e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2007
|
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:
001-33609
SUCAMPO PHARMACEUTICALS,
INC.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
13-3929237
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. employer
identification no.)
|
|
|
|
4520 East-West Highway, Suite 300
Bethesda, MD 20814
(Address of principal
executive offices,
including zip code)
|
|
(301) 961-3400
(Registrants telephone
number,
including area code)
|
Securities registered pursuant to Section 12(b) of the
Exchange Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Class A common stock, par value $0.01
|
|
The NASDAQ Global Market
|
Securities registered pursuant to Section 12(g) of the
Exchange Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act 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 a check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large Accelerated
Filer o
|
|
Accelerated
Filer o
|
|
Non-Accelerated
Filer þ
|
|
Smaller Reporting
Company o
|
|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
There was no active trading market for the registrants
common equity as of June 30, 2007. As of August 2,
2007 (the date that the registrants class A common
stock, par value $0.01 per share, began trading on the NASDAQ
Global Market), the aggregate market value of the voting and
non-voting common equity of the registrant held by
non-affiliates was approximately $190.0 million, based on
the closing price of the registrants class A common
stock reported on the NASDAQ Global Market on such date of
$12.20 per share.
As of March 20, 2008, there were outstanding
15,542,768 shares of the registrants class A
common stock, par value $0.01 per share, and 26,191,050 of the
registrants class B common stock, par value $0.01 per
share.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants Proxy Statement for its 2008
Annual Meeting of Stockholders to be held on June 5, 2008,
which Proxy Statement is to be filed within 120 days after
the end of the registrants fiscal year ended
December 31, 2007, are incorporated by reference in
Part III of this Annual Report on
Form 10-K.
Sucampo
Pharmaceuticals, Inc.
Form 10-K
Table of
Contents
2
PART I
This Annual Report on
Form 10-K,
including the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements regarding
us and our business, financial condition, results of operations
and prospects within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be
identified by the words project,
believe, anticipate, plan,
expect, estimate, intend,
should, would, could,
will, may or other similar expressions.
In addition, any statements that refer to projections of our
future financial performance, our anticipated growth and trends
in our business, and other characterizations of future events or
circumstances are forward-looking statements. We cannot
guarantee that we will achieve the plans, intentions or
expectations expressed or implied in our forward-looking
statements. There are a number of important factors that could
cause actual results, levels of activity, performance or events
to differ materially from those expressed or implied in the
forward-looking statements we make. These important factors are
described under Risk Factors set forth below. In
addition, any forward-looking statements we make in this
document speak only as of the date of this document, and we do
not intend to update any such forward-looking statements to
reflect events or circumstances that occur after that date.
Overview
We are a specialty biopharmaceutical company focused on the
discovery, development and commercialization of proprietary
drugs based on prostones, a class of compounds derived from
functional fatty acids that occur naturally in the human body.
The therapeutic potential of prostones was first identified by
one of our founders, Dr. Ryuji Ueno. We believe that most
prostones function as activators of cellular ion channels and,
as a result, may be effective at promoting fluid secretion and
enhancing cell protection, which may give them wide-ranging
therapeutic potential, particularly for age-related diseases. We
are focused on developing prostones with novel mechanisms of
action for the treatment of gastrointestinal, respiratory,
vascular and central nervous system diseases and disorders for
which there are unmet or underserved medical needs and
significant commercial potential.
In January 2006, we received marketing approval from the
U.S. Food and Drug Administration, or FDA, for our first
product, AMITIZA
®
(lubiprostone), for the treatment of chronic idiopathic
constipation in adults of all ages. AMITIZA is the only
prescription product for the treatment of chronic idiopathic
constipation that has been approved by the FDA for use by adults
of all ages, including those over 65 years of age, and that
has demonstrated effectiveness for use beyond 12 weeks.
Constipation becomes chronic when a patient suffers specified
symptoms for more than 12 non-consecutive weeks within a
12-month
period and is idiopathic if it is not caused by other diseases
or by use of medications. Studies published in The American
Journal of Gastroenterology estimate that approximately
42 million people in the United States suffer from
constipation. Based on these studies, we estimate that
approximately 12 million people can be characterized as
suffering from chronic idiopathic constipation. In an additional
study published in The American Journal of
Gastroenterology, 91% of physicians expressed a desire for
better treatment options for constipation.
AMITIZA increases fluid secretion into the intestinal tract by
activating specific chloride channels in cells lining the small
intestine. This increased fluid level softens the stool,
facilitating intestinal motility and bowel movements. In
addition, AMITIZA improves symptoms associated with chronic
idiopathic constipation, including straining, hard stools,
bloating and abdominal pain or discomfort.
We are party to a collaboration and license agreement with
Takeda Pharmaceutical Company Limited, or Takeda, to jointly
develop and commercialize AMITIZA for chronic idiopathic
constipation, irritable bowel syndrome with constipation,
opioid-induced bowel dysfunction and other gastrointestinal
indications in the United States and Canada. We have the right
to co-promote AMITIZA along with Takeda in these markets. We and
Takeda initiated commercial sales of AMITIZA in the United
States for the treatment of chronic idiopathic constipation in
April 2006. Takeda is marketing AMITIZA broadly to office-based
specialty physicians and primary care physicians. We are
complementing Takedas marketing efforts by promoting
AMITIZA through a specialty sales force in the institutional
marketplace, including specialist physicians based in academic
medical centers and long-term care facilities. This
institutional market is characterized by a concentration of
elderly patients, who we believe
3
will be a key market for AMITIZA to treat gastrointestinal
indications, and by physicians who are key opinion leaders in
the gastrointestinal field. We have performed all of the
development activities with respect to AMITIZA and Takeda has
funded a portion of the cost for these activities. We have
retained the rights to develop and commercialize AMITIZA outside
the United States and Canada and to develop and commercialize it
in the United States and Canada for indications other than
gastrointestinal indications.
We also plan to pursue marketing approval for AMITIZA for
additional constipation-related gastrointestinal indications
with large, underserved markets. We recently completed two
pivotal Phase III clinical trials and a long-term safety
trial of AMITIZA for the treatment of irritable bowel syndrome
with constipation. In these trials, AMITIZA improved overall
relief from symptoms associated with irritable bowel syndrome
with constipation with statistical significance and was well
tolerated. Based upon the results of these trials, we submitted
a supplement to our existing new drug application, or NDA, for
AMITIZA to the FDA in June 2007 seeking marketing approval for
AMITIZA for the treatment of this indication. Under the
Prescription Drug User Fee Act of 1992, or PDUFA, we expect the
FDA to announce a decision regarding our application, or a PDUFA
action, on or about April 29, 2008. According to the
American College of Gastroenterology, irritable bowel syndrome
affects approximately 58 million people in the United
States, with irritable bowel syndrome with constipation
accounting for approximately one-third of these cases. In
addition, we commenced Phase III pivotal clinical trials of
AMITIZA for the treatment of opioid-induced bowel dysfunction in
September 2007.
We also plan to pursue marketing approval for AMITIZA in Europe
and the Asia-Pacific region for appropriate gastrointestinal
indications based on local market disease definitions and the
reimbursement environment. In February 2008, we submitted a
marketing authorization application, or MAA, for lubiprostone,
24 micrograms, for the indication of chronic idiopathic
constipation in adults in the United Kingdom. The MAA has been
filed using the decentralized procedure with the United Kingdom,
through its Medicines and Healthcare Products Regulatory Agency,
serving as the reference member state, with additional
applications subsequently filed with the member states of
Belgium, Denmark, France, Germany, Ireland, the Netherlands,
Spain and Sweden.
In November 2007, we initiated a multi-center Phase IIb
dose-ranging study in Japan to evaluate the safety and efficacy
of lubiprostone for treating chronic idiopathic constipation in
adults.
In addition, we are developing other prostone compounds for the
treatment of a broad range of diseases. The most advanced of
these programs are:
|
|
|
|
|
Cobiprostone (formerly SPI-8811) for the treatment of ulcers
induced by non-steroidal anti-inflammatory drugs, or NSAIDs,
portal hypertension, non-alcoholic fatty liver disease,
disorders associated with cystic fibrosis and chronic
obstructive pulmonary disease. We have completed Phase I
clinical trials of cobiprostone in healthy volunteers and
commenced a Phase II clinical trial of this product
candidate for the treatment of NSAID-induced ulcers in the third
quarter of 2007. We also submitted an investigation new drug
application, or IND, to the FDA in December 2007 for a
Phase II
proof-of-concept
study of cobiprostone in patients with portal hypertension.
|
|
|
|
SPI-017 for the treatment of peripheral arterial and vascular
disease and central nervous system disorders. Initially, we are
working on the development of an intravenous formulation of
SPI-017 for the treatment of peripheral arterial disease. We
also are developing an oral formulation of SPI-017 for the
treatment of Alzheimers disease. We plan to commence Phase
I clinical trials of the intravenous formulation of SPI-017 in
2008 and Phase I clinical trials of the oral formulation in 2009.
|
We hold an exclusive worldwide royalty-bearing license from
Sucampo AG, a Swiss patent-holding company, to develop and
commercialize AMITIZA and other prostone compounds covered by
patents and patent applications held by Sucampo AG. We are
obligated to assign to Sucampo AG all patentable improvements
that we make in the field of prostones, which Sucampo AG will in
turn license back to us on an exclusive basis. AMITIZA,
cobiprostone and SPI-017 are covered by perpetual licenses that
cannot be terminated unless we default in our payment
obligations to Sucampo AG. If we have not committed specified
development efforts to any prostone compound other than AMITIZA,
cobiprostone and SPI-017 by the end of a specified period, which
ends on the later of June 30, 2011 or the date upon which
Drs. Ryuji Ueno and Sachiko Kuno, our founders and
controlling stockholders, no longer control our company, then
the commercial rights to that compound will revert to Sucampo
AG, subject to a
4
15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.
For this purpose, Drs. Ueno and Kuno will be deemed to
control our company as long as either they together own a
majority of the voting power of our stock or at least one of
them is a member of our board of directors.
We are party to exclusive supply arrangements with R-Tech Ueno,
Ltd., or R-Tech, a Japanese pharmaceutical manufacturer, to
provide us with clinical and commercial supplies of AMITIZA and
clinical supplies of our product candidates cobiprostone and
SPI-017. These arrangements include provisions requiring R-Tech
to assist us in connection with applications for marketing
approval for these compounds in the United States and elsewhere,
including assistance with regulatory compliance for chemistry,
manufacturing and controls.
In August 2007, we completed our initial public offering of
3,125,000 shares of class A common stock at a public
offering price of $11.50 per share, resulting in gross proceeds
of approximately $35.9 million. After deducting
underwriters discounts and commissions and expenses of the
offering, we raised net proceeds of $28.2 million. An
additional 625,000 shares of class A common stock were
sold by a selling stockholder and 562,500 shares were sold
under an overallotment option by S&R Technology Holdings,
LLC, or S&R, which is wholly-owned by our founders,
Drs. Ueno and Kuno. We did not receive any proceeds from
the sale of the shares by the selling stockholder or S&R.
Our two founders, Drs. Ueno and Kuno, together, directly or
indirectly, own all of the stock of Sucampo AG and a majority of
the stock of R-Tech. Drs. Ueno and Kuno also are
controlling stockholders of our company and are married to each
other. Dr. Ueno is our chief executive officer and the
chairman of our board of directors and Dr. Kuno was, until
June 2007, also an executive officer and director of our
company. Dr. Kuno currently serves as our advisor of
international business development.
Product
Pipeline
The table below summarizes the development status of AMITIZA and
our key product candidates. We currently hold all of the
commercialization rights to the prostone compounds in our
product pipeline, other than for commercialization of AMITIZA in
the United States and Canada, which is covered by our
collaboration and license agreement with Takeda.
|
|
|
|
|
|
|
Product/
|
|
|
|
|
|
|
Product Candidate
|
|
Target Indication
|
|
Development Phase
|
|
Next Milestone
|
|
AMITIZA
|
|
Chronic idiopathic constipation (adult)
|
|
Marketed in the U.S.
|
|
|
|
|
|
|
Marketing Authorization Application submitted in nine European
countries
|
|
Regulatory action by the European countries
|
|
|
|
|
Phase IIb dose-ranging study in Japan ongoing
|
|
Phase III program in Japan
|
|
|
Chronic idiopathic constipation (pediatric, patients with renal
impairment and patients with hepatic impairment)
|
|
Phase IV pediatric, renal impairment and hepatic impairment
trials ongoing
|
|
|
|
|
Irritable bowel syndrome with constipation
|
|
Supplemental NDA filed
|
|
FDA action on the supplemental NDA (PDUFA action expected in
late April 2008)
|
|
|
Opioid-induced bowel dysfunction
|
|
Phase III pivotal trials ongoing
|
|
Filing of NDA or supplemental NDA with FDA
|
5
|
|
|
|
|
|
|
Product/
|
|
|
|
|
|
|
Product Candidate
|
|
Target Indication
|
|
Development Phase
|
|
Next Milestone
|
|
Cobiprostone
|
|
Gastrointestinal
|
|
|
|
|
|
|
Non-steroidal anti-inflammatory drug (NSAID) induced ulcers
|
|
Phase II trial ongoing
|
|
Phase II dose-ranging trial planned to commence in 2009
|
|
|
Cystic fibrosis - gastrointestinal disorders (oral formulation)
|
|
Phase II trial completed
|
|
Phase II dose-ranging trial planned to commence in 2009
|
|
|
Liver
|
|
|
|
|
|
|
Portal hypertension
|
|
Phase II proof-of-concept study ongoing
|
|
Phase II dose-ranging trial planned to commence in 2009
|
|
|
Non-alcoholic fatty liver disease
|
|
Phase II trial completed
|
|
Pending availability of new diagnostic tool
|
|
|
Pulmonary
|
|
|
|
|
|
|
Cystic fibrosis - respiratory symptoms (inhaled formulation)
|
|
Preclinical
|
|
Finalize inhaled formulation
|
|
|
Chronic obstructive pulmonary disease
|
|
Preclinical
|
|
Finalize inhaled formulation
|
SPI-017
|
|
Peripheral arterial and vascular disease
|
|
Preclinical
|
|
Phase I trials of intravenous formulation planned to commence in
2008*
|
|
|
Stroke
|
|
Preclinical
|
|
Phase I trials of intravenous formulation planned to commence in
2008*
|
|
|
Alzheimers disease
|
|
Preclinical
|
|
Phase I trials of oral formulation planned to commence in 2009*
|
|
|
|
* |
|
Results from Phase I trials of both intravenous and oral
formulations may be useful in development of any of these
indications. |
Additionally, we have recently initiated pharmacologic studies
on six additional preclinical prostone compounds, including two
combination candidates, as we focus on development and
commercialization of therapies for age-related diseases.
Scientific
Background of Prostones
Prostones are a class of compounds derived from functional fatty
acids that occur naturally in the human body. The therapeutic
potential of prostones was first identified by Dr. Ueno.
Fatty acids serve as fuel for energy production in cells in many
organisms and are intermediates in the synthesis of other
important chemical compounds. To date, two prostone products
have received marketing approval: AMITIZA for the treatment of
chronic idiopathic constipation and
RESCULA®
(unoprostone isopropyl) for the treatment of glaucoma. RESCULA,
which was developed by R-Tech under the leadership of
Drs. Ueno and Kuno, was the first commercially available
prostone drug. RESCULA was first sold in Japan beginning in 1994
and is currently marketed in more than 40 countries worldwide.
Although we do not hold any rights to RESCULA, we believe that
the successful development of AMITIZA and RESCULA demonstrates
the initial therapeutic potential of prostones.
6
Ion
Channel Activation
Based on our preclinical and clinical studies, we believe that
most prostones work as selective ion channel activators, which
means that they promote the movement of specific ions into or
out of cells. Ions are charged particles, such as sodium,
potassium, calcium and chloride. The concentration of specific
ions within particular types of cells is important to many vital
physiological functions in the human body. Because ions cannot
move freely across cell membranes, they must enter or exit a
cell through protein structures known as ion channels. Ion
channels, which are found in every cell in the body, span the
cell membrane and regulate the flow of ions into and out of
cells by opening and closing in response to particular stimuli.
Each kind of ion moves through its own specific ion channel.
Some molecular compounds, including some prostones, have been
shown to activate or inhibit ion channels, thereby controlling
the concentration of specific ions within cells. We believe that
these prostones work selectively on specific ion channels and,
as a result, can be targeted to induce very specific
pharmacological activities without triggering other cellular
activity that could lead to undesirable side effects.
In preclinical in vitro tests on human cell lines
with the three prostones that we are currently developing,
AMITIZA, cobiprostone and SPI-017, all three compounds
selectively activated a specific ion channel known as the type-2
chloride channel, or ClC-2 channel. The ClC-2 channel is
expressed in cells throughout the body and is one of the
channels through which chloride ions move into and out of cells.
Chloride channels regulate many essential physiological
functions within cells, including cell volume, intracellular pH,
cellular water and ion balance and regulation of cellular
voltage and energy levels. We believe that AMITIZA is the first
selective chloride channel activator approved by the FDA for
therapeutic use in humans.
Potential
Beneficial Effects of Prostones
We believe that the method of action of prostones that serve as
selective ion channel activators may result in the following
beneficial effects:
|
|
|
|
|
Enhancement of Fluid Secretion. Activating the
movement of specific ions into and out of cells can promote the
secretion of fluid into neighboring areas. For example, AMITIZA
promotes fluid secretion into the small intestine by activating
the ClC-2 channel in the cells lining the small intestine.
Likewise, RESCULA is a potassium channel activator that works to
treat glaucoma by increasing aqueous humor outflow in ocular
cells in the eyes.
|
|
|
|
Recovery of Barrier Function. Disruption of
the barrier function in human cells can trigger cell damage by
increasing the permeability of cells and tissue, thereby
diminishing the bodys first line of defense. Recently,
protein complexes occurring between cells known as tight
junctions have been found to play a critical role in the
regulation of barrier function in the body. The ClC-2 channel
plays an important role in the restoration of these tight
junction complexes and in the recovery of barrier function in
the body. In preclinical studies, AMITIZA appeared to accelerate
the recovery of the disrupted barrier function through the
restoration of the tight junction structure. We believe that
this may be a result of AMITIZAs specific effects on the
ClC-2 channel. We believe that other prostones that act as ClC-2
channel activators may have a similar barrier recovery function.
|
|
|
|
Localized Activity. Because most prostones act
through contact with cells, their pharmacological activity is
localized in those areas where the compound is physically
present in its active form. Because some prostones metabolize
relatively quickly to an inactive form, we believe their
pharmacological effects are not spread to other parts of the
body. These properties allow some prostones to be targeted to
specific types of cells in specific organs through different
routes of administration. For example, when AMITIZA is taken
orally, it arrives in the small intestine and liver while it is
still active and begins to act on the cells lining those organs.
By the time it is passed through to the large intestine, it
appears to have been largely metabolized and is no longer
active. Similarly, we believe that inhaled formulations of some
prostones would act principally in the lungs and that
intravenous formulations would act principally in the vascular
system, in each case without having systemic effects.
|
7
Our
Strategy
Our goal is to become a leading specialty biopharmaceutical
company focused on discovering, developing and commercializing
proprietary drugs based on prostones to treat diseases and
disorders for which there are unmet or underserved medical needs
and significant commercial potential. Our strategy to achieve
this objective includes the following key elements:
Focus on commercial sales of AMITIZA in the United States for
the treatment of chronic idiopathic constipation in
adults. We initiated commercial sales of AMITIZA
in the United States for the treatment of chronic idiopathic
constipation in collaboration with Takeda in April 2006. Takeda
is marketing AMITIZA broadly to office-based specialty
physicians and primary care physicians. Pursuant to the terms of
our collaboration and license agreement with Takeda, Takeda is
obligated to provide a dedicated sales force of at least
200 people to promote AMITIZA and a supplemental sales
force of at least 500 people to promote AMITIZA together
with one other drug product, although Takeda has advised us that
their total sales force promoting AMITIZA consists of
approximately 950 people. We are complementing
Takedas marketing efforts by promoting AMITIZA in the
institutional marketplace through a specialty sales force
consisting of 38 field sales representatives. This institutional
market is characterized by a concentration of elderly patients,
who we believe will be a key market for AMITIZA to treat
gastrointestinal indications, and by physicians who are key
opinion leaders in the gastrointestinal field. In connection
with the commercial launch of AMITIZA, we have recruited
experienced internal sales and marketing leadership and
developed a marketing strategy and promotional materials for the
commercialization of AMITIZA in our targeted institutional
market.
Develop AMITIZA for the treatment of additional indications
and discover, develop and commercialize other prostone product
candidates. We are concentrating our development
efforts on expanding the approved indications for AMITIZA and
developing our product candidates cobiprostone and SPI-017. We
hold an exclusive worldwide royalty-bearing license from Sucampo
AG to develop and commercialize each of these prostone
compounds. In the future, we also expect to develop other
proprietary prostones. We believe that our focus on prostones
may offer several potential advantages, including:
|
|
|
|
|
Novel mechanisms of action. We believe that
AMITIZA, cobiprostone and SPI-017 have, and that additional
product candidates that we may develop in the future based on
prostones may have, novel mechanisms of action, such as
selective ClC-2 chloride channel activation, that offer
physicians a new approach to treat targeted indications.
|
|
|
|
Wide-ranging therapeutic potential of
prostones. We believe that many prostones promote
fluid secretion, enhance cell barrier protection and can be
developed to target particular organs or systems of the body. As
a result, we believe that we will be able to develop prostone
drugs to treat multiple diseases and disorders of the
gastrointestinal, respiratory, vascular and central nervous
systems.
|
|
|
|
Our discovery and development experience with
prostones. We expect that our considerable
experience with AMITIZA, as well as the knowledge gained by
Drs. Ueno and Kuno in the development of RESCULA, will
facilitate our discovery and clinical development of additional
prostone compounds.
|
|
|
|
Patent protection. AMITIZA, cobiprostone and
SPI-017 each are covered by
composition-of-matter,
method of use and other issued patents or patent applications in
the United States, Europe and Japan.
|
Target large and underserved markets, with a particular focus
on treating indications in the elderly
population. We believe that drugs based on
prostones may be able to address a variety of large markets
characterized either by treatments with limited effectiveness
or, in some cases, no treatment. In addition to AMITIZA for the
treatment of chronic idiopathic constipation in adults, the
indication for which it has been approved by the FDA, we are
targeting:
|
|
|
|
|
AMITIZA for the treatment of chronic idiopathic constipation in
pediatric patients and for the treatment of irritable bowel
syndrome with constipation and opioid-induced bowel dysfunction;
|
|
|
|
Cobiprostone for the treatment of NSAID-induced ulcers, portal
hypertension, non-alcoholic fatty liver disease, disorders
associated with cystic fibrosis and chronic obstructive
pulmonary disease; and
|
8
|
|
|
|
|
SPI-017 for the treatment of peripheral arterial disease, stroke
and Alzheimers disease.
|
Seek marketing approval for AMITIZA and our other product
candidates outside the United States. We plan to
pursue marketing approval for AMITIZA and our other product
candidates in markets outside the United States, including
Europe, the Asia Pacific region and Latin America. To the extent
possible, we intend to use the data from our U.S. clinical
trials and the experience gained from the U.S. approval
process to expedite the approval process in other countries. If
we receive marketing approval for our products outside the
United States, we plan to retain co-commercialization rights and
work with third-party pharmaceutical companies with marketing,
sales and distribution capabilities in the relevant regions to
commercialize these products. In February 2008, we filed a MAA
for lubiprostone, 24 micrograms, for the indication of chronic
idiopathic constipation in adults in the United Kingdom. This
application was filed using the decentralized procedure, with
the United Kingdom, through its Medicines and Healthcare
Products Regulatory Agency, serving as the reference member
state, with additional applications subsequently filed with the
member states of Belgium, Denmark, France, Germany, Ireland, the
Netherlands, Spain and Sweden.
Focus on our core discovery and clinical development and
commercialization activities. Our business model
is to devote our resources and efforts to discovering,
developing and commercializing product candidates based on
prostones, while outsourcing other, non-core business functions
to third parties. Following this approach, we selectively
collaborate with a number of third parties to assist us with
these non-core business functions. These collaborators include:
|
|
|
|
|
Our affiliate R-Tech, which manufacturers commercial and
clinical supplies of AMITIZA and other prostone compounds for us;
|
|
|
|
Takeda, with whom we are collaborating to market AMITIZA for the
treatment of chronic idiopathic constipation in adults and other
gastrointestinal indications in the United States and
Canada; and
|
|
|
|
Contract research organizations, which we engage to perform
preclinical and clinical trials of our product candidates.
|
We believe that applying our resources in this way allows us to
concentrate on our core strengths while benefiting from the
specialized expertise of our third-party collaborators. In
addition, we may decide to outsource clinical development
activities for some of the compounds and indications in our
product pipeline if we determine it would be more cost-effective
to do so. For example, we may conclude that it is more
economical to license cobiprostone for pulmonary indications,
such as respiratory symptoms of cystic fibrosis and chronic
obstructive pulmonary disease, to a third party who would
conduct the necessary clinical development activities in support
of those indications.
Grow through strategic acquisitions and in-licensing
opportunities. We intend to pursue strategic
acquisitions and in-licensing opportunities to complement our
existing product pipeline. We have a specialty sales and
marketing function focused on the institutional market and we
have significant experience in pharmaceutical research and
product development, including clinical trials and regulatory
affairs. We believe that the institutional focus of our
specialty sales force would facilitate our ability to sell
additional products targeted at a variety of indications in
several therapeutic fields that are concentrated in the
institutional setting. This institutional market is
characterized by a concentration of elderly patients. We believe
that these capabilities will help us to identify attractive
acquisition, in-licensing and co-promotion opportunities to
build upon our core clinical development and commercialization
capabilities.
Products
and Product Candidates
AMITIZA®
(lubiprostone)
Overview
We are developing AMITIZA for the treatment of multiple
constipation-related gastrointestinal disorders. AMITIZA
functions as a selective activator of the ClC-2 chloride channel
through which negatively charged chloride ions flow out of the
cells lining the small intestine and into the intestinal cavity.
As these negatively charged chloride ions enter the intestine,
positively charged sodium ions move through spaces between the
cells into the
9
intestine to balance the negative charge of the chloride ions.
As these sodium ions move into the intestine, water is also
allowed to pass into the intestine through these spaces between
the cells. We believe that this movement of water into the small
intestine promotes increased fluid content, which in turn
softens the stool and facilitates its movement, or motility,
through the intestine.
Chronic
Idiopathic Constipation
On January 31, 2006, after a
10-month
review, the FDA approved our NDA for AMITIZA for the treatment
of chronic idiopathic constipation in adults of both genders and
all ages, including those over 65 years of age, without
restriction as to duration of use. In collaboration with Takeda,
we initiated commercial sales of AMITIZA in the United States
for the treatment of chronic idiopathic constipation in April
2006. When used for this indication, AMITIZA gelatin capsules
are taken orally twice daily in doses of 24 micrograms each.
Disease Overview. Constipation is
characterized by infrequent and difficult passage of stool and
becomes chronic when a patient suffers specified symptoms for
over 12 non-consecutive weeks within a
12-month
period. Chronic constipation is idiopathic if it is not caused
by other diseases or by use of medications. Symptoms of chronic
idiopathic constipation include straining, hard stools, bloating
and abdominal pain or discomfort. Factors contributing to the
development of chronic idiopathic constipation include a diet
low in soluble and insoluble fiber, inadequate exercise, bowel
disorders and poor abdominal pressure and muscular weakness.
Current Treatment. Some patients suffering
from chronic idiopathic constipation can be successfully treated
with lifestyle modification, dietary changes and increased fluid
and fiber intake, and these treatments are generally tried
first. For patients who fail to respond to these approaches,
physicians typically recommend laxatives, most of which are
available
over-the-counter.
The most commonly used laxatives can be categorized as
stimulants, stool softeners, bulk-forming agents, osmotics or
lubricants. Though somewhat effective in treating chronic
idiopathic constipation, stimulants and stool softeners can be
habit forming, while bulk-forming agents are often ineffective
in patients with
moderate-to-severe
constipation. Osmotics, such as
MiraLaxtm
(polyethylene glycol 3350) and lactulose are labeled for
use only for treating occasional constipation, not chronic
idiopathic constipation, and they may cause fluid and
electrolyte imbalance, which, if left untreated, can impair
normal function of the nerves and muscles. MiraLax was recently
approved for sale as an
over-the-counter
treatment. In addition, lubricants, such as orally administered
mineral oil, can be inconvenient and unpleasant for patients to
ingest. For those patients who fail to respond to laxatives,
Zelnorm®
(tegaserod maleate), a partial serotonin-receptor agonist, was
often prescribed. In March 2007, at the request of the FDA,
Zelnorm was withdrawn from the U.S. market by Novartis
Pharmaceuticals Corporation, or Novartis. The FDA requested that
Novartis discontinue marketing Zelnorm based on an identified
finding of an increased risk of serious cardiovascular adverse
events associated with use of the drug. Following a public
advisory committee meeting, the FDA announced in July 2007 that
it is permitting the restricted use of Zelnorm under a treatment
IND protocol for patients whose physicians determine the drug is
medically necessary. Even before its withdrawal, however,
Zelnorm was not approved for administration to patients over
65 years of age and has been linked with incidents of
ischemic colitis, a life-threatening inflammation of the large
intestine caused by restricted blood flow, and other forms of
intestinal ischemia. In addition, the effectiveness of Zelnorm
for the treatment of chronic idiopathic constipation has not
been studied beyond 12 weeks.
Market Opportunity. Studies published in
The American Journal of Gastroenterology estimate that
approximately 42 million people in the United States suffer
from constipation. Based on these studies, we estimate that
approximately 12 million people can be characterized as
suffering from chronic idiopathic constipation. In an additional
study published in The American Journal of
Gastroenterology, 91% of physicians expressed a desire for
better treatment options for constipation.
We believe that AMITIZA has a number of advantages over existing
treatment options that could help it capture a significant
portion of, and potentially expand, the existing market for
chronic idiopathic constipation therapies. These advantages
include the following:
|
|
|
|
|
AMITIZA has been approved for administration to adults of all
ages, including those over 65 years of age;
|
|
|
|
AMITIZA has been approved without limitation on duration of
use; and
|
10
|
|
|
|
|
AMITIZA has not been associated with the serious side effects
observed with some other treatment options, such as ischemic
colitis, electrolyte imbalance and cardiovascular ischemic
events.
|
Clinical Trial Results. In connection with
obtaining FDA marketing approval of AMITIZA, we conducted a
comprehensive program of clinical trials of this drug for use in
treating chronic idiopathic constipation. This clinical program
included two Phase III pivotal trials and three long-term
safety and efficacy trials.
Efficacy Results in Two Pivotal Clinical
Trials. In August 2002 and September 2003, we
completed two multi-center, double-blind, randomized,
placebo-controlled, four-week, Phase III clinical trials of
substantially identical design to assess the safety and efficacy
of AMITIZA for the treatment of chronic idiopathic constipation.
In each of these trials, we enrolled approximately 240
participants aged 18 or older with a history of chronic
idiopathic constipation. The primary efficacy endpoint in these
trials was the frequency of spontaneous bowel movements during
the first week of treatment. Secondary efficacy endpoints
included the frequency of spontaneous bowel movements during the
second, third and fourth weeks of treatment, the percentage of
participants with a spontaneous bowel movement within
24 hours after administration, the time to first
spontaneous bowel movement and weekly subjective assessments by
participants of average stool consistency, degree of straining,
severity of constipation, overall treatment effectiveness and
prevalence of other related symptoms, such as bloating and
discomfort.
In these trials, AMITIZA met its primary efficacy endpoint with
statistical significance, increasing the frequency of
spontaneous bowel movements from baseline during the first week
of treatment by 75% in one pivotal trial and 78% in the second
pivotal trial, in each case with a p-value less than 0.0001. In
addition, on the basis of combined data from both pivotal
trials, AMITIZA met all but one of the secondary efficacy
endpoints with statistical significance for all treatment weeks.
That one secondary efficacy endpoint, abdominal discomfort,
showed statistically significant improvements only during the
last two weeks of treatment with AMITIZA compared to placebo.
The results of these trials were consistent in subpopulation
analyses for gender, race and patients 65 years of age or
older. We determined statistical significance based on a widely
used, conventional statistical method that establishes the
p-value of clinical results. Under this method, a p-value of
0.05 or less represents statistical significance, meaning that
there is a less than
one-in-twenty
likelihood that the observed results occurred by chance.
Efficacy Results in Long-term Safety
Trials. Between November 2001 and January 2005,
we conducted three multi-center, open-label, long-term clinical
safety and efficacy trials of AMITIZA in patients with a history
of chronic idiopathic constipation. The trials consisted of one
six-month trial and two twelve-month trials and enrolled a total
of 881 patients age 18 or older. The primary objective
of these trials was to demonstrate the safety of AMITIZA when
administered to participants in twice-daily doses of 24
micrograms each. A secondary objective was to provide further
evidence of the long-term efficacy of AMITIZA in treating the
symptoms of chronic idiopathic constipation. In these trials,
AMITIZA produced statistically significant improvements from
baseline in subjective assessments of constipation severity,
abdominal bloating and abdominal discomfort over both the
six-month and the twelve-month treatment periods with a p-value
less than or equal to 0.0001. Subjective assessment of
constipation severity was improved by an average of 1.47 points
on a five-point scale in the six-month trial and
1.38 points in the twelve-month trial; subjective
assessment of abdominal bloating was improved by an average of
0.98 points in the six-month trial and 1.00 points in the
twelve-month trial; and subjective assessment of abdominal
discomfort was improved by an average of 0.91 points in the
six-week trial and 0.87 points in the twelve-month trial.
Safety Profile and Withdrawal Effects. AMITIZA
was well tolerated in twice-daily doses of 24 micrograms each in
an earlier Phase II trial, the two Phase III pivotal
trials and the three long-term clinical safety and efficacy
trials. These trials revealed no apparent increased risk of
serious adverse events as a result of treatment with AMITIZA.
The most common adverse events reported by participants in these
six trials were nausea, which was reported by 31% of all trial
participants, and diarrhea and headache, which were each
reported by 13% of all trial participants. The incidence of
nausea was lower among participants 65 years of age or
older, with only 18.6% of those participants reporting this side
effect. In addition, because AMITIZA demonstrated a potential to
cause fetal loss in guinea pigs in preclinical studies, its
label provides that it should be used during pregnancy only if
the potential benefit justifies the potential risk to the fetus.
The label further states that women who could become
11
pregnant should have a negative pregnancy test prior to
beginning therapy with the drug and should be capable of
complying with effective contraceptive measures.
Post-marketing Studies. In connection with our
marketing approval for AMITIZA for the treatment of chronic
idiopathic constipation in adults, we committed to the FDA to
conduct post-marketing studies to evaluate the safety of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. We initiated the
studies in January 2007.
Japanese Studies. In November 2007, we
commenced a multi-center Phase IIb does-ranging study in Japan
to evaluate the safety and efficacy of lubiprostone for chronic
idiopathic constipation in adults. This randomized, parallel
group, double-blind, placebo-controlled study will compare the
dose response of oral lubiprostone with that of placebo in
Japanese patients diagnosed with chronic idiopathic
constipation. Approximately 160 patients are expected to be
enrolled at 13 sites. Patients are being randomized to one of
three twice-daily doses of lubiprostone (8, 16 or 24 micrograms)
or placebo. The primary endpoint of the study is the number of
spontaneous bowel movements after one week on treatment.
Irritable
Bowel Syndrome with Constipation
On June 29, 2007 we submitted a supplemental NDA, or sNDA,
to our existing NDA for AMITIZA. The sNDA is for the addition of
irritable bowel syndrome with constipation as a new indication
using a twice daily 8 microgram dose. We expect a PDUFA
action for our sNDA on or about April 29, 2008.
Disease Overview. Irritable bowel syndrome is
a disorder of the intestines with symptoms that include severe
cramping, pain, bloating and extreme changes of bowel habits,
such as diarrhea or constipation. Patients diagnosed with
irritable bowel syndrome are commonly classified as having one
of three forms: irritable bowel syndrome with constipation,
irritable bowel syndrome with diarrhea, or mixed-pattern
irritable bowel syndrome alternating between constipation and
diarrhea. Currently, irritable bowel syndrome in all its forms
is considered to be one of the most common gastrointestinal
disorders.
Current Treatment. Most treatment options for
irritable bowel syndrome with constipation focus on separately
addressing symptoms, such as pain or infrequent bowel movements.
Some patients suffering from irritable bowel syndrome with
constipation can be successfully treated with dietary measures,
such as increasing fiber and fluid intake, and these treatments
are generally tried first. If these measures prove ineffective,
laxatives are frequently used for the management of this
condition. Zelnorm is currently the only FDA-approved drug
indicated for the treatment of irritable bowel syndrome with
constipation, although its label limits its indication to
short-term treatment of women. In March 2007, however, at the
request of the FDA, Zelnorm was withdrawn from the
U.S. market by Novartis. The FDA requested that Novartis
discontinue marketing Zelnorm based on a finding of an increased
risk of serious cardiovascular adverse events associated with
use of the drug. Following a public advisory committee meeting,
the FDA announced that is it permitting the restricted use of
Zelnorm under a treatment IND protocol for patients whose
physicians determine the drug is medically necessary. Zelnorm
remains off the market for general use. In December 2005, the
European Medicines Agency refused marketing approval for Zelnorm
for the treatment of irritable bowel syndrome with constipation
in women, citing the inconclusiveness of clinical studies in
demonstrating its effectiveness. In March 2006, the Agency
denied an appeal of that decision.
Market Opportunity. According to the American
College of Gastroenterology, irritable bowel syndrome affects
approximately 58 million people in the United States, and
irritable bowel syndrome with constipation accounts for
approximately one-third of these cases.
Development Status. In June 2004, we completed
a multi-center, double-blind, randomized, placebo-controlled,
dose-response, 12-week Phase II clinical trial to assess
the safety and efficacy of AMITIZA for the treatment of
irritable bowel syndrome with constipation in daily doses of 16,
32 and 48 micrograms. In this trial, we enrolled approximately
200 participants meeting the International Congress of
Gastroenterologys working criteria for the diagnosis of
irritable bowel syndrome with constipation, referred to as the
Rome II criteria. The objective of this trial was to
evaluate the safety and efficacy of multiple dose levels of
AMITIZA in this patient population in order to select the
appropriate dose for Phase III pivotal studies.
12
The primary efficacy endpoint for this trial was a subjective
assessment of changes in abdominal discomfort and pain during
the first month of treatment. Secondary efficacy endpoints
included subjective assessments of changes in abdominal
discomfort and pain during the second and third months of
treatment, frequency of spontaneous bowel movements, subjective
assessments of average stool consistency, degree of straining,
abdominal bloating, severity of constipation and overall
treatment effectiveness and subjective assessment of quality of
life.
In this trial, AMITIZA demonstrated a statistically significant,
dose-dependent trend in improvement in mean change from baseline
abdominal discomfort and pain during the first month of
treatment with a p-value of 0.0431. The term mean change from
baseline refers to differences in patients condition after
treatment with the drug or the placebo compared to their
condition before treatment. This dose-dependent trend in
improvement in mean change from baseline also was statistically
significant during the second month of treatment with a p-value
of 0.0336. During the third month of treatment, the trend in
favor of AMITIZA continued, but was not statistically
significant. Several secondary efficacy endpoints, including
frequency of spontaneous bowel movements, subjective assessments
of average stool consistency, degree of straining, abdominal
bloating and severity of constipation, also showed overall
dose-dependent trends that were statistically significant for at
least two of the three months of treatment.
Although AMITIZA was effective and well tolerated at all doses
in this trial, the 16 microgram daily dose produced the best
overall balance of safety and efficacy, with participants in the
32 and 48 microgram treatment groups generally more likely to
discontinue treatment due to adverse events. Adverse events
appeared to be dose-dependent between the 16 and 48 microgram
AMITIZA treatment groups and occurred more frequently in the
AMITIZA treatment group than in the placebo treatment group.
Based on the results of this Phase II trial, we initiated
two pivotal Phase III clinical trials of AMITIZA in men and
women for irritable bowel syndrome with constipation in May
2005, each involving 570 or more participants meeting the
Rome II criteria for irritable bowel syndrome with
constipation at 65 investigative study sites in the United
States. These Phase III pivotal trials were designed as
double-blind, randomized, 12-week clinical trials to demonstrate
the efficacy and safety of AMITIZA for the treatment of symptoms
of irritable bowel syndrome with constipation using twice daily
doses of 8 micrograms each, or 16 micrograms total. The primary
efficacy endpoint for these trials was a subjective assessment
of the participants overall relief from the symptoms of
irritable bowel syndrome with constipation determined by the
question How would you rate your relief of irritable bowel
syndrome symptoms (abdominal discomfort/pain, bowel habits, and
other irritable bowel syndrome symptoms) over the past week
compared to how you felt before you entered the study?
Patient responses were recorded using a seven-point balanced
scale. Treatment responders were defined in each month as those
reporting at least significantly relieved, which was
the highest scale category, for two out of four weeks or
moderately relieved, the second highest category,
for four out of four weeks. To qualify as an overall treatment
responder, and count toward the primary efficacy endpoint,
patients had to be a monthly treatment responder for at least
two out of three months. The secondary efficacy endpoints were
similar to those for our Phase II clinical trials of
AMITIZA for this indication and involved subjective assessments
of such factors as abdominal discomfort and pain, bloating,
straining, stool consistency, severity of constipation and
quality of life components. The first of the two pivotal studies
was followed by a randomized withdrawal period to assess the
effects, if any, associated with withdrawal of AMITIZA over a
four-week period. We also initiated an additional follow-on
open-label safety and efficacy study to assess the long-term use
of AMITIZA as a treatment for this indication. This study
included 476 patients who were treated for an additional
36 weeks following the initial 12 or 16 week treatment
period.
In the two pivotal phase III trials, participants receiving
AMITIZA at a dose of 8 micrograms twice daily were more likely
to achieve overall relief from symptoms compared to those
receiving the placebo, with 17.9% of the AMITIZA group achieving
overall relief compared to 10.1% for the placebo group, with a
p-value of 0.001. In both trials individually, participants
receiving AMITIZA experienced overall relief from symptoms at
higher rates than those receiving the placebo, 18.2% compared to
9.8% with a p-value of 0.009 in one trial and 17.7% compared to
10.4% with a p-value of 0.031 in the other.
In the combined phase III trials, the secondary endpoints,
which were measured on a five-point scale, were improved with
statistical significance in participants receiving AMITIZA
compared to those receiving the placebo. At the end of the
three-month treatment period, subjective assessments of
abdominal discomfort and pain by
13
participants receiving AMITIZA improved from baseline by an
average of 0.45 points, compared to average improvements in
participants receiving the placebo of 0.35 points; subjective
assessments of stool consistency improved by an average of 0.51
points compared to 0.38 points; subjective assessments of
straining improved by an average of 0.60 points compared to 0.47
points; subjective assessments of constipation severity improved
by an average of 0.52 points compared to 0.40 points; and
subjective assessments of abdominal bloating improved by an
average of 0.45 points compared to 0.36 points. At the end of
the three-month treatment period, the overall composite score
for subjective assessments of quality of life improved from
baseline an average of 17.1 points on a 100-point scale for
participants receiving AMITIZA compared to an average
improvement of 14.4 points for those receiving the placebo.
Statistical significance was seen for each of these secondary
endpoints, with the subjective assessments of abdominal
discomfort and pain having a p-value of 0.013, stool consistency
having a p-value of 0.006, straining having a p-value of 0.020,
constipation severity having a p-value of 0.005, abdominal
bloating having a p-value of 0.024 and quality of life having a
p-value of 0.021.
The first of the two phase III trials also assessed the
rebound effect from the withdrawal of AMITIZA following
12 weeks of treatment with an 8 microgram dose twice daily.
In this trial, withdrawal of AMITIZA did not result in a rebound
effect. AMITIZA was well-tolerated in the phase II, phase III,
and long-term safety studies. In the combined phase II and
phase III studies and at the recommended dose, there was a
similar incidence of serious adverse events, 1% in both the
AMITIZA group and the placebo group, and treatment-related
adverse events, with 26% in the AMITIZA groups compared to 21%
in the placebo groups. The most common treatment-related adverse
events were nausea, which was reported by 8% of participants
receiving AMITIZA and 4% of those receiving the placebo, and
diarrhea, which was reported by 7% of the AMITIZA groups and 4%
of the placebo groups. Abdominal pain occurred at a similar rate
in the placebo groups and the AMITIZA groups, with 5% reporting
this adverse event.
Opioid-Induced
Bowel Dysfunction
We commenced Phase III pivotal clinical trials of orally
administered AMITIZA gelatin capsules for the treatment of
opioid-induced bowel dysfunction in September 2007.
Disease Overview. Opioid-induced bowel
dysfunction comprises a variety of gastrointestinal side effects
stemming from the use of narcotic medications such as morphine
and codeine, which are referred to as opioids. Physicians
prescribe opioids for patients with advanced medical illnesses,
such as cancer and AIDS, patients undergoing surgery and
patients who experience chronic pain. Despite their
pain-relieving effectiveness, opioids are known to produce
gastrointestinal effects that lead to opioid-induced
constipation, including inhibition of large intestine motility,
decreased gastric emptying and hard stools.
Current Treatment. There are currently no
FDA-approved products that are specifically indicated for
treatment of opioid-induced bowel dysfunction. Current treatment
options for opioid-induced bowel dysfunction include the use of
stool softeners, enemas, suppositories and peristaltic
stimulants such as senna, which stimulate muscle contractions in
the bowel. The effectiveness of these products for the treatment
of opioid-induced bowel dysfunction is limited due to the
severity of the constipation caused by opioids. In addition,
physicians often cannot prescribe peristaltic stimulants for the
duration of narcotic treatment because of the potential for
dependence upon these stimulants. As a result, patients
frequently must discontinue opioid therapy and endure pain in
order to obtain relief from opioid-induced bowel dysfunction.
Market Opportunity. According to the American
Pain Foundation, over 50 million Americans suffer from
chronic pain, and nearly 25 million Americans experience
acute pain each year due to injuries or surgery. Opioid pain
relievers are widely prescribed for these patients, many of whom
also develop opioid-induced bowel dysfunction. We believe over
three million people in the United States currently suffer from
opioid-induced bowel dysfunction.
Opioid drugs are known to increase absorption of electrolytes,
including chloride, in the small intestine, contributing to the
constipating effects of these analgesics. We believe that
AMITIZA, as a chloride channel activator, may directly
counteract this side effect without interfering with the
analgesic benefits of opioids. As a result, we believe that
AMITIZA, if approved for the treatment of opioid-induced bowel
dysfunction, could hold a competitive advantage over drugs that
do not work through this mechanism of action.
14
Development Status. We have completed
preclinical studies of AMITIZA as a potential therapy for
opioid-induced bowel dysfunction in a model of morphine-induced
constipation in mice. In these studies, AMITIZA was shown to
improve intestinal transit time and did not result in any
reduction of the analgesic effect of morphine. Based on these
preclinical results, we determined to pursue development of
AMITIZA as a treatment for opioid-induced bowel dysfunction.
Cobiprostone
Overview
We are developing the prostone compound cobiprostone for oral
administration to treat various gastrointestinal and liver
disorders, including NSAID-induced ulcers, non-alcoholic fatty
liver disease, portal hypertension and gastrointestinal
disorders associated with cystic fibrosis. We also plan to
develop an inhaled formulation of cobiprostone for the treatment
of respiratory symptoms of cystic fibrosis and chronic
obstructive pulmonary disease. We believe that cobiprostone,
like AMITIZA, is an activator of the chloride ion channel ClC-2,
which is known to be present in gastrointestinal, liver and lung
cells.
We completed two Phase I clinical trials of cobiprostone in
healthy volunteers in Japan in 1997. In these trials, orally
administered cobiprostone was generally well tolerated both when
it was administered three times daily for a period of seven days
at doses we expect to be clinically relevant and when it was
administered in single doses that were significantly higher than
those we expect to be clinically relevant. Several incidents of
loose or watery stools were reported, but at doses higher than
those we expect to use in planned additional clinical trials. No
serious adverse events were experienced by any participants in
these trials, and no participants withdrew from these trials due
to adverse events, even at dose levels several times higher than
what we expect to be clinically-relevant doses of cobiprostone.
Non-Steroidal
Anti-Inflammatory Drug-Induced Ulcers
We commenced a Phase II clinical trial of cobiprostone for
the prevention and treatment of NSAID-induced ulcers in
September 2007.
Disease Overview. NSAIDs, such as aspirin and
ibuprofen, are among the most commonly prescribed drugs
worldwide. They are used to treat common medical conditions,
such as arthritis, headaches and fever. In addition, with the
recent withdrawal from the marketplace of the COX-2 inhibitors
Vioxx®
(rofecoxib) and
Bextra®
(valdecoxib), which were widely prescribed for arthritis
patients, an increased number of these patients are returning to
NSAID therapy. However, gastrointestinal symptoms, such as
gastric, or stomach, ulcers and bleeding, are major limiting
side effects of long-term NSAID use.
Current Treatment. Current treatment options
for NSAID-induced ulcers include products designed to prevent
the formation of gastric ulcers during NSAID use and products
that help to repair the damage of ulcers after they have
developed.
Cytotec®
(misoprostol) is currently the only FDA approved product for the
prevention of NSAID-induced gastric ulcers. It is sometimes
marketed as a combination product with NSAIDs under the brand
name
Arthrotec®.
However, Cytotec has been associated with severe diarrhea,
particularly in higher doses, and its label restricts its use in
women of childbearing potential, except in very limited
circumstances, because it can cause abortion, premature birth
and birth defects.
After NSAID-induced ulcers have developed, proton pump
inhibitors, such as
Nexium®
(esomeprazole magnesium) and
Prevacid®
(lansoprazole), are prescribed to treat most gastric ulcer
patients, either alone or in combination with other treatments.
H2 blockers, such as
Pepcid®
(famotidine),
Tagamet®
(cimetidine) and
Zantac®
(ranitidine hydrochloride), help to reduce stomach acid and are
typically prescribed as a second line of therapy for gastric
ulcers, when proton pump inhibitors are not effective, or are
used in conjunction with proton pump inhibitors. Although both
proton pump inhibitors and H2 blockers can aid in the repair of
existing gastric ulcers, neither of these drug categories has
been shown to be effective in preventing ulcer development.
Furthermore the therapeutic effects of these products are only
observed at high doses and in some types of at-risk patients,
such as those with a prior history of ulcers or those
65 years of age or older.
15
Market Opportunity. According to a study
published in Postgraduate Medicine, approximately
13 million patients in the United States are regular users
of NSAIDs. According to the American Chronic Pain Association,
as many as 20% of patients who take NSAIDs daily may develop
gastric ulcers. We believe that many patients treated with
NSAIDs are not prescribed preventative treatment for gastric
ulcers due to a combination of high cost, side effects and lack
of a well established standard of care. We believe that these
factors also limit the use of prescription products for the
repair of gastric ulcers after they have developed. Based on
cobiprostones novel mechanism of action and protective
activity in animal models, we believe that it may be effective
at both preventing and treating NSAID-induced ulcers, but
without the safety concerns and restrictions on use associated
with existing treatment options.
Development Status. We have completed
preclinical studies of cobiprostone as a potential therapy for
NSAID-induced ulcers. In preclinical tests in rats, cobiprostone
protected against formation of ulcers induced by indomethacin,
an NSAID, and ulcers induced by stress and demonstrated an
acceptable safety profile at what we believe are clinically
relevant doses. In the third quarter of 2007, we commenced a
Phase II clinical trial for cobiprostone. This
Phase II trial is a multi-center, randomized,
placebo-controlled study to evaluate the effects of multiple
doses of cobiprostone for the treatment and prevention of ulcer
formation following treatment with NSAIDs. We believe that
cobiprostone may have utility in preventing other gastric injury
in addition to NSAID-induced ulcers. Accordingly, as we progress
through our clinical program for cobiprostone, we may seek to
broaden our indication for this compound by exploring other
gastrointestinal lesions, including hemorrhages, erosions and
ulcerations.
Other
Potential Indications
Portal Hypertension. Portal hypertension is
the build-up
of pressure in the portal vein connecting the intestines and the
liver and is caused by a narrowing of the blood vessel as a
result of liver cirrhosis. Increased pressure in the portal vein
can lead to the development of large, swollen veins in the
esophagus, stomach and rectum which, if ruptured, can result in
potentially life-threatening blood loss. According to a
physician survey conducted by MEDACorp, an independent strategic
consulting firm focused on the health care sector, approximately
4.0 million Americans suffer from liver cirrhosis, with
approximately 1.5 million of those individuals also
diagnosed with portal hypertension. Beta-adrenergic receptor
blocking agents, or beta blockers, such as propranolol are the
most common treatment for portal hypertension. Beta blockers
help to relieve the effects of portal hypertension by lowering
blood pressure throughout the body. However, these products are
associated with increased risk of stroke and a number of other
side effects, including, nausea, diarrhea, hypotension, heart
failure, dizziness, fatigue, insomnia and depression, which may
limit their use, particularly among elderly patients. In
contrast to beta blockers, we believe that cobiprostone may be
effective at reducing portal hypertension without exhibiting
many of the serious side effects associated with beta blockers.
In preclinical tests, cobiprostone:
|
|
|
|
|
decreased portal pressure in two rodent models of portal
hypertension disease;
|
|
|
|
increased cutaneous blood flow in two additional animal models
in the presence of chemical agents known to constrict the
peripheral vasculature; and
|
|
|
|
reduced vascular resistance in the liver induced by a chemical
agent in an isolated rat model.
|
We also submitted an IND to the FDA in December 2007 for a
Phase II
proof-of-concept
study of cobiprostone in patients with portal hypertension.
Non-Alcoholic Fatty Liver
Disease. Non-alcoholic fatty liver disease is
characterized by elevations of specific liver enzymes in the
absence of excessive alcohol intake or other chronic liver
diseases. Although all levels of non-alcoholic fatty liver
disease lead to fat accumulation in the liver, the more advanced
versions of this disease, known as Type 3 and Type 4
non-alcoholic fatty liver disease, also involve fibrosis and
greatly increase the risk of progressive liver disease,
cirrhosis and liver-related death. There is currently no
treatment available for non-alcoholic fatty liver disease and
the market size is unknown. According to the National Institute
of Diabetes and Digestive and Kidney Diseases, a division of the
National Institutes of Health, approximately 10% to 20% of
16
Americans are affected by fat in the liver, and this condition
is becoming more common, possibly due to the greater number of
Americans with obesity.
In preclinical studies of cobiprostone as a potential treatment
for non-alcoholic fatty liver disease in rodent models of liver
damage, cobiprostone was found to favorably alter various serum
indicators of liver function and to reduce the severity of liver
injury caused by hepatitis.
In June 2003, we completed a limited,
28-day
Phase II trial to assess the safety and efficacy of orally
administered cobiprostone for the treatment of non-alcoholic
fatty liver disease. The efficacy results of this trial were
inconclusive, which we believe was likely the result of the
trials short treatment period and the fact that all but
one of the participants in this trial suffered from Type 4
non-alcoholic fatty liver disease, the most severe form of the
disease. Although we believe that further investigation of the
role of cobiprostone in the prevention or delay of non-alcoholic
fatty liver disease progression is warranted, current techniques
for studying this condition require a biopsy of the liver. As a
result, we do not plan to pursue human clinical trials of
cobiprostone for the treatment of non-alcoholic fatty liver
disease until such time as less invasive methods or alternative
diagnostic endpoints are developed for diagnosing the disease
and evaluating its progress.
Cystic Fibrosis. Cystic fibrosis is a
congenital disease that usually develops during childhood and
causes pancreatic insufficiency and pulmonary disorder. The gene
product responsible for cystic fibrosis is a protein called the
cystic fibrosis transmembrane conductance regulator, or CFTR.
CFTR is found in cells lining the internal surfaces of the
lungs, salivary glands, pancreas, sweat glands, intestine and
reproductive organs and acts as a channel transporting chloride
ions out of the cell. Cystic fibrosis is caused by a defect in
the CFTR protein, which prevents the transport of chloride ions
between cells, causing the body to develop thick, sticky mucus
in the lungs, pancreas and liver. According to the Cystic
Fibrosis Foundation, cystic fibrosis currently affects
approximately 30,000 people in the United States and is
usually diagnosed in infants and children.
In preclinical in vitro tests on human cell lines,
cobiprostone acted as an ion transport modulator, facilitating
transport of chloride ions across cell membranes through the
ClC-2 chloride channel, a transport process different from that
which is defective in cystic fibrosis patients. We believe that
the ability of cobiprostone to activate chloride transport using
an alternate chloride channel could potentially reverse the
effects caused by the defective CFTR, reducing mucus viscosity
and allowing increased clearance of mucus in the lungs, pancreas
and liver.
In 2003, we conducted an open-label, dose-escalating
Phase II trial of orally administered cobiprostone in
24 participants with documented cystic fibrosis. These
participants were assigned to one of three dose cohorts at four
sites in the United States and treated with cobiprostone for
seven days. cobiprostone was generally well tolerated by trial
participants, although one participant experienced a serious
adverse event and was hospitalized for exacerbation, or
short-term worsening, of the disease, possibly as a result of
treatment with cobiprostone. Although this trial focused
primarily on safety, we also examined the effect of cobiprostone
on chloride secretion in cells lining the nose and salivary
glands as well as overall quality of life as measured by a
questionnaire published by the Cystic Fibrosis Foundation. The
results for chloride secretion were inconclusive, which we
believe was likely due to the rapid metabolization of the drug
in the gastrointestinal tract, the short duration of the trial
and the limited number of participants enrolled in the trial.
However, we did observe improvements in baseline
gastrointestinal disorders associated with cystic fibrosis as
measured by the questionnaire. As a result, we have determined
to focus our initial development efforts on the treatment of
gastrointestinal disorders associated with cystic fibrosis and
plan to commence a Phase II dose-ranging trial of orally
administered cobiprostone for the treatment of these disorders
by 2009. In the future, we also plan to develop an inhaled
formulation of cobiprostone for the treatment of respiratory
symptoms of cystic fibrosis.
Chronic Obstructive Pulmonary Disease. Chronic
obstructive pulmonary disease is characterized by the
progressive development of airflow limitation in the lungs that
is not fully reversible and encompasses chronic bronchitis and
emphysema. According to the National Heart, Lung and Blood
Institute, or the NHLBI, a division of the National Institutes
of Health, approximately 12 million adults 25 years of
age or older in the United States are diagnosed with chronic
obstructive pulmonary disease. The NHLBI further estimates that
approximately 24 million adults in the United States have
evidence of impaired lung function, indicating in their view
that this disease is underdiagnosed. Anticholinergics, smooth
muscle relaxers that can help to widen air passageways to the
lungs, have been the primary therapy to treat chronic
obstructive pulmonary disease. Recently, combination agents,
such as
17
steroid/Beta-2 agonists, have enjoyed increased use as chronic
obstructive pulmonary disease treatments. However, these
treatments relieve only the symptoms of chronic obstructive
pulmonary disease, such as chronic cough or shortness of breath,
and have limited effect on reducing the incidence of
exacerbation of the disease.
Because we believe that the method of action of cobiprostone
involves a barrier protection function resulting from chloride
channel activation, we believe that it may be able to address
multiple respiratory treatment needs, including treatment of
exacerbations, chronic excessive mucus secretion and the mucus
component of chronic bronchitis. In pharmacological testing
using an inhaled formulation of cobiprostone in a guinea pig
model to assess changes in respiratory and pulmonary function,
cobiprostone reduced cigarette smoke-induced airway resistance
and restored forced expiratory volume. We plan to conduct
additional preclinical testing of this inhaled formulation of
cobiprostone as a potential treatment for chronic obstructive
pulmonary disease.
SPI-017
Overview
We are conducting preclinical development of SPI-017 for the
treatment of peripheral arterial and vascular disease and
central nervous system disorders. Initially, we are working on
the development of an intravenous formulation of SPI-017 for the
treatment of peripheral arterial disease and stroke. We also are
developing an oral formulation of SPI-017 for the treatment of
Alzheimers disease. We plan to commence Phase I clinical
trials of the intravenous formulation of SPI-017 in 2008 and
Phase I clinical trials of the oral formulation in 2009. Results
from the Phase I trials of both the intravenous and the oral
formulations may be useful in the development of any of these
indications.
In preclinical in vitro tests on human cell lines,
SPI-017 activated chloride channels in very low concentrations
on a variety of cells found in the central nervous system and
peripheral blood vessels. We are currently evaluating the safety
profile of SPI-017 in preclinical toxicology studies.
Potential
Indications
Peripheral Arterial and Vascular
Disease. Peripheral arterial disease, which also
is sometimes referred to as peripheral vascular disease, is a
chronic condition that results from narrowing of the vessels
that supply blood to the stomach, kidneys, arms, legs and feet.
Peripheral arterial disease is caused by the
build-up of
fatty deposits, or plaque, in the inner walls of the arteries as
a result of a vascular condition known as atherosclerosis. This
build-up of
plaque restricts the flow of blood throughout the body,
particularly in the arms and legs, and can lead to painful
cramping and fatigue after exercise. The American Heart
Association estimates that peripheral arterial disease affects
as many as 8 million to 12 million people in the
United States.
Anti-platelet medications, vasodilators and prostaglandins
represent the most frequently prescribed treatments for
peripheral arterial disease, but they have little or no impact
on symptoms or the underlying atherosclerotic process.
Palux®
(alprostadil) and
Liple®
(alprostadil) are used for the treatment of chronic arterial
occlusion in Japan, but are not currently available in the
United States. In addition, Palux and other prostaglandin E1
drug products should not be administered to patients with
bleeding disorders or patients being treated with chronic
anti-platelet medications, such as aspirin, due to the
detrimental effect of these products on platelet aggregation.
Despite the need for additional treatments, we believe that few
novel therapies are being explored.
In preclinical animal studies, intravenously administered
SPI-017 counteracted blood vessel constriction induced by a
chemical agent without significantly affecting blood pressure.
In addition, in preclinical animal studies, SPI-017 had no
effect on platelet aggregation. We believe that this may suggest
that SPI-017, unlike Palux and other prostaglandin E1 drugs,
could be used to treat patients with bleeding disorders or
patients being treated with chronic anti-platelet medications.
We are planning additional experiments to further test the
activity of SPI-017 in animal models of peripheral arterial
disease.
Stroke. Ischemic stroke occurs when an artery
that supplies blood to the brain becomes blocked due to a blood
clot or other blockage or when blood flow is otherwise reduced
as a result of a heart condition. During ischemic stroke, a high
rate of damage of neuronal cells in the brain usually leads to
permanent functional loss. The
18
American Heart Association estimates that approximately
700,000 patients in the Unites States suffer strokes
annually, 88% of which are ischemic strokes.
The thrombolytic
Activase®
(alteplase, recombinant) is the principal drug currently used to
treat acute ischemic stroke in the United States. To be
effective, treatment with Activase must be initiated within
three hours after the onset of stroke symptoms. In addition,
because Activase is contraindicated in patients with
intracranial hemorrhaging or active internal bleeding, treatment
should be initiated only after exclusion of these conditions.
In animal studies, intravenously administered SPI-017 reduced
the extent of cerebral tissue damage in experimentally induced
ischemic stroke in rats. In these studies, intravenous SPI-017
administered shortly after the restoration of blood flow also
significantly reduced the extent of tissue damage. We are
planning additional animal tests to further define the time
window for administration of SPI-017 and the concentration range.
Alzheimers Disease. Alzheimers
disease is a chronic debilitating disease, with patients
suffering from a progressive dementia over a number of years,
ultimately resulting in severe incapacitation and a shortened
lifespan. According to the Alzheimers Association, there
are approximately 4.5 million Alzheimers disease
patients in the United States.
While the causes of Alzheimers disease are currently not
well understood, it is widely recognized that particular regions
of the brain may play a central role in memory. The brain
comprises a complex network of neurons that enable memory,
sensation, emotion and other cognitive functions. Neurons are
highly specialized cells that are capable of communicating with
each other through biochemical transmission across junctions
called synapses. For this communication to occur, neurons
secrete chemicals, known as neurotransmitters, that bind to
receptors on neighboring neurons. Coordinated communication
across synapses is essential for the formation of memories.
Several classes of ion channels play a critical role in both the
activation of neurons and in the secretion of neurotransmitters
across synapses. In particular, some classes of potassium ion
channels, sodium ion channels and calcium ion channels have been
shown to be critical in the cascade of events that leads to the
secretion of neurotransmitters in key regions of the brain
associated with memory. We believe that some of these channels
may be important in the process of memory formation and
retention.
Preliminary data from a preclinical study of SPI-017 in a rat
model of Alzheimers disease suggests that orally
administered SPI-017 may restore cognitive behavior. We are
planning additional studies to further define the activity of
SPI-017 in this animal model.
Marketing
and Sales
We are co-promoting AMITIZA in the United States with Takeda. We
plan to market other product candidates that we may bring to
market through a combination of our own sales capabilities and
co-marketing, co-promotion, licensing and distribution
arrangements with third-party collaborators.
As we develop other products for commercialization, we intend to
evaluate the merits of retaining commercialization rights for
ourselves, entering into similar collaborative arrangements with
leading pharmaceutical companies to help further develop and
commercialize our product candidates or a combination of both.
Our decision whether to enter into collaborative arrangements
will be based on such factors as anticipated development costs,
therapeutic expertise and the commercial infrastructure required
to access a particular market. We expect that in many of these
arrangements, we will seek to co-promote our products in the
United States and, in some cases, other markets as part of our
ongoing effort to build our internal sales and marketing
capabilities.
As part of this strategy, we entered into a
16-year
collaboration and license agreement with Takeda in October 2004
for the joint development and commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada. In
early 2006, we exercised the co-promotion rights under our
collaboration and license agreement with Takeda in order to
begin developing a specialized sales force to market AMITIZA and
other gastrointestinal-related products to complement
Takedas sales efforts. Our initial strategy is to focus
our marketing and sales efforts on promoting AMITIZA in the
institutional marketplace, including specialist physicians based
in academic medical centers and long-term care facilities. This
institutional market is characterized by a concentration
19
of elderly patients, who we believe will be a key market for
AMITIZA to treat gastrointestinal indications, and by physicians
who are key opinion leaders in the gastrointestinal field.
Takeda is marketing AMITIZA more broadly to office-based
specialty physicians and primary care physicians. Pursuant to
the terms of the collaboration and license agreement, Takeda is
required to provide a dedicated sales force of at least
200 people to promote AMITIZA and a supplemental sales
force of at least 500 people to promote AMITIZA together
with one other drug product. Takeda is currently utilizing TAP
Pharmaceutical Products, Inc., or TAP, a joint venture between
an affiliate of Takeda and Abbot Laboratories, to provide this
supplemental sales force. Takeda has advised us that the
supplemental sales force being supplied by TAP consists of
approximately 750 people and is marketing AMITIZA together
with
Prevacid®
(lansoprazole), a product for the treatment of gastroesophageal
reflux disease, ulcers and a variety of other gastrointestinal
indications.
In late 2005 and early 2006, in anticipation of the launch of
AMITIZA, we recruited an experienced sales and marketing
management team comprising an executive vice president of
commercial operations, a vice president of national sales, a
director of medical marketing, a national sales director and
four regional sales managers.
Effective July 1, 2007, we amended our contract sales
agreement with Ventiv Commercial Services, LLC, or Ventiv, under
which Ventiv provided us with a contract specialty sales force
of 38 field sales representatives to market AMITIZA in our
targeted institutional market. Pursuant to the amendment, we no
longer use Ventiv to provide our specialty sales force and we
hired a significant portion of Ventivs sales staff
dedicated to AMITIZA as employees of our company. Although these
sales representatives became employees of our company, we are
continuing to outsource most of the operational infrastructure
associated with this sales force from Ventiv and, in some cases,
through other vendors. In connection with this internalization
of our specialty sales force, we incurred approximately $250,000
of transition expenses, primarily recruiting and training
expenses.
We believe that the institutional focus of our specialty sales
force, which targets academic medical centers and long-term care
providers, would facilitate our ability to sell other products
for the treatment of a variety of indications in several
therapeutic fields that are concentrated in the institutional
setting, as well as additional products in our own pipeline that
might be approved. In particular, we expect that our specialty
sales force will develop expertise over time that could be
useful in marketing additional products for the treatment of
gastrointestinal indications and for the treatment of the
elderly. We intend to pursue strategic acquisitions,
in-licensing or co-promotion opportunities to supplement our
existing product pipeline, especially those that would add
products complementary to the focus of our specialty sales force.
Takeda
Collaboration
In October 2004, we entered into a
16-year
collaboration and license agreement with Takeda to jointly
develop and commercialize AMITIZA for gastrointestinal
indications in the United States and Canada. This agreement
provides Takeda with exclusive rights within these two countries
to develop and commercialize AMITIZA for these indications under
all relevant patents, know-how and trademarks. Takeda does not
have the right to manufacture AMITIZA. Instead, Takeda is
required to purchase all supplies of the product from R-Tech
under a supply and purchase agreement between Takeda and R-Tech.
Development Costs. The agreement provides for
development cost-sharing arrangements in which Takeda funds all
development costs for the development of AMITIZA as a treatment
for chronic idiopathic constipation and irritable bowel syndrome
with constipation up to $30.0 million, of which we received
the full amount in 2005. We are required to fund the next
$20.0 million in development costs for these two
indications, and all development costs in excess of
$50.0 million are shared equally between Takeda and us. In
addition, Takeda and we share equally in all external costs of
regulatory-required studies up to $20.0 million, with
Takeda funding any remaining costs related to such studies. For
any additional indications beyond chronic idiopathic
constipation and irritable bowel syndrome with constipation and
for new formulations of AMITIZA, Takeda has agreed to fund all
development costs, including regulatory-required studies, to a
maximum of $50.0 million for each new indication and
$20.0 million for each new formulation. Takeda and we have
agreed to share equally all costs in excess of these amounts.
With respect to any studies required to modify or expand the
label for AMITIZA for the treatment of chronic idiopathic
constipation or irritable bowel syndrome with constipation,
Takeda has agreed to fund 70% of the costs of such studies
and we have agreed to fund the remainder. With respect to the
development costs for AMITIZA for the
20
treatment of chronic idiopathic constipation in pediatric
patients, the Joint Commercialization Committee described below
has determined that such costs will be funded entirely by Takeda.
Commercialization Funding Commitment. Takeda
is obliged to maintain a specific level of funding for
activities in relation to the commercialization of AMITIZA. This
funding obligation is $10.0 million per year so long as
marketing approval for the product in the United States is
limited to the treatment of chronic idiopathic constipation. If
we receive marketing approval in the United States for the
treatment of irritable bowel syndrome with constipation and we
and Takeda jointly determine to conduct a full-scale
direct-to-consumer
television advertising campaign for AMITIZA, Takedas
funding obligation for commercialization activities will
increase to $80.0 million per year for three years.
Promotion and Marketing. Takeda is required to
provide a dedicated sales force of at least 200 people to
promote AMITIZA and a supplemental sales force of
500 people to promote AMITIZA together with one other drug
product. In addition, Takeda is required to perform specified
minimum numbers of product detail meetings with health care
professionals throughout the term of the agreement depending
upon the indications for which AMITIZA has been approved.
Co-Promotion Rights. Under the agreement, we
retained co-promotion rights, which we exercised in February
2006, resulting in a related supplemental agreement. In
connection with our exercise of these rights, we agreed to
establish our own specialty sales force consisting of a team of
approximately 38 field sales representatives. The supplemental
agreement provides that Takeda will fund a portion of our sales
force costs, for a period of five years from the date we first
deploy our sales representatives. We may increase the total
number of our sales representatives and receive additional
funding from Takeda for any related costs up to a specified
annual amount, subject to the unanimous approval of the Joint
Commercialization Committee described below.
Medical and Scientific Activities. We also are
entitled to receive cost reimbursement from Takeda on a
case-by-case
negotiated basis for a part of our commercialization efforts
after launch with respect to specific medical and scientific
activities undertaken by us. Takeda is to retain overall
responsibility for managing these medical and scientific
activities. We were responsible for the development of all
publications directed at a scientific audience until
January 31, 2007, with this work being reimbursed by Takeda
up to a specified limit. We retain all intellectual property
rights over the material in these publications. After
January 31, 2007, Takeda is primarily responsible for the
development of these publications.
Licensing Fees, Milestone Payments and
Royalties. Takeda made an up-front payment of
$20.0 million in 2004 and has paid total development
milestone payments of $80.0 million through
December 31, 2007, which includes a $30.0 million
milestone payment as a result of our submission to the FDA in
June 2007 of a supplement to our existing NDA for AMITIZA
seeking marketing approval for AMITIZA for the treatment of
irritable bowel syndrome with constipation. Subject to reaching
future development and commercial milestones, we are entitled to
receive $50.0 million upon FDA approval of our sNDA, and,
thereafter, up to $10.0 million in additional development
milestone payments and up to $50.0 million in commercial
milestone payments. We expect a PDUFA action in late April 2008
relating to this sNDA. In addition, upon commercialization of
any product covered by the agreement, Takeda is required to pay
us a quarterly royalty on net sales revenue on sales of the
commercialized product.
Governance. Our collaboration with Takeda is
governed by several committees consisting of an equal number of
representatives from both companies. These consist of a joint
steering committee, which resolves any conflicts arising within
the other committees, a joint development committee, a joint
commercialization committee and a joint manufacturing committee.
In the case of a deadlock within the joint steering committee,
our chief executive officer has the determining vote on matters
arising from the Joint Development and Manufacturing Committees,
while Takedas representative has the determining vote on
matters arising from the Joint Commercialization Committee.
New Indications and Additional
Territories. Under the agreement, Takeda has a
right of first refusal to obtain a license to develop and
commercialize AMITIZA in the United States and Canada for any
new indications that we may develop. In addition, the agreement
granted Takeda an option to exclusively negotiate with our
affiliated European and Asian operating companies, Sucampo
Pharma Europe Ltd., or Sucampo Europe, and Sucampo
21
Pharma Ltd., or Sucampo Japan, to jointly develop and
commercialize AMITIZA in two additional territories: Europe, the
Middle East, and Africa; and Asia. With respect to the
negotiation rights for Europe, the Middle East and Africa,
Takeda was required to pay Sucampo Europe an option fee of
$3.0 million. In the event that these negotiations failed
to produce a definitive agreement before we received marketing
approval in the United States for AMITIZA for the treatment of
chronic idiopathic constipation in adults, Sucampo Europe was
required to repay Takeda $1.5 million of the original
option fee. With respect to the negotiation rights for Asia,
Takeda was required to pay Sucampo Japan an option fee of
$2.0 million. In the event that these negotiations failed
to produce a definitive agreement within twelve months, Sucampo
Japan was required to repay Takeda $1.0 million of the
original option fee. By the first quarter of 2006, the option
rights for both territories had expired without agreement and,
accordingly, we repaid Takeda an aggregate of $2.5 million
of the original option fees. The amounts we retained were
recorded as contract revenue in the statements of operations
when the negotiations failed and agreements expired.
Under the agreement, if we wish to use data or information
developed under the collaboration with Takeda outside the United
States or Canada, for example in support of a regulatory filing
in Europe or Asia, we are obligated to pay to Takeda a one-time
fee the first time such data or information is used in specified
territories. The amount of the fee for each territory is to be
agreed between us and Takeda. In February 2008, in connection
with our MAA for lubiprostone in Europe, we agreed with Takeda
to make a one-time payment of $1.8 million, which will
permit us to use in Europe, the Middle East and Africa all data
and information developed under the agreement relating to the
use of lubiprostone to treat chronic idiopathic constipation.
Term. The Takeda agreement continues until
2020 unless earlier terminated. We may terminate the agreement
if Takeda fails to achieve specific levels of net sales revenue,
or if Takeda comes under the control of another party and
launches a product competitive with AMITIZA. Alternatively,
either party has the right to terminate the agreement in the
following circumstances:
|
|
|
|
|
a breach of the agreement by the other party that is not cured
within 90 days, or 30 days in the case of a breach of
payment obligations;
|
|
|
|
a change of control of the other party in which the new
controlling party does not expressly affirm its continuing
obligations under the agreement;
|
|
|
|
insolvency of the other party; or
|
|
|
|
a failure to receive marketing approval from the FDA for AMITIZA
for the treatment of irritable bowel syndrome with constipation
and subsequent failure of the parties to agree on an alternative
development and commercialization strategy.
|
Intellectual
Property
Our success depends in part on our ability, and that of Sucampo
AG, to obtain and maintain proprietary protection for the
technology and know-how upon which our products are based, to
operate without infringing on the proprietary rights of others
and to prevent others from infringing on our proprietary rights.
We hold an exclusive worldwide royalty-bearing license from
Sucampo AG to develop and commercialize AMITIZA and other
prostone compounds covered by patents and patent applications
held by Sucampo AG. We are obligated to assign to Sucampo AG all
patentable improvements that we make in the field of prostones,
which Sucampo AG will in turn license back to us on an exclusive
basis. If we have not committed specified development efforts to
any prostone compound other than AMITIZA, cobiprostone and
SPI-017 by the end of a specified period, which ends on the
later of June 30, 2011 or the date upon which
Drs. Ueno and Kuno no longer control our company, then the
commercial rights to that compound will revert to Sucampo AG,
subject to a
15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.
Sucampo AG, based in Zug, Switzerland, is the patent holding
company that maintains the patent portfolio derived from
Dr. Uenos research with prostone technology.
As of December 31, 2007, we had licensed from Sucampo AG
rights to a total of 52 U.S. patents, 21 U.S. patent
applications, 28 European patents, 17 European patent
applications, 35 Japanese patents and 21 Japanese patent
22
applications. Many of these patents and patent applications are
counterparts of each other. Our portfolio of licensed patents
includes patents or patent applications with claims directed to
the composition of matter, including both compound and
pharmaceutical formulation, or method of use, or a combination
of these claims, for AMITIZA, cobiprostone and SPI-017.
Depending upon the timing, duration and specifics of FDA
approval of the use of a compound for a specific indication,
some of our U.S. patents may be eligible for limited patent
term extension under the Drug Price Competition and Patent Term
Restoration Act of 1984, referred to as the Hatch-Waxman Act.
The patent rights relating to AMITIZA licensed by us consist of
seven issued U.S. patents, five issued European patents and
two issued Japanese patents relating to composition of matter
and methods of use. These patent rights also include various
U.S., European and Japanese patent applications relating to
dosing, pharmaceutical formulation and other claims. The
U.S. patents relating to composition of matter expire
between 2011 and 2020. The other U.S. and foreign patents
expire between 2008 and 2022.
The patent rights relating to cobiprostone licensed by us
consist of nine issued U.S. patents, six issued European
patents, and six issued Japanese patents relating to composition
of matter and methods of use. These patent rights also include
various U.S., European and Japanese patent applications relating
to dosing regimes, pharmaceutical formulation and other claims.
The U.S. patents relating to composition of matter expire
between 2011 and 2020. The other U.S. and foreign patents
expire between 2008 and 2022.
The patent rights relating to SPI-017 licensed by us consist of
ten issued U.S. patents, six issued European patents and
five issued Japanese patents relating to methods of use. These
patent rights also include various U.S., European and Japanese
patent applications relating to composition of matter and
methods of use. If the application for a U.S. patent
relating to composition of matter were granted, this patent
would expire in 2020. The U.S. patents relating to methods
of use and the other U.S. and foreign patents expire
between 2010 and 2022.
We are actively seeking to augment the patent protection of our
licensed compounds by focusing on the development of new
chemical entities, or NCEs, such as AMITIZA, cobiprostone and
SPI-017, which have not previously received FDA approval. Upon
approval by the FDA, NCEs are entitled to market exclusivity in
the United States with respect to generic drug products for a
period of five years from the date of FDA approval, even if the
related patents have expired.
The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our technology will depend on our success, in conjunction with
Sucampo AG, in obtaining effective claims and enforcing those
claims once granted. In some cases, we license patent
applications instead of issued patents, and we do not know
whether any of the patent applications will result in the
issuance of any patents. Our licensed patents may be challenged,
invalidated or circumvented, which could limit our ability to
stop competitors from marketing related products or the length
of term of patent protection that we may have for our products.
In addition, our competitors may independently develop similar
technologies or duplicate any technology developed by us, and
the rights granted under any issued patents may not provide us
with any meaningful competitive advantages against these
competitors. Furthermore, because of the extensive time required
for development, testing and regulatory review of a potential
product, it is possible that, before any of our product
candidates can be commercialized, any related patent may expire
or remain in force for only a short period following
commercialization, thereby reducing any advantage of the patent.
We may rely, in some circumstances, on trade secrets to protect
our technology. However, trade secrets can be difficult to
protect. We seek to protect our proprietary technology and
processes, in part, by confidentiality agreements with our
employees, consultants, scientific advisors and contractors. We
also seek to preserve the integrity and confidentiality of our
data and trade secrets by maintaining physical security of our
premises and physical and electronic security of our information
technology systems. While we have confidence in these
individuals, organizations and systems, agreements or security
measures may be breached, and we may not have adequate remedies
for any breach. In addition, our trade secrets may otherwise
become known or be independently discovered by competitors. To
the extent that our consultants or contractors use intellectual
property owned by others in their work for us, disputes may
arise as to the rights in related or resulting know-how and
inventions.
23
License
from Sucampo AG
On June 30, 2006, we entered into a restated license
agreement with Sucampo AG. Under this agreement, Sucampo AG has
granted to us a royalty-bearing, exclusive, worldwide license,
with the right to sublicense, to develop and commercialize
AMITIZA, cobiprostone and SPI-017 and any other prostone
compounds, other than RESCULA, subject to Sucampo AGs
patents. Under the terms of the license, which became effective
upon our initial public offering, we are obligated to assign to
Sucampo AG any patentable improvements derived or discovered by
us relating to AMITIZA, cobiprostone and SPI-017 through the
term of the license. In addition, we are obligated to assign to
Sucampo AG any patentable improvements derived or discovered by
us relating to other licensed prostone compounds prior to the
date which is the later of June 30, 2011 or the date on
which Drs. Ueno and Kuno cease to control our company. For
purposes of this agreement, Drs. Ueno and Kuno will be
deemed to control our company as long as either they together
own a majority of the voting power of our stock or at least one
of them is a member or our board of directors. All compounds
assigned to Sucampo AG under this agreement will be immediately
licensed back to us on an exclusive basis.
In consideration of the license, we are required to make
milestone and royalty payments to Sucampo AG. The milestone
payments include:
|
|
|
|
|
a payment of $500,000 upon the initiation of the first
Phase II clinical trial for each compound in each of three
territories covered by the license: North, Central and South
America (including the Caribbean), Asia and the rest of the
world; and
|
|
|
|
a payment of $1.0 million for the first NDA filing or
comparable foreign regulatory filing for each compound in each
of the same three territories.
|
Upon payment of the above milestones, no further payments will
be required either for new indications or formulations or for
further regulatory filings for the same compound in additional
countries within the same territory. In November 2007, when we
initiated a Phase II trial in Japan, we became obligated to
pay Sucampo AG $500,000. Subsequent to December 31, 2007,
when we filed a MAA with the Medicines and Healthcare Products
Regulatory Agency of the United Kingdom, we became obligated to
pay Sucampo AG $1.0 million.
In addition, we are required to pay Sucampo AG 5% of any
up-front or milestone payments that we receive from sublicensees.
Under the license, we also are required to pay Sucampo AG, on a
country-by-country
basis, ongoing patent royalties as follows:
|
|
|
|
|
With respect to sales of AMITIZA in North, Central and South
America, including the Caribbean, this royalty is set at 2.2% of
net sales. With respect to sales of AMITIZA in other countries
and to sales of other licensed compounds covered by patents
existing as of the date of the restated license agreement, we
are required to pay a royalty of 4.5% of net sales until the
last existing patent covering each relevant compound has expired.
|
|
|
|
Thereafter, if we have assigned any relevant improvement patents
to Sucampo AG with respect to AMITIZA in North, Central and
South America, including the Caribbean, we are required to pay
1.1% of net sales. With respect to sales of AMITIZA in other
countries and other licensed compounds, we are required to pay a
royalty of 2.25% of net sales, until the last improvement patent
covering each relevant compound has expired.
|
|
|
|
With respect to sales of licensed compounds covered by new
patents derived by us and assigned to Sucampo AG after the date
of the restated license agreement, we are required to pay a
royalty of 2.25% of net sales until the terms of the last new
patent covering each relevant compound have expired.
|
In addition, we are required to pay Sucampo AG, on a
country-by-country
basis, a know-how royalty of 2% of net sales, or 1% of net sales
in the case of sales of AMITIZA in North, Central and South
America, including the Caribbean, until the fifteenth
anniversary of the first sale of the respective compound. All
product royalties required to be paid under the license are
based on total product net sales, whether by us or a
sublicensee, and not on amounts actually received by us.
24
The license from Sucampo AG is perpetual as to AMITIZA,
cobiprostone and SPI-017 and cannot be terminated unless we
default in our payment obligations to Sucampo AG. With respect
to any other licensed prostone compounds, we are required to
perform preclinical testing over a specified period on those
compounds and to generate specified pharmacological and toxicity
data. The specified period ends on the later of June 30,
2011 or the date upon which Drs. Ueno and Kuno no longer
control our company. Following the end of the specified period,
Sucampo AG can terminate our license with respect to any
compounds as to which we have not performed the required
testing, except for any compounds we designate as compounds for
which we intend in good faith to perform the required testing
within the 15 months following the end of the specified
period. At the end of the
15-month
extension period, Sucampo AG may terminate our license as to any
of the designated compounds for which we have not performed the
required testing.
We will need to focus our development resources and funding on a
limited number of compounds during the specified period. The
decision whether to commit development resources to a particular
compound will require us to determine which compounds have the
greatest likelihood of commercial success. Dr. Ueno and his
staff will be instrumental in making these decisions on our
behalf, although to assist in this determination, we have formed
a selection committee consisting of certain members of
management other than Drs. Ueno and Kuno.
We retain the rights to any improvements, know-how or other
intellectual property we develop that is not related to
prostones. We also retain the rights to any improvements,
know-how or other intellectual property we develop after the end
of the specified period, even if they are related to prostones.
The agreement provides that, until the later to occur of
June 30, 2011 or until Drs. Ueno and Kuno cease to
control our company, Sucampo AG may not develop or commercialize:
|
|
|
|
|
any products with a primary mode of action substantially the
same as that of any licensed compound; or
|
|
|
|
any products licensed or approved for an indication for which a
licensed compound is approved or under development.
|
Thereafter, Sucampo AG may undertake development of competing
products but may not commercialize these products for an
additional two years.
As part of this license, we have assumed the responsibility to
pay the patent filing and maintenance costs related to the
licensed rights. In return, we have control over patent filing
and maintenance decisions. The license agreement also specifies
how we and Sucampo AG will allocate costs to defend patent
infringement litigation brought by third parties and costs to
enforce patents against third parties.
Manufacturing
We do not own or operate manufacturing facilities for the
production of commercial quantities of AMITIZA or preclinical or
clinical supplies of the other prostone compounds that we are
testing in our development programs. Instead, we rely, and
expect to continue to rely, exclusively on our affiliate R-Tech
to supply us with AMITIZA, cobiprostone and SPI-017 and any
future prostone compounds that we determine to develop or
commercialize. Drs. Ueno and Kuno own, directly and
indirectly, a majority of the stock of R-Tech.
We, together with our subsidiary, Sucampo Europe, have entered
into an exclusive supply arrangement with
R-Tech.
Under the terms of this arrangement, we have granted to R-Tech
the exclusive right to manufacture and supply AMITIZA to meet
our commercial and clinical requirements in the Americas,
Europe, the Middle East and Africa until 2026. In the future, we
intend to expand this arrangement to include our subsidiary,
Sucampo Japan, in order to meet our commercial and clinical
requirements for AMITIZA in Asia. With the exception of the
exclusive supply agreements with Takeda described below, R-Tech
is prohibited from supplying AMITIZA to anyone other than us
during this period. Our supply arrangement with R-Tech also
provides that R-Tech will assist us in connection with
applications for marketing approval for AMITIZA in the United
States and elsewhere, including assistance with regulatory
compliance for chemistry, manufacturing and controls. In
consideration of these exclusive rights, R-Tech has paid to us
$8.0 million in up-front and milestone payments. Either we
or R-Tech may terminate the supply arrangement with respect to
us or Sucampo Europe in the event of the other partys
uncured breach or insolvency.
25
In anticipation of the commercial development of AMITIZA,
Takeda, R-Tech and we entered into a
16-year
supply agreement in October 2004, which was supplemented by a
definitive supply and purchase agreement in January 2006. Under
these agreements, R-Tech agreed to supply and Takeda agreed to
purchase all of Takedas commercial requirements, including
product samples, for AMITIZA in the United States and Canada.
Pursuant to the terms of these agreements, Takeda is required to
provide R-Tech with a rolling
24-month
forecast of its product and sample requirements and R-Tech is
required to keep adequate levels of inventory in line with this
forecast. In addition, these agreements require R-Tech to
maintain a six-month supply of the active ingredient used in
manufacturing AMITIZA and a six-month supply of AMITIZA in bulk
form as backup inventory. Upon a termination of the
collaboration and license agreement between Takeda and us,
either Takeda or we may terminate these supply agreements by
notice to R-Tech.
R-Tech is Takedas and our sole supplier of AMITIZA. In the
event that R-Tech cannot meet some or all of Takedas or
our demand, neither Takeda nor we have alternative manufacturing
arrangements in place. However,
R-Tech has
agreed to maintain at least a six-month supply of AMITIZA and a
six-month supply of the active ingredient used in manufacturing
AMITIZA as a backup inventory. R-Tech may draw down this backup
inventory to supply AMITIZA to us in the event that R-Tech is
unable or unwilling to produce AMITIZA to meet our demand. We
also have the right to qualify a
back-up
supplier for AMITIZA. In the event that R-Tech is unwilling or
unable to meet our demand, R-Tech will grant to that
back-up
supplier a royalty-free license to use any patents or know-how
owned by R-Tech relating to the manufacturing process for
AMITIZA and will provide, upon our reasonable request and at our
expense, consulting services to the
back-up
supplier to enable it to establish an alternative manufacturing
capability for AMITIZA. We may purchase AMITIZA from the
back-up
supplier until R-Tech is able and willing to meet our demand for
AMITIZA.
R-Tech operates a manufacturing facility near Osaka, Japan that
we believe is compliant with current good manufacturing
practices, or cGMP. In October 2005, R-Tech received approval
from the FDA to manufacture AMITIZA at this facility. In
addition, R-Tech manufactures its own prostone product RESCULA
at this facility and has been the sole supplier of this product
to the marketplace since 1994 without interruption.
We have also entered into an exclusive supply arrangement with
R-Tech to provide us with clinical supplies of our product
candidates cobiprostone and SPI-017, as well as any other
prostone compound we may designate, and to assist us in
connection with applications for marketing approval for these
compounds in the United States and elsewhere, including
assistance with regulatory compliance for chemistry,
manufacturing and controls. This clinical supply arrangement has
a two year term which renews automatically for one-year periods
unless we and R-Tech agree not to renew it. Either we or R-Tech
may terminate the clinical supply arrangement with respect to us
or one of our operating subsidiaries in the event of the other
partys uncured breach or insolvency.
Competition
The biotechnology and pharmaceutical industries are
characterized by rapidly advancing technologies, intense
competition and a strong emphasis on proprietary products. While
we believe that our technologies, knowledge, experience, and
resources provide us with competitive advantages, we face
potential competition from many different sources, including
commercial pharmaceutical and biotechnology enterprises,
academic institutions, government agencies, and private and
public research institutions. AMITIZA and any other product
candidates that we successfully develop and commercialize will
compete with existing therapies and new therapies that may
become available in the future.
Many of our competitors may have significantly greater financial
resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals, and marketing approved products
than we do. These competitors also compete with us in recruiting
and retaining qualified scientific and management personnel, as
well as in acquiring technologies complementary to, or necessary
for, our programs. Smaller or early stage companies may also
prove to be significant competitors, particularly through
collaborative arrangements with large and established companies.
Our commercial opportunity could be reduced or eliminated if our
competitors develop and commercialize products that are safer,
more effective, have fewer side effects, are more convenient or
are less expensive than AMITIZA or the other product candidates
that we are developing. A competitive product might become more
26
popular if it is approved for sale over the counter. In
addition, our ability to compete may be affected because in some
cases insurers or other third-party payors seek to encourage the
use of generic products. This may have the effect of making
branded products less attractive, from a cost perspective, to
buyers.
There are currently approved therapies for the diseases and
conditions addressed by AMITIZA. For example, the osmotic
laxatives MiraLax, which is marketed by Braintree Laboratories,
Inc., and lactulose, which is produced by Solvay S.A., have each
been approved for the short-term treatment of occasional
constipation. MiraLax was recently approved for sale as an
over-the-counter
treatment.
Zelnorm, a partial serotonin-receptor agonist, which is marketed
by Novartis, has been approved both for the treatment of chronic
idiopathic constipation in adults under 65 years of age and
for the short-term treatment of irritable bowel syndrome with
constipation in women. In March 2007, however, at the request of
the FDA, Zelnorm was withdrawn from the U.S. market by
Novartis. The FDA requested that Novartis discontinue marketing
Zelnorm based on an identified finding of an increased risk of
serious cardiovascular adverse events associated with use of the
drug. Since July 2007, the FDA has permitted restricted use of
Zelnorm under a treatment IND protocol for patients whose
physicians determine the drug is medically necessary. Zelnorm
remains off the market for general use.
Several companies also are working to develop new drugs and
other therapies for these same diseases and conditions. Some of
these potential competitive drug products include:
|
|
|
|
|
Drugs targeting serotonin receptors for the treatment of
irritable bowel syndrome with constipation, such as Renzapride,
being developed by Alizyme plc and currently in Phase III
clinical trials, DDP733, being developed by Dynogen
Pharmaceuticals, Inc. and currently in Phase II clinical
trials, and Linaclotide, being developed by Microbia, Inc. and
currently in Phase II clinical trials;
|
|
|
|
Opioid antagonists such as methylnaltrexone, being developed by
Progenics Pharmaceuticals, Inc., for the treatment of
opioid-induced bowel dysfunction. Progenics and its
collaboration partner Wyeth Pharmaceuticals recently filed an
NDA with the FDA for a subcutaneous formulation of this drug for
the treatment of opioid-induced bowel dysfunction in patients
receiving palliative care. Adolor Corporation, the developer of
another opioid antagonist, Entereg
®
(alvimopan), recently announced that it was withdrawing its
protocol for an additional Phase III clinical trial of
Entereg to treat opioid-induced bowel dysfunction, which had
previously been filed with the FDA, based upon preliminary
Phase III trial safety results that suggest potential links
between use of Entereg and adverse cardiovascular events, tumor
development and bone fractures; and
|
|
|
|
TD-5108, being developed by Theravance, Inc. for the treatment
of chronic constipation, and linaclotide, being developed by
Microbia, Inc. for the treatment of irritable bowel syndrome
with constipation, both of which have recently completed
phase II clinical trials.
|
We face similar competition from approved therapies and
potential drug products for the diseases and conditions to be
addressed by cobiprostone, SPI-017 and our other product
candidates.
The key competitive factors affecting the success of all of our
product candidates are likely to be their efficacy, safety,
price and convenience.
Government
Regulation
Government authorities in the United States, at the federal,
state and local level, and in other countries extensively
regulate, among other things, the research, development,
testing, approval, manufacturing, labeling, post-approval
monitoring and reporting, packaging, promotion, storage,
advertising, distribution, marketing and export and import of
pharmaceutical products such as those we are developing. The
process of obtaining regulatory approvals and the subsequent
substantial compliance with appropriate federal, state, local
and foreign statutes and regulations require the expenditure of
substantial time and financial resources.
27
United
States Government Regulation
In the United States, the information that must be submitted to
the FDA in order to obtain approval to market a new drug varies
depending upon whether the drug is a new product whose safety
and efficacy have not previously been demonstrated in humans or
a drug whose active ingredients and certain other properties are
the same as those of a previously approved drug. A product whose
safety and efficacy have not previously been demonstrated in
humans will follow the NDA route.
The
NDA Approval Process
In the United States, the FDA regulates drugs under the Federal
Food, Drug, and Cosmetic Act, as amended, and implements
regulations. Failures to comply with the applicable FDA
requirements at any time during the product development process,
approval process or after approval may result in administrative
or judicial sanctions. These sanctions could include the
FDAs imposition of a hold on clinical trials, refusal to
approve pending applications, withdrawal of an approval, warning
letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines,
civil penalties or criminal prosecution. Any agency or judicial
enforcement action could have a material adverse effect on us.
The steps required before a drug may be marketed in the United
States include:
|
|
|
|
|
completion of preclinical laboratory tests, animal studies and
formulation studies under the FDAs good laboratory
practices regulations;
|
|
|
|
submission to the FDA of an IND for human clinical testing,
which must become effective before human clinical trials may
begin and which must include a commitment that an independent
Institutional Review Board, or IRB, will be responsible for the
review and approval of each proposed study and that the
investigator will report to the IRB proposed changes in research
activity;
|
|
|
|
performance of adequate and well-controlled clinical trials in
accordance with good clinical practices to establish the safety
and efficacy of the product for each indication;
|
|
|
|
submission to the FDA of an NDA;
|
|
|
|
satisfactory completion of an FDA Advisory Committee review, if
applicable;
|
|
|
|
satisfactory completion of an FDA inspection of the
manufacturing facility or facilities at which the product is
produced to assess compliance with cGMP to assure that the
facilities, methods and controls are adequate to preserve the
products identity, strength, quality and purity; and
|
|
|
|
FDA review and approval of the NDA.
|
Preclinical tests include laboratory evaluations of product
chemistry, toxicology and formulation, as well as animal
studies. An IND sponsor must submit the results of the
preclinical tests, together with manufacturing information and
analytical data, to the FDA as part of the IND. Preclinical
testing generally continues after the IND is submitted. The IND
must become effective before human clinical trials may begin. An
IND will automatically become effective 30 days after
receipt by the FDA, unless before that time the FDA raises
concerns or questions about issues such as the conduct of the
trials as outlined in the IND. In that case, the IND sponsor and
the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. In other words, submission
of an IND does not guarantee that the FDA will allow clinical
trials to commence.
Clinical trials involve the administration of the
investigational product to human subjects under the supervision
of qualified investigators. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the
study, the parameters to be used in monitoring safety and the
effectiveness criteria to be evaluated. A protocol for each
clinical trial and any subsequent protocol amendments must be
submitted to the FDA as part of the IND. In addition, an IRB at
each site at which the study is conducted must approve the
protocol, any amendments to the protocol and related materials
such as informed consent documents and investigator brochures.
All research subjects must provide their informed consent in
writing.
28
Clinical trials typically are conducted in three sequential
phases, but the phases may overlap or be combined. Phase I
trials usually involve the initial introduction of the
investigational drug into healthy volunteers to evaluate the
products safety, dosage tolerance and pharmacokinetics, or
the process by which the product is absorbed, distributed,
metabolized and eliminated by the body, and, if possible, to
gain an early indication of its effectiveness.
Phase II trials usually involve trials in a limited patient
population to:
|
|
|
|
|
evaluate dosage tolerance and appropriate dosage;
|
|
|
|
identify possible adverse effects and safety risks; and
|
|
|
|
provide a preliminary evaluation of the efficacy of the drug for
specific indications.
|
Phase II trials are sometimes denoted as Phase IIa or Phase
IIb trials. Phase IIa trials typically represent the first human
clinical trial of a drug candidate in a smaller patient
population and are designed to provide earlier information on
drug safety and efficacy. Phase IIb trials typically involve
larger numbers of patients and may involve comparison with
placebo, standard treatments or other active comparators.
Phase III trials usually further evaluate clinical efficacy
and test further for safety in an expanded patient population.
Phase III trials usually involve comparison with placebo,
standard treatments or other active comparators. These trials
are intended to establish the overall risk-benefit profile of
the product and provide an adequate basis for physician labeling.
Phase I, Phase II and Phase III testing may not
be completed successfully within any specified period, if at
all. Furthermore, the FDA or we may suspend or terminate
clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an
unacceptable health risk. Similarly, an IRB can suspend or
terminate approval of research if the research is not being
conducted in accordance with the IRBs requirements or if
the research has been associated with unexpected serious harm to
patients.
Assuming successful completion of the required clinical testing,
the results of the preclinical studies and of the clinical
trials, together with other detailed information, including
information on the chemistry, manufacture and composition of the
product, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more
indications. In most cases, a substantial user fee must
accompany the NDA. The FDA will initially review the NDA for
completeness before it accepts the NDA for filing. After the NDA
submission is accepted for filing, the FDA reviews the NDA to
determine, among other things, whether a product is safe and
effective for its intended use and whether the product is being
manufactured in accordance with cGMP to assure and preserve the
products identity, strength, quality and purity.
Under the Pediatric Research Equity Act of 2003, or PREA, all
NDAs or supplements to NDAs relating to a new active ingredient,
new indication, new dosage form, new dosing regimen or new route
of administration must contain data to assess the safety and
effectiveness of the drug for the claimed indications in all
relevant pediatric subpopulations and to support dosing and
administration for each pediatric subpopulation for which the
drug is determined to be safe and effective. The FDA may grant
deferrals for submission of data or full or partial waivers, as
it did in connection with our NDA for AMITIZA for the treatment
of chronic idiopathic constipation. Unless otherwise required by
regulation, PREA does not apply to any drug for an indication
for which orphan designation has been granted.
Before approving an NDA, the FDA will inspect the facility or
the facilities at which the product is manufactured. The FDA
will not approve the product unless cGMP compliance is
satisfactory. If the FDA determines the application,
manufacturing process or manufacturing facilities are not
acceptable, it will outline the deficiencies in the submission
and often will request additional testing or information.
Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application
does not satisfy the regulatory criteria for approval.
With respect to approval for a new indication where the product
candidate is already approved for another indication, the
results of product development, pre-clinical studies and
clinical trials are submitted to the FDA as part of an NDA
supplement. The FDA may deny approval of an NDA supplement if
the applicable regulatory criteria are not satisfied, or it may
require additional clinical data or an additional pivotal
Phase III clinical trial.
29
Even if such data are submitted, the FDA may ultimately decide
that the NDA supplement does not satisfy the criteria for
approval.
The testing and approval process requires substantial time,
effort and financial resources, and each may take several years
to complete. Data obtained from clinical activities are not
always conclusive and may be susceptible to varying
interpretations, which could delay, limit or prevent regulatory
approval. The FDA may not grant approval on a timely basis, or
at all. We may encounter difficulties or unanticipated costs in
our efforts to secure necessary governmental approvals, which
could delay or preclude us from marketing our products. The FDA
may limit the indications for use or place other conditions on
any approvals that could restrict the commercial application of
the products. After approval, some types of changes to the
approved product, such as manufacturing changes and additional
labeling claims, are subject to further FDA review and approval.
Post-Approval
Requirements
After regulatory approval of a product is obtained, we are
required to comply with a number of post-approval requirements.
For example, as a condition of approval of an NDA, the FDA may
require post marketing, or Phase IV, trials to assess the
products long-term safety or efficacy. In addition,
holders of an approved NDA are required to report certain
adverse reactions and production problems to the FDA, to provide
updated safety and efficacy information and to comply with
requirements concerning advertising and promotional labeling for
their products. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval. The
FDA periodically inspects manufacturing facilities to assess
compliance with cGMP, which imposes certain procedural,
substantive and recordkeeping requirements. Accordingly,
manufacturers must continue to expend time, money and effort in
the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
We rely, and expect to continue to rely, on third parties for
the production of clinical and commercial quantities of our
product candidates. Future FDA inspections may identify
compliance issues at our facilities or at the facilities of our
contract manufacturers that may disrupt production or
distribution, or require substantial resources to correct. In
addition, discovery of problems with a product or the failure to
comply with applicable requirements may result in restrictions
on a product, manufacturer or holder of an approved NDA,
including withdrawal or recall of the product from the market or
other voluntary, FDA-initiated or judicial action that could
delay or prohibit further marketing. Newly discovered or
developed safety or effectiveness data may require changes to a
products approved labeling, including the addition of new
warnings and contraindications. Also, new government
requirements, including those resulting from new legislation,
may be established that could delay or prevent regulatory
approval of our products under development.
Orphan
Drug Designation
We have received an orphan drug designation from the FDA for our
product candidate cobiprostone for the treatment of disorders
associated with cystic fibrosis and may pursue orphan drug
designation for additional product candidates, as appropriate.
The FDA may grant orphan drug designation to drugs intended to
treat a rare disease or condition that affects fewer
than 200,000 individuals in the United States, or more than
200,000 individuals in the United States and for which there is
no reasonable expectation that the cost of developing and making
available in the United States a drug for this type of disease
or condition will be recovered from sales in the United States
for that drug. Orphan drug designation must be requested before
submitting an application for marketing approval. Orphan drug
designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process. Orphan
drug designation can provide opportunities for grant funding
towards clinical trial costs, tax advantages and FDA user-fee
benefits. In addition, if a product which has an orphan drug
designation subsequently receives the first FDA approval for the
indication for which it has such designation, the product is
entitled to orphan drug exclusivity, which means the FDA may not
approve any other application to market the same drug for the
same indication for a period of seven years, except in limited
circumstances, such as a showing of clinical superiority to the
product with orphan exclusivity. Competitors may receive
approval of different drugs or biologics for the indications for
which the orphan product has exclusivity or may receive approval
of the same drug as the orphan drug product for a different
indication.
30
Regulation Outside
the United States
In addition to regulations in the United States, we will be
subject to a variety of regulations in other jurisdictions
governing clinical trials and commercial sales and distribution
of our products. Whether or not we obtain FDA approval for a
product, we must obtain approval of a product by the comparable
regulatory authorities of countries outside the United States
before we can commence clinical trials or marketing of the
product in those countries. The approval process varies from
country to country, and the time may be longer or shorter than
that required for FDA approval. The requirements governing the
conduct of clinical trials, product licensing, pricing and
reimbursement vary greatly from country to country.
Europe
To obtain regulatory approval of a drug under European Union
regulatory systems, we may submit marketing authorizations
either under a centralized or decentralized procedure. The
centralized procedure, which is compulsory for medicines
produced by certain biotechnological processes and optional for
those which are highly innovative, provides for the grant of a
single marketing authorization that is valid for all European
Union member states. All marketing authorizations for products
designated as orphan drugs must be granted in accordance with
the centralized procedure. The decentralized procedure provides
for a member state, known as the reference member state, to
assess an application, with one or more other, or concerned,
member states subsequently approving that assessment. Under this
procedure, an applicant submits an application, or dossier, and
related materials including a draft summary of product
characteristics, and draft labeling and package leaflet, to the
reference member state and concerned member states. The
reference member state prepares a draft assessment and related
materials within 120 days after receipt of a valid
application. Within 90 days of receiving the reference
member states assessment report, each concerned member
state must decide whether to approve the assessment report and
related materials. If a member state cannot approve the
assessment report and related materials on the grounds of
potential serious risk to the public health, any disputed points
may be referred to the European Commission, whose decision is
binding on all member states.
The European Medicines Agency, or EMEA, grants orphan drug
designation to promote the development of products that may
offer therapeutic benefits for life-threatening or chronically
debilitating conditions affecting not more than five in
10,000 people in the European Union. In addition, orphan
drug designation can be granted if the drug is intended for a
life threatening, seriously debilitating or serious and chronic
condition in the European Union and that without incentives it
is unlikely that sales of the drug in the European Union would
be sufficient to justify developing the drug. Orphan drug
designation is only available if there is no other satisfactory
method approved in the European Union of diagnosing, preventing
or treating the condition, or if such a method exists, the
proposed orphan drug will be of significant benefit to patients.
Orphan drug designation provides opportunities for free protocol
assistance, fee reductions for access to the centralized
regulatory procedures before and during the first year after
marketing authorization and 10 years of market exclusivity
following drug approval. Fee reductions are not limited to the
first year after authorization for small and medium enterprises.
The exclusivity period may be reduced to six years if the
designation criteria are no longer met, including where it is
shown that the product is sufficiently profitable that
maintaining market exclusivity is not justified. In addition,
European regulations establish that a competitors
marketing authorization for a similar product with the same
indication may be granted if there is an insufficient supply of
the product or if the competitor can establish that its product
is safer, more effective or otherwise clinically superior.
Japan
In Japan, pre-marketing approval and clinical studies are
required for all pharmaceutical products. The regulatory regime
for pharmaceuticals in Japan has in the past been so lengthy and
costly that it has been cost-prohibitive for many pharmaceutical
companies. Historically, Japan has required that all clinical
data submitted in support of a new drug application be performed
on Japanese patients. Recently, however, as a part of the global
drug harmonization process, Japan has signaled a willingness to
accept United States or European Union patient data when
submitted along with a bridging study, which demonstrates that
Japanese and non-Japanese subjects react comparably to the
product. This approach, which is executed on a
case-by-case
basis, may reduce the time required for approval and
introduction of new products into the Japanese market.
31
Amendments to Japans drug regulatory legislation went into
effect in April 2005.
|
|
|
|
|
Under the revised legislation, Japan adopted a marketing
authorization process comparable to the European Union
authorization and United States NDA. This is expected to allow
greater flexibility on the part of Japanese manufacturers to
efficiently organize their production/marketing activities.
|
|
|
|
The amended legislation requires worldwide compliance with good
manufacturing practice requirements by exporters of
pharmaceutical products to Japan and detailed disclosure of the
manufacturing process to the Japanese authorities, as well as to
the importer in Japan.
|
The Japanese government has also announced that it will consider
introducing a new proprietary data exclusivity period of up to
eight years in order to protect the value of clinical data.
Regulation
of the Health Care Industry
In addition to the regulatory approval requirements described
above, we are or will be directly, or indirectly through our
customers, subject to extensive regulation of the health care
industry by the federal government and the states and foreign
countries in which we may conduct our business. The laws that
directly or indirectly affect our ability to operate our
business include the following:
|
|
|
|
|
the federal Medicare and Medicaid Anti-Kickback law, which
prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or
indirectly, in cash or in kind, to induce either the referral of
an individual, or furnishing or arranging for a good or service,
for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid Programs;
|
|
|
|
other Medicare laws, regulations, rules, manual provisions and
policies that prescribe the requirements for coverage and
payment for services performed by our customers, including the
amount of such payment;
|
|
|
|
the federal False Claims Act, which imposes civil and criminal
liability on individuals and entities who submit, or cause to be
submitted, false or fraudulent claims for payment to the
government;
|
|
|
|
the federal False Statements Act, which prohibits knowingly and
willfully falsifying, concealing or covering up a material fact
or making any materially false statement in connection with the
delivery of or payment for healthcare benefits, items or
services; and
|
|
|
|
state and foreign law equivalents of the foregoing and state
laws regarding pharmaceutical company marketing compliance,
reporting and disclosure obligations.
|
If our operations are found to be in violation of any of these
laws, regulations, rules or policies or any other law or
governmental regulation to which we or our customers are or will
be subject, or if interpretations of the foregoing change, we
may be subject to civil and criminal penalties, damages, fines,
exclusion from the Medicare and Medicaid programs and the
curtailment or restructuring of our operations. Similarly, if
our customers are found non-compliant with applicable laws, they
may be subject to sanctions.
Pharmaceutical
Pricing and Reimbursement
In the United States and markets in other countries, sales of
any products for which we receive regulatory approval for
commercial sale will depend in part on the availability of
reimbursement from third-party payors. Third-party payors
include government health administrative authorities, managed
care providers, private health insurers and other organizations.
These third-party payors are increasingly challenging the price
and examining the cost-effectiveness of medical products and
services. In addition, significant uncertainty exists as to the
reimbursement status of newly approved healthcare product
candidates. We may need to conduct expensive pharmacoeconomic
studies in order to demonstrate the cost-effectiveness of our
products. Our product candidates may not be considered
cost-effective. Adequate third-party reimbursement may not be
available to enable us to maintain price levels sufficient to
realize an appropriate return on our investment in product
development.
In 2003, the United States government enacted legislation
providing a partial prescription drug benefit for Medicare
recipients, which became effective at the beginning of 2006.
Government payment for some of the costs of prescription drugs
may increase demand for any products for which we receive
marketing approval. However, to
32
obtain payments under this program, we would be required to sell
products to Medicare recipients through drug procurement
organizations operating pursuant to this legislation. These
organizations would negotiate prices for our products, which are
likely to be lower than the prices we might otherwise obtain.
Federal, state and local governments in the United States
continue to consider legislation to limit the growth of
healthcare costs, including the cost of prescription drugs.
Future legislation could limit payments for pharmaceuticals,
including AMITIZA and the drug candidates that we are developing.
The marketability of any products for which we receive
regulatory approval for commercial sale may suffer if the
government and third-party payors fail to provide adequate
coverage and reimbursement. In addition, an increasing emphasis
on managed care in the United States has increased and will
continue to increase the pressure on pharmaceutical pricing.
Another development that may affect the pricing of drugs is
proposed Congressional action regarding drug reimportation into
the United States. Proposed legislation would allow the
reimportation of approved drugs originally manufactured in the
United States back into the United States from other countries
where the drugs are sold at a lower price. If such legislation
or similar regulatory changes were enacted, they could reduce
the price we receive for any approved products, which, in turn,
could adversely affect our revenues. Even without legislation
authorizing reimportation, patients have been purchasing
prescription drugs from Canadian and other
non-United
States sources, which have reduced the price received by
pharmaceutical companies for their products.
Different pricing and reimbursement schemes exist in other
countries. In the European Community, governments influence the
price of pharmaceutical products through their pricing and
reimbursement rules and control of national health care systems
that fund a large part of the cost of such products to
consumers. The approach taken varies from member state to member
state. Some jurisdictions permit products to be marketed only
after a reimbursement price has been agreed. Other member states
allow companies to fix their own prices for medicines, but
monitor and control company profits.
In Japan, the National Health Ministry biannually reviews the
pharmaceutical prices of individual products. In the past, these
reviews have resulted in price reductions. In the 2006 biannual
review, the Japanese government reduced the overall drug
reimbursement rates. We expect similar price reviews in the
future, in line with the governments previously announced
plan for controlling health care costs. It is not possible to
predict the outcome of these reviews, and it is possible that
Japanese authorities will again reduce drug reimbursement rates,
which could adversely affect the reimbursement levels for our
products or product candidates.
Executive
Officers
The following table lists our executive officers and their ages
as of March 1, 2008.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Ryuji Ueno, M.D., Ph.D., Ph.D.
|
|
|
54
|
|
|
Chief Executive Officer, Chief Scientific Officer and Director,
Chairman of the Board of Directors
|
Mariam E. Morris
|
|
|
40
|
|
|
Chief Financial Officer and Treasurer
|
Brad E. Fackler
|
|
|
54
|
|
|
Executive Vice President of Commercial Operations
|
Gayle R. Dolecek
|
|
|
65
|
|
|
Senior Vice President of Research and Development
|
Kei S. Tolliver
|
|
|
34
|
|
|
Vice President of Business Development and Company Operations
and Secretary
|
Ryuji
Ueno, M.D., Ph.D., Ph.D. Dr. Ueno
is a founder of our company and has been our Chief Executive
Officer since September 2006 and our Chief Scientific Officer
since August 2004. Dr. Ueno also became the Chairman of our
Board of Directors effective June 1, 2007 following the
resignation of Dr. Kuno from that position. Dr. Ueno
also served as Chief Operating Officer from December 1996 to
November 2000 and again from March 2006 to September 2006 and as
Chief Executive Officer from December 2000 to September 2003.
Dr. Ueno has been a director since 1996 and served as
Chairman of our Board of Directors from December 2000 to
September 2006. Dr. Ueno co-founded our affiliate R-Tech in
September 1989 and served as its President from 1989 to March
2003. Dr. Ueno also co-founded Sucampo AG in December 1997
and served as its Chairman of the Board or Vice Chairman of the
Board since its inception. Dr. Ueno received his M.D. and a
Ph.D. in medical chemistry from Keio
33
University in Japan, and he received a Ph.D. in Pharmacology
from Osaka University. Dr. Ueno is married to Dr. Kuno.
Mariam E. Morris. Ms. Morris has been our
Chief Financial Officer and Treasurer since January 2008 and
served as our Chief Accounting Officer and Treasurer from
January 2007 to December 2007. Ms. Morris served as our
Chief Financial Officer from March 2006 to December 2006 and as
our Director of Finance from February 2004 to March 2006. From
January 2003 to February 2004, she worked as an independent
consultant for AuditWatch, Inc., a training and consultancy firm
for the audit profession. Ms. Morris was a supervising
auditor with the public accounting firm of Snyder, Cohn,
Collyer, Hamilton & Associates, P.C. from
November 2001 to December 2002. Ms. Morris also was a
senior auditor with the public accounting firm of
PricewaterhouseCoopers LLP from September 2000 to October 2001.
Ms. Morris is a certified public accountant and holds a
B.B.A. degree in Accounting from Texas Tech University and a
Masters degree in Taxation from Old Dominion University.
Brad E. Fackler. Mr. Fackler has been our
Executive Vice President of Commercial Operations since
September 2005. From January 2005 to September 2005,
Mr. Fackler was Vice President of The Collaborative Group,
a specialty consultancy firm servicing the pharmaceutical
industry. From September 2004 until January 2005, he was
self-employed. From 1978 to September 2004, Mr. Fackler was
a senior sales executive for Novartis Pharmaceuticals
Corporation. Mr. Fackler holds a Bachelors degree in Life
Science from Otterbein College and an M.B.A. degree from New
York University, Leonard Stern School of Business.
Gayle R. Dolecek. Dr. Dolecek has been
our Senior Vice President of Research and Development since May
2006. From August 1995 to April 2006, he was a Senior Consultant
at AAC Consulting Group, Inc., a provider of regulatory
consulting services to the pharmaceutical industry. Prior to
1995, Dr. Dolecek was an officer with the U.S. Public
Health Service where he served in pharmacy and health service
related positions. He completed his career with the government
in the Food and Drug Administration as Director of Compendial
Operations in the Center for Drug Evaluation and Research.
Dr. Dolecek received his B.S./P.D. in Pharmacy from the
University of Maryland and a M.P.H. in Health Services and
Planning from the University of Hawaii.
Kei S. Tolliver. Ms. Tolliver has been
our Vice President of Business Development and Company
Operations and Secretary since March 2006. From October 2004 to
March 2006, Ms. Tolliver was our Director of Business
Development. Since joining our company in May 1998,
Ms. Tolliver has held a number of positions within the
Sucampo group of affiliated companies, including Director of
Business Development for S&R, a position she has held since
May 2002, supplemental director for Sucampo AG, a position she
has held since September 2004, director of Sucampo Pharma, Ltd.,
a position she has held since July 2004, and General Manager and
director of Sucampo Pharma Europe Ltd., a position she has held
since January 2003. Ms. Tolliver holds a Bachelors degree
in Political Science from West Virginia University.
Employees
As of December 31, 2007, we had 104 full-time
employees, including 32 with doctoral or other advanced degrees.
Of our workforce, 27 employees are engaged in research and
development, 50 are engaged in sales and marketing and 27 are
engaged in business development, legal, finance and
administration. None of our employees are represented by a labor
union or covered by collective bargaining agreements. We have
never experienced a work stoppage and believe our relationship
with our employees is good.
Our Dual
Class Capital Structure
We have two classes of common stock authorized, class A
common stock and class B common stock. Holders of
class A common stock and class B common stock have
identical rights, except that holders of class A common
stock are entitled to one vote per share and holders of
class B common stock are entitled to ten votes per share on
all matters on which stockholders are entitled to vote.
As of March 20, 2008, we have outstanding
15,542,768 shares of class A common stock and
26,191,050 shares of class B common stock. The
class B common stock represents approximately 95% of the
combined voting power of our outstanding common stock. All of
the shares of class B common stock are owned by S&R.
As a result, Drs. Ueno and Kuno will be able to control the
outcome of all matters upon which our stockholders vote,
including
34
the election of directors, amendments to our certificate of
incorporation and mergers or other business combinations.
We are not authorized to issue additional shares of class B
common stock except in limited circumstances, such as a stock
split of both classes of common stock or a stock dividend made
in respect of both classes of common stock. Shares of
class B common stock will automatically be converted into
shares of class A common stock upon transfer, with limited
exceptions for transfers to family trusts. In addition, all
remaining outstanding shares of class B common stock will
automatically be converted into shares of class A common
stock upon the death, legal incompetence or retirement from our
company of both Drs. Ueno and Kuno or at such time as the
number of outstanding shares of class B common stock is
less than 20% of the number of outstanding shares of
class A and class B common stock together.
In this report, we refer to our authorized class A common
stock and class B common stock together as our common stock.
Our
Corporate Information
We were incorporated under the laws of Delaware in December
1996. Our principal executive offices are located at 4520
East-West Highway, Suite 300, Bethesda, Maryland 20814, and
our telephone number is
(301) 961-3400.
In September 2006, we acquired all of the capital stock of two
affiliated European and Asian operating companies, Sucampo
Pharma Europe Ltd., or Sucampo Europe, and Sucampo Pharma, Ltd.,
or Sucampo Japan, that were previously under common control with
us.
Website
Access to U.S. Securities and Exchange Commission
Reports
Our Internet address is
http://www.sucampo.com.
Through our website, we make available, free of charge, access
to all reports filed with the U.S. Securities and Exchange
Commission including our Annual Reports on
Form 10-K,
our Quarterly Reports on
Form 10-Q,
our Current Reports on
Form 8-K
and amendments to these reports, as filed with or furnished to
the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Copies of any
materials we file with, or furnish to, the SEC can also be
obtained free of charge through the SECs website at
http://www.sec.gov
or at the SECs Public Reference Room at
100 F Street, N.E.,Room 1580, Washington, DC
20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
In addition to the other information set forth in this report,
the following factors should be considered carefully in
evaluating our business and our company.
Risks
Related to Our Limited Commercial Operations
Although
we had net income in 2007 and 2006, we have historically
incurred operating losses and we might not achieve or maintain
operating profitability.
We initiated commercial sales of our first product, AMITIZA, for
the treatment of chronic idiopathic constipation in adults in
April 2006, and we first generated product royalty revenue in
the quarter ended June 30, 2006. We have historically
incurred operating losses and, as of December 31, 2007, we
had an accumulated deficit of $10.2 million. Although we
had net income of $13.2 million in 2007 and
$21.8 million in 2006, this was primarily attributable to
our development milestones of $30.0 million and
$20.0 million earned in 2007 and 2006, respectively, which
we recognized as revenue over the development period for
AMITIZA, which was completed in June 2007. Our historical losses
have resulted principally from costs incurred in our research
and development programs and from our general and administrative
expenses. We expect to continue to incur significant and
increasing expenses for at least the next several years as we
continue our research activities and conduct development of, and
seek regulatory approvals for, additional indications for
AMITIZA and for other drug candidates. Whether we are able to
achieve operating profitability in the future will depend upon
our ability to
35
generate revenues that exceed our expenses. Changes in market
conditions, including the failure or approval of competing
products, may require us to incur more expenses or change the
timing of expenses such that we may incur unexpected losses.
Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual
basis. If we are unable to achieve and maintain profitability,
the market value of our class A common stock will decline.
If we
are unable to successfully commercialize our first product,
AMITIZA, for the treatment of chronic idiopathic constipation in
adults or other indications for which we are developing this
drug, including irritable bowel syndrome with constipation, or
experience significant delays in doing so, our ability to
generate product-based revenues and achieve profitability will
be jeopardized.
In the near term, our ability to generate product-based revenues
will depend on the successful commercialization and continued
development of AMITIZA. We recorded our first product royalty
revenue from AMITIZA in the quarter ended June 30, 2006.
The commercial success of AMITIZA will depend on several
factors, including the following:
|
|
|
|
|
the effectiveness of Takedas sales force, as supplemented
by our internal specialty sales force, in marketing and selling
AMITIZA in the United States for the treatment of chronic
idiopathic constipation in adults;
|
|
|
|
the ability of R-Tech, which has the exclusive right to
manufacture and supply AMITIZA, or any substitute manufacturer
to supply quantities sufficient to meet market demand and at
acceptable levels of quality and price;
|
|
|
|
acceptance of the product within the medical community and by
third-party payors;
|
|
|
|
successful completion of clinical trials of AMITIZA for the
treatment of other constipation-related gastrointestinal
indications beyond chronic idiopathic constipation and irritable
bowel syndrome with constipation, and acceptance of the results
of these trials by regulatory authorities; and
|
|
|
|
receipt of marketing approvals from the FDA and similar foreign
regulatory authorities for the treatment of other indications,
including marketing approval in the United States for AMITIZA to
treat irritable bowel syndrome with constipation.
|
If we are not successful in commercializing AMITIZA for the
treatment of chronic idiopathic constipation or other
indications, or are significantly delayed in doing so, our
business will be materially harmed.
We
have limited experience commercializing drug products. If we are
not successful in making the transition from a pre-commercial
stage company to a commercial company, our ability to become
profitable will be compromised.
For most of our operating history, we have been a pre-commercial
stage company. We are in the process of transitioning to a
company capable of supporting commercial activities, and we may
not be successful in accomplishing this transition. Our
operations to date have been limited largely to organizing and
staffing our company, developing prostone technology,
undertaking preclinical and clinical trials of our product
candidates and coordinating the U.S. regulatory approval
process for AMITIZA for the treatment of chronic idiopathic
constipation in adults. To make the transition to a commercial
company, we will need to continue to develop internally, or
contract with third parties to provide us with, the capabilities
to manufacture a commercial scale product and to conduct the
sales and marketing activities necessary for successful product
commercialization. While we are currently utilizing R-Tech to
perform these manufacturing functions and Takeda to perform many
of these sales and marketing functions with respect to the sale
of AMITIZA in the United States, we may nevertheless encounter
unforeseen expenses, difficulties, complications and delays as
we establish these commercial functions for AMITIZA and for
other products for which we may receive regulatory marketing
approval. As we continue to develop and seek regulatory approval
of additional product candidates and additional indications for
AMITIZA, and to pursue regulatory approvals for AMITIZA and
other products outside the United States, it could be difficult
for us to obtain and devote the resources necessary to
successfully manage our commercialization efforts. If we are not
successful in completing our transition to a commercial company,
our ability to become profitable will be jeopardized and the
market price of our class A common stock is likely to
decline.
36
Risks
Related to Employees and Managing Growth
If we
are unable to retain our chief executive and chief scientific
officer and other key executives, we may not be able to
successfully develop and commercialize our
products.
We are highly dependent on Dr. Ryuji Ueno, our chief
executive officer and chief scientific officer, and the other
principal members of our executive and scientific teams,
including Mariam Morris, our chief financial officer, Brad
Fackler, our executive vice president of commercial operations,
Gayle Dolecek, our senior vice president of research and
development, and Kei Tolliver, our vice president of business
development and company operations. The loss of the services of
any of these persons might impede the achievement of our product
development and commercialization objectives and it might be
difficult to recruit a replacement executive for any of their
positions. We have employment agreements with these executives,
but these agreements are terminable by the employees on short or
no notice at any time without penalty to the employee. We do not
maintain key-man life insurance on any of our executives.
If we
fail to attract, retain and motivate qualified personnel, we may
not be able to pursue our product development and
commercialization programs.
Recruiting and retaining qualified scientific and commercial
personnel, including clinical development, regulatory, and
marketing and sales executives and field personnel, will be
critical to our success. If we fail to recruit and then retain
these personnel, our ability to pursue our clinical development
and product commercialization programs will be compromised. We
may not be able to attract and retain these personnel on
acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies for similar
personnel. We also experience competition for the hiring of
scientific personnel from universities and research institutions.
We
expect to expand our development, regulatory, sales and
marketing, and finance and accounting capabilities, and as a
result, we may encounter difficulties in managing our growth,
which could disrupt our operations.
We expect to experience significant growth in the number of our
employees and the scope of our operations, particularly in the
areas of drug development, regulatory affairs, sales and
marketing and finance and accounting. To manage our anticipated
future growth, we must continue to implement and improve our
managerial, operational and financial systems, expand our
facilities, and continue to recruit and train additional
qualified personnel. Due to our limited resources, we may not be
able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. The expansion
of our operations may lead to significant costs and may divert
our management and business development resources. The
challenges of managing our growth will become more significant
as we expand the operations of Sucampo Europe and Sucampo Japan.
Any inability to manage growth could delay the execution of our
business plans or disrupt our operations.
The
requirements of being a public company may strain our resources
and distract management.
We completed our initial public offering in August 2007. As a
public company, we will incur significant legal, accounting,
corporate governance and other expenses that we did not incur as
a private company. We are subject to the requirements of the
Exchange Act, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley,
The NASDAQ Global Market, and other rules and regulations. These
rules and regulations may place a strain on our systems and
resources. The Exchange Act requires, among other things, that
we file annual, quarterly and current reports with respect to
our business and financial condition. Sarbanes-Oxley requires,
among other things, that we maintain effective disclosure
controls and procedures and internal control over financial
reporting. The first time that we and our external auditors will
be required to issue a report on the design and operating
effectiveness of our internal controls over financial reporting
will be as of December 31, 2008. We currently do not have
an internal audit group. In order to maintain and improve the
effectiveness of our disclosure controls and procedures and
internal controls over financial reporting, we will need to
devote significant resources and management oversight. As a
result, managements attention may be diverted from other
business concerns. In addition, we will need to hire additional
accounting staff with appropriate public company experience and
technical accounting knowledge and we cannot assure you that we
will be able to do so in a timely fashion.
37
The rules and regulations applicable to us as a public company
may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required
to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board
of directors or as executive officers.
We may
experience material weaknesses in our internal controls over
financial reporting, which could result in delays of our public
filings and be costly to correct.
We have in the past identified material weaknesses in our
internal controls over financial reporting. Although we have
remediated these material weaknesses, if we identify other
material weaknesses in the future and are unable to remediate
them, we may not be able to accurately and timely report our
financial position, results of operations or cash flows as a
public company. Becoming subject to the public reporting
requirements of the Securities Exchange Act upon the completion
of the initial public offering intensified the need for us to
report our financial position, results of operations and cash
flows on an accurate and timely basis. If we are not able to
prepare complete and accurate financial statements on a timely
basis, this could result in delays in our public filings and
ultimately delisting of our class A common stock from its
principal trading market.
Risks
Related to Product Development and Commercialization
Commercial
rights to some prostone compounds will revert back to Sucampo AG
in the future unless we devote sufficient development resources
to those compounds during the next several years; if any of the
compounds that revert back to Sucampo AG subsequently become
valuable compounds, we will have lost the commercial rights to
those compounds and will not be able to develop or market them,
and the reverted compounds could ultimately compete with
compounds we are developing or marketing.
Sucampo AG has granted to us an exclusive worldwide license to
develop and commercialize products based upon Sucampo AGs
extensive portfolio of U.S. and foreign patents and patent
applications relating to prostone technology. To retain our
license rights to any prostone compounds other than AMITIZA,
cobiprostone and
SPI-017,
which are perpetual, we are required to perform preclinical
testing over a specified period on those compounds and to
generate specified pharmacological and toxicity data. The
specified period ends on the later of June 30, 2011 or the
date upon which Drs. Ueno and Kuno no longer control our
company. For purposes of this agreement, Drs. Ueno and Kuno
will be deemed to control our company as long as either they
together own a majority of the voting power of our stock or at
least one of them is a member of our board of directors.
Following the end of the specified period, Sucampo AG can
terminate our license with respect to any compounds as to which
we have not performed the required testing, except for any
compounds we designate as compounds for which we intend in good
faith to perform the required testing within 15 months
following the expiration of the specified period. At the end of
that
15-month
period, Sucampo AG may terminate our license as to any of the
designated compounds for which we have not performed the
required testing. Dr. Ueno and his wife, Dr. Kuno,
indirectly own all the stock of Sucampo AG.
We will need to focus our development resources and funding on a
limited number of compounds during the specified period. The
decision whether to commit development resources to a particular
compound will require us to determine which compounds have the
greatest likelihood of commercial success. Dr. Ueno and his
staff will be instrumental in making these decisions on our
behalf, although to assist in this determination, we have formed
a selection committee consisting of certain members of
management that exclude Drs. Ueno and Kuno. In this
process, we will likely commit resources to some compounds that
do not prove to be commercially feasible and we may overlook
other compounds that later prove to have significant commercial
potential. If we do not identify and commit resources to one of
these valuable compounds, the commercial rights with respect to
the compound will eventually revert back to Sucampo AG. After
the reversion of these rights to Sucampo AG, we will have no
ability to develop or commercialize the compound. Although
Sucampo AG will be prohibited from developing products that
compete with our products prior to the end of the specified
period, thereafter they will be free to develop competitive
products. In addition, although Sucampo AG will be prohibited
from marketing products that compete with our products for
24 months after the end of the specified period, after that
date Sucampo AG will be permitted to market products, including
products covered by the reverted license rights, in competition
with us.
38
If our
preclinical studies do not produce successful results or if our
clinical trials do not demonstrate safety and efficacy in
humans, our ability to develop additional indications for
AMITIZA and to develop and commercialize other product
candidates will be impaired.
Before obtaining regulatory approval for the sale of our product
candidates, we must conduct extensive preclinical tests and
clinical trials to demonstrate the safety and efficacy in humans
of our product candidates. Preclinical and clinical testing is
expensive, is difficult to design and implement, can take many
years to complete and is uncertain as to outcome. Success in
preclinical testing and early clinical trials does not ensure
that later clinical trials will be successful, and interim
results of a clinical trial do not necessarily predict final
results. A failure of one or more of our clinical trials can
occur at any stage of testing. We may experience numerous
unforeseen events during, or as a result of, preclinical testing
and the clinical trial process that could delay or prevent our
ability to receive regulatory approval or commercialize our
product candidates, including:
|
|
|
|
|
regulators or institutional review boards may not authorize us
to commence a clinical trial or conduct a clinical trial at a
prospective trial site;
|
|
|
|
our preclinical tests or clinical trials may produce negative or
inconclusive results, and as a result we may decide, or
regulators may require us, to conduct additional preclinical
testing or clinical trials or we may abandon projects that we
consider to be promising. For example, the efficacy results in
two of our Phase II trials of cobiprostone, specifically
the trials for the treatment of non-alcoholic fatty liver
disease and for the treatment of symptoms associated with cystic
fibrosis, were inconclusive. Therefore, further clinical testing
will be required in connection with the development of this
compound for these indications;
|
|
|
|
design of or enrollment in our clinical trials may be slower
than we currently anticipate, resulting in significant delays,
or participants may drop out of our clinical trials at rates
that are higher than we currently anticipate;
|
|
|
|
we might have to suspend or terminate our clinical trials, or
perform additional trials, if we discover that the participating
patients are being exposed to unacceptable health risks;
|
|
|
|
regulators or institutional review boards may require that we
hold, suspend or terminate clinical research for various
reasons, including noncompliance with regulatory requirements;
|
|
|
|
the cost of our clinical trials may be greater than we currently
anticipate;
|
|
|
|
we might have difficulty obtaining sufficient quantities of the
product candidate being tested to complete our clinical trials;
|
|
|
|
any regulatory approval we ultimately obtain may be limited or
subject to restrictions or post-approval commitments that render
the product not commercially viable; and
|
|
|
|
the effects of our product candidates may not be the desired or
anticipated effects or may include undesirable side effects, or
the product candidates may have other unexpected
characteristics. For example, in preclinical tests of AMITIZA,
the drug demonstrated a potential to cause fetal loss in guinea
pigs and, as a result, its label includes cautionary language as
to its use by pregnant women.
|
If we are required to conduct additional clinical trials or
other testing of our product candidates beyond those that we
currently contemplate, if we are unable to successfully complete
our clinical trials or other testing or if the results of these
trials or tests are not positive or are only modestly positive,
we may:
|
|
|
|
|
be delayed in obtaining marketing approval for our product
candidates;
|
|
|
|
not be able to obtain marketing approval; or
|
|
|
|
obtain approval for indications that are not as broad as those
for which we apply.
|
Our product development costs will also increase if we
experience delays in testing or approvals. We do not know
whether our clinical trials will begin as planned, will need to
be restructured or will be completed on schedule, if at all.
Significant clinical trial delays also could allow our
competitors to bring products to market before we do and impair
our ability to commercialize our products or product candidates.
39
We are
required to conduct supplemental post-marketing clinical trials
of AMITIZA and we may elect to perform additional clinical
trials for other indications or in support of applications for
regulatory marketing approval in jurisdictions outside the
United States. These supplemental trials could be costly and
could result in findings inconsistent with or contrary to our
historic U.S. clinical trials.
In connection with our marketing approval for AMITIZA for the
treatment of chronic idiopathic constipation in adults, we
committed to the FDA to conduct post-marketing studies of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. In the future, we may
be required, or we may elect, to conduct additional clinical
trials of AMITIZA. In addition, if we seek marketing approval
from regulatory authorities in jurisdictions outside the United
States, such as the European Medicines Agency, or EMEA, they may
require us to submit data from supplemental clinical trials in
addition to data from the clinical trials that supported our
U.S. filings with the FDA. Any requirements to conduct
supplemental trials would add to the cost of developing our
product candidates. Additional or supplemental trials could also
produce findings that are inconsistent with the trial results we
have previously submitted to the FDA, in which case we would be
obligated to report those findings to the FDA. This could result
in new restrictions on AMITIZAs existing marketing
approval for chronic idiopathic constipation in adults or could
force us to stop selling AMITIZA altogether. Inconsistent trial
results could also lead to delays in obtaining marketing
approval in the United States for other indications for AMITIZA
or for other product candidates, could cause regulators to
impose restrictive conditions on marketing approvals and could
even make it impossible for us to obtain marketing approval. Any
of these results could materially impair our ability to generate
revenues and to achieve or maintain profitability.
If we
are unable to establish sales and marketing capabilities or
successfully use third parties to market and sell our products,
we may be unable to generate sufficient product revenues to
become profitable.
We currently have limited sales and distribution capabilities
and little experience in marketing and selling pharmaceutical
products. To achieve commercial success for AMITIZA and any
other approved products, we must either further develop our
internal sales and marketing organization or continue to
outsource these functions to third parties. There are risks
associated with either of these alternatives. For example,
expanding a sales force would be expensive and time consuming
and could delay any product launch. If the commercial launch of
a product for which we recruit a sales force and establish
marketing capabilities were delayed, we would incur related
expenses too early relative to the product launch. This may be
costly, and our investment would be lost if we could not retain
our sales and marketing personnel.
We have entered into a joint collaboration and license agreement
with Takeda for the commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada.
Takeda will broadly market AMITIZA for the treatment of chronic
idiopathic constipation in adults and for other
constipation-related gastrointestinal indications, if approved,
to office-based specialty physicians and primary care physicians
in the United States. The Takeda sales force dedicated to
selling AMITIZA will be significantly larger than our internal
sales force, and we will therefore be heavily dependent on the
marketing and sales efforts of Takeda. If our internal sales
force is not effective, or if Takeda is less successful in
selling AMITIZA than we anticipate, our ability to generate
revenues and achieve profitability will be significantly
compromised.
We
face substantial competition which may result in others
discovering, developing or commercializing products earlier or
more successfully than we do.
The development and commercialization of pharmaceutical products
is highly competitive. We expect to face intense competition
with respect to AMITIZA and our other product candidates from
major pharmaceutical companies, specialty pharmaceutical
companies and biotechnology companies worldwide. Potential
competitors also include academic institutions, government
agencies, and other public and private research organizations
that conduct research, seek patent protection and establish
collaborative arrangements for research, development,
manufacturing and commercialization. Our competitors may develop
products that are safer, more effective, have fewer side
effects, are more convenient or are less costly than AMITIZA or
the other product candidates that we are developing or that
would render AMITIZA or our other product candidates obsolete or
uncompetitive. Our competitors may also obtain FDA or other
regulatory approval for their products more rapidly than we may
obtain approval for ours or achieve product commercialization
before we do. A competitive product might become more
40
popular if it is approved for sale over the counter. If any of
our competitors develops a product that is more effective, safer
or more convenient for patients, or is able to obtain FDA
approval for commercialization before we do, we may not be able
to achieve market acceptance for our products, which would
impair our ability to generate revenues and recover the
substantial developments costs we have incurred and will
continue to incur.
There are currently approved therapies for the diseases and
conditions addressed by AMITIZA. For example,
Zelnorm®,
which is marketed by Novartis, has been approved both for the
treatment of chronic idiopathic constipation in adults under
65 years of age and for the short-term treatment of
irritable bowel syndrome with constipation in women. In March
2007, Zelnorm was withdrawn from the U.S. market by
Novartis at the request of the FDA, but may continue to be sold
in other countries and may be acquired for use by individuals in
the United States and in other markets. In July 2007, the FDA
granted Zelnorm a limited treatment IND, allowing for restricted
use of Zelnorm for patients whose physicians determine the drug
is medically necessary. Zelnorm remains off the market for
general use. In addition, the osmotic laxatives
MiraLaxtm
(polyethylene glycol 3350), which is marketed by Braintree
Laboratories, Inc., and lactulose, which is produced by Solvay
S.A., have each been approved for the short-term treatment of
occasional constipation. Miralax was recently approved for sale
as an
over-the-counter
treatment.
Several companies also are working to develop new drugs and
other therapies for these same diseases and conditions. Some of
these potential competitive drug products include:
|
|
|
|
|
Drugs targeting serotonin receptors for the treatment of
irritable bowel syndrome with constipation, such as Renzapride,
being developed by Alizyme plc and currently in Phase III
clinical trials, DDP733, being developed by Dynogen
Pharmaceuticals, Inc. and currently in Phase II clinical
trials, and Linaclotide, being developed by Microbia, Inc. and
currently in Phase II clinical trials;
|
|
|
|
Opioid antagonists such as methylnaltrexone, being developed by
Progenics Pharmaceuticals, Inc., for the treatment of
opioid-induced bowel dysfunction. Progenics and its partner
Wyeth Pharmaceuticals recently filed an NDA with the FDA for a
subcutaneous formulation of this drug for the treatment of
opioid-induced bowel dysfunction in patients receiving
palliative care; and
|
|
|
|
TD-5108, being developed by Theravance, Inc. for the treatment
of chronic constipation, and linaclotide, being developed by
Microbia, Inc. for the treatment of irritable bowel syndrome
with constipation, both of which have recently completed
phase II clinical trials.
|
Many patients are treated for chronic idiopathic constipation
with competing
over-the-counter
products that are sold for occasional or infrequent use or for
recurring use and that are directly competitive with our
products.
We face similar competition from approved therapies and
potential drug products for the diseases and conditions
addressed by cobiprostone and SPI-017, and are likely to face
significant competition for any other product candidates we may
elect to develop in the future.
Many of our competitors may have significantly greater financial
resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals, and marketing approved products
than we do. Smaller or early stage companies may also prove to
be significant competitors, particularly through collaborative
arrangements with large and established companies.
The
commercial success of AMITIZA and any other products that we may
develop will depend upon the degree of market acceptance by
physicians, patients, healthcare payors and others in the
medical community.
AMITIZA and any other products that we bring to the market may
not gain acceptance by physicians, patients, healthcare payors
and others in the medical community. If these products do not
achieve an adequate level of acceptance, we may not generate
sufficient product revenues to become profitable. The degree of
market acceptance of AMITIZA and any other products approved for
commercial sale will depend on a number of factors, including:
|
|
|
|
|
the prevalence and severity of any side effects. For example,
the most common side effects reported by participants in our
clinical trials of AMITIZA for the treatment of chronic
idiopathic constipation were
|
41
nausea, which was reported by 31% of trial participants, and
diarrhea and headache, both of which were reported by 13% of
trial participants;
|
|
|
|
|
the efficacy and potential advantages over alternative
treatments;
|
|
|
|
the competitiveness of the pricing of our products;
|
|
|
|
relative convenience and ease of administration of our products
compared to other alternatives;
|
|
|
|
the timing of the release of our products to the public compared
to alternative products or treatments;
|
|
|
|
the willingness of the target patient population to try new
therapies and of physicians to prescribe these therapies;
|
|
|
|
the strength of marketing and distribution support; and
|
|
|
|
the level of third-party coverage or reimbursement.
|
The recent withdrawal of Zelnorm from the U.S. market might
adversely affect market acceptance of AMITIZA. The FDA requested
that Novartis discontinue marketing Zelnorm based on an
identified finding of an increased risk of serious
cardiovascular adverse events associated with use of the drug.
Although the mechanism of action of AMITIZA is different from
that of Zelnorm, and although AMITIZA has not been associated
with serious adverse cardiovascular events, nonetheless the
withdrawal of Zelnorm may result in heightened concerns in the
minds of some patients or physicians about the safety of using
alternative treatments such as AMITIZA.
In addition, Adolor Corporation, the developer of an opioid
antagonist,
Entereg®
(alvimopan), for the treatment of opioid-induced bowel
dysfunction, recently announced that it was withdrawing its
protocol for an additional Phase III clinical trial of
Entereg to treat this condition, which had previously been filed
with the FDA. This decision was reportedly based upon
preliminary Phase III trial safety results that suggest
potential links between use of Entereg and adverse
cardiovascular events, tumor development and bone fractures. It
is possible that this development, coming so shortly after the
withdrawal of Zelnorm, could further confuse patients and
physicians and lead to reluctance on their part to use and to
prescribe new drugs to treat gastrointestinal conditions, even
those with different mechanisms of action such as AMITIZA.
If we
are unable to obtain adequate reimbursement from third-party
payors for AMITIZA and any other products that we may develop,
or acceptable prices for those products, our revenues and
prospects for profitability will suffer.
Our revenues and ability to become profitable will depend
heavily upon the availability of adequate reimbursement for the
use of our products from governmental and other third party
payors, both in the United States and in foreign markets.
Reimbursement by a third-party payor may depend upon a number of
factors, including the third-party payors determination
that use of a product is:
|
|
|
|
|
a covered benefit under its health plan;
|
|
|
|
safe, effective and medically necessary;
|
|
|
|
appropriate for the specific patient;
|
|
|
|
cost effective; and
|
|
|
|
neither experimental nor investigational.
|
Obtaining reimbursement approval for a product from each
government or other third-party payor is a time-consuming and
costly process that could require us to provide supporting
scientific, clinical and cost-effectiveness data for the use of
our products to each payor. We may not be able to provide data
sufficient to gain acceptance with respect to reimbursement.
Even when a payor determines that a product is eligible for
reimbursement, the payor may impose coverage limitations that
preclude payment for some product uses that are approved by the
FDA or comparable authorities. Moreover, eligibility for
coverage does not imply that any product will be reimbursed in
all cases or at a rate that allows us to make a profit or even
cover our costs. If we are not able to obtain coverage and
42
profitable reimbursement promptly from government-funded and
private third-party payors for our products, our ability to
generate revenues and become profitable will be compromised.
Recent
federal legislation will increase the pressure to reduce prices
of prescription drugs paid for by Medicare, which could limit
our ability to generate revenues.
In 2003, the United States government enacted legislation
providing a partial prescription drug benefit for Medicare
recipients, which became effective at the beginning of 2006.
Government payment for some of the costs of prescription drugs
may increase demand for any products for which we receive
marketing approval. However, to obtain payments under this
program, we will be required to sell products to Medicare
recipients through drug procurement organizations operating
pursuant to this legislation. These organizations will negotiate
prices for our products, which are likely to be lower than those
we might otherwise obtain. Federal, state and local governments
in the United States continue to consider legislation to limit
the growth of healthcare costs, including the cost of
prescription drugs. Future legislation could limit payments for
pharmaceuticals such as AMITIZA and the other product candidates
that we are developing.
Legislation
has been proposed from time to time that would permit
re-importation of drugs from foreign countries into the United
States, including foreign countries where the drugs are sold at
lower prices than in the United States, which could force us to
lower the prices at which we sell our products and impair our
ability to derive revenues from these products.
Legislation has been introduced from time to time in the
U.S. Congress that would permit more widespread
re-importation of drugs from foreign countries into the United
States. This could include re-importation from foreign countries
where the drugs are sold at lower prices than in the United
States. Such legislation, or similar regulatory changes, could
lead to a decrease in the price we receive for any approved
products, which, in turn, could impair our ability to generate
revenues. Alternatively, in response to legislation such as
this, we might elect not to seek approval for or market our
products in foreign jurisdictions in order to minimize the risk
of re-importation, which could also reduce the revenue we
generate from our product sales.
Foreign
governments tend to impose strict price controls, which may
limit our ability to generate revenues.
In some foreign countries, particularly Japan and the countries
of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take considerable time after the receipt of marketing
approval for a product. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a
clinical trial that compares the cost-effectiveness of our
products to other available therapies. If reimbursement of our
products is unavailable in particular countries or limited in
scope or amount, or if pricing is set at unsatisfactory levels,
our ability to generate revenue and profitably distribute
products in these countries could be compromised.
If
product liability lawsuits are brought against us, we may incur
substantial liabilities and may be required to limit
commercialization of any products that we may
develop.
We face an inherent risk of product liability exposure, both
from the testing of our product candidates in human clinical
trials and from the sale of AMITIZA and any other drugs we may
sell in the future. If we cannot successfully defend ourselves
against claims that our products or product candidates caused
injuries, we will incur substantial liabilities. Regardless of
merit or eventual outcome, product liability claims may result
in:
|
|
|
|
|
decreased demand for AMITIZA or any other product that we may
develop;
|
|
|
|
injury to our reputation;
|
|
|
|
withdrawal of clinical trial participants;
|
|
|
|
costs to defend the related litigation;
|
|
|
|
substantial monetary awards to trial participants or patients;
|
43
|
|
|
|
|
loss of revenue; and
|
|
|
|
the inability to continue to commercialize AMITIZA or to
commercialize any other product that we may develop.
|
We currently have product liability insurance that covers our
clinical trials in adult patients and our commercial sales of
AMITIZA up to an annual aggregate limit of $20.0 million
and that covers our clinical trials of AMITIZA in pediatric
patients up to an annual aggregate limit of $5.0 million,
in each case subject to a per claim deductible. The amount or
scope of our product liability insurance may not be adequate to
cover all liabilities that we may incur. Insurance coverage is
increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost, and we may not be able to obtain
insurance coverage that will be adequate to cover any liability
that may arise. We may not have sufficient resources to pay for
any liabilities resulting from a claim beyond the limits of our
insurance coverage. If we cannot protect against product
liability claims, we or our collaborators may find it difficult
or impossible to commercialize our products.
Our
strategy of generating growth through acquisitions and
in-licenses may not be successful if we are not able to identify
suitable acquisition or licensing candidates, to negotiate the
terms of any such transaction or to successfully manage the
integration of any acquisition.
As part of our business strategy, we intend to pursue strategic
acquisitions and in-licensing opportunities with third parties
to complement our existing product pipeline. We have no
experience in completing acquisitions with third parties to date
and we may not be able to identify appropriate acquisition or
licensing candidates or to successfully negotiate the terms of
any such transaction. The licensing and acquisition of
pharmaceutical and biological products is a competitive area. A
number of more established companies are also pursuing
strategies to license or acquire products in the pharmaceutical
field, and they may have a competitive advantage over us due to
their size, cash resources and greater clinical development and
commercialization capabilities. If we are unable to successfully
complete acquisitions or in-licensing transactions for suitable
products and product candidates, our prospects for growth could
suffer.
Even if we are successful in completing one or more
acquisitions, the failure to adequately address the financial,
operational or legal risks of these transactions could harm our
business. To finance an acquisition, we could be required to use
our cash resources, issue potentially dilutive equity securities
or incur or assume debt or contingent liabilities. Accounting
for acquisitions can require impairment losses or restructuring
charges, large write-offs of in-process research and development
expense and ongoing amortization expenses related to other
intangible assets. In addition, integrating acquisitions can be
difficult, and could disrupt our business and divert management
resources. If we are unable to manage the integration of any
acquisitions successfully, our ability to develop new products
and continue to expand our product pipeline may be impaired.
We may
need substantial additional funding and be unable to raise
capital when needed, which could force us to delay, reduce or
abandon our commercialization efforts or product development
programs.
We expect to incur significant commercialization expenses for
product sales, marketing, manufacturing and distribution of
AMITIZA. In addition, we expect our research and development
expenses to increase in connection with our ongoing activities.
We may need substantial additional funding and be unable to
raise capital when needed or on attractive terms, which would
force us to delay, reduce or abandon our commercialization
efforts or development programs.
We have financed our operations and internal growth principally
through private placements and a public offering of equity
securities, payments received under our collaboration agreement
with Takeda and milestone and other payments from Sucampo AG and
R-Tech. We believe that our existing cash and cash equivalents
and internally generated funds that we anticipate from AMITIZA
product sales, will be sufficient to enable us to fund our
operating expenses for the foreseeable future. Our future
funding requirements, however, will depend on many factors,
including:
|
|
|
|
|
actual levels of AMITIZA product sales;
|
|
|
|
the cost of commercialization activities, including product
marketing, sales and distribution;
|
44
|
|
|
|
|
the scope and results of our research, preclinical and clinical
development activities;
|
|
|
|
the timing of, and the costs involved in, obtaining regulatory
approvals;
|
|
|
|
the costs involved in obtaining and maintaining proprietary
protection for our products, technology and know-how, including
litigation costs and the results of such litigation;
|
|
|
|
our ability to recruit and retain internal staff resources to
conduct these activities;
|
|
|
|
the extent to which we acquire or invest in businesses, products
and technologies;
|
|
|
|
the success of our collaboration with Takeda; and
|
|
|
|
our ability to establish and maintain additional collaborations.
|
If we are required to raise additional funds from external
sources, we might accomplish this through public or private
equity offerings, debt financings or corporate collaboration and
licensing arrangements. If we raise additional funds by issuing
equity securities, current stockholders may experience dilution.
Debt financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take
specific actions, such as incurring additional debt, making
capital expenditures or declaring dividends. If we raise
additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to
relinquish valuable rights and related intellectual property to
our technologies, research programs, products or product
candidates.
Risks
Related to Our Dependence on Third Parties, Including Related
Parties
We
have no manufacturing capabilities and are dependent upon R-Tech
to manufacture and supply us with our product and product
candidates. If R-Tech does not manufacture AMITIZA or our other
product candidates in sufficient quantities, at acceptable
quality levels and at acceptable cost and if we are unable to
identify a suitable replacement manufacturer, our sales of
AMITIZA and our further clinical development and
commercialization of other products could be delayed, prevented
or impaired.
We do not own or operate manufacturing facilities and have
little experience in manufacturing pharmaceutical products. We
currently rely, and expect to continue to rely, exclusively on
R-Tech to supply Takeda and us with AMITIZA, cobiprostone and
SPI-017 and any future prostone compounds that we may determine
to develop or commercialize. We have granted R-Tech the
exclusive right to manufacture and supply AMITIZA to meet our
commercial and clinical requirements in the Americas, Europe,
the Middle East and Africa until 2026, and we do not have an
alternative source of supply for AMITIZA in these or any other
territories. We also do not have an alternative source of supply
for cobiprostone or SPI-017, which R-Tech manufactures and
supplies to us. If R-Tech is not able to supply AMITIZA or these
other compounds on a timely basis, in sufficient quantities and
at acceptable levels of quality and price and if we are unable
to identify a replacement manufacturer to perform these
functions on acceptable terms, sales of AMITIZA would be
significantly impaired and our development programs could be
seriously jeopardized. In addition, we currently do not have a
manufacture or supply arrangement for the supply of AMITIZA in
Asia. Our ability to market and sell AMITIZA in Asia also would
be significantly impaired if we are unable to enter into a
supply and manufacture arrangement with R-Tech or another
suitable manufacturer for the supply of AMITIZA in that
territory.
The risks of relying solely on R-Tech for the manufacture of our
products include:
|
|
|
|
|
we rely solely on R-Tech for quality assurance and their
continued compliance with regulations relating to the
manufacture of pharmaceuticals;
|
|
|
|
R-Techs manufacturing capacity may not be sufficient to
produce commercial quantities of our product, or to keep up with
subsequent increases in the quantities necessary to meet
potentially growing demand;
|
|
|
|
R-Tech may not have access to the capital necessary to expand
its manufacturing facilities in response to our needs;
|
45
|
|
|
|
|
in light of the complexity of the manufacturing process for
prostones, if R-Tech were to cease conducting business, or if
its operations were to be interrupted, it would be difficult and
time consuming for us to find a replacement supplier and the
change would need to be submitted to and approved by the FDA;
|
|
|
|
R-Tech has substantial proprietary know-how relating to the
manufacture of prostones and, in the event we must find a
replacement or supplemental manufacturer or we elect to contract
with another manufacturer to supply us with products other than
AMITIZA, we would need to transfer this know-how to the new
manufacturer, a process that could be both time consuming and
expensive to complete;
|
|
|
|
R-Tech may experience events, such as a fire or natural
disaster, that force it to stop or curtail production for an
extended period; and
|
|
|
|
R-Tech could encounter significant increases in labor, capital
or other costs that would make it difficult for R-Tech to
produce our products cost-effectively.
|
In addition, R-Tech currently uses one supplier for the primary
ingredient used in the manufacture of prostones. R-Tech could
experience delays in production should it become necessary to
switch its source of supply for this ingredient to another
supplier or to manufacture the ingredient itself.
Our current and anticipated future dependence upon R-Tech for
the manufacture of our products and product candidates may
adversely affect our future revenues, our cost structure and our
ability to develop product candidates and commercialize any
approved products on a timely and competitive basis. In
addition, if R-Tech should cease to manufacture prostones for
our clinical trials for any reason, we likely would experience
delays in advancing these trials while we seek to identify and
qualify replacement suppliers. We may be unable to obtain
replacement supplies on a timely basis, on terms that are
favorable to us or at all.
We and
R-Tech are dependent upon a single contract manufacturer to
complete the final stage of manufacture of
AMITIZA.
R-Tech has subcontracted with a single contract manufacturer to
encapsulate the bulk form AMITIZA supplied by R-Tech into
gelatin capsules and to package the final product for
distribution in the United States. If this subcontractor
experiences difficulties or delays in performing these services
for any reason, our ability to deliver adequate supplies of
finished product to physicians and patients will be impaired
during the period in which R-Tech seeks a replacement
manufacturer, which could cause us to lose revenues. In
addition, any change in the party providing encapsulation of
AMITIZA would need to be approved by the FDA, and any change in
the party packaging the product would need to be submitted to
and reviewed by the FDA, which could increase the time required
to replace this subcontractor should that become necessary.
R-Tech
and any other third-party manufacturer of our products and
product candidates are subject to significant regulations
governing manufacturing facilities and procedures.
R-Tech, R-Techs subcontractors and suppliers and any other
potential manufacturer of our products or product candidates may
not be able to comply with the FDAs cGMP regulations,
other U.S. regulations or similar regulatory requirements
in force outside the United States. These regulations govern
manufacturing processes and procedures and the implementation
and operation of systems to control and assure the quality of
products approved for sale. In addition, the FDA or other
regulatory agencies outside the United States may at any time
audit or inspect a manufacturing facility to ensure compliance
with cGMP or similar regulations. Our failure, or the failure of
R-Tech, R-Techs subcontractors and suppliers or any other
third-party manufacturer we use, to comply with applicable
manufacturing regulations could result in sanctions being
imposed on us, including fines, injunctions, civil penalties,
failure of regulatory authorities to grant marketing approval of
our product candidates, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of product
candidates or products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely
affect supplies of our products and product candidates.
If it were to become necessary for us to replace R-Tech as
contract manufacturer of our product and product candidates, we
would compete with other products for access to appropriate
manufacturing facilities and the change
46
would need to be submitted to and approved by the FDA. Among
manufacturers that operate under cGMP regulations, there are a
limited number that would be both capable of manufacturing for
us and willing to do so.
We
depend significantly on our collaboration with Takeda, and may
depend in the future on collaborations with other third parties,
to develop and commercialize our product
candidates.
A key element of our business strategy is to collaborate where
appropriate with third parties, particularly leading
pharmaceutical companies, to develop, commercialize and market
our products and product candidates. We are currently party to a
16-year
joint collaboration and license agreement with Takeda for the
development and commercialization of AMITIZA for
gastrointestinal indications in the United States and Canada.
Our agreement with Takeda provides that it may be terminated by
either party if we fail to receive marketing approval from the
FDA for AMITIZA for the treatment of irritable bowel syndrome
with constipation and if we and Takeda do not thereafter agree
on an alternative development and commercialization strategy. If
Takeda were to terminate the agreement under these conditions,
we would likely realize significantly lower revenues from sales
of AMITIZA for the treatment of chronic idiopathic constipation
until we could find a replacement marketing organization or
develop our own, and our ability to continue our development
program for AMITIZA for other gastrointestinal indications could
be seriously compromised. In addition, if we fail to receive
marketing approval from the FDA for this indication, we might
not receive up to $60.0 million of development milestone
payments that Takeda is obligated to pay us upon our achievement
of future regulatory milestones relating to AMITIZA. We also
might not receive up to $50.0 million of commercial
milestone payments that Takeda is obligated to pay us upon the
achievement of specified targets for annual net sales revenue
from AMITIZA in the United States and Canada.
The success of our collaboration arrangement will depend heavily
on the efforts and activities of Takeda. The risks that we face
in connection with this collaboration, and that we anticipate
being subject to in any future collaborations, include the
following:
|
|
|
|
|
our joint collaboration agreement with Takeda is, and any future
collaboration agreements that we may enter into are likely to
be, subject to termination under various circumstances;
|
|
|
|
Takeda and other future collaborators may develop and
commercialize, either alone or with others, products and
services that are similar to or competitive with the products
that are the subject of the collaboration with us;
|
|
|
|
Takeda and other future collaborators may underfund or not
commit sufficient resources to the testing, marketing,
distribution or other development of our products or may use
committed resources inefficiently;
|
|
|
|
Takeda and other future collaborators may not properly maintain
or defend our intellectual property rights or may utilize our
proprietary information in such a way as to invite litigation
that could jeopardize or invalidate our proprietary information
or expose us to potential liability; and
|
|
|
|
Takeda and other future collaborators may change the focus of
their development and commercialization efforts. Pharmaceutical
and biotechnology companies historically have re-evaluated their
priorities from time to time, including following mergers and
consolidations, which have been common in recent years in these
industries.
|
The ability of our products and product candidates to reach
their potential could be limited if Takeda or any other future
collaborators decrease or fail to increase spending relating to
such products, fail to dedicate sufficient resources to
promoting our products or change their business focus.
Because
we rely upon third parties to provide the sales representatives
marketing AMITIZA, we may face increased risks arising from
their misconduct or improper activities, which would harm our
business.
Because we will have only limited capacity to monitor the sales
efforts of Takedas sales force, we may be exposed to
increased risks arising from any misconduct or improper
activities of these sales representatives, including the
potential off-label promotion of our products or their failure
to adhere to standard requirements in connection with product
promotion. In addition, we will be exposed to similar risks
arising from our previous use of Ventivs employees to
market AMITIZA. Although we amended our agreement with Ventiv
and ceased to use Ventivs employees effective July 1,
2007, any misconduct or inappropriate activities by Ventiv
employees prior to
47
termination could create future liabilities for us, and any
misconduct or inappropriate activities might not come to light
for an extended period after the termination. Any such improper
activities could hurt our reputation, cause us to become subject
to significant liabilities and otherwise harm our business.
We may
not be successful in establishing additional collaborations,
which could compromise our ability to develop and commercialize
products.
If we are unable to reach new agreements with suitable
collaborators, we may fail to meet our business objectives for
the affected product or program. We face significant competition
in seeking appropriate collaborators. Moreover, these
collaboration arrangements are complex and time-consuming to
negotiate and document. We may not be successful in our efforts
to establish additional collaborations or other alternative
arrangements. The terms of any additional collaborations or
other arrangements that we establish may not be as favorable to
us as we anticipate. Moreover, these collaborations or other
arrangements may not be successful.
We
rely on third parties to conduct our clinical trials and those
third parties may not perform satisfactorily or may fail to meet
established deadlines for the completion of these
trials.
We generally do not have the independent ability to conduct
clinical trials for our product candidates. We rely on third
parties, such as contract research organizations, clinical data
management organizations, medical institutions, and clinical
investigators, to perform this function. For example,
approximately 130 separate clinical investigators participated
in our trials for irritable bowel syndrome with constipation. We
use multiple contract research organizations to coordinate the
efforts of our clinical investigators and to accumulate the
results of our trials. Our reliance on these third parties for
clinical development activities reduces our control over these
activities. Furthermore, these third parties may also have
relationships with other entities, some of which may be our
competitors. If these third parties do not carry out their
contractual duties or meet expected deadlines, we will be
delayed in obtaining, or may not be able to obtain, regulatory
approvals for our product candidates and will be delayed in our
efforts to, or may not be able to, successfully commercialize
our product candidates.
In addition, we are responsible for ensuring that each of our
clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. The FDA
requires us to comply with standards, commonly referred to as
good clinical practices, for conducting and recording and
reporting the results of clinical trials to assure that data and
reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are
protected. Our reliance on third parties that we do not control
does not relieve us of these responsibilities and requirements.
Conflicts
of interest may arise between Sucampo AG or R-Tech and us, and
these conflicts might ultimately be resolved in a manner
unfavorable to us.
Our founders, Dr. Sachiko Kuno and Dr. Ryuji Ueno,
together wholly own Sucampo AG and own a majority of the stock
of R-Tech. Drs. Kuno and Ueno are married to each other.
Ownership interests of our founders in the stock of R-Tech or
Sucampo AG, and Dr. Uenos service as a director and
executive officer of our company, could give rise to conflicts
of interest when faced with a decision that could favor the
interests of one of the affiliated companies over another. In
addition, conflicts of interest may arise with respect to
existing or possible future commercial arrangements between us
and R-Tech or Sucampo AG in which the terms and conditions of
the arrangements are subject to negotiation or dispute. For
example, conflicts of interest could arise over matters such as:
|
|
|
|
|
disputes over the cost or quality of the manufacturing services
provided to us by R-Tech with respect to AMITIZA, cobiprostone
and SPI-017;
|
|
|
|
a decision whether to engage R-Tech in the future to manufacture
and supply compounds other than AMITIZA, cobiprostone and SPI-017
|
|
|
|
decisions as to which particular prostone compounds, other than
AMITIZA, cobiprostone or SPI-017, we will commit sufficient
development efforts to so that commercial rights to those
compounds will not revert back to Sucampo AG at the end of the
specified period; or
|
|
|
|
business opportunities unrelated to prostones that may be
attractive both to us and to the other company.
|
48
If
United States or foreign tax authorities disagree with our
transfer pricing policies, we could become subject to
significant tax liabilities.
We are a member of an affiliated group of entities, including
Sucampo AG and R-Tech, each of which is directly or indirectly
controlled by Drs. Ueno and Kuno. We have had and will
continue to have significant commercial transactions with these
entities. Furthermore, we operate two foreign subsidiaries,
Sucampo Japan and Sucampo Europe. We expect to enter into
commercial transactions with each of these entities on an
ongoing basis. As a result of these transactions, we will be
subject to complex transfer pricing regulations in both the
United States and the other countries in which we and our
affiliates operate. Transfer pricing regulations generally
require that, for tax purposes, transactions between our
subsidiaries and affiliates and us be priced on a basis that
would be comparable to an arms length transaction and that
contemporaneous documentation be maintained to support the
related party agreements. To the extent that United States or
any foreign tax authorities disagree with our transfer pricing
policies, we could become subject to significant tax liabilities
and penalties related to prior, existing and future related
party agreements.
Risks
Related to Our Intellectual Property
If we
are unable to obtain and maintain proprietary protection for the
intellectual property relating to our technology and products,
the value of our technology and products will be adversely
affected and our ability to derive revenue from our products
would be impaired.
Our success depends in part on our ability, and that of Sucampo
AG, to obtain and maintain proprietary protection for the
technology and know-how upon which our products are based, to
operate without infringing on the proprietary rights of others
and to prevent others from infringing on our proprietary rights.
The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our intellectual property will depend on our success, in
conjunction with Sucampo AG, in obtaining effective claims and
enforcing those claims once granted. The scope of protection
afforded by a set of patent claims is subject to inherent
uncertainty unless the patent has already been litigated and a
court has ruled on the meaning of the claim language and other
issues affecting how broadly a patent claim can be enforced. In
some cases, we license patent applications from Sucampo AG
instead of issued patents, and we do not know whether these
patent applications will result in the issuance of any patents.
Our licensed patents may be challenged, invalidated or
circumvented, which could limit the term of patent protection
for our products or diminish our ability to stop competitors
from marketing related products. In addition, changes in either
patent laws or in interpretations of patent laws in the United
States and other countries may diminish the value of Sucampo
AGs patents and our intellectual property or narrow the
scope of the protection provided by these patents. Accordingly,
we cannot determine the degree of future protection for our
proprietary rights in the licensed patents and patent
applications. Furthermore, because of the extensive time
required for development, testing and regulatory review of a
potential product, it is possible that, before any of our
product candidates can be commercialized, a related patent may
expire or may remain in force for only a short period following
commercialization, thereby reducing any advantage of the patent.
The patents we license from Sucampo AG also may not afford us
protection against competitors with similar technology. Because
patent applications in the United States and many foreign
jurisdictions are typically not published until 18 months
after filing, or in some cases not at all, and because
publications of discoveries in the scientific literature often
lag behind actual discoveries, neither we nor Sucampo AG can be
certain that we or they were the first to make the inventions
claimed in issued patents or pending patent applications, or
that we or they were the first to file for protection of the
inventions set forth in these patent applications.
Confidentiality
agreements with our employees and other precautions may not be
adequate to prevent disclosure of our proprietary information
and know-how.
In addition to patented technology, we rely upon unpatented
proprietary technology, processes and know-how developed both by
Sucampo AG and by us. We and Sucampo AG seek to protect our
respective proprietary technology and processes, in part, by
confidentiality agreements with our respective employees,
consultants, scientific advisors and contractors. We also seek
to preserve the integrity and confidentiality of our data and
trade
49
secrets by maintaining physical security of our premises and
physical and electronic security of our information technology
systems. These agreements or security measures may be breached,
and we and Sucampo AG may not have adequate remedies for any
such breach. In addition, our trade secrets may otherwise become
known or be independently developed by competitors. If we or
Sucampo AG are unable to protect the confidentiality of our
proprietary information and know-how, competitors may be able to
use this information to develop products that compete with our
products, which could compromise our ability to produce revenue
and achieve profitability.
If we
infringe or are alleged to infringe intellectual property rights
of third parties, our business could be harmed.
There has been substantial litigation and other proceedings
regarding patent and other intellectual property rights in the
pharmaceutical and biotechnology industries. Our research,
development and commercialization activities and those of
Sucampo AG, as well as any products or product candidates
resulting from these activities, may infringe or be alleged to
infringe patents or patent applications owned or controlled by
other parties. These third parties could bring claims against us
or one of our collaborators that would require us to incur
substantial expenses and, if successful against us, could cause
us to pay substantial damages. Further, if a patent infringement
suit were brought against us or one of our collaborators, we or
they could be forced to stop or delay research, development,
manufacturing or sales of the product or product candidate that
is the subject of the suit.
As a result of patent infringement claims, or in order to avoid
potential claims, we or one of our collaborators may choose or
be required to seek a license from a third party and be required
to pay license fees or royalties or both. These licenses may not
be available on acceptable terms, or at all. Even if we or a
collaborator were able to obtain a license, the rights may be
nonexclusive, which could result in our competitors gaining
access to the same intellectual property. Ultimately, we could
be prevented from commercializing a product, or be forced to
cease some aspect of our business operations, if, as a result of
actual or threatened patent infringement claims, we or one of
our collaborators are unable to enter into licenses on
acceptable terms. This could harm our business significantly.
We may
be subject to other patent related litigation or proceedings
that could be costly to defend and uncertain in their
outcome.
In addition to infringement claims against us, we may become a
party to other patent litigation and proceedings, including
interference proceedings declared by the United States Patent
and Trademark Office or opposition proceedings in the European
Patent Office regarding intellectual property rights with
respect to our products and technology, as well as other
disputes with licensees, licensors or others with whom we have
contractual or other business relationships for intellectual
property. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.
Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively than we can because
of their substantially greater financial resources.
Uncertainties resulting from the initiation and continuation of
patent litigation or other proceedings could negatively affect
our ability to compete in the marketplace. Patent litigation and
other proceedings may also absorb significant management
resources.
Risks
Related to Regulatory Approval and Oversight
If we
are not able to obtain required regulatory approvals, we will
not be able to commercialize our product candidates and our
ability to generate revenue will be materially
impaired.
Our product candidates and the activities associated with their
development and commercialization, including testing,
manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertising, promotion, sale and distribution, are
subject to comprehensive regulation by the FDA and other
regulatory agencies in the United States and by authorities in
other countries. Failure to obtain regulatory approval for a
product candidate will prevent us from commercializing the
product candidate.
Securing FDA approval requires the submission of extensive
preclinical and clinical data, information about product
manufacturing processes and inspection of facilities and
supporting information to the FDA for each therapeutic
indication to establish the product candidates safety and
efficacy. Our future products may not be
50
effective, may be only moderately effective or may prove to have
undesirable side effects, toxicities or other characteristics
that may preclude our obtaining regulatory approval or prevent
or limit commercial use.
The process of obtaining regulatory approvals is expensive,
often takes many years, if approval is obtained at all, and can
vary substantially based upon the type, complexity and novelty
of the product candidates involved. Changes in the regulatory
approval policy during the development period, changes in or the
enactment of additional statutes or regulations, or changes in
regulatory review for each submitted product application, may
cause delays in the approval or rejection of an application. The
FDA has substantial discretion in the approval process and may
refuse to accept any application or may decide that our data are
insufficient for approval and require additional preclinical,
clinical or other studies. In addition, varying interpretations
of the data obtained from preclinical and clinical testing could
delay, limit or prevent regulatory approval of a product
candidate. Any regulatory approval we ultimately obtain may be
limited in scope or subject to restrictions or post-approval
commitments that render the product not commercially viable. If
any regulatory approval that we obtain is delayed or is limited,
we may decide not to commercialize the product candidate after
receiving the approval.
Even
if we receive regulatory approval for a product, the product
could be subject to regulatory restrictions or withdrawal from
the market, and we may be subject to penalties if we fail to
comply with ongoing regulatory requirements.
AMITIZA and any other product for which we obtain marketing
approval, along with the manufacturing processes, post-approval
clinical data, labeling, advertising and promotional activities
for such product, will be subject to continual requirements of
and review by the FDA and other regulatory bodies. These
requirements include submissions of safety and other
post-marketing information and reports, registration
requirements, cGMP requirements relating to quality control,
quality assurance and corresponding maintenance of records and
documents, requirements regarding the distribution of samples to
physicians and recordkeeping. Even if regulatory approval of a
product is granted, the approval may be subject to limitations
on the indicated uses for which the product may be marketed or
to the conditions of approval, or contain requirements for
costly post-marketing testing and surveillance to monitor the
safety or efficacy of the product. If we fail to comply with
applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and
criminal prosecution.
We may
experience unanticipated safety issues with our products after
they are approved for marketing, which could harm our business
and our reputation.
Because AMITIZA and our other product candidates are based on
newly discovered prostone technology with novel mechanisms of
action, there may be long-term safety risks associated with
these products that are not identifiable or well-understood at
early stages of development and commercialization. Later
discovery of previously unknown problems with our products,
manufacturers or manufacturing processes may result in:
|
|
|
|
|
restrictions on such products, manufacturers or manufacturing
processes;
|
|
|
|
warning letters;
|
|
|
|
withdrawal of the products from the market;
|
|
|
|
refusal to approve pending applications or supplements to
approved applications that we submit; and
|
|
|
|
voluntary or mandatory product recalls.
|
Because we rely on Takeda to provide a significant portion of
the sales force that is selling AMITIZA, we are dependent to
some degree on Takeda to promptly and properly report any safety
issues encountered in the field. If Takeda or their sales
representatives fail to provide timely and accurate reporting of
any safety issues that arise in connection with AMITIZA, our
business and reputation could be harmed.
51
Failure
to obtain regulatory approval in international jurisdictions
would prevent us from marketing our products outside the United
States and could adversely affect our reputation and our product
marketing activities within the United States.
We intend to market our products both domestically and outside
the United States. In order to market our products in the
European Union, Japan and many other foreign jurisdictions, we
must obtain separate regulatory approvals and comply with
numerous and varying regulatory requirements. The approval
procedure varies among countries and can involve additional
testing. The time required to obtain approval may differ from
that required to obtain FDA approval. The foreign regulatory
approval process may include all of the risks associated with
obtaining FDA approval. We may not obtain foreign regulatory
approvals on a timely basis, if at all. Approval by the FDA does
not ensure approval by regulatory authorities in other countries
or jurisdictions, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in
other foreign countries or jurisdictions or by the FDA. We may
not be able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.
We may
not be able to obtain orphan drug exclusivity for our product
candidates. If our competitors are able to obtain orphan drug
exclusivity for a product that is competitive with one or more
of our product candidates and we cannot show that our product
candidate is clinically superior, we may not be able to have
competing products approved by the applicable regulatory
authority for a significant period of time.
Regulatory authorities in some jurisdictions, including Europe
and the United States, may designate drugs that target
relatively small patient populations as orphan drugs. We have
received an orphan drug designation from the FDA for our product
candidate cobiprostone for the treatment of disorders associated
with cystic fibrosis and we may pursue orphan drug designation
for additional product candidates. Generally, if a product with
an orphan drug designation subsequently receives the first
marketing approval for the indication for which it has such
designation, the product is entitled to a period of marketing
exclusivity. The exclusivity applies only to the indication for
which the drug has been designated and approved. The applicable
exclusivity period is seven years in the United States, but this
period may be interrupted if a sponsor of a competitive product
that is otherwise the same drug for the same use can show that
its drug is clinically superior to our orphan drug candidate.
The European exclusivity period is ten years, but may be reduced
to six years if a drug no longer meets the criteria for orphan
drug designation, including where it is shown that the drug is
sufficiently profitable so that market exclusivity is no longer
justified. In addition, European regulations establish that a
competitors marketing authorization for a similar product
with the same indication may be granted if there is an
insufficient supply of the product or if another applicant can
establish that its product is safer, more effective or otherwise
clinically superior. If a competitor obtains orphan drug
exclusivity for a product competitive with cobiprostone before
we do and if the competitors product is the same drug with
the same indication as ours, we would be excluded from the
market, unless we can show that our drug is safer, more
effective or otherwise clinically superior. Even if we obtain
orphan drug exclusivity for cobiprostone for these indications,
we may not be able to maintain it if a competitor with a product
that is otherwise the same drug can establish that its product
is clinically superior.
We
must comply with federal, state and foreign laws, regulations,
and other rules relating to the health care business, and, if we
are unable to fully comply with such laws, regulations and other
rules, we could face substantial penalties.
We are or will be directly, or indirectly through our customers,
subject to extensive regulation by the federal government, the
states and foreign countries in which we may conduct our
business. The laws that directly or indirectly affect our
ability to operate our business include the following:
|
|
|
|
|
the federal Medicare and Medicaid Anti-Kickback law, which
prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or
indirectly, in cash or in kind, to induce either the referral of
an individual, or furnishing or arranging for a good or service,
for which payment may be made under federal healthcare programs
such as the Medicare and Medicaid Programs;
|
|
|
|
other Medicare laws, regulations, rules, manual provisions and
policies that prescribe the requirements for coverage and
payment for services performed by our customers, including the
amount of such payment;
|
52
|
|
|
|
|
the federal False Claims Act, which imposes civil and criminal
liability on individuals and entities who submit, or cause to be
submitted, false or fraudulent claims for payment to the
government;
|
|
|
|
the federal False Statements Act, which prohibits knowingly and
willfully falsifying, concealing or covering up a material fact
or making any materially false statement in connection with the
delivery of or payment for healthcare benefits, items or
services; and
|
|
|
|
state and foreign law equivalents of the foregoing and state
laws regarding pharmaceutical company marketing compliance,
reporting and disclosure obligations.
|
If our operations are found to be in violation of any of the
laws, regulations, rules or policies described above or any
other law or governmental regulation to which we or our
customers are or will be subject, or if the interpretation of
the foregoing changes, we may be subject to civil and criminal
penalties, damages, fines, exclusion from the Medicare and
Medicaid programs and the curtailment or restructuring of our
operations. Similarly, if our customers are found non-compliant
with applicable laws, they may be subject to sanctions, which
could also have a negative impact on us. Any penalties, damages,
fines, curtailment or restructuring of our operations would harm
our ability to operate our business and our financial results.
The risk of our being found in violation of these laws is
increased by the fact that many of them have not been fully
interpreted by the regulatory authorities or the courts, and
their provisions may be open to a variety of interpretations.
Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur
significant legal expenses, divert management resources from the
operation of our business and damage our reputation.
Risks
Related to Our Common Stock
Our
founders maintain the ability to control all matters submitted
to stockholders for approval, which could result in actions of
which you or other stockholders do not approve.
Dr. Sachiko Kuno, who was an executive officer and director
of our company until May 31, 2007, and Dr. Ryuji Ueno,
our chief executive officer, chief scientific officer and a
director, together beneficially own 2,426,385 shares of
class A common stock and 26,191,050 shares of
class B common stock, representing approximately 95% of the
combined voting power of our outstanding common stock. As a
result, Drs. Ueno and Kuno, who are married, acting by
themselves will be able to control the outcome of all matters
that our stockholders vote upon, including the election of
directors, amendments to our certificate of incorporation, and
mergers or other business combinations. The concentration of
ownership and voting power also may have the effect of delaying
or preventing a change in control of our company and could
prevent stockholders from receiving a premium over the market
price if a change in control is proposed.
Provisions
in our corporate charter documents and under Delaware law may
prevent or frustrate attempts by our stockholders to change our
management and hinder efforts to acquire a controlling interest
in us, and the market price of our class A common stock may
be lower as a result.
There are provisions in our certificate of incorporation and
by-laws that may make it difficult for a third party to acquire,
or attempt to acquire, control of our company, even if a change
in control was considered favorable by you and other
stockholders. For example, our board of directors has the
authority to issue up to 5,000,000 shares of preferred
stock. The board of directors can fix the price, rights,
preferences, privileges, and restrictions of the preferred stock
without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a
change in control transaction. As a result, the market price of
our class A common stock and the voting and other rights of
our stockholders may be adversely affected. An issuance of
shares of preferred stock may result in the loss of voting
control to other stockholders.
Our charter documents contain other provisions that could have
an anti-takeover effect, including:
|
|
|
|
|
the high-vote nature of our class B common stock;
|
|
|
|
following the conversion of all shares of class B common
stock into class A common stock, only one of our three
classes of directors will be elected each year;
|
53
|
|
|
|
|
following the conversion of all shares of class B common
stock into class A common stock, stockholders will not be
entitled to remove directors other than by a 75% vote and for
cause;
|
|
|
|
following the conversion of all shares of class B common
stock into class A common stock, stockholders will not be
permitted to take actions by written consent;
|
|
|
|
stockholders cannot call a special meeting of
stockholders; and
|
|
|
|
stockholders must give advance notice to nominate directors or
submit proposals for consideration at stockholder meetings.
|
In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. These provisions could
discourage potential acquisition proposals and could delay or
prevent a change in control transaction. They could also have
the effect of discouraging others from making tender offers for
our class A common stock. These provisions may also prevent
changes in our management.
Our
class A common stock is thinly traded and our stock price
is volatile; investors in our class A common stock could
incur substantial losses.
The public trading market for our class A common stock is
characterized by small trading volumes and a highly volatile
stock price. The stock market in general and the market for
pharmaceutical and biotechnology companies in particular have
experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. As a result
of this volatility, investors may not be able to sell their
class A common stock at or above the price they paid, and
may have difficulty selling their shares at any price. The
market price for our class A common stock may be influenced
by many factors, including:
|
|
|
|
|
failure of AMITIZA or other approved products, if any, to
achieve commercial success;
|
|
|
|
results of clinical trials of our product candidates or those of
our competitors;
|
|
|
|
the regulatory status of our product candidates;
|
|
|
|
the success of competitive products or technologies;
|
|
|
|
regulatory developments in the United States and foreign
countries;
|
|
|
|
developments or disputes concerning patents or other proprietary
rights;
|
|
|
|
the ability of R-Tech to manufacture our products to commercial
standards in sufficient quantities;
|
|
|
|
actual or anticipated fluctuations in our quarterly financial
results;
|
|
|
|
variations in the financial results of companies that are
perceived to be similar to us;
|
|
|
|
changes in the structure of healthcare payment systems;
|
|
|
|
market conditions in the pharmaceutical and biotechnology
sectors and issuance of new or changed securities analysts
reports or recommendations; and
|
|
|
|
general economic, industry and market conditions.
|
We
have never paid cash dividends on our capital stock, and we do
not anticipate paying any cash dividends in the foreseeable
future.
We have paid no cash dividends on our capital stock to date. We
currently intend to retain our future earnings, if any, to fund
the development and growth of our business. In addition, the
terms of any existing or future debt agreements may preclude us
from paying dividends. As a result, capital appreciation, if
any, of our class A common stock will be your sole source
of gain for the foreseeable future.
54
A
significant portion of our total outstanding shares are eligible
to be sold into the market. This could cause the market price of
our class A common stock to drop significantly, even if our
business is doing well.
Sales of a substantial number of shares of our class A
common stock in the public market could occur at any time. If
our stockholders sell, or the market perceives that our
stockholders intend to sell, substantial amounts of our
class A common stock in the public market, the market price
of our class A common stock could decline significantly.
Virtually all of our outstanding shares of common stock are
eligible to be resold in the public markets, including
approximately 37.5 million shares that first became
available for sale in the public market in February 2008
following the expiration of
lock-up
agreements between our stockholders and the underwriters of our
public offering, subject in some cases to volume limitations
imposed by federal securities laws. Moreover, holders of an
aggregate of 6,751,609 shares of our common stock have
rights, subject to some 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. We also registered the
13,900,900 shares of class A common stock that we may
issue in the future under our equity compensation plans, and
they can be freely sold in the public market upon issuance.
Due to
recent uncertainties in the credit markets, we may be unable to
liquidate some holdings of our auction rate securities and as a
result, may suffer losses from these investments. In addition,
given the complexity of auction rate securities and their
valuations, our estimates of their fair value may differ from
the actual amount we would be able to collect in an ultimate
sale.
As of December 31, 2007, we had $60.9 million invested
in auction rate securities. Auction rate securities are
long-term debt instruments that provide liquidity through a
Dutch auction process that resets the applicable interest rate
at pre-determined calendar intervals, generally every seven to
49 days. This mechanism generally allows existing investors
to roll-over their holdings and continue to own their respective
securities or liquidate their holdings by selling their
securities at par value and therefore are usually classified
within current assets.
We generally invest in auction rate securities for short periods
of time as part of our cash management program. Recent
uncertainties in the credit markets have prevented us from
liquidating some of our holdings of auction rate securities
subsequent to December 31, 2007 because the amount of
securities submitted for sale during the auction exceeded the
amount of purchase orders. In one instance, the first auction
after year-end failed as to one security we hold in the amount
of $9.4 million. In other instances, we experienced
successful auctions shortly after December 31, 2007, but
then encountered subsequent failed auctions in February and
March 2008 in an aggregate amount of $18.3 million.
As of March 20, 2008, we had reduced our investment in
auction rate securities by selling $33.2 million of
investments at par value. We continue to hold the remaining
securities and are due interest at a higher rate on those
securities as to which the auctions have failed than similar
securities for which auctions have cleared. These investments
consist of AAA-rated non-mortgage related auction rate
securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. If
the credit ratings of the issuer, the bond insurer or the
collateral deteriorate or the carrying value of the investments
decline for any other reason, we may need to adjust the carrying
value of these investments.
It is uncertain as to when the liquidity issues relating to
these investments will improve. Although we do not currently
anticipate having to sell these securities in order to operate
our business, if that were to change, or if the liquidity issues
continue over a prolonged period, we might be unable to
liquidate some holdings of our auction rate securities and as a
result, might suffer losses from these investments. In addition,
given the complexity of auction rate securities and their
valuations, our estimates of their fair value may differ from
the actual amount we would be able to collect in an ultimate
sale.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
55
Our corporate headquarters, including our principal executive
officers, and some of our commercial, administrative and
research and development activities, are located in Bethesda,
Maryland. Our lease for this facility, which comprises
approximately 25,000 square feet of office space, expires
in February 2017. In addition, we have a short-term lease in
Fuquay-Varina, North Carolina to house our national sales office.
In July 2007, we vacated our previous headquarters in Bethesda,
Maryland. We were able to sublease 1,600 square feet of
space under a lease that expires in December 2010 and are
seeking to sublease 11,166 square feet of space under a
lease that expires in November 2009. We remain obligated to make
rent payments under both leases.
We lease our Asian and European headquarters, located in Tokyo
and Osaka, Japan and Oxford, England, under short-term leases.
We believe that our current facilities are sufficient to meet
our needs for at least the next 12 months.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are not currently a party to any legal proceedings of which
the ultimate outcome, in our judgment, would have a material
adverse effect on our business, financial condition or results
of operations.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2007.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our class A common stock is traded on The NASDAQ Global
Market under the symbol SCMP. The following table
sets forth, for the periods indicated, the range of high and low
sale prices of our class A common stock as reported on The
NASDAQ Global Market since our initial public offering on
August 2, 2007.
|
|
|
|
|
|
|
|
|
2007
|
|
High
|
|
|
Low
|
|
|
Third quarter (beginning August 2, 2007, our initial public
offering date)
|
|
$
|
14.50
|
|
|
$
|
10.75
|
|
Fourth quarter
|
|
$
|
19.75
|
|
|
$
|
10.16
|
|
As of March 20, 2008, we had 15,542,768 shares of
class A common stock outstanding held by approximately 19
stockholders of record. The number of holders of record of our
class A common stock is not representative of the number of
beneficial holders because many shares are held by depositories,
brokers or nominees. As of March 20, 2008, the closing
price of our class A common stock was $9.74. As of
March 20, 2008, we had 26,191,050 shares of
class B common stock outstanding held by one stockholder of
record.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain earnings, if any, to
support our growth strategy and do not anticipate paying cash
dividends in the foreseeable future.
We did not repurchase any of our equity securities in 2007.
The equity compensation plan information required under this
Item is incorporated by reference to the information provided
under the heading Equity Compensation Plan
Information in our proxy statement to be filed within
120 days after the fiscal year end of December 31,
2007.
56
Stock
Performance Graph
The information included under this heading Stock
Performance Graph is furnished and not
filed and shall not be deemed to be soliciting
material or subject to Regulation 14A, shall not be
deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, or otherwise subject to the liabilities of that section,
nor shall it be deemed incorporated by reference in any filing
under the Securities Act of 1933, as amended, or the Exchange
Act.
The following graph compares the cumulative total return,
assuming the investment of $100 on August 2, 2007, the date
on which our class A common stock began trading on The
NASDAQ Global Market, in each of (1) our class A
common stock, (2) The NASDAQ Composite Index (U.S. and
Foreign) and (3) the NASDAQ Pharmaceutical Index, assuming
reinvestment of any dividends. These comparisons are required by
the SEC and are not intended to forecast or be indicative of
possible future performance of our class A common stock.
Use of
Proceeds from Initial Public Offering of Class A Common
Stock
In August 2007, we completed an initial public offering of
class A common stock pursuant to a registration statement
on
Form S-1
(Registration
No. 333-135133)
which the SEC declared effective on August 2, 2007.
Pursuant to the registration statement, we registered the
offering and sale of an aggregate of 4,312,500 shares of
our class A common stock, of which 3,125,000 shares
were sold by us and 625,000 shares were sold by a selling
stockholder, at a price of $11.50 per share. S&R, which is
wholly-owned by our founders, Drs. Kuno and Ueno, granted
to the underwriters an option to purchase an additional
562,500 shares of our class A common stock at the
initial public offering price of $11.50 per share to cover
over-allotments, if any. The initial closing of the offering
occurred on August 2, 2007. The underwriters exercised
their over-allotment option and purchased an additional
562,500 shares of class A common stock from S&R
on August 29, 2007. We did not receive any proceeds from
the sale of these shares by S&R. The managing underwriters
for the offering were Cowen and Company, LLC, CIBC World Markets
Corp. and Leerink Swann & Co., Inc.
57
We raised a total of $35.9 million in gross proceeds from
the initial public offering, or approximately $28.2 million
in net proceeds after deducting underwriting discounts and
commissions of $3.0 million and other offering expenses of
approximately $4.7 million. The selling stockholder
received a total of approximately $7.2 million in gross
proceeds from the initial public offering, or approximately
$6.7 million of net proceeds after deducting the
underwriting discounts. S&R received a total of
approximately $6.5 million in gross proceeds from the
initial public offering, or approximately $6.0 million of
net proceeds after deducting the underwriting discounts.
We have not used any of the net proceeds from the offering to
make payments, directly or indirectly, to any director or
officer of ours, or any of their associates, to any person
owning 10% or more of our common stock or to any affiliate of
ours, and none of the expenses we incurred in connection with
the offering or the underwriting discounts and commissions were
paid, directly or indirectly, to any such persons. We did,
however, contemporaneously with the closing of our initial
public offering, make payments of approximately
$3.1 million in the aggregate to Ryuji Ueno, a director,
officer and 10% stockholder, and Sachiko Kuno, a 10%
stockholder, in settlement of special stock and cash awards that
had been made to them in June 2007.
We have invested the net proceeds from the offering in
short-term, investment grade, interest-bearing instruments.
There has been no material change in our planned use of the
balance of the net proceeds from the offering as described in
our final prospectus filed with the SEC pursuant to
Rule 424(b) under the Securities Act.
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
We have derived the following consolidated financial data as of
December 31, 2005, 2006 and 2007 from audited balance
sheets and for the five years ended December 31, 2007 from
audited consolidated statements of operations. Consolidated
balance sheets as of December 31, 2006 and 2007 and the
related consolidated statements of operations and comprehensive
income (loss), of changes in stockholders equity (deficit)
and of cash flows for each of the three years in the period
ended December 31, 2007 and notes thereto appear elsewhere
in this Annual Report. We have derived the following
consolidated financial data as of and for the years ended
December 31, 2003 and 2004 from unaudited consolidated
balance sheets and audited consolidated statements of
operations, which are not included in this Annual Report. The
information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction
with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and related footnotes
appearing elsewhere in this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,125
|
|
|
$
|
3,839
|
|
|
$
|
40,205
|
|
|
$
|
59,266
|
|
|
$
|
91,891
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
18,445
|
|
|
|
14,036
|
|
|
|
31,167
|
|
|
|
16,392
|
|
|
|
28,334
|
|
General and administrative
|
|
|
7,447
|
|
|
|
8,216
|
|
|
|
7,760
|
|
|
|
14,587
|
|
|
|
25,031
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
11,103
|
|
|
|
13,229
|
|
Product royalties related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,171
|
|
|
|
4,890
|
|
Milestone royalties related parties
|
|
|
|
|
|
|
1,000
|
|
|
|
1,500
|
|
|
|
1,250
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
25,892
|
|
|
|
23,252
|
|
|
|
40,722
|
|
|
|
44,503
|
|
|
|
73,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(21,767
|
)
|
|
|
(19,413
|
)
|
|
|
(517
|
)
|
|
|
14,763
|
|
|
|
18,407
|
|
Total non-operating (expense) income, net
|
|
|
(250
|
)
|
|
|
(56
|
)
|
|
|
990
|
|
|
|
2,141
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(22,017
|
)
|
|
|
(19,469
|
)
|
|
|
473
|
|
|
|
16,904
|
|
|
|
21,023
|
|
Income tax (provision) benefit
|
|
|
|
|
|
|
|
|
|
|
(789
|
)
|
|
|
4,897
|
|
|
|
(7,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(22,017
|
)
|
|
$
|
(19,469
|
)
|
|
$
|
(316
|
)
|
|
$
|
21,801
|
|
|
$
|
13,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.68
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.63
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(0.68
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.63
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
32,564
|
|
|
|
32,600
|
|
|
|
32,601
|
|
|
|
34,383
|
|
|
|
37,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
32,564
|
|
|
|
32,600
|
|
|
|
32,601
|
|
|
|
34,690
|
|
|
|
38,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,070
|
|
|
$
|
21,918
|
|
|
$
|
17,436
|
|
|
$
|
22,481
|
|
|
$
|
25,559
|
|
Short-term investments
|
|
|
|
|
|
|
3,000
|
|
|
|
28,435
|
|
|
|
29,399
|
|
|
|
51,552
|
|
Working capital
|
|
|
14,834
|
|
|
|
7,850
|
|
|
|
10,051
|
|
|
|
40,623
|
|
|
|
84,313
|
|
Total assets
|
|
|
20,072
|
|
|
|
25,837
|
|
|
|
47,985
|
|
|
|
67,084
|
|
|
|
110,027
|
|
Notes payable related parties, current
|
|
|
271
|
|
|
|
4,040
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
Notes payable related parties, net of current portion
|
|
|
3,352
|
|
|
|
2,326
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,196
|
|
|
|
39,375
|
|
|
|
58,225
|
|
|
|
28,551
|
|
|
|
23,499
|
|
Convertible preferred stock
|
|
|
20,288
|
|
|
|
20,288
|
|
|
|
20,288
|
|
|
|
20,288
|
|
|
|
|
|
Accumulated deficit
|
|
|
(25,382
|
)
|
|
|
(44,852
|
)
|
|
|
(45,167
|
)
|
|
|
(23,366
|
)
|
|
|
(10,176
|
)
|
Total stockholders equity (deficit)
|
|
|
5,876
|
|
|
|
(13,538
|
)
|
|
|
(10,240
|
)
|
|
|
38,533
|
|
|
|
86,528
|
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion and analysis
together with our consolidated financial statements and the
related notes included elsewhere in this Annual Report on
Form 10-K.
This discussion contains forward-looking statements that are
based on our current expectations, estimates and projections
about our business and operations. Our actual results may differ
materially from those currently anticipated and expressed in
such forward-looking statements as a result of a number of
factors, including those we discuss under
Item 1A Risk Factors and elsewhere
in this Annual Report.
Overview
We are a specialty biopharmaceutical company focused on the
discovery, development and commercialization of proprietary
drugs based on prostones, a class of compounds derived from
functional fatty acids that occur naturally in the human body.
In January 2006, we received marketing approval from the FDA for
our first product, AMITIZA, for the treatment of chronic
idiopathic constipation in adults.
We are party to a collaboration and license agreement and a
related supplemental agreement with Takeda, or, collectively,
the Takeda Agreements, to jointly develop and commercialize
AMITIZA for chronic idiopathic constipation, irritable bowel
syndrome with constipation, opioid-induced bowel dysfunction and
other gastrointestinal indications in the United States and
Canada. We have the right to co-promote AMITIZA along with
Takeda in these markets. We and Takeda initiated commercial
sales of AMITIZA in the United States for the treatment of
59
chronic idiopathic constipation in adults in April 2006. Under
the Takeda Agreements, Takeda records all product revenue and we
receive a royalty on product revenue for such sales.
We first generated product royalty revenue for commercial sales
of AMITIZA in the second quarter of 2006. We have historically
incurred operating losses and, as of December 31, 2007, we
had an accumulated deficit of $10.2 million. We recognized
net income of $13.2 million and $21.8 million in 2007
and 2006, respectively, and net losses of $316,000 in 2005.
Historically, we have generated losses resulting principally
from costs incurred in our research and development programs and
from our general and administrative expenses. We expect to
continue to incur significant and increasing expenses for the
next several years as we continue to expand our research and
development activities, seek regulatory approvals for additional
indications for AMITIZA and for other compounds as they are
developed and augment our sales and marketing capabilities.
Whether we are able to sustain profitability will depend upon
our ability to generate revenues and receive payments under our
contracts with Takeda or similar arrangements in the future that
exceed these expenses. In the near term, our ability to generate
product revenues will depend primarily on the successful
commercialization and continued development of additional
indications for AMITIZA.
We hold an exclusive worldwide royalty-bearing license from
Sucampo AG to develop and commercialize AMITIZA and all other
prostone compounds covered by patents and patent applications
held by Sucampo AG. We are obligated to assign to Sucampo AG all
patentable improvements that we make in the field of prostones,
which Sucampo AG is obligated in turn to license back to us on
an exclusive basis. AMITIZA, cobiprostone and SPI-017 are
covered by perpetual licenses that cannot be terminated unless
we default in our payment obligations to Sucampo AG. If we have
not committed specified development efforts to any prostone
compound other than AMITIZA, cobiprostone and SPI-017 by the end
of a specified period, which ends on the later of June 30,
2011 or the date upon which Drs. Ryuji Ueno and Sachiko
Kuno, our founders and controlling stockholders, no longer
control our company, then the commercial rights to that compound
will revert to Sucampo AG, subject to a
15-month
extension in the case of any compound that we designate in good
faith as planned for development within that extension period.
In August 2007, we completed our initial public offering,
consisting of 3,125,000 shares of class A common stock
sold by us, 625,000 shares of class A common stock
sold by a stockholder and 562,500 shares of class A
common stock sold under an overallotment option by S&R, at
a public offering price of $11.50 per share, resulting in gross
proceeds to us of approximately $35.9 million. After
deducting underwriters discounts and commissions and
expenses of the offering, including costs of $3.1 million
incurred in 2006, we raised net proceeds of $28.2 million.
Our
Clinical Development Programs
We are developing AMITIZA and our other prostone compounds for
the treatment of a broad range of diseases. The most advanced of
these programs are:
|
|
|
|
|
AMITIZA (lubiprostone). In connection with our
marketing approval for AMITIZA for the treatment of chronic
idiopathic constipation in adults, we committed to the FDA to
conduct post-marketing studies to evaluate the safety of the
product in pediatric patients, in patients with renal impairment
and in patients with hepatic impairment. We initiated these
studies in January 2007. In addition, we are developing AMITIZA
to treat irritable bowel syndrome with constipation and
opioid-induced bowel dysfunction. We recently completed two
pivotal Phase III clinical trials of AMITIZA for the
treatment of irritable bowel syndrome with constipation and a
follow-on safety study to assess the long-term use of AMITIZA as
a treatment for this indication. Based on the results of these
trials, we are seeking marketing approval for AMITIZA for the
treatment of this indication and submitted a supplement to our
existing new drug application for AMITIZA in June 2007 and we
expect a PDUFA action in late April 2008. In addition, we
commenced Phase III pivotal clinical trials of AMITIZA for
the treatment of opioid-induced bowel dysfunction in September
2007. Our collaboration and co-promotion arrangement with Takeda
also covers these additional indications for AMITIZA.
|
In February 2008, we submitted an MAA for lubiprostone, 24
micrograms, for the indication of chronic idiopathic
constipation in adults in the United Kingdom. The MAA has been
filed using the decentralized procedure with the United Kingdom,
through its Medicines and Healthcare Products Regulatory Agency,
60
serving as the reference member state, with additional
applications subsequently filed with the member states of
Belgium, Denmark, France, Germany, Ireland, the Netherlands,
Spain and Sweden.
In November 2007, we initiated a multi-center Phase IIb
dose-ranging study in Japan to evaluate the safety and efficacy
of lubiprostone for treating chronic idiopathic constipation in
adults.
|
|
|
|
|
Cobiprostone. We are developing orally
administered cobiprostone to treat various gastrointestinal and
liver disorders, including NSAID-induced ulcers, portal
hypertension, non-alcoholic fatty liver disease and
gastrointestinal disorders associated with cystic fibrosis. We
also are planning to develop an inhaled formulation of
cobiprostone for the treatment of respiratory symptoms of cystic
fibrosis and chronic obstructive pulmonary disease. Our near
term focus is on the development of cobiprostone as a treatment
for NSAID-induced ulcers. We have completed Phase I clinical
trials of cobiprostone in healthy volunteers and commenced a
Phase II clinical trial of this product candidate for the
treatment of NSAID-induced ulcers in the third quarter of 2007.
We also submitted an IND to the FDA in December 2007 for a
Phase II
proof-of-concept
study of cobiprostone in patients with portal hypertension.
|
|
|
|
SPI-017. We are developing SPI-017 to treat
vascular disease and central nervous system disorders. We are
initially focused on developing an intravenous formulation of
this product candidate for the treatment of peripheral arterial
disease. We also are developing an oral formulation of SPI-017
for the treatment of Alzheimers disease. We plan to
commence Phase I clinical trials of the intravenous formulation
of SPI-017 in 2008.
|
Financial
Terms of our Collaboration with Takeda
We entered into a
16-year
collaboration agreement with Takeda in October 2004 to jointly
develop and commercialize AMITIZA for gastrointestinal
indications in the United States and Canada. We also entered
into a related supplemental agreement with Takeda in February
2006. Under the terms of these agreements, we have received a
variety of payments and will have the opportunity to receive
additional payments in the future.
Up-front
Payment
Upon signing the original collaboration agreement with Takeda,
we received a non-refundable up-front payment of
$20.0 million. We deferred $2.4 million of this
up-front payment associated with our obligation to participate
in joint committees with Takeda and we are recognizing this
amount as collaboration revenue ratably over the
16-year life
of the agreement. We recognized the remaining $17.6 million
as research and development revenue ratably over the estimated
development period associated with the chronic idiopathic
constipation and irritable bowel syndrome with constipation
indications, which was completed in June 2007 as evidenced by
the filing with the FDA of a supplement to our existing NDA for
AMITIZA relating to the treatment of irritable bowel syndrome
with constipation.
Product
Development Milestone Payments
We have also received the following non-refundable payments from
Takeda reflecting our achievement of specific product
development milestones:
|
|
|
|
|
$10.0 million upon the filing of the NDA for AMITIZA to
treat chronic idiopathic constipation in March 2005;
|
|
|
|
$20.0 million upon the initiation of our Phase III
clinical trial related to AMITIZA for the treatment of irritable
bowel syndrome with constipation in May 2005; and
|
|
|
|
$20.0 million upon the receipt of approval from the FDA for
AMITIZA for the treatment of chronic idiopathic constipation in
adults in January 2006.
|
We recognized each of these payments as research and development
revenue ratably over the estimated development period associated
with the chronic idiopathic constipation and irritable bowel
syndrome with constipation indications, which was completed in
June 2007.
61
In June 2007, we submitted a supplement to our existing NDA for
AMITIZA to the FDA seeking marketing approval for AMITIZA for
the treatment of irritable bowel syndrome with constipation. As
a result of this submission, Takeda was required by the terms of
our collaboration agreement to make a $30.0 million
milestone payment to us. We recognized the entire amount of this
payment as research and development revenue in the quarter ended
June 30, 2007, reflecting the end of the development period
for AMITIZA to treat chronic idiopathic constipation and
irritable bowel syndrome with constipation.
In addition, our collaboration agreement requires that Takeda
pay us up to a further aggregate of $60.0 million
conditioned upon our achievement of future regulatory milestones
relating to AMITIZA. We would recognize these payments as
research and development revenue ratably over the respective
performance periods.
Research
and Development Cost-Sharing for AMITIZA
Our collaboration agreement and related supplemental agreement
with Takeda provides for the sharing between Takeda and us of
the costs of our research and development activities for AMITIZA
in the United States and Canada as follows:
|
|
|
|
|
Takeda was responsible for the first $30.0 million in
research and development expenses we incurred after October 2004
related to AMITIZA for the treatment of chronic idiopathic
constipation and irritable bowel syndrome with constipation. We
received reimbursement payments from Takeda of
$28.5 million in 2005 and $1.5 million in 2004. We
recognized each of these payments as research and development
revenue ratably over the development period associated with the
chronic idiopathic constipation and irritable bowel syndrome
with constipation indications, which was completed in June 2007.
We did not recognize revenue in any period to the extent that it
resulted in cumulative recognized revenue exceeding cumulative
reimbursable expenses incurred.
|
We were responsible for the next $20.0 million in research
and development expenses we incurred related to AMITIZA for the
treatment of chronic idiopathic constipation and irritable bowel
syndrome with constipation. Thereafter, any expenses in excess
of $50.0 million were shared equally between Takeda and us.
Because we had received reimbursements of $30.0 million
from Takeda, we were responsible for the next $20.0 million
of these expenses. Of this next $20.0 million, we incurred
$14.0 million through December 31, 2007 to complete
the research and development activities for AMITIZA.
|
|
|
|
|
For research and development expenses relating to changing or
expanding the labeling of AMITIZA to treat chronic idiopathic
constipation and irritable bowel syndrome with constipation,
Takeda is responsible for 70% of these expenses and we are
responsible for 30%. In connection with our marketing approval
for AMITIZA for the treatment of chronic idiopathic constipation
in adults, we committed to the FDA to conduct post-marketing
studies to evaluate the safety of the product in patients with
renal impairment and patients with hepatic impairment. We
initiated these studies in January 2007. The expenses of these
studies, which we began to incur in the quarter ended
September 30, 2006, are being shared 70% by Takeda and 30%
by us. Through December 31, 2007, we had incurred
$1.5 million of these expenses, of which we have been or
will be reimbursed $1.0 million.
|
|
|
|
The expense of Phase IV clinical trials of AMITIZA for the
treatment of chronic idiopathic constipation in pediatric
patients that we initiated in January 2007 will be borne by
Takeda in full. As of December 31, 2007, we had incurred
$4.7 million of these expenses, all of which have been or
will be reimbursed by Takeda.
|
|
|
|
For expenses in connection with additional clinical trials
required by regulatory authorities relating to AMITIZA to treat
chronic idiopathic constipation or irritable bowel syndrome with
constipation, Takeda and we are responsible to share these
expenses equally. We have not incurred any expenses of this
nature to date.
|
|
|
|
Takeda is responsible for the first $50.0 million in
expenses we incur related to the development of AMITIZA for each
gastrointestinal indication other than chronic idiopathic
constipation and irritable bowel syndrome with constipation, and
any expenses in excess of $50.0 million are shared equally
between Takeda and us. We initiated clinical trials of AMITIZA
for the treatment of opioid-induced bowel dysfunction in
September 2007. We began incurring expenses for these trials in
the third quarter of 2006. Currently, we anticipate the
aggregate expenses necessary to complete our development of
AMITIZA for this indication
|
62
|
|
|
|
|
will be approximately $54.0 million, of which Takeda will
be responsible for $52.0 million and we will be responsible
for $2.0 million. As of December 31, 2007, we had
incurred $10.8 million of these expenses, all of which we
have been or will be reimbursed by Takeda.
|
|
|
|
|
|
Takeda is responsible for the first $20.0 million in
expenses we incur related to the development of each new
formulation of AMITIZA, and any expenses in excess of
$20.0 million are shared equally between Takeda and us. We
have not incurred any expenses of this nature to date.
|
Co-Promotion
Expense Reimbursements
In connection with our exercise of our co-promotion rights under
the collaboration agreement and our entry into the related
supplemental agreement in February 2006, Takeda agreed to
reimburse us for a portion of our expenses related to our
specialty sales force. We estimate that these reimbursements
will cover approximately 70% of the direct costs for our current
sales force of 38 sales representatives. We began to receive
monthly reimbursement for these expenses during the quarter
ended June 30, 2006, reflecting the commencement by our
sales representatives of their activities in April 2006, and we
had recognized $4.3 million and $3.4 million of
co-promotion
revenue reflecting these reimbursements for the years ended
December 31, 2007 and 2006, respectively.
Takeda also agreed in the supplemental agreement to reimburse us
for all of the costs we incur in connection with specified
miscellaneous marketing activities related to the promotion of
AMITIZA. During the years ended December 31, 2007 and 2006,
we recognized $158,000 and $779,000, respectively, as
co-promotion revenue reflecting these reimbursements. We
completed the miscellaneous marketing activities, to which these
reimbursements relate, in the quarter ended March 31, 2007
and, accordingly, we do not expect to recognize additional
co-promotion revenue related to these activities.
Product
Royalty Revenue
Takeda is obligated to pay us a varying royalty based on a
percentage of the net sales revenue from the sale of AMITIZA in
the United States and Canada. The actual percentage will depend
on the level of net sales revenue during each calendar year. All
sales of AMITIZA in the United States and Canada, including
those arranged by our specialty sales force, will be made
through Takeda. We began to recognize product royalty revenue in
the quarter ended June 30, 2006, reflecting the
commencement of commercial sales of AMITIZA in April 2006.
During the years ended December 31, 2007 and 2006, we
recognized a total of $27.5 million and $6.6 million,
respectively, as product royalty revenue.
Commercialization
Milestone Payments
Our collaboration agreement also requires Takeda to pay us up to
an additional aggregate of $50.0 million conditioned upon
the achievement of specified targets for annual net sales
revenue from AMITIZA in the United States and Canada. We had not
met these targets as of December 31, 2007.
Option
Payment
In November 2004, we received $5.0 million from Takeda as
an option payment to continue negotiations for the joint
development and commercialization of AMITIZA for
gastrointestinal indications in additional territories. In the
event that these negotiations failed to produce a definitive
agreement by specified dates, the terms of the option required
us to repay $2.5 million of the original $5.0 million
option payment to Takeda. The option right for Asia expired
during 2005, at which time we repaid $1.0 million to Takeda
and recognized the remaining $1.0 million as contract
revenue. The option right for Europe, the Middle East and Africa
expired during the first quarter of 2006, at which time we
repaid $1.5 million to Takeda and recognized the remaining
$1.5 million as contract revenue.
63
Takeda
Cash Flows and Revenue
The following table summarizes the cash streams and related
collaboration and research and development revenue recognized
under the Takeda Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
Amount
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable at
|
|
|
Deferred at
|
|
|
|
December 31,
|
|
|
Revenue Recognized for the Year Ended December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007*
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment associated with our obligation to participate
in joint committees with Takeda
|
|
$
|
2,375
|
|
|
$
|
23
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
|
|
|
$
|
1,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment remainder
|
|
$
|
17,624
|
|
|
$
|
1,356
|
|
|
$
|
8,134
|
|
|
$
|
6,157
|
|
|
$
|
1,977
|
|
|
$
|
|
|
|
$
|
|
|
Development milestones
|
|
|
80,000
|
|
|
|
|
|
|
|
16,154
|
|
|
|
28,237
|
|
|
|
35,609
|
|
|
|
|
|
|
|
|
|
Reimbursement of research and development expenses
|
|
|
43,048
|
|
|
|
1,482
|
|
|
|
14,672
|
|
|
|
11,988
|
|
|
|
21,793
|
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,672
|
|
|
$
|
2,838
|
|
|
$
|
38,960
|
|
|
$
|
46,382
|
|
|
$
|
59,379
|
|
|
$
|
6,887
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes billed and unbilled accounts receivable. |
Financial
Terms of our License from Sucampo AG
Under our license agreement with our affiliate, Sucampo AG, we
are required to pay Sucampo AG 5% of every milestone payment we
receive from a sublicensee, such as Takeda. We also are
obligated to make the following milestone payments to Sucampo AG:
|
|
|
|
|
$500,000 upon initiation of the first Phase II clinical
trial for each compound in each of three territories covered by
the license: North, Central and South America (including the
Caribbean), Asia and the rest of the world; and
|
|
|
|
$1.0 million for the first NDA filing or comparable foreign
regulatory filing for each compound in each of these three
territories.
|
In addition, we are required to pay Sucampo AG, on a
country-by-country
basis, royalty payments of 6.5% of net sales for every product
covered by existing patents and, if applicable, thereafter 4.25%
of net sales for every product candidate covered by new or
improvement patents assigned by us to Sucampo AG. With respect
to sales of AMITIZA in North, Central and South America,
including the Caribbean, the rates for these royalty payments
are set at 3.2% and 2.1% of net sales, respectively. The product
royalties that we pay to Sucampo AG are based on total product
net sales, whether by us or a sublicensee, and not on amounts
actually received by us. We expensed $4.9 million and
$1.2 million in product royalties to Sucampo AG during the
years ended December 31, 2007 and 2006, respectively,
reflecting 3.2% of AMITIZA net sales during each of these years,
which we recorded as product royalties related
parties on the consolidated statements of operations and
comprehensive income (loss).
We paid Sucampo AG the following milestone royalty payments that
were expensed as incurred and recorded as milestone
royalties related parties in the respective periods:
|
|
|
|
|
$1.5 million, reflecting 5% of $30.0 million of
development milestone payments that we received from Takeda in
2005;
|
64
|
|
|
|
|
$1.0 million, reflecting 5% of a $20.0 million
development milestone payment that we received from Takeda, and
$250,000 upon marketing approval of AMITIZA by the FDA for the
treatment chronic idiopathic constipation in adults in 2006;
|
|
|
|
$1.5 million, reflecting 5% of a $30.0 million
milestone payment received from Takeda as a result of our
submission to the FDA in June 2007 of the supplement to our
existing NDA for AMITIZA seeking marketing approval for AMITIZA
for the treatment of irritable bowel syndrome with
constipation; and
|
|
|
|
$500,000 upon the initiation of the first Phase IIb dose-ranging
study in Japan in 2007.
|
We are required to make a $1.0 million payment to Sucampo
AG for our first NDA filing, or comparable foreign regulatory
filing, in each of the three following territories covered by
the license agreement: North, Central and South America
(including the Caribbean), Asia and the rest of the world. In
February 2008, we filed an MAA in the United Kingdom, which
triggered our obligation to make a $1.0 million payment to
Sucampo AG for the
rest-of-world
territory in March 2008.
Supply
Agreement with R-Tech
We entered into an exclusive supply arrangement with our
affiliate, R-Tech, in March 2003. In return for the exclusive
right to manufacture and supply clinical and commercial supplies
of AMITIZA and a second prostone compound that we are no longer
developing in North, Central and South America, including the
Caribbean, R-Tech agreed to make the following milestone
payments to us:
|
|
|
|
|
$1.0 million upon entry into the arrangement, which we
received in March 2003;
|
|
|
|
$2.0 million upon commencement of a first Phase II
clinical trial relating to AMITIZA to treat irritable bowel
syndrome with constipation, which we received in April
2003; and
|
|
|
|
$3.0 million upon commencement of a first Phase II
clinical trial for the other compound, which we received in
2003. On March 31, 2005, after evaluating the Phase II
study results, we determined to discontinue any further research
and development related to this compound and will not receive
any further payments in respect of this compound.
|
We evaluated the $6.0 million in cash receipts from R-Tech
and determined these payments were made for the exclusive right
to supply inventory to us and, accordingly, should be deferred
until commercialization of the drugs begins. We also were unable
to accurately apportion value between AMITIZA and the other
compound based on the information available to us and determined
that the full $6.0 million deferred amount should be
amortized over the contractual life of the relationship, which
we concluded was equivalent to the commercialization period of
AMITIZA and the other compound. Accordingly, we began
recognizing this revenue during the quarter ended June 30,
2006 and will continue recognizing it ratably on a straight-line
basis over the remaining life of our supply agreement with
R-Tech through 2026. As of December 31, 2007, we had
recognized a total of $418,000 as contract revenue
related parties under this exclusive supply arrangement with
R-Tech.
The supply agreement also requires payment of a specified
transfer price in respect of supplies of AMITIZA. Takeda is
obligated to make such payment, without reimbursement from us,
in respect of commercial supplies of AMITIZA for the territory
covered by our collaboration with Takeda.
In June 2005, Sucampo Europe entered into an exclusive supply
agreement with R-Tech. In return for the exclusive right to
manufacture and supply clinical and commercial supplies of
AMITIZA in Europe, the Middle East and Africa, R-Tech agreed to
pay us $2.0 million in anticipation of entering into this
agreement, which we received in March 2005. We determined that
this payment should be deferred until commercialization of
AMITIZA begins within the specified territory and, accordingly,
the entire $2.0 million is reflected as deferred revenue at
December 31, 2007.
Critical
Accounting Policies and Estimates
This discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the
65
United States of America. The preparation of our consolidated
financial statements requires us to make estimates and judgments
that affect our reported assets, liabilities, revenues and
expenses. Actual results may differ significantly from those
estimates under different assumptions and conditions.
We regard an accounting estimate or assumption underlying our
financial statements as a critical accounting estimate if:
|
|
|
|
|
the nature of the estimate or assumption is material due to the
level of subjectivity and judgment necessary to account for
highly uncertain matters or the susceptibility of such matters
to change; and
|
|
|
|
the impact of the estimates and assumptions on financial
condition or operating performance is material.
|
Our significant accounting policies are described in more detail
in note 2 of our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
Short-
and Long-Term Investments
Short- and long-term investments consist entirely of auction
rate securities and a money market account. Our investments in
these securities are accounted for as
available-for-sale
securities under the guidance of Statement of Financial
Accounting Standards, or SFAS, No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
Although the auction rate securities have variable interest
rates which typically reset every seven to 49 days through
a competitive bidding process known as a Dutch
auction, they have long-term contractual maturities
usually exceeding ten years, and therefore are not classified as
cash equivalents. These investments are generally classified
within current assets because we have the ability and the intent
to liquidate these securities if needed within a short time
frame, usually at the next auction.
The
available-for-sale
securities are accounted for at fair market value and unrealized
gains and losses on these securities, if any, are included in
accumulated other comprehensive income (loss) in
stockholders equity. We assess the recoverability of our
available-for-sale
securities and, if impairment is indicated, we measure the
amount of such impairment by comparing the fair value to the
carrying value.
Other-than-temporary
impairments are included in our statement of operations and
comprehensive income (loss).
Interest and dividend income is recorded when earned and
included in interest income. Premiums and discounts, if any, on
short- and long-term investments are amortized or accreted to
maturity and included in interest income. During the years ended
December 31, 2007, 2006 and 2005, there were no short- and
long-term investments that were purchased at a premium or
discount. We use the specific identification method in computing
realized gains and losses on sale of our securities. During the
years ended December 31, 2007, 2006 and 2005, there were no
gains or losses realized on the sale of these investments.
Recent uncertainties in the credit markets have prevented us
from liquidating some of our holdings of auction rate securities
subsequent to December 31, 2007 as the amount of securities
submitted for sale during the auction has exceeded the amount of
purchase orders. Although an event of an auction failure does
not necessarily mean that a security is impaired, we considered
various factors to assess the fair value and the classification
of the securities as short-term or long-term assets. Such
factors include, but are not necessarily limited to, timing of
the failed auction, specific security auction history,
likelihood of redemptions, restructurings and other similar
liquidity events, quality of underlying collateral, rating of
the security and the bond insurer and other factors. Such
considerations involve a considerable amount of judgment. As a
result of our assessment of the market conditions and related
facts, including an instance in which the first auction after
year-end failed, one security in an amount of $9.4 million
was classified as a long-term investment as of December 31,
2007. In other instances, we experienced successful auctions
shortly after December 31, 2007, but then encountered
subsequent failed auctions in February and March 2008 in an
aggregate amount of $18.3 million.
At December 31, 2007 and 2006, we determined the fair
market values of these securities to be the carrying values and
we recorded no unrealized gains and losses or
other-than-temporary
impairments. We assessed the fair value of the auction rate
securities as of December 31, 2007 through either an
independent valuation for securities which we felt were subject
to credit risk at December 31, 2007, including an
assessment of all key underlying data and assumptions, or
through our own internal assessment of the carrying value and
reasonableness of fair values.
66
Considerable judgment was involved in reaching these
determinations. We will continue to monitor the fair value and
balance sheet classification of the securities and future
adjustments may be necessary.
As of December 31, 2007, all of our auction rate securities
consisted of AAA rated non-mortgage related auction rate
securities which are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. As
of March 20, 2008, we had reduced our investment in auction
rate securities by selling $33.2 million of investments at
par value. It is uncertain as to when the liquidity issues
relating to these investments will improve, although we believe
as of December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. We do not anticipate having to sell the remaining
securities in order to operate our business. If this changes,
however, we may be unable to liquidate some holdings of the
auction rate securities and as a result, may suffer losses from
these investments. Although a limited secondary market exists
for these securities, we do not at this time intend to use the
secondary market to dispose of the auction rate securities. In
addition, given the complexity of auction rate securities and
their valuations, our estimates of their fair value may differ
from the actual amount we would be able to collect in an
ultimate sale.
Revenue
Recognition
Collaboration
and License Agreements
Our primary sources of revenue include up-front payments,
product development milestone payments, reimbursements of
research and development expenses, reimbursement of co-promotion
costs related to our specialty sales force and miscellaneous
marketing activities, and product royalties. We recognize
revenue from these sources in accordance with Staff Accounting
Bulletin, or SAB, 104, Revenue Recognition,
Emerging Issues Task Force, or EITF, Issue
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent, and EITF Issue
No. 00-21,
Revenue Arrangements with Multiple
Deliverables, or
EITF 00-21.
The application of
EITF 00-21
requires subjective analysis and requires us to make estimates
and assumptions about whether deliverables within
multiple-element arrangements are separable from the other
aspects of the contractual arrangement into separate units of
accounting and, if so, to determine the fair value to be
allocated to each unit of accounting.
We evaluated the multiple deliverables within our joint
collaboration and license agreement and the related supplemental
agreement with Takeda in accordance with the provisions of
EITF 00-21
to determine whether our deliverables have value to Takeda on a
stand-alone basis and whether objective reliable evidence of
fair value of the undelivered items exists. We separately
evaluate deliverables that meet these criteria for the purposes
of revenue recognition. We combine deliverables that do not meet
these criteria and account for them as a single unit of
accounting.
In accordance with
EITF 00-21,
we recognized the cash flows associated with the individual
units of accounting from the joint collaboration and license
agreement as revenue using a time-based model that recognizes
the revenue ratably over the period in which we complete our
performance requirements. However, revenue is limited to amounts
that are non-refundable and that Takeda is contractually
obligated to pay. With respect to the portion of the up-front
payment we attributed to our obligation to participate in joint
committees with Takeda, which we present as collaboration
revenue, the performance period is the
16-year term
of the collaboration agreement. With respect to the remainder of
the up-front payment, as well as the product development
milestone payments and the reimbursement of research and
development expenses, all of which we present as research and
development revenue, the performance period is the estimated
development period for AMITIZA to treat chronic idiopathic
constipation and irritable bowel syndrome with constipation. The
performance period was completed in June 2007 as evidenced by
the filing with the FDA of a supplement to our existing NDA for
AMITIZA relating to the treatment of irritable bowel syndrome
with constipation. We have determined that we are acting as a
principal under the collaboration agreement and, as such, we
record these amounts on a gross basis as collaboration revenue
and as research and development revenue.
We have other obligations with Takeda to perform research and
development activities, for which Takeda reimburses us after the
services have been performed. We recognize these reimbursable
costs as research and development revenue using a similar
time-based model over the estimated performance period. The
research and
67
development revenue for these obligations is limited to the
lesser of the actual reimbursable costs incurred or the
straight-line amount of revenue recognized over the estimated
performance period. Revenues are recognized for reimbursable
costs only if those costs are supported by an invoice or final
contract with a vendor.
Reimbursements of co-promotion costs under the supplemental
agreement with Takeda, including costs associated with our
specialty sales force and miscellaneous marketing activities,
are recognized as co-promotion revenue as the related costs are
incurred and Takeda becomes contractually obligated to pay the
amounts. We have determined that we are acting as a principal
under the supplemental agreement and, as such, we record
reimbursements of these amounts on a gross basis as co-promotion
revenue.
Product royalty revenue is based on third-party sales of
licensed products. We record these amounts on the accrual basis
when earned in accordance with contractual terms when
third-party results are reliably measurable, collectability is
reasonably assured and all other revenue recognition criteria
are met.
We do not immediately recognize as revenue option fees received
for other potential joint collaboration and license agreements
with Takeda because the transactions do not represent a separate
earnings process. Our policy is to recognize revenue immediately
upon expiration of the option or to commence revenue recognition
upon exercise of the option and continue recognition over the
estimated performance period because we will have contingent
performance obligations if and when the options are exercised.
We record option fees as contract revenue when they are
recognized.
We recognize contract revenue related to development activities
with related parties under the time-based method and we
recognize contract revenue related to consulting activities with
related parties as performance is rendered. We record
cost-sharing payments received in advance as deferred revenue
and recognize these payments as revenue over the applicable
clinical trial period.
Accrued
Expenses
As part of our process of preparing our consolidated financial
statements, we are required to estimate accrued expenses. This
process involves reviewing and identifying services which have
been performed by third parties on our behalf and determining
the value of these services. Examples of these services are
payments to clinical investigators, professional fees, such as
accountants and attorneys fees, and payments to
contracted service organizations. In addition, we make estimates
of costs incurred to date but not yet invoiced to us in relation
to external contract research organizations and clinical site
costs. We analyze the progress of clinical trials, including
levels of patient enrollment, invoices received and contracted
costs, when evaluating the adequacy of the accrued liabilities.
We must make significant judgments and estimates in determining
the accrued balance in any accounting period.
In connection with these service fees, our estimates are most
affected by our understanding of the status and timing of
services provided relative to the actual levels of services
incurred by the service providers. The majority of our service
providers invoice us monthly in arrears for services performed.
In the event we do not identify costs that have begun to be
incurred or we under-estimate or over-estimate the level of
services performed or the costs of such services, our reported
expenses for the relevant period would be too low or too high.
We must also sometimes make judgments about the date on which
services commence, the level of services performed on or before
a given date and the cost of such services. We make these
judgments based upon the facts and circumstances known to us in
accordance with generally accepted accounting principles.
Stock-Based
Compensation
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123R, Share-Based
Payment, or SFAS 123R, a revision of
SFAS 123. SFAS 123R requires companies to recognize
expense associated with share-based compensation arrangements,
including employee stock options, using a fair value-based
option-pricing model, and eliminates the alternative to use
Accounting Principles Board, or APB, Opinion No. 25s,
Accounting for Stock Issued to Employees, or
APB 25, intrinsic-value method of accounting for share-based
payments to employees. The standard generally allows two
alternative transition methods in the year of
adoption prospective application and retroactive
application with restatement of prior financial statements to
68
include the same amounts that were previously included in the
SFAS 123 pro forma disclosures. On January 1, 2006, we
adopted SFAS 123R using the prospective method of
implementation. According to the modified prospective method, we
have been recognizing compensation expense for all share-based
payment awards granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R.
For recording our stock-based compensation expense under
SFAS 123R, we have chosen to use:
|
|
|
|
|
the straight-line method of allocating compensation cost under
SFAS 123R;
|
|
|
|
the Black-Scholes-Merton Option Pricing Formula as our chosen
option-pricing model;
|
|
|
|
the simplified method to calculate the expected term for options
as discussed under SAB No. 107, Share-Based
Payment; and
|
|
|
|
an estimate of expected volatility based on the historical
volatility of similar entities whose share prices are publicly
available.
|
In accordance with the modified prospective method, our
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS 123R, as all outstanding stock options as of
January 1, 2006 were fully vested.
Through December 31, 2005, we had elected to account for
stock-based compensation attributable to stock options awarded
to employees, directors and officers using the intrinsic value
method prescribed in APB 25. Under APB 25 guidance, stock-based
compensation expense was based on the intrinsic value of awarded
stock options, which is measured as the excess, if any, of the
fair market value of our class A common stock at the date
of grant over the exercise price of the option granted.
Stock-based compensation, if any, is recognized over the related
vesting period. Accordingly, we have not recorded stock-based
compensation expense for stock options issued to employees in
fixed amounts with exercise prices at least equal to the fair
value of the underlying common stock on the date of grant,
including those granted in 2004. We did not award stock options
to employees in 2005, although we did award options to
non-employees. In note 2 to our consolidated financial
statements included later in this Annual Report on
Form 10-K,
we provide pro forma disclosures for the year ended
December 31, 2005 in accordance with SFAS 123 and
related pronouncements.
We account for transactions with non-employees in which services
are received in exchange for equity instruments under
EITF 96-18,
Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring or in Conjunction with
Selling Goods or Services. Under this guidance, the
transactions are based on the fair value of the services
received from the non-employees or the fair value of the equity
instruments issued, whichever is more reliably measured. The
fair value of the equity instruments is calculated based on the
guidance of SFAS 123. The three factors which most affect
stock-based compensation are the fair value of the common stock
underlying stock options for which stock-based compensation is
recorded, the vesting term of the options and the volatility of
such fair value of common stock. Accounting for these equity
instruments requires us to determine the fair value of the
equity instrument granted or sold. If our estimates of the fair
value of these equity instruments are too high or too low, it
would have the effect of overstating or understating stock-based
compensation expenses.
Prior to the completion of our initial public offering in August
2007, our board of directors determined the fair value of our
class A common stock for stock option awards given the lack
of an active market for our class A common stock. In
establishing the estimates of fair value, our board of directors
considered the guidance set forth in the AICPA Practice Guide,
Valuation of Privately-Held-Company Equity Securities
Issued as Compensation, and made retrospective
determinations of fair value. The board of directors gave
significant consideration to the price of the class A
common stock sold to unrelated third parties in the first half
of 2006 in determining fair value for purposes of the stock
options granted to employees shortly after the sales occurred.
Determining the fair value of our class A common stock
required making complex and subjective judgments. Our approach
to valuation was based on a discounted future cash flow approach
that used our estimates of revenue, driven by assumed market
growth rates, and estimated costs as well as appropriate
discount rates. These estimates were consistent with the plans
and estimates that we used to manage our business. There was
inherent uncertainty in making these estimates.
69
Income
Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. We follow
SFAS No. 109, Accounting for Income
Taxes. This process requires us to estimate our actual
current tax exposure while assessing our temporary differences
resulting from the differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These
differences have resulted in deferred tax assets and
liabilities, which are included in our consolidated balance
sheets. We record a valuation allowance to reduce our deferred
tax assets to the amount that is more likely than not to be
realized. We consider forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we
operate, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. Considerable
judgment is involved in developing such estimates. In the event
we were to determine that we would not be able to realize all or
part of our net deferred tax assets in the future, we would
charge an adjustment to earnings for the deferred tax assets in
the period in which we make that determination. Likewise, if we
later determine that it is more likely than not that the net
deferred tax assets would be realized, we would reverse the
applicable portion of the previously provided valuation
allowance. In order for us to realize our deferred tax assets we
must be able to generate sufficient taxable income in the tax
jurisdictions in which our deferred tax assets are located.
Significant judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance
recorded against our deferred tax assets. We have recorded a
partial valuation allowance of $10.8 million as of
December 31, 2007, which resulted in a net deferred tax
asset of $639,000 as of December 31, 2007, due to
uncertainties related to our ability to utilize a portion of the
deferred tax assets in years beyond 2008. Significant future
events, including marketing approval by the FDA of AMITIZA for
the treatment of irritable bowel syndrome with constipation, are
not in our control and could affect our future earnings
potential and consequently the amount of deferred tax assets
that will be utilized. We determined the amount of the valuation
allowance based on our estimates of income in the jurisdictions
in which we operate over the periods in which the related
deferred tax assets are recoverable.
As of December 31, 2007, we had foreign net operating loss
carryforwards of $1.9 million. The foreign net operating
loss carryforwards will begin to expire on December 31,
2010. As of December 31, 2007, we had U.S. general
business tax credits of $3.1 million, which also may be
available to offset future income tax liabilities and will
expire if not utilized at various dates beginning
December 31, 2022. The Tax Reform Act of 1986 contains
provisions that may limit our ability to use our credits
available in any given year in which there has been a
substantial change in ownership interest, as defined. The
realization of the benefits of the tax credits is dependent on
sufficient taxable income in future years. Lack of earnings, a
change in the ownership of our company, or the application of
the alternative minimum tax rules could adversely affect our
ability to utilize these tax credits.
Related
Party Transactions
As part of our operations, we enter into transactions with our
affiliates. At the time of the transaction, we estimate the fair
market value of the transaction based upon estimates of net
present value or comparable third party information. For
material transactions with our foreign subsidiaries and
affiliates, we have evaluated the terms of transactions similar
to those that would have prevailed had the entities not been
affiliated.
Founders
Awards
On June 19, 2007, the Compensation Committee of our board
of directors authorized a one-time stock and cash award to each
of our founders, Drs. Ueno and Kuno. These awards were
granted on June 29, 2007 when the founders agreed to their
terms and were settled on August 2, 2007 upon the
effectiveness of our initial public offering. The Compensation
Committee intended for these awards to compensate the founders
for the lost value of stock options that had been granted to
them in 2001 and 2002 and had been understood by them to have
ten-year terms, but which had expired in 2006 and early 2007 as
a result of the terms of our 2001 stock incentive plan. The
expired options would have entitled the founders to purchase an
aggregate of 578,000 shares of class A common stock at
a price of $0.21 per share and 136,000 shares at a price of
$2.95 per share. These awards were fully vested at the grant
date.
70
Upon the completion of the initial public offering, these stock
and cash awards had an aggregate value equal to the difference
between the value of the shares that could have been purchased
under each of the expired options, determined on the basis of
the public offering price per share of $11.50 in the initial
public offering, and the respective aggregate exercise prices
for such shares as provided in the option agreements.
These awards consisted of a combination of cash and shares of
class A common stock. Of the aggregate value of each award,
40% was payable in cash and 60% in stock. For purposes of
determining the number of shares of class A common stock to
be issued in connection with each award, the stock was valued on
the basis of the public offering price per share in the initial
public offering.
The estimated fair value of these founders awards,
totaling $10.2 million on grant date, was determined using
the Black-Scholes-Merton Option Pricing Formula, as allowed
under SFAS 123R. For the six months ended June 30,
2007, we recorded $10.2 million of general and
administrative expense for these awards, of which
$4.1 million was recorded as other liabilities
related parties for the cash settlement portion and
$6.1 million as Additional paid-in capital for
the stock settlement portion. The liability portion of the
awards would then be adjusted based upon the final cash
settlement amount, but the equity portion was fixed upon the
grant date.
When the initial public offering was completed in August 2007,
the awards were settled and 401,133 shares of class A
common stock were issued to the founders. In addition, as a
result of the lower public offering price compared to the
estimated public offering price at June 30, 2007, we
recorded an adjustment of $1.0 million to reduce the amount
of expense and related cash portion of the awards, which was
paid to the founders.
Results
of Operations
Comparison
of years ended December 31, 2007 and December 31,
2006
Revenues
The following table summarizes our revenues for the years ended
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Research and development revenue
|
|
$
|
59,379
|
|
|
$
|
46,382
|
|
Product royalty revenue
|
|
|
27,536
|
|
|
|
6,590
|
|
Co-promotion revenue
|
|
|
4,411
|
|
|
|
4,243
|
|
Contract revenue related parties
|
|
|
418
|
|
|
|
404
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
147
|
|
Contract revenue
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,891
|
|
|
$
|
59,266
|
|
|
|
|
|
|
|
|
|
|
Total revenues were $91.9 million in 2007 compared to
$59.3 million in 2006, an increase of $32.6 million.
This increase was primarily due to an increase in payments
received from Takeda for research and development services
performed by us and product royalties from AMITIZA sales.
Research and development revenue was $59.4 million in 2007
compared to $46.4 million in 2006, an increase of
$13.0 million. This increase was due to the recognition of
the $30.0 million research and development milestone
payment for the completion of our development of AMITIZA to
treat chronic idiopathic constipation and irritable bowel
syndrome with constipation and the recognition of payments
previously received from Takeda, offset in part by a decline of
$17.0 million of research and development revenue
reflecting the recognition of AMITIZA-related deferred revenue
previously received from Takeda for only six months in 2007
compared with twelve months in 2006. We recognized revenue for
this development work ratably over the estimated performance
period associated with the development of AMITIZA, which was
completed in June 2007.
71
The specific revenue streams associated with research and
development revenue for the years ended December 31, 2007
and 2006 were as follows:
|
|
|
|
|
In October 2004, we received an up-front payment of
$20.0 million from Takeda, of which $17.6 million was
associated with the development of AMITIZA. This amount was
recognized ratably over the estimated performance period,
resulting in $2.0 million and $6.2 million of research
and development revenue in 2007 and 2006, respectively. The
smaller amount of revenue recognized in 2007 is a result of the
inclusion in 2006 of a full year of revenue recognition compared
to 2007, which only included revenue recognition through the
first six months. It also reflects our determination in June
2006 to extend the estimated completion of the development
period to June 2007, which had the effect of spreading out the
remaining revenue over a longer period of time with a smaller
amount thus being recognized after that point in each reporting
period.
|
|
|
|
In March and May 2005, we received development milestone
payments from Takeda totaling $30.0 million related to our
efforts to develop AMITIZA. We recognized these payments as
research and development revenue ratably over the performance
period, resulting in $3.4 million of research and
development revenue in 2007 and $10.5 million in 2006. The
smaller amount of revenue recognized in 2007 is a result of a
full year of revenue recognized in 2006 compared to a partial
year of revenue recognized in 2007, reflecting the completion of
the development period in June 2007.
|
|
|
|
In January 2006, we received a $20.0 million development
milestone payment from Takeda related to our efforts to develop
AMITIZA, which we recognized as research and development revenue
ratably over the performance period, resulting in
$2.2 million of research and development revenue in 2007
and $17.8 million in 2006. We recognized a significant
portion of this milestone payment in the three months ended
March 31, 2006, the quarter in which it was received,
reflecting the fact that we were then well into the estimated
development period. The smaller amount of revenue recognized in
2007 is a result of a full year of revenue recognized in 2006
compared to a partial year of revenue recognized in 2007,
reflecting the completion of the development period in June 2007.
|
|
|
|
Since inception of our agreement with Takeda, we have received a
total of $30.0 million of reimbursement payments for
research and development costs from Takeda related to our
efforts to develop AMITIZA, which we recognized as research and
development revenue ratably over the performance period,
resulting in $3.4 million of research and development
revenue in 2007 and $10.5 million in 2006. The smaller
amount of revenue recognized in 2007 is a result of the full
year of revenue recognition in 2006 and also reflects our
determination in June 2006 to extend the estimated completion of
the development period to June 2007.
|
|
|
|
We also began to perform services and receive payments from
Takeda during the third quarter of 2006 for the following three
deliverables: post-marketing studies to evaluate the safety of
AMITIZA in patients with renal impairment and patients with
hepatic impairment, Phase IV clinical trials of AMITIZA for
the treatment of chronic idiopathic constipation in pediatric
patients and clinical trials of AMITIZA for the treatment of
opioid-induced bowel dysfunction. Total research and development
revenue associated with these three deliverables in 2007 and
2006 was $18.3 million and $1.1 million, respectively.
|
Product royalty revenue represents payments received from Takeda
relating to net sales of AMITIZA. We began to recognize product
royalty payments from Takeda as revenue in the second quarter of
2006 following the product launch of AMITIZA. In 2007, we
recognized $27.5 million of product royalty revenue
compared to $6.6 million in 2006, reflecting increased
sales of AMITIZA.
Co-promotion revenues represent reimbursement by Takeda of
co-promotion costs for our specialty sales force and costs
associated with miscellaneous marketing activities in connection
with the commercialization of AMITIZA. We began to receive
reimbursement of costs for our sales force in the second quarter
of 2006 following the product launch of AMITIZA. In 2007, we
recognized $4.4 million of co-promotion revenues, of which
approximately $158,000 was for reimbursement of costs for
miscellaneous marketing activities and approximately
$4.3 million was for reimbursement of sales force costs. In
2006, we recognized $4.2 million as co-promotion revenues,
of which approximately $291,000 was for reimbursement of costs
for miscellaneous marketing activities and $3.5 million was
for reimbursement of sales force costs.
72
Contract revenue related parties represents
reimbursement of costs incurred by us on behalf of affiliated
companies for research and development consulting, patent
maintenance and certain administrative costs. These revenues are
recognized in accordance with the terms of the contract or
project to which they relate. We had no contract revenue in 2007
compared to $1.5 million in 2006. Contract revenue
represents amounts released from previously deferred revenue
that we recognized upon the expiration in January 2006 of the
option we had previously granted to Takeda for joint development
and commercialization rights for AMITIZA in Europe, Africa and
the Middle East.
Research
and Development Expenses
Total research and development expenses in 2007 were
$28.3 million compared to $16.4 million in 2006, an
increase of $11.9 million. The higher costs in 2007 reflect
the significant research and development expenses incurred by us
during that period in connection with the filing of the sNDA for
the treatment of irritable bowel syndrome with constipation; the
initiation of post-marketing safety studies in pediatric
patients, in patients with renal impairment and in patients with
hepatic impairment; the initiation of Phase III studies for
opioid-induced bowel dysfunction; and the initiation of a
Phase II study of NSAID-induced ulcers. In 2006, our
research and development expenses were primarily those
associated with the ongoing Phase III clinical trials of
AMITIZA for the treatment of irritable bowel syndrome with
constipation. In September 2007, we enrolled our first patient
in a Phase III study for opioid-induced bowel dysfunction
and our first patient in a multi-center Phase II study of
NSAID-induced ulcers.
General
and Administrative Expenses
The following summarizes our general and administrative expenses
for years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Salaries, benefits and related costs
|
|
$
|
6,472
|
|
|
$
|
5,342
|
|
Legal and consulting expenses
|
|
|
2,968
|
|
|
|
3,356
|
|
Stock-based compensation
|
|
|
237
|
|
|
|
2,708
|
|
Founders stock-based awards
|
|
|
9,188
|
|
|
|
|
|
Lease loss
|
|
|
432
|
|
|
|
|
|
Other operating expenses
|
|
|
5,734
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,031
|
|
|
$
|
14,587
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses were $25.0 million in
2007 compared to $14.6 million in 2006, an increase of
$10.4 million. This increase was due primarily to the
founders stock-based award of $9.2 million granted in
June 2007, comprising of $6.1 million non-cash compensation
expense and $3.1 million cash settlement expense, offset in
part by the decline in stock-based compensation expenses from
the $2.7 million recorded in the prior year. This increase
also reflected increases in operational headcount, rent for
additional leased office space, lease loss related to the
abandonment of our former office in Bethesda, Maryland in 2007
and additional costs associated with being a publicly-traded
company.
We recorded a cumulative out-of-period adjustment of
approximately $358,000 in 2007 to reduce an overstatement of
additional paid-in capital and general administrative expenses
that had been recorded as of and for the year ended
December 31, 2006 in connection with certain employee stock
options awarded in 2006. The error resulted from applying the
incorrect contractual term for to the employee stock options.
The impacts of this adjustment were not material to the
consolidated financial statements for the year ended
December 31, 2006, for the corresponding interim periods or
for the period in which it was recorded, as the adjustment
consisted of insignificant amounts related to each of the
quarterly reporting periods dating back to the quarter ended
September 30, 2006.
73
Selling
and Marketing Expenses
Selling and marketing expenses were $13.2 million in 2007
compared to $11.1 million in 2006, an increase of
$2.1 million. This increase was due to increased costs for
market research and analysis, marketing and promotional
materials and other costs, reflecting the operation of our sales
and marketing function for twelve months in 2007 compared to
only nine months in 2006.
Product
Royalties Related Parties
We began to incur product royalty expenses for net sales of
AMITIZA in the second quarter of 2006 following the product
launch of AMITIZA. In 2007, we expensed $4.9 million in
product royalties related parties compared to
$1.2 million in 2006, reflecting higher product sales in
2007.
Milestone
Royalties Related Parties
Milestone royalties related parties were
$2.0 million and $1.3 million in 2007 and 2006,
respectively. These royalties were paid to Sucampo AG,
reflecting the 5% we owed them for the $30.0 million
development milestone earned from Takeda during that period and
a $500,000 milestone for the initiation of a Phase II
trial in Japan. The milestone royalties related
parties of $1.3 million for the year ended
December 31, 2006 were paid to Sucampo AG, reflecting the
5% we owed them for the $20.0 million development milestone
payment we received from Takeda during that period, and a
$250,000 milestone payment for regulatory approval of
AMITIZA.
Non-Operating
Income and Expense
The following table summarizes our non-operating income and
expense for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,465
|
|
|
$
|
1,976
|
|
Interest expense
|
|
|
|
|
|
|
(90
|
)
|
Other (expense) income, net
|
|
|
151
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income, net
|
|
$
|
2,616
|
|
|
$
|
2,141
|
|
|
|
|
|
|
|
|
|
|
Interest income was $2.5 million in 2007 compared to
$2.0 million in 2006, an increase of $489,000. The increase
was primarily due to an increase in the funds available for
investment as a result of our receipt of development milestone
payments from Takeda in June 2007 and the closing of our initial
public offering in August 2007. Interest expense was $0 in 2007
compared to $90,000 in 2006, a decrease of $90,000. This
decrease reflected our repayment in full in June 2006 of related
party debt instruments.
Income
Taxes
For the years ended December 31, 2007 and 2006, our
consolidated effective tax rate was 37.3% and (29.0%),
respectively. The increase in the effective tax rate in 2007
from 2006 was due to a partial release of the valuation
allowance on the U.S. deferred tax assets in 2006 that did
not recur in 2007. As of December 31, 2007, our remaining
valuation allowance against our deferred tax assets was
$10.8 million.
74
Comparison
of years ended December 31, 2006 and December 31,
2005
Revenues
The following table summarizes our revenues for the years ended
December 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
46,382
|
|
|
$
|
38,960
|
|
Product royalty revenue
|
|
|
6,590
|
|
|
|
|
|
Co-promotion revenue
|
|
|
4,243
|
|
|
|
|
|
Contract revenue related parties
|
|
|
404
|
|
|
|
98
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
147
|
|
Contract revenue
|
|
|
1,500
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,266
|
|
|
$
|
40,205
|
|
|
|
|
|
|
|
|
|
|
Total revenues were $59.3 million in 2006 compared to
$40.2 million in 2005, an increase of $19.1 million.
This increase was primarily due to an increase in payments
received from Takeda for research and development services
performed by us, product royalties from AMITIZA sales, and
reimbursements of co-promotion efforts performed by us to market
and sell AMITIZA.
Research and development revenue was $46.4 million for the
year ended December 31, 2006 compared to $39.0 million
for the year ended December 31, 2005, an increase of
$7.4 million. The specific revenue streams associated with
research and development revenue for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
In October 2004, we received the up-front payment of
$20.0 million from Takeda, of which $17.6 million was
associated with the development of AMITIZA. This amount was
recognized ratably over the estimated performance period,
resulting in $6.2 million and $8.1 million of research
and development revenue in 2006 and 2005, respectively. The
smaller amount of revenue recognized in 2006 was a result of our
determination in June 2006 to extend the estimated completion of
the development period to mid 2007.
|
|
|
|
In March and May 2005, we received development milestone
payments from Takeda totaling $30.0 million related to our
efforts to develop AMITIZA. We recognized these payments as
research and development revenue ratably over the performance
period, resulting in $10.5 million of research and
development revenue in 2006 and $16.2 million in 2005. The
smaller amount of revenue recognized in 2006 was a result of our
determinations in June 2006 to extend the estimated completion
of the development period to mid 2007.
|
|
|
|
In January 2006, we received a $20.0 million development
milestone payment from Takeda related to our efforts to develop
AMITIZA, which we recognized as research and development revenue
ratably over the performance period, resulting in
$17.8 million of research and development revenue in 2006.
|
|
|
|
Since inception of our agreement with Takeda, we have received a
total of $30.0 million of reimbursement payments for
research and development costs from Takeda related to our
efforts to develop AMITIZA, which we recognized as research and
development revenue ratably over the performance period,
resulting in $10.5 million of research and development
revenue in 2006 and $14.7 million in 2005. The smaller
amount of revenue recognized in 2006 was a result of our
determination in June 2006 to extend the estimated completion of
the development period to mid 2007.
|
|
|
|
We also began to perform services and receive payments from
Takeda during the third quarter of 2006 for the following three
deliverables: post-marketing studies to evaluate the safety of
AMITIZA in patients with renal impairment and patients with
hepatic impairment, Phase IV clinical trials of AMITIZA for
the treatment of chronic idiopathic constipation in pediatric
patients and clinical trials of AMITIZA for the treatment of
opioid-induced bowel dysfunction. Total research and development
revenue associated with these three deliverables in 2006 was
$1.1 million.
|
75
Product royalty revenue represents payments received from Takeda
relating to net sales of AMITIZA. We began to recognize the
royalty payments from Takeda as revenue in the second quarter of
2006 following the product launch of AMITIZA. In 2006, we
recognized $6.6 million of product royalty revenue. Of this
product royalty revenue, we recognized $4.5 million in the
quarter ended June 30, 2006, which reflected stocking
purchases by drug wholesalers to establish their initial
inventory levels, and therefore these revenues may not be
indicative of product royalty revenue levels that we may achieve
in future periods.
Co-promotion revenues represent reimbursement by Takeda of
co-promotion costs for our specialty sales force and costs
associated with miscellaneous marketing activities in connection
with the commercialization of AMITIZA. We began to receive
reimbursement of costs for our sales force in the second quarter
of 2006 following the product launch of AMITIZA. In 2006, we
recognized $4.2 million as co-promotion revenues, of which
approximately $291,000 was for reimbursement of costs for
miscellaneous marketing activities and $3.5 million was for
reimbursement of sales force costs.
Contract revenue related parties represents
reimbursement of costs incurred by us on behalf of affiliated
companies for research and development consulting, patent
maintenance and certain administrative costs. These revenues are
recognized in accordance with the terms of the contract or
project to which they relate. Contract revenue
related parties was $404,000 for the year ended
December 31, 2006 compared to $98,000 for the year ended
December 31, 2005, an increase of $306,000.
Upon receipt of the $20.0 million up-front payment, we
deferred $2.4 million to be recognized using the time-based
model over the
16-year
performance period of our participation in the committee
meetings. During each of the years ended December 31, 2006
and 2005, we recognized $147,000 of this deferred amount as
collaboration revenue.
Contract revenue was $1.5 million for the year ended
December 31, 2006 compared to $1.0 million for the
year ended December 31, 2005, an increase of $500,000.
Contract revenue represents amounts released from previously
deferred revenue that we recognized upon the expiration of the
option granted to Takeda for joint development and
commercialization rights for AMITIZA in Europe, Africa and the
Middle East.
Research
and Development Expenses
Total research and development expenses in 2006 were
$16.4 million compared to $31.2 million in 2005, a
decrease of $14.8 million. The higher costs in 2005 reflect
the significant research and development expenses incurred by us
during that period in connection with the filing of the NDA for
AMITIZA to treat chronic idiopathic constipation in adults and
the initiation of Phase III clinical trials of AMITIZA for
the treatment of irritable bowel syndrome with constipation. In
2006, our research and development expenses were primarily those
associated with the ongoing Phase III clinical trials of
AMITIZA for the treatment of irritable bowel syndrome with
constipation.
General
and Administrative Expenses
The following summarizes our general and administrative expenses
for years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
Salaries, benefits and related costs
|
|
$
|
5,342
|
|
|
$
|
3,843
|
|
Legal and consulting expenses
|
|
|
3,356
|
|
|
|
1,565
|
|
Stock-based compensation
|
|
|
2,708
|
|
|
|
138
|
|
Other operating expenses
|
|
|
3,181
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,587
|
|
|
$
|
7,760
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses were $14.6 million in
2006 compared to $7.8 million in 2005, an increase of
$6.8 million. This increase was due primarily to
recognition of $2.7 million in stock-based compensation
expenses following our adoption of SFAS 123R in January
2006, increases in operational headcount, rent for
76
additional leased office space and a one-time bonus payment to
our employees upon receipt of marketing approval for AMITIZA to
treat chronic idiopathic constipation in adults, as well as
professional fees in connection with our acquisition of the
capital stock of Sucampo Europe and Sucampo Japan.
Selling
and Marketing Expenses
Selling and marketing expenses were $11.1 million in 2006
compared to $295,000 in 2005, an increase of $10.8 million.
This increase was due to costs we incurred to launch AMITIZA in
April 2006 and other selling and marketing expenses through the
remainder of 2006, including costs for market research and
analysis, marketing and promotional materials, product samples
and other costs.
Milestone
Royalties Related Parties
Milestone royalties related parties were
$1.3 million in 2006 compared to $1.5 million in 2005,
a decrease of $200,000. In the year ended December 31,
2006, we paid Sucampo AG $1.0 million, reflecting the 5% we
owed them in respect of the $20.0 million development
milestone payment we received from Takeda during that period,
and a $250,000 milestone payment for regulatory approval of
AMITIZA. In the year ended December 31, 2005, we paid
Sucampo AG $1.5 million, reflecting the 5% we owed them in
respect of the $30.0 million development milestone payments
we received from Takeda during that period.
Product
Royalties Related Parties
We began to incur product royalty expenses for net sales of
AMITIZA in the second quarter of 2006 following the product
launch of AMITIZA. In 2006, we expensed $1.2 million in
product royalties related parties.
Non-Operating
Income and Expense
The following table summarizes our non-operating income and
expense for the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
1,976
|
|
|
$
|
1,046
|
|
Interest expense
|
|
|
(90
|
)
|
|
|
(311
|
)
|
Other income, net
|
|
|
255
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income, net
|
|
$
|
2,141
|
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
|
Interest income was $2.0 million in 2006 compared to
$1.0 million in 2005, an increase of $1.0 million. The
increase was primarily due to an increase in the funds available
for investment as a result of our receipt of development
milestone payments from Takeda in March 2005, May 2005 and
January 2006. Interest expense was $90,000 in 2006 compared to
$311,000 in 2005, a decrease of $221,000. This decrease
reflected our repayment in full in December 2005 and June 2006
of related party debt.
Income
Taxes
For the years ended December 31, 2006 and 2005, our
consolidated effective tax rate was (29.0)% and 166.7%,
respectively. The decrease in the effective tax rate in 2006
from 2005 was due primarily to the release of $4.9 million
from the valuation allowance in 2006 on a portion of the
U.S. deferred tax assets.
77
Reportable
Geographic Segments
We have determined that we have three reportable geographic
segments based on our method of internal reporting, which
disaggregates business by geographic location. These segments
are the United States, Europe and Japan. We evaluate the
performance of these segments on the basis of income from
operations. The following is a summary of financial information
by reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
United States
|
|
|
Europe
|
|
|
Japan
|
|
|
Eliminations
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
91,891
|
|
|
$
|
|
|
|
$
|
840
|
|
|
$
|
(840
|
)
|
|
$
|
91,891
|
|
Income (loss) from operations
|
|
|
21,681
|
|
|
|
(1,127
|
)
|
|
|
(2,155
|
)
|
|
|
8
|
|
|
|
18,407
|
|
Identifiable assets
|
|
|
114,490
|
|
|
|
2,381
|
|
|
|
1,987
|
|
|
|
(8,831
|
)
|
|
|
110,027
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
57,676
|
|
|
$
|
1,500
|
|
|
$
|
161
|
|
|
$
|
(71
|
)
|
|
$
|
59,266
|
|
Income (loss) from operations
|
|
|
13,974
|
|
|
|
980
|
|
|
|
(190
|
)
|
|
|
(1
|
)
|
|
|
14,763
|
|
Identifiable assets
|
|
|
68,943
|
|
|
|
496
|
|
|
|
2,556
|
|
|
|
(4,899
|
)
|
|
|
67,084
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
39,107
|
|
|
$
|
|
|
|
$
|
1,098
|
|
|
$
|
|
|
|
$
|
40,205
|
|
Income (loss) from operations
|
|
|
115
|
|
|
|
(1,475
|
)
|
|
|
843
|
|
|
|
|
|
|
|
(517
|
)
|
Liquidity
and Capital Resources
Sources
of Liquidity
We require cash principally to meet our operating expenses. We
have financed our operations since inception with a combination
of private placements of equity securities, our initial public
offering, up-front payment, milestone and royalty payments
received from Takeda and R-Tech, and research and development
expense reimbursements from Takeda. From inception through
December 31, 2007, we had raised net proceeds of
$55.3 million from private equity financings and net
proceeds of $28.2 million from our initial public offering
in August 2007. From inception through December 31, 2007,
we had also received an aggregate of $140.5 million in
up-front, milestone, option and expense reimbursement payments
from third parties. We operated profitably in 2007 and 2006,
principally as a result of the development milestones and
product royalties that we earned from Takeda. We are entitled to
receive $50.0 million upon FDA approval of our sNDA for
AMITIZA for the treatment of irritable bowel syndrome with
constipation. We expect a PDUFA action in late April 2008
relating to this sNDA.
As of December 31, 2007, we had cash and cash equivalents
of $25.6 million, short-term investments of
$51.6 million and long-term investments of
$9.4 million compared to cash and cash equivalents of
$22.5 million and short-term investments of
$29.4 million at December 31, 2006. Our cash and cash
equivalents are deposits in operating accounts and highly liquid
investments with the original maturity at time of purchase of
90 days or less.
As of December 31, 2007, our short- and long-term
investments consist of investments in auction rate securities.
Auction rate securities are generally long-term debt instruments
that provide liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined calendar
intervals, generally every seven to 49 days. This mechanism
generally allows existing investors to roll-over their holdings
and continue to own their respective securities or liquidate
their holdings by selling their securities at par value.
We generally invest in auction rate securities for short periods
of time as part of our cash management program. Recent
uncertainties in the credit markets have prevented us from
liquidating certain holdings of auction rate securities
subsequent to December 31, 2007 as the amount of securities
submitted for sale during the auction has exceeded the amount of
purchase orders. Although an event of an auction failure does
not necessarily mean that a security is impaired, we considered
various factors to assess the fair value and the classification
of the securities as short-term or long-term assets. Such
factors include, but are not necessarily limited to, timing of
the failed auction, specific security auction history,
likelihood of redemptions, restructurings and other similar
liquidity events, quality
78
of underlying collateral, rating of the security and the bond
insurer and other factors. Such considerations involve a
considerable amount of judgment. As a result of our assessment
of the market conditions and related facts, including an
instance in which the first auction after year-end failed, one
security in the amount of $9.4 million was classified as a
long-term investment as of December 31, 2007. In other
instances, we experienced successful auctions shortly after
December 31, 2007, but then encountered subsequent failed
auctions in February and March 2008 in an aggregate amount of
$18.3 million.
As of March 20, 2008, we had reduced our investment in
auction rate securities by selling $33.2 million of
investments at par value. We continue to hold the remaining
securities and are due interest at a higher rate on those
securities as to which the auctions have failed than similar
securities for which auctions have cleared. These investments
consist of AAA-rated non-mortgage related auction rate
securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. At
December 31, 2007 and 2006, the fair market values of these
securities were determined to be the carrying values and no
unrealized gains and losses or other-than-temporary impairments
were recorded. We assessed the fair value of the auction rate
securities as of December 31, 2007 through either an
independent valuation for securities which we felt were subject
to credit risk at December 31, 2007, including an
assessment of all key underlying data and assumptions, or
through our own internal assessment of the carrying value and
reasonableness of fair values. Considerable judgment was
involved in reaching these determinations. If the credit ratings
of the issuer, the bond insurer or the collateral deteriorate or
the carrying value of the investments decline for any other
reason, we may need to adjust the carrying value of these
investments. Although a limited secondary market exists for
these securities, we do not intend at this time to use the
secondary market to dispose of the auction rate securities.
It is uncertain as to when the liquidity issues relating to
these investments will improve, although we believe as of
December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. Although we do not currently anticipate having to sell
these securities in order to operate our business, if that were
to change, or if the liquidity issues continue over a prolonged
period, we might be unable to liquidate some holdings of our
auction rate securities and as a result, might suffer losses
from these investments or find that ultimate liquidity for these
securities is further reduced. In addition, given the complexity
of auction rate securities and their valuations, our estimates
of their fair value may differ from the actual amount we would
be able to collect in an ultimate sale.
On March 5, 2008, we entered into a line of credit
providing for uncommitted borrowings of up to
$30.0 million. The lender has no obligation to make
advances under this line of credit but may do so in its sole
discretion. The line of credit is collateralized by our short-
and long-term investments. Advances made under this line of
credit will bear an interest rate based on LIBOR plus a
predetermined percentage based on the amount of the advance and
other conditions. Borrowings under this line of credit are due
upon the demand of the lender and the lender can make a
repayment demand at its sole option at any time for any or no
reason. As of March 20, 2008, we had not drawn down any
funds under this line of credit.
Cash
Flows
The following table summarizes our cash flows for the years
ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
5,649
|
|
|
$
|
(10,914
|
)
|
|
$
|
23,815
|
|
Investing activities
|
|
|
(33,784
|
)
|
|
|
(1,413
|
)
|
|
|
(25,474
|
)
|
Financing activities
|
|
|
31,341
|
|
|
|
17,421
|
|
|
|
(2,278
|
)
|
Effect of exchange rates
|
|
|
(128
|
)
|
|
|
(49
|
)
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
3,078
|
|
|
$
|
5,045
|
|
|
$
|
(4,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Year
ended December 31, 2007
Net cash provided by operating activities was $5.6 million
for the year ended December 31, 2007. This reflected net
income of $13.2 million, which included non-cash deferred
tax provision of $4.3 million and non-cash stock-based
compensation of $6.7 million, offset by an increase in
product royalties receivable of $6.6 million and in
accounts receivable of $5.9 million and a decrease in
deferred revenue of $11.0 million. The decrease in deferred
revenue primarily related to the amortization of deferred
research and development revenue over the performance period of
the development of AMITIZA.
Net cash used in investing activities was $33.8 million for
the year ended December 31, 2007. This primarily reflected
our purchases of short-term investments and of property and
equipment associated with the move of our offices in the United
States in July 2007 offset by proceeds from the sale of
short-term investments.
Net cash provided by financing activities was $31.3 million
for the year ended December 31, 2007. This reflected the
net proceeds from the issuance of class A common stock in
our initial public offering, which was consummated in August
2007. We had prepaid $3.1 million of offering expenses
prior to 2007.
Year
ended December 31, 2006
Net cash used in operating activities was $10.9 million for
the year ended December 31, 2006. This reflected net income
of $21.8 million, which included a non-cash charge of
$3.3 million of stock-based compensation expense. We also
had a decrease in deferred tax provision of $4.0 million
and a decrease in deferred revenue of $26.8 million. The
decrease in deferred revenue primarily related to the
amortization of deferred research and development revenue over
the performance period of the development of AMITIZA.
Net cash used in investing activities was $1.4 million for
the year ended December 31, 2006. This reflected our
purchases of short-term investments and property and equipment
of $2.5 million, offset in part by proceeds received from
sales and maturities of short-term investments of
$1.3 million.
Net cash provided by financing activities was $17.4 million
for the year ended December 31, 2006. This reflected
$23.9 million in net proceeds raised in a private placement
sale of 2,398,759 shares of class A common stock,
$1.2 million in funds received from borrowings under
related party debt instruments, $2.9 million of payments
incurred for our completed initial public offering and
$4.8 million of repayments under related party debt
instruments.
Year
ended December 31, 2005
Net cash provided by operating activities was $23.8 million
for the year ended December 31, 2005. This reflected a net
loss of $316,000, an increase in our deferred revenue of
$20.4 million from research and development payments from
Takeda to be amortized over the performance period of the
development of AMITIZA and $3.6 million of non-cash
stock-based compensation charges.
Net cash used in investing activities was $25.5 million for
the year ended December 31, 2005, reflecting our net
purchases of $25.4 million in short-term investments.
Net cash provided by financing activities was $2.3 million
for the year ended December 31, 2005, reflecting our
repayment of related party debt.
Commitments
and Contingencies
As of December 31, 2007, our principal outstanding
contractual obligations related to our office leases in
Bethesda, Maryland, England and Japan. The following table
summarizes these significant contractual obligations at December
31 for the indicated year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 and
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
1,555
|
|
|
$
|
1,325
|
|
|
$
|
969
|
|
|
$
|
937
|
|
|
$
|
963
|
|
|
$
|
4,243
|
|
|
$
|
9,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
The above table does not include:
|
|
|
|
|
Contingent milestone and royalty obligations under our license
agreement with Sucampo AG. These obligations are described in
more detail above, and include obligations to pay Sucampo AG:
|
|
|
|
|
|
5% of every milestone payment we receive from a sublicensee;
|
|
|
|
$500,000 upon initiation of the first Phase II clinical
trial for each compound in each of the three territories covered
by the license;
|
|
|
|
$1.0 million for the first NDA filing or comparable foreign
regulatory filing for each compound in each of these three
territories; and
|
|
|
|
royalty payments ranging from 2.1% to 6.5% of net sales of
products covered by patents licensed to us by Sucampo AG.
|
|
|
|
|
|
Our share of research and development costs for AMITIZA. As of
December 31, 2007, we had incurred $14.0 million of
these costs. In June 2007, we submitted an sNDA for the addition
of irritable bowel syndrome with constipation as a new
indication using a twice daily 8 microgram dose. We expect to
incur approximately $2.0 million of additional costs in
connection with the development of AMITIZA for other
indications, such as the treatment of opioid-induced bowel
dysfunction, which will not be reimbursed by Takeda.
|
|
|
|
Expenses under agreements with contract research organizations
for clinical trials of our product candidates. The timing and
amount of these disbursements are based on a variety of factors,
such as the achievement of specified milestones, patient
enrollment, services rendered or the incurrence of expenses by
the contract research organization. As a result, we reasonably
estimate that as of December 31, 2007, our current
commitments to contract research organizations to be
$24.2 million during 2008 and 2009.
|
In addition, the FDA has required us to perform two
post-marketing studies to evaluate the safety of AMITIZA in
patients with renal impairment and patients with hepatic
impairment. Under our collaboration agreement with Takeda, the
costs for these studies will be shared 70% by Takeda and 30% by
us. We do not anticipate our portion of these expenses will
exceed $5.0 million.
Funding
Requirements
We will need substantial amounts of capital to continue growing
our business. We will require this capital to:
|
|
|
|
|
fund our 30% share of the two post-marketing studies of AMITIZA
to evaluate its safety in patients with renal impairment and
patients with hepatic impairment;
|
|
|
|
fund regulatory efforts by Sucampo Europe and Sucampo Japan for
AMITIZA and cobiprostone;
|
|
|
|
fund development and regulatory activities for cobiprostone and
SPI-017;
|
|
|
|
fund research and development activities for prostone compounds
other than AMITIZA, cobiprostone and SPI-017;
|
|
|
|
fund the expansion of our commercialization activities in the
United States and the initiation of commercialization efforts in
non-U.S. markets; and
|
|
|
|
fund costs for capital expenditures to support the growth of our
business.
|
The timing of these funding requirements is difficult to predict
due to many factors, including the outcomes of our research and
development programs and when those outcomes are determined, the
timing of obtaining regulatory approvals and the presence and
status of competing products. Our capital needs may exceed the
capital available from our future operations, collaborative and
licensing arrangements and existing liquid assets. Our future
capital requirements and liquidity will depend on many factors,
including, but not limited to:
|
|
|
|
|
the revenue from AMITIZA;
|
|
|
|
the future expenditures we may incur to increase revenue from
AMITIZA;
|
81
|
|
|
|
|
the cost and time involved to progress our research and
development programs;
|
|
|
|
our ability to establish collaborative arrangements and to enter
into licensing agreements and contractual arrangements with
others; and
|
|
|
|
any future change in our business strategy.
|
To the extent that our capital resources may be insufficient to
meet our future capital requirements, we may need to finance our
future cash needs through public or private equity offerings,
debt financings or corporate collaboration and licensing
arrangements. Except for research and development funding and
potential future milestone payments of up to $110.0 million
from Takeda, we do not currently have any commitments for future
external funding.
Additional equity or debt financing, grants or corporate
collaboration and licensing arrangements may not be available on
acceptable terms, if at all. If adequate funds are not
available, we may be required to delay, reduce the scope of or
eliminate our research and development programs, reduce our
planned commercialization efforts or obtain funds through
arrangements with collaborators or others that may require us to
relinquish rights to certain product candidates that we might
otherwise seek to develop or commercialize independently. In
addition, any future equity funding may dilute the ownership of
our equity investors.
Related
Party Transactions
Under our license agreement with our affiliate Sucampo AG, we
are required to make specified milestone and royalty payments.
We estimated the fair value of this arrangement based upon
like-kind third-party evidentiary matter for the transaction.
When we entered into this agreement, we performed an economic
analysis of the transaction to ensure that we were receiving a
return on our investment equivalent to that of other
pharmaceutical companies. In addition, we performed a transfer
pricing study and economic analysis to provide evidence that the
agreement did not conflict with taxing guidelines.
Under our exclusive supply agreement with R-Tech, R-Tech made
milestone payments to us totaling $6.0 million during 2004
and we recorded the full amount as deferred revenue. We first
began to recognize these payments as revenue during the quarter
ended June 30, 2006 and will continue to recognize them
ratably through 2020. When we entered into this agreement, we
evaluated the net present value of the supply agreement, based
upon anticipated cash flows from the successful development and
commercialization of the compounds it covers, to determine the
current value of the transaction. Additionally, we performed a
transfer pricing study and economic analysis to provide evidence
the agreement did not conflict with taxing guidelines.
For information regarding additional related party transactions,
see note 9 to our consolidated financial statements
included in this Annual Report on
Form 10-K.
Changes in the application of domestic or foreign taxing
regulations and interpretation of related party transactions
with foreign entities could affect the extent to which taxing
authorities agree that these transactions are on an arms
length basis.
Effects
of Inflation
Our most liquid assets are cash, cash equivalents and short-term
investments. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have
intangible assets in the value of our intellectual property. In
accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our balance sheets. Due to the nature of this intellectual
property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue
to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related
to replacement costs of such items will not materially affect
our operations. However, the rate of inflation affects our
expenses, such as those for employee compensation and contract
services, which could increase our level of expenses and the
rate at which we use our resources.
82
Effects
of Foreign Currency
We currently incur a portion of our operating expenses in the
United Kingdom and Japan. The reporting currency for our
consolidated financial statements is U.S. Dollars. As such,
our results of operations could be adversely effected by changes
in exchange rates either due to transaction losses, which are
recognized in the statement of operations, or translation
losses, which are recognized in comprehensive income. We
currently do not hedge foreign exchange rate exposure.
Off
Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities.
Accounting
Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS 157,
which addresses how companies should measure fair value when
they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting
principles. SFAS 157 outlines a common definition of fair
value and the new standard intends to make the measurement of
fair value more consistent and comparable and improve
disclosures about those measures. We will need to adopt
SFAS 157 for financial statements issued for fiscal years
beginning after November 15, 2007. In February 2008, the
FASB agreed to delay the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after
November 15, 2008. We are assessing SFAS 157 and its
impact on our consolidated financial statements upon adoption.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement
No. 115, or SFAS 159. Under this standard,
entities will now be permitted to measure many financial
instruments and certain other assets and liabilities at fair
value on an
instrument-by-instrument
basis. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We are assessing SFAS 159 in
connection with SFAS 157 and its impact on our consolidated
financial statements upon adoption.
In June 2007, the EITF issued EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities, or
EITF 07-3,
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. We will be
required to adopt
EITF 07-3
for the year beginning after December 15, 2007. We are
assessing
EITF 07-3
and do not expect a material impact on our future consolidated
financial statements upon adoption.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS 141R, and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research
Bulletin No. 51, or SFAS 160.
SFAS 141R will change how business acquisitions are
accounted for and will affect financial statements both on the
acquisition date and in subsequent periods. SFAS 160 will
change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 141R and
SFAS 160 will be applied to acquisitions that close in
years beginning after December 15, 2008. Early adoption is
not permitted. SFAS 141R and SFAS 160 will not have
any impact our future consolidated financial statements unless
we undertake an acquisition in the future.
In December 2007, the FASB ratified EITF Issue
07-1,
Accounting for Collaborative Arrangements, or
EITF 07-1.
The consensus prohibits the equity method of accounting for
collaborative arrangements under APB 18, The Equity
Method of Accounting for Investments in Common Stock,
unless a legal entity exists. Payments between the collaborative
partners will be evaluated and reported in the income statement
based on applicable accounting principles generally accepted in
the United States of America, or GAAP. Absent specific GAAP, the
participants to the arrangement will apply other existing GAAP
by analogy or apply a reasonable and rational accounting policy
consistently. The guidance in Issue
07-1 is
effective for periods that begin after December 15,
83
2008 and will apply to arrangements in existence as of the
effective date. The effect of the new consensus will be
accounted for as a change in accounting principle through
retrospective application. We are assessing
EITF 07-1
and its impact on our consolidated financial statements upon
adoption.
In December 2007, the SEC issued SAB No. 110,
Share-Based Payment, or SAB 110, which
expresses the views of the SEC regarding the use of a simplified
method, as discussed in SAB 107, in developing an estimate
of the expected term of plain vanilla share options in
accordance with SFAS 123R. In SAB 110, the SEC stated
that it understood that the detailed information necessary to
calculate an expected term for plain vanilla options may not be
widely available by December 31, 2007, as previously
discussed within SAB 107. Accordingly, the SEC will
continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. As allowed
under SAB 110, we will continue to use the simplified
method in estimating the expected term of our stock options
until such time as more relevant detailed information becomes
available.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our international sales generally are denominated in United
States Dollars, and are, therefore, not exposed to changes in
foreign currency exchange rates.
We do not use derivative financial instruments for trading or
speculative purposes. However, we regularly invest excess cash
in overnight repurchase agreements that are subject to changes
in short-term interest rates. We believe that the market risk
arising from holding these financial instruments is minimal.
Our exposure to market risks associated with changes in interest
rates relates primarily to the increase or decrease in the
amount of interest income earned on our investment portfolio. We
ensure the safety and preservation of invested funds by limiting
default risks, market risk and reinvestment risk. We mitigate
default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not have
materially affected the fair value of our interest sensitive
financial instruments as of December 31, 2007.
Our exposure to credit risk consist of cash and cash
equivalents, restricted cash, investments and receivables. We
place our cash and case equivalents, restricted cash and
investments with highly rated financial institutions. As of
December 31, 2007 we had approximately $85.9 million
of cash and cash equivalents, restricted cash and investments in
excess of federally insured limits. We have not experienced any
losses on these accounts in excess of insured limits.
As of December 31, 2007, we had $60.9 million invested
in auction rate securities. Auction rate securities are
long-term debt instruments that provide liquidity through a
Dutch auction process that resets the applicable interest rate
at pre-determined calendar intervals, generally every seven to
49 days. This mechanism generally allows existing investors
to roll-over their holdings and continue to own their respective
securities or liquidate their holdings by selling their
securities at par value and therefore are usually classified
within current assets.
We generally invest in auction rate securities for short periods
of time as part of our cash management program. Recent
uncertainties in the credit markets have prevented us from
liquidating certain holdings of auction rate securities
subsequent to December 31, 2007 as the amount of securities
submitted for sale during the auction has exceeded the amount of
purchase orders. Although an event of an auction failure does
not necessarily mean that a security is impaired, we considered
various factors to assess the fair value and the classification
of the securities as short-term or long-term assets. Such
factors include, but are not necessarily limited to, timing of
the failed auction, specific security auction history,
likelihood of redemptions, restructurings and other similar
liquidity events, quality of underlying collateral, rating of
the security and the bond insurer and other factors. Such
considerations involve a considerable amount of judgment. As a
result of our assessment of the market conditions and related
facts, including an instance in which the first auction after
year-end failed, one security in the amount of $9.4 million
was classified as a long-term investment as of December 31,
2007. In other instances, we experienced successful auctions
shortly after December 31, 2007, but then encountered
subsequent failed auctions in February and March 2008 in an
aggregate amount of $18.3 million.
As of March 20, 2008, we had reduced our investment in
auction rate securities by selling $33.2 million of
investments at par value. We continue to hold the remaining
securities and are due interest at a higher rate on those
84
securities as to which the auctions have failed than similar
securities for which auctions have cleared. These investments
consist of AAA-rated non-mortgage related auction rate
securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. At
December 31, 2007 and 2006, the fair market values of these
securities were determined to be the carrying values and no
unrealized gains and losses or other-than-temporary impairments
were recorded. We assessed the fair value of the auction rate
securities as of December 31, 2007 through either an
independent valuation for securities which we felt were subject
to credit risk at December 31, 2007, including an
assessment of all key underlying data and assumptions, or
through our own internal assessment of the carrying value and
reasonableness of fair values. Considerable judgment was
involved in reaching these determinations. If the credit ratings
of the issuer, the bond insurer or the collateral deteriorate or
the carrying value of the investments decline for any other
reason, we may need to adjust the carrying value of these
investments. Although a limited secondary market exists for
these securities, we do not intend at this time to use the
secondary market to dispose of the auction rate securities.
It is uncertain as to when the liquidity issues relating to
these investments will improve, although we believe as of
December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. Although we do not currently anticipate having to sell
these securities in order to operate our business, if that were
to change, or if the liquidity issues continue over a prolonged
period, we might be unable to liquidate some holdings of our
auction rate securities and as a result, might suffer losses
from these investments. In addition, given the complexity of
auction rate securities and their valuations, our estimates of
their fair value may differ from the actual amount we would be
able to collect in an ultimate sale.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The consolidated financial statements and related financial
statement schedules required by this item are included beginning
on
page F-1
of this report.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer,
performed an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures
(as defined in
Rule 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934) as of
December 31, 2007. Based upon this evaluation, management
has concluded that, as of December 31, 2007, our disclosure
controls and procedures were effective to provide reasonable
assurance that the information required to be disclosed is
recorded, processed, summarized and reported within the time
periods specified under applicable rules of the Securities and
Exchange Commission, and that such information is accumulated
and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.
Changes
in Internal Controls
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
85
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information regarding our executive officers required by
this Item is set forth under Item 1 to this Annual Report
on
Form 10-K.
The following information will be included in our Proxy
Statement to be filed within 120 days after the fiscal year
end of December 31, 2007, and is incorporated herein by
reference:
|
|
|
|
|
Information regarding our directors required by this Item is set
forth under the heading Election of Directors;
|
|
|
|
Information regarding our Audit Committee and designated
audit committee financial experts is set forth under
the heading Corporate Governance Principles and Board
Matters, Board Structure and Committee Composition
Audit Committee; and
|
|
|
|
Information regarding Section 16(a) beneficial ownership
reporting compliance is set forth under the heading
Section 16(a) Beneficial Ownership Reporting
Compliance.
|
Code of
Ethics
We have adopted a code of ethics and business conduct that
applies to our employees including our principal executive
officer, principal financial officer, principal accounting
officer, and persons performing similar functions. Our code of
ethics and business conduct can be found posted in the investor
relations section on our website at
http://www.sucampo.com.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Executive Compensation of the Proxy Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information of the Proxy Statement.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Certain Relationships and Related Transactions of
the Proxy Statement.
86
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this Item is incorporated by
reference to the information provided under the heading
Principal Accounting Fees and Services of the Proxy
Statement.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULE
|
(a) The following financial statements, financial statement
schedule and exhibits are filed as part of this report or
incorporated herein by reference:
(1) Consolidated Financial
Statements. See index to consolidated financial
statements on
page F-1.
(2) Financial Statement
Schedule: Schedule II Valuation
and Qualifying Accounts. All other schedules are omitted because
they are not applicable, not required or the information
required is shown in the financial statements or notes thereto.
(3) Exhibits. See subsection (b)
below.
(b) Exhibits. The following exhibits are
filed or incorporated by reference as part of this report.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation
|
|
Exhibit 3.1 to the Companys Current Report on
Form 8-K
(filed August 8, 2007)
|
|
3
|
.2
|
|
Form of Restated Bylaws
|
|
Exhibit 3.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
4
|
.1
|
|
Specimen Stock Certificate evidencing the shares of class A
common stock
|
|
Exhibit 4.1 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
|
10
|
.1
|
|
Amended and Restated 2001 Stock Incentive Plan
|
|
Exhibit 10.1 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.2
|
|
Amended and Restated 2006 Stock Incentive Plan
|
|
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.3
|
|
2006 Employee Stock Purchase Plan
|
|
Exhibit 10.3 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.4
|
|
Form of Incentive Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.5
|
|
Form of Nonstatutory Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.5 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.6
|
|
Form of Restricted Stock Agreement for 2006 Stock Incentive Plan
|
|
Exhibit 10.6 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.7
|
|
Non-employee Director Compensation Summary
|
|
Exhibit 10.7 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.8
|
|
Employment Agreement, dated June 16, 2006, between the Company
and Ryuji Ueno
|
|
Exhibit 10.9 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.9
|
|
Form of Executive Employment Agreement
|
|
Exhibit 10.10 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
87
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.10
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Sachiko Kuno
|
|
Exhibit 10.11 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.11
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Ryuji Ueno
|
|
Exhibit 10.12 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.12
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Michael Jeffries
|
|
Exhibit 10.13 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.13
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Hidetoshi Mine
|
|
Exhibit 10.14 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.14
|
|
Form of Investor Rights Agreement
|
|
Exhibit 10.16 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.15
|
|
Lease Agreement, dated September 16, 1998, between the Company
and Plaza West Limited Partnership, successor in interest to
Trizechahn Plaza West Limited Partnership, as amended
|
|
Exhibit 10.17 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.16
|
|
Sublease Agreement, dated October 26, 2005, between the Company
and First Potomac Realty Investment L.P.
|
|
Exhibit 10.18 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.17
|
|
Amended and Restated Patent Access Agreement, dated June 30,
2006, among the Company, Sucampo Pharma Europe Ltd., Sucampo
Pharma, Ltd. and Sucampo AG
|
|
Exhibit 10.19 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.18*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 23,
2004, between the Company and
R-Tech Ueno,
Ltd., as amended on October 2, 2006
|
|
Exhibit 10.20 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.19*
|
|
Collaboration and License Agreement, dated October 29, 2004,
between the Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.21 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.20*
|
|
Agreement, dated October 29, 2004, among the Company, Takeda
Pharmaceutical Company Limited and Sucampo AG
|
|
Exhibit 10.22 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.21*
|
|
Supply Agreement, dated October 29, 2004, among the Company,
Takeda Pharmaceutical Company Limited and R-Tech Ueno, Ltd.
|
|
Exhibit 10.23 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.22*
|
|
Supply and Purchase Agreement, dated January 25, 2006, among the
Company, Takeda Pharmaceutical Company Limited and R-Tech Ueno,
Ltd.
|
|
Exhibit 10.24 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.23*
|
|
Supplemental Agreement, dated February 1, 2006, between the
Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.25 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.24*
|
|
Services Agreement, dated February 9, 2006, between the Company
and Ventiv Commercial Services, LLC
|
|
Exhibit 10.26 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.25
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Timothy Maudlin
|
|
Exhibit 10.27 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.26
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Sue Molina
|
|
Exhibit 10.28 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
88
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.27*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 24,
2005, between Sucampo Pharma Europe Ltd. and R-Tech Ueno, Ltd.,
as amended on October 2, 2006
|
|
Exhibit 10.29 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.28*
|
|
SPI-8811 and SPI-017 Exclusive Clinical Manufacturing and Supply
Agreement, dated October 4, 2006, between the Company and R-Tech
Ueno, Ltd.
|
|
Exhibit 10.31 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.29
|
|
Lease Agreement, dated December 18, 2006, between the Company
and EW Bethesda Office Investors, LLC
|
|
Included herewith
|
|
10
|
.30
|
|
Amendment to Employment Agreement, dated November 20, 2006,
between the Company and Ryuji Ueno
|
|
Exhibit 10.35 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
|
10
|
.31
|
|
Letter agreement, dated January 29, 2007, between the Company
and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.36 to Registration Statement
No. 333-135133,
Amendment No. 6 (filed May 14, 2007)
|
|
10
|
.32
|
|
Employment Agreement, effective June 1, 2007, between the
Company and Sachiko Kuno
|
|
Exhibit 10.37 to Registration Statement
No. 333-135133,
Amendment No. 8 (filed July 17, 2007)
|
|
10
|
.33
|
|
Amended Employment Agreement, dated May 12, 2007, between the
Company and Mariam E. Morris
|
|
Exhibit 10.38 to Registration Statement
No. 333-135133,
Amendment No. 7 (filed June 25, 2007)
|
|
10
|
.34
|
|
Indemnification Agreement, dated October 18, 2007, between the
Company and Anthony C. Celeste
|
|
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.35
|
|
Amendment, dated December 14, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.1 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.36
|
|
Amendment, dated December 10, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.2 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.37
|
|
Amendment, dated December 7, 2007, to Employment Agreement
between the Company and Brad Fackler
|
|
Exhibit 10.3 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.38
|
|
Amendment, dated December 6, 2007, to Employment Agreement
between the Company and Gayle Dolecek
|
|
Exhibit 10.4 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.39
|
|
Amendment, dated December 5, 2007, to Employment Agreement
between the Company and Kei Tolliver
|
|
Exhibit 10.5 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.40
|
|
Amendment, dated November 26, 2007, to Employment Agreement
between the Company and Ryuji Ueno
|
|
Exhibit 10.6 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.41
|
|
Credit Line Agreement, dated March 5, 2008, between the Company
and UBS Bank USA
|
|
Included herewith
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLC, Independent Registered
Public Accounting Firm
|
|
Included herewith
|
|
31
|
.1
|
|
Certification of the Principal Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
89
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
31
|
.2
|
|
Certification of the Principal Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.1
|
|
Certification of the Principal Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.2
|
|
Certification of the Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
|
|
|
|
Compensatory plan, contract or arrangement. |
|
* |
|
Confidential treatment has been requested for portions of this
exhibit. |
90
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Sucampo Pharmaceuticals, Inc.
Ryuji Ueno, M.D., Ph.D.,Ph.D.
Chief Executive Officer,
Chief Scientific Officer and
Chairman of the Board of Directors
March 27, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ RYUJI
UENO
Ryuji
Ueno, M.D., Ph.D., Ph.D.
|
|
Chief Executive Officer
(Principal Executive Officer),
Chief Scientific Officer and Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ MARIAM
E. MORRIS
Mariam
E. Morris
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 27, 2008
|
|
|
|
|
|
/s/ ANTHONY
C. CELESTE
Anthony
C. Celeste
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ MICHAEL
J. JEFFRIES
Michael
J. Jeffries
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ TIMOTHY
I. MAUDLIN
Timothy
I. Maudlin
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ HIDETOSHI
MINE
Hidetoshi
Mine
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ V.
SUE MOLINA
V.
Sue Molina
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ JOHN
C. WRIGHT
John
C. Wright
|
|
Director
|
|
March 27, 2008
|
91
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Sucampo Pharmaceuticals, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Sucampo
Pharmaceuticals, Inc. and its subsidiaries at December 31,
2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the accompanying consolidated
financial statements, the Company changed the manner in which it
accounts for share-based compensation in 2006.
/s/ PricewaterhouseCoopers
LLP
Baltimore, Maryland
March 24, 2008
F-2
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands, except share data)
|
|
|
ASSETS:
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,559
|
|
|
$
|
22,481
|
|
Investments, short-term
|
|
|
51,552
|
|
|
|
29,399
|
|
Accounts receivable
|
|
|
1,525
|
|
|
|
1,537
|
|
Unbilled accounts receivable
|
|
|
5,883
|
|
|
|
|
|
Product royalties receivable
|
|
|
8,667
|
|
|
|
2,029
|
|
Prepaid and income taxes receivable
|
|
|
1,922
|
|
|
|
2,355
|
|
Deferred tax assets, net
|
|
|
88
|
|
|
|
1,612
|
|
Prepaid expenses and other current assets
|
|
|
2,222
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
97,418
|
|
|
|
59,949
|
|
Restricted cash
|
|
|
213
|
|
|
|
213
|
|
Investments, long-term
|
|
|
9,400
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,265
|
|
|
|
343
|
|
Deferred tax assets noncurrent, net
|
|
|
551
|
|
|
|
3,289
|
|
Deposits and other assets
|
|
|
180
|
|
|
|
3,290
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
110,027
|
|
|
$
|
67,084
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,313
|
|
|
$
|
2,391
|
|
Accrued expenses
|
|
|
8,730
|
|
|
|
5,418
|
|
Deferred revenue current
|
|
|
1,062
|
|
|
|
11,517
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,105
|
|
|
|
19,326
|
|
Deferred revenue, net of current portion
|
|
|
8,626
|
|
|
|
9,192
|
|
Other liabilities
|
|
|
1,768
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,499
|
|
|
|
28,551
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.01 par value;
0 and 10,000 shares authorized at December 31, 2007
and 2006, respectively; 0 and 3,780 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
|
|
|
|
20,288
|
|
Preferred stock, $0.01 par value; 5,000,000 and
0 shares authorized at December 31, 2007 and 2006,
respectively; no shares issued and outstanding at
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
Class A common stock, $0.01 par value; 270,000,000 and
75,000,000 shares authorized at December 31, 2007 and
2006, respectively; 15,538,518 and 8,799,385 shares issued
and outstanding at December 31, 2007 and 2006, respectively
|
|
|
155
|
|
|
|
88
|
|
Class B common stock, $0.01 par value;
75,000,000 shares authorized; 26,191,050 shares issued
and outstanding at December 31, 2007 and 2006
|
|
|
262
|
|
|
|
262
|
|
Additional paid-in capital
|
|
|
96,680
|
|
|
|
41,555
|
|
Accumulated other comprehensive loss
|
|
|
(393
|
)
|
|
|
(294
|
)
|
Accumulated deficit
|
|
|
(10,176
|
)
|
|
|
(23,366
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
86,528
|
|
|
|
38,533
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
110,027
|
|
|
$
|
67,084
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Statements of Operations and Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
59,379
|
|
|
$
|
46,382
|
|
|
$
|
38,960
|
|
Product royalty revenue
|
|
|
27,536
|
|
|
|
6,590
|
|
|
|
|
|
Co-promotion revenue
|
|
|
4,411
|
|
|
|
4,243
|
|
|
|
|
|
Contract revenue related parties
|
|
|
418
|
|
|
|
404
|
|
|
|
98
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
147
|
|
|
|
147
|
|
Contract revenue
|
|
|
|
|
|
|
1,500
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
91,891
|
|
|
|
59,266
|
|
|
|
40,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
28,334
|
|
|
|
16,392
|
|
|
|
31,167
|
|
General and administrative
|
|
|
25,031
|
|
|
|
14,587
|
|
|
|
7,760
|
|
Selling and marketing
|
|
|
13,229
|
|
|
|
11,103
|
|
|
|
295
|
|
Product royalties related parties
|
|
|
4,890
|
|
|
|
1,171
|
|
|
|
|
|
Milestone royalties related parties
|
|
|
2,000
|
|
|
|
1,250
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
73,484
|
|
|
|
44,503
|
|
|
|
40,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
18,407
|
|
|
|
14,763
|
|
|
|
(517
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,465
|
|
|
|
1,976
|
|
|
|
1,046
|
|
Interest expense
|
|
|
|
|
|
|
(90
|
)
|
|
|
(311
|
)
|
Other income, net
|
|
|
151
|
|
|
|
255
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income, net
|
|
|
2,616
|
|
|
|
2,141
|
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
21,023
|
|
|
|
16,904
|
|
|
|
473
|
|
Income tax (provision) benefit
|
|
|
(7,833
|
)
|
|
|
4,897
|
|
|
|
(789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
37,778
|
|
|
|
34,383
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
38,226
|
|
|
|
34,690
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(99
|
)
|
|
|
(200
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
13,091
|
|
|
$
|
21,601
|
|
|
$
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Statements of Changes in Stockholders Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Convertible
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
(Deficit)
|
|
(In thousands, except share data)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance at December 31, 2004
|
|
|
3,780
|
|
|
$
|
20,288
|
|
|
|
2,165,502
|
|
|
$
|
21
|
|
|
|
30,441,050
|
|
|
$
|
305
|
|
|
$
|
10,888
|
|
|
$
|
(62
|
)
|
|
$
|
(127
|
)
|
|
$
|
(44,851
|
)
|
|
$
|
(13,538
|
)
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Conversion of class B common stock to class A common
stock
|
|
|
|
|
|
|
|
|
|
|
4,250,000
|
|
|
|
43
|
|
|
|
(4,250,000
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options and vesting modifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,614
|
|
Forfeitures of 31,875 shares of restricted class A
common stock
|
|
|
|
|
|
|
|
|
|
|
(31,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
Exercise of 8,500 options for 8,500 shares of class A
common stock
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
33
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(316
|
)
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
3,780
|
|
|
|
20,288
|
|
|
|
6,392,127
|
|
|
|
64
|
|
|
|
26,191,050
|
|
|
|
262
|
|
|
|
14,407
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
(45,167
|
)
|
|
|
(10,240
|
)
|
Issuance of 2,398,758 shares of class A common stock
at $10 per share net of offering costs of $91,792
|
|
|
|
|
|
|
|
|
|
|
2,398,758
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
23,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,896
|
|
Exercise of 8,500 options for 8,500 shares of class A
common stock
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
|
|
(200
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,274
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,801
|
|
|
|
21,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
3,780
|
|
|
|
20,288
|
|
|
|
8,799,385
|
|
|
|
88
|
|
|
|
26,191,050
|
|
|
|
262
|
|
|
|
41,555
|
|
|
|
|
|
|
|
(294
|
)
|
|
|
(23,366
|
)
|
|
|
38,533
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
401,133
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
6,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,682
|
|
Issuance of 3,125,000 shares of class A common stock
at $11.50 per share, net of offering costs of $5,200
|
|
|
|
|
|
|
|
|
|
|
3,125,000
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
28,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,222
|
|
Conversion of series A convertible preferred stock to
class A common stock
|
|
|
(3,780
|
)
|
|
|
(20,288
|
)
|
|
|
3,213,000
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
20,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
(99
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,190
|
|
|
|
13,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
15,538,518
|
|
|
$
|
155
|
|
|
|
26,191,050
|
|
|
$
|
262
|
|
|
$
|
96,680
|
|
|
$
|
|
|
|
$
|
(393
|
)
|
|
$
|
(10,176
|
)
|
|
$
|
86,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SUCAMPO
PHARMACEUTICALS, INC.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
251
|
|
|
|
69
|
|
|
|
62
|
|
Loss on disposal of property and equipment
|
|
|
63
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
4,262
|
|
|
|
(4,035
|
)
|
|
|
(684
|
)
|
Stock-based compensation
|
|
|
6,682
|
|
|
|
3,274
|
|
|
|
3,615
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23
|
)
|
|
|
(813
|
)
|
|
|
(489
|
)
|
Unbilled accounts receivable
|
|
|
(5,883
|
)
|
|
|
|
|
|
|
|
|
Product royalties receivable
|
|
|
(6,638
|
)
|
|
|
(2,029
|
)
|
|
|
|
|
Prepaid and income taxes receivable and payable, net
|
|
|
431
|
|
|
|
(4,007
|
)
|
|
|
1,464
|
|
Prepaid expenses and other current assets
|
|
|
(1,655
|
)
|
|
|
(254
|
)
|
|
|
(103
|
)
|
Deposits and other assets
|
|
|
|
|
|
|
(84
|
)
|
|
|
15
|
|
Accounts payable
|
|
|
924
|
|
|
|
437
|
|
|
|
610
|
|
Accrued expenses
|
|
|
3,341
|
|
|
|
3,023
|
|
|
|
354
|
|
Deferred revenue
|
|
|
(11,028
|
)
|
|
|
(26,829
|
)
|
|
|
20,364
|
|
Other liabilities
|
|
|
1,732
|
|
|
|
(1,467
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
5,649
|
|
|
|
(10,914
|
)
|
|
|
23,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(88,647
|
)
|
|
|
(2,309
|
)
|
|
|
(28,435
|
)
|
Proceeds from the sales and maturities of short-term investments
|
|
|
57,094
|
|
|
|
1,345
|
|
|
|
3,000
|
|
Purchases of property and equipment
|
|
|
(2,231
|
)
|
|
|
(236
|
)
|
|
|
(39
|
)
|
Investments in restricted cash
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(33,784
|
)
|
|
|
(1,413
|
)
|
|
|
(25,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of offering costs
|
|
|
31,341
|
|
|
|
23,896
|
|
|
|
|
|
Payments of initial public offering costs
|
|
|
|
|
|
|
(2,923
|
)
|
|
|
|
|
Issuance of notes payable related parties
|
|
|
|
|
|
|
1,200
|
|
|
|
|
|
Payments on notes payable related parties
|
|
|
|
|
|
|
(4,754
|
)
|
|
|
(2,280
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
31,341
|
|
|
|
17,421
|
|
|
|
(2,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(128
|
)
|
|
|
(49
|
)
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,078
|
|
|
|
5,045
|
|
|
|
(4,482
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
22,481
|
|
|
|
17,436
|
|
|
|
21,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
25,559
|
|
|
$
|
22,481
|
|
|
$
|
17,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
86
|
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax refunds received
|
|
$
|
1,361
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax payments made
|
|
$
|
4,500
|
|
|
$
|
3,161
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon the completion of the Companys initial public
offering in August 2007, $3.1 million of initial public
offering costs paid in 2006 were reclassified from deposits and
other assets to additional paid-in capital.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
|
|
1.
|
Business
Organization and Basis of Presentation
|
Description
of the Business
Sucampo Pharmaceuticals, Inc. (Sucampo) was incorporated in the
State of Delaware on December 5, 1996 and is a specialty
biopharmaceutical company focused on the discovery, development
and commercialization of proprietary drugs based on prostones, a
class of compounds derived from functional fatty acids that
occur naturally in the human body. Sucampo is focused on
developing prostones for the treatment of gastrointestinal,
respiratory, vascular and central nervous system diseases and
disorders. In September 2006, Sucampo acquired the capital stock
of its affiliated European and Asian operating companies,
Sucampo Pharma Europe, Ltd. (Sucampo Europe) and Sucampo Pharma,
Ltd. (Sucampo Japan). Hereinafter, Sucampo, Sucampo Europe and
Sucampo Japan are referred to collectively as the
Company. The financial information of these three
entities is presented in these consolidated financial statements.
The Company is a member of a group of affiliated companies
(Affiliates) in which the Companys founders and
controlling stockholders own directly or indirectly the majority
holdings. Currently, one of the Companys founders is a
member of some of the Affiliates boards of directors and
serves as the Chief Executive Officer and Chief Scientific
Officer of the Company (see Note 9).
The Company is party to a collaboration and license agreement
with Takeda Pharmaceutical Company Limited (Takeda) to jointly
develop and commercialize
AMITIZA®
(lubiprostone) for chronic idiopathic constipation, irritable
bowel syndrome with constipation, opioid-induced bowel
dysfunction and other gastrointestinal indications in the United
States and Canada. In January 2006, the Company received
marketing approval from the U.S. Food and Drug
Administration (FDA) for its first product, AMITIZA, to treat
chronic idiopathic constipation in adults. Commercialization of
AMITIZA began in April 2006 throughout the United States.
Basis
of Presentation
The accompanying consolidated financial statements of the
Company have been prepared in accordance with generally accepted
accounting principles in the United States of America (GAAP).
The consolidated financial statements include the accounts of
Sucampo and its wholly-owned subsidiaries. All significant
inter-company balances and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to
the current year presentation, primarily with respect to items
and matters not required to be disclosed separately in prior
periods.
Initial
Public Offering
In August 2007, the Company completed its initial public
offering of 3,125,000 shares of class A common stock
at a public offering price of $11.50 per share, resulting in
gross proceeds to the Company of approximately
$35.9 million. After deducting underwriters
discounts, commissions, and expenses of the offering, including
costs of $3.1 million incurred in 2006, the Company raised
net proceeds of $28.2 million. An additional
625,000 shares of class A common stock were sold by a
selling stockholder of the Company and 562,500 shares were
sold under an overallotment option by S&R Technology
Holdings, LLC (S&R), which is an entity wholly-owned by the
Companys founders. In connection with the initial public
offering, the Company implemented an 8.5-to-one stock split of
the Companys class A and class B common stock in
the form of a stock dividend. This stock dividend was effective
July 12, 2007. All historical common stock and per share
common stock information has been retroactively restated to
reflect this stock split. Historical series A convertible
preferred stock information has not been changed except to
reflect the modification of the conversion ratio to 850-to-one,
after giving effect to this stock split.
In connection with the initial public offering, the Company
amended its certificate of incorporation to increase the
authorized number of shares of class A common stock to
270,000,000 and the authorized number of shares of
F-7
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
class B common stock to 75,000,000 and authorized
5,000,000 shares of undesignated preferred stock, par value
$0.01 per share. Upon consummation of the initial public
offering, all shares of the Companys series A
convertible preferred stock were converted into an aggregate of
3,213,000 shares of class A common stock.
Capital
Resources
The Company has a limited operating history and its expected
activities will necessitate significant uses of working capital
throughout 2008 and beyond. The Companys working capital
requirements will depend on many factors, including the
successful sales of AMITIZA, research and development efforts to
develop new products, payments received under contractual
agreements with other parties, the status of competitive
products and market acceptance of the Companys new
products by physicians and patients. The Company plans to
continue financing operations in part with cash received from
its initial public offering and from its joint collaboration and
license agreement and the supplemental agreement entered into
with Takeda (see Note 10).
|
|
2.
|
Summary
of Significant Accounting Policies
|
Cash
and Cash Equivalents
For the purpose of the consolidated balance sheets and
statements of cash flows, cash equivalents include all highly
liquid investments with an original maturity of 90 days or
less at the time of purchase.
Restricted
Cash
Restricted cash consists of approximately $213,000 at
December 31, 2007 and 2006 of cash securing a letter of
credit related to the Companys new headquarters lease
agreement dated December 18, 2006. This letter of credit
renews automatically each year and is required until the lease
expires on February 15, 2017.
Short-
and Long-Term Investments
Short- and long-term investments consist entirely of auction
rate securities and a money market account. The Companys
investments in these securities are classified as
available-for-sale securities under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities
(SFAS 115). Although the auction rate securities have
variable interest rates which typically reset every seven to
49 days through a competitive bidding process known as a
Dutch auction, they have long-term contractual
maturities usually exceeding ten years, and therefore are not
classified as cash equivalents. These investments are generally
classified within current assets because the Company has the
ability and the intent to liquidate these securities if needed
within a short time frame, usually at the next auction.
The available-for-sale securities are accounted for at fair
market value and unrealized gains and losses on these
securities, if any, are included in accumulated other
comprehensive income (loss) in stockholders equity. The
Company assesses the recoverability of its available-for-sale
securities and, if impairment is indicated, the Company measures
the amount of such impairment by comparing the fair value to the
carrying value. Other-than-temporary impairments are included in
the statement of operations and comprehensive income (loss).
Interest and dividend income is recorded when earned and
included in interest income. Premiums and discounts, if any, on
short- and long-term investments are amortized or accreted to
maturity and included in interest income. During the years ended
December 31, 2007, 2006 and 2005, there were no short- and
long-term investments that were purchased at a premium or
discount. The Company uses the specific identification method in
computing realized gains and losses on sale of its securities.
During the years ended December 31, 2007, 2006 and 2005,
there were no gains or losses realized on the sale of these
investments.
F-8
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Certain
Risks, Concentrations and Uncertainties
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist of cash and
cash equivalents, restricted cash, investments and receivables.
The Company places its cash and cash equivalents, restricted
cash and investments with highly rated financial institutions.
At December 31, 2007 and 2006, the Company had
approximately $85.9 million and $49.9 million,
respectively, of cash and cash equivalents, restricted cash and
investments in excess of federally insured limits. The Company
has not experienced any losses on these accounts related to
amounts in excess of insured limits.
As of December 31, 2007, all of the Companys auction
rate securities consisted of AAA rated non-mortgage related
auction rate securities which are insured against loss of
principal and interest by bond insurers whose AAA ratings are
under review. As of March 20, 2008, the Company had reduced its
investment in auction rate securities by selling
$33.2 million of investments at par value. It is uncertain
as to when the liquidity issues relating to these investments
will improve, although the Company believes as of
December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. The Company does not anticipate having to sell the
remaining securities in order to operate its business. If this
changes, however, the Company may be unable to liquidate some
holdings of the auction rate securities and as a result, may
suffer losses from these investments. Although a limited
secondary market exists for these securities, the Company does
not currently intend to use the secondary market to dispose of
the auction rate securities. In addition, given the complexity
of auction rate securities and their valuations, the
Companys estimates of their fair value may differ from the
actual amount that the Company would be able to collect in an
ultimate sale.
The Companys product candidates under development require
approval from the FDA or other international regulatory agencies
prior to commercial sales. For those product candidates that
have not yet been approved by the FDA, or international
regulatory agencies, there can be no assurance the products will
receive the necessary approval. If the Company is denied
approval or approval is delayed, it may have a material adverse
impact on the Company.
The Companys product competes in a rapidly changing,
highly competitive market, which is characterized by advances in
scientific discovery, changes in customer requirements, evolving
regulatory requirements and developing industry standards. Any
failure by the Company to anticipate or to respond adequately to
scientific developments in its industry, changes in customer
requirements or changes in regulatory requirements or industry
standards, or any significant delays in the development or
introduction of products or services could have a material
adverse effect on the Companys business, operating results
and future cash flows.
Revenues from one unrelated party, Takeda, accounted for 100%,
98% and 100% of the Companys total revenues for the years
ended December 31, 2007, 2006 and 2005, respectively.
Accounts receivable, unbilled accounts receivable and product
royalties receivable from Takeda accounted for 99% of the
Companys accounts and product royalty receivables at
December 31, 2007 and 2006. The Company depends
significantly upon the collaboration with Takeda and its
activities may be impacted if this relationship is disrupted.
The Company has also entered into an exclusive supply
arrangement with R-Tech Ueno, Ltd (R-Tech), an affiliate, to
provide it with commercial and clinical supplies of its product
and product candidates. Any difficulties or delays in performing
the services under this exclusive supply arrangement may cause
the Company to lose revenues, delay research and development
activities or otherwise disrupt the Companys operations
(see Note 9).
Fair
Value of Financial Instruments
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, restricted
cash, short- and long-term investments, receivables, accounts
payable and accrued liabilities, approximate their fair values
based on their short maturities, independent valuations or
internal assessments.
F-9
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Accounts
Receivable
Accounts receivable represent amounts due under the joint
collaboration and licensing agreement with Takeda (see
Note 10). The Company did not record an allowance for
doubtful accounts at December 31, 2007 or 2006 because it
believes that its accounts receivable are fully collectible and
it does not have a history of credit losses or write-offs of its
accounts receivable.
Unbilled
Accounts Receivable
Unbilled accounts receivable represent the research and
development expenses that are reimbursable by Takeda but have
not been billed to Takeda as of the balance sheet date.
Product
Royalties Receivable
Product royalties receivable represent amounts due from Takeda
for the Companys royalties on sales of AMITIZA, which are
based on reports obtained directly from Takeda.
Property
and Equipment
Property and equipment are recorded at cost and consist of
computer and office machines, furniture and fixtures and
leasehold improvements. Depreciation is computed using the
straight-line method over the estimated useful lives of the
respective assets. Computer and office machines are depreciated
over four years and furniture and fixtures are depreciated over
seven years. Leasehold improvements are amortized over the
shorter of ten years or the life of the lease. Significant
additions and improvements are capitalized. Expenditures for
maintenance and repairs are charged to earnings as incurred.
When assets are sold or retired, the related cost and
accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is included in earnings.
Impairment
of Long-lived Assets
When necessary, the Company assesses the recoverability of its
long-lived assets by determining whether the carrying value of
such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company
measures the amount of such impairment by comparing the fair
value to the carrying value. There have been no impairment
charges recorded during the years ended December 31, 2007,
2006 or 2005 because there have been no indicators of impairment
during those years.
Deposits
and Other Assets
At December 31, 2006, the Company was uncertain of when the
initial public offering would be completed; therefore, the
Company capitalized costs of $3.1 million associated with
its initial public offering and recorded the capitalized costs
as other assets. Upon the completion of the initial public
offering in August 2007, the Company reclassified these costs,
as well as additional costs of $2.1 million in 2007, to
additional paid-in capital at the closing date of the offering.
Revenue
Recognition
Collaboration
and License Agreements
The Companys primary sources of revenue include up-front
payments, development milestone payments, reimbursements of
development and co-promotion costs and product royalties. The
Company recognizes revenue from these sources in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition (SAB 104), Emerging Issues Task Force
(EITF)
No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent
(EITF 99-19),
and EITF
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables
(EITF 00-21).
The application of
EITF 00-21
requires subjective analysis and requires management
F-10
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
to make estimates and assumptions about whether deliverables
within multiple-element arrangements are separate units of
accounting and to determine the fair value to be allocated to
each unit of accounting.
The Company entered into a
16-year
joint collaboration and license agreement with Takeda in October
2004 (Takeda Agreement) and a supplemental agreement to the
Takeda Agreement (Supplemental Agreement) in February 2006. The
Company evaluated the multiple deliverables within the Takeda
Agreement and the Supplemental Agreement in accordance with the
provisions of
EITF 00-21
to determine whether the delivered elements that are the
obligation of the Company have value to Takeda on a stand-alone
basis and whether objective reliable evidence of fair value of
the undelivered items exists. Deliverables that meet these
criteria are considered a separate unit of accounting.
Deliverables that do not meet these criteria are combined and
accounted for as a single unit of accounting. The appropriate
recognition of revenue is then applied to each separate unit of
accounting.
The Companys deliverables under the Takeda Agreement and
the Supplemental Agreement, including the related rights and
obligations, contractual cash flows and performance periods, are
more fully described in Note 10.
The Takeda Agreement consists of the following key funding
streams: an up-front payment, product development milestone
payments, reimbursements of development costs and product
royalty payments. The cash flows associated with the individual
units of accounting from the Takeda Agreement are recognized as
revenue using a time-based model when the Company has
obligations to perform. Under this model, cash flow streams
related to each unit of accounting are recognized as revenue
over the estimated performance period. Upon receipt of cash
payments, revenue is recognized to the extent the accumulated
service time, if any, has occurred. The remainder is deferred
and recognized as revenue ratably over the remaining estimated
performance period. A change in the period of time expected to
complete the deliverable is accounted for as a change in
estimate on a prospective basis. Revenue is limited to amounts
that are nonrefundable and that Takeda is contractually
obligated to pay to the Company.
The Company has other obligations with Takeda to perform
research and development activities, for which Takeda reimburses
the Company after the services have been performed. The Company
recognizes these reimbursable costs as research and development
revenue using a similar time-based model over the estimated
performance period. The research and development revenue for
these obligations is limited to the lesser of the actual
reimbursable costs incurred or the straight-line amount of
revenue recognized over the estimated performance period.
Revenues are recognized for reimbursable costs only if those
costs are supported by an invoice or final contract with a
vendor.
Based on the guidance of
EITF 99-19,
the Company has determined that it is acting as a principal
under the Takeda Agreement and, as such, records these amounts
as collaboration revenue and research and development revenue.
Royalties from licensees are based on third-party sales of
licensed products and are recorded on the accrual basis when
earned in accordance with contractual terms when third-party
results are reliably measurable, collectability is reasonably
assured and all other revenue recognition criteria are met.
The Supplemental Agreement consists of the following key funding
streams: reimbursements of co-promotion costs based upon a
per-day rate
and reimbursements of the costs of miscellaneous marketing
activities.
Reimbursements of co-promotion costs for the Companys
sales force efforts and reimbursements of miscellaneous
marketing costs under the Supplemental Agreement are recognized
as revenue as the related costs are incurred and Takeda becomes
contractually obligated to pay the amounts. Based on the
guidance of
EITF 99-19,
the Company has determined that it is acting as a principal as
it relates to these activities under the Supplemental Agreement
and, as such, records reimbursements of these amounts as
co-promotion revenue.
Option fees received for other potential joint collaboration and
license agreements with Takeda are not recognized as revenue
immediately because the transactions do not represent a separate
earnings process. Because there are contingent performance
obligations by the Company when and if the options are
exercised, the Companys
F-11
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
policy is to recognize revenue immediately upon expiration of
the option or to commence revenue recognition upon exercise of
the option and continue recognition over the estimated
performance period. When recognized, option fees are recorded as
contract revenue.
Contract
Revenue
Contract revenue related to development and consulting
activities with related parties is also accounted for under the
time-based model.
Deferred
Revenue
Consistent with the Companys policy on revenue
recognition, deferred revenue represents cash received in
advance for licensing fees, option fees, consulting, research
and development contracts and related cost sharing and supply
agreements. Such payments are reflected as deferred revenue
until revenue can be recognized under the Companys revenue
recognition policy. Deferred revenue is classified as current if
management believes the Company will be able to recognize the
deferred amount as revenue within 12 months of the balance
sheet date. At December 31, 2007 and 2006, total deferred
revenue was approximately $9.7 million and
$20.7 million, respectively.
Total deferred revenue consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Deferred revenue current
|
|
$
|
1,062
|
|
|
$
|
11,517
|
|
Deferred revenue, net of current portion
|
|
|
8,626
|
|
|
|
9,192
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,688
|
|
|
$
|
20,709
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue to related parties current
|
|
$
|
419
|
|
|
$
|
419
|
|
Deferred revenue to related parties, net of current portion
|
|
|
6,862
|
|
|
|
7,281
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue to related parties, included above
|
|
$
|
7,281
|
|
|
$
|
7,700
|
|
|
|
|
|
|
|
|
|
|
Research
and Development Expenses
Research and development costs are expensed in the period in
which they are incurred and include the expenses from third
parties who conduct research and development activities pursuant
to development and consulting agreements on behalf of the
Company. Costs related to the acquisition of intellectual
property are expensed as incurred in research and development
expenses since the underlying technology associated with such
acquisitions is unproven, has not received regulatory approval
at its early stage of development and does not have alternative
future uses. Milestone payments due under agreements with
third-party contract research organizations (CROs) are accrued
when it is deemed probable that the milestone event will be
achieved.
General
and Administrative Expenses
General and administrative costs are expensed as incurred and
consist primarily of salaries and other related costs for
personnel serving executive, finance, accounting, information
technology and human resource functions. Other costs include
facility costs and professional fees for legal and accounting
services.
Reimbursement of the Companys safety costs under the
Supplemental Agreement is recorded as a reduction of safety
expenses and is included in general and administrative expenses.
The Company has determined, in accordance with
EITF 99-19,
that it is acting as an agent in this arrangement and, as such,
records reimbursements of these expenses on a net basis,
offsetting the underlying expenses.
F-12
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Selling
and Marketing Expenses
Selling and marketing expenses are expensed as incurred and
consist primarily of salaries and related costs for personnel,
sales force fees and certain marketing expenditures.
Milestone
Royalties Related Parties
The milestone royalties related parties represent
royalties paid or due to Sucampo AG (SAG), a company organized
in Switzerland, affiliated through common ownership. The
milestone royalty is 5% of milestone payments received under any
sublicensing agreements for AMITIZA. In addition, for each
indication for AMITIZA for which the Company obtains regulatory
approval, the Company must pay a $250,000 milestone. The
Company must also pay a $500,000 milestone upon the
initiation of the first Phase II clinical trial for each
compound in each of the three territories covered by the
license: (1) North, Central and South America, including
the Caribbean, (2) Asia and (3) the rest of the world,
and a $1.0 million milestone for the first NDA filing or
comparable foreign regulatory filing for each compound in each
of the same three territories. Milestone royalties
related parties are expensed as incurred immediately when the
related milestones become probable under the guidance of
SFAS No. 5, Accounting for
Contingencies. For the years ended December 31,
2007 and 2006, the Company expensed $2.0 million and
$1.3 million in milestone royalties related
parties, respectively.
Product
Royalties Related Parties
Product royalties related parties represent the
Companys obligation to SAG for 3.2% of AMITIZA net sales
and are expensed as incurred. For the years ended
December 31, 2007 and 2006, the Company expensed
approximately $4.9 million and $1.2 million in product
royalties, respectively. The Company has recorded a
corresponding liability of approximately $1.5 million and
$361,000 as accrued expenses as of December 31, 2007 and
2006, respectively.
Interest
Income
Interest income consists of interest earned on the
Companys cash and cash equivalents and short- and
long-term investments.
Accrued
expenses
As part of the process of preparing financial statements,
management estimates accrued expenses. This process involves
identifying services that have been performed on the
Companys behalf, and then estimating the level of service
performed and the associated cost incurred for such services as
of each balance sheet date. Accrued expenses include contract
service fees, such as those under contracts with clinical
monitors, data management organizations and investigators in
conjunction with clinical trials, fees to its contract
manufacturer for the production of clinical materials and
commercial supplies, professional service fees and other
activities. Pursuant to managements assessment of the
services that have been performed, the Company recognizes these
expenses as the services are provided. Such assessments include,
but are not limited to: (1) an evaluation by the project
manager of the work that has been completed during the period,
(2) measurement of progress prepared internally
and/or
provided by the third-party service provider and
(3) analyses of data that justify the progress.
Employee
Stock-Based Compensation
On January 1, 2006, the Company adopted
SFAS No. 123R, Share-Based Payment
(SFAS 123R), which requires the measurement and
recognition of expense for all share-based compensation of
employees and directors to be based on estimated fair values of
the share-based awards. SFAS 123R requires companies to
estimate the fair value of share-based awards on the date of
grant using an option-pricing model. The value of the portion of
the
F-13
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
award that is ultimately expected to vest is recognized as
expense over the requisite service period in the Companys
consolidated statement of operations.
The Company adopted SFAS 123R utilizing the modified
prospective method. Under this method, the Companys
consolidated financial statements for prior periods were not
restated to reflect, and do not include, the impact of
SFAS 123R. Upon adoption of SFAS 123R, the Company
decided to utilize the straight-line method of allocating
stock-based compensation expense over the vesting term of the
stock-based awards and continued to use the Black-Scholes-Merton
Option Pricing Formula which was previously used for the
Companys pro-forma information required under
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). The Companys
determination of fair value of share-based awards on the date of
grant using an option-pricing model is affected by the
Companys stock price and assumptions regarding a number of
highly complex and subjective variables.
The assumptions used to estimate the fair value of stock options
granted for the years ended December 31, 2007 and 2006 were
as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
Expected volatility
|
|
39.20% - 60.10%
|
|
54.0% - 75.7%
|
Risk-free interest rate
|
|
2.99% - 3.59%
|
|
4.72% - 4.93%
|
Expected term (in years)
|
|
3.25 - 6.25
|
|
2.63 - 5.75
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
Expected Volatility: The Company evaluated the
assumptions used to estimate expected volatility, including
whether implied volatility of its options appropriately reflects
the markets expectations of future volatility. The Company
determined that it would calculate the expected volatility rate
using historical stock prices obtained from comparable
publicly-traded companies due to the limited history of the
Companys common stock activity.
Risk-Free Interest Rate: The risk-free
interest rate is based on the market yield currently available
on U.S. Treasury securities with maturity that approximates
the expected term of the share-based awards.
Expected Term: Due to the limited history of
employee stock options granted by the Company, the Company
elected to use the simplified method allowed under
SAB No. 107, Share-Based Payment
(SAB 107), to calculate its expected term as the share-
based awards meet the plain vanilla definition
described in SAB 107. Under this method, the expected term
is the weighted average of the vesting term and the contractual
term.
Expected Dividend Yield: The Company has not
paid, and does not anticipate paying, any dividends in the
foreseeable future.
Employee stock-based compensation expense for the years ended
December 2007 and 2006 has been reduced for estimated
forfeitures as such expense is based upon awards expected to
ultimately vest. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. During the years ended December 31, 2007 and
2006, the estimated forfeiture rate ranged from 8.0% to 12.0%.
F-14
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Employee stock-based compensation expense under SFAS 123R
recorded in the Companys consolidated statements of
operations for years ended December 31, 2007 and 2006 was
as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Selling and marketing expense
|
|
$
|
333
|
|
|
$
|
566
|
|
General and administrative expense
|
|
|
595
|
|
|
|
2,708
|
|
Founders stock-based awards (Note 9)
|
|
|
6,112
|
|
|
|
|
|
Cumulative out-of-period adjustment
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense included in operating
expenses
|
|
$
|
6,682
|
|
|
$
|
3,274
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense per basic share of
common stock
|
|
$
|
0.18
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense per diluted share of
common stock
|
|
$
|
0.17
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
The Company recorded a cumulative out-of-period adjustment of
approximately $358,000 during the year ended December 31,
2007 to reduce an overstatement of additional paid-in capital
and general and administrative expenses that had been recorded
as of and for the year ended December 31, 2006 in
connection with certain employee stock options awarded in 2006.
The error resulted from applying the incorrect contractual term
for certain employee stock options. The impacts of this
adjustment were not material to the consolidated financial
statements for the year ended December 31, 2006 or for the
period in which it was recorded, as the adjustment consisted of
insignificant amounts related to each of the quarterly reporting
periods dating back to the quarter ended June 30, 2006.
Pro forma information for period prior to adoption of
SFAS 123R: Through December 31, 2005,
the Company had elected to account for stock-based compensation
attributable to stock options awarded to employees, directors
and officers using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25). Under APB 25 guidance, stock-based compensation expense was
based on the intrinsic value of awarded stock options, which is
measured as the excess, if any, of the fair market value of the
Companys common stock at the date of grant over the
exercise price of the option granted. Stock-based compensation,
if any, is recognized over the related vesting period.
Had stock-based employee compensation expense been recorded
based on the fair value at the grant dates consistent with the
recognition method prescribed by SFAS 123, the
Companys net loss for the year ended December 31,
2005 would have been changed to the following pro forma amounts:
|
|
|
|
|
|
|
Year Ended
|
|
(In thousands, except per share data)
|
|
December 31, 2005
|
|
|
Net loss
|
|
$
|
(316
|
)
|
Add: Stock-based employee compensation expense included in net
loss
|
|
|
317
|
|
Less: Stock-based employee compensation expense determined under
SFAS 123
|
|
|
(531
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(530
|
)
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
Non-employee
Stock-Based Compensation
The Company accounts for non-employee stock-based compensation
in accordance with 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. In August 2005, the
Company granted 510,000 shares to non-
F-15
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
employees. The stock-based compensation expense was calculated
at the date of grant using the fair value method and the
Black-Scholes-Merton Option Pricing Formula with the following
assumptions:
|
|
|
|
|
Contractual term
|
|
|
10 years
|
|
Risk-free interest rate
|
|
|
4.4%
|
|
Expected volatility
|
|
|
75.0%
|
|
Expected dividend yield
|
|
|
0%
|
|
There were no stock options granted to non-employees during the
years ended December 31, 2007 and 2006.
Income
Taxes
The Company accounts for income taxes under the liability method
in accordance with provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS 109),
which requires companies to account for deferred income taxes
using the asset and liability method. Under the asset and
liability method, current income tax provision or benefit is the
amount of income taxes expected to be payable or refundable for
the current year. A deferred income tax asset or liability is
recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and tax credits and loss carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Tax rate
changes are reflected in the income tax provision during the
period such changes are enacted. Changes in ownership may limit
the amount of net operating loss carryforwards that can be
utilized in the future to offset taxable income.
Significant judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance
recorded against the Companys net deferred tax assets. The
Company has recorded a partial valuation allowance, which
resulted in a net deferred tax asset of $639,000 and
$4.9 million as of December 31, 2007 and
December 31, 2006, due to uncertainties related to its
ability to utilize a portion of the net deferred tax assets.
Significant future events, including marketing approval by the
FDA of AMITIZA for the treatment of irritable bowel syndrome
with constipation, are not in the control of the Company and
will impact the amount of net deferred tax assets that will be
utilized. The amount of the valuation allowance has been
determined based on managements estimates of income by
jurisdiction in which the Company operates, over the periods in
which the related deferred tax assets are recoverable.
For all significant transactions between Sucampo, Sucampo Europe
and Sucampo Japan, the Companys management has evaluated
the terms of the transactions using significant estimates and
judgments to ensure that each significant transaction would be
on similar terms if the Company completed the transaction with
an unrelated party. Although the Company believes there will be
no material tax liabilities to the Company as a result of
multi-jurisdictional transactions, there can be no assurance
that taxing authorities will not assert that transactions were
entered into at monetary values other than fair values. If such
assertions were made, the Companys intention would be to
vigorously defend its positions; however, there can be no
assurance that additional liabilities may not occur as a result
of any such assertions.
On January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 prescribes a
recognition threshold that a tax position is required to meet
before being recognized in the financial statements and provides
guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition issues. The adoption of FIN 48 did not have a
significant impact on the Companys consolidated financial
statements.
The Company conducts business in the United States, Japan and
the United Kingdom and is subject to tax in those jurisdictions.
As a result of its business activities, the Company files tax
returns that are subject to
F-16
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
examination by the respective federal, state, local and foreign
tax authorities. For income tax returns filed by the Company,
the Company is no longer subject to U.S. federal, state and
local, or foreign income tax examination by tax authorities for
years before 2004, although carryforward tax attributes that
were generated prior to 2004 may still be adjusted upon
examination by tax authorities if they either have been or will
be utilized. The Company has not received any communications by
taxing authorities that cause it to believe it is currently
under examination by the tax authorities in any of the
jurisdictions in which it operates.
The Company recognizes interest and penalties accrued related to
uncertain tax positions as a component of the income tax
provision. There were no material uncertain tax positions as of
December 31, 2007. For the year ended December 31,
2007, there have been no interest and penalties recorded as a
component of the income tax provision.
Foreign
Currency
The Company translates the assets and liabilities of its foreign
subsidiaries, Sucampo Europe and Sucampo Japan, into
U.S. dollars at the current exchange rate in effect at the
end of the year and maintains the capital accounts of these
subsidiaries at the historical exchange rates. The revenue,
income and expense accounts of the foreign subsidiaries are
translated into U.S. dollars at the average rates that
prevailed during the relevant period. The gains and losses that
result from this process are included in accumulated other
comprehensive income (loss) in the stockholders equity
section of the consolidated balance sheet.
Realized and unrealized foreign currency gains or losses on
assets and liabilities denominated in a currency other than the
functional currency are included in net income (loss).
Other
Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income
(Loss), requires that all components of comprehensive
income (loss) be reported in the financial statements during the
period in which they are recognized. Comprehensive income (loss)
is net income (loss) plus certain other items that are recorded
directly to stockholders equity. The Company has reported
the comprehensive income (loss) in the consolidated statements
of operations and comprehensive income (loss).
Segment
Information
Management has determined that the Company has three reportable
segments, which are based on its method of internal reporting by
geographical location. The Companys reportable segments
are the United States, Europe and Japan.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates that affect the reported
amounts of assets and liabilities at the date of the financial
statements, disclosure of contingent assets and liabilities, and
the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Change
in Estimate
Effective June 1, 2006, as a result of new study evaluation
requirements released by the Rome III Committee on
Functional Gastrointestinal Disorders, an international
committee of gastroenterologists, management of the Company
concluded that the completion of the final analysis of data from
its clinical trials of AMITIZA for the treatment of irritable
bowel syndrome with constipation would be extended from December
2006 to mid 2007. Accordingly, the Company determined in June
2006 that the recognition period for associated research and
development revenue should be extended. The Company deferred the
remaining $11.0 million as of December 31,
F-17
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
2006 and recognized the revenues ratably through the completion
date of June 2007. Under the provisions of
SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3 (SFAS 154), the Company
recognized this as a change in estimate on a prospective basis
from June 1, 2006. The effect on net income and basic and
diluted net income per share for the year ended
December 31, 2006 was as follows:
|
|
|
|
|
(In thousands, except for per share data)
|
|
|
|
|
Decrease in revenue and net income
|
|
$
|
10,951
|
|
Impact on basic net income per share
|
|
|
(0.32
|
)
|
Impact on diluted net income per share
|
|
|
(0.32
|
)
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which addresses how companies should measure fair value when
they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting
principles. SFAS 157 outlines a common definition of fair
value and the new standard intends to make the measurement of
fair value more consistent and comparable and improve
disclosures about those measures. The Company will need to adopt
SFAS 157 for financial statements issued for fiscal years
beginning after November 15, 2007. In February 2008, the
FASB agreed to delay the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after
November 15, 2008. The Company is assessing SFAS 157
and its impact on the consolidated financial statements upon
adoption.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). According to this
standard, entities will now be permitted to measure many
financial instruments and certain other assets and liabilities
at fair value on an
instrument-by-instrument
basis. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is assessing
SFAS 159 in connection with SFAS 157 and its impact on
the consolidated financial statements upon adoption.
In June 2007, the EITF issued EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities
(EITF 07-3),
which provides guidance to research and development companies on
how to account for the nonrefundable portion of an advance
payment made for research and development activities. The
Company will be required to adopt
EITF 07-3
for the year beginning after December 15, 2007. The Company
is currently assessing
EITF 07-3
and does not expect a material impact on its future consolidated
financial statements upon its adoption.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141R) and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research
Bulletin No. 51 (SFAS 160).
SFAS 141R will change how business acquisitions are
accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS 160 will
change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 141R and
SFAS 160 will be applied to acquisitions that close in
years beginning after December 15, 2008. Early adoption is
not permitted. SFAS 141R and SFAS 160 will not have
any impact on the Companys future consolidated financial
statements unless it undertakes an acquisition in the future.
In December 2007, the FASB ratified EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
The consensus prohibits the equity method of accounting for
collaborative arrangements under APB 18, The Equity
Method of Accounting for Investments in Common Stock,
unless a legal entity exists. Payments between the collaborative
partners will be evaluated and reported in the income statement
based on applicable GAAP. Absent specific GAAP, the participants
to the arrangement will apply other existing GAAP by analogy or
F-18
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
apply a reasonable and rational accounting policy consistently.
The guidance in
EITF 07-1
is effective for periods that begin after December 15, 2008
and will apply to arrangements in existence as of the effective
date. The effect of the new consensus will be accounted for as a
change in accounting principle through retrospective
application. The Company is assessing
EITF 07-1
and its impact on the consolidated financial statements upon
adoption.
In December 2007, the SEC issued SAB No. 110,
Share-Based Payment (SAB 110), which
expresses the views of the SEC regarding the use of a simplified
method, as discussed in SAB 107, in developing an estimate
of the expected term of plain vanilla share options in
accordance with SFAS 123R. In SAB 110, the SEC stated
that it understood that the detailed information necessary to
calculate an expected term for plain vanilla options may not be
widely available by December 31, 2007, as previously
discussed within SAB 107. Accordingly, the SEC will
continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. As allowed
under SAB 110, the Company will continue to use the
simplified method in estimating the expected term of its stock
options until such time as more relevant detailed information
becomes available.
|
|
3.
|
Net
Income (Loss) per Share
|
Basic net income (loss) per share is computed by dividing net
income (loss) by the sum of the weighted average class A
and B common shares outstanding. Diluted net income per share is
computed by dividing net income by the weighted average common
shares and potential dilutive common shares outstanding. Diluted
net loss per share is computed by dividing net loss by the
weighted average common shares outstanding without the impact of
potential dilutive common shares outstanding because they would
have an anti-dilutive impact on diluted net loss per share.
The computation of net income (loss) per share for the years
ended December 31, 2007, 2006 and 2005 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average class A and B common shares outstanding
|
|
|
37,778
|
|
|
|
34,383
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,190
|
|
|
$
|
21,801
|
|
|
$
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average class A and B common shares outstanding
for diluted net income (loss) per share
|
|
|
37,778
|
|
|
|
34,383
|
|
|
|
32,601
|
|
Assumed exercise of stock options under the treasury stock method
|
|
|
448
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,226
|
|
|
|
34,690
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
0.63
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
For the years listed above, the potentially dilutive securities
used in the calculations of diluted net income per share as of
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Series A preferred stock*
|
|
|
|
|
|
|
3,780
|
|
|
|
|
|
Employee stock options
|
|
|
908,400
|
|
|
|
826,200
|
|
|
|
|
|
Non-employee stock options
|
|
|
510,000
|
|
|
|
510,000
|
|
|
|
|
|
The following securities were excluded from the computation of
diluted net income (loss) per share as their effect would be
anti-dilutive as of December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Series A preferred stock*
|
|
|
|
|
|
|
|
|
|
|
3,780
|
|
Employee stock options
|
|
|
10,757
|
|
|
|
15,300
|
|
|
|
171,000
|
|
Non-employee stock options
|
|
|
|
|
|
|
|
|
|
|
510,000
|
|
|
|
|
* |
|
Each share of series A preferred stock was converted into
850 shares of class A common stock in connection with
the initial public offering, which was completed in August 2007. |
|
|
4.
|
Short-
and Long-Term Investments
|
As of December 31, 2007, the Company had short- and
long-term investments of $61.0 million, consisting of
primarily investments in auction rate securities. Auction rate
securities are long-term debt instruments that provide liquidity
through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals, generally
every seven to 49 days. This mechanism generally allows
existing investors to roll-over their holdings and continue to
own their respective securities or liquidate their holdings by
selling their securities at par value and therefore are usually
classified within current assets.
The Company generally invests in auction rate securities for
short periods of time as part of its cash management program.
Recent uncertainties in the credit markets have prevented the
Company from liquidating certain holdings of auction rate
securities subsequent to December 31, 2007 as the amount of
securities submitted for sale during the auction exceeded the
amount of purchase orders. Although an event of an auction
failure does not necessarily mean that a security is impaired,
the Company considered various factors to assess the fair value
and the classification of the securities as short-term or
long-term assets. Such factors include, but are not necessarily
limited to, timing of the failed auction, specific security
auction history, likelihood of redemptions, restructurings and
other similar liquidity events, quality of underlying
collateral, rating of the security and the bond insurer and
other factors. Such considerations involve a considerable amount
of judgment. As a result of the Companys assessment of the
market conditions and related facts, including an instance in
which the first auction after year-end failed, one security in
the amount of $9.4 million was classified as a long-term
investment as of December 31, 2007. In other instances, the
Company experienced successful auctions shortly after
December 31, 2007, but then encountered subsequent failed
auctions in February and March 2008 in an aggregate amount of
$18.3 million.
As of March 20, 2008, the Company reduced its investment in
auction rate securities by selling $33.2 million of
investments at par value. The Company continues to hold the
remaining securities and is due interest at a higher rate on
those securities as to which the auctions have failed than
similar securities for which auctions have cleared. These
investments consist of AAA-rated non-mortgage related auction
rate securities and are insured against loss of principal and
interest by bond insurers whose AAA ratings are under review. At
December 31, 2007 and 2006, the fair market values of these
securities were determined to be the carrying values and no
unrealized gains and losses or other-than-temporary impairments
were recorded. The Company assessed the fair value of the
auction rate securities as of December 31, 2007 through
either an independent valuation for securities which it felt
were subject to credit risk at December 31, 2007, including
an assessment of all key underlying data and assumptions, or
through
F-20
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
its own internal assessment of the carrying value and
reasonableness of fair values. Considerable judgment was
involved in reaching these determinations. If the credit ratings
of the issuer, the bond insurer or the collateral deteriorate or
the carrying value of the investments decline for any other
reason, the Company may need to adjust the carrying value of
these investments. Although a limited secondary market exists
for these securities, the Company does not intend at this time
to use the secondary market to dispose of the auction rate
securities.
It is uncertain as to when the liquidity issues relating to
these investments will improve, although the Company believes as
of December 31, 2007 that the investments classified as
short-term will be able to be liquidated within the next
12-month
period. Although the Company does not currently anticipate
having to sell these securities in order to operate our
business, if that were to change, or if the liquidity issues
continue over a prolonged period, it might be unable to
liquidate some holdings of its auction rate securities and as a
result, might suffer losses from these investments. In addition,
given the complexity of auction rate securities and their
valuations, the Companys estimates of their fair value may
differ from the actual amount it would be able to collect in an
ultimate sale.
|
|
5.
|
Property
and Equipment
|
Property and equipment consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Computer and office machines
|
|
$
|
1,036
|
|
|
$
|
587
|
|
Furniture and fixtures
|
|
|
348
|
|
|
|
290
|
|
Leasehold improvements
|
|
|
1,270
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
2,654
|
|
|
|
946
|
|
Less: accumulated depreciation and amortization
|
|
|
(389
|
)
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,265
|
|
|
$
|
343
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2007, 2006 and 2005 was $251,000, $69,000 and
$62,000, respectively.
The leasehold improvements as of December 31, 2007 are
related to tenant improvements to the Companys new
headquarters in Bethesda, Maryland, to which the Company
relocated in July 2007.
Accrued expenses consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Research and development costs
|
|
$
|
4,422
|
|
|
$
|
2,460
|
|
Selling and marketing costs
|
|
|
384
|
|
|
|
986
|
|
Employee compensation
|
|
|
1,867
|
|
|
|
1,238
|
|
Legal service fees
|
|
|
226
|
|
|
|
213
|
|
Royalty liability related party
|
|
|
1,536
|
|
|
|
361
|
|
Other expenses
|
|
|
295
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,730
|
|
|
$
|
5,418
|
|
|
|
|
|
|
|
|
|
|
F-21
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Other liabilities consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
Deferred leasehold incentive
|
|
$
|
1,080
|
|
|
$
|
|
|
Deferred rent expense
|
|
|
397
|
|
|
|
33
|
|
Lease loss liability
|
|
|
286
|
|
|
|
|
|
Other liabilities
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,768
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
In July 2007, the Company relocated to new offices (see
Note 8). Under the terms of the new lease, the Company
received $1.1 million in associated leasehold incentives in
the form of reimbursements for leasehold improvement
expenditures. The Company recorded a liability for the cash
incentives and is amortizing these incentives as reductions of
rental expense over the term of the lease, which expires in
February 2017, using the straight-line method.
Operating
Leases
The Company leases office space in the United States, United
Kingdom and Japan under operating leases through 2017. Total
future minimum, non-cancelable lease payments under operating
leases are as follows as of December 31, 2007:
|
|
|
|
|
(In thousands)
|
|
|
|
|
2008
|
|
$
|
1,555
|
|
2009
|
|
|
1,325
|
|
2010
|
|
|
969
|
|
2011
|
|
|
937
|
|
2012
|
|
|
963
|
|
2013 and thereafter
|
|
|
4,243
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
9,992
|
|
|
|
|
|
|
Rent expense for all operating leases was $1.1 million,
$572,000 and $538,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
The Company is party to a non-cancelable operating lease
agreement for office space in the United States, which expires
in November 2009. The Company vacated these premises in July
2007 to relocate to its new leased facility. According to
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146), a
liability for costs that will continue to be incurred under a
lease for its remaining term without economic benefit to the
Company shall be recognized and measured when the Company ceases
using the right conveyed by the lease, reduced by estimated
sublease rentals that could be reasonably obtained. In
accordance with SFAS 146, the Company recorded non-cash
charges relating to the abandonment of its former office of
approximately $432,000 during the year ended December 31,
2007. This is reflected in general and administrative expenses
in the accompanying consolidated statement of operations and
comprehensive income (loss). At December 31, 2007, the
lease loss liability was $286,000.
F-22
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Research
and Development Costs
The Company routinely enters into agreements with third-party
CROs to oversee clinical research and development studies
provided on an outsourced basis. The Company is not generally
contractually obligated to pay the CRO if the service or reports
are not provided. Total future estimated costs under these
agreements as of December 31, 2007 are as follows:
|
|
|
|
|
(In thousands)
|
|
|
|
|
2008
|
|
$
|
19,999
|
|
2009
|
|
|
4,211
|
|
|
|
|
|
|
|
|
$
|
24,210
|
|
|
|
|
|
|
|
|
9.
|
Related
Party Transactions
|
Founders
Stock-Based Awards
On June 19, 2007, the Compensation Committee of the
Companys Board of Directors authorized a one-time stock
and cash award to each of the Companys founders. These
awards were granted and fully vested on June 29, 2007 when
the founders agreed to their terms, but were not to be settled
until the earlier of the completion of the initial public
offering or December 31, 2007. In August 2007, the awards
were settled upon the completion of the initial public offering.
The Compensation Committee intended for these awards to
compensate the founders for the lost value of stock options that
had been granted to them in 2001 and 2002 and had been
understood by them to have ten-year terms, but which had expired
in 2006 and early 2007 as a result of the terms of the 2001
Stock Incentive Plan. The expired options would have entitled
the founders to purchase an aggregate of 578,000 shares of
class A common stock at a price of $0.21 per share and
136,000 shares at a price of $2.95 per share.
Upon their settlement at the completion of the initial public
offering, these stock and cash awards had an aggregate value
equal to the difference between the value of the shares that
could have been purchased under each of the expired options,
determined on the basis of the public offering price per share
of $11.50, and the respective aggregate exercise prices for such
shares as provided in the option agreements.
These awards consisted of a combination of cash and shares of
class A common stock. Of the aggregate value of each award,
40% was payable in cash and 60% in stock. For purposes of
determining the number of shares of class A common stock to
be issued in connection with each award, the stock was valued on
the basis of the $11.50 public offering price per share in the
initial public offering.
The estimated fair value of these awards, totaling
$10.2 million on the grant date, was determined using the
Black-Scholes-Merton Option Pricing Formula, as allowed under
SFAS 123R. For the six months ended June 30, 2007, the
Company recorded $10.2 million of general and
administrative expense for these awards, of which
$4.1 million was recorded as other liabilities
related parties for the cash settlement portion and
$6.1 million as additional paid-in capital for the stock
settlement portion. The liability portion of the awards was
adjusted based upon the final cash settlement amount, but the
equity portion was fixed upon the grant date.
When the initial public offering was completed in August 2007,
the awards were settled and 401,133 shares of class A
common stock were issued to the founders. In addition, as a
result of the lower public offering price compared to the
estimated public offering price at June 30, 2007, the
Company recorded an adjustment of $1.0 million to reduce
the amount of expense and related liability for the cash portion
of the awards, which was paid to the founders, resulting in a
net expense of $9.2 million for the year ended
December 31, 2007.
R-Tech
Ueno, Ltd.
On March 7, 2003, the Company entered into an exclusive
supply agreement with R-Tech Ueno), affiliated through common
ownership. This agreement grants R-Tech the exclusive right to
manufacture and supply RUG-
F-23
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
015, a prostone compound, and lubiprostone, and in consideration
for such right R-Tech agreed to pay the Company as follows:
$1.0 million upon execution of the agreement,
$2.0 million upon commencement of a first Phase II
lubiprostone trial, $3.0 million upon commencement of a
first Phase II RUG-015 trial and $2.0 million upon
commencement of the earlier of a second Phase II or a first
Phase III RUG-015 trial. Upon execution of the agreement,
the Company had already commenced Phase II clinical trials
for RUG-015 and lubiprostone, which resulted in an immediate
payment of $6.0 million $1.0 million for
the agreement execution, $2.0 million for the commencement
of the first Phase II lubiprostone trial, and
$3.0 million for the commencement of the first
phase II RUG-015 trial. The Company evaluated the
$6.0 million in cash receipts from R-Tech and determined
the payments were made for the exclusive right to supply
inventory to the Company and determined that the amounts should
be deferred until commercialization of the drugs begins since
this is the point at which the underlying services would
commence. Management also was unable to adequately assign value
between the two compounds based on the information available to
the Company and determined that the full $6.0 million
deferred amount would be amortized over the contractual life of
the relationship which was equivalent to the estimated
commercialization periods of both RUG-015 and lubiprostone
(estimated to be through December 2020).
During the year ended December 31, 2005, the Company ceased
the development of RUG-015 due to less than satisfactory
Phase II results and the Companys Board of Directors
approved the Companys decision to discontinue the
development of RUG-015. In addition to the Companys Board
of Directors, R-Tech also formally approved the abandonment of
RUG-015, which was a requirement in the supply agreement terms.
Because the Company was unable to assign value to the compounds
at the time the agreement was executed and the $6.0 million
was received from R-Tech, the full $6.0 million remained
deferred at the abandonment of RUG-015.
The abandonment of RUG-015 changed the amortization period of
the $6.0 million deferred revenue to the commercialization
period of AMITIZA, which began April 2006. The Company has
recognized revenue of $418,000 and $314,000 for the years ended
December 31, 2007 and 2006, respectively, which is recorded
as contract revenue related parties. During the
years ended December 31, 2007, 2006 and 2005, Sucampo
purchased from R-Tech $1.6 million, $608,000 and
$1.3 million, respectively, of clinical supplies under the
terms of this agreement.
On June 24, 2005, the Company entered into a
20-year
exclusive manufacturing and supply agreement with R-Tech. The
agreement grants R-Tech the exclusive right to manufacture and
supply lubiprostone for clinical and commercial supplies within
Europe. In consideration of the exclusive rights, R-Tech paid
the Company $2.0 million prior to the execution of the
agreement on March 31, 2005. Management has determined that
the amount should be deferred until such time as the commercial
benefit to R-Tech can be realized. As lubiprostone has not been
approved within Europe, the $2.0 million has been recorded
as non-current deferred revenue as of December 31, 2007 and
2006. During the year ended December 31, 2007, Sucampo
Europe purchased from R-Tech $336,000 of clinical supplies under
the terms of this agreement. There were no such clinical supply
purchases in 2006 or 2005.
On September 7, 2006, the Companys Board of Directors
approved an agreement which amends the exclusive manufacturing
agreement with R-Tech. This agreement allows the Company to
elect a
back-up
supplier for the supply of drug substance and drug product. In
addition, the agreement provides that R-Tech shall maintain at
least a six-month inventory of drug substance and at least a
six-month inventory of intermediate drug product. Sucampo had no
clinical supply purchases from a
back-up
supplier in 2007 or 2006.
On October 4, 2006, the Company entered into a two-year
exclusive clinical manufacturing and supply agreement with
R-Tech for two of its drug compounds, cobiprostone and SPI-017.
Under the terms of this agreement, R-Tech agreed to manufacture
and supply the necessary drug substance and drug product for the
purpose of clinical development. Pricing for clinical supplies
will be determined on a
batch-by-batch
basis and shall not exceed a certain
mark-up
percentage. Unless this agreement is terminated by mutual
written consent within 90 days of expiration, it will
automatically be renewed for an additional two years. During the
years ended December 31, 2007 and 2006, Sucampo purchased
from R-Tech $1.8 million and $472,000, respectively, of
clinical supplies under the terms of this agreement.
F-24
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Sucampo
AG License Agreements
On June 30, 2006, the Company entered into a restated
license agreement with SAG. Under this agreement, SAG has
granted to the Company a royalty-bearing, exclusive, worldwide
license, with the right to sublicense, to develop and
commercialize AMITIZA, cobiprostone and SPI-017 and any other
prostone compounds, other than RESCULA, subject to SAGs
patents. This agreement supersedes all previous license and data
sharing arrangements between the parties and functions as a
master license agreement with respect to SAGs prostone
technology. The license is perpetual as to AMITIZA, cobiprostone
and SPI-017 and cannot be terminated unless the Company defaults
in its payment obligations to SAG. If the Company has not
committed specified development efforts to any prostone compound
other than AMITIZA, cobiprostone and SPI-017 by the end of a
specified period, which ends on the later of June 30, 2011
or the date upon which the founders, no longer control our
company, then the commercial rights to that compound will revert
to SAG, subject to a
15-month
extension in the case of any compound designate by the Company
in good faith as planned for development within that extension
period. Under the terms of the license, the Company is obligated
to assign to SAG any patentable improvements derived or
discovered by the Company relating to AMITIZA, cobiprostone and
SPI-017 through the term of the license. In addition, the
Company is obligated to assign to SAG any patentable
improvements derived or discovered by the Company relating to
other licensed prostone compounds prior to the date which is the
later of June 30, 2011 or the date on which the founders
cease to control the Company. All compounds assigned to SAG
under this agreement will be immediately licensed back to the
Company on an exclusive basis.
In consideration of the license, the Company is required to make
milestone and royalty payments to SAG. The milestone payments
include:
|
|
|
|
|
a payment of $500,000 upon the initiation of the first
Phase II clinical trial for each compound in each of three
territories covered by the license: North, Central and South
America (including the Caribbean), Asia and the rest of the
world; and
|
|
|
|
a payment of $1.0 million for the first NDA filing or
comparable foreign regulatory filing for each compound in each
of the same three territories.
|
Upon payment of the above milestones, no further payments will
be required either for new indications or formulations or for
further regulatory filings for the same compound in additional
countries within the same territory. In addition, the Company is
required to pay SAG 5% of any up-front or milestone payments
that are received from sublicensees.
In addition, the Company is required to pay SAG, on a
country-by-country
basis, royalty payments of 6.5% of net sales for every product
covered by existing patents and, if applicable, thereafter 4.25%
of net sales for every product candidate covered by new or
improvement patents assigned by the Company to SAG. With respect
to sales of AMITIZA in North, Central and South America,
including the Caribbean, the rates for these royalty payments
are set at 3.2% and 2.1% of net sales, respectively. The product
royalties that the Company pays to SAG are based on total
product net sales, whether by the Company or a sublicensee, and
not on amounts actually received by the Company. The Company
expensed $4.9 million and $1.2 million in product
royalties to SAG during the years ended December 31, 2007
and 2006, respectively, reflecting 3.2% of AMITIZA net sales
during each of these years, which was recorded as product
royalties related parties.
During the years ended December 31, 2006 and 2005 the
Company paid SAG $1.1 million and $400,000, respectively,
of non-refundable upfront payments for the initial SPI-017
license which were recorded as a research and development
expense.
During the year ended December 31, 2005, and in accordance
with the initial license agreement for AMITIZA, the Company paid
SAG $1.5 million in milestone royalty payments upon
receiving $30.0 million in development milestone payments
from Takeda for work surrounding AMITIZA. During the year ended
December 31, 2006, the Company paid SAG milestone royalty
payments of $1.0 million and $250,000 upon receiving a
$20.0 million
F-25
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
development milestone payment from Takeda for the FDA approval
of AMITIZA. During the year ended December 31, 2007, the
Company paid SAG $1.5 million upon receiving a
$30.0 million development milestone payment from Takeda for
the supplemental NDA for irritable bowel syndrome with
constipation and $500,000 upon the initiation of the first Phase
IIb dose-ranging study in Japan. These milestone royalty
payments to SAG were expensed in the respective period as
milestone royalties related parties.
Sucampo
AG Notes Payable
On August 1, 2003, Sucampo Japan entered into a note
agreement with SAG pursuant to which Sucampo Japan borrowed
$2.5 million. The rate of interest charged on the loan was
calculated on an annual basis of 1% in excess of the six-month
Tokyo InterBank Offered Rate per annum on the outstanding
principal balance. Interest payments were due and payable
semi-annually and the note balance of $2.6 million was
completely paid off in the year ended December 31, 2006.
On July 1, 2004, Sucampo Europe formalized a note agreement
with SAG, related to the advances previously made to Sucampo
Europe by SAG for general working capital purposes. The rate of
interest charged on the loan was equal to the minimum rate
permitted by the Swiss Federal Tax Administration for
obligations denominated in British Pounds. Interest payments
were due and payable semi-annually and the note balance of
$947,000 was completely paid off in the year ended
December 31, 2006.
On February 27, 2006, Sucampo Europe entered into a note
agreement with SAG, pursuant to which Sucampo Europe borrowed
$1.2 million. The rate of interest charged on the loan was
equal to the minimum rate permitted by the Swiss Federal Tax
Administration for obligations denominated in British Pounds.
Interest payments were due and payable semi-annually and the
note balance of $1.2 million was completely paid off in the
year ended December 31, 2006.
S&R
Technology Holdings LLC Notes Payable
On February 20, 2004 and March 29, 2004, Sucampo Japan
issued three-year bonds with an aggregate face value of
$1,025,970 to S&R. Interest on the bonds was payable every
six months at a rate of 0.5% per annum, which represented a
market rate of interest in Japan. The bonds were paid in full
during 2005 and all conversion rights were cancelled.
On May 7, 2004, Sucampo Europe entered into a three-year
facility agreement with S&R pursuant to which Sucampo
Europe borrowed $603,919 during May 2004 and $613,925 during
July of 2004. The rate of interest charged on the agreement was
calculated on the basis of Euro LIBOR plus 0.5% per annum
(approximately 2.9% at December 31, 2005). Principal and
interest payments were repayable anytime during the three-year
term. The note paid in full during 2005.
F-26
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
10.
|
Collaboration
and License Agreements
|
The following table summarizes the cash streams and related
collaboration and research and development revenue recognized
under the Takeda Agreement and the Supplemental Agreement, which
are described in more detail below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
Amount
|
|
|
|
through
|
|
|
Revenue Recognized for the Year Ended
|
|
|
Receivable at
|
|
|
Deferred at
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007*
|
|
|
2007
|
|
|
Collaboration revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment associated with the obligation to participate
in joint committees with Takeda
|
|
$
|
2,375
|
|
|
$
|
23
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
147
|
|
|
$
|
|
|
|
$
|
1,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up-front payment remainder
|
|
$
|
17,624
|
|
|
$
|
1,356
|
|
|
$
|
8,134
|
|
|
$
|
6,157
|
|
|
$
|
1,977
|
|
|
$
|
|
|
|
$
|
|
|
Development milestones
|
|
|
80,000
|
|
|
|
|
|
|
|
16,154
|
|
|
|
28,237
|
|
|
|
35,609
|
|
|
|
|
|
|
|
|
|
Reimbursement of research and development expenses
|
|
|
43,048
|
|
|
|
1,482
|
|
|
|
14,672
|
|
|
|
11,988
|
|
|
|
21,793
|
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,672
|
|
|
$
|
2,838
|
|
|
$
|
38,960
|
|
|
$
|
46,382
|
|
|
$
|
59,379
|
|
|
$
|
6,887
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes billed and unbilled accounts receivable. |
On October 29, 2004, the Company entered into the Takeda
Agreement to exclusively co-develop, commercialize and sell
products that contain lubiprostone for gastroenterology
indications in the United States and Canada. Payments to the
Company under the Takeda Agreement include a non-refundable
up-front payment, non-refundable development and commercial
milestone payments, reimbursement of certain development and
co-promotion costs and royalties.
Upon execution of the Takeda Agreement, the Company was required
to complete several deliverables, which Takeda was responsible
to fund. The following are the required deliverables of the
Company, along with the related contractual cash flows from
Takeda and the associated obligations and performance period of
the Company:
|
|
|
|
|
The Company granted Takeda an exclusive license of lubiprostone
to co-develop, commercialize, and sell products for
gastroenterology indications in the United States and Canada.
There are no defined contractual cash flows within the Takeda
Agreement for the grant of this license, but the Company did
receive a non-refundable up-front payment of $20.0 million
upon executing the Takeda Agreement. The license was granted to
Takeda on October 29, 2004 and will expire when the Takeda
Agreement expires or is terminated. After the commercial launch
in 2006, Takeda has paid and will pay the Company pre-determined
royalties on net revenues on a quarterly basis for the products
sold by Takeda during the term of the Takeda Agreement. The
level of royalties is tiered based on the net sales recognized
by Takeda. Royalty payments, which the Company began to earn in
April 2006 and receive in July 2006, will cease when the Takeda
Agreement is terminated and all cash payments due to the Company
are paid. The Company has recorded product royalty revenue of
approximately $27.5 million and $6.6 million for the
years ended December 31, 2007 and 2006, respectively. This
revenue is recorded as product royalty revenue in the
consolidated statements of operations and comprehensive income
(loss).
|
F-27
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
The Company participates in the following committees, along with
Takeda: Joint Steering Committee, Joint Development Committee,
Joint Commercialization Committee and Joint Manufacturing
Committee. There are no separate cash flows identified within
the Takeda Agreement associated with the participation by the
Company in these committees. There is no defined performance
period for this obligation, but the performance period will not
exceed the term of the Takeda Agreement. The Company expects its
participation on all committees to continue throughout the term
of the Takeda Agreement, except for the Joint Development
Committee, which will continue until development work is
complete.
|
|
|
|
The Company has provided development work necessary for an NDA
submission to the FDA for the treatment of chronic idiopathic
constipation and irritable bowel syndrome with constipation
indications. Takeda funded the initial $30.0 million of
development costs, the Company was obligated to fund the first
$20.0 million in excess of the initial $30.0 million
funded by Takeda and the two parties are to equally share any
required development costs in excess of $50.0 million.
Although there was no defined performance period for this
development work, the period to perform the work would not
exceed the term of the Takeda Agreement. In January 2006, the
Company received approval for its NDA for AMITIZA to treat
chronic idiopathic constipation and completed and submitted the
supplemental NDA for irritable bowel syndrome with constipation
to the FDA in June 2007.
|
As a result of its assessment of the deliverables under the
Takeda Agreement, the Company determined there were four
separate units of accounting as of the inception of the Takeda
Agreement (1) participation in the Joint
Steering Committee, (2) participation in the Joint
Manufacturing Committee, (3) participation in the Joint
Commercialization Committee and (4) the combined
requirement of the development work of chronic idiopathic
constipation and irritable bowel syndrome with constipation and
participation in the Joint Development Committee. The Company
has assessed these required deliverables under the guidance of
EITF 00-21
to determine which deliverables are considered separate units of
accounting.
Upon receipt of the $20.0 million up-front payment, the
Company deferred approximately $2.4 million to be
recognized using the time-based model over the performance
period of the participation in these meetings. During the years
ended December 31, 2007, 2006 and 2005, the Company
recognized approximately $147,000 of this deferred amount as
collaboration revenue on the consolidated statements of
operations and comprehensive income (loss). The related deferred
revenue as of December 31, 2007 and 2006 was approximately
$1.9 million and $2.1 million, respectively.
Since the execution of the Takeda Agreement, the Company
deferred the residual amount of the $20.0 million up-front
payment totaling approximately $17.6 million, development
milestone payments received totaling $50.0 million, and
reimbursement of the initial $30.0 million of research and
development costs for the development of AMITIZA for chronic
idiopathic constipation and irritable bowel syndrome with
constipation indications. These deferred amounts were applied
towards the unit of accounting that combines the participation
in the Joint Development Committee and the development of
chronic idiopathic constipation and irritable bowel syndrome
with constipation and was recognized over the performance period
of developing the chronic idiopathic constipation and irritable
bowel syndrome with constipation NDA submissions. The Company
completed the development of the chronic idiopathic constipation
and irritable bowel syndrome with constipation in June 2007 and
filed a supplemental NDA (sNDA) for irritable bowel syndrome
with constipation. This was the culmination of the performance
period. In June 2007, the Company also recognized as revenue, in
full, $30.0 million from Takeda upon the filing of the sNDA
for AMITIZA to treat irritable bowel syndrome with constipation.
During the years ended December 31, 2007, 2006 and 2005,
the Company recognized approximately $41.1 million,
$45.3 million and $39.0 million, respectively, of
research and development revenue in the consolidated statements
of operations and comprehensive income (loss) relating to this
unit of accounting for the development of AMITIZA for chronic
idiopathic constipation and irritable bowel syndrome with
constipation indications. There was no related deferred revenue
as of December 31, 2007. The related deferred revenue as of
December 31, 2006 was $11.0 million.
F-28
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
The Company incurred research and development costs for the
development of AMITIZA for chronic idiopathic constipation and
irritable bowel syndrome with constipation indications of
approximately $5.0 million, $11.6 million and
$25.9 million for the years ended December 31, 2007,
2006 and 2005, respectively.
During the quarter ended June 30, 2006, the Joint
Commercialization Committee granted approval for the Company and
Takeda to begin three new studies related to funding
arrangements discussed in both the Takeda Agreement and the
Supplemental Agreement. The following are the three additional
deliverables of the Company, along with the related contractual
cash flows from Takeda and the associated obligations and
performance period of the Company, when the three studies were
agreed upon:
|
|
|
|
|
The Company is obligated to perform studies in connection with
changes to labeling for chronic idiopathic constipation. Takeda
is obligated to fund 70% of the labeling studies and the
Company is obligated to fund the remaining 30%. There is no
defined performance period, but the performance period will not
exceed the term of the Takeda Agreement. The Company initiated
the first labeling study for chronic idiopathic constipation in
August 2006.
|
|
|
|
The Company is obligated to perform studies for the development
of an additional indication for opioid-induced bowel
dysfunction. Takeda is obligated to fund all development work up
to a maximum aggregate of $50.0 million for each additional
indication and $20.0 million for each new formulation. If
development costs exceed these amounts, Takeda and the Company
shall equally share such excess costs. There is no defined
performance period, but the performance period will not exceed
the term of the Takeda Agreement. The Company initiated work on
the first additional indication for AMITIZA in July 2006 and
expects the development costs to exceed $50.0 million.
|
|
|
|
The Company is obligated to perform all development work
necessary for Phase IV studies, for which Takeda is
obligated to fund all development work. There is no defined
performance period, but the performance period will not exceed
the term of the Supplemental Agreement. The Company began work
on a Phase IV study for chronic idiopathic constipation in
August 2006.
|
The Company has assessed these required deliverables under the
guidance of
EITF 00-21
to determine which deliverables are considered separate units of
accounting. As a result of the Company and Takeda agreeing to
perform and fund these studies simultaneously, the Company
determined that there is no objective and reliable evidence to
determine the fair value for each of the studies. Accordingly,
the Company has combined these three required deliverables as a
single unit of accounting. All cash payments from Takeda related
to these three deliverables are deferred upon receipt and
recognized over the estimated performance period to complete the
three studies using the time-based model. The estimated
completion date is June 2009. During the years ended
December 31, 2007 and 2006, the Company recognized
approximately $18.3 million and $1.1 million related
to these three deliverables as research and development revenue
in the consolidated statements of operations and comprehensive
income (loss), respectively.
On February 1, 2006, the Company entered into the
Supplemental Agreement with Takeda, which amended the
responsibilities of both the Company and Takeda for the
co-promotion of AMITIZA and clarified the responsibilities and
funding arrangements for other marketing services to be
performed by both parties.
Upon execution of the Supplemental Agreement, the Company was
required to complete several deliverables, which Takeda was
responsible to fund. The following are the required deliverables
of the Company, along with the related contractual cash flows
from Takeda and the associated obligations and performance
period of the Company, under the Supplemental Agreement:
|
|
|
|
|
The Company is obligated to co-promote AMITIZA with Takeda by
employing a sales force of approximately 38 representatives to
supplement Takedas sales activities. Takeda is obligated
to reimburse the Company a specified amount per day per sales
force representative, but such reimbursements shall not exceed
certain pre-defined amounts. The term of this reimbursement
arrangement ceases five years
|
F-29
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
following the first date that the Company deployed sales
representatives, which was in April 2006. The Company has
recognized approximately $4.3 million and $3.4 million
of revenues for the years ended December 31, 2007 and 2006,
respectively, reflecting these co-promotion reimbursements,
which is recorded as co-promotion revenue in the consolidated
statements of operations and comprehensive income (loss).
|
|
|
|
|
|
The Company was obligated to perform miscellaneous marketing
activities for AMITIZA, the majority of which would be
reimbursed by Takeda. The miscellaneous marketing activities
were completed in the first quarter of 2007 and the Company has
recorded $158,000 and $779,000 of reimbursements of
miscellaneous costs for the years ended December 31, 2007
and 2006, respectively. These amounts are recorded as
co-promotion revenue in the consolidated statements of
operations and comprehensive income (loss).
|
The Company views the deliverables under the Supplemental
Agreement as economically independent of those in the original
Takeda Agreement.
The Company has assessed these required deliverables under the
guidance of
EITF 00-21
to determine which deliverables are considered separate units of
accounting. The Company was able to determine that its sales
force miscellaneous marketing activities are treated as separate
units of accounting. The Company is recognizing the cost
reimbursements received for these deliverables as co-promotion
revenues when services are performed and the reimbursement
payments are due under the Supplemental Agreement.
Capital
Structure
The class A common stock is entitled to one vote per share
and, with respect to the election of directors, votes as a
separate class and is entitled to elect that number of directors
which constitutes ten percent of the total membership of the
Board of Directors. The class B common stock is entitled to
10 votes per share and votes as a separate class on the
remaining percentage of Board of Directors not voted on by the
class A common stockholders. Each holder of record of
class B common stock may, in such holders sole
discretion and at such holders option, convert any whole
number or all of such holders shares of class B
common stock into fully paid and non-assessable shares of
class A common stock for each share of class B common
stock surrendered for conversion. The class B common stock
is not transferable, except upon conversion. All of the shares
of class B common stock are indirectly owned by the
Companys founders.
On March 18, 2005, R-Tech converted all shares of its
class B common stock into 4,250,000 shares of
class A common stock.
During the year ended December 31, 2006, the Company sold
2,398,758 shares of class A common stock in a private
transaction. As a result, the Company received net proceeds of
$23.9 million.
In August 2007, the Company completed its initial public
offering, consisting of 3,125,000 shares of class A
common stock at a public offering price of $11.50 per share.
After deducting underwriters discounts, commissions, and
expenses of the offering, including costs of $3.1 million
incurred in 2006, the Company raised net proceeds of
$28.2 million. Upon completion of the initial public
offering, all shares of the Companys series A
convertible preferred stock were converted into an aggregate of
3,213,000 shares of class A common stock.
Stock
Option Plan
On February 15, 2001, the Company adopted the 2001 Stock
Incentive Plan (the 2001 Incentive Plan) in order to provide
common stock incentives to certain eligible employees, officers
and directors, consultants and advisors of the Company. The
Board of Directors administers the 2001 Incentive Plan and has
sole discretion to grant options. Prior to the Companys
initial public offering, the exercise price of each option
granted under the 2001 Incentive Plan was determined by the
Board of Directors and was to be no less than 100% of the fair
market value of
F-30
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
the Companys common stock on the date of grant.
Determinations of fair market value of the class A common
stock under the 2001 Incentive Plan was made in accordance with
methods and procedures established by the Board of Directors
prior to the Companys initial public offering. On
September 1, 2003, the Board of Directors amended the 2001
Incentive Plan to allow for a maximum of 8,500,000 shares
of class A common stock to be issued under all awards,
including incentive stock options under the 2001 Incentive Plan.
Although at December 31, 2007, 7,332,100 shares were
available for future grants under the 2001 Incentive Plan, the
Company does not currently plan to issue equity instruments
under the 2001 Incentive Plan.
On June 5, 2006, the Companys Board of Directors
approved a 2006 Stock Incentive Plan (the 2006 Incentive Plan)
and reserved 8,500,000 shares of class A common stock
for issuance under that plan. In addition, the Board at that
time approved the Employee Stock Purchase Plan (ESPP) and
reserved 4,250,000 shares of class A common stock for
issuance under the ESPP. At December 31, 2007, a total of
8,232,500 shares were available for future grants under the
2006 Incentive Plan and no shares have been issued under the
ESPP. Option awards under the 2006 Incentive Plan are generally
granted with an exercise price equal to the closing market price
of the Companys stock at the date of grant and they
generally vest over four years and have ten-year contractual
terms. The stock option awards granted in 2007 generally vest
over three years.
On October 18, 2007, the Companys Board of Directors
approved an amendment to the 2006 Incentive Plan. The 2006
Incentive Plan includes an evergreen provision by
which the number of shares of the Companys class A
common stock available for issuance under the 2006 Incentive
Plan increases automatically on the first day of each calendar
year by a number equal to 5% of the aggregate number of shares
of the Companys class A common stock and class B
common stock outstanding on such date, or such lesser number as
the Board of Directors may determine. As amended, the 2006
Incentive Plan will provide that the number of shares of
class A common stock included in each annual increase will
be 500,000, or such lesser number as the Board of Directors may
determine. The Board of Directors also determined that the
amount of the increase in the shares available for issuance
under the 2006 Incentive Plan as of January 1, 2008,
pursuant to the evergreen provision, would be zero.
When an option is exercised, the Company issues a new share of
class A common stock.
A summary of the employee stock option activity for the year
ended December 31, 2007 under the Companys 2001
Incentive Plan is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Term (Years)
|
|
|
Value
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006
|
|
|
826,200
|
|
|
$
|
9.02
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(25,925
|
)
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(159,375
|
)
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2007
|
|
|
640,900
|
|
|
|
10.24
|
|
|
|
7.10
|
|
|
$
|
5,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2007
|
|
|
538,900
|
|
|
|
10.28
|
|
|
|
6.89
|
|
|
$
|
4,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
A summary of the employee stock option activity for the year
ended December 31, 2007 under the Companys 2006
Incentive Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Term (Years)
|
|
|
Value ($000)
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
267,500
|
|
|
|
14.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2007
|
|
|
267,500
|
|
|
|
14.44
|
|
|
|
8.83
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2007
|
|
|
67,500
|
|
|
|
14.44
|
|
|
|
8.84
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
during the years ended December 31, 2007 and 2006 were
$7.19 and $6.41, respectively. There were no employee options
granted in 2005. The total intrinsic value of options exercised
during the years ended December 31, 2006 and 2005 were
$83,000 and $66,000, respectively. As of December 31, 2007,
approximately $1.6 million of total unrecognized
compensation costs, net of estimated forfeitures, related to
non-vested awards are expected to be recognized over a weighted
average period of 2.71 years.
The Company granted 510,000 stock options with an exercise price
of $5.85 per share to non-employees in August 2005 under the
2001 Incentive Plan and recorded a charge of $3.4 million
in conjunction with the grant, which was recorded as a component
of research and development expenses. These non-employee stock
options vested immediately and have a maximum term of
10 years and the weighted average remaining contractual
life of these options as of December 31, 2007 was
7.33 years. The weighted average fair value per share of
non-employee options granted for the year ended
December 31, 2005 was $6.75.
The provision (benefit) for income taxes consists of the
following for the three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Current tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,900
|
|
|
$
|
(715
|
)
|
|
$
|
1,505
|
|
State
|
|
|
671
|
|
|
|
(261
|
)
|
|
|
261
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision (benefit)
|
|
|
3,571
|
|
|
|
(976
|
)
|
|
|
1,472
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,821
|
|
|
|
(4,182
|
)
|
|
|
(862
|
)
|
State
|
|
|
441
|
|
|
|
261
|
|
|
|
(117
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
4,262
|
|
|
|
(3,921
|
)
|
|
|
(683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
7,833
|
|
|
$
|
(4,897
|
)
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
Deferred tax assets, net, consist of the following as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Foreign net operating loss carryforwards
|
|
$
|
1,892
|
|
|
$
|
683
|
|
Deferred revenue
|
|
|
3,345
|
|
|
|
7,409
|
|
General business credit carryforwards
|
|
|
3,086
|
|
|
|
4,366
|
|
Accrued expenses
|
|
|
1,102
|
|
|
|
198
|
|
Tax benefits on stock options
|
|
|
2,069
|
|
|
|
2,005
|
|
Other
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
11,494
|
|
|
|
14,785
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(42
|
)
|
|
|
(12
|
)
|
Other
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(42
|
)
|
|
|
(33
|
)
|
Less: valuation allowance
|
|
|
(10,813
|
)
|
|
|
(9,851
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
639
|
|
|
$
|
4,901
|
|
|
|
|
|
|
|
|
|
|
The Company continued to assess its ability to realize certain
deferred tax assets in the years ended December 31, 2007
and 2006. During the fourth quarter of 2006, the Company
performed an analysis of future projections due to an additional
year of profitability in 2006 and the expectation of
profitability in 2007. As a result of this analysis, the Company
reversed an additional $4.9 million of valuation allowance
on its U.S. deferred tax assets in 2006. During the fourth
quarter of 2007, the Company had an additional release of
$204,000. The net deferred tax asset as of December 31,
2007 and 2006 represents the amount which the Company believes
is more likely than not to be utilized. As of December 31,
2007, the net deferred tax asset of $639,000 represents the
expected realization of deferred tax assets with the carryback
of anticipated taxable losses in future years.
The provision (benefit) for income taxes vary from the income
taxes provided based on the federal statutory rate of 35%, 34%
and 34% as follows for the three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Federal tax provision at statutory rate
|
|
|
35.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal tax benefit
|
|
|
4.7
|
|
|
|
2.3
|
|
|
|
(52.1
|
)
|
General business credits
|
|
|
(2.6
|
)
|
|
|
(2.6
|
)
|
|
|
(361.0
|
)
|
Changes in valuation allowance
|
|
|
4.2
|
|
|
|
(69.6
|
)
|
|
|
272.2
|
|
Adjustment to net operating loss carryforward
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
248.3
|
|
Changes in other tax matters
|
|
|
(4.0
|
)
|
|
|
7.0
|
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
37.3
|
%
|
|
|
(29.0
|
)%
|
|
|
166.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, the Company had foreign net
operating loss carryforwards (NOLs) of $5.4 million and
$2.2 million, respectively. Approximately $2.9 million
of the foreign NOLs begin to expire in December 2010, and
$2.5 million of the foreign NOLs do not expire. At
December 31, 2007 and 2006, the Company had
U.S. general business credits of $3.1 million and
$4.4 million, respectively, which also may be available to
offset future income tax liabilities and will expire if not
utilized at various dates beginning
F-33
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
December 31, 2022. The realization of the benefits of the
tax credits is dependent on sufficient taxable income in future
years. Lack of earnings, a change in the ownership of the
Company, or the application of the alternative minimum tax rules
could adversely affect the Companys ability to utilize
these tax credits.
As of December 31, 2007 and 2006, the Company had a
valuation allowance on its deferred tax assets of
$10.8 million and $9.9 million, respectively. The
increase in the valuation allowance of $962,000 was due
primarily to an increase in foreign deferred tax assets related
to NOLs that are not more likely than not to be
utilized.
Should the Company determine that it would be able to realize
its deferred tax assets in the foreseeable future, an adjustment
to the remaining deferred tax assets could cause a material
increase to income in the period such determination is made.
Significant management judgment is required in determining the
period in which the reversal of a valuation allowance should
occur. The Company considered all available evidence, both
positive and negative, such as historical levels of income and
future forecasts of taxable income amongst other items in
determining whether a full or partial release of a valuation
allowance was required as of December 31, 2007 and 2006.
The valuation allowance at December 31, 2007 was
approximately $10.8 million, of which $8.4 million
related to deferred tax assets in the United States. The Company
will continue to evaluate its valuation allowance position in
each jurisdiction on a regular basis. Significant future events,
including marketing approval by the FDA of AMITIZA for the
treatment of irritable bowel syndrome, are not in the
Companys control and could affect its future earnings
potential and consequently the amount of deferred tax assets
that will be utilized. To the extent that the Company determines
that all or a portion of its valuation allowance is no longer
necessary, the Company will recognize an income tax benefit in
the period such determination is made for the reversal of the
valuation allowance. Once the valuation allowance is eliminated
in whole or in part, it will not be available to offset the
Companys future tax provision. Any such reduction of the
Companys valuation allowance could have a material impact
on the Companys future results from operations and
financial condition.
The Company has determined that it has three reportable
geographic segments based on the Companys method of
internal reporting, which disaggregates the business by
geographic location. These segments are the United States,
Europe and Japan. The Company evaluates performance of these
segments based on income from operations. The reportable
segments have historically derived their revenue from joint
collaboration and license agreements (see Note 2).
Transactions between the segments consist primarily of loans and
the provision of research and development services by Sucampo
Europe and Sucampo Japan to the domestic entity. Following is a
summary of financial information by reportable geographic
segment.
F-34
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
United States
|
|
|
Europe
|
|
|
Japan
|
|
|
Eliminations
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
59,379
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,379
|
|
Product royalty revenue
|
|
|
27,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,536
|
|
Co-promotion revenue
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,411
|
|
Contract revenue related parties
|
|
|
418
|
|
|
|
|
|
|
|
840
|
|
|
|
(840
|
)
|
|
|
418
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
91,891
|
|
|
|
|
|
|
|
840
|
|
|
|
(840
|
)
|
|
|
91,891
|
|
Depreciation and amortization
|
|
|
239
|
|
|
|
2
|
|
|
|
10
|
|
|
|
|
|
|
|
251
|
|
Other operating expenses
|
|
|
69,971
|
|
|
|
1,125
|
|
|
|
2,985
|
|
|
|
(848
|
)
|
|
|
73,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
21,681
|
|
|
|
(1,127
|
)
|
|
|
(2,155
|
)
|
|
|
8
|
|
|
|
18,407
|
|
Interest income
|
|
|
2,618
|
|
|
|
1
|
|
|
|
7
|
|
|
|
(161
|
)
|
|
|
2,465
|
|
Interest expense
|
|
|
|
|
|
|
(57
|
)
|
|
|
(104
|
)
|
|
|
161
|
|
|
|
|
|
Other non-operating (expense) income, net
|
|
|
(72
|
)
|
|
|
311
|
|
|
|
(80
|
)
|
|
|
(8
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
24,227
|
|
|
$
|
(872
|
)
|
|
$
|
(2,332
|
)
|
|
$
|
|
|
|
$
|
21,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,231
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
46,382
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
46,382
|
|
Product royalty revenue
|
|
|
6,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,590
|
|
Co-promotion revenue
|
|
|
4,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,243
|
|
Contract revenue related parties
|
|
|
314
|
|
|
|
|
|
|
|
161
|
|
|
|
(71
|
)
|
|
|
404
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Contract revenue
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
57,676
|
|
|
|
1,500
|
|
|
|
161
|
|
|
|
(71
|
)
|
|
|
59,266
|
|
Depreciation and amortization
|
|
|
59
|
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
69
|
|
Other operating expenses
|
|
|
43,643
|
|
|
|
518
|
|
|
|
343
|
|
|
|
(70
|
)
|
|
|
44,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
13,974
|
|
|
|
980
|
|
|
|
(190
|
)
|
|
|
(1
|
)
|
|
|
14,763
|
|
Interest income
|
|
|
2,035
|
|
|
|
2
|
|
|
|
4
|
|
|
|
(65
|
)
|
|
|
1,976
|
|
Interest expense
|
|
|
(20
|
)
|
|
|
(71
|
)
|
|
|
(67
|
)
|
|
|
68
|
|
|
|
(90
|
)
|
Other non-operating income, net
|
|
|
31
|
|
|
|
23
|
|
|
|
201
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
16,020
|
|
|
$
|
934
|
|
|
$
|
(52
|
)
|
|
$
|
2
|
|
|
$
|
16,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
196
|
|
|
$
|
|
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
United States
|
|
|
Europe
|
|
|
Japan
|
|
|
Eliminations
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue
|
|
$
|
38,960
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,960
|
|
Contract revenue related parties
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
98
|
|
Collaboration revenue
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Contract revenue
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
39,107
|
|
|
|
|
|
|
|
1,098
|
|
|
|
|
|
|
|
40,205
|
|
Depreciation and amortization
|
|
|
61
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
62
|
|
Other operating expenses
|
|
|
38,931
|
|
|
|
1,475
|
|
|
|
254
|
|
|
|
|
|
|
|
40,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
115
|
|
|
|
(1,475
|
)
|
|
|
843
|
|
|
|
|
|
|
|
(517
|
)
|
Interest income
|
|
|
941
|
|
|
|
3
|
|
|
|
136
|
|
|
|
(34
|
)
|
|
|
1,046
|
|
Interest expense
|
|
|
(157
|
)
|
|
|
(139
|
)
|
|
|
(49
|
)
|
|
|
34
|
|
|
|
(311
|
)
|
Other non-operating income, net
|
|
|
|
|
|
|
174
|
|
|
|
81
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
899
|
|
|
$
|
(1,437
|
)
|
|
$
|
1,011
|
|
|
$
|
|
|
|
$
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
39
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,182
|
|
|
$
|
|
|
|
$
|
83
|
|
|
$
|
|
|
|
$
|
2,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
114,490
|
|
|
$
|
2,381
|
|
|
$
|
1,987
|
|
|
$
|
(8,831
|
)
|
|
$
|
110,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
253
|
|
|
$
|
2
|
|
|
$
|
88
|
|
|
$
|
|
|
|
$
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
68,943
|
|
|
$
|
496
|
|
|
$
|
2,544
|
|
|
$
|
(4,899
|
)
|
|
$
|
67,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 19, 2008, the Company announced that Sucampo
Europe opened a branch office in Basel, Switzerland. This office
will interact with the Swiss Agency for Therapeutic Products on
planned future regulatory submissions for clinical research and
product marketing as the Company advances AMITIZA through the
regulatory process in Europe and other overseas markets.
On February 27, 2008, the Company announced that Sucampo
Europe filed a Marketing Authorization Application (MAA) for
lubiprostone, 24 micrograms, for the indication of chronic
idiopathic constipation in adults in the United Kingdom. Under
the Takeda Agreement, if the Company wishes to use data or
information developed under the collaboration with Takeda
outside the United States or Canada, for example in support of a
regulatory filing in Europe or Asia, the Company is obligated to
pay to Takeda a one-time fee the first time such data or
information is used in specified territories. The amount of the
fee for each territory is to be agreed between the Company and
Takeda. In connection with the Companys MAA filing for
lubiprostone in Europe, the Company agreed with Takeda to make a
one-time payment of $1.8 million, which will permit the
Company to use in Europe, the Middle East and Africa certain
data and information developed under the Takeda Agreement
relating to the use of lubiprostone to treat chronic idiopathic
constipation. Also, in consideration of the license agreement
with SAG, the Company is required to make a $1.0 million
payment to SAG for its first NDA filing, or comparable foreign
regulatory filing, in each of the three following territories
covered by the license agreement: North, Central and South
America (including the Caribbean), Asia and the rest of the
world. The Companys MAA filing described
F-36
SUCAMPO
PHARMACEUTICALS, INC.
Notes to
Consolidated Financial Statements
(Continued)
above triggered the obligation on the part of the Company to
make a $1.0 million payment to SAG for the
rest-of-world
territory.
On March 5, 2008, the Company entered into a line of credit
providing for uncommitted borrowings of up to
$30.0 million. The lender has no obligation to make
advances under this line of credit but may do so in its sole
discretion. The line of credit is collateralized by the
Companys short- and long-term investments. Advances made
under this line of credit will bear an interest rate based on
LIBOR plus a predetermined percentage based on the amount of the
advance and other conditions. Borrowings under this line of
credit are due upon the demand of the lender and the lender can
make a repayment demand at its sole option at any time for any
or no reason. As of March 20, 2008, the Company had not
drawn down any funds under this line of credit.
|
|
15.
|
Quarterly
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarters Ended
|
|
(In thousands, except per share data)
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total revenues
|
|
$
|
17,145
|
|
|
$
|
12,852
|
|
|
$
|
48,934
|
|
|
$
|
12,960
|
|
Loss (income) from operations
|
|
$
|
(2,115
|
)
|
|
$
|
(875
|
)
|
|
$
|
20,859
|
|
|
$
|
538
|
|
Net (loss) income
|
|
$
|
(735
|
)
|
|
$
|
(474
|
)
|
|
$
|
13,883
|
|
|
$
|
516
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.40
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.39
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total revenues
|
|
$
|
11,372
|
|
|
$
|
8,294
|
|
|
$
|
15,432
|
|
|
$
|
24,168
|
|
Loss (income) from operations
|
|
$
|
(494
|
)
|
|
$
|
(376
|
)
|
|
$
|
2,751
|
|
|
$
|
12,882
|
|
Net income
|
|
$
|
4,937
|
|
|
$
|
82
|
|
|
$
|
3,475
|
|
|
$
|
13,307
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share is computed independently for each
of the quarters presented. Therefore, the sum of the quarterly
net (loss) income per share information may not equal annual net
income (loss) per share.
F-37
Schedule II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
|
|
|
End
|
|
(In thousands)
|
|
of Year
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Other
|
|
|
of Year
|
|
|
Valuation allowance for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
20,764
|
|
|
$
|
1,675
|
(a)
|
|
$
|
(980
|
)(b)
|
|
$
|
|
|
|
$
|
21,459
|
|
2006
|
|
|
21,459
|
|
|
|
|
|
|
|
(11,608
|
)(c)
|
|
|
|
|
|
|
9,851
|
|
2007
|
|
|
9,851
|
|
|
|
1,166
|
(a)
|
|
|
(204
|
)(b)
|
|
|
|
|
|
|
10,813
|
|
|
|
|
(a) |
|
The 2007 and 2005 increases in the valuation allowance are
primarily associated with certain foreign net operating losses.
This increase in the valuation allowance was based on
managements assessment that, due to changing business
conditions and the limitation of tax planning strategies, the
Company was not likely to fully realize these deferred tax
assets. |
|
(b) |
|
In 2007 and 2005, the decrease in valuation allowance for
deferred tax assets reflects the change in managements
judgment related to estimated future taxable income in the
United States. |
|
(c) |
|
The 2006 decrease in valuation allowance for deferred tax assets
reflects primarily the Companys utilization of the
deferred tax assets of $6.7 million and a decrease in
valuation allowance for deferred tax assets of $4.9 million
resulting from a change in managements judgment related to
estimated future taxable income in the United States. |
S-1
Sucampo
Pharmaceuticals, Inc.
Exhibit Index
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation
|
|
Exhibit 3.1 to the Companys Current Report on
Form 8-K
(filed August 8, 2007)
|
|
3
|
.2
|
|
Form of Restated Bylaws
|
|
Exhibit 3.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
4
|
.1
|
|
Specimen Stock Certificate evidencing the shares of class A
common stock
|
|
Exhibit 4.1 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
|
10
|
.1
|
|
Amended and Restated 2001 Stock Incentive Plan
|
|
Exhibit 10.1 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.2
|
|
Amended and Restated 2006 Stock Incentive Plan
|
|
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.3
|
|
2006 Employee Stock Purchase Plan
|
|
Exhibit 10.3 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.4
|
|
Form of Incentive Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.4 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.5
|
|
Form of Nonstatutory Stock Option Agreement for 2006 Stock
Incentive Plan
|
|
Exhibit 10.5 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.6
|
|
Form of Restricted Stock Agreement for 2006 Stock Incentive Plan
|
|
Exhibit 10.6 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.7
|
|
Non-employee Director Compensation Summary
|
|
Exhibit 10.7 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.8
|
|
Employment Agreement, dated June 16, 2006, between the Company
and Ryuji Ueno
|
|
Exhibit 10.9 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.9
|
|
Form of Executive Employment Agreement
|
|
Exhibit 10.10 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.10
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Sachiko Kuno
|
|
Exhibit 10.11 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.11
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Ryuji Ueno
|
|
Exhibit 10.12 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.12
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Michael Jeffries
|
|
Exhibit 10.13 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.13
|
|
Indemnification Agreement, dated May 26, 2004, between the
Company and Hidetoshi Mine
|
|
Exhibit 10.14 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.14
|
|
Form of Investor Rights Agreement
|
|
Exhibit 10.16 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.15
|
|
Lease Agreement, dated September 16, 1998, between the Company
and Plaza West Limited Partnership, successor in interest to
Trizechahn Plaza West Limited Partnership, as amended
|
|
Exhibit 10.17 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
II-1
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.16
|
|
Sublease Agreement, dated October 26, 2005, between the Company
and First Potomac Realty Investment L.P.
|
|
Exhibit 10.18 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.17
|
|
Amended and Restated Patent Access Agreement, dated June 30,
2006, among the Company, Sucampo Pharma Europe Ltd., Sucampo
Pharma, Ltd. and Sucampo AG
|
|
Exhibit 10.19 to Registration Statement
No. 333-135133,
Amendment No. 1 (filed August 11, 2006)
|
|
10
|
.18*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 23,
2004, between the Company and R-Tech Ueno, Ltd., as amended on
October 2, 2006
|
|
Exhibit 10.20 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.19*
|
|
Collaboration and License Agreement, dated October 29, 2004,
between the Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.21 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.20*
|
|
Agreement, dated October 29, 2004, among the Company, Takeda
Pharmaceutical Company Limited and Sucampo AG
|
|
Exhibit 10.22 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.21*
|
|
Supply Agreement, dated October 29, 2004, among the Company,
Takeda Pharmaceutical Company Limited and R-Tech Ueno, Ltd.
|
|
Exhibit 10.23 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.22*
|
|
Supply and Purchase Agreement, dated January 25, 2006, among the
Company, Takeda Pharmaceutical Company Limited and R-Tech Ueno,
Ltd.
|
|
Exhibit 10.24 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.23*
|
|
Supplemental Agreement, dated February 1, 2006, between the
Company and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.25 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.24*
|
|
Services Agreement, dated February 9, 2006, between the Company
and Ventiv Commercial Services, LLC
|
|
Exhibit 10.26 to Registration Statement
No. 333-135133,
(filed June 19, 2006)
|
|
10
|
.25
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Timothy Maudlin
|
|
Exhibit 10.27 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.26
|
|
Indemnification Agreement, dated September 7, 2006, between the
Company and Sue Molina
|
|
Exhibit 10.28 to Registration Statement
No. 333-135133,
Amendment No. 2 (filed October 20, 2006)
|
|
10
|
.27*
|
|
Exclusive Manufacturing and Supply Agreement, dated June 24,
2005, between Sucampo Pharma Europe Ltd. and R-Tech Ueno, Ltd.,
as amended on October 2, 2006
|
|
Exhibit 10.29 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.28*
|
|
SPI-8811 and SPI-017 Exclusive Clinical Manufacturing and Supply
Agreement, dated October 4, 2006, between the Company and R-Tech
Ueno, Ltd.
|
|
Exhibit 10.31 to Registration Statement
No. 333-135133,
Amendment No. 3 (filed October 25, 2006)
|
|
10
|
.29
|
|
Lease Agreement, dated December 18, 2006, between the Company
and EW Bethesda Office Investors, LLC
|
|
Included herewith
|
|
10
|
.30
|
|
Amendment to Employment Agreement, dated November 20, 2006,
between the Company and Ryuji Ueno
|
|
Exhibit 10.35 to Registration Statement
No. 333-135133,
Amendment No. 5 (filed February 1, 2007)
|
II-2
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.31
|
|
Letter agreement, dated January 29, 2007, between the Company
and Takeda Pharmaceutical Company Limited
|
|
Exhibit 10.36 to Registration Statement
No. 333-135133,
Amendment No. 6 (filed May 14, 2007)
|
|
10
|
.32
|
|
Employment Agreement, effective June 1, 2007, between the
Company and Sachiko Kuno
|
|
Exhibit 10.37 to Registration Statement
No. 333-135133,
Amendment No. 8 (filed July 17, 2007)
|
|
10
|
.33
|
|
Amended Employment Agreement, dated May 12, 2007, between the
Company and Mariam E. Morris
|
|
Exhibit 10.38 to Registration Statement
No. 333-135133,
Amendment No. 7 (filed June 25, 2007)
|
|
10
|
.34
|
|
Indemnification Agreement, dated October 18, 2007, between the
Company and Anthony C. Celeste
|
|
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
(filed November 14, 2007)
|
|
10
|
.35
|
|
Amendment, dated December 14, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.1 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.36
|
|
Amendment, dated December 10, 2007, to Employment Agreement
between the Company and Mariam E. Morris
|
|
Exhibit 10.2 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.37
|
|
Amendment, dated December 7, 2007, to Employment Agreement
between the Company and Brad Fackler
|
|
Exhibit 10.3 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.38
|
|
Amendment, dated December 6, 2007, to Employment Agreement
between the Company and Gayle Dolecek
|
|
Exhibit 10.4 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.39
|
|
Amendment, dated December 5, 2007, to Employment Agreement
between the Company and Kei Tolliver
|
|
Exhibit 10.5 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.40
|
|
Amendment, dated November 26, 2007, to Employment Agreement
between the Company and Ryuji Ueno
|
|
Exhibit 10.6 to the Companys Current Report on
Form 8-K
(filed December 14, 2007)
|
|
10
|
.41
|
|
Credit Line Agreement, dated March 5, 2008, between the Company
and UBS Bank USA
|
|
Included herewith
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLC, Independent Registered
Public Accounting Firm
|
|
Included herewith
|
|
31
|
.1
|
|
Certification of the Principal Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
31
|
.2
|
|
Certification of the Principal Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.1
|
|
Certification of the Principal Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
32
|
.2
|
|
Certification of the Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
Included herewith
|
|
|
|
|
|
Compensatory plan, contract or arrangement. |
|
* |
|
Confidential treatment has been requested for portions of this
exhibit. |
II-3