e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___to ___
Commission File Number 000-28782
SPECTRUM PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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93-0979187
(I.R.S. Employer
Identification No.) |
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157 Technology Drive
Irvine, California
(Address of Principal Executive Offices)
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92618
(Zip Code) |
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Registrants Telephone Number, Including Area Code:
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(949) 788-6700 |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12B-2 of
the Exchange Act).
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12B-2 of the
Exchange Act).
Indicate the number of shares outstanding of each of the issuers classes of Common Stock as of the
latest practicable date:
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Class |
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Outstanding at November 1, 2005 |
Common Stock, $.001 par value
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23,368,849 |
SPECTRUM PHARMACEUTICALS, INC.
Notes to Condensed Financial Statements
(continued)
September 30, 2005
(Unaudited)
SPECTRUM PHARMACEUTICALS, INC.
TABLE OF CONTENTS
SPECTRUM PHARMACEUTICALS, INC.
FORM 10-Q
For the Three-month and Nine-month periods ended September 30, 2005
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information
The condensed consolidated financial statements of Spectrum Pharmaceuticals, Inc. included
herein have been prepared by management, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information normally included in the consolidated
financial statements prepared in accordance with accounting principles generally accepted in the
United States has been condensed or omitted pursuant to such rules and regulations. However, we
believe that the disclosures are adequate to make the information presented not misleading.
We recommend that you read the condensed consolidated financial statements included herein in
conjunction with the audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities
and Exchange Commission.
3
SPECTRUM PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
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September 30, |
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December 31, |
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2005 |
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2004 |
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(In Thousands, Except Share and Per Share Data) |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
68,622 |
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$ |
3,241 |
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Marketable securities |
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35,965 |
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Accounts Receivable |
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354 |
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199 |
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Inventory |
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143 |
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224 |
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Prepaid expenses and other current assets |
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138 |
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372 |
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Total current assets |
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69,257 |
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40,001 |
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Property and equipment, net |
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638 |
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687 |
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Other Assets |
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169 |
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70 |
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Total assets |
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$ |
70,064 |
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$ |
40,758 |
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Liabilities and Stockholders Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
2,123 |
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$ |
1,609 |
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Accrued compensation |
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236 |
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662 |
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Accrued clinical study costs |
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2,080 |
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300 |
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Other accrued expenses |
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899 |
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95 |
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Total current liabilities |
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5,338 |
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2,666 |
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Deferred rent and deposit |
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244 |
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178 |
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Total liabilities |
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5,582 |
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2,844 |
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Commitments and Contingencies (Note 4)
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Minority Interest |
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20 |
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24 |
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Stockholders Equity: |
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Preferred Stock, par value $0.001 per share, 5,000,000 shares authorized: |
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Series B Junior Participating Preferred Stock, 200,000 shares authorized, no shares issued and outstanding
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Series D 8% Cumulative Convertible Voting Preferred Stock, 600 shares authorized, stated value $10,000
per share,
liquidation value $1,884, issued and outstanding 157 shares at September 30, 2005 and December 31, 2004 |
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747 |
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747 |
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Series E Convertible Voting Preferred Stock, 2,000 shares authorized, stated value $10,000 per share,
liquidation
value $3,492, issued and outstanding, 291 shares at September 30, 2005 and December 31, 2004 |
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1,795 |
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1,795 |
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Common stock, par value $0.001 per share, 50,000,000 shares authorized: |
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Issued and outstanding, 23,368,849 and 14,825,558 shares at September 30, 2005 and December 31, 2004,
respectively |
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23 |
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15 |
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Additional paid-in capital |
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243,251 |
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201,218 |
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Deferred stock-based compensation |
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(521 |
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(97 |
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Accumulated deficit |
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(180,833 |
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(165,788 |
) |
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Total stockholders equity |
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64,462 |
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37,890 |
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Total liabilities and stockholders equity |
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$ |
70,064 |
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$ |
40,758 |
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The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
SPECTRUM
PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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Three-Months |
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Three-Months |
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Nine-Months |
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Nine-Months |
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Ended |
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Ended |
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Ended |
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Ended |
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September 30, 2005 |
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September 30, 2004 |
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September 30, 2005 |
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September 30, 2004 |
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(In Thousands, Except Share and Per Share Data) |
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Revenues
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Licensing fees |
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$ |
56 |
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$ |
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$ |
56 |
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$ |
73 |
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Product sales |
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128 |
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368 |
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Revenues |
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184 |
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424 |
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73 |
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Operating expenses: |
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Cost of product sold |
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103 |
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324 |
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Research and development |
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3,252 |
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2,372 |
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10,319 |
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4,546 |
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General and administrative |
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2,152 |
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1,168 |
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4,721 |
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3,785 |
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Stock-based charges |
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169 |
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707 |
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863 |
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865 |
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Total operating expenses |
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5,676 |
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4,247 |
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16,227 |
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9,196 |
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Loss from operations |
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(5,492 |
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(4,247 |
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(15,803 |
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(9,123 |
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Other income, net |
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264 |
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178 |
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754 |
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314 |
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Net loss before minority interest in consolidated subsidiary |
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(5,228 |
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(4,069 |
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(15,049 |
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(8,809 |
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Minority interest in net loss of consolidated subsidiary |
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4 |
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Net loss |
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$ |
(5,228 |
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$ |
(4,069 |
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$ |
(15,045 |
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$ |
(8,809 |
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Basic and diluted net loss per share |
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$ |
(0.32 |
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$ |
(0.29 |
) |
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$ |
(0.96 |
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$ |
(0.74 |
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Basic and diluted weighted average common shares outstanding |
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16,666,960 |
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14,063,355 |
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15,723,509 |
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12,052,017 |
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Supplemental Information |
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Stock-based charges Components: |
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Research and development |
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$ |
147 |
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$ |
635 |
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$ |
801 |
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$ |
640 |
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General and administrative |
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22 |
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72 |
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62 |
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225 |
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Total stock based charges |
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$ |
169 |
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$ |
707 |
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$ |
863 |
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$ |
865 |
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The accompanying notes are an integral part of these
condensed consolidated balance sheets.
5
SPECTRUM PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Nine-Months |
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Nine-Months |
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Ended |
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Ended |
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September 30, 2005 |
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September 30, 2004 |
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(In Thousands, Except Share and Per Share Data) |
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Cash Flows From Operating Activities: |
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Net loss |
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$ |
(15,045 |
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$ |
(8,809 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization |
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175 |
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145 |
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Amortization of deferred stock-based compensation |
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269 |
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231 |
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Fair value of common stock issued in connection with drug license |
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594 |
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634 |
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Minority interest in subsidiary |
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(4 |
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(6 |
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Changes in operating assets and liabilities: |
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Increase in Accounts Receivable |
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(155 |
) |
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Decrease in Inventory |
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81 |
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Decrease in other current assets |
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239 |
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142 |
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Increase (decrease) in accounts payable and accrued expenses |
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3,098 |
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(516 |
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Decrease in accrued compensation and related taxes |
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(426 |
) |
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(847 |
) |
Increase in other non-current liabilities |
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66 |
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Net cash used in operating activities |
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(11,108 |
) |
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(9,026 |
) |
Cash Flows From Investing Activities: |
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Sales of marketable securities |
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35,965 |
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1770 |
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Cash
Flows From Investing Activities: |
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Purchases of marketable securities |
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(104 |
) |
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Purchases of property and equipment |
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(126 |
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(105 |
) |
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Net cash provided by (used in) investing activities |
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35,735 |
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1,665 |
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Cash Flows From Financing Activities: |
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Proceeds from issuance of common stock and warrants, net of
related offering costs and expenses paid during the period |
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40,117 |
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25,160 |
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Proceeds from exercise of warrants |
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1,052 |
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Repurchase of warrants |
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(420 |
) |
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Proceeds from exercise of stock options |
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5 |
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Payments made on capital lease obligations |
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(145 |
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Minority investment in subsidiary |
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20 |
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Net cash provided by financing activities |
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40,754 |
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25,035 |
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Net increase in cash and cash equivalents |
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65,381 |
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17,674 |
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Cash and cash equivalents, beginning of period |
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3,241 |
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24,581 |
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Cash and cash equivalents, end of period |
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$ |
68,622 |
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$ |
42,255 |
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Supplemental Cash Flow Information: |
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Interest paid |
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$ |
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$ |
3 |
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Income taxes paid |
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$ |
1 |
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$ |
1 |
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Schedule of Non-Cash Investing and Financing Activities: |
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Fair value of common stock issued in connection with drug license |
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$ |
594 |
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$ |
634 |
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Preferred stock dividends paid with common stock |
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$ |
95 |
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$ |
130 |
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Fair value of warrants issued to consultants for services |
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$ |
693 |
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$ |
157 |
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Fair value of warrants issued to placement agents |
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$ |
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$ |
542 |
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The accompanying notes are an integral part of these
condensed consolidated balance sheets.
6
Notes
to Condensed Financial Statements
(continued)
September 30,
2005
(Unaudited)
1. Business and Basis of Presentation
Business
Spectrum Pharmaceuticals, Inc. (the Company) is a specialty pharmaceutical company engaged
in the business of acquiring, developing and commercializing prescription drug products for various
indications. While we own patent rights to certain product candidates, the drug products we are
currently developing, which are focused on the treatment of cancer and other unmet medical needs,
are in-licensed from third parties whereby we acquired exclusive rights to develop and
commercialize those compounds in territories specified in the agreements. We are also actively
seeking Food and Drug Administration, or FDA, approval for marketing generic versions of branded
drugs whose patent protection has either already expired, or is scheduled to expire in the
foreseeable future.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are prepared on a
consistent basis in accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and consolidation and elimination entries) considered necessary for a
fair presentation have been included. Operating results for the three-month and nine-month periods
ended September 30, 2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. The balance sheet at December 31, 2004 has been derived from the
audited financial statements at that date but does not include all of the information and footnotes
required by GAAP for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2004.
Certain quarterly amounts have been reclassified to conform to the current period
presentation.
2. Summary of Significant Accounting Policies and Estimates
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and of our wholly
owned and majority owned subsidiaries. As of September 30, 2005, we had three subsidiaries: NeoJB
LLC (NeoJB), 80% owned, organized in Delaware in April 2002; Spectrum Pharmaceuticals GmbH, wholly
owned, incorporated in Switzerland in April 1997; and NeoGene Technologies, Inc. (NeoGene), an
inactive subsidiary, 88.4% owned, incorporated in California in October 1999. We have eliminated
all significant intercompany accounts and transactions.
Investments by outside parties in our consolidated subsidiary are recorded as Minority
Interest in Consolidated Subsidiary in our accounts, and stated net after allocation of income and
losses in the subsidiary.
Since the adoption of our current business strategy in August 2002, we have operated in one
business segment, that of acquiring, developing and commercializing prescription drug products. The
business has not matured to the point that disaggregated segment information would be meaningful.
Accordingly, the accompanying financial statements are reported in the aggregate including all our
activities in one segment.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities,
7
revenues and expenses and disclosure of contingent obligations in the financial statements and
accompanying notes. Our most significant assumptions are employed in estimates used in determining
values of financial instruments and accrued obligations, as well as in estimates used in applying
the revenue recognition policy and estimating stock-based charges. The estimation process requires
assumptions to be made about future events and conditions, and as such, is inherently subjective
and uncertain. Actual results could differ materially from our estimates.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable,
accounts payable and accrued liabilities, as reported in the balance sheets, are considered to
approximate fair value given the short term maturity and/or liquidity of these financial
instruments.
Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities primarily consist of bank checking deposits,
short-term treasury securities, and institutional money market funds, but from time to time also
include corporate debt and equity, municipal obligations, including market auction debt securities,
government agency notes, and certificates of deposit. We classify highly liquid short-term
investments, with insignificant interest rate risk and maturities of 90 days or less at the time of
acquisition, as cash and cash equivalents. Other investments, which do not meet the above
definition of cash equivalents, are classified as either held-to-maturity or available-for-sale
marketable securities, in accordance with the provisions of Financial Accounting Standards Board
(FASB) Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Investments that we intend to hold for more than one year are classified as long-term investments.
Concentrations of Credit Risk, Supplier and Customer
All of our cash, cash equivalents and marketable securities are invested at two major
financial institutions. To a limited degree, these investments are insured by the Federal Deposit
Insurance Corporation (FDIC) and by third party insurance. However, these investments are not
insured against the possibility of a complete loss of earnings or principal and are inherently
subject to the credit risk related to the credit worthiness of the underlying issuer. We believe
that such risks are mitigated by the fact that we invest only in investment grade securities. We
have not incurred any significant credit risk losses related to such investments.
As of September 30, 2005, we had a bank account with a balance that exceeded the amount
insured by the Federal Deposit Insurance Corporation by $1,138,000. We believe this concentration
risk is mitigated by the financial strength of the bank at which we maintain the account.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market. As of
September 30, 2005, inventory consisted of approximately $45,000 raw materials and $98,000 finished
goods.
Patents and Licenses
We own or license all the intellectual property that forms the basis of our business model. We
expense all licensing and patent application costs as they are incurred.
Revenue Recognition
License fees representing non-refundable payments received upon the execution of license
agreements are recognized as revenue upon execution of the license agreements where we have no
significant future performance obligations and collectibility of the fees is assured. Milestone
payments, which are generally based on developmental or regulatory events, are recognized as
revenue when the milestones are achieved, collectibility is assured, and we have no significant
future performance obligations in connection with the milestones. In those
8
instances where we have collected fees or milestone payments but have ongoing future
obligations related to the development of the drug product, revenue recognition is deferred and
amortized ratably over the period of our future obligations.
Revenue from sales of product is recognized upon shipment of product when title and risk of
loss have transferred to the customer, and provisions for estimates, including promotional
adjustments, price adjustments, returns, and other potential adjustments are reasonably
determinable. Such revenue is recorded, net of such estimated provisions, at the minimum amount of
the customers obligation to us. Additional revenue, if any, resulting from profit sharing
arrangements are recorded when the amount of such profit sharing revenue is determinable with
reasonable certainty. We state the related accounts receivable at net realizable value, with any
allowance for doubtful accounts charged to general operating expenses.
Research and Development
Research and development expenses are comprised of the following types of costs incurred in
performing research and development activities: personnel expenses, facility costs, contract
services, license fees and milestone payments, costs of clinical trials, laboratory supplies and
drug products, and allocations of corporate costs. We expense all research and development costs in
the period incurred.
Basic and Diluted Net Loss Per Share
In accordance with FASB Statement No. 128, Earnings Per Share, we calculate basic and diluted
net loss per share using the weighted average number of common shares outstanding during the
periods presented, and adjust the amount of net loss, used in this calculation, for preferred stock
dividends declared during the period.
We incurred a net loss in each period presented, and as such, did not include the effect of
potentially dilutive common stock equivalents in the diluted net loss per share calculation, as
their effect would be anti-dilutive for all periods. Potentially dilutive common stock equivalents
would include the common stock issuable upon the conversion of preferred stock and the exercise of
warrants and stock options that have conversion or exercise prices below the market value of our
common stock at the measurement date. As of September 30, 2005 and 2004, all potentially dilutive
common stock equivalents amounted to approximately 15 million and 10 million shares, respectively.
The following data show the amounts used in computing basic loss per share for the three-month
and nine-month periods ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months |
|
|
Three-Months |
|
|
Nine-Months |
|
|
Nine-Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(In Thousands, Except Share and Per Share Data) |
|
|
|
|
|
Net loss |
|
$ |
(5,228 |
) |
|
$ |
(4,069 |
) |
|
$ |
(15,045 |
) |
|
$ |
(8,809 |
) |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends paid in cash or stock |
|
|
(32 |
) |
|
|
(32 |
) |
|
|
(95 |
) |
|
|
(130 |
) |
|
|
|
Income available to common stockholders
used in computing basic earnings per
share |
|
$ |
(5,260 |
) |
|
$ |
(4,101 |
) |
|
$ |
(15,140 |
) |
|
$ |
(8,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
16,666,960 |
|
|
|
14,063,355 |
|
|
|
15,723,509 |
|
|
|
12,052,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.32 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting for Stock-Based Employee Compensation
At September 30, 2005, we had three stock-based employee compensation plans, which are
described more fully in Note 9 to the Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2004. As permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation, we account for grants
9
pursuant to those plans under the intrinsic value method described in Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Under the intrinsic value method, no stock-based employee compensation cost is recorded when the
exercise price is equal to, or higher than, the market value of the underlying common stock on the
date of grant. We recognize stock-based compensation expense for all grants to consultants and for
those grants to employees where the exercise prices are below the market price of the underlying
stock at the measurement date of the grant.
The following table illustrates the effect on net loss and loss per share if we had applied
the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation, using the straight-line method, for the
three-month and nine-month periods ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months |
|
|
Three-Months |
|
|
Nine-Months |
|
|
Nine-Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(In Thousands, Except Share and Per Share Data) |
|
|
|
|
|
Net loss, as reported |
|
$ |
(5,228 |
) |
|
$ |
(4,069 |
) |
|
$ |
(15,045 |
) |
|
$ |
(8,809 |
) |
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects |
|
|
(803 |
) |
|
|
(1,271 |
) |
|
|
(3,582 |
) |
|
|
(2,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(6,031 |
) |
|
$ |
(5,340 |
) |
|
$ |
(18,627 |
) |
|
$ |
(10,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted as reported |
|
$ |
(0.32 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma |
|
$ |
(0.36 |
) |
|
$ |
(0.38 |
) |
|
$ |
(1.19 |
) |
|
$ |
(0.92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
The net loss reflected on our Consolidated Statements of Operations substantially represents
the total comprehensive loss for the periods presented.
New Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment. This Statement
eliminates the use of the intrinsic value method described in Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and requires an entity to measure the
cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award. We expect to adopt the
provisions of Statement No. 123(R) when it becomes a mandatory requirement, currently expected to
be January 1, 2006. The adoption of this Statement is expected to result in significantly higher
reported operating expenses in our future financial statements. Had we adopted the provisions of
Statement No. 123(R) as of January 1, 2005, our reported loss for the nine-month period ended
September 30, 2005 would have been approximately $3,582,000 higher, or $18,627,000, as disclosed
above in this Note 2, Accounting for Stock-Based Employee Compensation.
3. Products and Strategic Alliances
As of September 30, 2005, we had seven proprietary drug product candidates under development:
satraplatin, EOquin, elsamitrucin, ozarelix (formerly SPI-153), lucanthone, RenaZorb, and
SPI-1620, and through the date of this report we have filed twelve
Abbreviated New Drug Applications, or
ANDAs, with the FDA, including those for ciprofloxacin and fluconazole tablets, and carboplatin
injection, which have been approved by the FDA. We are developing our proprietary drug product
candidates for the treatment of a variety of cancers and other unmet medical needs. We are also
active in filing ANDAs with the FDA seeking approval for marketing generic versions of branded
prescription drugs whose patent protection has either already expired or is scheduled to expire in
the
10
foreseeable future. In addition, we have a few neurology compounds that we may out-license to
third parties for further development.
In general, we direct and pay for all aspects of the drug development process, and
consequently incur the risks and rewards of drug development, which is an inherently uncertain
process. To mitigate such risks we enter into alliances where we believe that our partners can
provide strategic advantage in the development, manufacturing or distribution of our drugs. In such
situations, the alliance partners may share in the risks and rewards of the drug development and
commercialization.
Business Alliances
Our business alliances are described in detail in our Annual Report on Form 10-K for the year
ended December 31, 2004. The following represents an update for current developments.
Cura Pharmaceuticals Co., Inc (CURA): In April 2005, we entered into an exclusive
agreement with Cura Pharmaceuticals Co. Inc. for the marketing and distribution in the United
States of carboplatin injection, which was approved by the FDA in June 2005. Under the terms of
this agreement, we sell the product to Cura at prices specified in the agreement. In addition, we
are entitled to share in the profit, if any, between such specified prices and the selling prices
ultimately realized by Cura.
Products under development
The following is a brief outline of the products under development as of September 30, 2005:
Satraplatin: Satraplatin is an orally administered chemotherapeutic agent that has an
initial indication of efficacy in treating hormone refractory prostate cancer. As of September 30,
2005, a Phase 3 clinical trial being conducted by our development partner, GPC Biotech AG, was
proceeding in accordance with plans. Additional studies in other indications have been initiated
by GPC Biotech.
EOquin
: EOquin (EO-9), a synthetic drug which is activated by certain enzymes
present in higher amounts in cancer cells than in normal tissues, is currently being developed for
its initial indication, recurrent superficial bladder cancer. As of September 30, 2005, a Phase 2
clinical trial had been completed and the study report is being finalized. In addition, we
initiated a new Phase 2 study of EOquin intravesical instillation in patients with
high-risk superficial bladder cancer and it is proceeding in
accordance with plans. Also,
EO-9 is being evaluated as a radiation sensitizer.
Elsamitrucin: Elsamitrucin, an anti-tumor antibiotic that acts as a dual inhibitor of
two key enzymes involved in DNA replication, topoisomerase I and II, is currently being developed
for its initial indication, refractory non-Hodgkins lymphoma. As of September 30, 2005, a Phase 2
clinical trial was proceeding in accordance with plans.
Ozarelix: Ozarelix (formerly SPI-153), a fourth generation LHRH (Luteinizing Hormone
Releasing Hormone, also known as GnRH or Gonadotropin Releasing Hormone) antagonist is under
evaluation for its initial indications, hormone-dependent prostate cancer and benign prostatic
hypertrophy. As of the date of this report, Phase 2 clinical trials in each of those indications
were proceeding in Europe in accordance with plans. An Investigational New Drug (IND) application
was submitted earlier this year and subsequently received concurrence from the U.S. Food and Drug Administration
(FDA) to conduct a Phase 1/2 clinical trial in patients with HDPC in the United States, which has been initiated.
We expect these trials will conclude in the first half of 2006.
Lucanthone:
We own a license to a method of treating cancer of the central nervous
system through the administration of lucanthone and radiation. Lucanthone, an orally active
radiation sensitizer, has the potential to improve the treatment outcomes in a number of human
malignancies, specifically brain tumors, as it readily crosses the blood brain barrier. Lucanthone
is currently in a Phase 2 clinical trial.
RenaZorb : RenaZorb , a second-generation lanthanum-based phosphate binding agent,
has the potential to treat hyperphosphatemia, or high phosphate levels in blood, in patients with
end-stage and chronic kidney disease. RenaZorb is currently in pre-clinical development and we
plan to file an IND (Investigative New Drug) application with the FDA to begin human clinical
trials in the next twelve to eighteen months.
11
SPI-1620: We believe SPI-1620, an endothelinB agonist, may selectively dilate tumor
blood vessels and thereby selectively increase the delivery of anti-cancer drugs to cancer tissue
for the treatment of cancer. SPI-1620 is currently in pre-clinical development and we plan to file
an IND (Investigative New Drug) application with the FDA to begin human clinical trials in the next
twelve to eighteen months.
4. Commitments and Contingencies
Facility and Equipment Leases
As of September 30, 2005 we were obligated under a facility lease and several operating
equipment leases. We have sub-leased a portion of our facility through September 2007, with a
renewal option through the remaining term of our underlying lease.
Minimum lease commitments, and minimum contractual sublease income for each of the next five
years and thereafter, under the property and equipment operating leases, are as follows:
|
|
|
|
|
|
|
|
|
Year ending December 31: |
|
Lease
Commitments |
|
|
Sub-Lease
Income |
|
|
|
Amounts In Thousands |
|
2005 (Remainder of year) |
|
$ |
111 |
|
|
$ |
54 |
|
2006 |
|
$ |
452 |
|
|
$ |
225 |
|
2007 |
|
$ |
471 |
|
|
$ |
171 |
|
2008 |
|
$ |
491 |
|
|
$ |
|
|
2009 |
|
$ |
250 |
|
|
$ |
|
|
Thereafter |
|
$ |
3 |
|
|
$ |
|
|
|
|
|
|
|
$ |
1,778 |
|
|
$ |
450 |
|
|
|
|
Licensing Agreements
Each of our proprietary drug product candidates is being developed pursuant to license
agreements, which provide us with exclusive rights to certain territories to, among other things,
develop, sublicense, and sell the drug product candidates. With regard to one of our drug product
candidates, satraplatin, we have out licensed our rights to GPC Biotech AG. We are required to use
commercially reasonable efforts to develop the drug product candidates, are generally responsible
for all development, patent filing and maintenance costs, sales, marketing and liability insurance
costs, and are contingently obligated to make milestone payments to the licensors if we
successfully reach development and regulatory milestones specified in the agreements. In addition,
we are obligated to pay royalties and milestone payments based on net sales, if any, after
marketing approval is obtained from regulatory authorities. We have no similar milestone or other
payment obligations in connection with our generic drug products.
The potential contingent development and regulatory milestone obligations, aggregating
approximately $50 million as of September 30, 2005, under all our licensing agreements, are
generally tied to progress through the FDA approval process, which approval significantly depends
on positive clinical trial results. The following list is typical of milestone events: commencement
of Phase 3 clinical trials, filing of new drug applications in the United States, Europe and Japan,
and approvals from those regulatory agencies.
Given the uncertainty of the drug development process, we are unable to predict with any
certainty when any of the milestones will occur and, accordingly, the milestone payments represent
contingent obligations that will be recorded as expense when the milestone is achieved. In
connection with the development of in-licensed drug products, we anticipate certain milestones will be achieved over the next eighteen months. If the anticipated milestones are
achieved, we will likely become obligated to issue approximately 200,000 restricted shares of our
common stock and pay approximately between $1 to $3 million in cash during the eighteen month
period.
12
If we reach a milestone, it will likely occur prior to revenues being generated from the
related compound. However, in connection with the milestone obligations related to satraplatin,
each of our contingent future payment obligations is generally matched by a corresponding, greater
payment milestone obligation of GPC Biotech to us.
Service Agreements
In connection with the research and development of our drug products, we have entered into
contracts with numerous third party service providers, such as clinical trial centers, clinical
research organizations, data monitoring centers, and with drug formulation, development and testing
laboratories. The financial terms of these agreements are varied and generally obligate us to pay
in stages, depending on achievement of certain events specified in the agreements, such as contract
execution, reservation of service or production capacity, actual performance of service, or the
successful accrual and dosing of patients. As of each period end, we accrue for all non-cancelable
installment amounts that we are likely to become obligated to pay.
Employment Agreements
We have entered into employment agreements with two of our Executive Officers, Dr. Shrotriya,
Chief Executive Officer, and Dr. Lenaz, Chief Scientific Officer, expiring December 31, 2006 and
July 1, 2006, respectively. The employment agreements automatically renew for a one-year term
unless either party gives written notice at least 90 days prior to the commencement of the next
year of such partys intent not to renew the agreement. The agreements require each executive to
devote his full working time and effort to the business and affairs of the Company during the term
of the agreement. The agreements provide for an annual base salary with annual increases, periodic
bonuses and option grants as determined by the Compensation Committee of our Board of Directors.
Each officers employment may be terminated by us with or without cause, as defined in the
agreement. The agreements provide for certain guaranteed severance payments and benefits if the
officers employment is terminated without cause, if the officers employment is terminated due to
a change in control or is adversely affected due to a change in control and the officer resigns or
if the officer decides to terminate his employment due to a disposition of a significant amount of
assets or business units. The guaranteed severance payment includes a payment equal to the
officers annual base salary and other cash compensation, and any approved bonus. The officer is
also entitled to two years medical, dental and other benefits for two years following termination.
In addition, all options held by the officer shall immediately vest and will be exercisable for one
year from the date of termination; provided, however, if the Board determines that the officers
employment is being terminated for the reason that the shared expectations of the officer and the
Board are not being met, in the Boards judgment, then the options currently held by the officer
will vest in accordance with their terms for up to one year after the date of termination, with the
right to exercise those options, when they vest, for approximately thirteen (13) months after the
date of termination. The agreements also provide that, upon his retirement, all options held by the
officer will become fully vested.
Litigation
On February 18, 2005, GlaxoSmithKline filed a lawsuit against us in the United States District
Court for the District of Delaware, alleging infringement of a patent on Imitrex®. This lawsuit was
filed as a result of an ANDA that we filed with the FDA in October 2004 for sumatriptan succinate
injection, seeking approval to engage in the commercial manufacture, sale, and use of the
sumatriptan succinate injection product in the United States. Sumatriptan succinate is marketed by
GlaxoSmithKline under the brand name Imitrex® and is used for the acute treatment of migraine
attacks and the acute treatment of cluster headache episodes in adults. Our ANDA includes a
Paragraph IV certification that the patent expiring in 2009 associated with GlaxoSmithKlines
Imitrex® injection, is invalid, unenforceable and/or will not be infringed by our generic product
candidate. While it is not possible to determine with any degree of certainty the ultimate outcome
of these legal proceedings, we believe that we have substantial and meritorious basis with respect
to our Paragraph IV challenge of the GlaxoSmithKline patent for sumatriptan succinate injection.
13
5. Stockholders Equity
Common Stock
In connection with the license agreement with Altair Nanotechnologies, Inc., in January 2005,
we issued 100,000 restricted shares of Spectrum common stock to Altair. The fair value of the
stock, $594,000, was recorded as a stock-based charge for the nine-month period ended September 30,
2005.
In connection with the FDA approval of the ciprofloxacin tablets ANDA in September 2004, an
entity affiliated with J.B. Chemical & Pharmaceuticals Ltd., our joint venture partner for
ciprofloxacin, invested $750,000 in our common stock in February 2005. We issued 119,617 restricted
shares of common stock to that entity, based on the closing price of our common stock, $6.27, on
the day prior to the FDA approval.
On September 15, 2005, we sold 8,000,000 shares of our common stock at a purchase price of
$5.25 per share and six-year warrants to purchase up to a total of 4,000,000 shares of our common
stock at an exercise price of $6.62 per share, for net cash proceeds of approximately $39,400,000,
after offering costs of approximately $2,600,000.
Deferred Stock-Based Compensation
During the nine-month period ended September 30, 2005, we granted stock options and warrants
to employees and consultants at exercise prices equal to or greater than the quoted price of our
common stock on the grant dates. The fair value of the stock options and warrants to consultants
was estimated at approximately $693,000, using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%; expected volatility of 91.6%; risk free interest rate
of 3.7%; and an expected life of five years, was recorded as deferred compensation, and is being
amortized to expense over the vesting period of the options and warrants.
During the nine-month periods ended September 30, 2005 and 2004, amortization of deferred
stock-based compensation amounted to $269,000 and $231,000, respectively.
Warrants Activity
We typically issue warrants to purchase shares of our common stock to investors as part of a
financing transaction, or in connection with services rendered by placement agents and outside
consultants. Our outstanding warrants expire at varying dates through September 2013. Below is a
summary of warrant activity during the nine-month period ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Weighted Average Exercise |
|
|
|
Warrants |
|
|
Price |
|
Outstanding at beginning of period |
|
|
6,561,789 |
|
|
$ |
9.71 |
|
Granted |
|
|
4,120,000 |
|
|
$ |
6.58 |
|
Exercised |
|
|
(300,963 |
) |
|
$ |
3.50 |
|
Repurchased |
|
|
(420,000 |
) |
|
$ |
6.50 |
|
Expired |
|
|
(41,615 |
) |
|
$ |
403.59 |
|
|
|
|
Outstanding, at the end of period |
|
|
9,919,211 |
|
|
$ |
7.08 |
|
|
|
|
Exercisable, at the end of period |
|
|
9,799,211 |
|
|
$ |
7.10 |
|
|
|
|
14
Stock Incentive Plans Activity
Below is a summary of activity, for all of our stock incentive plans, during the nine-month
period ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Common |
|
|
Average |
|
|
|
Stock |
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
Outstanding at beginning of period |
|
|
2,370,026 |
|
|
$ |
7.97 |
|
Granted |
|
|
1,068,152 |
|
|
$ |
6.50 |
|
Expired |
|
|
(39,630 |
) |
|
$ |
27.33 |
|
Forfeited |
|
|
(31,350 |
) |
|
$ |
6.24 |
|
Exercised |
|
|
(5,000 |
) |
|
$ |
1.06 |
|
|
|
|
Outstanding, at the end of period |
|
|
3,362,198 |
|
|
$ |
7.31 |
|
|
|
|
Exercisable, at the end of period |
|
|
2,017,920 |
|
|
$ |
7.64 |
|
|
|
|
As of September 30, 2005, approximately 3.6 million incentive awards were available for
grant under all of our stock incentive plans.
We apply APB Opinion No. 25 and related interpretations in accounting for stock options
granted to employees and directors, and do not recognize compensation expense when the exercise
price of the options equals or exceeds the fair market value of the underlying shares at the date
of grant. All of the options granted during the nine-month period ended September 30, 2005 were
made at fair market values on the dates of grant.
Common Stock Reserved for Future Issuance
As of September 30, 2005, approximately 15 million shares of common stock were issuable upon
conversion or exercise of rights granted under prior financing arrangements and stock options and
warrants, as follows:
|
|
|
|
|
Conversion of Series D preferred shares |
|
|
665,691 |
|
Conversion of Series E preferred shares |
|
|
582,000 |
|
Exercise of stock options |
|
|
3,362,198 |
|
Exercise of warrants |
|
|
9,919,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares of common stock reserved for future issuances |
|
|
14,529,100 |
|
|
|
|
|
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding
our future product development activities and costs, the revenue
potential (licensing, royalty and sales) of our product
candidates, the timing and likelihood of achieving development milestones and product revenues, the
sufficiency of our capital resources, and other statements containing forward-looking words, such
as, believes, may, will, expects, intends, estimates, anticipates, plans, seeks,
or continues. Such forward-looking statements are based on the beliefs of the Companys
management as well as assumptions made by and information currently available to the Companys
management. Readers should not put undue reliance on these forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
15
some of which cannot be predicted or quantified; therefore, our actual results may differ
materially from those described in any forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below, including Risk Factors. These
factors include, but are not limited to:
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our ability to successfully develop, obtain regulatory approvals for and market our products; |
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our ability to generate and maintain sufficient cash resources to increase investment in our business; |
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our ability to enter into strategic alliances with partners for manufacturing,
development and commercialization; |
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our ability to identify new product candidates; |
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the timing or results of pending or future clinical trials; |
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competition in the marketplace for our generic drugs; |
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actions by the FDA and other regulatory agencies; |
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demand and market acceptance for our approved products; and |
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the effect of changing economic conditions. |
You should read the following discussion of the financial condition and results of our
operations in conjunction with the condensed financial statements and the notes to those financial
statements included in Item 1 of Part 1 of this report.
Overview
Spectrum Pharmaceuticals, Inc. is a specialty pharmaceutical company engaged in the business
of acquiring, developing and commercializing prescription drug products for various indications.
While we own patent rights to certain product candidates, the drug products we are currently
developing, which are focused on the treatment of cancer and other unmet medical needs, are
in-licensed from third parties whereby we acquired exclusive rights to develop and commercialize
those compounds in territories specified in the agreements. We are also actively seeking FDA
approval for marketing generic versions of branded drugs whose patent protection has either already
expired, or is scheduled to expire in the foreseeable future. We currently have three generic
products approved by the FDA for marketing in the United States, ciprofloxacin and fluconazole
tablets, and carboplatin injection. In addition, we have a few neurology compounds that we may
out-license to third parties for further development.
New drug development is an inherently uncertain, lengthy and expensive process. We focus our
research and development efforts principally on clinical stage drug candidates, for which the
primary expenses relate to the conduct of clinical trials necessary to demonstrate to the
satisfaction of the United States Food and Drug Administration, or FDA, and other regulatory
authorities in the United States and other countries, that the products are both safe and effective
in their respective indications and that they can be produced by a validated consistent
manufacturing process. The number, size, scope and timing of the clinical trials necessary to bring
a product candidate to development completion and commercialization cannot readily be determined at
an early stage, nor, given the timelines of the trials extending over periods of years, can future
costs be estimated with precision. While generic drug development is also subject to approval by
regulatory authorities, the costs and timelines of development completion and commercialization can
be significantly shorter, and compared to new drug development, relatively less uncertain and less
expensive.
16
Business Outlook
Our primary business focus for 2005, and beyond, will be to continue to acquire and develop a
portfolio of marketable prescription drug products with a mix of near-term and long-term revenue
potential. As of the date of filing this report, we had seven proprietary drug product candidates
under development: satraplatin, EOquin , elsamitrucin, ozarelix, lucanthone, RenaZorb , and
SPI-1620.
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Funding for satraplatin clinical trials is being borne entirely by our co-development
partner GPC Biotech who is currently enrolling patients in a Phase 3 clinical trial, which
is expected to be completed by the end of 2005. A rolling NDA filing is expected to begin
in the fourth quarter of 2005 and interim analysis of the Phase 3 data is anticipated to be
announced in early 2006. Completion of a full NDA filing is expected during the second half
of 2006. |
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We funded the Phase 2 clinical trial of EOquin in recurrent superficial bladder
cancer, which has concluded enrollment. Data from the trial has been monitored and a
written report is currently being finalized. We are planning to meet with the FDA in the
next several months with the view to initiating Phase 3 trials in the United States in 2006
to evaluate EOquin in recurrent superficial bladder cancer. Plans to initiate a Phase 3
study in Europe in 2006 are also in preparation. |
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We are funding a multicenter, Phase 2 clinical trial of elsamitrucin in refractory
non-Hodgkins lymphoma, and the trial is proceeding as planned. Patient enrollment is
expected to be completed by the end of 2005. We plan to initiate a Phase 2 study in head
and neck cancer and other pilot combination studies. |
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In April, we initiated two Phase 2 multicenter clinical trials in Europe for ozarelix, one in hormone-dependent prostate cancer (HDPC) and one for benign prostate hypertrophy. Enrollment is now completed in the HDPC trial, four months ahead of completion date.
An Investigational New Drug (IND) application was submitted earlier this year and subsequently received concurrence from the U.S. Food and Drug Administration (FDA) to conduct a Phase 1/2 clinical trial in patients with HDPC in the United States, which has been initiated.
We expect these trials will conclude in the first half of 2006.
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During 2005, we acquired the worldwide rights to a method of using lucanthone in
combination with radiation in the treatment of cancer of the central nervous system, which
is currently in an ongoing Phase 2 clinical trial. |
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We plan to fund the development, including clinical trials,
of two drugs, RenaZorb and
SPI-1620, and expect to file INDs with the FDA with respect to these drugs within the next
twelve to eighteen months. |
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Our goal is to continue to acquire or license additional promising drug product
candidates for clinical stage development. |
We have filed twelve ANDAs with the FDA, including those for ciprofloxacin and fluconazole
tablets and carboplatin injection, which received FDA approval in September 2004, September 2005,
and June 2005, respectively. As of the date of this report, we are awaiting the approval by the FDA
of nine ANDAs, including one ANDA for sumatriptan succinate injection, which we believe we are the
first-to-file for our ANDA with paragraph IV certification. We are currently in litigation over a
patent for Imitrex®, the branded version of sumatriptan
succinate, and if we are successful in our
challenge and we obtain 180-day marketing exclusivity as the only generic version of this product,
the resulting revenue made could be significant.
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We have recorded only modest revenues to date from generic product sales, due primarily
to our late entry into the market. We are unable at this time to reliably estimate
recurring revenues or profits from these generic products in the foreseeable future. |
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We have observed significant price declines in the marketplace for each of our marketed
products, due to the FDAs approval of several competing ANDAs, and the resultant glut of
product introduced on and after the generic product launch dates. We continue to explore
sales opportunities for our products and believe that after the market absorbs the initial
product glut, we may be in a position to realize at least modest revenues from these
products. |
17
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We intend to continue to pursue our strategy of filing additional ANDAs for selected
niche products, including several injectable products, and to have 15 to 20 generic drugs
approved by the FDA and marketed in the United States over the next 5 years. We continue to
believe that this strategy will increase the critical mass of our generic drug portfolio,
and in due course will result in more meaningful revenues. |
Financial Condition
Liquidity and Capital Resources
Our current business operations do not generate sufficient operating cash to finance the
clinical development of our drug product candidates. Our cumulative losses, since inception in
1987, through September 30, 2005, have exceeded $175 million. We expect to continue to incur
significant additional losses as we implement our growth strategy of developing marketable drug
products for at least the next several years unless they are offset, if at all, by licensing
revenues under our out-license agreement with GPC Biotech AG and any profits from the sale of
generic products.
We believe that the approximately $69 million in cash and cash equivalents that we had on hand
as of September 30, 2005, will allow us to fund our current planned operations. Our long-term
strategy is to generate profits from the sale of propriety drug products. In the next several
years, we anticipate supplementing our cash position with licensing and royalties revenues under
our out-license agreement with GPC Biotech and profits from the sale of our generic products.
However, if we are unable to generate the necessary revenues to finance our operations long-term, we
may have to seek additional capital through the sale of our equity. Our operations have historically
been financed by the issuance of capital stock. It is generally difficult to fund pharmaceutical
research and development via borrowings due to the significant expenses involved, lack of revenues
sufficient to service debt and the significant inherent uncertainty as to results of research and
the timing of those results.
As described elsewhere in this report, including the Risk Factors section, our drug
development efforts are subject to the considerable uncertainty inherent in any new drug
development. Due to the uncertainties involved in progressing through clinical trials, and the time
and cost involved in obtaining regulatory approval and in establishing collaborative arrangements,
among other factors, we cannot reasonably estimate the timing and ultimate aggregate cost of
developing each of our drug product candidates, and are similarly unable to reasonably estimate
when, if ever, we will realize material net cash inflows from our proprietary drug product
candidates. Accordingly, the following discussion of our current assessment of the need for cash to
fund our operations may prove too optimistic and our assessment of expenditures may prove
inadequate.
Our expenditures for research and development and general and administrative expenses consist
of direct and indirect costs (such as personnel and occupancy). The following describes our current
assessment of direct, or product specific development costs, such as upfront license fees,
milestone payments, active pharmaceutical ingredient (API), clinical trials, patent related legal
costs, and product liability insurance, among others, for each significant proprietary product, and
generics as a group, currently under development. As we mentioned above, these costs are subject to
uncertainties inherent in new drug development. In addition, the expenses are not necessarily
cumulative. We may reduce the amount we spend on one product to shift our cash resources to another
product. Therefore, what we actually spend to develop a particular product may not fall within the
estimated range and the estimated ranges may change from quarter to quarter based upon changes in
priorities or strategy and/or the results of the development. While we do not receive any funding
from third parties for research and development we conduct, our estimated costs could be mitigated
should we enter into co-development agreements for any of our drug product candidates.
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Satraplatin: The costs of conducting clinical trials are being borne entirely
by our co-development partner GPC Biotech. While we have licensed the development of
satraplatin to GPC Biotech, we are not obligated to reimburse GPC Biotech for development
costs they incur or to refund any license or milestone payments we receive. |
18
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EOquin : Excluding indirect costs described earlier, we incurred less than
$500,000 on the development of EOquin in the quarter ended September 30, 2005. Estimated
expenditures for the next twelve months are subject to considerable uncertainty, and are
largely dependent on the outcome of discussions with the FDA expected to occur within
approximately the next six months. |
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Elsamitrucin: Excluding indirect costs described earlier, we incurred less than
$500,000 on the development of Elsamitrucin in the quarter ended September 30, 2005.
Estimated expenditures for the next twelve months are subject to considerable uncertainty,
and are largely dependent on the successful completion of enrollment in the Phase 2
clinical trial, targeted for the end of 2005, and analysis of the study data, expected in
the first half of 2006. Completion of the current Phase 2 clinical trial is expected to
cost less than $1 million. |
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Ozarelix: Excluding indirect costs described earlier, we incurred approximately
$500,000 on the development of ozarelix in the quarter ended September 30, 2005. Estimated
expenditures for the next twelve months are subject to considerable uncertainty. Depending
on the indications we develop the product for, and successful achievement of specified
milestones, we may incur development costs, including milestone obligations, ranging
between approximately $2 million and $5 million over the next twelve months. |
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Lucanthone: Excluding indirect costs described earlier, we incurred less than
$250,000 on the development of lucanthone in the quarter ended September 30, 2005. As of
the date of this report we are unable to reliably estimate the development costs for
lucanthone because we only recently acquired the rights to the compound and we are still in
the early stages of evaluating the development of the compound. |
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RenaZorb : Excluding indirect costs described earlier, we incurred
approximately $500,000 on the development of Renazorb in the quarter ended September 30,
2005. As of the date of this report we are unable to reliably estimate the development
costs for RenaZorb because we are still in the early stages of evaluating the development
of the compound. |
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SPI-1620: Excluding indirect costs described earlier, we incurred less than
$250,000 on the development of SPI-1620 in the quarter ended September 30, 2005. As of the
date of this report we are unable to reliably estimate the development costs for SPI-1620
because we only recently acquired the rights to the compound and we are still in the early
stages of evaluating the development of the compound. |
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Generic drugs: During the threemonth period ended September 30, 2005, we have
incurred costs of approximately $1.5 million for the advancement of our generic drugs,
including costs for products for which we anticipate filing ANDAs in the future and increased
legal costs associated with the lawsuit regarding our patent challenge of GlaxoSmithKlines
Imitrex® injection. Over the next twelve to eighteen months we expect to incur additional
costs ranging between $3 million and $5 million. We do not receive any funding from third
parties for research and development we conduct for generic products, nor do we pay our
generic alliance partners for any research and development they incur in the development of
ANDAs for regulatory approval. |
In addition to the foregoing drug product candidates, we continually evaluate proprietary
products for acquisition. If we are successful in acquiring rights to additional products, we may
pay up-front licensing fees in cash and our research and development expenditures would increase.
Under our various existing licensing agreements we are contingently obligated to make cash
milestone payments. In connection with the development of certain in-licensed drug products, we
anticipate the occurrence of certain of these milestones over the
next eighteen months. Upon
successful achievement of these milestones, we will likely become
obligated to pay approximately between $1
to $3 million in cash during the eighteen month period.
Net Cash used in Operating activities
During the nine-month period ended September 30, 2005, the net cash used in operations was
approximately $11.2 million, and was net of interest income of approximately $754,000 earned during
the period.
19
Based on our current plans and the scope of our activities, our anticipated use of cash for
operations for all of 2005, excluding the cost of in-licensing any additional drug products, is
expected to average approximately $5 million per quarter. Such cash expenses are susceptible to
increases or decreases dictated by results derived from the ongoing clinical trials and research
and development activity.
Net Cash provided by and used for Investing Activities
During the nine-month period ended September 30, 2005, we invested our funds in short-term
treasury securities and money market accounts resulting in conversion of approximately $36 million
of marketable securities into cash and cash equivalents. We also paid Altair Nanotechnologies,
Inc.$200,000 in cash in connection with the in-licensing of Renazorb. The fair value of Altair
common stock received, approximately $104,000, was recorded as a long-term investment and the
remaining amount of $96,000 was charged as research and development expense for the nine-month
period ended September 30, 2005.
Net Cash provided by and used for Financing Activities
Net cash provided by financing activities, approximately $40.8 million, for the nine-month
period ended September 30, 2005, was comprised of approximately $39.4 million from the sale of
8,000,000 shares of common stock, $1.1 million from the exercise of outstanding warrants for
300,963 shares of our common stock, and from the exercise of stock options for 5,000 shares of our
common stock, and $750,000 received as an equity investment for the issuance of 119,617 restricted
shares of our common stock; which was offset by $420,000 paid to repurchase warrants to acquire
420,000 shares of our stock.
Results of Operations
Results of Operations for the three-month period ended September 30, 2005 Compared to the
three-month period ended September 30, 2004
For the three-month period ended September 30, 2005, we incurred a net loss of approximately
$5.2 million compared to a net loss of approximately $4.1 million in the three-months ended
September 30, 2004. The increase of $1.1 million in the net loss was primarily due to increases in
research and development expense and increased legal expense in connection with the lawsuit
regarding our patent challenge of GlaxoSmithKlines Imitrex® injection, described elsewhere in this
report, offset by a decrease in stock-based charges.
As of September 30, 2005, the FDA has approved three of our products, ciprofloxacin and
fluconazole tablets and carboplatin injection, for sale in the United States. During the
three-month period ended September 30, 2005, we had $128,000 of revenues from product sales to our
distributor Cura Pharmaceuticals for carboplatin injection. In addition, we may receive additional
revenue from these product sales for our share of any net profit margin generated by our
distributor. Future product sales are dependent on our distributors reordering the product from us.
Cost of product sold was $103,000. The profit margin earned during the period is not considered
representative of future margins, if any. During the three-month period ended September 30, 2005,
we had $56,000 of revenues representing amounts received from the GPC Biotech under our license
agreement for commissions on drug products used by GPC Biotech in clinical trials. The timing and
amount of future commissions is neither predictable nor assured.
Research and development expenses increased by approximately $0.9 million, from
approximately $2.4 million in the three-month period ended September 30, 2004 to approximately $3.3
million in the three-month period ended September 30, 2005, primarily due to an increase resulting
from an expansion in the number and scope of our clinical trials and other research and development
activity. During the three-month period ended September 30, 2004, the principal clinical trials
costs related to a Phase 2 trial on EOquin . In the three-month period ended September 30, 2005,
we incurred costs related to multiple Phase 2 clinical trials on EOquin , elsamitrucin and
ozarelix, as described elsewhere in this report.
20
General and administrative expenses increased by approximately $1.0 million, from
approximately $1.2 million in the three-month period ended September 30, 2004 to approximately $2.2
million in the three-month period ended September 30, 2005, primarily due to an increase in legal
expense in connection with the lawsuit regarding our patent challenge of GlaxoSmithKlines Imitrex®
injection, described elsewhere in this report.
Stock-based charges decreased by approximately $538,000, from $707,000 in the three-month
period ended September 30, 2004 to $169,000 in the three-month period ended September 30, 2005,
primarily because in 2004 we recorded a charge of $634,000 for the estimated fair value of 251,896
shares of restricted common stock issued to Zentaris GMBH in connection with the in-licensing of
ozarelix.
Other income consisted of net interest income of $264,000 for the three-month period ended
September 30, 2005 and $178,000 for the three-month period ended September 30, 2004. The increase
of $86,000 is attributable to significantly higher average interest rates in 2005.
Results of Operations for the nine-month period ended September 30, 2005 compared to the
nine-month period ended September 30, 2004
For the nine-month period ended September 30, 2005, we incurred a net loss of approximately
$15.0 million compared to a net loss of approximately $8.8 million in the nine-month period ended
September 30, 2004. The increase of $6.2 million in the net loss was primarily due to increases in
research and development expense and increased legal expense in connection with the lawsuit
regarding our patent challenge of GlaxoSmithKlines Imitrex® injection, described elsewhere in this
report.
As of September 30, 2005, the FDA has approved three of our products, ciprofloxacin and
fluconazole tablets and carboplatin injection, for sale in the United States. During the nine-month
period ended September 30, 2005, we had $368,000 of revenues from product sales to our distributor
Cura Pharmaceuticals for carboplatin injection. In addition, we may receive additional revenue from
these product sales for our share of any net profit margin generated by our distributor. Future
product sales is dependent on our distributors reordering the product from us. Cost of product sold
was $324,000, including certain nonrecurring initial costs. The profit margin earned during the
period is not considered representative of future margins, if any. During the nine-month periods
ended September 30, 2005 and 2004, we recorded $56,000 and $73,000, respectively, of revenues
representing amounts received from the GPC Biotech under our license agreement for commissions on
drug products used by GPC Biotech in clinical trials. The timing and amount of future commissions
is neither predictable nor assured.
Research and development expenses increased by approximately $5.8 million, from approximately
$4.5 million in the nine-month period ended September 30, 2004 to approximately $10.3 million in
the nine-month period ended September 30, 2005, primarily due to an increase resulting from an
expansion in the number and scope of our clinical trials and research and development activity.
During the nine-month period ended September 30, 2004, the principal clinical trials costs related
to a Phase 2 trial on EOquin . In the nine-month period ended September 30, 2005, we incurred
costs related to multiple Phase 2 clinical trials on EOquin , elsamitrucin and ozarelix, as
described elsewhere in this report.
General and administrative expenses increased by approximately $0.9 million, from
approximately $3.8 million in the nine-month period ended September 30, 2004 to approximately $4.7
million in the nine-month period ended September 30, 2005, primarily due to an increase in legal
expense in connection with the lawsuit regarding our patent challenge of GlaxoSmithKlines Imitrex®
injection, described elsewhere in this report.
Stock-based charges were approximately $860,000 in each of the nine-month periods ended
September 30, 2005 and 2004. During 2004 we recorded a charge of $634,000 for the estimated fair
value of 251,896 shares of restricted common stock issued to Zentaris GMBH in connection with the
in-licensing of ozarelix. During 2005, we recorded a charge of approximately $594,000 for the
estimated fair value of 100,000 shares of common stock issued to Altair Nanotechnologies, Inc. in
connection with the in-licensing of RenaZorb . Amortization of stock-based deferred compensation
amounted to $269,000 and $231,000 in the nine-month periods ended September 30, 2005 and 2004,
respectively.
21
Other income consisted of net interest income of $754,000 for the nine-month period ended
September 30, 2005 and $314,000 for the nine-month period ended September 30, 2004. The increase of
$440,000 is attributable to significantly higher average interest rates in 2005.
Off-Balance Sheet Arrangements
None.
Contractual and Commercial Obligations
The following table summarizes our contractual and other commitments, including obligations
under facility and equipment leases, as of September 30, 2005:
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Payment Due by Period |
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Less than |
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More than |
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Total |
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1 Year |
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1-3 Years |
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3-5 Years |
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5 Years |
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Contractual Obligations (1) |
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Capital Lease Obligations (2) |
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$ |
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$ |
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$ |
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$ |
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$ |
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Operating Lease Obligations (3) |
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$ |
1,779 |
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$ |
448 |
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$ |
952 |
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|
$ |
379 |
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$ |
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Purchase Obligations (4) |
|
$ |
2,176 |
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$ |
2,092 |
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$ |
84 |
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$ |
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$ |
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Contingent Milestone Obligations (5) |
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$ |
49,100 |
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$ |
1,200 |
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$ |
5,900 |
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$ |
5,200 |
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$ |
36,800 |
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Total |
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$ |
53,055 |
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$ |
3,740 |
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$ |
6,936 |
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$ |
5,579 |
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$ |
36,800 |
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(1) |
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The table of contractual and commercial obligations excludes contingent payments that we may
become obligated to pay upon the occurrence of future events whose outcome is not readily
predictable. Such significant contingent obligations are described below under Employment
Agreements. |
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(2) |
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As of September 30, 2005, we had no capital lease obligations. |
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(3) |
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The operating lease obligations are substantially related to the facility lease for our
corporate office, which extends through June 2009. |
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(4) |
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Purchase Obligations represent the amount of open purchase orders and contractual commitments
to vendors, for products and services that have not been delivered, or rendered, as of
September 30, 2005. |
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(5) |
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Milestone Obligations are payable contingent upon successfully reaching certain development
and regulatory milestones as further described below under
Licensing Agreements. While the
amounts included in the table above represent all of our potential cash milestone obligations
as of September 30, 2005, given the unpredictability of the drug development process, and the
impossibility of predicting the success of current and future clinical trials, the timelines
estimated above do not represent a forecast of when payment milestones will actually be
reached, if at all. Rather, they assume that all milestones under all of our license
agreements are successfully met, and represent our best estimates of the timelines. In the
event that the milestones are met, we believe it is likely that the increase in the potential
value of the related drug product will significantly exceed the amount of the milestone
obligation. |
Licensing Agreements
Each of our proprietary drug product candidates is being developed pursuant to license
agreements, which provide us with exclusive rights to certain territories to, among other things,
develop, sublicense, and sell the drug product candidates. With regard to one of our drug product
candidates, satraplatin, we have out-licensed our rights to GPC Biotech AG. We are required to use
commercially reasonable efforts to develop the drug product candidates, are generally responsible
for all development, patent filing and maintenance costs, sales, marketing and liability
22
insurance costs, and are contingently obligated to make milestone payments to the licensors if
we successfully reach development and regulatory milestones specified in the agreements. In
addition, we are obligated to pay royalties and milestone payments based on net sales, if any,
after marketing approval is obtained from regulatory authorities. We have no similar milestone or
other payment obligations in connection with our generic drug products.
The potential contingent development and regulatory milestone obligations, aggregating
approximately $50 million as of September 30, 2005, under all our licensing agreements are
generally tied to progress through the FDA approval process, which approval significantly depends
on positive clinical trial results. The following list is typical of milestone events: commencement
of Phase 3 clinical trials, filing of new drug applications in the United States, Europe and Japan,
and approvals from those regulatory agencies.
Given the uncertainty of the drug development process, we are unable to predict with any
certainty when any of the milestones will occur and, accordingly, the milestone payments represent
contingent obligations that will be recorded as expense when the milestone is achieved. In
connection with the development of in-licensed drug products, we anticipate certain milestones will be achieved over the next eighteen months. If the anticipated milestones are
achieved, we will likely become obligated to issue approximately 200,000 restricted shares of our
common stock and pay approximately between $1 to $3 million in cash during the eighteen month
period.
If we reach a milestone, it will likely occur prior to revenues being generated from the
related compound. However, in connection with the milestone obligations related to satraplatin,
each of our contingent future payment obligations is generally matched by a corresponding, greater
payment milestone obligation of GPC Biotech to us.
Service Agreements
In connection with the research and development of our drug products, we have entered into
contracts with numerous third party service providers, such as clinical trial centers, clinical
research organizations, data monitoring centers, and with drug formulation, development and testing
laboratories. The financial terms of these agreements are varied and generally obligate us to pay
in stages, depending on achievement of certain events specified in the agreements, such as contract
execution, reservation of service or production capacity, actual performance of service, or the
successful accrual and dosing of patients. As of each period end, we accrue for all non-cancelable
installment amounts that we are likely to become obligated to pay, and charge such accruals to
research and development costs.
Employment Agreements
We have entered into employment agreements with two of our Executive Officers, Dr. Shrotriya,
Chief Executive Officer, and Dr. Lenaz, Chief Scientific Officer, expiring December 31, 2006 and
July 1, 2006, respectively. The employment agreements automatically renew for a one-year term
unless either party gives written notice at least 90 days prior to the commencement of the next
year of such partys intent not to renew the agreement. The agreements require each executive to
devote his full working time and effort to the business and affairs of the Company during the term
of the agreement. The agreements provide for an annual base salary with annual increases, periodic
bonuses and option grants as determined by the Compensation Committee of our Board of Directors.
Each officers employment may be terminated by us with or without cause, as defined in the
agreement. The agreements provide for certain guaranteed severance payments and benefits if the
officers employment is terminated without cause, if the officers employment is terminated due to
a change in control or is adversely affected due to a change in control and the officer resigns or
if the officer decides to terminate his employment due to a disposition of a significant amount of
assets or business units. The guaranteed severance payment includes a payment equal to the
officers annual base salary and other cash compensation, and any approved bonus. The officer is
also entitled to two years medical, dental and other benefits for two years following termination.
In addition, all options held by the officer shall immediately vest and will be exercisable for one
year from the date of termination; provided, however, if the Board determines that the officers
employment is being terminated for the reason that the shared expectations of the officer and the
Board are not being met, in the Boards judgment, then the options currently held by the officer
will vest in accordance with their terms for up to one year after the date of termination,
23
with the right to exercise those options, when they vest, for approximately thirteen (13)
months after the date of termination. The agreements also provide that, upon his retirement, all
options held by the officer will become fully vested.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including cash requirements, from assessing: planned
research and development activities and general and administrative requirements, required clinical
trial activity, market need for our drug candidates and other major business assumptions.
The SEC defines critical accounting policies as those that are, in managements view, most
important to the portrayal of our financial condition and results of operations and most demanding
of our judgment. We consider the following policies to be critical to an understanding of our
consolidated financial statements and the uncertainties associated with the complex judgments made
by us that could impact our results of operations, financial position and cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent
obligations in the financial statements and accompanying notes. Our most significant assumptions
are employed in estimates used in estimating stock-based charges, determining values of financial
instruments and accrued obligations, as well as in estimates used in applying the revenue
recognition policy. The estimation process requires assumptions to be made about future events and
conditions, and as such, is inherently subjective and uncertain. Actual results could differ
materially from our estimates.
In estimating the fair value of stock-based compensation, we use the Black Scholes Option
Pricing Model. We estimate future volatility based on past volatility of our common stock; and we
estimate the expected length of the option on several criteria, including the vesting period of the
grant, and the expected volatility. In estimating the fair value of restricted common stock we
issue in connection with licensing transactions, we apply a discount for the marketability
restrictions, that is calculated after considering past volatility of our common stock as well as
the term of restriction and the cost of risk free capital for a period that is comparable with the
term of the restriction on the shares.
Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities primarily consist of bank checking deposits,
short-term treasury securities, and institutional money market funds, but from time to time also
include corporate debt and equity, municipal obligations, including market auction debt securities,
government agency notes, and certificates of deposit. We classify highly liquid short-term
investments, with insignificant interest rate risk and maturities of 90 days or less at the time of
acquisition, as cash and cash equivalents. Other investments, which do not meet the above
definition of cash equivalents, are classified as either held-to-maturity or available-for-sale
marketable securities, in accordance with the provisions of Financial Accounting Standards Board
(FASB) Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Investments that we intend to hold for more than one year are classified as long-term investments.
Patents and Licenses
We own or license all the intellectual property that forms the basis of our business model. We
expense all licensing and patent application costs as they are incurred.
24
Revenue Recognition
License fees representing non-refundable payments received upon the execution of license
agreements are recognized as revenue upon execution of the license agreements where we have no
significant future performance obligations and collectibility of the fees is assured. Milestone
payments, which are generally based on developmental or regulatory events, are recognized as
revenue when the milestones are achieved, collectibility is assured, and we have no significant
future performance obligations in connection with the milestones. In those instances where we have
collected fees or milestone payments, but have ongoing future obligations related to the development
of the drug product, revenue recognition is deferred and amortized ratably over the period of our
future obligations.
Revenue from sales of product is recognized upon shipment of product when title and risk of
loss have transferred to the customer, and provisions for estimates, including promotional
adjustments, price adjustments, returns, and other potential adjustments are reasonably
determinable. Such revenue is recorded net of such estimated provisions, at the minimum amount of
the customers obligation to us. Additional revenue, if any, resulting from profit sharing
arrangements are recorded when the amount of such profit sharing revenue is determinable with
reasonable certainty. We state the related accounts receivable at net realizable value, with any
allowance for doubtful accounts charged to general operating expenses.
Research and Development
Research and development expenses are comprised of the following types of costs incurred in
performing research and development activities: personnel expenses, facility costs, contract
services, license fees and milestone payments, costs of clinical trials, laboratory supplies and
drug products, and allocations of corporate costs. We expense all research and development costs in
the period incurred.
Accounting for Stock-Based Employee Compensation
At September 30, 2005, we had three stock-based employee compensation plans, which are
described more fully in Note 9 to the Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2004. As permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation", we account for grants pursuant to those plans under the intrinsic value
method described in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees", and related Interpretations. Under the intrinsic value method, no stock-based
employee compensation cost is recorded when the exercise price is equal to, or higher than, the
market value of the underlying common stock on the date of grant. We recognize stock-based
compensation expense for all grants to consultants, and for those grants to employees where the
exercise prices are below the market price of the underlying stock at the measurement date of the
grant.
New Accounting Pronouncements
In
December 2004, the FASB issued Statement No. 123(R), Share-Based Payment." This Statement
eliminates the use of the intrinsic value method described in Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees", and requires a public entity to measure
the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award. We expect to adopt the
provisions of Statement No. 123(R) when it becomes a mandatory requirement, currently expected to
be January 1, 2006. The adoption of this statement is expected to result in significantly higher
reported operating expenses in our future financial statements. Had we adopted the provisions of
Statement No. 123(R) as of January 1, 2005, our reported loss for the nine-month period ended
September 30, 2005 would have been $3,582,000 higher, or $18,627,000.
25
RISK FACTORS
An investment in our common stock involves a high degree of risk. Our business, financial
condition, operating results and prospects can be impacted by a number of factors, any one of which
could cause our actual results to differ materially from recent results or from our anticipated
future results. As a result, the trading price of our common stock could decline, and you could
lose a part or all of your investment. You should carefully consider the risks described below with
all of the other information included in this Quarterly Report. Failure to satisfactorily achieve
any of our objectives or avoid any of the risks described below or other risks listed in our Annual
Report on Form 10-K would likely have a material adverse effect on our business and results of
operations.
Risks Related to Our Business
Our losses will continue to increase as we expand our development efforts, and our efforts may
never result in profitability.
Our cumulative losses since our inception in 1987 through September 30, 2005 were in excess of
$175 million. We lost approximately $12 million in 2004, $10 million in 2003, $18 million in 2002
and $15 million in the nine-month period ended September 30, 2005. We expect to continue to incur
losses in the future, particularly as we continue to invest in the development of our drug product
candidates, acquire additional drug candidates and expand the scope of our operations. We have
received FDA approval to market three generic drug products, ciprofloxacin and fluconazole tablets
and carboplatin injection, in the United States and recorded modest revenue in 2004 and 2005.
However, we may never achieve significant revenues from sales of products or become profitable.
Even if we eventually generate significant revenues from sales, we will likely continue to incur
losses over the next several years.
Our business does not generate the cash needed to finance our ongoing operations and therefore, we
may need to continue to raise additional capital.
Our current business operations do not generate sufficient operating cash to finance the
clinical development of our drug product candidates. We have historically relied primarily on
raising capital through the sale of our securities and out-licensing our drug candidates and
technology to meet our financial needs. While anticipated profits from the sale of generic drugs,
if we are successful in generating significant revenues from generics, may help defray some of the
expenses of operating our business, we believe that in order to
prepare the Company for continued
future drug product development and acquisition, and to capitalize on growth opportunities, we may
need to continue to raise funds through public or private financings.
We may not be able to raise additional capital on favorable terms, if at all. Accordingly, we
may be forced to significantly change our business plans and restructure our operations to conserve
cash, which would likely involve out-licensing or selling some or all of our intellectual,
technological and tangible property not presently contemplated and at terms that we believe would
not be favorable to us, and/or reducing the scope and nature of our currently planned research and
drug development activities. An inability to raise additional capital would also impact our ability
to expand operations.
Clinical trials may fail to demonstrate the safety and efficacy of our proprietary drug
candidates, which could prevent or significantly delay obtaining regulatory approval.
Prior to receiving approval to commercialize any of our proprietary drug candidates, we must
demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction
of the FDA and other regulatory authorities in the United States and other countries, that each of
the products is both safe and effective. For each product candidate, we will need to demonstrate
its efficacy and monitor its safety throughout the process. If such development is unsuccessful,
our business and reputation would be harmed and our stock price would be adversely affected.
All of our product candidates are prone to the risks of failure inherent in drug development.
The results of pre-clinical studies and early-stage clinical trials of our product candidates do
not necessarily predict the results of later-stage clinical trials. Later-stage clinical trials may
fail to demonstrate that a product candidate is safe and effective
26
despite having progressed through initial clinical testing. Even if we believe the data
collected from clinical trials of our drug candidates are promising, such data may not be
sufficient to support approval by the FDA or any other United States or foreign regulatory
approval. Pre-clinical and clinical data can be interpreted in different ways.
Accordingly, FDA officials could interpret such data in different ways than we or our partners
do, which could delay, limit or prevent regulatory approval. The FDA, other regulatory authorities,
our institutional review boards, our contract research organizations, or we may suspend or terminate
our clinical trials for our drug candidates. Any failure or significant delay in completing
clinical trials for our product candidates, or in receiving regulatory approval for the sale of any
drugs resulting from our drug candidates, may severely harm our business and reputation. Even if we
receive FDA and other regulatory approvals, our product candidates may later exhibit adverse
effects that may limit or prevent their widespread use, may cause the FDA to revoke, suspend or
limit their approval, or may force us to withdraw products derived from those candidates from the
market.
Our proprietary drug candidates, their target indications, and status of development are
summarized in the following table:
|
|
|
|
|
Drug Candidate |
|
Target Indication |
|
Development Status |
Satraplatin
|
|
Hormone Refractory Prostate Cancer
|
|
Late Phase 3 clinical trial |
EOquin (EO9)
|
|
Recurrent Superficial Bladder Cancer
|
|
Late Phase 2 clinical trial |
Elsamitrucin
|
|
Refractory non-Hodgkins Lymphoma
|
|
Phase 2 clinical trial |
Ozarelix (formerly SPI-153)
|
|
Hormone Dependent Prostate Cancer
|
|
Phase 1/2 clinical trials |
Ozarelix (formerly SPI-153)
|
|
Benign Prostatic Hypertrophy
|
|
Phase 2 clinical trial |
Lucanthone
|
|
Radiation Sensitizer for Brain
Tumors and Brain Metastases
|
|
Phase 2 clinical trial |
Satraplatin
|
|
Non-small Cell Lung Cancer
|
|
Phase 1/2 clinical trial |
Satraplatin
|
|
In combination with Taxotere®
|
|
Phase 1 clinical trial |
EO9
|
|
Radiation Sensitizer
|
|
Pre-clinical |
RenaZorb
|
|
Hyperphosphatemia in End-stage
Renal Disease
|
|
Pre-clinical |
SPI-1620
|
|
Adjunct to Chemotherapy
|
|
Pre-clinical |
The development of our drug candidate, satraplatin, depends on the efforts of a third party and,
therefore, its eventual success or commercial viability is largely beyond our control.
In 2002, we entered into a co-development and license agreement with GPC Biotech AG for the
development and commercialization of our lead drug candidate, satraplatin. GPC Biotech has agreed
to fully fund development and commercialization expenses for satraplatin. We do not have control
over the drug development process and therefore the success of our lead drug candidate depends upon
the efforts of GPC Biotech. GPC Biotech may not be successful in the clinical development of the
drug, the achievement of any additional milestones such as the acceptance of a New Drug
Application, or NDA, filing by the FDA, or the eventual commercialization of satraplatin.
We may not be able to obtain co-promotion rights in the United States with regard to our drug
candidate, satraplatin, under our co-development and license agreement with GPC Biotech AG which
may adversely affect our ability to timely establish our own sales
force in the United States, if
and when we choose to do so.
Pursuant to the terms of our co-development and license agreement with GPC Biotech, in the
event GPC Biotech determines to market satraplatin within the United States, we will have the
right to co-promote satraplatin in the United States with GPC Biotech pursuant to terms to be
negotiated by both parties. If GPC Biotech grants rights to a third party to market satraplatin
in the United States, then GPC Biotech is only obligated to use commercially reasonable efforts to
obtain co-promotion rights for us with such third party. Therefore, we may not be able to obtain
co-promotion rights for satraplatin in the United States which may adversely affect our ability to
timely establish our own sales force in the United States, if and when we choose to do so.
27
The development of our drug candidate, ozarelix, may be adversely affected by the development
efforts of Zentaris GmbH who retained certain rights to the product.
Zentaris GmbH licensed the rights to us to develop and market ozarelix in the United States,
Canada, Mexico and India. Zentaris may conduct their own clinical trials on ozarelix for regulatory
approval in other parts of the world. We will not have control over Zentaris efforts in this area
and our own development efforts for ozarelix may be adversely impacted if their efforts are not
successful.
From time to time we may need to license proprietary technologies from third parties, which may be
difficult or expensive to obtain.
We may need to obtain licenses to patents and other proprietary rights held by third parties
to successfully develop, manufacture and market our drug products. As an example, it may be
necessary to use a third partys proprietary technology to reformulate one of our drug products in
order to improve upon the capabilities of the drug product. If we are unable to timely obtain these
licenses on reasonable terms, our ability to commercially exploit our drug products may be
inhibited or prevented.
The inability to retain and attract key personnel could significantly hinder our growth strategy
and might cause our business to fail.
Our success depends upon the contributions of our key management and scientific personnel,
especially Dr. Rajesh C. Shrotriya, our Chairman, President and Chief Executive Officer and Dr.
Luigi Lenaz, our Chief Scientific Officer. Dr. Shrotriya has been President since 2000 and Chief
Executive Officer since 2002, and has spearheaded the major changes in our business strategy and
coordinated our structural reorganization. Dr. Lenaz has been President of our Oncology Division
from November 2000 to February 2005 and Chief Scientific Officer since 2005, and has played a key
role in the identification and development of our proprietary drug candidates. The loss of the
services of Dr. Shrotriya, Dr. Lenaz or any other key personnel could delay or preclude us from
achieving our business objectives. Dr. Shrotriya has an employment agreement with us that will
expire on December 31, 2006, with automatic one-year renewals thereafter unless we, or Dr.
Shrotriya, give notice of intent not to renew at least 90 days in advance of the renewal date. Dr.
Lenaz has an employment agreement with us that will expire on July 1, 2006, with automatic one year
renewals thereafter unless we, or Dr. Lenaz, give notice of intent not to renew at least 90 days in
advance of the renewal date.
We also may need substantial additional expertise in marketing, pharmaceutical drug
development and other areas in order to achieve our business objectives. Competition for qualified
personnel among pharmaceutical companies is intense, and the loss of key personnel, or the delay or
inability to attract and retain the additional skilled personnel required for the expansion of our
business, could significantly damage our business.
We are dependent on third parties for clinical testing, manufacturing and marketing our proposed
proprietary products. If we are not able to secure favorable arrangements with such third parties,
our business and financial condition could be harmed.
We may not conduct clinical trials ourselves, and we will not manufacture any of our proposed
proprietary products for commercial sale nor do we have the resources necessary to do so. In
addition, we currently do not have the capability to market our drug products ourselves. We intend
to contract with larger pharmaceutical companies or contract research organizations to conduct such
activities. In connection with our efforts to secure corporate partners, we may seek to retain
certain co-promotional or co-marketing rights to certain of our proprietary drug candidates, so
that we may promote our products to selected medical specialists while our corporate partner
promotes these products to the medical market generally. We may not be able to enter into any
partnering arrangements on this or any other basis. If we are not able to secure adequate
partnering arrangements, our business and financial condition could be harmed. In addition, we will
have to hire additional employees or consultants, since our current employees have limited
experience in these areas. Sufficient employees with relevant skills may not be
28
available to us. Any increase in the number of our employees would increase our expense level,
and could have an adverse effect on our financial position.
In addition, we, or our potential corporate partners, may not successfully introduce our
proposed proprietary products or our proposed proprietary products may not achieve acceptance by
patients, health care providers and insurance companies. Further, it is possible that we may not be
able to secure arrangements to manufacture and market our proposed proprietary products at prices
that would permit us to make a profit. To the extent that corporate partners conduct clinical
trials, we may not be able to control the design and conduct of these clinical trials.
We may have conflicts with our partners that could delay or prevent the development or
commercialization of our product candidates.
We may have conflicts with our partners, such as conflicts concerning the interpretation of
preclinical or clinical data, the achievement of milestones, payments for services, development
obligations or the ownership of intellectual property developed during our collaboration. If any
conflicts arise with any of our partners, such partner may act in a manner that is adverse to our
best interests. Any such disagreement could result in one or more of the following, each of which
could delay or prevent the development or commercialization of our product candidates, and in turn
prevent us from generating revenues:
|
|
|
unwillingness on the part of a partner to pay us milestone payments or royalties we
believe are due to us under a collaboration; |
|
|
|
|
uncertainty regarding ownership of intellectual property rights arising from our
collaborative activities, which could prevent us from entering into additional
collaborations; |
|
|
|
|
unwillingness by the partner to cooperate in the development of the product, including
providing us with product data or materials; |
|
|
|
|
unwillingness on the part of a partner to keep us informed regarding the progress of
its development and commercialization activities or to permit public disclosure of the
results of those activities; |
|
|
|
|
initiating of litigation by the partner to resolve the dispute; or |
|
|
|
|
attempts by the partner to terminate the agreement. |
Our efforts to acquire or in-license and develop additional proprietary drug candidates may fail,
which would limit our ability to grow our proprietary business.
The long-term success of our strategy depends in part on obtaining drug candidates in addition
to our existing portfolio. We are actively seeking to acquire, or in-license, additional
proprietary drug candidates that demonstrate the potential to be both medically and commercially
viable. We have certain criteria that we are looking for in any drug candidate acquisition and we
may not be successful in locating and acquiring, or in-licensing, additional desirable drug
candidates on acceptable terms.
We are a small company relative to our principal competitors and our limited financial resources
may limit our ability to develop and market our drug products.
Many companies, both public and private, including well-known pharmaceutical companies and
smaller niche-focused companies, are developing products to treat all of the diseases we are
pursuing, or distributing generic drug products directly competitive to the generic drugs we intend
to market and distribute. Many of these companies have substantially greater financial, research
and development, manufacturing, marketing and sales experience and resources than us. As a result,
our competitors may be more successful than us in developing their products, obtaining regulatory
approvals and marketing their products to consumers.
29
Competition for branded or proprietary drugs is less driven by price and is more focused on
innovation in treatment of disease, advanced drug delivery and specific clinical benefits over
competitive drug therapies. We have seven proprietary drug candidates currently under development.
We may not be successful in any or all of these studies; or if successful, and if one or more of
our proprietary drug candidates is approved by the FDA, we may encounter direct competition from
other companies who may be developing products for similar or the same indications as our drug
candidates. Companies active in the areas of oncology which is our focus include Astra Zeneca,
Amgen, Inc., Bayer AG, Eli Lilly and Co., Genentech, Inc., Novartis Pharmaceuticals Corporation,
Bristol-Myers Squibb Company, GlaxoSmithKline, Biogen-IDEC Pharmaceuticals, Inc., Guilford
Pharmaceuticals, Inc., Cephalon, Inc., Sanofi-Aventis Inc., Pfizer, Inc., Chiron Corp., Genta Inc.,
Imclone Systems Incorporated, Millennium Pharmaceuticals, MGI Pharma, Inc., SuperGen, Inc., Roche Pharmaceuticals,
Schering-Plough, Johnson & Johnson and others who are more established and are currently marketing
products for the treatment of various forms of cancer including the forms our oncology drug
candidates target. Many of our competitors are large and well capitalized companies focusing on a
wide range of diseases and drug indications, and have substantially greater financial, research and
development, human and other resources than we do. Furthermore, large pharmaceutical companies have
significantly more experience than we do in pre-clinical testing, human clinical trials and
regulatory approval procedures, among other things.
Any proprietary product for which we obtain FDA approval must compete for market acceptance
and market share. For example, cisplatin injection and carboplatin injection are the most prevalent
platinum-based derivatives used in chemotherapy and are the primary treatment for many of the
cancer types we are pursuing. Our drug candidate satraplatin, if the FDA approves it for sale,
would likely compete against these drugs directly. Unless satraplatin is shown to have better
efficacy and is as cost effective, if not more cost effective, than cisplatin and carboplatin, it
may not gain acceptance by the medical field and therefore may never be successful commercially.
With regard to our drug product candidate, RenaZorb, under the new National Kidney Foundation
K/DOQI guidelines for treating hyperphosphatemia, non-calcium, non-aluminum binders are the
recommended first-line long-term therapy for managing high phosphate levels. Genzyme Corporations
Renagel® and Shire Pharmaceuticals Fosrenol® are the only two FDA approved non-calcium,
non-aluminum, branded pharmaceuticals specifically for the treatment of hyperphosphatemia in end
stage renal disease. We expect to compete with these products and potentially others based upon
phosphate binding capacity, patient compliance, side effects and cost. While we believe RenaZorb
has the potential to perform better than these competitors, if RenaZorb is successfully developed
and receives FDA approval, it will be a number of years after Renagel® and Fosrenol® have been FDA
approved and marketed. In addition, Genzyme and Shire may seek to modify their products or create
new therapies that could reduce or eliminate any perceived benefit we believe RenaZorb may have
over these products.
Our success in the marketing of our generic drug products will depend significantly upon our
ability to forecast market conditions that may prevail after we obtain ANDA approval and identify
generic drugs that our strategic partners and associated suppliers can produce for us
cost-effectively. In addition, we must be able to expand our marketing, selling and distribution
relationships in the United States since we currently do not have any internal distribution
capabilities and alliances with only two product distributors. Furthermore, as a new generic
competitor entering the marketplace, which is made up of many well-established companies, with
established customers as well as established sales, marketing and distribution organizations, we
may not be able to successfully compete.
Because price is the primary basis for competition among generic versions of a given drug, any
ability by our competitors to reduce production costs can provide them with a significant
competitive advantage, and our ability to compete will be largely dependent on our ability to
obtain supplies of our generic drug product from manufacturers at favorable prices. As a new
generic competitor, we will be competing against established generic companies such as Teva
Pharmaceuticals, Sandoz, Par Pharmaceuticals, Barr Laboratories, Mylan Laboratories Inc., Watson
Pharmaceuticals, Inc., Genpharm, Dr. Reddys, Ranbaxy, American Pharmaceutical Partners, Bedford
Laboratories, Mayne Pharmaceuticals and others. In addition, we anticipate that many foreign manufacturers will continue
to enter the generic market due to low barriers to entry. These companies may have greater
economies of scale in the production of their products and, in certain cases, may produce their own
product supplies, such as active pharmaceutical ingredients, or can
30
procure product supplies on more favorable terms which may provide significant cost and supply
advantages to customers in the retail prescription market. We expect that the generic market will
be competitive and will be largely dominated by the competitors listed above who will target many,
if not all, of the same products for development as us.
We currently have nine generic drug candidates under review at the FDA. For ciprofloxacin
tablets, our first generic product candidate filed with FDA, and for which we obtained approval in
September 2004, there are currently seventeen generic manufacturers approved to sell versions of
ciprofloxacin tablets, such as Apotex, Barr, Cobalt, Taro, Teva, West Ward, Eon Labs, Carlsbad
Technology, IVAX, Sandoz, Genpharm, Ranbaxy, Dr. Reddys, Martec and Mylan Laboratories, Inc. The
pediatric exclusivity for Diflucan®, the branded form of fluconazole, and our second generic
product filed with the FDA, expired on July 29, 2004. We obtained FDA approval in September 2005.
The market is very competitive with versions from generic drug manufacturers such as Taro
Pharmaceutical Industries, Mylan Laboratories, Inc, Sandoz, Ranbaxy, IVAX, Genpharm, Gedeon
Richter, TEVA, Torpharm, Roxane, Dr. Reddys Labs, Inc., and Pliva approved by the FDA for sale in
the United States. Carboplatin injection, our third generic drug ANDA filed with FDA, and for which
we obtained approval in June 2005, is the generic equivalent of Bristol Meyers Squibbs brand
Paraplatin®, for which the patent expired in April 2004. The FDA has granted approval, following
the expiration of pediatric exclusivity in October 2004, for carboplatin injection and carboplatin
for injection to seven generic companies, including Pharmachemie, APP, Bedford, Mayne, Sandoz
(formerly Eon), Sicor Pharmaceuticals and Pliva. TEVA Pharmaceuticals, through an agreement with
Bristol Myers Squibb and prior to their ANDA approval in September, 2005, is currently selling
carboplatin injection produced by Bristol Myers Squibb as a generic drug. The patent for Imitrex®
injection, the brand name for sumatriptan succinate injection, for which we filed an ANDA with
paragraph IV certification, has not yet expired. However, we have initiated a challenge of the
patent and are currently in litigation with GlaxoSmithKline, the patent holder for Imitrex®
injection. Based on the guidelines available to us, and our experience with the FDA approval
process, we do not anticipate receiving approval for our eight other ANDAs, filed in 2004 and in
2005, before the first quarter of 2006, if at all, and all approvals, except one, will come after
patents and/or exclusivities expire and after some of our competitors have already obtained
approval and begun marketing.
Our proprietary drug candidates may not be more effective, safer or more cost efficient than
competing drugs and otherwise may not have any competitive advantage, which could hinder our
ability to successfully commercialize our drug candidates.
Drugs produced by other companies are currently on the market for each disease type we are
pursuing. Even if one or more of our drug candidates ultimately received FDA approval, our drug
candidates may not have better efficacy in treating the target indication than a competing drug,
may not have a more favorable side-effect profile than a competing drug, may not be more cost
efficient to manufacture or apply, or otherwise may not demonstrate a competitive advantage over
competing therapies. Accordingly, even if FDA approval is obtained for one or more of our drug
candidates, they may not gain acceptance by the medical field or become commercially successful.
Price and other competitive pressures may make the marketing and sale of our generic drugs not
commercially feasible and not profitable.
The generic drug market in the United States is extremely competitive, characterized by many
participants and constant downward price pressure on generic drug products. Consequently, margins
are continually reduced and it is necessary to continually introduce new products to achieve and
maintain profitability. We have only obtained regulatory approval for three of our generic drug
candidates. While we have entered into agreements with third parties to manufacture the drug
products for us, given the price volatility of the generic market, we believe it is imprudent to
enter into definitive agreements on transfer prices with the manufacturers of our generic drug
product candidates prior to FDA approval, and we do not expect to do so until we receive FDA
approval and are ready to begin selling the generic drug products. Our ability to compete
effectively in the generic drug market depends largely on our ability to obtain transfer price
agreements that ensure a supply of our generic drug products at favorable prices. Even if we obtain
regulatory approval to market our generic drug candidates in the United States, we may not be able
to complete a transfer price arrangement with the manufacturers of the drug candidates that will
allow us to market the generic drug products in the United States on terms favorable to us, or at
all.
31
Also, if we fail to obtain approval of our ANDAs from the FDA in a timely manner, preferably
before the patent and any additional exclusivity granted by the FDA to the branded drug product
expire, our profitability will be significantly affected due to the significant price erosion
caused by the typically large number of the generic companies entering the market. The United
States patent and pediatric exclusivity for Cipro®, the branded form of our generic drug product
ciprofloxacin tablets, had both expired by June 2004. We received approval from the FDA of our ANDA
for ciprofloxacin tablets in September 2004, however, seventeen other companies have received FDA
approval to market generic versions of ciprofloxacin tablets, and we have observed a significant
reduction in the market price for ciprofloxacin since June 2004. The patents and all exclusivities
for our four ophthalmic products and three of our undisclosed products have previously expired (one
is still covered by a patent), and a number of other companies are currently selling their own
generic versions of the products. In addition, we did not obtain approval of our ANDAs for
fluconazole tablets and carboplatin injection prior to the expirations in July and October 2004,
respectively, of the patents and exclusivities granted by the FDA to the corresponding branded
products. Consequently, our ability to achieve a profit may be significantly harmed as we have
observed significant reductions in the market prices for these products as well. The patents for
sumatriptan succinate injection, the generic version of Imitrex®, marketed by GlaxoSmithKline, for
which we filed an ANDA with paragraph IV certification in October 2004, have not yet expired.
In addition to competitive pressures related to price, we may face opposition from the
producers of the branded versions of the generic drugs for which we obtain approval. Branded
pharmaceutical companies have aggressively sought to prevent generic competition, including the
extensive use of litigation. On February 18, 2005, GlaxoSmithKline filed suit in United States
federal court to prevent us from proceeding with the commercialization of our generic version of
Imitrex® which action formally initiates our challenge of one of the patents listed by
GlaxoSmithKline in connection with Imitrex® injection. For information regarding the risks of this
litigation, please see the risk factor below.
In addition, many branded pharmaceutical companies increasingly have used state and federal
legislative and regulatory means to delay generic competition. These efforts have included:
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pursuing new patents for existing products which may be granted just before the
expiration of one patent, which could extend patent protection for a number of years or
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using the citizen petition process, a process by which any person can submit a petition
to the Commissioner of the FDA to issue, amend or revoke a regulation or order or take or
refrain from taking any other administrative action, to request amendments to FDA
standards; |
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seeking changes to the United States Pharmacopoeia, an organization which publishes
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attaching patent extension amendments to non-related federal legislation. |
Also, branded pharmaceutical companies are selling generic versions of their own branded
drugs, or authorizing other companies to sell generic versions. This could hurt our ability to
capture market share and generate profits, especially if we are granted 180 days marketing
exclusivity for one of our generic drugs.
We may not be successful in expanding our generic drug distribution capabilities in the United
States, our only current target market for generic drugs, which would limit our ability to grow
our generic drug business.
Many of our competitors have substantial, established direct and indirect distribution
channels. We have not yet undertaken the marketing and distribution of a generic drug product
ourselves and we currently have no direct sales and marketing organization and our limited sales
and marketing resources are devoted to establishing and enhancing our third party distribution
relationships.
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We have established relationships with distributors for the distribution of ciprofloxacin
tablets and carboplatin injection; who have commenced distribution of these drugs. The long-term
success in the marketing of our generic drugs will depend in part on our drug distribution
capabilities in the United States, our only current target market for generic drugs. We may not be
successful in expanding our existing distribution channels, establishing new, additional
distribution channels or establishing a direct generic drug marketing capability sufficient to
effectively and successfully compete in the generic drug market.
We may not be successful in establishing additional generic drug supply relationships, which would
limit our ability to grow our generic drug business.
Long-term success in the marketing of generic drugs depends in part on our ability to expand
and enhance our existing relationships and establish new relationships for supplying generic drug
products. We do not presently intend to focus our research and development efforts on developing
active pharmaceutical ingredients or the dosage form for generic drugs. In addition, we currently
have no capacity to manufacture generic drug products and do not intend to spend our capital
resources to develop the capacity to do so. Therefore, we must rely on relationships with other
companies to supply our generic drug products. We may not be successful in expanding or enhancing
our existing relationships or in securing new relationships. If we fail to expand our existing
relationships or secure new relationships, our ability to expand our generic drug business will be
harmed.
Our supply of drug products will be dependent upon the production capabilities of our supply
sources, which may limit our ability to meet demand for our products and ensure regulatory
compliance.
We have no internal manufacturing capacity for our drug product candidates, and therefore, we
have entered into agreements with third party manufacturers to supply us with our drug products,
subject to further agreement on pricing for particular drug products. Consequently, we will be
dependent on our manufacturing partners for our supply of drug products. Some of these
manufacturing facilities are located outside the United States. The manufacture of drug products,
including the acquisition of compounds used in the manufacture of the finished drug product, may
require considerable lead times. Further, with regard to our generic drug products, sales of a new
generic drug product may be difficult to forecast. We will have little or no control over the
production process. Accordingly, while we do not currently anticipate shortages of supply, there
could arise circumstances in which market demand for a particular generic product could outstrip
the ability of our supply source to timely manufacture and deliver the product, thereby causing us
to lose sales.
Reliance
on third party manufacturers entails risks to which we would not be subject if we
manufactured products ourselves, including reliance on the third party for regulatory compliance
and adhering to FDAs current Good Manufacturing Practices, or cGMP, requirements, the possible
breach of the manufacturing agreement by the third party because of factors beyond our control and
the possibility of termination or non-renewal of the agreement by the third party, based on its own
business priorities, at a time that is costly or inconvenient for us. Before we can obtain
marketing approval for our product candidates, our suppliers manufacturing facilities must pass an
FDA pre-approval inspection. In order to obtain approval, all of the facilitys manufacturing
methods, equipment and processes must comply with cGMP requirements. The cGMP requirements govern
all areas of record keeping, production processes and controls, personnel and quality control. Any
failure of our third party manufacturers or us to comply with applicable regulations, including an
FDA pre-approval inspection and cGMP requirements, could result in sanctions being imposed on us,
including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing
approval of our products, delay, suspension or withdrawal of approvals, license revocation,
seizures or recalls of product, operation restrictions and criminal prosecutions, any of which
could significantly and adversely affect our business.
GlaxoSmithKline filed suit in United States federal court asserting that we have infringed one of
their patents for Imitrex® injection by filing our ANDA for sumatriptan injection, the generic
form of Imitrex® injection. This challenge may prevent us from commercializing sumatriptan until
after the patent has expired and may require us to incur substantial expense and the significant
effort of technical and management personnel.
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On February 18, 2005, GlaxoSmithKline filed suit in United States federal court to prevent us
from proceeding with the commercialization of our generic form of sumatriptan injection. Since
patent litigation has been initiated, the FDA will not approve our ANDA until the earlier of 30
months from GlaxoSmithKlines receipt of our notice of ANDA acceptance (the 30-month stay) or the
issuance of a final non-appealed, or non-appealable court decision finding the Imitrex® patent we
are currently challenging invalid, unenforceable or not infringed. If the patent is found to be
infringed by the filing of our ANDA, GlaxoSmithKline could seek an injunction to block the launch
of our generic product until the patent expires. This would prohibit us from obtaining the 180-day
marketing exclusivity afforded by the FDA to companies who are the first to file an ANDA with a
paragraph IV certification for a generic equivalent to a brand name product. We believe we are the
first to file an ANDA with a paragraph IV certification for sumatriptan injection.
Our defense against the charge of infringement by GlaxoSmithKline could require us to incur
substantial legal expense and to divert significant effort of our technical and management
personnel away from their regular activities in our business, which could substantially hinder our
ability to conduct, advance and grow our business.
Risks Related to Our Industry
Rapid technological advancement may render our drug candidates obsolete before we recover expenses
incurred in connection with their development. As a result, our drug products may never become
profitable.
The pharmaceutical industry is characterized by rapidly evolving technology. Technologies
under development by other pharmaceutical companies could result in treatments for diseases and
disorders for which we are developing our own treatments. Several other companies are engaged in
research and development of compounds that are similar to our research. A competitor could develop
a new technology, product or therapy that has better efficacy, a more favorable side-effect profile
or is more cost effective than one or more of our drug candidates and thereby cause our drug
candidate to become commercially obsolete. Some of our drug candidates may become obsolete before
we recover the expenses incurred in their development. As a result, such products may never become
profitable.
Competition for patients in conducting clinical trials may prevent or delay product development
and strain our limited financial resources.
Many pharmaceutical companies are conducting clinical trials in patients with the disease
indications that our drug candidates target. As a result, we must compete with them for clinical
sites, physicians and the limited number of patients who fulfill the stringent requirements for
participation in clinical trials. Also, due to the confidential nature of clinical trials, we do
not know how many of the eligible patients may be enrolled in competing studies and consequently
not available to us. Our clinical trials may be delayed or terminated due to the inability to
enroll enough patients to complete our clinical trials. Patient enrollment depends on many factors,
including the size of the patient population, the nature of the trial protocol, the proximity of
patients to clinical sites and the eligibility criteria for the study. The delay or inability to
meet planned patient enrollment may result in increased costs and delays or termination of the
trial, which could have a harmful effect on our ability to develop products.
We may not be successful in obtaining regulatory approval to market and sell our proprietary or
generic drug candidates.
Before our proprietary drug candidates can be marketed and sold, regulatory approval must be
obtained from the FDA and comparable foreign regulatory agencies. We must demonstrate to the FDA
and other regulatory authorities in the United States and abroad that our product candidates
satisfy rigorous standards of safety and efficacy. We will need to conduct significant additional
research, pre-clinical testing and clinical testing, before we can file applications with the FDA
for approval of our product candidates. The process of obtaining FDA and other regulatory approvals
is time consuming, expensive, and difficult to design and implement. The review and approval, or
denial, process for an application can take years. The FDA, or comparable foreign regulatory
agencies, may not timely, or ever, approve an application. Among the many possibilities, the FDA
may require substantial additional testing or clinical trials or find our drug candidate is not
sufficiently safe or effective in treating the targeted disease.
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This could result in the denial or delay of product approval. Our product development costs
will increase if we experience delays in testing or approvals. Further, a competitor may develop a
competing drug or therapy that impairs or eliminates the commercial feasibility of our drug
candidates.
In order to obtain approval for our generic drug candidates, we will need to scientifically
demonstrate that our drug product is safe and bioequivalent to the innovator drug. Bioequivalence
may be demonstrated by comparing the generic drug candidate to the innovator drug product in dosage
form, strength, route of administration, quality, performance characteristics and intended use. We
plan to use our managements experience with the regulatory approval process in the United States
to prepare, file and prosecute appropriate Abbreviated New Drug Applications, or ANDAs, for our
current and future generic drug candidates. Since 2003 we have filed twelve ANDAs with the FDA. We
have received approval from the FDA to market ciprofloxacin and fluconazole tablets and carboplatin
injection in the United States. We intend to file additional ANDAs in the foreseeable future. The
FDA may not agree that our safety and bioequivalence studies provide sufficient support for
approval. This could result in denial or delay of FDA approval of our generic products. Generic
drugs generally have a relatively short window in which they can be profitable before other
manufacturers introduce competing products that impose downward pressure on prices and reduce
market share for other versions of the generic drug. Consequently, delays in obtaining FDA approval
may also significantly impair our ability to compete.
Our failure or inability to comply with extensive governmental regulation to which we are subject
may delay or prevent approval of our product candidates and may subject us to penalties.
The FDA and comparable agencies in foreign countries impose many requirements on the
introduction of new drugs through lengthy and detailed clinical testing and data collection
procedures, and other costly and time consuming compliance procedures. These requirements apply to
every stage of the clinical trial process and make it difficult to estimate when any of our drug
candidates will be available commercially, if at all. While we believe that we are currently in
compliance with applicable FDA regulations, if partners, our contract research organizations, or we
fail to comply with the regulations applicable to our clinical testing, the FDA may delay, suspend
or cancel our clinical trials, or the FDA might not accept the test results. The FDA, an
institutional review board at our clinical trial sites, our third party investigators, any
comparable regulatory agency in another country, or we, may suspend clinical trials at any time if
the trials expose subjects participating in such trials to unacceptable health risks. Further,
human clinical testing may not show any current or future product candidate to be safe and
effective to the satisfaction of the FDA or comparable regulatory agencies or the data derived from
the clinical tests may be unsuitable for submission to the FDA or other regulatory agencies.
Once we submit a drug candidate for commercial sale approval, the FDA or other regulatory
agencies may not issue their approvals on a timely basis, if at all. If we are delayed or fail to
obtain these approvals, our business and prospects may be significantly damaged. Even if we obtain
regulatory approval for our product candidates, we, our partners, our manufacturers, and other
contract entities will continue to be subject to extensive requirements by a number of national,
foreign, state and local agencies. These regulations will impact many aspects of our operations,
including testing, research and development, manufacturing, safety, effectiveness, labeling,
storage, quality control, adverse event reporting, record keeping, approval, advertising and
promotion of our future products. Failure to comply with applicable regulatory requirements could,
among other things, result in:
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fines; |
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changes in advertising; |
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revocation or suspension of regulatory approvals of products; |
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product recalls or seizures; |
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delays, interruption, or suspension of product distribution, marketing and sale; |
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civil or criminal sanctions; and |
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refusals to approve new products. |
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The later discovery of previously unknown problems with our products may result in
restrictions of the product candidate, including withdrawal from manufacture. In addition, the FDA
may revisit and change its prior determinations with regard to the safety and efficacy of our
future products. If the FDAs position changes, we may be required to change our labeling or to
cease manufacture and marketing of the challenged products. Even prior to any formal regulatory
action, we could voluntarily decide to cease the distribution and sale or recall any of our future
products if concerns about their safety or effectiveness develop.
In their regulation of advertising, the FDA and the Federal Trade Commission from time to time
issue correspondence alleging that some advertising or promotional practices are false, misleading
or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such
advertising practices, and the receipt of correspondence from the FDA alleging these practices
could result in any of the following:
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incurring substantial expenses, including fines, penalties, legal fees and costs to
comply with the FDAs requirements; |
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changes in the methods of marketing and selling products; |
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taking FDA-mandated corrective action, which may include placing advertisements or
sending letters to physicians, rescinding previous advertisements or promotions; and |
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disruption in the distribution of products and loss of sales until compliance with the
FDAs position is obtained. |
If we were to become subject to any of the above requirements, it could be damaging to our
reputation, and our business condition could be adversely affected.
Physicians may prescribe pharmaceutical products for uses that are not described in a
products labeling or differ from those tested by us and approved by the FDA. While such
off-label uses are common and the FDA does not regulate physicians choice of treatments, the FDA
does restrict a manufacturers communications on the subject of off-label use. Companies cannot
actively promote FDA-approved pharmaceutical products for off-label uses, but they may disseminate
to physicians articles published in peer-reviewed journals. If our promotional activities fail to
comply with the FDAs regulations or guidelines, we may be subject to warnings from, or enforcement
action by, the FDA.
Legislative or regulatory reform of the healthcare system and pharmaceutical industry may hurt our
ability to sell our products profitably or at all.
In both the United States and certain foreign jurisdictions, there have been and may continue
to be a number of legislative and regulatory proposals to change the healthcare system and
pharmaceutical industry in ways that could impact upon our ability to sell our products profitably.
For example, sales of our products will depend in part on the availability of reimbursement from
third party payers such as government health administration authorities, private health insurers,
health maintenance organizations including pharmacy benefit managers and other health care-related
organizations. Both the federal and state governments in the United States and foreign governments
continue to propose and pass new legislation, rules and regulations designed to contain or reduce
the cost of health care. As an example, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, or the Medicare Modernization Act, was recently enacted. This
legislation provides a new Medicare prescription drug benefit beginning in 2006 and mandates other
reforms. Also, the passage of the Medicare Modernization Act reduces reimbursement for certain
drugs used in the treatment of cancer. Although we cannot predict the full effects on our business
of the implementation of this new legislation, it is possible that the new benefit, which will be
managed by private health insurers, pharmacy benefit managers and other managed care organizations,
will result in decreased
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reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to
reduce the prices charged for prescription drugs. This could harm our ability to market our
products and generate revenues.
It is also possible that other proposals will be adopted. As a result of the new Medicare
prescription drug benefit, or any other proposals, we may determine to change our current manner of
operation, which could harm our ability to operate our business efficiently. Existing regulations
that affect the price of pharmaceutical and other medical products may also change before any of
our products are approved for marketing. Cost control initiatives could decrease the price that we
receive for any of our products we are developing. In addition, third party payers are increasingly
challenging the price and cost-effectiveness of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved pharmaceutical products. Our
products may not be considered cost effective, or adequate third party reimbursement may not be
available to enable us to maintain price levels sufficient to realize a return on our investments.
In addition, new court decisions, FDA interpretations, and legislative changes have modified
the rules governing eligibility for and the timing of 180-day market exclusivity periods, a period
of marketing exclusivity that the FDA may grant to an ANDA applicant who is the first to file a
legal challenge to patents of branded drugs. We believe we were the first to file an ANDA for
sumatriptan succinate injection, the generic form of GlaxoSmithKlines Imitrex ® injection, and are
currently in litigation with GlaxoSmithKline regarding the patent that covers this product.
However, it is difficult to predict the effects such changes may have on our business or our
current case. Any changes in FDA regulations, procedures, or interpretations may make ANDA
approvals of generic drugs more difficult or otherwise limit the benefits available to us through
the granting of 180-day marketing exclusivity. If we are not able to exploit the 180-day
exclusivity period for our sumatriptan succinate injection ANDA or one of our generic product
candidates that we were first to file, for any reason, our product may not gain market share, which
could materially adversely affect our results of operations.
As part of the Medicare Modernization Act, companies are now required to file with the Federal
Trade Commission and the Department of Justice certain types of agreements entered into between
branded and generic pharmaceutical companies related to the manufacture, marketing and sale of
generic versions of branded drugs. This new requirement could affect the manner in which generic
drug manufacturers resolve intellectual property litigation and other disputes with branded
pharmaceutical companies, and could result generally in an increase in private-party litigation
against pharmaceutical companies. The impact of this new requirement, and the potential
private-party lawsuits associated with arrangements between brand name and generic drug
manufacturers, is uncertain and could adversely affect our business.
Additional government regulations, legislation, or policies may be enacted which could prevent
or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or
extent of adverse government action that may arise from future legislation or administrative
action, either in the United States or abroad. If we are not able to maintain regulatory
compliance, we might not be permitted to market our products and our business could suffer.
Our corporate compliance program may not ensure that we are in compliance with all applicable
fraud and abuse laws and regulations, and a failure to comply with such regulations or prevail
in litigation related to noncompliance could harm our business.
Pharmaceutical and biotechnology companies have faced lawsuits and investigations pertaining
to violations of health care fraud and abuse laws, such as the federal false claims act, the
federal anti-kickback statute, and other state and federal laws and regulations. While we have
developed and implemented a corporate compliance program based upon what we believe are the
relevant current best practices, we cannot guarantee that this program will protect us from future
lawsuits or investigations. If any such actions are instituted against us, and we are not
successful in defending ourselves or asserting our rights, those actions could have a significant
impact on our business, including the imposition of significant fines or other sanctions.
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If we are unable to adequately protect our technology or enforce our patent rights, our business
could suffer.
Our success with proprietary products that we develop will depend, in part, on our ability to
obtain and maintain patent protection for these products. We currently have a number of United
States and foreign patents issued and pending, however, we primarily rely on patent rights licensed
from others. These patents generally give us the right and/or obligation to maintain and enforce
the subject patents. We cannot be sure that we will receive patents for any of our pending patent
applications or any patent applications we may file in the future. If our pending and future patent
applications are not approved or, if approved, if such patents and the patents we have licensed are
not upheld in a court of law, our ability to competitively exploit our proprietary products would
be substantially harmed. Also, such patents may or may not provide competitive advantages for their
respective products or they may be challenged or circumvented by our competitors, in which case our
ability to commercially exploit these products may be diminished.
We also rely on trade secret protection and contractual protections for our unpatented,
confidential and proprietary technology. Trade secrets are difficult to protect. While we enter
into proprietary information agreements with our employees, consultants and others, these
agreements may not successfully protect our trade secrets or other confidential and proprietary
information. It is possible that these agreements will be breached, or that they will not be
enforceable in every instance, and that we will not have adequate remedies for any such breach. It
is also possible that our trade secrets will become known or independently developed by our
competitors.
If we are unable to adequately protect our technology, trade secrets or proprietary know-how,
or enforce our patents, our business, financial condition and prospects could suffer.
Intellectual property rights are complex and uncertain and therefore may subject us to
infringement claims.
The patent positions related to our proprietary and generic drug candidates are inherently
uncertain and involve complex legal and factual issues. Although we are not aware of any
infringement by any of our drug candidates on the rights of any third party, there may be third
party patents or other intellectual property rights relevant to our drug candidates of which we are
not aware. Third parties may assert patent or other intellectual property infringement claims
against us with respect to our proprietary drug candidates or our generic drug products. This could
draw us into costly litigation as well as result in the loss of our use of the intellectual
property that is critical to our business strategy.
Intellectual property litigation is increasingly common and increasingly expensive and may result
in restrictions on our business and substantial costs, even if we prevail.
Patent and other intellectual property litigation is becoming more common in the
pharmaceutical industry. Litigation is sometimes necessary to defend against or assert claims of
infringement, to enforce our patent rights, including those we have licensed from others, to
protect trade secrets or to determine the scope and validity of proprietary rights of third
parties. Other than the lawsuit filed against us by GlaxoSmithKline related to our ANDA for
sumatriptan injection, currently no third party has asserted that we are infringing upon their
patent rights or other intellectual property, nor are we aware or believe that we are infringing
upon any third partys patent rights or other intellectual property. We may, however, be infringing
upon a third partys patent rights or other intellectual property, and litigation asserting such
claims might be initiated in which we would not prevail or we would not be able to obtain the
necessary licenses on reasonable terms, if at all. All such litigation, whether meritorious or not,
as well as litigation initiated by us against third parties, is time consuming and very expensive
to defend or prosecute and to resolve. In addition, if we infringe the intellectual property rights
of others, we could lose our right to develop, manufacture or sell our products or could be
required to pay monetary damages or royalties to license proprietary rights from third parties. An
adverse determination in a judicial or administrative proceeding or a failure to obtain necessary
licenses could prevent us from manufacturing or selling our products, which could harm our
business, financial condition and prospects.
If our competitors prepare and file patent applications in the United States that claim
technology we also claim, we may have to participate in interference proceedings required by the
Patent and Trademark Office to determine priority of invention, which could result in substantial
costs, even if we ultimately prevail. Results of interference
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proceedings are highly unpredictable and may result in us having to try to obtain licenses in
order to continue to develop or market certain of our drug candidates.
We may be subject to product liability claims, and may not have sufficient product liability
insurance to cover any such claims, which may expose us to substantial liabilities.
We may be exposed to product liability claims from patients who participate in our clinical
trials or from consumers of our products. Although we currently carry product liability insurance
in the amount of at least $5 million in the aggregate, it is possible that this coverage will be
insufficient to protect us from future claims.
Further, we may not be able to maintain our existing insurance or obtain or maintain
additional insurance on acceptable terms for our clinical and commercial activities or that such
additional insurance would be sufficient to cover any potential product liability claim or recall.
Failure to maintain sufficient insurance coverage could have a material adverse effect on our
business, prospects and results of operations if claims are made that exceed our coverage.
The use of hazardous materials in our research and development efforts imposes certain compliance
costs on us and may subject us to liability for claims arising from the use or misuse of these
materials.
Our research and development efforts involved and currently involves the use of hazardous
materials. We are subject to federal, state and local laws and regulations governing the storage,
use and disposal of these materials and some waste products. We believe that our safety procedures
for the storage, use and disposal of these materials comply with the standards prescribed by
federal, state and local regulations. However, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. If there were to be an accident, we could
be held liable for any damages that result, which could exceed our financial resources. We
currently maintain insurance coverage for injuries resulting from the hazardous materials we use,
and for pollution clean up and removal; however, future claims may exceed the amount of our
coverage. Currently the costs of complying with federal, state and local regulations are not
significant, and consist primarily of waste disposal expenses.
Risks Related to Our Stock
There are a substantial number of shares of our common stock eligible for future sale in the
public market. The sale of these shares could cause the market price of our common stock to fall.
Any future equity issuances by us may have dilutive and other effects on our existing
stockholders.
As of September 30, 2005, there were approximately 23.4 million shares of our common stock
outstanding, and in addition, security holders held options, warrants and preferred stock which, if
exercised or converted, would obligate us to issue up to approximately 15 million additional shares
of common stock. A substantial number of those shares, when we issue them upon conversion or
exercise, will be available for immediate resale in the public market. In addition, we have filed a
shelf registration statement that allows us to sell up to $100 million of our securities, some or
all of which may be shares of our common stock or securities convertible into or exercisable for
shares of our common stock, and all of which would be available for immediate resale in the market.
We may issue and sell all of these securities within two years after January 24, 2005, the date of
the effectiveness of the registration statement. On September 15, 2005, we sold 8,000,000 shares
of our common stock for $42 million and warrants to acquire
4,000,000 shares of our common stock at $6.62 per share. If we were
to sell the remaining $32 million available
under the registration statement as common stock at a price approximately equal to the current
market price of our common stock, we would issue approximately 7 million new shares of our
common stock. The market price of our common stock could fall as a result of resales of any of
these shares of common stock due to the increased number of shares available for sale in the
market.
We have financed our operations, and we anticipate that we will have to finance a portion of
our operating cash requirements, primarily by issuing and selling our common stock or securities
convertible into or exercisable for shares of our common stock. Any issuances by us of equity
securities may be at or below the prevailing market price of our common stock and may have a
dilutive impact on our other stockholders. These issuances would also cause
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our net income, if any, per share to decrease or our loss per share to decrease in future
periods. As a result, the market price of our common stock could drop.
The market price and volume of our common stock fluctuate significantly and could result in
substantial losses for individual investors.
The stock market from time to time experiences significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. These broad market fluctuations
may cause the market price and volume of our common stock to decrease. In addition, the market
price and volume of our common stock is highly volatile. Factors that may cause the market price
and volume of our common stock to decrease include fluctuations in our results of operations,
timing and announcements of our technological innovations or new products or those of our
competitors, FDA and foreign regulatory actions, developments with respect to patents and
proprietary rights, public concern as to the safety of products developed by us or others, changes
in health care policy in the United States and in foreign countries, changes in stock market
analyst recommendations regarding our common stock, the pharmaceutical industry generally and
general market conditions. In addition, the market price and volume of our common stock may
decrease if our results of operations fail to meet the expectations of stock market analysts and
investors. Also, certain dilutive securities such as warrants can be used as hedging tools which
may increase volatility in our stock and cause a price decline. While a decrease in market price
could result in direct economic loss for an individual investor, low trading volume could limit an
individual investors ability to sell our common stock, which could result in substantial economic
loss as well. During 2004, the price of our common stock ranged between $3.92 and $10.13, and the
daily trading volume was as high as 1,391,800 shares and as low as 9,900 shares. During 2005
through November 1, 2005, the price of our common stock has ranged between $4.06 and $7.50, and the
daily trading volume has been as high as 1,368,400 shares and as low as 18,400 shares.
Provisions of our charter, bylaws and stockholder rights plan may make it more difficult for
someone to acquire control of us or replace current management even if doing so would benefit our
stockholders, which may lower the price an acquirer or investor would pay for our stock.
Provisions of our certificate of incorporation, as amended, and bylaws may make it more
difficult for someone to acquire control of us or replace our current management. These provisions
include:
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the ability of our board of directors to amend our bylaws without stockholder approval; |
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the inability of stockholders to call special meetings; |
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the ability of members of the board of directors to fill vacancies on the board of directors; |
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the inability of stockholders to act by written consent, unless such consent is unanimous; |
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the establishment of advance notice requirements for nomination for election to our
board of directors or for proposing matters that can be acted on by stockholders at
stockholder meetings. |
These provisions may make it more difficult for stockholders to take certain corporate actions
and could delay, discourage or prevent someone from acquiring our business or replacing our current
management, even if doing so would benefit our stockholders. These provisions could limit the price
that certain investors might be willing to pay for shares of our common stock.
In December 2000, we adopted a stockholder rights plan pursuant to which we distributed rights
to purchase units of our Series B junior participating preferred stock. The rights become
exercisable upon the earlier of ten days after a person or group of affiliated or associated
persons has acquired 20% or more of the outstanding shares of our common stock or ten business days
after a tender offer has commenced that would result in a person or group beneficially owning 20%
or more of our outstanding common stock. These rights could delay or discourage someone from
acquiring our business, even if doing so would benefit our stockholders. We currently have no
stockholders who own 20% or more of the outstanding shares of our common stock.
40
We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any
cash dividends in the near future. Our current policy is to retain all funds and any earnings for
use in the operation and expansion of our business
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks associated with interest rate fluctuations and credit
risk on our cash equivalents and marketable securities, which investments are entered into for
purposes other than trading. The primary objective of our investment activities is to preserve
principal, while at the same time maximizing yields without significantly increasing risk. We do
not utilize hedging contracts or similar instruments.
Our primary exposure relates to interest rate risk on our investment portfolio. As of
September 30, 2005 our funds were invested primarily in short term treasury securities and money
market accounts. Because of the liquidity and short term nature of these instruments, changes in
interest rates would have an immaterial effect on the fair value of these investments. If a 10%
change in interest rates were to have occurred on September 30, 2005, any potential decline in the
fair value of our investments would not be material.
ITEM 4. Controls and Procedures
We have established disclosure controls and procedures (as such terms are defined in Rules
13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934), as amended (the Exchange
Act) that are designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer (our principal executive officer) and Vice President Finance
(our principal financial officer), as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, our management is
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Our disclosure controls and procedures are designed to provide a reasonable level of
assurance of reaching our desired disclosure control objectives.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and our Vice
President Finance, of the effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2005, the end of the period covered by this report (Evaluation
Date). Based on the foregoing, our Chief Executive Officer and Vice President Finance concluded
that our disclosure controls and procedures were effective and were operating at the reasonable
assurance level.
There has been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Sumatriptan succinate injection Paragraph IV Litigation
In October 2004, we filed with the FDA an ANDA for sumatriptan succinate injection 6mg/0.5mL,
seeking approval to engage in the commercial manufacture, sale, and use of the sumatriptan
succinate injection product in the United States. Sumatriptan succinate is marketed by
GlaxoSmithKline under the brand name Imitrex® and is used for the acute treatment of migraine
attacks with or without aura and the acute treatment of cluster headache episodes in adults.
GlaxoSmithKline has two patents for sumatriptan succinate injection listed in the FDAs Orange
Book, which is the FDAs listing of approved drug products. The exclusivity afforded the two
patents listed in the Orange Book for Imitrex® injection will expire on June 28, 2007 and February
6, 2009, respectively in each case including extensions for pediatric exclusivity. Our ANDA
includes a Paragraph IV certification that the later to expire patent associated with
GlaxoSmithKlines Imitrex® injection, is invalid, unenforceable and/or will not be infringed by our
generic product candidate.
On February 18, 2005, GlaxoSmithKline filed a lawsuit against us in the United States District
Court for the District of Delaware, alleging infringement of the patent on Imitrex®. Pursuant to
the Hatch-Waxman Act, the FDA is stayed from approving our ANDA until the earlier of a final,
non-appealed or non-appealable court decision finding the patent invalid, unenforceable or not
infringed or the expiration of 30 months from GlaxoSmithKlines receipt of our notice of ANDA
acceptance. Often more than one company will file an ANDA that includes a Paragraph IV
certification. However, the Hatch-Waxman Act provides that such subsequent ANDA applications will
not be approved until 180 days after the earlier of (1) the date of the first commercial marketing
of the first-filed ANDA applicants generic drug or (2) the date of a decision of a court in an
action holding the relevant patent invalid, unenforceable, or not infringed. Thus, the Hatch-Waxman
Act effectively grants the first-filed ANDA holder 180 days of marketing exclusivity for the
generic product. We believe that our ANDA was the first filed ANDA containing a Paragraph IV
certification in connection with sumatriptan succinate injection 6mg/0.5mL. If the filing of our
ANDA is found to be infringe a valid and enforceable patent, GlaxoSmithKline could seek an
injunction to block the launch of our generic product until the patent expires.
While it is not possible to determine with any degree of certainty the ultimate outcome of the
foregoing legal proceedings, we believe that we have substantial meritorious basis for our
Paragraph IV challenge of GlaxoSmithKline patent for sumatriptan succinate injection 6mg/0.5mL. We
are currently in fact discovery.
Other
We are sometimes involved in matters of litigation that we consider ordinary routine
litigation incidental to our business. We are not aware of any pending litigation matters that will
materially affect our financial statements.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 20, 2005, we agreed to issue an eight-year warrant to purchase up to 120,000
shares of our common stock, at an exercise price of $5.13, to a consultant for services. The
warrant shall vest in three installments of 20,000, 40,000 and 60,000 shares of common stock on the
first, second and third year anniversaries of the effective date of the warrant, respectively,
subject to a consulting agreement with the consultant being in effect
at the time of vesting.
On November 2, 2005, we executed Amendment No. 1 to a five-year warrant dated September 17,
2003, between the Company and a consultant, to purchase up to 130,000 shares of our common stock,
at an exercise price
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of $4.90, in consideration for services. The amendment modified the expiration date of the
warrant from September 16, 2008 to September 16, 2011.
The securities issued by the Company pursuant to the transactions described above have been
issued without registration under the Securities Act of 1933 in reliance upon the exemptions from
registration provided under Section 4(2) of the Securities Act and Regulation D promulgated
thereunder. The foregoing transactions did not involve any public offering; we made no
solicitation in connection with the transaction, other than communications with the consultant; we
obtained representations from the consultant regarding their investment intent, experience and
sophistication; the consultant either received or had access to adequate information about the
Company in order to make an informed investment decision; and the Company reasonably believed that
the consultant was sophisticated within the meaning of Section 4(2) of the Securities Act. No
underwriting discounts or commissions were paid in conjunction with the issuances.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information (not previously reported in a Form 8-K)
On September 20, 2005, we agreed to issue an eight-year warrant to purchase up to 120,000
shares of our common stock, at an exercise price of $5.13, to a consultant for services. The
warrant shall vest in three installments of 20,000, 40,000 and 60,000 shares of common stock on the
first, second and third year anniversaries of the effective date of the warrant, respectively,
subject to a consulting agreement with the consultant being in effect
at the time of vesting.
On November 2, 2005, we executed Amendment No. 1 to a five-year warrant dated September 17,
2003, between the Company and a consultant, to purchase up to 130,000 shares of our common stock,
at an exercise price of $4.90, in consideration for services. The amendment modified the
expiration date of the warrant from September 16, 2008 to September 16, 2011.
The securities issued by the Company pursuant to the transactions described above have been
issued without registration under the Securities Act of 1933 in reliance upon the exemptions from
registration provided under Section 4(2) of the Securities Act and Regulation D promulgated
thereunder. The foregoing transactions did not involve any public offering; we made no
solicitation in connection with the transaction, other than communications with the consultant; we
obtained representations from the consultant regarding their investment intent, experience and
sophistication; the consultant either received or had access to adequate information about the
Company in order to make an informed investment decision; and the Company reasonably believed that
the consultant was sophisticated within the meaning of Section 4(2) of the Securities Act. No
underwriting discounts or commissions were paid in conjunction with the issuances.
ITEM 6. Exhibits
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Exhibit No. |
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Description |
4.1
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Form of Warrant dated September 15, 2005. (Filed as Exhibit 4.1 to Form 8-K, as
filed with the Securities and Exchange Commission on September 15, 2005, and
incorporated herein by reference.) |
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4.2 +
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Amendment No. 1 dated as of
November 2, 2005, to Warrant issued by the Registrant to a Consultant, dated as of
September 17, 2003. |
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Exhibit No. |
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Description |
4.3 +
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Warrant issued by the Registrant to a Consultant, dated as of September 20, 2005. |
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10.1
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Form Securities Purchase Agreement dated September 14, 2005. (Filed as Exhibit
10.1 to Form 8-K, as filed with the Securities and Exchange Commission on
September 15, 2005, and incorporated herein by reference.) |
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10.2
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Letter Agreement between the Registrant and Rodman and Renshaw, LLC. (Filed as
Exhibit 10.2 to Form 8-K, as filed with the Securities and Exchange Commission
on September 15, 2005, and incorporated herein by reference.) |
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10.3
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Summary of Director Compensation.
(Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and
Exchange Commission on September 22, 2005, and incorporated
herein by reference.) |
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31.1+
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Certification of Chief Executive Officer, pursuant to Rule 13a-14 promulgated
under the Exchange Act, as created by Section 302 of the Sarbanes-Oxley Act of
2002. |
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31.2+
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Certification of Vice President Finance, pursuant to Rule 13a-14 promulgated
under the Exchange Act, as created by Section 302 of the Sarbanes-Oxley Act of
2002. |
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32.1+
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Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2+
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Certification of Vice President Finance, pursuant to 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SPECTRUM PHARMACEUTICALS, INC.
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Date: November 4, 2005 |
By: |
/s/ Shyam K. Kumaria
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Shyam K. Kumaria, Vice President, Finance |
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(Authorized Signatory and Principal Financial Officer) |
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EXHIBIT INDEX
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Exhibit No. |
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Description |
4.1
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Form of Warrant dated September 15, 2005. (Filed as Exhibit 4.1 to Form 8-K, as
filed with the Securities and Exchange Commission on September 15, 2005, and
incorporated herein by reference.) |
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4.2 +
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Amendment No. 1 dated as of
November 2, 2005, to Warrant issued by the Registrant to a consultant, dated as of
September 17, 2003. |
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4.3 +
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Warrant issued by the Registrant to a consultant, dated as of September 20, 2005. |
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10.1
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Form Securities Purchase Agreement dated September 14, 2005. (Filed as Exhibit
10.1 to Form 8-K, as filed with the Securities and Exchange Commission on
September 15, 2005, and incorporated herein by reference.) |
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10.2
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Letter Agreement between the Registrant and Rodman and Renshaw, LLC. (Filed as
Exhibit 10.2 to Form 8-K, as filed with the Securities and Exchange Commission
on September 15, 2005, and incorporated herein by reference.) |
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10.3
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Summary of Director Compensation.
(Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and
Exchange Commission on September 22, 2005, and incorporated
herein by reference.) |
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31.1+
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Certification of Chief Executive Officer, pursuant to Rule 13a-14 promulgated
under the Exchange Act, as created by Section 302 of the Sarbanes-Oxley Act of
2002. |
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31.2+
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Certification of Vice President Finance, pursuant to Rule 13a-14 promulgated
under the Exchange Act, as created by Section 302 of the Sarbanes-Oxley Act of
2002. |
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32.1+
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Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2+
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Certification of Vice President Finance, pursuant to 18 U.S.C. Section 1350, as
created by Section 906 of the Sarbanes-Oxley Act of 2002. |