form10q06302008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended June 30, 2008
OR
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ___________________ to ________________
Commission
file number 000-23143
PROGENICS
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
13-3379479
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
777
Old Saw Mill River Road
Tarrytown,
New York 10591
(Address
of principal executive offices)
(Zip
Code)
(914)
789-2800
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.
Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
Large
accelerated filer ¨ Accelerated
filer x
Non-accelerated
filer ¨ Smaller
reporting company ¨
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
As of
August 6, 2008 there were 30,454,262 shares of common stock, par value $.0013
per share, of the registrant outstanding.
PROGENICS PHARMACEUTICALS,
INC.
|
|
Page
No.
|
Part
I
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Financial
Statements (unaudited)
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
Item
2.
|
|
18
|
Item
3.
|
|
36
|
Item
4.
|
|
37
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
Item
1A.
|
|
37
|
Item
6.
|
|
40
|
|
|
41
|
PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited)
PROGENICS PHARMACEUTICALS,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts
in thousands, except for par value and share amounts)
(Unaudited)
|
|
June
30,
2008
|
|
|
December
31, 2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
35,420 |
|
|
$ |
10,423 |
|
Marketable
securities
|
|
|
77,492 |
|
|
|
120,000 |
|
Accounts
receivable
|
|
|
4,209 |
|
|
|
1,995 |
|
Other
current assets
|
|
|
3,060 |
|
|
|
3,111 |
|
Total
current assets
|
|
|
120,181 |
|
|
|
135,529 |
|
Marketable
securities
|
|
|
37,653 |
|
|
|
39,947 |
|
Fixed
assets, at cost, net of accumulated depreciation and
amortization
|
|
|
12,840 |
|
|
|
13,511 |
|
Restricted
cash
|
|
|
520 |
|
|
|
552 |
|
Other
assets
|
|
|
7 |
|
|
|
- |
|
Total
assets
|
|
$ |
171,201 |
|
|
$ |
189,539 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
12,993 |
|
|
$ |
14,765 |
|
Deferred
revenue ¾
current
|
|
|
14,140 |
|
|
|
17,728 |
|
Other
current liabilities
|
|
|
57 |
|
|
|
57 |
|
Total
current liabilities
|
|
|
27,190 |
|
|
|
32,550 |
|
Deferred
revenue — long term
|
|
|
4,890 |
|
|
|
9,131 |
|
Other
liabilities
|
|
|
313 |
|
|
|
359 |
|
Total
liabilities
|
|
|
32,393 |
|
|
|
42,040 |
|
Commitments
and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 20,000,000 shares authorized; issued and
outstanding — none
|
|
|
|
|
|
|
|
|
Common
stock, $.0013 par value; 40,000,000 shares authorized; issued and
outstanding — 30,049,958 in 2008 and 29,753,820 in 2007
|
|
|
39 |
|
|
|
39 |
|
Additional
paid-in capital
|
|
|
411,158 |
|
|
|
401,500 |
|
Accumulated
deficit
|
|
|
(271,900
|
) |
|
|
(254,046
|
) |
Accumulated
other comprehensive (loss) income
|
|
|
(489
|
) |
|
|
6 |
|
Total
stockholders’ equity
|
|
|
138,808 |
|
|
|
147,499 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
171,201 |
|
|
$ |
189,539 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
PROGENICS
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts
in thousands, except net loss per share)
(Unaudited)
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development from collaborator
|
|
$ |
26,771 |
|
|
$ |
22,948 |
|
|
$ |
38,881 |
|
|
$ |
38,447 |
|
Royalty
income
|
|
|
42 |
|
|
|
- |
|
|
|
42 |
|
|
|
- |
|
Research
grants and contract
|
|
|
1,699 |
|
|
|
2,486 |
|
|
|
4,312 |
|
|
|
4,606 |
|
Other
revenues
|
|
|
72 |
|
|
|
23 |
|
|
|
111 |
|
|
|
41 |
|
Total
revenues
|
|
|
28,584 |
|
|
|
25,457 |
|
|
|
43,346 |
|
|
|
43,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
23,923 |
|
|
|
22,371 |
|
|
|
46,713 |
|
|
|
44,792 |
|
License
fees – research and development
|
|
|
334 |
|
|
|
210 |
|
|
|
1,483 |
|
|
|
960 |
|
General
and administrative
|
|
|
7,113 |
|
|
|
6,196 |
|
|
|
14,265 |
|
|
|
12,471 |
|
Royalty
expense
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
Depreciation
and amortization
|
|
|
1,147 |
|
|
|
807 |
|
|
|
2,261 |
|
|
|
1,299 |
|
Total
expenses
|
|
|
32,521 |
|
|
|
29,584 |
|
|
|
64,726 |
|
|
|
59,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(3,937
|
) |
|
|
(4,127
|
) |
|
|
(21,380
|
) |
|
|
(16,428
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,568 |
|
|
|
1,744 |
|
|
|
3,526 |
|
|
|
3,612 |
|
Total
other income
|
|
|
1,568 |
|
|
|
1,744 |
|
|
|
3,526 |
|
|
|
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,369 |
) |
|
$ |
(2,383 |
) |
|
$ |
(17,854 |
) |
|
$ |
(12,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$ |
(0.08 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.61 |
) |
|
$ |
(0.48 |
) |
Weighted-average
shares - basic and diluted
|
|
|
29,526 |
|
|
|
26,569 |
|
|
|
29,418 |
|
|
|
26,468 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
.
PROGENICS
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
LOSS
FOR
THE SIX MONTHS ENDED JUNE 30, 2008
(amounts
in thousands)
(Unaudited)
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Comprehensive
(Loss) Income
|
|
|
Total
|
|
Balance
at December 31, 2007
|
|
|
29,754 |
|
|
$ |
39 |
|
|
$ |
401,500 |
|
|
$ |
(254,046 |
) |
|
$ |
6 |
|
|
$ |
147,499 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17,854 |
) |
|
|
- |
|
|
|
(17,854 |
) |
Net
change in unrealized gain on marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(495 |
) |
|
|
(495 |
) |
Total
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense for vesting of share-based payment arrangements
|
|
|
- |
|
|
|
- |
|
|
|
6,786 |
|
|
|
- |
|
|
|
- |
|
|
|
6,786 |
|
Issuance
of restricted stock, net of forfeitures
|
|
|
(39 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Sale
of common stock under employee stock purchase plans and exercise of stock
options
|
|
|
335 |
|
|
|
- |
|
|
|
2,872 |
|
|
|
- |
|
|
|
- |
|
|
|
2,872 |
|
Balance
at June 30, 2008
|
|
|
30,050 |
|
|
$ |
39 |
|
|
$ |
411,158 |
|
|
$ |
(271,900 |
) |
|
$ |
(489 |
) |
|
$ |
138,808 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
PROGENICS
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts
in thousands)
(Unaudited)
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(17,854 |
) |
|
$ |
(12,816 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,261 |
|
|
|
1,299 |
|
Amortization
of discounts, net of premiums, on marketable securities
|
|
|
306 |
|
|
|
(223
|
) |
Noncash
expenses incurred in connection with vesting of share-based compensation
awards
|
|
|
6,786 |
|
|
|
5,674 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(2,214
|
) |
|
|
(323
|
) |
Decrease
in other current assets
|
|
|
51 |
|
|
|
576 |
|
Increase
in other assets
|
|
|
(7
|
) |
|
|
- |
|
(Decrease)
increase in accounts payable and accrued expenses
|
|
|
(1,772
|
) |
|
|
2,461 |
|
Decrease
in deferred revenue
|
|
|
(7,829
|
) |
|
|
(9,041
|
) |
(Decrease)
increase in deferred lease liability
|
|
|
(46
|
) |
|
|
1 |
|
Net
cash used in operating activities
|
|
|
(20,318
|
) |
|
|
(12,392
|
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,590
|
) |
|
|
(2,142
|
) |
Sales/maturities
of marketable securities
|
|
|
82,301 |
|
|
|
142,624 |
|
Purchase
of marketable securities
|
|
|
(38,300
|
) |
|
|
(109,375
|
) |
Decrease
(increase) in restricted cash
|
|
|
32 |
|
|
|
(4
|
) |
Net
cash provided by investing activities
|
|
|
42,443 |
|
|
|
31,103 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options and sale of Common Stock under the
Employee Stock Purchase Plan
|
|
|
2,872 |
|
|
|
4,422 |
|
Repurchase
of restricted stock
|
|
|
- |
|
|
|
(19
|
) |
Net
cash provided by financing activities
|
|
|
2,872 |
|
|
|
4,403 |
|
Net
increase in cash and cash equivalents
|
|
|
24,997 |
|
|
|
23,114 |
|
Cash
and cash equivalents at beginning of period
|
|
|
10,423 |
|
|
|
11,947 |
|
Cash
and cash equivalents at end of period
|
|
$ |
35,420 |
|
|
$ |
35,061 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
1. Interim Financial Statements
Progenics
Pharmaceuticals, Inc. (“Progenics,” “we” or “us”) is a biopharmaceutical company
focusing on the development and commercialization of innovative therapeutic
products to treat the unmet medical needs of patients with debilitating
conditions and life-threatening diseases. Our principal programs are directed
toward gastroenterology, virology and oncology.
Progenics
was incorporated in Delaware on December 1, 1986 and commenced principal
operations in late 1988. Currently, all of our operations are conducted at our
facilities in Tarrytown, New York. Our chief operating decision maker reviews
financial analyses and forecasts relating to all of our research programs as a
single unit and allocates resources and assesses performance of such programs as
a whole. We operate under a single research and development
segment.
Gastroenterology
Our lead
product is RELISTOR™ (methylnaltrexone bromide). On April 24, 2008, RELISTOR
subcutaneous injection was approved by the U.S. Food and Drug Administration
(“FDA”) for sale in the United States for the treatment of opioid-induced
constipation (“OIC”) in patients with advanced illness who are receiving
palliative care, when response to laxative therapy has not been sufficient. Our
collaboration partner, Wyeth Pharmaceuticals (“Wyeth”), commenced sales of
RELISTOR subcutaneous injection in the U.S. in June 2008.
As
previously announced on April 1, 2008, RELISTOR subcutaneous injection received
marketing approval from Health Canada for the treatment of OIC in patients with
advanced illness receiving palliative care. Also, as previously announced on
July 3, 2008, we and Wyeth received marketing approval from the European
Commission for the treatment of OIC in advanced illness patients who are
receiving palliative care when response to usual laxative therapy has not been
sufficient. Wyeth commenced sales of RELISTOR subcutaneous injection in Canada
in June 2008. The commercial launch of RELISTOR has begun in Europe and will
occur on a country-by-country basis.
Marketing
applications for RELISTOR subcutaneous injection are also pending in Australia
and other countries.
Development
and commercialization of RELISTOR is being conducted under a license and
co-development agreement (“Collaboration Agreement”) between us and Wyeth. Under
that agreement, we (i) have received an upfront payment from Wyeth, (ii) have
received, and are entitled to receive further, additional payments as certain
developmental milestones for RELISTOR are achieved, (iii) have been and will be
reimbursed by Wyeth for expenses we incur in connection with the development of
RELISTOR under an agreed-upon development plan and budget, and (iv) have
received and will receive royalties and commercialization milestone
payments. These payments will depend on continued success in
development and commercialization of RELISTOR, which are in turn dependent on
the actions of Wyeth and the FDA and other regulatory bodies, as well as the
outcome of clinical and other testing of RELISTOR. Many of these matters are
outside our control. Manufacturing and commercialization expenses for RELISTOR
are funded by Wyeth.
In May 2007, we earned $9.0 million in
milestone payments under the Collaboration Agreement for having made filings
seeking marketing approval for RELISTOR subcutaneous injection in the U.S. and
Europe. In April 2008, we earned a $15.0 million milestone payment for the FDA
approval of subcutaneous RELISTOR. In July 2008, we earned a $10.0 million
milestone payment for the European approval of subcutaneous
RELISTOR.
We and Wyeth are also developing
intravenous and oral formulations of RELISTOR.
Virology
In the
area of virology, we are developing viral-entry inhibitors for Human
Immunodeficiency Virus (“HIV”), the virus that causes AIDS, and Hepatitis C
virus infection (“HCV”). These inhibitors are molecules designed to inhibit a
virus’ ability to enter certain types of immune cells and liver cells. In May
2007, we announced positive results in HIV-infected individuals from a phase 1b
trial examining a single dose of an intravenous formulation of our monoclonal
antibody, PRO 140. We are also investigating a subcutaneous formulation of PRO
140 with the goal of developing a long-acting, self-administered therapy for HIV
infection. In January 2008, we initiated the phase 2 clinical program for PRO
140, which will investigate further both the intravenous and subcutaneous
formulations. We are also engaged in research regarding a product candidate for
HCV and a vaccine against HIV infection.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
Oncology
In the
area of prostate cancer, we are developing a human monoclonal antibody-drug
conjugate, consisting of a selectively targeted cytotoxic antibody directed
against prostate specific membrane antigen (“PSMA”), a protein found on the
surface of prostate cancer cells. We are also developing vaccines designed to
stimulate an immune response to PSMA. Our PSMA programs are conducted through
our wholly owned subsidiary, PSMA Development Company LLC (“PSMA LLC”), which
prior to April 2006 was a joint venture with Cytogen Corporation
(“Cytogen”).
Our
virology and oncology product candidates are not as advanced in development as
RELISTOR, and we do not expect any recurring revenues from sales or otherwise
with respect to these product candidates in the near term. As a result of
Wyeth’s agreement to reimburse us for RELISTOR development expenses, we are able
to devote our current and future resources to our other research and development
programs.
Corporate-Related
Matters
Because
of our development expenses and other needs, we may require additional funding
to continue our operations. As a result, we may enter into a collaboration
agreement, license or sale transaction or royalty sales or financings with
respect to our products and product candidates. We may also seek to raise
additional capital through the sale of our common stock or other securities and
expect to fund certain aspects of our operations through government grants and
contracts.
As a
biopharmaceutical company, which only recently became commercial, we have had
recurring losses. At June 30, 2008, we had an accumulated deficit of $271.9
million and had cash, cash equivalents and marketable securities, including
non-current portion, totaling $150.6 million. We expect that cash, cash
equivalents and marketable securities at June 30, 2008 will be sufficient to
fund current operations beyond one year. During the six months ended June 30,
2008, we had a net loss of $17.9 million and used cash in operating activities
of $20.3 million.
On April
24, 2008, we announced that our Board of Directors had approved a share
repurchase program to acquire up to $15.0 million of our outstanding common
shares, funding for which will come from the $15.0 million milestone payment we
received from Wyeth for receiving U.S. marketing approval for RELISTOR.
Purchases under the program will be made at our discretion subject to market
conditions in the open-market or otherwise, and will be made in accordance with
the regulations of the U.S. Securities and Exchange Commission, including Rule
10b-18. We have made no commitment to purchase any shares and purchases may be
discontinued at any time. Reacquired shares will be held in treasury until
redeployed or retired. None of our outstanding common shares were repurchased as
of June 30, 2008.
Pending
use in our business, our revenues and proceeds of financing activities are held
in cash, cash equivalents and marketable securities. Our marketable securities,
which include corporate debt securities, securities of government-sponsored
entities and auction rate securities, are classified as
available-for-sale.
Our
interim Condensed Consolidated Financial Statements included in this report have
been prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
necessary for a presentation of our financial position, results of operations
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, these financial statements reflect all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair
statement of results for the periods presented. The results of operations for
interim periods are not necessarily indicative of the results for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007. All terms used but not defined elsewhere
herein have the meaning ascribed to them in that Annual Report. The year end
condensed consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. Certain amounts
have been reclassified in prior years’ financial statements to conform to the
current presentation. This included the reclassification of license fees from
“Research and development” to “License fees – research and development” which
had no effect on total expenses as previously reported.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
2. Share-Based
Payment Arrangements
On
January 1, 2007, we began to estimate the expected term of stock options granted
to employees and officers and directors by using historical data for each of
those two groups. The expected term for options granted to the two groups
mentioned above was 5.33 and 8 years, respectively, in 2008 and 5.25 and 7.5
years, respectively, in 2007. The expected term for stock options granted to
non-employee consultants was ten years, which was equal to the contractual term
of those options. The expected volatility of stock options granted to each group
was calculated based upon the periods of the respective expected terms. We have
never paid dividends and do not expect to pay dividends in the future.
Therefore, our dividend rate is zero. The risk-free rate for periods within the
expected term of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
The
assumptions we used in the Black-Scholes option pricing model to estimate the
grant date fair values of stock options granted under our stock incentive plans
(the “Incentive Plans”) during the six months ended June 30, 2008 and 2007 were
as follows:
|
|
For
the Six Months Ended
June
30,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Expected
volatility
|
|
66%
– 91%
|
|
55%
– 87%
|
Expected
dividends
|
|
zero
|
|
zero
|
Expected
term (in years)
|
|
5.33
– 10
|
|
5.25
– 10
|
Weighted
average expected term (years)
|
|
6.87
|
|
6.91
|
Risk-free
rate
|
|
2.80%
– 3.71%
|
|
4.48%
– 4.64%
|
During
the six months ended June 30, 2008 and 2007, the fair value of shares purchased
under the two employee stock purchase plans (the “Purchase Plans”) was estimated
on the date of grant in accordance with FASB Technical Bulletin No. 97-1
“Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a
Look-Back Option,” using the same option valuation model used for options
granted under the Incentive Plans, except that the assumptions noted in the
following table were used for the Purchase Plans:
|
|
For
the Six Months Ended
June
30,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Expected
volatility
|
|
170%
|
|
42%
|
Expected
dividends
|
|
zero
|
|
zero
|
Expected
term
|
|
6
months
|
|
6
months
|
Risk-free
rate
|
|
1.87%
|
|
5.09%
|
The total
fair value of shares under all of our share-based payment arrangements that
vested during the six months ended June 30, 2008 and 2007 was $6.8 million and
$5.7 million, respectively. In such periods; $3.5 million and $3.2 million,
respectively, of such value was reported as research and development expense,
and $3.3 million and $2.5 million, respectively, of such value was reported as
general and administrative expense.
No tax
benefit was recognized related to such compensation cost during the six months
ended June 30, 2008 and 2007 because we had a net loss for each of those periods
and the related deferred tax assets were fully offset by valuation allowance.
Accordingly, no amounts related to windfall tax benefits have been reported in
cash flows from operations or cash flows from financing activities for the six
months ended June 30, 2008 and 2007.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
In
applying the treasury stock method for the calculation of diluted earnings per
share (“EPS”), amounts of unrecognized compensation expense and windfall tax
benefits are required to be included in the assumed proceeds in the denominator
of the diluted earnings per share calculation unless they are anti-dilutive. We
incurred a net loss for the three and six months ended June 30, 2008 and 2007
and, therefore, such amounts have not been included for those periods in the
calculation of diluted EPS since they would be anti-dilutive. Accordingly, basic
and diluted EPS are the same for each of those periods. We have made an
accounting policy decision to calculate windfall tax benefits/shortfalls for
purposes of diluted EPS calculation, excluding the impact of pro forma deferred
tax assets. This policy decision will apply when we have net
income.
3. Fair
Value Measurements
Our
available-for-sale investment portfolio consists of marketable securities, which
include corporate debt securities, securities of government-sponsored entities
and auction rate securities, and is recorded at fair value in the accompanying
Condensed Consolidated Balance Sheets in accordance with Financial Accounting
Standards Board (“FASB”) Statement No. 115 (“FAS 115”) “Accounting for
Certain Investments in Debt and Equity Securities.” The change in the fair value
of these investments is recorded as a component of other comprehensive
income.
Investments
consisted of the following:
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
Short-term
|
|
|
|
|
|
|
Corporate debt securities and securities of government-sponsored
entities
|
|
$ |
77,492 |
|
|
$ |
81,170 |
|
Auction rate securities
|
|
|
- |
|
|
|
38,830 |
|
Total
short-term investments
|
|
|
77,492 |
|
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
Corporate
debt securities and securities of government-sponsored
entities
|
|
|
31,611 |
|
|
|
39,947 |
|
Auction rate securities
|
|
|
6,042 |
|
|
|
- |
|
Total
long-term investments
|
|
|
37,653 |
|
|
|
39,947 |
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
$ |
115,145 |
|
|
$ |
159,947 |
|
We
adopted FASB Statement No. 159 (“FAS 159”) “The Fair Value Option of Financial
Assets and Financial Liabilities” effective January 1, 2008, which provides
companies with an option to report certain financial assets and liabilities at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. FAS 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The objective of FAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. We have elected not to apply the
fair value option to any of our financial assets or liabilities.
We also
adopted FASB Statement No. 157 (“FAS 157”) “Fair Value Measurements” effective
January 1, 2008 for financial assets and financial liabilities. FAS 157 defines
fair value as the price that would be received to sell an asset or would be paid
to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date, and
establishes a framework to make the measurement of fair value more consistent
and comparable. In accordance with Financial Accounting Standards Board Staff
Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” we will defer
the adoption of FAS 157 for our nonfinancial assets and nonfinancial liabilities
until January 1, 2009. We are currently evaluating the impact of FAS 157 for
nonfinancial assets and nonfinancial liabilities, and currently do not expect
the adoption of this statement to have a material effect on our financial
position or results of operations. The partial adoption of FAS 157
did not have a material impact on our fair value measurements.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
FAS 157
established a three-level hierarchy for fair value measurements that
distinguishes between market participant assumptions developed based on market
data obtained from sources independent of the reporting entity (“observable
inputs”) and the reporting entity’s own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (“unobservable inputs”). The hierarchy level assigned to each
security in our available-for-sale portfolio is based on our assessment of the
transparency and reliability of the inputs used in the valuation of such
instrument at the measurement date. The three hierarchy levels are defined as
follows:
·
|
Level
1 - Valuations based on unadjusted quoted market prices in active markets
for identical securities.
|
·
|
Level
2 - Valuations based on observable inputs other than Level 1 prices, such
as quoted prices for similar assets at the measurement date, quoted prices
in markets that are not active or other inputs that are observable, either
directly or indirectly.
|
·
|
Level
3 - Valuations based on inputs that are unobservable and significant to
the overall fair value measurement, and involve management
judgment.
|
The
following table presents our available-for-sale investments measured at fair
value on a recurring basis as of June 30, 2008 classified by the FAS 157
valuation hierarchy (as previously discussed):
|
|
Balance
at
June
30, 2008
|
|
Fair
Value Measurements at Reporting Date Using
|
Description
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
27,018
|
|
$
|
27,018
|
|
$
|
-
|
|
$
|
-
|
Corporate
debt securities and securities of government-sponsored
entities
|
|
|
109,103
|
|
|
-
|
|
|
109,103
|
|
|
-
|
Auction
rate securities
|
|
|
6,042
|
|
|
-
|
|
|
-
|
|
|
6,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142,163
|
|
$
|
27,018
|
|
$
|
109,103
|
|
$
|
6,042
|
At June 30, 2008 we hold $6.0 million
(4% of total assets measured at fair value) in auction rate securities that were
originally issued with Aaa/AAA credit ratings. Auction rate securities are
collateralized long-term instruments that provide liquidity through a Dutch
auction process that resets the applicable interest rate at pre-determined
intervals, typically every 7 to 35 days. Beginning in February 2008, auctions
failed for certain of our auction rate securities because sell orders exceeded
buy orders, and we were unable to dispose of those securities at auction. The
funds associated with these failed auctions will not be accessible until a
successful auction occurs, the issuer calls or restructures the security, the
security matures and is paid or a buyer outside the auction process emerges. The
fair value of the auction rate securities we hold includes $4.0 million of
securities collateralized by student loan obligations subsidized
by the U.S. government, $0.8 million of municipal bonds and $1.2 million of
investment company preferred stock, and do not include mortgage-backed
instruments. As of June 30, 2008, we have received all scheduled interest
payments on these securities, which, in the event of auction failure, are reset
according to the contractual terms in the governing
instruments.
We
continue to monitor the market for auction rate securities and consider its
effect (if any) on the fair market value of our investments. If market
conditions do not recover, we may be required to record additional unrealized
losses in 2008. We believe we will have the ability to hold any auction rate
securities for which auctions fail until the market recovers. We do not
anticipate having to sell these securities in order to operate our business. We
do not believe the carrying values of these auction rate securities are
permanently impaired and therefore expect the positions will eventually be
liquidated without significant loss.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
The
valuation of the auction rate securities we hold is based on Level 3
unobservable inputs which consist of internal analysis of timing of expected
future successful auctions, collateralization of underlying assets of the
security and credit quality of the security. As a result of the estimated fair
value, we have determined a temporary impairment in the valuation of these
securities of $0.4 million, recorded for the three months ended March 31, 2008,
which is reflected as a part of other comprehensive loss on our balance sheet.
These securities are held "available-for-sale" in conformity with FAS 115 and
the unrealized loss is included in other comprehensive loss in the current
period. Due to the uncertainty related to the liquidity in the auction rate
security market and therefore when individual positions may be liquidated, we
have classified these auction rate securities as long-term assets on our balance
sheet.
For those
financial instruments with significant Level 3 inputs (all of which are auction
rate securities), the following tables summarize the activities for the three
and six month periods ended June 30, 2008:
|
|
Fair
Value Measurements Using Significant Unobservable Inputs
(Level
3)
|
|
Description
|
|
For
the Three
Months
Ended
June
30, 2008
|
|
|
For
the Six
Months
Ended
June
30, 2008
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
7,742 |
|
|
$ |
- |
|
Transfers
into Level 3
|
|
|
- |
|
|
|
8,150 |
|
Total
realized/unrealized losses
|
|
|
|
|
|
|
|
|
Included
in net loss
|
|
|
- |
|
|
|
- |
|
Included
in comprehensive loss
|
|
|
- |
|
|
|
(408 |
) |
Settlements
|
|
|
(1,700 |
) |
|
|
(1,700 |
) |
Balance
at end of period
|
|
$ |
6,042 |
|
|
$ |
6,042 |
|
Total
amount of unrealized losses for the period included in other comprehensive
loss attributable to the change in fair market value of related assets
still held at the reporting date
|
|
$ |
- |
|
|
$ |
(408 |
) |
4. Prepaid
Research and Development
On
January 1, 2008, we adopted Emerging Issues Task Force Issue 07-3 (“EITF 07-3”)
“Accounting for Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities.” Prior to January 1, 2008, under FASB
Statement No. 2, “Accounting for Research and Development Costs,” non-refundable
advance payments for future research and development activities for materials,
equipment, facilities and purchased intangible assets that had no alternative
future use were expensed as incurred. Beginning January 1, 2008, we have been
capitalizing such non-refundable advance payments and expensing them as the
goods are delivered or the related services are performed. EITF 07-3 applies to
new contracts entered into after the effective date of January 1, 2008. Applying
EITF 07-3 did not have a material impact on our financial position or results of
operations for the three and six months ended June 30, 2008.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
5.
Accounts Receivable
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
Research and development from collaborator
|
|
$
|
2,575
|
|
|
$
|
-
|
|
Royalty
|
|
|
321
|
|
|
|
-
|
|
National Institute of Health
|
|
|
1,252
|
|
|
|
1,956
|
|
Other
|
|
|
61
|
|
|
|
39
|
|
Total
|
|
$
|
4,209
|
|
|
$
|
1,995
|
|
6. Accounts
Payable and Accrued Expenses
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
Accounts
payable
|
|
$ |
799 |
|
|
$ |
1,158 |
|
Accrued
consulting and clinical trial costs
|
|
|
8,954 |
|
|
|
10,848 |
|
Accrued
payroll and related costs
|
|
|
1,999 |
|
|
|
1,489 |
|
Legal
and professional fees
|
|
|
1,184 |
|
|
|
1,127 |
|
Other
|
|
|
57 |
|
|
|
143 |
|
Total
|
|
$ |
12,993 |
|
|
$ |
14,765 |
|
7. Revenue
Recognition
On
December 23, 2005, we entered into the Collaboration Agreement with Wyeth for
the purpose of developing and commercializing RELISTOR. The Collaboration
Agreement involves three formulations of RELISTOR: (i) a subcutaneous
formulation to be used in patients with opioid-induced constipation, (ii) an
oral formulation to be used in patients with opioid-induced constipation, and
(iii) an intravenous formulation to be used in patients with post-operative
ileus.
The
collaboration is being administered by a Joint Steering Committee (“JSC”) and a
Joint Development Committee (“JDC”), each with equal representation by the
parties. The JSC is responsible for coordinating the key activities of Wyeth and
us under the Collaboration Agreement. The JDC is responsible for overseeing,
coordinating and expediting the development of RELISTOR by the parties. In
addition, a Joint Commercialization Committee (“JCC”) and Joint Communications
Committee (“JComm”) were established, composed of representatives of both Wyeth
and us in number and function according to each of our responsibilities, which
is responsible for facilitating open communication between Wyeth and us on
matters relating to the commercialization of RELISTOR approved products, and
communication about RELISTOR approved products or RELISTOR product candidates in
development.
We have
assessed the nature of our involvement with the committees. Our involvement in
the JSC and JDC is one of several obligations to develop the subcutaneous and
intravenous formulations of RELISTOR through regulatory approval in the U.S. We
have combined the committee obligations with the other development obligations
and are accounting for these obligations during the development phase as a
single unit of accounting. After the period during which we have developmental
responsibilities, however, we have assessed that the nature of our involvement
with the committees will be a right, rather than an obligation. Our assessment
is based upon the fact that we negotiated to be on the committees as an
accommodation for our granting of the license for RELISTOR to Wyeth. Wyeth has
been granted by us an exclusive license (even as to us) to the technology and
know-how regarding RELISTOR and has been assigned the agreements for the
manufacture of RELISTOR by third parties. During that period, the activities of
the committees will be focused on Wyeth’s development and commercialization
obligations.
Under the
Collaboration Agreement, we granted to Wyeth an exclusive, worldwide license,
even as to us, to develop and commercialize RELISTOR. We and Wyeth are
responsible for developing the subcutaneous and intravenous formulations in the
U.S., until the drug formulations receive regulatory approval. We have
transferred to Wyeth all existing supply agreements with third parties for
RELISTOR and have sublicensed intellectual property rights to permit Wyeth to
manufacture or have manufactured RELISTOR, during the development and
commercialization phases of the Collaboration Agreement, in both bulk and
finished form for all products worldwide. We have no further manufacturing
obligations under the Collaboration Agreement. We have and will continue to
transfer to Wyeth all know-how, as defined, related to RELISTOR. Based upon our
research and development programs, such period will cease upon completion of our
development obligations under the Collaboration Agreement.
Wyeth is
developing the oral formulation worldwide and the subcutaneous and intravenous
formulations outside the U.S. In the event the JSC approves any formulation of
RELISTOR other than subcutaneous, intravenous or oral or any other indication
for a product using any formulation of RELISTOR, Wyeth will be responsible for
development of such products, including conducting clinical trials and obtaining
and maintaining regulatory approval. Wyeth is also responsible for the
commercialization of the subcutaneous, intravenous and oral products, and any
other methylnaltrexone based products developed upon approval by the JSC,
throughout the world. Wyeth will pay all costs of commercialization of all
products, including manufacturing costs, and will retain all proceeds from the
sale of the products, subject to the royalties payable by Wyeth to us. Decisions
with respect to commercialization of any products developed under the
Collaboration Agreement will be made solely by Wyeth.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
Wyeth
granted to us an option (the “Co-Promotion Option”) to enter into a Co-Promotion
Agreement to co-promote any of the products developed under the Collaboration
Agreement, at any time, subject to certain conditions. We may exercise this
option on an annual basis. We have not exercised the option in connection with
the initial commercialization of RELISTOR, and as of June 30, 2008 have not
determined when we will exercise it, if at all. The extent of our co-promotion
activities and the fee that we will be paid by Wyeth for these activities will
be established if, as and when we exercise our option. Wyeth will record all
sales of products worldwide (including those sold by us, if any, under a
Co-Promotion Agreement). Wyeth may terminate any Co-Promotion Agreement if a top
15 pharmaceutical company acquires control of us. Our potential right to
commercialize any product, including our Co-Promotion Option, is not essential
to the usefulness of the already delivered products or services (i.e., our development
obligations) and our failure to fulfill our co-promotion obligations would not
result in a full or partial refund of any payments made by Wyeth to us or reduce
the consideration due to us by Wyeth or give Wyeth the right to reject the
products or services previously delivered by us.
We are
recognizing revenue in connection with the Collaboration Agreement under the
Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB
104”) “Revenue Recognition” and will apply the Substantive Milestone Method. In
accordance with the Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”)
“Accounting for Revenue Arrangements with Multiple Deliverables,” all of our
deliverables under the Collaboration Agreement, consisting of granting the
license for RELISTOR, transfer of supply contracts with third party
manufacturers of RELISTOR, transfer of know-how related to RELISTOR development
and manufacturing, and completion of development for the subcutaneous and
intravenous formulations of RELISTOR in the U.S., represent one unit of
accounting since none of those components has standalone value to Wyeth prior to
regulatory approval of at least one product; that unit of accounting comprises
the development phase, through regulatory approval, for the subcutaneous and
intravenous formulations in the U.S.
Within
five business days of execution of the Collaboration Agreement, Wyeth made a
non-refundable, non-creditable upfront payment of $60 million, for which we
deferred revenue at December 31, 2005. Subsequently, we are recognizing revenue
related to the upfront license payment over the period during which the
performance obligations, noted above, are being performed using the
proportionate performance method. We expect that period to extend through 2009.
We are recognizing revenue using the proportionate performance method since we
can reasonably estimate the level of effort required to complete our performance
obligations under the Collaboration Agreement and such performance obligations
are provided on a best-efforts basis. Full-time equivalents are being used as
the measure of performance. Under the proportionate performance method, revenue
related to the upfront license payment is recognized in any period as the
percent of actual effort expended in that period relative to expected total
effort. The total effort expected is based upon the most current budget and
development plan which is approved by both us and Wyeth and includes all of the
performance obligations under the arrangement. Significant judgment is required
in determining the nature and assignment of tasks to be accomplished by each of
the parties and the level of effort required for us to complete our performance
obligations under the arrangement. The nature and assignment of tasks to be
performed by each party involves the preparation, discussion and approval by the
parties of a development plan and budget. Since we have no obligation to develop
the subcutaneous and intravenous formulations of RELISTOR outside the U.S. or
the oral formulation at all and have no significant commercialization
obligations for any product, recognition of revenue for the upfront payment is
not required during those periods, if they extend beyond the period of our
development obligations. If Wyeth terminates the Collaboration Agreement in
accordance with its terms, we will recognize any unamortized remainder of the
upfront payment at the time of the termination.
The
amounts of the upfront license payment that we recognized as revenue for each
fiscal quarter prior to the third quarter of 2007 were based upon several
revised approved budgets, although the revisions to those budgets did not
materially affect the amounts of revenue recognized in those periods. During the
third quarter of 2007, the estimate of our total remaining effort to complete
our development obligations was increased significantly based upon a revised
development budget approved by both us and Wyeth. As a result, the period over
which our obligations will extend, and over which the upfront payment will be
amortized, was extended from the end of 2008 to the end of 2009. Consequently,
the amount of revenue recognized from the upfront payment during the three and
six months ended June 30, 2008 declined relative to that in the comparable
periods of 2007.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
Beginning
in January 2006, costs for the development of RELISTOR incurred by Wyeth or us
are being paid by Wyeth. Wyeth has the right once annually to engage an
independent public accounting firm to audit expenses for which we have been
reimbursed during the prior three years. If the accounting firm concludes that
any such expenses have been understated or overstated, a reconciliation will be
made. We are recognizing as research and development revenue from collaborator,
amounts received from Wyeth for reimbursement of our development expenses for
RELISTOR as incurred under the development plan agreed to between us and Wyeth.
In addition to the upfront payment and reimbursement of our development costs,
Wyeth has made or will make the following payments to us, provided all forms of
RELISTOR reach specific milestones that include clinical, regulatory and sales
events: (i) development and sales milestones and contingent payments, consisting
of defined non-refundable, non-creditable payments, totaling $356.5 million, in
respect of clinical and regulatory events and, for each form approved as a
commercial product, combined annual worldwide net sales, as defined, and (ii)
sales royalties during each calendar year during the royalty period, as defined,
based on certain percentages of net sales in the U.S. and worldwide. Upon
achievement of defined substantive development milestones by us for the
subcutaneous and intravenous formulations, the milestone payments will be
recognized as revenue. Recognition of revenue for developmental contingent
events related to the oral formulation, which is the responsibility of Wyeth,
will be recognized as revenue when Wyeth achieves those events, if they occur
subsequent to completion by us of our development obligations, since we would
have no further obligations related to those products. Otherwise, if Wyeth
achieves any of those events before we have completed our development
obligations, recognition of revenue for the Wyeth contingent events will be
recognized over the period from the effective date of the Collaboration
Agreement to the completion of our development obligations. All sales milestones
will be recognized as revenue when earned. Royalty revenue is recognized upon
the sale of related products, provided that the royalty amounts are fixed or
determinable, collection of the related receivable is reasonably assured and we
have no remaining performance obligations under the arrangement. If the
royalties are received when we have remaining performance obligations, the
royalty payments would be attributed to the services being provided under the
arrangement and, therefore, would be recognized as such performance obligations
are performed under either the proportionate performance or straight-line
methods, as applicable, and in accordance with the policies above.
During
the three and six month periods ended June 30, 2008, we recognized $2.8 million
and $6.0 million, respectively, of revenue from the $60 million upfront payment
and $9.0 million and $17.8 million, respectively, as reimbursement for our
out-of-pocket development costs, including our labor costs. In May 2007 and
April 2008, we earned $9.0 million and $15.0 million, respectively, in milestone
payments upon the submission and approval for review of applications for
marketing in the U.S. and European Union of the subcutaneous formulation of
RELISTOR in patients receiving palliative care, and the FDA approval of
subcutaneous RELISTOR in the U.S., respectively. We considered those milestones
to be substantive based on (i) the significant degree of risk, at the inception
of the Collaboration Agreement, related to the conduct and successful completion
of clinical trials and, therefore, of not achieving the milestones, (ii) the
amount of the payment received relative to the significant costs incurred since
inception of the Collaboration Agreement and amount of effort expended to
achieve the milestones, and (iii) the passage of 17 and 28 months, respectively,
from inception of the Collaboration Agreement to the achievement of those
milestones. Therefore, we recognized the milestone payments as revenue in the
respective periods in which the milestones were earned. As of June 30, 2008,
relative to the $60 million upfront license payment received from Wyeth, we have
recorded $13.9 million as deferred revenue – current and $4.8 million as
deferred revenue – long term, which is expected to be recognized as revenue
through 2009. In addition, at June 30, 2008, we recorded $2.6 million as revenue
receivable related to reimbursements from Wyeth for development
costs.
In
addition, during the three and six months ended June 30, 2008, we earned $321 of
royalty receivables, based on the net sales of RELISTOR, as defined. We
recognized $42 of royalty income and $279 of deferred royalty revenue ($207 in
deferred revenue – current and $72 in deferred revenue – long term), during the
three and six months ended June 30, 2008. The $279 of deferred royalty revenue
is expected to be recognized as royalty income through 2009. We incurred $32 of
royalty costs during the three and six month periods ended June 30, 2008. We
recognized $4 of royalty expenses and $28 of deferred royalty charges, during
the three and six months ended June 30, 2008. The $28 of deferred royalty
charges are expected to be recognized as royalty expense through
2009.
The
Collaboration Agreement extends, unless terminated earlier, on a
country-by-country and product-by-product basis, until the last to expire
royalty period, as defined, for any product. We may terminate the Collaboration
Agreement at any time upon 90 days written notice to Wyeth (30 days in the case
of breach of a payment obligation) upon material breach that is not cured. Wyeth
may, with or without cause, following the second anniversary of the first
commercial sale, as defined, of the first commercial product in the U.S.,
terminate the Collaboration Agreement by providing us with at least 360 days
prior written notice of such termination. Wyeth may also terminate the agreement
(i) upon 30 days written notice following one or more serious safety or efficacy
issues that arise, as defined, and (ii) at any time, upon 90 days written notice
of a material breach that is not cured by us. Upon termination of the
Collaboration Agreement, the ownership of the license we granted to Wyeth will
depend on the party that initiates the termination and the reason for the
termination.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
8. Net Loss Per
Share
Our basic
net loss per share amounts have been computed by dividing net loss by the
weighted-average number of common shares outstanding during the respective
periods. For the three and six months ended June 30, 2008 and 2007, we reported
a net loss and, therefore, potential common shares were not included since such
inclusion would have been anti-dilutive. The calculations of net loss per share,
basic and diluted, are as follows:
|
|
Net
Loss (Numerator)
|
|
Shares
(Denominator)
|
|
Per
Share Amount
|
|
Three
months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(2,369
|
)
|
29,526
|
|
$
|
(0.08
|
)
|
Six
months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(17,854
|
)
|
29,418
|
|
$
|
(0.61
|
)
|
Three
months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(2,383
|
)
|
26,569
|
|
$
|
(0.09
|
)
|
Six
months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(12,816
|
)
|
26,468
|
|
$
|
(0.48
|
)
|
For the
three and six months ended June 30, 2008 and 2007, potential common shares,
which have been excluded from diluted per share amounts because their effect
would have been anti-dilutive, include the following:
|
|
For
the Three Months Ended June 30,
|
|
|
2008
|
|
2007
|
|
|
Wtd.
Avg. Number
|
|
Wtd.
Avg. Exercise Price
|
|
Wtd.
Avg. Number
|
|
Wtd.
Avg. Exercise Price
|
Stock
options
|
|
|
4,679
|
|
$
|
18.10
|
|
|
4,541
|
|
$
|
17.38
|
Nonvested
shares
|
|
|
493
|
|
|
|
|
|
375
|
|
|
|
Total
|
|
|
5,172
|
|
|
|
|
|
4,916
|
|
|
|
|
|
For
the Six Months Ended June 30,
|
|
|
2008
|
|
2007
|
|
|
Wtd.
Avg. Number
|
|
Wtd.
Avg. Exercise Price
|
|
Wtd.
Avg. Number
|
|
Wtd.
Avg. Exercise Price
|
Stock
options
|
|
|
4,702
|
|
$
|
18.11
|
|
|
4,615
|
|
$
|
17.08
|
Nonvested
shares
|
|
|
510
|
|
|
|
|
|
385
|
|
|
|
Total
|
|
|
5,212
|
|
|
|
|
|
5,000
|
|
|
|
9. Comprehensive
Loss
Comprehensive
loss represents the change in net assets of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Our comprehensive loss includes net loss adjusted for the change in net
unrealized gain or loss on marketable securities. For the three and six months
ended June 30, 2008 and 2007, the components of comprehensive loss
were:
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
loss
|
|
$ |
(2,369 |
) |
|
$ |
(2,383 |
) |
|
$ |
(17,854 |
) |
|
$ |
(12,816 |
) |
Change
in net unrealized loss on marketable securities
|
|
|
(881
|
) |
|
|
(149
|
) |
|
|
(495
|
) |
|
|
(70
|
) |
Comprehensive loss
|
|
$ |
(3,250 |
) |
|
$ |
(2,532 |
) |
|
$ |
(18,349 |
) |
|
$ |
(12,886 |
) |
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
10. Commitments and
Contingencies
In the
ordinary course of our business, we enter into agreements with third parties
that include indemnification provisions which, in our judgment, are normal and
customary for companies in our industry sector. These agreements are typically
with business partners, clinical sites and suppliers. Pursuant to these
agreements, we generally agree to indemnify, hold harmless and reimburse the
indemnified parties for losses suffered or incurred by the indemnified parties
with respect to our products or product candidates, use of such products or
other actions taken or omitted by us. The maximum potential amount of future
payments we could be required to make under these indemnification provisions is
not limited. We have not incurred material costs to defend lawsuits or settle
claims related to these indemnification provisions. As a result, the estimated
fair value of liabilities relating to these provisions is minimal. Accordingly,
we have no liabilities recorded for these provisions as of June 30,
2008.
11. Impact of Recently Issued Accounting
Standards
In March
2008, the FASB issued SFAS No. 161 (“FAS 161”) “Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No. 133,”
which is intended to improve financial standards for derivative instruments and
hedging activities by requiring enhanced disclosures. The enhanced disclosure
conveys the purpose of derivative use to enable investors a better understanding
of their effects on an entity's financial position, financial performance and
cash flows. Entities are required to provide enhanced disclosures about (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption encouraged. We do not expect the impact
of the adoption of FAS 161 to have a material effect on our financial position
or results of operations.
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Special
Note Regarding Forward-Looking Statements
This
document contains statements that do not relate strictly to historical fact, any
of which may be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When we use the words “anticipates,”
“plans,” “expects” and similar expressions, we are identifying forward-looking
statements.
Forward-looking
statements involve known and unknown risks and uncertainties which may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by forward-looking statements. While it is impossible
to identify or predict all such matters, this may result from, among other
things, the inherent uncertainty of the timing and success of, and expense
associated with, research, development, regulatory approval and
commercialization of our products and product candidates, including the risks
that clinical trials will not commence or proceed as planned; products appearing
promising in early trials will not demonstrate efficacy or safety in
larger-scale trials; clinical trial data on our products and product candidates
will be unfavorable; our products will not receive marketing approval from
regulators or, if approved, do not gain sufficient market acceptance to justify
development and commercialization costs; we, our collaborators or others might
identify side effects after the product is on the market; or efficacy or safety
concerns regarding marketed products, whether or not originating from subsequent
testing or other activities by us, governmental regulators, other entities or
organizations or otherwise, and whether or not scientifically justified, may
lead to product recalls, withdrawals of marketing approval, reformulation of the
product, additional pre-clinical testing or clinical trials, changes in labeling
of the product, the need for additional marketing applications, declining sales
or other adverse events.
We
are also subject to risks and uncertainties associated with the actions of our
corporate, academic and other collaborators and government regulatory agencies;
potential product liability; intellectual property, litigation, environmental
and other risks; the risk that licenses to intellectual property may be
terminated for our failure to satisfy performance milestones; the risk of
difficulties in, and regulatory compliance relating to, manufacturing products;
and the uncertainty of our future profitability.
Risks
and uncertainties also include general economic conditions, including interest
and currency exchange rate fluctuations and the availability of capital; changes
in generally accepted accounting principles; the impact of legislation and
regulatory compliance; the highly regulated nature of our business, including
government cost-containment initiatives and restrictions on third-party payments
for our products; trade buying patterns; the competitive climate of our
industry; and other factors set forth in our Annual Report on Form 10-K and
other reports filed with the U.S. Securities and Exchange Commission. In
particular, we cannot assure you that RELISTOR will be commercially successful
or be approved in the future in other formulations, indications or
jurisdictions, or that any of our other programs will result in a commercial
product.
We
do not have a policy of updating or revising forward-looking statements and
assume no obligation to update any statements as a result of new information or
future events or developments. Thus, it should not be assumed that our silence
over time means that actual events are bearing out as expressed or implied in
forward-looking statements.
Overview
General
and Outlook
We are a
biopharmaceutical company focusing on the development and commercialization of
innovative therapeutic products to treat the unmet medical needs of patients
with debilitating conditions and life-threatening diseases. Our principal
programs are directed toward gastroenterology, virology and oncology. We
commenced principal operations in late 1988, and since that time we have been
engaged primarily in research and development efforts, development of our
manufacturing capabilities, establishment of corporate collaborations and
raising capital. We have only recently begun to derive revenue from a commercial
product. In order to commercialize the principal products that we
have under development, we have been and continue to address a number of
technological and clinical challenges and comply with comprehensive U.S. and
foreign regulatory requirements. We expect to incur additional operating losses
in the future, which could increase significantly as we expand our clinical
trial programs and other product development efforts.
Gastroenterology
Our lead
product is RELISTOR™ (methylnaltrexone bromide). On April 24, 2008 RELISTOR
subcutaneous injection was approved by the U.S. Food and Drug Administration
(“FDA”) for sale in the United States for the treatment of opioid-induced
constipation (“OIC”) in patients with advanced illness who are receiving
palliative care, when response to laxative therapy has not been sufficient. Our
collaboration partner, Wyeth Pharmaceuticals (“Wyeth”), launched the sale of
RELISTOR subcutaneous injection in the U.S. in June 2008.
As
previously announced on April 1, 2008, RELISTOR subcutaneous injection received
marketing approval from Health Canada for the treatment of OIC in patients with
advanced illness receiving palliative care. Also, as previously announced on
July 3, 2008, we and Wyeth received marketing approval from the European
Commission for the treatment of OIC in advanced illness patients who are
receiving palliative care when response to usual laxative therapy has not been
sufficient. Wyeth launched the sale of RELISTOR subcutaneous injection in Canada
in June 2008. The commercial launch of RELISTOR has begun in Europe and will
occur on a country-by-country basis.
Marketing
applications for RELISTOR subcutaneous injection are also pending in Australia
and other countries.
Development
and commercialization of RELISTOR is being conducted under a license and
co-development agreement (“Collaboration Agreement”) between us and Wyeth. Under
that agreement, we (i) have received an upfront payment from Wyeth, (ii) have
received, and are entitled to receive further, additional payments as certain
developmental milestones for RELISTOR are achieved, (iii) have been and will be
reimbursed by Wyeth for expenses we incur in connection with the development of
RELISTOR under an agreed-upon development plan and budget, and (iv) have
received and will receive royalties and commercialization milestone
payments. These payments will depend on continued success
in development and commercialization of RELISTOR, which are in turn
dependent on the actions of Wyeth and the FDA and other regulatory bodies, as
well as the outcome of clinical and other testing of RELISTOR. Many of these
matters are outside our control. Manufacturing and commercialization expenses
for RELISTOR are funded by Wyeth.
In May 2007, we earned $9.0 million in
milestone payments under Collaboration Agreement for having made filings seeking
marketing approval for RELISTOR subcutaneous injection in the U.S. and Europe.
In April 2008, we earned a $15.0 million milestone payment for the FDA approval
of subcutaneous RELISTOR. In July 2008, we earned a $10.0 million milestone
payment for the European approval of subcutaneous RELISTOR.
We are
also developing, in collaboration with Wyeth, an intravenous formulation of
RELISTOR for the management of post-operative ileus (“POI”), a temporary
impairment of the
gastrointestinal tract function. Development of the intravenous formulation of
RELISTOR for POI has been granted “Fast Track” status from the FDA, which
facilitates development and expedites regulatory review of drugs intended to
address an unmet medical need for serious or life-threatening
conditions.
We and
Wyeth have conducted two global pivotal phase 3 clinical trials to evaluate the
safety and efficacy of intravenous RELISTOR for the treatment of POI in patients
recovering from segmental colectomy surgical procedures. In October 2006, we
earned a $5.0 million milestone payment under the Collaboration Agreement in
connection with the initiation of the first phase 3 clinical trial.
In March
2008, we reported that preliminary results from the phase 3 segmental colectomy
clinical trial conducted by Wyeth showed that treatment did not achieve the
primary end point of the study: a reduction in time to recovery of
gastrointestinal function (i.e., time to first bowel
movement) as compared to placebo. The study also did not show that secondary
measures of surgical recovery, including time to discharge eligibility, were
superior to placebo. We led the second phase 3 trial of intravenous
methylnaltrexone for management of POI, which was similar in design to the Wyeth
study. As previously announced, this second study did not meet the primary or
secondary end points, confirming the earlier findings of the Wyeth phase 3
intravenous POI study. Progenics and Wyeth are analyzing the results of both
studies to determine whether and how to continue development of this formulation
of RELISTOR for this indication.
In addition, the companies are
currently conducting a third phase 3 trial evaluating an intravenous formulation
of RELISTOR in patients following abdominal hernia repair.
We and
Wyeth are also developing an oral formulation of RELISTOR for the treatment of
OIC in patients with chronic pain.
In March 2007, Wyeth began clinical
testing of a new oral formulation of methylnaltrexone for the treatment of OIC,
and in July 2007 we and Wyeth announced positive preliminary results from this
phase 1 clinical trial. Commencing October 2007, two proprietary oral
formulations of RELISTOR were tested in separate four-week, double-blind,
randomized, placebo-controlled phase 2 trials each consisting of approximately
120 patients with chronic, non-malignant pain who were receiving opioids for
pain management. In comparing the activity and tolerability of these oral
formulations of RELISTOR, both were generally well tolerated; however, one
formulation was identified as having a more favorable clinical profile, while
the other did not demonstrate sufficient clinical activity to warrant its
continued study. As previously announced on May 22, 2008, the formulation
with the more favorable clinical profile demonstrated statistically significant
results after once daily dosing, as assessed by the occurrence of spontaneous
bowel movements and other efficacy measures. Further improvement upon this oral
formulation through clinical optimization studies will begin in the coming
months, with next steps in the development plan for oral RELISTOR to be decided
in early 2009.
At
inception of the Collaboration Agreement, Wyeth paid to us a $60 million
non-refundable upfront payment. Wyeth has made $29.0 million in milestone
payments since that time and is obligated to make up to $327.5 million in
additional payments to us upon the achievement of milestones and contingent
events in the development and commercialization of RELISTOR. Costs for the
development of RELISTOR incurred by Wyeth or us starting January 1, 2006 are
paid by Wyeth. We are being reimbursed for our out-of-pocket development costs
by Wyeth and receive reimbursement for our efforts based on the number of our
full time equivalent employees devoted to the development project. Wyeth has the
right once annually to engage an independent public accounting firm to audit
expenses for which we have been reimbursed during the prior three years. If the
accounting firm concludes that any such expenses have been understated or
overstated, a reconciliation will be made. Wyeth is obligated to pay to us
royalties on the sale of RELISTOR by Wyeth throughout the world during the
applicable royalty periods.
In
January 2006, we began recognizing revenue from Wyeth for reimbursement of our
development expenses for RELISTOR as incurred during each quarter under the
development plan agreed to by us and Wyeth. We also began recognizing revenue
for a portion of the $60 million upfront payment we received from Wyeth, based
on the proportion of the expected total effort for us to complete our
development obligations, as reflected in the most recent development plan and
budget approved by us and Wyeth, that was actually performed during that
quarter. Starting June 2008, we began recognizing royalty income based on the
net sales of RELISTOR, as defined, by Wyeth.
Virology
In the
area of virology, we are developing viral-entry inhibitors for Human
Immunodeficiency Virus (“HIV”), the virus that causes AIDS, and Hepatitis C
virus infection (“HCV”). These inhibitors are molecules designed to inhibit a
virus’ ability to enter certain types of immune cells and liver cells. In May
2007, we announced positive results in HIV-infected individuals from a phase 1b
trial examining a single dose of an intravenous formulation of our monoclonal
antibody, PRO 140. We are also investigating a subcutaneous formulation of PRO
140 with the goal of developing a long-acting, self-administered therapy for HIV
infection. In January 2008, we initiated the phase 2 clinical program for PRO
140, which will investigate further both the intravenous and subcutaneous
formulations. We are also engaged in research regarding a product candidate for
HCV and a vaccine against HIV infection.
Oncology
In the
area of prostate cancer, we are developing a human monoclonal antibody-drug
conjugate, consisting of a selectively targeted cytotoxic antibody directed
against prostate specific membrane antigen (“PSMA”), a protein found on the
surface of prostate cancer cells. We are also developing vaccines designed to
stimulate an immune response to PSMA. Our PSMA programs are conducted through
our wholly owned subsidiary, PSMA Development Company LLC (“PSMA LLC”), which
prior to April 2006 was a joint venture with Cytogen Corporation
(“Cytogen”).
In the
second quarter of 2007, we discontinued our GMK melanoma vaccine program. An
independent data monitoring committee recommended that treatment in the
European-based phase 3 trial, which began in 2001, be stopped because lack of
efficacy was observed after an interim analysis. We have subsequently terminated
our license agreement with Memorial Sloan-Kettering Cancer Center relating to
this program.
Results of
Operations (amounts in thousands)
Revenues:
Our
sources of revenue during the three and six months ended June 30, 2008 and 2007
included our collaboration with Wyeth, which was effective on January 1, 2006,
our research grants and contracts from the National Institutes of Health (the
“NIH”), royalty income from sales of RELISTOR, and, to a small extent, our sale
of research reagents.
|
|
For
the Three Months Ended
June
30,
|
|
For the Six Months Ended
June
30,
|
|
|
2008
|
|
2007
|
|
Percent
Change
|
|
2008
|
|
2007
|
|
Percent
Change
|
Sources
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
from collaborator
|
|
$ 26,771
|
|
$ 22,948
|
|
17%
|
|
$ 38,881
|
|
$ 38,447
|
|
1%
|
Royalty
income
|
|
42
|
|
-
|
|
N/A
|
|
42
|
|
-
|
|
N/A
|
Research
grants and contract
|
|
1,699
|
|
2,486
|
|
(32%)
|
|
4,312
|
|
4,606
|
|
(6%)
|
Other
revenues
|
|
72
|
|
23
|
|
213%
|
|
111
|
|
41
|
|
171%
|
Total
|
|
$ 28,584
|
|
$ 25,457
|
|
12%
|
|
$ 43,346
|
|
$ 43,094
|
|
1%
|
Research
revenue from collaborator
Research
revenue from collaborator relates to our Collaboration Agreement with Wyeth.
From the inception of the Collaboration Agreement through June 30, 2008 we
recognized as revenue: (i) in October 2006, $5,000 milestone payment in
connection with the initiation of the first phase 3 clinical trial of
intravenous RELISTOR, (ii) in May 2007, $9,000 in milestone payments related to
the acceptance for review of applications submitted for marketing approval of a
subcutaneous formulation of RELISTOR in the U.S and European Union, and (iii) in
April 2008, $15,000 milestone payment related to the FDA approval of
subcutaneous RELISTOR. We have analyzed the facts and circumstances of the four
milestones achieved since inception of the Collaboration Agreement through June
30, 2008, and believe that they met those criteria for revenue recognition upon
achievement of the respective milestones. See Critical Accounting Policies
–Revenue Recognition, below.
During
the three months ended June 30, 2008 and 2007, we recognized $26,771 and
$22,948, respectively, of revenue from Wyeth, consisting of (i) $2,806 and
$4,931, respectively, of the $60,000 upfront payment we received upon entering
into the Collaboration Agreement in December 2005, (ii) and $8,965 and $9,017,
respectively, as reimbursement of our development expenses, and (iii) $15,000
and $9,000, respectively, of non-refundable milestone payments.
During
the six months ended June 30, 2008 and 2007, we recognized $38,881 and $38,447,
respectively, of revenue from Wyeth, consisting of (i) $6,040 and $9,919,
respectively, of the $60,000 upfront payment we received upon entering into the
Collaboration Agreement, (ii) $17,841 and $19,528, respectively, as
reimbursement of our development expenses, and (iii) $15,000 and $9,000,
respectively, of non-refundable milestone payments.
From the
inception of our Collaboration Agreement through June 30, 2008, we recognized
$41,249 of revenue from the $60,000 upfront payment, $92,502 as reimbursement
for our development costs, and a total of $29,000 for non-refundable milestone
payments.
We
recognize a portion of the upfront payment in a reporting period in accordance
with the proportionate performance method, which is based on the percentage of
actual effort performed on our development obligations in that period relative
to total effort expected for all of our performance obligations under the
arrangement, as reflected in the most recent development plan and budget
approved by Wyeth and us. During the third quarter of 2007, a revised budget was
approved, which extended our performance period to the end of 2009 and, thereby,
decreased the amount of revenue we are recognizing in each reporting period. As
a result, the amount of revenue recognized from the upfront payment in the first
two quarters of 2008 declined by $3,879 as compared to the first two quarters of
2007.
Royalty
income
We began earning royalties
from sales by Wyeth of RELISTOR in June 2008. During the three and six
month periods ended June 30, 2008, we earned $321 of royalty receivables, based
on the net sales of RELISTOR, as defined. We recognized $42 of royalty income
and $279 of deferred royalty revenue ($207 in deferred revenue – current and $72
in deferred revenue – long term), during the three and six months ended June 30,
2008. The $279 of deferred royalty revenue is expected to be recognized as
royalty income through 2009. Our royalties from sales by Wyeth of
RELISTOR, as defined, are based on royalty rates under our Collaboration
Agreement. These rates can range up to 30% of U.S. and 25% of foreign net sales
at the highest sales levels. Royalty rates will increase on incremental sales as
net sales in a calendar year exceed specified levels.
Research
grants and contract
In
September 2003, we were awarded a contract (the “NIH Contract”) by
the NIH to develop a prophylactic vaccine (“ProVax”) designed to prevent HIV
from becoming established in uninfected individuals exposed to the virus.
Funding under the NIH Contract provides for pre-clinical research, development
and early clinical testing. These funds are being used principally in connection
with our ProVax HIV vaccine program. The NIH Contract originally provided for up
to $28,562 in funding to us, subject to annual funding approvals and compliance
with its terms, over five years. The total of our approved award under the NIH
Contract through September 2008 is $15,509. Funding under this contract includes
the payment of an aggregate of $1,617 in fees, subject to achievement of
specified milestones. Through June 30, 2008, we had recognized revenue of
$14,436 from this contract, including $180 for the achievement of two
milestones. We have recently been informed by the NIH that it has decided not to
fund the NIH Contract beyond September 2008. To continue to develop the HIV
vaccine after that time, therefore, we will need to provide funding on our own
or obtain new governmental or other funding. If we choose not to provide our own
or cannot secure governmental or other funding, we will discontinue this
project.
Revenues
from research grants and contract from the NIH decreased to $1,699 for the three
months ended June 30, 2008 from $2,486 for the same period of 2007; these
amounts consisted of $1,083 and $1,284, respectively, from grants and $616 and
$1,202, respectively, from the NIH Contract for the three months ended June 30,
2008 and 2007. The decrease in grant and contract revenue resulted from fewer
reimbursable expenses in 2008 than in 2007 on new and continuing
grants.
Revenues
from research grants and contract from the NIH decreased to $4,312 for the six
months ended June 30, 2008 from $4,606 for the same period of 2007; these
amounts consisted of $3,176 and $2,580, respectively, from grants and $1,136 and
$2,026, respectively, from the NIH Contract for the six months ended June 30,
2008 and 2007. The decrease in contract revenue resulted from fewer contract
related expenses in 2008. The increase in grant revenue for the six months ended
June 30, 2008, as compared to the same period in 2007, was due higher levels of
reimbursable expenses during the first three months of 2008.
Other
revenues
Other
revenues primarily from higher orders for research reagents increased to $72 for
the three months ended June 30, 2008 from $23 for the three months ended June
30, 2007. Other revenues primarily from higher orders for research reagents
increased to $111 for the six months ended June 30, 2008 from $41 for the six
months ended June 30, 2007.
Expenses:
Research
and Development Expenses:
Research
and development expenses include scientific labor, supplies, facility costs,
clinical trial costs, product manufacturing costs, royalty payments and license
fees. Research and development expenses increased to $24,261 for the three
months ended June 30, 2008 from $22,581 for the same period of 2007, and
increased to $48,200 for the six months ended June 30, 2008 from $45,752 for the
same period of 2007, as follows:
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits (cash)
|
|
$6,614
|
|
$6,412
|
|
3%
|
|
$13,173
|
|
$11,937
|
|
10%
|
Three Months: The increase
was due to company-wide compensation increases and an increase in average
headcount to 198 from 185 for the three months ended June 30, 2008 and 2007,
respectively, in the research and development, manufacturing and clinical
departments.
Six Months: The increase was
due to compensation increases and an increase in average headcount to 198 from
173 for the six months ended June 30, 2008 and 2007, respectively, in the same
departments.
|
|
Three Months Ended
June 30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation (non-cash)
|
|
$1,444
|
|
$1,561
|
|
(7%)
|
|
$3,456
|
|
$3,175
|
|
9%
|
Three Months: The decrease
was due to non-vested restricted stock award cancellations partially offset by
the vesting of awards. (See Critical Accounting Policies −
Share-Based Payment Arrangements, below).
Six Months: The increase was
due to restricted stock award vesting partially offset by non-vested
cancellations. (See Critical
Accounting Policies − Share-Based Payment Arrangements, below).
|
|
Three Months Ended
June 30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical
trial costs
|
|
$6,039
|
|
$3,747
|
|
61%
|
|
$10,902
|
|
$8,396
|
|
30%
|
Three Months: Increase
primarily related to RELISTOR ($1,645) and HIV ($860) due to increased RELISTOR
and PRO 140 clinical trial activities in the 2008 period. These increases were
partially offset by a decrease in Cancer ($213) due to termination of the GMK
study in the second quarter of 2007.
Six Months: Increase
primarily related to HIV ($1,628) and RELISTOR ($1,112), due to increased PRO
140 and RELISTOR clinical trial activities in the 2008 period, partially offset
by a decrease in Cancer ($234) due to termination of the GMK
study.
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory
supplies
|
|
$764
|
|
$2,007
|
|
(62%)
|
|
$2,247
|
|
$3,664
|
|
(39%)
|
Three Months: Decrease in
RELISTOR ($357), due to purchase of less drug supplies in the 2008 period
compared to 2007, Cancer ($234), due to fewer expenses for PSMA and GMK, Other
projects ($435) and HIV-related costs ($217).
Six Months: Decrease in
RELISTOR ($539), due to purchase of less drug supplies in the 2008 period
compared to 2007, Cancer ($256), due to fewer expenses for PSMA and GMK, Other
projects ($407) and HIV-related costs ($215).
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
manufacturing and subcontractors
|
|
$6,508
|
|
$5,693
|
|
14%
|
|
$11,174
|
|
$11,787
|
|
(5%)
|
Three Months: Increase in HIV
($2,767) due to manufacturing expenses for PRO 140 in the second quarter of 2008
but not in 2007, and Other projects ($317), partially offset by decreases in
Cancer ($2,114), primarily due to contract manufacturing expenses for PSMA in
the second quarter of 2007 but not in 2008, and RELISTOR ($155). These expenses
are related to the conduct of clinical trials, including manufacture by third
parties of drug materials, testing, analysis, formulation and toxicology
services, and vary as the timing and level of such services are
required.
Six Months: Decrease in
Cancer ($4,182), primarily due to contract manufacturing expenses for PSMA in
the first half of 2007 but not in 2008, and RELISTOR ($130), partially offset by
increases in HIV ($2,987) due to manufacturing expenses for PRO 140 in the first
half of 2008 but not in 2007, and Other projects ($712). These expenses are
related to the conduct of clinical trials, including manufacture by third
parties of drug materials, testing, analysis, formulation and toxicology
services, and vary as the timing and level of such services are
required.
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants
|
|
$849
|
|
$1,131
|
|
(25%)
|
|
$2,464
|
|
$2,702
|
|
(9%)
|
Three Months: Decreases in
RELISTOR ($295), Cancer ($12) and Other projects ($51), partially offset by an
increase in HIV ($76). These expenses are related to the monitoring of clinical
trials as well as analysis of data from completed clinical trials and vary as
the timing and level of such services are required. During the remainder of
2008, consultant expenses are expected to change approximately proportionately
with spending levels for all of our research and development
programs.
Six Months: Decrease in
RELISTOR ($745), partially offset by increases in Cancer ($264), HIV ($170) and
Other projects ($73). These expenses are related to the monitoring of clinical
trials as well as analysis of data from completed clinical trials and vary as
the timing and level of such services are required. During the remainder of
2008, consultant expenses are expected to change approximately proportionately
with spending levels for all of our research and development
programs.
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
$334
|
|
$210
|
|
59%
|
|
$1,483
|
|
$960
|
|
54%
|
Three Months: Increase
primarily related to payments in the 2008 period related to Cancer ($115) and
RELISTOR ($34), partially offset by a decrease in HIV ($25).
Six Months: Increase
primarily related to payments in the 2008 period related to HIV ($975) and
RELISTOR ($44), partially offset by a decrease in Cancer
($496).
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty expense
|
|
$4
|
|
-
|
|
N/A
|
|
$4
|
|
-
|
|
N/A
|
Three and Six Months: We
incurred $32 of royalty costs during the three and six month periods ended June
30, 2008. We recognized $4 of royalty expenses and $28 of deferred royalty
charges, during the three and six months ended June 30, 2008. The $28 of
deferred royalty charges are expected to be recognized as royalty expense
through 2009.
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
$1,705
|
|
$1,820
|
|
(6%)
|
|
$3,297
|
|
$3,131
|
|
5%
|
Three Months: Decrease
primarily in facilities ($167), insurance ($151), travel ($35) and other
operating expenses ($74), partially offset by an increase in rent
($312).
Six Months: Increase
primarily due to expenses related to rent ($574) partially offset by decreases
in insurance ($177), facilities ($144), travel ($52) and other operating
expenses ($35).
A major
portion of our spending has been, and we expect will continue to be, associated
with RELISTOR, although beginning in 2006, Wyeth has been reimbursing us for
development expenses we incur related to RELISTOR under the development plan
agreed to between us and Wyeth.
General and Administrative
Expenses:
General
and administrative expenses increased to $7,113 for the three months ended June
30, 2008 from $6,196 for the same period of 2007 and to $14,265 for the six
months ended June 30, 2008 from $12,471 for the same period of 2007, as
follows:
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits (cash)
|
|
$2,318
|
|
$1,820
|
|
27%
|
|
$4,576
|
|
$3,777
|
|
21%
|
Three Months: Increase due to
compensation increases and an increase in average headcount to 55 from 42 in the
general and administrative departments between the periods.
Six Months: Increase due to
compensation increases and an increase in average headcount to 51 from 41 in the
general and administrative departments between the periods.
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation (non-cash)
|
|
$1,430
|
|
$1,165
|
|
23%
|
|
$3,330
|
|
$2,499
|
|
33%
|
Three and Six Months: The
increase was due to restricted stock award vesting partially offset by
non-vested cancellations. (See Critical Accounting Policies −
Share-Based Payment Arrangements, below).
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
and professional fees
|
|
$1,940
|
|
$1,906
|
|
2%
|
|
$3,810
|
|
$3,746
|
|
2%
|
Three Months: Increase due
primarily to increases in legal and patent fees ($389) and miscellaneous costs
($29), partially offset by decreases in recruiting ($165), consulting fees
($218) and audit and tax fees ($1).
Six Months: Increase due
primarily to increases in legal and patent fees ($449) and miscellaneous costs
($74), partially offset by decreases in recruiting ($127), consulting fees
($238) and audit and tax fees ($94).
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
$1,425
|
|
$1,305
|
|
9%
|
|
$2,549
|
|
$2,449
|
|
4%
|
Three Months: Increase in
rent ($104) due to higher rent and facility costs and computer expenses ($83),
partially offset by decreases in insurance ($37) and other operating expenses
($30).
Six Months: Increase in rent
($188) due to higher rent and facility costs and computer expenses ($104),
partially offset by decreases in facility tools and equipment ($95), insurance
($62), travel ($25) and other operating expenses ($10).
Depreciation
and Amortization:
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$1,147
|
|
$807
|
|
42%
|
|
$2,261
|
|
$1,299
|
|
74%
|
Three Months: Depreciation
expense increased to $1,147 for the three months ended June 30, 2008 from $807
for the same period of 2007, due to purchases of capital assets and additional
leasehold improvements made after June 30, 2007.
Six Months: Depreciation
expense increased to $2,261 for the six months ended June 30, 2008 from $1,299
for the same period of 2007 due to purchases of capital assets and additional
leasehold improvements made after June 30, 2007.
Other
Income:
|
|
Three Months Ended
June
30,
|
|
Percent
Change
|
|
Six
Months Ended
June
30,
|
|
Percent
Change
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$1,568
|
|
$1,744
|
|
(10%)
|
|
$3,526
|
|
$3,612
|
|
(2%)
|
Three Months: Interest income
decreased to $1,568 for the three months ended June 30, 2008 from $1,744 for the
same period of 2007. Interest income, as reported, is primarily the result of
investment income from our marketable securities, decreased by the amortization
of premiums we paid or increased by the amortization of discounts we received
for those marketable securities. For the three months ended June 30, 2008 and
2007, investment income increased to $1,779 from $1,569, respectively, due to a
higher average balance of cash equivalents and marketable securities in 2008
than in 2007. Amortization of discounts net of premiums, which is included in
interest income, decreased to ($211) from $175 for the three months ended June
30, 2008 and 2007, respectively.
Six Months: Interest income
decreased to $3,526 for the six months ended June 30, 2008 from $3,612 for the
same period of 2007. Interest income, as reported, is primarily the result of
investment income from our marketable securities, decreased by the amortization
of premiums we paid or increased by the amortization of discounts we received
for those marketable securities. For the six months ended June 30, 2008 and
2007, investment income increased to $3,832 from $3,389, respectively, due to a
higher average balance of cash equivalents and marketable securities in 2008
than in 2007. Amortization of discounts net of premiums, which is included in
interest income, decreased to ($306) from $223 for the six months ended June 30,
2008 and 2007, respectively.
Net
Loss:
Net loss
was $2,369 for the three months ended June 30, 2008 compared to $2,383 for the
same period of 2007, and $17,854 for the six months ended June 30, 2008 compared
to $12,816 for the same period of 2007.
Liquidity
and Capital Resources
Overview
We have
to date generated no meaningful amounts of product revenue, and consequently
have relied principally on external funding and our Collaboration Agreement with
Wyeth to finance our operations. We have funded operations since inception
primarily through private placements of equity securities, payments received
under collaboration agreements, public offerings of common stock, funding under
government research grants and contracts, interest on investments, proceeds from
the exercise of outstanding options and warrants and sale of our common stock
under our two employee stock purchase plans (the “Purchase Plans”). At June 30,
2008, we had cash, cash equivalents and marketable securities, including
non-current portion, totaling $150.6 million compared with $170.4 million at
December 31, 2007. We expect that our existing cash, cash equivalents and
marketable securities at June 30, 2008 will be sufficient to fund current
operations for at least one year. Our cash flow from operating activities was
negative for the six-month periods ended June 30, 2008 and 2007 due primarily to
the excess of expenditures on our research and development programs and general
and administrative costs related to those programs over cash received from
collaborators and government grants and contracts to fund such programs, as
described below.
Sources
of Cash
Operating
Activities. Our current collaboration with Wyeth provided us
with a $60 million upfront payment in December 2005. In addition, since January
2006, Wyeth has been reimbursing us for development expenses we incur related to
RELISTOR under the development plan agreed to between us, which is currently
expected to continue through 2009. For the six months ended June 30, 2008 and
2007, we received $17.8 million and $19.5 million, respectively, of such
reimbursement. Since inception of the Collaboration Agreement, Wyeth has made
$29.0 million in milestone payments upon the achievement of certain events. In
May 2007, we earned $9.0 million of milestone payments related to the acceptance
for review of applications submitted for marketing approval of a subcutaneous
formulation of RELISTOR for the treatment of opioid-induced constipation in
patients receiving palliative care in the U.S. and the European Union. Approval
of the U.S. application resulted in our earning a $15.0 million milestone
payment, which was recognized in the second quarter of 2008. Wyeth has also
submitted applications for the marketing of RELISTOR in Australia and Canada,
the latter of which was approved in March 2008. In October 2006, we earned a
$5.0 million milestone payment in connection with the start of a phase 3
clinical trial of intravenous RELISTOR for the treatment of post-operative
ileus. Wyeth is obligated to make up to $327.5 million in additional payments to
us upon the achievement of milestones and other contingent events in the
development and commercialization of RELISTOR. Wyeth is also responsible for all
commercialization activities related to RELISTOR products. We will receive
royalty payments from Wyeth as the product is sold in the various countries
where marketing approval has been obtained. We will also receive royalty
payments upon the sale of all other products developed under the Collaboration
Agreement.
The
funding by Wyeth of our development costs for RELISTOR generally enhances our
ability to devote current and future resources to other research and development
programs. We may also enter into collaboration agreements, license or sale
transactions or royalty sales or financings with respect to our products and
product candidates. We cannot forecast with any degree of certainty, however,
which products or indications, if any, will be subject to future arrangements,
or how they would affect our capital requirements. The consummation of other
agreements would further allow us to advance other projects with current
funds.
In
September 2003, we were awarded a contract by the NIH to develop a prophylactic
vaccine designed to prevent HIV from becoming established in uninfected
individuals exposed to the virus. Funding under the NIH Contract provided for
pre-clinical research, development and early clinical testing. These funds are
being used principally in connection with our ProVax HIV vaccine program. The
NIH Contract originally provided for up to $28.6 million in funding to us,
subject to annual funding approvals and compliance with its terms, over five
years. The total of our approved award under the NIH Contract through September
2008 is $15.5 million. Funding under this contract includes the payment of an
aggregate of $1.6 million in fees, subject to achievement of specified
milestones. Through June 30, 2008, we had recognized revenue of $14.4 million
from this contract, including $0.2 million for the achievement of two
milestones. We have recently been informed by the NIH that it has decided not to
fund this contract beyond September 2008. To continue to develop the HIV vaccine
after that time, therefore, we will need to provide funding on our own or obtain
new government or other funding. If we choose not to provide our own or cannot
secure governmental or other funding, we will discontinue this
project.
We have
also been awarded grants from the NIH which provide ongoing funding for a
portion of our virology and cancer research programs. Among those grants were an
aggregate of $4.4 million in grants made in 2006 and 2007 which extend over two-
and three-year periods. Two awards made during 2005, provide for up to $3.0
million and $9.7 million in support of our HCV research program and PRO 140 HIV
development programs to be awarded over a three year and a three and a half year
period, respectively. Funding under all of our NIH grants is subject to
compliance with their terms, and is subject to annual funding approvals. For the
six months ended June 30, 2008 and 2007, we recognized $3.2 million and $2.6
million, respectively, of revenue from all of our NIH grants.
Changes
in Accounts receivable and Accounts payable for the six months ended June 30,
2008 from the same period of 2007 resulted from the timing of receipts from the
NIH and Wyeth, and payments made to trade vendors in the normal course of
business.
Other
than amounts to be received from Wyeth and from currently approved grants and
contracts, we have no committed external sources of capital. Other than revenues
from RELISTOR, we expect no significant product revenues for a number of years,
as it will take at least that much time, if ever, to bring our product
candidates to the commercial marketing stage.
Investing
Activities. We purchase and sell marketable securities in
order to provide funding for operations and achieve appreciation of unused cash
in a low risk environment. Our marketable securities, which include corporate
debt securities, securities of government-sponsored entities and auction rate
securities, are classified as available-for-sale.
As a
result of recent changes in general market conditions, we determined to reduce
the principal amount of auction rate securities in our portfolio as they came up
for auction and invest the proceeds in other securities in accordance with our
investment guidelines. Beginning in February 2008, auctions failed for certain
of our auction rate securities because sell orders exceeded buy orders. As a
result, at June 30, 2008, we continue to hold approximately $6.0 million (4% of
total assets measured at fair value) of auction rate securities, in respect of
which we have received all scheduled interest payments, which, in the event of
auction failure, are reset according to the contractual terms in the governing
instrument. The principal amount of these remaining auction rate securities will
not be accessible until a successful auction occurs, the issuer calls or
restructures the underlying security, the underlying security matures and is
paid or a buyer outside the auction process emerges.
We
continue to monitor the market for auction rate securities and consider its
effect (if any) on the fair market value of our investments. If market
conditions do not recover, we may be required to record additional unrealized
losses in 2008, which may affect our financial condition, cash flows and net
loss. We believe that the failed auctions experienced to date are not a result
of the deterioration of the underlying credit quality of these securities,
although valuation of them is subject to uncertainties that are difficult to
predict, such as changes to credit ratings of the securities and/or the
underlying assets supporting them, default rates applicable to the underlying
assets, underlying collateral value, discount rates, counterparty risk and
ongoing strength and quality of market credit and liquidity. We do not believe
the carrying values of these auction rate securities are permanently impaired
and therefore expect the positions will eventually be liquidated without
significant loss.
Our
marketable securities are purchased and, in the case of auction rate securities,
sold by third-party brokers in accordance with our investment policy guidelines.
Our brokerage account requires that all marketable securities, other than
auction rate securities, be held to maturity unless authorization is obtained
from us to sell earlier. In fact, we have a history of holding all marketable
securities, other than auction rate securities, to maturity. We, therefore,
consider that we have the intent and ability to hold any securities with
unrealized losses until a recovery of fair value (which may be maturity), and we
do not consider these marketable securities to be other than temporarily
impaired at June 30, 2008.
Financing
Activities. During the six months ended June 30, 2008 and
2007, we received cash of $2.9 million and $4.4 million, respectively, from the
exercise of stock options by employees, directors and non-employee consultants
and from the sale of our common stock under our Purchase Plans. The amount of
cash we receive from these sources fluctuates commensurate with headcount levels
and changes in the price of our common stock on the grant date for options
exercised, and on the sale date for shares sold under the Purchase
Plans.
On April
24, 2008 RELISTOR subcutaneous injection was approved by the FDA for sale in the
U.S. for the treatment of OIC in patients with advanced illness who are
receiving palliative care, when response to laxative therapy has not been
sufficient. Unless we obtain regulatory approval from the FDA for at least one
of our other product candidates and/or enter into additional agreements with
others with respect to the development of our technologies, we may be required
to fund our operations for periods in the future by seeking additional financing
through offerings of equity or debt securities or funding from additional grants
and government contracts. Adequate additional funding may not be available to us
on acceptable terms or at all. Our inability to raise additional capital on
terms reasonably acceptable to us would seriously jeopardize the future success
of our business.
Uses
of Cash
Operating
Activities. The majority of our cash has been used to advance
our research and development programs. We currently have major research and
development programs investigating gastroenterology, virology and oncology, and
are conducting several smaller research projects in the areas of virology and
oncology. Our total expenses for research and development from inception through
June 30, 2008 have been approximately $465.6 million. For various reasons, many
of which are outside of our control, including the early stage of certain of our
programs, the timing and results of our clinical trials and our dependence in
certain instances on third parties, we cannot estimate the total remaining costs
to be incurred and timing to complete our research and development programs.
Under our Collaboration Agreement with Wyeth, we are able to estimate that those
remaining costs for the subcutaneous and intravenous formulations of RELISTOR,
based upon the development plan and budget approved by us and Wyeth, which
defines the totality of our obligations, are $32.6 million over the period from
July 1, 2008 to December 31, 2009.
For the
six months ended June 30, 2008 and 2007, research and development costs incurred
by project were as follows:
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
(in
millions)
|
|
RELISTOR
|
|
$ |
18.2 |
|
|
$ |
19.6 |
|
HIV
|
|
|
20.3 |
|
|
|
12.5 |
|
Cancer
|
|
|
4.8 |
|
|
|
9.7 |
|
Other
programs
|
|
|
4.9 |
|
|
|
4.0 |
|
Total
|
|
$ |
48.2 |
|
|
$ |
45.8 |
|
Although
we expect that our spending on RELISTOR during the remainder of 2008 will be
similar to that in 2007, our cash outlays in accordance with the agreed upon
development plan will be reimbursed by Wyeth. We also expect that spending on
our PRO 140 and PSMA programs will increase during the remainder of 2008.
Consequently, we may require additional funding to continue our research and
product development programs, conduct pre-clinical studies and clinical trials,
fund operating expenses, pursue regulatory approvals for our product candidates,
file and prosecute patent applications and enforce or defend patent claims, if
any, and fund product in-licensing and any possible acquisitions. Manufacturing
and commercialization expenses for RELISTOR will be funded by Wyeth. However, if
we exercise our option to co-promote RELISTOR products in the U.S., which must
be approved by Wyeth, we will be required to establish and fund a sales force,
which we currently do not have. If we commercialize any other product candidate
other than with a collaborator, we would also require additional funding to
establish manufacturing and marketing capabilities.
Our
purchase of rights from our methylnaltrexone licensors in December 2005 has
extinguished the obligation to make cash payments that would have been due to
those licensors in the future upon the achievement of certain events, including
sales of RELISTOR products. We continue to be responsible to make payments
(including royalties) to the University of Chicago upon the occurrence of
certain events. See Results of
Operations – Royalty expenses, above.
We are
continuing to conduct the PSMA research and development projects on our own
subsequent to our acquisition of PSMA LLC and are required to fund the entire
amount of such efforts, thus increasing our cash expenditures. We are funding
PSMA-related research and development efforts from internally-generated cash
flows. We are also continuing to receive funding from the NIH for a portion of
our PSMA-related research and development costs.
Investing
Activities. During the six months ended June 30, 2008 and
2007, we have spent $1.6 million and $2.1 million, respectively, on capital
expenditures related to the expansion of office, laboratory and manufacturing
facilities and the purchase of more laboratory equipment for ongoing and future
research and development projects, including the purchase of a second 150-liter
bioreactor in February 2007 for the manufacture of research and clinical
products.
On April
24, 2008, we announced that our Board of Directors had approved a share
repurchase program to acquire up to $15.0 million of our outstanding common
shares, funding for which will come from the $15.0 million milestone payment we
received from Wyeth for receiving U.S. marketing approval for RELISTOR.
Purchases under the program will be made at our discretion subject to market
conditions in the open-market or otherwise, and will be made in accordance with
the regulations of the U.S. Securities and Exchange Commission, including Rule
10b-18. We have made no commitment to purchase any shares and purchases may be
discontinued at any time. Reacquired shares will be held in treasury
until redeployed or retired. None of our outstanding common shares were
repurchased as of June 30, 2008.
Contractual
Obligations
Our
funding requirements, both for the next 12 months and beyond, will include
required payments under operating leases and licensing and collaboration
agreements. The following table summarizes our contractual obligations as of
June 30, 2008 for future payments under these agreements:
|
|
|
|
|
Payments
due by June 30,
|
|
|
|
Total
|
|
|
2009
|
|
|
|
2010-2011
|
|
|
|
2012-2013
|
|
|
Thereafter
|
|
|
|
(in
millions)
|
|
Operating
leases
|
|
$ |
6.9 |
|
|
$ |
3.1 |
|
|
$ |
2.7 |
|
|
$ |
0.8 |
|
|
$ |
0.3 |
|
License
and collaboration agreements (1)
|
|
|
98.1 |
|
|
|
1.9 |
|
|
|
5.9 |
|
|
|
13.8 |
|
|
|
76.5 |
|
Total
|
|
$ |
105.0 |
|
|
$ |
5.0 |
|
|
$ |
8.6 |
|
|
$ |
14.6 |
|
|
$ |
76.8 |
|
(1)
|
Assumes
attainment of milestones covered under each agreement, including those by
PSMA LLC. Timing of achievement of milestones is highly uncertain, and
accordingly the actual timing of payments, if any, is likely to vary,
perhaps significantly, relative to the timing contemplated by this
table.
|
We
periodically assess the scientific progress and merits of each of our programs
to determine if continued research and development is economically viable.
Certain of our programs have been terminated due to the lack of scientific
progress and prospects for ultimate commercialization. Because of the
uncertainties associated with research and development in these programs, the
duration and completion costs of our research and development projects are
difficult to estimate and are subject to considerable variation. Our inability
to complete research and development projects in a timely manner or failure to
enter into collaborative agreements could significantly increase capital
requirements and adversely affect our liquidity.
Our cash
requirements may vary materially from those now planned because of results of
research and development and product testing, changes in existing relationships
or new relationships with licensees, licensors or other collaborators, changes
in the focus and direction of our research and development programs, competitive
and technological advances, the cost of filing, prosecuting, defending and
enforcing patent claims, the regulatory approval process, manufacturing and
marketing and other costs associated with the commercialization of products
following receipt of regulatory approvals and other factors.
The above
discussion contains forward-looking statements based on our current operating
plan and the assumptions on which it relies. There could be deviations from that
plan that would consume our assets earlier than planned.
Off-Balance Sheet
Arrangements and Guarantees
We have
no off-balance sheet arrangements and do not guarantee the obligations of any
other unconsolidated entity.
Critical
Accounting Policies
We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. Our significant
accounting policies are disclosed in Note 2 to our financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2007. The
selection and application of these accounting principles and methods requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial statement
disclosures. On an ongoing basis, we evaluate our estimates. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of our evaluation
form the basis for making judgments about the carrying values of assets and
liabilities that are not otherwise readily apparent. While we believe that the
estimates and assumptions we use in preparing the financial statements are
appropriate, these estimates and assumptions are subject to a number of factors
and uncertainties regarding their ultimate outcome and, therefore, actual
results could differ from these estimates.
We have
identified our critical accounting policies and estimates below. These are
policies and estimates that we believe are the most important in portraying our
financial condition and results of operations, and that require our most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
have discussed the development, selection and disclosure of these critical
accounting policies and estimates with the Audit Committee of our Board of
Directors.
Revenue
Recognition
We
recognize revenue from all sources based on the provisions of the Securities and
Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB 104”) “Revenue
Recognition,” Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”)
“Accounting for Revenue Arrangements with Multiple Deliverables” and EITF Issue
No. 99-19 (“EITF 99-19”) “Reporting Revenue Gross as a Principal Versus Net as
an Agent.” Our license and co-development agreement with Wyeth includes a
non-refundable upfront license fee, reimbursement of development costs, research
and development payments based upon our achievement of clinical development
milestones, contingent payments based upon the achievement by Wyeth of defined
events and royalties on product sales. We began recognizing research revenue
from Wyeth on January 1, 2006. During the six months ended June 30, 2008 and
2007, we also recognized revenue from government research grants and contracts,
which are used to subsidize a portion of certain of our research projects,
exclusively from the NIH. We also recognized revenue from the sale of research
reagents during those periods.
Non-refundable
upfront license fees are recognized as revenue when we have a contractual right
to receive such payment, the contract price is fixed or determinable, the
collection of the resulting receivable is reasonably assured and we have no
further performance obligations under the license agreement. Multiple element
arrangements, such as license and development arrangements are analyzed to
determine whether the deliverables, which often include a license and
performance obligations, such as research and steering or other committee
services, can be separated in accordance with EITF 00-21. We would recognize
upfront license payments as revenue upon delivery of the license only if the
license had standalone value and the fair value of the undelivered performance
obligations, typically including research or steering or other committee
services, could be determined. If the fair value of the undelivered performance
obligations could be determined, such obligations would then be accounted for
separately as performed. If the license is considered to either (i) not have
standalone value or (ii) have standalone value but the fair value of any of the
undelivered performance obligations could not be determined, the upfront license
payments would be recognized as revenue over the estimated period of when our
performance obligations are performed.
We must
determine the period over which our performance obligations will be performed
and revenue related to upfront license payments will be recognized. Revenue will
be recognized using either a proportionate performance or straight-line method.
We recognize revenue using the proportionate performance method provided that we
can reasonably estimate the level of effort required to complete our performance
obligations under an arrangement and such performance obligations are provided
on a best-efforts basis. Direct labor hours or full-time equivalents will
typically be used as the measure of performance. Under the proportionate
performance method, revenue related to upfront license payments is recognized in
any period as the percent of actual effort expended in that period relative to
total effort for all of our performance obligations under the arrangement. We
are recognizing revenue related to the upfront license payment we received from
Wyeth using the proportionate performance method since we can reasonably
estimate the level of effort required to complete our performance obligations
under the Collaboration Agreement based upon the most current budget approved by
both Wyeth and us. Such performance obligations are provided by us on a
best-efforts basis. Full-time equivalents are being used as the measure of
performance. Significant judgment is required in determining the nature and
assignment of tasks to be accomplished by each of the parties and the level of
effort required for us to complete our performance obligations under the
arrangement. The nature and assignment of tasks to be performed by each party
involves the preparation, discussion and approval by the parties of a
development plan and budget. Since we have no obligation to develop the
subcutaneous and intravenous formulations of RELISTOR outside the U.S. or the
oral formulation at all and have no significant commercialization obligations
for any product, recognition of revenue for the upfront payment is not required
during those periods, if they extend beyond the period of our development
obligations.
During
the course of a collaboration agreement, e.g., the Collaboration
Agreement, that involves a development plan and budget, the amount of the
upfront license payment that is recognized as revenue in any period will
increase or decrease as the percentage of actual effort increases or decreases,
as described above. When a new budget is approved, generally annually, the
remaining unrecognized amount of the upfront license fee will be recognized
prospectively, using the methodology described above and applying any changes in
the total estimated effort or period of development that is specified in the
revised approved budget. The amounts of the upfront license payment that we
recognized as revenue for each fiscal quarter prior to the third quarter of 2007
were based upon several revised approved budgets, although the revisions to
those budgets did not materially affect the amounts of revenue recognized in
those periods. During the third quarter of 2007, the estimate of our total
remaining effort to complete our development obligations was increased
significantly based upon a revised development budget approved by both us and
Wyeth. As a result, the period over which our obligations will extend, and over
which the upfront payment will be amortized, was extended from the end of 2008
to the end of 2009. Consequently, the amount of revenue recognized from the
upfront payment in the first quarter of 2008 declined relative to that in the
comparable period of 2007. Due to the significant judgments involved in
determining the level of effort required under an arrangement and the period
over which we expect to complete our performance obligations under the
arrangement, further changes in any of those judgments are reasonably likely to
occur in the future which could have a material impact on our revenue
recognition. If a collaborator terminates an agreement in accordance with the
terms of the agreement, we would recognize any unamortized remainder of an
upfront payment at the time of the termination.
If we
cannot reasonably estimate the level of effort required to complete our
performance obligations under an arrangement and the performance obligations are
provided on a best-efforts basis, then the total upfront license payments would
be recognized as revenue on a straight-line basis over the period we expect to
complete our performance obligations.
If we are
involved in a steering or other committee as part of a multiple element
arrangement, we assess whether our involvement constitutes a performance
obligation or a right to participate. For those committees that are deemed
obligations, we will evaluate our participation along with other obligations in
the arrangement and will attribute revenue to our participation through the
period of our committee responsibilities. In relation to the Collaboration
Agreement, we have assessed the nature of our involvement with the JSC, JDC, JCC
and JComm. Our involvement in the first two such committees is one of several
obligations to develop the subcutaneous and intravenous formulations of RELISTOR
through regulatory approval in the U.S. We have combined the committee
obligations with the other development obligations and are accounting for these
obligations during the development phase as a single unit of accounting. After
the development period, however, we have assessed the nature of our involvement
with the three committees to be a right, rather than an obligation. Our
assessment is based upon the fact we negotiated to be on these committees as an
accommodation for our granting of the license for RELISTOR to Wyeth. Further,
Wyeth has been granted by us an exclusive license (even as to us) to the
technology and know-how regarding RELISTOR and has been assigned the agreements
for the manufacture of RELISTOR by third parties. Following regulatory approval
of the subcutaneous and intravenous formulations of RELISTOR, Wyeth will
continue to develop the oral formulation and to commercialize all formulations,
for which it is capable and responsible. During those periods, the activities of
these committees will be focused on Wyeth’s development and commercialization
obligations.
Collaborations
may also contain substantive milestone payments. Substantive milestone payments
are considered to be performance payments that are recognized upon achievement
of the milestone only if all of the following conditions are met: (i) the
milestone payment is non-refundable, (ii) achievement of the milestone involves
a degree of risk and was not reasonably assured at the inception of the
arrangement, (iii) substantive effort is involved in achieving the milestone,
(iv) the amount of the milestone payment is reasonable in relation to the effort
expended or the risk associated with achievement of the milestone, and (v) a
reasonable amount of time passes between the upfront license payment and the
first milestone payment as well as between each subsequent milestone payment
(the “Substantive Milestone Method”). During October 2006, May 2007 and April
2008, we earned $5.0 million, $9.0 million and $15 million, respectively, upon
achievement of non-refundable milestones anticipated in the Collaboration
Agreement; the first in connection with the commencement of a phase 3 clinical
trial of the intravenous formulation of RELISTOR, the second in connection with
the submission and acceptance for review of an NDA for a subcutaneous
formulation of RELISTOR with the FDA and a comparable submission in the European
Union and the third for the FDA approval of subcutaneous RELISTOR. We considered
those milestones to be substantive based on the significant degree of risk at
the inception of the Collaboration Agreement related to the conduct and
successful completion of clinical trials and, therefore, of not achieving the
milestones; the amount of the payment received relative to the significant costs
incurred since inception of the Collaboration Agreement and amount of effort
expended or the risk associated with the achievement of these milestones; and
the passage of ten, 17 and 28 months, respectively, from inception of the
Collaboration Agreement to the achievement of those milestones. Therefore, we
recognized the milestone payments as revenue in the respective periods in which
the milestones were earned.
Determination
as to whether a milestone meets the aforementioned conditions involves
management’s judgment. If any of these conditions are not met, the resulting
payment would not be considered a substantive milestone and, therefore, the
resulting payment would be considered part of the consideration and be
recognized as revenue as such performance obligations are performed under either
the proportionate performance or straight-line methods, as applicable, and in
accordance with the policies described above.
We will
recognize revenue for payments that are contingent upon performance solely by
our collaborator immediately upon the achievement of the defined event if we
have no related performance obligations.
Reimbursement
of costs is recognized as revenue provided the provisions of EITF 99-19 are met,
the amounts are determinable and collection of the related receivable is
reasonably assured.
Royalty
revenue is recognized based upon net sales of related licensed products, as
reported to us by Wyeth. Royalty revenue is recognized in the period the sales
occur, provided that the royalty amounts are fixed or determinable, collection
of the related receivable is reasonably assured and we have no remaining
performance obligations under the arrangement. If royalties are received when we
have remaining performance obligations, the royalty payments would be attributed
to the services being provided under the arrangement and, therefore, would be
recognized as such performance obligations are performed under either the
proportionate performance or straight-line methods, as applicable, and in
accordance with the policies described above.
Amounts
received prior to satisfying the above revenue recognition criteria are recorded
as deferred revenue in the accompanying consolidated balance sheets. Amounts not
expected to be recognized within one year of the balance sheet date are
classified as long-term deferred revenue. The estimate of the classification of
deferred revenue as short-term or long-term is based upon management’s current
operating budget for the Wyeth Collaboration Agreement for our total effort
required to complete our performance obligations under that arrangement. That
estimate may change in the future and such changes to estimates would be
accounted for prospectively and would result in a change in the amount of
revenue recognized in future periods.
NIH grant
and contract revenue is recognized as efforts are expended and as related
subsidized project costs are incurred. We perform work under the NIH grants and
contract on a best-effort basis. The NIH reimburses us for costs associated with
projects in the fields of virology and cancer, including pre-clinical research,
development and early clinical testing of a prophylactic vaccine designed to
prevent HIV from becoming established in uninfected individuals exposed to the
virus, as requested by the NIH. Substantive at-risk milestone payments are
uncommon in these arrangements, but would be recognized as revenue on the same
basis as the Substantive Milestone Method.
Share-Based
Payment Arrangements
Our
share-based compensation to employees includes non-qualified stock options,
restricted stock (non-vested shares) and shares issued under our Purchase Plans,
which are compensatory under Statement of Financial Accounting Standards No. 123
(revised 2004) (“SFAS No. 123(R)”) “Share-Based Payment.” We account for
share-based compensation to non-employees, including non-qualified stock options
and restricted stock (non-vested shares), in accordance with Emerging Issues
Task Force Issue No. 96-18 “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Connection with Selling, Goods or
Services.”
We
adopted SFAS No. 123(R) using the modified prospective application, under which
compensation cost for all share-based awards that were unvested as of January 1,
2006, the adoption date, and those newly granted or modified after the adoption
date will be recognized in our financial statements over the related requisite
service periods; usually the vesting periods for awards with a service
condition. Compensation cost is based on the grant-date fair value of awards
that are expected to vest. We apply a forfeiture rate to the number of unvested
awards in each reporting period in order to estimate the number of awards that
are expected to vest. Estimated forfeiture rates are based upon historical data
on vesting behavior of employees. We adjust the total amount of compensation
cost recognized for each award, in the period in which each award vests, to
reflect the actual forfeitures related to that award. Changes in our estimated
forfeiture rate will result in changes in the rate at which compensation cost
for an award is recognized over its vesting period. We have made an accounting
policy decision to use the straight-line method of attribution of compensation
expense, under which the grant date fair value of share-based awards will be
recognized on a straight-line basis over the total requisite service period for
the total award.
Under
SFAS No. 123(R), the fair value of each non-qualified stock option award is
estimated on the date of grant using the Black-Scholes option pricing model,
which requires input assumptions of stock price on the date of grant, exercise
price, volatility, expected term, dividend rate and risk-free interest rate. For
this purpose:
·
|
We
use the closing price of our common stock on the date of grant, as quoted
on The NASDAQ Stock Market LLC, as the exercise
price.
|
·
|
Historical
volatilities are based upon daily quoted market prices of our common stock
on The NASDAQ Stock Market LLC over a period equal to the expected term of
the related equity instruments. We rely only on historical volatility
since it provides the most reliable indication of future volatility.
Future volatility is expected to be consistent with historical; historical
volatility is calculated using a simple average calculation; historical
data is available for the length of the option’s expected term and a
sufficient number of price observations are used consistently. Since our
stock options are not traded on a public market, we do not use implied
volatility. For the six months ended June 30, 2008 and 2007, the
volatility of our common stock has been high, 66% - 91% and 55% - 87%,
respectively, which is common for entities in the biotechnology industry
that do not have commercial products. A higher volatility input to the
Black-Scholes model increases the resulting compensation
expense.
|
·
|
The
expected term of options granted represents the period of time that
options granted are expected to be outstanding. For the six months ended
June 30, 2008 and 2007, our expected term was calculated based upon
historical data related to exercise and post-termination cancellation
activity for each of two groups of recipients of stock options: employees,
and officers and directors. Accordingly, for grants made to each of the
groups mentioned above, we are using expected terms of 5.33 and 8 years
and 5.25 and 7.5 years, respectively. Expected term for options granted to
non-employee consultants was ten years, which is the contractual term of
those options. A shorter expected term would result in a lower
compensation expense. For the July 1, 2008 award, the Compensation
Committee of the Board of Directors modified the form of the grant used
for stock incentive awards to provide for vesting of stock incentive
awards granted on that date ratably over a three-year period and for
acceleration of the vesting of such awards and all previously granted and
outstanding awards for any employee in the event that, following a Change
in Control, such employee’s employment is Terminated without Cause (as
such terms are defined in our 2005 Stock Incentive
Plan).
|
·
|
Since
we have never paid dividends and do not expect to pay dividends in the
future, our dividend rate is zero.
|
·
|
The
risk-free rate for periods within the expected term of the options is
based on the U.S. Treasury yield curve in effect at the time of
grant.
|
A portion
of the options granted to our Chief Executive Officer on July 1, 2002, 2003,
2004 and 2005, on July 3, 2006 and on July 2, 2007 cliff vests after nine years
and eleven months from the respective grant date. Vesting of a defined portion
of each award will occur earlier if a defined performance condition is achieved;
more than one condition may be achieved in any period. In accordance with SFAS
No. 123(R), at the end of each reporting period, we will estimate the
probability of achievement of each performance condition and will use those
probabilities to determine the requisite service period of each award. The
requisite service period for the award is the shortest of the explicit or
implied service periods. In the case of the executive’s options, the explicit
service period is nine years and eleven months from the respective grant dates.
The implied service periods related to the performance conditions are the
estimated times for each performance condition to be achieved. Thus,
compensation expense will be recognized over the shortest estimated time for the
achievement of performance conditions for that award (assuming that the
performance conditions will be achieved before the cliff vesting occurs).
Changes in the estimate of probability of achievement of any performance
condition will be reflected in compensation expense of the period of change and
future periods affected by the change.
The fair
value of shares purchased under the Purchase Plans is estimated on the date of
grant in accordance with FASB Technical Bulletin No. 97-1 “Accounting under
Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back
Option.” The same option valuation model is used for the Purchase Plans as for
non-qualified stock options, except that the expected term for the Purchase
Plans is six months and the historical volatility is calculated over the six
month expected term.
In
applying the treasury stock method for the calculation of diluted earnings per
share (“EPS”), amounts of unrecognized compensation expense and windfall tax
benefits are required to be included in the assumed proceeds in the denominator
of the diluted earnings per share calculation unless they are anti-dilutive. We
incurred a net loss for the six months ended June 30, 2008 and 2007, and,
therefore, such amounts have not been included for those periods in the
calculation of diluted EPS since they would be anti-dilutive. Accordingly, basic
and diluted EPS are the same for those periods. We have made an accounting
policy decision to calculate windfall tax benefits/shortfalls for purposes of
diluted EPS calculations, excluding the impact of pro forma deferred tax assets.
This policy decision will apply when we have net income.
For the
six months ended June 30, 2008, no tax benefit was recognized related to total
compensation cost for share-based payment arrangements recognized in operations
because we had a net loss for the period and the related deferred tax assets
were fully offset by a valuation allowance. Accordingly, no amounts related to
windfall tax benefits have been reported in cash flows from operations or cash
flows from financing activities for the six months ended June 30,
2008.
Research
and Development Expenses Including Clinical Trial Expenses
Clinical
trial expenses, which are included in research and development expenses,
represent obligations resulting from our contracts with various clinical
investigators and clinical research organizations in connection with conducting
clinical trials for our product candidates. Such costs are expensed based on the
expected total number of patients in the trial, the rate at which the patients
enter the trial and the period over which the clinical investigators and
clinical research organizations are expected to provide services. We believe
that this method best approximates the efforts expended on a clinical trial with
the expenses we record. We adjust our rate of clinical expense recognition if
actual results differ from our estimates. The Collaboration Agreement with Wyeth
in which Wyeth has assumed all of the financial responsibility for further
development, will mitigate those costs. In addition to clinical trial expenses,
we estimate the amounts of other research and development expenses, for which
invoices have not been received at the end of a period, based upon communication
with third parties that have provided services or goods during the
period.
On
January 1, 2008, we adopted Emerging Issues Task Force Issue 07-3 (“EITF 07-3”)
“Accounting for Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities.” Prior to January 1, 2008, under FASB
Statement No. 2, “Accounting for Research and Development Costs,” non-refundable
advance payments for future research and development activities for materials,
equipment, facilities and purchased intangible assets that had no alternative
future use were expensed as incurred. Beginning January 1, 2008, we have been
capitalizing such non-refundable advance payments and expensing them as the
goods are delivered or the related services are performed. EITF 07-3 applies to
new contracts entered into after the effective date of January 1, 2008. Applying
EITF 07-3 did not have a material impact on the financial position or results of
operations for the three and six months ended June 30, 2008.
Fair
Value Measurements
Our
available-for-sale investment portfolio consists of marketable securities, which
include corporate debt securities, securities of government-sponsored entities
and auction rate securities, and is recorded at fair value in the accompanying
Condensed Consolidated Balance Sheets in accordance with Financial Accounting
Standards Board (“FASB”) Statement No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” The change in the fair value
of these investments is recorded as a component of other comprehensive
loss.
We
adopted FASB Statement No. 159 (“FAS 159”) “The Fair Value Option of
Financial Assets and Financial Liabilities” effective January 1, 2008,
which provides companies with an option to report certain financial assets and
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. FAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The objective of FAS 159 is to
reduce both complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities
differently. We have elected not to apply the fair value option to any of our
financial assets or liabilities.
We also
adopted FASB Statement No. 157 (“FAS 157”) “Fair Value Measurements”
effective January 1, 2008 for financial assets and financial liabilities.
FAS 157 defines fair value as the price that would be received to sell an
asset or would be paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date, and
establishes a framework to make the measurement of fair value more consistent
and comparable. In accordance with Financial Accounting Standards Board
Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” we will
defer the adoption of FAS 157 for our nonfinancial assets and nonfinancial
liabilities until January 1, 2009. We are currently evaluating the impact of FAS
157 for nonfinancial assets and nonfinancial liabilities, and currently do not
expect the adoption of this statement to have a material effect on our financial
position or results of operations. The partial adoption of FAS 157 did not have
a material impact on our fair value measurements.
FAS 157
established a three-level hierarchy for fair value measurements that
distinguishes between market participant assumptions developed based on market
data obtained from sources independent of the reporting entity (“observable
inputs”) and the reporting entity’s own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (“unobservable inputs”). The hierarchy level assigned to
each security in our available-for-sale portfolio is based on our assessment of
the transparency and reliability of the inputs used in the valuation of such
instrument at the measurement date. The three hierarchy levels are defined
as follows:
·
|
Level
1 - Valuations based on unadjusted quoted market prices in active markets
for identical securities.
|
·
|
Level
2 - Valuations based on observable inputs other than Level 1 prices, such
as quoted prices for similar assets at the measurement date, quoted prices
in markets that are not active or other inputs that are observable, either
directly or indirectly.
|
·
|
Level
3 - Valuations based on inputs that are unobservable and significant to
the overall fair value measurement, and involve management
judgment.
|
Impact
of Recently Issued Accounting Standards
In March
2008, the FASB issued SFAS No. 161 (“FAS 161”) “Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No. 133,”
which is intended to improve financial standards for derivative instruments and
hedging activities by requiring enhanced disclosures. The enhanced disclosure
conveys the purpose of derivative use to enable investors a better understanding
of their effects on an entity's financial position, financial performance, and
cash flows. Entities are required to provide enhanced disclosures about (i) how
and why an entity uses derivative instruments, (ii) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption encouraged. We do not expect the effect
of the adoption of FAS 161 to have a material effect on our financial position
or results of operations.
Item
3. Quantitative and Qualitative Disclosures about
Market Risk
Our
primary investment objective is to preserve principal while maximizing yield
without significantly increasing our risk. Our investments consist of taxable
corporate debt securities, securities of government sponsored entities and
auction rate securities. Our investments totaled $141.6 million at June 30,
2008. Approximately $109.3 million of these investments had fixed interest
rates, and $32.3 million had interest rates that were variable. Our marketable
securities are classified as available-for-sale.
Due to
the conservative nature of our short-term fixed interest rate investments, we do
not believe that we have a material exposure to interest rate risk. Our
fixed-interest-rate long-term investments are sensitive to changes in interest
rates. Interest rate changes would result in a change in the fair values of
these investments due to differences between the market interest rate and the
rate at the date of purchase of the investment. A 100 basis point increase in
the June 30, 2008 market interest rates would result in a decrease of
approximately $0.077 million in the market values of these
investments.
As a
result of recent changes in general market conditions, we determined to reduce
the principal amount of auction rate securities in our portfolio as they came up
for auction and invest the proceeds in other securities in accordance with our
investment guidelines. Beginning in February 2008, auctions failed for certain
of our auction rate securities because sell orders exceeded buy orders. As a
result, at June 30, 2008, we continue to hold approximately $6.0 million (4% of
assets measured at fair value) of auction rate securities, in respect of which
we have received all scheduled interest payments, which, in the event of auction
failure, are reset according to the contractual terms in the governing
instruments. The principal amount of these remaining auction rate securities
will not be accessible until a successful auction occurs, the issuer calls or
restructures the underlying security, the underlying security matures and is
paid or a buyer outside the auction process emerges.
We
continue to monitor the market for auction rate securities and consider its
effect (if any) on the fair market value of our investments. If market
conditions do not recover, we may be required to record additional impairment
charges in 2008, which may affect our financial condition, cash flows and
earnings. We believe that the failed auctions experienced to date are not a
result of the deterioration of the underlying credit quality of these
securities, although valuation of them is subject to uncertainties that are
difficult to predict, such as changes to credit ratings of the securities and/or
the underlying assets supporting them, default rates applicable to the
underlying assets, underlying collateral value, discount rates, counterparty
risk and ongoing strength and quality of market credit and liquidity. We do not
believe the carrying values of these auction rate securities are permanently
impaired and therefore expect the positions will eventually be liquidated
without significant loss.
The
valuation of the auction rate securities we hold is based on an internal
analysis of timing of expected future successful auctions, collateralization of
underlying assets of the security and credit quality of the security. As a
result of the estimated fair value, we have determined a temporary impairment in
the valuation of these securities of $0.4 million as of the six months ended
June 30, 2008. A 100 basis point increase to our internal analysis would result
in an increase of approximately $0.054 million in the valuation of these
securities as of the six months ended June 30, 2008.
Item
4. Controls and Procedures
We
maintain disclosure controls and procedures, as such term is defined under Rules
13a-15(e) and 15d-15(e) promulgated under the U.S. Securities Exchange Act of
1934, 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 SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Principal Financial and Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can only provide reasonable assurance of achieving the desired control
objectives, and in reaching a reasonable level of assurance, our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We also established a
Disclosure Committee that consists of certain members of our senior
management.
The
Disclosure Committee, under the supervision and with the participation of our
senior management, including our Chief Executive Officer and Principal Financial
and Accounting Officer, carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based upon their evaluation and subject to
the foregoing, the Chief Executive Officer and Principal Financial and
Accounting Officer concluded that our disclosure controls and procedures were
effective.
There
have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
— OTHER
INFORMATION
Our
business and operations entail a variety of serious risks and uncertainties,
including those described in Item 1A of our Form 10-K for the year ended
December 31, 2007 and our other public reports. In addition, the following risk
factors have changed during the quarter ended June 30, 2008:
We are
subject to the risks of failure inherent in the development of product
candidates based on new technologies.
We have
received marketing approvals in the U.S. and other countries for the sale of
RELISTOR subcutaneous injection for the treatment of OIC in patients with
advanced illness who are receiving palliative care, when response to laxative
therapy has not been sufficient. We continue to develop RELISTOR subcutaneous
injection for other indications, and, together with Wyeth, are also developing
intravenous and oral formulations of RELISTOR. We will have to
complete successfully additional clinical trials and obtain regulatory approvals
for these additional formulations and indications. Our other research and
development programs, including those related to PSMA, involve novel approaches
to human therapeutics. For example, our principal HIV product candidate, the
monoclonal antibody PRO 140, is designed to block viral entry. To our knowledge,
there are two approved drugs designed to treat HIV infection by blocking viral
entry (Trimeris’ FUZEON™ and Pfizer’s SELZENTRY™) that have been approved for
marketing in the U.S., but neither are monoclonal antibodies. There is little
precedent for the successful commercialization of products based on our
technologies. There are a number of technological challenges that we must
overcome to complete most of our development efforts. We may not be able
successfully to develop further any of our products.
We
are likely to need additional financing, but our access to capital funding is
uncertain.
As of
June 30, 2008, we had cash, cash equivalents and marketable securities,
including non-current portion, totaling $150.6 million. During the six months
ended June 30, 2008, we had a net loss of $17.9 million and cash used in
operating activities was $20.3 million. Our accumulated deficit is expected to
increase in the future.
Under our
agreement with Wyeth, Wyeth is responsible for all future development and
commercialization costs relating to RELISTOR starting January 1, 2006. As a
result, although our spending on RELISTOR has been significant during the first
and second quarter of 2008 and 2007 and is expected to continue at a similar
level in the future, our net expenses for RELISTOR have been and will continue
to be reimbursed by Wyeth.
With
regard to our other product candidates, we expect that we will continue to incur
significant expenditures for their development, and we do not have committed
external sources of funding for most of these projects. These expenditures will
be funded from our cash on hand, or we may seek additional external funding for
these expenditures, most likely through collaborative agreements, license or
sale transactions or royalty sales or financings, with one or more
pharmaceutical companies, through the issuance and sale of securities or through
additional government grants or contracts. We cannot predict with any certainty
when we will need additional funds or how much we will need or if additional
funds will be available to us. Our need for future funding will depend on
numerous factors, many of which are outside our control.
Our
access to capital funding is always uncertain. Despite previous experience, we
may not be able at the necessary time to obtain additional funding on acceptable
terms, or at all. Our inability to raise additional capital on terms reasonably
acceptable to us may jeopardize the future success of our business.
If we
raise funds by issuing and selling securities, it may be on terms that are not
favorable to our existing stockholders. If we raise additional funds by selling
equity securities, our current stockholders will be diluted, and new investors
could have rights superior to our existing stockholders. If we raise funds by
selling debt securities, we could be subject to restrictive covenants and
significant repayment obligations.
We
believe that existing balances of cash, cash equivalents and marketable
securities and cash generated from operations are sufficient to finance our
current operations and working capital requirements on both a short-term and
long-term basis. We cannot, however, predict the amount or timing of our need
for additional funds under various circumstances, which could include new
product development projects, other opportunities or other factors that may
require us to raise additional funds in the future. Purchases of our common
shares pursuant to our recently announced $15.0 million share repurchase program
would reduce the amount of cash on hand available for unforeseen
needs.
Our
marketable securities, which include corporate debt securities, securities of
government-sponsored entities and auction rate securities, are classified as
available-for-sale.
As a
result of recent changes in general market conditions, we determined to reduce
the principal amount of auction rate securities in our portfolio as they came up
for auction and invest the proceeds in other securities in accordance with our
investment guidelines. Beginning in February 2008, auctions failed for certain
of our auction rate securities because sell orders exceeded buy orders. As a
result, at June 30, 2008, we continue to hold approximately $6.0 million (4% of
total assets measured at fair value) of auction rate securities, in respect of
which we have received all scheduled interest payments, which, in the event of
auction failure, are reset according to the contractual terms in the governing
instruments. The principal amount of these remaining auction rate securities
will not be accessible until a successful auction occurs, the issuer calls or
restructures the underlying security, the underlying security matures and is
paid or a buyer outside the auction process emerges.
We
continue to monitor the market for auction rate securities and consider its
effect (if any) on the fair market value of our investments. If market
conditions do not recover, we may be required to record additional unrealized
losses in 2008, which may affect our financial condition, cash flows and net
loss. We believe that the failed auctions experienced to date are not a result
of the deterioration of the underlying credit quality of these securities,
although valuation of them is subject to uncertainties that are difficult to
predict, such as changes to credit ratings of the securities and/or the
underlying assets supporting them, default rates applicable to the underlying
assets, underlying collateral value, discount rates, counterparty risk and
ongoing strength and quality of market credit and liquidity. We do not believe
the carrying values of these auction rate securities are permanently impaired
and therefore expect the positions will eventually be liquidated without
significant loss.
Our
product candidates may not obtain regulatory approvals needed for marketing, and
may face challenges after approval.
None of
our product candidates other than RELISTOR has been approved by applicable
regulatory authorities for marketing. The process of obtaining FDA and foreign
regulatory approvals often takes many years and can vary substantially based
upon the type, complexity and novelty of the products involved. We have had only
limited experience in filing and pursuing applications and other submissions
necessary to gain marketing approvals. Products under development may never
obtain the marketing approval from the FDA or any other regulatory authority
necessary for commercialization.
Even if
our products receive regulatory approval:
·
|
they
might not obtain labeling claims necessary to make the product
commercially viable (in general, labeling claims define the medical
conditions for which a drug product may be marketed, and are therefore
very important to the commercial success of a
product);
|
·
|
approval
may be limited to uses of the product for treatment or prevention of
diseases or conditions that are relatively less financially advantageous
to us than approval of greater or different
scope;
|
·
|
we
or our collaborators might be required to undertake post-marketing trials
to verify the product’s efficacy or
safety;
|
·
|
we,
our collaborators or others might identify side effects after the product
is on the market, or efficacy or safety concerns regarding marketed
products, whether or not originating from subsequent testing or other
activities by us, governmental regulators, other entities or organizations
or otherwise, and whether or not scientifically justified, may lead to
product recalls, withdrawals of marketing approval, reformulation of the
product, additional pre-clinical testing or clinical trials, changes in
labeling of the product, the need for additional marketing applications,
declining sales or other adverse
events;
|
·
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we
or our collaborators might experience manufacturing problems, which could
have the same, similar or other consequences;
and
|
·
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we
and our collaborators will be subject to ongoing FDA obligations and
continuous regulatory review.
|
If our
products fail to receive marketing approval or lose previously received
approvals, our financial results would be adversely affected.
One
or more competitors developing an opioid antagonist may reach the market ahead
of us and adversely affect the market potential for RELISTOR.
We are
aware that Adolor Corporation, in collaboration with GlaxoSmithKline (“GSK”),
received FDA approval in May 2008 for ENTEREG® (alvimopan), an oral form of an
opioid antagonist, for postoperative ileus, for the proposed indication of
acceleration of time to upper and lower gastrointestinal recovery following
partial large or small bowel resection surgery with primary anastomosis, and is
developing the oral form of alvimopan for opioid-induced bowel dysfunction,
which has been the subject of phase 3 clinical trials. We are
also aware that Sucampo Pharmaceuticals, Inc., in collaboration with Takeda
Pharmaceutical Company Limited, is currently conducting Phase III pivotal
clinical trials of AMITIZA® (lubiprostone) for the treatment of opioid-induced
bowel dysfunction. If either ENTEREG or AMITIZA reaches the market before
RELISTOR in one or more formulations for particular indications or settings, it
could achieve a significant competitive advantage relative to our product. In
any event, the considerable marketing and sales capabilities of GSK and Takeda
may impair our ability to penetrate the market.
Under the
terms of our collaboration with Wyeth with respect to RELISTOR, Wyeth is
developing the oral formulation of RELISTOR worldwide. We and Wyeth are
responsible for the U.S. development of the subcutaneous and intravenous
formulations of RELISTOR, while Wyeth is leading development of these parenteral
products outside the U.S. Decisions regarding the timelines for development of
the three RELISTOR formulations are being be made by a JDC, and endorsed by the
JSC, each committee formed under the terms of the license and co-development
agreement, consisting of members from both Wyeth and Progenics.
Our stock
price has a history of significant volatility. Between January 1, 2006 and June
30, 2008, our stock price has ranged from $4.33 to $30.83 per share.
Historically, our stock price has fluctuated through an even greater range. At
times, our stock price has been volatile even in the absence of significant news
or developments relating to us. The stock prices of biotechnology companies and
the stock market generally have been subject to dramatic price swings in recent
years. Factors that may have a significant impact on the market price of our
common stock include:
|
· the
results of clinical trials and pre-clinical studies involving our products
or those of our competitors;
|
|
· changes
in the status of any of our drug development programs, including delays in
clinical trials or program
terminations;
|
|
· developments
regarding our efforts to achieve marketing approval for our
products;
|
|
· developments
in our relationship with Wyeth regarding the development and
commercialization of RELISTOR;
|
|
· announcements
of technological innovations or new commercial products by us, our
collaborators or our competitors;
|
|
· developments
in our relationships with other collaborative
partners;
|
|
· developments
in patent or other proprietary
rights;
|
|
· governmental
regulation;
|
|
· changes
in reimbursement policies or health care
legislation;
|
|
· public
concern as to the safety and efficacy of products developed by us, our
collaborators or our competitors;
|
|
· our
ability to fund on-going
operations;
|
|
· fluctuations
in our operating results; and
|
|
· general
market conditions.
|
Purchases
of our common shares pursuant to our recently announced $15.0 million share
repurchase program may, depending on their timing, volume and form, result in
our stock price to be higher than it would be in the absence of such purchases.
If purchases under the program are not initiated or are discontinued, our stock
price may fall.
Item
6. Exhibits
31.1
|
Certification
of Paul J. Maddon, M.D., Ph.D., Chief Executive Officer of the Registrant,
pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities
Exchange Act of 1934, as amended
|
31.2
|
Certification
of Robert A. McKinney, Chief Financial Officer and Senior Vice President,
Finance and Operations (Principal Financial and Accounting Officer) of the
Registrant, pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the
Securities Exchange Act of 1934, as amended
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
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.
|
PROGENICS
PHARMACEUTICALS, INC.
|
Date:
August 8, 2008
|
By:
|
/s/
Robert A. McKinney
|
|
|
Robert
A. McKinney
Chief
Financial Officer
Senior
Vice President, Finance & Operations and Treasurer
(Duly
authorized officer of the Registrant and Principal Financial and
Accounting Officer)
|