2) areduction in BMS’s ownership interest in ImClone Systems to below 5% for 45consecutive days, (3) a transfer or other disposition of shares of theCompany’s common stock by BMS or any of its affiliates such that BMS and itsaffiliates own or have control over less than 75% of the maximum number ofshares of the Company’s common stock owned by BMS and its affiliates at anytime after September 19, 2001, (4) an acquisition by a third party ofmore than 35% of the outstanding Shares, (5) a termination of theCommercial Agreement by BMS due to significant regulatory or safety concernsregarding ERBITUX, or (6) the Company’s termination of the CommercialAgreement due to a material breach by BMS.

 

*Restriction on Competing Products*—During the period from the date of theCommercial Agreement until September 19, 2008, the parties have agreed notto, directly or indirectly, develop or commercialize a competing product(defined as a product that has as its only mechanism of action an antagonism ofthe EGF receptor) in any country in the territory. In the event that any partyproposes to commercialize a competing product or purchases or otherwise takescontrol of a third party which has developed or commercialized a competingproduct, then such party must either divest the competing product within12 months or offer the other party the right to participate in thecommercialization and development of the competing product on a 50/50 basis(provided that if the parties cannot reach agreement with respect to such anagreement, the competing product must be divested within 12 months).

 

*Ownership—*The Commercial Agreement provides that the Company owns all data andinformation concerning ERBITUX and the product and (except for the E.R. SquibbInventions) all processes, know-how and other inventions relating to theproduct and developed by either party or jointly by the parties. E.R. Squibb,however, has the right to use all such data and information, and all suchprocesses, know-how or other inventions, in order to fulfill its obligationsunder the Commercial Agreement.

 

*Product Recalls*—If E.R. Squibb is required by any regulatory authority to recall theproduct in any country in the territory (or if the JCC determines such a recallto be appropriate), then E.R. Squibb and ImClone Systems shall bear the costsand expenses associated with such a recall (1) in the United States andCanada, in the proportion of 39% for ImClone Systems and 61% for E.R. Squibband (2) in Japan, in the proportion for which each party is entitled toreceive operating profit or loss (unless, in the territory, the predominantcause for such a recall is the fault of either party, in which case all suchcosts and expenses shall be borne by such party).

 

*Mandatory Transfer—*Each of BMS and E.R. Squibb has agreed under the Commercial Agreementthat in the event it sells or otherwise transfers all or substantially all ofits pharmaceutical business or pharmaceutical oncology business, it must alsotransfer to the transferee its rights and obligations under the CommercialAgreement.

 

*Indemnification—*Pursuant to the Commercial Agreement, each party has agreed toindemnify the other for (1) its negligence, recklessness or wrongfulintentional acts or omissions, (2) its failure to perform certain of itsobligations under the agreement, and (3) any breach of its representationsand warranties under the agreement.

 

*Termination—*Unless earlier terminated pursuant to the termination rights discussedbelow, the Commercial Agreement expires with regard to the product in eachcountry in the territory on the later of September 19, 2018 and the dateon which the sale of the product ceases to be covered by a validly issued orpending patent in such country. The Commercial agreement may also be terminatedprior to such expiration as follows:

 

*•**             *by either party, in the event that the otherparty materially breaches any of its material obligations under the CommercialAgreement and has not cured such breach within 60 days after notice;

 

*•**             *by E.R. Squibb, if the JEC determines thatthere exists a significant concern regarding a regulatory or patient safetyissue that would seriously impact the long-term viability of all products.

 

***Acquisition Agreement***

 

On October 29, 2001, pursuant to theAcquisition Agreement, BMS Biologics accepted for payment pursuant to thetender offer 14,392,003 shares of the Company’s common stock on a pro ratabasis from all tendering shareholders and those conditionally exercising stockoptions.

 

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***Stockholder Agreement***

 

Pursuant to the Stockholder Agreement, the Company’s Board wasincreased from ten to twelve members in October 2001. BMS received the rightto nominate two directors to the Company’s Board (each a “BMS director”) solong as its ownership interest in ImClone Systems is 12.5% or greater. If BMS’ownership interest is 5% or greater but less than 12.5%, BMS will have theright to nominate one BMS director, and if BMS’ ownership interest is less than5%, BMS will have no right to nominate a BMS director. If the size of the Boardis increased to a number greater than twelve, the number of BMS directors wouldbe increased, subject to rounding, such that the number of BMS directors isproportionate to the lesser of BMS’ then-current ownership interest and 19.9%.Notwithstanding the foregoing, BMS will have no right to nominate any BMSdirectors if (1) the Company has terminated the Commercial Agreement dueto a material breach by BMS or (2) BMS’ ownership interest were to remainbelow 5% for 45 consecutive days.

 

Based on the number of shares of common stock acquired pursuant to thetender offer, BMS has the right to nominate two directors. BMS designatedAndrew G. Bodnar, M.D., J.D., BMS’ Senior Vice President, Strategy andMedical & External Affairs, as one of the initial BMS directors. Thenomination of Dr. Bodnar was approved by the Board on November 15,2001. The other BMS director position was initially filled by Peter S.Ringrose, M.A, and Ph.D. Dr. Ringrose retired in 2002 from his position ofChief Scientific Officer and President, Pharmaceutical Research Institute atBMS, and also resigned from his director position with the Company. BMS has notyet designated a replacement to fill Dr. Ringrose’s vacated Board seat.

 

*Voting of Shares*—During the period in which BMS has the rightto nominate up to two BMS directors, BMS and its affiliates are required tovote all of their shares in the same proportion as the votes cast by all of theCompany’s other stockholders with respect to the election or removal of non-BMSdirectors.

 

*Committees of the Board of Directors*—During the period in which BMS has the rightto nominate up to two BMS directors, BMS also has the right, subject to certainexceptions and limitations, to have one member of each committee of the Boardbe a BMS director.

 

*Approval Required for Certain Actions*—The Company may not take any action thatconstitutes a prohibited action under the Stockholder Agreement without theconsent of the BMS directors, until September 19, 2006 or earlier, if anyof the following occurs: (1) a reduction in BMS’s ownership interest tobelow 5% for 45 consecutive days, (2) a transfer or other disposition ofshares of the Company’s common stock by BMS or any of its affiliates such thatBMS and its affiliates own or have control over less than 75% of the maximumnumber of shares of the Company’s common stock owned by BMS and its affiliatesat any time after September 19, 2001, (3) an acquisition by a thirdparty of more than 35% of the outstanding shares of the Company’s common stock,(4) a termination of the Commercial Agreement by BMS due to significantregulatory or safety concerns regarding ERBITUX, or (5) a termination ofthe Commercial Agreement due to a material breach by BMS. Such prohibitedactions include (1) issuing additional shares or securities convertibleinto shares in excess of 21,473,002 shares of the Company’s common stock in theaggregate, subject to certain exceptions; (2) incurring additionalindebtedness if the total of (A) the principal amount of indebtednessincurred since September 19, 2001 and then-outstanding, and (B) thenet proceeds from the issuance of any redeemable preferred stock then-outstanding,would exceed the Company’s amount of indebtedness for borrowed moneyoutstanding as of September 19, 2001 by more than $500 million;(3) acquiring any business if the aggregate consideration for suchacquisition, when taken together with the aggregate consideration for all otheracquisitions consummated during the previous twelve months, is in excess of 25%of the Company’s aggregate value at the time the binding agreement relating tosuch acquisition was entered into; (4) disposing of all or any substantialportion of the Company’s non-cash assets; (5) entering intonon-competition agreements that would be binding on BMS, its affiliates or anyBMS director; (6) taking certain actions that would have a discriminatoryeffect on BMS or any of its affiliates as a stockholder; and (7) issuingcapital stock with more than one vote per share.

 

*Limitation on Additional Purchases of Shares and OtherActions*—Subject tothe exceptions set forth below, until September 19, 2006 or, if earlier,the occurrence of any of (1) an acquisition by a third party of more than35% of the Company’s outstanding shares, (2) the first anniversary of areduction in BMS’s ownership interest in the Company to below 5% for 45consecutive days, or (3) the Company’s taking a prohibited action underthe Stockholder Agreement without the consent of the BMS directors, neither BMSnor any of its affiliates will acquire beneficial ownership of any shares ofthe Company’s common stock or take any of the following actions:(1) encourage any proposal for a business combination with the Company’sor an acquisition of our shares; (2) participate in the solicitation ofproxies from holders of shares of the Company’s common stock; (3) form orparticipate in any “group” (within the meaning of Section 13(d)(3) of theSecurities 

 

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ExchangeAct of 1934) with respect to shares of the Company’s common stock;(4) enter into any voting arrangement with respect to shares of theCompany’s common stock; or (5) seek any amendment to or waiver of theserestrictions.

 

The following are exceptionsto the standstill restrictions described above: (1) BMS Biologics mayacquire beneficial ownership of shares of the Company’s common stock either inthe open market or from the Company pursuant to the option described below, solong as, after giving effect to any such acquisition of shares, BMS’ ownershipinterest would not exceed 19.9%; (2) BMS may make, subject to certainconditions, a proposal to the Board to acquire shares of the Company’s commonstock if the Company provides material non-public information to a third partyin connection with, or begins active negotiation of, an acquisition by a thirdparty of more than 35% of the outstanding shares; (3) BMS may acquireshares of the Company’s common stock if such acquisition has been approved by amajority of the non-BMS directors; and (4) BMS may make, subject tocertain conditions, including that an acquisition of shares be at a premium ofat least 25% to the prevailing market price, non-public requests to the Boardto amend or waive any of the standstill restrictions described above. Certainof the exceptions to the standstill provisions described above will terminateupon the occurrence of: (1) a reduction in BMS’s ownership interest in theCompany to below 5% for 45 consecutive days, (2) a transfer or otherdisposition of shares of the Company’s common stock by BMS or any of itsaffiliates such that BMS and its affiliates own or have control over less than75% of the maximum number of shares owned by BMS and its affiliates at any timeafter September 19, 2001, (3) a termination of the CommercialAgreement by BMS due to significant regulatory or safety concerns regardingERBITUX, or (4) a termination of the Commercial Agreement by the Companydue to a material breach by BMS.

 

*Option to Purchase Shares in the Event of Dilution*—BMS Biologics has the right under certaincircumstances to purchase additional shares of common stock from the Company atmarket prices, pursuant to an option granted to BMS by the Company, in theevent that BMS’s ownership interest is diluted (other than by any transfer orother disposition by BMS or any of its affiliates). BMS can exercise this right(1) once per year, (2) if the Company issues shares of common stockin excess of 10% of the then-outstanding shares in one day, and (3) if BMS’sownership interest is reduced to below 5% or 12.5%. BMS Biologics’ right topurchase additional shares of common stock from the Company pursuant to thisoption will terminate on September 19, 2006 or, if earlier, upon theoccurrence of (1) an acquisition by a third party of more than 35% of theoutstanding shares, or (2) the first anniversary of a reduction in BMS’sownership interest in the Company to below 5% for 45 consecutive days.

 

*Transfers of Shares*—Until March 19, 2005, neither BMS norany of its affiliates were permitted to transfer any shares of the Company’scommon stock or enter into any arrangement that transfers any of the economicconsequences associated with the ownership of shares. After March 19,2005, neither BMS nor any of its affiliates may transfer any shares or enterinto any arrangement that transfers any of the economic consequences associatedwith the ownership of shares, except (1) pursuant to registration rightsgranted to BMS with respect to the shares, (2) pursuant to Rule 144under the Securities Act of 1933, as amended or (3) for certain hedgingtransactions. Any such transfer is subject to the following limitations:(1) the transferee may not acquire beneficial ownership of more than 5% ofthe then-outstanding shares of common stock; (2) no more than 10% of thetotal outstanding shares of common stock may be sold in any one registeredunderwritten public offering; and (3) neither BMS nor any of itsaffiliates may transfer shares of common stock (except for registered firmcommitment underwritten public offerings pursuant to the registration rightsdescribed below) or enter into hedging transactions in any twelve-month period thatwould, individually or in the aggregate, have the effect of reducing theeconomic exposure of BMS and its affiliates by the equivalent of more than 10%of the maximum number of shares of common stock owned by BMS and its affiliatesat any time after September 19, 2001. Notwithstanding the foregoing, BMSBiologics may transfer all, but not less than all, of the shares of commonstock owned by it to BMS or to E.R. Squibb or another wholly-owned subsidiaryof BMS.

 

*Registration Rights*—The Company granted BMS customaryregistration rights with respect to shares of common stock owned by BMS or anyof its affiliates.

 

Amounts due from BMS related to thisagreement totaled approximately $40,052,000 and $61,621,000 at March 31,2005 and December 31, 2004, respectively, and are included in amounts duefrom corporate partners in the Consolidated Balance Sheets. The Companyrecorded collaborative agreement revenue related to this agreement in theConsolidated Statements of Operations totaling approximately $9,556,000 and$7,854,000 for the three months ended March 31, 2005 and 2004,respectively. Of these amounts, $1,633,000 and $3,813,000 for the three monthsended March 31, 2005 and 2004, respectively, related to reimbursable costsassociated with supplying ERBITUX for use in clinical trials associated withthis agreement. The majority of the related manufacturing costs have beenexpensed in prior periods when the related raw materials were purchased and theassociated direct labor and overhead was consumed or, in the case of contractmanufacturing, when such services were performed. Reimbursable clinical andregulatory expenses were incurred and totaled 

 

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approximately $3,488,000 and $2,969,000 for the three months endedMarch 31, 2005 and 2004, respectively. These amounts have been recorded asclinical and regulatory expenses and also as collaborative agreement revenue inthe Consolidated Statements of Operations. Reimbursable marketing and generalexpenses and royalty expenses were incurred and totaled approximately$4,435,000 and $1,072,000 for the three months ended March 31, 2005 and2004, respectively. These amounts have been recorded as marketing, general andadministrative expenses, royalty expense, and also as collaborative agreementrevenue in the Consolidated Statements of Operations.

 

License fees and milestone revenue consists of the following: (inthousands)

 
| ** **                               | ** ** | **Three Months   Ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| BMS:                                     |       |                               |       |   |   |
| ERBITUX license fee revenue              |       | $                                  | 23,438     |   | $ | 67,344 |   |
| Merck KGaA:                              |       |                               |       |   |   |
| ERBITUX and BEC2 license fee revenue     |       | 1,096                              |       | 96 |   |
| Other license fee revenue                |       | —                             |       | 58 |   |
| Total license fees and milestone revenue |       | $                                  | 24,534     |   | $ | 67,498 |   |

 

Royalty revenue consists of the following: (in thousands)

 
| ** **            | ** ** | **Three Months   Ended March 31,** | ** ** |
|-----------------------|------------|------------------------------------|------------|
| ** **            | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| BMS                   |       | $                                  | 33,981     |   | $ | 6,824 |   |
| Merck KGaA            |       | 2,391                              |       | 257 |   |
| Other                 |       | —                             |       | 64 |   |
| Total royalty revenue |       | $                                  | 36,372     |   | $ | 7,145 |   |

 

Collaborative agreement revenue from corporate partners consists of thefollowing: (in thousands)

 
| ** **                            | ** ** | **Three Months   Ended March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| BMS                                   |       | $                                  | 9,556      |   | $ | 7,854 |   |
| Merck KGaA                            |       | 4,282                              |       | 2,163 |   |
| Other                                 |       | 8                                  |       | — |   |
| Total collaborative agreement revenue |       | $                                  | 13,846     |   | $ | 10,017 |   |

 

 

Amounts due from corporate partners consists of the following: (inthousands)

 
| ** **                                | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| BMS:                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| ERBITUX                                   |       | $                  | 40,052     |                  | $          | 61,621 |   |
| Merck KGaA:                               |       |               |       |                  |       |
| ERBITUX and BEC2                          |       | 6,989              |       | 8,132                 |       |
| Total amounts due from corporate partners |       | $                  | 47,041     |                  | $          | 69,753 |   |

 

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Deferred revenue consists of the following: (in thousands)

 
| ** **                                                  | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| BMS:                                                        |       |               |       |                  |       |
| ERBITUX commercial agreement                                |       | $                  | 426,930    |                  | $          | 450,368 |   |
| Merck KGaA:                                                 |       |               |       |                  |       |
| ERBITUX development and license agreement                   |       | 3,056              |       | 3,111                 |       |
| Prepayment of ERBITUX supplied for medical  affairs program |       | —             |       | 2,544                 |       |
| BEC2 development and commercialization  agreement           |       | 1,744              |       | 1,785                 |       |
| Total deferred revenue                                      |       | 431,730            |       | 457,808               |       |
| Less: current portion                                       |       | (108,249           | )          | (108,994              | )          |
| Total long-term deferred revenue                            |       | $                  | 323,481    |                  | $          | 348,814 |   |

 

The Company earned manufacturing revenue of $11,019,000 and $25,504,000related to sales of ERBITUX to BMS for commercial use for the three monthsended March 31, 2005 and 2004, respectively.

 

**(9)****          ****Commitments and Contingencies**

 

Beginning inJanuary 2002, a number of complaints asserting claims under the federalsecurities laws against the Company and certain of the Company’s directors andofficers were filed in the U.S. District Court for the Southern District of NewYork. Those actions were consolidated under the caption Irvine v. ImCloneSystems Incorporated, et al., No. 02 Civ. 0109 (RO). In the correctedconsolidated amended complaint, plaintiffs asserted claims against the Company,its former President and Chief Executive Officer, Dr. Samuel D. Waksal,its former Chief Scientific Officer and then-President and Chief ExecutiveOfficer, Dr. Harlan W. Waksal, and several of the Company’s other presentor former officers and directors, for securities fraud under sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Securities and ExchangeCommission Rule 10b5, on behalf of a purported class of persons whopurchased the Company’s publicly traded securities between March 27, 2001and January 25, 2002. The complaint also asserted claims againstDr. Samuel D. Waksal under section 20A of the Exchange Act on behalfof a separate purported sub-class of purchasers of the Company’s securitiesbetween December 27, 2001 and December 28, 2001. The complaintgenerally alleged that various public statements made by or on behalf of theCompany or the other defendants during 2001 and early 2002 regarding theprospects for FDA approval of ERBITUX® were false or misleading when made, thatthe individual defendants were allegedly aware of material non-publicinformation regarding the actual prospects for ERBITUX at the time that theyengaged in transactions in the Company’s common stock and that members of thepurported stockholder class suffered damages when the market price of theCompany’s common stock declined following disclosure of the information thatallegedly had not been previously disclosed. The complaint sought to proceed onbehalf of the alleged classes described above, sought monetary damages in anunspecified amount and sought recovery of plaintiffs’ costs and attorneys’fees. On January 24, 2005, the Company announced that it had reached anagreement in principle to settle the consolidated class action for a cashpayment of $75 million, a portion of which will be paid by the Company’sinsurers. The parties signed a definitive stipulation of settlement as of March9, 2005. The Court has scheduled a hearing to consider approval of the proposedsettlement on June 24, 2005.  As providedfor under the settlement documents, the Company has paid $50 million into anescrow account pending final court approval of the settlement. Upon final courtapproval of the settlement, the Company will pay the remaining $25 million, ofwhich approximately $20.5 million, included in Other current assets, will bepaid by the Company’s insurers.

 

Separately, onSeptember 17, 2002, an individual purchaser of the Company’s common stockfiled an action (Flynn v. ImClone Systems Incorporated, et al., No. 02 Civ7499 (RO)) on his own behalf in the U.S. District Court for the SouthernDistrict of New York asserting claims against the Company, Dr. Samuel D.Waksal and Dr. Harlan W. Waksal under sections 10(b) and 20(a) of theExchange Act and Securities and Exchange Commission Rule 10b-5. Thismatter was settled and dismissed with prejudice in a stipulation and orderentered on March 21, 2005.

 

 Beginning onJanuary 13, 2002, and continuing thereafter, nine separate purportedshareholder derivative actions were filed against members of the Company’s boardof directors, certain of the Company’s present and former officers, and theCompany, as nominal defendant, advancing claims based on allegations similar tothe allegations in the federal securities class action complaints. Four ofthese derivative cases were filed in the Delaware Court of Chancery and havebeen consolidated in that court under the caption In re ImClone SystemsIncorporated Derivative Litigation, Cons. C.A. No. 19341-NC. Three of 

 

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these derivative actions were filed in NewYork State Supreme Court in Manhattan.  Allof these state court actions have been stayed in deference to the proceedingsin the U.S. District Court for the Southern District of New York, which havebeen consolidated under the caption In re ImClone Systems, Inc.Shareholder Derivative Litigation, Master File No. 02 CV 163 (RO). Asupplemental verified consolidated amended derivative complaint in theseconsolidated federal actions was filed on August 8, 2003. It asserted,purportedly on behalf of the Company, claims including breach of fiduciary dutyby certain current and former members of the Company’s board of directors,among others, based on allegations including that they failed to ensure thatthe Company’s disclosures relating to the regulatory and marketing prospectsfor ERBITUX were not misleading and that they failed to maintain adequatecontrols and to exercise due care with regard to the Company’s ERBITUXapplication to the FDA. On January 9, 2004, the Company filed a motion todismiss the complaint due to plaintiffs’ failure to make a pre-suit demand onthe Company’s board of directors to institute suit or to allege grounds forconcluding that such a demand would have been futile. The individual defendantsfiled motions on the same date, both joining in the Company’s motion andseeking to dismiss the complaint for failure to state a claim.  On January 24, 2005, the Companyannounced that it had reached an agreement in principle to settle theconsolidated derivative action. The parties entered into a definitivestipulation of settlement on March 14, 2005. Under the settlement, the Companywill be paid $8.75 million by its insurers, which the Company intends tocontribute toward the settlement of the Irvine securities class actiondescribed above after deducting amounts awarded by the Court in the derivativeaction for plaintiffs’ attorney’s fees and expenses in that action, which theCompany has agreed not to oppose in an amount up to $875,000.  The settlement is subject to Court approval,which will be considered at a hearing that has been scheduled for June 24, 2005,and is also conditioned upon approval and consummation of the settlement of theIrvine class action.

 

The Company has recorded a receivable totaling $1,277,000 and $1,810,000as of March 31, 2005 and December 31, 2004, respectively, for the portionof the legal fees related to the above matters that the Company believes arerecoverable from its insurance carriers. This receivable is included in Other currentassets in the Consolidated Balance Sheets.

 

On October 8, 2003,certain mutual funds that are past or present common stockholders of BMS filedan action in New York State court against BMS, certain present or formerofficers and directors of BMS and the Company asserting that they were misledinto purchasing or holding their shares of BMS common stock as a result ofvarious public statements by BMS and certain present or former officers ordirectors of BMS, and that the Company allegedly aided and abetted certain ofthese misstatements. The action is styled FSS Franklin Global Health Care Fund,et al. v. Bristol-Myers Squibb Co., et al., Index No. 603168/03. OnJanuary 9, 2004, the Company and all of the other defendants servedmotions to dismiss the complaint for failure to state a cause of action. InDecember 2004, the plaintiffs filed an amended complaint. The allegation andclaims asserted against the Company in the amended complaint were virtuallyunchanged. On February 11, 2005, all defendants served motions to dismiss theamended complaint. These motions to dismiss have been fully briefed andargument is scheduled for May 13, 2005. The court has not yet ruled upon themotions, and discovery has been stayed during the pendency of the motions.

 

The Company intends to vigorously defend against the claims asserted inthis action. The Company is unable to predict the outcome of this action atthis time. No reserve has been established in the financial statements becausethe Company does not believe that such a reserve is required to be establishedat this time under Statement of Financial Accounting Standards No. 5.

 

The Company received subpoenas and requests for information inconnection with an investigation by the SEC relating to the circumstances surroundingthe disclosure of the FDA “refusal to file” letter dated December 28,2001, and trading in the Company’s securities by certain ImClone Systemsinsiders in 2001. The Company also received subpoenas and requests forinformation pertaining to document retention issues in 2001 and 2002, and tocertain communications regarding ERBITUX in 2000. On June 19, 2002, theCompany received a written “Wells Notice” from the staff of the SEC, indicatingthat the staff of the SEC is considering recommending that the SEC bring anaction against the Company relating to the Company’s disclosures immediatelyfollowing the receipt of a “refusal to file” letter from the FDA onDecember 28, 2001 for the Company’s BLA for ERBITUX. The Company filed aWells submission on July 12, 2002 in response to the staff’s Wells Notice.There have been no recent developments in connection with this SECinvestigation.

 

On August 14, 2002, after the federal grand jury indictment ofDr. Samuel D. Waksal had been issued but before Dr. Samuel D. Waksal’sguilty plea to certain counts of that indictment, the Company filed an actionin New York State Supreme Court seeking recovery of certain compensation,including advancement of certain defense costs, that the Company had paid to oron behalf of Dr. Samuel D. Waksal and cancellation of certain stockoptions. That action was styled ImClone Systems Incorporated v. Samuel D.Waksal, Index No. 02/602996. On July 25, 2003, Dr. Samuel D.Waksal filed a Motion to Compel Arbitration seeking to have all claims inconnection with the Company’s action against him resolved in arbitration. By

 

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orderdated September 19, 2003, the Court granted Dr. Samuel D. Waksal’smotion and the action was stayed pending arbitration. On September 25,2003, Dr. Samuel D. Waksal submitted a Demand for Arbitration with theAmerican Arbitration Association (the “AAA”), by which Dr. Samuel D.Waksal asserts claims to enforce the terms of his separation agreement,including provisions relating to advancement of legal fees, expenses, interestand indemnification, for which Dr. Samuel D. Waksal claims unspecifieddamages of $10 million. The Demand for Arbitration also seeks to resolvethe claims that the Company asserted in the New York State Supreme Courtaction. On November 7, 2003, the Company filed an Answer and Counterclaimsby which the Company denied Dr. Samuel D. Waksal’s entitlement toadvancement of legal fees, expenses and indemnification, and asserted claimsseeking recovery of certain compensation, including stock options, cashpayments and advancement of certain defense costs that the Company had paid toor on behalf of Dr. Samuel D. Waksal. In response, on December 15,2003, Dr. Samuel D. Waksal filed a Reply to Counterclaims. Arbitrationhearings in this matter are scheduled to occur in October andNovember 2005.

 

The Company intends to vigorously defend against the claims asserted inthis matter and to vigorously pursue its counterclaims. The Company is unableto predict the outcome of this action at this time. No reserve has beenestablished in the financial statements because the Company does not believethat such a reserve is required to be established at this time under Statementof Financial Accounting Standards No. 5.

 

On March 10, 2004, the Company commenced a second action againstDr. Samuel D. Waksal in the New York State Supreme Court. That action isstyled ImClone Systems Incorporated v. Samuel D. Waksal, IndexNo. 04/600643. By this action, the Company seeks the return of more than$21 million that the Company paid to Dr. Samuel D. Waksal, asproceeds from stock option exercises, which the Company alleges he was expectedto pay over to federal, state and local tax authorities in satisfaction of histax obligations arising from certain exercises between 1999 and 2001 ofwarrants and non-qualified stock options. Specifically, by this action, theCompany seeks to recover: (a) $4.5 million that the Company paid tothe State of New York in respect of exercises of non-qualified stock optionsand certain warrants in 2000; (b) at least $16.6 million that theCompany paid to Samuel D. Waksal in the form of ImClone common stock, in lieuof withholding federal income taxes from exercises of non-qualified stockoptions and certain warrants in 2000; and (c) approximately$1.1 million that the Company paid in the form of ImClone common stock toSamuel D. Waksal and his beneficiaries, in lieu of withholding federal, stateand local income taxes from certain warrant exercises in 1999-2001. Thecomplaint asserts claims for unjust enrichment, common law indemnification,moneys had and received and constructive trust. On June 18, 2004,Dr. Samuel D. Waksal filed an Answer to the Company’s Complaint. Factdiscovery in this matter is underway.

 

The IRS has commenced audits of the Company’s income tax and employmenttax returns for tax years 1999 through 2001. The Company has responded to allrequests for information and documents received to date from the IRS and isawaiting further requests or action from the IRS.

 

On March 31, 2003, the Company received notification from the SECthat it was conducting an informal inquiry into these matters and onApril 2, 2003, the Company received a request from the SEC for thevoluntary production of related documents and information. The Company iscooperating fully with this SEC inquiry. There have been no recent developmentsin connection with this SEC investigation.

 

On October 28, 2003, a complaint was filed by Yeda Research andDevelopment Company Ltd. (“Yeda”) against ImClone Systems and AventisPharmaceuticals, Inc. in the U.S. District Court for the Southern Districtof New York (03 CV 8484). This action alleges and seeks that three individualsassociated with Yeda should also be named as co-inventors on U.S. PatentNo. 6,217,866. On February 9, 2005, Yeda indicated that they intendto amend their U.S. complaint to seek sole inventorship of the subject patent.The Company is vigorously defending against the claims asserted in this action.The Company is unable to predict the outcome of this action at the presenttime.

 

On March 25, 2004, an action was filed in the United KingdomPatent Office entitled Referrer’s Statement requesting transfer of co-ownershipand amendment of patent EP (UK) 0 667 165 to add three Yeda employees asinventors. Also on March 25, 2004, a German action entitled Legal Actionwas filed in the Munich District Court I, Patent Litigation Division, seekingto add three Yeda employees as inventors on patent EP (DE) 0 667 165. TheCompany was not named as a party in these actions that relate to the Europeanequivalent of U.S. Patent No. 6,217,866 discussed above; accordingly, theCompany has intervened in the German and the U.K. actions. Additionally, on orabout March 25, 2005 and March 29, 2005, respectively, Yeda filed legal actionsin Austria and France against both Aventis and ImClone Systems seeking fullinventorship of EP (AU) 0 667 165 and EP (FR) 0 667 165, as well as payment oflegal costs and fees.

 

On May 4, 2004, a complaint was filed against the Company byMassachusetts Institute of Technology (“MIT”) and 

 

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RepligenCorporation (“Repligen”) in the U.S. District Court for the District ofMassachusetts (04-10884 RGS). This action alleges that ERBITUX infringes U.S.Patent No. 4,663,281, which is owned by MIT and exclusively licensed toRepligen. The Company intends to defend vigorously against claims asserted inthis action, which is in its early stages. The Company is unable to predict theoutcome of this action at the present time.

 

No reserve has been established in the financial statements for any ofthe Yeda or MIT and Repligen actions because the Company does not believe thatsuch a reserve is required to be established at this time under Statement ofFinancial Accounting Standards No. 5.

 

The Company has not recognized withholding tax liabilities in respectof exercises of certain warrants by Robert F. Goldhammer, one of the fourformer officers or directors to whom warrants were issued and previouslytreated as non-compensatory warrants. Based on the Company’s investigation, itbelieves that, although such warrants were compensatory, such warrants werereceived by Mr. Goldhammer in connection with the performance of servicesby him in his capacity as a director, rather than as an employee, and, as such,are not subject to tax withholding requirements. In addition, in 1999,Mr. Goldhammer erroneously received a portion of a stock option grant inthe form of incentive stock options, which under federal law may only begranted to employees. There can be no assurance, however, that the taxingauthorities will agree with the Company’s position and will not assert that theCompany is liable for the failure to withhold income and employment taxes withrespect to the exercise of such warrants and any stock options byMr. Goldhammer. If the Company became liable for the failure to withholdtaxes on the exercise of such warrants and any stock options by Mr. Goldhammer,the aggregate potential liability, exclusive of any interest or penalties,would be approximately $8,300,000.

 

The Company has not recognized accruals for penalties and interest thatmay be imposed with respect to the withholding tax issues previously describedand other related contingencies, including the period covered by the statute oflimitations and the Company’s determination of certain exercise dates, becauseit does not believe that losses from such contingencies are probable, or in theevent that any taxing authority makes a claim for penalties or interest, theCompany believes that it will be able to settle the total amount asserted(including any liability for taxes) for an amount not in excess of theliability for taxes already accrued with respect to the relevant withholdingtax issue. With respect to the statute of limitations and the Company’sdetermination of certain exercise dates, while the Company does not believe aloss is probable, there is a potential additional liability with respect to theseissues that may be asserted by a taxing authority. If taxing authorities assertsuch issues and prevail related to these withholding tax issues and otherrelated contingencies, including penalties, the liability that could be imposedby taxing authorities would be substantial. The potential interest on thewithholding tax liabilities recorded on the Consolidated Balance Sheets couldbe up to a maximum amount of approximately $8,300,000 at March 31, 2005.Potential additional withholding tax liability on other related contingenciesamounts to approximately $8,000,000, exclusive of any interest or penalties,and excluding the amount potentially attributable to Mr. Goldhammer notedabove.

 

In October 2001, the Companyentered into a sublease (the “Sublease”) for a four-story building at 325Spring Street, New York, New York, which includes between 75,000 and 100,000square feet of usable space. The sublease has a term of 22 years, followed bytwo five-year renewal option periods. In order to induce the sublandlord toenter into the sublease, the Company made a loan to the sublandlord in theprincipal amount of a $10,000,000 note receivable, of which $9,100,000 isoutstanding as of March 31, 2005. The loan is secured by a leasehold mortgageon the prime lease as well as a collateral assignment of rents by thesublandlord. The loan is payable by the sublandlord over 20 years and bearsinterest at 5 1⁄2 % in years one through five, 6 1⁄2 % in years six through ten, 71⁄2 % in years eleven through fifteen and 8 1⁄2 % in years sixteen through twenty.In addition, the Company paid the owner a consent fee in the amount of$500,000. Effective March 1, 2005, the Company amended the Sublease to add anadditional 6,500 square feet of space upon all the same terms and conditions setforth in the Sublease. In connection with this amendment, the Company paid anup-front fee of $1,690,000 which is being amortized over the respective term ofthe Sublease.  The future minimum leasepayments remaining at March 31, 2005, are approximately $50,599,000 over theterm of the Sublease.  In June 2004, theCompany indicated its plan to develop the property for occupancy by itsResearch departments, which currently includes both antibody and small moleculeresearch teams.   The Company has incurred approximately $850,000in construction in progress which is reflected under Property, plant andequipment, net in the Company’s Consolidated Balance Sheet as of March 31,2005.  The Company has approximately $18,000in committed purchase orders related to this project as of March 31, 2005payable during 2005.

 

The Company leases itsbiologics research and corporate headquarters in New York City. In August 2004,the Company modified its existing operating lease for its corporateheadquarters in New York City. The modification extends the term of the lease,which was to expire at December 31, 2004, for an additional ten years for aportion of the premises and by an additional four years for the space thathouses its Research department. As noted above, the Company plans toconsolidate 

 

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its research departments to its 325 SpringStreet, New York location. The future minimum lease payments remaining at March31, 2005, are approximately $11,676,000 over the term of the lease.

 

In June 2004, the Companyentered into an operating lease for a building located at 59-61 ImClone Drivein Branchburg, New Jersey. The building contains approximately 54,247 squarefeet of floor area. The lease expires on December 31, 2020 with no option torenew or extend beyond such date. The future minimum lease payments at March31, 2005 are $10,789,000.

 

In May 2001, theCompany entered into an operating lease for a 4,000 square foot portion of a15,000 square foot building and an adjacent 6,250 square foot building(collectively the “Brooklyn facility”) in Brooklyn, New York. The Company hascompleted renovations to the premises and relocated its chemistry and highthroughput screening personnel during November 2002, from its corporateheadquarters and research facility in downtown New York. The term of the leaseis for five years and contains five successive one-year extensions.   The future minimum lease payments under thiscommitment are $200,000.    EffectiveFebruary 1, 2005, the Company entered into an operating lease for approximately2,269 square feet of a building known as 760 Parkside Avenue in Brooklyn, NewYork. The term of the lease is for fifteen months, to coincide with the term ofthe Brooklyn facility lease. The future minimum lease payments at March 31,2005 are $67,000.

 

**(10) ****      ****Defined Contribution Plan**

 

All employees of the Companywho meet certain minimum age and period of service requirements are eligible toparticipate in a 401(k) defined contribution plan. The 401(k) plan allowseligible employees to defer up to 25 percent of their annual compensation,subject to certain limitations imposed by federal law. The amounts contributedby employees are immediately vested and non-forfeitable. Under the 401(k) plan,the Company, at management’s discretion, may match employee contributionsand/or make discretionary contributions. Neither the employee contributions norvoluntary matching contributions are invested in the Company’s securities.Total expense incurred by the Company was $512,000 and $168,000 for the threemonths ended March 31, 2005 and 2004, respectively.

 

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**Item 2.  *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

The following discussion and analysis is provided to further the reader’sunderstanding of the consolidated financial statements, financial condition andresults of operations of ImClone Systems in this Quarterly Report on Form 10-Q.This discussion should be read in conjunction with the consolidated financialstatements and the accompanying notes included in our filings with theSecurities and Exchange Commission (“SEC”), including our Annual Report onForm 10-K for the year ended December 31, 2004.  This discussion contains forward-lookingstatements based upon current expectations that involve risk and uncertainties.Our actual results and the timing of certain events could differ materiallyfrom those anticipated in these forward-looking statements as a result ofcertain factors, including those set forth below as well as other risksdetailed in our filings with the SEC.

 

**OVERVIEW**

 

ImClone Systems is a biopharmaceutical company whose mission is toadvance oncology care by developing and commercializing a portfolio of targetedtreatments designed to address the medical needs of patients with cancer. Ourlead product, ERBITUX is a first-of-its-kind antibody approved by the UnitedStates Food and Drug Agency (“FDA”) for use in combination with irinotecan inthe treatment of patients with EGFR-expressing, metastatic colorectal cancerwho are refractory to irinotecan-based chemotherapy and for use as a singleagent in the treatment of patients with EGFR-expressing, metastatic colorectalcancer who are intolerant to irinotecan-based chemotherapy. ERBITUX bindsspecifically to epidermal growth factor receptor (EGFR, HER1, c-ErbB-1) on bothnormal and tumor cells, and competitively inhibits the binding of epidermalgrowth factor (EGF) and other ligands, such as transforming growthfactor-alpha. We are conducting, and in some cases have completed, potentialregistration studies evaluating ERBITUX for the treatment of colorectal, headand neck, lung and pancreatic cancers, as well as other indications.

 

On February 12, 2004, the FDA approved ERBITUX for use incombination with irinotecan in the treatment of patients with EGFR-expressing,metastatic colorectal cancer who are refractory to irinotecan-basedchemotherapy and for use as a single agent in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are intolerant toirinotecan-based chemotherapy. On June 18, 2004 the FDA approved our ChemistryManufacturing and Controls (CMC) supplemental Biologics License Application(sBLA) for licensure of our manufacturing facility referred to as BB36.

 

On December 1, 2003, Swissmedic, the Swiss agency for therapeuticproducts, approved ERBITUX in Switzerland for the treatment of patients withcolorectal cancer who no longer respond to standard chemotherapy treatment withirinotecan. On June 30, 2004 Merck KGaA received marketing approval by theEuropean Commission to sell ERBITUX for use in combination with irinotecan forthe treatment of patients with EGFR-expressing metastatic colorectal cancerafter failure of irinotecan including cytotoxic therapy in all 25 member statesof the newly expanded European Union, as well as Iceland and Norway inaccordance with local legal regulations. In addition, ERBITUX has been approvedin Argentina, Australia, Croatia, Peru, Singapore, Chile and Mexico.

 

Our revenues, as well as our results of operations, have fluctuated andare expected to continue to fluctuate significantly from period to period dueto several factors, including but not limited to:

 

*•*theamount and timing of revenues earned from commercial sales of ERBITUX;

 

*•*thetiming of when we begin to reflect full absorption cost of goods sold on salesof ERBITUX to our corporate partners;

 

*•*thetiming of recognition of license fees and milestone revenues;

 

*•*thestatus of development of our various product candidates;

 

*•*whetheror not we achieve specified research or commercialization milestones;

 

*•*timelypayment by our corporate partners of amounts payable to us;

 

*•*legalcosts and the outcome of outstanding legal proceedings and investigations; and

 

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*•*theaddition or termination of research programs or funding support and variationsin the level of expenses related to our proprietary product candidates duringany given period.

 

As a result of our substantial investment in research and development,we have incurred significant operating losses and have an accumulated deficitof approximately $500 million as of March 31, 2005. We anticipate that ouraccumulated deficit may continue to decrease in the future as we earn revenueson commercial sales of ERBITUX and generate net income. Although we havehistorically devoted most of our efforts and resources to research anddevelopment, we expect to devote greater efforts and resources to themanufacturing, marketing, and commercialization of ERBITUX. There is noassurance that we will be able to continue to successfully manufacture, marketor commercialize ERBITUX or that potential customers will buy ERBITUX. We relyentirely on third party manufacturers for filling and finishing services withrespect to ERBITUX. If our current third party manufacturers or critical rawmaterial suppliers fail to meet our expectations, we cannot be assured that wewill be able to enter into new agreements with other suppliers or third partymanufacturers without an adverse effect on our business.

 

**OUTLOOK**

 

From a financial perspective, we anticipate that our results in 2005will reflect the following: Royalty revenue will continue to reflect 39% of BMS’in-market net sales and a range of 4.0%—4.5% of Merck KGaA’s in-market net salesuntil such time as a contractual minimum of cumulative sales has been reached;thereafter the royalty rate from Merck KGaA will increase. Specifically, by thesecond half of 2005, we would anticipate this rate to increase to approximately7.0%-7.5% of Merck’s in-market net sales. On April 12, 2005, we issued a press release announcing that we aretaking additional time to file a sBLA to seek approval of ERBITUX for use as asingle agent and in combination with radiation in Squamous Cell Carcinoma ofthe Head and Neck (SCCHN) with the FDA before the end of the year.  We had previously announced that we intendedto submit a sBLA in the second quarter of 2005 and therefore, we were expectingto receive a milestone payment from BMS by the end of 2005.  Due to the expected delay in our sBLA filingwith the FDA, we no longer expect to earn a milestone from BMS in 2005.  Therefore, License fees and milestone revenuein 2005 will include the continuing amortization, based on clinical developmentspending, of the $650 million received thus far from BMS. At comparable orslightly increased rates of spending from the current quarter, amortization ofmilestones received to date should approximate $100 million in 2005. Theselling price to our partners for Manufacturing revenue in 2005 isapproximately one-half of the price in 2004, since the 2004 price reflected asignificant component of materials sourced from Lonza at significantly highercosts than our own manufacturing costs. Collaborative agreement revenue willcontinue to include the purchase of ERBITUX for clinical use by our partners,as well as reimbursement of certain regulatory and clinical expenses incurredon behalf of ERBITUX, reimbursement for certain marketing and administrativeexpenses, and reimbursement for royalty expenses which will approximate 4.5% ofU.S. in-market net sales, and approximately 1% of net sales outside the U.S.

 

We previously estimated that research and development expenses in 2005 wouldbe approximately $100 million. However, we now estimate that research and development expenses for thefull year of 2005 will range between $110-$115 million due to higher thananticipated demand of ERBITUX for clinical use by Merck, based on their mostrecent inventory supply demand schedule. It should be noted that Collaborativeagreement revenue will also increase proportionately, to reflect thereimbursement of ERBITUX for clinical supply. Clinical and regulatory expensesin 2005 are expected to reach approximately $50 million for the full year,as we embark on a number of studies in support of expanded use of ERBITUX aswell as Phase I clinical development programs for four pipeline products.  Marketing, general and administrativeexpenses should approximate $68 million in 2005.  Gross royalty expenses in 2005 for ERBITUXwill include approximately 12.75% of U.S. in-market net sales; of whichapproximately 4.5% of U.S. in-market net sales is reimbursed as a component ofcollaborative agreement revenue, resulting in a net royalty burden to ImCloneof 8.25% related to U.S. in-market net sales. Cost of manufacturing revenuewill not be fully reflected on our statement of operations until such time asall previously expensed ERBITUX has been sold through to our partners foreither commercial or clinical use. Based on our current expectations ofpurchases by our partners, we expect to begin to reflect full cost ofmanufacturing revenue during the third quarter of 2005.  The estimated effective tax rate for 2005 is1.3%.

 

**CRITICALACCOUNTING POLICIES**

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. We base our estimates on historical experience and onassumptions that we believe to be 

 

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reasonableunder the circumstances. Estimates are deemed critical when a differentmethodology could have reasonably been used or where changes in the estimatefrom period to period may have a material impact on the Company’s financialcondition or results of operations. The Company’s critical accounting policiesthat require management to make significant judgments, estimates, andassumptions are set forth below. The development and selection of the criticalaccounting policies, and the related disclosure below have been reviewed withthe Audit Committee of the Company’s Board of Directors.

 

*RevenueRecognition*—Ourrevenues are derived from four primary sources: license fees and milestonepayments, manufacturing revenue, royalty revenue, and collaborative agreementrevenue.

 

Revenues from license fees and milestone payments primarily consist ofup-front license fees and milestone payments received under the CommercialAgreement with BMS and E.R. Squibb, relating to ERBITUX, and milestone paymentsreceived under the development and license agreement with Merck KGaA. Werecognize all non-refundable up-front license fees as revenues in accordancewith the guidance provided in the SEC’s Staff Accounting Bulletins No. 101and 104. Our most critical application of this policy, to date, relates to the$650,000,000 in license fees received from BMS and E.R. Squibb under theCommercial Agreement which are being deferred and recognized as revenue basedupon the actual product research and development costs incurred sinceSeptember 19, 2001 to date by BMS and E.R. Squibb and ImClone as apercentage of the estimated total of such costs to be incurred over the17 year term of the Commercial Agreement. The estimated total of such costis based on the clinical development budget which establishes jointresponsibilities that will be carried out by both the Company and BMS and E.R.Squibb for certain clinical and other studies. Of the $650,000,000 in paymentsreceived through March 31, 2005, $23,438,000 was recognized as revenue in thefirst quarter of 2005 and $223,069,000 from the commencement of the CommercialAgreement in 2001 through March 31, 2005. The methodology used torecognize deferred revenue involves a number of estimates and judgments, suchas the estimate of total product research and development costs to be incurredunder the Commercial Agreement. Changes in these estimates and judgments canhave a significant effect on the size and timing of revenue recognition. Inaddition, if management had chosen a different methodology to recognize thelicense fee and milestone payments received under the Commercial Agreement, theCompany’s financial position and results of operations could have differedmaterially. For example, if the Company were to recognize the revenues earnedfrom the Commercial Agreement on a straight-line basis over the life of theagreement, the Company would have recognized approximately $10,600,000 and $97,000,000as revenue for the three months and from the commencement of the CommercialAgreement, respectively, through March 31, 2005. Management believes thatthe current methodology used to recognize revenues under the CommercialAgreement, which reflects the level of effort consistent with the productdevelopment activities, is the most appropriate methodology because it reflectsthe level of expenditure and activity in the period in which it is being spentas compared to the total expected expenditure over the life of the CommercialAgreement. This cost to cost approach is systematic and rational, it provides afactually supportable pattern to track progress, and is reflective of the levelof effort, which varies over time.

 

Non-refundable upfront payments received from Merck KGaA were deferreddue to our significant continuing involvement and are being recognized asrevenue on a straight-line basis over the estimated service period because theactivities specified in the agreement between the Company and Merck KGaA willbe performed over the estimated service period and there is no other pattern orcircumstances that indicate a different way in which the revenue is earned. Inaddition, the development and license agreement with Merck KGaA does notcontain any provisions for establishing a clinical budget and none has beenestablished between the parties. This agreement does not call for co-developmentwith the Company in Merck KGaA’s territory; rather Merck KGaA is solelyresponsible for regulatory efforts in its territory. Non-refundable milestonepayments, which represent the achievement of a significant step in the researchand development process, pursuant to collaborative agreements other than theCommercial Agreement, are recognized as revenue upon the achievement of thespecified milestone. This is because each milestone payment represents theachievement of a substantive step in the research and development process andMerck KGaA has the right to evaluate the technology to decide whether tocontinue with the research and development program as each milestone isreached.

 

Manufacturing revenue consists of revenue earned on the sale of ERBITUXto our corporate partners for subsequent commercial sale. The Companyrecognizes manufacturing revenue when the product is shipped, which is when ourpartners take ownership and title has passed, collectibility is reasonablyassured, the sales price is fixed and determinable, and there is persuasiveevidence of an agreement. We are contractually obligated to sell ERBITUX to BMSat our cost of production plus a 10% markup. We sell bulk inventory to MerckKGaA at our full absorption cost of production. The sales price for ERBITUX toBMS in 2004 reflected the weighted average costs of production for inventoryproduced by Lonza (which was exhausted in 2004) and at our BB36 manufacturingplant.  The sales price to our corporatepartners for ERBITUX for commercial distribution in 2005, which is based solelyon our costs to produced at our BB36 plant,  is significantly lower (i.e. 

 

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roughlyone-half) than the price charged to BMS in 2004 since our unit cost tomanufacture ERBITUX is significantly lower than the cost paid to Lonza formanufacturing ERBITUX. The continuing level of manufacturing revenue in futureperiods may fluctuate significantly based on market demand, our cost ofproduction, as well as BMS’s required level of safety stock inventory forERBITUX.

 

Royalty revenues from licensees, which are based on third-party salesof licensed products and technology, are recorded as earned in accordance withcontract terms when third-party sales can be reliably measured and collectionof funds is reasonably assured.

 

Collaborative agreement revenue consists of reimbursements receivedfrom BMS and E.R. Squibb and Merck KGaA related to clinical and regulatorystudies, ERBITUX provided to them for use in clinical studies, reimbursement ofa portion of royalty expense and certain marketing and administrative costs.Collaborative agreement revenue is recorded as earned based on the performancerequirements under the respective contracts.

 

*Withholding Taxes*—In January 2003, New York Statenotified the Company that it was liable for the New York State and City incometaxes that were not withheld because one or more of the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payNew York State and City income taxes for those years. On March 13, 2003,the Company entered into a closing agreement with New York State, paying$4,500,000 to settle the matter. Subsequently, the Company became aware ofanother potential income and employment tax withholding liability associatedwith the exercise of certain warrants granted in the early years of the Company’sexistence that were held by certain former officers, directors and employees.After the Company informed New York State of the issue relating to thewarrants, New York State, in June 2003, notified the Company that it wascontinuing the previously conducted audit of the Company and was evaluating theterms of the closing agreement to determine whether or not it should bere-opened. On March 31, 2004, the Company entered into a new closingagreement pursuant to which the Company paid New York State an additional$1,000,000 in full satisfaction of all the deficiencies and determinations ofwithholding taxes for the years 1999-2001. As a result, we utilized $1,000,000of the liability of $2,815,000 that we previously established for New Yorkwithholding taxes on stock options and warrants exercised and recognized abenefit of $1,815,000 as a recovery in the Consolidated Statements ofOperations for the three months ended March 31, 2004.

 

On March 13, 2003, the Company initiated discussions with theInternal Revenue Service (the “IRS”) relating to the federal income taxesapplicable to the above noted issues. Although the IRS has not yet asserted thatthe Company is required to make a payment with respect to such failure towithhold, the IRS may assert that such a liability exists, and may furtherassert that the Company is liable for interest and penalties. The IRS hascommenced audits of the Company’s income tax and employment tax returns for taxyears 1999 through 2001. The Company is cooperating fully with the IRS withrespect to these audits, and intends to continue to do so.

 

The Company has not recognized withholding tax liabilities in respect ofexercises of certain warrants by Robert F. Goldhammer, one of the four formerofficers or directors to whom warrants were issued and previously treated asnon-compensatory warrants. Based on the Company’s investigation, it believesthat, although such warrants were compensatory, such warrants were received byMr. Goldhammer in connection with the performance of services by him inhis capacity as a director, rather than as an employee, and, as such, is notsubject to tax withholding requirements. In addition, in 1999,Mr. Goldhammer erroneously received a portion of a stock option grant inthe form of incentive stock options, which under federal law may only begranted to employees. There can be no assurance, however, that the IRS willagree with the Company’s position and will not assert that the Company isliable for the failure to withhold income and employment taxes with respect tothe exercise of such warrants and any stock options by Mr. Goldhammer. Ifthe Company became liable for the failure to withhold taxes on the exercise ofsuch warrants and any stock options by Mr. Goldhammer, the aggregatepotential liability, exclusive of any interest or penalties, would beapproximately $8,300,000.

 

The Company has not recognized accruals for penalties and interest thatmay be imposed with respect to the withholding tax issues previously describedand other related contingencies, including the period covered by the statute oflimitations and the Company’s determination of certain exercise dates, becauseit does not believe that losses from such contingencies are probable, or in theevent that any taxing authority makes a claim for penalties or interest, theCompany believes that it will be able to settle the total amount asserted(including any liability for taxes) for an amount not in excess of theliability for taxes already accrued with respect to the relevant withholdingtax issue. With respect to the statute of limitations and the Company’sdetermination of certain exercise dates, while the Company does not believe aloss is probable, there is a potential additional liability with respect tothese issues that may be asserted by a taxing authority. If taxing authoritiesassert such issues and prevail related to these withholding tax issues andother related contingencies, including 

 

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penalties,the liability that could be imposed by taxing authorities would be substantial.The potential interest on the withholding tax liabilities recorded on theConsolidated Balance Sheets could be up to a maximum amount of approximately$8,300,000 at March 31, 2005. Potential additional withholding tax liability onother related contingencies amounts to approximately $8,000,000, exclusive ofany interest or penalties, and excluding the amount potentially attributable toMr. Goldhammer noted above.

 

*Inventories*—Until February 12, 2004, all costs associated with themanufacturing of ERBITUX were included in research and development expenseswhen incurred. Effective February 13, 2004, the date after the Companyreceived approval from the FDA for ERBITUX, we began to capitalize in inventorythe cost of manufacturing ERBITUX for commercial sale and will expense suchcost as cost of manufacturing revenue at the time of sale. However, as we sellour existing inventory that was previously expensed, there will be a period oftime whereby the Company will reflect manufacturing revenue with minimal cost. Thecost of manufacturing revenue reflected in the Company’s operating expenses in2004 and in the first quarter of 2005 therefore, does not reflect fullabsorption cost of production because a portion of the raw materials, labor andoverhead costs incurred to produce the product sold, were previously expensed. Therefore,consistent with 2004, we anticipate that our margin on sales of ERBITUX to ourcorporate partners will continue to fluctuate from quarter to quarter during2005.  If the Company had capitalizedinventory prior to obtaining FDA approval of ERBITUX, the cost basis of theinventory sold would be at least 90% of manufacturing revenue or a gross marginof approximately 10%, depending on the relative level of sales to BMS and MerckKGaA. Based on our current demand schedules from our corporate partners, weexpect that we will begin to reflect full absorption costs of manufacturingrevenue sometime during the third quarter of 2005.

 

*Litigation*—The Company is currently involved in certain legal proceedings as disclosedin the Notes to the Consolidated Financial Statements. Except for the reservesestablished as of December 31, 2004 relating to settlements of certain legalproceedings, no additional reserve has been established in our financialstatements because we do not believe that such a reserve is required to beestablished at this time, in accordance with Statement of Financial StandardsNo. 5. However, if in a future period, events in any such legal proceedingsrender it probable that a loss will be incurred, and if such loss is reasonablyestimable at that time, we will establish such a reserve. Thus, it is possiblethat legal proceedings may have a material adverse impact on the operatingresults for that period, on our balance sheet or both**.**

 

*Long-Lived Assets*—We review long-lived assets for impairmentwhen events or changes in business conditions indicate that their full carryingvalue may not be recovered. Assets are considered to be impaired and writtendown to fair value if expected associated undiscounted cash flows are less thancarrying amounts. Fair value is generally determined as the present value ofthe expected associated cash flows. We have built BB36 and are building BB50,and purchased a material logistics and warehousing facility and anadministrative facility. BB36 is dedicated to the clinical and commercial productionof ERBITUX and BB50 will be a multi-use production facility. ERBITUX iscurrently being produced for clinical studies and commercialization at BB36.The material logistics and warehousing facility includes office space, astorage location and sampling laboratory for ERBITUX. A newly renovatedadministrative facility houses the clinical, regulatory, sales, marketing,finance, human resources, project management and MIS departments, as well ascertain executive and legal offices and other necessities. Based on management’scurrent estimates, we expect to recover the carrying value of such assets.Changes in regulatory or other business conditions in the future could changeour judgments about the carrying value of these facilities, which could resultin the recognition of material impairment losses.

 

*Income Taxes*—Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards. Significant estimatesare required in determining our provision for income taxes. As of March 31, 2005,the Company continues to reflect a valuation allowance against its total netdeferred tax assets because, more likely than not, its net deferred tax assetswill not be realized. Although management believes that the valuation allowanceas of March 31, 2005 is appropriate, we expect that as we continue to sellERBITUX to our corporate partners for commercial use and earn royalties andincome from operations from the expected commercial sales of ERBITUX, we willneed to revise our conclusions regarding the realization of our deferred taxassets due to expected changes in overall levels of pretax earnings. Inaddition, there may be other factors such as changes in tax laws and futurelevels of research and development spending that may impact our effective taxrate in the future.

 

**RECENTLYISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS**

 

On November 24, 2004 the Financial Accounting Standards Board (“FASB”)issued FASB Statement No. 151*,Inventory Costs*, an amendment of ARB No. 43. This Statementamends the guidance in ARB No. 43, Chapter 4, “Inventory 

 

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Pricing”,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). The provisions of thisStatement are effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The adoption of this accountingpronouncement is not expected to have a material effect on the Company’sconsolidated financial statements.

 

On December 16, 2004 the FASB issued Statement No. 123(revised 2004),*Share-Based Payment*(“Statement 123R”). This Statementrequires that the cost resulting from all share-based payment transactions berecognized in the financial statements and establishes fair value as themeasurement objective in accounting for all share-based payment arrangements. OnMarch 29, 2005 the SEC issued Staff Accounting Bulletin No. 107, *Share-Based Payment*, which summarizes the views of the staffregarding the interaction between Statement 123R and certain SEC rules andregulations and provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies.  Statement 123R was originally effective as ofthe beginning of the first interim or annual reporting period that begins afterJune 15, 2005.  However, on April14, 2005 the SEC announced a new rule that allows companies to implementStatement 123R at the beginning of their fiscal year beginning after June 15,2005.  As such, the Company will adoptStatement 123R in the first quarter of 2006. The adoption of this Statement is expected to have a material effect onthe Company’s consolidated financial statements.

 

**RESULTS OF OPERATIONS**

 

Selected financial and operating data for the three months ended March 31,2005 and 2004 are as follows: (in thousands)

 
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2005**                          | ** ** | **2004**   | ** ** | **Variance** | ** ** |
| ** **                            | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results of Operations:**            |       |                              |       |       |       |   |   |
| ** **                            |       |                              |       |       |       |   |   |
| License fees and milestone revenue    |       | $                                 | 24,534     |       | $          | 67,498 |   | $ | (42,964 | ) |
| Manufacturing revenue                 |       | 11,019                            |       | 25,504     |       | (14,485 | ) |
| Royalty revenue                       |       | 36,372                            |       | 7,145      |       | 29,227 |   |
| Collaborative agreement revenue       |       | 13,846                            |       | 10,017     |       | 3,829 |   |
| Total revenues                        |       | 85,771                            |       | 110,164    |       | (24,393 | ) |
|                                  |       |                              |       |       |       |   |   |
| Research and development              |       | 21,173                            |       | 20,211     |       | 962 |   |
| Clinical and regulatory               |       | 9,398                             |       | 7,062      |       | 2,336 |   |
| Marketing, general and administrative |       | 17,623                            |       | 11,628     |       | 5,995 |   |
| Royalty expense                       |       | 12,566                            |       | 2,043      |       | 10,523 |   |
| Cost of manufacturing revenue         |       | 743                               |       | 213        |       | 530 |   |
| Other                                 |       | —                            |       | (1,815     | )          | 1,815 |   |
| Total operating expenses              |       | 61,503                            |       | 39,342     |       | 22,161 |   |
|                                  |       |                              |       |       |       |   |   |
| Operating income                      |       | $                                 | 24,268     |       | $          | 70,822 |   | $ | (46,554 | ) |

 

***Three Months Ended March 31, 2005 and 2004***

 

**Revenues**

 

**LicenseFees and Milestone Revenue**

 

License fees and milestone revenue for the three months ended March 31,2005 of $24,534,000 consists of the recognition of up-front and milestonepayments received under the Commercial Agreement with BMS and E.R. Squibb of $23,438,000and recognition of payments received under the development and licenseagreements with Merck KGaA of 

 

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$1,096,000.The decrease of $42,964,000 from the comparable period in 2004 is due to thefact that we received a milestone payment from BMS of $250,000,000 in the firstquarter of 2004, when we obtained FDA approval of ERBITUX resulting inincremental amortization of deferred revenue of approximately $43 millionrelated to the actual product research and development costs incurred frominception through December 31, 2004 as a percentage of the estimated totalcosts to be incurred over the term of the Commercial Agreement with BMS.  License fees and milestone revenue in 2005will include the continuing amortization, based on clinical developmentspending, of the $650 million received thus far from BMS. At comparable orslightly increased rates of spending from the first quarter of 2005,amortization of milestones received to date should approximate$100 million for the full year of 2005.

 

**ManufacturingRevenue**

 

Manufacturing revenue for the three months ended March 31, 2005 of $11,019,000consists of sales of ERBITUX to our corporate partners for commercial use. Thedecrease of $14,485,000 from the comparable period in 2004 is due to acombination of lower selling price in 2005 and the absence of the initialstocking purchases by BMS as it was launching the product in the first quarterof 2004.   In accordance with theCommercial Agreement, we are contractually obligated to sell ERBITUX to BMS atour cost of production plus a 10% markup. We sell bulk inventory to Merck KGaAat our full absorption cost of production. There were no sales of ERBITUX toMerck KGaA for commercial supply during the first quarters of 2005 or 2004.  During 2004, the price charged to BMSreflected the weighted average costs of production for inventory previouslyproduced by Lonza and at our BB36 manufacturing plant. During 2004, we sold allinventory produced by Lonza, therefore our costs in 2005 reflect only costsassociated with manufacturing inventory at our BB36 manufacturing facility.Therefore, the sales price to our corporate partners in 2005 is significantlylower than the price we charged our partner in 2004 since our unit cost tomanufacture ERBITUX is significantly lower than the cost paid to Lonza formanufacturing ERBITUX. The continuing level of manufacturing revenue in futureperiods may fluctuate significantly based on market demand, our cost ofproduction, as well as BMS’s required level of safety stock inventory forERBITUX.

 

**RoyaltyRevenue**

 

Royalty revenue consists of royalty payments earned on the sale ofERBITUX by our partners, BMS and Merck KGaA. Under our agreement with BMS, weare entitled to royalty payments equal to 39% of BMS’s net sales of ERBITUX inthe United States and Canada. Under our agreement with Merck KGaA, we areentitled to royalty payments based on a percentage of gross margin of MerckKGaA’s sales of ERBITUX outside the United States and Canada. The increase of$29,227,000 from the comparable period in 2004 is primarily due to an increasein royalty received from BMS of $27,157,000 and an increase in royalty receivedfrom Merck in 2005 of approximately $2,100,000. Royalty revenue in 2005 willcontinue to reflect 39% of BMS’ net in-market sales and a range of 4.0%—4.5% ofMerck KGaA’s in-market sales until such time as a contractual minimum ofcumulative sales has been reached, thereafter the royalty rate from Merck KGaA willincrease. Specifically, by the second half of 2005, we would anticipate thisrate to increase to approximately 7.0%-7.5% of Merck’s in-market net sales.

 

**CollaborativeAgreement Revenue**

 

Collaborative agreement revenue consists primarily of reimbursementsfrom our partners BMS and E.R. Squibb and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: clinical and regulatory expenses, the cost of ERBITUXsupplied to our partners for use in clinical studies, certain marketing andadministrative expenses and a portion of royalty expense. During the firstquarter of 2005, we earned $13,846,000 in collaborative agreement revenue ofwhich approximately $9,560,000 represents amounts earned from BMS and E.R.Squibb and approximately $4,280,000 represents amounts earned from Merck KGaA,as compared to $10,017,000 earned in the comparable period in 2004, of which $7,854,000was earned from BMS and E.R. Squibb and $2,163,000 was earned from Merck KGaA.The increase in collaborative agreement revenue of $3,829,000 is principallydue to an increase in royalty expense reimbursed by our corporate partners as aresult of higher in-market sales.  Collaborativeagreement revenue in 2005 will continue to include the purchase of ERBITUX forclinical use by our partners, as well as reimbursement of certain regulatoryand clinical expenses incurred on behalf of ERBITUX, reimbursement of certainmarketing and administrative expenses, and reimbursement for royalty expenseswhich will approximate 4.5% of US in-market sales, and approximately 1% ofsales outside the U.S.

 

**Researchand Development**

 

Research and development expenses in the first quarter of 2005 of$21,173,000 increased by approximately $960,000 from the comparable period in 2004.The increase is primarily due to an increase in costs associated with thedevelopment of our non-ERBITUX pipeline. Research and development expensesinclude costs associated with our in-house 

 

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andcollaborative research programs, product and process development expenses,costs to manufacture ERBITUX (until February 12, 2004) and other productcandidates and quality assurance and quality control costs. Research anddevelopment includes costs that are reimbursable from our corporate partners.Approximately $4,640,000 and $5,357,000 of costs representing research anddevelopment expenses for the three months ended March 31, 2005 and 2004,respectively, were reimbursed and included under collaborative agreementrevenue since they represent inventory supplied to our partners for use inclinical studies. We previously estimated that research and developmentexpenses in 2005 would be approximately $100 million.  However, we now estimate that research anddevelopment expenses for the full year of 2005 will range between $110-$115million due to higher than anticipated demand of ERBITUX for clinical use byMerck, based on their most recent inventory supply demand schedule.  It should be noted that Collaborativeagreement revenue will also increase proportionately, to reflect thereimbursement of ERBITUX for clinical supply.

 

**Clinicaland Regulatory**

 

Clinical and regulatory expenses in the first quarter of 2005 were $9,398,000,an increase of $2,336,000 from the comparable period in 2004. This increase isdue to an increase in expenses associated with payments to third parties forclinical trials of approximately $1.2 million and increases in salaries andbenefits of approximately $1.0 million as a result of an increase in headcountand merit increases that took effect in January of 2005. Clinical and regulatoryexpenses consist of costs to conduct our clinical studies and associatedregulatory activities.  Approximately $4,160,000and $3,365,000 of the costs included in this category for the three monthsended March 31, 2005 and 2004, respectively, are reflected as revenuesunder collaborative agreement revenue since they represent costs that arereimbursable by our corporate partners. Clinical and regulatory expenses in2005 are expected to reach approximately $50 million for the full year, aswe embark on a number of studies in support of expanded use of ERBITUX as wellas Phase I clinical development programs for four pipeline products.

 

**Marketing,General and Administrative**

 

Marketing, general and administrative expenses include marketing andadministrative personnel costs, including related facility costs, additionalcosts to develop internal marketing and field operations capabilities andexpenses associated with applying for patent protection for our technology andproducts. Marketing, general and administrative expenses also include amountsreimbursable from our corporate partners.

 

Marketing, general and administrative expenses in the three monthsended March 31, 2005 amounted to $17,623,000, an increase of $5,995,000 or 52.0%from the comparable period in 2004. This increase is partly due to increases insalaries and benefits of approximately $3.0 million due to increased headcountand an increase of approximately $2.3 million in professional services feesrelated to legal, tax consulting and marketing programs. Certain expenses inthis category are reimbursable from our corporate partners. Approximately $570,000and $423,000 of costs representing marketing and general expenses for the threemonths ended March 31, 2005 and 2004, respectively, are reimbursed andincluded in collaborative agreement revenue. Marketing, general and administrative expenses should approximate $68million in 2005.

 

**Cost ofManufacturing Revenue**

 

Effective February 13, 2004, the Company began to capitalize ininventory the costs of manufacturing of ERBITUX for sale and will expense suchcosts as cost of manufacturing revenue at the time of commercial sale. However,as we continue to sell inventory that was previously expensed, we will continueto reflect minimum cost of manufacturing revenue since the majority of the costof such inventory has already been expensed in prior periods as research anddevelopment expenses.  Consistent with2004, we anticipate that our manufacturing revenue margin on sales of ERBITUXto our corporate partners will continue to fluctuate from quarter to quarter untilsuch time as we exhaust all inventory whose costs was expensed as research anddevelopment prior to obtaining FDA approval for ERBITUX. The costs ofmanufacturing revenue in the first quarter of 2005 continues to reflect onlycosts associated with packaging, filling, labeling and shipping. We anticipatethat in the second quarter of 2005, we will begin to reflect incremental costsof manufacturing revenue reflecting partial costs related to batches that werein work-in-process on February 13, 2004. Based on our current expectations of purchases by our partners, weexpect to begin to reflect full cost of manufacturing revenue during the thirdquarter of 2005.

 

**RoyaltyExpense**

 

Royalty expense of $12,566,000 for the three months ended March 31,2005 increased by $10,523,000 from the comparable period in 2004.  Royalty expense consists of obligationsrelated to certain licensing agreements related to ERBITUX.  We are obligated to pay royalties ofapproximately 12.75% of North American net sales and a low single digit 

 

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royaltyon sales outside of North America, which will increase if sales outside ofNorth America consist of ERBITUX produced in the United States. We receivereimbursements from our corporate partners of 4.5% on North American net salesand a minimum of 1% on sales outside of North America.  After the first quarter of 2006, gross royaltyexpense due on North American net sales will decrease to 9.75% and ourreimbursement on such sales will decrease to 2.5%. Approximately $4,468,000 and$871,000 of royalty expense is reimbursable by our corporate partners andincluded as collaborative agreement revenue for the three months ended March 31,2005 and 2004, respectively. We expect that royalty expenses in 2005 forERBITUX will continue to reflect the same percentages outlined above.

 

**InterestIncome and Interest Expense**

 

Interest income for the three months ended March 31, 2005 amounted to$6,757,000, an increase of approximately $6.3 million from the comparableperiod in 2004. This increase is attributable to the increase in the Company’scash and cash equivalents and our securities portfolio primarily as a result ofthe $600,000,000 of convertible debt issued in May 2004.

 

Interest expense for the first three months ended March 31, 2005amounted to $1,809,000, an increase of approximately $130,000. The increase isdue to higher debt outstanding, partly offset by lower interest rate than inthe comparable period of 2004.

 

**Provisionfor Income Taxes**

 

The estimated effective income tax rate used in calculating the fullyear 2005 is 1.3% as compared to the federal statutory rate of 35%. Thedifference from the statutory rate results from the utilization of fullyreserved deferred tax assets, primarily the amortization of deferred revenueassociated with license fees and milestones, which were taxable in priorperiods.

 

**Net Income**

 

For the three months ended March 31, 2005 we had net income of $28,820,000or $.35 per basic common share and $.33 per diluted common share, compared withnet income of $62,736,000 or $.83 per basic and $.76 per diluted common sharein the comparable period in 2004. The fluctuation in results was due to thefactors noted above.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

At March 31, 2005, our principal sources of liquidity consisted ofcash and cash equivalents and securities available for sale of approximately $824 million.Historically, we have financed our operations through a variety of sources,most significantly through the issuance of public and private equity andconvertible notes, license fees and milestone payments and reimbursements fromour corporate partners. Since the approval of ERBITUX on February 12, 2004,we began to generate royalty revenue and manufacturing revenue from thecommercial sale of ERBITUX by our corporate partners and generated income fromoperations in 2004 and in the first quarter of 2005. As we continue to generateincome, our cash flows from operating activities is expected to increase as asource to fund our operations.

 

***SUMMARY OF CASH FLOWS***

 
| ** **                                            | ** ** | **Three Months   Ended March 31,** | ** ** | ** **         | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **2005**                           | ** ** | **2004**           | ** ** | **Variance** | ** ** |
| ** **                                            | ** ** | ** **                         | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Cash provided by (used in):                           |       |                               |       |               |       |   |   |
| Operating activities                                  |       | $                                  | (70,004    | )                  | $          | 194,376 |   | $ | (264,380 | ) |
| Investing activities                                  |       | 454                                |       | (54,729            | )          | 55,183 |   |
| Financing activities                                  |       | 6,617                              |       | 8,399              |       | (1,782 | ) |
| Net (decrease) increase in cash and cash  equivalents |       | $                                  | (62,933    | )                  | $          | 148,046 |   | $ | (210,979 | ) |

 

Historically our cash flows from operating activities have fluctuatedsignificantly due to the nature of our operations and the timing of our cashreceipts. During the three months ended March 31, 2005, we did not generatepositive cash flows from operations but used approximately $70 million of cash inoperating activities mainly due to the payment of $50 million related to theshareholders lawsuit that we settled in January 2005 and approximately $30million of royalty and other license related payments to Genentech and Centocorrelated to 2004, for license agreements that we finalized during January 2005, 

 

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partiallyoffset by cash generated from operations. As we have noted in the past, we expect significant fluctuations in ouroperating cash flows as we continue to transform from a research anddevelopment company to a commercial operating entity.

 

Our primary sources and uses of cash under investing activities consistof purchases and sales activity in our investment portfolio, which we managebased on our liquidity needs, possible business development transactions andamounts used for capital expenditures. During the three months ended March 31,2005, we generated approximately $450,000 in investing activities ascompared to the comparable period in 2004, in which we used $54.7 millionfrom investing activities.  Thefluctuation in investing activities is due to the fact that in the firstquarter of 2005, we sold a number of securities and used such proceeds to payfor some operating expenses such as the $50 million in settlement of theshareholder litigation.  We expect thatin 2005, capital spending will range from $100-$120 million includingapproximately $30 million of validation and commissioning costs associated withour multiple product manufacturing facility (“BB50”).

 

Net cash flows provided by financing activities in the three monthsended March 31, 2005 decreased by approximately $1.8 million, due to a decreasein the amount of cash generated from the exercise of stock options.

 

We believe that our existing cash and cash equivalents and marketablesecurities and our cash provided by operating activities will provide us withsufficient liquidity to support our operations at least through the secondquarter of 2006. We are also entitled to reimbursement for certain marketing,royalty expense, and research and development expenditures and certain otherpayments, some of which are payable contingent upon the achievement of researchand development and regulatory milestones. There can be no assurance that wewill achieve these milestones. Our future working capital and capitalrequirements will depend upon numerous factors, including, but not limited to:

 

*•*progressand cost of our research and development programs, pre-clinical testing andclinical studies;

 

*•*theamount and timing of revenues earned from the commercial sale of ERBITUX;

 

*•*ourcorporate partners fulfilling their obligations to us;

 

*•*timingand cost of seeking and obtaining additional regulatory approvals;

 

*•*levelof resources that we devote to the development of marketing and fieldoperations capabilities;

 

*•*costsinvolved in filing, prosecuting and enforcing patent claims; and legal costsassociated with the outcome of outstanding legal proceedings andinvestigations;

 

*•*statusof competition; and

 

*•*ourability to maintain existing corporate collaborations and establish newcollaborative arrangements with other companies to provide funding to supportthese activities.

 

The table below presents our contractual obligations and commercialcommitments as of March 31, 2005: (in thousands)

 
| ** **                    | ** ** | ** ** | ** ** | **Payments due by Year** | ** ** |
|-------------------------------|------------|------------|------------|--------------------------|------------|
| ** **                    | ** ** | **Total**  | ** ** | **2005**                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** |
| Long-term debt                |       | $          | 600,000    |                     | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Operating leases obligations  |       | 74,295     |       | 3,960                    |       | 5,162 |   | 5,146 |   | 3,988 |   | 4,027 |   | 52,012 |   |
| Purchase obligations          |       | 7,236      |       | 7,236                    |       | — |   | — |   | — |   | — |   | — |   |
| Contract services obligations |       | 16,380     |       | 7,200                    |       | 1,620 |   | 1,620 |   | 1,350 |   | 1,620 |   | 2,970 |   |
| Construction obligations      |       | 14,431     |       | 14,431                   |       | — |   | — |   | — |   | — |   | — |   |
|                          |       |       |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Total                         |       | $          | 712,342    |                     | $          | 32,827 |   | $ | 6,782 |   | $ | 6,766 |   | $ | 5,338 |   | $ | 5,647 |   | $ | 654,982 |   |

 

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**OFF-BALANCESHEET ARRANGEMENTS**

 

We have no off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on our financial condition, resultsof operations, liquidity, capital expenditures or capital resources.

 

**Item 3****.  *Quantitative and Qualitative Disclosures About MarketRisk***

 

Our holdings of financialinstruments comprise a mix of U.S. dollar denominated securities that mayinclude U.S. corporate debt, foreign corporate debt, U.S. government debt,foreign government/agency guaranteed debt and commercial paper. All suchinstruments are classified as securities available for sale. Generally, we donot invest in portfolio equity securities, commodities, foreign exchangecontracts or use financial derivatives for trading purposes. Our debt securityportfolio represents funds held temporarily pending use in our business andoperations. We manage these funds accordingly. We seek reasonable assurednessof the safety of principal and market liquidity by investing in investmentgrade fixed income securities while at the same time seeking to achieve a favorablerate of return. Our market risk exposure consists principally of exposure tochanges in interest rates. Our holdings are also exposed to the risks ofchanges in the credit quality of issuers. We invest in securities that have arange of maturity dates. Typically, those with a short-term maturity arefixed-rate; highly liquid debt instruments and those with longer-termmaturities are highly liquid debt instruments with fixed interest rates or withperiodic interest rate adjustments.

 

The table below presents theprincipal amounts and related weighted average interest rates by year ofmaturity for our investment portfolio as of March 31, 2005: (in thousands,except interest rates)

 
| ** **            | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------|------------|-----------|------------|-----------------|------------|
| Fixed Rate            |       | $        | 84,683     |     | $          | 168,002  |       | $        | 202,402    |     | $          | 100,000                 |       | $         | 55,000     |            | $          | 20,000 |   | $ | 630,087 |   | $ | 622,371 |   |
| Average Interest Rate |       | 2.00     | %          | 2.96     | %          | 3.49     | %          | 3.86     | %          | 4.33     | %          | 4.54                    | %          | 3.31      | %          |            |       |
| Variable Rate(1)      |       | 162,140  |       | —   |       | 10,000   |       | 1,805    |       | —   |       | 11,860                  |       | 185,805   |       | 185,644         |       |
| Average Interest Rate |       | 2.89     | %          | —   |       | 3.00     | %          | 1.37     | %          | —   |       | 3.64                    | %          | 2.93      | %          |            |       |
|                  |       | $        | 246,823    |     | $          | 168,002  |       | $        | 212,402    |     | $          | 101,805                 |       | $         | 55,000     |            | $          | 31,860 |   | $ | 815,892 |   | $ | 808,015 |   |

 

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(1)           These holdings consist of U.S. corporate andforeign corporate floating rate notes. Interest on the securities is adjustedmonthly, quarterly or semi-annually, depending on the instrument, usingprevailing interest rates. These holdings are highly liquid and we consider thepotential for loss of principal to be minimal.

 

Our outstanding 13/8% fixed rate convertiblesenior notes in the principal amount of $600,000,000 due May 15, 2024 areconvertible into our common stock at a conversion price of $94.69 per share,subject to certain restrictions as outlined in the indenture agreement. Thefair value of fixed interest rate instruments is affected by changes ininterest rates and in the case of the convertible notes by changes in the priceof our common stock as well. The fair value of the convertible senior notes wasapproximately $499,500,000 at March 31, 2005.

 

**Item 4****.  *Controls and Procedures***

 

*DisclosureControls and Procedures*

 

Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, has evaluated the effectiveness of our “disclosurecontrols and procedures” (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report. Based on suchevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures are effective in recording, processing,summarizing and reporting, on a timely basis, information that we are requiredto disclose in the reports that we file or submit under the Exchange Act.

 

*Changes InInternal Control Over Financial Reporting*

 

There has been no change in our internal control over financialreporting during the three months ended March 31, 2005 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

34

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**PART II.**

 

**OTHERINFORMATION**

 

**Item1.  *LegalProceedings***

 

***A. Litigation***

 

**1. FederalSecurities Actions**

 

As previously reported,beginning in January 2002, a number of complaints asserting claims underthe federal securities laws against the Company and certain of the Company’sdirectors and officers were filed in the U.S. District Court for the SouthernDistrict of New York. Those actions were consolidated under the caption Irvinev. ImClone Systems Incorporated, et al., No. 02 Civ. 0109 (RO).  In the corrected consolidated amendedcomplaint plaintiffs asserted claims against the Company, its former Presidentand Chief Executive Officer, Dr. Samuel D. Waksal, its former ChiefScientific Officer and then-President and Chief Executive Officer,Dr. Harlan W. Waksal, and several of the Company’s other present or formerofficers and directors, for securities fraud under sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934 and Securities and Exchange CommissionRule 10b-5, on behalf of a purported class of persons who purchased theCompany’s publicly traded securities between March 27, 2001 andJanuary 25, 2002.  The complaintalso asserted claims against Dr. Samuel D. Waksal under section 20Aof the Exchange Act on behalf of a separate purported sub-class of purchasersof the Company’s securities between December 27, 2001 andDecember 28, 2001. The complaint generally alleged that various publicstatements made by or on behalf of the Company or the other defendants during2001 and early 2002 regarding the prospects for FDA approval of ERBITUX® werefalse or misleading when made, that the individual defendants were allegedlyaware of material non-public information regarding the actual prospects forERBITUX at the time that they engaged in transactions in the Company’s commonstock and that members of the purported stockholder class suffered damages whenthe market price of the Company’s common stock declined following disclosure ofthe information that allegedly had not been previously disclosed. The complaintsought to proceed on behalf of the alleged classes described above, soughtmonetary damages in an unspecified amount and sought recovery of plaintiffs’ costsand attorneys’ fees. On June 3, 2003, the court granted, in part, a motionto dismiss filed by all defendants and dismissed plaintiff’s claims exceptthose asserted against the Company, Dr. Samuel D. Waksal, andDr. Harlan W. Waksal. On April 14, 2004, the court granted plaintiffs’motion for class certification. On January 24, 2005, the Company announcedthat it had reached an agreement in principle to settle the consolidated classaction for a cash payment of $75 million, a portion of which will be paidby the Company’s insurers. The parties signed a definitive stipulation ofsettlement as of March 9, 2005. The Court has scheduled a hearing to considerapproval of the proposed settlement on June 24, 2005. As provided for under thesettlement documents, the Company has paid $50 million into an escrow accountpending final court approval of the settlement. Upon final court approval ofthe settlement, the Company will pay the remaining $25 million, a portion ofwhich will be paid by the Company’s insurers.

 

As previously reported, separately, on September 17, 2002, anindividual purchaser of the Company’s common stock filed an action (Flynn v.ImClone Systems Incorporated, et al., No. 02 Civ 7499 (RO)) on his ownbehalf in the U.S. District Court for the Southern District of New Yorkasserting claims against the Company, Dr. Samuel D. Waksal andDr. Harlan W. Waksal under sections 10(b) and 20(a) of the Exchange Actand Securities and Exchange Commission Rule 10b-5. This matter was settledand dismissed with prejudice in a stipulation and order entered on March 21,2005.

 

**2.Derivative Actions**

 

As previously reported,beginning on January 13, 2002, and continuing thereafter, nine separatepurported shareholder derivative actions were filed against members of theCompany’s board of directors, certain of the Company’s present and formerofficers, and the Company, as nominal defendant, advancing claims based onallegations similar to the allegations in the federal securities class actioncomplaints. Four of these derivative cases were filed in the Delaware Court ofChancery and have been consolidated in that court under the caption In reImClone Systems Incorporated Derivative Litigation, Cons. C.A.No. 19341-NC. Three of these derivative actions were filed in New YorkState Supreme Court in Manhattan. All of these state court actions have beenstayed in deference to the proceedings in the U.S. District Court for theSouthern District of New York, which have been consolidated under the captionIn re ImClone Systems, Inc. Shareholder Derivative Litigation, Master FileNo. 02 CV 163 (RO). A supplemental verified consolidated amendedderivative complaint in these consolidated federal actions was filed onAugust 8, 2003. It asserted, purportedly on behalf of the Company, claimsincluding breach of fiduciary duty by certain current and former members of theCompany’s board of directors, among others, based on allegations including thatthey failed to ensure that the Company’s disclosures relating to the regulatoryand 

 

35

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marketing prospects for ERBITUX were notmisleading and that they failed to maintain adequate controls and to exercisedue care with regard to the Company’s ERBITUX application to the FDA. OnJanuary 9, 2004, the Company filed a motion to dismiss the complaint dueto plaintiffs’ failure to make a pre-suit demand on the Company’s board ofdirectors to institute suit or to allege grounds for concluding that such ademand would have been futile. The individual defendants filed motions on thesame date, both joining in the Company’s motion and seeking to dismiss thecomplaint for failure to state a claim. On January 24, 2005, the Companyannounced that it had reached an agreement in principle to settle the consolidatedderivative action. The parties entered into a definitive stipulation ofsettlement on March 14, 2005. Under the settlement, the Company will be paid$8.75 million by its insurers, which the Company intends to contributetoward the settlement of the Irvine securities class action described aboveafter deducting amounts awarded by the Court in the derivative action forplaintiffs’ attorney’s fees and expenses in that action, which the Company hasagreed not to oppose in an amount up to $875,000.  The settlement is subject to Court approval,which will be considered at a hearing that has been scheduled for June 24,2005, and is also conditioned upon approval and consummation of the settlementof the Irvine class action.

 

**3.     Bristol-MyersAction**

 

As previously reported, onOctober 8, 2003, certain mutual funds that are past or present commonstockholders of BMS filed an action in New York State court against BMS,certain present or former officers and directors of BMS and the Companyasserting that they were misled into purchasing or holding their shares of BMScommon stock as a result of various public statements by BMS and certainpresent or former officers or directors of BMS, and that the Company allegedlyaided and abetted certain of these misstatements. The action is styled FSSFranklin Global Health Care Fund, et al. v. Bristol-Myers Squibb Co., et al.,Index No. 603168/03. On January 9, 2004, the Company and all of theother defendants served motions to dismiss the complaint for failure to state acause of action. In December 2004, the plaintiffs filed an amended complaint.The allegation and claims asserted against the Company in the amended complaintwere virtually unchanged. On February 11, 2005, all defendants served motionsto dismiss the amended complaint. These motions to dismiss have been fullybriefed and argument is scheduled for May 13, 2005. The court has not yet ruledupon the motions, and discovery has been stayed during the pendency of themotions.

 

The Company intends tovigorously defend against the claims asserted in this action. The Company isunable to predict the outcome of this action at this time. No reserve has beenestablished in the financial statements because the Company does not believethat such a reserve is required to be established at this time under Statementof Financial Accounting Standards No. 5.

 

***B. Government Inquiries and Investigations***

Aspreviously reported, the Company received subpoenas and requests forinformation in connection with an investigation by the SEC relating to thecircumstances surrounding the disclosure of the FDA “refusal to file” letterdated December 28, 2001, and trading in the Company’s securities bycertain ImClone Systems insiders in 2001. The Company also received subpoenasand requests for information pertaining to document retention issues in 2001and 2002, and to certain communications regarding ERBITUX in 2000. OnJune 19, 2002, the Company received a written “Wells Notice” from thestaff of the SEC, indicating that the staff of the SEC is consideringrecommending that the SEC bring an action against the Company relating to theCompany’s disclosures immediately following the receipt of a “refusal to file”letter from the FDA on December 28, 2001 for the Company’s BLA forERBITUX. The Company filed a Wells submission on July 12, 2002 in responseto the staff’s Wells Notice. There have been no recent developments inconnection with this SEC investigation.

 

In January 2003, NewYork State notified the Company that the Company was liable for theNew York State and City income taxes that were not withheld because one ormore the Company’s employees who exercised certain non-qualified stock optionsin 1999 and 2000 failed to pay New York State and City income taxes forthose years. On March 13, 2003, the Company entered into a closingagreement with New York State, paying $4,500,000 to settle the matter. TheCompany believes that substantially all of the underpayment of New York Stateand City income tax identified by New York State is attributable to theexercise of non-qualified stock options by the Company’s former President andChief Executive Officer, Dr. Samuel D. Waksal. At the same time, theCompany informed the IRS, the SEC and the United States Attorney’s Office,responsible for the prosecution of Dr. Samuel D. Waksal, of this issue. Inorder to confirm whether the Company’s liability in this regard was limited toDr. Samuel D. Waksal’s failure to pay income taxes, the Company contactedcurrent and former officers and employees who had exercised non-qualified stockoptions to confirm that those individuals had properly reported and paid theirpersonal income tax liabilities for the years 1999 and 2000 in which theyexercised options, which would reduce or eliminate the Company’s potentialliability for failure to withhold income taxes on the exercise of thoseoptions. In the course of doing so, the Company became aware of anotherpotential income and employment tax withholding liability 

 

36

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associated with the exercise of certainwarrants granted in the early years of the Company’s existence that were heldby certain former officers, directors and employees, including the Company’sformer President and Chief Executive Officer, Samuel D. Waksal, the Company’sformer General Counsel, John B. Landes, the Company’s former Chief ScientificOfficer, Harlan W. Waksal, and the Company’s former director and Chairman ofthe Board, Robert F. Goldhammer. Again, the Company promptly informed the IRS,the SEC and the United States Attorney’s Office of this issue. The Company alsoinformed New York State of this issue. On June 17, 2003, New York Statenotified the Company that based on this issue, they were continuing apreviously conducted audit and were evaluating the terms of the closingagreement to determine whether it should be re-opened. On March 31, 2004,the Company entered into a new closing agreement pursuant to which the Companypaid New York State an additional $1,000,000 in full satisfaction of all thedeficiencies and determinations of withholding taxes for the years 1999-2001.Therefore, the Company has eliminated the liability of $2,815,000 primarilyattributable to New York State withholding taxes on stock options and warrantsexercised by Dr. Samuel D. Waksal and has recognized a benefit of$1,815,000 as a recovery in the Consolidated Statements of Operations in thefirst quarter of 2004.

 

The IRS has commenced auditsof the Company’s income tax and employment tax returns for tax years 1999through 2001. The Company has responded to all requests for information anddocuments received to date from the IRS and is awaiting further requests oraction from the IRS.

 

On March 31, 2003, theCompany received notification from the SEC that it was conducting an informalinquiry into the matters discussed above and on April 2, 2003, the Companyreceived a request from the SEC for the voluntary production of relateddocuments and information. The Company is cooperating fully with this SEC inquiry.There have been no recent developments in connection with this SECinvestigation.

 

***C. Actions Against Dr. Samuel D. Waksal***

 

As previously reported, on August 14, 2002, after the federalgrand jury indictment of Dr. Samuel D. Waksal had been issued but before Dr. SamuelD. Waksal’s guilty plea to certain counts of that indictment, the Company filedan action in New York State Supreme Court seeking recovery of certaincompensation, including advancement of certain defense costs, that the Companyhad paid to or on behalf of Dr. Samuel D. Waksal and cancellation ofcertain stock options. That action was styled ImClone Systems Incorporated v.Samuel D. Waksal, Index No. 02/602996. On July 25, 2003,Dr. Samuel D. Waksal filed a Motion to Compel Arbitration seeking to haveall claims in connection with the Company’s action against him resolved inarbitration. By order dated September 19, 2003, the Court grantedDr. Samuel D. Waksal’s motion and the action was stayed pendingarbitration. On September 25, 2003, Dr. Samuel D. Waksal submitted aDemand for Arbitration with the American Arbitration Association (the “AAA”),by which Dr. Samuel D. Waksal asserts claims to enforce the terms of hisseparation agreement, including provisions relating to advancement of legalfees, expenses, interest and indemnification, for which Dr. Samuel D.Waksal claims unspecified damages of $10 million. The Demand forArbitration also seeks to resolve the claims that the Company asserted in theNew York State Supreme Court action. On November 7, 2003, the Companyfiled an Answer and Counterclaims by which the Company denied Dr. SamuelD. Waksal’s entitlement to advancement of legal fees, expenses andindemnification, and asserted claims seeking recovery of certain compensation,including stock options, cash payments and advancement of certain defense coststhat the Company had paid to or on behalf of Dr. Samuel D. Waksal. Inresponse, on December 15, 2003, Dr. Samuel D. Waksal filed a Reply toCounterclaims. Arbitration hearings in this matter are scheduled to occur inOctober and November 2005. The Company intends to vigorously defend against theclaims asserted in this matter and to vigorously pursue its counterclaims. TheCompany is unable to predict the outcome of this action at this time. Noreserve has been established in the financial statements because the Companydoes not believe that such a reserve is required to be established at this timeunder Statement of Financial Accounting Standards No. 5.

 

As previously reported, onMarch 10, 2004, the Company commenced a second action againstDr. Samuel D. Waksal in the New York State Supreme Court. That action isstyled ImClone Systems Incorporated v. Samuel D. Waksal, IndexNo. 04/600643. By this action, the Company seeks the return of more than$21 million that the Company paid to Dr. Samuel D. Waksal, asproceeds from stock option exercises, which the Company alleges he was expectedto pay over to federal, state and local tax authorities in satisfaction of histax obligations arising from certain exercises between 1999 and 2001 ofwarrants and non-qualified stock options. Specifically, by this action, theCompany seeks to recover: (a) $4.5 million that the Company paid tothe State of New York in respect of exercises of non-qualified stock optionsand certain warrants in 2000; (b) at least $16.6 million that theCompany paid to Samuel D. Waksal in the form of ImClone common stock, in lieuof withholding federal income taxes from exercises of non-qualified stockoptions and certain warrants in 2000; and (c) approximately$1.1 million that the Company paid in the form of ImClone common stock toSamuel D. Waksal and his beneficiaries, in lieu of withholding federal, stateand local income taxes from certain warrant exercises in 1999-2001. The complaintasserts claims for unjust enrichment, common law indemnification, moneys hadand received and constructive trust. 

 

37

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OnJune 18, 2004, Dr. Samuel D. Waksal filed an Answer to the Company’sComplaint. Fact discovery in this matter is underway.

 

***D. IntellectualProperty Litigation***

 

As previously reported, onOctober 28, 2003, a complaint was filed by Yeda Research and DevelopmentCompany Ltd. (“Yeda”) against ImClone Systems and AventisPharmaceuticals, Inc. in the U.S. District Court for the Southern Districtof New York (03 CV 8484). This action alleges and seeks that three individualsassociated with Yeda should also be named as co-inventors on U.S. PatentNo. 6,217,866. On February 9, 2005, Yeda indicated that they intend toamend their U.S. complaint to seek sole inventorship of the subject patent. TheCompany is vigorously defending against the claims asserted in this action. TheCompany is unable to predict the outcome of this action at the present time.

 

As previously reported, onMarch 25, 2004, an action was filed in the United Kingdom Patent Officeentitled Referrer’s Statement requesting transfer of co-ownership and amendmentof patent EP (UK) 0 667 165 to add three Yeda employees as inventors.. Also onMarch 25, 2004, a German action entitled Legal Action was filed in theMunich District Court I, Patent Litigation Division, seeking to add three Yedaemployees as inventors on patent EP (DE) 0 667 165. The Company was not namedas a party in these actions that relate to the European equivalent of U.S.Patent No. 6,217,866 discussed above; accordingly, the Company hasintervened in the German and the U.K. actions.  Additionally, on or about March 25, 2005 andMarch 29, 2005, respectively, Yeda filed legal actions in Austria and Franceagainst both Aventis and ImClone Systems seeking full inventorship of EP (AU) 0667 165 and EP (FR) 0 667 165, as well as payment of legal costs and fees.

 

As previously reported, onMay 4, 2004, a complaint was filed against the Company by MassachusettsInstitute of Technology (“MIT”) and Repligen Corporation (“Repligen”) in theU.S. District Court for the District of Massachusetts (04-10884 RGS). Thisaction alleges that ERBITUX infringes U.S. Patent No. 4,663,281, which isowned by MIT and exclusively licensed to Repligen. The Company intends todefend vigorously against claims asserted in this action, which is in its earlystages. The Company is unable to predict the outcome of this action at thepresent time.

 

No reserve has beenestablished in the financial statements for any of the Yeda or MIT and Repligenactions because the Company does not believe that such a reserve is required tobe established at this time under Statement of Financial Accounting StandardsNo. 5.

 

**Item 2.  *Unregistered Sales of Equity Securities and Use ofProceeds***

 

Not applicable

 

**Item 3.  *Defaults upon Senior Securities***

 

Not applicable

 

**Item 4.  *Submission of Matters to a Vote of Security Holders***

 

Not applicable

 

 

**Item5.  *OtherInformation***

 

Not applicable

 

38

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**Item 6.  *Exhibits***

 
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                              | ** ** | **Incorporation by  Reference** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|
| 3.1               |       | Certificate  of Incorporation, as amended through December 31, 1998                                                                                                                          |       | D (3.1)                         |
| 3.2               |       | Amendment  dated June 4, 1999 to the Company’s Certificate of Incorporation, as amended                                                                                                 |       | H (3.1A)                        |
| 3.3               |       | Amendment  dated June 12, 2000 to the Company’s Certificate of Incorporation, as amended                                                                                                |       | K (3.1A)                        |
| 3.4               |       | Amendment  dated August 9, 2002 to the Company’s Certificate of Incorporation, as  amended                                                                                              |       | Q (3.1C)                        |
| 3.5               |       | Amended  and Restated By-Laws of the Company                                                                                                                                                 |       | S (3.2)                         |
| 4.1               |       | Rights  Agreement dated as of February 15, 2002 between the Company and EquiServe  Trust Company, N.A., as Rights Agent                                                                      |       | M (99.2)                        |
| 4.2               |       | Stockholder  Agreement, dated as of September 19, 2001, among Bristol-Myers Squibb  Company, Bristol-Myers Squibb Biologics Company and the Company                                          |       | L (99.2D2)                      |
| 4.3               |       | Indenture  dated as of May 7, 2004 by and between the Company and The Bank of New York,  as Trustee and Form of 13/8% Convertible Notes Due 2024                                             |       | V(4.5)                          |
| 4.4               |       | Registration  Rights Agreement dated as of May 7, 2004 by and between the Company, as  Issuer, and Morgan Stanley & Co., Incorporated and UBS Securities LLC, as  the Initial Purchasers |       | V(4.6)                          |
| 10.1              |       | Company’s  1986 Employee Incentive Stock Option Plan, including form of Incentive Stock  Option Agreement                                                                               |       | A (10.1)                        |
| 10.2              |       | Company’s  1986 Non-qualified Stock Option Plan, including form of Non-qualified Stock  Option Agreement                                                                                |       | A (10.2)                        |
| 10.3              |       | 1996  Incentive Stock Option Plan, as amended                                                                                                                                                |       | O (99.1)                        |
| 10.4              |       | 1996  Non-Qualified Stock Option Plan, as amended                                                                                                                                            |       | O (99.2)                        |
| 10.5              |       | ImClone  Systems Incorporated 1998 Non-Qualified Stock Option Plan, as amended                                                                                                               |       | O (99.2)                        |
| 10.6              |       | ImClone  Systems Incorporated 2002 Stock Option Plan                                                                                                                                         |       | Q (99.8)                        |
| 10.7              |       | ImClone  Systems Incorporated 1998 Employee Stock Purchase Plan                                                                                                                              |       | I (99.4)                        |
| 10.8              |       | Option  Agreement, dated as of September 1, 1998, between the Company and Ron Martell                                                                                                        |       | F (99.3)                        |
| 10.9              |       | Option  Agreement, dated as of January 4, 1999, between the Company and S. Joseph Tarnowski                                                                                                  |       | J (99.4)                        |
| 10.10             |       | License  Agreement between the Company and the Regents of the University of California  dated April 9, 1993                                                                                  |       | B (10.48)                       |
| 10.11             |       | Collaboration  and License Agreement between the Company and the Cancer Research Campaign  Technology, Ltd., signed April 4, 1994, with an effective date of April 1,  1994                  |       | B (10.50)                       |
| 10.12             |       | License  Agreement between the Company and Rhone-Poulenc Rorer dated June 13, 1994                                                                                                           |       | C (10.56)                       |
| 10.13             |       | Development  and License Agreement between the Company and Merck KGaA dated December 14,  1998                                                                                               |       | E (10.70)                       |
| 10.14             |       | Lease  dated as of December 15, 1998 for the Company’s premises at 180 Varick  Street, New York, New York                                                                               |       | G (10.69)                       |
| 10.15             |       | Amendment  dated March 2, 1999 to Development and License Agreement between the Company  and Merck KGaA                                                                                      |       | G (10.71)                       |
| 10.16             |       | Acquisition  Agreement dated as of September 19, 2001, among the Company, Bristol-Myers  Squibb Company and Bristol-Myers Squibb Biologics Company                                           |       | L(99.D1)                        |
| 10.17             |       | Development,  Promotion, Distribution and Supply Agreement, dated as of September 19, 2001,  among the Company, Bristol-Myers Squibb Company and E.R. Squibb & Sons,  L.L.C              |       | L (99.D3)                       |
| 10.18             |       | Employment  Agreement, dated as of September 19, 2001, between the Company and S. Joseph  Tarnowski, Ph.D                                                                                    |       | L (99.D10)                      |
| 10.20             |       | Employment  Agreement, dated as of March 19, 2004, between the Company and Daniel S.  Lynch.                                                                                                 |       | U (10.1)                        |
| 10.21             |       | Agreement  of Sublease dated October 5, 2001, by and between 325 Spring Street LLC and  the Company                                                                                          |       | O (10.86)                       |
| 10.22             |       | Promissory  Note in the principal amount of $10,000,000, dated October 5, 2001, executed  by 325 Spring Street LLC in favor of the Company                                                   |       | O(10.86.1)                      |

 

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| 10.23  |   | Amendment  No. 1 to Development, Promotion, Distribution and Supply Agreement, dated as  of March 5, 2002, among the Company, Bristol-Myers Squibb Company and E.R.  Squibb & Sons, L.L.C                                                                                                                          |   | N (99.2)  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|
| 10.24  |   | Amendment,  dated as of August 16, 2001 to the Development and License Agreement between  the Company and Merck KGaA                                                                                                                                                                                                   |   | P (10.88) |
| 10.25  |   | Agreement  of Sale and Purchase between 4/33 Building Associates,  LP and ImClone Systems Incorporated pertaining to 33 Chubb Way, Branchburg,  New Jersey executed as of March 1, 2002                                                                                                                                |   | Q (10.92) |
| 10.26  |   | Target  Price Contract, dated as of July 15, 2002, between ImClone Systems  Incorporated and Kvaerner Process, a division of Kvaerner U.S. Inc., for the  Architectural, Engineering, Procurement Assistance, Construction Management  and Validation of a Commercial Manufacturing Project in Branchburg, New  Jersey |   | R(10.930) |
| 10.27  |   | Modifications  Agreement dated as of December 15, 2000 by an between 180 Varick Street  Corporation and the Company                                                                                                                                                                                                    |   | S (10.94) |
| 10.28  |   | Amendment  number 4 to the Company’s lease at 180 Varick Street dated August 13, 2004 by  and between 180 Varick Street Corporation and the Company                                                                                                                                                               |   | V (10.28) |
| 10.29  |   | ImClone  Systems Incorporated Annual Incentive Plan                                                                                                                                                                                                                                                                    |   | T (A.C)   |
| 10.30* |   | Supply  Agreement between the Company and Lonza Biologics PLC dated March 17, 2005                                                                                                                                                                                                                                     |   |      |
| 10.31  |   | ImClone  Systems Incorporated Senior Executive Severance Plan                                                                                                                                                                                                                                                          |   | W (10.29) |
| 10.32  |   | ImClone  Systems Incorporated Change in Control Plan                                                                                                                                                                                                                                                                   |   | W (10.30) |
| 31.1*  |   | Certification  of the Company’s Chief Executive Officer pursuant to Section 302 of the  Sarbanes- Oxley Act of 2002.                                                                                                                                                                                              |   |      |
| 31.2*  |   | Certification  of the Company’s Chief Financial Officer pursuant to Section 302 of the  Sarbanes- Oxley Act of 2002.                                                                                                                                                                                              |   |      |
| 32.1*  |   | Certification  of the Company’s Chief Executive Officer and Chief Financial Officer pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   |   |      |

 

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*              Filed herewith.

 

(A)          Previously filed with the Commission;incorporated by reference to Amendment No. 1 to Registration Statement onto Form S-1, File No. 33-61234.

 

(B)           Previously filed with the Commission;incorporated by reference to the Company’s Annual Report on Form 10-K,File No. 0-19612, for the fiscal year ended December 31, 1993.Confidential Treatment was granted for a portion of this Exhibit.

 

(C)           Previously filed with the Commission;incorporated by reference to the Company’s Annual Report on Form 10-K,File No. 0-19612, for the fiscal year ended December 31, 1994.

 

(D)          Previously filed with the Commission;incorporated by reference to the Company’s Quarterly Report on Form 10-Q,File No. 0-19612, for the quarter ended June 30, 1997.

 

(E)           Previously filed with the Commission;incorporated by reference to the Company’s Registration Statement onForm S-3, File No. 333-67335. Confidential treatment was granted fora portion of this Exhibit.

 

(F)           Previously filed with the Commission;incorporated by reference to the Company’s Registration Statement onForm S-8, File No. 333-64827.

 

(G)           Previously filed with the Commission;incorporated by reference to the Company’s Annual Report on Form 10-K,File No. 0-19612, for the fiscal year ended December 31, 1998.

 

(H)          Previously filed with the Commission;incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 1999.

 

40

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(I)            Previously filed with the Commission;incorporated by reference to the Company’s Annual Report on Form 10-K forthe year ended December 31, 1999.

 

(J)            Previously filed with the Commission;incorporated by reference to the Company’s Registration Statement onForm S-8; File No. 333-30172.

 

(K)          Previously filed with the Commission;incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2000.

 

(L)           Previously filed with the Commission;incorporated by reference to the Company’s Schedule 14D-9 filed onSeptember 28, 2001.

 

(M)         Previously filed with the Commission;incorporated by reference to the Company’s Current Report on Form 8-Kdated February 19, 2002.

 

(N)          Previously filed with the Commission;incorporated by reference to the Company’s Current Report on Form 8-Kdated March 6, 2002.

 

(O)          Previously filed with the Commission;incorporated by reference to the Company’s Annual Report on Form 10-K, forthe year ended December 31, 2001.

 

(P)           Previously filed with the Commission;incorporated by reference to the Company’s Annual Report on Form 10-K, forthe year ended December 31, 2001, and Confidential Treatment has beenrequested for a portion of this exhibit.

 

(Q)          Previously filed with the Commission;incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2002.

 

(R)           Previously filed with the Commission;incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2002.

 

(S)           Previously filed with the Commission; incorporatedby reference to the Company’s Annual Report on Form 10-K, for the yearended December 31, 2002.

 

(T)           Previously filed with the Commission;incorporated by reference to the Company’s Proxy Statement for its 2003 AnnualMeeting of Shareholders, filed August 21, 2003, as appendix C.

 

(U)          Previously filed with the Commission;incorporated by reference to the Company’s Current Report on Form 8-Kdated March 19, 2004.

 

(V)           Previously filed with the Commission;incorporated by reference to the Company’s Quarterly Report on Form 10-Q forthe quarter ended September 30, 2004

 

(W)         Previously filed with the Commission;incorporated by reference to the Company’s Annual Report on Form 10-K for theyear ended December 31, 2004.

 

41

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|               | IMCLONE SYSTEMS  INCORPORATED  (Registrant) |
|--------------------|---------------------------------------------|
|               |                                        |   |
|               | By:                                         | /s/  Daniel S. Lynch |   |
|               |                                        | Daniel  S. Lynch *Chief Executive Officer* |   |
|               |                                        |   |
| Date: May 10, 2005 |                                        |   |
|               |                                        |   |
|               | By:                                         | /s/  Michael J. Howerton |   |
|               |                                        | Michael  J. Howerton *Chief Financial Officer* |   |
|               |                                        |   |
| Date: May 10, 2005 |                                        |   |
|                    |                                             |  |  |  |

 

42

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