e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2006
or
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-49839
Idenix Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
| |
|
|
| Delaware
|
|
45-0478605 |
| (State or Other Jurisdiction of
|
|
(IRS Employer Identification No.) |
| Incorporation or Organization) |
|
|
| |
|
|
| 60 Hampshire Street |
|
|
| Cambridge, MA
|
|
02139 |
| (Address of Principal Executive Offices)
|
|
(Zip Code) |
Registrant’s telephone number, including area code: (617) 995-9800
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act. Yes o No þ
As of July 31, 2006, the number of shares of the registrant’s common stock, par value $.001
per share, outstanding was 56,071,053 shares.
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
103,241 |
|
|
$ |
83,733 |
|
Restricted cash |
|
|
411 |
|
|
|
411 |
|
Marketable securities |
|
|
64,622 |
|
|
|
95,579 |
|
Receivables from related party |
|
|
16,305 |
|
|
|
13,723 |
|
Prepaid expenses and other current assets |
|
|
6,691 |
|
|
|
6,139 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
191,270 |
|
|
|
199,585 |
|
Property and equipment, net |
|
|
12,783 |
|
|
|
11,051 |
|
Restricted cash, non-current |
|
|
750 |
|
|
|
750 |
|
Marketable securities, non-current |
|
|
58,841 |
|
|
|
62,855 |
|
Income taxes receivable |
|
|
1,761 |
|
|
|
946 |
|
Investment |
|
|
500 |
|
|
|
500 |
|
Other assets |
|
|
927 |
|
|
|
1,970 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
266,832 |
|
|
$ |
277,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,392 |
|
|
$ |
5,665 |
|
Accrued expenses |
|
|
14,596 |
|
|
|
16,685 |
|
Deferred rent |
|
|
265 |
|
|
|
265 |
|
Deferred revenue, related party |
|
|
13,471 |
|
|
|
9,695 |
|
Income taxes payable |
|
|
— |
|
|
|
206 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
30,724 |
|
|
|
32,516 |
|
Long-term obligations |
|
|
2,042 |
|
|
|
2,792 |
|
Deferred rent, net of current portion |
|
|
1,969 |
|
|
|
2,101 |
|
Deferred revenue |
|
|
4,272 |
|
|
|
4,272 |
|
Deferred revenue, related party, net of current portion |
|
|
47,148 |
|
|
|
29,089 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
86,155 |
|
|
|
70,770 |
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 75,000,000 and 60,000,000 shares authorized at
June 30, 2006 and December 31, 2005, respectively; 56,023,053 and 55,813,275
shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively |
|
|
56 |
|
|
|
56 |
|
Additional paid-in capital |
|
|
493,318 |
|
|
|
488,340 |
|
Deferred compensation |
|
|
(154 |
) |
|
|
(320 |
) |
Accumulated other comprehensive income (loss) |
|
|
102 |
|
|
|
(335 |
) |
Accumulated deficit |
|
|
(312,645 |
) |
|
|
(280,854 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
180,677 |
|
|
|
206,887 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
266,832 |
|
|
$ |
277,657 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
| |
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
License fees and collaborative research and development — related party |
|
$ |
19,253 |
|
|
$ |
15,983 |
|
Government research grants |
|
|
60 |
|
|
|
99 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
19,313 |
|
|
|
16,082 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
24,862 |
|
|
|
23,190 |
|
Selling, general and administrative |
|
|
12,163 |
|
|
|
7,163 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
37,025 |
|
|
|
30,353 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(17,712 |
) |
|
|
(14,271 |
) |
Investment and other income, net |
|
|
2,519 |
|
|
|
801 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(15,193 |
) |
|
|
(13,470 |
) |
Income tax benefit |
|
|
584 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(14,609 |
) |
|
$ |
(13,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.26 |
) |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share |
|
|
55,991 |
|
|
|
48,119 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| |
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
License fees and collaborative research and development — related party |
|
$ |
32,308 |
|
|
$ |
30,809 |
|
Government research grants |
|
|
116 |
|
|
|
176 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
32,424 |
|
|
|
30,985 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
46,930 |
|
|
|
41,653 |
|
Selling, general and administrative |
|
|
22,803 |
|
|
|
13,777 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
69,733 |
|
|
|
55,430 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(37,309 |
) |
|
|
(24,445 |
) |
Investment and other income, net |
|
|
4,654 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(32,655 |
) |
|
|
(22,825 |
) |
Income tax benefit |
|
|
864 |
|
|
|
126 |
|
|
|
|
|
|
|
|
| |
Net loss |
|
$ |
(31,791 |
) |
|
$ |
(22,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.57 |
) |
|
$ |
(0.47 |
) |
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share |
|
|
55,941 |
|
|
|
48,038 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
IDENIX PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| |
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(31,791 |
) |
|
$ |
(22,699 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,495 |
|
|
|
970 |
|
Stock-based compensation expense |
|
|
4,230 |
|
|
|
967 |
|
Gain on sale of marketable securities |
|
|
(2,104 |
) |
|
|
(279 |
) |
Revenue adjustment for contingently issuable shares |
|
|
71 |
|
|
|
897 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivable from related party |
|
|
(2,582 |
) |
|
|
458 |
|
Prepaid expenses and other current assets |
|
|
(393 |
) |
|
|
506 |
|
Income taxes receivable |
|
|
(917 |
) |
|
|
(97 |
) |
Other assets |
|
|
1,043 |
|
|
|
(593 |
) |
Accounts payable |
|
|
(3,307 |
) |
|
|
(2,136 |
) |
Accrued expenses |
|
|
(2,133 |
) |
|
|
901 |
|
Deferred rent |
|
|
(132 |
) |
|
|
(25 |
) |
Deferred revenue, related party |
|
|
21,937 |
|
|
|
(4,851 |
) |
Income taxes payable |
|
|
(101 |
) |
|
|
4 |
|
Long-term obligations |
|
|
(750 |
) |
|
|
(933 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(15,434 |
) |
|
|
(26,910 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(3,055 |
) |
|
|
(1,902 |
) |
Restricted deposits |
|
|
— |
|
|
|
(411 |
) |
Purchases of marketable securities |
|
|
(142,552 |
) |
|
|
(13,402 |
) |
Sales of marketable securities |
|
|
179,742 |
|
|
|
46,416 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
34,135 |
|
|
|
30,701 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock to related party |
|
|
54 |
|
|
|
— |
|
Proceeds from exercise of common stock options |
|
|
651 |
|
|
|
1,030 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
705 |
|
|
|
1,030 |
|
Effect of changes in exchange rates on cash and cash equivalents |
|
|
102 |
|
|
|
(231 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
19,508 |
|
|
|
4,590 |
|
Cash and cash equivalents at beginning of period |
|
|
83,733 |
|
|
|
42,083 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
103,241 |
|
|
$ |
46,673 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Taxes paid |
|
$ |
89 |
|
|
$ |
— |
|
Supplemental disclosure of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Value of shares of common stock contingently issuable or issued to related party |
|
$ |
174 |
|
|
$ |
2,749 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Idenix Pharmaceuticals, Inc. (together with its consolidated subsidiaries, the “Company”) is a
biopharmaceutical company engaged in the discovery, development and commercialization of drugs for
the treatment of human viral and other infectious diseases with operations in the United States and
Europe. The Company’s current focus is on diseases caused by hepatitis B virus (“HBV”), hepatitis C
virus (“HCV”) and human immunodeficiency virus (“HIV”).
The Company is subject to risks common to companies in the biopharmaceutical industry
including, but not limited to, the successful development and commercialization of product
candidates, clinical trial uncertainty, regulatory approval, fluctuations in operating results and
financial risks, potential need for additional funding, protection of proprietary technology and
patent risks, compliance with government regulations, dependence on key personnel and collaborative
partners, competition, technological and medical risks and management of growth.
Effective May 8, 2003, Novartis Pharma AG (“Novartis”), a subsidiary of Novartis AG, acquired
a majority interest in the Company’s outstanding capital stock and the operations of the Company
have been consolidated in the financial statements of Novartis AG since that date. Novartis has the
ability to exercise control over the Company’s strategic direction, research and development
activities and other material business decisions (Note 4).
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements are unaudited and have been
prepared by the Company in accordance with accounting principles generally accepted in the United
States of America for interim reporting.
The condensed consolidated financial statements reflect the operations of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in the Company’s annual
consolidated financial statements have been condensed or omitted. Certain prior year amounts have
been reclassified to conform to current year presentation. The interim financial statements, in the
opinion of management, reflect all adjustments (including normal recurring accruals) necessary for
a fair statement of the financial position and results of operations for the interim periods
presented.
The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for any future period or the fiscal year ending December 31,
2006. These interim financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 2005, which are included in the Company’s Annual Report
on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on March 16,
2006.
Revenue Recognition
The Company records revenue provided that there is persuasive evidence that an arrangement
exists, the price is fixed or determinable and collectibility is reasonably assured. The Company
records revenue earned under collaborative research and development arrangements and government
research grants.
Collaborative Research and Development Revenue — Revenue related to collaborative research and
development arrangements includes nonrefundable license fees, milestones and collaborative research
and development funding from the Company’s collaborative partners. Where the Company has continuing
performance obligations under the terms of a collaborative arrangement, nonrefundable license fees
are recognized as revenue over the specified development period as the Company completes its
performance obligations. When the Company’s level of effort is relatively constant over the
performance period, the revenue is recognized on a straight-line basis. The determination of the
performance period involves judgment on the part of management. If the Company cannot reasonably
estimate its costs, then it recognizes the license fee revenue on a straight-line basis over the
performance period. Payments received from collaborative partners for research and development
efforts by the Company are recognized as revenue over the contract term as the related costs are
incurred, net of any amounts due to the collaborative partner for shared development costs incurred
during the period. Revenues from milestones related to an arrangement under which the Company has
continuing performance obligations, if deemed substantive, are recognized as revenue upon
achievement of the milestone. Milestones are considered substantive if all of the following
conditions are met: the milestone is nonrefundable; achievement of the milestone was
7
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
not reasonably assured at the inception of the arrangement; substantive effort is involved to
achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort
expended, other milestones in the arrangement and the related risk associated with the achievement
of the milestone. If any of these conditions is not met, the milestone payment is deferred and
recognized as revenue as the Company completes its performance obligations.
Where the Company has no continuing involvement under a collaborative arrangement, the Company
records nonrefundable license fee revenue when the Company has the contractual right to receive the
payment, in accordance with the terms of the license agreement, and records milestones upon
appropriate notification to the Company of achievement of the milestones by the collaborative
partner.
In March 2003, the Company entered into a final settlement agreement with Sumitomo
Pharmaceuticals Co., Ltd. (“Sumitomo”) under which the rights to develop and commercialize
telbivudine, the Company’s lead product candidate for the treatment of hepatitis B, in Japan,
China, South Korea and Taiwan previously granted to Sumitomo were returned to the Company. This
agreement with Sumitomo became effective upon consummation of the Company’s collaboration with
Novartis in May 2003. The Company repurchased these product rights for $5,000,000 and, as a result
of this payment, the Company reversed approximately $4,571,000 of revenue previously recognized in
connection with the original arrangements with Sumitomo and recorded the remaining amount as a
reduction of deferred revenue. The Company also has $4,272,000 included in deferred revenue on its
consolidated balance sheet at each of December 31, 2005 and June 30, 2006, representing amounts
received from Sumitomo that have not been included in revenue to date. The Company must pay an
additional $5,000,000 to Sumitomo upon the first commercial sale of telbivudine in Japan. This
payment will be recorded first as a reduction of the remaining deferred revenue, with the excess
recorded as an expense. If and when the Company determines that it will not seek regulatory
approval for telbivudine in Japan, the Company would have no further obligations under the
settlement agreement with Sumitomo and, therefore, the remaining deferred revenue would be
recognized as
revenue at that time.
In November 2002, the Emerging Issues Task Force (“EITF”), reached a consensus on EITF Issue
No. 00-21, ‘‘Accounting for Revenue Arrangements with Multiple Deliverables’’ (“EITF No. 00-21”).
EITF No. 00-21 provides guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The provisions of EITF No.
00-21 apply to revenue arrangements entered into on or after July 1, 2003.
Government Research Grant Revenue – Government research grants that provide for payments to
the Company for work performed are recognized as revenue when the related expense is incurred and
the Company has obtained governmental approval to use the grant funds for these expenses.
Marketable Securities
The Company invests its excess cash balances in short-term and long-term marketable debt
securities. The Company classifies all of its marketable securities as available-for-sale. The
Company reports available-for-sale investments at fair value as of each balance sheet date and
includes any unrealized gains and, to the extent deemed temporary, losses in stockholders’ equity.
If any adjustment to fair value reflects a decline in the value of the investment, the Company
considers available evidence to evaluate whether the decline is “other than temporary” and, if so,
marks the investment to market through a charge to the consolidated statement of operations.
Realized gains and losses are determined on the specific identification method and are included in
investment income. The Company classifies its marketable securities with remaining maturities of 12
months or less as current marketable securities exclusive of those categorized as cash equivalents.
The Company classifies its marketable securities with remaining maturities greater than 12 months
as non-current marketable securities.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), or SFAS No. 123(R), “Share-Based
Payment.” This Statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and
supersedes Accounting Principles Board Opinion No. 25, or APB No. 25, “Accounting for Stock Issued
to Employees.” SFAS No. 123(R) requires share-based transactions for employees and directors to be
accounted for using a fair value based method that results in expense being recognized in the
Company’s financial statements.
8
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
The Company adopted SFAS No. 123(R) on January 1, 2006. The Company applied the modified
prospective method at adoption in which stock compensation expense was determined based on fair
value using the Black-Scholes method at grant dates for stock options. Accordingly, financial
statement amounts for the periods prior to the adoption of SFAS No. 123(R), including the three
months and six months ended June 30, 2005, have not been restated to reflect the fair value method
of expensing. Prior to January 1, 2006, the Company accounted for its stock-based awards to
employees and directors using the intrinsic method prescribed in APB No. 25 and related
interpretations. As a result of adopting SFAS No. 123(R) on
January 1, 2006, the Company’s net loss for the
three and six months ended June 30, 2006 is $2,054,000 and $4,064,000 higher than had the Company
continued to account for employee stock-based compensation expense under APB No. 25.
The Company recognizes compensation expense for restricted stock sold and stock options
granted to non-employees in accordance with the requirements of SFAS No. 123(R) and EITF Issue No.
96-18, “Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services” (“EITF 96-18”). EITF 96-18 requires such equity
instruments to be recorded at their fair value at the measurement date, which is generally the
vesting date of the instruments. Therefore, the measurement of stock-based compensation is subject
to periodic adjustments as the underlying equity instruments vest.
The Company’s equity incentive plans are administered by the Compensation Committee of the
Board of the Directors. The Compensation Committee determines the type and term of each award, the
award exercise or purchase price, if applicable, the number of shares underlying each award granted
and the rate at which each award becomes vested or exercisable. Incentive stock options may be
granted only to employees of the Company at an exercise price per share not less than the fair
market value per share of common stock as determined by the Board of Directors on the date of grant
(not less than 110% of the fair market value in the case of holders of more than 10% of the
Company’s common stock) and with a term not to exceed ten years from the date of grant (five years
for
incentive stock options granted to holders of more than 10% of the Company’s voting common stock).
Nonqualified stock options may be granted to any officer, employee, director, consultant or advisor
at a per share exercise price in such amount as the Compensation Committee may determine. The
Compensation Committee may also grant restricted stock and other stock-based awards on terms and
conditions it may determine.
In May 1998, the Company adopted the 1998 Equity Incentive Plan, as amended (“1998 Plan”),
which provides for the grant of incentive stock options, nonqualified stock options, stock awards
and stock appreciation rights. The Company initially reserved 1,468,966 shares of common stock for
issuance pursuant to the 1998 Plan. The Company subsequently amended the 1998 Plan and reserved an
additional 3,600,000 shares of common stock for issuance under the 1998 Plan.
In June 2005, the Company’s stockholders approved the 2005 Stock Incentive Plan (“2005 Plan”).
The 2005 Plan allows for the granting of incentive stock options, nonqualified stock options, stock
appreciation rights, performance share awards and restricted stock awards (“Awards”). The 2005 Plan
provides for the authorization of awards covering an aggregate of 3,000,000 shares of common stock.
As of June 30, 2006, the Company has 1,190,375 shares available for grant under its equity
incentive plans.
The following table shows stock-based compensation expense as reflected in the Company’s
condensed consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
| |
|
(in thousands) |
|
|
(in thousands) |
|
Research and development |
|
$ |
767 |
|
|
$ |
254 |
|
|
$ |
1,533 |
|
|
$ |
517 |
|
Selling, general and administrative |
|
|
1,335 |
|
|
|
258 |
|
|
|
2,697 |
|
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
2,102 |
|
|
$ |
512 |
|
|
$ |
4,230 |
|
|
$ |
967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has an aggregate of $20,401,000 of stock compensation as of June 30, 2006
remaining to be amortized over a weighted average life of 2.8 years.
9
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
The assumptions used for the Black-Scholes method are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Expected dividend yield |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Risk-free interest rate |
|
|
5.03 |
% |
|
|
3.83 |
% |
|
|
4.76 |
% |
|
|
3.88 |
% |
Expected option term (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility |
|
|
61 |
% |
|
|
85 |
% |
|
|
64 |
% |
|
|
85 |
% |
No dividend yield was assumed as the Company does not pay dividends on its common stock. The
risk-free interest rate is based on the yield of U.S. Treasury securities consistent with the
expected life of the option. The expected option term and expected volatility were determined by
examining the expected option term and volatility of the Company’s stock as well as the expected
terms and volatilities of similarly sized biotechnology companies.
As share-based compensation expense recognized in the condensed consolidated statements of
operations for the three and six months ended June 30, 2006 is based on awards ultimately expected
to vest, it should be reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods as options vest, if
actual forfeitures differ from those estimates. During the three and six months ended June 30,
2006, because substantially all of the Company’s stock option grants vest monthly, no forfeiture
assumption was applied. In the Company’s pro forma information required under SFAS No. 123 for the
periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.
The following table illustrates the effect on net income and earnings per share as if the
Company had applied the fair value recognition provisions of SFAS No. 123 to stock options for
employees for the three and six months ended June 30, 2005:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
Six Months |
|
| |
|
Ended |
|
|
Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2005 |
|
|
2005 |
|
| |
|
(in thousands, |
|
|
(in thousands, |
|
| |
|
except |
|
|
except |
|
| |
|
per share data) |
|
|
per share data) |
|
Net loss — as
reported |
|
$ |
(13,433 |
) |
|
$ |
(22,699 |
) |
Add stock-based employee compensation expense
included in reported net loss |
|
|
512 |
|
|
|
967 |
|
Deduct stock-based employee compensation expense
determined under fair value based method |
|
|
(1,765 |
) |
|
|
(3,120 |
) |
|
|
|
|
|
|
|
Net loss — pro
forma |
|
$ |
(14,686 |
) |
|
$ |
(24,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share (basic and diluted): |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.28 |
) |
|
$ |
(0.47 |
) |
Pro forma |
|
$ |
(0.31 |
) |
|
$ |
(0.52 |
) |
Information regarding outstanding stock options for the three and six months
ended June 30, 2006 is as follows:
10
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
|
|
|
|
average |
|
| |
|
|
|
|
|
Weighted |
|
|
remaining |
|
| |
|
|
|
|
|
average |
|
|
contractual |
|
| |
|
Number |
|
|
exercise |
|
|
term |
|
| |
|
of options |
|
|
price |
|
|
(years) |
|
Outstanding, December 31, 2005 |
|
|
3,584,322 |
|
|
$ |
12.20 |
|
|
|
|
|
Granted |
|
|
910,376 |
|
|
|
17.04 |
|
|
|
|
|
Exercised |
|
|
(195,225 |
) |
|
|
3.33 |
|
|
|
|
|
Cancelled |
|
|
(164,643 |
) |
|
|
18.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
4,134,830 |
|
|
$ |
13.42 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
2,151,103 |
|
|
$ |
10.30 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
The Company granted 287,376 and 254,000 stock options for the three months
ended June 30, 2006 and 2005, respectively.
The weighted average fair value of options granted during the three months ended June 30, 2006 and
2005 was $5.36 and $13.13, respectively. The Company granted 910,376 and 915,500 stock options for
the six months ended June 30, 2006 and 2005, respectively. The weighted average fair value of
options granted during the six months ended June 30, 2006 and 2005 was $9.91 and
$13.43, respectively. The total intrinsic value of options exercised during the six months ended
June 30, 2006 was $1,185,000. The intrinsic value was calculated as the difference between the
market value as of June 30, 2006 and the weighted average exercise price of the shares. The market
value as of June 30, 2006 was $9.40 as reported on the Nasdaq stock exchange.
Basic and Diluted Net Loss per Common Share
The Company accounts for and discloses net loss per common share in accordance with SFAS No.
128, “Earnings Per Share” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net loss
per common share is computed by dividing the net loss by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share is computed by dividing the
net loss by the weighted average number of common shares and dilutive potential common shares then
outstanding. Potential common shares consist of common shares issuable upon the assumed exercise of
outstanding stock options (using the treasury stock method), issuance of contingently issuable
shares subject to Novartis’ subscription rights (see Note 4) and restricted stock awards.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
| |
|
(in thousands, except |
|
(in thousands, except |
| |
|
per share data) |
|
per share data) |
Basic and diluted net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(14,609 |
) |
|
$ |
(13,433 |
) |
|
$ |
(31,791 |
) |
|
$ |
(22,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
number of common shares
outstanding |
|
|
55,991 |
|
|
|
48,119 |
|
|
|
55,941 |
|
|
|
48,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common
share |
|
$ |
(0.26 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.47 |
) |
The following potential common shares were excluded from the calculation of diluted net loss
per common share because their effect was anti-dilutive:
11
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
| |
|
(in thousands) |
|
(in thousands) |
Options |
|
|
4,135 |
|
|
|
3,781 |
|
|
|
4,135 |
|
|
|
3,781 |
|
Contingently issuable shares to related party |
|
|
256 |
|
|
|
1,125 |
|
|
|
256 |
|
|
|
1,125 |
|
Restricted stock |
|
|
— |
|
|
|
53 |
|
|
|
— |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,391 |
|
|
|
4,959 |
|
|
|
4,391 |
|
|
|
4,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. COMPREHENSIVE LOSS
For the three and six months ended June 30, 2006 and 2005, respectively, comprehensive loss
was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
| |
|
(in thousands) |
|
|
(in thousands) |
|
Net loss |
|
$ |
(14,609 |
) |
|
$ |
(13,433 |
) |
|
$ |
(31,791 |
) |
|
$ |
(22,699 |
) |
Changes in other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
210 |
|
|
|
(267 |
) |
|
|
321 |
|
|
|
(431 |
) |
Unrealized gain (loss) on investments |
|
|
52 |
|
|
|
132 |
|
|
|
116 |
|
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(14,347 |
) |
|
$ |
(13,568 |
) |
|
$ |
(31,354 |
) |
|
$ |
(23,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4. NOVARTIS RELATIONSHIP
Overview
In May 2003, the Company entered into a collaboration with Novartis relating to the worldwide
development and commercialization of the Company’s product candidates. The collaboration includes
the development, license and commercialization agreement dated as of May 8, 2003, by and among the
Company, Idenix (Cayman) Limited and Novartis (as amended, the “Development Agreement”) and the
master manufacturing and supply agreement dated as of May 8, 2003, by and between Idenix (Cayman)
Limited and Novartis (the “Supply Agreement”). As part of such arrangement, Novartis paid the
Company a license fee of $75,000,000 for its hepatitis B virus, or HBV, product candidates,
telbivudine and valtorcitabine, is providing development funding for these HBV product candidates
and will make milestone payments which could total up to $35,000,000 upon the achievement of
certain regulatory approvals, as well as additional milestone payments based upon achievement of
predetermined HBV product sales levels.
Novartis also acquired an option to license the Company’s HCV and other product candidates. In
March 2006, Novartis exercised its option to license valopicitabine, the Company’s lead HCV product
candidate. As a result, Novartis paid the Company a license fee of $25,000,000 in March 2006, is
providing development funding for valopicitabine and will pay the Company up to $500,000,000 in
additional license fees and regulatory milestone payments, as well as additional milestone payments
based upon achievement of predetermined HCV product sales levels. The Company has recorded this HCV
license fee as deferred revenue, which is being recognized over the development period of the
licensed product candidates. In June 2004, the Company received a $25,000,000 milestone payment
from Novartis that it recognized as revenue based upon results from a phase I clinical trial of
valopicitabine.
Under the Development Agreement, the Company has granted Novartis an exclusive,
worldwide license to market and sell the Company’s HBV product candidates and valopicitabine, and
the Company will grant Novartis similar licenses with respect to any other product candidates for
which Novartis exercises its option to license. The Company has retained the right to co-promote or
co-market its HBV product candidates and valopicitabine in the U.S., the U.K., France, Germany,
Italy and Spain.
12
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
The Company is reimbursed by Novartis on a quarterly basis for expenses incurred by the
Company in connection with the development and registration of its licensed product candidates.
Pursuant to a cost sharing arrangement with Novartis, the Company is also reimbursed for certain
registration expenses and phase IIIb clinical trial costs associated with licensed product
candidates, net of certain qualifying costs incurred by Novartis.
Pursuant to the Supply Agreement, Novartis was appointed to finish and package licensed
products for commercial sale. Novartis was also afforded the opportunity to manufacture active
pharmaceutical ingredient for the commercial supply of licensed products if certain conditions and
criteria were satisfied.
Simultaneously with the collaboration described above, Novartis purchased approximately 54% of
the Company’s outstanding capital stock from the Company’s then existing stockholders for
$255,000,000 in cash, with an additional aggregate amount of up to $357,000,000 contingently
payable to these stockholders if the Company achieves predetermined development milestones relating
to an HCV product candidate. As of June 30, 2006, Novartis owned approximately 56% of the Company’s
outstanding stock.
To date, the Company has received from Novartis a $25,000,000 license fee for valopicitabine,
a $75,000,000 license fee for its HBV product candidates and a $5,000,000 reimbursement for
reacquiring product rights from Sumitomo to develop and commercialize telbivudine in certain
markets in Asia. The Company included this reimbursement as part of the license fee for accounting
purposes because Novartis required the repurchase of these rights as a condition to entering into
the Development Agreement. The Company also incurred approximately $2,250,000 in costs associated
with the development of valopicitabine prior to Novartis licensing valopicitabine in March 2006 for
which Novartis reimbursed the Company. This amount was included as part of the license fee.
The Company reviews its assessment and judgement on a quarterly basis with respect to the
expected duration of the development period of its licensed product candidates. The Company has
estimated that the performance period during which the development of the HBV product candidates
and valopicitabine will be completed is a period of approximately seven and one-half years
following the effective date of the Development Agreement that the Company entered into with
Novartis, or December 2010. The Company is recognizing revenue on the license fee payments over
this period. If the estimated performance period changes, the Company will adjust the periodic
revenue that is being recognized and will record the remaining unrecognized license fee payments
over the remaining development period during which the Company’s performance obligations will be
completed. Significant judgments and estimates are involved in determining the estimated
development period and different assumptions could yield materially different results.
Stockholders’ Agreement
In connection with Novartis’ purchase of stock from the Company’s stockholders, the Company,
Novartis and substantially all of the Company’s stockholders entered into a stockholders’ agreement
which was amended and restated in 2004 in connection with the Company’s initial public offering of
its common stock (the “Stockholders’ Agreement”). The Stockholders’ Agreement provides, among other
things, that the Company will use its reasonable best efforts to nominate for election as a
director at least two designees of Novartis for so long as Novartis and its affiliates own at least
35% of the Company’s voting stock and at least one designee of Novartis for so long as Novartis and
its affiliates own at least 19.4% of the Company’s voting stock. As long as Novartis and its
affiliates continue to own at least 19.4% of the Company’s voting stock, Novartis will have
approval rights over a number of corporate actions that the Company may take, including the
authorization or issuance of additional shares of capital stock and significant acquisitions and
dispositions.
Subject to certain exceptions, Novartis and its affiliates have contractually agreed not to
acquire prior to May 8, 2008, additional shares of the Company’s voting stock unless a majority of
the independent board members waive such contractual provision. Acquisitions of the Company’s
voting stock by exercise of Novartis’ stock purchase rights under the Stockholders’ Agreement or
acquisitions of voting stock to maintain a 51% ownership interest in the Company’s fully diluted
common stock, exclusive of any shares formerly held by Novartis BioVentures, Ltd., are specifically
excepted from this restriction.
Novartis’ Stock Purchase Rights
Novartis has the right to purchase, at par value of $0.001 per share, such number of shares as
is required to maintain its percentage ownership of the Company’s voting stock if the Company
issues shares of capital stock in connection with the acquisition
13
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
or in-licensing of technology through the issuance of up to 5% of the Company’s stock in any
24-month period. These purchase rights of Novartis remain in effect until the earlier of: a) the
date that Novartis and its affiliates own less than 19.4% of the Company’s voting stock; or b) the
date that Novartis becomes obligated to make the additional contingent payments of $357,000,000 to
holders of the Company’s stock who sold shares to Novartis on May 8, 2003.
If the Company issues any shares of its capital stock, other than in certain situations,
Novartis has the right to purchase such number of shares required to maintain its percentage
ownership of the Company’s voting stock for the same consideration per share paid by others
acquiring the Company’s stock. Upon the grant of options and stock awards under stock incentive
plans, with the exception of the 1998 Equity Incentive Plan, the fair value of the Company’s common
stock that would be issuable to Novartis, less
the exercise price, if any, payable by the option or award holder, will be recorded as a reduction
of the license fees associated with the Novartis collaboration. The amount will be attributed
proportionately between cumulative revenue recognized through that date and the remaining amount of
deferred revenue. These amounts will be adjusted through the date that Novartis elects to purchase
the shares to maintain its percentage ownership based upon changes in the value of the Company’s
common stock and in Novartis’ percentage ownership. These adjustments will also be attributed
proportionately between cumulative revenue recognized through the measurement date and the
remaining deferred revenue.
In connection with the closing of the Company’s initial public offering in July 2004, Novartis
terminated a common stock subscription right with respect to 1,399,106 shares of common stock
issuable by the Company as a result of the exercise of stock options granted after May 8, 2003
pursuant to the 1998 Equity Incentive Plan. In exchange for Novartis’ termination of such right,
the Company issued 1,100,000 shares of common stock to Novartis for a purchase price of $0.001 per
share. The fair value of these shares was determined to be $15,400,000 at the time of issuance. As
a result of the issuance of these shares, Novartis’ rights to purchase additional shares as a
result of future option grants and stock issuances under the 1998 Equity Incentive Plan are
terminated, and no additional adjustments to revenue and deferred revenue will be required. Prior
to the termination of the stock subscription rights under the 1998 Equity Incentive Plan, as the
Company granted options that were subject to this stock subscription right, the fair value of the
Company’s common stock that would be issuable to Novartis, less par value, was recorded as an
adjustment of the license fee and payments received from Novartis. The Company remains subject to
potential revenue adjustments relating to grants of options and stock awards under its stock
incentive plans other than the 1998 Equity Incentive Plan.
As of June 30, 2006, Novartis stock subscription rights have reduced the license fee by an
aggregate of $15,600,000, which has been recorded to additional paid-in capital. Of this amount,
$12,865,000 has been recorded as a reduction of deferred revenue as of June 30, 2006 with the
remaining amount of $2,735,000 recorded as a reduction of revenue. The Company recorded $75,000
and $708,000 of this reduction of revenue for each of the three months ended June 30, 2006 and
2005, respectively, associated with this stock subscription right, and a $71,000 and $897,000
reduction of revenue for the six months ended June 30, 2006 and 2005, respectively.
Manufacturing Arrangement
On June 22, 2006, the Company entered into a commercial manufacturing agreement (the
“Manufacturing Agreement”) with Novartis and a packaging agreement (the “Packaging Agreement”) with
Novartis Pharmaceuticals Corporation, an affiliate of Novartis. Under the Manufacturing Agreement,
Novartis will manufacture the commercial supply of telbivudine that is intended for sale in the
United States. The Packaging Agreement provides that the supply of telbivudine intended for
commercial sale in the United States will be packaged by Novartis Pharmaceuticals Corporation.
5. MARKETABLE SECURITIES
The Company invests its excess cash with large U.S. based financial institutions and considers
its investment portfolio as marketable securities available-for-sale as defined in SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, these investments
are recorded at fair value, which is based on quoted market prices. The fair values of
available-for-sale investments by type of security, contractual maturity and classification in the
balance sheets as of June 30, 2006 and December 31, 2005 are as follows:
14
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2006 |
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
(in thousands) |
|
Type of security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
32,234 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
32,234 |
|
Commercial paper |
|
|
49,036 |
|
|
|
— |
|
|
|
— |
|
|
|
49,036 |
|
Corporate debt securities |
|
|
71,216 |
|
|
|
3 |
|
|
|
(80 |
) |
|
|
71,139 |
|
U.S. Treasury securities and obligations of
U.S. government agencies |
|
|
15,272 |
|
|
|
— |
|
|
|
(43 |
) |
|
|
15,229 |
|
Taxable auction rate securities |
|
|
27,065 |
|
|
|
13 |
|
|
|
— |
|
|
|
27,078 |
|
Accrued interest |
|
|
1,008 |
|
|
|
— |
|
|
|
— |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
195,831 |
|
|
$ |
16 |
|
|
$ |
(123 |
) |
|
$ |
195,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 |
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
| |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Type of security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
11,580 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,580 |
|
Corporate debt securities |
|
|
108,559 |
|
|
|
2 |
|
|
|
(132 |
) |
|
|
108,429 |
|
U.S. Treasury securities and obligations of
U.S. government agencies |
|
|
23,469 |
|
|
|
— |
|
|
|
(90 |
) |
|
|
23,379 |
|
Taxable auction rate securities |
|
|
51,310 |
|
|
|
— |
|
|
|
(3 |
) |
|
|
51,307 |
|
Accrued interest |
|
|
1,427 |
|
|
|
— |
|
|
|
— |
|
|
|
1,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
196,345 |
|
|
$ |
2 |
|
|
$ |
(225 |
) |
|
$ |
196,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(in thousands) |
|
Contractual maturity: |
|
|
|
|
|
|
|
|
Maturing in one year or less |
|
$ |
136,883 |
|
|
$ |
133,267 |
|
Maturing after one year through two years |
|
|
14,075 |
|
|
|
— |
|
Maturing after two years through ten years |
|
|
11,600 |
|
|
|
26,030 |
|
Maturing after ten years |
|
|
33,166 |
|
|
|
36,825 |
|
|
|
|
|
|
|
|
|
|
$ |
195,724 |
|
|
$ |
196,122 |
|
|
|
|
|
|
|
|
Included in the table above are taxable auction rate securities, which typically reset to
current interest rates every 28 to 45 days, but are included in the table above based on their
stated maturities.
15
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(in thousands) |
|
Classification in balance sheets: |
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
72,261 |
|
|
$ |
37,688 |
|
Marketable securities |
|
|
64,622 |
|
|
|
95,579 |
|
Marketable securities,
non-current |
|
|
58,841 |
|
|
|
62,855 |
|
|
|
|
|
|
|
|
|
|
$ |
195,724 |
|
|
$ |
196,122 |
|
|
|
|
|
|
|
|
The cash equivalent amounts of $72,261,000 and $37,688,000 are included as part of cash and
cash equivalents on the Company’s consolidated balance sheet at June 30, 2006 and December 31,
2005, respectively. The Company has the ability to hold its marketable securities to their
effective maturities.
6. RECEIVABLES FROM RELATED PARTY
Receivables from related party consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(in thousands) |
|
Unbilled receivables from related party |
|
$ |
16,305 |
|
|
$ |
13,723 |
|
|
|
|
|
|
|
|
|
|
$ |
16,305 |
|
|
$ |
13,723 |
|
|
|
|
|
|
|
|
Unbilled accounts receivable represent amounts under collaborative agreements that have not
been billed at June 30, 2006 and December 31, 2005. All related party receivables are due from
Novartis.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(in thousands) |
|
Research and development contract costs |
|
$ |
7,511 |
|
|
$ |
8,018 |
|
Payroll and benefits |
|
|
3,559 |
|
|
|
4,916 |
|
License fees |
|
|
1,000 |
|
|
|
1,000 |
|
Professional fees |
|
|
666 |
|
|
|
884 |
|
Other |
|
|
1,860 |
|
|
|
1,867 |
|
|
|
|
|
|
|
|
|
|
$ |
14,596 |
|
|
$ |
16,685 |
|
|
|
|
|
|
|
|
16
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
8. LEGAL CONTINGENCIES
Hepatitis C Product Candidates
In May 2004, the Company and, in an individual capacity, its Chief Executive Officer (“CEO”),
entered into a settlement agreement with the University of Alabama at Birmingham (“UAB”) and its
affiliate, the UAB Research Foundation (“UABRF”), to resolve a dispute among these parties. In
March 2004, the Company and, in an individual capacity, its CEO, filed a lawsuit against UABRF in
the United States District Court, District of Massachusetts, seeking declaratory judgment regarding
the Company’s ownership of inventions and discoveries made during the period from November 1999 to
November 2002 (“Leave Period”) by the CEO and the Company’s ownership of patents and patent
applications related to such inventions and discoveries. During the Leave Period, while acting in
the capacity of the Company’s Chief Scientific Officer, the CEO was on sabbatical from November
1999 to November 2000 (“Sabbatical Period”) and then unpaid leave prior to resigning in November
2002 from his position as a professor at UAB.
As a part of the settlement agreement, UAB and UABRF agreed that neither UAB nor UABRF has any
right, title or ownership interest in the inventions and discoveries made or reduced to practice
during the Leave Period or the related patents and patent applications. In exchange, the Company
made a $2,000,000 payment to UABRF in May 2004, which was recorded as research and development
expense in the year ended December 31, 2003. The Company also dismissed the pending litigation and
agreed to make certain future payments to UABRF. These future payments consist of: (i) a $1,000,000
payment upon the receipt of regulatory approval to market and sell in the U.S. a product which
relates to inventions and discoveries made by the CEO during the Sabbatical Period; and (ii)
payments in an amount equal to 0.5% of worldwide net sales of such products with a minimum sales
based payment to equal $12,000,000. The sales based payments (including the minimum amount) are
contingent upon the commercial launch of
products that relate to inventions and discoveries made by the CEO during the Sabbatical Period.
The minimum amount is due within seven years after the later of the commercial launch in the United
States or any of the United Kingdom, France, Germany, Italy or Spain, of a product that: (i) has
within its approved product label a use for the treatment of hepatitis C infection; and (ii)
relates to inventions and discoveries made by the CEO during the Sabbatical Period, if sales based
payments for such product have not then exceeded $12,000,000. At that time, the Company will be
obligated to pay to UABRF the difference between the sales based payments then paid to date for
such product and $12,000,000.
Hepatitis B Product Candidates
In addition to the Leave Period matter noted above, the Company was notified in January 2004,
February 2005 and June 2005, that UABRF believes that patent applications which the Company has
licensed from UABRF can be amended to obtain broad patent claims that would generally cover the
method of using telbivudine to treat HBV. In July 2005, UABRF filed this continuation patent
application.
In February 2006, UABRF notified the Company that it and Emory University were asserting a
claim that the UAB license agreement covers the Company’s telbivudine technology and that the
Company is currently obligated to pay to UABRF, Emory University and Le Centre Nationale de la
Recherché Scientifique (“CNRS”) (collectively, the “1998 licensors”) an aggregate of $15.3 million,
comprised of 20% of the $75 million license fee that the Company received from Novartis in May 2003
in connection with the license of its hepatitis B product candidates and a $0.3 million payment in
connection with the submission to the FDA of the IND pursuant to which the Company has conducted
its clinical development of telbivudine. The Company disagrees with the assertion made by UABRF and
Emory University and intends to dispute these assertions. Under the terms of the license agreement,
the dispute will be resolved by a panel of arbitrators if the parties are unable to reach agreement
after a period of negotiation and mediation.
The Company does not believe that it is probable that UABRF’s position will be upheld and as
such, the Company has not recorded a liability at June 30, 2006. However, if it is determined that
the license agreement does cover the Company’s telbivudine technology, the Company will become
obligated to make payments to the 1998 licensors in the amounts and manner specified in the license
agreement. Such amounts, in addition to those asserted by UABRF and Emory University, include
payments in the aggregate amount of $1.0 million due upon achievement of certain regulatory
milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual sales greater
than $50 million made by the Company or any affiliate of the Company. Additionally, if the Company
sublicenses its rights to any entity other than one which holds or controls at least 50% of the
Company’s capital stock, or if Novartis’ ownership interest in the Company declines below 50% of
the Company’s outstanding shares of capital stock, it could be obligated to pay to the 1998
licensors 30% of all royalties it receives from sales by the sublicensee of telbivudine and 20% of
all fees, milestone payments and other cash consideration the Company receives from the sublicensee
with respect to telbivudine.
17
IDENIX PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — CONTINUED
Indemnification
The Company has agreed to indemnify Novartis and its affiliates against losses suffered as a
result of any breach of representations and warranties in the Development Agreement. Under the
Development Agreement and the stock purchase agreement (the “Stock Purchase Agreement”), the
Company made numerous representations and warranties to Novartis regarding its hepatitis B and C
product candidates, including representations regarding the Company’s ownership of the inventions
and discoveries described above. If one or more of the representations or warranties were not true
at the time they were made to Novartis, the Company would be in breach of one or both of these
agreements. In the event of a breach by the Company, Novartis has the right to seek indemnification
from the Company and, under certain circumstances, the Company and its stockholders who sold shares
to Novartis, which include many of its directors and officers, for damages suffered by Novartis as
a result of such breach. While it is possible that the Company may be required to make payments
pursuant to the indemnification obligations it has under the Development Agreement, the Company
cannot reasonably estimate the amount of such payments or the likelihood that such payments will be
required.
18
ITEM
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Information and Factors That May Affect Future Results
This report contains “forward-looking statements” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. For this purpose, any statements
contained herein regarding our strategy, future operations, financial position, future revenues,
projected costs and expenses, prospects, plans and objectives of management, other than statements
of historical facts, are forward-looking statements. The words “anticipate,” “believes,”
“estimates,” “intends,” “may,” “plans,” “will,” “would” and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements contain these
identifying words. Such statements reflect our current views with respect to future events. We
cannot guarantee that we actually will achieve the plans, intentions, or expectations disclosed in
our forward-looking statements. There are a number of important factors that could cause actual
results or events to differ materially from those disclosed in the expressed or implied
forward-looking statements we make. These important factors include our “critical accounting
estimates” and the risk factors set forth below in Part II, Item 1A – Risk Factors. Although we may
elect to update forward-looking statements in the future, we specifically disclaim any obligation
to do so, even if our estimates change, and readers should not rely on those forward-looking
statements as representing our views as of any date subsequent to the date of this quarterly
report.
Overview
Idenix is a biopharmaceutical company engaged in the discovery, development and
commercialization of drugs for the treatment of human viral and other infectious diseases with
operations in the United States and Europe. Our current focus is on the treatment of infections
caused by hepatitis B virus, or HBV; hepatitis C virus, or HCV; and human immunodeficiency virus,
or HIV. Each of telbivudine and valtorcitabine, our product candidates for the treatment of HBV,
and valopicitabine, our product candidate for the
treatment of HCV, is a nucleoside or nucleoside analog that we believe may have one or more
therapeutic features that will afford competitive advantages to our product candidates over
currently approved therapies. Such therapeutic features may include efficacy, safety, resistance
profile or convenience of dosing. Each of the product candidates that we are developing is
selective and specific, may be administered orally once a day, and we believe may be used in
combination with other therapeutic agents to improve clinical benefits.
The following table summarizes key information regarding our pipeline of product candidates:
| |
|
|
|
|
|
|
| |
|
Product |
|
|
|
Next |
| |
|
Candidates/ |
|
|
|
Development |
| Indication |
|
Programs |
|
Description |
|
Stage |
HBV
|
|
telbivudine (L-
nucleoside)
|
|
Regulatory
applications have
been submitted in a
number of regions,
including the
United States, the
European Union,
Canada, Australia,
Switzerland,
Taiwan, South Korea
and China, for
marketing approval
of telbivudine for
the treatment of
chronic hepatitis
B. In addition to
the GLOBE study,
which is a two year
international phase
III clinical trial
in patients with
chronic hepatitis
B, a phase III
clinical trial in
HBV infected
patients with liver
failure, or
decompensated liver
disease, is
ongoing, and phase
IIIb trials, which
are intended to
provide certain
additional product
data at the
commercial launch
of telbivudine, are
also ongoing.
|
|
If approved, the
commercial launch
of telbivudine |
|
|
|
|
|
|
|
HBV
|
|
valtorcitabine
(L-nucleoside)
|
|
This product
candidate is being
developed for use
in fixed dose
combination with
telbivudine for
treatment of
hepatitis B
patients who
require more
intensive antiviral
therapy than
achieved by single
agent therapy. A
phase IIb clinical
trial of the
combination of
valtorcitabine and
telbivudine is
ongoing.
|
|
phase III |
19
| |
|
|
|
|
|
|
| |
|
Product |
|
|
|
Next |
| |
|
Candidates/ |
|
|
|
Development |
| Indication |
|
Programs |
|
Description |
|
Stage |
HCV
|
|
valopicitabine
(NM283)
(Nucleoside analog)
|
|
Two ongoing phase
IIb clinical trials
are evaluating the
combination of
valopicitabine and
pegylated
interferon in HCV
infected patients
who previously
failed to respond
to antiviral
treatment, as well
as in patients who
have not yet been
treated for
hepatitis C.
Preliminary results
from clinical
trials have
demonstrated that
the antiviral
effects of
valopicitabine are
enhanced when this
agent is used in
combination with
pegylated
interferon. To
date, the most
commonly occurring
adverse events are
gastrointestinal
side effects
(nausea, vomiting
and occasionally
diarrhea). After
observing that
patients at the 800
mg/day dose level
were experiencing
moderate to severe
gastrointestinal
side effects at a
rate
proportionately
higher than the
patients at the 200
to 400 mg/day dose
levels, and
following
discussions with
the U.S. Food and
Drug
Administration, or
FDA, in March 2006,
we modified the
phase IIb clinical
trials to reduce
valopicitabine
dosing levels from
800 mg/day to 200
mg/day or 400
mg/day.
|
|
phase III |
|
|
|
|
|
|
|
HCV
|
|
NV-08
|
|
Preclinical
evaluation of
product candidates
from this program
is in progress.
This program
consists of
structurally
different chemical
classes than
valopicitabine. We
are seeking a
candidate that may
be developed for
use in combination
with
valopicitabine.
|
|
phase I* |
|
|
|
|
|
|
|
HIV
|
|
NV-05
(Non-nucleoside
reverse
transcriptase
inhibitor or NNRTI)
|
|
We have identified
two lead candidates
in this program and
plan to file an
exploratory
investigational new
drug application,
or exploratory IND,
in the U.S. by
year-end 2006. This
exploratory IND
evaluation is
intended to enable
us to gain human
pharmacokinetic
insights that will
help us select the
most promising
candidate to move
into full clinical
development.
|
|
phase I* |
|
|
|
| * |
|
Phase I clinical trial is expected to incorporate certain of the objectives of a phase II clinical trial. |
In May 2003, we entered into collaboration with Novartis relating to the worldwide development
and commercialization of our product candidates, which was amended in February 2006. The
collaboration includes the development, license and commercialization agreement dated as of May 8,
2003, by and among us, Idenix (Cayman) Limited and Novartis as amended, and the master
manufacturing and supply agreement dated as of May 8, 2003, by and between Idenix (Cayman) Limited
and Novartis. Novartis paid us a license fee of $75 million for our HBV product candidates,
telbivudine and valtorcitabine, is providing development funding for these HBV product candidates
and will make milestone payments, which could total up to $35 million upon the achievement of
specific regulatory approvals. If telbivudine is approved for commercial sale, additional milestone
payments will be paid to us by Novartis upon achievement of predetermined HBV product sales levels.
Novartis also acquired an option to license our HCV and other product candidates. In March
2006, Novartis exercised its option to license valopicitabine, our lead HCV product candidate. As a
result, we received a $25 million license payment from Novartis in March 2006, and Novartis is
providing development funding for valopicitabine and will pay us up to $500 million in additional
license fees and milestone payments, if certain development and regulatory milestones are achieved.
If valopicitabine is approved for commercial sale, additional milestone payments will be paid to us
by Novartis upon achievement of predetermined HCV product sales levels.
We plan to co-promote or co-market with Novartis in the U.S., the U.K., France, Germany, Italy
and Spain all products Novartis licenses from us that are successfully developed. Novartis has the
exclusive right to promote and market such products in the rest of
the world. In support of such
co-promotion and co-marketing activities, we have recruited and employed in July 2006 a sales force
in the United States and anticipate recruiting a sales force in each of the other co-promotion and
co-marketing countries in advance of the marketing authorization approval, if any, of telbivudine
in each of these European countries.
Pursuant to the supply agreement, Novartis was appointed to finish and package licensed
products for commercial sale. Novartis was also afforded the opportunity to manufacture active
pharmaceutical ingredient for the commercial supply of licensed products if certain conditions and
criteria were satisfied. On June 22, 2006, we entered into a commercial manufacturing agreement
with Novartis and a packaging agreement with Novartis Pharmaceuticals Corporation, an affiliate of
Novartis. Under the manufacturing agreement, Novartis will manufacture the commercial supply of
telbivudine that is intended for sale in the United States. The packaging agreement provides that
the supply of telbivudine intended for commercial sale in the United States will be packaged by
20
Novartis Pharmaceuticals Corporation.
In addition to the collaboration described above, Novartis purchased approximately 54% of our
outstanding capital stock in May 2003 from our then existing stockholders for $255 million in cash,
with an additional aggregate amount of up to $357 million contingently payable to these
stockholders if we achieve predetermined development milestones relating to an HCV product
candidate. Novartis presently owns approximately 56% of our outstanding common stock.
All of our product candidates are currently in preclinical or clinical development. To
commercialize any of our product candidates, we will be required to obtain marketing authorization
approvals after successfully completing preclinical studies and clinical trials of such product
candidates. We submitted a new drug application, or NDA, to the FDA for telbivudine, our lead
hepatitis B product candidate in late 2005. In March 2006, we were notified that this submission
had been accepted for filing and that the NDA is under formal review
by the FDA. Additionally, to
date in 2006, Novartis has submitted applications seeking authorization to market telbivudine in
many other territories, including the European Union, China, Canada, Switzerland, Taiwan, South
Korea and Australia. Any delay in obtaining or failure to obtain such required approvals by either
us or Novartis, will materially adversely affect our ability to realize revenues from commercial
sales of telbivudine and our other product candidates, if any, for which marketing authorization is
sought and obtained. Even if telbivudine is approved for commercial sale without delay, we do not
expect to realize any product sales prior to late 2006 at the earliest. Accordingly, we expect our
sources of funding for 2006 to consist principally of the reimbursement of expenses we may incur in
connection with the development and registration of licensed product candidates and license fees
relating to valopicitabine.
We have incurred significant losses since our inception in May 1998 and expect such losses to
continue in the foreseeable future. Historically, we have generated losses principally from costs
associated with research and development activities, including clinical trial costs, and general
and administrative activities. As a result of planned expenditures for future discovery,
development and commercialization activities and the expansion of our sales, operational and
administrative infrastructure, we expect to incur additional operating losses for the foreseeable
future.
Our research and development expenses consist primarily of salaries and payroll-related
expenses for research and development personnel, including stock-based compensation, fees paid to
clinical research organizations and other professional service providers in conjunction with our
clinical trials, fees paid to research organizations in conjunction with animal studies, costs of
material used in research and development, costs of contract manufacturing consultants, occupancy
costs associated with the use of our research facilities and equipment, consulting and license fees
paid to third parties, and depreciation of property and equipment related to research and
development. The majority of our research and development spending is incurred on clinical,
preclinical and manufacturing activity with third-party contractors relating to the development of
our HBV and HCV product candidates. We expense internal and external research and development costs
as incurred. We expect our research and development expenses to increase as we continue to engage
in research activities, further develop our potential product candidates and advance our clinical
trials.
Pursuant to our development agreement with Novartis, after it licenses a product candidate,
Novartis is obligated to fund development expenses that we incur in accordance with development
plans agreed upon by us and Novartis. The option we have granted to Novartis with respect to its
right to license our product candidates generally requires that Novartis exercise the option for
each such product candidate prior to the commencement of phase III clinical trials. The expenses
associated with phase III clinical trials generally are the most costly component in the
development of a successful new product.
Results of Operations
Comparison of Three Months Ended June 30, 2006 and 2005
Revenues
Total revenues were $19.3 million for the three months ended June 30, 2006 as compared with
$16.1 million for the three months ended June 30, 2005.
Total revenues for the three months ended June 30, 2006 were primarily comprised of $19.3
million in related party revenue from Novartis, consisting of $3.3 million in license fee revenue
and $16.0 million for reimbursement of research and development expenses.
Total revenues for the three months ended June 30, 2005 were primarily comprised of $16.0
million in related party revenue from Novartis, consisting of $1.7 million in license fee revenue,
net of a $0.7 million reduction due to Novartis stock subscription rights, and $14.3 million for
reimbursement of research and development expenses.
The increase in revenues of $3.2 million for the three months ended June 30, 2006 in
comparison with the prior reporting period was primarily due to an increase in license fee revenue
and reimbursements from Novartis associated with valopicitabine, which was licensed by Novartis in
March 2006.
21
Research and Development Expenses
Research and development expenses were $24.9 million for the three months ended June 30, 2006
as compared with $23.2 million for the three months ended June 30, 2005. The increase of $1.7
million was primarily due to increases of $0.9 million for HCV and HIV research collaborations with
third parties and $0.7 million in salary and other payroll-related expenses as we expand our
research and development activities.
We expect our research and development expenses to increase in future periods as we continue
to devote substantial resources to our research and development activities and we engage in a
greater number of later-stage clinical trials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $12.2 million for the three months ended
June 30, 2006 as compared with $7.2 million for the three months ended June 30, 2005. The increase
of $5.0 million was primarily due to increases of $1.0 million in salary and other payroll-related
expenses associated with the hiring of additional personnel as we expand our operations, $1.1
million in stock-based compensation with the adoption of SFAS 123(R), $1.0 million in professional
fees associated with patent prosecution and auditing activities and $1.1 million in consulting
expenses attributable to marketing activities.
We expect that our selling, general and administrative expenses will increase significantly in
the future as we expand marketing activities, continue to build a commercial infrastructure,
implement new computer systems, hire additional personnel and recruit a specialized sales force in
connection with the marketing and sale of telbivudine, if approved, and other product candidates,
if any, which we may successfully develop and commercialize in the future.
Investment Income, Net
Net investment income was $2.5 million for the three months ended June 30, 2006 as compared
with $0.8 million for the three months ended June 30, 2005.
The increase of $1.7 million was primarily the
result of higher average cash and marketable securities balances held during the three months ended
June 30, 2006 due to the receipt of proceeds from our public offering in October 2005 and the
license payment we received from Novartis in March 2006.
Income Taxes
Income tax benefit was approximately $0.6 million for the three months ended June 30, 2006 as
compared with approximately $0.1 million for the three months ended June 30, 2005. The increase in
income tax benefits for the three months ended June 30, 2006 was due to amounts our French
subsidiary has received or is expected to receive for certain research and development credits, net
of income tax expense incurred by our U.S., French and Dutch subsidiaries. Our U.S. and French
subsidiaries perform services for us and are reimbursed for these costs, plus a profit margin.
Comparison of Six Months Ended June 30, 2006 and 2005
Revenues
Total revenues were $32.4 million for the six months ended June 30, 2006 as compared with
$31.0 million for the six months ended June 30, 2005.
Total revenues for the six months ended June 30, 2006 were primarily comprised of $32.3
million in related party revenue from Novartis consisting of $5.2 million in license fee revenue
and $27.1 million for reimbursement of research and development expenses.
Total revenues for the six months ended June 30, 2005 were primarily comprised of $30.8
million in related party revenue from Novartis, consisting of $4.0 million in license fee revenue,
net of a $0.9 million reduction due to Novartis’ stock subscription rights, and $26.8 million for
reimbursement of research and development expenses.
The increase in revenues of $1.4 million for the six months ended June 30, 2006 in comparison
with the prior reporting period was primarily due to an increase in license fee revenue as a result
of Novartis licensing valopicitabine in March 2006 and a reduction in the impact of the Novartis
stock subscription rights.
Research and Development Expenses
Research and development expenses were $46.9 million for the six months ended June 30, 2006 as
compared with $41.7 million for the six months ended June 30, 2005. The increase of $5.2 million
was primarily due to increases of $1.5 million for HCV and HIV research collaborations with third
parties, $1.7 million in salary and other payroll-related expenses and $1.0 million in stock-based
compensation with the adoption of SFAS 123(R).
22
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $22.8 million for the six months ended June
30, 2006 as compared with $13.8 million for the six months ended June 30, 2005. The increase of
$9.0 million was primarily due to increases of $2.4 million in salary and other payroll-related
expenses associated with the hiring of additional personnel as we expand our operations, $2.2
million in stock-based compensation with the adoption of SFAS 123(R), $1.8 million in consulting
expenses attributable to marketing activities and $0.8 million in professional fees primarily for
patent prosecution and audit activities.
Investment Income, Net
Net investment income was $4.7 million for the six months ended June 30, 2006 as compared with
the $1.6 million for the six months ended June 30, 2005. The increase of $3.1 million was primarily
the result of higher average cash and marketable securities balances held during the six months
ended June 30, 2006 due to the receipt of proceeds from our public offering in October 2005 and the
license payment we received from Novartis in March 2006.
Income Taxes
Income tax benefit was approximately $0.9 million for the six months ended June 30, 2006 as
compared with approximately $0.1 million for the six months ended June 30, 2005. The increase in
income tax benefits for the six months ended June 30, 2006 was due to amounts our French subsidiary
has received or is expected to receive for certain research and development credits, net of income
tax expense incurred by our U.S., French and Dutch subsidiaries.
Liquidity and Capital Resources
Since our inception in 1998, we have financed our operations with proceeds obtained in
connection with license and development arrangements and equity financings. The proceeds include
license, milestone and other payments from Novartis, reimbursements from Novartis for costs we have
incurred subsequent to May 8, 2003 in connection with the development of our HBV product candidates
and valopicitabine, net proceeds from Sumitomo for reimbursement of development costs, net proceeds
from private placements of our convertible preferred stock, net proceeds from the initial public
offering and concurrent private placement of our common stock in July 2004, net proceeds from a
public offering of our common stock in October 2005 and proceeds from the exercise of stock options
granted pursuant to our equity compensation plans.
In July 2004, we completed an initial public offering and concurrent private placement in
which we issued and sold 4,600,000 shares of common stock in the public offering and 5,400,000
shares of common stock to Novartis in the private placement. In connection with the initial public
offering and concurrent private placement, we received approximately $132.6 million in net
proceeds, after deducting underwriting discounts and offering expenses.
In October 2005, we completed a public offering of our common stock. In this transaction, we
issued and sold 7,278,020 shares of common stock, including 3,939,131 shares of common stock to
Novartis. From this issuance and sale of stock, we received approximately $145.5 million in
proceeds, after deducting underwriting discounts and offering expenses.
We had $103.2 million and $83.7 million in cash and cash equivalents as of June 30, 2006 and
December 31, 2005, respectively. We invest our excess cash balances in short-term and long-term
marketable debt securities. All of our marketable securities are classified as available-for-sale.
Our investments have an effective maturity not greater than 24 months and investments with
maturities greater than 12 months are classified as non-current marketable securities. As of June
30, 2006, we had $64.6 million in current marketable securities and $58.8 million in non-current
marketable securities. As of December 31, 2005, we had $95.6 million in current marketable
securities and $62.9 million in non-current marketable securities.
Net cash used in operating activities was $15.4 million for the six months ended June 30, 2006
compared to net cash used in operating activities of $26.9 million for the six months ended June
30, 2005. The net cash used in operating activities for the six months ended June 30, 2006 was
primarily related to the net loss for the period and decreases in receivables from related party,
accounts payable and accrued expenses. This was offset by the receipt of a $25 million payment from
Novartis relating to the license of valopicitabine in March 2006. The net cash used in operating
activities for the six months ended June 30, 2005 was primarily due to the net loss for the period
adjusted for a decrease in deferred revenue due to the amortization of our license fee received
from Novartis in 2003.
Net cash provided by investing activities was $34.1 million and $30.7 million for the six
months ended June 30, 2006 and 2005, respectively. The net cash provided by investing activities
for the six months ended June 30, 2006 was primarily due to net proceeds from sales of our
marketable securities to fund operations, offset by capital expenditures for computer software
development projects. The net cash provided by investing activities for the six months ended June
30, 2005 was primarily due to net proceeds from net sales of our marketable securities to fund
operations, offset by capital expenditures and restriction of certain cash deposits relating to the
issuance of a letter of credit in connection with a new lease we entered into in June 2005 for
additional office facilities in Cambridge, Massachusetts.
23
Net cash provided by financing activities was $0.7 million and $1.0 million for the six months
ended June 30, 2006 and 2005, respectively. The net cash provided by financing activities for the
six months ended June 30, 2006 and 2005 was due to proceeds received from the issuance of stock
primarily from the exercise of employee stock options.
Set forth below is a description of our contractual obligations as of June 30, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
|
|
|
|
One to |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Less Than |
|
|
Three |
|
|
Four to |
|
|
After Five |
|
| Contractual Cash Obligations |
|
Total |
|
|
One Year |
|
|
Years |
|
|
Five Years |
|
|
Years |
|
| |
|
(in thousands) |
|
Operating
leases |
|
$ |
20,466 |
|
|
$ |
3,179 |
|
|
$ |
5,877 |
|
|
$ |
4,625 |
|
|
$ |
6,785 |
|
Consulting and other
agreements |
|
|
10,739 |
|
|
|
4,139 |
|
|
|
4,760 |
|
|
|
1,840 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
$ |
31,205 |
|
|
$ |
7,318 |
|
|
$ |
10,637 |
|
|
$ |
6,465 |
|
|
$ |
6,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have certain potential milestone payment obligations relating to our hepatitis B and
hepatitis C product candidates. These obligations are excluded from the contractual obligations
table above and are more fully described below.
Pursuant to the license agreement between us and the University of Alabama at Birmingham
Research Foundation, or the UAB license agreement, we were granted an exclusive license to the
rights that the University of Alabama at Birmingham Research Foundation, or UABRF, Emory University
and Le Centre Nationale de la Recherche, or CNRS, collectively the 1998 licensors, have to a 1995
U.S. patent application and counterpart patent applications in Europe, Canada, Japan and Australia
that cover the use of certain synthetic nucleosides for the treatment of hepatitis B infection.
In February 2006, UABRF notified us that it and Emory University were asserting a claim that,
as a result of the filing of a continuation patent application in July 2005 by UABRF, the UAB license agreement covers our telbivudine
technology. If this were held to be true, we would be obligated to pay to the 1998 licensors an
aggregate of $15.3 million comprised of 20% of the $75 million license fee we received from
Novartis in May 2003 in connection with the license of our hepatitis B product candidates and a
$0.3 million payment in connection with the submission to the FDA of the IND pursuant to which we
have conducted our clinical development of telbivudine. We disagree that the 1995 patent
application or corresponding foreign applications provide an adequate basis for the issuance of a
valid and enforceable patent claim covering the use of telbivudine to treat hepatitis B. We intend
to dispute these assertions. Under the terms of the UAB license agreement, the dispute will be
resolved by a panel of arbitrators if we are unable to reach agreement with UABRF after a period of
negotiation and mediation.
We do not believe that it is probable that UABRF’s position will be upheld and as such, we
have not recorded a liability as of June 30, 2006. However, if it is determined that the UAB
license agreement does cover our technology, we will become obligated to make payments to the 1998
licensors in the amounts and manner specified in the UAB license agreement. Such amounts in
addition to those asserted by UABRF and Emory University include payments in the aggregate amount
of $1.0 million due upon achievement of regulatory milestones, a 6% royalty on annual sales up to
$50 million and a 3% royalty on annual sales greater than $50 million made by us or an affiliate of
ours. Additionally, if we sublicense our rights to any entity other than one which holds or
controls at least 50% of our capital stock, or if Novartis’ ownership interest in us declines below
50% of our outstanding shares of capital stock, we could be obligated to pay to the 1998 licensors
30% of all royalties received by us from sales by the sublicensee of telbivudine and 20% of all
fees, milestone payments and other cash consideration we receive from the sublicensee with respect
to telbivudine.
If it is determined that the UAB license agreement does cover our use of telbivudine to treat
hepatitis B, or we must otherwise rely upon a license granted by the 1998 licensors to
commercialize telbivudine, we may be in breach of certain of the representations and warranties we
made to Novartis under the development agreement and the stock purchase agreement.
Additionally, in connection with the resolution of matters relating to certain of our
hepatitis C product candidates, we entered into a settlement agreement with UABRF which provides
for a milestone payment of $1 million to UABRF upon receipt of regulatory approval in the U.S. to
market and sell certain hepatitis C products invented or discovered by our chief executive officer
during the period from November 1, 1999 to November 1, 2000. Such hepatitis C products would
include valopicitabine if successfully developed and commercialized.
Further, we have potential payment obligations under the license agreement with the University
of Cagliari pursuant to which we have the exclusive worldwide right to make, use and sell
valopicitabine and certain other HCV and HIV technology. We are liable for certain payments to the
University of Cagliari if we receive from Novartis or another collaborator license fees or
milestone payments with respect to such technology. As a result of the license by Novartis of
valopicitabine and the payment of a $25 million license fee to us, we remitted a payment to the
University of Cagliari in the amount of $250,000 in the quarter ended June 30, 2006.
24
The settlement agreement which we have entered into with Sumitomo provides for a $5.0 million
milestone payment to Sumitomo if and when the first commercial sale of telbivudine occurs in Japan.
We believe that our current cash and cash equivalents and marketable securities together with
funding we expect to receive from Novartis relating to the development of our HBV product
candidates and valopicitabine will be sufficient to satisfy our cash needs until at least the end
of 2007. At any time, it is possible that we may seek additional financing. We may seek such
financing through a combination of public or private financing, collaborative relationships and
other arrangements. Additional funding may not be available to us or, if available, may not be on
terms favorable to us. Further, any additional equity financing may be dilutive to stockholders,
other than Novartis, which has the right to maintain its current ownership level, and debt
financing, if available, may involve restrictive covenants. Our failure to obtain financing when
needed may harm our business and operating results.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of the financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition, accrued expenses and stock-based compensation. We
base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in Note 2 to our consolidated
financial statements included in our Annual Report on Form 10-K. There have been no material
changes to the critical accounting policies for revenue recognition and accrued expenses for the
three and six months ended June 30, 2006. We have updated our accounting policy for stock-based
compensation during the three and six months ended June 30, 2006 as described below.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standard No. 123 (revised 2004), or SFAS No. 123(R), “Share-Based
Payment.” This Statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and
supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
or APB No. 25. SFAS No. 123(R) requires share-based transactions for employees and directors to be
accounted for using a fair value based method resulting in expense being recognized in our
financial statements.
We adopted SFAS No. 123(R) on January 1, 2006. We applied the modified prospective method at
adoption in which stock compensation expense was determined based on fair value using the
Black-Scholes method at grant dates for stock options. Accordingly, financial statement amounts for
the periods prior to the adoption of SFAS No. 123(R) including the three and six months ended June
30, 2005 have not been restated to reflect the fair value method of expensing required by SFAS No.
123(R). Prior to January 1, 2006, we accounted for stock-based awards to employees and
directors using the intrinsic method prescribed in APB No. 25 and related interpretations.
For purposes of estimating the fair value of stock options granted during the three and six
months ended June 30, 2006 using the Black-Scholes method, we have made assumptions for the inputs
in the model regarding expected dividend yield, risk-free interest rate, expected option term and
expected volatility. The amounts recognized for stock-based compensation expense could vary
depending upon changes in assumptions in the model.
No dividend yield was assumed as we do not pay dividends on our common stock. The risk-free
interest rate is based on the yield of U.S. Treasury securities consistent with the expected life
of the option (5.03% and 4.76% for the three and six months ended June 30, 2006, respectively). The
expected option term (5 years for each of the three and six months ended June 30, 2006) and
expected volatility (61% and 64% for the three and six months ended June 30, 2006, respectively)
were determined by examining the expected option term and volatility of our own stock as well as
the expected terms and volatilities of similarly sized biotechnology companies.
As share-based compensation expense recognized in the condensed consolidated statements of
operations for the three and six months ended June 30, 2006 is based on awards ultimately expected
to vest, it should be reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods as options vest, if
actual forfeitures differ from those estimates. During the three and six months ended June 30,
2006, because substantially all of the Company’s stock option grants vest monthly, no forfeiture
assumption was applied. In our pro forma information required under
25
SFAS No. 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.
We recognize compensation expense for restricted stock sold and stock options granted to
non-employees in accordance with the requirements of SFAS No. 123 and EITF Issue No. 96-18,
“Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” or “EITF 96-18.” EITF 96-18 requires such equity
instruments to be recorded at their fair value at the measurement date, which is generally the
vesting date of the instruments. Therefore, the measurement of stock-based compensation is subject
to periodic adjustments as the underlying equity instruments vest.
Our equity incentive plans are administered by the compensation committee of the board of
directors. The compensation committee determines the type and term of each award, the award
exercise or purchase price, if applicable, the number of shares underlying each award granted and
the rate at which each award becomes vested or exercisable. Incentive stock options may be granted
only to employees at an exercise price per share not less than the fair market value per share of
common stock as determined by the board of directors on the date of grant (not less than 110% of
the fair market value in the case of holders of more than 10% of our common stock) and with a term
not to exceed ten years from the date of grant (five years for incentive stock options granted to
holders of more than 10% of our voting common stock). Nonqualified stock options may be granted to
any officer, employee, director, consultant or advisor at a per share exercise price in such amount
as the compensation committee may determine. The compensation committee may also grant restricted
stock and other stock-based awards on terms and conditions it may determine. These equity incentive
plans are described more fully in Note 14 to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the year ended December 31, 2005.
Recent Accounting Pronouncements
In June 2006, the FASB published FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertain
Tax Positions” or FIN No. 48. This interpretation seeks to reduce the significant diversity in
practice associated with recognition and measurement in the accounting for income taxes. It would
apply to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes.” FIN No. 48 requires that a tax position meet “a more likely than not” threshold for the
benefit of the uncertain tax position to be recognized in the financial statements. This threshold
is to be met assuming that the tax authorities will examine the uncertain tax position. FIN No. 48
contains guidance with respect to the measurement of the benefit that is recognized for an
uncertain tax position, when that benefit should be derecognized, and other matters. FIN No. 48
should clarify the accounting for uncertain tax positions in accordance with SFAS No. 109. FIN No.
48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the
impact, if any, that this interpretation will have on our financial position and results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, operating
results or cash flows due to changes in interest rates. The primary objective of our investment
activities is to preserve capital, while maintaining liquidity, until it is required to fund
operations. To minimize risk, we maintain our operating cash in commercial bank accounts. We invest
our excess cash in high quality financial instruments with active secondary or resale markets
consisting primarily of money market funds, U.S. government guaranteed debt obligations, repurchase
agreements with major financial institutions and certain corporate debt securities, with the dollar
weighted average effective maturity of the portfolio less than 12 months and no security with an
effective maturity in excess of 24 months. Since our investments have effective maturities that are
short term in duration and the investments are denominated in U.S. dollars, we believe that we are
not subject to any material credit, market or foreign exchange risk exposure. We do not have any
derivative financial instruments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2006.
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Exchange
Act, means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers, as appropriate, to
allow timely decisions regarding required disclosure. Our management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and our management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of June 30, 2006, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
26
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30,
2006 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
Our business faces many risks. The risks described below may not be the only risks we face.
Additional risks we do not yet know of or we currently believe are immaterial may also impair our
business operations. If any of the events or circumstances described in the following risks
actually occur, our business, financial condition or results of operations could suffer, and the
trading price of our common stock could decline. You should consider the following risks, together
with all of the other information in this quarterly report on Form 10-Q as read in conjunction with
our Annual Report on Form 10-K for the year ended December 31, 2005, before deciding to invest in
our securities. We have not made any material changes in the risk factors previously disclosed in
our quarterly report on Form 10-Q for the three month period ended March 31, 2006.
Factors Related to Our Business
We have a limited operating history and have incurred a cumulative loss since inception. If we do
not generate significant product revenues, we will not be profitable.
We have incurred significant losses since our inception in May 1998. We expect our annual
operating losses to increase over the next several years as we expand our drug discovery,
development and commercialization efforts. To generate product revenues, we must successfully
develop and obtain regulatory approval for our product candidates and effectively manufacture,
market and sell such products. Telbivudine, which we are evaluating in phase III and phase IIIb
clinical trials and for which we have an NDA filed with the FDA, is our most advanced product
candidate. To date, no sales of telbivudine have occurred and we have not generated any revenue
from the sale of telbivudine or any other product in any country. Even if we do successfully
receive regulatory approval to market telbivudine in other countries or we succeed in our efforts
to develop other product candidates that receive regulatory approval, we may not be able to realize
revenues at a level that would allow us to achieve or sustain profitability. Our failure to become
and remain profitable may depress the market price of our common stock and impair our ability to
raise capital, expand our business or continue our operations.
We will need additional capital to fund our operations, including product candidate development,
manufacturing and commercialization. If we do not have or cannot raise additional capital when
needed, we will be unable to develop and commercialize our product candidates successfully.
Our June 30, 2006 cash, cash equivalents and marketable securities balance was $226.7 million.
We believe that this balance and the funding we expect to receive from Novartis relating to the
development of our licensed hepatitis B product candidates and our lead hepatitis C product
candidate, valopicitabine, will be sufficient to satisfy our anticipated cash needs at least until
the end of 2007. However, we may need or choose to seek additional funding within this period of
time. The commercialization of any product we successfully develop and the development of our
product candidates will require substantial additional cash to fund expenses that we will incur in
connection with sales and marketing efforts, manufacturing of commercial supply, preclinical
studies and clinical trials, and regulatory review. We expect that our selling, general and
administrative expenses will increase significantly as we prepare for the anticipated launch of
telbivudine, if approved, and the continued efforts thereafter to market and sell such product and
any other product candidates we successfully develop.
Our need for additional funding will depend in large part on whether:
| |
• |
|
telbivudine is approved for sale in major markets; |
| |
| |
• |
|
with respect to our HBV product candidates and
valopicitabine, Novartis continues to reimburse us for
development expenses and we achieve and receive from
Novartis additional license fees and milestone payments
relating to the development and regulatory approval of
these product candidates; and |
| |
| |
• |
|
with respect to our other product candidates, Novartis
exercises its option to license other product candidates
and we receive related license fees, milestone payments and
development expense reimbursement payments from Novartis. |
27
In addition, although Novartis has agreed to pay for certain development expenses incurred
under development plans it approves for our HBV product candidates, valopicitabine and other
product candidates, if any, Novartis licenses from us, Novartis has the right to terminate its
license and the related funding obligations with respect to any product candidate by providing us
with six months written notice.
Our future capital needs will also depend generally on many other factors, including:
| |
• |
|
the costs of launching telbivudine, and any of our other product
candidates, if such product candidates are approved for commercial
sale by regulatory authorities; |
| |
| |
• |
|
the amount of revenue, if any, that we may be able to realize from commercialization and sale of telbivudine and any of
our other product candidates if such product candidates are approved for commercial sale by regulatory authorities; |
| |
| |
• |
|
the scope and results of our preclinical studies and clinical trials; |
| |
| |
• |
|
the progress of our current preclinical and clinical development programs for HCV, HBV and HIV; |
| |
| |
• |
|
the cost of obtaining, maintaining and defending patents on our product candidates and processes; |
| |
| |
• |
|
the arrangements we establish for manufacturing and the related cost of manufacturing commercial supply of products; |
| |
| |
• |
|
the cost, timing and outcome of regulatory reviews; |
| |
| |
• |
|
the cost of establishing and maintaining sales and marketing functions; |
| |
| |
• |
|
the commercial potential of our product candidates; |
| |
| |
• |
|
the rate of technological advances in our markets; |
| |
| |
• |
|
the cost of acquiring or in-licensing new discovery compounds, technologies, product candidates or other business assets; |
| |
| |
• |
|
the magnitude of our general and administrative expenses; and |
| |
| |
• |
|
any costs we may incur under current and future licensing arrangements. |
We estimate that we will incur significant costs to complete clinical trials relating to
telbivudine. We also expect that we will incur significant costs to complete the clinical trials
and other studies required to enable us to submit NDAs with the FDA for valtorcitabine and
valopicitabine, assuming development of each of these product candidates is continued. The time and
cost to complete clinical development of these product candidates may vary as a result of a number
of factors.
We may seek additional capital through a combination of public and private equity offerings,
debt financings and collaborative, strategic alliance and licensing arrangements. Such additional
financing may not be available when we need it or may not be available on terms that are favorable
to us.
If we raise additional capital through the sale of our common stock, existing stockholders,
other than Novartis, which has the right to maintain its current level of ownership, will be
diluted and the terms of the financing may adversely affect the holdings or rights of our
stockholders. If we are unable to obtain adequate financing on a timely basis, we could be required
to delay, reduce or eliminate one or more of our drug development programs or to enter into new
collaborative, strategic alliance or licensing arrangements that may not be favorable to us. These
arrangements could result in the transfer to third parties of rights that we consider valuable.
We will not be able to commercialize our drug products successfully if we are unable to hire,
train, deploy and retain qualified sales personnel to develop a direct sales force.
Our successful commercialization of telbivudine, if approved, and other product candidates we
successfully develop will depend upon our ability to establish and maintain an effective marketing
and sales organization. Currently, we have limited sales, marketing and distribution experience. We
have recently established a U.S. sales force and we expect to begin in the near-term to recruit
sales personnel to establish a direct sales force for the European markets in which we expect to
co-promote or co-market with Novartis products, if any, for which marketing authorization approval
is received. Competition for sales personnel is intense. Due to the promotion, marketing and sale
of competitive and potentially competitive products within specialized markets by companies that
have significantly greater resources and existing commercialization infrastructures, we believe
that it may be difficult for us to recruit and retain qualified personnel with experience in sales
and marketing of viral and other infectious disease therapeutics. As a result, we may not be able
to successfully hire, train, deploy and retain qualified sales personnel to establish a direct
sales force in time for the launch of telbivudine, if approved, or at all. In addition, we do not
know if any sales force we establish will be sufficient in size or scope to compete successfully in
the marketplace.
28
We will incur significant expense to establish our marketing and sales capabilities.
To establish our marketing and sales capabilities, we will incur significant expenses. A
substantial portion of these expenses will be incurred before any of our product candidates will
have been approved for marketing. Moreover, if the approval of telbivudine or any of our other
product candidates is delayed substantially, or not approved, we will have incurred significant
unrecoverable expenses. Additionally, the cost of establishing a marketing and sales force may not
be justifiable in light of the revenues generated by any particular product or combination of
products.
Our market is subject to intense competition. If we are unable to compete effectively, our product
candidates may be rendered noncompetitive or obsolete.
We are engaged in segments of the pharmaceutical industry that are highly competitive and
rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions,
governmental agencies and other public and private research organizations are commercializing or
pursuing the development of products that target viral diseases, including the same diseases we are
targeting. We face intense competition from existing products and we expect to face increasing
competition as new products enter the market and advanced technologies become available. We are
aware of four drug products, being lamivudine, entecavir and adefovir, each nucleoside analogs, and
pegylated interferon, that are approved by the FDA and commercially available in the United States
for the treatment of hepatitis B infection. We are also aware that the current standard of care for
the treatment of chronic hepatitis C is pegylated interferon in combination with ribavirin, a
nucleoside analog. Currently, for the treatment of HIV infection, there are 22 antiviral therapies
approved for commercial sale in the U.S. Of these approved therapies, 7 are nucleosides, 3 are
non-nucleosides, 11 are protease inhibitors and one is an entry inhibitor.
Additionally, we believe that a significant number of drugs currently under development may
become available in the future for the treatment of hepatitis B, hepatitis C and HIV infections. If
any of these product candidates are successfully developed, they may be marketed before our product
candidates. Our competitors’ products may be more effective, have fewer side effects, lower costs
or be better marketed and sold, than any of our products. Many of our competitors have:
| |
• |
|
significantly greater financial, technical and human resources than we have and may be better
equipped to discover, develop, manufacture and commercialize products; |
| |
| |
• |
|
more extensive experience in conducting preclinical studies and clinical trials, obtaining
regulatory approvals and manufacturing and marketing pharmaceutical products; |
| |
| |
• |
|
products that have been approved or product candidates that are in late-stage development; and |
| |
| |
• |
|
collaborative arrangements in our target markets with leading companies and research institutions. |
Under certain circumstances, Novartis has the right to compete with product candidates and
drugs developed or licensed by us. Novartis has the right under certain circumstances to market and
sell products that compete with the product candidates and products that we license to it, and any
competition by Novartis could have a material adverse effect on our business.
Competitive products may render our products obsolete or noncompetitive before we can recover
the expenses of developing and commercializing our product candidates. Furthermore, the development
of new treatment methods and/or the widespread adoption or increased utilization of vaccines for
the diseases we are targeting could render our product candidates noncompetitive, obsolete or
uneconomical.
If we successfully develop and obtain approval for our product candidates, we will face
competition based on the safety and effectiveness of our products, the timing and scope of
regulatory approvals, the availability and cost of supply, marketing and sales capabilities,
reimbursement coverage, price, patent position and other factors. Our competitors may develop or
commercialize more effective or more affordable products, or obtain more effective patent
protection, than we do. Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could adversely affect our competitive position and business.
Our ability to compete successfully will depend in part on the success of our marketing and
sales efforts. We do not know if we will be able to build the sales force we anticipate or whether
such sales force, if established, will be sufficient in size or scope to compete successfully in
the marketplace. Among other factors, we may not be able to gain sufficient access to healthcare
practitioners, which would have a negative effect on our ability to promote our products, gain
market acceptance and acquire market share from existing products.
In addition to direct competition, to receive attention from and be considered by physicians
and patients, any product we successfully develop and receive approval to commercialize will
compete against the promotional efforts of other products. In the pharmaceutical and
biopharmaceutical markets, the level of promotional effort required to effect awareness of new
products is substantial. Market acceptance of our products will be affected by the level of
promotional effort that we are able to provide for our
29
products. The level of our promotional efforts will depend in part on our ability to recruit,
train, deploy and retain an effective sales and marketing organization. We cannot offer assurance
that the level of promotional effort that we will be able to provide for products we successfully
develop will be effective in allowing our products to compete successfully, if at all, in the
market.
Biotechnology and related pharmaceutical technologies have undergone and continue to be
subject to rapid and significant change. Our future will depend in large part on our ability to
maintain a competitive position with respect to these technologies.
If we successfully develop and obtain regulatory approval for our products, but those products do
not achieve and maintain market acceptance, our business will not be successful.
Even if our product candidates are successfully developed and approved for commercialization,
our success and growth will depend upon the acceptance of these products by physicians, healthcare
professionals and third-party payers. Acceptance will be a function of:
| |
• |
|
our products being clinically useful and demonstrating similar or superior
therapeutic effect with an acceptable side effect profile as compared to
existing or future treatments; |
| |
| |
• |
|
the timing of our receipt of any marketing approvals, the terms of any
approval (including labeling requirements and/or limitations), and the
countries in which approvals are obtained, if any; |
| |
| |
• |
|
the perception of our products by physicians and other members of the
healthcare community and the success of our physician and healthcare
professional education programs; and |
| |
| |
• |
|
the availability and level of government and third-party payer reimbursement. |
Lamivudine, adefovir dipivoxil and entecavir are small molecule therapeutics currently
approved in the United States and some other jurisdictions for the treatment of chronic hepatitis
B. The current standard of care for the treatment of chronic hepatitis C is the combination of
pegylated interferon and ribavirin, a small molecule therapeutic. The labeling for our approved
products, if any, will have a direct impact on our marketing, promotional and sales programs.
Unfavorable labeling will restrict our marketing, promotional and sales programs, which would
adversely affect market acceptance of our products.
We are aware that a significant number of product candidates are currently under development
and may become available in the future for the treatment of hepatitis B, hepatitis C and HIV
infections. If our products do not achieve market acceptance, then we will not be able to generate
sufficient revenue from product sales to maintain or grow our business. In addition, even if
product candidates we successfully develop are approved for sale and achieve market acceptance, we
may not be able to maintain that market acceptance over time if:
| |
• |
|
new products, including lower price generic products, or technologies are introduced that are more
favorably received than our products or render our products obsolete; |
| |
| |
• |
|
there are changes in the regulatory environment affecting manufacture, marketing or use of our products; |
| |
| |
• |
|
litigation or threatened litigation arises with respect to the use of our products; |
| |
| |
• |
|
we are not successful in our marketing and sales efforts; |
| |
| |
• |
|
we encounter unfavorable publicity regarding our products or similar products; or |
| |
| |
• |
|
complications, such as unacceptable levels of viral resistance or adverse side effects, arise with
respect to the use of our products. |
Our research and development efforts may not result in additional product candidates being
discovered on timelines anticipated, if at all, which could limit our ability to generate revenues.
Our research and development programs, other than our programs for telbivudine and
valtorcitabine for hepatitis B and valopicitabine for hepatitis C, are at preclinical stages.
Additional product candidates that we may develop will require significant research, development,
preclinical studies and clinical trials, regulatory approval and commitment of resources before any
commercialization may occur. We cannot predict whether our research will lead to the discovery of
any additional product candidates that could generate revenues for us. As a result, we may be
unable to maintain our proposed schedule for the submission to the FDA of an exploratory
investigational new drug application, or IND, for our HIV product candidate or any other product
candidate. INDs are regulatory filings made by a drug sponsor to the FDA to allow human clinical
testing in the United States.
Our failure to successfully acquire, develop and market additional product candidates or approved
drugs would impair our ability to grow.
30
As part of our strategy, we intend to establish a franchise in the hepatitis B and hepatitis C
market by developing two or more product candidates for each therapeutic indication. The success of
this strategy depends upon the development and commercialization of additional product candidates
that we successfully discover, license or otherwise acquire.
Product candidates we discover, license or acquire will require additional and likely
substantial development, including extensive clinical testing and approval by the FDA and
applicable foreign regulatory authorities. All product candidates are prone to the risks of failure
inherent in pharmaceutical product development, including the possibility that the product
candidate will not be shown to be sufficiently safe and effective for approval by regulatory
authorities.
Proposing, negotiating and implementing acquisition or in-license of product candidates may be
a lengthy and complex process. Other companies, including those with substantially greater
financial, marketing and sales resources, may compete with us for the acquisition of product
candidates. We may not be able to acquire the rights to additional product candidates on terms that
we find acceptable, if at all.
As we evolve from a company primarily involved in discovery and development to one also involved in
commercialization, we may encounter difficulties in managing our growth and expanding our
operations successfully.
We have experienced rapid and substantial growth that has placed a strain on our
administrative and operational infrastructure, and we expect that our anticipated growth will
continue to have a similar impact. As we advance our product candidates through clinical trials and
regulatory approval processes and further our preparations for the anticipated commercial launch of
telbivudine, if approved, we are expanding significantly our development, regulatory,
manufacturing, marketing and sales capabilities, including the hiring of a sales force in the U.S.
Additionally, we are establishing our infrastructure and our marketing and sales capabilities in
those European countries in which we expect to co-promote with Novartis, telbivudine if approved
for commercial sale and other licensed products, if any, successfully developed. In both the U.S.
and Europe, we are entering into additional contracts with third parties to provide certain of
these capabilities for us. Such expansion of capabilities is requiring us to invest substantial
cash and management resources. If the development, regulatory approval or commercialization of any
of our product candidates is delayed or terminated, we will have incurred significant unrecoverable
costs in connection with the expansion of our administrative and operational capabilities at a time
earlier than necessary, if necessary at all.
As our operations expand, we expect that we will need to manage additional relationships with
various collaborative partners, suppliers and other third parties. Our ability to manage our
operations and growth requires us to continue to improve our operational, financial and management
controls, reporting systems and procedures. We may not be able to implement improvements to our
management information and control systems in an efficient or timely manner and may discover
deficiencies in existing systems and controls that could expose us to an increased risk of
incurring financial or accounting irregularities or fraud.
If we are not able to attract and retain key management, scientific and commercial personnel and
advisors, we may not successfully develop our product candidates, commercialize any products or
achieve our other business objectives.
The growth of our business and our success depends in large part on our ability to attract and
retain key management, research and development, and sales and marketing personnel. Our key
personnel include our executive officers, many of whom have very specialized scientific, medical or
operational knowledge. Additionally, the successful and timely launch of telbivudine, if approved,
will depend in large part on our ability to recruit, train and deploy an effective sales and
marketing organization in a timely fashion. Our inability to recruit such persons, or the loss of
the service of any of the key members of our senior management, may significantly delay or prevent
our discovery of additional product candidates, the development of our product candidates, the
successful commercialization of products we develop and achievement of our other business
objectives. Our ability to attract and retain qualified personnel, consultants and advisors is
critical to our success.
We face intense competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities, governmental entities and other research institutions. We
may be unable to attract and retain these individuals, and our failure to do so would have an
adverse effect on our business.
Our business has a substantial risk of product liability claims. If we are unable to obtain
appropriate levels of insurance, a product liability claim against us could adversely affect our
business.
Our business exposes us to significant potential product liability risks that are inherent in
the development, manufacturing and marketing of human therapeutic products. Product liability
claims could result in a recall of products or a change in the therapeutic indications for which
such products may be used. In addition, product liability claims may distract our management and
key personnel from our core business, require us to spend significant time and money in litigation
or to pay significant damages, which could prevent or interfere with commercialization efforts and
could adversely affect our business. Claims of this nature would also adversely affect our
reputation which could damage our position in the market. Although we do not currently
commercialize any products, product liability claims could be made against us based on the use of
our product candidates in clinical trials. We maintain clinical trial insurance for our product
candidates in development. We are currently seeking to obtain product liability insurance for
telbivudine
31
prior to any commercial marketing which may be approved for this product candidate. If available at
all, such insurance may not provide adequate coverage against potential liabilities.
Furthermore, clinical trial and product liability insurance is becoming increasingly
expensive. As a result, we may be unable to maintain current amounts of clinical trial insurance
coverage, obtain product liability insurance for products that we seek to commercialize, maintain
any insurance we obtain, obtain additional clinical trial insurance or obtain sufficient insurance
at a reasonable cost. If we are unable to obtain or maintain sufficient insurance coverage on
reasonable terms or to otherwise protect against potential product liability claims, we may be
unable to commercialize our potential products. A successful product liability claim brought
against us in excess of our insurance coverage, if any, may require us to pay substantial amounts.
This could adversely affect our cash position and results of operations.
Our insurance policies are expensive and protect us only from some business risks, which will leave
us exposed to significant, uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. We
currently maintain general liability, property, auto, workers’ compensation, products liability,
directors’ and officers’, and employment practices insurance policies. We do not know, however, if
we will be able to maintain existing insurance with adequate levels of coverage. Any significant
uninsured liability may require us to pay substantial amounts, which would adversely affect our
cash position and results of operations.
If the estimates we make, and the assumptions on which we rely, in preparing our financial
statements prove inaccurate, our actual results may vary from those reflected in our projections
and accruals.
Our financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of our assets, liabilities,
revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. There can be no assurance,
however, that our estimates, or the assumptions underlying them, will not change. We review our
estimate of the development period on a quarterly basis. As of June 30, 2006, we have estimated
that the performance period during which the development of our HBV product candidates and
valopicitabine will be completed is a period of approximately seven and one-half years following
the effective date of the development agreement that we entered into with Novartis, or December
2010. If the estimated development period changes, we will adjust periodic revenue that is being
recognized and will record the remaining unrecognized license fees and other up-front payments over
the remaining development period during which our performance obligations will be completed.
Significant judgments and estimates are involved in determining the estimated development period
and different assumptions could yield materially different financial results. This, in turn, could
adversely affect our stock price.
If we fail to design and maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud. As a result, current and potential
stockholders could lose confidence in our financial reporting, which could harm our business and
the trading price of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission adopted rules requiring public companies to include a report of management on our
internal control over financial reporting in our Annual Reports on Form 10-K that contains an
assessment by management of the effectiveness of our internal control over financial reporting. In
addition, our registered independent public accountants must attest to and report on management’s
assessment of the effectiveness of our internal control over financial reporting. This requirement
first applied to us with respect to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005 and thereafter applies to each annual filing. The manner by which companies
implement, maintain and enhance these requirements including internal control reforms, if any, to
comply with Section 404, and how registered independent public accountants apply these requirements
and test companies’ internal controls, is subject to change and will evolve over time.
We have completed an assessment and will continue to review in the future our internal control
over financial reporting in an effort to ensure compliance with the Section 404 requirements.
Notwithstanding these efforts, it is possible that our management may determine that our internal
control over financial reporting is not effective.
Any of these events could result in an adverse reaction in the financial marketplace due to a
loss of investor confidence in the reliability of our financial statements, which ultimately could
negatively impact the market price of our shares, increase the volatility of our stock price and
adversely affect our ability to raise additional funding.
Factors Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates
All of our product candidates are in development and remain subject to clinical testing and
regulatory approval. If we are unable to develop our product candidates, we will not be successful.
32
To date, we have not marketed, distributed or sold any products. The success of our business
depends primarily upon our ability to develop and commercialize our product candidates
successfully. Our most advanced product candidates are telbivudine, valtorcitabine and
valopicitabine. Currently, we are conducting phase III clinical trials of telbivudine and
applications seeking authorization to market telbivudine have been filed with the FDA, European
Agency for the Evaluation of Medicinal Products, or EMEA, and regulatory authorities in certain
other jurisdictions. We are conducting phase IIb clinical trials of both valopicitabine and the
combination of valtorcitabine and telbivudine. Our other product candidates are in various earlier
stages of development. All of our product candidates, including telbivudine, require regulatory
review and approval prior to commercialization. Approval by regulatory authorities requires, among
other things, that our product candidates satisfy rigorous standards of safety, including
assessments of the toxicology and carcinogenicity of the product candidates we are developing, and
efficacy. To satisfy these standards, we must engage in expensive and lengthy testing. As a result
of efforts to satisfy these regulatory standards, our product candidates may not:
| |
• |
|
offer therapeutic or other improvements over existing drugs; |
| |
| |
• |
|
be proven safe and effective in clinical trials; |
| |
| |
• |
|
meet applicable regulatory standards; |
| |
| |
• |
|
be capable of being produced in commercial quantities at acceptable costs; or |
| |
| |
• |
|
be successfully commercialized. |
Commercial availability of our product candidates is dependent upon successful clinical
development and receipt of requisite regulatory approvals. Based on the one year results from the
GLOBE study, which is a two year study evaluating the use of telbivudine for the treatment of
chronic HBV infection, we filed an NDA with the FDA seeking authorization to market telbivudine in
the U.S. The one year and other available longer-term data from the GLOBE study appear to be
positive. However, new information may arise from this and other continuing clinical trials that
may be less favorable than that which is currently available. Additionally, clinical data often are
susceptible to varying interpretations. Many companies that have believed that their product
candidates performed satisfactorily in clinical trials in terms of both safety and efficacy have
nonetheless failed to obtain FDA approval for such product candidates. Furthermore, the FDA may
request from us and the EMEA and regulatory agencies in other jurisdictions may request from
Novartis, additional information including data from additional clinical trials, which may delay
significantly any approval and ultimately may not grant marketing approval for telbivudine.
If our clinical trials are not successful, we will not obtain regulatory approval for commercial
sale of our product candidates.
To obtain regulatory approval for the commercial sale of our product candidates, we will be
required to demonstrate through preclinical studies and clinical trials that our product candidates
are safe and effective. Preclinical studies and clinical trials are lengthy and expensive and the
historical rate of failure for product candidates is high. The results from preclinical studies of
a product candidate may not predict the results that will be obtained in human clinical trials.
We, the FDA or other applicable regulatory authorities may prohibit the initiation or suspend
clinical trials of a product candidate at any time if we or they believe the persons participating
in such clinical trials are being exposed to unacceptable health risks or for other reasons. For
example, in our ongoing phase IIb clinical trials evaluating the combination of valopicitabine and
pegylated interferon the most commonly observed adverse events have been gastrointestinal side
effects (nausea, vomiting, and occasionally diarrhea). For most patients, these side effects have
been generally mild to moderate, transient, and resolved while remaining on treatment. However,
data indicated that at the 800 mg/day dosing level, while most patients reported only mild side
effects, a higher proportion reported moderate or severe intensity to the gastrointestinal side
effects compared to observations at the 200 to 400 mg/day dosing level. As a result, following
discussions with the FDA, in March 2006 we modified the phase IIb clinical trials to reduce
valopicitabine dosing levels from 800 mg/day to 200 mg/day or 400 mg/day.
The observation of adverse side effects in a clinical trial may result in the FDA or foreign
regulatory authorities refusing to approve a particular product candidate for any or all
indications of use. Additionally, adverse or inconclusive clinical trial results concerning any of
our product candidates could require us to conduct additional clinical trials, result in increased
costs, significantly delay the submission of applications seeking marketing approval for such
product candidates, result in a filing or approval, if any, for a narrower indication than was
originally sought or result in a decision to discontinue development of such product candidates.
Clinical trials require sufficient patient enrollment, which is a function of many factors,
including the size of the patient population, the nature of the protocol, the proximity of patients
to clinical sites, the availability of effective treatments for the relevant disease, the
eligibility criteria for the clinical trial and clinical trials evaluating other investigational
agents which may compete with us for patient enrollment. Delays in patient enrollment can result in
increased costs and longer development times.
We cannot predict whether we will encounter problems with any of our completed, ongoing or
planned clinical trials that will cause us or regulatory authorities to delay or suspend our
clinical trials, delay or suspend patient enrollment into our clinical trials or
33
delay the analysis of data from our completed or ongoing clinical trials. Delays in the development
of our product candidates would delay our ability to seek and obtain regulatory approvals, increase
expenses associated with clinical development and increase the volatility of the price of our
common stock.
Any of the following could delay the completion of our ongoing and the initiation of our
planned clinical trials:
| |
• |
|
discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials; |
| |
| |
• |
|
delays or the inability to obtain required approvals from, or suspensions or termination by institutional
review boards or other governing entities at clinical sites selected for participation in our clinical trials; |
| |
| |
• |
|
delays enrolling participants into clinical trials; |
| |
| |
• |
|
lower than anticipated retention of participants in clinical trials; |
| |
| |
• |
|
insufficient supply or deficient quality of product candidate materials or other materials necessary to conduct
our clinical trials;
• serious or unexpected drug-related side effects experienced by participants in our clinical trials; or |
| |
| |
• |
|
negative results of clinical trials. |
If the results of our ongoing or planned clinical trials for our product candidates are not
available when we expect or if we encounter any delay in the analysis of data from our preclinical
studies and clinical trials:
| |
• |
|
we may be unable to complete phase III and phase IIIb clinical trials of telbivudine; |
| |
| |
• |
|
we may be unable to complete phase IIb clinical trials of valtorcitabine and/or valopicitabine; |
| |
| |
• |
|
we may be unable to initiate phase III clinical trials of valtorcitabine and/or valopicitabine; |
| |
| |
• |
|
we may be unable to commence human clinical trials of any additional HCV, HIV or other product candidates; |
| |
| |
• |
|
Novartis may choose not to license our product candidates other than telbivudine, valtorcitabine and
valopicitabine, and we may not be able to enter into other collaborative arrangements for any of our other
product candidates; or |
| |
| |
• |
|
we may not have the financial resources to continue the research and development of our product candidates. |
If our product candidates fail to obtain U.S. and/or foreign regulatory approval, we and our
collaborators will be unable to commercialize our product candidates.
Each of our product candidates is subject to extensive governmental regulations relating to
development, clinical trials, manufacturing and commercialization. Rigorous preclinical studies and
clinical trials and an extensive regulatory approval process are required in the U.S. and in many
foreign jurisdictions prior to the commercial sale of our product candidates. Before telbivudine or
any product candidate can be approved for sale, we must demonstrate that it can be manufactured in
accordance with the FDA’s current good manufacturing practices, which are a rigorous set of
requirements. In addition, facilities of Novartis, where the principal commercial supply of
telbivudine is to be manufactured, as well as facilities of other third parties manufacturing our
product candidates, must pass FDA inspection prior to approval. Satisfaction of these and other
regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays.
It is possible that none of telbivudine or the other product candidates we are developing will
obtain the appropriate regulatory approvals necessary to permit commercial distribution.
We have limited experience in conducting and managing the clinical trials necessary to obtain
regulatory approvals, including approval by the FDA. The time required for FDA and other approvals
is uncertain and typically takes a number of years, depending upon the complexity of the product
candidate. Our analysis of data obtained from preclinical studies and clinical trials is subject to
confirmation and interpretation by regulatory authorities, which could delay, limit or prevent
regulatory approval. We may also encounter unanticipated delays or increased costs due to
government regulation from future legislation or administrative action, changes in FDA policy
during the period of product development, clinical trials and FDA regulatory review.
Any delay in obtaining or failure to obtain required approvals could materially adversely
affect our ability to generate revenues from a particular product candidate. Furthermore, any
regulatory approval to market a product may be subject to limitations on the indicated uses for
which we may market the product. These restrictions may limit the size of the market for the
product. Additionally, product candidates we successfully develop could be subject to post market
surveillance and testing.
We are also subject to numerous foreign regulatory requirements governing the conduct of
clinical trials, and we, with Novartis, are subject to numerous foreign regulatory requirements
relating to manufacturing and marketing authorization, pricing and third-party
34
reimbursement. The foreign regulatory approval processes include all of the risks associated with
FDA approval described above as well as risks attributable to the satisfaction of local regulations
in foreign jurisdictions. Approval by any one regulatory authority does not assure approval by
regulatory authorities in other jurisdictions. Many foreign regulatory authorities, including those
in the European Union and in China, a major market for chronic hepatitis B therapeutics, have
different approval procedures than those required by the FDA and may impose additional testing
requirements for our product candidates. The acceptability and approvability of the applications
that have been submitted by Novartis for authorization to market telbivudine in jurisdictions
outside the U.S. cannot be currently predicted. Any failure or delay in obtaining such marketing
authorizations would have a material adverse effect on us.
Even if we obtain regulatory approvals, our products will be subject to ongoing regulatory review.
If we fail to comply with applicable U.S. and foreign regulations, we could lose those approvals
and our business would be seriously harmed.
Approvals of our product candidates are subject to continuing regulatory review, including the
review of clinical results, which are reported after our product candidates become commercially
available. Manufacturing facilities of Novartis and any other manufacturer we use to make any
approved products will be subject to periodic review and inspection by the FDA. The subsequent
discovery of previously unknown problems with the product, manufacturer or facility may result in
restrictions on the drug manufacturer or facility, including withdrawal of the drug from the
market. We do not have, and currently do not intend to develop, the ability to manufacture material
at commercial scale or for our clinical trials. Our reliance on Novartis and third-party
manufacturers entails risks to which we would not be subject if we manufactured products ourselves,
including reliance on such manufacturers for regulatory compliance.
If we fail to comply with applicable continuing regulatory requirements, we may be subject to
civil penalties, suspension or withdrawal of any regulatory approval obtained, product recalls and
seizures, injunctions, operating restrictions and criminal prosecutions and penalties. Because of
these potential sanctions, we seek to monitor compliance with these regulations.
If we are subject to unfavorable pricing regulations, third-party reimbursement practices or
healthcare reform initiatives, our business may be harmed.
The regulations governing drug product marketing authorization, pricing and reimbursement vary
widely from country to country. Some countries require approval of the sale price of a drug before
it can be marketed. In many countries, the pricing review period begins after product marketing
authorization approval is granted. In some foreign markets, prescription pharmaceutical pricing
remains subject to continuing governmental control even after initial approval is granted. As a
result, we or Novartis may obtain regulatory approval for a product in a particular country, but
then be subject to price regulations, which may delay the commercial launch of the product and may
negatively impact the revenues we are able to derive from sales by us or Novartis of the product in
that country.
Successful commercialization of our products will also depend in part on the extent to which
reimbursement for our products and related treatments will be available from government health
administration authorities, private health insurers and other organizations. If we succeed in
bringing one or more products to the market, these products may not be considered cost effective
and reimbursement to the patient may not be available or sufficient to allow sale of our products
on a competitive basis. We may need to conduct expensive pharmacoeconomic studies to demonstrate to
third-party payers the cost effectiveness of our product candidates. Sales of prescription drugs
depend on the availability and level of reimbursement to the consumer from third-party payers, such
as government and private insurance plans. These third-party payers frequently require that drug
companies provide such third-party payers with predetermined discounts from list prices, and
third-party payers are increasingly challenging the prices charged for medical products. Because
none of our product candidates have received the pricing approvals required to commercialize such
products, we do not know the level of reimbursement, if any, that we will receive for products, if
any, that do receive such approval. If the reimbursement we receive for any of our products is
inadequate in light of our development and other costs, our profitability could be adversely
affected.
We believe that the efforts of governments and third-party payers to contain or reduce the
cost of healthcare will increase pressure on drug pricing and continue to affect the business and
financial condition of pharmaceutical and biopharmaceutical companies.
If we receive regulatory clearance or approval but fail to comply with ongoing regulatory
requirements, we may be subject to significant FDA sanctions.
The research, testing, manufacturing and marketing of product candidates and products are
subject to extensive regulation by numerous regulatory authorities; including the FDA in the United
States, and other agencies in other countries where approval has been sought. Failure to comply
with FDA or other applicable regulatory requirements may subject a company to administrative or
judicially imposed sanctions. These include without limitation:
| |
• |
|
warning letters and other regulatory authority
communications objecting to matters such as promotional
materials and requiring corrective action such as revised
communications to healthcare practitioners; |
35
| |
• |
|
civil penalties; |
| |
| |
• |
|
criminal penalties; |
| |
| |
• |
|
injunctions; |
| |
| |
• |
|
product seizure or detention; |
| |
| |
• |
|
product recalls; |
| |
| |
• |
|
total or partial suspension of manufacturing; and |
| |
| |
• |
|
FDA refusal to review or approve pending new drug
applications or supplements to new drug applications for
previously approved products, and/or similar rejections of
marketing applications or supplements by foreign regulatory
authorities. |
The imposition of one or more of these sanctions on us would have a material adverse effect on our
business.
If we violate healthcare statutes such as fraud and abuse laws, we would be subject to significant
penalties and expenses.
Commercialization efforts in which we currently and expect in the future to engage in the
United States are subject to various federal and state laws pertaining to pharmaceutical promotion
and healthcare fraud and abuse, including the Food, Drug and Cosmetic Act, the Prescription Drug
Marketing Act, federal and state anti-kickback laws and false claims laws.
Anti-kickback laws make it illegal for a prescription drug manufacturer to offer or pay any
remuneration in exchange for, or to induce, the referral of business, including the purchase or
prescription of a particular drug. The federal government has published regulations that identify
safe harbors or exemptions for types of payment arrangements that do not violate the anti-kickback
statutes. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to
be presented for payment to third-party payers (including Medicare and Medicaid), claims for
reimbursed drugs or services that are false or fraudulent, claims for items or services not
provided as claimed, or claims for medically unnecessary items or services.
The activities in which we and Novartis expect to engage in relating to the sale and marketing
of any of our products that are approved for commercialization will be subject to scrutiny under
these laws and regulations. Violations may be punishable by significant criminal and/or civil fines
and other penalties, as well as the possibility of exclusion of the approved product from
governmental healthcare programs (including Medicare and Medicaid). If the government were to
allege against or convict us or any of our employees of violating these laws, there could be a
material adverse effect on our business, including our stock price. Our activities and those of
Novartis could be subject to challenge for many reasons, including the broad scope and complexity
of these laws and regulations and the high degree of prosecutorial resources and attention being
devoted to the sales practices of pharmaceutical companies by law enforcement authorities. During
the last few years, several companies have agreed to enter into corporate integrity agreements and
have paid multi-million dollar fines for alleged violation of these laws, and other companies are
under active investigation. Although we are in the process of developing and implementing a
corporate compliance program as part of our commercialization preparations relating to telbivudine,
if approved, we cannot assure you that we or our employees, directors or agents are or will be or
will act in compliance with all applicable laws and regulations. If we fail to comply with any of
these laws or regulations, various negative consequences could result, including the termination of
clinical trials, the failure to gain regulatory approval of a product candidate, restrictions on
our products or manufacturing processes, withdrawal of the approved product from the market,
exclusion of the approved product from governmental healthcare programs (including Medicare and
Medicaid), significant criminal and/or civil fines or other penalties, and costly litigation. In
addition, our efforts to comply with these laws will be time consuming and expensive.
Additionally, Novartis has the right to terminate the development agreement due to our uncured
material breach, which could include our failure to comply with applicable laws and regulations
relating to our efforts to commercialize telbivudine and our other product candidates.
If we do not comply with laws regulating the protection of the environment and health and human
safety, our business could be adversely affected.
Our research and development activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although we believe that our safety procedures for
handling and disposing of these materials comply with the standards prescribed by state and federal
laws and regulations, the risk of accidental contamination or injury from these materials cannot be
eliminated. If an accident occurs, we could be held liable for resulting damages, which could be
substantial. We are also subject to numerous environmental, health and workplace safety laws and
regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and
the handling of biohazardous materials. Although we maintain workers’ compensation insurance to
cover us for costs we may incur due to injuries to our employees resulting from the use of these
materials and environmental liability insurance to cover us for costs associated with environmental
or toxic tort claims that may be asserted against
36
us, this insurance may not provide adequate coverage against potential liabilities. Additional
federal, state, foreign and local laws and regulations affecting our operations may be adopted in
the future. We may incur substantial costs to comply with, and substantial fines or penalties if we
violate, any of these laws or regulations.
Factors Related to Our Relationship with Novartis
Novartis has substantial control over us and could delay or prevent a change in corporate control.
Novartis presently owns approximately 56% of our outstanding common stock. For so long as
Novartis owns at least a majority of our outstanding common stock, in addition to its contractual
approval rights, Novartis has the ability to delay or prevent a change in control of Idenix that
may be favored by other stockholders and otherwise exercise substantial control over all corporate
actions requiring stockholder approval irrespective of how our other stockholders may vote,
including:
| |
• |
|
the election of directors; |
| |
| |
• |
|
any amendment of our restated certificate of incorporation or amended and restated by-laws; |
| |
| |
• |
|
the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets; or |
| |
| |
• |
|
the defeat of any non-negotiated takeover attempt that might otherwise benefit our other stockholders. |
Novartis has the right to exercise control over certain corporate actions that may not otherwise
require stockholder approval as long as it holds at least 19.4% of our voting stock.
As long as Novartis and its affiliates own at least 19.4% of our voting stock, which we define
below, we cannot take certain actions without the consent of Novartis. These actions include:
| |
• |
|
the authorization or issuance of additional shares of our capital stock or the capital stock of our
subsidiaries, except for a limited number of specified issuances; |
| |
| |
• |
|
any change or modification to the structure of our board of directors or a similar governing body of
any of our subsidiaries; |
| |
| |
• |
|
any amendment or modification to any of our organizational documents or those of our subsidiaries; |
| |
| |
• |
|
the adoption of a three-year strategic plan; |
| |
| |
• |
|
the adoption of an annual operating plan and budget, if there is no approved strategic plan; |
| |
| |
• |
|
any decision that would result in a variance of total annual expenditures, capital or expense, in
excess of 20% from the approved three-year strategic plan; |
| |
| |
• |
|
any decision that would result in a variance in excess of the greater of $10 million or 20% of our
profit or loss target in the strategic plan or annual operating plan; |
| |
| |
• |
|
the acquisition of stock or assets of another entity that exceeds 10% of our consolidated net revenue,
net income or net assets; |
| |
| |
• |
|
the sale, lease, license or other disposition of any assets or business which exceeds 10% of our net
revenue, net income or net assets; |
| |
| |
• |
|
the incurrence of any indebtedness by us or our subsidiaries for borrowed money in excess of $2 million; |
| |
| |
• |
|
any material change in the nature of our business or that of any of our subsidiaries; |
| |
| |
• |
|
any change in control of Idenix or any subsidiary; and |
| |
| |
• |
|
any dissolution or liquidation of Idenix or any subsidiary, or the commencement by us or any subsidiary
of any action under applicable bankruptcy, insolvency, reorganization or liquidation laws. |
Pursuant to the amended and restated stockholders’ agreement, dated July 27, 2004, among us,
Novartis and certain of our stockholders, which we refer to as the stockholders’ agreement, we are
obligated to use our reasonable best efforts to nominate for election as a director at least two
designees of Novartis for so long as Novartis and its affiliates own at least 35% of our voting
stock and at least one designee of Novartis for so long as Novartis and its affiliates own at least
19.4% of our voting stock.
Additionally, until such time as Novartis and its affiliates own less than 50% of our voting
stock, Novartis’ consent is required for the selection and appointment of our chief financial
officer. If in Novartis’ reasonable judgment our chief financial officer is not satisfactorily
performing his duties, we are required to terminate the employment of our chief financial officer.
37
Furthermore, under the terms of the stock purchase agreement, dated as of March 21, 2003,
among us, Novartis and substantially all of our then existing stockholders, which we refer to as
the stock purchase agreement, Novartis is required to make future contingent payments of up to $357
million to these stockholders if we achieve predetermined development milestones with respect to an
HCV product candidate. As a result, in making determinations as to our annual operating plan and
budget for the
development of our product candidates, the interests of Novartis may be different than the
interests of our other stockholders, and Novartis could exercise its approval rights in a manner
that may not be in the best interests of all of our stockholders.
Under the stockholders’ agreement, voting stock means our outstanding securities entitled to
vote in the election of directors, but does not include:
| |
• |
|
securities issued in connection with our acquisition of all
of the capital stock or all or substantially all of the
assets of another entity; and |
| |
| |
• |
|
shares of common stock issued upon exercise of stock
options or stock awards pursuant to compensation and equity
incentive plans. Notwithstanding the foregoing, voting
stock includes up to 1,399,106 shares that were reserved as
of May 8, 2003 for issuance under our 1998 equity incentive
plan. |
Novartis has the ability to exercise substantial control over our strategic direction, our
research and development focus and other material business decisions.
We currently depend on one collaboration partner, Novartis, for substantially all our revenues and
for support in development and commercialization of our HBV product candidates and valopicitabine,
and may depend on Novartis for commercialization of other product candidates. If our development,
license and commercialization agreement with Novartis terminates, our business and, in particular,
the development of our product candidates and the commercialization of any products that we
successfully develop would be significantly harmed.
In May 2003, we received a $75 million license fee from Novartis in connection with the
license to Novartis of our HBV product candidates, telbivudine and valtorcitabine, under a
development, license and commercialization agreement with Novartis, dated May 8, 2003, which we
refer to as the development agreement. Pursuant to the development agreement, as amended, Novartis
also acquired options to license valopicitabine and additional product candidates from us. In March
2006, Novartis exercised its option and acquired a license to valopicitabine. In exchange we
received a $25 million license fee from Novartis and the right to receive up to an additional $45
million in license fee payments from Novartis upon advancement of valopicitabine into phase III
clinical trials. Assuming we continue to successfully develop and commercialize these product
candidates, under the terms of the development agreement, we are entitled to receive reimbursements
of expenses we incur in connection with the development of these product candidates and additional
milestone payments from Novartis. Additionally, if any of the product candidates we have licensed
to Novartis are approved for commercialization, we anticipate receiving proceeds in connection with
the sales of such products. If Novartis exercises the option to license with respect to other
product candidates that we discover, or in some cases, acquire, we are entitled to receive license
fees and milestone payments as well as reimbursement of expenses we incur in the development of
such product candidates in accordance with development plans mutually agreed with Novartis. We
expect that we will derive substantially all of our near-term revenues from Novartis.
Pursuant to the development agreement, we will co-promote and co-market with Novartis in the
U.S., the U.K., France, Germany, Italy and Spain, and Novartis will exclusively commercialize
products we successfully develop in the rest of the world, including China, a major market for
chronic hepatitis B therapeutics. In reliance on this arrangement, we are seeking to establish
marketing and sales capabilities, which when combined with the capabilities Novartis will provide,
is anticipated to be adequate to allow us and Novartis to market and sell such products. We do not
currently have and do not intend to establish marketing and sales
capabilities in any territories outside of the countries where we
expect to co-promote and co-market our products with Novartis. We are dependent upon Novartis for the commercialization of our products in the other
territories.
Novartis may terminate the development agreement in any country or with respect to any product
or product candidate licensed under the development agreement for any reason on six months’ written
notice. If the development agreement is terminated in whole or in part and we are unable to enter
similar arrangements with other collaborators, our business would be materially adversely affected.
Novartis has the option to license from us product candidates we discover, or in some cases,
acquire. If Novartis does not exercise its option with respect to a product candidate, our
development, manufacture and/or commercialization of such product candidate may be substantially
delayed or limited.
Our drug development programs and potential commercialization of our product candidates will
require substantial additional funding.
In addition to its license of telbivudine, valtorcitabine and valopicitabine, Novartis has the
option under the development agreement to license our other product candidates. If Novartis elects
not to exercise such option, we may be required to seek other
38
collaboration arrangements to provide funds necessary to enable us to develop such product
candidates.
If we are not successful in efforts to enter into a collaboration arrangement with respect to
a product candidate not licensed by Novartis, we may not have sufficient funds to develop such
product candidate internally. As a result, our business would be adversely affected. In addition,
the negotiation of a collaborative agreement is time consuming, and could, even if successful,
delay the development, manufacture and/or commercialization of a product candidate and the terms of
the collaboration agreements may not be favorable to us.
If we breach any of the numerous representations and warranties we made to Novartis under the
development agreement or the stock purchase agreement, Novartis has the right to seek
indemnification from us for damages it suffers as result of such breach. These amounts could be
substantial.
We have agreed to indemnify Novartis and its affiliates against losses suffered as a result of
our breach of representations and warranties in the development agreement and the stock purchase
agreement. Under the development agreement and stock purchase agreement, we made numerous
representations and warranties to Novartis regarding our hepatitis C and hepatitis B product
candidates, including representations regarding our ownership of and licensed rights to the
inventions and discoveries relating to such product candidates. If one or more of our
representations or warranties were not true at the time we made them to Novartis, we would be in
breach of these agreements. In the event of a breach by us, Novartis has the right to seek
indemnification from us and, under certain circumstances, us and our stockholders who sold shares
to Novartis, which include many of our directors and officers, for damages suffered by Novartis as
a result of such breach. The amounts for which we could become liable to Novartis may be
substantial.
In May 2004, we entered into a settlement agreement with the University of Alabama at
Birmingham, or UAB, and the University of Alabama at Birmingham Research Foundation, or UABRF,
relating to our ownership of our chief executive officer’s inventorship interest in certain of our
patents and patent applications, including patent applications covering our hepatitis C product
candidates. Under the terms of the settlement agreement, we agreed to make payments to UABRF,
including an initial payment made in 2004 in the amount of $2 million, as well as regulatory
milestone payments and payments relating to net sales of certain products. Novartis may seek to
recover from us, and, under certain circumstances, us and our stockholders who sold shares to
Novartis, which include many of our officers and directors, the losses it suffers as a result of
any breach of the representations and warranties we made relating to our hepatitis C product
candidates and may assert that such losses include the settlement payments.
Novartis could also suffer losses in connection with any amounts we become obligated to pay
relating to or under the terms of any license agreement, including the UAB license agreement, or
other arrangements we may be required to enter into with UAB, Emory University and the Centre
Nationale de la Recherché Scientifique, or CNRS, each licensors under the UAB license agreement, to
commercialize telbivudine. Novartis may seek to recover from us, and, under certain circumstances,
us and those of our officers, directors and other stockholders who sold shares to Novartis, such
losses and other losses it suffers as a result of any breach of the representations and warranties
we made relating to our hepatitis B product candidates.
If we are required to rely upon the UAB license agreement to commercialize telbivudine, we
will be obligated to make certain payments to UABRF and the other licensors. Such amounts would
include payments in the aggregate amount of $1.3 million due upon achievement of regulatory
milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual sales greater
than $50 million made by us or an affiliate of ours. Additionally, if we sublicense our rights to a
non-affiliate sublicensee, which is defined as any entity other than one which holds or controls at
least 50% of our capital stock, or if Novartis’s ownership interest in us declines below 50% of our
outstanding shares of capital stock, we could be obligated to pay to UABRF 30% of all royalties
received by us from sales by the sublicensee of telbivudine and 20% of all fees, milestone payments
and other cash consideration we receive from the sublicensee with respect to telbivudine.
If we materially breach our obligations or covenants arising under the development agreement or our
master manufacturing and supply agreement with Novartis, we may lose our right to develop or
commercialize our product candidates.
We have significant obligations to Novartis under the development agreement and our master
manufacturing and supply agreement, dated as of May 8, 2003, between our subsidiary, Idenix
(Cayman) Limited and Novartis. We refer to the master manufacturing and supply agreement as the
Supply Agreement. The obligations to which we are subject include the responsibility for developing
and, in some countries, co-promoting or co-marketing the products licensed to Novartis in
accordance with plans and budgets subject to Novartis’ approval. The covenants and agreements we
made when entering into the development agreement and supply agreement include covenants relating
to payment of our required portion of development expenses under the development agreement,
compliance with certain third-party license agreements, the conduct of our clinical studies and
activities relating to the commercialization of any products that we successfully develop. If we
materially breach one or both of these agreements and are unable within an agreed time period to
cure such breach, the agreements may be terminated and we may be required to grant Novartis an
exclusive license to develop, manufacture and/or sell such products. Although such a license would
be subject to payment of a royalty by Novartis to be negotiated in good faith, we and Novartis have
stipulated that no such payments would permit the breaching party to receive more than 90% of the
net benefit it was entitled to receive before the agreements were terminated. Accordingly, if we
39
materially breach our obligations under the development agreement or the supply agreement, we may
lose our rights to develop or commercialize our product candidates and receive lower payments from
Novartis than we had anticipated.
If we issue capital stock, in certain situations Novartis will be able to purchase shares at par
value to maintain its percentage ownership in Idenix and, if that occurs, this could cause
dilution. In addition, Novartis has the right, under specified circumstances, to purchase a pro
rata portion of other shares that we may issue.
Under the terms of the stockholders’ agreement, Novartis has the right to purchase at par
value of $0.001 per share, such number of shares required to maintain its percentage ownership of
our voting stock if we issue shares of capital stock in connection with the acquisition or
in-licensing of technology through the issuance of up to 5% of our stock in any 24-month period. If
Novartis elects to maintain its percentage ownership of our voting stock under the rights described
above, Novartis will be buying such shares at a price, which is substantially below market value,
which would cause dilution. This right of Novartis will remain in effect until the earlier of:
| |
• |
|
the date that Novartis and its affiliates own less than 19.4% of our voting stock; or |
| |
| |
• |
|
the date that Novartis becomes obligated under the stock purchase agreement to make
the additional future contingent payments of $357 million to our stockholders who
sold shares to Novartis in May 2003. |
In addition to the right to purchase shares of our common stock at par value as described
above, Novartis has the right, subject to limited exceptions noted below, to purchase a pro rata
portion of shares of capital stock that we issue. The price that Novartis pays for these securities
would be the price that we offer such securities to third parties, including the price paid by
persons who acquire shares of our capital stock pursuant to awards granted under stock compensation
plans. Novartis’ right to purchase a pro rata portion does not include:
| |
• |
|
securities issuable in connection with any stock split, reverse stock split,
stock dividend or recapitalization that we undertake that affects all holders
of our common stock proportionately; |
| |
| |
• |
|
shares that Novartis has the right to purchase at par value, as described above; |
| |
| |
• |
|
shares of common stock issuable upon exercise of stock options and other awards
pursuant to our 1998 Equity Incentive Plan; and |
| |
| |
• |
|
securities issuable in connection with our acquisition of all the capital stock
or all or substantially all of the assets of another entity. |
Novartis’ right to purchase shares includes a right to purchase securities that are
convertible into, or exchangeable for, our common stock, provided that Novartis’ right to purchase
stock in connection with options or other convertible securities issued to any of our directors,
officers, employees or consultants pursuant to any stock compensation or equity incentive plan will
not be triggered until the underlying equity security has been issued to the director, officer,
employee or consultant.
If Novartis terminates or fails to perform its obligations under the development agreement, we may
not be able to successfully commercialize our product candidates licensed to Novartis and the
development and commercialization of our other product candidates could be delayed, curtailed or
terminated.
Under the development agreement, if marketing authorization is obtained, we will co-promote or
co-market with Novartis in the U.S., the U.K., France, Germany, Italy and Spain, telbivudine and
valtorcitabine, our hepatitis B product candidates, valopicitabine, our lead hepatitis C product
candidate, and other products that Novartis licenses from us. Novartis will market and sell these
drug products throughout the rest of the world. We have also recently entered into agreements that
set forth the terms and conditions pursuant to which Novartis will manufacture the U.S. commercial
supply of telbivudine and we currently anticipate entering into similar agreements pursuant to
which Novartis will manufacture the supply of telbivudine intended for sale in all other parts of
the world. As a result, we will depend upon the success of the efforts of Novartis to manufacture,
market and sell telbivudine, if approved, and our other product candidates, if any, that we
successfully develop. However, we have limited control over the resources that Novartis may devote
to such manufacturing and commercialization efforts and, if Novartis does not devote sufficient
time and resources to such efforts, we may not realize the commercial benefits we anticipate, and
our results of operations may be adversely affected.
In addition, Novartis has the right to terminate the development agreement with respect to any
product, product candidate or country with six months written notice to us. If Novartis were to
breach or terminate this agreement with us, the development or commercialization of the affected
product candidate or product could be delayed, curtailed or terminated because we may not have
sufficient resources or capabilities, financial or otherwise, to continue development and
commercialization of the product candidate, and we may not be successful in entering into a
collaboration with another third party.
40
Novartis has the right under certain circumstances to market and sell products that compete with
the product candidates and products that we license to it, and any competition by Novartis could
have a material adverse effect on our business.
Novartis has agreed that, except as set forth in the development agreement, it will not
market, sell or promote certain competitive products except that:
| |
• |
|
this agreement not to compete extends only until May 2008; |
| |
| |
• |
|
as to any country, the agreement not to compete would
terminate if Novartis terminates the development agreement
with respect to that country; and |
| |
| |
• |
|
if Novartis wishes to market, sell, promote or license a
competitive product, it is required to inform us of the
competitive product opportunity and, at our election, enter
into good faith negotiations with us concerning such
opportunity. If we either do not elect to enter into
negotiations with respect to such opportunity or are unable
to reach agreement within a specified period, Novartis
would be free to proceed with its plans with respect to
such competing product. |
Accordingly, Novartis may under certain circumstances market, sell, promote or license
competitive products. Novartis has significantly greater financial, technical and human resources
than we have and is better equipped to discover, develop, manufacture and commercialize products.
In addition, Novartis has more extensive experience in preclinical studies and clinical trials,
obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. In the
event that Novartis competes with us, our business could be materially and adversely affected.
Factors Related to Our Dependence on Third Parties
Because we have limited sales, marketing and distribution capabilities, we may seek to enter into
additional arrangements with third parties. We may not be successful in establishing these
relationships or, if established, the relationship may not be successful.
Currently, we have limited sales, marketing and distribution capabilities. Although we are
seeking to build an internal sales force and expand our marketing capabilities, we may elect to
further augment our sales, marketing and distribution capabilities through arrangements with third
parties. We may not be successful in entering into any such arrangements in time for the
anticipated launch of telbivudine, if approved, and, if entered into, the terms of any such
arrangements may not be favorable. We cannot be assured that any third party would devote the
necessary time or attention to sell, market or distribute our products. If these arrangements are
unsuccessful, we may be unable to successfully commercialize our products.
If we seek to enter into collaboration agreements for any product candidates other than those
licensed to Novartis and we are not successful in establishing such collaborations, we may not be
able to continue development of those product candidates.
Our drug development programs and potential commercialization of our product candidates will
require substantial additional cash to fund expenses to be incurred in connection with these
activities. We have entered into an agreement with Novartis for the development and
commercialization of our HBV product candidates and valopicitabine, our lead hepatitis C product
candidate, and we have granted options to Novartis with respect to development and
commercialization of our other product candidates. We may seek to enter into additional
collaboration agreements with pharmaceutical companies to fund all or part of the costs of drug
development and commercialization of product candidates that Novartis does not license. We may not
be able to enter into collaboration agreements and the terms of the collaboration agreements, if
any, may not be favorable to us. If we are not successful in our efforts to enter into a
collaboration arrangement with respect to a product candidate, we may not have sufficient funds to
develop this or any other product candidate internally.
If we do not have sufficient funds to develop our product candidates, we will not be able to
bring these product candidates to market and generate revenue. As a result, our business will be
adversely affected. In addition, the inability to enter into collaboration agreements could delay
or preclude the development, manufacture and/or commercialization of a product candidate and could
have a material adverse effect on our financial condition and results of operations because:
| |
• |
|
we may be required to expend our own funds to advance the product candidate to commercialization; |
| |
| |
• |
|
revenue from product sales could be delayed; or |
| |
| |
• |
|
we may elect not to develop or commercialize the product candidate. |
If any collaborative partner terminates or fails to perform its obligations under agreements with
us, the development and commercialization of our product candidates could be delayed or terminated.
We have entered into the development agreement with Novartis and we may enter into additional
collaborative arrangements in the future. If collaborative partners do not devote sufficient time
and resources to any collaboration arrangement with us, we may not
41
realize the potential commercial benefits of the arrangement, and our results of operations may be
adversely affected. In addition, if Novartis or future collaboration partners were to breach or
terminate their arrangements with us, the development and commercialization of the affected product
candidate could be delayed, curtailed or terminated because we may not have sufficient financial
resources or capabilities to continue development and commercialization of the product candidate.
Our collaborations with outside scientists may be subject to restriction and change.
We work with chemists and biologists at academic and other institutions that assist us in our
research and development efforts. Telbivudine, valtorcitabine and valopicitabine were discovered
with the research and development assistance of these chemists and biologists. Many of the
scientists who have contributed to the discovery and development of our product candidates are not
our employees and may have other commitments that would limit their future availability to us.
Although our scientific advisors and collaborators generally agree not to do competing work, if a
conflict of interest between their work for us and their work for another entity arises, we may
lose their services.
We depend on third-party manufacturers to manufacture products for us. If in the future we
manufacture any of our products, we will be required to incur significant costs and devote
significant efforts to establish these capabilities.
We have limited manufacturing experience and have the capability to manufacture only small
quantities of compounds required in preclinical studies for our product candidates. We do not have,
and do not intend to develop, the ability to manufacture material for our clinical trials or at
commercial scale. To develop our product candidates, apply for regulatory approvals and
commercialize any products, we need to contract for or otherwise arrange for the necessary
manufacturing facilities and capabilities. Under the supply agreement, Novartis has agreed to
manufacture or have manufactured for us the active pharmaceutical ingredients, or API, of product
candidates that we license to Novartis for our clinical supply requirements and may manufacture API
for commercial supply. Pursuant to the manufacturing agreement and packaging agreement, Novartis
will manufacture the commercial supply of telbivudine which is intended for sale in the U.S. If the
manufacturing arrangements we have established with Novartis relating to the manufacture of
commercial supply were to terminate, the development or commercialization of telbivudine could be
delayed, which would have an adverse affect on our business. In addition, any change in our
manufacturers could be costly because the commercial terms of any such arrangement could be less
favorable than the commercial terms we negotiate with Novartis.
Factors Related to Patents and Licenses
If we are unable to adequately protect our patents and licenses related to our product candidates,
or if we infringe the rights of others, we may not be able to successfully commercialize our
product candidates.
Our success will depend in part on our ability to obtain patent protection both in the U.S.
and in other countries for any products we successfully develop. The patents and patent
applications in our patent portfolio are either owned by us, exclusively licensed to us, or
co-owned by us and others and exclusively licensed to us. Our ability to protect any products we
successfully develop from unauthorized or infringing use by third parties depends substantially on
our ability to obtain and maintain valid and enforceable patents. Due to evolving legal standards
relating to the patentability, validity and enforceability of patents covering pharmaceutical
inventions and the scope of claims made under these patents, our ability to obtain and enforce
patents is uncertain and involves complex legal and factual questions. Accordingly, rights under
any issued patents may not provide us with sufficient protection for any products we successfully
develop or provide sufficient protection to afford us a commercial advantage against our
competitors or their competitive products or processes. In addition, we cannot guarantee that any
patents will be issued from any pending or future patent applications owned by or licensed to us.
Even if patents have been issued or will be issued, we cannot guarantee that the claims of these
patents are, or will be, valid or enforceable, or provide us with any significant protection
against competitive products or otherwise be commercially valuable to us.
We may not have identified all patents, published applications or published literature that
affect our business either by blocking
our ability to commercialize our product candidates, by preventing the patentability of our product
candidates to us or our licensors or co-owners, or by covering the same or similar technologies
that may invalidate our patents, limit the scope of our future patent claims or adversely affect
our ability to market our product candidates. For example, patent applications in the U.S. are
maintained in confidence for up to 18 months after their filing. In some cases, however, patent
applications remain confidential in the U.S. Patent and Trademark Office, which we refer to as the
U.S. Patent Office, for the entire time prior to issuance as a U.S. patent. Patent applications
filed in countries outside the U.S. are not typically published until at least 18 months from their
first filing date. Similarly, publication of discoveries in the scientific or patent literature
often lags behind actual discoveries. Therefore, we cannot be certain that we or our licensors or
co-owners were the first to invent, or the first to file, patent applications on our product
candidates or for their use as antiviral drugs. In the event that a third party has also filed a
U.S. patent application covering our product candidates or a similar invention, we may have to
participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent
Office to determine priority of invention in the U.S. The costs of these proceedings could be
substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our
U.S. patent position. The laws of some foreign jurisdictions do not protect intellectual property
rights to the same extent as in the U.S. and many companies have encountered significant
difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such
difficulties in protecting or are otherwise precluded
42
from effectively protecting our intellectual property rights in foreign jurisdictions, our business
prospects could be substantially harmed.
Since our hepatitis B product candidate, telbivudine, was a known compound before the filing
of our patent applications covering the use of this product candidate to treat hepatitis B
infection, we cannot obtain patent protection on telbivudine itself. As a result, we are limited to
relying upon patents granted on the method of using telbivudine as a medical therapy for the
treatment of hepatitis B infection.
Our other hepatitis B product candidate, valtorcitabine, is a prodrug of the L-nucleoside
ß-L-2’- deoxycytidine, or LdC, which is converted into biologically active LdC in the body. The
U.S. Patent Office has issued to us a patent on valtorcitabine itself, as well as claims on
pharmaceutical compositions that include valtorcitabine. Claims to the method to treat hepatitis B
using valtorcitabine are pending. We will not, however, be able to obtain patent protection on the
biologically active form of LdC itself, because it was a known compound at the time the patent
applications covering LdC were filed. Instead, our patent protection will be limited to patents
covering the method of using LdC in medical therapy for the treatment of hepatitis B infection. We
are aware of an issued U.S. patent with claims directed to a broad genus of compounds which may be
construed to include valtorcitabine. We believe those claims to be invalid as a result of prior art
in existence at the time those claims were filed. We would assert an invalidity defense against any
such claims were they to be asserted against us. However, there is no assurance that these claims
would be found to be invalid; in which case, we would need to obtain a license to these patent
rights which may not be available on reasonable terms, on an exclusive basis or at all.
Pursuant to the UAB license agreement, we were granted an exclusive license to the rights that
the 1998 licensors have to a 1995 U.S. patent application and counterpart patent applications in
Europe, Canada, Japan and Australia that cover the use of certain synthetic nucleosides for the
treatment of hepatitis B infection.
In February 2006, UABRF notified us that it and Emory University were asserting a claim that
is a result of the filing in July 2005 by UABRF of a continuation patent claiming priority to the
1995 patent application. The UAB license agreement covers our telbivudine technology and that we
are currently obligated to pay to the 1998 licensors an aggregate of $15.3 million, which is 20% of
the $75 million HBV license fee we received from Novartis in May 2003 and a $0.3 million payment in
connection with the submission to the FDA of the IND pursuant to which we have conducted our
clinical development of telbivudine. We disagree that the 1995 patent application or corresponding
foreign applications provide an adequate basis for the issuance of a valid and enforceable patent
claim covering the use of telbivudine to treat hepatitis B. We intend to dispute these assertions.
Under the terms of the UAB license agreement, the dispute will be resolved by a panel of
arbitrators if we are unable to reach agreement with UABRF after a period of negotiation and
mediation.
If it is determined that the UAB license agreement does cover our use of telbivudine to treat
hepatitis B, we will become obligated to make payments to the 1998 licensors in the amounts and
manner specified in the UAB license agreement. Such amounts in addition to those asserted by UABRF
and Emory include payments in the aggregate amount of $1.0 million due upon achievement of
regulatory milestones, a 6% royalty on annual sales up to $50 million and a 3% royalty on annual
sales greater than $50 million made by us or an affiliate of ours. Additionally, if we sublicense
our rights to any entity other than one which holds or controls at least 50% of our capital stock,
or if Novartis’ ownership interest in us declines below 50% of our outstanding shares of capital
stock, we could be obligated to pay to the 1998 licensors 30% of all royalties received by us from
sales by the sublicensee of telbivudine and 20% of all fees, milestone payments and other cash
consideration we receive from the sublicensee with respect to telbivudine.
If we fail to perform our material obligations under the UAB license agreement, UABRF, acting
for the 1998 licensors, may attempt to terminate the UAB license agreement or render the license to
us non-exclusive. We do not believe that we are in default of any of the material obligations to
which we are subject under the UAB license agreement. Any attempt to terminate the agreement would
be subject to binding arbitration. In the event UABRF is successful in terminating the license
agreement as a result of a breach by us after a period of arbitration, and the 1998 licensors
obtain a valid enforceable claim that generally covers the use of telbivudine to treat hepatitis B,
it would be necessary for us to obtain another license from the 1998 licensors. Such license may
not be available to us on reasonable terms, on an exclusive basis or at all. This could materially
adversely affect or preclude our ability to commercialize telbivudine.
If the 1998 licensors were instead to render the UAB license agreement to us non-exclusive, we
would not be prohibited from using telbivudine to treat hepatitis B, but a non-exclusive license
could be granted to one or more of our competitors by one or more of the 1998 licensors. In the
event that the 1998 licensors exclusively or non-exclusively license any claims covering the use of
telbivudine to treat hepatitis B to a competitor, we believe that such a competitor would have to
overcome substantial legal and commercial hurdles to successfully commercialize the product. For
example, we have five U.S. patents covering the use of telbivudine to treat hepatitis B, which we
believe a competitor would infringe if it sought to commercialize telbivudine. Our patent
applications are also pending in Europe, Australia, Canada, and Japan, as well as numerous other
countries. Additionally, since we are the first company that is taking telbivudine through clinical
trials, we expect to benefit from a five-year period of commercialization exclusivity in the U.S.
that is granted by the FDA during which it will refuse to grant marketing approval to any
competitor to sell telbivudine for the treatment of hepatitis B. We may also receive regulatory
exclusivity periods in Europe and in other countries.
43
If it is determined that the UAB license agreement between us and UABRF does cover our use of
telbivudine to treat hepatitis B, or we must otherwise rely upon a license agreement granted by the
1998 licensors to commercialize telbivudine, we may be in breach of certain of the representations
and warranties we made to Novartis under the development agreement and the stock purchase
agreement. Pursuant to the terms of the development agreement and the stock purchase agreement, if
there is a breach Novartis has the right to seek indemnification from us, and, under certain
circumstances, us and our stockholders who sold shares to Novartis, for the losses Novartis incurs
as a result of the breach. The amounts for which we could be liable to Novartis may be substantial.
Our initial hepatitis C clinical product candidate, valopicitabine or NM283, is a prodrug of
the active molecule NM107, which is converted into biologically active NM107 in the body. NM107
was a known compound at the time that the patent applications covering the use of this active form
of NM283 to treat hepatitis C infection were filed. We have two issued U.S. patents claiming
methods of treatment using NM107, one directed to treating hepatitis C infection specifically and
one directed to treating flavivirus and pestivirus infection. We have recently received a notice of
allowance from the U.S. Patent Office for a patent covering the compound NM283 as well as the
methods of treatment using NM283. However, we cannot obtain patent protection on the compound
NM107.
Despite the fact that NM107 is a known compound, we are aware that a number of companies have
filed patent applications attempting to cover NM107 specifically as a compound, as well as NM283,
as members of broad classes of compounds. Companies have also filed patent applications covering
the use of NM107, specifically, and NM283, generically, to treat hepatitis C infection, or
infection by any member of the Flaviviridae virus family to which hepatitis C virus belongs. These
companies include Merck & Co., Inc. together with Isis Pharmaceuticals, Inc., Ribapharm, Inc., a
wholly-owned subsidiary of Valeant Pharmaceuticals International, Genelabs Technologies, Inc. and
Biota, Inc., a subsidiary of Biota Holdings Ltd., or Biota. We believe that we were the first to
file patent applications covering the use of these product candidates to treat hepatitis C
infection. Because patents in countries outside the U.S. are awarded to the first to file a patent
application covering an invention, we believe that we are entitled to patent protection in these
countries. Notwithstanding this, a foreign country may grant patent rights covering our product
candidates to one or more other companies, either because it is not aware of our patent filings or
because the country does not interpret our patent filing as a bar to issuance of a patent to the
other company in that country. If that occurs, we may need to challenge the third-party patent to
establish our proprietary rights, and if we do not or are not successful, we will need to obtain a
license that may not be available at all or on commercially reasonable terms. In the U.S., a patent
is awarded to the first to invent the subject matter. The U.S. Patent Office could initiate an
interference between us and Merck/Isis, Ribapharm, Genelabs, Biota or another company to determine
the priority of invention of the use of these compounds to treat hepatitis C infection. If such an
interference is initiated and it is determined that we were not the first to invent the use of
these compounds in methods for treating hepatitis C or other viral infection under U.S. law, we
would need to obtain a license that may not be available at all or on commercially reasonable
terms.
A number of companies have filed patent applications and have obtained patents covering
general methods for the treatment of hepatitis B, hepatitis C and HIV infections that could
materially affect our ability to develop and sell our HBV and HCV product candidates as well as
other product candidates we may develop in the future. For example, we are aware that Chiron
Corporation, now a part of Novartis AG, and Apath, LLC have obtained broad patents covering
hepatitis C proteins, nucleic acids, diagnostics and drug screens. If we need to use these patented
materials or methods to develop valopicitabine or any other hepatitis C product candidates and the
materials or methods fall outside certain safe harbors in the laws governing patent infringement,
we will need to buy these products from a licensee of the company authorized to sell such products
or we will require a license from one or more companies, which may not be available to us on
reasonable terms or at all. This could materially affect or preclude our ability to develop and
sell our hepatitis C drug product.
If we find that any product candidates we are developing should be used in combination with a
product covered by a patent held by another company or institution, and that a labeling instruction
is required in product packaging recommending that combination, we could be accused of, or held
liable for, infringement or inducement of infringement of the third-party patents covering the
product recommended for co-administration with our product. In that case, we may be required to
obtain a license from the other company or institution to provide the required or desired package
labeling, which may not be available on commercially reasonable terms or at all.
Litigation and disputes related to intellectual property matters occur frequently in the
biopharmaceutical industry. Litigation regarding patents, patent applications and other proprietary
rights may be expensive and time consuming. If we are unsuccessful in litigation concerning patents
or patent applications owned or co-owned by us or licensed to us, we may not be able to protect our
products from competition or we may be precluded from selling our products. If we are involved in
such litigation, it could cause delays in bringing product candidates to market and harm our
ability to operate. Such litigation could take place in the United States in a federal court or in
the U.S. Patent Office. The litigation could also take place in a foreign country, in either the
court or the patent office of that country.
Our success will depend in part on our ability to uphold and enforce patents or patent
applications owned or co-owned by us or licensed to us, which cover products we successfully
develop. Proceedings involving our patents or patent applications could result in adverse decisions
regarding:
44
| |
• |
|
ownership of patents and patent applications; |
| |
| |
• |
|
the patentability of our inventions relating to our product candidates; and/or |
| |
| |
• |
|
the enforceability, validity or scope of protection offered by our patents relating to our product candidates. |
Even if we are successful in these proceedings, we may incur substantial cost and divert
management time and attention in pursuing these proceedings, which could have a material adverse
effect on us.
In May 2004, we and our chief executive officer, Dr. Sommadossi, entered into a settlement
agreement with UAB and UABRF resolving a dispute regarding ownership of inventions and discoveries
made by Dr. Sommadossi during the period from November 1999 to November 2002, at which time Dr.
Sommadossi was on sabbatical and then unpaid leave from his position at UAB. The patent
applications we filed with respect to such inventions and discoveries include the patent
applications covering valopicitabine, our hepatitis C product candidate. Under the terms of the
settlement agreement, we agreed to make a $2 million initial payment to UABRF, as well as other
potential contingent payments based upon the commercial launch of products discovered or invented
by Dr. Sommadossi during his sabbatical and unpaid leave. In addition, UAB and UABRF have each
agreed that neither of them has any right, title or ownership interest in these inventions and
discoveries. Under the development agreement and stock purchase agreement, we made numerous
representations and warranties to Novartis regarding valopicitabine and our hepatitis C program,
including representations regarding our ownership of the inventions and discoveries. If one or more
of our representations or warranties were not true at the time we made them to Novartis, we would
be in breach of these agreements. In the event of a breach by us, Novartis has the right to seek
indemnification from us and, under certain circumstances, us and our stockholders who sold shares
to Novartis, which include many of our directors and officers, for damages suffered by Novartis as
a result of such breach. The amounts for which we could be liable to Novartis may be substantial.
Our success will also depend in part on our ability to avoid infringement of the patent rights
of others. If it is determined that we do infringe a patent right of another, we may be required to
seek a license, defend an infringement action or challenge the validity of the patents in court.
Patent litigation is costly and time consuming. We may not have sufficient resources to bring these
actions to a successful conclusion. In addition, if we are not successful in infringement
litigation and we do not license or develop non-infringing technology, we may:
| |
• |
|
incur substantial monetary damages; |
| |
| |
• |
|
encounter significant delays in bringing our product candidates to market; and/or |
| |
| |
• |
|
be precluded from participating in the manufacture, use or sale of our product
candidates or methods of treatment requiring licenses. |
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information.
To protect our proprietary technology and processes, we also rely in part on confidentiality
agreements with our corporate collaborators, employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors. These agreements may not effectively
prevent disclosure of confidential information and may not provide an adequate remedy in the event
of unauthorized disclosure of confidential information. In addition, others may independently
discover our trade secrets and proprietary information, and in such cases we could not assert any
trade secret rights against such parties. Costly and time-consuming litigation could be necessary
to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain
trade secret protection could adversely affect our competitive business position.
If any of our agreements that grant us the exclusive right to make, use and sell our product
candidates are terminated, we may be unable to develop or commercialize our product candidates.
We, together with Novartis, have entered into an amended and restated agreement with CNRS and
L’Universite Montpellier II, which we refer to as the University of Montpellier, co-owners of the
patents and patent applications covering our hepatitis B product candidates. This agreement covers
both the cooperative research program and the terms of our exclusive right to exploit the results
of the cooperative research, including our hepatitis B product candidates. We, together with
Novartis, have also entered into two agreements with the Universita degli Studi di Cagliari, which
we refer to as the University of Cagliari, the co-owner of the patents and patent applications
covering our hepatitis C product candidates and certain NNRTI HIV preclinical product candidates.
One agreement with the University of Cagliari covers our cooperative research program and the other
agreement is an exclusive license to develop and sell the jointly created HCV and HIV product
candidates. Under the amended and restated agreement with CNRS and the University of Montpellier
and the license agreement, as amended, with the University of Cagliari, we obtained from our
co-owners the exclusive right to exploit these product candidates. Subject to certain rights
afforded to Novartis, these agreements can be terminated by either party in circumstances such as
the occurrence of an uncured breach by the non-terminating party. The termination of our rights
under the agreement with CNRS and the University of Montpellier or the license agreement, as
amended, with the University of
45
Cagliari would have a material adverse effect on our business and could prevent us from developing
a product candidate or selling a product. In addition, these agreements provide that we pay the
costs of patent prosecution, maintenance and enforcement. These costs could be substantial. Our
inability or failure to pay these costs could result in the termination of the agreements or
certain rights under them.
Under our amended and restated agreement with CNRS and the University of Montpellier and our
license agreement, as amended, with the University of Cagliari, we and Novartis have the right to
exploit and license our co-owned product candidates without the permission of the co-owners.
However, our agreements with CNRS and the University of Montpellier and with the University of
Cagliari are currently governed by, and will be interpreted and enforced under, French and Italian
law, respectively, which are different in substantial respects from U.S. law, and which may be
unfavorable to us in material respects. Under French law, co-owners of intellectual property cannot
exploit, assign or license their individual rights without the permission of the co-owners.
Similarly, under Italian law, co-owners of intellectual property cannot exploit or license their
individual rights without the permission of the co-owners. Accordingly, if our agreements with the
University of Cagliari terminate, we may not be able to exploit, license or otherwise convey to
Novartis or other third parties our rights in our product candidates for a desired commercial
purpose without the consent of the co-owner, which could materially affect our business and prevent
us from developing our product candidates and selling our products.
Under U.S. law, a co-owner has the right to prevent the other co-owner from suing infringers
by refusing to join voluntarily in a suit to enforce a patent. Our amended and restated agreement
with CNRS and the University of Montpellier and our license agreement, as amended, with the
University of Cagliari provide that such parties will cooperate to enforce our jointly owned
patents on our product candidates. If these agreements terminate or their cooperation is not given
or is withdrawn, or they refuse to join in litigation that requires their participation, we may not
be able to enforce these patent rights or protect our markets.
If our cooperative research agreement with the University of Cagliari is terminated, we may be
unable to develop research results arising out of that work prior to the termination.
Our cooperative research agreement with the University of Cagliari, as amended, grants us the
exclusive right to directly or indirectly use or license to Novartis or other third parties the
results of research obtained from the cooperative effort, in exchange for a fixed royalty. If the
cooperative research agreement is terminated, our exclusive right to use the research results will
also terminate, unless those rights are also granted under a separate license agreement. Our
cooperative agreement with the University of Cagliari currently expires in January 2007 and can
only be renewed by the written consent of both parties. If the agreement is not renewed, there is
no guarantee that the University of Cagliari will agree to transfer rights to any of the research
results into a separate license agreement on termination of the research program, or that it will
agree to do so on reasonable commercial terms. If we are not able to obtain a license to research
results in the event of a termination of the cooperative research agreement, we will be unable to
develop the research results.
Factors Related to Our Common Stock
Sales of additional shares of our common stock could result in dilution to existing stockholders
and cause the price of our common stock to decline.
Sales of substantial amounts of our common stock in the public market, or the availability of
such shares for sale, could adversely affect the price of our common stock. In addition, the
issuance of common stock upon exercise of outstanding options could be dilutive, and may cause the
market price for a share of our common stock to decline. As of July 31, 2006, we had 56,071,053
shares of common stock issued and outstanding, together with outstanding options to purchase
approximately 4,247,827 shares of common stock with a weighted average exercise price of $13.37 per
share.
Novartis and other holders of an aggregate of approximately 37,152,234 shares of common stock
have rights, subject to certain conditions, to require us to file registration statements covering
their shares or to include their shares in registration statements that we may file for ourselves
or other stockholders.
Fluctuation of our quarterly results may cause our stock price to decline, resulting in losses to
you.
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the
future. A number of factors, many of which are not within our control, could subject our operating
results and stock price to volatility, including:
| |
• |
|
realization of license fees and achievement of milestones under our development agreement with Novartis and, to
the extent applicable, other licensing and collaborative agreements; |
| |
| |
• |
|
reductions in revenue associated with Novartis’ right to maintain its percentage ownership of our voting stock
when we issue shares at a price below fair market value; |
| |
| |
• |
|
adverse developments regarding the safety and efficacy of our product candidates; |
46
| |
• |
|
the results of ongoing and planned clinical trials of our product candidates; |
| |
| |
• |
|
developments in the market with respect to competing products or more generally the treatment of HBV, HCV or HIV; |
| |
| |
• |
|
the results of regulatory reviews relating to the approval of our product candidates; |
| |
| |
• |
|
the timing and success of launches of any product we successfully develop; |
| |
| |
• |
|
the initiation or conclusion of litigation to enforce or defend any of our assets; and |
| |
| |
• |
|
general and industry-specific economic conditions that may affect our research and development expenditures. |
Due to the possibility of significant fluctuations, we do not believe that quarterly
comparisons of our operating results will necessarily be indicative of our future operating
performance. If our quarterly operating results fail to meet the expectations of stock market
analysts and investors, the price of our common stock may decline, resulting in losses to you.
An investment in our common stock may decline in value as a result of announcements of business
developments by us or our competitors.
The market price of our common stock is subject to substantial volatility as a result of
announcements by us or other companies in our industry. As a result, purchasers of our common stock
may not be able to sell their shares of common stock at or above the price at which they purchased
such stock. Announcements which may subject the price of our common stock to substantial volatility
include announcements regarding:
| |
• |
|
our collaboration with Novartis; |
| |
| |
• |
|
the results of discovery, preclinical studies and clinical trials by us or our competitors; |
| |
| |
• |
|
the acquisition of technologies, product candidates or products by us or our competitors; |
| |
| |
• |
|
the development of new technologies, product candidates or products by us or our competitors; |
| |
| |
• |
|
regulatory actions with respect to our product candidates or products or those of our competitors, including
those relating to our clinical trials, marketing authorizations, pricing and reimbursement; |
| |
| |
• |
|
the timing and success of launches of any product we successfully develop; |
| |
| |
• |
|
the market acceptance of any products we successfully develop; |
| |
| |
• |
|
the initiation or conclusion of litigation to enforce or defend any of our assets; and |
| |
| |
• |
|
significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors. |
In addition, if we fail to reach an important research, development or commercialization
milestone or result by a publicly expected deadline, even if by only a small margin, there could be
a significant impact on the market price of our common stock. Additionally, as we approach the
announcement of important clinical data or other significant information and as we announce such
results and information, we expect the price of our common stock to be particularly volatile, and
negative results would have a substantial negative impact on the price of our common stock.
We could be subject to class action litigation due to stock price volatility, which, if it occurs,
will distract our management and could result in substantial costs or large judgments against us.
The stock market frequently experiences extreme price and volume fluctuations. In addition,
the market prices of securities of companies in the biotechnology industry have been extremely
volatile and have experienced fluctuations that have often been unrelated or disproportionate to
the operating performance of these companies. These fluctuations could adversely affect the market
price of our common stock. In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market prices of their securities. We may
be the target of similar litigation in the future. Securities litigation could result in
substantial costs and divert our management’s attention and resources, which could cause serious
harm to our business, operating results and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
47
None.
(b) Initial Public Offering and Use of Proceeds from the Sale of Registered Securities
None.
(c) Repurchase of Securities
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company’s annual meeting of stockholders was held on June 14, 2006.
The stockholders elected the directors named below to serve until the next annual meeting of
stockholders and until his or her successor is elected and qualified or if earlier until her or his
death, resignation or removal. The tabulation of votes with respect to the election of such
directors was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Total Vote |
|
Total Vote |
| |
|
For: |
|
Withheld: |
Jean-Pierre Sommadossi |
|
|
43,559,496 |
|
|
|
843,033 |
|
Charles W. Cramb |
|
|
43,559,678 |
|
|
|
842,851 |
|
Thomas Ebeling |
|
|
41,818,408 |
|
|
|
2,584,121 |
|
Wayne Hockmeyer |
|
|
43,571,056 |
|
|
|
831,473 |
|
Thomas Hodgson |
|
|
43,557,128 |
|
|
|
845,401 |
|
Robert Pelzer |
|
|
41,817,983 |
|
|
|
2,584,546 |
|
Denise Pollard-Knight |
|
|
43,568,076 |
|
|
|
834,453 |
|
Pamela Thomas-Graham |
|
|
43,555,673 |
|
|
|
846,856 |
|
As of the date of this Quarterly Report on Form 10-Q, our Board of Directors consists of
Jean-Pierre Sommadossi, Charles W. Cramb, Thomas Ebeling, Wayne Hockmeyer, Thomas Hodgson, Robert
Pelzer, Denise Pollard-Knight and Pamela Thomas-Graham. Currently, there is one vacancy on the
Board of Directors.
The stockholders also voted to ratify the selection of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the current fiscal year ending December 31, 2006.
The tabulation of votes with respect to the ratification of the selection of
PricewaterhouseCoopers LLP was 44,264,613 votes in favor, 119,170 votes against, and 18,746 votes
abstaining.
Item 5. Other Information
None
Item 6. Exhibits
See Exhibit Index on the page immediately preceding the exhibits for a list of the exhibits filed
as a part of this quarterly report, which Exhibit Index is incorporated by reference.
48
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: August 8, 2006
|
|
By:
|
|
/s/ Jean-Pierre Sommadossi |
|
|
|
|
|
|
|
|
|
Jean-Pierre Sommadossi |
|
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
Date: August 8, 2006
|
|
By:
|
|
/s/ David A. Arkowitz |
|
|
|
|
|
|
|
|
|
David A. Arkowitz |
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
(Principal Accounting Officer) |
49
Exhibit Index
| |
|
|
| Exhibit |
|
|
| No. |
|
Description |
10.1+
|
|
Commercial Manufacturing Agreement dated as of June 22, 2006 by and between the Registrant and
Novartis Pharma AG |
|
|
|
10.2+
|
|
Packaging Agreement dated as of June 22, 2006 by and between the Registrant and Novartis
Pharmaceuticals Corporation |
|
|
|
10.3
|
|
First Amendment of Lease dated July 24, 2006 by and between the Registrant and RB Kendall Fee, LLC |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
+
|
|
Confidential treatment requested as to certain portions, which portions have been separately
filed with the Securities and Exchange Commission |