UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
|
Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
|
|
|
|
For the quarterly period ended March 31,
2008.
|
|
|
o
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Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
|
|
|
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For the transition period from
to
.
|
Commission
File Number
000-29815
Allos
Therapeutics, Inc.
(Exact name of
Registrant as specified in its charter)
Delaware
|
|
54-1655029
|
(State or other
jurisdiction of
|
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(I.R.S. Employer
|
incorporation or
organization)
|
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Identification
No.)
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11080
CirclePoint Road, Suite 200
Westminster, Colorado 80020
(303) 426-6262
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer
o
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|
Accelerated
filer
x
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|
|
Non-accelerated
filer
o
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(Do not check if a
smaller reporting company)
|
Smaller
reporting company
o
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|
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of May 1, 2008,
there were 68,115,616 shares of the registrants Common Stock, par value
$0.001 per share, outstanding.
ALLOS
THERAPEUTICS, INC.
FORM 10-Q
TABLE
OF CONTENTS
NOTE:
Allos Therapeutics, Inc.,
the Allos Therapeutics, Inc. logo,
and all other Allos names are trademarks of Allos Therapeutics, Inc. in
the United States and in other selected countries. All other brand names or
trademarks appearing in this report are the property of their respective
holders. Unless the context requires otherwise, references in this report to Allos,
the Company, we, us, and our refer to Allos Therapeutics, Inc.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLOS THERAPEUTICS, INC.
BALANCE SHEETS
(unaudited)
|
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March 31,
|
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December 31,
|
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|
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2008
|
|
2007
|
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ASSETS
|
|
|
|
|
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Current
assets:
|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
12,932,317
|
|
$
|
15,919,664
|
|
Restricted
cash
|
|
183,334
|
|
183,334
|
|
Investments
in marketable securities
|
|
37,581,559
|
|
41,836,566
|
|
Prepaid
research and development expenses
|
|
807,350
|
|
524,704
|
|
Prepaid
expenses and other assets
|
|
2,430,936
|
|
2,374,471
|
|
Total
current assets
|
|
53,935,496
|
|
60,838,739
|
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Property
and equipment, net
|
|
604,639
|
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621,451
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Total
assets
|
|
$
|
54,540,135
|
|
$
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61,460,190
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
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Current
liabilities:
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
1,658,110
|
|
$
|
1,191,849
|
|
Accrued
liabilities
|
|
7,914,012
|
|
7,689,338
|
|
Total
current liabilities
|
|
9,572,122
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8,881,187
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Commitments
and contingencies (See Note 6)
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|
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Stockholders
equity:
|
|
|
|
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Preferred
stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2008
and December 31, 2007; no shares issued or outstanding
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|
|
|
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Series A
Junior Participating Preferred Stock, $0.001 par value; 1,000,000 shares
designated from authorized preferred stock at March 31, 2008 and
December 31, 2007; no shares issued or outstanding
|
|
|
|
|
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Common
stock, $0.001 par value; 150,000,000 shares authorized at March 31, 2008
and December 31, 2007; 68,075,978 and 67,641,943 shares issued and
outstanding at March 31, 2008 and December 31, 2007,
respectively
|
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68,076
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67,642
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Additional
paid-in capital
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304,835,511
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300,440,336
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Deficit
accumulated during the development stage
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(259,935,574
|
)
|
(247,928,975
|
)
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Total
stockholders equity
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44,968,013
|
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52,579,003
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Total
liabilities and stockholders equity
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$
|
54,540,135
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|
$
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61,460,190
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|
The accompanying notes are an integral part of these
financial statements.
3
ALLOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended
March 31,
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Cumulative
Period from
September 1, 1992
(date of inception)
through March 31,
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2008
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2007
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2008
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Operating
expenses:
|
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|
|
|
|
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Research
and development
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$
|
5,973,612
|
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$
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3,289,428
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$
|
131,273,484
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Clinical
manufacturing
|
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1,586,558
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1,147,304
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36,198,664
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Marketing,
general and administrative
|
|
5,011,364
|
|
4,747,596
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107,841,905
|
|
Restructuring
and separation costs
|
|
|
|
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1,663,821
|
|
Total
operating expenses
|
|
12,571,534
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|
9,184,328
|
|
276,977,874
|
|
Loss
from operations
|
|
(12,571,534
|
)
|
(9,184,328
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)
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(276,977,874
|
)
|
Gain
on settlement claims
|
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5,110,083
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Interest
and other income, net
|
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564,935
|
|
773,464
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22,168,681
|
|
Net
loss
|
|
(12,006,599
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)
|
(8,410,864
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)
|
(249,699,110
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)
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Dividend
related to beneficial conversion feature of preferred stock
|
|
|
|
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(10,236,464
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)
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Net
loss attributable to common stockholders
|
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$
|
(12,006,599
|
)
|
$
|
(8,410,864
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)
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$
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(259,935,574
|
)
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Net
loss per share: basic and diluted
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$
|
(0.18
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)
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$
|
(0.14
|
)
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Weighted
average shares outstanding: basic and diluted
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67,266,819
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62,151,400
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The accompanying notes are an integral part of these
financial statements.
4
ALLOS THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
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Three Months Ended
March 31,
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Cumulative
Period from
September 1, 1992
(date of inception)
through
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2008
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2007
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March 31, 2008
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Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,006,599
|
)
|
$
|
(8,410,864
|
)
|
$
|
(249,699,110
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
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Depreciation
and amortization
|
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103,336
|
|
84,037
|
|
3,551,645
|
|
Stock-based
compensation expense
|
|
2,114,511
|
|
1,303,380
|
|
34,396,230
|
|
Write-off
of long-term investment
|
|
|
|
|
|
1,000,000
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Other
|
|
|
|
|
|
99,121
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Prepaid
expenses and other assets
|
|
(339,110
|
)
|
65,683
|
|
(3,228,285
|
)
|
Interest
receivable on investments
|
|
105,879
|
|
(123,605
|
)
|
(559,430
|
)
|
Accounts
payable
|
|
466,261
|
|
460,709
|
|
1,658,110
|
|
Accrued
liabilities
|
|
224,674
|
|
(1,254,337
|
)
|
7,914,012
|
|
Net
cash used in operating activities
|
|
(9,331,048
|
)
|
(7,874,997
|
)
|
(204,867,707
|
)
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
(86,524
|
)
|
(82,740
|
)
|
(3,902,278
|
)
|
Purchases
of marketable securities
|
|
(27,050,872
|
)
|
(39,928,440
|
)
|
(542,709,098
|
)
|
Proceeds
from sales of marketable securities
|
|
31,200,000
|
|
19,600,000
|
|
505,686,969
|
|
Purchase
of long-term investment
|
|
|
|
|
|
(1,000,000
|
)
|
Payments
received on notes receivable
|
|
|
|
|
|
49,687
|
|
Net
cash provided by (used in) investing activities
|
|
4,062,604
|
|
(20,411,180
|
)
|
(41,874,720
|
)
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
Principal
payments under capital leases
|
|
|
|
|
|
(422,088
|
)
|
Proceeds
from sales leaseback
|
|
|
|
|
|
120,492
|
|
Pledge
of restricted cash
|
|
|
|
|
|
(183,334
|
)
|
Proceeds
from issuance of convertible preferred stock, net of issuance costs
|
|
|
|
|
|
89,125,640
|
|
Proceeds
from issuance of common stock associated with stock options, stock warrants
and employee stock purchase plan
|
|
2,281,097
|
|
235,028
|
|
11,882,215
|
|
Proceeds
from issuance of common stock, net of issuance costs
|
|
|
|
50,322,214
|
|
159,151,819
|
|
Net
cash provided by financing activities
|
|
2,281,097
|
|
50,557,242
|
|
259,674,744
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
(2,987,347
|
)
|
22,271,065
|
|
12,932,317
|
|
Cash
and cash equivalents, beginning of period
|
|
15,919,664
|
|
10,070,526
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
12,932,317
|
|
$
|
32,341,591
|
|
$
|
12,932,317
|
|
Supplemental
Schedule of Cash and Non-cash Operating and Financing Activities:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
|
|
$
|
|
|
$
|
1,033,375
|
|
Issuance
of stock in exchange for license agreement
|
|
|
|
|
|
40,000
|
|
Capital
lease obligations incurred for acquisition of property and equipment
|
|
|
|
|
|
422,088
|
|
Issuance
of stock in exchange for notes receivable
|
|
|
|
|
|
139,687
|
|
Conversion
of preferred stock to common stock
|
|
|
|
|
|
89,125,640
|
|
The accompanying notes are an integral part of these
financial statements.
5
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1.
Basis of
Presentation
The unaudited financial
statements of Allos Therapeutics, Inc. (referred to herein as the Company,
we, us or our) included herein reflect all adjustments, consisting only
of normal recurring adjustments, which in the opinion of management are
necessary to fairly state our financial position, results of operations and
cash flows for the periods presented.
Certain information and footnote disclosures normally included in
audited financial information prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission, or SEC. Operating
results for the three months ended March 31, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008. These financial statements should
be read in conjunction with the audited financial statements and notes thereto
which are included in our Annual Report on Form 10-K for the year ended December 31,
2007 for a broader discussion of our business and the opportunities and risks
inherent in such business.
Since our inception in
1992, we have not generated any revenue from product sales and have experienced
significant net losses and negative cash flows from operations. Our activities have consisted primarily of
developing products, licensing products, raising capital and recruiting
personnel. Accordingly, we are
considered to be in the development stage as of March 31, 2008, as defined
in Statement of Financial Accounting Standards (SFAS) No. 7,
Accounting and Reporting by Development Stage
Enterprises.
Liquidity
Our ability to generate revenue and achieve
profitability is dependent on our ability, alone or with partners, to
successfully complete the development of our product candidates, conduct
clinical trials, obtain the necessary regulatory approvals, and manufacture and
market our product candidates. The timing and costs to complete the successful
development of any of our product candidates are highly uncertain, and
therefore difficult to estimate. The lengthy process of seeking regulatory
approvals for our product candidates, and the subsequent compliance with
applicable regulations, require the expenditure of substantial resources.
Clinical development timelines, likelihood of success and total costs vary
widely and are impacted by a variety of risks and uncertainties. Because of these
risks and uncertainties, we cannot predict when or whether we will successfully
complete the development of any of our product candidates or the ultimate costs
of such efforts. Due to these same factors, we cannot be certain when, or if,
we will generate any revenue or net cash inflow from any of our current product
candidates.
Even if our clinical trials demonstrate the safety and
effectiveness of our product candidates in their target indications, we do not
expect to be able to record commercial sales for any of our product candidates
until 2009 at the earliest. We expect to
incur significant and growing net losses for the foreseeable future as a result
of our research and development programs and the costs of preparing for the
potential commercial launch of PDX.
Although the size and timing of our future net losses are subject to
significant uncertainty, we expect them to increase over the next several years
as we continue to fund our development programs and prepare for the potential
commercial launch of PDX.
As of March 31, 2008, we had $50.5 million in
cash, cash equivalents and investments in marketable securities. Based upon the current status of our product
development plans, we believe that our cash, cash equivalents, and investments
in marketable securities as of March 31, 2008 should be adequate to
support our operations through at least the first quarter of 2009, although
there can be no assurance that this can, in fact, be accomplished. Our forecast
of the period of time through which our financial resources will be adequate to
support our operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially.
6
We anticipate continuing our current development
programs and/or beginning other long-term development projects involving our
product candidates. These projects may require many years and substantial
expenditures to complete and may ultimately be unsuccessful. Therefore, we will
need to obtain additional funds from outside sources to continue research and
development activities, fund operating expenses, pursue regulatory approvals
and build sales and marketing capabilities, as necessary. If we are unable to
raise sufficient additional funds to support our operations, we may be required
to delay, reduce the scope of or eliminate one or more of our development
programs. However, our actual capital requirements will depend on many factors,
including:
·
the
timing and outcome of our ongoing PROPEL trial;
·
costs
associated with the commercialization of our product candidates, if approved
for marketing;
·
our
evaluation of, and decisions with respect to, additional therapeutic
indications for which we may develop PDX;
·
our
evaluation of, and decisions with respect to, our strategic alternatives; and
·
costs associated with
securing potential in-license opportunities and additional product candidates
and conducting preclinical research and clinical development for our product
candidates.
2.
Prepaid Expenses
and Other Assets
Prepaid expenses and other assets are comprised of the
following:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Prepaid
expenses and other assets
|
|
$
|
665,936
|
|
$
|
615,471
|
|
Receivable
related to pending litigation settlement (see Note 6)
|
|
1,765,000
|
|
1,759,000
|
|
|
|
$
|
2,430,936
|
|
$
|
2,374,471
|
|
3.
Accrued
Liabilities
Accrued liabilities are
comprised of the following:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Accrued
research and development expenses
|
|
$
|
2,270,273
|
|
$
|
1,571,975
|
|
Accrued
litigation settlement costs (see Note 6)
|
|
2,000,000
|
|
2,000,000
|
|
Accrued
personnel costs
|
|
1,335,356
|
|
2,122,805
|
|
Accrued
clinical manufacturing expenses
|
|
1,250,049
|
|
1,259,799
|
|
Accrued
expensesother
|
|
1,031,425
|
|
696,027
|
|
Accrued
restructuring and separation costs
|
|
26,909
|
|
38,732
|
|
|
|
$
|
7,914,012
|
|
$
|
7,689,338
|
|
4.
Stock-Based
Compensation
In accordance with the modified prospective transition
method of SFAS No. 123 (Revised 2004),
Share-Based Payment
(SFAS 123R), stock-based compensation expense for the three months ended March 31,
2008 and 2007 has been recognized in the accompanying Statements of Operations
as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Research
and development
|
|
$
|
675,787
|
|
$
|
264,300
|
|
Clinical
manufacturing
|
|
103,230
|
|
36,018
|
|
Marketing,
general and administrative
|
|
1,335,494
|
|
1,003,062
|
|
Total
stock-based compensation expense
|
|
$
|
2,114,511
|
|
$
|
1,303,380
|
|
7
We did not recognize a related tax benefit during the
three months ended March 31, 2008 and 2007, as we maintain net operating
loss carryforwards and we have established a valuation allowance against the
entire tax benefit as of March 31, 2008.
SFAS 123R did not impact our net cash flows from operating, investing or
financing activities for the three months ended March 31, 2008 and
2007. No stock-based compensation
expense was capitalized on our Balance Sheet as of March 31, 2008 and December 31,
2007.
The following table summarizes activity and related
information for stock option awards granted under our equity incentive plans:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2007
|
|
6,405,430
|
|
$
|
4.68
|
|
2,754,274
|
|
$
|
3.80
|
|
Granted
|
|
1,693,812
|
|
6.17
|
|
|
|
|
|
Exercised
|
|
(434,035
|
)
|
5.26
|
|
|
|
|
|
Canceled
|
|
(142,684
|
)
|
6.60
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
7,522,523
|
|
$
|
4.95
|
|
2,829,721
|
|
$
|
3.89
|
|
During the three months ended March 31, 2008, we
granted 1,693,812 stock options with a weighted-average
grant-date fair value of $3.94 per share.
As of March 31, 2008, the unrecorded stock-based
compensation balance related to stock option awards was $10,165,904 and will be
recognized over an estimated weighted-average amortization period of 1.5 years.
The following table summarizes information about
outstanding stock options that are fully vested and currently exercisable, and
outstanding stock options that are expected to vest in the future:
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Term
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
As of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
Options
fully vested and exercisable
|
|
2,829,721
|
|
6.5
|
|
$
|
3.89
|
|
$
|
6,845,585
|
|
Options
expected to vest, including effects of expected forfeitures
|
|
4,061,309
|
|
9.1
|
|
$
|
5.56
|
|
3,175,640
|
|
Options
fully vested and expected to vest
|
|
6,891,030
|
|
8.0
|
|
$
|
4.88
|
|
$
|
10,021,225
|
|
The aggregate intrinsic value in the tables above
represents the total pretax intrinsic value, based on our closing stock price
of $6.08 as of March 31, 2008, which would have been received by the
option holders had all option holders with in-the-money options exercised their
options as of that date. The total
number of in-the-money options exercisable as of March 31, 2008 was
2,309,020.
The total intrinsic value of options exercised during
the three months ended March 31, 2008 and 2007 was $728,260 and $448,547,
respectively, determined as of the date of option exercise. We settle employee stock option exercises
with newly issued common shares. No tax
benefits were realized by us in connection with these exercises during the
three months ended March 31, 2008 and 2007 as we maintain net operating
loss carryforwards and we have established a valuation allowance against the
entire tax benefit as of March 31, 2008.
The following table summarizes activity and related
information for restricted stock awards granted under our equity incentive
plans:
|
|
Number of
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at December 31, 2007
|
|
412,500
|
|
$
|
3.89
|
|
Granted
|
|
|
|
|
|
Vested
|
|
(101,250
|
)
|
3.90
|
|
Nonvested at March 31, 2008
|
|
311,250
|
|
$
|
3.88
|
|
8
The shares of restricted
stock vest in four equal annual installments from the date of grant. D
uring the three months ended March 31,
2008 and 2007, we recorded stock-based compensation related to restricted stock
awards of $147,499 and $178,057, respectively.
As of March 31, 2008, the unrecorded stock-based compensation
balance related to restricted stock awards was $552,310 and will be recognized
over an estimated weighted-average amortization period of 1.4 years.
5.
Net Loss Per
Share
Net loss per share is calculated in accordance with
SFAS No. 128,
Earnings Per Share
(SFAS 128). Under the provisions of SFAS 128, basic net loss per
share is computed by dividing the net loss attributable to common stockholders
for the period by the weighted average number of common shares outstanding
during the period. Diluted earnings per
share is computed by giving effect to all dilutive potential common stock
outstanding during the period, including stock options, restricted stock, stock
warrants and shares to be issued under our employee stock purchase plan.
Diluted net loss per share is the same as basic net
loss per share for all periods presented because any potential dilutive common
shares were anti-dilutive due to our net loss (as including such shares would
decrease our basic net loss per share). Potential dilutive common shares that
would have been included in the calculation of diluted earnings per share if we
had net income are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Common
stock options
|
|
1,953,517
|
|
2,543,049
|
|
Restricted
stock
|
|
384,478
|
|
440,000
|
|
Common
stock warrants
|
|
|
|
382,877
|
|
|
|
2,337,995
|
|
3,365,926
|
|
6.
Commitments and
Contingencies
Royalty
and License Fee Commitments for PDX
In December 2002, we entered into a license
agreement with Memorial Sloan-Kettering Cancer Center, SRI International and
Southern Research Institute, as amended, under which we obtained exclusive
worldwide rights to a portfolio of patents and patent applications related to
PDX (pralatrexate) and its uses. Under the terms of the agreement, we paid an
up-front license fee of $2.0 million upon execution of the agreement and are
also required to make certain additional cash payments based upon the
achievement of certain clinical development or regulatory milestones or the
passage of certain time periods. To date, we have made aggregate milestone
payments of $2.0 million based on the passage of time. In the future, we could
make aggregate milestone payments of $1.0 million upon the earlier of
achievement of a clinical development milestone or the passage of certain time
periods (the Clinical Milestone), and up to $10.3 million upon achievement of
certain regulatory milestones, including regulatory approval to market PDX in
the United States or Europe. The next scheduled payments toward the Clinical
Milestone of $500,000 each are currently due on December 23, 2008 and
2009.
The up-front license fee and all
milestone payments under the agreement have been or will be recorded to
research and development expense when incurred
. Under the terms of the
agreement, we are required to fund all development programs and will have sole
responsibility for all commercialization activities. In addition, we will pay
the licensors a royalty based on a percentage of net revenues arising from
sales of the product or sublicense revenues arising from sublicensing the
product, if and when such sales or sublicenses occur.
Contingencies
The Company and one of its former officers were named
as defendants in a purported securities class action lawsuit filed in May 2004
in the United States District Court for the District of Colorado (the District
Court). An amended complaint was filed in August 2004. The lawsuit was
brought on behalf of a purported class of purchasers of our securities during
the period from May 29, 2003 to April 29, 2004, and sought
unspecified damages relating to the issuance of allegedly false and misleading
statements regarding EFAPROXYN, one of our former product candidates, during
this period and subsequent declines in our stock price. On October 20,
2005, the District Court granted the defendants motion to dismiss the lawsuit
with prejudice. In an opinion dated October 20, 2005, the District Court
concluded that the plaintiffs complaint failed to meet the legal requirements
applicable to its alleged claims.
9
On November 20, 2005, the plaintiff appealed the
District Courts decision to the U.S. Court of Appeals for the Tenth Circuit
(the Court of Appeals). On February 6, 2008, the parties
signed a stipulation of settlement, settling the case for
$2,000,000. Neither we nor our former officer admits any liability in
connection with the settlement. The Court of Appeals accordingly has remanded
the case to the District Court for consideration of the settlement.
The settlement is subject to various conditions, including without
limitation approval of the District Court.
We expect that the amount of the settlement in excess of our deductible
will be covered by our insurance carrier.
In the event the settlement does not become final, we intend to
vigorously defend against the plaintiffs appeal. If the Court of Appeals then
were to reverse the District Courts decision and we were not successful in our
defense of such claims, we could be forced to make significant payments to the
plaintiffs, and such payments could have a material adverse effect on our
business, financial condition, results of operations and cash flows to the extent
such payments are not covered by our insurance carriers. Even if our defense
against such claims were successful, the litigation could result in substantial
costs and divert managements attention and resources, which could adversely
affect our business. As of March 31, 2008, we have recorded $2,000,000 in
accrued litigation settlement costs, which represents our best estimate of the
potential gross amount of the settlement costs to be paid to the plaintiffs,
and $1,765,000 in prepaid expenses and other assets, which represents the
amount we expect to be reimbursed from our insurance carrier. The net
difference of $235,000 between these amounts represents the remaining unpaid
deductible under our insurance policy, and this amount was recorded to marketing,
general and administrative expenses during the year ended December 31,
2006.
7.
Recent Accounting
Pronouncements
In September 2006,
the FASB issued SFAS 157,
Fair Value Measurements
,
which defines fair value, provides a framework for measuring fair value, and
expands the disclosures required for fair value measurements. SFAS 157 applies
to other accounting pronouncements that require fair value measurements; it
does not require any new fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 and we adopted it on January 1,
2008. The application of SFAS 157 to certain items has been deferred and will
be effective for fiscal years beginning after November 15, 2008 and
interim periods within that year. The
adoption of this pronouncement did not have a material impact on our results of
operations or financial position for the three month period ended March 31,
2008. We have no assets or liabilities that were measured using significant
unobservable inputs (Level 3 assets and liabilities) as of March 31,
2008. Our financial instruments include
cash and cash equivalents, investments in marketable securities, prepaid
expenses, accounts payable and accrued liabilities. The carrying amounts of
financial instruments approximate their fair value due to their short
maturities. The carrying values of our cash equivalents and investments in
marketable securities approximate their market values based on quoted market
prices, or Level 1 inputs. We account for investments in marketable securities
in accordance with SFAS No. 115,
Accounting
for Certain Investments in Debt and Equity Securities
. Investments
in marketable securities are classified as held to maturity and are carried at
cost plus accrued interest.
In February 2007, the
FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of
FASB Statement No. 115,
which is effective for fiscal years
beginning after November 15, 2007 and we adopted it on January 1, 2008.
This statement permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
Subsequent unrealized gains and losses on items for which the fair value option
has been elected will be reported in earnings. The adoption of this
pronouncement did not have a material impact on our results of operations or
financial position for the three month period ended March 31, 2008, as we
did not elect to measure any of our financial instruments at fair value.
In June 2007, the
Emerging Issues Task Force (EITF) issued a consensus, EITF 07-3,
Advance Payments for Research and Development
Activities
, which states that non-refundable advance payments for
goods that will be used or services that will be performed in future research
and development activities should be deferred and capitalized until the goods
have been delivered or the related services have been rendered. EITF 07-3 is to be applied prospectively for
new contractual arrangements entered into in fiscal years beginning after December 15,
2007 and we adopted it on January 1, 2008. The adoption did not result in
a material change to our current accounting practice.
In November 2007, the EITF issued a consensus,
EITF 07-01,
Accounting for Collaboration
Arrangements Related to the Development and Commercialization of Intellectual
Property
, which is focused on how the parties to a collaborative
agreement should account for costs incurred and revenue generated on sales to
third parties, how sharing payments pursuant to a collaboration agreement
should be presented in the income statement and certain related disclosure
questions. EITF 07-1 is to be applied retrospectively for collaboration
arrangements in fiscal years beginning after December 15, 2008. We currently do not have any such
arrangements.
10
In December 2007,
the FASB issued SFAS 141(R),
Business
Combinations
. This Statement replaces SFAS 141,
Business Combinations,
and requires an
acquirer to recognize the assets acquired, the liabilities assumed, including
those arising from contractual contingencies, any contingent consideration, and
any noncontrolling interest in the acquiree at the acquisition date, measured
at their fair values as of that date, with limited exceptions specified in the
statement. SFAS 141(R) also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with SFAS 141(R)). In
addition, SFAS 141(R)s requirement to measure the noncontrolling interest in
the acquiree at fair value will result in recognizing the goodwill attributable
to the noncontrolling interest in addition to that attributable to the
acquirer. SFAS 141(R) amends SFAS No. 109,
Accounting for Income Taxes
, to require the acquirer to
recognize changes in the amount of its deferred tax benefits that are
recognizable because of a business combination either in income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances. It also amends SFAS 142,
Goodwill and Other Intangible Assets
, to,
among other things, provide guidance on the impairment testing of acquired
research and development intangible assets and assets that the acquirer intends
not to use. SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We are currently
evaluating the potential impact of this statement.
In December 2007,
the FASB issued SFAS 160,
Noncontrolling
Interests in Consolidated Financial Statements
. SFAS 160 amends
Accounting Research Bulletin 51,
Consolidated
Financial Statements
, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements.
SFAS 160 also changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated statement of income,
of the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent owners and the interests of the
noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal
periods, and interim periods within those fiscal years, beginning on or after December 15,
2008. We are currently evaluating the potential impact of this statement.
In March 2008, the
FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. SFAS 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring companies to enhance
disclosure about how these instruments and activities affect their financial
position, performance and cash flows. SFAS 161 also improves the transparency
about the location and amounts of derivative instruments in a companys
financial statements and how they are accounted for under SFAS 133. SFAS 161 is
effective for financial statements issued for fiscal years beginning after November 15,
2008, and interim periods within beginning after that date. We are currently
evaluating the potential impact of this statement.
11
ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following Managements Discussion and Analysis of Financial Condition and
Results of Operations, as well as information contained elsewhere in this
report,
contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements include, but are not limited to, statements concerning our projected
timelines for the initiation of new trials and announcement of results from our
ongoing clinical trials, including our Phase 2 PROPEL trial; the potential
for the results of our Phase 2 PROPEL trial to support marketing approval of
PDX; other statements regarding our future product development and regulatory
strategies, including our intent to develop or seek regulatory approval for our
product candidates in specific indications; the ability of our third-party
manufacturing parties to support our requirements for drug supply; any
statements regarding our future financial performance, results of operations or
sufficiency of capital resources to fund our operating requirements; and any
other statements which are other than statements of historical fact. In some
cases, these statements may be identified by terminology such as may, will,
should, expects, plans, anticipates, believes, estimates, predicts,
potential or continue, or the negative of such terms and other comparable
terminology. Although we believe that the expectations reflected in the
forward-looking statements contained herein are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. These
statements involve known and unknown risks and uncertainties that
may cause our, or our industrys results, levels of activity, performance
or achievements to be materially different from those expressed or implied by
the forward-looking statements. Factors that may cause or contribute to such
differences include, among other things, those discussed in Part II, Item
1A of this report under the caption Risk Factors. All forward-looking
statements included in this report are based on information available to us as
of the date hereof and we undertake no obligation to revise any forward-looking
statements in order to reflect any subsequent events or circumstances.
Forward-looking statements not specifically described above also may be found
in these and other sections of this report.
Overview
We are a biopharmaceutical company focused on
developing and commercializing innovative small molecule drugs for the
treatment of cancer. Our goal is to build a profitable company by generating
income from products we develop and commercialize, either alone or with one or
more potential strategic partners. We
strive to develop proprietary products that have the potential to improve the
standard of care in cancer therapy. Our
focus is on product opportunities for oncology that leverage our internal
clinical development and regulatory expertise and address important markets
with unmet medical need. We may also seek to grow our existing portfolio of
product candidates through product acquisition and in-licensing efforts.
We currently have two small molecule chemotherapeutic
product candidates in clinical development,
PDX (pralatrexate) and RH1.
PDX
PDX
(pralatrexate) is
a small molecule chemotherapeutic agent that inhibits dihydrofolate reductase,
or DHFR, a folic acid (folate)-dependent enzyme involved in the building of
nucleic acid, or DNA, and other processes. PDX was rationally designed for
efficient transport into tumor cells via the reduced folate carrier, or RFC-1,
and effective intracellular drug retention. We believe these biochemical
features, together with preclinical and clinical data in a variety of tumors,
suggest that PDX may have a favorable safety and efficacy profile relative to
methotrexate and other related DHFR inhibitors. We believe PDX has the
potential to be delivered as a single agent or in combination therapy regimens.
In August 2006, we initiated PROPEL, an
international, multi-center, open-label, single-arm Phase 2 clinical trial of
PDX in patients with relapsed or refractory peripheral T-cell lymphoma, or
PTCL, that we believe, if positive, will be sufficient to support the filing of
a new drug application, or NDA, to seek marketing approval for PDX in this
indication. In July 2006, we
reached agreement with the Food and Drug Administration, or FDA, under its special
protocol assessment, or SPA, process on the design of this Phase 2 trial. The SPA process allows for FDA evaluation of
a clinical trial protocol intended to form the primary basis of an efficacy
claim in support of an NDA, and provides an agreement that the study design,
including trial size, clinical endpoints and/or data analyses are acceptable to
the FDA. The SPA agreement is not a
guarantee of approval, and we cannot assure you that the design of, or data
collected from, the PROPEL trial will be adequate to demonstrate the safety and
efficacy of PDX for the treatment of PTCL, or otherwise be sufficient to
support FDA or any foreign regulatory approval. In addition, the PROPEL trial
protocol does not specify the response rate required to support FDA approval
and the response rate will need to be adequate to support approval. The primary endpoint of the study is
objective response rate (complete and partial response). Secondary endpoints include duration of
response, progression-free survival and overall survival. Patients receive 30 mg/m(2) of PDX once
every
12
week for six weeks followed by one week of rest per
cycle of treatment. The treatment
regimen also includes vitamin B
12
and folic acid
supplementation.
In accordance with the PROPEL trial protocol, we
conducted three pre-planned interim analyses of safety data and one pre-planned
interim analysis of response data. In
January, September and December 2007, we announced that an independent
data monitoring committee, or DMC, completed interim analyses of safety data
from the first 10, 35 and 65 evaluable patients who completed at least one
cycle of treatment with PDX, respectively, and recommended that the trial
continue per the protocol at each analysis.
No major safety concerns were identified by the DMC. In September 2007, we announced that the
results of the interim analysis of patient response data exceeded the
pre-specified threshold for continuation of the trial, which required a minimum
of four responses (complete or partial) out of the first 35 evaluable patients,
as determined by independent oncology review.
In April 2008, we completed patient enrollment in the PROPEL
trial. We enrolled more than 100
evaluable patients from sites across the United States, Canada and Europe. We expect to report top line results of the
trial by year end, although the actual timing may vary based on a number of
factors. Following our review of the
trial results, we intend to submit a New Drug Application for PDX for the
treatment of patients with relapsed or refractory PTCL as expeditiously as
possible.
In July 2006, the
FDA awarded orphan drug designation to PDX for the treatment of patients with
T-cell lymphoma. The FDA may award orphan drug designation to drugs that target
conditions affecting 200,000 or fewer patients per year in the United States
and provide a significant therapeutic advantage over existing treatments. Under
the Orphan Drug Act, if we are the first company to receive FDA approval for
PDX for this orphan drug indication, we will obtain seven years of marketing
exclusivity during which the FDA may not approve another companys application
for the same drug for the same orphan indication. In October 2006, the FDA granted fast
track designation to PDX for the treatment of patients with T-cell lymphoma.
The fast track program is designed to facilitate the development and expedite
the review of new drugs that are intended to treat serious or life-threatening
conditions and that demonstrate the potential to address unmet medical
needs. In April 2007, the European Commission,
with a favorable opinion of the Committee for Orphan Medicinal Products of the
European Medicines Agency, or EMEA, granted orphan medicinal product designation
to PDX for the treatment of patients with PTCL.
The EMEA orphan medicinal product designation, or OMPD, is intended to
promote the development of drugs that may provide significant benefit to
patients suffering from rare diseases identified notably as life-threatening, chronically
debilitating or very serious. Under EU regulation, OMPD provides ten years of
potential market exclusivity once the product candidate is approved for
marketing for the designated indication in the European Union, which can be reduced
to six years or terminated in certain circumstances.
In addition to the PROPEL trial, the following
clinical trials involving PDX are also open for enrollment:
·
a Phase 1/2a, open-label,
multi-center study of PDX and gemcitabine with vitamin B
12
and
folic acid supplementation in patients with relapsed or refractory non-Hodgkins
lymphoma, or NHL, and Hodgkins disease.
We initiated patient enrollment in this study in May 2007. We plan to enroll up to 54 evaluable patients
in the Phase 1 portion of the study and up to 30 additional patients with
relapsed or refractory PTCL in the expanded Phase 2a portion of the study.
·
a Phase 1, open-label, multi-center
study of PDX with vitamin B
12
and folic acid supplementation in
patients with relapsed or refractory cutaneous T-cell lymphoma, or CTCL. We initiated patient enrollment in this study
in August 2007. We plan to enroll
up to 56 evaluable patients in the study, including at least 20 patients at
what we believe to be the optimal dose and schedule.
·
a Phase 1/2, open-label,
single-center study of PDX with vitamin B
12
and folic acid
supplementation in patients with relapsed or refractory NHL and Hodgkins
disease. This study is currently focused
on exploring alternate dosing and administration schedules in patients with
B-cell lymphoma to further evaluate PDXs potential clinical utility in this
setting.
·
a Phase 1 dose escalation study of
PDX with vitamin B
12
and folic acid supplementation in patients with
previously treated (Stage IIIB/IV) advanced non-small cell lung cancer, or
NSCLC.
·
a Phase 2b, randomized, multi-center
study comparing PDX and Tarceva® (erlotinib), both with vitamin B
12
and folic acid supplementation, in patients with Stage IIIB/IV NSCLC who are,
or have been, cigarette smokers who have failed treatment with at least one
prior platinum-based chemotherapy regimen.
We initiated patient enrollment in this study in January 2008. The
study will seek to enroll approximately 160 patients in up to 50 investigative
sites worldwide.
In addition to our ongoing NSCLC studies, we intend to
initiate a Phase 2, single-agent study of PDX in another solid tumor
13
indication in the second quarter of 2008 and
additional studies with PDX by year-end.
In December 2002, we entered into a license agreement with Memorial
Sloan-Kettering Cancer Center, SRI International and Southern Research
Institute, as amended, under which we obtained exclusive worldwide rights to a
portfolio of patents and patent applications related to PDX and its uses. The
portfolio currently consists of two issued patents in the U.S., two allowed
patent applications in Europe, and pending patent applications in the U.S.,
Canada, Europe, Australia, Japan, China, Brazil, Indonesia, South Korea,
Mexico, Norway, New Zealand, the Philippines, Singapore, and South Africa.
14
RH1
RH1
is a small molecule chemotherapeutic agent that we
believe is bioactivated by the enzyme DT-diaphorase, or DTD, also known as
NAD(P)H quinone oxidoreductase, or NQ01.
We believe DTD is over-expressed in many tumors, relative to normal
tissue, including lung, colon, breast and liver tumors. We believe that because RH1 is bioactivated
in the presence of DTD, it has the potential to provide targeted drug delivery
to these tumor types while limiting the amount of toxicity to normal tissue.
In November 2007, we initiated
patient enrollment in a Phase 1, open-label, multi-center dose escalation study
of RH1 in patients with advanced solid tumors or NHL. We plan to enroll up to 60 evaluable patients
in the study with the objective of determining the maximum tolerated dose, or
MTD, recommended Phase 2 dose and safety profile of RH1 in this
population. We plan to enroll three to
six patients per cohort. Once we
determine what we believe to be the optimal dose and schedule, we plan to
recruit an expanded cohort of up to 24 evaluable patients who have tumor types
with a high likelihood of DTD over-expression to explore possible markers of
anticancer activity.
In December 2004, we entered into an agreement with the University of
Colorado Health Sciences Center, the University of Salford and Cancer Research
Technology under which we obtained exclusive worldwide rights to certain
intellectual property surrounding RH1.
EFAPROXYN
TM
(efaproxiral)
Development Discontinued
In mid-2007, we discontinued the development of
EFAPROXYN, our former lead product candidate, after announcing top-line results
from ENRICH, a Phase 3 clinical trial of EFAPROXYN plus whole brain radiation
therapy, or WBRT, in women with brain metastases originating from breast
cancer. The study failed to achieve its
primary endpoint of demonstrating a statistically significant improvement in
overall survival in patients receiving EFAPROXYN plus WBRT, compared to
patients receiving WBRT alone. We are
currently pursuing the sale of our rights to EFAPROXYN although we may not
receive any material consideration for any sale. The discontinuation of EFAPROXYN has caused
no significant decrease in the results of operations from the three months
ended March 31, 2008 as compared to the same period in 2007.
Results
of Operations
We are a development stage company. Since our
inception in 1992, we have not generated any revenue from product sales and
have experienced significant net losses and negative cash flows from
operations. We have incurred these losses principally from costs incurred in
our research and development programs, our clinical manufacturing, and from our
marketing, general and administrative expenses. Our ability to generate revenue
and achieve profitability is dependent on our ability, alone or with partners,
to successfully complete the development of our product candidates, conduct
clinical trials, obtain the necessary regulatory approvals, and manufacture and
market our product candidates. The timing and costs to complete the successful
development of any of our product candidates are highly uncertain, and
therefore difficult to estimate. The lengthy process of seeking regulatory
approvals for our product candidates, and the subsequent compliance with
applicable regulations, require the expenditure of substantial resources.
Clinical development timelines, likelihood of success and total costs vary
widely and are impacted by a variety of risks and uncertainties discussed in
the Risk Factors section of Part II, Item 1A below. Because of
these risks and uncertainties, we cannot predict when or whether we will
successfully complete the development of any of our product candidates or the
ultimate costs of such efforts. Due to these same factors, we cannot be certain
when, or if, we will generate any revenue or net cash inflow from any of our
current product candidates.
Even if our clinical trials demonstrate the safety and
effectiveness of our product candidates in their target indications, we do not
expect to be able to record commercial sales of any of our product candidates
until 2009, at the earliest. We expect to incur significant and growing net
losses for the foreseeable future as a result of our research and development
programs and the costs of preparing for the potential commercial launch of
PDX. Although the size and timing of our
future net losses are subject to significant uncertainty, we expect them to
increase over the next several years as we continue to fund our development
programs and prepare for the potential commercial launch of PDX.
15
Comparison
of three months ended March 31, 2008 and 2007
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Research
and development
|
|
$
|
5,973,612
|
|
$
|
3,289,428
|
|
Clinical
manufacturing
|
|
1,586,558
|
|
1,147,304
|
|
Marketing,
general and administrative
|
|
5,011,364
|
|
4,747,596
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
$
|
12,571,534
|
|
$
|
9,184,328
|
|
Research
and Development.
Research and development expenses
include the costs of certain personnel, basic research, preclinical studies,
clinical trials, regulatory affairs, biostatistical data analysis, patents and
licensing fees for our product candidates.
Research and development expenses for the three months ended March 31,
2008 and 2007 were $6.0 million and $3.3 million, respectively. The $2.7 million increase in research and
development expenses in the three months ended March 31, 2008 as compared
to the same period in 2007 was primarily due to the following:
·
a
$2.3 million increase in clinical trial costs involving PDX, including
increased costs for PROPEL and initiation of patient enrollment in three new
trials involving PDX after the first quarter of 2007;
·
a
$411,000 increase in non-cash stock-based compensation expense, as discussed in
more detail below; and
·
a
$200,000 increase related to key personnel changes and related travel costs,
mainly attributable to additional headcount and increases in compensation costs
year over year.
These increases were partially offset by a $466,000
decrease in preclinical study costs, primarily related to PDX.
For the remainder of 2008, we expect our average
quarterly research and development expenses to increase relative to the amount
recorded for the three months ended March 31, 2008 due to the following:
·
increases
in costs for our ongoing and planned clinical trials;
·
an
increase in personnel costs, primarily resulting from additional headcount; and
·
an increase in non-cash
stock-based compensation expense related to grants for new employees and a full
quarter of expense related to our annual grants to existing employees which
occurred at the end of February 2008.
Clinical
Manufacturing.
Clinical manufacturing expenses include
the costs of certain personnel, third-party manufacturing costs for development
of drug materials for use in clinical trials and preclinical studies, and costs
associated with pre-commercial scale-up of manufacturing to support anticipated
regulatory and potential commercial requirements. Clinical manufacturing expenses for the three
months ended March 31, 2008 and 2007 were $1.6 million and $1.1 million,
respectively. The $439,000 increase in
clinical manufacturing expenses in the three months ended March 31, 2008
as compared to the same period in 2007 was primarily due to increases in
third-party manufacturing costs for clinical trial material and pre-commercial
scale-up activities for PDX.
For the remainder of 2008, we expect our average
quarterly clinical manufacturing expenses to increase relative to the amount
recorded for the three months ended March 31, 2008 due to the following:
·
an
increase in third-party manufacturing costs for PDX to support ongoing and
planned clinical trials and pre-commercial scale-up;
·
an
increase in personnel costs primarily resulting from additional headcount; and
·
an
increase in non-cash stock-based compensation expense related to grants for new
employees and a full quarter of expense related to our annual grants to
existing employees which occurred at the end of February 2008
.
16
Marketing, General and
Administrative.
Marketing, general and administrative
expenses include costs for pre-marketing activities, corporate development,
executive administration, corporate offices and related infrastructure. Marketing, general and administrative
expenses for the three months ended March 31, 2008 and 2007 were $5.0
million and $4.7 million, respectively.
The $264,000 increase in marketing, general and administrative expenses
in the three months ended March 31, 2008 as compared to the same period in
2007 was primarily due to an increase in non-cash stock-based compensation
expense, as discussed in more detail below.
For the remainder of 2008, we expect our average
quarterly marketing, general and administrative expenses to increase relative
to the amount recorded for the three months ended March 31, 2008 due to
the following:
·
an
increase in non-cash stock-based compensation expense related to grants for new
employees and a full quarter of expense related to our annual grants to
existing employees which occurred at the end of February 2008;
·
an
increase in costs relating to pre-commercial planning activities for PDX; and
·
an
increase in personnel costs, primarily resulting from additional headcount
.
Stock-based Compensation
Expense.
S
tock-based compensation expense for the
three months ended March 31, 2008 and 2007 has been recognized in
our Statements of Operations as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Research
and development
|
|
$
|
675,787
|
|
$
|
264,300
|
|
Clinical
manufacturing
|
|
103,230
|
|
36,018
|
|
Marketing,
general and administrative
|
|
1,335,494
|
|
1,003,062
|
|
Total
stock-based compensation expense
|
|
$
|
2,114,511
|
|
$
|
1,303,380
|
|
Of the $2.1 million
of stock-based compensation recognized in the three months ended March 31,
2008, $1.9 million was related to our stock option plans, $147,000 related
to restricted stock and $20,000 related to our employee stock purchase
plan. Of the $1.3 million of
stock-based compensation recognized in the three months ended March 31,
2007, $1.1 million was related to our stock option plans, $178,000 related
to restricted stock and $9,000 related to our employee stock purchase
plan. The $811,000 increase in
stock-based compensation expense in the three months ended March 31, 2008
as compared to the same period in 2007 was primarily due to the increase in the
number of options outstanding resulting from grants for new employees and our
annual grants to existing employees which occurred in February 2008.
As of March 31,
2008, the unrecorded stock-based compensation balance related to stock option
awards was $10.2 million and will be recognized over an estimated
weighted-average amortization period of 1.5 years. As of March 31, 2008,
the unrecorded stock-based compensation balance related to restricted stock
awards was $552,000 and will be recognized over an estimated weighted-average
amortization period of 1.4 years.
Interest
and Other Income, Net
.
Interest income, net of interest expense, for the three months ended March 31,
2008 and 2007 was $565,000 and $773,000, respectively. The $209,000 decrease in net interest income
in the three months ended March 31, 2008 as compared to the same period in
2007 was primarily due to
lower average
investment balances
and lower yields on our cash, cash equivalents and
investments in marketable securities.
Liquidity
and Capital Resources
As of March 31, 2008, we had $50.5 million in
cash, cash equivalents, and investments in marketable securities. Since our inception, we have financed our
operations primarily through public and private sales of our equity securities,
which have resulted in net proceeds to us of $260.2 million through March 31,
2008. We have also generated
$22.2 million of net interest income since our inception from investing
the net proceeds of these financings.
We have used $204.9
million of cash for operating activities from our inception through March 31,
2008. Net cash used to fund our
operating activities for the three months ended March 31, 2008 and 2007
was $9.3 million and $7.9 million, respectively.
17
Net cash provided by
investing activities for the three months ended March 31, 2008 was $4.1
million and consisted primarily of proceeds from maturities of investments in
marketable securities, partially offset by the purchase of investments in
marketable securities. Net cash used in
investing activities for the three months ended March 31, 2007 was $20.4
million and consisted primarily of purchases of investments in marketable
securities, partially offset by the proceeds from maturities of investments in
marketable securities.
Net cash provided by financing activities for the
three months ended March 31, 2008 was $2.3 million and consisted of
proceeds associated with the exercise of common stock options. Net cash provided by financing activities for
the three months ended March 31, 2007 was $50.6 million and consisted
primarily of the net proceeds from the sale of 9,000,000 shares of common stock
in February 2007 in an underwritten offering at a price of $6.00 per share
(the February 2007 Financing). We
received net proceeds from the February 2007 Financing of approximately
$50.3 million, after deducting underwriting commissions of approximately
$3.2 million and other offering expenses of approximately $503,000.
Based upon the current status of our product
development plans, we believe that our cash, cash equivalents, and investments
in marketable securities as of March 31, 2008 should be adequate to
support our operations through at least the first quarter of 2009, although
there can be no assurance that this can, in fact, be accomplished. Our forecast
of the period of time through which our financial resources will be adequate to
support our operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially.
We anticipate continuing our current development
programs and/or beginning other long-term development projects involving our
product candidates. These projects may require many years and substantial
expenditures to complete and may ultimately be unsuccessful. Therefore, we will
need to obtain additional funds from outside sources to continue research and
development activities, fund operating expenses, pursue regulatory approvals
and build sales and marketing capabilities, as necessary. However, our actual
capital requirements will depend on many factors, including:
·
the
timing and outcome of our ongoing PROPEL trial;
·
costs
associated with the commercialization of our product candidates, if approved
for marketing;
·
our
evaluation of, and decisions with respect to, additional therapeutic
indications for which we may develop PDX;
·
our
evaluation of, and decisions with respect to, our strategic alternatives; and
·
costs associated with
securing potential in-license opportunities and additional product candidates
and conducting preclinical research and clinical development for our product
candidates.
We will be required to raise additional capital to
support our future operations, including the potential commercialization of PDX
in the event the PROPEL trial is positive and we obtain regulatory approval to
market PDX. We may seek to obtain this additional capital through arrangements
with corporate partners, equity or debt financings, or from other sources. Such
arrangements, if successfully consummated, may be dilutive to our existing
stockholders. However, there is no assurance that we will be successful in
consummating any such arrangements. In addition, in the event that additional
funds are obtained through arrangements with collaborative partners or other
sources, such arrangements may require us to relinquish rights to some of our
technologies, product candidates or products under development that we would
otherwise seek to develop or commercialize ourselves. If we are unable to
generate meaningful amounts of revenue from future product sales, if any, or
cannot otherwise raise sufficient additional funds to support our operations,
we may be required to delay, reduce the scope of or eliminate one or more of
our development programs and our business and future prospects for revenue and
profitability may be harmed.
Obligations and Commitments
Royalty
and License Fee Commitments for PDX
In December 2002, we entered into a license
agreement with Memorial Sloan-Kettering Cancer Center, SRI International and
Southern Research Institute, as amended, under which we obtained exclusive
worldwide rights to a portfolio of patents and patent applications related to
PDX (pralatrexate) and its uses. Under the terms of the agreement, we paid an
up-front license fee of $2.0 million upon execution of the agreement and are
also required to make certain additional cash payments based upon the
achievement of certain clinical development or regulatory milestones or the
passage of certain time periods. To date,
18
we have made aggregate milestone payments of $2.0
million based on the passage of time. In the future, we could make aggregate
milestone payments of $1.0 million upon the earlier of achievement of a
clinical development milestone or the passage of certain time periods (the Clinical
Milestone), and up to $10.3 million upon achievement of certain regulatory
milestones, including regulatory approval to market PDX in the United States or
Europe. The next scheduled payments toward the Clinical Milestone of $500,000
each are currently due on December 23, 2008 and 2009.
The up-front license fee and all milestone
payments under the agreement have been or will be recorded to research and
development expense when incurred
. Under the terms of the agreement, we
are required to fund all development programs and will have sole responsibility
for all commercialization activities. In addition, we will pay the licensors a
royalty based on a percentage of net revenues arising from sales of the product
or sublicense revenues arising from sublicensing the product, if and when such
sales or sublicenses occur.
Critical
Accounting Policies
Our discussion and analysis of our financial condition
and results of operations are based upon our financial statements, which 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 assets, liabilities, and expenses. We base our estimates on historical
experience available information and assumptions that we believe to be
reasonable under the circumstances.
Actual results may differ from these estimates under different
assumptions or conditions. For a
description of our critical accounting policies, please see our Annual Report
on Form 10-K for the fiscal year ended December 31, 2007.
Recent
Accounting Pronouncements
For a description of our recent accounting
pronouncements, please see Note 7 of the unaudited March 31, 2008
financial statements included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We do not use derivative financial instruments or
auction rate securities in our investment portfolio and have no foreign
exchange contracts. Our financial instruments
as of March 31, 2008 consist of cash, cash equivalents, investments in
marketable securities, and accounts payable.
All highly liquid investments with original maturities of three months
or less are considered to be cash equivalents.
We invest in marketable securities in accordance with
our investment policy. The primary
objectives of our investment policy are to preserve principal, maintain proper
liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality
standards for our investments and limits the amount of credit exposure to any
single issue, issuer or type of investment.
The average duration of the issues in our portfolio of investments in
marketable securities as of March 31, 2008 is approximately four
months. As of March 31, 2008, our
investments in marketable securities of $37.6 million are all classified
as held-to-maturity and were held in a variety of interest-bearing instruments,
consisting mainly of high-grade corporate notes.
Investments in fixed-rate interest-earning instruments
carry varying degrees of interest rate risk.
The fair market value of our fixed-rate securities may be adversely
impacted due to a rise in interest rates.
In general, securities with longer maturities are subject to greater
interest-rate risk than those with shorter maturities. Due in part to this factor, our interest
income may fall short of expectations or we may suffer losses in principal if
securities are sold that have declined in market value due to changes in
interest rates. Due to the short
duration of our investment portfolio, we believe an immediate 10% change in
interest rates would not be material to our financial condition or results of
operations.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures
As of the end of the
period covered by this report, an evaluation was carried out under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer (the Evaluating
Officers), of the effectiveness of our disclosure controls and procedures, as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended (Exchange Act). Based on that
evaluation, our management, including the Evaluating Officers, concluded that
our disclosure controls and procedures were effective as of March 31, 2008
to ensure that
19
information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management, including the
Evaluating Officers, as appropriate, to allow timely decisions regarding
required disclosure.
No
Changes in Internal Control over Financial Reporting
There were no changes in
our internal controls over financial reporting during the three months ended March 31,
2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
The Company and one of its former officers were named
as defendants in a purported securities class action lawsuit filed in May 2004
in the United States District Court for the District of Colorado (the District
Court). An amended complaint was filed in August 2004. The lawsuit was
brought on behalf of a purported class of purchasers of our securities during
the period from May 29, 2003 to April 29, 2004, and sought
unspecified damages relating to the issuance of allegedly false and misleading
statements regarding EFAPROXYN, one of our former product candidates, during
this period and subsequent declines in our stock price. On October 20,
2005, the District Court granted the defendants motion to dismiss the lawsuit
with prejudice. In an opinion dated October 20, 2005, the District Court
concluded that the plaintiffs complaint failed to meet the legal requirements
applicable to its alleged claims.
On November 20, 2005, the plaintiff appealed the
District Courts decision to the U.S. Court of Appeals for the Tenth Circuit
(the Court of Appeals). On February 6, 2008, the parties signed
a stipulation of settlement, settling the case for $2,000,000. Neither we
nor our former officer admits any liability in connection with the settlement.
The Court of Appeals accordingly has remanded the case to the District
Court for consideration of the settlement. The settlement is subject to
various conditions, including without limitation approval of the District
Court. We expect that the amount of the
settlement in excess of our deductible will be covered by our insurance
carrier. In the event the settlement
does not become final, we intend to vigorously defend against the plaintiffs
appeal. If the Court of Appeals then were to reverse the District Courts
decision and we were not successful in our defense of such claims, we could be
forced to make significant payments to the plaintiffs, and such payments could
have a material adverse effect on our business, financial condition, results of
operations and cash flows to the extent such payments are not covered by our
insurance carriers. Even if our defense against such claims were successful,
the litigation could result in substantial costs and divert managements
attention and resources, which could adversely affect our business. As of March 31,
2008, we have recorded $2,000,000 in accrued litigation settlement costs, which
represents our best estimate of the potential gross amount of the settlement
costs to be paid to the plaintiffs, and $1,765,000 in prepaid expenses and
other assets, which represents the amount we expect to be reimbursed from our
insurance carrier. The net difference of $235,000 between these amounts
represents the remaining unpaid deductible under our insurance policy, and this
amount was recorded to marketing, general and administrative expenses during
the year ended December 31, 2006.
ITEM 1A. RISK FACTORS
Our business faces significant
risks. These risks include those described below and may include additional
risks of which we are not currently aware or which we currently do not believe
are material. If any of the events or circumstances described in the following
risk factors actually occurs, they may materially harm our business, financial
condition, operating results and cash flow. As a result, the market price of
our common stock could decline. Additional risks and uncertainties that are not
yet identified or that we think are immaterial may also materially harm our
business, operating results and financial condition.
Stockholders
and potential investors in shares of our common stock should carefully consider
the following risk factors, which hereby update those risks contained in the Risk
Factors section of our Annual Report on Form 10-K for the year ended December 31, 2007, in
addition to other information and risk factors in this report. We are identifying these risk factors as
important factors that could cause our actual results to differ materially from
those contained in any written or oral forward-looking statements made by or on
behalf of the Company. We are relying upon
the safe harbor for all forward-looking statements in this report, and any such
statements made by or on behalf of the Company are qualified by reference to
the following cautionary statements, as well as to those set forth elsewhere in
this report. We consistently update and include our risk factors in our
Quarterly Reports on Form 10-Q. Risk factors which have been substantively
changed from those set
20
forth
in our Annual Report on Form 10-K for the period ended December 31,
2007 have been marked with an asterisk immediately following the heading of
such risk factor.
We
have a history of net losses and an accumulated deficit, and we may never
generate revenue or achieve or maintain profitability in the future. *
Since our inception in 1992, we have not generated any
revenue from product sales and have experienced significant net losses and
negative cash flows from operations. To date, we have financed our operations
primarily through the private and public sale of securities. For the three months ended March 31,
2008, we had a net loss of $12.0 million.
As of March 31, 2008, we had accumulated a deficit during our
development stage of $259.9 million.
We have incurred these losses principally from costs incurred in our
research and development programs, our clinical manufacturing, and from our
marketing, general and administrative expenses. We expect to continue incurring
net losses for the foreseeable future. Our ability to generate revenue and
achieve profitability is dependent on our ability, alone or with partners, to
successfully complete the development of our product candidates, conduct
clinical trials, obtain the necessary regulatory approvals, and manufacture and
market our product candidates. We may never generate revenue from product sales
or become profitable. We expect to continue to spend substantial amounts on
research and development, including amounts spent on conducting clinical trials
for our product candidates, and in preparing for the potential commercial
launch of our product candidates. We may not be able to continue as a going
concern if we are unable to generate meaningful amounts of revenue to support
our operations or cannot otherwise raise the necessary funds to support our
operations.
Our near-term prospects are substantially
dependent on PDX, our lead product candidate. If we are unable to
successfully develop and obtain regulatory approval for PDX for the treatment
of patients with relapsed or refractory PTCL, our ability to generate revenue
will be significantly delayed.
We currently have no products that are approved for
commercial sale. Our product candidates are in various stages of
development, and significant research and development, financial resources and
personnel will be required to develop commercially viable products and obtain
regulatory approvals for them. Most of our efforts and expenditures over
the next few years will be devoted to PDX. Accordingly, our future
prospects are substantially dependent on the successful development, regulatory
approval and commercialization of PDX for the treatment of patients with
relapsed or refractory PTCL. PDX is not expected to be commercially
available for this or any other indication until at least 2009. RH1 is in
an earlier stage of development relative to PDX, and if both PDX and RH1 are
approved for marketing, we expect that RH1 would not be commercially available
until after PDX is commercially available. Further, certain of the
indications that we are pursuing have relatively low incidence rates, which may
make it difficult for us to enroll a sufficient number of patients in our
clinical trials on a timely basis, or at all, and may limit the revenue
potential of our product candidates. If we are unable to successfully
develop, obtain regulatory approval for and commercialize PDX for the treatment
of relapsed or refractory PTCL, our ability to generate revenue from product
sales will be significantly delayed and our stock price would likely decline.
We
cannot predict when or if we will obtain regulatory approval to commercialize
our product candidates. *
The research, testing, manufacturing, labeling,
approval, selling, marketing and distribution of drug products are subject to
extensive regulation by the FDA and other regulatory authorities in the United
States and other countries, which regulations differ from country to country.
Our product candidates are in the preclinical and clinical stages of
development and have not been approved for marketing in the United States. A
pharmaceutical product cannot be marketed in the United States or most other
countries until it has completed a rigorous and extensive regulatory review and
approval process. If we fail to obtain regulatory approval to market our
product candidates, we will be unable to sell our products and generate
revenue, which would jeopardize our ability to continue operating our business.
Satisfaction of regulatory requirements typically takes many years, is
dependent upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Of particular significance are the
requirements covering research and development, testing, manufacturing, quality
control, labeling and promotion of drugs for human use. We may not obtain
regulatory approval for any product candidates we develop, including PDX. For a
complete description of the regulatory approval process and related risks,
please refer to the Government Regulation section of Item 1 of our Annual
Report on Form 10-K for the year ended December 31, 2007.
If
our product candidates, including PDX, fail to meet safety and efficacy
endpoints in clinical trials, they will not receive regulatory approval, and we
will be unable to market them. *
Our product candidates may not prove to be safe and
efficacious in clinical trials and may not meet all of the applicable
regulatory requirements needed to receive regulatory approval. The clinical
development and regulatory approval process is
21
extremely expensive and takes many years. Failure can
occur at any stage of development, and the timing of any regulatory approval
cannot be accurately predicted. In addition, failure to comply with the FDA and
other applicable United States and foreign regulatory requirements applicable
to clinical trials may subject us to administrative or judicially imposed
sanctions.
We completed patient enrollment in our pivotal Phase 2
PROPEL trial in April 2008. We
cannot assure you that the design of, or data collected from, the PROPEL trial
will be adequate to demonstrate the safety and efficacy of PDX for the
treatment of patients with relapsed or refractory PTCL, or otherwise be
sufficient to support FDA or any foreign regulatory approval, even though
PROPEL may be positive and we have a SPA agreement with the FDA for the trial.
If the PROPEL trial fails to achieve its safety and efficacy endpoints, we may
be unable to obtain regulatory approval to commercialize PDX, and our business
and stock price would be harmed. Further, even if we believe the data from the
trial are positive, the FDA may disagree with our interpretation and determine
that the data are not sufficient to support approval. If we fail to obtain
regulatory approval for PDX or any of our other current or future product candidates,
we will be unable to market and sell them and therefore may never generate
meaningful amounts of revenue or become profitable.
As part of the regulatory process, we must conduct
clinical trials for each product candidate to demonstrate safety and efficacy
to the satisfaction of the FDA and other regulatory authorities abroad. The
number and design of clinical trials that will be required varies depending on
the product candidate, the condition being evaluated, the trial results, and
regulations applicable to any particular product candidate. The design of our
clinical trials is based on many assumptions about the expected effect of our
product candidates, and if those assumptions prove incorrect, the clinical
trials may not demonstrate the safety or efficacy of our product candidates.
Preliminary results may not be confirmed upon full analysis of the detailed
results of a trial, and prior clinical trial program designs and results may
not be predictive of future clinical trial designs or results. Product
candidates in later stage clinical trials may fail to show the desired safety
and efficacy despite having progressed through initial clinical trials with
acceptable endpoints. For example, we terminated the development of EFAPROXYN,
one of our former product candidates, when it failed to demonstrate
statistically significant improvement in overall survival in the targeted
patients in a Phase 3 clinical trial. If our product candidates fail to show
clinically significant benefits, they will not be approved for marketing.
We
may experience delays in our clinical trials that could adversely affect our
financial position and our commercial prospects.
We do not know when our current clinical trials,
including our PROPEL trial, will be completed, if at all. We also cannot
accurately predict when other planned clinical trials will begin or be
completed. Many factors affect patient enrollment, including the size of the
patient population, the proximity of patients to clinical sites, the
eligibility criteria for the trial, competing clinical trials and new drugs
approved for the conditions we are investigating. Other companies are
conducting clinical trials and have announced plans for future trials that are
seeking or likely to seek patients with the same diseases as those we are
studying. Competition for patients in some cancer trials is particularly
intense because of the limited number of leading specialist physicians and the
geographic concentration of major clinical centers.
As a result of the numerous factors which can affect
the pace of progress of clinical trials, our trials may take longer to enroll
patients than we anticipate, if they can be completed at all. Delays in patient
enrollment in the trials may increase our costs and slow our product development
and approval process. Our product development costs will also increase if we
need to perform more or larger clinical trials than planned. If other companies
product candidates show favorable results, we may be required to conduct
additional clinical trials to address changes in treatment regimens or for our
products to be commercially competitive. Any delays in completing our clinical
trials will delay our ability to generate revenue from product sales, and we
may have insufficient capital resources to support our operations. Even if we do have sufficient capital
resources, our ability to become profitable will be delayed.
While
we have negotiated a special protocol assessment with the FDA relating to our
PROPEL trial, this agreement does not guarantee any particular outcome from
regulatory review of the trial or the product, including any regulatory
approval. *
The protocol for the PROPEL trial was reviewed by the
FDA under its special protocol assessment, or SPA, process, which allows for
FDA evaluation of a clinical trial protocol intended to form the primary basis
of an efficacy claim in support of a new drug application, and provides an
agreement that the study design, including trial size, clinical endpoints
and/or data analyses are acceptable to the FDA. However, the PROPEL trial
protocol does not specify the response rate required to support FDA approval
and the response rate will need to be adequate to support approval. In addition, even if we believe PROPEL is
positive, a SPA agreement is not a guarantee of approval, and we cannot be
certain that the design of, or data collected from, the PROPEL trial will be
adequate to demonstrate the safety and efficacy of PDX for the treatment of
patients with relapsed or refractory PTCL, or otherwise be sufficient to
support FDA or any foreign regulatory approval. Further, the
22
SPA agreement is not binding on the FDA if public
health concerns unrecognized at the time the SPA agreement is entered into become
evident, other new scientific concerns regarding product safety or efficacy
arise, or if we fail to comply with the agreed upon trial protocols. In
addition, the SPA agreement may be changed by us or the FDA on written
agreement of both parties, and the FDA retains significant latitude and
discretion in interpreting the terms of the SPA agreement and the data and
results from the PROPEL trial. As a result, we do not know how the FDA will
interpret the parties respective commitments under the SPA agreement, how it
will interpret the data and results from the PROPEL trial, or whether PDX will
receive any regulatory approvals as a result of the SPA agreement or the
clinical trial. Therefore, despite the potential benefits of the SPA agreement,
significant uncertainty remains regarding the clinical development and
regulatory approval process for PDX for the treatment of PTCL.
We
may be required to suspend, repeat or terminate our clinical trials if they are
not conducted in accordance with regulatory requirements, the results are
negative or inconclusive or the trials are not well designed. *
Clinical trials must be conducted in accordance with
the FDAs Good Clinical Practices or other applicable foreign government
guidelines and are subject to oversight by the FDA, other foreign governmental
agencies and Institutional Review Boards, or IRBs, at the medical institutions
where the clinical trials are conducted. In addition, clinical trials must be
conducted with product candidates produced under the FDAs Good Manufacturing
Practices, and may require large numbers of test subjects. Clinical trials may
be suspended by the FDA other foreign governmental agencies, or us for various
reasons, including:
·
deficiencies
in the conduct of the clinical trials, including failure to conduct the
clinical trial in accordance with regulatory requirements or clinical
protocols;
·
deficiencies
in the clinical trial operations or trial sites resulting in the imposition of
a clinical hold;
·
the
product candidate may have unforeseen adverse side effects;
·
the
time required to determine whether the product candidate is effective may be
longer than expected;
·
fatalities
or other adverse events arising during a clinical trial due to medical problems
that may not be related to clinical trial treatments;
·
the
product candidate may not appear to be more effective than current therapies;
·
quality
or stability of the product candidate may fall below acceptable standards; or
·
we may
not be able to produce sufficient quantities of the product candidate to
complete the trials.
In addition, changes in regulatory requirements and
guidance may occur and we may need to amend clinical trial protocols to reflect
these changes. Amendments may require us to resubmit our clinical trial
protocols to IRBs for reexamination, which may impact the costs, timing or
successful completion of a clinical trial. Due to these and other factors, our
current product candidates or any of our other future product candidates could
take a significantly longer time to gain regulatory approval than we expect or
may never gain approval, which could reduce or eliminate our revenue by
delaying or terminating the potential commercialization of our product
candidates.
Even if we achieve positive interim results in
clinical trials, these results do not necessarily predict final results, and
acceptable results in early trials may not be repeated in later trials. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations that could delay, limit or prevent regulatory clearances, and
the FDA can request that we conduct additional clinical trials. A number of
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials. As a
result, there can be no assurance that our PROPEL trial will achieve its
primary or secondary endpoints. In addition, negative or inconclusive results
or adverse medical events during a clinical trial could cause a clinical trial
to be repeated or terminated. Also, failure to construct clinical trial
protocols to screen patients for risk profile factors relevant to the trial for
purposes of segregating patients into the patient populations treated with the
drug being tested and the control group could result in either group
experiencing a disproportionate number of adverse events and could cause a
clinical trial to be repeated or terminated. If we have to conduct additional
clinical trials, whether for PDX or any other product candidate, it would
significantly increase our expenses and delay potential marketing of our
product candidates.
Reports
of adverse events or safety concerns involving our product candidates or in
related technology fields or other companies clinical trials could delay or
prevent us from obtaining regulatory approval or negatively impact public
perception of our product candidates.
Our product candidates may produce serious adverse
events. These adverse events could interrupt, delay or halt clinical trials of
our product candidates and could result in the FDA or other regulatory
authorities denying approval of our product candidates for any or all targeted
indications. An independent data safety monitoring board, the FDA, other
regulatory authorities or the Company may suspend or terminate clinical trials
at any time. We cannot assure you that any of our product candidates will be
safe for human use.
At present, there are a number of clinical trials
being conducted by other pharmaceutical companies involving small molecule
chemotherapeutic agents. If other pharmaceutical companies announce that they
observed frequent adverse events or unknown safety issues in their trials
involving compounds similar to, or competitive with, our product candidates, we
could encounter delays in the timing of our clinical trials or difficulties in
obtaining the approval of our product candidates. In addition, the public perception of our
product candidates might be adversely affected, which could harm our business
and results of operations and cause the market price of our common stock to
decline, even if the concern relates to another companys product or product
candidate.
Due
to our reliance on contract research organizations and other third parties to
conduct our clinical trials, we are unable to directly control the timing,
conduct and expense of our clinical trials.
We rely primarily on third parties to conduct our
clinical trials, including the PROPEL trial. As a result, we have had and will
continue to have less control over the conduct of our clinical trials, the
timing and completion of the trials, the required reporting of adverse events
and the management of data developed through the trial than would be the case
if we were relying
23
entirely upon our own staff. Communicating with
outside parties can also be challenging, potentially leading to mistakes as
well as difficulties in coordinating activities. Outside parties may have
staffing difficulties, may undergo changes in priorities or may become
financially distressed, adversely affecting their willingness or ability to
conduct our trials. We may experience unexpected cost increases that are beyond
our control. Problems with the timeliness or quality of the work of a contract
research organization may lead us to seek to terminate the relationship and use
an alternative service provider. However, making this change may be costly and
may delay our trials, and contractual restrictions may make such a change
difficult or impossible. Additionally, it may be impossible to find a
replacement organization that can conduct our trials in an acceptable manner
and at an acceptable cost.
Even
if our product candidates meet safety and efficacy endpoints in clinical trials,
regulatory authorities may not approve them, or we may face post-approval
problems that require withdrawal of our products from the market. *
We will not be able to commercialize any of our
product candidates until we have obtained regulatory approval. We have limited
experience in filing and pursuing applications necessary to gain regulatory
approvals, which may place us at risk of delays, overspending and human
resources inefficiencies.
Our product candidates may not be approved even if
they achieve their endpoints in clinical trials. Regulatory agencies, including
the FDA or their advisors, may disagree with our interpretations of data from
preclinical studies and clinical trials.The FDA has substantial discretion in
the approval process, and when or whether regulatory approval will be obtained
for any drug we develop. For example, even though we established a SPA with the
FDA for our PROPEL trial, there is no guarantee that the data generated from
the PROPEL trial will be adequate to support FDA approval. Regulatory agencies
also may approve a product candidate for fewer conditions than requested or may
grant approval subject to the performance of post-marketing studies for a
product candidate. In addition, regulatory agencies may not approve the labeling
claims that are necessary or desirable for the successful commercialization of
our product candidates.
Even if we receive regulatory approvals, our product
candidates may later produce adverse events that limit or prevent their
widespread use or that force us to withdraw those product candidates from the
market. In addition, a marketed product continues to be subject to strict
regulation after approval and may be required to undergo post-approval studies.
Any unforeseen problems with an approved product or any violation of
regulations could result in restrictions on the product, including its
withdrawal from the market. Any delay in or failure to receive or maintain
regulatory approval for any of our products could harm our business and prevent
us from ever generating meaningful revenues or achieving profitability.
Even
if we receive regulatory approval for our product candidates, we will be
subject to ongoing regulatory obligations and review. *
Following any regulatory approval of our product candidates,
we will be subject to continuing regulatory obligations such as safety
reporting requirements and additional post-marketing obligations, including
regulatory oversight of the promotion and marketing of our products. In
addition, we or our third-party manufacturers will be required to adhere to
regulations setting forth current Good Manufacturing Practices, or cGMP. These
regulations cover all aspects of the manufacturing, storage, testing, quality
control and record keeping relating to our product candidates. Furthermore, we
or our third-party manufacturers must pass a pre-approval inspection of
manufacturing facilities by the FDA and foreign authorities before obtaining
marketing approval and will be subject to periodic inspection by these regulatory
authorities to ensure strict compliance with cGMP or other applicable
government regulations and corresponding foreign standards. We do not have
control over a third-party manufacturers compliance with these regulations and
standards. Such inspections may result in compliance issues that could prevent
or delay marketing approval, or require the expenditure of financial or other
resources to address. If we or our third-party manufacturers fail to comply
with applicable regulatory requirements, we may be subject to fines, suspension
or withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.
Budget
constraints may force us to delay our efforts to develop certain product
candidates in favor of developing others, which may prevent us from
commercializing all product candidates as quickly as possible.
Because we have limited resources, and because
research and development is an expensive process, we must regularly assess the
most efficient allocation of our research and development budget. As a result,
we may have to prioritize development candidates and may not be able to fully
realize the value of some of our product candidates in a timely manner, if at
all.
If
we fail to obtain the capital necessary to fund our operations, we will be
unable to successfully develop or commercialize our product candidates. *
We expect that significant additional capital will be
required in the future to continue our research and development efforts and to
commercialize our product candidates, if approved for marketing. Our actual
capital requirements will depend on many factors, including:
24
·
the
timing and outcome of our ongoing PROPEL trial;
·
costs
associated with the commercialization of our product candidates, if approved
for marketing;
·
our
evaluation of, and decisions with respect to, additional therapeutic
indications for which we may develop PDX or RH1;
·
our
evaluation of, and decisions with respect to, our strategic alternatives; and
·
costs
associated with securing potential in-license opportunities and additional
product candidates and conducting preclinical research and clinical development
for our product candidates.
We will need to raise additional capital to support
our future operations, including the potential commercialization of PDX in the
event the PROPEL trial is positive and we obtain regulatory approval to market PDX.
We may seek to obtain this additional capital through arrangements with
corporate partners, equity or debt financings, or from other sources. Such
arrangements, if successfully consummated, may be dilutive to our existing
stockholders. However, there is no assurance that additional financing will be
available when needed, or that, if available, we will obtain such financing on
terms that are favorable to our stockholders or us. In addition, in the event
that additional funds are obtained through arrangements with collaborative
partners or other sources, such arrangements may require us to relinquish
rights to some of our technologies, product candidates or products under
development that we would otherwise seek to develop or commercialize ourselves. If we are unable to generate meaningful
amounts of revenue from future product sales, if any, or cannot otherwise raise
sufficient additional funds to support our operations, we may be required to
delay, reduce the scope of or eliminate one or more of our development programs
and our business and future prospects for revenue and profitability may be
harmed.
If
we are unable to effectively protect our intellectual property, we will be
unable to prevent third parties from using our technology, which would impair
our competitiveness and ability to commercialize our product candidates. In
addition, enforcing our proprietary rights may be expensive and result in
increased losses.
Our success will depend in part on our ability to
obtain and maintain meaningful patent protection for our products, both in the
United States and in other countries. We rely on patents to protect a large
part of our intellectual property and our competitive position. Any patents
issued to or licensed by us could be challenged, invalidated, infringed,
circumvented or held unenforceable. In addition, it is possible that no patents
will issue on any of our licensed patent applications. It is possible that the
claims in patents that have been issued or licensed to us or that may be issued
or licensed to us in the future will not be sufficiently broad to protect our
intellectual property or that the patents will not provide protection against
competitive products or otherwise be commercially valuable. Failure to obtain
and maintain adequate patent protection for our intellectual property would
impair our ability to be commercially competitive.
Our commercial success will also depend in part on our
ability to commercialize our product candidates without infringing patents or
other proprietary rights of others or breaching the licenses granted to us. We
may not be able to obtain a license to third-party technology that we may
require to conduct our business or, if obtainable, we may not be able to
license such technology at a reasonable cost. If we fail to obtain a license to
any technology that we may require to commercialize our technologies or product
candidates, or fail to obtain a license at a reasonable cost, we will be unable
to commercialize the affected product or to commercialize it at a price that
will allow us to become profitable.
In addition to patent protection, we also rely upon
trade secrets, proprietary know-how and technological advances which we seek to
protect through confidentiality agreements with our collaborators, employees
and consultants. Our employees and consultants are required to enter into
confidentiality agreements with us. We also enter into non-disclosure
agreements with our collaborators and vendors, which are intended to protect
our confidential information delivered to third parties for research and other
purposes. However, these agreements could be breached and we may not have
adequate remedies for any breach, or our trade secrets and proprietary know-how
could otherwise become known or be independently discovered by others.
Furthermore, as with any pharmaceutical company, our
patent and other proprietary rights are subject to uncertainty. Our patent
rights related to our product candidates might conflict with current or future
patents and other proprietary rights of others. For the same reasons, the
products of others could infringe our patents or other proprietary rights.
Litigation or patent interference proceedings, either of which could result in
substantial costs to us, may be necessary to enforce any of our patents or
other proprietary rights, or to determine the scope and validity or
enforceability of other parties proprietary rights. The defense and
prosecution of patent and intellectual property infringement claims are both
costly and time consuming,
25
even if the outcome is favorable to us. Any adverse
outcome could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require us to cease selling
our future products. We are not currently a party to any patent or other
intellectual property infringement claims.
We
do not have manufacturing facilities or capabilities and are dependent on third
parties to fulfill our manufacturing needs, which could result in the delay of
clinical trials, regulatory approvals, product introductions and commercial
sales.
We are dependent on third parties for the manufacture
and storage of our product candidates for clinical trials and, if approved, for
commercial sale. If we are unable to contract for a sufficient supply of our
product candidates on acceptable terms, or if we encounter delays or
difficulties in the manufacturing process or our relationships with our
manufacturers, we may not have sufficient product to conduct or complete our
clinical trials or support commercial requirements for our product candidates,
if approved for marketing.
Both PDX and RH1 are cytotoxic which requires
manufacturers of these substances to have specialized equipment and safety
systems to handle such substances. In addition, the starting materials for PDX
require custom preparations, which will require us to manage an additional set
of suppliers to obtain the needed supplies of PDX.
Given our lack of formal supply agreements and the
fact that in many cases our components are supplied by a single source, our
third party suppliers may be unable or unwilling to fulfill our potential
commercial needs or meet our deadlines, or the components they supply to us may
not meet our specifications and quality policies and procedures. If we need to
find an alternative supplier of PDX or other components, we may not be able to
contract for those components on acceptable terms, if at all. Any such failure to supply or delay caused by
such suppliers would have an adverse affect on our ability to continue clinical
development of our product candidates or commercialize any future products.
Even if we obtain approval to market our product
candidates in one or more indications, our current or future manufacturers may
be unable to accurately and reliably manufacture commercial quantities of our
product candidates at reasonable costs, on a timely basis and in compliance
with the FDAs current Good Manufacturing Practices. If our current or future contract
manufacturers fail in any of these respects, our ability to timely complete our
clinical trials, obtain required regulatory approvals and successfully
commercialize our product candidates will be materially and adversely affected.
This risk may be heightened with respect to PDX and RH1 as there are a limited
number of fill/finish manufacturers with the ability to handle cytotoxic
products such as PDX and RH1. Our
reliance on contract manufacturers exposes us to additional risks, including:
·
delays or failure to
manufacture sufficient quantities needed for clinical trials in accordance with
our specifications or to deliver such quantities on the dates we require;
·
our current and future
manufacturers are subject to ongoing, periodic, unannounced inspections by the
FDA and corresponding state and international regulatory authorities for
compliance with strictly enforced current Good Manufacturing Practice
regulations and similar state and foreign standards, and we do not have control
over our contract manufacturers compliance with these regulations and
standards;
·
our manufacturers may not
be able to comply with applicable regulatory requirements, which would prohibit
them from manufacturing products for us;
·
our
manufacturers may have staffing difficulties, may undergo changes in control or
may become financially distressed, adversely affecting their willingness or
ability to manufacture products for us;
·
our manufacturers might not
be able to fulfill our commercial needs, which would require us to seek new
manufacturing arrangements and may result in substantial delays in meeting
market demands;
·
if we need to change to
other commercial manufacturing contractors, the FDA and comparable foreign
regulators must approve our use of any new manufacturer, which would require
additional testing, regulatory filings and compliance inspections, and the new
manufacturers would have to be educated in, or themselves develop substantially
equivalent processes necessary for, the production of our products; and
·
we may not have
intellectual property rights, or may have to share intellectual property
rights, to any improvements in
26
the manufacturing processes or new manufacturing
processes for our products.
Any of these factors could result in the delay of
clinical trials, regulatory submissions, required approvals or
commercialization of our product candidates.
They could also entail higher costs and result in our being unable to
effectively commercialize our product candidates.
We may explore strategic partnerships that may
never materialize or may fail
.
We may, in the future,
periodically explore a variety of possible strategic partnerships in an effort
to gain access to additional complementary resources. At the current time, we
cannot predict what form such a strategic partnership might take. We are likely
to face significant competition in seeking appropriate strategic partners, and
these strategic partnerships can be complicated and time consuming to negotiate
and document. We may not be able to negotiate strategic partnerships on
acceptable terms, or at all. We are unable to predict when, if ever, we will
enter into any additional strategic partnerships because of the numerous risks
and uncertainties associated with establishing strategic partnerships.
If we enter into one or more strategic
partnerships, we may be required to relinquish important rights to and control
over the development of our product candidates or otherwise be subject to
unfavorable terms
.
Any future strategic
partnerships we enter into could subject us to a number of risks, including:
·
we
may be required to undertake the expenditure of substantial operational,
financial and management resources in integrating new businesses, technologies
and products;
·
we
may be required to issue equity securities that would dilute our existing
stockholders percentage ownership;
·
we
may be required to assume substantial actual or contingent liabilities;
·
we
may not be able to control the amount and timing of resources that our
strategic partners devote to the development or commercialization of product
candidates;
·
strategic
partners may delay clinical trials, provide insufficient funding, terminate a
clinical trial or abandon a product candidate, repeat or conduct new clinical
trials or require a new version of a product candidate for clinical testing;
·
strategic
partners may not pursue further development and commercialization of products
resulting from the strategic partnering arrangement or may elect to discontinue
research and development programs;
·
strategic
partners may not commit adequate resources to the marketing and distribution of
any future products, limiting our potential revenues from these products;
·
disputes
may arise between us and our strategic partners that result in the delay or
termination of the research, development or commercialization of our product
candidates or that result in costly litigation or arbitration that diverts
managements attention and consumes resources;
·
strategic
partners may experience financial difficulties;
·
strategic
partners may not properly maintain or defend our intellectual property rights
or may use our proprietary information in a manner that could jeopardize or
invalidate our proprietary information or expose us to potential litigation;
·
business
combinations or significant changes in a strategic partners business strategy
may also adversely affect a strategic partners willingness or ability to
complete its obligations under any arrangement;
·
strategic
partners could independently move forward with a competing product candidate
developed either independently or in collaboration with others, including our
competitors; and
·
strategic
partners could terminate the arrangement or allow it to expire, which would
delay the development and may increase the cost of developing our product
candidates.
27
Acceptance
of our products in the marketplace is uncertain, and failure to achieve market
acceptance will limit our ability to generate revenue and become profitable.
Even if approved for marketing, our products may not
achieve market acceptance. The degree of market acceptance will depend upon a
number of factors, including:
·
the receipt of timely
regulatory approval for the uses that we are studying;
·
the establishment and
demonstration in the medical community of the safety and efficacy of our
products and their potential advantages over existing and newly developed therapeutic
products;
·
ease of use of our
products;
·
reimbursement and coverage
policies of government and private payors such as Medicare, Medicaid, insurance
companies, health maintenance organizations and other plan administrators; and
·
the scope and effectiveness
of our sales and marketing efforts.
Physicians, patients, payors or the medical community
in general may be unwilling to accept, utilize or recommend the use of any of
our products.
The
status of reimbursement from third-party payors for newly approved health care
drugs is uncertain and failure to obtain adequate coverage and reimbursement
could limit our ability to generate revenue.
Our ability to successfully commercialize our products
will depend, in part, on the extent to which coverage and reimbursement for the
products will be available from government and health administration
authorities, private health insurers, managed care programs, and other
third-party payors.
Significant uncertainty exists as to the reimbursement
status of newly approved health care products. Third-party payors, including
Medicare, are challenging the prices charged for medical products and services.
Government and other third-party payors increasingly are attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new drugs and by refusing, in some cases, to provide coverage for uses of
approved products for disease conditions for which the FDA has not granted
labeling approval. Third-party insurance coverage may not be available to
patients for our products. If government and other third-party payors do not
provide adequate coverage and reimbursement levels for our product candidates,
their market acceptance may be reduced.
Health
care reform measures could adversely affect our business.
The business and financial condition of pharmaceutical
and biotechnology companies are affected by the efforts of governmental and
third-party payors to contain or reduce the costs of health care. In the United
States and in foreign jurisdictions there have been, and we expect that there
will continue to be, a number of legislative and regulatory proposals aimed at
changing the health care system. For example, in some countries other than the
United States, pricing of prescription drugs is subject to government control,
and we expect proposals to implement similar controls in the United States to
continue. We are unable to predict what additional legislation or regulation,
if any, relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect such legislation or
regulation would have on our business. The pendency or approval of such
proposals or reforms could result in a decrease in our stock price or limit our
ability to raise capital or to obtain strategic partnerships or licenses.
28
We may not obtain orphan drug exclusivity or we
may not receive the full benefit of orphan drug exclusivity even if we obtain
it. *
The FDA has awarded orphan drug status to PDX for the treatment of
patients with T-cell lymphoma. Under the Orphan Drug Act, if we are the first
company to receive FDA approval for this drug for the designated orphan drug
indication, we will obtain seven years of marketing exclusivity during which
FDA may not approve another companys application for the same drug for the same
orphan indication. Orphan drug
exclusivity would not prevent FDA approval of a different drug for the orphan
indication or the same drug for a different indication.
If
we fail to comply with healthcare fraud and abuse laws, we could face
substantial penalties and our business, operations and financial condition
could be adversely affected
.
*
As a biopharmaceutical company, even though we do not
and will not control referrals of health care services or bill directly to
Medicare, Medicaid or other third-party payors, certain federal and state
healthcare laws and regulations pertaining to fraud and abuse will be
applicable to our business. These laws and regulations, include, among others:
·
the
federal Anti-Kickback Statute, which prohibits, among other things, persons
from soliciting, receiving or providing remuneration, directly or indirectly,
to induce either the referral of an individual for an item or service or the
purchasing or ordering of a good or service, for which payment may be made
under federal health care programs such as the Medicare and Medicaid programs;
·
federal
false claims laws which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third-party payors that are false or fraudulent;
·
the
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,
which prohibits executing a scheme to defraud any healthcare benefit program or
making false statements relating to healthcare matters and which also imposes
certain requirements relating to the privacy, security and transmission of
individually identifiable health information;
·
federal
self-referral laws, such as STARK, which prohibits a physician from making a
referral to a provider of certain health services with which the physician or
the physicians family member has a financial interest; and
·
state
law equivalents of each of the above federal laws, such as anti-kickback and
false claims laws which may apply to items or services reimbursed by any
third-party payor, including commercial insurers, and state laws governing the
privacy of health information in certain circumstances, many of which differ
from each other in significant ways and often are not preempted by HIPAA.
Although there are a number of statutory exemptions and
regulatory safe harbors protecting certain common activities from prosecution
under the federal Anti-Kickback statute, the exemptions and safe harbors are
drawn narrowly, and practices that involve remuneration intended to induce
prescribing, purchases or recommendations may be subject to scrutiny if they do
not qualify for an exemption or safe harbor. Our practices may not in all cases
meet all of the criteria for safe harbor protection from anti-kickback
liability.
If our operations are found to be in violation of any
of the laws described above or any other governmental regulations that apply to
us, we may be subject to penalties, including civil and criminal penalties,
damages, fines and the curtailment or restructuring of our operations. Any
penalties, damages, fines, curtailment or restructuring of our operations could
adversely affect our ability to operate our business and our financial results.
Although compliance programs can mitigate the risk of investigation and
prosecution for violations of these laws, the risks cannot be entirely
eliminated. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal
expenses and divert our managements attention from the operation of our
business. Moreover, achieving and sustaining compliance with all applicable
federal and state fraud and abuse laws may prove costly.
If
we are unable to develop adequate sales, marketing or distribution capabilities
or enter into agreements with third parties to perform some of these functions,
we will not be able to commercialize our products effectively.
We have limited experience in sales, marketing and
distribution. To directly market and distribute any products, we must build a
sales and marketing organization with appropriate technical expertise and
distribution capabilities. We may attempt to build such a sales and marketing
organization on our own or with the assistance of a contract sales
organization. For some market opportunities, we may need to enter into
co-promotion or other licensing arrangements with larger pharmaceutical or
biotechnology firms in order to increase the likelihood of commercial success
for our products. We may not be able to establish sales, marketing and
distribution capabilities of our own or enter into such arrangements with third
parties in a timely manner or on acceptable terms. To the extent that we enter
into co-promotion or other licensing arrangements, our product revenues are
likely to be lower than if we directly marketed and sold our products, and some
or all of the revenues we receive will depend upon the efforts of third
parties, and these efforts may not be successful. Additionally, building
marketing and distribution capabilities may be more expensive than we
anticipate, requiring us to divert capital from other intended purposes or
preventing us from building our marketing and distribution capabilities to the
desired levels.
If
our competitors develop and market products that are more effective than ours,
our commercial opportunity will be reduced or eliminated.
Even if we obtain the necessary regulatory approvals
to market PDX or any other product candidate, our commercial opportunity will
be reduced or eliminated if our competitors develop and market products that
are more effective, have fewer
29
side effects or are less expensive than our product
candidates. Our potential competitors include large fully integrated
pharmaceutical companies and more established biotechnology companies, both of
which have significant resources and expertise in research and development,
manufacturing, testing, obtaining regulatory approvals and marketing. Academic
institutions, government agencies, and other public and private research
organizations conduct research, seek patent protection and establish
collaborative arrangements for research, development, manufacturing and
marketing. It is possible that competitors will succeed in developing
technologies that are more effective than those being developed by us or that
would render our technology obsolete or noncompetitive.
If
product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
product candidates.
The testing and marketing of pharmaceutical products
entail an inherent risk of product liability. Product liability claims might be
brought against us by consumers, health care providers or by pharmaceutical
companies or others selling our future products. If we cannot successfully
defend ourselves against such claims, we may incur substantial liabilities or
be required to limit the commercialization of our product candidates. We have
obtained limited product liability insurance coverage for our human clinical
trials. However, product liability insurance coverage is becoming increasingly
expensive, and we may be unable to maintain product liability insurance
coverage at a reasonable cost or in sufficient amounts to protect us against
losses due to product liability. A successful product liability claim in excess
of our insurance coverage could have a material adverse effect on our business,
financial condition and results of operations. We may not be able to obtain
commercially reasonable product liability insurance for any products approved
for marketing.
We
are currently involved in a securities class action litigation, which could
harm our business if management attention is diverted or the claims are decided
against us.
We have been named as a defendant in a purported
securities class action lawsuit seeking unspecified damages relating to the
issuance of allegedly false and misleading statements regarding EFAPROXYN
during the period from May 29, 2003 to April 29, 2004 and subsequent
declines in our stock price. In an opinion dated October 20, 2005, the
District Court concluded that the plaintiffs complaint failed to meet the
legal requirements applicable to its alleged claims and dismissed the
lawsuit. On November 20, 2005, the
plaintiff appealed the District Courts decision to the U.S. Court of Appeals
for the Tenth Circuit (the Court of Appeals). On February 6,
2008, the parties signed a stipulation of settlement, settling the case for
$2,000,000. The defendants do not admit any liability in connection with
the settlement. The Court of Appeals accordingly has remanded the case to
the District Court for consideration of the settlement. The settlement is
subject to various conditions, including without limitation approval of the
District Court. We expect that the
amount of the settlement in excess of our deductible will be covered by our
insurance carrier. In the event the
settlement does not become final, we intend to vigorously defend against the
plaintiffs appeal. If the Court of Appeals then were to reverse the District
Courts decision and we were not successful in our defense of such claims, we
could be forced to make significant payments to the plaintiffs, and such
payments could have a material adverse effect on our business, financial
condition, results of operations and cash flows to the extent such payments are
not covered by our insurance carriers. Even if our defense against such claims
were successful, the litigation could result in substantial costs and divert
managements attention and resources, which could adversely affect our
business. As of March 31, 2008, we have recorded $2,000,000 in accrued
litigation settlement costs, which represents our best estimate of the
potential gross amount of the settlement costs to be paid to the plaintiffs,
and $1,765,000 in prepaid expenses and other assets, which represents the
amount we expect to be reimbursed from our insurance carrier. The net
difference of $235,000 between these amounts represents the remaining unpaid
deductible under our insurance policy, and this amount was recorded to
marketing, general and administrative expenses during the year ended December 31,
2006.
Our success depends on retention of our President
and Chief Executive
Officer, Chief Medical Officer and other key
personnel.
We are highly dependent on our President and Chief
Executive Officer, Paul L. Berns, our Chief Medical Officer, Pablo J. Cagnoni,
M.D. and other members of our management team. We are named as the beneficiary
on a term life insurance policy covering Mr. Berns in the amount of $10.0
million. We also depend on academic collaborators for each of our research and
development programs. The loss of any of our key employees or academic
collaborators could delay our discovery research program and the development
and commercialization of our product candidates or result in termination of
them in their entirety. Mr. Berns and Dr. Cagnoni, as well as others
on our executive management team, have severance agreements with us, but the agreements
provide for at-will employment with no specified term. Our future success
also will depend in large part on our continued ability to attract and retain
other highly qualified scientific, technical and management personnel, as
30
well as personnel with expertise in clinical testing,
governmental regulation and commercialization. We face competition for
personnel from other companies, universities, public and private research
institutions, government entities and other organizations. If we are
unsuccessful in our recruitment and retention efforts, our business will be
harmed.
We also rely on consultants, collaborators and
advisors to assist us in formulating and conducting our research. All of our
consultants, collaborators and advisors are employed by other employers or are
self-employed and may have commitments to or consulting contracts with other
entities that may limit their ability to contribute to our company.
We
cannot guarantee that we will be in compliance with all potentially applicable
regulations.
The development, manufacturing, and, if approved,
pricing, marketing, sale and reimbursement of our products, together with our
general obligations, are subject to extensive regulation by federal, state and
other authorities within the United States and numerous entities outside of the
United States. We also have significantly fewer employees than many other
companies that have the same or fewer product candidates in late stage clinical
development and we rely heavily on third parties to conduct many important
functions.
As a publicly-traded company, we are subject to
significant regulations, some of which have either only recently been adopted,
including the Sarbanes Oxley Act of 2002, or are currently proposals subject to
change. We cannot assure you that we are or will be in compliance with all
potentially applicable regulations. If we fail to comply with the Sarbanes
Oxley Act of 2002 or any other regulations we could be subject to a range of
consequences, including restrictions on our ability to sell equity securities
or otherwise raise capital funds, the de-listing of our common stock from the
Nasdaq Global Market, suspension or termination of our clinical trials, failure
to obtain approval to market our product candidates, restrictions on future
products or our manufacturing processes, significant fines, or other sanctions
or litigation.
If
our internal controls over financial reporting are not considered effective,
our business and stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002
requires us to evaluate the effectiveness of our internal controls over
financial reporting as of the end of each fiscal year, and to include a
management report assessing the effectiveness of our internal controls over
financial reporting in our annual report on Form 10-K for that fiscal
year. Section 404 also requires our independent registered public
accounting firm to attest to, and report on, managements assessment of our
internal controls over financial reporting.
Our management, including our chief executive officer
and principal financial officer, does not expect that our internal controls
over financial reporting will prevent all error and all fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud involving a company have been, or will be, detected. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and we cannot assure you that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become ineffective because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. We cannot assure you that
we or our independent registered public accounting firm will not identify a
material weakness in our internal controls in the future. A material weakness
in our internal controls over financial reporting would require management and
our independent registered public accounting firm to consider our internal
controls as ineffective. If our internal controls over financial reporting are
not considered effective, we may experience a loss of public confidence, which
could have an adverse effect on our business and on the market price of our
common stock.
If
we do not progress in our programs as anticipated, our stock price could
decrease.
For planning purposes, we estimate the timing of a
variety of clinical, regulatory and other milestones, such as when a certain
product candidate will enter clinical development, when a clinical trial will
be initiated or completed, or when an application for regulatory approval will
be filed. Some of our estimates are included in this report. Our estimates are
based on information available to us as of the date of this report and a
variety of assumptions. Many of the underlying assumptions are outside of our
control. If milestones are not achieved when we estimated that they would be,
investors could be disappointed, and our stock price may decrease.
31
Warburg
Pincus Private Equity VIII, L.P. (Warburg) and Baker Brothers Life Sciences,
L.P. (Baker) each control a substantial percentage of the voting power of our
outstanding common stock.*
On March 2, 2005, we entered into a Securities
Purchase Agreement with Warburg Pincus Private Equity VIII, L.P. (Warburg)
and certain other investors pursuant to which we issued and sold an aggregate
of 2,352,443 shares of our Series A Exchangeable Preferred Stock (the Exchangeable
Preferred) at a price per share of $22.10, for aggregate gross proceeds of
approximately $52.0 million. On May 18, 2005, at our Annual Meeting
of Stockholders, our stockholders voted to approve the issuance of shares of
our common stock upon exchange of shares of the Exchangeable Preferred. As a
result of such approval, we issued a total of 23,524,430 shares of common stock
upon exchange of 2,352,443 shares of Exchangeable Preferred. In connection with
its purchase of the Exchangeable Preferred, Warburg entered into a standstill
agreement agreeing not to pursue certain activities the purpose or effect of
which may be to change or influence the control of the Company.
On February 2, 2007, we closed an underwritten
offering of 9,000,000 shares of common stock, of which Baker Brothers Life
Sciences, L.P. and certain other affiliated funds (collectively Baker)
purchased 3,300,000 shares, at a price per share of $6.00, for aggregate gross
proceeds of approximately $54.0 million (the February 2007 Financing)
. In
connection
with its purchase of shares in the February 2007 Financing, Baker entered
into a standstill agreement agreeing not to pursue certain activities the
purpose or effect of which might be to change or influence the control of the
Company.
As of March 31, 2008, we had 68,075,978 shares of
common stock outstanding, of which Warburg owned 22,624,430 shares, or
approximately 33.2% of the voting power of our outstanding common stock, and
Baker owned 9,863,065 shares, or approximately 14.5% of the voting power of our
outstanding common stock. Although each of Warburg and Baker have entered into
a standstill agreement with us, they are, and will continue to be, able to
exercise substantial influence over any actions requiring stockholder approval.
Anti-takeover
provisions in our charter documents and under Delaware law could discourage,
delay or prevent an acquisition of us, even if an acquisition would be
beneficial to our stockholders, and may prevent attempts by our stockholders to
replace or remove our current management.
Provisions of our amended and restated certificate of
incorporation and bylaws, as well as provisions of Delaware law, could make it
more difficult for a third party to acquire us, even if doing so would benefit
our stockholders. In addition, these provisions may frustrate or prevent any
attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our board of
directors. Because our board of directors is responsible for appointing the
members of our management team, these provisions could in turn affect any
attempt by our stockholders to replace current members of our management team.
These provisions include:
·
authorizing
the issuance of blank check preferred stock that could be issued by our board
of directors to increase the number of outstanding shares or change the balance
of voting control and thwart a takeover attempt;
·
prohibiting
cumulative voting in the election of directors, which would otherwise allow for
less than a majority of stockholders to elect director candidates;
·
prohibiting
stockholder action by written consent, thereby requiring all stockholder
actions to be taken at a meeting of our stockholders;
·
eliminating
the ability of stockholders to call a special meeting of stockholders; and
·
establishing
advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon at stockholder
meetings.
In addition, we are subject to Section 203 of the
Delaware General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
an interested stockholder for a period of three years following the date on
which the stockholder became an interested stockholder. This provision could
have the effect of delaying or preventing a change of control, whether or not
it is desired by or beneficial to our stockholders. Notwithstanding the
foregoing, the three year moratorium imposed on business combinations by Section 203
will not apply to either Warburg or Baker because, prior to the dates on which
they became interested stockholders, our board of directors approved the transactions
which resulted in Warburg and Baker becoming interested stockholders. However,
in connection
32
with its purchase of Exchangeable Preferred in March 2005,
Warburg entered into a standstill agreement agreeing not to pursue certain
activities the purpose or effect of which may be to change or influence the
control of the Company. Similarly, in
connection with the February 2007 Financing, Baker entered into a
standstill agreement agreeing not to pursue certain activities the purpose or
effect of which may be to change or influence the control of the Company.
We
have adopted a stockholder rights plan that may discourage, delay or prevent a
merger or acquisition that is beneficial to our stockholders.
In May 2003, our
board of directors adopted a stockholder rights plan that may have the effect
of discouraging, delaying or preventing a merger or acquisition of us that our
stockholders may consider beneficial by diluting the ability of a potential
acquirer to acquire us. Pursuant to the terms of the stockholder rights plan,
when a person or group, except under certain circumstances, acquires 15% or
more of our outstanding common stock or 10 business days after announcement of
a tender or exchange offer for 15% or more of our outstanding common stock, the
rights (except those rights held by the person or group who has acquired or
announced an offer to acquire 15% or more of our outstanding common stock)
would generally become exercisable for shares of our common stock at a
discount. Because the potential acquirers rights would not become exercisable
for our shares of common stock at a discount, the potential acquirer would
suffer substantial dilution and may lose its ability to acquire us. In
addition, the existence of the plan itself may deter a potential acquirer from
acquiring or making an offer to acquire us.
As a result, either by operation of the plan or by its potential
deterrent effect, mergers and acquisitions of the Company that our stockholders
may consider in their best interests may not occur.
Because Warburg owns a substantial percentage of our
outstanding common stock, we amended the stockholder rights plan in connection
with Warburgs purchase of Exchangeable Preferred in March 2005 to provide
that Warburg and its affiliates will be exempt from the stockholder rights
plan, unless Warburg and its affiliates become, without the prior consent of
our board of directors, the beneficial owner of more than 44% of our common
stock. Likewise, since Baker owns a substantial percentage of our outstanding
common stock, we amended the stockholder rights plan in connection with the February 2007
Financing to provide that Baker and its affiliates will be exempt from the
stockholder rights plan, unless Baker becomes, without the prior consent of our
board of directors, the beneficial owner of more than 20% of our common stock.
Under the stockholder rights plan, our board of directors has express authority
to amend the rights plan without stockholder approval.
The
market price for our common stock has been and may continue to be highly
volatile, and an active trading market for our common stock may never exist.
We cannot assure you that an active trading market for
our common stock will exist at any time. Holders of our common stock may not be
able to sell shares quickly or at the market price if trading in our common
stock is not active. The trading price of our common stock has been and is
likely to continue to be highly volatile and could be subject to wide fluctuations
in price in response to various factors, many of which are beyond our control,
including:
·
actual
or anticipated results of our clinical trials, including our pivotal Phase 2
PROPEL trial;
·
actual
or anticipated regulatory approvals or non-approvals of our product candidates,
including PDX, or of competing product candidates;
·
changes
in laws or regulations applicable to our product candidates;
·
changes
in the expected or actual timing of our development programs;
·
actual
or anticipated variations in quarterly operating results;
·
announcements
of technological innovations by us or our competitors;
·
changes
in financial estimates or recommendations by securities analysts;
·
conditions
or trends in the biotechnology and pharmaceutical industries;
·
changes
in the market valuations of similar companies;
33
·
announcements
by us of significant acquisitions, strategic partnerships, joint ventures or
capital commitments;
·
additions
or departures of key personnel;
·
disputes
or other developments relating to proprietary rights, including patents,
litigation matters and our ability to obtain patent protection for our
technologies;
·
developments
concerning any of our research and development, manufacturing and marketing
collaborations;
·
sales
of large blocks of our common stock;
·
sales
of our common stock by our executive officers, directors and five percent
stockholders; and
·
economic
and other external factors, including disasters or crises.
Public companies in general and companies included on
the Nasdaq Global Market in particular have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of those companies. There has been particular volatility
in the market prices of securities of biotechnology and other life sciences
companies, and the market prices of these companies have often fluctuated
because of problems or successes in a given market segment or because investor
interest has shifted to other segments. These broad market and industry factors
may cause the market price of our common stock to decline, regardless of our
operating performance. We have no control over this volatility and can only
focus our efforts on our own operations, and even these may be affected due to
the state of the capital markets. In the past, following large price declines
in the public market price of a companys securities, securities class action
litigation has often been initiated against that company, including in 2004
against us. Litigation of this type could result in substantial costs and
diversion of managements attention and resources, which would hurt our
business. Any adverse determination in litigation could also subject us to
significant liabilities.
We
are required to recognize stock-based compensation expense relating to employee
stock options, restricted stock, and stock purchases under our Employee Stock
Purchase Plan, and the amount of expense we recognize may not accurately
reflect the value of our share-based payment awards. Further, the recognition
of stock-based compensation expense will cause our net losses to increase and
may cause the trading price of our common stock to fluctuate.
On January 1, 2006, we adopted SFAS No. 123
(Revised 2004),
Share-Based Payment
(SFAS 123R),
which requires the measurement and recognition of compensation expense for all
stock-based compensation based on estimated fair values. As a result, our
operating results for the three months ended March 31, 2008 and 2007
include, and future periods will include, a charge for stock-based compensation
related to employee stock options, restricted stock and discounted employee
stock purchases. The application of
SFAS 123R requires the use of an option-pricing model to determine the
fair value of share-based payment awards.
This determination of fair value is affected by our stock price as well
as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to, our expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behaviors. Option-pricing models were developed for use in
estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because our employee stock options
have certain characteristics that are significantly different from traded
options, and because changes in the subjective assumptions can materially
affect the estimated value, in managements opinion the existing valuation
models may not provide an accurate measure of the fair value of our employee
stock options.
SFAS 123R has had a material impact on our
financial statements and results of operations. We also expect that
SFAS 123R will have a material impact on our future financial statements
and results of operations. We cannot predict the effect that our stock-based
compensation expense will have on the trading price of our common stock.
Substantial
sales of shares may impact the market price of our common stock.
If our stockholders sell substantial amounts of our
common stock, the market price of our common stock may decline. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we consider appropriate. We
are unable to predict the effect that sales may have on the then prevailing
market price of our common stock. We
have entered into a Registration Rights Agreement with Warburg and the other purchasers
of our
34
Exchangeable Preferred pursuant to which such
investors are entitled to certain registration rights with respect to the
shares of common stock that we issued upon exchange of the Exchangeable
Preferred.
In addition, we will need
to raise substantial additional capital in the future to fund our
operations. If we raise additional funds
by issuing equity securities, the market price of our common stock may decline
and our existing stockholders may experience significant dilution.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
|
None
|
|
|
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
None
|
|
|
|
|
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
|
None
|
|
|
|
|
ITEM 5.
|
OTHER INFORMATION
|
None
|
|
|
|
|
ITEM 6.
|
EXHIBITS
|
|
Exhibit No.
|
|
Note
|
|
Description
|
10.24
|
|
(1)
|
|
Letter Agreement, effective January 22, 2008,
between Allos and Bruce K. Bennett.
|
10.25
|
|
(2)
|
|
Executive Compensation
|
31.1
|
|
|
|
Certification of principal executive officer
required by Rule 13a-14(a) / 15d-14(a)
|
31.2
|
|
|
|
Certification of principal financial officer
required by Rule 13a-14(a) / 15d-14(a)
|
32.1#
|
|
|
|
Section 1350 Certification.
|
Indicates
management contract or compensatory plan or arrangement.
#
The
certifications attached as Exhibit 32.1 that accompany this Quarterly
Report on Form 10-Q are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of Allos
Therapeutics, Inc. under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Form 10-Q, irrespective of any general incorporation language
contained in such filing.
(1)
Incorporated
by reference to the same numbered exhibit filed with our Annual Report on Form 10-K
for the year ended December 31, 2007.
(2)
Incorporated
by reference to exhibit 10.1 filed with our current report on Form 8-K
filed on February 29, 2008.
35
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.
Date: May 7, 2008
|
ALLOS THERAPEUTICS, INC.
|
|
|
|
/s/ Paul L. Berns
|
|
Paul L. Berns
|
|
President and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
|
|
/s/ David C. Clark
|
|
David C. Clark
|
|
Vice President, Finance and Treasurer
|
|
(Principal Financial and Accounting Officer)
|
36
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