**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe Quarterly Period Ended June 30, 2007**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe Transition period from                    to                     **

**Commissionfile number 0-19612**

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**ImClone Systems Incorporated**

(Exact name of registrantas specified in its charter)

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

 

**(212) 645-1405**

(Registrant’s telephonenumber, including area code)

**Not Applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer x | Accelerated filer o | Non-accelerated  filer o |
|--------------------------------|--------------------------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined by Rule 12b-2of the Exchange Act). Yes o  No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| **Class**                       | ** ** | **Outstanding as of August 1, 2007** |
|---------------------------------|------------|--------------------------------------|
| Common Stock, par  value $0.001 |       | 85,899,687 Shares                    |

 

 

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**IMCLONE SYSTEMSINCORPORATEDINDEX**
| PART I—FINANCIAL  INFORMATION |   |                                                                                                                       |   |
|-----------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.                                 |   | Financial  Statements                                                                                                      |   | 1 |   |
|                                    |   | Unaudited  Consolidated Balance Sheets—June 30, 2007 and December 31, 2006                                  |   | 1 |   |
|                                    |   | Unaudited  Consolidated Statements of Income—Three months and Six months  ended June 30, 2007 and 2006 |   | 2 |   |
|                                    |   | Unaudited  Consolidated Statements of Cash Flows—Six months ended June 30, 2007  and 2006                   |   | 3 |   |
|                                    |   | Notes  to Unaudited Consolidated Financial Statements                                                                      |   | 4 |   |
| Item  2.                                |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                |   | 17 |   |
| Item  3.                                |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                |   | 31 |   |
| Item  4.                                |   | Controls  and Procedures                                                                                                   |   | 31 |   |
| PART II—OTHER INFORMATION     |   |                                                                                                                       |   |
| Item 1.                                 |   | Legal  Proceedings                                                                                                         |   | 32 |   |
| Item 1A.                                |   | Risk Factors                                                                                                               |   | 33 |   |
| Item  2.                                |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               |   | 34 |   |
| Item  3.                                |   | Defaults  Upon Senior Securities                                                                                           |   | 34 |   |
| Item  4.                                |   | Submission  of Matters to a Vote of Security Holders                                                                       |   | 34 |   |
| Item 5.                                 |   | Other  Information                                                                                                         |   | 34 |   |
| Item 6.                                 |   | Exhibits                                                                                                                   |   | 34 |   |
| Signatures                              |   | 35                                                                                                                         |   |

 

i

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**PART I. FINANCIAL INFORMATION**

**Item 1.**                        *Financial Statements*

**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED BALANCE SHEETS(in thousands, except per share and share data)(Unaudited)**

| ** **                                                                                                                                                                                                                                                                    | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                    | ** ** | ** **              |       |                        |       |   |   |
| Current assets:                                                                                                                                                                                                                                                               |       |                    |       |                        |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                     |       | $                       | 56,929     |                        |       | $ | 20,568 |   |   |
| Securities available for  sale                                                                                                                                                                                                                                                |       | 1,051,305               |       |                        | 1,023,609  |   |   |
| Prepaid expenses                                                                                                                                                                                                                                                              |       | 4,353                   |       |                        | 3,972      |   |   |
| Amounts due from  corporate partners                                                                                                                                                                                                                                          |       | 85,585                  |       |                        | 78,030     |   |   |
| Inventories                                                                                                                                                                                                                                                                   |       | 123,254                 |       |                        | 102,215    |   |   |
| Deferred income taxes, net                                                                                                                                                                                                                                                    |       | 30,878                  |       |                        | 29,715     |   |   |
| Other current assets                                                                                                                                                                                                                                                          |       | 13,791                  |       |                        | 12,123     |   |   |
| Total current assets                                                                                                                                                                                                                                                          |       | 1,366,095               |       |                        | 1,270,232  |   |   |
| Property, plant  and equipment, net                                                                                                                                                                                                                                           |       | 409,584                 |       |                        | 423,000    |   |   |
| Deferred financing  costs, net                                                                                                                                                                                                                                                |       | 6,962                   |       |                        | 8,818      |   |   |
| Deferred income  taxes, net                                                                                                                                                                                                                                                   |       | 91,576                  |       |                        | 124,033    |   |   |
| Other assets                                                                                                                                                                                                                                                                  |       | 12,896                  |       |                        | 13,753     |   |   |
| Total assets                                                                                                                                                                                                                                                                  |       | $                       | 1,887,113  |                        |       | $ | 1,839,836 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                                | ** ** | ** **              |       |                        |       |   |   |
| Current liabilities:                                                                                                                                                                                                                                                          |       |                    |       |                        |       |   |   |
| Accounts payable  (including $5,413 and $4,765 due Bristol-Myers Squibb Company (“BMS”) at  June 30, 2007 and December 31, 2006, respectively)                                                                                                       |       | $                       | 28,642     |                        |       | $ | 26,421 |   |   |
| Accrued expenses  (including $21,808 and $21,705 due BMS at June 30, 2007 and  December 31, 2006, respectively)                                                                                                                                                     |       | 84,694                  |       |                        | 69,080     |   |   |
| Current portion of  deferred revenue                                                                                                                                                                                                                                          |       | 136,185                 |       |                        | 142,013    |   |   |
| Other current liabilities                                                                                                                                                                                                                                                     |       | 2,130                   |       |                        | 1,418      |   |   |
| Total current liabilities                                                                                                                                                                                                                                                     |       | 251,651                 |       |                        | 238,932    |   |   |
| Deferred revenue,  less current portion                                                                                                                                                                                                                                       |       | 180,954                 |       |                        | 237,864    |   |   |
| Long-term debt                                                                                                                                                                                                                                                                |       | 600,000                 |       |                        | 600,000    |   |   |
| Share based  compensation, less current portion                                                                                                                                                                                                                               |       | 607                     |       |                        | 261        |   |   |
| Other liabilities                                                                                                                                                                                                                                                             |       | 3,383                   |       |                        | 3,130      |   |   |
| Total liabilities                                                                                                                                                                                                                                                             |       | 1,036,595               |       |                        | 1,080,187  |   |   |
| Commitments and contingencies (Note 8)                                                                                                                                                                                                                                        |       |                    |       |                        |       |   |   |
| 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, $0.001 par  value; authorized 200,000,000 shares; issued 86,881,523 and 86,143,604  at June 30, 2007 and December 31, 2006, respectively; outstanding  85,876,849 and 85,138,930 at June 30, 2007 and December 31, 2006,  respectively |       | 87                      |       |                        | 86         |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                   |       | 892,801                 |       |                        | 865,560    |   |   |
| Accumulated deficit                                                                                                                                                                                                                                                           |       | (9,618                  | )          |                        | (71,785    | ) |   |
| Treasury stock, at cost;  1,004,674 at June 30, 2007 and December 31, 2006,  respectively                                                                                                                                                                           |       | (29,149                 | )          |                        | (29,149    | ) |   |
| Accumulated other comprehensive loss:                                                                                                                                                                                                                                         |       |                    |       |                        |       |   |   |
| Net unrealized loss on  securities available for sale                                                                                                                                                                                                                         |       | (3,603                  | )          |                        | (5,063     | ) |   |
| Total stockholders’  equity                                                                                                                                                                                                                                              |       | 850,518                 |       |                        | 759,649    |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                               |       | $                       | 1,887,113  |                        |       | $ | 1,839,836 |   |   |

 

See accompanying notes to consolidated financial statements.

1

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**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share data)(Unaudited)**

| ** **                                              | ** ** | **Three Months Ended  June 30**                       | ** ** | **Six Months Ended  June 30**                         | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **     2007     ** | ** ** | **     2006     ** | ** ** | **     2007     ** | ** ** | **     2006     ** | ** ** |
| Revenues:                                               |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Royalty revenue                                         |       | $                                                                    | 78,144     |                                                                 | $          | 74,614 |   | $ | 154,507 |   | $ | 134,884 |   |
| License fees and milestone revenue                      |       | 33,445                                                               |       | 33,456                                                               |       | 62,739 |   | 177,859 |   |
| Manufacturing revenue                                   |       | 23,025                                                               |       | 28,356                                                               |       | 39,483 |   | 47,705 |   |
| Collaborative agreement revenue                         |       | 15,818                                                               |       | 13,430                                                               |       | 35,203 |   | 34,539 |   |
| Total revenues                                          |       | 150,432                                                              |       | 149,856                                                              |       | 291,932 |   | 394,987 |   |
| Operating expenses:                                     |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Research and development                                |       | 33,723                                                               |       | 27,583                                                               |       | 68,598 |   | 60,576 |   |
| Clinical and regulatory                                 |       | 14,820                                                               |       | 14,929                                                               |       | 28,628 |   | 30,010 |   |
| Marketing, general and administrative                   |       | 18,567                                                               |       | 22,963                                                               |       | 33,926 |   | 40,964 |   |
| Royalty expense                                         |       | 18,988                                                               |       | 18,414                                                               |       | 35,774 |   | 38,480 |   |
| Cost of manufacturing revenue                           |       | 22,999                                                               |       | 26,877                                                               |       | 36,854 |   | 42,279 |   |
| Total operating expenses                                |       | 109,097                                                              |       | 110,766                                                              |       | 203,780 |   | 212,309 |   |
| Operating income                                        |       | 41,335                                                               |       | 39,090                                                               |       | 88,152 |   | 182,678 |   |
| Other (income)  expense:                                |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Interest income                                         |       | (13,317                                                              | )          | (10,222                                                              | )          | (25,834 | ) | (17,386 | ) |
| Interest expense                                        |       | 2,990                                                                |       | 1,914                                                                |       | 5,962 |   | 3,376 |   |
| Other income, net                                       |       | (10,327                                                              | )          | (8,308                                                               | )          | (19,872 | ) | (14,010 | ) |
| Income before income taxes                              |       | 51,662                                                               |       | 47,398                                                               |       | 108,024 |   | 196,688 |   |
| Income tax provision (benefit)                          |       | 19,757                                                               |       | 10,189                                                               |       | 47,364 |   | (70,112 | ) |
| Net income                                              |       | $                                                                    | 31,905     |                                                                 | $          | 37,209 |   | $ | 60,660 |   | $ | 266,800 |   |
| Income per common  share:                               |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Basic                                                   |       | $                                                                    | 0.37       |                                                                 | $          | 0.44 |   | $ | 0.71 |   | $ | 3.18 |   |
| Diluted                                                 |       | $                                                                    | 0.36       |                                                                 | $          | 0.42 |   | $ | 0.69 |   | $ | 2.93 |   |
| Shares used in  calculation of income per common share: |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Basic                                                   |       | 85,726                                                               |       | 84,072                                                               |       | 85,492 |   | 83,849 |   |
| Diluted                                                 |       | 93,212                                                               |       | 92,184                                                               |       | 92,790 |   | 92,001 |   |

 

See accompanying notes to consolidated financial statements.

2

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**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)**

| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                              |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 60,660     |   | $ | 266,800 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                     |       | 15,591                                        |       | 14,573 |   |
| Amortization of  deferred financing costs                                          |       | 1,856                                         |       | 1,856 |   |
| Share-based  compensation                                                          |       | 2,494                                         |       | 3,965 |   |
| Tax benefit from  share-based compensation                                         |       | (10,946                                       | )          | (48,495 | ) |
| Loss on disposal  of fixed assets                                                  |       | 3,582                                         |       | — |   |
| Deferred income  taxes                                                             |       | 31,294                                        |       | (129,444 | ) |
| Other                                                                              |       | 20                                            |       | — |   |
| Changes in:                                                                        |       |                                          |       |   |   |
| Prepaid expenses                                                                   |       | (381                                          | )          | (3,783 | ) |
| Amounts due from  corporate partners                                               |       | (7,555                                        | )          | (30,730 | ) |
| Inventories                                                                        |       | (21,039                                       | )          | 14,713 |   |
| Other current  assets                                                              |       | (1,668                                        | )          | (1,856 | ) |
| Other assets                                                                       |       | 787                                           |       | (9,934 | ) |
| Accounts payable                                                                   |       | 2,221                                         |       | (3,069 | ) |
| Accrued expenses                                                                   |       | 25,597                                        |       | 64,099 |   |
| Share-based  compensation, less current portion                                    |       | 346                                           |       | 868 |   |
| Other current  liabilities                                                         |       | 712                                           |       | — |   |
| Withholding tax  liability                                                         |       | —                                        |       | (31,736 | ) |
| Deferred revenue                                                                   |       | (62,738                                       | )          | 72,141 |   |
| Other liabilities                                                                  |       | 253                                           |       | 340 |   |
| Net cash provided  by operating activities                                         |       | 41,086                                        |       | 180,308 |   |
| Cash flows from investing activities:                                              |       |                                          |       |   |   |
| Acquisitions of  property, plant and equipment                                     |       | (5,707                                        | )          | (32,450 | ) |
| Purchases of  securities available for sale                                        |       | (884,336                                      | )          | (741,409 | ) |
| Proceeds from sale  of securities available for sale                               |       | 746,325                                       |       | 546,370 |   |
| Proceeds from  maturities of securities available for sale                         |       | 111,775                                       |       | 8,325 |   |
| Net cash used in  investing activities                                             |       | (31,943                                       | )          | (219,164 | ) |
| Cash flows from financing activities:                                              |       |                                          |       |   |   |
| Proceeds from  exercise of stock options                                           |       | 15,930                                        |       | 12,593 |   |
| Proceeds from  issuance of common stock under the employee stock purchase plan     |       | 342                                           |       | 460 |   |
| Tax benefit from  share-based compensation                                         |       | 10,946                                        |       | 48,495 |   |
| Net cash provided  by financing activities                                         |       | 27,218                                        |       | 61,548 |   |
| Net increase in  cash and cash equivalents                                         |       | 36,361                                        |       | 22,692 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 20,568                                        |       | 3,403 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                             | 56,929     |   | $ | 26,095 |   |
| Supplemental cash flow information:                                                |       |                                          |       |   |   |
| Cash paid for:                                                                     |       |                                          |       |   |   |
| Interest, net of  amounts capitalized                                              |       | $                                             | 4,106      |   | $ | 1,519 |   |
| Income taxes                                                                       |       | $                                             | 2,875      |   | $ | 2,408 |   |
| Non-cash investing and financing activity:                                         |       |                                          |       |   |   |
| Change in net  unrealized loss in securities available-for-sale                    |       | $                                             | (1,460     | ) | $ | 2,003 |   |

 

See accompanying notes to consolidated financial statements.

3

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

The accompanying consolidated financial statements ofImClone Systems Incorporated (“ImClone Systems” or the “Company”) as of June 30,2007 and for the three and six months ended June 30, 2007 and 2006 are unaudited.The accompanying unaudited consolidated balance sheets, statements of incomeand statements of cash flows have been prepared in accordance with U.S.generally accepted accounting principles (“GAAP”) for interim financialinformation and in conjunction with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not includeall of the disclosures required by GAAP for complete financial statements. Thefinancial statements reflect all adjustments, consisting only of normal,recurring adjustments, which are in the opinion of management, necessary for afair presentation for the interim periods. Management of the Company has made anumber of estimates and assumptions relating to the reporting of assets and liabilitiesand related revenue and expense accounts and the disclosure of contingentassets and liabilities to prepare these consolidated financial statements inconformity with GAAP. Actual results could differ materially from thoseestimates. These financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2006, as filed with the SEC.

The results of operations for the interim periods arenot necessarily indicative of results to be expected for the entire fiscal yearor any other period.

The Company is abiopharmaceutical company whose mission is to advance oncology care bydeveloping and commercializing a portfolio of targeted treatments designated toaddress the medical need of patients with cancer. Our commercially availableproduct, ERBITUX® (cetuximab) binds specifically to epidermal growth factorreceptor (EGFR, HER1, c-ErbB-1) on both normal and tumor cells, andcompetitively inhibits the binding of epidermal growth factor (EGF) and otherligands, such as transforming growth factor-alpha. We are conducting, and insome cases have completed, clinical studies evaluating ERBITUX® for broader usein colorectal cancer, squamous cell carcinoma of the head and neck (“SCCHN”),for the potential treatment of lung and pancreatic cancers, as well as otherpotential indications. The Company does not operate separate lines of businessor separate business entities and does not conduct any of its operationsoutside the United States. Accordingly, the Company does not prepare discretefinancial information with respect to separate product areas or by location anddoes not have separately reportable segments.

**Impact of RecentAccounting Pronouncements**

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(SFAS) No. 157, “Accounting for Fair Value Measurements” (“SFAS 157”).SFAS 157 defines fair value, and establishes a framework for measuring fairvalue in accordance with GAAP, and expands disclosure about fair valuemeasurements. SFAS 157 is effective for fiscal years beginning after November 15,2007. The Company is currently evaluating the requirements of SFAS 157.

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS159”). SFAS 159 permits the measurement of certain financial instruments andcertain other items at fair value. Entities may choose to measure eligibleitems at fair value at specified election dates, reporting unrealized gains andlosses on such items at each subsequent reporting period. 

4

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. The Company iscurrently evaluating the requirements of SFAS 159.

In June 2007, theEmerging Issues Task Force reached a consensus on Issue No. 07-3, “Accountingfor Nonrefundable Advance Payments for Good or Services to Be Used in FutureResearch and Development Activities.” This Issue requires that nonrefundableadvance payments for research and development activities be deferred andcapitalized. Such amounts should be recognized as an expense as the relatedgoods are delivered or the services are performed or when the goods or servicesare no longer expected to be provided. This Issue will be effective for fiscalyears beginning after December 15, 2007, and earlier adoption is notpermitted. This consensus is to be applied prospectively for new contractsentered into after that date. The Company is currently evaluating the potentialimpact of this consensus on its consolidated financial statements.

**ComprehensiveIncome**

Thefollowing table reconciles net income to comprehensive income: (in thousands)

| ** **                                                         | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                         |       | $                                              | 31,905     |                                         | $          | 37,209 |   | $ | 60,660 |   | $ | 266,800 |   |
| Other  comprehensive (loss) income:                                |       |                                           |       |                                         |       |   |   |   |   |
| Unrealized gain  (loss) on marketable securities during the period |       | (45                                            | )          | (670                                         | )          | 1,460 |   | (2,003 | ) |
| Total other  comprehensive (loss) income                           |       | (45                                            | )          | (670                                         | )          | 1,460 |   | (2,003 | ) |
| Total comprehensive  income                                        |       | $                                              | 31,860     |                                         | $          | 36,539 |   | $ | 62,120 |   | $ | 264,797 |   |

 

The tax benefit(provision) on the items included in other comprehensive (loss) income assumingthey were recognized in income would be approximately $40,000 and $126,000 forthe three months ended June 30, 2007 and 2006, respectively, and$(577,000) and $299,000 for the six months ended June 30, 2007 and 2006,respectively.

**Fair Value ofFinancial Instruments**

The fair value of theCompany’s 13¤8%convertible senior notes of $600.0 million was approximately $559.9 millionand $545.6 million at June 30, 2007 and December 31, 2006,respectively, based on their quoted market price.

5

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

**(2)   Inventories**

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

| ** **                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials and  supplies |       | $                       | 16,393     |                        |       | $ | 17,818 |   |   |
| Work in process             |       | 93,870                  |       |                        | 79,048     |   |   |
| Finished goods              |       | 12,991                  |       |                        | 5,349      |   |   |
| Total                       |       | $                       | 123,254    |                        |       | $ | 102,215 |   |   |

 

In June 2006, theCompany began producing ERBITUX® for commercial use at its multiple productmanufacturing facility (“BB50”), located in Branchburg, New Jersey. The Companyfiled a supplemental Biologics License Application with the FDA for approval ofBB50 in April 2007. Until such time as the Company receives approval ofBB50 from the FDA, the ERBITUX® inventory produced in BB50 cannot be used forcommercial distribution. Based on management’s current expectations, the costsof such inventory will be fully realizable once the Company obtains approval ofBB50, which is anticipated in the second half of 2007. As of June 30,2007, the Company has capitalized approximately $55.6 million related tothe costs of producing ERBITUX® in BB50. The Company will continue tocapitalize the costs of producing ERBITUX® in BB50 as long as management canconclude that the costs of such inventory will be fully realizable in thefuture.

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

Property,plant and equipment are recorded at cost and consist of the following: (inthousands)

| ** **                          | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Land                                |       | $                       | 4,899      |                        |       | $ | 4,899 |   |   |
| Building                            |       | 282,714                 |       |                        | 281,556    |   |   |
| Leasehold improvements              |       | 24,043                  |       |                        | 14,595     |   |   |
| Machinery and  equipment            |       | 171,024                 |       |                        | 164,869    |   |   |
| Furniture and  fixtures             |       | 6,694                   |       |                        | 6,368      |   |   |
| Construction in  progress           |       | 30,768                  |       |                        | 45,924     |   |   |
| Total cost                          |       | 520,142                 |       |                        | 518,211    |   |   |
| Less accumulated  depreciation      |       | (110,558                | )          |                        | (95,211    | ) |   |
| Property, plant  and equipment, net |       | $                       | 409,584    |                        |       | $ | 423,000 |   |   |

 

In the first quarter of 2007, the Company determinedthat it was not cost effective to develop its Spring Street facility to houseits Research organization. As a result, the Company recorded a write-off ofapproximately $3.4 million related to design and engineering costs associatedwith this facility that were included in construction in progress as of December 31,2006. This write-off is included in Research and Development expenses in the Company’sStatement of Income for the six months ended June 30, 2007. The Company isin the process of evaluating alternative uses for this facility.

6

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

The process of preparingconsolidated financial statements in accordance with GAAP requires the Companyto evaluate the carrying values of its long-lived assets. The recoverability ofthe carrying values of long-lived assets depends on the Company’s ability toearn sufficient returns on ERBITUX®. Other than the asset impairment discussedabove, based on management’s current estimates, the Company expects to recoverthe carrying value of such assets.

**(4)   Share-BasedCompensation Plans**

On February 15, 2007, the Company awarded 268,283Restricted Stock Units (“RSU”) to its employees under its 2006 Stock IncentivePlan (the “06 Plan”). The grant date fair value of the Company’s RSU awards wascalculated using the closing market price of the Company’s common stock aslisted on the Nasdaq Global Select Market on February 15, 2007. The RSUvest 331¤3%annually over the three-year vesting period.

RSU activity for the six months ended June 30,2007 is summarized as follows:

| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  December 31, 2006 |       |                       | —     |                                                             |       |                                                     |       |   |   |   |   |   |   |
| Granted                                |       |                       | 268,283    |                                                             |       |                                                     |       |   |   |   |   |   |   |
| Forfeitures                            |       |                       | (22,103    | )                                                                |       |                                                     |       |   |   |   |   |   |   |
| Outstanding at June 30,  2007     |       |                       | 246,180    |                                                             |       |                                                     | 1.63       |   |   |   | $ | 8,705 |   |   |
| Expected to vest                       |       |                       | 202,323    |                                                             |       |                                                     | 1.63       |   |   |   | $ | 7,154 |   |   |

 

The grant date fair value of the RSU was $29.60. Theaggregate intrinsic value of RSU outstanding as of June 30, 2007 iscalculated as the number of shares multiplied by the closing market price ofour common stock on that date, which was $35.36.

The Company recognized for the three and six monthsended June 30, 2007 approximately $382,000 and $579,000, respectively, inshare-based compensation expense, net of amounts capitalized, for RSU grantedunder the 06 Plan. As of June 30, 2007, there was $5.3 million oftotal unrecognized compensation cost related to the RSU. This amount considersthe Company’s expected forfeiture rate. That cost is expected to be recognizedover a weighted average period of 2.6 years. The Company will utilizenewly issued shares to satisfy the vesting of RSU.

7

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

Inaddition to the RSU discussed above, the Company also granted stock options forpromotions and new hire grants. The activity related to stock options for thesix months ended June 30, 2007 is summarized as follows:

| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  December 31, 2006 |       |                       | 10,509,294 |                                                       |       |                                                             | $          | 38.55                                                    |       |   |   |   |   |   |   |   |   |   |
| Granted                                |       |                       | 336,000    |                                                       |       |                                                             | $          | 36.40                                                    |       |   |   |   |   |   |   |   |   |   |
| Exercised                              |       |                       | (727,313   | )                                                          |       |                                                             | $          | 21.90                                                    |       |   |   |   |   |   |   |   |   |   |
| Forfeitures                            |       |                       | (565,942   | )                                                          |       |                                                             | $          | 45.24                                                    |       |   |   |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2007     |       |                       | 9,552,039  |                                                       |       |                                                             | $          | 39.35                                                    |       |   |   | 5.77 |   |   |   | $ | 29,907 |   |   |
| Vested and  expected to vest           |       |                       | 9,306,537  |                                                       |       |                                                             | $          | 39.48                                                    |       |   |   | 5.67 |   |   |   | $ | 29,304 |   |   |
| Exercisable at  June 30, 2007     |       |                       | 8,281,273  |                                                       |       |                                                             | $          | 40.12                                                    |       |   |   | 5.28 |   |   |   | $ | 26,957 |   |   |

 

The weighted average fairvalue of options granted during the three months ended June 30, 2007 and2006 was $17.28 and $12.26, respectively. The weighted average fair value ofoptions granted during the six months ended June 30, 2007 and 2006was $15.53 and $14.82, respectively. The aggregate intrinsic value of optionsoutstanding at June 30, 2007 is calculated as the difference between theexercise price of the underlying options and the market price of the Company’scommon stock for the 3,459,821 options that had exercise prices that were lowerthan the market price of our common stock at June 30, 2007. The totalintrinsic value of options exercised during the three months ended June 30,2007 and 2006 was $5.6 million and $3.2 million, respectively,determined as of the date of exercise. The total intrinsic value of optionsexercised during the six months ended June 30, 2007 and 2006 was $11.4 millionand $13.2 million, respectively, determined as of the date of exercise.

**(5)   IncomePer Common Share**

Basic income per common share is computed by dividingnet income by the weighted-average number of common shares outstanding duringthe period. Diluted income per common share is computed by dividing net incomeby the weighted-average number of common shares outstanding during the periodincreased to include all additional common shares that would have beenoutstanding assuming potentially dilutive common share equivalents had beenissued. Dilutive common share equivalents include 1) the dilutive effect ofin-the-money shares related to stock options, which is calculated based on theaverage share price for each period using the treasury stock method. Under thetreasury stock method, the exercise price of an option, the average amount ofcompensation cost, if any, for future service that the Company has not yetrecognized, and the amount of tax benefits that would be recorded in additionalpaid-in capital, if any, when the option is exercised, are assumed to be usedto repurchase shares in the current period and 2) the conversion ofconvertible debt which is calculated using an “if-converted” basis. In addition,in computing the dilutive effect of convertible debt, the numerator is adjustedto add back the after-tax amount of interest recognized in the period and 3)the dilutive effect of RSU which is calculated under the treasury stock method.Under the treasury stock method for RSU, the average amount of compensationcost, if any, for future service that the Company has not yet recognized, andthe amount of tax benefits that 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

would be recorded inadditional paid-in capital, if any, are assumed to be used to repurchase sharesin the current period. For the three months ended June 30, 2007 and 2006,there were an aggregate of 5,694,000 and 8,080,000, respectively, potentialcommon shares excluded from the diluted income per share computation becausetheir inclusion would have had an anti-dilutive effect. For the six monthsended June 30, 2007 and 2006, there were an aggregate of 7,045,000 and8,295,000, respectively, potential common shares excluded from the dilutedincome per share computation because their inclusion would have had ananti-dilutive effect.

Basicand diluted income per common share (EPS) were computed using the following:(in thousands, except per share data)

| ** **                                                                 | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| EPS Numerator—Basic:                                                  |       |                                           |       |                                         |       |   |   |   |   |
| Net Income                                                                 |       | $                                              | 31,905     |                                         | $          | 37,209 |   | $ | 60,660 |   | $ | 266,800 |   |
| EPS Denominator—Basic:                                                |       |                                           |       |                                         |       |   |   |   |   |
| Weighted-average number of shares of  common stock outstanding        |       | 85,726                                         |       | 84,072                                       |       | 85,492 |   | 83,849 |   |
| EPS Numerator—Diluted:                                                |       |                                           |       |                                         |       |   |   |   |   |
| Net Income                                                                 |       | $                                              | 31,905     |                                         | $          | 37,209 |   | $ | 60,660 |   | $ | 266,800 |   |
| Adjustment for  interest, net of amounts capitalized and income tax effect |       | 1,854                                          |       | 1,597                                        |       | 3,607 |   | 2,871 |   |
| Net income, adjusted                                                       |       | $                                              | 33,759     |                                         | $          | 38,806 |   | $ | 64,267 |   | $ | 269,671 |   |
| EPS Denominator—Diluted:                                              |       |                                           |       |                                         |       |   |   |   |   |
| Weighted-average number of shares of common stock  outstanding             |       | 85,726                                         |       | 84,072                                       |       | 85,492 |   | 83,849 |   |
| Effect of  dilutive securities:                                            |       |                                           |       |                                         |       |   |   |   |   |
| Stock options                                                              |       | 1,067                                          |       | 1,776                                        |       | 917 |   | 1,816 |   |
| Restricted stock units                                                     |       | 83                                             |       | —                                       |       | 45 |   | — |   |
| Convertible subordinated notes                                             |       | 6,336                                          |       | 6,336                                        |       | 6,336 |   | 6,336 |   |
| Dilutive potential common shares                                           |       | 7,486                                          |       | 8,112                                        |       | 7,298 |   | 8,152 |   |
| Weighted-average  common shares and dilutive potential common shares       |       | 93,212                                         |       | 92,184                                       |       | 92,790 |   | 92,001 |   |
| Basic income per  common share                                             |       | $                                              | 0.37       |                                         | $          | 0.44 |   | $ | 0.71 |   | $ | 3.18 |   |
| Diluted income  per common share                                           |       | $                                              | 0.36       |                                         | $          | 0.42 |   | $ | 0.69 |   | $ | 2.93 |   |

 

**(6)   Taxes**

The Company’s annual effective income tax rate for2007 is expected to be approximately 42%, which is inclusive of discrete itemsrecorded through the six months ended June 30, 2007. The differencebetween the statutory rate and the Company’s expected annual effective incometax rate primarily relates to state taxes. Actual cash tax payments in 2007 areestimated to be approximately $3.0 million.

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), whichclarifies the accounting and disclosure for uncertainty in tax positions. The 

9

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

Company adopted theprovisions of FIN 48 effective January 1, 2007, and as a result of theadoption the Company recorded a decrease to beginning accumulated deficit ofapproximately $1.5 million and an offsetting amount to additional paid-incapital. As of the adoption date, the Company had unrecognized tax benefits ofapproximately $38.3 million. Of this amount $36.1 million would impact theeffective income tax rate. A portion of the $36.1 million if recognizedcould require additional valuation allowance to be recorded.

The Company recognizes both interest and penaltiesaccrued related to unrecognized tax benefits as elements of income tax expensein the Consolidated Statements of Income. As of the adoption date, the totalamount of accrued interest and penalties was approximately $787,000. Additionally,during the three and six months ended June 30, 2007, the Company recordedapproximately $262,000 and $627,000, respectively, of interest and penalties.

The Company is subject toUnited States federal income tax as well as income tax of multiple statejurisdictions. The statute of limitations on the Company’s federal income taxreturns through 2002 has expired. The Company recently concluded a New JerseyState audit for income tax years 2001 through 2004. The outcome of this auditdid not have a material impact on the Company’s results of operations orfinancial position. The statute of limitations on the Company’s New Jerseyincome tax returns through 2000 has expired.

**(7)   CollaborativeAgreements**

The following representsan update of the Company’s contractual relationship with Merck KGaA and BMSduring the six months ended June 30, 2007. For a more detailed descriptionof the Company’s contractual agreements with our partners Merck KGaA and BMS,reference Note 10(a) of the Notes to the Consolidated Financial Statementsincluded in the Company’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2006.

***(a) Merck KGaA***

In July 2006, theCompany and Merck KGaA entered into agreements amending and supplementing the1998 development and license agreement. As part of the agreements, the Companyconsented to Merck KGaA’s sublicense of certain intellectual property rightsrelating to the development and commercialization of an anti-EGFR antibody toTakeda Pharmaceutical Company (“Takeda”). Merck KGaA and Takeda signed analliance in September 2005 for the development and commercialization ofmatuzumab (EMD-72000), a humanized EGFR-targeting monoclonal antibody. Inconsideration for the Company’s consent, Merck KGaA agreed to pay the Company €2.5 million within 30 days of the execution of the agreements and afurther €5.0 million within 30 days of the Company’s written consent tothe sublicense. The Company received the first payment of € 2.5 millionin August 2006 and has deferred the revenue associated with this paymentand is recognizing it over the estimated service period. In July 2007, theCompany gave written consent to sublicense and became entitled to the additional€ 5.0 millionpayment, which it expects to receive in August 2007. The Company has aliability due Merck KGaA of approximately $58,000 as of June 30, 2007and December 31, 2006.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

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

In July 2007, the Company and BMS amended theterms of their agreement for the codevelopment and copromotion of ERBITUX® inNorth America. Under this amendment, the companies have jointly agreed toexpand the investment in the ongoing clinical development plan for ERBITUX® byup to several hundred million dollars. Development costs, up to a thresholdvalue, will be the sole responsibility of BMS; costs in excess of thisthreshold will be shared by both companies according to a pre-determined ratio.With this additional funding, the companies will further explore the use ofERBITUX® in additional tumor types including brain, breast, bladder, gastric,lung, pancreas and prostate.

The Company is currently analyzing if the amendment tothe BMS agreement, which will be reflected prospectively, will impact itsfinancial statements.

*Development of theProduct—**The* Company incurred approximately$4.3 million and $6.7 million pursuant to cost sharing agreementswith BMS for the three months ended June 30, 2007 and 2006, respectivelyand $7.3 million and $13.6 million for the six months ended June 30,2007 and 2006, respectively. The Company has also incurred $436,000 and$662,000 for the three months ended June 30, 2007 and 2006, respectively,and $1.3 million and $1.2 million for the six months ended June 30, 2007and 2006, respectively, related to the agreement with respect to development inJapan.

***Stockholder Agreement***

On April 25, 2007,the Company named Andrew R. J. Bonfield, current Chief Financial Officer ofBMS, to the Company’s Board of Directors. Mr. Bonfield has served as ChiefFinancial Officer of BMS since September 2002. On May 7, 2007, AndrewG. Bodnar, M.D., J.D., a BMS-appointed director resigned from the Company’sBoard of Directors.

***Collaborative Agreement Tables***

Royaltyrevenue consists of the following: (in thousands)

| ** **             | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **             | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| BMS                    |       | $                                              | 63,215     |                                         | $          | 67,226 |   | $ | 125,670 |   | $ | 121,058 |   |
| Merck KGaA             |       | 14,929                                         |       | 7,337                                        |       | 28,791 |   | 13,613 |   |
| Other                  |       | —                                         |       | 51                                           |       | 46 |   | 213 |   |
| Total royalty  revenue |       | $                                              | 78,144     |                                         | $          | 74,614 |   | $ | 154,507 |   | $ | 134,884 |   |

 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

Licensefees and milestone revenue consists of the following: (in thousands)

| ** **                                | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| BMS:                                      |       |                                           |       |                                         |       |   |   |   |   |
| ERBITUX® license fee revenue         |       | $                                              | 33,326     |                                         | $          | 33,401 |   | $ | 62,502 |   | $ | 177,748 |   |
| Merck KGaA:                               |       |                                           |       |                                         |       |   |   |   |   |
| ERBITUX® license fee revenue         |       | 119                                            |       | 55                                           |       | 237 |   | 111 |   |
| Total license  fees and milestone revenue |       | $                                              | 33,445     |                                         | $          | 33,456 |   | $ | 62,739 |   | $ | 177,859 |   |

 

Manufacturingrevenue from corporate partners consists of the following: (in thousands)

| ** **                   | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| BMS                          |       | $                                              | 20,400     |                                         | $          | 27,605 |   | $ | 36,858 |   | $ | 44,236 |   |
| Merck KGaA                   |       | 2,625                                          |       | 751                                          |       | 2,625 |   | 3,469 |   |
| Total  manufacturing revenue |       | $                                              | 23,025     |                                         | $          | 28,356 |   | $ | 39,483 |   | $ | 47,705 |   |

 

Collaborativeagreement revenue from partners consists of the following: (in thousands)

| ** **                                          | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| BMS:                                                |       |                                           |       |                                         |       |   |   |   |   |
| ERBITUX® supplied for clinical trials          |       | $                                              | 2,665      |                                         | $          | 1,011 |   | $ | 5,139 |   | $ | 4,393 |   |
| ERBITUX® clinical and regulatory expenses      |       | 3,629                                          |       | 2,773                                        |       | 7,390 |   | 6,142 |   |
| ERBITUX® marketing, general and administrative |       | 233                                            |       | 300                                          |       | 491 |   | 551 |   |
| ERBITUX® royalty expenses                      |       | 4,052                                          |       | 7,757                                        |       | 8,056 |   | 13,968 |   |
| Total BMS                                           |       | 10,579                                         |       | 11,841                                       |       | 21,076 |   | 25,054 |   |
| Merck KGaA:                                         |       |                                           |       |                                         |       |   |   |   |   |
| ERBITUX® supplied for clinical trials          |       | 1,949                                          |       | 127                                          |       | 9,662 |   | 5,564 |   |
| ERBITUX® marketing, general and administrative |       | 26                                             |       | 36                                           |       | 88 |   | 99 |   |
| ERBITUX® royalty expenses                      |       | 2,664                                          |       | 1,419                                        |       | 3,777 |   | 3,806 |   |
| Total Merck KGaA                                    |       | 4,639                                          |       | 1,582                                        |       | 13,527 |   | 9,469 |   |
| Other                                               |       | 600                                            |       | 7                                            |       | 600 |   | 16 |   |
| Total  collaborative agreement revenue              |       | $                                              | 15,818     |                                         | $          | 13,430 |   | $ | 35,203 |   | $ | 34,539 |   |

 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

Amountsdue from corporate partners consists of the following: (in thousands)

| ** **                                 | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| BMS:                                       | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| ERBITUX®                              |       | $                       | 63,341     |                        |       | $ | 64,991 | ** ** |   |
| Merck KGaA:                                |       |                    |       |                        |       | ** ** |   |
| ERBITUX®                              |       | 22,244                  |       |                        | 13,039     | ** ** |   |
| Total amounts due  from corporate partners |       | $                       | 85,585     |                        |       | $ | 78,030 | ** ** |   |

 

Deferredrevenue consists of the following: (in thousands)

| ** **                                      | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| BMS:                                            |       |                    |       |                        |       |   |   |
| ERBITUX® commercial agreement              |       | $                       | 311,714    |                        |       | $ | 374,215 |   |   |
| Merck KGaA:                                     |       |                    |       |                        |       |   |   |
| ERBITUX® development and license agreement |       | 5,425                   |       |                        | 5,662      |   |   |
| Total deferred revenue                          |       | 317,139                 |       |                        | 379,877    |   |   |
| Less current  portion                           |       | (136,185                | )          |                        | (142,013   | ) |   |
| Total long term  deferred revenue               |       | $                       | 180,954    |                        |       | $ | 237,864 |   |   |

 

**(8)   Commitmentsand Contingencies**

On October 28, 2003, a complaint was filed byYeda Research and Development Company Ltd. (“Yeda”) against ImCloneSystems and Aventis Pharmaceuticals, Inc. (“Aventis”) in the U.S. DistrictCourt for the Southern District of New York (03 CV 8484). This action did notseek damages, but rather alleged that three individuals associated with Yedashould also be named as co-inventors on U.S. Patent No. 6,217,866, whichrelates to the therapeutic use of EGFR antibodies (such as ERBITUX®, theCompany’s EGFR antibody product) in combination with chemotherapy. The Companyhas exclusively licensed this patent from Rhone-Poulenc Rorer Pharmaceuticals,now known as Sanofi-Aventis. On June 7, 2005, Yeda amended its U.S.complaint to seek sole inventorship of the subject patent. On November 4,2005, the Court denied the Company’s motion for summary judgment with respectto this matter, as filed with the Court on June 24, 2005. At the sametime, the Court granted summary judgment to Yeda dismissing two of ImClone’saffirmative defenses. A bench trial on the merits of Yeda’s complaint was heldbetween June 5, 2006 and July 19, 2006. On September 18, 2006,the Court ruled in favor of Yeda by awarding it sole inventorship rights to thepatent. The Company then appealed the Court’s decision to the Court of Appealsfor the Federal Circuit. The appeal was docketed on October 5, 2006 (as No. 2007-1012).Briefing is now complete and a decision from the Federal Circuit is expected indue course. The Company, having had the advice of its patent counsel, believesthe positions raised on appeal are sound and it plans to vigorously pursue thisappeal.

On September 20, 2006, subsequent to the Court’sinventorship decision, the Company also filed an action (06 CV 7190) againstYeda in the U.S. District Court for the Southern District of New York seeking adeclaratory judgment that the patent is invalid. On October 31, 2006, Yedafiled an answer and counterclaim to the Company’s declaratory judgmentcomplaint in which Yeda alleges the Company is 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

liable to Yeda for willfulpatent infringement, unjust enrichment and conversion, and seeks damages fromthe Company and an order requiring the Company to license the patent and payYeda royalties until the patent expires. The declaratory judgment actionremains in its early stages. The Company, having had the advice of its patentcounsel, believes that the claims asserted in the declaratory judgment actionare sound, and that Yeda’s counterclaims are not sound, and it plans tovigorously pursue this action. The Company is unable to predict the outcome ofthese actions at this time. If the Company’s appeal is unsuccessful and Yeda’ssole inventorship rights to the patent are upheld and the Company isunsuccessful with respect to its declaratory judgment action, the Company maybecome obligated to pay Yeda a royalty and may be liable to Yeda for otherdamages.

On March 25, 2004, an action was filed in theUnited Kingdom Patent Office entitled Referrer’s Statement requesting transferof co-ownership and amendment of patent EP (UK) 0 667 165 to add three Yedaemployees as inventors. Also on March 25, 2004, a German action entitledLegal Action was filed in the Munich District Court I, Patent LitigationDivision, in which Yeda sought a 75% ownership interest in patent EP (DE) 0 667165 based on its allegation that the inventorship on that patent was incorrect.The Company was not named as a party in these actions which relate to theEuropean equivalent of U.S. Patent No. 6,217,866 discussed above. TheCompany has intervened in the U.K. and German actions. Yeda sought to amend itspleadings in the United Kingdom and Germany to seek sole inventorship and soleownership. Following hearings, both the U.K. and German courts held that Yedawas not entitled to amend its pleadings. In the U.K., Yeda sought leave fromthe House of Lords to appeal the High Court’s decision, and such leave wasgranted in November 2006. A hearing was held before the House of Lords on July 23-25,2007. A judgment from the Court is unlikely before October 2007. InGermany, Yeda has appealed the lower court’s decision to the Higher RegionalCourt of Munich. The Higher Regional Court is presently expected to hear theappeal in September 2007. Additionally, on or about March 25, 2005and March 29, 2005, respectively, Yeda filed legal actions in Austria andFrance against both Aventis and ImClone Systems seeking full inventorship of EP(AU) 0 667 165 and EP (FR) 0 667 165, as well as payment of legal costs andfees. The Company, having had the advice of its patent counsel, believes thereare sound defenses to these actions, and it presently plans to vigorouslydefend against the claims asserted. The Company is unable to predict theoutcome of these actions at this time. In addition, in December 2002,Opposition Proceedings seeking to revoke the European patent discussed abovewere brought by the Scripps Research Institute, Amgen Inc., Abgenix, Inc.,and YM Biosciences Inc. An Opposition Proceeding is an administrative process,the outcome of which may be that the European patent will be revoked. TheOpposition Proceedings are suspended pending a final determination of the Yedamatter discussed above.

On May 4, 2004, a complaint was filed against theCompany by Massachusetts Institute of Technology (“MIT”) and RepligenCorporation (“Repligen”) in the U.S. District Court for the District ofMassachusetts (04-10884 RGS). This action alleges that ERBITUX® infringesU.S. Patent No. 4,663,281 (the “‘281 patent”), which is owned by MIT andexclusively licensed to Repligen and that the Company should therefore paydamages. On July 28, 2006, the Court denied the Company’s motion forsummary judgment seeking to dismiss all claims on the basis that the patentrights at issue were exhausted as a matter of law and granted MIT and Repligen’scross motion that their patent rights were not exhausted. On September 26,2006, a hearing was held in response to a Motion for Sanctions filed byRepligen, which alleged that the Company’s counsel, Kenyon & Kenyon,and the Company acted improperly during and after the deposition of one ofRepligen’s potential witnesses. In May 2007, the Company hired the lawfirm 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

of Wiley Rein LLP toreplace Kenyon & Kenyon and to represent it in this case. The Courtallowed Repligen’s motion and ordered sanctions against the Company, includingthe possibility of an adverse jury instruction. The Court held a hearing on July 26,2007 for the purpose of construing the disputed claim terms of the ‘281 patent,and we are waiting for a ruling from the Court. The Court has set a trial dateof September 10, 2007. The Company, having had the advice of its patentcounsel, believes that its defenses are sound, and it plans to vigorouslydefend against the claims asserted. The outcome cannot be predicted withcertainty, however and the Company could be liable for damages in the event ofan adverse judgment at trial.

On February 5, 2007, a complaint was filedagainst the Company by Abbott Laboratories (“Abbott”) in the U.S. DistrictCourt for the District of Massachusetts (07-cv-10216). This actionalleges that the manufacture and sale of ERBITUX® infringes U.S. Patent No. 5,665,578,which is owned by Abbott and that the Company should therefore pay damages. On April 24,2007, the Company filed an answer, which it amended on May 17, 2007, tothis complaint denying all claims. The case is in its early stages. TheCompany, having had the advice of its patent counsel, believes that itsdefenses are sound, and it plans to vigorously defend against the claimsasserted. The Company is unable to predict the outcome of this action at thepresent time.

No reserve has been established in the financialstatements for any of the legal proceedings described above because the Companydoes not believe that such a reserve is required to be established at this timeunder Statement of Financial Accounting Standards No. 5. However, if in afuture period, events in any such legal proceedings render it probable that aloss will be incurred and if such loss is reasonably estimable at that time,the Company will establish such a reserve. Thus, it is possible that legalproceedings and settlements arising there from, if any, may have a materialadverse impact on operating results for that period, on our balance sheet orboth.

In October 2001, theCompany entered into a sublease (the “Sublease”) for a four-story building at325 Spring Street, New York, New York, which includes approximately 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 $10.0 million note receivable, of which $8.1 million isoutstanding as of June 30, 2007. The loan is secured by a leaseholdmortgage on 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 51¤2%in years one through five, 61¤2%in years six through ten, 71¤2%in years eleven through fifteen and 81¤2%in years sixteen through twenty. In addition, the Company paid the owner aconsent fee in the amount of $500,000. Effective March 1, 2005, theCompany amended the Sublease to add an additional 6,500 square feet of spaceupon all the same terms and conditions set forth in the Sublease. In connectionwith this amendment, the Company paid an up-front fee of $1.7 million which isbeing amortized to lease expense over the respective term of the Sublease. Thefuture minimum lease payments remaining at June 30, 2007, areapproximately $45.3 million.

**(9)   EmployeeBenefit Plans**

***Defined Contribution Plan***

All employees of theCompany who meet certain minimum age and period of service requirements areeligible to participate in a 401(k) defined contribution plan. The 401(k) planallows eligible employees to 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)**

defer upto 25 percent of their annual compensation, subject to certain limitationsimposed by federal law. The amounts contributed by employees are immediatelyvested and non-forfeitable. Under the 401(k) plan, the Company, atmanagement’s discretion, may match employee contributions and/or makediscretionary contributions. Neither the employee contributions nor voluntarymatching contributions are invested in the Company’s securities. Total expenseincurred by the Company was $454,000 and $484,000 for the three months ended June 30,2007 and 2006, respectively, and approximately $1.1 million and $1.2 millionfor the six months ended June 30, 2007 and 2006, respectively.

**(10)   Long-termDebt**

The Company’s long-term debt was $600.0 million at June 30,2007 and December 31, 2006. For a more detailed description of the Company’slong-term debt, reference Note 8 of the Notes to the Consolidated FinancialStatements included in the Company’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2006.

In December 2006, the FASB issued FASB StaffPosition Issue No.EITF 00-19-2, “Accounting for RegistrationPayment Arrangements” (“FSP 00-19-2”). FSP 00-19-2addresses an issuer’s accounting for registration payment arrangements andspecifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement, whether issuedas a separate agreement or included as a provision of a financial instrument orother agreement, should be separately recognized and measured in accordancewith SFAS No. 5, “Accounting for Contingencies.” FSP 00-19-2is effective immediately for registration payment arrangements and financialinstruments subject to those arrangements that were entered into or modifiedsubsequent to the issuance of FSP 00-19-2. For registrationpayment arrangements and financial instruments subject to those arrangementsthat were entered into prior to the issuance of FSP 00-19-2, it iseffective for financial statements issued for fiscal years beginning after December 15,2006. The Company has adopted the provisions of FSP 00-19-2 as of January 1,2007, and has determined that it had no impact on our consolidated financialstatements.

Under the Registration Rights Agreement for theseconvertible notes, the Company could be subject to liquidated damages if theeffectiveness of the registration statement covering the convertible debt isnot maintained at any time prior to the redemption of the convertible notes,the repayment of the convertible notes, or certain corporate events as definedin the convertible note agreement. The Company believes the likelihood of suchan event occurring is remote and, as such we have not recorded a liability asof June 30, 2007. In the unlikely event that it becomes probable that wewould have to pay liquidated damages under the Registration Rights Agreement,until a shelf registration statement covering the convertible debt is againeffective, the potential liquidated damages would be 0.25% of the outstandingamount of notes for the first 90 days and 0.50% of the outstanding amount ofnotes thereafter. Such damages (i) would accrue only with respect to theshares of the Company’s common stock that were not already sold by the holder(using the registration statement or pursuant to SEC Rule 144) and thatwere not eligible for sale without a registration statement; (ii) wouldaccrue only over the period during which the registration statement was noteffective; and (iii) would be settled in cash in accordance with the termsof the Registration Rights Agreement.

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**Item2.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

The following discussionand analysis is provided to further the reader’s understanding of theconsolidated financial statements, financial condition and results ofoperations 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 the SEC,including our 2006 Annual Report on Form 10-K. This discussioncontains forward-looking statements based upon current expectations thatinvolve risk and uncertainties. Our actual results and the timing of certainevents could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth below andunder “Risk Factors” and elsewhere in our 2006 Annual Report on Form 10-K.

**OVERVIEW**

ImClone Systems is abiopharmaceutical company whose mission is to advance oncology care bydeveloping and commercializing a portfolio of targeted treatments designed toaddress the medical needs of patients with cancer. Our commercially availableproduct, ERBITUX® (cetuximab) binds specifically to epidermal growth factorreceptor (EGFR, HER1, c-ErbB-1) on both normal and tumor cells, andcompetitively inhibits the binding of epidural growth factor (EGF) and otherligands, such as transforming growth factor-alpha. We are conducting, and insome cases have completed, clinical studies evaluating ERBITUX® for broader usein colorectal cancer, squamous cell carcinoma of the head and neck (“SCCHN”),for the potential treatment of lung and pancreatic cancers, as well as other potentialindications.

In June 2007, the FDAaccepted a supplemental Biologics License Application (sBLA) for ERBITUX®. Withthis application, the Company seeks to include evidence of improved overallsurvival in the product labeling for ERBITUX® in the third-line treatment ofpatients with metastatic colorectal cancer (mCRC). If the sBLA is approved,ERBITUX® would be the only biologic therapy to demonstrate overall survival asa single agent in patients with mCRC. The ERBITUX® sBLA has been granted a priorityreview, with a likely action date of early October 2007.

In July 2007, theCompany and BMS amended the terms of their agreement for the codevelopment andcopromotion of ERBITUX® in North America. Under this amendment, the companieshave jointly agreed to expand the investment in the ongoing clinicaldevelopment plan for ERBITUX® by up to several hundred million dollars. Developmentcosts, up to a threshold value, will be the sole responsibility of BMS; costsin excess of this threshold will be shared by both companies according to apre-determined ratio. With this additional funding, the companies will furtherexplore the use of ERBITUX® in additional tumor types including brain, breast,bladder, gastric, lung, pancreas and prostate.

Ourrevenues, as well as our results of operations, have fluctuated and areexpected to continue to fluctuate significantly from period to period due toseveral factors, including but not limited to:

·       theamount and timing of revenues earned from commercial sales of ERBITUX®;

·       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 objectives;

·       anybusiness development transactions;

·       fluctuationsin our effective tax rate and timing on when we may revise our conclusionsregarding the realization of our net deferred tax assets, which currently havea partial valuation allowance;

·       legalcosts and the outcome of outstanding legal proceedings; 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 oursubstantial investment in research and development, we incurred significantoperating losses prior to fiscal 2004 and have an accumulated deficit ofapproximately $9.6 million as of June 30, 2007. We anticipate thatour accumulated deficit will continue to decrease in the future as we earnrevenues on commercial sales of ERBITUX® and generate net income. There is noassurance that we will be able to continue to successfully manufacture marketor commercialize ERBITUX® or that potential customers will buy ERBITUX®. Werely entirely on third-party manufacturers for filling and finishing serviceswith respect to ERBITUX®. If our current third-party manufacturers or criticalraw material suppliers fail to meet our expectations, we cannot be assured thatwe will be able to enter into new agreements with other suppliers or thirdparty manufacturers without an adverse effect on our business.

**HIGHLIGHTS AND OUTLOOK**

On July 27, 2007, weannounced that we have amended our existing agreement with BMS for thecodevelopment and copromotion of ERBITUX® in North America. With us, BMS willinvest significant additional funding to expand our ongoing ERBITUX® clinicaldevelopment program by up to several hundred million dollars. With thisadditional financial commitment, the scope of our development activitiesexpands dramatically. We will conduct numerous Phase II and Phase III clinicaltrials that will further explore the activity of ERBITUX® in a wide variety oftherapeutic settings. We have proven the effectiveness of ERBITUX® in bothcolorectal and head and neck cancers and, based on this success, we areconfident of its value in other indications, including brain, breast, bladder,esophageal, gastric, lung, pancreas and prostate. This program is notexploratory—it is squarely focused on registrational opportunities. In 2007 andbeyond, this amended agreement allows us to significantly reduce our clinicaland regulatory expenses for ERBITUX® while at the same time expanding theantibody’s development. We now expect that our portion of the ERBITUX® spend in2007 to be $35 - $40 million less than what we had anticipated earlier inthe year.

As we stated late lastyear when the Board began evaluating the relationship between ImClone and BMS,our goal was to seek for ways to optimize our collaboration in terms ofrealizing the full potential of ERBITUX®. We believe this expanded clinicaldevelopment program with BMS greatly enhances the long-term value of ERBITUX®in treating a wide range of cancer patients.

The U.S. in-market secondquarter sales of ERBITUX® represented an important milestone—the reversal of adeclining sales trend since the introduction of Panitumumab in September 2006.Additionally, we nearly doubled the size of our sales force during the secondquarter and now have 64 U.S. sales professionals in the field as of July 1,2007. With the second quarter performance of ERBITUX® and the expansion of oursales force, we believe we are well positioned for a positive second half ofthe year.

We had a major presence atthe ASCO and AACR meetings, presenting extensive clinical data in more than 100abstracts in several different tumor types. These abstracts build on thegrowing body of ERBITUX® data and bolster the value of our robust pipeline ofIgG1 fully human antibodies.

Wealso recently achieved significant regulatory milestones:

1)              TheFDA has accepted, for filing and review, a supplementary BLA for ERBITUX® whichincludes evidence that ERBITUX® is the only monoclonal antibody to showimproved overall survival as a single agent in colorectal cancer. Thissupplementary BLA has been granted priority review and we expect the FDA actiondate to be early October.

2)              InApril, we submitted a supplementary BLA seeking the approval of ourmanufacturing facility BB50 as a second manufacturing source for ERBITUX®.

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Beyond ERBITUX®, we havemade a great deal of progress in advancing the development of a number of ourclinical antibodies during the second quarter of 2007. Most recently, weannounced that the first of our Phase II clinical trials of IMC-A12, our IGFRantibody, for advanced colorectal cancer, has commenced patient enrollment. Weexpect to enroll very shortly our first patients in each of our Phase IIstudies of IMC-1121B, our VEGFR-2 antibody, in renal cellcarcinoma, and IMC-11F8, our fully-human EGFR antibody, in colorectalcancer.

On August 9, 2007, weannounced that John H. Johnson has been appointed to be our ChiefExecutive Officer. Mr. Johnson has more than two decades of executive andoperational management experience in the pharmaceutical and healthcareindustries.

**CRITICAL ACCOUNTING POLICIES**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reporting period. We baseour estimates on historical experience and on assumptions that we believe to bereasonable under the circumstances. Estimates are deemed critical when adifferent methodology could have reasonably been used or where changes in theestimate from period to period may have a material impact on our financialcondition or results of operations. Our critical accounting policies thatrequire management to make significant judgments, estimates, and assumptionsare set forth below. The development and selection of the critical accountingpolicies, and the related disclosure below, have been reviewed with the AuditCommittee of our Board of Directors.

*Revenue Recognition—**Our***revenues are derived from four primary sources: licensefees and milestone payments, manufacturing revenue, royalty revenue, andcollaborative agreement revenue.

Revenues from license feesand milestone payments primarily consist of up-front license fees and milestonepayments received under the Commercial Agreement with BMS, relating toERBITUX®, and milestone payments received under the development and licenseagreement with Merck KGaA. We recognize all non-refundable up-frontlicense fees as revenues in accordance with the guidance provided in the SEC’sStaff Accounting Bulletin No. 104. Our most critical application of thispolicy, to date, relates to the $900.0 million in license fees receivedfrom BMS under the Commercial Agreement which are being deferred and recognizedas revenue based upon the actual product clinical and development costsincurred since September 19, 2001 to date by BMS and ImClone as apercentage of the estimated total of such costs to be incurred over the 17-yearterm of the Commercial Agreement. The estimated total of such costs is based onthe clinical development budget which establishes joint responsibilities thatwill be carried out by both the Company and BMS for certain clinical and otherstudies. Of the $900.0 million in payments received to date, $33.3 millionwas recognized as revenue in the second quarter of 2007 and $588.3 millionfrom the commencement of the Commercial Agreement in 2001 through June 30,2007. The methodology used to recognize deferred revenue involves a number ofestimates and judgments, such as the estimate of total product clinical anddevelopment costs to be incurred under the Commercial Agreement. Changes inthese estimates and judgments can have a significant effect on the size andtiming of revenue recognition. In addition, if management had chosen adifferent methodology to recognize the license fee and milestone paymentsreceived under the Commercial Agreement, the Company’s financial position andresults of operations could have differed materially. For example, if theCompany were to recognize the revenues earned from the Commercial Agreement ona straight-line basis over the life of the agreement, the Company would haverecognized approximately $16.0 million and $221.1 million as revenuein the second quarter of 2007 and from the commencement of the CommercialAgreement, respectively, through June 30, 2007. Management believes thatthe current methodology used to recognize revenues under the 

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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 upfrontpayments received from Merck KGaA were deferred due to our significantcontinuing involvement and are being recognized as revenue on a straight-linebasis over the estimated service period because the activities specified in theagreement between the Company and Merck KGaA will be performed over theestimated service period and there is no other pattern or circumstances thatindicate a different way in which the revenue is earned. In addition, thedevelopment and license agreement with Merck KGaA does not contain anyprovisions for establishing a clinical budget and none has been establishedbetween the parties. This agreement does not call for codevelopment with theCompany 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 and Merck KGaAhas the right to evaluate the technology to decide whether to continue with theresearch and development program as each milestone is reached.

Manufacturing revenueconsists of revenue earned on the sale of ERBITUX® to our corporate partnersfor subsequent commercial sale. The Company recognizes manufacturing revenuewhen the product is shipped, which is when our partners take ownership andtitle has passed, collectibility is reasonably assured, the sales price isfixed or determinable, and there is persuasive evidence of an arrangement. Weare contractually obligated to sell ERBITUX® to BMS at our cost of productionplus a 10% markup on bulk. We sell bulk inventory to Merck KGaA at ourfull absorption cost of production. The continuing level of manufacturingrevenue in future periods may fluctuate significantly based on marketdemand, our cost of production, as well as BMS’s required level of safety stockinventory for ERBITUX® and whether Merck KGaA continues to order ERBITUX®for commercial use.

Royalty revenues fromlicensees, which are based on third-party sales of licensed products andtechnology, are recorded as earned in accordance with contract terms whenthird-party sales can be reliably measured and collection of funds isreasonably assured.

Collaborative agreementrevenue consists of reimbursements received from BMS and Merck KGaArelated to clinical and regulatory studies, ERBITUX® provided to them for usein clinical studies, reimbursement of a portion of royalty expense and certainmarketing and administrative costs. Collaborative agreement revenue is recordedas earned based on the performance requirements under the respective contracts.

The Company is currentlyanalyzing if the amendment to the BMS agreement, which will be reflectedprospectively, will impact its financial statements.

*Inventories—**Our* policy is tocapitalize inventory costs associated with our products when, based onmanagement’s judgment, future economic benefit is expected to be realized. Ouraccounting policy addresses the attributes that should be considered inevaluating whether the costs to manufacture a product have met the definitionof an asset as stipulated in FASB Concepts Statement No. 6. If applicable,we assess the regulatory and approval process including any known constraintsand impediments to approval. We also consider the shelf-life of the product inrelation to the expected timeline for approval. We review our inventory forexcess or obsolete inventory and write down obsolete or otherwise unmarketableinventory to its estimated net realizable value.

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In June 2006, webegan producing ERBITUX® for commercial use at our BB50 manufacturing facility.We filed a sBLA with the FDA for approval of our BB50 facility in April 2007.Until such time as we receive approval of BB50 from the FDA, we will not be ableto sell the ERBITUX® inventory produced in BB50. Based on management’s currentexpectations, we expect that the costs of such inventory will be fullyrealizable once we obtain approval of BB50. Therefore, in June 2006 webegan to capitalize the costs of producing ERBITUX® in BB50 and will continueto do so, as long as we can conclude that the costs of such inventory will befully realizable. As of June 30, 2007, we have capitalized approximately$55.6 million of inventory produced in BB50.

*Litigation—**The*Company iscurrently involved in certain legal proceedings more fully described under Part II—Item 1—“LegalProceedings” and as disclosed in the notes to the consolidated financialstatements. As of June 30, 2007, we have not established a legal reservein our financial statements because we do not believe that such a reserve isrequired to be established at this time, in accordance with Statement ofFinancial Standards No. 5. However, if in a future period, events in anysuch legal proceedings render it probable that a loss will be incurred, and ifsuch loss is reasonably estimable at that time, we will establish such areserve. Thus, it is possible that legal proceedings and settlements arisingthere from, if any, may have a material adverse impact on the operatingresults for that period, on our balance sheet or both.

*Long-Lived Assets—**We*review long-livedassets for impairment when events or changes in business conditions indicatethat their full carrying value may not be recovered. Assets are consideredto be impaired and written down to fair value if expected associatedundiscounted cash flows are less than carrying amounts. Fair value is generallydetermined as the present value of the expected associated cash flows. We own anumber of buildings that are primarily dedicated to the manufacturing ofERBITUX® and other clinical products in our pipeline. 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 areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Significant estimates are required in determining ourprovision for income taxes. In 2006, we released a portion of our valuationallowance against our deferred tax assets. This partial release was based onrevised expectations of our projected book and taxable income which caused usto conclude that it is more likely than not that a portion of the benefits ofthese deferred taxes would be realized. The financial projections supportingour conclusion to release a portion of our valuation allowance contain significantassumptions based on current facts about our market share and our competitivelandscape. If such assumptions were to differ significantly, it may have amaterial impact on our ability to realize our deferred tax assets. We willcontinue to monitor our current performance and future financial projections,including market share and competitive landscape, in order to determine theeffect on the valuation allowance.

**Impact of Recent Accounting Pronouncements**

In September 2006,the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157,“Accounting for Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fairvalue, and establishes a framework for measuring fair value in accordance withaccounting GAAP, and expands disclosure about fair value measurements. SFAS 157is effective for fiscal years beginning after November 15, 2007. TheCompany is currently evaluating the requirements of SFAS 157.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”). SFAS 159 permits the measurement ofcertain financial instruments 

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andcertain other items at fair value. Entities may choose to measure eligibleitems at fair value at specified election dates, reporting unrealized gains andlosses on such items at each subsequent reporting period. SFAS 159 iseffective for fiscal years beginning after November 15, 2007. The Companyis currently evaluating the requirements of SFAS 159.

In June 2007, theEmerging Issues Task Force reached a consensus on Issue No. 07-3, “Accountingfor Nonrefundable Advance Payments for Good or Services to Be Used in FutureResearch and Development Activities.” This Issue requires that nonrefundableadvance payments for research and development activities be deferred andcapitalized. Such amounts should be recognized as an expense as the relatedgoods are delivered or the services are performed or when the goods or servicesare no longer expected to be provided. This Issue will be effective for fiscalyears beginning after December 15, 2007, and earlier adoption is notpermitted. This consensus is to be applied prospectively for new contractsentered into after that date. The Company is currently evaluating the potentialimpact of this consensus on its consolidated financial statements.

**RESULTS OF OPERATIONS**

Selectedfinancial and operating data for the three and six months ended June 30,2007 and 2006 are as follows: (in thousands)

| ** **                             | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **Variance** | ** ** | **2007** | ** ** | **2006** | ** ** | **Variance** | ** ** |
| **Results of Operations:**             |       |                                           |       |                                         |       |   |   |   |   |   |   |   |   |
| Royalty revenue                        |       | $                                              | 78,144     |                                         | $          | 74,614 |   | $ | 3,530 |   | $ | 154,507 |   | $ | 134,884 |   | $ | 19,623 |   |
| License fees and  milestone revenue    |       | 33,445                                         |       | 33,456                                       |       | (11 | ) | 62,739 |   | 177,859 |   | (115,120 | ) |
| Manufacturing revenue                  |       | 23,025                                         |       | 28,356                                       |       | (5,331 | ) | 39,483 |   | 47,705 |   | (8,222 | ) |
| Collaborative agreement  revenue       |       | 15,818                                         |       | 13,430                                       |       | 2,388 |   | 35,203 |   | 34,539 |   | 664 |   |
| Total revenues                         |       | 150,432                                        |       | 149,856                                      |       | 576 |   | 291,932 |   | 394,987 |   | (103,055 | ) |
| Research and development               |       | 33,723                                         |       | 27,583                                       |       | 6,140 |   | 68,598 |   | 60,576 |   | 8,022 |   |
| Clinical and regulatory                |       | 14,820                                         |       | 14,929                                       |       | (109 | ) | 28,628 |   | 30,010 |   | (1,382 | ) |
| Marketing, general and  administrative |       | 18,567                                         |       | 22,963                                       |       | (4,396 | ) | 33,926 |   | 40,964 |   | (7,038 | ) |
| Royalty expense                        |       | 18,988                                         |       | 18,414                                       |       | 574 |   | 35,774 |   | 38,480 |   | (2,706 | ) |
| Cost of manufacturing  revenue         |       | 22,999                                         |       | 26,877                                       |       | (3,878 | ) | 36,854 |   | 42,279 |   | (5,425 | ) |
| Total operating expenses               |       | 109,097                                        |       | 110,766                                      |       | (1,669 | ) | 203,780 |   | 212,309 |   | (8,529 | ) |
| Operating income                       |       | $                                              | 41,335     |                                         | $          | 39,090 |   | $ | 2,245 |   | $ | 88,152 |   | $ | 182,678 |   | $ | (94,526 | ) |

 

***Three Months Ended June 30, 2007 and 2006***

**Revenues**

**Royalty Revenue**

Royalty revenues consist primarily of royalty paymentsearned on the sales of ERBITUX® by our partners, BMS and Merck KGaA. Underour agreement with BMS, we are entitled to royalty payments equal to 39% of BMS’snet sales of ERBITUX® in the United States and Canada. Under our agreement withMerck KGaA, beginning July 2006, we are entitled to royalty paymentsequal to 9.5% of Merck’s KGaA’s net sales outside of the United States andCanada.

In the second quarter of2007, our royalty revenue increased by approximately $3.5 million, or 5%,from the comparable period in 2006 due to an increase in international netsales of ERBITUX®. Domestic net sales by our partner BMS in the second quarterof 2007 amounted to $162.1 million compared to net sales in the comparableperiod in 2006 of $172.4 million, a decrease of $10.3 million, or 6%.International net sales of ERBITUX® by our partner Merck KGaA in thesecond quarter of 2007 

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amountedto approximately $157.2 million, an increase of $54.7 million or 53%from the comparable period in 2006.

**License Fees andMilestone Revenue**

License fees and milestone revenues consist of therecognition of up-front license fees and milestone payments received under theCommercial Agreement with BMS and recognition of payments received under thedevelopment and license agreements with Merck KGaA. In the second quarterof 2007, total license fee and milestone revenue consisted of approximately$33.3 million earned from BMS and $119,000 from Merck KGaA, ascompared to the same period in 2006, in which approximately $33.4 millionwas earned from BMS and $55,000 was earned from Merck KGaA. Total licensefees and milestone revenues were comparable to the same period in 2006.

As discussed above, on July 27,2007, we announced that we had amended our codevelopment and copromotion agreementwith BMS. This amendment provides for a significant increase in the clinicalbudget to develop ERBITUX® over the remaining length of our partnership. We arein the process of analyzing if this amendment, which will be reflectedprospectively will impact license fee and milestone revenue, as well as otherrevenue categories.

**ManufacturingRevenue**

Manufacturing revenues consist of sales of ERBITUX® toour corporate partners for commercial use. In accordance with the CommercialAgreement, we are contractually obligated to sell ERBITUX® to BMS at our costof production plus a 10% markup on bulk. We sell bulk inventory to Merck KGaAat our full absorption cost of production.

During the second quarter of 2007, manufacturingrevenue decreased by $5.3 million from the comparable period in 2006 dueto efficiencies in the manufacturing process of ERBITUX® resulting in adecrease in the price we charge our partners for ERBITUX® . Total volumepurchases from our partners in the second quarter of 2007 increased from thecomparable period in 2006 by approximately 11%.

For the full year of 2007,we anticipate that total manufacturing revenues will be in the range of $70 - $75 millionbased on the current anticipated demand from our partners.

**CollaborativeAgreement Revenue**

Collaborative agreement revenue consists primarily ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: the cost of ERBITUX® supplied to our partners for use inclinical studies, clinical and regulatory expenses, certain marketing andadministrative expenses, and a portion of royalty expense. During the secondquarter of 2007, we earned approximately $15.8 million in collaborativeagreement revenue, which consists of $10.6 million earned from BMS and$4.6 million earned from Merck KGaA, as compared to $13.4 millionearned in the comparable period in 2006, of which $11.8 million was earnedfrom BMS and $1.6 million was earned from Merck KGaA.

The increase from the comparable period of $2.4 million,or 18%, is due to an increase in clinical shipments of ERBITUX® to our partnersof approximately $3.5 million and increased reimbursement of clinical andregulatory expenses due to higher activity of $856,000, partly offset by adecrease in reimbursement for royalty expenses of $2.5 million resultingfrom the decrease in the reimbursement rate from BMS for third-party royaltiesfrom 4.5% to 2.5% on January 1, 2007.

For the full year 2007, we anticipate that totalcollaborative agreement revenue will range between $70-$75 million.

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**Expenses**

**Research and Development**

Research and developmentexpenses in the second quarter of 2007 of $33.7 million increased from thecomparable period in 2006 by $6.1 million, or 22%. This increase isprimarily due to an increase of approximately $4.7 million associated withproduction of pipeline products, and an increase of $4.1 million inshipments of ERBITUX® sold to our partners for clinical studies, partly offsetby decreases in various other expense categories. Research and developmentexpenses include costs associated with our in-house research programs, productand process development expenses, costs to manufacture our product candidatesfor clinical studies, quality assurance, and quality control infrastructure.Research and development expenses also include our cost of inventory that issupplied to our corporate partners for use in clinical studies that arereimbursable from our corporate partners. As a result, approximately $4.6 millionand $1.1 million of costs representing research and development expensesin the second quarters of 2007 and 2006, respectively, were reimbursable andincluded under collaborative agreement revenue since they represent inventorysupplied to our partners for use in clinical studies.

**Clinical and Regulatory**

Clinical and regulatoryexpenses consist of costs to conduct our clinical studies and associatedregulatory activities. Clinical and regulatory expenses in the second quarterof 2007 amounted to $14.8 million, which is comparable to the spend in thecomparable period of 2006. Clinical and regulatory expenses includes certainamounts that are reimbursable from our corporate partners. As a result,approximately $3.6 million and $2.8 million of the costs included inthis category for the second quarters of 2007 and 2006, respectively, arereflected as revenues under collaborative agreement revenue since theyrepresent costs that are reimbursable by our corporate partners.

The amended agreement withBMS discussed above, specifically as they pertain to the clinical developmentof ERBITUX® specifies that each year BMS will fund 100% of the annualdevelopment costs up to a specific threshold and that we will contribute aportion of the costs in excess of that threshold. The financial impact of theamended agreement with BMS will be reflected prospectively, beginning with ourthird quarter results.

We are revising ourfull-year estimate of clinical and regulatory expense and now expect it to bein the range of approximately $55 to $60 million.

**Marketing, General and Administrative**

Marketing, general andadministrative expenses include marketing and administrative personnel costs,including related facility costs, additional costs to develop internalmarketing and field operations capabilities and expenses associated withapplying for patent protection for our technology and products.

Marketing, general andadministrative expenses in the second quarter of 2007 amounted to $18.6 million,a decrease of $4.4 million or 19% from the comparable period in 2006.Expenses in this category have decreased from the comparable period in 2006,mainly due to costs efficiencies in areas such as insurance expense and variousother categories as well as a decrease in legal fees of approximately $3.2 million,partly offset by incremental costs related to the increase in our sales forcethat we announced in the first quarter of 2007. Marketing, general andadministrative expenses include amounts reimbursable from our corporatepartners. As a result, approximately $259,000 and $336,000 of costsrepresenting marketing and general expenses in the second quarters of 2007 and2006, respectively, were reimbursable and included in collaborative agreementrevenue.

We continue toaggressively pursue cost saving opportunities in this area as well as in therest of our operations. For the full year of 2007, we expect total marketing,general and administrative expenses to be approximately $75 million.

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**Royalty Expense**

Royalty expense consistsof obligations related to certain licensing agreements related to ERBITUX®. Weare obligated to pay royalties of approximately 9.25% of North American netsales and a low single-digit royalty on sales outside of North America, whichwill increase if sales outside of North America consist of ERBITUX® produced inthe United States. In 2007, we receive reimbursements from our corporatepartners of 2.5% on North American net sales and a single-digit percentage onnet sales outside of North America, which is reflected in collaborativeagreement revenue. As a result, approximately $6.7 million and $9.2 millionof royalty expense were reimbursable by our corporate partners and included ascollaborative agreement revenue in the second quarters of 2007 and 2006,respectively.

In the second quarter of2007, we incurred royalty expense of $19.0 million an increase of$574,000, or 3%, from the comparable period in 2006. The increase is due to anincrease in international net sales of ERBITUX® in the second quarter of 2007from the comparable period in 2006. Effectiveat the end of July, our total domestic royalty expense decreased from 9.25% to8.5% due to the expiration of a patent we licensed.

**Cost of Manufacturing Revenue**

We sell ERBITUX® to BMS atour cost of production plus a 10% mark-up on bulk and to Merck KGaA at ourcost of production. Therefore, depending on certain circumstances, such as themix of demand from our partners, and the costs of filling and finishingERBITUX® bulk (for which we do not charge a 10% markup when selling to BMS), weexpect that our gross margins on sales of ERBITUX® may fluctuate from quarterto quarter.

Cost of manufacturingrevenue in the second quarter of 2007 amounted to $23.0 million representing agross margin of less than 1%, compared to costs of manufacturing revenue in thecomparable period of 2006 of approximately $26.9 million, or a gross margin of5%. Gross margin for the quarter ended June 30, 2007 were adverselyimpacted by higher manufacturing costs.

**Interest Income and Interest Expense**

Interest income in thesecond quarter of 2007 amounted to $13.3 million, an increaseof approximately $3.1 million, or 30% from the comparable period in 2006. Thisincrease is attributable to increases in interest rates and higher averagebalance of our investment portfolio from the comparable period in 2006.

Interest expense in thesecond quarter of 2007 amounted to $3.0 million, an increase of $1.1million, or 56% from the comparable period in 2006. The increase is due to thefact that we finalized construction of our BB50 manufacturing facility in May of2006, and therefore, ceased capitalizing interest on the construction of thisfacility at that time.

**Provision for Income Taxes**

Oureffective tax rate for the second quarter of 2007 is higher than the comparableperiod in 2006 mainly due to the utilization of fully reserved deferred taxassets in 2006. The Company’s annual effective income tax rate for 2007 isexpected to be approximately 42%, which is inclusive of discrete items recordedthrough the six months ended June 30, 2007. Cash taxes in 2007 are expectedto be approximately $3 million.

**Net Income**

In the second quarter of2007 we generated net income of $31.9 million, and $0.36 per diluted commonshare, compared with net income of $37.2 million, and $0.42 per diluted commonshare for the comparable period in 2006. The fluctuation in results was due tothe factors noted above.

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***Six Months Ended June 30,2007 and 2006***

**Revenues**

**Royalty Revenue**

Royalty revenues consistprimarily of royalty payments earned on net sales of ERBITUX® by our partners,BMS and Merck KGaA. Under our agreement with BMS, we are entitled to royaltypayments equal to 39% of BMS’s net sales of ERBITUX® in the United States andCanada. Under our agreement with Merck KGaA, beginning July 2006, we areentitled to royalty payments equal to 9.5% of Merck’s KGaA’s net sales outsideof the United States and Canada.

For the six months ended June 30,2007, royalty revenue amounted to $154.5 million, an increase of $19.6 million,or 15%, from the comparable period in 2006. This increase is due to an increasein net sales of ERBITUX®. In North America, net sales by BMS for the first sixmonths of 2007 amounted to $322.2 million, an increase of $11.8 million, or 4%.Outside of North America, net sales of ERBITUX® by Merck KGaA in the firsthalf of 2007 amounted to $303.1 million, an increase of $110.8 million or 58%from the comparable period in 2006.

**License Fees and Milestone Revenue**

License fees and milestonerevenues consist of the recognition of up-front license fees and milestonepayments received under the Commercial Agreement with BMS and recognition ofpayments received under the development and license agreements with Merck KGaA.For the six months ended June 30, 2007, license fees and milestone revenueconsisted of $62.5 million earned from BMS and $237,000 from Merck KGaA, ascompared to the same period in 2006 in which $177.7 million was earned from BMSand $111,000 was earned from Merck KGaA.

The decrease of $115.1million, or 65%, from the comparable period in 2006 is mainly due to the factthat in March 2006, we received the last milestone payment from BMS of$250.0 million, as a result of obtaining approval from the FDA for ERBITUX® inthe head and indication. The milestone revenue in the first quarter of 2006 includeda “catch-up” adjustment of approximately $112.7 million related to the actualproduct clinical development costs incurred from inception through December 31,2005 as a percentage of the estimated total costs to be incurred over the termof the Commercial Agreement.

As discussed above, on July 27,2007, we announced that we had amended our codevelopment and copromotionagreement with BMS. This amendment provides for a significant increase in theclinical budget to develop ERBITUX® over the remaining length of ourpartnership. We are in the process of analyzing if this amendment which will bereflected prospectively, will impact license fee and milestone revenue, as wellas other revenue categories.

**Manufacturing Revenue**

Manufacturing revenuesconsist of sales of ERBITUX® to our corporate partners for commercial use. Inaccordance with the Commercial Agreement, we are contractually obligated tosell ERBITUX® to BMS at our cost of production plus a 10% markup on bulk. Wesell bulk inventory to Merck KGaA at our full absorption cost of production.

During the first half of2007, manufacturing revenue decreased by $8.2 million from the comparableperiod in 2006 due primarily to efficiencies in the manufacturing process ofERBITUX® resulting in a decrease in the price we charge our partners forERBITUX®. Total volume purchases from our partners in the first six months of2007 increased by approximately 4% from the comparable period in 2006.

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**Collaborative Agreement Revenue**

Collaborative agreementrevenue consists primarily of reimbursements from our partners BMS and MerckKGaA under our collaborative agreements. There are certain categories for whichwe receive reimbursement from our partners: the cost of ERBITUX® supplied toour partners for use in clinical studies, clinical and regulatory expenses,certain marketing and administrative expenses, and a portion of royalty expense.During the six months ended June 30, 2007, we earned $35.2 million incollaborative agreement revenue, which primarily consists of approximately$21.1 million earned from BMS and approximately $13.5 million earned from MerckKGaA, as compared to $34.5 million earned in the comparable period in 2006, ofwhich $25.1 million was earned from BMS and approximately $9.4 million wasearned from Merck KGaA. The increase in collaborative agreement revenue of$664,000 is principally due to increases in reimbursement for clinical drugs ofapproximately $4.8 million and in the reimbursement of clinical and regulatoryexpenses of approximately $1.2 million, partially offset by a decrease inreimbursement for royalty expense of $5.9 million, primarily resulting from thedecrease in the reimbursement rate from BMS for third-party royalties from 4.5%to 2.5% on January 1, 2007.

**Research and Development**

Research and developmentexpenses include costs associated with our in-house research programs, productand process development expenses, costs to manufacture our product candidatesfor clinical studies, quality assurance and quality control infrastructure.Research and development expenses also include our cost of inventory that issupplied to our corporate partners for use in clinical studies that arereimbursable from our corporate partners. As a result, approximately $14.8million and $10.0 million of costs representing research and developmentexpenses in the first half of 2007 and 2006, respectively, were reimbursableand included under collaborative agreement revenue since they representinventory supplied to our partners for use in clinical studies

Research and developmentexpenses for the six months ended June 30, 2007 of $68.6 million increasedby approximately $8.0 million, or 13%, from the comparable period in 2006. Theincrease is primarily due to an increase in shipments of ERBITUX® sold to ourpartners for clinical studies of approximately $8.1 million, the write-offof $3.4 million of previously capitalized costs associated with the developmentof our Spring Street location and $3.1 million of increased costs forthird-party clinical manufacturing. These increases were partially offset bylower expenses in various categories due to costs associated with BB50manufacturing facility being capitalized into inventory after this facility wasplaced into service in June 2006.

**Clinical and Regulatory**

Clinical and regulatoryexpenses consist of costs to conduct our clinical studies and associatedregulatory activities. Clinical and regulatory expenses also include certainamounts that are reimbursable from our corporate partners. As a result,approximately $7.4 million and $6.1 million of the costs included in thiscategory for the first half of 2007 and 2006, respectively, are reflected asrevenues under collaborative agreement revenue since they represent costs thatare reimbursable by our corporate partners. Clinical and regulatory expensesfor the six months ended June 30, 2007 amounted to $28.6 million, adecrease of $1.4 million, or 5%, from the comparable period in 2006. Whilethere are no significant fluctuations in the total expenditure in 2007 comparedto the comparable period in 2006, we are aggressively focusing on moving ourproduct candidates from Phase I to Phase II and therefore, a significantportion of our expenditure in this category in 2007 has been directed towardsadvancing the development of our pipeline products.

The amended agreement withBMS discussed above, specifically as it pertains to the clinical development ofERBITUX® specifies that each year BMS will fund 100% of the annual developmentcosts up to a specific threshold and that we will contribute a portion of thecosts in excess of that threshold. 

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Thefinancial impact of the amended agreement with BMS will be reflectedprospectively, beginning with our third quarter results.

We are revising ourfull-year estimate of clinical and regulatory expense and now expect it to bein the range of approximately $55 to $60 million.

**Marketing, General and Administrative**

Marketing, general andadministrative expenses include marketing and administrative personnel costs,including related facility costs, additional costs to develop internalmarketing and field operations capabilities and expenses associated withapplying for patent protection for our technology and products. Marketing,general and administrative expenses also include amounts reimbursable from ourcorporate partners. As a result, approximately $579,000 and $650,000 of costsrepresenting marketing and general expenses in the first half of 2007 and 2006,respectively, were reimbursable and included in collaborative agreementrevenue.

Marketing, general andadministrative expenses for the six months ended June 30, 2007 amounted to$33.9 million, a decrease of $7.0 million or 17% from the comparable period in2006. Expenses in this category have decreased from the comparable period in2006, mainly due to a $5.0 million decrease in personnel costs as a result ofthe turnover of executive level employees who have not been replaced, a $1.6million decrease in legal fees from the first half of 2006 as well as smalldecreases in various other categories.

We continue toaggressively pursue cost saving opportunities in this area as well as in therest of our operations. For the full year of 2007, we expect total marketing,general and administrative expenses to be approximately $75 million.

**Royalty Expense**

Royalty expense consistsof obligations related to certain licensing agreements related to ERBITUX®. Weare obligated to pay royalties of approximately 9.25% of North American netsales and a low single-digit royalty on sales outside of North America,which will increase if sales outside of North America consist of ERBITUX®produced in the United States. In 2007, we receive reimbursements from ourcorporate partners of 2.5% on North American net sales and a single-digitpercentage on net sales outside of North America, which is reflected incollaborative agreement revenue. As a result, approximately $11.8 millionand $17.8 million of royalty expense were reimbursable by our corporatepartners and included as collaborative agreement revenue in the first half of2007 and 2006, respectively.

During the six monthsended June 30, 2007, we incurred royalty expense of $35.8 million, adecrease of $2.7 million, or 7% from the comparable period in 2006. Thedecrease is primarily due the fact that prior to the second quarter of 2006, wepaid royalties of approximately 12.25% of North American net sales and effectivein the second quarter of 2006, our obligation decreased by 3%. This decreasewas partially reduced as a result of additional royalties resulting from theincreased worldwide net sales of ERBITUX® from $502.7 million for the firsthalf of 2006 to $625.3 million in the first half of 2007. Effective at the end of July 2007, ourtotal domestic royalty expense decreased from 9.25% to 8.5% due to theexpiration of a patent we licensed.

**Cost of Manufacturing Revenue**

We sell ERBITUX® to BMS atour cost of production plus a 10% mark-up on bulk and to Merck KGaA at our costof production. Therefore, depending on certain circumstances, such as the mixof demand from our partners, and the costs of filling and finishing ERBITUX®bulk (for which we do not charge a 10% markup when selling to BMS), we expectthat our gross margins on sales of ERBITUX® may fluctuate from quarter toquarter.

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Cost of manufacturingrevenue for the six months ended June 30, 2007 amounted to $36.9 millionrepresenting a gross margin of approximately 7% compared to costs ofmanufacturing revenue in the comparable period of 2006 of approximately $42.3million, or a gross margin of 11%.

**Interest Income and Interest Expense**

Interest income for thesix months ended June 30, 2007 amounted to $25.8 million, an increaseof approximately $8.4 million, or 49% from the comparable period in 2006.This increase is attributable to increases in interest rates and higher averagebalance in our investment portfolio from the comparable period in 2006, due primarilyto the receipt of a $250.0 million milestone payment we received from BMS on March 31,2006.

Interest expense for thesix months ended June 30, 2007 amounted to approximately $6.0 million, anincrease of approximately $2.6 million, or 77% from the comparable period in2006. The increase is due to the fact that we finalized construction of ourBB50 manufacturing facility in May of 2006, and therefore, ceasedcapitalizing interest on the construction of the facility at that time.

**Provision for Income Taxes**

Our effective tax rate forthe six months ended June 30, 2007 is higher than the comparable period in2006 mainly due to the utilization of fully reserved deferred tax assets in2006, combined with the fact we had a partial release of our valuation allowancein the first quarter of 2006. The Company’s annual effective income tax ratefor 2007 is expected to be approximately 42%, which is inclusive of discreteitems recorded through the six months ended June 30, 2007. We expect topay cash taxes of approximately $3.0 million in 2007.

**Net Income**

For the six months ended June 30,2007, we had net income of $60.7 million, and $0.69 per diluted common sharecompared with net income of $266.8 million, and $2.93 per diluted common sharefor the comparable period in 2006. The fluctuation in results was due to thefactors noted above.

**LIQUIDITY AND CAPITAL RESOURCES**

At June 30, 2007, ourprincipal sources of liquidity consisted of cash and cash equivalents andsecurities available for sale of approximately $1.1 billion. Historically, wehave financed our operations through a variety of sources, most significantlythrough the issuance of public and private equity and convertible notes,license fees and milestone payments and reimbursements from our corporatepartners. Since the approval of ERBITUX® on February 12, 2004, we began togenerate royalty revenue and manufacturing revenue from the commercial sale ofERBITUX® by our corporate partners and we have generated income from operationssince 2004. As we continue to generate income, our cash flows from operatingactivities are expected to increase as a source to fund our operations.Therefore, we anticipate that our future financial condition and our futureoperating performance will continue to experience significant changes and thatpast performance will not likely be indicative of our future performance.

**SUMMARY OF CASH FLOWS**

| ** **                                | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | ** ** | **Variance** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-------------------------|------------|--------------|------------|
| Cash provided by (used in):               |       |                    |       |                    |       |         |       |
| Operating activities                      |       | $                       | 41,086     |                    | $          | 180,308      |       | $ | (139,222 | ) |
| Investing activities                      |       | (31,943                 | )          | (219,164                | )          | 187,221      |       |
| Financing activities                      |       | 27,218                  |       | 61,548                  |       | (34,330      | )          |
| Net increase in cash and cash equivalents |       | $                       | 36,361     |                    | $          | 22,692       |       | $ | 13,669 |   |

 

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Historically our cashflows from operating activities have fluctuated significantly due to the natureof our operations and the timing of our cash receipts. During the first half of2007, we generated approximately $41.1 million in cash from operatingactivities, as compared to $180.3 million in the comparable period of 2006. Thedecrease in operating cash flows in the first half of 2007 is primarily due tothe receipt of a $250.0 million milestone payment from our corporate partnerBMS in March 2006, as a result of obtaining approval from the FDA forERBITUX® in a second indication offset by an increase in royalty revenues in2007. In addition, during the first six months of 2007, we have placedsignificant emphasis on identifying and implementing cost saving initiativesthat have resulted in our ability to generate operational savings. Some of thesavings have resulted from changing to new providers in the areas of insurance,technology infrastructure, and various other expense categories.

Our primary sources anduses of cash from investing activities consist of purchases and sales activityin our investment portfolio, which we manage based on our liquidity needs,possible business development transactions and amounts used for capitalexpenditures. During the first half of 2007, we used net cash from investingactivities of $31.9 million comprised of approximately $5.7 million inacquisition of fixed assets, and we made net purchases of securities ofapproximately $26.2 million. The excess cash flows from operations for thefirst half of 2007 was invested in our investment portfolio.

Net cash flows generatedin financing activities in 2007 were approximately $27.2 million, of whichapproximately $16.3 million of proceeds were generated from the exercise ofstock options and sales under the Company’s employee stock purchase plan and$10.9 million was generated from tax benefits associated with equity netoperating losses that will be taken as a reduction on our tax returns.

Ourfuture working capital and capital requirements will depend upon numerousfactors, 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;

·       possiblebusiness development transactions;

·       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.

**OFF-BALANCE SHEETARRANGEMENTS**

We have no off-balancesheet arrangements that have or are reasonably likely to have a current orfuture effect on our financial condition, results of operations, liquidity,capital expenditures or capital resources.

**Item3.**                        *Quantitative and Qualitative Disclosures About Market Risk*

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 debt, asset-backed securities, auction rate securities andcommercial paper. All such instruments are classified as securities availablefor sale. Generally, we do not invest in portfolio equity securities,commodities, foreign exchange contracts or use financial derivatives fortrading purposes, however, we may make these investments depending upon our needs.Our debt security portfolio represents funds held temporarily 

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pendinguse in our business and operations. We manage these funds accordingly. We seekreasonable assuredness of the safety of principal and market liquidity byinvesting in investment grade fixed income securities while at the same timeseeking to achieve a favorable rate of return. Our market risk exposureconsists principally of exposure to changes in interest rates. Our holdings arealso exposed to the risks of changes in the credit quality of issuers. Weinvest in securities that have a range of maturity dates.

The table below presentsthe principal amounts and related weighted average interest rates by year ofmaturity for our investment portfolio as of June 30, 2007: (in thousands,except interest rates)

| ** **             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and  Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|-----------------|------------|
| Fixed Rate             |       | $        | 130,000    |     | $          | 100,000  |       | $        | 85,041     |     | $          | 163,355                       |       | $         | 20,000     |            |       | $ | 10,013 |   |   | $ | 508,409 |   | $ | 504,804 |   |
| Average Interest  Rate |       | 3.51     | %          | 3.86     | %          | 4.75     | %          | 5.36     | %          | 5.5      | %          |                          | 5.70       | %         |       | 4.50            | %          |   |   |
| Variable Rate(1)       |       | —   |       | 1,801    |       | —   |       | —   |       | —   |       |                          | 544,698    |      |       | 546,499         |       | 546,501 |   |
| Average Interest  Rate |       | —   |       | 5.70     | %          | —   |       | —   |       | —   |       |                          | 5.34       | %         |       | 5. 34           | %          |   |   |
|                   |       | $        | 130,000    |     | $          | 101,801  |       | $        | 85,041     |     | $          | 163,355                       |       | $         | 20,000     |            |       | $ | 554,711 |   |   | $ | 1,054,908 |   | $ | 1,051,305 |   |

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(1)             *These holdings primarily consist of U.S. corporate and foreigncorporate floating rate notes. Interest on the securities is adjusted monthly,quarterly or semi-annually, depending on the instrument, using prevailinginterest rates. These holdings are highly liquid and we consider the potentialfor loss of principal to be minimal.*

Our outstanding 13¤8%fixed rate convertible senior notes in the principal amount of $600.0 milliondue May 15, 2024 are convertible into our common stock at a conversionprice of $94.69 per share, subject to certain restrictions as outlined in theindenture agreement. The fair value of fixed interest rate instruments isaffected by changes in interest rates and in the case of the convertible notesby changes in the price of our common stock as well. The fair value of theconvertible senior notes was approximately $559.9 million at June 30,2007.

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

*Disclosure Controlsand Procedures*

Our management, with theparticipation of our Executive Committee of the Board, Chairman and Senior VicePresident, Finance, has evaluated the effectiveness of our “disclosure controlsand 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 onsuch evaluation, our Executive Committee of the Board, Chairman and Senior VicePresident, Finance have concluded that, as of the end of the period covered bythis report, our disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information that weare required to disclose in the reports that we file or submit under theExchange Act.

*Changes In InternalControl Over Financial Reporting*

There has been no change in our internal control overfinancial reporting during the three months ended June 30, 2007 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**PART II**

**OTHER INFORMATION**

**Item 1.**                        *Legal Proceedings*

***Intellectual Property Litigation***

As previously reported, on October 28, 2003, acomplaint was filed by Yeda Research and Development Company Ltd. (“Yeda”)against ImClone Systems and Aventis Pharmaceuticals, Inc. (“Aventis”) inthe U.S. District Court for the Southern District of New York (03 CV 8484).This action did not seek damages, but rather alleged that three individualsassociated with Yeda should also be named as co-inventors on U.S. Patent No. 6,217,866,which relates to the therapeutic use of EGFR antibodies (such as ERBITUX®, theCompany’s EGFR antibody product) in combination with chemotherapy. The Companyhas exclusively licensed this patent from Rhone-Poulenc Rorer Pharmaceuticals,now known as Sanofi-Aventis. On June 7, 2005, Yeda amended its U.S.complaint to seek sole inventorship of the subject patent. On November 4,2005, the Court denied the Company’s motion for summary judgment with respectto this matter, as filed with the Court on June 24, 2005. At the sametime, the Court granted summary judgment to Yeda dismissing two of ImClone’saffirmative defenses. A bench trial on the merits of Yeda’s complaint was heldbetween June 5, 2006 and July 19, 2006. On September 18, 2006,the Court ruled in favor of Yeda by awarding it sole inventorship rights to thepatent. The Company then appealed the Court’s decision to the Court of Appealsfor the Federal Circuit. The appeal was docketed on October 5, 2006 (as No. 2007-1012).Briefing is now complete and a decision from the Federal Circuit is expected indue course. The Company, having had the advice of its patent counsel, believesthe positions raised on appeal are sound, and it plans to vigorously pursuethis appeal.

On September 20, 2006, subsequent to the Court’sinventorship decision, the Company also filed an action (06 CV 7190) againstYeda in the U.S. District Court for the Southern District of New York seeking adeclaratory judgment that the patent is invalid. On October 31, 2006, Yedafiled an answer and counterclaim to the Company’s declaratory judgmentcomplaint in which Yeda alleges the Company is liable to Yeda for willfulpatent infringement, unjust enrichment and conversion, and seeks damages fromthe Company and an order requiring the Company to license the patent and payYeda royalties until the patent expires. The declaratory judgment actionremains in its early stages. The Company, having had the advice of its patentcounsel, believes that the claims asserted in the declaratory judgment actionare sound, and that Yeda’s counterclaims are not sound, and it plans tovigorously pursue this action. The Company is unable to predict the outcome ofthese actions at this time. If the Company’s appeal is unsuccessful and Yeda’ssole inventorship rights to the patent are upheld and the Company isunsuccessful with respect to its declaratory judgment action, the Company maybecome obligated to pay Yeda a royalty and may be liable to Yeda for otherdamages.

On March 25, 2004, an action was filed in theUnited Kingdom Patent Office entitled Referrer’s Statement requesting transferof co-ownership and amendment of patent EP (UK) 0 667 165to add three Yeda employees as inventors. Also on March 25, 2004, a Germanaction entitled Legal Action was filed in the Munich District Court I, PatentLitigation Division, in which Yeda sought a 75% ownership interest in patent EP(DE) 0 667 165 based on its allegation that the inventorship on that patent wasincorrect. The Company was not named as a party in these actions which relateto the European equivalent of U.S. Patent No. 6,217,866 discussed above.The Company intervened in the U.K. and German actions. Yeda sought to amend itspleadings in the United Kingdom and Germany to seek sole inventorship and soleownership. Following hearings, both the U.K. and German courts held that Yedawas not entitled to amend its pleadings. In the U.K., Yeda sought leave fromthe House of Lords to appeal the High Court’s decision, and such leave wasgranted in November 2006. A hearing was held before the House of Lords on July 23-25,2007. A judgment from the Court is unlikely before October 2007. InGermany, Yeda has appealed the lower court’s decision to the Higher RegionalCourt of Munich. The Higher Regional Court 

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is presently expected tohear the appeal in September 2007. Additionally, on or about March 25,2005 and March 29, 2005, respectively, Yeda filed legal actions in Austriaand France against both Aventis and ImClone Systems seeking full inventorshipof EP (AU) 0 667 165 and EP (FR) 0 667 165, as well as payment oflegal costs and fees. The Company, having had the advice of its patent counsel,believes there are sound defenses to these actions, and it presently plans tovigorously defend against the claims asserted. In addition, in December 2002,Opposition Proceedings seeking to revoke the European patent discussed abovewere brought by Scripps Research Institute, Amgen Inc., Abgenix, Inc., andYM Biosciences Inc. An Opposition Proceeding is an administrative process, theoutcome of which may be that the European patent will be revoked. TheOpposition Proceedings are suspended pending a final determination on the Yedamatter discussed above.

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX® infringes U.S. Patent No. 4,663,281 (the “‘281patent”), which is owned by MIT and exclusively licensed to Repligen and thatthe Company should therefore pay damages. On July 28, 2006, the Courtdenied the Company’s motion for summary judgment seeking to dismiss all claimson the basis that the patent rights at issue were exhausted as a matter of lawand granted MIT and Repligen’s cross motion that their patent rights were notexhausted. On September 26, 2006, a hearing was held in response to aMotion for Sanctions filed by Repligen, which alleged that the Company’scounsel, Kenyon & Kenyon, and the Company acted improperly during andafter the deposition of one of Repligen’s potential witnesses. In May 2007,the Company hired the law firm of Wiley Rein LLP to replace Kenyon and Kenyonand to represent it in this case. The Court allowed Repligen’s motion andordered sanctions against the Company, including the possibility of an adversejury instruction. The Court held a hearing on July 26, 2007 for thepurpose of construing the disputed claim terms of the ‘281 patent, and we arewaiting for a ruling from the Court. The Court has set a trial date of September 2007.The Company, having had the advice of its patent counsel, believes that itsdefenses are sound, and it plans to vigorously defend against the claims asserted.The outcome cannot be predicted with certainty, however, and the Company couldbe liable for substantial damages in the event of an adverse judgment at trial.

On February 5, 2007, a complaint was filedagainst the Company by Abbott Laboratories (“Abbott”) in the U.S. DistrictCourt for the District of Massachusetts (07-cv-10216). This actionalleges that the manufacture and sale of ERBITUX® infringes U.S. Patent No. 5,665,578,which is owned by Abbott and that the Company should therefore pay damages. On April 24,2007, the Company filed an answer, which it amended on May 17, 2007, tothis complaint denying all claims. This case is currently in its early stages.The Company, having had the advice of its patent counsel, believes that itsdefenses are sound, and it plans to vigorously defend against the claimsasserted. 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 items described above inthis Part II. Item 1—“Legal Proceedings—Intellectual Property Litigation”because the Company does not believe that such a reserve is required to beestablished at this time under Statement of Financial Accounting Standards No. 5.However, if in a future period, events in any such legal proceedings render itprobable that a loss will be incurred and if such loss is reasonably estimable,the Company will establish such a reserve. Thus, it is possible that legalproceedings and settlements arising therefrom, if any, may have a materialadverse impact on operating results for that period, on our balance sheet orboth.

**Item 1A.**                *Risk Factors*

There have been nomaterial changes to the risk factors as set forth in the Company’s AnnualReport filed on Form 10-K for the year ended December 31, 2006.

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

Not applicable

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

Not applicable

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

Not applicable

**Item 5.**                        *Other Information*

Not applicable

**Item6.**                     *Exhibits*
| Exhibit No. | ** ** | ** **                                                                                                                                                       | ** ** | **Description** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 31.1             |       | Certification of the  Company’s Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                 |
| 31.2             |       | Certification of  the Company’s Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                 |
| 32               |       | Certification of the  Company’s Principal Executive Officer and Principal Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|                  |            |                                                                                                                                                                  |            |                 |  |  |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                            | IMCLONE SYSTEMS INCORPORATED  (Registrant) |
|----------------------------|--------------------------------------------|
| Date: August 9,  2007 | By:                                        | /s/  ALEXANDER J. DENNER |
|                       |                                       | Alexander J.  Denner |
|                       | * *                                   | *Executive  Committee of the Board, Chairman* |
|                       |                                       | *Principal  Executive Officer* |
| Date: August 9,  2007 | By:                                        | /s/  ANA I. STANCIC |
|                       |                                       | Ana I. Stancic |
|                       | * *                                   | *Senior  Vice President, Finance* |
|                       |                                       | *Principal  Financial Officer* |

 

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