e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended June 30, 2007
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period to
Commission File Number: 000-50767
Critical Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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04-3523569
(I.R.S. Employer
Identification No.) |
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60 Westview Street
Lexington, Massachusetts
(Address of Principal Executive Offices)
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02421
(Zip Code) |
(781) 402-5700
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of August 1, 2007, the registrant had 43,157,747 shares of Common Stock, $0.001 par value
per share, outstanding.
CRITICAL THERAPEUTICS, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I. Financial Information
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report on Form 10-Q includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. For this
purpose, any statements contained herein, other than statements of historical fact, including
statements regarding our anticipated commercial launch of ZYFLO CR™ (zileuton) extended-release
tablets, or ZYFLO CR; possible therapeutic benefits and market acceptance of ZYFLO®
(zileuton tablets) and ZYFLO CR; the progress and timing of our drug development programs and
related trials; the efficacy of our drug candidates; and our strategy, future operations, financial
position, future revenues, projected costs, prospects, plans and objectives of management, may be
forward-looking statements under the provisions of The Private Securities Litigation Reform Act of
1995. We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “project,” “should,” “will,” “would” or other words that convey
uncertainty of future events or outcomes to identify these forward-looking statements. Actual
results may differ materially from those indicated by such forward-looking statements as a result
of various important factors, including our “critical accounting estimates” and risks relating to:
our ability to successfully market and sell ZYFLO and ZYFLO CR, including the success of our
co-promotion arrangement with Dey, L.P., or DEY; our ability to develop and maintain the necessary
sales, marketing, distribution and manufacturing capabilities to commercialize ZYFLO CR; patient,
physician and third-party payor acceptance of ZYFLO CR as a safe and effective therapeutic product;
adverse side effects experienced by patients taking ZYFLO or ZYFLO CR; our ability to maintain
regulatory approvals to market ZYFLO CR; the success of our co-promotion agreement with DEY for
PERFOROMIST™ (fomoterol fumarate) Inhalation Solution, or PERFOROMIST; our ability to successfully
enter into additional strategic co-promotion, collaboration or licensing transactions on favorable
terms, if at all; conducting clinical trials, including difficulties or delays in the completion of
patient enrollment, data collection or data analysis; the results of preclinical studies and
clinical trials with respect to our products under development and whether such results will be
indicative of results obtained in later clinical trials; our heavy dependence on the commercial
success of ZYFLO CR; our ability to obtain the substantial additional funding required to conduct
our research, development and commercialization activities; our ability to transition our
management team effectively; our dependence on our strategic collaboration with MedImmune, Inc; and
our ability to obtain, maintain and enforce patent and other intellectual property protection for
ZYFLO, ZYFLO CR, our discoveries and drug candidates. These and other risks are described in
greater detail below under the caption “Risk Factors” in Part II, Item 1A. If one or more of these
factors materialize, or if any underlying assumptions prove incorrect, our actual results,
performance or achievements may vary materially from any future results, performance or
achievements expressed or implied by these forward-looking statements. In addition, any
forward-looking statements in this quarterly report represent our views only as of the date of this
quarterly report and should not be relied upon as representing our views as of any subsequent date.
We anticipate that subsequent events and developments will cause our views to change. However,
while we may elect to update these forward-looking statements publicly at some point in the future,
we specifically disclaim any obligation to do so, whether as a result of new information, future
events or otherwise. Our forward-looking statements do not reflect the potential impact of any
future acquisitions, mergers, dispositions, joint ventures or investments we may make.
3
Item 1. Financial Statements
CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, |
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December 31, |
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| in thousands |
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2007 |
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|
2006 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
39,813 |
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$ |
48,388 |
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Accounts receivable, net |
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|
1,014 |
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|
877 |
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Amount due under collaboration agreements |
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31 |
|
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|
650 |
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Short-term investments |
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650 |
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|
650 |
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Inventory, net |
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4,385 |
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|
4,048 |
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Prepaid expenses and other |
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2,191 |
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|
980 |
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|
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Total current assets |
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48,084 |
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55,593 |
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Fixed assets, net |
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1,856 |
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2,421 |
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Other assets |
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568 |
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|
168 |
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Total assets |
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$ |
50,508 |
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$ |
58,182 |
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Liabilities and Stockholders’ Equity: |
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Current liabilities: |
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Current portion of long-term debt and capital lease obligations |
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$ |
755 |
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$ |
1,012 |
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Current
portion of accrued license fees |
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|
1,788 |
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— |
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Accounts payable |
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|
1,391 |
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|
1,049 |
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Accrued expenses |
|
|
3,165 |
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|
3,941 |
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Deferred collaboration revenue |
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— |
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|
|
675 |
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Deferred product revenue |
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— |
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|
1,178 |
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Deferred co-promotion fees |
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|
6,943 |
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|
— |
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Total current liabilities |
|
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14,042 |
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|
7,855 |
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Long-term debt and capital lease obligations, less current portion |
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122 |
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|
421 |
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Long-term
portion of accrued license fees, less current portion |
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|
1,707 |
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— |
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Commitments and contingencies (Note 8) |
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Stockholders’ equity: |
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Preferred stock, par value $0.001; authorized 5,000,000
shares; no shares issued and outstanding |
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— |
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— |
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Common stock, par value $0.001; authorized 90,000,000 shares;
issued and outstanding 43,157,747 and 42,902,142 shares at
June 30, 2007 and December 31, 2006, respectively |
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43 |
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43 |
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Additional paid-in capital |
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206,657 |
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204,378 |
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Deferred stock-based compensation |
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(45 |
) |
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(99 |
) |
Accumulated deficit |
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(172,005 |
) |
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(154,399 |
) |
Accumulated other comprehensive loss |
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(13 |
) |
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(17 |
) |
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Total stockholders’ equity |
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34,637 |
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|
49,906 |
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Total liabilities and stockholders’ equity |
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$ |
50,508 |
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$ |
58,182 |
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|
|
|
|
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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| in thousands except share and per share data |
|
2007 |
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2006 |
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|
2007 |
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|
2006 |
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Revenues: |
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Net product sales |
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$ |
2,291 |
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$ |
1,809 |
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$ |
5,185 |
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$ |
2,831 |
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Revenue under collaboration and license agreements |
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1,136 |
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|
1,696 |
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|
1,737 |
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2,947 |
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|
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Total revenues |
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3,427 |
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3,505 |
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|
6,922 |
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5,778 |
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Costs and expenses: |
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|
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|
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Cost of products sold |
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|
680 |
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890 |
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|
1,421 |
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|
1,394 |
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Research and development |
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10,104 |
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6,935 |
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|
13,022 |
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|
16,328 |
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Sales and marketing |
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2,600 |
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|
5,663 |
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|
4,582 |
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|
12,570 |
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General and administrative |
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3,533 |
|
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|
5,081 |
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|
6,588 |
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|
8,009 |
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Total costs and expenses |
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16,917 |
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|
18,569 |
|
|
|
25,613 |
|
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|
38,301 |
|
|
|
|
|
|
|
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|
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Operating loss |
|
|
(13,490 |
) |
|
|
(15,064 |
) |
|
|
(18,691 |
) |
|
|
(32,523 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest income |
|
|
564 |
|
|
|
716 |
|
|
|
1,154 |
|
|
|
1,488 |
|
Interest expense |
|
|
(30 |
) |
|
|
(55 |
) |
|
|
(69 |
) |
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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Total other income |
|
|
534 |
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|
|
661 |
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|
|
1,085 |
|
|
|
1,373 |
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss |
|
($ |
12,956 |
) |
|
($ |
14,403 |
) |
|
($ |
17,606 |
) |
|
($ |
31,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share |
|
($ |
0.30 |
) |
|
($ |
0.42 |
) |
|
($ |
0.41 |
) |
|
($ |
0.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average common shares
outstanding |
|
|
42,571,420 |
|
|
|
34,203,598 |
|
|
|
42,513,852 |
|
|
|
34,150,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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|
|
|
|
|
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Six Months Ended |
|
| |
|
June 30, |
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| in thousands |
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
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Net loss |
|
($ |
17,606 |
) |
|
($ |
31,150 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
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Depreciation and amortization expense |
|
|
335 |
|
|
|
500 |
|
Amortization of premiums on short-term investments and other |
|
|
4 |
|
|
|
(1 |
) |
Loss on disposal of fixed assets |
|
|
18 |
|
|
|
51 |
|
Change in reserve for inventory |
|
|
279 |
|
|
|
702 |
|
Preferred stock received in license agreement, net |
|
|
(400 |
) |
|
|
— |
|
Stock-based compensation expense |
|
|
2,038 |
|
|
|
4,523 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(137 |
) |
|
|
67 |
|
Amount due under collaboration agreements |
|
|
619 |
|
|
|
(45 |
) |
Inventory |
|
|
(616 |
) |
|
|
(1,619 |
) |
Prepaid expenses and other |
|
|
(1,211 |
) |
|
|
616 |
|
Accounts payable |
|
|
342 |
|
|
|
(323 |
) |
Accrued expenses |
|
|
(776 |
) |
|
|
(308 |
) |
Accrued
license fees |
|
|
3,495 |
|
|
|
— |
|
Deferred
collaboration revenue |
|
|
(675 |
) |
|
|
(2,447 |
) |
Deferred product revenue |
|
|
(1,178 |
) |
|
|
(435 |
) |
Deferred co-promotion fees |
|
|
6,943 |
|
|
|
— |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(8,526 |
) |
|
|
(29,869 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of fixed assets |
|
|
212 |
|
|
|
— |
|
Purchases of fixed assets |
|
|
— |
|
|
|
(321 |
) |
Proceeds from sales and maturities of short-term investments |
|
|
— |
|
|
|
22,551 |
|
Purchases of short-term investments |
|
|
— |
|
|
|
(11,802 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
212 |
|
|
|
10,428 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and other |
|
|
295 |
|
|
|
63 |
|
Repayments of long-term debt and capital lease obligations |
|
|
(556 |
) |
|
|
(587 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(261 |
) |
|
|
(524 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(8,575 |
) |
|
|
(19,965 |
) |
Cash and cash equivalents at beginning of period |
|
|
48,388 |
|
|
|
57,257 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
39,813 |
|
|
$ |
37,292 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
74 |
|
|
$ |
117 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
CRITICAL THERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Critical Therapeutics, Inc. and its subsidiary (the “Company”), and have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The Company believes that all
adjustments, consisting of normal recurring adjustments, considered necessary for a fair
presentation, have been included. The information included in this quarterly report on Form 10-Q
should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and footnotes thereto included in
the Company’s annual report on Form 10-K for the year ended December 31, 2006 filed with the
Securities and Exchange Commission, or SEC.
Operating results for the three and six-month periods ended June 30, 2007 and 2006 are not
necessarily indicative of the results for the full year.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates or
assumptions. The more significant estimates reflected in these financial statements include certain
judgments regarding revenue recognition, product returns, inventory valuation, accrued and prepaid
expenses and valuation of stock-based compensation.
Recent Accounting Pronouncements
In
June 2007, the Emerging SEC's Issues Task Force
(“EITF”) issued EITF No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities, (“EITF 07-3”). EITF 07-3 provides guidance for upfront payments related to goods and
services of research and development costs and is effective for fiscal years beginning after
December 15, 2007. The Company is currently evaluating the impact of
EITF 07-3 on its financial
statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS 157”),
which defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. FAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The Company
does not expect the adoption of FAS 157 to significantly affect its financial condition or results
of operations.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an amendment of SFAS 115 (“FAS 159”), which permits
companies to choose to measure many financial instruments and certain other items at fair value.
FAS 159 is effective for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. The Company is currently evaluating the effect FAS 159 will have on our
consolidated financial position and results of operations.
(2) Revenue Recognition
Revenue Recognition and Deferred Revenue
The Company recognizes revenue in accordance with the SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, or SAB 101, as amended by SEC Staff Accounting
Bulletin No. 104, Revenue Recognition, or SAB 104. Specifically, revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
the price is fixed and determinable and collectibility is reasonably assured. The Company’s revenue
is currently derived from product sales of its only commercially marketed product, ZYFLO, and its
collaboration and license agreements. These agreements provide for various payments, including
research and development funding, license fees, milestone payments and royalties. In addition, the
Company’s product sales are subject to various rebates, discounts and incentives that are customary
in the pharmaceutical industry.
The Company sells ZYFLO, and expects to sell the controlled release formulation of Zileuton, (“ZYFLO CR”) after its commercial launch, to
wholesalers, distributors and pharmacies, which have the right to return purchased product. In
accordance with Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right
of Return Exists, or SFAS No. 48, the Company deferred revenue on product shipments until the
Company could reasonably estimate returns relating to these shipments. Because ZYFLO was a new
product for the Company and this was its first commercial product launch, the Company did not have
an objective measurement or history to allow it to estimate returns in 2005 and 2006. In the first
quarter of 2007, based on the Company’s return experience since it launched ZYFLO in October 2005,
the Company began recording revenue upon shipment to third parties including wholesalers,
distributors and
7
pharmacies and provided a reserve for potential returns from these third parties based on its
product returns experience. In connection with this change in estimate, the Company recorded an
increase in net product sales in the six months ended June 30, 2007 related to the recognition of
revenue from product sales that had been previously deferred, net of an estimate for remaining
product returns. This change in estimate totaled approximately
$953,000 and was reported in the Company’s
results for the first quarter of 2007.
Under the Company’s collaboration agreements with MedImmune and Beckman Coulter, the Company
is entitled to receive non-refundable license fees, milestone payments and other research and
development payments. Payments received are initially deferred from revenue and subsequently
recognized in the Company’s statement of operations when earned. The Company must make significant
estimates in determining the performance period and periodically review these estimates, based on
joint management committees and other information shared by the Company’s collaborators. The
Company recognizes these revenues over the estimated performance period as set forth in the
contracts based on proportional performance adjusted from time to time for any delays or
acceleration in the development of the product. For example, a delay or acceleration of the
performance period by the Company’s collaborator may result in further deferral of revenue or the
acceleration of revenue previously deferred. Because MedImmune and Beckman Coulter can each cancel
its agreement with the Company, the Company does not recognize revenues in excess of cumulative
cash collections.
The
Company recently licensed to Innovative Metabolics, Inc.
(“IMI”) patent rights and know-how relating to the
mechanical and electrical stimulation of the Vagus nerve.
Under the Company’s license agreement with IMI, the Company
received an initial license fee of $500,000 in cash and IMI preferred stock valued at $500,000.
However, under its license agreement with The Feinstein Institute for Medical Research (formerly
known as The North Shore-Long Island Jewish Research Institute), the Company owed the Feinstein
Institute $100,000 of this cash payment and IMI preferred stock valued at $100,000. The Company
included in revenue under collaboration and license agreements in the three months ended June 30,
2007 the $1.0 million total initial license fee that the Company received from IMI and included the
payments of $100,000 in cash and IMI preferred stock valued at $100,000 that the Company made to
The Feinstein Institute in research and development expenses. Under the license agreement, IMI also
has agreed to pay the Company $1.0 million, excluding $200,000
that the Company is obligated to pay to the Feinstein Institute, upon full regulatory approval of a licensed
product by the U.S. Food and Drug Administration (“FDA”) or a foreign counterpart agency and royalties based on net sales of licensed
products and methods by IMI and its affiliates.
At June 30, 2007, the Company’s account receivable balance of $1.0 million was net of
allowances of $22,000. At June 30, 2006, the Company’s account receivable balance of $979,000 was
net of allowances of $22,000.
(3) Cash Equivalents and Short-Term Investments
The Company considers all highly-liquid investments with original maturities of three months
or less when purchased to be cash equivalents.
Short-term investments consist primarily of U.S. government treasury and agency notes,
corporate debt obligations, municipal debt obligations, auction rate securities and money market
funds, each of investment-grade quality, which have a maturity date greater than 90 days that can
be sold within one year. These securities are held until such time as the Company intends to use
them to meet the ongoing liquidity needs to support its operations. These investments are recorded
at fair value and accounted for as available-for-sale securities. The unrealized gain (loss) during
the period is recorded as an adjustment to stockholders’ equity. The Company recorded unrealized
gains on investments of $1,000 and $4,000 during the three and six months ended June 30, 2007,
respectively, and $34,000 and $63,000 during the three and six months ended June 30, 2006,
respectively. The cost of the debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. The amortization or accretion is included in interest income
(expense) in the corresponding period. The Company has concluded that the unrealized gain (loss) on
investments is temporary and therefore no impairment exists at June 30, 2007.
(4) Research and License Agreements
In December 2003, the Company entered into an agreement to in-license the controlled-release
formulation and the injectable formulation of zileuton from Abbott Laboratories and
entered into an agreement with a subsidiary of SkyePharma PLC (“SkyePharma”), to in-license the
controlled-release technology relating to zileuton from SkyePharma. Under these agreements, the
Company is required to make milestone payments for successful
8
completion
of the technology transfer, filing and approval of the product in the
United States and
commercialization of the product. In May 2007, the Company
received approval by the FDA of the new drug application (“NDA”) for ZYFLO CR. As a result of the
FDA approval, the Company paid $3.1 million under these agreements in June 2007 and accrued an
additional $1.8 million and $1.7 million that will be due on the Company’s first and second anniversary of the FDA’s
approval, respectively. The amounts due on the first and second anniversary of the
FDA’s approval were
accrued at the present value of the total $3.8 million owed and
the accretion of the discount shall be included in interest expense. These amounts are included in the Company’s
research and development expenses.
(5) Inventory
Inventory is stated at the lower of cost or market, with cost determined under the first-in,
first-out (FIFO) method. As of June 30, 2007, the Company
held $4.4 million in inventory to be used
for commercial sales related to its commercial products, ZYFLO and ZYFLO CR. The Company analyzes
its inventory levels quarterly and records reserves for inventory that has become obsolete,
inventory that has a cost basis in excess of its expected net realizable value and inventory in
excess of expected requirements. Expired inventory is disposed of and the related costs are written
off. In the quarter ended June 30, 2007, the Company recorded an
inventory reserve of $398,000 relating to questions regarding current good
manufacturing practices, or cGMP, documentation associated with the
manufacture of ZYFLO CR. Under an agreement with the Company’s
manufacturer, the Company recorded a receivable,
included in other current assets, of
$398,000 related to the inventory reserved for in the quarter ended
June 30, 2007. At June 30, 2007, the inventory related to these lots has not yet
been disposed. Inventory consisted of the following at June 30, 2007 and December 31, 2006, respectively (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Raw material |
|
$ |
3,850 |
|
|
$ |
3,662 |
|
Work in process |
|
|
785 |
|
|
|
83 |
|
Finished goods |
|
|
148 |
|
|
|
422 |
|
|
|
|
|
|
|
|
Total inventory |
|
|
4,783 |
|
|
|
4,167 |
|
Less: reserve |
|
|
(398 |
) |
|
|
(119 |
) |
|
|
|
|
|
|
|
Inventory, net |
|
$ |
4,385 |
|
|
$ |
4,048 |
|
|
|
|
|
|
|
|
The
Company currently purchases API for its
commercial requirements for ZYFLO from a single source. In addition, the Company currently
manufactures ZYFLO with a single third-party manufacturer. The Company expects to continue to
purchase its API for commercial requirements from a single source and will manufacture ZYFLO CR
with a single third-party manufacturer. The disruption or termination of the supply of the API, a
significant increase in the cost of the API from this single source or the disruption or
termination of the manufacturing of the commercial product would have a material adverse effect on
the Company’s business, financial position and results of operations.
(6) Comprehensive Loss
Comprehensive loss is the total of net loss and all other non-owner changes in equity. The
difference between net loss, as reported in the accompanying condensed consolidated statements of
operations for the three and six months ended June 30, 2007 and 2006, and comprehensive loss is the
unrealized gain (loss) on short-term investments for the period.
Total comprehensive loss was $13.0 million and $17.6 million for the three and six months ended June 30, 2007, respectively, and $14.4
million and $31.1 million for the three and six months ended June 30, 2006, respectively. The
unrealized gain (loss) on investments is the only component of accumulated other comprehensive loss
in the accompanying condensed consolidated balance sheet.
(7) Stock-Based Compensation
Effective
January 1, 2006, the Company adopted SFAS
No. 123(R), using the modified prospective application method, which allows the Company to
recognize compensation cost for granted, but unvested, awards, new awards and awards modified,
repurchased, or cancelled after the required effective date. Because the Company issued options
prior to March 19, 2004, the date it filed its initial registration statement on Form S-1, or S-1,
with the SEC, at values less than fair market value, the Company
continues to amortize deferred compensation related to those awards under APB No. 25.
All stock-based awards to non-employees are accounted for at their fair market value in
accordance with SFAS 123(R) and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, or EITF No. 96-18.
9
Stock option activity for the six-month periods ended June 30, 2007 and 2006 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Weighted-Average |
|
| |
|
Number of |
|
|
Exercise Price |
|
|
Number of |
|
|
Exercise Price |
|
| |
|
Shares |
|
|
Per Share |
|
|
Shares |
|
|
Per Share |
|
Outstanding—January 1 |
|
|
5,714,770 |
|
|
$ |
4.60 |
|
|
|
6,200,106 |
|
|
$ |
5.03 |
|
Granted |
|
|
201,000 |
|
|
|
2.05 |
|
|
|
741,250 |
|
|
|
6.97 |
|
Exercised |
|
|
(173,567 |
) |
|
|
1.04 |
|
|
|
(89,204 |
) |
|
|
0.46 |
|
Cancelled |
|
|
(595,804 |
) |
|
|
5.81 |
|
|
|
(62,594 |
) |
|
|
6.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding—March 31 |
|
|
5,146,399 |
|
|
$ |
4.48 |
|
|
|
6,789,558 |
|
|
$ |
5.29 |
|
Granted |
|
|
210,500 |
|
|
|
2.41 |
|
|
|
1,661,250 |
|
|
|
3.99 |
|
Exercised |
|
|
(71,241 |
) |
|
|
1.04 |
|
|
|
(21,609 |
) |
|
|
1.04 |
|
Cancelled |
|
|
(207,501 |
) |
|
|
3.97 |
|
|
|
(1,020,344 |
) |
|
|
5.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding—June 30 |
|
|
5,078,157 |
|
|
$ |
4.46 |
|
|
|
7,408,855 |
|
|
$ |
4.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable— June 30 |
|
|
2,038,204 |
|
|
$ |
5.01 |
|
|
|
2,595,458 |
|
|
$ |
4.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual term and the aggregate intrinsic value for options
outstanding at June 30, 2007 were 8.3 years and $635,000, respectively. The weighted average
remaining contractual term and the aggregate intrinsic value for options exercisable at June 30,
2007 were 7.7 years and $323,000, respectively. The weighted average exercise price and the number
of options vested or expected to vest at June 30, 2007 were $4.59 and 4,320,264, respectively. The
total intrinsic value of the options exercised during the three months and six months ended June
30, 2007 was approximately $59,000 and $219,000, respectively.
As described above, the Company had previously recorded deferred compensation for options
granted prior to the date of its initial S-1 filing at prices deemed to be below fair value. As of
June 30, 2007, $45,000 of deferred compensation has yet to be recognized for these options. Such
amounts will be recognized during 2007. The Company has expensed this deferred stock-based
compensation to operations over the vesting period of the options and recorded $37,000 and $158,000
as stock-based compensation expense for the six months ended June 30, 2007 and June 30, 2006,
respectively, related to these options. For the three months ended
June 30, 2007 and June 30, 2006 the Company recorded
$29,000 of stock-based compensation and a $104,000 adjustment to
stock-based compensation, respectively.
The total fair value of the shares vested and unexercised (other than pre S-1 shares) and
expensed during the three and six months ended June 30, 2007 was $994,000 and $1.7 million, respectively. As of June 30, 2007, there was
$7.2 million of total unrecognized compensation expense (including the pre S-1 shares) related to
unvested share-based compensation awards granted under the Company’s stock plans, which is expected
to be recognized over a weighted average period of 1.4 years.
The Company anticipates recording additional stock-based compensation expense of $2.1 million
in the remaining two quarters of 2007, $2.6 million in 2008 and $2.5 million thereafter relating to
the amortization of unrecognized compensation expense as of June 30, 2007. These anticipated
compensation expenses do not include any adjustment for new or additional options to purchase
common stock granted to employees.
Option valuation models require the input of highly subjective assumptions. Because changes in
subjective input assumptions can materially affect the fair value estimate, in management’s
opinion, the calculated fair value may not necessarily be indicative of the actual fair value of
the stock options. The Company has computed the impact under SFAS No. 123(R) for options granted
using the Black-Scholes option-pricing model for the quarters ended June 30, 2007 and 2006. The
Company increased its expected volatility assumption for the three and six months ended June 30,
2007 to 74% and 70%, respectively, from 60% in corresponding periods of 2006. The rate is based on
the Company’s actual historical volatility since its initial public offering. The expected life of
options granted was estimated using the simplified method calculation as prescribed by SEC Staff
Accounting Bulletin No. 107. The assumptions used and weighted-average information are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Risk free interest rate |
|
|
4.9 |
% |
|
|
5.1 |
% |
|
|
4.8 |
% |
|
|
4.9 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected forfeiture rate |
|
|
10.2 |
% |
|
|
4.2 |
% |
|
|
10.2 |
% |
|
|
4.2 |
% |
Expected life |
|
6.15 |
years |
|
6.25 |
years |
|
6.20 |
years |
|
6.25 |
years |
Expected volatility |
|
|
74 |
% |
|
|
60 |
% |
|
|
70 |
% |
|
|
60 |
% |
Weighted-average fair value
of options granted equal to
fair value |
|
$ |
1.67 |
|
|
$ |
2.45 |
|
|
$ |
1.52 |
|
|
$ |
2.99 |
|
10
(8) Basic and Diluted Loss per Share
Basic and diluted net loss per common share is calculated by dividing the net loss by the
weighted-average number of unrestricted common shares outstanding during the period. Diluted net
loss per common share is the same as basic net loss per common share, since the effects of
potentially dilutive securities are anti-dilutive for all periods presented. Anti-dilutive
securities that are not included in the diluted net loss per share calculation aggregated
12,835,478 and 10,917,110 as of June 30, 2007 and 2006, respectively. These anti-dilutive
securities consist of outstanding stock options, warrants, and unvested restricted common stock as
of June 30, 2007 and 2006.
The following table reconciles the weighted-average common shares outstanding to the shares
used in the computation of basic and diluted weighted-average common shares outstanding:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 31, |
|
Six Months Ended June 30, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Weighted-average common shares outstanding |
|
|
43,123,803 |
|
|
|
34,236,210 |
|
|
|
43,067,804 |
|
|
|
34,190,231 |
|
Less:
weighted-average unvested restricted common
shares outstanding |
|
|
(552,383 |
) |
|
|
(32,612 |
) |
|
|
(553,952 |
) |
|
|
(39,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average common
shares outstanding |
|
|
42,571,420 |
|
|
|
34,203,598 |
|
|
|
42,513,852 |
|
|
|
34,150,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) Commitments and Contingencies
The Company has entered into various agreements with third parties and certain related parties
in connection with the research and development activities of its existing product candidates as
well as discovery efforts on potential new product candidates. These agreements include costs for
research and development and license agreements that represent the Company’s fixed obligations
payable to sponsor research and minimum royalty payments for licensed patents. These amounts do not
include any additional amounts that the Company may be required to pay under its license agreements
upon the achievement of scientific, regulatory and commercial milestones that may become payable
depending on the progress of scientific development and regulatory approvals, including milestones
such as the submission of an investigational new drug application to the FDA similar submissions to foreign regulatory authorities and the first
commercial sale of the Company’s products in various countries. These agreements include costs
related to manufacturing, clinical trials and preclinical studies performed by third parties. The
estimated amount that may be incurred in the future under these agreements totals approximately
$37.9 million as of June 30, 2007. The amount and timing of these commitments may change, as they
are largely dependent on the rate of enrollment in the Company’s clinical trials and timing of the
development of the Company’s product candidates. As of June 30, 2007, the Company had $597,000 and
$298,000 included in prepaid expenses and accrued expenses,
respectively, related to its research and development agreements on the accompanying condensed consolidated balance sheet.
These research and development are accounted
for under the percentage of completion method. In addition, as of
June 30, 2007, the Company had $3.5 million in accrued
license fees related its license agreements on the accompanying
condensed consolidated balance sheet.
The Company is also party to a number of agreements that require it to make milestone
payments, royalties on net sales of the Company’s products and payments on sublicense income
received by the Company. In addition, the Company entered into a manufacturing and supply agreement
with Rhodia Pharma Solutions, which was assigned to Shasun Pharma Solutions Ltd. or Shasun, for
commercial production of the API for ZYFLO and ZYFLO CR, subject to specified limitations, through
December 31, 2009. Under this agreement, the Company committed to purchase minimum amounts of API
in the first quarter of 2008. The API purchased from Shasun
currently has a shelf-life of 36 months. The Company evaluates the need to provide reserves for
contractually committed future purchases of inventory that may be in excess of forecasted future
demand. In making these assessments, the Company is required to make judgments as to the future
demand for current or committed inventory levels and as to the expiration dates of its product. As
of June 30, 2007, no reserves have been recorded for purchase commitments.
11
In May 2007, the Company entered into a three year manufacturing services agreement with
Patheon Pharmaceuticals Inc. (“Patheon”), under which Patheon agreed to coat, conduct quality
control and quality assurance and stability testing and package commercial supplies of ZYFLO CR in
tablet form. Under this agreement, the Company is responsible for supplying uncoated ZYFLO CR
tablets to Patheon. The Company has agreed to purchase at least 50% of its requirements for such
manufacturing services for ZYFLO CR for sale in the United States from Patheon each year for the
term of the agreement.
From time to time, the Company may have certain contingent liabilities that arise in the
ordinary course of business. The Company accrues for liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. The Company is not a
party to any pending material litigation or other material legal proceedings and was not a party to
any such litigation or proceedings during any of the periods presented.
In June 2007, following the
approval by the FDA of the NDA for ZYFLO CR in May 2007, the Company paid milestone payments of
$3.1 million and accrued $3.5 million
representing the net present value of the Company’s milestone obligations due on the first
and second anniversary of the FDA’s approval.
(10) DEY Co-promotion and Marketing Services Agreements
On March 13, 2007, the Company entered into an agreement with Dey, L.P, an affiliate of Merck
KGaA (“DEY”), under which the Company and DEY agreed to jointly promote ZYFLO and ZYFLO CR. Under
the co-promotion and marketing services agreement, the Company granted DEY an exclusive right and
license to promote and detail ZYFLO and ZYFLO CR in the United States, together with the Company.
Under the co-promotion agreement, DEY paid the Company a non-refundable upfront payment of
$3.0 million in March 2007 and a milestone payment of $4.0 million in June 2007 following approval
by the FDA of the NDA for ZYFLO CR in May 2007. In addition, DEY has agreed to pay the Company a
milestone payment of $5.0 million following commercial launch of ZYFLO CR, which is anticipated to
occur in the fall of 2007. Under the co-promotion agreement, DEY
shall have the right to terminate the contract if the commercial
launch is later than May 31, 2008. If such termination occurs
the Company is obligated to refund DEY $2.0 million of the
$4.0 million paid upon approval by the FDA of the NDA for ZYFLO
CR. Under the co-promotion agreement, the Company will pay DEY a
commission on quarterly net sales of ZYFLO and ZYFLO CR, after third-party
royalties, in excess of $1.95 million. From the date DEY begins detailing ZYFLO through the
commercial launch of ZYFLO CR, the commission rate is 70%, following the commercial launch of
ZYFLO CR through December 31, 2010, the commission rate is 35%
and from January 1, 2011 through December 31,
2013, the commission rate is 20%. The co-promotion agreement expires
on December 31, 2013 and
may be extended upon mutual agreement by the parties.
The Company has deferred the $7.0 million in aggregate
payments received and is amortizing these payments over the term of the
agreement, along with the future $5.0 million milestone payment
the Company expects to receive from DEY. The amortization
of the upfront and milestone payments will be offset by the co-promotion fees paid to DEY
for promoting ZYFLO and ZYFLO CR. The Company records all ZYFLO and ZYFLO CR sales generated by the combined sales force and record any
co-promotion fees paid to DEY and the amortization of the upfront and milestone payments in sales
and marketing. For the three months ended June 30, 2007,
approximately $57,000 was amortized from the deferred co-promotion
fees representing the amount earned by DEY during the period.
On June 25, 2007,
the Company entered into definitive agreement with DEY to jointly promote DEY’s product PERFOROMIST™ (formoterol fumarate) Inhalation Solution,
referred to as PERFOROMIST, for the treatment of chronic obstructive pulmonary disease, or COPD.
Under the agreement, DEY agreed to pay the Company a commission
on retail sales of PERFOROMIST. The agreement has a term expiring on December 31,
2013, which may be extended upon mutual agreement by the parties.
(11) Income Tax
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. As of the date of adoption, the total amount of net
unrecognized tax benefit was $202,000, which has been recorded with an offsetting adjustment to the
Company’s valuation allowance. Accordingly, there was no adjustment to accumulated deficit at the
date of adoption.
The Company did not recognize any accrued interest and penalties related to unrecognized tax
benefits as no amounts would be due as a result of the Company’s net tax loss carryforward. The
Company’s policy is to record interest and penalties related to unrecognized tax benefits in income
tax expense. Tax years for 2000 to 2006 remain
subject to examination for federal and numerous state jurisdictions. The primary state
jurisdiction to which the Company is subject is the Commonwealth of Massachusetts.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our financial statements and accompanying
notes included in this quarterly report and our audited financial statements included in our
annual report on Form 10-K for the year ended December 31, 2006 which is on file with the SEC.
In addition to historical information, the following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results could differ
materially from those anticipated by the forward-looking statements due to important factors and
risks including, but not limited to, those set forth under “Risk Factors” in Part II, Item 1A.
Financial Operations Overview
Critical Therapeutics, Inc. is a biopharmaceutical company focused on the development and
commercialization of products designed to treat respiratory, inflammatory and critical care
diseases linked to the body’s inflammatory response. Our marketed product is ZYFLO, an
immediate-release tablet formulation of zileuton, which the U.S. Food and Drug Administration, or
FDA, approved in 1996 for the prevention and chronic treatment of asthma in adults and children 12
years of age or older. We licensed from Abbott Laboratories exclusive worldwide rights to ZYFLO and
other formulations of zileuton for multiple diseases and conditions. We began selling ZYFLO in the
United States in October 2005. In addition, we have developed a controlled-release formulation of
zileuton, or ZYFLO CR, and we are developing an injectable formulation of zileuton, or zileuton
injection. In connection with a restructuring that we announced in October 2006, we decided to
focus most of our resources on these formulations.
ZYFLO CR is a tablet designed to be taken twice daily, two tablets per dose. We received FDA
approval on our new drug application, or NDA, for ZYFLO CR on May 30, 2007, and we expect to launch
ZYFLO CR commercially in the fall of 2007. On March 13, 2007, we entered into an agreement with
Dey, L.P., or DEY, an affiliate of Merck KGaA, under which we and DEY agreed to jointly promote
ZYFLO and ZYFLO CR. Under the co-promotion agreement, DEY paid us a non-refundable upfront payment
of $3.0 million upon signing the co-promotion agreement and a milestone payment of $4.0 million
following approval by the FDA of the NDA for ZYFLO CR. In addition, DEY has agreed to pay us $5.0
million following commercial launch of ZYFLO CR, which we expect to receive in the fall of 2007.
Under the co-promotion agreement, we will retain all quarterly net sales of ZYFLO and ZYFLO CR,
after third party royalties, up to $1.95 million and will pay
DEY commission on quarterly
net sales of ZYFLO and ZYFLO CR, after third-party royalties, in excess of $1.95 million.
Under the co-promotion agreement,
we have deferred the $7.0 million in aggregate payments that
we received from DEY to date and we are amortizing these payments over the term of the agreement, along with
the future $5.0 million milestone payment we expect to receive from DEY. The amortization of the upfront and
milestone payments will offset some or all of the co-promotion fees paid to DEY for promoting ZYFLO
and ZYFLO CR in future periods under the agreement. We expect to record all ZYFLO and ZYFLO CR
sales generated by the combined sales force and record any co-promotion fees paid to DEY and the
amortization of the upfront and milestone payments in sales and marketing.
On June 25, 2007,
we entered into a definitive agreement with DEY to
jointly promote DEY’s product PERFOROMIST™ (formoterol
fumarate) Inhalation Solution, or PERFOROMIST, for the treatment of chronic obstructive pulmonary disease, or COPD. Under the
agreement, DEY granted us a right and license or sublicense to promote and detail
PERFOROMIST in the United States, together with DEY. Under the agreement, after the
later of the commercial launch date for PERFOROMIST and such time as we have completed the
expansion of our sales force to at least 40 representatives and begin detailing PERFOROMIST, DEY
agreed to pay us a commission on retail sales of PERFOROMIST. The
agreement has a term expiring on December 31, 2013, which may be extended upon mutual
agreement by the parties. The Company has the right to terminate the agreement after
June 30, 2008 with 90-days advance written notice to DEY.
In addition, we are developing zileuton injection initially for add-on use in emergency room
or urgent care centers for patients who suffer acute exacerbations of asthma. In August 2006, we
announced results from our Phase I/II clinical trial designed to evaluate safety, tolerability and
pharmacokinetics of zileuton injection in patients with asthma. We plan to initiate a Phase II
clinical trial in the second half of 2007 with zileuton injection in asthma patients.
13
We are also developing other product candidates to regulate the excessive inflammatory
response that can damage vital internal organs and, in the most severe cases, result in multiple
organ failure and death. The inflammatory response occurs following stimuli such as infection or
trauma. Our product candidates target the production and release into the bloodstream of proteins
called cytokines that play a fundamental role in the body’s inflammatory response.
We are collaborating with MedImmune, Inc., a subsidiary of AstraZeneca PLC, on preclinical
development of monoclonal antibodies directed toward a cytokine called high mobility group box
protein 1, or HMGB1, which we believe may be an important target for the development of products to
treat diseases mediated by the body’s inflammatory response. In addition, we are collaborating with
Beckman Coulter, Inc. on the development of a diagnostic directed toward measuring HMGB1 in the
bloodstream.
We are conducting preclinical work in our small molecule alpha-7 program. We believe the successful development of a product candidate targeting the nicotinic
alpha-7 cholinergic receptor, or alpha-7 receptor, could lead to a novel treatment for severe acute
inflammatory disease, as well as an oral anti-cytokine therapy that could be directed at chronic
inflammatory diseases such as asthma and rheumatoid arthritis. Based
on preclinical studies, we have selected a lead compound that is
currently in development and which we are continuing to move toward an
IND submission. In addition, we continue to seek collaborations
with other pharmaceutical companies for our alpha-7 program. We have
licensed to Innovative Metabolics, Inc., or IMI,
patent rights and know-how relating to the mechanical and electrical stimulation of the vagus
nerve. This license agreement specifically excludes from the licensed field pharmacological
modulation of the alpha-7 receptor.
Since our inception, we have incurred significant losses each year. As of June 30, 2007, we
had an accumulated deficit of $172.0 million. We expect to incur significant losses for the
foreseeable future and we may never achieve profitability. Although the size and timing of our
future operating losses are subject to significant uncertainty, we expect our operating losses to
continue over the next several years as we fund our development programs, market and sell ZYFLO and
ZYFLO CR and prepare for the potential commercial launch of our product candidates. Since our
inception, we have raised proceeds to fund our operations through public offerings of common stock,
private placements of equity securities, debt financings, the receipt of interest income, payments
from our collaborators MedImmune and Beckman Coulter, license fees from IMI, payments from DEY
under our zileuton co-promotion agreement and revenues from sales of ZYFLO.
Revenues. From our inception on July 14, 2000 through the third quarter of 2005, we derived
all of our revenues from license fees, research and development payments and milestone payments
that we have received from our collaboration and license agreements with MedImmune and Beckman
Coulter. In the fourth quarter of 2005, we began selling, and recognizing revenue from our first
commercial product, ZYFLO. In the first quarter of 2007, based on our return experience since our
ZYFLO launch in October 2005, we began recording revenue upon shipment to third parties, including
wholesalers, distributors and pharmacies, and provided an adequate reserve for potential returns
from these third parties based on our product returns experience.
Cost of Products Sold. Cost of products sold consists of manufacturing, distribution and other
costs related to our commercial product, ZYFLO. In addition, it includes royalties to third parties
related to ZYFLO and any reserves established for excess or obsolete inventory. Most of our
manufacturing and distribution costs are paid to third party manufacturers. However, there are some
internal costs included in cost of products sold, including salaries and expenses related to
managing our supply chain and for certain quality assurance and release testing costs.
Research and Development Expenses. Research and development expenses consist of costs incurred
in identifying, developing and testing product candidates. These expenses consist primarily of
salaries and related expenses for personnel, fees paid to professional service providers for
monitoring and analyzing clinical trials, such as a Phase IV clinical
trial of ZYFLO CR that we initiated in July 2007, milestone payments
to third parties, costs related to the development of our recently approved NDA for ZYFLO CR, costs
of contract research and manufacturing and the cost of facilities. In addition, research and
development expenses include the cost of our medical affairs and medical information functions,
which
14
educate physicians on the scientific aspects of our commercial products and the approved
indications, labeling and the costs of monitoring adverse events. After FDA approval of a product
candidate, we record manufacturing expenses associated with a product as cost of products sold
rather than as research and development expenses. We expense research and development costs and
patent related costs as they are incurred. Because of our ability to utilize resources across
several projects, many of our research and development costs are not tied to any particular project
and are allocated among multiple projects. We record direct costs on a project-by-project basis. We
record indirect costs in the aggregate in support of all research and development. Development
costs for clinical development stage programs such as the injectable formulation of zileuton tend
to be higher than earlier stage programs such as our HMGB1 and alpha-7 programs, due to the costs
associated with conducting clinical trials and large-scale manufacturing.
We expect that research and development expenses relating to our portfolio will fluctuate
depending primarily on the timing of clinical trials, related manufacturing initiatives and
milestone payments to third parties. We expect to incur additional expenses over the next several
years for clinical trials of ZYFLO CR and our product development candidates, including zileuton
injection. As a result of our October 2006 restructuring, we anticipate that our research and
development expenses will decrease in 2007 compared to 2006. We also expect manufacturing expenses
for some programs included in research and development expenses to increase as we scale up
production of zileuton injection for later stages of clinical development. We have initiated a
Phase IV clinical trial related to ZYFLO CR to examine its potential clinical benefits in
particular populations of asthma patients, which will be included in research and development
expenses. As a result of the FDA’s approval of the NDA for ZYFLO CR in May 2007, we made milestone
payments totaling $3.1 million and accrued at present value an
additional $3.5 million related to milestone obligations due on the first and second anniversary of
the FDA’s approval. We included these milestone payments and
accruals in research and development expenses in the three months
ended June 30, 2007 and the accretion of the discount related to
the present valued obligation will be included in interest expense.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries and other
related costs for personnel in sales, marketing, sales operations and our managed care functions as
well as other costs related to ZYFLO and ZYFLO CR. We will also be incurring marketing and other
costs in preparation for the anticipated launch of ZYFLO CR in the fall of 2007. Other costs
included in sales and marketing expenses include sales and marketing cost related to our
co-promotion and marketing agreement, cost of product samples of ZYFLO, promotional materials,
market research and sales meetings. We expect to continue to incur sales and marketing costs
associated with our sales force to support ZYFLO. We expect to incur additional expenses related
to enhancing our sales and marketing functions and adding sales representatives in connection with
the commercial launch of ZYFLO CR. In addition, under our co-promotion agreement with DEY, we have deferred the $7.0 million in aggregate payments that we received upon signing
the agreement and upon receiving approval by the FDA of the NDA for ZYFLO CR. We are amortizing
these payments over the term of the agreement, along with any future milestone payments received
from DEY. The amortization of the up front and milestone payments will offset some or all of the
co-promotion fees paid to DEY for promoting ZYFLO and ZYFLO CR in future periods under the
agreement. We expect to record all ZYFLO and ZYFLO CR sales generated by the combined sales force
and record any co-promotion fees paid to DEY and the amortization of
the upfronts and milestone payments in
sales and marketing.
General and Administrative Expenses. General and administrative expenses consist primarily of
salaries and other related costs for personnel in executive, finance, accounting, legal, business
development, information technology and human resource functions. Other costs included in general
and administrative expenses include certain facility and insurance costs, including director and
officer liability insurance, as well as professional fees for legal, consulting and accounting
services.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect our reported assets and
liabilities, revenues and expenses, and other financial information. Actual results may differ
significantly from these estimates under different assumptions and conditions. In addition, our
reported financial condition and results of operations could vary due to a change in the
application of a particular accounting standard.
15
We regard an accounting estimate or assumption underlying our financial statements as a
“critical accounting estimate” where:
| |
• |
|
the nature of the estimate or assumption is material due to the level of subjectivity
and judgment necessary to account for highly uncertain matters or the susceptibility of
such matters to change; and |
| |
| |
• |
|
the impact of the estimates and assumptions on financial condition or operating
performance is material. |
Our significant accounting policies are more fully described in the notes to our consolidated
financial statements included in this quarterly report on Form 10-Q. Not all of these significant
accounting policies, however, fit the definition of “critical accounting estimates.” We have
discussed our accounting policies with the audit committee of our board of directors, and we
believe that our estimates relating to revenue recognition, product returns, inventory, accrued
expenses, short-term investments, stock-based compensation and income taxes described below fit the
definition of “critical accounting estimates.”
Revenue Recognition. We sell ZYFLO to wholesalers, distributors and pharmacies, which have the
right to return purchased product. In accordance with Statement of Financial Accounting Standards
No. 48, Revenue Recognition When Right of Return Exists, or SFAS No. 48, we deferred revenue on
product shipments until we could reasonably estimate returns relating to these shipments. Because
ZYFLO was a new product for us and this was our first commercial product launch, we did not have an
objective measurement or history to allow us to estimate returns in 2005 and 2006. Accordingly, in
2005 and 2006, we deferred the recognition of revenue on product shipments of ZYFLO to our
customers until the product was dispensed through patient prescriptions. Since product dispensed to
patients through prescription is not subject to return, there is no remaining contingency that
would prohibit revenue recognition once delivered through prescription. In the first quarter of
2007, based on our product return experience since we launched ZYFLO in October 2005, we began
recording revenue upon shipment to third parties, including wholesalers, distributors and
pharmacies, and providing a reserve for potential returns from these third parties. In connection
with this change, we recorded an increase in net product sales in the six months ended June 30,
2007 related to the recognition of revenue from product sales that had been previously deferred,
net of an estimate for remaining product returns. This change in estimate totaled approximately
$953,000 and was reported in our results for the first quarter of 2007.
Under our collaboration agreements with MedImmune and Beckman Coulter, we are entitled to
receive non-refundable license fees, milestone payments and other research and development
payments. Payments received are initially deferred from revenue and subsequently recognized in our
statement of operations when earned. We must make significant estimates in determining the
performance period and periodically review these estimates, based on joint management committees
and other information shared by our collaborators with us. We recognize these revenues over the
estimated performance period as set forth in the contracts based on proportional performance
adjusted from time to time for any delays or acceleration in the development of the product. Because MedImmune
and Beckman Coulter can each cancel its agreement with us, we do not recognize revenues in excess
of cumulative cash collections. It is difficult to estimate the impact of the adjustments on the
results of our operations because, in each case, the adjustment is limited to the cash received.
Under our license agreement with IMI, we received an initial license fee of $500,000 in cash
and IMI preferred stock valued at $500,000. However, under our license agreement with The Feinstein
Institute for Medical Research (formerly known as The North Shore-Long Island Jewish Research
Institute), we owed the Feinstein Institute $100,000 of this cash payment and IMI preferred stock
valued at $100,000. We included in revenue from collaboration and license agreements in the three
months ended June 30, 2007 the $1.0 million total initial license fee that we received from IMI and
included the $100,000 cash payment and IMI preferred stock payment valued at $100,000 that the
Company made to The Feinstein Institute in research and development expenses. Under the license
agreement, IMI also has agreed to pay us $1.0 million in cash upon full regulatory approval of a
licensed product by the FDA or a foreign counterpart agency and royalties based on net sales of
licensed products and methods by IMI and its affiliates.
Product Returns. Consistent with industry practice, we offer customers the ability to return
products during the six months prior to, and the twelve months after, the product expires. At the
time of commercial launch in October
16
2005, we began shipping our products with an expiration date of 12 months. Since our launch of
ZYFLO, we had extended ZYFLO’s expiration date from 12 months to 24 months as of June 30, 2007. We
may adjust our estimate of product returns if we become aware of other factors that we believe
could significantly impact our expected returns. These factors include our estimate of inventory
levels of our products in the distribution channel, the shelf-life of the product shipped,
competitive issues such as new product entrants and other known changes in sales trends. As a
result of this ongoing evaluation, our product return reserve was $153,000 at June 30, 2007. We
evaluate this reserve on a quarterly basis, assessing each of the factors described above, and
adjust the reserve accordingly.
Inventory. Inventory is stated at the lower of cost or market value with cost determined under
the first-in, first-out, or FIFO, method. Our estimate of the net realizable value of our
inventories is subject to judgment and estimation. The actual net realizable value of our
inventories could vary significantly from our estimates and could have a material effect on our
financial condition and results of operations in any reporting period. We determine the estimated
useful life of our inventory based upon stability data of the underlying product stored at
different temperatures or in different environments. As of June 30, 2007, inventory consists of
zileuton active pharmaceutical ingredient, or API, which is raw
material in powder form, work-in-process and
finished tablets to be used for commercial sale. On a quarterly basis, we analyze our inventory
levels and write down inventory that has become obsolete, inventory that has a cost basis in excess
of our expected net realizable value and inventory that is in excess of expected requirements based
upon anticipated product revenues. As of June 30, 2007, we had a
reserve against our inventory of approximately $398,000 related to zileuton API and other manufacturing costs related
to the product not meeting our manufacturing specifications. In June 2007, we recorded a
receivable, included in our other current assets, of $398,000 for reimbursement owed to us for
the costs related to zileuton API costs and other
manufacturing costs.
Accrued Expenses. As part of the process of preparing our condensed consolidated financial
statements, we are required to estimate certain expenses. This process involves identifying
services that have been performed on our behalf and estimating the level of service performed and
the associated cost incurred for such service as of each balance sheet date in our condensed
consolidated financial statements. Examples of estimated expenses for which we accrue include
professional service fees, such as fees paid to lawyers and accountants, rebates to third parties,
including government programs such as Medicaid or private insurers, contract service fees, such as
amounts paid to clinical monitors, data management organizations and investigators in connection
with clinical trials, fees paid to contract manufacturers in connection with the production of
clinical materials and restructuring charges.
In connection with rebates, our estimates are based on our estimated mix of sales to various
third-party payors, which either contractually or statutorily are entitled to certain discounts off
our listed price of ZYFLO. In the event that our sales mix to certain third-party payors is
different from our estimates, we may be required to pay higher or lower total rebates than we have
estimated. In connection with service fees, our estimates are most affected by our understanding of
the status and timing of services provided relative to the actual levels of services incurred by
such service providers. The majority of our service providers invoice us monthly in arrears for
services performed; however, certain service providers invoice us based upon milestones in the
agreement. In the event that we do not identify certain costs that we have begun to incur or we
under or over-estimate the level of services performed or the costs of such services, our reported
expenses for such period would be too low or too high. The date on which certain services commence,
the level of services performed on or before a given date and the cost of such services are often
subject to judgment. We make these judgments based upon the facts and circumstances known to us in
accordance with generally accepted accounting principles.
Short-term Investments. Short-term investments consist primarily of U.S. government treasury
and agency notes, corporate debt obligations, municipal debt obligations, auction rate securities
and money market funds, each of investment-grade quality, which have an original maturity date
greater than 90 days. These investments are recorded at fair value and accounted for as
available-for-sale securities. We record any unrealized gain (loss) during the year as an
adjustment to stockholders’ equity unless we determine that the unrealized gain (loss) is not
temporary. We adjust the original cost of debt securities for amortization of premiums and
accretion of discounts to maturity. Because we have determined that the unrealized gain (loss) on
our investments have been temporary, we have not recorded any impairment losses since inception.
It is our intent to hold our short-term investments until such time as we intend to use them
to meet the ongoing liquidity needs of our operations. However, if the circumstances regarding an
investment or our liquidity needs were to change, such as a change in an investment’s external
credit rating, we would consider a sale of the related security prior to the maturity of the
underlying investment to minimize any losses.
17
Stock-Based Compensation. Effective January 1, 2006, we adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, or SFAS 123(R), using the modified prospective application method, which requires us to
recognize compensation cost for granted, but unvested, awards, new awards and awards modified,
repurchased, or cancelled after January 1, 2006 if such awards were granted after becoming a public
company.
We account for transactions in which services are received in exchange for equity instruments
based on the fair value of such services received from non-employees or of the equity instruments
issued, whichever is more reliably measured, in accordance with SFAS 123(R). We use the
Black-Scholes option-pricing model to calculate the fair value of stock-based compensation under
SFAS 123(R). There are a number of assumptions used to calculate the fair value of stock options or
restricted stock issued to employees under this pricing model.
The two factors which most affect charges or credits to operations related to stock-based
compensation are the fair value of the common stock underlying stock options for which stock-based
compensation is recorded and the volatility of such fair value. Accounting for equity instruments
granted by us under SFAS 123(R) and EITF No. 96-18 requires fair value estimates of the equity
instrument granted. If our estimates of the fair value of these equity instruments are too high or
too low, it would have the effect of overstating or understating expenses. When equity instruments
are granted or sold in exchange for the receipt of goods or services and the value of those goods
or services can be readily estimated, we use the value of such goods or services to determine the
fair value of the equity instruments. When equity instruments are granted or sold in exchange for
the receipt of goods or services and the value of those goods or services cannot be readily
estimated, as is true in connection with most stock options and warrants granted to employees or
non-employees, we estimate the fair value of the equity instruments based upon the consideration of
factors which we deem to be relevant at the time using cost, market or income approaches to such
valuations.
Income Taxes. As part of the process of preparing our consolidated financial statements, we
are required to estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatments of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. In addition, as of June 30, 2007, we had
federal and state tax net operating loss carryforwards of approximately $140 million, which expire
beginning in 2021 and 2007, respectively. We also have research and experimentation credit
carryforwards of approximately $2.4 million, which expire beginning in 2021. We have recorded a
full valuation allowance as an offset against these otherwise recognizable net deferred tax assets
due to the uncertainty surrounding the timing of the realization of the tax benefit. In the event
that we determine in the future that we will be able to realize all or a portion of its net
deferred tax benefit, an adjustment to deferred tax valuation allowance would increase net income
or additional paid in capital for deferred tax assets related to stock compensation deductions in
the period in which such a determination is made. The Tax Reform Act of 1986 contains provisions
that may limit the utilization of net operating loss carryforwards and credits available to be used
in any given year in the event of significant changes in ownership interest, as defined.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes. As of the date of adoption, the total amount of net unrecognized
tax benefit is $202,000, which has been recorded with an offsetting adjustment to our valuation
allowance. Accordingly, there was no adjustment to accumulated deficit at the
date of adoption.
We did not recognize any accrued interest and penalties related to unrecognized tax benefits
as no amounts would be due as a result of our net tax loss carryforward. Our policy is to record
interest and penalties related to unrecognized tax benefits in income tax expense. Tax years for
2000 to 2006 remain subject to examination for federal and numerous state jurisdictions. The
primary state tax jurisdiction to which we are subject is the Commonwealth of Massachusetts.
18
Results of Operations
Three Months Ended June 30, 2007 and 2006
Revenues
Revenue from Product Sales. We recognized $2.3 million of revenue from product sales of ZYFLO
in the three months ended June 30, 2007 compared to $1.8 million in three months ended June 30,
2006. The increase in product revenue is primarily attributable to a 3.5% increase in prescription
volume and an 11% price increase in ZYFLO’s wholesale acquisition price over the corresponding
period in 2006. On January 1, 2007, based on our product return experience since our launch of
ZYFLO in October 2005, we began recording revenue upon shipment to third parties, including
wholesalers, distributors and pharmacies, and providing a reserve for potential returns from these
third parties, as we are now able to estimate product returns. Prior to this change in the first
quarter of 2007, we recognized revenue from product shipments when we determined the right to
return the product had lapsed or when we could reasonably estimate returns relating to the
shipments to third parties under SFAS No. 48.
Revenue under Collaboration and License Agreements. We recognized collaboration and license
revenues of $1.1 million in the three months ended June 30, 2007, compared to $1.7 million in the
three months ended June 30, 2006, a decrease of approximately $560,000. This decrease was primarily
due to a $1.6 million decrease in collaboration revenue
recognized from MedImmune, offset, in part,
by $1.0 million in license revenue related to our agreement with IMI. We did not receive any
license revenue in the three months ended June 30, 2006. Collaboration and license revenue in the
three months ended June 30, 2007 was primarily comprised of the $1.0 million in license revenue
related to the IMI agreement and $136,000 in collaboration revenue related to the remaining
obligation under the MedImmune agreement.
Since we entered into the agreement with MedImmune in 2003, we have billed a total of $17.8
million to MedImmune, consisting of the $12.5 million initial payment, a $1.3 million milestone
payment and $4.1 million of development support. As of June 30, 2007, we have recognized this
entire amount as collaboration revenue. At June 30, 2007, we had no deferred collaboration revenue
and have completed the research term of our agreement with MedImmune. Our revenue recognized from
existing collaborations in 2007 may decline substantially because we have now recognized all of the
revenue that we previously deferred. Going forward, our revenue from collaboration agreements will
fluctuate each quarter and will be highly dependent upon the achievement of milestones under our
existing agreements or entering into new collaboration agreements.
Costs and Expenses
Cost of Products Sold. Cost of products sold in the three months ended June 30, 2007 was
$680,000, compared to $890,000 in the three months ended June 30, 2006. Cost of products sold
consisted primarily of the expenses associated with manufacturing and distributing ZYFLO and
royalty payments to Abbott under the license agreement for ZYFLO. We
recorded $187,000 of
inventory write-offs in the three months ended June 30, 2006. In the three months ended June 30, 2007
we did not record any write-off. The write-offs in the second quarter of
2006 resulted from excess or obsolete inventory that could no longer be used for commercial sale.
Excluding the impact of write-offs, our gross margins from product sales was 70% in the three
months ended June 30, 2007, compared to 61% in the three months ended June 30, 2006. This increase
in gross margins resulted from our increase in the wholesale acquisition price of ZYFLO and our
ability to spread some of our fixed costs associated with managing our supply chain over a larger
revenue base in 2007. Following the commercial launch of ZYFLO CR, our gross margins will likely
decrease as a result of additional royalty obligations to SkyePharma for utilization of its
controlled-release technology.
Research and Development Expenses. Research and development expenses in the three months ended
June 30, 2007 were $10.1 million, compared to $6.9 million in the three months ended June 30, 2006,
an increase of approximately $3.2 million, or 46%. This increase was primarily due to $6.6 million in
milestone payments paid and accrued in the three months ended June 30, 2007 as a result of the
FDA’s approval of the NDA for ZYFLO CR in May 2007, offset, in part, by lower expenses in the
three months ended June 30, 2007 associated with clinical trials and a reduction in the number of
employees performing research and development functions following our 2006 restructurings.
19
The following table summarizes the primary components of our research and development expenses
for the three months ended June 30, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(in thousands) |
|
Zileuton (ZYFLO and ZYFLO CR) |
|
$ |
8,537 |
|
|
$ |
2,987 |
|
Zileuton injection |
|
|
159 |
|
|
|
731 |
|
CTI-01 |
|
|
(96 |
) |
|
|
831 |
|
Alpha-7 |
|
|
1,014 |
|
|
|
985 |
|
HMGB1 |
|
|
91 |
|
|
|
519 |
|
General research and development expenses |
|
|
100 |
|
|
|
635 |
|
Stock-based compensation expense |
|
|
299 |
|
|
|
247 |
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
10,104 |
|
|
$ |
6,935 |
|
|
|
|
|
|
|
|
The following summarizes the expenses associated with our primary research and development
programs:
Zileuton (ZYFLO and ZYFLO CR). During the three months ended June 30, 2007, we incurred
$8.5 million in expenses related to our orally-dosed zileuton programs, including ZYFLO and
ZYFLO CR, compared to $3.0 million during the three months ended
June 30, 2006, a 186% increase.
This increase was primarily due to the following:
| |
• |
|
$3.1 million in milestone fees paid to third parties as a result of the FDA’s
approval of the NDA for ZYFLO CR in May 2007; |
| |
| |
• |
|
$3.5 million in accrued milestone payments to third parties as a result of the
FDA’s approval on the NDA for ZYFLO CR in May 2007, which are due on the first and second year
anniversary of the FDA’s approval; |
| |
| |
• |
|
$486,000 increase in clinical and manufacturing costs for related to our Phase IV
clinical trial for zileuton; and |
| |
| |
• |
|
$359,000 increase in manufacturing costs related to our life cycle extension
program for zileuton. |
The increases in the costs described above were partially offset by the following:
| |
• |
|
$1.2 million reduction in clinical, consulting and manufacturing costs for our
NDA registration batches for ZYFLO CR; |
| |
| |
• |
|
$236,000 reduction in operating expenses incurred by our medical affairs and
medical information functions, related to our scientific support of ZYFLO, as a result
of our 2006 restructurings; and |
| |
| |
• |
|
$276,000 reduction in salaries and other personnel related costs related to our
2006 restructurings. |
We anticipate that our research and development expenses related to our orally-dosed zileuton
programs for the remainder of 2007 will consist primarily of costs related to conducting our Phase
IV clinical trial for ZYFLO CR. This clinical trial is designed to examine the utility of ZYFLO CR
in particular groups of asthma patients. In addition, we expect to continue to incur research and
development expenses to maintain and operate our medical affairs, medical information and
pharmacovigilance functions in support of ZYFLO and ZYFLO CR.
Zileuton Injection. During the three months ended June 30, 2007, we incurred $159,000 in
expenses related to our zileuton injection program, compared to $731,000 during the three months
ended June 30, 2006, a 78% decrease. This decrease was primarily due to reduction in clinical trial
expense related to our Phase I/II clinical trial, which concluded in the first half of 2006. We
expect that our costs associated with the development of zileuton injection will increase during
the second half 2007 as we initiate a Phase II clinical trial and continue the formulation
development to be used in future clinical trials.
CTI-01. During the three months ended June 30, 2007, we received a $96,000 credit related to
program clinical trial costs, as compared to expenses of $831,000 in the three months ended June
30, 2006. Effective February 2007, we terminated our license agreements with the University of
Pittsburgh and Xanthus Pharmaceuticals related to the development of CTI-01. We do not plan to
pursue further development or incur additional costs related to CTI-01.
20
Alpha-7. During the three months ended June 30, 2007, we incurred $1.0 million of expenses in
connection with research and development of our alpha-7 program, compared to $985,000 during the
three months ended June 30, 2006, a 3% increase. Although our expenses related to our alpha-7
program remain consistent, we experienced a decrease in research and development related expenses
primarily due to a reduction in the number of employees working on the program following our
October 2006 restructuring, offset by payments made to The Feinstein Institute for Medical Research
as a result of our license agreement with IMI in cash and preferred stock. We anticipate that our
research and development expenses for our alpha-7 program will not grow substantially in 2007, as
we expect increased costs related to preclinical studies conducted by third parties to advance our
lead molecule to be offset by the reduced number of employees working on this program. We
anticipate that significant additional expenditures will be required to advance any product
candidate through preclinical and clinical development. We plan to seek a collaborator for our
alpha-7 program and do not currently expect to conduct clinical trials with the alpha-7 program
without entering into such an arrangement. However, because this project is at a very early stage,
the actual costs and timing of research, preclinical development, clinical trials and associated
activities are highly uncertain, subject to risk, and will change depending upon the project we
choose to develop, the clinical indication developed, the development strategy adopted, and the
terms of a collaboration, if we are able to enter into one. As a result, we are unable to estimate
the costs or the timing of advancing a small molecule from our alpha-7 program through clinical
development.
HMGB1. During the three months ended June 30, 2007, we incurred $91,000 of expenses for our
HMGB1 program, compared to $519,000 during the three months ended June 30, 2006, a 82% decrease.
This decrease was primarily due to lower license fees, sponsored research and laboratory supplies
for our continued testing under our collaboration agreement with MedImmune as well as lower
personnel costs devoted to this program. We anticipate that research and development costs relating
to HMGB1 for the remainder 2007 will be lower than the corresponding period in the prior year, as a
result of our October 2006 restructuring. In addition, a larger portion of the expenses in our
HMGB1 program will be assumed by MedImmune as the program advances into later stages of preclinical
development. We also anticipate that some of our expenses in the HMGB1 program will be covered by
funding and potential milestone payments from MedImmune under our collaboration agreement. Because
the HMGB1 program is still in preclinical development, the actual costs and timing of preclinical
development, clinical trials and associated activities are highly uncertain, subject to risk and
will change depending upon the clinical indication developed and the development strategy adopted.
A significant amount of these clinical trial costs will be incurred by MedImmune. The expenses for
HMGB1 are reflected in the accompanying statements of operations as part of research and
development expenses, while the funding received from MedImmune and Beckman Coulter to fund our
research efforts is included in revenue under collaboration agreements.
Our general research and development expenses, which are not allocated to any specific
program, decreased by $535,000 in the three months ended June 30, 2007 as compared to the three
months ended June 30, 2006. This decrease was primarily attributable to reduction in salaries and
wages and other employee related costs as a result of our May 2006 and October 2006 restructurings
as well as improved cost allocation methods for our existing research and development personnel and
the related laboratory and general expenses for our current research and development programs.
In addition, our stock-based compensation expense increased $52,000 in the three months ended
June 30, 2007, compared to the three months ended June 30, 2006. This increase was primarily due to
a $178,000 increase in stock-based compensation expense related to the effects of the change in the
market price of our common stock on unvested non-employee options, offset, in part, by a decrease
in stock-based compensation expense as a result of the reduction in the number of employees
performing research and development functions following our May 2006 and October 2006
restructurings. The adjustment to stock-based compensation expense on unvested non-employee options
is calculated based on the change in fair value of our common stock during the period. The fair
value of our common stock was unchanged during the three months ended June 30, 2007. The fair
value of our common stock decreased during the three months ended June 30, 2006, which resulted in
a reduction to our stock-based compensation expense to non-employees of $139,000 during the period.
Sales and Marketing. Sales and marketing expenses for the three months ended June 30, 2007
were $2.6 million, compared to $5.7 million for the three months ended June 30, 2006. The $3.1
million decrease was primarily attributable to a decrease in the number of employees performing
sales and marketing functions, offset by promotional and other marketing expenses as a result of
our obligations under our co-promotion and marketing
21
agreement with DEY. The number of employees performing sales and marketing functions decreased
to 26 employees at June 30, 2007 from 77 employees at June 30, 2006. We expect that our sales and
marketing costs will increase during the second half of 2007 as a result of our co-promotion and
marketing agreement with DEY and the anticipated commercial launch of ZYFLO CR in the fall of 2007.
General and Administrative Expenses. General and administrative expenses for the three months
ended June 30, 2007 were $3.5 million, compared to $5.1 million for the three months ended June 30,
2006. The decrease in the three months ended June 30, 2007 was primarily due to a reduction in
salaries and wages and other personnel cost as a result of our 2006 restructurings offset by
increased consulting and advisory fees associated with our co-promotion and marketing agreement
with DEY. General and administrative expenses for the three months ended June 30, 2006 included
$749,000 of severance expense, of which $670,000 related to the departure of our former President
and Chief Executive Officer, and $1.3 million in stock-based compensation expense related to the
accelerated vesting of certain stock options upon the departure of
this executive. The number of employees performing
general and administrative functions decreased to 14 employees at June 30, 2007 from 22 employees
at June 30, 2006.
Other Income. Interest income for the three months ended June 30, 2007 was $564,000 compared
to $716,000 for the three months ended June 30, 2006. The decrease in the three months ended June
30, 2007 was primarily attributable to lower average cash and investment balances, offset, in part,
by higher interest rates. Interest expense amounted to $30,000 and $55,000 for the three months
ended June 30, 2007 and June 30, 2006, respectively. The interest expense relates to borrowings
under our loan with Silicon Valley Bank for capital expenditures.
Six Months Ended June 30, 2007 and 2006
Revenues
Revenue from Product Sales. We recognized revenue from product sales of ZYFLO of $5.2 million
in the six months ended June 30, 2007, compared to $2.8 million in the six months ended June 30,
2006. The increase in product revenue is primarily attributable to a 30% increase in prescription
volume over the corresponding period in 2006 and an 11% increase in ZYFLO’s wholesale acquisition
price from the corresponding period in 2006. In addition, in the first quarter of 2007 we
recorded a $953,000 increase in product sales related to the recognition of revenue from product
sales that had been previously deferred, net of an estimate for remaining product returns. On
January 1, 2007, based on our product return experience since our launch of ZYFLO in October 2005,
we began recording revenue upon shipment to third parties, including wholesalers, distributors and
pharmacies, and providing a reserve for potential returns from these third parties, as we are now
able to estimate product returns. Prior to this change in the first quarter of 2007, we recognized
revenue from product shipments when we determined the right to return the product had lapsed or
when we could reasonably estimate returns relating to the shipments to third parties under SFAS No.
48.
Revenue under Collaboration and License Agreements. We recognized collaboration and license
revenues of $1.7 million in the six months ended June 30, 2007, compared to $2.9 million in the six
months ended June 30, 2006, a decrease of approximately $1.2 million. This decrease was primarily
due to a $2.2 million decrease in collaboration revenue from our collaboration with MedImmune,
offset by $1.0 million in license revenue related to our agreement with IMI. We did not recognize
any license revenue in the six months ended June 30, 2006. Collaboration revenue of $737,000
related to our collaboration with MedImmune in the six months ended June 30, 2007 was primarily due
to the recognition of $400,000 of deferred revenue recognized under our collaboration agreement
with Beckman Coulter for a license fee paid to advance into formal product development a diagnostic
assay in connection with our HMGB1 program. Collaboration revenue in the six months ended June 30,
2007 also included approximately $337,000 related to a portion of the $12.5 million of initial fees
MedImmune paid to us that we recognized over the duration of the contract and the $5.3 million
cumulatively billed to MedImmune for milestone payments and development support from the inception
of the agreement through June 30, 2007. Collaboration revenue in the six months ended June 30, 2006
was primarily comprised of the portion of the initial fees MedImmune paid to us that we recognized
in each period, and the portion of milestone payments and development support billed to MedImmune
in the first quarter of 2006, in 2005 and in 2004 that we recognized in the six months ended June
30, 2006.
22
Since we entered into the agreement with MedImmune in 2003, we have billed a total of $17.8
million to MedImmune, consisting of the $12.5 million initial payment, a $1.3 million milestone
payment and $4.1 million of development support. As of
June 30, 2007, we have recognized this entire amount as collaboration revenue. At June 30, 2007 we had no deferred
collaboration revenue and had completed the research term of our agreement with MedImmune. Our
revenue recognized from existing collaborations in 2007 may decline substantially because we have
now recognized all of the revenue that we previously deferred. Going forward, our revenue from
collaboration agreements will fluctuate each quarter and will be highly dependent upon the
achievement of milestones under our existing agreements, or will be dependent upon us entering into
new collaboration agreements.
Costs and Expenses
Cost of Products Sold. Cost of products sold was $1.4 million in both the six months ended
June 30, 2007 and the six months ended June 30, 2006. Cost of products sold in each period
consisted primarily of the expenses associated with manufacturing and distributing ZYFLO and
royalty payments to Abbott under the license agreement for ZYFLO. As a result of our change in
estimates relating to recognition of ZYFLO sales, we recorded $166,000 in cost of product sold in
the six months ended June 30, 2007. We recorded $331,000 of inventory write-offs in the six months
ended June 30, 2006. We did not record any inventory write-offs during the six months ended June
30, 2007. The write-offs in the first six months of 2006 resulted from excess or obsolete inventory
that could no longer be used for commercial sale. Our gross margins from product sales were 73% in
the six months ended June 30, 2007, compared to 63% in the six months ended June 30, 2006. This
increase in gross margins resulted from our increase in wholesale acquisition price for ZYFLO and
our ability to spread some of our fixed costs associated with managing our supply chain over a
larger revenue base in 2007. Following the commercial launch of ZYFLO
CR our gross margins will likely decrease as a result of additional
royalty obligations to SkyePharma for utilization of its
controlled-release technology.
Research and Development Expenses. Research and development expenses in the six months ended
June 30, 2007 were $13.0 million, compared to $16.3 million in the six months ended June 30, 2006,
a decrease of approximately $3.3 million, or 20%. This decrease was primarily due to lower expenses
associated with the clinical trials, as well as the reduction in the number of employees performing
research and development functions following our 2006 restructurings, offset, in part, by $6.6
million in milestone payments paid and accrued in the three months ended June 30, 2007 as a result
of the FDA’s approval of the NDA for ZYFLO CR in May 2007.
The following table summarizes the primary components of our research and development expenses
for the six months ended June 30, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
| |
|
Six months Ended June 30, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(in thousands) |
|
Zileuton (ZYFLO and ZYFLO CR) |
|
$ |
9,872 |
|
|
$ |
6,850 |
|
Zileuton injection |
|
|
315 |
|
|
|
1,868 |
|
CTI-01 |
|
|
(83 |
) |
|
|
2,373 |
|
Alpha-7 |
|
|
1,847 |
|
|
|
2,132 |
|
HMGB1 |
|
|
210 |
|
|
|
1,025 |
|
General research and development expenses |
|
|
322 |
|
|
|
1,480 |
|
Stock-based compensation expense |
|
|
539 |
|
|
|
600 |
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
13,022 |
|
|
$ |
16,328 |
|
|
|
|
|
|
|
|
The following summarizes the expenses associated with our primary research and development
programs:
Zileuton
(ZYFLO and ZYFLO CR). During the six months ended June 30,
2007, we incurred $9.9 million in expenses related to our orally-dosed zileuton programs, including ZYFLO and ZYFLO CR,
compared to $6.9 million during the six months ended
June 30, 2006, a 44% increase. This
increase was primarily due to the following:
| |
• |
|
$3.1 million in milestone fees paid to third parties as a result of the FDA’s
approval of the NDA for ZYFLO CR in May 2007; |
| |
| |
• |
|
$3.5 million in accrued milestone payments to third parties as a result of the
FDA’s approval on the NDA for ZYFLO CR in May 2007, which are due on the first and second year
anniversary of the FDA’s approval; |
23
| |
• |
|
$576,000 increase in clinical and manufacturing costs related to our Phase IV
clinical trial for ZYFLO CR; and |
| |
| |
• |
|
$398,000 increase in clinical and manufacturing costs related to our life cycle
extension program for zileuton. |
The increases in the costs described above were partially offset by the following:
| |
• |
|
$2.5 million reduction in clinical and manufacturing costs for ZYFLO and our NDA
registration batches for ZYFLO CR; |
| |
| |
• |
|
$551,000 reduction in consulting and scientific advisor fees related to the ZYFLO
CR NDA registration batches and ZYFLO product launch; |
| |
| |
• |
|
$483,000 reduction in operating expenses incurred by our medical affairs and
medical information functions, related to our scientific support of ZYFLO, as a result
of our 2006 restructurings; and |
| |
| |
• |
|
$924,000 reduction in salaries, other personnel related costs and overhead
related to our 2006 restructurings. |
We
anticipate that our research and development expenses related to our orally-dosed zileuton programs
in for the remainder of 2007 will consist primarily of costs related to conducting our Phase IV clinical
trial for ZYFLO CR. This clinical trial is designed to examine the utility of ZYFLO CR in particular groups of
asthma patients. In addition, we expect to continue to incur research and development expenses to
maintain and operate our medical affairs, medical information and pharmacovigilance functions in
support of ZYFLO and ZYFLO CR.
Zileuton Injection. During the six months ended June 30, 2007, we incurred $315,000 in
expenses related to our zileuton injection program, compared to $1.9 million during the six months
ended June 30, 2006, an 83% decrease. This decrease was primarily due to reduction in clinical
trial expense related to our Phase I/II clinical trial, which concluded in the first half of 2006.
We expect that our costs associated with the development of zileuton injection will increase during
the second half 2007 as we initiate a Phase II clinical trial, progress into later stages of
clinical development and continue the formulation development to be used in future clinical trials.
CTI-01. During the six months ended June 30, 2007, we received a net credit of $83,000 related
to our CTI-01 program clinical trial costs, as compared to expenses of $2.4 million in the six
months ended June 30, 2006. Effective February 2007, we terminated our license agreements with the
University of Pittsburgh and Xanthus Pharmaceuticals related to the development of CTI-01. We do
not plan to pursue further development of CTI-01 or to incur additional costs related to CTI-01.
Alpha-7. During the six months ended June 30, 2007, we incurred $1.8 million of expenses in
connection with research and development of our alpha-7 program, compared to $2.1 million during
the six months ended June 30, 2006, a 13% decrease. This decrease was primarily due to a reduction
in the number of employees working on the program following our October 2006 restructuring, offset
by payments made to The Feinstein Institute for Medical Research as a result of our license
agreement with IMI in $100,000 cash and IMI preferred stock valued at $100,000. We anticipate that
our research and development expenses for our alpha-7 program will not grow substantially in 2007,
as we expect increased costs related to preclinical studies conducted by third parties to advance
our lead molecule to be offset by the reduced headcount of employees working on this program. We
anticipate that significant additional expenditures will be required to advance any product
candidate through preclinical and clinical development. We plan to seek a collaborator for our
alpha-7 program and do not currently expect to conduct clinical trials with the alpha-7 program
without entering into such an arrangement. However, because this project is at a very early stage,
the actual costs and timing of research, preclinical development, clinical trials and associated
activities are highly uncertain, subject to risk, and will change depending upon the project we
choose to develop, the clinical indication developed, the development strategy adopted, and the
terms of a collaboration, if we are able to enter into one. As a result, we are unable to estimate
the costs or the timing of advancing a small molecule from our alpha-7 program through clinical
development.
24
HMGB1. During the six months ended June 30, 2007, we incurred $210,000 of expenses for our
HMGB1 program, compared to $1.0 million during the six months ended June 30, 2006, a 80% decrease.
This decrease was primarily due to lower sponsored research costs and laboratory supplies for our
continued testing under our collaboration agreement with MedImmune as well as lower personnel costs
devoted to this program. We anticipate that research and development costs relating to HMGB1 for
the remainder 2007 will be lower as a result of our October 2006 restructuring. In addition, a
larger portion of the expenses in our HMGB1 program have been assumed by MedImmune as the program
advances into later stages of preclinical development. We also anticipate that some of our expenses
in the HMGB1 program will be covered by funding and potential milestone payments from MedImmune
under our collaboration agreement. Because the HMGB1 program is still in preclinical development,
the actual costs and timing of preclinical development, clinical trials and associated activities
are highly uncertain, subject to risk and will change depending upon the clinical indication
developed and the development strategy adopted. A significant amount of these clinical trial costs
will be incurred by MedImmune. The expenses for HMGB1 are reflected in the accompanying statements
of operations as part of research and development expenses, while the funding received from
MedImmune and Beckman Coulter to fund our research efforts is included in revenue under
collaboration agreements.
Our general research and development expenses, which are not allocated to any specific
program, decreased by $1.2 million in the six months ended June 30, 2007 as compared to the six
months ended June 30, 2006. This decrease was primarily attributable to reduction in salaries and
wages and other employee related costs as a result of our 2006 restructurings and improved cost
allocation methods for our existing research and development personnel and the related laboratory
and general expenses for our current research and development programs.
In addition, our stock-based compensation expense decreased $62,000 in the six months ended
June 30, 2007, compared to the six months ended June 30, 2006. This decrease was primarily due to a
$374,000 reduction in stock-based compensation expense related to the reduction in the number of
employees performing research and development functions following our 2006 restructurings, offset,
in part, by the effects of the change in the market price of our common stock on unvested
non-employee options. The adjustment to stock-based compensation expense on unvested non-employee
stock options is calculated based on the change in fair value of our common stock during the
period. The fair value of our common stock increased during the six months ended June 30, 2007,
which resulted in stock-based compensation expense to non-employees of $29,000 during the period.
The fair value of our common stock decreased during the six months ended June 30, 2006, which
resulted in an adjustment to our stock-based compensation expense to non-employees of $283,000
during the period.
Sales and Marketing. Sales and marketing expenses for the six months ended June 30, 2007 were
$4.6 million, compared to $12.6 million for the six months ended June 30, 2006. The $8.0 million
decrease was primarily attributable to a decrease in the number of employees performing sales and
marketing functions, as well as the absence of certain costs associated with the commercial launch
of ZYFLO, including market research and advisory board meetings performed in the six months ended
June 30, 2006. The number of employees performing sales and marketing functions decreased to 26
employees at June 30, 2007 from 77 employees at June 30, 2006. We expect that our sales and
marketing costs will increase during 2007 as a result of our co-promotion and marketing agreement
with DEY and the anticipated commercial launch of ZYFLO CR in the fall of 2007.
General and Administrative Expenses. General and administrative expenses for the six months
ended June 30, 2007 were $6.6 million, compared to $8.0 million for the six months ended June 30,
2006. The decrease in the six months ended June 30, 2007 was primarily due to a reduction in
salaries and wages and other personnel costs as a result of our 2006 restructurings, offset, in
part, by increased consulting and advisory fees associated with our co-promotion and marketing
agreement with DEY. The number of employees performing general and administrative functions
decreased to 14 employees at June 30, 2007 from 22 employees at June 30, 2006.
Other Income. Interest income for the six months ended June 30, 2007 was $1.2 million,
compared to $1.5 million for the six months ended June 30, 2006. The decrease in the six months
ended June 30, 2007 was primarily attributable to lower average cash and investment balances,
offset, in part, by higher interest rates. Interest expense amounted to $69,000 and $115,000 for
the six months ended June 30, 2007 and June 30, 2006, respectively. The interest expense relates to
borrowings under our loan with Silicon Valley Bank for capital expenditures.
25
Liquidity and Capital Resources
Sources of Liquidity
Since our inception on July 14, 2000, we have raised proceeds to fund our operations through
public offerings and private placements of equity securities, debt financings, the receipt of
interest income, payments from our collaboration and co-promotion agreements, the exercise of stock
options, and, beginning in the fourth quarter of 2005, revenues from sales of ZYFLO. As of June 30,
2007, we had $40.5 million in cash, cash equivalents and short-term investments. We have invested
our remaining cash balance in highly liquid, interest-bearing, investment grade securities in
accordance with our established corporate investment policy.
In 2003, we entered into an exclusive license and collaboration agreement with MedImmune for
the discovery and development of novel drugs for the treatment of acute and chronic inflammatory
diseases associated with HMGB1, a newly discovered cytokine. Under this collaboration, MedImmune
paid us initial fees of $12.5 million and an additional $5.3 million through June 30, 2007 for
milestone payments and to fund certain research expenses incurred by us for the HMGB1 program. We
invoiced MedImmune for an additional $31,000 for work performed in the six months ended June 30,
2007. As of June 30, 2007 we had completed the research term of our agreement with MedImmune.
Under our collaboration with MedImmune, we may receive additional payments upon the
achievement of research, development and commercialization milestones up to a maximum of $124.0
million, after taking into account payments we are obligated to make to The Feinstein Institute on
milestone payments we receive from MedImmune. We anticipate that by the end of 2007, in addition to
payments already received, we will receive $1.0 million in aggregate milestone payments from
MedImmune, after taking into account payments we are obligated to make to The Feinstein Institute.
Under our co-promotion agreement with DEY, we received a non-refundable upfront payment of
$3.0 million in March 2007 and a milestone payment of $4.0 million in June 2007 following approval
by the FDA of the NDA for ZYFLO CR in May 2007. In addition, DEY has agreed to pay us a milestone
payment of $5.0 million following commercial launch of ZYFLO CR. If the commercial launch of ZYFLO
CR is delayed beyond May 31, 2008, DEY has the right to terminate the co-promotion agreement on or
before July 1, 2008 by providing 60 days prior written notice. If DEY exercises this termination
right, we will be obligated to pay DEY $2.0 million.
Credit Agreement with Silicon Valley Bank. We have financed the purchase of general purpose
computer equipment, office equipment, fixtures and furnishings, test and laboratory equipment,
software licenses and the completion of leasehold improvements through advances under a credit
agreement with Silicon Valley Bank, which was most recently modified as of January 6, 2006. As of
June 30, 2007, we had no borrowing capacity available under the modified credit agreement or any
other credit agreement. We are currently considering financing alternatives to fund capital
expenditures in the future.
We have granted Silicon Valley Bank a first priority security interest in substantially all of
our assets, excluding intellectual property, to secure our obligations under the credit agreement.
As of June 30, 2007, we had $869,000 in debt outstanding under this credit agreement related to
equipment advances. As a result of our October 2006 restructuring, we incurred restructuring
charges for the impairment of some of our assets. As a result of these charges, we may be required
to pay to Silicon Valley Bank the proceeds received from these impaired assets.
Advances made under the modified credit agreement after June 30, 2004 accrue interest at a
rate equal to the prime rate plus 2% per year. As of June 30, 2007, outstanding equipment advances
under the modified credit agreement had a weighted-average effective interest rate of approximately
10.25% per year. Advances made under the modified credit agreement are required to be repaid in
equal monthly installments of principal plus interest accrued through the repayment term, which
range from 36 to 42 months. Repayment begins the first day of the month following the advance. No
advances were made in the six months ended June 30, 2007 under the modified credit agreement.
26
Cash Flows
Operating Activities. Net cash used in operating activities was $ 8.5 million for the six
months ended June 30, 2007, as compared to $29.9 million for the six months ended June 30, 2006.
Net cash used in operations for the six months ended June 30,
2007 consisted of a net loss of $17.6 million, depreciation and amortization expense, the amortization of premiums on short-term
investments and the loss on the disposal of fixed assets of
$357,000, a net change in the reserve for inventory of $279,000, stock-based compensation
expense of $2.0 million and an increase in working capital
accounts of $6.6 million offset by IMI
preferred stock valued at $400,000 that we received as part of a license agreement. The increase in working
capital accounts was primarily due to $7.0 million in aggregate payments that we received from DEY
upon the signing of the co-promotion agreement and receiving approval by the FDA of the NDA for
ZYFLO CR and a $3.5 million increase in accrued license expenses offset, in part, by a $1.2 million
reduction in deferred product revenue, a $675,000 reduction in
deferred collaboration revenue and fees, a $1.2 million increase
in prepaid and other expenses and a $616,000 reduction in
inventory.
Investing Activities. Investing activities provided $212,000 of net cash in the six months
ended June 30, 2007, compared to $10.4 million in the six months ended June 30, 2006. During the
six months ended June 30, 2007, we made no capital expenditures. In addition, as interest rates
have gradually increased, we have maintained more of our proceeds from recent financings as cash
equivalents rather than short-term investments.
Financing Activities. In the six months ended June 30, 2007, we used $261,000 of net cash in
financing activities, compared to $524,000 in the six months ended June 30, 2006. Net cash used in
financing activities for the six months ended June 30, 2007 principally related to our repayment of
our long-term debt offset in part by proceeds from stock option
exercises and our employee stock
purchase plan.
Income Taxes
We have accumulated net operating losses and tax credits available to offset future taxable
income for federal and state income tax purposes as of June 30, 2007. If not utilized, federal net
operating loss carryforwards will begin to expire in 2021. State net operating loss carryforwards
began to expire in 2006. The federal tax credits expire beginning in 2021. To date, we have not
recognized the potential tax benefit of our net operating loss carryforwards or credits on our
balance sheet or statements of operations. The future utilization of our net operating loss
carryforwards may be limited based upon changes in ownership pursuant to regulations promulgated
under the Internal Revenue Code.
Funding Requirements
We expect to devote substantial resources to continue our research and development efforts,
including preclinical testing and clinical trials, enhance our sales and marketing infrastructure,
commercially launch ZYFLO CR, and achieve regulatory approvals for and, subject to regulatory
approval, commercially launch any future product candidates. We also expect to spend approximately
$200,000 in capital expenditures in the remainder of 2007 for the purchase of software and computer
equipment. We expect to fund our capital expenditures through cash received from product sales and
interest income from invested cash and cash equivalents and short-term investments. Our funding
requirements will depend on numerous factors, including:
| |
• |
|
the timing and costs of the commercial launch of ZYFLO CR; |
| |
| |
• |
|
the scope, costs and results of our clinical trials on ZYFLO CR and zileuton injection; |
| |
| |
• |
|
the amount and timing of sales and returns of ZYFLO and ZYFLO CR; |
| |
| |
• |
|
the costs of ongoing sales, marketing and manufacturing activities for ZYFLO and ZYFLO CR; |
| |
| |
• |
|
the time and costs involved in preparing, submitting, obtaining and maintaining
regulatory approvals for our other product candidates; |
| |
| |
• |
|
the timing, receipt and amount of milestone and other payments, if any, from DEY,
MedImmune, Beckman Coulter or future collaborators; |
| |
| |
• |
|
the timing, receipt and amount of sales and royalties, if any, from our potential
products; |
27
| |
• |
|
continued progress in our research and development programs, as well as the magnitude
of these programs, including milestone payments to third parties under our license
agreements; |
| |
| |
• |
|
the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; |
| |
| |
• |
|
the cost of obtaining and maintaining licenses to use patented technologies; |
| |
| |
• |
|
potential acquisition or in-licensing of other products or technologies; |
| |
| |
• |
|
our ability to establish and maintain additional collaborative or co-promotion arrangements; and |
| |
| |
• |
|
the ongoing time and costs involved in corporate governance requirements, including
work related to compliance with the Sarbanes-Oxley Act of 2002. |
Other
than payments that we receive from our collaborations with DEY and
MedImmune, we expect that sales of ZYFLO will represent our only sources of cash flows and
revenue until we commercially launch ZYFLO CR. In addition to the foregoing factors, we believe
that our ability to access external funds will depend upon market acceptance of ZYFLO CR, the success of our other preclinical and clinical development programs, the
receptivity of the capital markets to financings by biopharmaceutical companies, our ability to
enter into additional strategic collaborations with corporate and academic collaborators and the
success of such collaborations.
The extent of our future capital requirements is difficult to assess and will depend largely
on our ability to successfully commercialize ZYFLO CR. Based on our operating plans, we believe
that our available cash and cash equivalents and anticipated cash received from product sales and
anticipated payments received under existing collaboration agreements will be sufficient to fund
anticipated levels of operations into the second half of 2008.
For the six months ended June 30, 2007, our net cash used for operating activities was $8.5
million, and we had no capital expenditures. If our existing resources are insufficient to satisfy
our liquidity requirements or if we acquire or license rights to additional product candidates, we
may need to raise additional external funds through collaborative arrangements and public or
private financings. Additional financing may not be available to us on acceptable terms or at all.
In addition, the terms of the financing may adversely affect the holdings or the rights of our
stockholders. For example, if we raise additional funds by issuing equity securities, further
dilution to our then-existing stockholders will result. Such equity securities may have rights and
preferences superior to those of the holders of our common stock. If we are unable to obtain
funding on a timely basis, we may be required to significantly delay, limit or eliminate one or
more of our research, development or commercialization programs, which could harm our financial
condition and operating results. We also could be required to seek funds through arrangements with
collaborators or others that may require us to relinquish rights to some of our technologies,
product candidates or products which we would otherwise pursue on our own.
Contractual Obligations
We have summarized in the table below our fixed contractual obligations as of June 30, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Less Than |
|
|
One to |
|
|
Three to |
|
|
More than |
|
| Contractual Obligations |
|
Total |
|
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
| |
|
(In thousands) |
|
Short- and long-term debt |
|
$ |
921 |
|
|
$ |
795 |
|
|
$ |
126 |
|
|
$ |
— |
|
|
$ |
— |
|
Research and license agreements |
|
|
10,240 |
|
|
|
2,032 |
|
|
|
2,522 |
|
|
|
764 |
|
|
|
4,922 |
|
Consulting agreements |
|
|
660 |
|
|
|
660 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Severance agreements |
|
|
4 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Manufacturing and clinical trial agreements |
|
|
27,045 |
|
|
|
19,030 |
|
|
|
8,015 |
|
|
|
— |
|
|
|
— |
|
Lease obligations |
|
|
2,440 |
|
|
|
1,532 |
|
|
|
908 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
41,310 |
|
|
$ |
24,053 |
|
|
$ |
11,571 |
|
|
$ |
764 |
|
|
$ |
4,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
The amounts listed for short- and long-term debt represent the principal and interest amounts
we owe under our credit agreement with Silicon Valley Bank.
The amounts listed for research and license agreements represent our fixed obligations payable
to sponsor research and minimum royalty payments for licensed patents. These amounts do not include
any additional amounts that we may be required to pay under our license agreements upon the
achievement of scientific, regulatory and commercial milestones that may become payable depending
on the progress of scientific development and regulatory approvals, including milestones such as
the submission of an investigational new drug application to the FDA, similar submissions to
foreign regulatory authorities and the first commercial sale of our products in various countries.
We are party to a number of agreements that require us to make milestone payments. In
particular, under our license agreement with Abbott Laboratories for zileuton, we agreed to make
aggregate milestone payments of up to $13.0 million to Abbott upon the achievement of various
development and commercialization milestones relating to zileuton, including the completion of the
technology transfer from Abbott to us, filing and approval of a product in the United States and
specified minimum net sales of licensed products. Through June 30, 2007, we have made aggregate
milestone payments of $7.8 million to Abbott under our license agreements related to ZYFLO and
ZYFLO CR.
In addition, under our manufacturing agreement with SkyePharma, through its subsidiary
Jagotec, for ZYFLO CR, we agreed to make aggregate milestone payments of up to $6.6 million upon
the achievement of various development and commercialization milestones. Through June 30, 2007, we
have made aggregate milestone payments of $3.0 million to SkyePharma under our agreement.
The amounts shown in the table do not include royalties on net sales of our products and
payments on sublicense income that we may owe as a result of receiving payments under our
collaboration agreement with MedImmune. Our license agreements are described in our annual report
on Form 10-K for the year ended December 31, 2006.
The amounts listed for consulting agreements are for fixed payments due to our scientific and
business consultants.
The amounts listed for manufacturing and clinical trial agreements represent amounts due to
third parties for manufacturing, clinical trials and preclinical studies. As discussed in our
annual report on Form 10-K for the year ended December 31, 2006, we entered into a manufacturing
and supply agreement with Rhodia Pharma Solutions Ltd. for commercial production of zileuton API,
subject to specified limitations, through December 31, 2009. On June 30, 2006, Rhodia SA, the
parent company of Rhodia Pharma Solutions Ltd., sold the European assets of its pharmaceutical
custom synthesis business to Shasun Chemicals and Drugs Ltd. As part of this transaction, Rhoda SA
assigned our contract with Rhodia Pharma Solutions Ltd. to Shasun Pharma Solutions Ltd., or Shasun.
Under this agreement, we committed to purchase a minimum amount of API in the fourth quarter of
2006, the first quarter of 2007 and in the first quarter of 2008. The API purchased from Shasun
currently has a minimum shelf-life of 36 months. We evaluate the need to provide reserves for
contractually committed future purchases of inventory that may be in excess of forecasted future
demand. In making these assessments, we are required to make judgments as to the future demand for
current or committed inventory levels and as to the expiration dates of its product. While our
purchase commitment for API from Shasun exceeds our current forecasted demand in 2007, we expect
that any excess API purchased in 2006 under our agreement with Shasun will be used in commercial
production batches in 2007 and 2008 and sold before it requires retesting. Therefore, no reserve
for this purchase commitment has been recorded as of June 30, 2007.
Significant differences between our current estimates and judgments and future estimated
demand for our product and the useful life of inventory may result in significant charges for
excess inventory or purchase commitments in the future. These differences could have a material
adverse effect on our financial condition and results of operations during the period in which we
recognize charges for excess inventory. For example, we recorded charges of $299,000 in 2006 and
$280,000 in 2005 to reserve for excess or obsolete inventory that had an expiration date such that
the product was unlikely to be sold. The charge was included in cost of products sold in the
accompanying statements of operations.
29
Currently we purchase our API for commercial requirements for ZYFLO from a single source. In
addition, we currently manufacture ZYFLO with a single third-party manufacturer. We expect to
continue to purchase our API for commercial requirements from a single source and will manufacture
ZYFLO CR with a single third-party manufacturer. The disruption or termination of the supply of
API, a significant increase in the cost of the API from this single source or the disruption or
termination of the manufacturing of the commercial product could have a material adverse effect on
our business, financial position and results of operations.
The amounts listed for research and license agreements, consulting agreements and
manufacturing and clinical trial agreements include amounts that we owe under agreements that are
subject to cancellation or termination by us under various circumstances, including a material
uncured breach by the other party, minimum notice to the other party or payment of a termination
fee.
The amounts listed for lease obligations represent the amount we owe under our office,
computer, vehicle and laboratory space lease agreements under both operating and capital leases.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates. Our current investment
policy is to maintain an investment portfolio consisting mainly of U.S. money market and corporate
notes, directly or through managed funds, with maturities of two years or less. Our cash is
deposited in and invested through highly-rated financial institutions in North America. Our
short-term investments are subject to interest rate risk and will fall in value if market interest
rates increase. If market interest rates were to increase immediately and uniformly by 10% from
levels at June 30, 2007, we estimate that the fair value of our investment portfolio would decline
by approximately $9,000. In addition, we could be exposed to losses related to these securities
should one of our counterparties default. We attempt to mitigate this risk through credit
monitoring procedures. Although we consider our investments to be available-for-sale securities in
order to fund operations, if necessary, we have the ability to hold our fixed income investments
until maturity, and therefore we would not expect our operating results or cash flows to be
affected to any significant degree by the effect of a change in market interest rates on our
investments.
Item 4. Controls and Procedures
Our management, with the participation of our president and chief executive officer, who
functions as both our principal executive officer and principal financial officer, evaluated the
effectiveness of our disclosure controls and procedures as of June 30, 2007. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to
be disclosed by the company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Our management
recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of June 30, 2007, our
president and chief executive officer concluded that, as of such date, our disclosure controls and
procedures were not effective at the reasonable assurance level as a result of the material
weakness in our internal control over financial reporting described below.
Our management, with the participation of our president and chief executive officer, evaluated
whether any changes in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2007
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Based on the evaluation we conducted, management has identified the material
weakness in our internal control over financial reporting described below.
30
Our management identified a material weakness that existed as of June 30, 2007 related to the
operation of controls over accounting for non-routine transactions, specifically the accrual of
milestone obligations due under certain of our contractual arrangements in accordance with generally
accepted accounting principles, or GAAP. As a result of this material weakness, a material
adjustment was recorded to our draft interim financial statements after the financial close of the
quarter ended June 30, 2007. While our internal disclosure controls and procedures detected the
need to accrue for the milestone obligations, we did not initially reach the appropriate conclusion relative to the
timing of the accrual recognition. As a result of the foregoing, our management determined that
our operation of controls related to accounting for non-routine transactions was inadequate and
ineffective as of June 30, 2007.
To remediate the material weakness described above and to enhance our internal control over
financial reporting, the following improvements to our internal controls process have been or will
be implemented during the second half of 2007:
| |
• |
|
we are further improving our procedures for the review of non-routine transactions; |
| |
• |
|
we are currently assessing the expertise and training of our employees responsible
for finance and accounting who perform and review non-routine transactions and we will
provide additional training to such employees addressing any identified training
deficiencies; and |
| |
• |
|
we are reviewing our controls and procedures relating to the financial close
process and determining if any specific improvements need to be implemented. |
Except as noted above, there was no change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June
30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 1A. Risk Factors.
You should carefully consider the following risk factors, in addition to other information
included in this quarterly report on Form 10-Q and the other reports that we file with the
Securities and Exchange Commission, in evaluating Critical Therapeutics and our business. If any of
the following risks occur, our business, financial condition and operating results could be
materially adversely affected. The following risk factors include any material changes to and
supersede the risk factors previously disclosed in our annual report on Form 10-K for the year
ended December 31, 2006.
31
Risks Relating to Our Business
Our business depends heavily on the commercial success of ZYFLO CR.
ZYFLO is currently our only commercially marketed product, and it has not achieved broad
market acceptance. If we are able to successfully launch ZYFLO CR, we expect it will account for a
significant portion of our revenues for the foreseeable future and that sales of ZYFLO will decline
as patients convert to ZYFLO CR. However, we cannot assure you that ZYFLO CR will not suffer the
same lack of broad market acceptance that has affected ZYFLO. Our product candidates are in early
clinical, preclinical and research stages of development and are a number of years away from
commercialization.
Research and development of product candidates is a lengthy and expensive process. Our
early-stage product candidates in particular will require substantial funding for us to complete
preclinical testing and clinical trials, initiate manufacturing and, if approved for sale, initiate
commercialization. If ZYFLO CR is not commercially successful, we may be forced to find additional
sources of funding earlier than we anticipated. If we are not successful in obtaining additional
funding on acceptable terms, we may be forced to significantly delay, limit or eliminate one or
more of our research, development or commercialization programs.
If ZYFLO CR does not achieve market acceptance, we may not be able to generate significant
revenues unless we are able to successfully develop and commercialize other product candidates.
The commercial success of ZYFLO CR will depend upon its acceptance by the medical community,
third-party payors and patients. Physicians will prescribe ZYFLO CR only if they determine, based
on experience, clinical data, side effect profiles or other factors, that this product either alone
or in combination with other products is appropriate for managing their patient’s asthma. We
believe that the primary advantage of ZYFLO CR over ZYFLO is ZYFLO CR’s more convenient dosing
schedule, but this advantage may not result in broad market acceptance of ZYFLO CR, and we may
experience the same types of difficulties with ZYFLO CR that we have experienced with ZYFLO.
Despite being approved by the FDA since 1996, ZYFLO, our first marketed zileuton product, has
not achieved broad market acceptance. During the period between our commercial launch of ZYFLO in
October 2005 through the week ending May 31, 2007, prescription data for ZYFLO indicates that
approximately 4,400 physicians prescribed the product. We recorded revenue from the sale of ZYFLO
of only $6.6 million for the year ended December 31, 2006 and $5.2 million for the six months ended
June 30, 2007. We have had difficulty expanding the prescriber and patient base for ZYFLO, in
part, we believe, because some physicians view ZYFLO as less effective than other products on the
market or view its clinical data as outdated and because it requires dosing of one pill four times
per day, which some physicians and patients may find inconvenient or difficult to comply with
compared to other available asthma therapies that require dosing only once or twice daily. In
addition, if physicians do not prescribe ZYFLO CR for the recommended dosing regimen of two pills
twice daily or if patients do not comply with the dosing schedule and take less than the prescribed
number of tablets, our sales of ZYFLO CR will be limited and our revenues will be adversely
affected.
Market perceptions about the safety of ZYFLO may limit the market acceptance of ZYFLO CR. In
the clinical trials that were reviewed by the FDA prior to its approval of ZYFLO, 3.2% of the
approximately 5,000 patients who received ZYFLO experienced increased levels of a liver enzyme
called alanine transaminase, or ALT, of over three times the levels normally seen in the
bloodstream. In these trials, one patient developed symptomatic hepatitis with jaundice, which
resolved upon discontinuation of therapy, and three patients developed mild elevations in
bilirubin. In clinical trials for ZYFLO CR, 1.94% of the patients taking ZYFLO CR in a three-month
efficacy trial and 2.6% of the patients taking ZYFLO CR in a six-month safety trial experienced ALT
levels greater than or equal to three times the level normally seen in the bloodstream. Because
ZYFLO can elevate liver enzyme levels, periodic liver function tests are recommended for patients
taking ZYFLO. These periodic liver function tests also are recommended for patients taking ZYFLO
CR, based upon its product label, which was approved by the FDA in May 2007. Some physicians and
patients may perceive liver function tests as inconvenient or indicative of safety issues, which
could make them reluctant to prescribe or accept ZYFLO and other zileuton product candidates,
including ZYFLO CR. As a result, many physicians may have negative perceptions about the safety of
ZYFLO and other zileuton product candidates, including ZYFLO CR, which could limit their commercial
acceptance. The absence of ZYFLO from the market prior to our commercial launch in October 2005 may
have exacerbated any negative perceptions about ZYFLO if physicians believe the absence of ZYFLO
from the market was related to safety or efficacy issues. These negative perceptions could carry
over to ZYFLO CR.
32
The position of ZYFLO in managed care formularies, which are lists of approved products
developed by managed care organizations, or MCOs, has also made it more difficult to expand the
current market share for this product. As a result of a lack of a sustained sales and marketing
effort prior to our commercial launch in October 2005, in many instances ZYFLO had been relegated
to a third-tier status, which typically requires the highest co-pay for patients. Similarly, we
expect ZYFLO CR to have third-tier status in many instances as well. In some cases, MCOs may
require additional paperwork or prior authorization from the MCO before approving reimbursement for
ZYFLO CR.
If any existing negative perceptions about ZYFLO persist, we will have difficulty achieving
market acceptance for ZYFLO CR. If we are unable to achieve market acceptance of ZYFLO CR, we will
not generate significant revenues unless we are able to successfully develop and commercialize
other product candidates.
If our marketing and sales infrastructure and presence are not adequate or our collaborative
marketing arrangements are not successful, our ability to market and sell our products will be
impaired.
We reduced the size of our sales force as part of the cost reduction programs that we
announced in 2006. As of June 30, 2007, we had 18 sales representatives. Due to our difficulty in
achieving market acceptance of ZYFLO since its commercial launch in October 2005 and the reduction
in the size of our sales force in 2006, it may be difficult for us to hire and retain qualified
sales and marketing personnel and maintain an effective sales force. In connection with the launch
of ZYFLO CR, we expect to increase the size of our sales force to at least 40 sales
representatives, which would involve significant time and expense. In addition, we may not be able
to attract, hire, train and retain qualified sales and marketing personnel to rebuild the sales
force. If we are not successful in our efforts to rebuild this sales force, our ability to launch
and market ZYFLO CR would be impaired.
In March 2007, we entered into a co-promotion agreement with Dey, L.P., or DEY, for the
co-promotion of ZYFLO and ZYFLO CR. We cannot predict whether the co-promotion arrangement will
lead to increased sales for ZYFLO or ZYFLO CR. DEY initiated promotional detailing activities for
ZYFLO on April 30, 2007, and we expect that DEY will initiate promotional detailing activities for
ZYFLO CR in the fall of 2007. Given the recent start of DEY’s efforts, the potential success of the
co-promotion arrangement is uncertain. Under the co-promotion agreement, we agreed to provide a
minimum number of promotional details per month by our sales representatives to a specified group
of office-based physicians and other health care professionals for ZYFLO and ZYFLO CR. If we are
not successful in our efforts to provide the required level of promotional detailing, DEY’s
co-promotion fee may be increased and DEY may have a right to terminate the co-promotion agreement
for ZYFLO CR. For example, if we experience greater than expected turnover of sales
representatives, we may have difficulty satisfying our minimum detailing obligations.
On June 25, 2007, as contemplated by the terms of the zileuton co-promotion agreement, we and
DEY entered into a separate definitive co-promotion agreement providing for us to co-promote DEY’s
product PERFOROMIST™ (formoterol fumarate) Inhalation Solution for the long-term, twice daily
maintenance treatment of bronchoconstriction for emphysema and chronic bronchitis, which is also
known as chronic obstructive pulmonary disease, or COPD. Under the PERFOROMIST co-promotion
agreement, after the later of the commercial launch date for PERFOROMIST and such time as we have
completed the expansion of our sales force to at least 40 representatives and begin detailing
PERFOROMIST, DEY agreed to pay us a co-promotion fee based on retail sales of PERFOROMIST and we
agreed to provide a minimum number of promotional details per month by our sales representatives to
a specified group of office-based physicians and other health care professionals. If we are not
successful in our efforts to provide the required level of promotional detailing for PERFOROMIST,
our co-promotion fee may be reduced and DEY may have a right to terminate the PERFOROMIST
co-promotion agreement. Promoting both ZYFLO CR and PERFOROMIST may be challenging for our sales
representatives and may reduce their efficiency, which could negatively impact our revenues.
In addition, the amount of any co-promotion fee that DEY pays to us under the PERFOROMIST
co-promotion agreement will be limited if PERFOROMIST does not achieve market acceptance. For
example, safety concerns relating to PERFOROMIST may harm potential sales. PERFOROMIST belongs to
a class of medications known as long-acting beta2-adrenergic agonists, or LABAs, which
may increase the risk of asthma-related death. Data from a large placebo-controlled study in the
United States comparing the safety of the LABA salmeterol or placebo plus
33
usual asthma therapy showed an increase in asthma-related deaths in patients receiving
salmeterol. This finding also may apply to formoterol, the active ingredient in PERFOROMIST.
A failure to maintain appropriate inventory levels could harm our reputation and subject us to
financial losses.
We purchased quantities of raw materials and supplies of ZYFLO tablets in connection with the
commercial launch of ZYFLO. These purchases were made consistent with our forecasts of inventory
levels of ZYFLO that we based on our estimate of expected customer orders in combination with
limited historical information regarding actual sales. Because product demand for ZYFLO has been
less than we anticipated, our inventory levels of the zileuton active pharmaceutical ingredient, or
API, used for ZYFLO have been higher than anticipated. In addition, we are subject to minimum
purchase obligations under our supply agreements with our third-party manufacturers, which could
require us to buy additional inventory. We plan to use a portion of the zileuton API manufactured
for ZYFLO to manufacture ZYFLO CR. If ZYFLO demand does not increase, the commercial launch of
ZYFLO CR is delayed or ZYFLO CR does not achieve the level of demand we anticipate, we may not be
able to reduce these inventories or use the additional inventory we are required to purchase.
Significant differences between our current estimates and judgments and future estimated demand for
our products and the useful life of inventory may result in significant charges for excess
inventory or purchase commitments in the future. If we are required to recognize charges for excess
inventories, it could have a material adverse effect on our financial condition and results of
operations during the period in which we recognize charges for excess inventory.
In the quarter ended June 30, 2007, we have not released for commercial supply four
batches of ZYFLO CR tablet cores due to questions regarding current good
manufacturing practices, or cGMP, documentation associated with the
manufacture. If we are unable to manufacture or release ZYFLO CR on a
timely and consistent basis, if we fail to maintain an
adequate inventory of zileuton API or ZYFLO CR core tablets, or if our inventory were to be destroyed or
damaged or reached its expiration date, our commercial launch of ZYFLO CR could be delayed,
patients might not have access to ZYFLO CR, our reputation and our brand could be harmed and
physicians may be less likely to prescribe ZYFLO CR in the future. Conversely, if we are unable to
sell our inventory in a timely manner, we could experience cash flow difficulties and additional
financial losses.
We
would be exposed to similar risks if we fail to maintain an adequate
inventory of ZYFLO or zileuton API or if our inventory were to be
destroyed or damaged or reach its expiration date.
If the market is not receptive to our product candidates, we will be unable to generate revenues
from sales of these products.
The probability of commercial success of each of our product candidates is subject to
significant uncertainty. Factors that we believe will materially affect market acceptance of our
product candidates under development include:
| |
• |
|
the timing of our receipt of any marketing approvals, the terms of any approval and the
countries in which approvals are obtained; |
| |
| |
• |
|
the safety, efficacy and ease of administration; |
| |
| |
• |
|
the therapeutic benefit or other improvement over existing comparable products; |
| |
| |
• |
|
pricing and cost effectiveness; |
| |
| |
• |
|
the ability to be produced in commercial quantities at acceptable costs; |
| |
| |
• |
|
the availability of reimbursement from third-party payors such as state and Federal
governments, under programs such as Medicare and Medicaid, and private insurance plans and
managed care organizations; and |
| |
| |
• |
|
the extent and success of our sales and marketing efforts. |
The failure of our product candidates to achieve market acceptance would prevent us from ever
generating meaningful revenues from sales of these product candidates.
We may not be successful in our efforts to advance and expand our portfolio of product
candidates.
An element of our strategy is to develop and commercialize product candidates that address
large unmet medical needs. We seek to do so through:
34
| |
• |
|
internal research programs; |
| |
| |
• |
|
sponsored research programs with academic and other research institutions and
individual doctors, chemists and researchers; and |
| |
| |
• |
|
collaborations with other pharmaceutical or biotechnology companies with complementary
clinical development or commercialization capabilities or capital to assist in funding
product development and commercialization. |
A significant portion of the research that we are conducting involves new and unproven
technologies. Research programs to identify new product candidates, whether conducted by us or by
academic or other research institutions under sponsored research agreements, require substantial
technical, financial and human resources. These research programs may initially show promise in
identifying potential product candidates, yet fail to yield product candidates for clinical
development for a variety of reasons, including:
| |
• |
|
the research methodology used may not be successful in identifying potential product
candidates; |
| |
| |
• |
|
the time, money and other resources that we devote to our research programs may not be
adequate, including as a result of our 2006 cost reduction programs; or |
| |
| |
• |
|
potential product candidates may, on further study, be shown to have harmful side
effects or other characteristics that indicate that they are unlikely to be effective
products. |
In addition, subject to having sufficient cash and other resources to develop or commercialize
additional products, we may seek to in-license or acquire product candidates or approved products.
However, we may be unable to license or acquire suitable product candidates or products from third
parties for a number of reasons. In particular, the licensing and acquisition of pharmaceutical
products is competitive. A number of more established companies are also pursuing strategies to
license or acquire products. These established companies may have a competitive advantage over us
due to their size, cash resources or greater clinical development and commercialization
capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable
product candidates or approved products include the following:
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we may be unable to license or acquire the relevant technology on terms that would
allow us to make an appropriate return from the product; |
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companies that perceive us as a competitor may be unwilling to assign or license their
product rights to us; |
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we may be unable to identify suitable products or product candidates within our areas
of expertise; and |
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we may have inadequate cash resources or may be unable to access public or private
financing to obtain rights to suitable products or product candidates from third parties. |
If we are unable to develop suitable potential product candidates through internal research
programs, sponsored research programs or by obtaining rights from third parties, we will not be
able to increase our revenues in future periods, which could result in significant harm to our
financial position and adversely impact our stock price.
We
face substantial competition. If we are unable to compete
effectively, ZYFLO, ZYFLO CR, PERFOROMIST and
our product candidates may be rendered noncompetitive or obsolete.
The development and commercialization of new drugs is highly competitive. We will face
competition with respect to the development of product candidates and for ZYFLO, ZYFLO CR, and any
other products that we commercialize in the future from pharmaceutical companies, biotechnology
companies, specialty pharmaceutical companies, companies selling low-cost generic substitutes,
academic institutions, government agencies or research institutions. A number of large
pharmaceutical and biotechnology companies currently market and sell products to treat asthma that
compete with ZYFLO and will compete with ZYFLO CR. Many established therapies currently
35
command large market shares in the asthma market, including Merck & Co., Inc.’s
Singulair®, GlaxoSmithKline plc’s Advair® and inhaled corticosteroid
products.
In the severe asthma market, competition results primarily from the therapies developed for
mild to moderate asthma, such as Singulair®, Advair® and inhaled
corticosteroids that are used in combination or as add-on therapies, along with oral and injectable
steroid treatments. One product, Xolair®, developed jointly by Novartis AG, Genentech,
Inc. and Tanox, Inc., was approved in 2004 for severe allergic asthma and had U.S. sales of $427
million in 2006. In addition, we may face competition from pharmaceutical companies seeking to
develop new drugs for the asthma market. For example, in June 2007, AstraZeneca commercially
launched in the United States Symbicort®, a twice-daily asthma therapy combining
budesonide, an inhaled corticosteroid, and formoterol, a long-acting beta2-agonist, which is
expected to compete in the moderate and severe asthma markets.
In the COPD market, PERFOROMIST and zileuton, if we are able to develop it as a treatment for
COPD, will face intense competition. COPD patients are currently treated primarily with a number
of medications that are indicated for COPD, asthma, or both COPD and asthma. The primary products
used to treat COPD are anticholnergics, long-acting beta-agonists and combination long-acting
beta-agonists and inhaled corticosteroids. These medications are delivered in various device
formulations, including meter dose inhalers, dry powder inhalers and by nebulization. Lung
reduction surgery is also an option for COPD patients.
Many therapies for COPD are already well established in the respiratory marketplace, including
Sepracor, Inc.’s Brovana®, GlaxoSmithKline’s Advair® and Serevent® and Spiriva®, a once daily
muscarinic antagonist from Boehringer Ingleheim GmbH and Pfizer. Other novel approaches are also
in development.
In April 2007, Sepracor commercially launched a direct competitor to PERFOROMIST called
Brovana®. Brovana is an isomer of formoterol that is delivered in a nebulized formulation. DEY
has sued Sepracor for infringement of DEY’s patents and Sepracor has counterclaimed.
We are developing an injectable formulation of zileuton, or zileuton injection, for use in
severe acute asthma attacks. We may face intense competition from companies seeking to develop new
drugs for use in severe acute asthma attacks. For example, Merck & Co., Inc. is conducting clinical
trials of an intravenous formulation of its product Singulair®.
If our therapeutic programs directed toward the body’s inflammatory response result in
commercial products, such products will compete predominantly with therapies that have been
approved for diseases such as rheumatoid arthritis, like Amgen, Inc.’s Enbrel®, Johnson
& Johnson’s Remicade®, Bristol-Myers Squibb Company’s Orencia®, Abbott Laboratories’
Humira® and Rituxan® marketed by Biogen Idec Inc. and Genentech, Inc., and diseases such
as sepsis, like Eli Lilly and Company’s Xigris®.
Our competitors’ products may be safer, more effective, more convenient or more effectively
marketed and sold, than any of our products. Many of our competitors have:
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significantly greater financial, technical and human resources than we have and may be
better equipped to discover, develop, manufacture and commercialize products; |
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more extensive experience than we have in conducting preclinical studies and clinical
trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products; |
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competing products that have already received regulatory approval or are in late-stage development; and |
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collaborative arrangements in our target markets with leading companies and research institutions. |
We will face competition based on the safety and effectiveness of our products, the timing and
scope of regulatory approvals, the availability and cost of supply, marketing and sales
capabilities, reimbursement coverage, price, patent position and other factors. Our competitors may
develop or commercialize more effective, safer or more affordable products, or obtain more
effective patent protection, than we are able to. Accordingly, our competitors may commercialize
products more rapidly or effectively than we are able to, which would adversely
36
affect our competitive position, the likelihood that our product candidates will achieve
initial market acceptance and our ability to generate meaningful revenues from our product
candidates. Even if our product candidates achieve initial market acceptance, competitive products
may render our products obsolete or noncompetitive. If our product candidates are rendered
obsolete, we may not be able to recover the expenses of developing and commercializing those
product candidates.
If we are unable to retain key personnel and hire additional qualified management and scientific
personnel, we may not be able to achieve our goals.
We depend on the principal members of our management and scientific staff, including Frank E.
Thomas, our President and Chief Executive Officer, Trevor Phillips, Ph.D., our Chief Operating
Officer and Senior Vice President of Operations, and Dana Hilt, M.D., our Chief Medical Officer and
Senior Vice President of Clinical Development. The loss of any of these individuals’ services would
diminish the knowledge and experience that we, as an organization, possess and might significantly
delay or prevent the achievement of our research, development or commercialization objectives and
could cause us to incur additional costs to recruit replacement executive personnel. We do not
maintain key person life insurance on any of these individuals or any of our other scientific and
management staff.
In 2006, we implemented a new management structure, with a management team that does not
include a chief scientific officer or a chief financial officer, and promoted individuals already
employed by us to assume additional responsibilities. If we are not successful in transitioning our
management staff to compensate for our smaller management team, the achievement of our research,
development and commercialization objectives could be significantly delayed or may not occur. In
addition, our focus on transitioning to our new management structure could divert our management’s
attention from other business concerns. Furthermore, if we decide to recruit new executive
personnel, we will incur additional costs.
Our success depends in large part on our ability to attract and retain qualified scientific,
commercial and management personnel. Any expansion into areas and activities requiring additional
expertise, such as clinical trials, governmental approvals, contract manufacturing and sales and
marketing, will place additional requirements on our management, operational and financial
resources. These demands may require us to hire additional management and scientific personnel and
will require our existing management personnel to develop additional expertise. We face intense
competition for personnel. The failure to attract and retain personnel or to develop such expertise
could delay or halt the research, development, regulatory approval and commercialization of our
product candidates.
We have also experienced turnover on our board of directors. For example, we have had five
directors leave our board and two directors join our board since June 30, 2006. If we are unable
to attract and retain qualified directors, the achievement of our corporate objectives could be
significantly delayed or may not occur.
We have identified a material weakness in our internal control over financial reporting that has
not yet been effectively remediated. Any inability on our part to remediate this material
weakness promptly and effectively, or any material weaknesses in our internal control over
financial reporting that we discover and report in the future, may adversely impact investor
confidence and our stock price.
For the second quarter of 2007, we have identified a material weakness in our internal control
over financial reporting as discussed in Item 4 of this
Quarterly Report on Form 10-Q. A material
weakness in our internal control over financial reporting could result in our inability to
prevent or detect material misstatements in our financial statements. We may not be successful in
promptly and effectively remediating the material weakness. In addition, our management may not be
able to provide an unqualified assessment of our internal control over financial reporting for the
year ending December 31, 2007 or beyond, or be able to provide quarterly certifications that our
disclosure controls and procedures are effective. In addition, our independent registered public
accounting firm may not be able to provide an unqualified opinion on the
effectiveness of our internal control over financial reporting as of December 31,
2007 or beyond. Any material weakness, or any unsuccessful remediation thereof, may harm investor
confidence in the accuracy and completeness of our financial statements, which in turn could harm
our business and could negatively impact our stock price and our ability to raise additional funds
needed for the growth of our business.
37
We will spend considerable time and money complying with Federal and state laws and regulations,
and, if we are unable to fully comply with such laws and regulations, we could face substantial
penalties.
We are subject to extensive regulation by Federal and state governments. The laws that
directly or indirectly affect our business include, but are not limited to, the following:
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Federal Medicare and Medicaid anti-kickback laws, which prohibit persons from knowingly
and willfully soliciting, offering, receiving or providing remuneration, directly or
indirectly, in cash or in kind, to induce either the referral of an individual, or
furnishing or arranging for a good or service, for which payment may be made under Federal
healthcare programs such as the Medicare and Medicaid programs; |
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other Medicare laws and regulations that establish the requirements for coverage and
payment for our products, including the amount of such payments; |
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the Federal False Claims Act, which imposes civil and criminal liability on individuals
and entities who submit, or cause to be submitted, false or fraudulent claims for payment
to the government; |
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the Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,
which prohibits executing a scheme to defraud any healthcare benefit program, including
private payors and, further, requires us to comply with standards regarding privacy and
security of individually identifiable health information and conduct certain electronic
transactions using standardized code sets; |
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the Federal False Statements statute, which prohibits knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially false
statement in connection with the delivery of or payment for healthcare benefits, items or
services; |
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the Federal Food, Drug and Cosmetic Act, which regulates development, manufacturing,
labeling, marketing, distribution and sale of prescription drugs and medical devices; |
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the Federal Prescription Drug Marketing Act of 1987, which regulates the distribution
of drug samples to physicians and other prescribers who are authorized under state law to
receive and dispense drug samples; |
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state and foreign law equivalents of the foregoing; |
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state food and drug laws, pharmacy acts and state pharmacy board regulations, which
govern sale, distribution, use, administration and prescribing of prescription drugs; and |
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state laws that prohibit practice of medicine by non-physicians and fee-splitting
arrangements between physicians and non-physicians, as well as state law equivalents to the
Federal Medicare and Medicaid anti-kickback laws, which may not be limited to government
reimbursed items or services. |
On January 1, 2006, we became a participant in the Medicaid rebate program established by the
Omnibus Budget Reconciliation Act of 1990, as amended, effective in 1993. Under the Medicaid rebate
program, we pay a rebate for each unit of our product reimbursed by Medicaid. The amount of the
rebate for each product is set by law. We are also required to pay certain statutorily defined
rebates on Medicaid purchases for reimbursement on prescription drugs under state Medicaid plans.
Both the Federal government and state governments have initiated investigations into the rebate
practices of many pharmaceutical companies to ensure compliance with these rebate programs. Any
investigation of our rebate practices could be costly, could divert the attention of our management
and could damage our reputation.
If our past or present operations are found to be in violation of any of the laws described
above or other laws or governmental regulations to which we or our customers are subject, we may be
subject to the applicable penalty associated with the violation, including civil and criminal
penalties, damages, fines, exclusion from Medicare and Medicaid programs and curtailment or
restructuring of our operations. Similarly, if our customers are found non-compliant with
applicable laws, they may be subject to sanctions, which could also have a negative impact on us.
In
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addition, if we are required to obtain permits or licenses under these laws that we do not
already possess, we may become subject to substantial additional regulation or incur significant
expense. Any penalties, damages, fines, curtailment or restructuring of our operations would
adversely affect our ability to operate our business and our financial results. Healthcare fraud
and abuse regulations are complex, and even minor irregularities can potentially give rise to
claims of a violation. The risk of our being found in violation of these laws is increased by the
fact that many of them have not been fully interpreted by the regulatory authorities or the courts,
and their provisions are open to a variety of interpretations, and additional legal or regulatory
change.
If our promotional activities fail to comply with the FDA’s regulations or guidelines, we may
be subject to enforcement action by the FDA. For example, we received a warning letter from the FDA
in November 2005 relating to certain promotional material that included an illustration of the
mechanism of action for ZYFLO. The FDA asserted that the promotional material incorporating the
illustration was false or misleading because it presented efficacy claims for ZYFLO, but failed to
contain fair balance by not communicating the risks associated with its use and failing to present
the approved indication for ZYFLO. In response to the warning letter, and as requested by the FDA,
we stopped disseminating the promotional material containing the mechanism of action and we
provided a written response to the FDA. As part of our response, we provided a description of our
plan to disseminate corrective messages about the promotional material to those who received this
material. We revised the promotional material containing the mechanism of action to address the
FDA’s concerns regarding fair balance. If our promotional activities fail to comply with the FDA’s
regulations or guidelines, we could be subject to additional regulatory actions by the FDA,
including product seizure, injunctions, and other penalties and our reputation and the reputation
of ZYFLO in the market could be harmed.
Any action against us for violation of these laws, even if we successfully defend against it,
could cause us to incur significant legal expenses, divert our management’s attention from
operating our business and damage our reputation or our brands. If there is a change in law,
regulation or administrative or judicial interpretations, we may have to change or discontinue our
business practices or our existing business practices could be challenged as unlawful, which could
materially harm our business, financial condition and results of operations.
State pharmaceutical marketing and promotional compliance and reporting requirements may expose
us to regulatory and legal action by state governments or other government authorities.
In recent years, several states, including California, Maine, Minnesota, New Mexico, Nevada,
Vermont and West Virginia, as well as the District of Columbia have enacted legislation requiring
pharmaceutical companies to establish marketing and promotional compliance programs and file
periodic reports with the state on sales, marketing, pricing, reporting pricing and other
activities. For example, a California statute effective July 1, 2005 requires pharmaceutical
companies to adopt and post on their public web site a comprehensive compliance program that
complies with the Pharmaceutical Research and Manufacturers of America Code on Interactions with
Healthcare Professionals and the Office of Inspector General of the Department of Health and Human
Services Compliance Program Guidance for Pharmaceutical Manufacturers. In addition, such compliance
program must establish a specific annual dollar limit on gifts or other items given to individual
healthcare professionals in California.
Maine, Minnesota, New Mexico, Nevada, Vermont, West Virginia and the District of Columbia have
also enacted statutes of varying scope that impose reporting and disclosure requirements upon
pharmaceutical companies pertaining to drug pricing and payments and costs associated with
pharmaceutical marketing, advertising and promotional activities, as well as restrictions upon the
types of gifts that may be provided to healthcare practitioners. Similar legislation is being
considered in a number of other states. Many of these requirements are new and uncertain, and
available guidance is limited. We are in the process of identifying the universe of state laws
applicable to pharmaceutical companies and are taking steps to ensure that we come into compliance
with all such laws. Unless and until we are in full compliance with these laws, we could face
enforcement action and fines and other penalties, and could receive adverse publicity, all of which
could materially harm our business.
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Our corporate compliance and corporate governance programs cannot guarantee that we are in
compliance with all potentially applicable regulations.
The development, manufacturing, pricing, marketing, sales and reimbursement of ZYFLO, ZYFLO CR
and our other product candidates, together with our general operations, are subject to extensive
regulation by Federal, state and other authorities within the United States and numerous entities
outside of the United States. We are a relatively small company and had approximately 58 employees
as of June 30, 2007. We rely heavily on third parties to conduct many important functions. While
we have developed and instituted a corporate compliance program based on what we believe are the
current best practices and continue to update the program in response to newly implemented and
changing regulatory requirements, it is possible that we may not be in compliance with all
potentially applicable regulations. If we fail to comply with any of these regulations, we could be
subject to a range of regulatory actions, including significant fines, litigation or other
sanctions. Any action against us for a violation of these regulations, even if we successfully
defend against it, could cause us to incur significant legal expenses, divert our management’s
attention and harm our reputation.
As a publicly traded company, we are subject to significant legal and regulatory requirements,
including the Sarbanes-Oxley Act of 2002 and related regulations, some of which have either only
recently become applicable to us or are subject to change. For example, we continue to incur
substantial expenses and are devoting significant management time and attention to evaluating our
internal control systems in order to allow our management to report on, and our registered public
accounting firm to attest to, our internal controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. If the controls and procedures that we have implemented do
not comply with all of the relevant rules and regulations of the Securities and Exchange
Commission, or SEC, and The NASDAQ Global Market, we may be subject to sanctions or investigation
by regulatory authorities, including the SEC or The NASDAQ Global Market. This type of action could
adversely affect our financial results or investors’ confidence in our company and our ability to
access the capital markets. If we fail to maintain adequate controls and procedures, we may be
unable to provide the required financial information in a timely and reliable manner, which could
cause a decline in our stock price.
Our sales depend on payment and reimbursement from third-party payors, and a reduction in
payment rate or reimbursement could result in decreased use or sales of our products.
Our sales of ZYFLO are, and sales of ZYFLO CR and our product candidates will be, dependent,
in part, on the availability of reimbursement from third-party payors such as state and Federal
governments, under programs such as Medicare and Medicaid, and private insurance plans. There have
been, there are and we expect there will continue to be, state and Federal legislative and
administrative proposals that could limit the amount that state or Federal governments will pay to
reimburse the cost of pharmaceutical and biologic products. For example, the Medicare Prescription
Drug Improvement and Modernization Act of 2003, or the MMA, was signed into law in December 2003.
Legislative or administrative acts that reduce reimbursement for our products could adversely
impact our business. In addition, we believe that private insurers, such as managed care
organizations, or MCOs, may adopt their own reimbursement reductions in response to legislation.
Any reduction in reimbursement for our products could materially harm our results of operations. In
addition, we believe that the increasing emphasis on managed care in the United States has and will
continue to put pressure on the price and usage of our products, which may adversely impact our
product sales. Furthermore, when a new drug product is approved, governmental and private
reimbursement for that product, and the amount for which that product will be reimbursed, are
uncertain. We cannot predict the availability or amount of reimbursement for our product
candidates, including ZYFLO CR, and current reimbursement policies for marketed products may change
at any time.
The MMA established a prescription drug benefit that became effective in 2006 for all Medicare
beneficiaries. We cannot be certain that ZYFLO CR, or any of our product candidates still in
development, will be included in the Medicare prescription drug benefit. Even if our products are
included, the MCOs, health maintenance organizations, or HMOs, preferred provider organizations, or
PPOs, and private health plans that administer the Medicare drug benefit have the ability to
negotiate price and demand discounts from pharmaceutical and biotechnology companies that may
implicitly create price controls on prescription drugs. On the other hand, the drug benefit may
increase the volume of pharmaceutical drug purchases, offsetting at least in part these potential
price discounts. In addition, MCOs, HMOs, PPOs, healthcare institutions and other government
agencies continue to seek price discounts. Because MCOs, HMOs and PPOs and private health plans
will administer the Medicare drug benefit, managed care and private health plans will influence
prescription decisions for a larger segment of the population. In addition, certain states have
proposed and certain other states have adopted various programs to control prices for senior
40
citizen and drug programs for people with low incomes, including price or patient
reimbursement constraints, restrictions on access to certain products, and bulk purchasing of
drugs.
If we succeed in bringing products in addition to ZYFLO and ZYFLO CR to the market, these
products may not be considered cost effective and reimbursement to the patient may not be available
or sufficient to allow us to sell our product candidates on a competitive basis to a sufficient
patient population. Because our product candidates are in the development stage, we are unable at
this time to determine the cost-effectiveness of these product candidates. We may need to conduct
expensive pharmacoeconomic trials in order to demonstrate their cost-effectiveness. Sales of
prescription drugs are highly dependent on the availability and level of reimbursement to the
consumer from third-party payors, such as government and private insurance plans. These third-party
payors frequently require that drug companies provide them with predetermined discounts or rebates
from list prices, and third-party payors are increasingly challenging the prices charged for
medical products. Because our product candidates are in the development stage, we do not know the
level of reimbursement, if any, we will receive for those product candidates if they are
successfully developed. If the reimbursement we receive for any of our product candidates is
inadequate in light of our development and other costs, our ability to realize profits from the
affected product candidate would be limited. If reimbursement for our marketed products changes
adversely or if we fail to obtain adequate reimbursement for our other current or future products,
health care providers may limit how much or under what circumstances they will prescribe or
administer them, which could reduce use of our products or cause us to reduce the price of our
products.
Our business has a substantial risk of product liability claims. If we are unable to obtain
appropriate levels of insurance, a product liability claim against us could interfere with the
development and commercialization of our product candidates or subject us to unanticipated
damages or settlement amounts.
Our business exposes us to significant potential product liability risks that are inherent in
the development, manufacturing and marketing and sale of drugs. If the use of ZYFLO, ZYFLO CR or
one or more of our other product candidates harms people, we may be subject to costly and damaging
product liability claims. We currently have a $20.0 million annual aggregate limit for insurance
covering both product liability claims for ZYFLO and ZYFLO CR and clinical trial liability claims
for our product candidates. We may seek additional product liability insurance prior to commercial
launch of any of our product candidates still in development. However, our insurance may not
provide adequate coverage against potential liabilities. Furthermore, product liability and
clinical trial insurance is becoming increasingly expensive. As a result, we may be unable to
maintain current amounts of insurance coverage, obtain additional insurance or obtain sufficient
insurance at a reasonable cost to protect against losses that we have not anticipated in our
business plans. Any product liability claim against us, even if we successfully defend against it,
could cause us to incur significant legal expenses, divert our management’s attention and harm our
reputation.
We handle hazardous materials and must comply with laws and regulations, which can be expensive
and restrict how we do business. If we are involved in a hazardous waste spill or other
accident, we could be liable for damages, penalties or other forms of censure.
Our research and development work involves, and any future manufacturing processes that we
conduct may involve, the use of hazardous, controlled and radioactive materials. We are subject to
Federal, state and local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials. Despite precautionary procedures that we implement for handling and
disposing of these materials, we cannot eliminate the risk of accidental contamination or injury.
In the event of a hazardous waste spill or other accident, we could be liable for damages,
penalties or other forms of censure.
In addition, we may be required to incur significant costs to comply with laws and regulations
in the future, or we may be materially and adversely affected by current or future laws or
regulations related to hazardous materials or wastes.
While we have a property insurance policy that covers bio-contamination up to a $25,000
per-occurrence limit and radioactive contamination up to a $25,000 per-occurrence limit, this
policy may not provide adequate coverage against potential losses, damages, penalties or costs
relating to accidental contamination or injury as a result of hazardous, controlled or radioactive
materials.
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Risks Relating to Development, Clinical Testing and Regulatory Approval of Our Product Candidates
If we do not obtain the regulatory approvals or clearances required to market and sell our
product candidates under development, our business may be unsuccessful.
Neither we nor any of our collaborators may market any of our products in the United States,
Europe or in any other country without marketing approval from the FDA or the equivalent foreign
regulatory agency. ZYFLO and, pending commercial launch, ZYFLO CR are currently our only commercial
products and can only be marketed in the United States.
The regulatory process to obtain market approval or clearance for a new drug or biologic takes
many years, requires expenditures of substantial resources, is uncertain and is subject to
unanticipated delays. We have had only limited experience in preparing applications and obtaining
regulatory approvals and clearances. Adverse side effects of a product candidate in a clinical
trial could result in the FDA or foreign regulatory authorities refusing to approve or clear a
particular product candidate for any or all indications for use.
The FDA and foreign regulatory agencies have substantial discretion in the drug approval
process and can deny, delay or limit approval of a product candidate for a variety of reasons. If
we do not receive required regulatory approval or clearance to market any of our product candidates
under development, our ability to generate product revenue and achieve profitability, our
reputation and our ability to raise additional capital will be materially impaired.
If clinical trials for our product candidates are not successful, we may not be able to develop,
obtain regulatory approval for and commercialize these product candidates successfully.
Our product candidates are still in development and remain subject to clinical testing and
regulatory approval or clearance. In order to obtain regulatory approvals or clearances for the
commercial sale of our product candidates, we and our collaborators will be required to complete
extensive clinical trials in humans to demonstrate the safety and efficacy of our product
candidates. We may not be able to obtain authority from the FDA, institutional review boards or
other regulatory agencies to commence or complete these clinical trials. If permitted, such
clinical testing may not prove that our product candidates are safe and effective to the extent
necessary to permit us to obtain marketing approvals or clearances from regulatory authorities. One
or more of our product candidates may not exhibit the expected therapeutic results in humans, may
cause harmful side effects or have other unexpected characteristics that may delay or preclude
submission and regulatory approval or clearance or limit commercial use if approved or cleared.
Furthermore, we, one of our collaborators, institutional review boards, or regulatory agencies may
hold, suspend or terminate clinical trials at any time if it is believed that the subjects or
patients participating in such trials are being exposed to unacceptable health risks or for other
reasons.
For example, in March 2006, we announced that we had discontinued a Phase II clinical trial of
ethyl pyruvate, which we refer to as CTI-01, a small molecule product candidate that we had been
developing for prevention of complications that can occur in patients after cardiopulmonary bypass,
a procedure commonly performed during heart surgery. After reviewing the final data from the trial,
we decided to discontinue further development of CTI-01. Effective February 6, 2007, we terminated
the license agreements between us and the University of Pittsburgh and Xanthus Pharmaceuticals,
Inc., formerly Phenome Sciences, Inc., related to certain patent rights related to CTI-01
controlled by University of Pittsburgh and Xanthus.
Preclinical testing and clinical trials of new drug and biologic candidates are lengthy and
expensive and the historical failure rate for such candidates is high. We may not be able to
advance any more product candidates into clinical trials. Even if we do successfully enter into
clinical trials, the results from preclinical testing of a product candidate may not predict the
results that will be obtained in human clinical trials. In addition, positive results demonstrated
in preclinical studies and clinical trials that we complete may not be indicative of results
obtained in additional clinical trials. Clinical trials may take several years to complete, and
failure can occur at any stage of testing.
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Adverse or inconclusive clinical trial results concerning any of our product candidates could
require us to conduct additional clinical trials, result in increased costs and significantly delay
the submission for marketing approval or clearance for such product candidates with the FDA or
other regulatory authorities or result in a submission or approval for a narrower indication. If
clinical trials fail, our product candidates would not become commercially viable. In particular,
if our Phase IV clinical trial for ZYFLO CR that we initiated in July 2007 fails or produces
results that are adverse or inconclusive, our ability to increase sales of ZYFLO CR following
commercial launch and our financial results could be materially and adversely affected.
If clinical trials for our product candidates are delayed, we would be unable to commercialize
our product candidates on a timely basis, which would require us to incur additional costs and
delay the receipt of any revenues from product sales.
We cannot predict whether we will encounter problems with any of our completed, ongoing or
planned clinical trials that will cause regulatory authorities, institutional review boards or us
to delay or suspend those clinical trials, or delay the analysis of data from our ongoing clinical
trials.
Any of the following could delay the completion of our ongoing and planned clinical trials:
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ongoing discussions with the FDA or comparable foreign authorities regarding the scope
or design of our clinical trials; |
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delays or the inability to obtain required approvals from institutional review boards
or other governing entities at clinical sites selected for participation in our clinical
trials; |
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delays in enrolling patients and volunteers into clinical trials; |
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lower than anticipated retention rates of patients and volunteers in clinical trials; |
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the need to repeat clinical trials as a result of inconclusive or negative results or poorly executed testing; |
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insufficient supply or deficient quality of product candidate materials or other
materials necessary to conduct our clinical trials; |
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unfavorable FDA inspection and review of a clinical trial site or records of any
clinical or preclinical investigation; |
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serious and unexpected drug-related side effects experienced by participants in ongoing
or past clinical trials for the same or a different indication; |
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serious and unexpected drug-related side effects observed during ongoing or past preclinical studies; or |
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the placement of a clinical hold on a trial. |
Our ability to enroll patients in our clinical trials in sufficient numbers and on a timely
basis will be subject to a number of factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites, the seasonality of the
disease, the availability of effective treatments for the relevant disease, competing trials with
other product candidates and the eligibility criteria for the clinical trial. Delays in patient
enrollment can result in increased costs and longer development times. In addition, subjects may
drop out of our clinical trials and thereby impair the validity or statistical significance of the
trials.
We expect to rely on academic institutions and clinical research organizations to supervise or
monitor some or all aspects of the clinical trials for the product candidates we advance into
clinical testing. Accordingly, we have less control over the timing and other aspects of these
clinical trials than if we conducted them entirely on our own.
As a result of these factors, we or third parties on whom we rely may not successfully begin
or complete our clinical trials in the time periods we have forecasted, if at all. If the results
of our ongoing or planned clinical trials
43
for our product candidates are not available when we expect or if we encounter any delay in
the analysis of data from our preclinical studies and clinical trials, we may be unable to submit
for regulatory approval or clearance or conduct additional clinical trials on the schedule we
currently anticipate.
If clinical trials are delayed, the commercial viability of our product candidates may be
reduced. If we incur costs and delays in our programs, or if we do not successfully develop and
commercialize our products, our future operating and financial results will be materially affected.
Even if we obtain regulatory approvals or clearances, our products and product candidates will
be subject to ongoing regulatory requirements and review. If we fail to comply with continuing
U.S. and applicable foreign regulations, we could lose permission to manufacture and distribute
our products and the sale of our product candidates could be suspended.
Our products and product candidates are subject to continuing regulatory review after
approval, including the review of spontaneous adverse drug experiences and clinical results from
any post-market testing required as a condition of approval that are reported after our product
candidates become commercially available. The manufacturer and the manufacturing facilities we use
to make any of our product candidates will also be subject to periodic review and inspection by the
FDA. The subsequent discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on the product or manufacturer or facility, including
withdrawal of the product from the market. Our product promotion and advertising will also be
subject to regulatory requirements and continuing FDA review.
Numerous proposals have been made in recent months and years to impose new requirements on
drug approvals, expand post-approval requirements, and restrict sales and promotional activities.
For example, a new drug application, or NDA, requires that an applicant submit risk evaluation and
minimization plans to monitor and address potential safety issues for products upon approval, and
federal legislation has been proposed that would require all new drug applicants to submit risk
evaluation and minimization plans to monitor and address potential safety issues for products upon
approval, grant the FDA the authority to impose risk management measures for marketed products and
to mandate labeling changes in certain circumstances, and establish new requirements for disclosing
the results of clinical trials. Additional measures have also been proposed to address perceived
shortcomings in the FDA’s handling of drug safety issues, and to limit pharmaceutical company sales
and promotional practices that some see as excessive or improper. If these or other legal or
regulatory changes are enacted, it may become more difficult or burdensome for us to obtain
extended or new product approvals, and our current approvals may be restricted or subject to
onerous post-approval requirements. Such changes may increase our costs and adversely affect our
operations. The ability of us or our partners to commercialize approved products successfully may
be hindered, and our business may be harmed as a result.
If we or our third-party manufacturers or service providers fail to comply with applicable laws
and regulations, we or they could be subject to enforcement actions, which could adversely
affect our ability to market and sell our product candidates and may harm our reputation.
If we or our third-party manufacturers or service providers fail to comply with applicable
Federal, state or foreign laws or regulations, we could be subject to enforcement actions, which
could adversely affect our ability to develop, market and sell our product candidates successfully
and could harm our reputation and hinder market acceptance of our product candidates. These
enforcement actions include:
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product seizures; |
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voluntary or mandatory recalls; |
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suspension of review or refusal to approve pending applications; |
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voluntary or mandatory patient or physician notification; |
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withdrawal of product approvals; |
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restrictions on, or prohibitions against, marketing our product candidates; |
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restrictions on applying for or obtaining government bids; |
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fines; |
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restrictions on importation of our product candidates; |
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injunctions; and |
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civil and criminal penalties. |
Risks Relating to Our Dependence on Third Parties
We will depend on DEY to jointly promote and market ZYFLO and ZYFLO CR. This co-promotion
arrangement may not be successful.
We are relying on DEY to jointly promote and market ZYFLO and ZYFLO CR. Pending commercial
launch of ZYFLO CR, ZYFLO is our only commercially marketed product, and it has not achieved broad
market acceptance. Our sales force has not been successful to date in significantly expanding the
market for ZYFLO. As a result, our ability to generate meaningful near-term revenues from product
sales is substantially dependent on the success of our co-promotion arrangement with DEY. DEY
initiated promotional detailing activities for ZYFLO on April 30, 2007, and we expect that DEY will
initiate promotional detailing activities for ZYFLO CR in the fall of 2007.
Beginning three years after the commercial launch of ZYFLO CR, DEY may terminate the
co-promotion agreement with six months advance written notice. If the commercial launch of ZYFLO CR
is delayed beyond May 31, 2008, DEY has the right to terminate the co-promotion agreement on or
before July 1, 2008 by providing written notice, which will be effective 60 days after receipt by
us. If DEY exercises this termination right, we will be obligated to pay DEY $2.0 million. In
addition, DEY has the right to terminate the co-promotion agreement with two-months prior written
notice if ZYFLO CR cumulative net sales for any four consecutive calendar quarters after commercial
launch of ZYFLO CR are less than $25 million. Each party has the right to terminate the
co-promotion agreement upon the occurrence of a material uncured breach by the other party. Both we
and DEY have agreed to use diligent efforts to promote the applicable products in the United States
during the term of the co-promotion agreement. In particular, both we and DEY have agreed to
provide a minimum number of details per month for ZYFLO and ZYFLO CR. If DEY were to terminate or
breach the co-promotion agreement, and we were unable to enter into a similar co-promotion
agreement with another qualified party in a timely manner or devote sufficient financial resources
or capabilities to independently promoting and marketing ZYFLO or ZYFLO CR, our sales of ZYFLO and
ZYFLO CR would be limited and we would not be able to generate significant revenues from product
sales. In addition, DEY may choose not to devote time, effort or resources to the promotion and
marketing of ZYFLO or ZYFLO CR beyond the minimum required by the terms of the co-promotion
agreement. Any decision not to devote sufficient resources to the co-promotion arrangement or any
future reduction in efforts under the co-promotion arrangement would limit our ability to generate
significant revenues from product sales.
DEY is a subsidiary of Merck KGaA. Merck KGaA has publicly announced that it is selling its
generic business, of which DEY is a part, to Mylan Laboratories Inc. in a transaction expected to
close in the second half of 2007. We cannot predict what impact Merck KGaA’s consummation of the
sale of its generic business may have on our co-promotion arrangement with DEY.
We depend on MedImmune and Beckman Coulter and expect to depend on additional collaborators in
the future for a portion of our revenues and to develop, conduct clinical trials with, obtain
regulatory approvals for, and manufacture, market and sell some of our product candidates. These
collaborations may not be successful.
We are relying on MedImmune, Inc., a wholly-owned subsidiary of AstraZeneca PLC, to fund the
development of and to commercialize product candidates in our HMGB1 program. We are relying on
Beckman Coulter to fund
45
the development and to commercialize diagnostics in our HMGB1 program. All of our revenues
prior to October 2005, when we commercially launched ZYFLO, were derived from our collaboration
agreements with MedImmune and Beckman Coulter. Additional payments due to us under the
collaboration agreements with MedImmune and Beckman Coulter are generally based on our achievement
of specific development and commercialization milestones that we may not meet. In addition, the
collaboration agreements entitle us to royalty payments that are based on the sales of products
developed and marketed through the collaborations. These future royalty payments may not
materialize or may be less than expected if the related products are not successfully developed or
marketed or if we are forced to license intellectual property from third parties. Accordingly, we
cannot predict if our collaborations with MedImmune and Beckman Coulter will continue to generate
revenues for us.
Our collaboration agreement with MedImmune generally is terminable by MedImmune at any time
upon six months’ notice or upon our material uncured breach of the agreement. Under the
collaboration agreement, we are obligated to use commercially reasonable, good faith efforts to
conduct the collaboration in accordance with rolling three-year research plans that describe and
allocate between MedImmune and us responsibility for, among other things, the proposed research,
preclinical studies, toxicology formulation activities and clinical studies for that time period.
In addition, we and MedImmune agreed to work exclusively in the development and commercialization
of HMGB1-inhibiting products for a period of four years, and, after such time, we have agreed to
work exclusively with MedImmune in the development of HMGB1-inhibiting products for the remaining
term of the agreement. If MedImmune were to terminate or breach our arrangement, and we were unable
to enter into a similar collaboration agreement with another qualified third party in a timely
manner or devote sufficient financial resources or capabilities to continue development and
commercialization on our own, the development and commercialization of our HMGB1 program likely
would be delayed, curtailed or terminated. The delay, curtailment or termination of our HMGB1
program could significantly harm our future prospects. We intend to enter into collaboration
agreements with other parties in the future that relate to other product candidates, and we are
likely to have similar risks with regard to any such future collaborations.
Our license agreement with Beckman Coulter generally is terminable by Beckman Coulter on
90-days written notice. Each party has the right to terminate the license agreement upon the
occurrence of a material uncured breach by the other party. If Beckman Coulter were to terminate or
breach our arrangement, and we were unable to enter into a similar agreement with another qualified
third party in a timely manner or devote sufficient financial resources or capabilities to continue
development and commercialization on our own, the development and commercialization of a diagnostic
based on the detection of HMGB1 likely would be delayed, curtailed or terminated.
In addition, our collaborations with MedImmune and Beckman Coulter and any future
collaborative arrangements that we enter into with third parties may not be scientifically or
commercially successful. Factors that may affect the success of our collaborations include the
following:
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our collaborators may be pursuing alternative technologies or developing alternative
products, either on their own or in collaboration with others, that may be competitive with
the product on which they are collaborating with us or that could affect our collaborators’
commitment to us; |
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reductions in marketing or sales efforts or a discontinuation of marketing or sales of
our products by our collaborators would reduce our revenues, which we expect will be based
on a percentage of net sales by collaborators; |
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our collaborators may terminate their collaborations with us, which could make it
difficult for us to attract new collaborators or adversely affect how we are perceived in
the business and financial communities; |
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our collaborators may not devote sufficient time and resources to any collaboration
with us, which could prevent us from realizing the potential commercial benefits of that
collaboration; and |
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our collaborators may pursue higher priority programs or change the focus of their
development programs, which could affect their commitments to us. |
In June 2007, AstraZeneca PLC completed its acquisition of MedImmune and MedImmune became a
wholly-owned subsidiary of AstraZeneca. We cannot predict what impact this transaction may have on
our HMGB1
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collaboration with MedImmune. If MedImmune does not devote sufficient time and resources to
our collaboration or changes the focus of its programs, it could delay or prevent the achievement
of clinical, regulatory and commercial milestones and prevent us from realizing the potential
commercial benefits of the collaboration.
IMI may not be successful in developing a product under the patent rights and know-how that we
licensed to IMI relating to the mechanical and electrical stimulation of the vagus nerve.
We have licensed to Innovative Metabolics, Inc., or IMI, patent rights and know-how relating
to the mechanical and electrical stimulation of the vagus nerve. We are not involved in IMI’s
efforts to develop and commercialize a medical device based on the intellectual property that we
licensed to IMI. We will receive additional payments under the IMI license only if IMI is
successful in achieving full regulatory approval of such a device or receives a royalty, fee or
other payment from a third party in connection with a sublicense of its rights under our license
agreement.
We rely on third parties to manufacture and supply the zileuton API, ZYFLO, ZYFLO CR and our
product candidates. We expect to continue to rely on these sole source suppliers for these
purposes and would incur significant costs to independently develop manufacturing facilities.
We have no manufacturing facilities and limited manufacturing experience. In order to continue
to commercialize ZYFLO and ZYFLO CR, develop product candidates, apply for regulatory approvals and
commercialize our product candidates, we need to develop, contract for or otherwise arrange for the
necessary manufacturing capabilities. We expect to continue to rely on third parties for production
of the zileuton API, commercial supplies of ZYFLO and ZYFLO CR and preclinical and clinical
supplies of our product candidates. These third parties are currently our sole source suppliers,
and we expect to continue to rely on them for these purposes for the foreseeable future.
We have contracted with Shasun Pharma Solutions Ltd. for commercial production of the zileuton
API, subject to specified limitations, through December 31, 2010. Zileuton API is used in our two
FDA-approved oral zileuton products, ZYFLO and ZYFLO CR, as well as in our zileuton injectable
product candidate. Our only source of supply for zileuton API is
Shasun, which manufactures the
zileuton API in the United Kingdom. We then ship zileuton API to a third-party warehouse in the
United States. The manufacturing process for the zileuton API involves an exothermic reaction that
generates heat and, if not properly controlled by the safety and protection mechanisms in place at
the manufacturing sites, could result in unintended combustion of the product. The manufacture of
the zileuton API could be disrupted or delayed if a batch is discontinued or damaged, if the
manufacturing sites are damaged, or if local health and safety regulations require a third-party
manufacturer to implement additional safety procedures or cease production. In addition, there is
only one qualified supplier of a chemical known as 2-ABT, which is one of the starting materials
for zileuton, and if that manufacturer stops manufacturing 2-ABT, is unable to manufacture 2-ABT or
is unwilling to manufacture 2-ABT on commercially reasonable terms or at all, Shasun may be unable
to manufacture ZYFLO and ZYFLO CR.
We have contracted with SkyePharma PLC, through its subsidiary Jagotec AG, for the manufacture
of tablets of ZYFLO CR for clinical trials and regulatory review and,
subject to negotiating a manufacturing agreement, the manufacture of tablet
cores for ZYFLO CR for commercial sale. Our only source of supply for
the core tablets of ZYFLO CR is
SkyePharma, which manufactures the core tablets in France. The manufacture of the core tablets for
ZYFLO CR could be disrupted or delayed if one or more batches are discontinued or damaged or if the
manufacturing site were damaged or destroyed. In January 2007, following a decision to concentrate
on oral and pulmonary products, SkyePharma announced that it had reached an agreement for the sale
of its injectable business. If SkyePharma sells all or a part of its remaining business or the
manufacturing site for the core tablets of ZYFLO CR, our ability to produce ZYFLO CR may be
impaired.
We have contracted with Patheon Pharmaceuticals Inc. for the manufacture of commercial
supplies of ZYFLO tablets. We have also contracted with Patheon to coat and package the core
tablets of ZYFLO CR for commercial supplies. Patheon is currently our only source of finished
ZYFLO CR tablets. The manufacture of the finished ZYFLO CR tablets could be disrupted or delayed if
one or more batches are discontinued or damaged or if the manufacturing site were damaged or
destroyed.
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We are dependent upon Shasun, Patheon and SkyePharma as sole providers, and will be dependent
on any other third parties who manufacture our product candidates, to perform their obligations in
a timely manner and in accordance with applicable government regulations. For example, during the
quarter ended June 30, 2006, one of our contract manufacturers failed to meet our manufacturing
specifications relating to certain manufacturing batches of ZYFLO. If third-party manufacturers
with whom we contract fail to perform their obligations, we may be adversely affected in a number
of ways, including the following:
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we may not be able to meet commercial demands for ZYFLO or ZYFLO CR; |
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we may be required to cease distribution or issue recalls; |
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we may not be able to initiate or continue clinical trials of our product candidates
that are under development; and |
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we may be delayed in submitting applications for regulatory approvals for our product
candidates. |
If Shasun, Patheon or SkyePharma experiences any significant difficulties in their respective
manufacturing processes for our products including the zileuton API, ZYFLO CR core tablets or
finished product for ZYFLO or ZYFLO CR, we could experience significant interruptions in the supply
of ZYFLO and ZYFLO CR. Our inability to coordinate the efforts of our third party manufacturing
partners, or the lack of capacity or the scheduling of manufacturing sufficient for our needs at
our third party manufacturing partners, could impair our ability to supply ZYFLO CR and ZYFLO at
required levels. Such an interruption could cause us to incur
substantial costs and impair our ability to
generate revenue from ZYFLO and ZYFLO CR may be adversely affected.
In particular, our ability to commercially launch ZYFLO CR depends on
having a sufficient supply of ZYFLO CR on hand.
The
zileuton API is manufactured in United Kingdom by Shasun, and we ship the zileuton API to a
third-party warehouse in the United States. For the manufacture of ZYFLO, we ship zileuton API to
Patheon in Ohio for manufacturing, finishing, packaging and labeling. For the manufacture of ZYFLO
CR, we ship zileuton API from the United States to France for manufacturing of core tablets by
SkyePharma and we ship core tablets from France to the United States to be coated, packaged and
labeled at Patheon. While in transit, our zileuton API and ZYFLO CR core tablets, each shipment of
which is of significant value, could be lost or damaged. Moreover, at any time after shipment from
Shasun, our zileuton API, which is stored in the United States at third-party warehouse, or our
ZYFLO CR core tablets, which are stored at Patheon prior to coating
and packaging, and our finished
ZYFLO and ZYFLO CR products, which are stored at our third party logistics provider, Integrated
Commercialization Solutions, Inc., or ICS, could be lost or suffer damage which would render them
unusable. We have attempted to take appropriate risk mitigation steps and to obtain transit
insurance. However, depending on when in the process the zileuton API, ZYFLO CR core tablets or
finished product is lost or damaged, we may have limited recourse for recovery against our
manufacturers or insurers. As a result, our financial performance could be impacted by any such
loss or damage to our zileuton API, ZYFLO CR core tablets or finished product.
We may not be able to enter
into alternative supply arrangements at commercially acceptable
rates, if at all. If we were required to change manufacturers for the zileuton API, ZYFLO or ZYFLO CR, we would
be required to verify that the new manufacturer maintains facilities and procedures that comply
with quality standards and all applicable regulations and guidelines, including FDA requirements
and approved NDA product specifications. In addition, we would be required to conduct additional
clinical bioequivalence trials to demonstrate that ZYFLO CR manufactured by the new manufacturer is
equivalent to ZYFLO CR manufactured by our current manufacturer. Any delays associated with the
verification of a new manufacturer or conducting additional clinical bioequivalence trials could
adversely affect our production schedule or increase our production costs.
We have not secured a long-term commercial supply arrangement for any of our product
candidates other than the zileuton API. The manufacturing process for our product candidates is an
element of the FDA approval process. We will need to contract with manufacturers who can meet the
FDA requirements, including current Good Manufacturing Practices, on an ongoing basis. In
addition, if we receive the necessary regulatory approval for our product candidates, we also
expect to rely on third parties, including our collaborators, to produce materials required for
commercial production. We may experience difficulty in obtaining adequate manufacturing capacity or
timing for our needs. If we are unable to obtain or maintain contract manufacturing of these
product candidates, or to do so
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on commercially reasonable terms, we may not be able to develop and commercialize our product
candidates successfully.
Any failure to manage and maintain our distribution network could compromise sales of ZYFLO and
ZYFLO CR and harm our business.
We will continue to rely on third parties to distribute ZYFLO and, following commercial
launch, ZYFLO CR to pharmacies. We have contracted with ICS, a third-party logistics company, to warehouse and distribute ZYFLO and, upon
commercial launch ZYFLO CR, to three primary wholesalers, AmerisourceBergen Corporation, Cardinal
Health and McKesson Corporation, and a number of smaller wholesalers. ICS is our exclusive supplier
of commercial distribution logistics services. The wholesalers in turn distribute to chain and
independent pharmacies. Sales to AmerisourceBergen Corporation, Cardinal Health and McKesson
Corporation collectively accounted for at least 75% of our annual billings for ZYFLO during 2006.
The loss of any of these wholesaler customers’ accounts or a material reduction in their purchases
could harm our business, financial condition and results of operations.
We expect to continue to rely on Phoenix Marketing Group LLC to distribute product samples to
our sales representatives, who in turn distribute samples to physicians and other prescribers who
are authorized under state law to receive and dispense samples. We contracted with RxHope, Inc. to
implement and administer our patient assistance program for ZYFLO. We expect to rely on RxHope to
administer our patient assistance program and to distribute ZYFLO and, upon commercial launch ZYFLO
CR, to physicians and other prescribers who are authorized under state law to receive and dispense
samples.
This distribution network requires significant coordination with our supply chain, sales and
marketing and finance organizations. Failure to maintain our contracts with our logistics company,
the wholesalers, Phoenix and RxHope, or the inability or failure of any of them to adequately
perform as agreed under their respective contracts with us, could negatively impact us. We do not
have our own warehouse or distribution capabilities, we lack the resources and experience to
establish any of these functions and we do not intend to establish these functions in the
foreseeable future. If we were unable to replace ICS, AmerisourceBergen, Cardinal, McKesson,
Phoenix or RxHope in a timely manner in the event of a natural disaster, failure to meet FDA and
other regulatory requirements, business failure, strike or any other difficulty affecting any of
them, the distribution of ZYFLO and ZYFLO CR could be delayed or interrupted, which would damage
our results of operations and market position. Failure to coordinate financial systems could also
negatively impact our ability to accurately report and forecast product sales and fulfill our
regulatory obligations. If we are unable to effectively manage and maintain our distribution
network, sales of ZYFLO and ZYFLO CR could be severely compromised and our business could be
harmed.
If we are unable to enter into additional collaboration agreements, we may not be able to
continue development of our product candidates.
Our drug development programs and potential commercialization of our product candidates will
require substantial additional cash to fund expenses to be incurred in connection with these
activities. We may seek to enter into additional collaboration agreements with pharmaceutical
companies to fund all or part of the costs of drug development and commercialization of product
candidates. For example, we have determined to seek to enter into a collaboration arrangement with
respect to the development of our alpha-7 product candidate. We do not plan to proceed with
clinical development of our alpha-7 product candidate without entering into such an arrangement. We
face, and will continue to face, significant competition in seeking appropriate collaborators.
Moreover, collaboration agreements are complex and time consuming to negotiate, document and
implement. We may not be able to enter into future collaboration agreements, and the terms of the
collaboration agreements, if any, may not be favorable to us. If we are not successful in efforts
to enter into a collaboration arrangement with respect to a product candidate, we may not have
sufficient funds to develop any of our product candidates internally. If we do not have sufficient
funds to develop our product candidates, we will not be able to bring these product candidates to
market and generate revenue. In addition, our inability to enter into collaboration agreements
could delay or preclude the development, manufacture and/or commercialization of a product
candidate and could have a material adverse effect on our financial condition and results of
operations because:
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we may be required to expend our own funds to advance the product candidate to commercialization; |
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revenue from product sales could be delayed; or |
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we may elect not to commercialize the product candidate. |
We plan to rely significantly on third parties to market some product candidates, and these
third parties may not successfully commercialize these product candidates.
For product candidates with large target physician markets, we plan to rely significantly on
sales, marketing and distribution arrangements with third parties. For example, we plan to rely on
MedImmune for the commercialization of any anti-HMGB1 products that we develop and we plan to rely
on Beckman Coulter for the commercialization of any diagnostic assay for HMGB1. We may not be
successful in entering into additional marketing arrangements in the future and, even if
successful, we may not be able to enter into these arrangements on terms that are favorable to us.
In addition, we may have limited or no control over the sales, marketing and distribution
activities of these third parties. If these third parties are not successful in commercializing the
products covered by these arrangements, our future revenues may suffer.
Risks Relating to Intellectual Property and Licenses
If we or our licensors are not able to obtain and enforce patent and other intellectual property
protection for our discoveries or discoveries we have in-licensed, our ability to prevent third
parties from using our inventions and proprietary information will be limited and we may not be
able to operate our business profitably.
Our success depends, in part, on our ability to protect proprietary products, methods and
technologies that we invent, develop or license under the patent and other intellectual property
laws of the United States and other countries, so that we can prevent others from using our
inventions and proprietary information. The composition of matter patent for zileuton in the United
States will expire in 2010. The patent for ZYFLO CR, which relates only to the controlled-release
technology used to control the release of zileuton, will expire in 2012. We are exploring
strategies to extend and expand the patent protection for our zileuton products, but we may not be
able to obtain additional patent protection.
Because certain U.S. patent applications are confidential until patents issue, such as
applications filed prior to November 29, 2000, or applications filed after such date that will not
be filed in foreign countries and for which a request for non-publication is filed, and because
even patent applications for which no request for non-publication is made are not published until
approximately 18 months after filing, third parties may have already filed patent applications for
technology covered by our pending patent applications, and our patent applications may not have
priority over any such patent applications of others. There may also be prior art that may prevent
allowance of our patent applications or enforcement of our or our licensors’ issued patents.
Our patent strategy depends on our ability to rapidly identify and seek patent protection for
our discoveries. This process is expensive and time consuming, and we may not be able to file and
prosecute all necessary or desirable patent applications at a reasonable cost or in a timely or
successful manner. Moreover, the mere issuance of a patent does not guarantee that it is valid or
enforceable. As a result, even if we obtain patents, they may not be valid or enforceable against
third parties.
Our pending patent applications and those of our licensors may not result in issued patents.
In addition, the patent positions of pharmaceutical or biotechnology companies, including ours, are
generally uncertain and involve complex legal and factual considerations. The standards that the
U.S. Patent and Trademark Office and its foreign counterparts use to grant patents are not always
applied predictably or uniformly and can change. There is also no uniform, worldwide policy
regarding the subject matter and scope of claims granted or allowable in pharmaceutical or
biotechnology patents. Accordingly, we do not know the degree of future protection for our
proprietary rights or the breadth of claims that will be allowed in any patents issued to us or to
others with respect to our products in the future.
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We also rely on trade secrets, know-how and technology, which are not protected by patents, to
maintain our competitive position. If any trade secret, know-how or other technology not protected
by a patent were to be disclosed to, or independently developed by a competitor, any competitive
advantage that we may have had in the development or commercialization of our product candidates
would be minimized or eliminated.
Our confidentiality agreements with our collaborators, employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors may not effectively prevent
disclosure of our confidential information and may not provide an adequate remedy in the event of
unauthorized disclosure of confidential information. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or
maintain trade secret protection could adversely affect our competitive business position.
Litigation regarding patents, patent applications and other proprietary rights is expensive and
time consuming. If we are unsuccessful in litigation or other adversarial proceedings concerning
patents or patent applications, we may not be able to protect our products from competition or
we may be precluded from selling our products. If we are involved in such litigation, it could
cause delays in, or prevent us from, bringing products to market and harm our ability to
operate.
Our success will depend in part on our ability to uphold and enforce the patents or patent
applications owned or co-owned by us or licensed to us that cover our products and product
candidates. Litigation, interferences or other adversarial proceedings relating to our patents or
patent applications could take place in the United States’ or foreign courts or in the United
States’ or foreign patent offices or other administrative agencies. Proceedings involving our
patents or patent applications could result in adverse decisions regarding:
| |
• |
|
the patentability of our applications, including those relating to our products; or |
| |
| |
• |
|
the enforceability, validity or scope of protection offered by our patents, including
those relating to our products. |
These proceedings are costly and time consuming. We may not have sufficient resources to bring
these actions or to bring such actions to a successful conclusion. Even if we are successful in
these proceedings, we may incur substantial cost and divert time and attention of our management
and scientific personnel in pursuit of these proceedings, which could have a material adverse
effect on our business.
If it is determined that we do infringe a patent right of another, we may be required to seek
a license, defend an infringement action or challenge the validity of the patent in court. In
addition, if we are not successful in infringement litigation brought against us and we do not
license or develop non-infringing technology, we may:
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• |
|
incur substantial monetary damages, potentially including treble damages, if we are
found to have willfully infringed on such parties’ patent rights; |
| |
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• |
|
encounter significant delays in bringing our product candidates to market; or |
| |
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• |
|
be precluded from participating in the manufacture, use or sale of our products or methods of treatment. |
If any parties should successfully claim that our creation or use of proprietary technologies
infringes upon their intellectual property rights, we might be forced to pay damages. In addition
to any damages we might have to pay, a court could require us to stop the infringing activity.
Moreover, any legal action against us or our collaborators claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in addition to
subjecting us to potential liability for damages, require us or our collaborators to obtain a
license in order to continue to manufacture or market the affected products and processes. Any such
required license may not be made available on commercially acceptable terms, if at all. In
addition, some licenses may be non-exclusive and, therefore, our competitors may have access to the
same technology licensed to us.
If we fail to obtain a required license or are unable to design around a patent, we may be
unable to effectively market some of our technology or products, which could limit our ability to
generate revenues or achieve profitability and possibly prevent us from generating revenue
sufficient to sustain our operations. In addition, our
51
MedImmune collaboration provides that a portion of the royalties payable to us by MedImmune
for licenses to our intellectual property may be offset by amounts paid by MedImmune to third
parties who have competing or superior intellectual property positions in the relevant fields,
which could result in significant reductions in our revenues.
Some of our competitors may be able to sustain the costs of complex intellectual property
litigation more effectively than we can because they have substantially greater resources.
Uncertainties resulting from the initiation and continuation of any litigation could limit our
ability to continue our operations.
We in-license a significant portion of our principal proprietary technologies, and if we fail to
comply with our obligations under any of the related agreements, we could lose license rights
that are necessary to develop and market our zileuton products, our HMGB1 products and our other
product candidates.
We are a party to a number of licenses that give us rights to third-party intellectual
property that is necessary for our business. In fact, we acquired the rights to each of our product
candidates under licenses with third parties. These licenses impose various development,
commercialization, funding, royalty, diligence and other obligations on us. If we breach these
obligations, our licensors may have the right to terminate the licenses or render the licenses
non-exclusive, which would result in our being unable to develop, manufacture and sell products
that are covered by the licensed technology, or at least to do so on an exclusive basis.
Risks Relating to Our Financial Results and Need for Additional Financing
We have incurred losses since inception and we anticipate that we will continue to incur losses
for the foreseeable future. If we do not generate significant revenues, we will not be able to
achieve profitability.
We have experienced significant operating losses in each year since our inception in 2000. We
had net losses of $17.6 million in the six months ended June 30, 2007 and net losses of $48.8 million
in the year ended December 31, 2006. As of June 30, 2007, we had an accumulated deficit of
approximately $172.0 million. For the quarter ended June 30, 2007, we recorded $2.3 million of
revenue from the sale of ZYFLO and have not recorded revenue from any other product. We expect
that we will continue to incur substantial losses for the foreseeable future as we spend
significant amounts to fund our research, development and commercialization efforts. We expect that
the losses that we incur will fluctuate from quarter to quarter and that these fluctuations may be
substantial. We will need to generate significant revenues to achieve profitability. Until we are
able to generate such revenues, we will not be profitable and will need to raise substantial
additional capital to fund our operations.
We will require substantial additional capital to fund our operations. If additional capital is
not available, we may need to delay, limit or eliminate our development and commercialization
processes.
We expect to devote substantial resources to support the anticipated commercial launch of
ZYFLO CR, to fund addition clinical trials on ZYFLO CR and to fund the development of our other
product candidates. Our funding requirements will depend on numerous factors, including:
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• |
|
the timing and costs of the commercial launch of ZYFLO CR; |
| |
| |
• |
|
the scope, costs and results of our clinical trials on ZYFLO CR and zileuton injection; |
| |
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• |
|
the amount and timing of sales and returns of ZYFLO and ZYFLO CR; |
| |
| |
• |
|
the costs of ongoing sales, marketing and manufacturing activities for ZYFLO and ZYFLO CR; |
| |
| |
• |
|
the time and costs involved in preparing, submitting, obtaining and maintaining
regulatory approvals for our other product candidates; |
| |
| |
• |
|
the timing, receipt and amount of milestone and other payments, if any, from DEY,
MedImmune, Beckman Coulter, Innovative Metabolics or future collaborators or licensees; |
| |
| |
• |
|
the timing, receipt and amount of sales and royalties, if any, from our potential
products; |
52
| |
• |
|
continued progress in our research and development programs, as well as the magnitude
of these programs, including milestone payments to third parties under our license
agreements; |
| |
| |
• |
|
the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; |
| |
| |
• |
|
the cost of obtaining and maintaining licenses to use patented technologies; |
| |
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• |
|
potential acquisition or in-licensing of other products or technologies; |
| |
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• |
|
our ability to establish and maintain additional collaborative or co-promotion arrangements; and |
| |
| |
• |
|
the ongoing time and costs involved in corporate governance requirements, including
work related to compliance with the Sarbanes-Oxley Act of 2002. |
Other than payments that we receive from our collaborations with DEY and MedImmune, we expect that sales of
ZYFLO will represent our only source of revenue until we commercially launch ZYFLO CR. We believe
that our ability to access external funds will depend upon market acceptance of ZYFLO CR, market
acceptance of ZYFLO, the success of our other preclinical and clinical development programs, the
receptivity of the capital markets to financings by biopharmaceutical companies, our ability to
enter into additional strategic collaborations with corporate and academic collaborators and the
success of such collaborations.
The extent of our future capital requirements is difficult to assess and will depend largely
on our ability to obtain regulatory approval for and successfully commercialize ZYFLO CR and to
sell ZYFLO. Based on our operating plans, we believe that our available cash and cash equivalents
and anticipated cash received from product sales and anticipated payments received under
collaboration agreements will be sufficient to fund anticipated levels of operations into the third
quarter of 2008.
For
the six months ended June 30, 2007, our net cash used for operating activities was $8.5
million, and we had no capital expenditures. For the year ended December 31, 2006, our net cash
used for operating activities was $51.4 million, and we had capital expenditures of approximately
$370,000. If our existing resources are insufficient to satisfy our liquidity requirements or if we
acquire or license rights to additional product candidates, we may need to raise additional
external funds through collaborative arrangements and public or private financings. Additional
financing may not be available to us on acceptable terms or at all. In addition, the terms of the
financing may adversely affect the holdings or the rights of our stockholders. For example, if we
raise additional funds by issuing equity securities, further dilution to our then-existing
stockholders will result. If we are unable to obtain funding on a timely basis, we may be required
to significantly delay, limit or eliminate one or more of our research, development or
commercialization programs, which could harm our financial condition and operating results. We also
could be required to seek funds through arrangements with collaborators or others that may require
us to relinquish rights to some of our technologies, product candidates or products which we would
otherwise pursue on our own.
If the estimates we make, or the assumptions on which we rely, in preparing our financial
statements prove inaccurate, our actual results may vary from those reflected in our
projections.
Our financial statements have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and
expenses, the amounts of charges accrued by us and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances. For example, our reserve for potential returns
for ZYFLO is based on our historical experience of product returns for ZYFLO and other factors that
could significantly impact expected returns. We cannot assure you, however, that our estimates, or
the assumptions underlying them, will be correct. If our estimates are inaccurate, this could
adversely affect our stock price.
53
Risks Relating to Our Common Stock
Our stock price is subject to fluctuation, which may cause an investment in our stock to suffer
a decline in value.
The market price of our common stock may fluctuate significantly in response to factors that
are beyond our control. The stock market in general has recently experienced extreme price and
volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies
have been extremely volatile, and have experienced fluctuations that often have been unrelated or
disproportionate to the operating performance of these companies. These broad market fluctuations
could result in extreme fluctuations in the price of our common stock, which could cause a decline
in the value of our common stock.
If our quarterly results of operations fluctuate, this fluctuation may subject our stock price
to volatility, which may cause an investment in our stock to suffer a decline in value.
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the
future. A number of factors, many of which are not within our control, could subject our operating
results and stock price to volatility, including:
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• |
|
the amount and timing of sales of ZYFLO and ZYFLO CR; |
| |
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• |
|
the timing of operating expenses, including selling and marketing expenses and the
costs of maintaining a direct sales force; |
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• |
|
the availability and timely delivery of a sufficient supply of ZYFLO or ZYFLO CR; |
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• |
|
the amount of rebates, discounts and chargebacks to wholesalers, Medicaid and managed
care organizations related to ZYFLO or ZYFLO CR; |
| |
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• |
|
the amount and timing of product returns for ZYFLO or ZYFLO CR; |
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• |
|
achievement of, or the failure to achieve, milestones under our development agreement
with MedImmune, our license agreements with Beckman Coulter and Innovative Metabolics and,
to the extent applicable, other licensing and collaboration agreement; |
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• |
|
the results of ongoing and planned clinical trials of our product candidates; |
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• |
|
production problems occurring at our third party manufacturers; |
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• |
|
the results of regulatory reviews relating to the development or approval of our product candidates; and |
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• |
|
general and industry-specific economic conditions that may affect our research and
development expenditures. |
Due to the possibility of significant fluctuations, we do not believe that quarterly
comparisons of our operating results will necessarily be indicative of our future operating
performance. If our quarterly operating results fail to meet the expectations of stock market
analysts and investors, the price of our common stock may decline.
If significant business or product announcements by us or our competitors cause fluctuations in
our stock price, an investment in our stock may suffer a decline in value.
The market price of our common stock may be subject to substantial volatility as a result of
announcements by us or other companies in our industry, including our collaborators. Announcements
which may subject the price of our common stock to substantial volatility include announcements
regarding:
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• |
|
our operating results, including the amount and timing of sales of ZYFLO and ZYFLO CR; |
54
| |
• |
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our licensing and collaboration agreements and the products or product candidates that
are the subject of those agreements; |
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• |
|
the results of discovery, preclinical studies and clinical trials by us or our competitors; |
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• |
|
the acquisition of technologies, product candidates or products by us or our competitors; |
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• |
|
the development of new technologies, product candidates or products by us or our competitors; |
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• |
|
regulatory actions with respect to our product candidates or products or those of our competitors; and |
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• |
|
significant acquisitions, strategic partnerships, joint ventures or capital commitments
by us or our competitors. |
Insiders have substantial control over us and could delay or prevent a change in corporate
control, including a transaction in which our stockholders could sell or exchange their shares
for a premium.
As of July 31, 2007, our directors, executive officers and 10% or greater stockholders,
together with their affiliates, to our knowledge, beneficially owned, in the aggregate,
approximately 23.1% of our outstanding common stock. As a result, our directors, executive officers
and 10% or greater stockholders, together with their affiliates, if acting together, may have the
ability to affect the outcome of matters submitted to our stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all or substantially all
of our assets. In addition, these persons, acting together, may have the ability to control the
management and affairs of our company. Accordingly, this concentration of ownership may harm the
market price of our common stock by:
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• |
|
delaying, deferring or preventing a change in control of our company; |
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• |
|
impeding a merger, consolidation, takeover or other business combination involving our company; or |
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• |
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discouraging a potential acquirer from making a tender offer or otherwise attempting to
obtain control of our company. |
Anti-takeover provisions in our charter documents and under Delaware law could prevent or
frustrate attempts by our stockholders to change our management or our board and hinder efforts
by a third party to acquire a controlling interest in us.
We are incorporated in Delaware. Anti-takeover provisions of Delaware law and our charter
documents may make a change in control more difficult, even if the stockholders desire a change in
control. For example, anti-takeover provisions to which we are subject include provisions in our
by-laws providing that stockholders’ meetings may be called only by our president or the majority
of our board of directors and a provision in our certificate of incorporation providing that our
stockholders may not take action by written consent.
Additionally, our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the terms of those shares of stock without any further action by
our stockholders. The rights of holders of our common stock are subject to the rights of the
holders of any preferred stock that we issue. As a result, our issuance of preferred stock could
cause the market value of our common stock to decline and could make it more difficult for a third
party to acquire a majority of our outstanding voting stock.
Delaware law also prohibits a corporation from engaging in a business combination with any
holder of 15% or more of its capital stock until the holder has held the stock for three years
unless, among other possibilities, the board of directors approves the transaction. The board may
use this provision to prevent changes in our management. Also, under applicable Delaware law, our
board of directors may adopt additional anti-takeover measures in the future.
55
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.
The following matters were submitted to a vote of our stockholders at our 2007 Annual Meeting of
Stockholders held on May 2, 2007 and approved by the requisite vote of our stockholders as follows:
1. To elect Jean George and Frank E. Thomas to our board of directors to serve as Class III
directors, each for a term of three years.
| |
|
|
|
|
|
|
|
|
| |
|
Number of Shares |
| Nominee |
|
For |
|
Withheld |
Jean George |
|
|
36,109,563 |
|
|
|
43,240 |
|
Frank E. Thomas |
|
|
36,119,168 |
|
|
|
33,635 |
|
2. To
ratify our audit committee’s selection of Deloitte & Touche LLP as our registered
public accounting firm for the fiscal year ending December 31, 2007.
| |
|
|
|
|
|
|
|
|
| Number of Shares |
| For |
|
Against |
|
Abstain |
36,132,458 |
|
|
19,345 |
|
|
|
1,000 |
|
The number of shares of our common stock eligible to vote as of the record date of March 5, 2007
was 43,066,165 shares.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on
Form 10-Q.
56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
CRITICAL THERAPEUTICS, INC. |
|
|
|
Date:
August 9, 2007 |
|
/s/ Frank E. Thomas |
|
|
|
|
|
Frank E. Thomas |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer and Principal
Financial Officer) |
|
|
|
Date:
August 9, 2007 |
|
/s/ Jeffrey E. Young |
|
|
|
|
|
Jeffrey E. Young |
|
|
Vice President of Finance, Chief
Accounting Officer and Treasurer |
|
|
(Principal Accounting Officer) |
57
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
10.1 +
|
|
Amendment No. 1, dated May 9, 2007, to Agreement for Manufacturing and Supply of Zileuton
effective February 8, 2005, by and between Shasun Pharma Solutions Limited and the Registrant
(Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q
for the period ended March 31, 2007, as filed with the SEC on May 10, 2007 (SEC File No.
000-50767)). |
|
|
|
10.2 +
|
|
Manufacturing Services Agreement between Patheon Pharmaceuticals Inc. and the Registrant
dated May 9, 2007 (Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly
Report on Form 10-Q for the period ended March 31, 2007, as filed with the SEC on May 10,
2007 (SEC File No. 000-50767)). |
|
|
|
10.3 +
|
|
License and Supply Agreement, dated May 16, 2007, by and between CyDex, Inc. and the
Registrant. |
|
|
|
10.4 +
|
|
FFIS Co-Promotion Agreement, dated June 25, 2007, by and between Dey, L.P. and the Registrant. |
|
|
|
10.5 +
|
|
Amendment No. 1, dated June 25, 2007, to Co-Promotion and Marketing Services Agreement,
effective March 13, 2007, by and between the Registrant and Dey, L.P. |
|
|
|
10.6 +
|
|
First Amendment, dated June 29, 2007, to Exclusive License Agreement effective January 29,
2007, by and between the Registrant and Innovative Metabolics, Inc. |
|
|
|
10.7 +
|
|
Amendment No. 3, dated June 29, 2007, to Sponsored Research and License Agreement effective
January 1, 2003, between the Registrant and The Feinstein Institute for Medical Research. |
|
|
|
31
|
|
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32
|
|
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
| + |
|
Confidential treatment requested as to certain portions, which portions have been omitted and
filed separately with the Securities and Exchange Commission. |
58