UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended March 31, 2009
|
|
Or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from ___________ to
___________
|
Commission
File No. 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 Number)
|
777
Old Saw Mill River Road
Tarrytown,
NY 10591
(Address
of principal executive offices, including zip code)
Registrant’s
telephone number, including area code: (914) 789-2800
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o 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 ¨ (Do not
check if a smaller reporting
company) 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 May
6, 2009 there were 31,022,934 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.
|
|
33
|
Item
4.
|
|
34
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
Item
1A.
|
|
35
|
Item
2.
|
|
37
|
Item
6.
|
|
37
|
|
|
38
|
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)
|
|
December
31,
2008
|
|
|
March
31,
2009
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
56,186 |
|
|
$ |
62,288 |
|
Marketable
securities
|
|
|
63,127 |
|
|
|
56,300 |
|
Accounts
receivable
|
|
|
1,337 |
|
|
|
692 |
|
Other
current assets
|
|
|
3,531 |
|
|
|
2,774 |
|
Total
current assets
|
|
|
124,181 |
|
|
|
122,054 |
|
Marketable
securities
|
|
|
22,061 |
|
|
|
9,108 |
|
Fixed
assets, at cost, net of accumulated depreciation and
amortization
|
|
|
11,071 |
|
|
|
10,464 |
|
Restricted
cash
|
|
|
520 |
|
|
|
520 |
|
Total
assets
|
|
$ |
157,833 |
|
|
$ |
142,146 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
6,496 |
|
|
$ |
6,379 |
|
Deferred
revenue - current
|
|
|
31,645 |
|
|
|
12,005 |
|
Other
current liabilities
|
|
|
57 |
|
|
|
57 |
|
Total
current liabilities
|
|
|
38,198 |
|
|
|
18,441 |
|
Other
liabilities
|
|
|
266 |
|
|
|
242 |
|
Total
liabilities
|
|
|
38,464 |
|
|
|
18,683 |
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
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 — 30,807,387
in 2008 and 31,082,566 in 2009
|
|
|
40 |
|
|
|
40 |
|
Additional
paid-in capital
|
|
|
422,085 |
|
|
|
427,689 |
|
Accumulated
deficit
|
|
|
(298,718 |
) |
|
|
(300,506 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,297 |
) |
|
|
(1,019 |
) |
Treasury
stock, at cost (200,000 shares in 2008 and 2009)
|
|
|
(2,741 |
) |
|
|
(2,741 |
) |
Total
stockholders’ equity
|
|
|
119,369 |
|
|
|
123,463 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
157,833 |
|
|
$ |
142,146 |
|
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
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
Research
and development
|
|
$ |
12,110 |
|
|
$ |
20,144 |
|
Royalty
income
|
|
|
- |
|
|
|
175 |
|
Research
grants and contract
|
|
|
2,613 |
|
|
|
507 |
|
Other
revenues
|
|
|
39 |
|
|
|
78 |
|
Total
revenues
|
|
|
14,762 |
|
|
|
20,904 |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
22,790 |
|
|
|
14,830 |
|
License
fees – research and development
|
|
|
1,149 |
|
|
|
630 |
|
General
and administrative
|
|
|
7,152 |
|
|
|
6,801 |
|
Royalty
expense
|
|
|
- |
|
|
|
18 |
|
Depreciation
and amortization
|
|
|
1,114 |
|
|
|
1,203 |
|
Total
expenses
|
|
|
32,205 |
|
|
|
23,482 |
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(17,443 |
) |
|
|
(2,578 |
) |
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,958 |
|
|
|
790 |
|
Total
other income
|
|
|
1,958 |
|
|
|
790 |
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(15,485 |
) |
|
$ |
(1,788 |
) |
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$ |
(0.52 |
) |
|
$ |
(0.06 |
) |
Weighted-average
shares - basic and diluted
|
|
|
29,789 |
|
|
|
30,707 |
|
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 THREE MONTHS ENDED MARCH 31, 2008 AND 2009
(amounts
in thousands)
(Unaudited)
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Comprehensive
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
Balance
at December 31, 2007
|
|
|
29,754 |
|
|
$ |
39 |
|
|
$ |
401,500 |
|
|
$ |
(254,046 |
) |
|
$ |
6 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
147,499 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,485 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,485 |
) |
Net
change in unrealized gain on marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
386 |
|
|
|
- |
|
|
|
- |
|
|
|
386 |
|
Total
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,099 |
) |
Compensation
expenses for share-based payment arrangements
|
|
|
- |
|
|
|
- |
|
|
|
3,912 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,912 |
|
Issuance
of restricted stock, net of forfeitures
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Sale
of common stock under employee stock purchase plans and exercise of stock
options
|
|
|
157 |
|
|
|
- |
|
|
|
1,538 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,538 |
|
Balance
at March 31, 2008
|
|
|
29,909 |
|
|
$ |
39 |
|
|
$ |
406,950 |
|
|
$ |
(269,531 |
) |
|
$ |
392 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
137,850 |
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Comprehensive
(Loss) Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
|
30,807 |
|
|
$ |
40 |
|
|
$ |
422,085 |
|
|
$ |
(298,718 |
) |
|
$ |
(1,297 |
) |
|
|
(200 |
) |
|
$ |
(2,741 |
) |
|
$ |
119,369 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,788 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,788 |
) |
Net
change in unrealized loss on marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
278 |
|
|
|
- |
|
|
|
- |
|
|
|
278 |
|
Total
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,510 |
) |
Compensation
expenses for share-based payment arrangements
|
|
|
- |
|
|
|
- |
|
|
|
4,143 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,143 |
|
Issuance
of restricted stock, net of forfeitures
|
|
|
42 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Sale
of common stock under employee stock purchase plans and exercise of stock
options
|
|
|
234 |
|
|
|
- |
|
|
|
1,461 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,461 |
|
Balance
at March 31, 2009
|
|
|
31,083 |
|
|
$ |
40 |
|
|
$ |
427,689 |
|
|
$ |
(300,506 |
) |
|
$ |
(1,019 |
) |
|
|
(200 |
) |
|
$ |
(2,741 |
) |
|
$ |
123,463 |
|
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 Three Months Ended
March
31,
|
|
|
|
2008
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(15,485 |
) |
|
$ |
(1,788 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,114 |
|
|
|
1,203 |
|
Write-off
of fixed assets
|
|
|
- |
|
|
|
1 |
|
Amortization
of discounts, net of premiums, on marketable securities
|
|
|
95 |
|
|
|
299 |
|
Expenses
for share-based compensation awards
|
|
|
3,912 |
|
|
|
4,143 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
388 |
|
|
|
645 |
|
(Increase)
decrease in other current assets
|
|
|
(267 |
) |
|
|
757 |
|
Decrease
in accounts payable and accrued expenses
|
|
|
(2,069 |
) |
|
|
(117 |
) |
Decrease
in deferred revenue
|
|
|
(4,098 |
) |
|
|
(19,640 |
) |
Decrease
in other liabilities
|
|
|
(23 |
) |
|
|
(24 |
) |
Net
cash used in operating activities
|
|
|
(16,433 |
) |
|
|
(14,521 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(797 |
) |
|
|
(597 |
) |
Sales/maturities
of marketable securities
|
|
|
63,055 |
|
|
|
19,759 |
|
Purchase
of marketable securities
|
|
|
(31,800 |
) |
|
|
- |
|
Increase
in restricted cash
|
|
|
(1 |
) |
|
|
- |
|
Net
cash provided by investing activities
|
|
|
30,457 |
|
|
|
19,162 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options and sale of common stock under the
Employee Stock Purchase Plan
|
|
|
1,538 |
|
|
|
1,461 |
|
Net
cash provided by financing activities
|
|
|
1,538 |
|
|
|
1,461 |
|
Net
increase in cash and cash equivalents
|
|
|
15,562 |
|
|
|
6,102 |
|
Cash
and cash equivalents at beginning of period
|
|
|
10,423 |
|
|
|
56,186 |
|
Cash
and cash equivalents at end of period
|
|
$ |
25,985 |
|
|
$ |
62,288 |
|
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 and unless otherwise noted)
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 supportive care, virology and oncology.
Progenics
commenced principal operations in 1988, became publicly traded in 1997 and
throughout has been engaged primarily in research and development efforts,
developing manufacturing capabilities, establishing corporate collaborations and
raising capital. We have only recently begun to derive revenue from a commercial
product. 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.
Supportive
Care. Our first commercial product, RELISTOR®
(methylnaltrexone bromide) subcutaneous injection, was approved by the U.S. Food
and Drug Administration (“FDA”) in April 2008 for sale in the United States. Our
collaboration partner, Wyeth Pharmaceuticals (“Wyeth”), commenced sales of
RELISTOR subcutaneous injection in June, and we have begun earning royalties on
world-wide sales. Regulatory approvals have also been obtained in Canada, the
European Union, Australia and Venezuela, and marketing applications have been
approved or are pending or scheduled in other countries. In October 2008, we
out-licensed to Ono Pharmaceutical Co., Ltd. (“Ono”), Osaka, Japan, the rights
to subcutaneous RELISTOR in Japan, where Wyeth elected not to develop the
product. We continue development and clinical trials with respect to other
indications for RELISTOR.
Development
and commercialization of RELISTOR is being conducted under a license and
co-development agreement (“Wyeth 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 additional payments as certain
developmental milestones for RELISTOR are achieved, (iii) have been and are
entitled to 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 are entitled to receive royalties and commercialization
milestone payments. Manufacturing and commercialization expenses for RELISTOR
are funded by Wyeth. In January 2009, Wyeth and Pfizer Inc. announced a
definitive agreement under which Pfizer is to acquire Wyeth. We understand that
the transaction is currently expected to close in late 2009 and is subject to a
variety of conditions. The proposed acquisition does not trigger any
change-of-control provisions in our collaboration with Wyeth, and if the
acquisition is completed in the transaction structure announced by the parties,
the combined Pfizer/Wyeth organization will continue to have the same rights and
responsibilities under the Collaboration following the acquisition as Wyeth had
before. We may not, however, learn of any plans the parties may have for
RELISTOR and our Collaboration unless and until or even after the proposed
transaction closes.
Under our
License Agreement with Ono, we have received an upfront payment of $15.0
million, and are entitled to receive potential milestones, upon achievement of
development responsibilities by Ono, of up to $20.0 million, commercial
milestones and royalties on sales by Ono of subcutaneous RELISTOR in Japan. Ono
also has the option to acquire from us the rights to develop and commercialize
in Japan other formulations of RELISTOR, including intravenous and oral forms,
on terms to be negotiated separately.
Because
Wyeth is not developing RELISTOR in Japan, we will not receive from it
Japan-related milestone payments provided in the original Wyeth Collaboration
Agreement. These potential future milestone payments would have totaled $22.5
million (of which $7.5 million related to the subcutaneous formulation of
RELISTOR and the remainder to the intravenous and oral formulations). As a
result, we now have the potential to receive a total of $334.0 million in
development and commercialization milestone payments from Wyeth under the Wyeth
Collaboration Agreement (of which $60.0 million relate to the intravenous
formulation of RELISTOR), and of which $39.0 million ($5.0 million relating to
the intravenous formulation) have been paid to date.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
(amounts
in thousands, except per share amounts and unless otherwise noted)
The
payments described above will depend on continued success in development and
commercialization of RELISTOR, which are in turn dependent on the actions of
Wyeth, Ono, 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.
Virology.
In the area of virology, we are developing two viral-entry inhibitors: a
humanized monoclonal antibody, PRO 140, for treatment of human immunodeficiency
virus (“HIV”), the virus that causes acquired immunodeficiency syndrome
(“AIDS”), and a proprietary orally-available small-molecule drug candidate, PRO
206, for treatment of hepatitis C virus infection (“HCV”). Based on results from
previous phase 2 clinical trials, we are developing the subcutaneous form of PRO
140 for treatment of HIV infection, which has the potential for convenient,
weekly self-administration, and we are conducting preclinical development
activities in preparation for filing an Investigational New Drug (“IND”)
application for PRO 206. We are also engaged in research regarding prophylactic
vaccines against HIV infection.
Oncology.
In the area of prostate cancer, we are conducting a phase 1 clinical trial of a
fully human monoclonal antibody-drug conjugate (“ADC”) directed against prostate
specific membrane antigen (“PSMA”), a protein found at high levels on the
surface of prostate cancer cells and also on the neovasculature of a number of
other types of solid tumors. We are also developing therapeutic vaccines
designed to stimulate an immune response to PSMA. Our PSMA programs are
conducted through our wholly owned subsidiary, PSMA Development Company (“PSMA
LLC”).
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.
Corporate-Related
Matters. 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 awards. We are
currently in discussions with government agencies and others to obtain pivotal
clinical trial funding to support our PRO 140 compound, and are pursuing
strategic collaborations with biopharmaceutical companies to support our
development plan for PSMA ADC.
We have
had recurring losses since our inception. At March 31, 2009, we had cash, cash
equivalents and marketable securities, including non-current portion, totaling
$127.7 million which we expect will be sufficient to fund current operations
beyond one year. During the three months ended March 31, 2009, we had a net loss
of $1.8 million and used $14.5 million of cash in operating activities. At March 31, 2009, we
had an accumulated deficit of $300.5 million.
In April
2008, our Board of Directors approved a share repurchase program to acquire up
to $15.0 million of our outstanding common shares, under which we have $12.3
million remaining available for purchases. Purchases may be discontinued at any
time. Reacquired shares will be held in treasury until redeployed or retired. We
have not repurchased any of our outstanding common shares during the three
months ended March 31, 2009.
Pending
use in our business, our revenues and proceeds of financing activities are held
in cash, cash equivalents and marketable securities. 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, 2008. Terms used but not defined herein have the
meanings 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.
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
We
estimate the expected term of stock options granted to employees and officers
(excluding our Chief Executive Officer) and directors by using historical data
for these two groups. The expected term for options granted to these two groups
was 5.33 and 8 years, respectively, in 2008 and 5.3 and 7.3 years, respectively,
in the first quarter of 2009. Beginning in the third quarter of 2008, we began
estimating the expected term of stock options granted to our Chief Executive
Officer separately from stock options granted to employees and officers, and the
expected term was 7.8 years in the first quarter of 2009. The expected term for
stock options granted to non-employee consultants was ten years, equal to the
contractual term of those options. In making these estimates, we calculated the
expected volatility based upon the period of the respective expected terms,
using a dividend rate of zero (since we have never paid and do not expect to pay
dividends in the future) and a risk-free rate for periods within the expected
term of the option 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 three months ended March 31, 2008 and 2009
were as follows:
|
|
For
the Three Months Ended
March
31,
|
|
|
2008
|
|
2009
|
|
|
|
|
|
Expected
volatility
|
|
66%
– 90%
|
|
71%
– 91%
|
Expected
dividends
|
|
zero
|
|
zero
|
Expected
term (years)
|
|
5.33
– 10
|
|
5.3
– 10
|
Weighted
average expected term (years)
|
|
5.58
|
|
7.1
|
Risk-free
rate
|
|
3.08%
– 3.71%
|
|
1.78%
– 2.68%
|
During
the three months ended March 31, 2008 and 2009, 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 Financial Accounting Standards
Board (“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, but
with the following assumptions:
|
|
For
the Three Months Ended
March
31,
|
|
|
2008
|
|
2009
|
|
|
|
|
|
Expected
volatility
|
|
154%
|
|
100%
|
Expected
dividends
|
|
zero
|
|
zero
|
Expected
term
|
|
6
months
|
|
6
months
|
Risk-free
rate
|
|
2.74%
|
|
0.38%
|
The total
fair value of shares under all of our share-based payment arrangements that
vested during the three months ended March 31, 2008 and 2009 was $3.9 million
and $4.1 million, respectively. In such periods, $2.0 million and $2.1 million,
respectively, of such value was reported as research and development expense,
and $1.9 million and $2.0 million, respectively, of such value was reported as
general and administrative expense.
No tax
benefit was recognized related to such compensation cost during the three months
ended March 31, 2008 and 2009 because we had net losses for each of those
periods 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 three months ended March 31, 2008 and 2009.
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 EPS calculation unless they are anti-dilutive. We incurred net
losses for the three months ended March 31, 2008 and 2009 and, therefore, such
amounts have not been included in the calculations for those periods since they
would be anti-dilutive. As a result, basic and diluted EPS are the same for each
period. 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.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
3. Fair
Value Measurements
Our
available-for-sale investment portfolio consists of marketable securities,
including 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 Statement of Financial
Accounting Standards No. 115 (“FAS 115”) “Accounting for Certain Investments in
Debt and Equity Securities.” The change in the fair value of these marketable
securities is recorded as a component of other comprehensive
income.
Marketable
securities consisted of the following:
|
|
December
31,
2008
|
|
|
March
31,
2009
|
|
Short-term
|
|
|
|
|
|
|
Corporate
debt securities
|
|
$ |
63,127 |
|
|
$ |
56,300 |
|
Total
short-term marketable securities
|
|
|
63,127 |
|
|
|
56,300 |
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
Corporate
debt securities and securities of
government-sponsored
entities
|
|
|
18,002 |
|
|
|
5,049 |
|
Auction
rate securities
|
|
|
4,059 |
|
|
|
4,059 |
|
Total
long-term marketable securities
|
|
|
22,061 |
|
|
|
9,108 |
|
|
|
|
|
|
|
|
|
|
Total
marketable securities
|
|
$ |
85,188 |
|
|
$ |
65,408 |
|
We
adopted Statement of Financial Accounting Standards 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 in
selling an asset or paid in transferring 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 FASB Staff Position (“FSP”) No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” we also adopted FAS 157 for our
nonfinancial assets and nonfinancial liabilities on January 1, 2009 and our
adoption did not have a material impact on our financial position or results of
operations.
FAS 157
establishes a three-level hierarchy for fair value measurements that
distinguishes between market participant assumptions developed from market data
obtained from sources independent of the reporting entity (“observable inputs”)
and the reporting entity’s own assumptions about market participant assumptions
developed from 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.
|
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
The
following tables present our available-for-sale investments measured at fair
value on a recurring basis as of December 31, 2008 and March 31, 2009,
classified by the FAS 157 valuation hierarchy (discussed above):
|
|
|
|
|
Fair
Value Measurements at December 31, 2008
|
|
Investment
Type
|
|
Balance
at
December
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$ |
43,859 |
|
|
$ |
43,859 |
|
|
$ |
- |
|
|
$ |
- |
|
Corporate
debt securities and securities of government-sponsored
entities
|
|
|
81,129 |
|
|
|
- |
|
|
|
81,129 |
|
|
|
- |
|
Auction
rate securities
|
|
|
4,059 |
|
|
|
- |
|
|
|
- |
|
|
|
4,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
129,047 |
|
|
$ |
43,859 |
|
|
$ |
81,129 |
|
|
$ |
4,059 |
|
|
|
|
|
|
Fair
Value Measurements at March 31, 2009
|
|
Investment
Type
|
|
Balance
at
March
31, 2009
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$ |
55,322 |
|
|
$ |
55,322 |
|
|
$ |
- |
|
|
$ |
- |
|
Corporate
debt securities and securities of government-sponsored
entities
|
|
|
61,349 |
|
|
|
- |
|
|
|
61,349 |
|
|
|
- |
|
Auction
rate securities
|
|
|
4,059 |
|
|
|
- |
|
|
|
- |
|
|
|
4,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
120,730 |
|
|
$ |
55,322 |
|
|
$ |
61,349 |
|
|
$ |
4,059 |
|
At March
31, 2009 we hold $4.1 million (3% of total assets measured at fair value) in
auction rate securities which are classified as Level 3. The fair value of these
securities includes $3.0 million of securities collateralized by student loan
obligations subsidized by the U.S. government and $1.1 million of investment
company preferred stock, and do not include mortgage-backed instruments. Auction
rate securities are collateralized long-term instruments that were intended to
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. We will not realize cash in respect of
the principal amount of these securities 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. As of March 31, 2009, 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.
The
valuation of auction rate securities we hold is based on Level 3 unobservable
inputs which consist of our internal analysis of (i) timing of expected future
successful auctions, (ii) collateralization of underlying assets of the security
and (iii) credit quality of the security. We re-evaluated the valuation of these
securities as of March 31, 2009 and the temporary impairment amount remained
unchanged at $0.3 million, which is reflected as a part of other comprehensive
loss on our accompanying condensed consolidated balance sheets. These securities
are held “available-for-sale” in conformity with FAS 115 and the unrealized loss
is included in other comprehensive loss. 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 accompanying condensed consolidated balance
sheets.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
We
continue to monitor markets for our investments and consider the impact, if any,
of market conditions on the fair market value of our investments. If market
conditions for our investments do not recover, we may be required to record
additional losses during the remainder of 2009. We believe we will have the
ability to hold any of our investments until their markets recover. We do not
anticipate having to sell these securities in order to operate our business. We
do not believe the carrying values of our investments are other than temporarily
impaired and therefore expect the positions will eventually be liquidated
without significant loss.
For those
of our financial instruments with significant Level 3 inputs (all of which are
auction rate securities), the following table summarizes the activities for the
three months ended March 31, 2008 and 2009:
|
|
Fair
Value Measurements Using Significant
Unobservable
Inputs
(Level
3)
|
|
Description
|
|
For
the Three Months Ended
March
31, 2008
|
|
|
For
the Three Months Ended
March
31, 2009
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
- |
|
|
$ |
4,059 |
|
Transfers
into Level 3
|
|
|
8,150 |
|
|
|
- |
|
Total
realized/unrealized gains (losses)
|
|
|
|
|
|
|
|
|
Included
in net loss
|
|
|
- |
|
|
|
- |
|
Included
in comprehensive income (loss)
|
|
|
(408 |
) |
|
|
- |
|
Settlements
|
|
|
- |
|
|
|
- |
|
Balance
at end of period
|
|
$ |
7,742 |
|
|
$ |
4,059 |
|
Total
amount of unrealized gains (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. Accounts
Receivable
|
|
December
31,
2008
|
|
|
March
31,
2009
|
|
National
Institutes of Health
|
|
$ |
1,107 |
|
|
$ |
104 |
|
Royalties
|
|
|
229 |
|
|
|
280 |
|
Research
and development from collaborator
|
|
|
- |
|
|
|
293 |
|
Other
|
|
|
1 |
|
|
|
15 |
|
Total
|
|
$ |
1,337 |
|
|
$ |
692 |
|
5. Accounts
Payable and Accrued Expenses
|
|
December
31,
2008
|
|
|
March
31,
2009
|
|
Accounts
payable
|
|
$ |
899 |
|
|
$ |
712 |
|
Accrued
consulting and clinical trial costs
|
|
|
3,556 |
|
|
|
3,253 |
|
Accrued
payroll and related costs
|
|
|
1,093 |
|
|
|
1,094 |
|
Legal
and professional fees
|
|
|
925 |
|
|
|
1,292 |
|
Other
|
|
|
23 |
|
|
|
28 |
|
Total
|
|
$ |
6,496 |
|
|
$ |
6,379 |
|
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
6. Revenue
Recognition
On
December 23, 2005, we entered into the Wyeth Collaboration Agreement for the
purpose of developing and commercializing RELISTOR. The Wyeth Collaboration
Agreement involves three formulations of RELISTOR: (i) a subcutaneous
formulation to be used in patients with opioid-induced constipation (“OIC”),
(ii) an intravenous formulation to be used in patients with POI and (iii) an
oral formulation to be used in patients with OIC.
The Wyeth
Collaboration Agreement establishes the Joint Steering Committee (“JSC”) and
Joint Development Committee (“JDC”), each with an equal number of
representatives from both Wyeth and us. The JSC is responsible for coordinating
the companies’ key activities, while the JDC oversees, coordinates and expedites
the development of RELISTOR by Wyeth and us. A Joint Commercialization Committee
(“JCC”), composed of company representatives in number and function according to
our respective responsibilities, facilitates open communication between Wyeth
and us on commercialization matters.
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. During that
period, the activities of the committees will be focused on Wyeth’s development
and commercialization obligations. Our assessment is based upon the fact that we
negotiated to be on the committees as an accommodation for our granting the
license for RELISTOR to Wyeth.
Under the
Wyeth Collaboration Agreement, we granted to Wyeth an exclusive, worldwide
license, even as to us, to develop and commercialize RELISTOR and have assigned
the agreements for the manufacture of RELISTOR by third parties to Wyeth. Wyeth
returned the rights with respect to Japan to us in connection with its election
not to develop RELISTOR there and the transaction with Ono discussed in Note 1,
above. We are responsible for developing the subcutaneous and intravenous
formulations in the U.S. until they receive regulatory approval, while Wyeth is
responsible for these formulations outside the U.S. other than Japan. Wyeth is
also responsible for the development of the oral formulation worldwide excluding
Japan. 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 Wyeth Collaboration Agreement, in both bulk and
finished form for all products worldwide. We have no further manufacturing
obligations under the Collaboration. We have transferred 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 Wyeth Collaboration Agreement.
In the
event the JSC approves for development any formulation of RELISTOR other than
subcutaneous, intravenous or oral or any other indication for a product using
any formulation of RELISTOR, Wyeth is obligated to be responsible for
development of such products as provided in the Wyeth Collaboration Agreement,
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
excluding Japan. Wyeth is obligated to 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 Wyeth
Collaboration Agreement are to be made solely by Wyeth.
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 Wyeth
Collaboration Agreement, at any time, subject to certain conditions. We may
exercise this option on an annual basis. We did not exercise the option in
connection with the initial commercialization of RELISTOR, and as of March 31,
2009 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.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
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
(“Substantive Milestone Method”).
We are
recognizing revenue in connection with the Wyeth Collaboration Agreement under
the SEC’s Staff Accounting Bulletin (“SAB”) No. 104 (“SAB 104”) “Revenue
Recognition” and apply the Substantive Milestone Method. In accordance with the
Emerging Issues Task Force (“EITF”) Issue No. 00-21 (“EITF 00-21”) “Accounting
for Revenue Arrangements with Multiple Deliverables,” all of our deliverables
under the Wyeth 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.
Upon
execution of the Collaboration Agreement, Wyeth made a non-refundable,
non-creditable upfront payment of $60.0 million, for which we deferred revenue
at December 31, 2005. 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 the end of 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 Wyeth
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, which is based
upon the most current budget and development plan 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 in accordance with its terms, we will recognize any unamortized
remainder of the upfront payment at the time of the termination.
The
amount of the upfront license payment that we recognized as revenue for each
fiscal quarter prior to the third quarter of 2007 was based upon several revised
approved budgets, although the revisions to those budgets did not materially
affect the amount 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.
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 payments to us, provided specific milestones,
including clinical, regulatory and sales events, are reached, and taking in to
account the modifications made in connection with the Ono transaction discussed
in Note 1, above, consisting of: (i) development and sales milestones and
contingent payments, consisting of defined non-refundable, non-creditable
payments, totaling $334.0 million, in respect of clinical and regulatory events
and, for each form approved as a commercial product, combined annual worldwide
(excluding Japan) net sales, as defined, and (ii) sales royalties during each
calendar year during a royalty period based on specified percentages of net
sales in the U.S. and worldwide (excluding Japan). 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 receipt of the
milestone payment to the completion of our development obligations. All sales
milestones will be recognized as revenue when earned.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
During
the three months ended March 31, 2008 and 2009, we recognized $3.2 million and
$3.2 million, respectively, of revenue from the $60.0 million upfront payment
and $8.9 million and $1.9 million, respectively, as reimbursement for our
out-of-pocket development costs, including our labor costs. As of March 31,
2009, $11.4 million of the $60.0 million upfront license payment received from
Wyeth, which is included in deferred revenue – current, is expected to be
recognized as revenue over the period of our development obligations relating to
RELISTOR, which we currently estimate will terminate at the end of 2009. In
addition, at March 31, 2009, we recorded $0.3 million as revenue receivable
related to reimbursements from Wyeth for development costs.
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 providing for the royalty. If royalties are received when we have
remaining performance obligations, they are attributed to the services being
provided under the arrangement and, therefore, recognized as such obligations
are performed under either the proportionate performance or straight-line
methods, as applicable, and in accordance with the policies above.
In
addition, during three months ended March 31, 2009, we earned royalties of $280,
based on the net sales of subcutaneous RELISTOR, and we recognized $175 of
royalty income. As of March 31, 2009, we have recorded a cumulative total of
$624 as deferred revenue – current, which is expected to be recognized as
royalty income over the period of our development obligations relating to
RELISTOR, which we currently estimate will terminate at the end of 2009. We
incurred $28 of royalty costs and recognized $18 of royalty expenses during the
three months ended March 31, 2009. As of March 31, 2009, we recorded a
cumulative total of $62 of deferred royalty costs from the royalty costs
incurred since we began earning royalties in the second quarter of 2008. The $62
of deferred royalty costs are expected to be recognized as royalty expense over
the period of our development obligations relating to RELISTOR.
The Wyeth
Collaboration Agreement extends, unless terminated earlier, on a
country-by-country and product-by-product basis, until the last to expire
royalty period for any product. We may terminate the Wyeth Collaboration
Agreement at any time upon 90 days written notice to Wyeth upon Wyeth’s material
uncured breach (30 days in the case of breach of a payment obligation). Wyeth
may, with or without cause, terminate the Collaboration effective on or after
the second anniversary of the first U.S. commercial sale of RELISTOR, by
providing us with at least 360 days prior written notice. Wyeth may also
terminate the agreement (i) upon 30 days written notice following one or more
serious safety or efficacy issues that arise and (ii) upon 90 days written
notice of a material uncured breach by us. Upon termination of the Wyeth
Collaboration Agreement, the ownership of the license we granted to Wyeth will
depend on which party initiates the termination and the reason for the
termination.
We
recognized the upfront payment of $15.0 million which we received from Ono in
November 2008 as research and development revenue during the first quarter of
2009, upon satisfaction of our performance obligations.
Ono is
responsible for developing and commercializing subcutaneous RELISTOR in Japan,
including conducting the clinical development necessary to support regulatory
marketing approval. Ono is to own the subcutaneous filings and approvals
relating to RELISTOR in Japan. In addition to the $15.0 million upfront payment
from Ono, we are entitled to receive up to an additional $20.0 million, payable
upon achievement by Ono of its development milestones. Ono is also obligated to
pay to us royalties and commercialization milestones on sales by Ono of
subcutaneous RELISTOR in Japan. Ono has the option to acquire from us the rights
to develop and commercialize in Japan other formulations of RELISTOR, including
intravenous and oral forms, on terms to be negotiated separately. Supervision of
and consultation with respect to Ono’s development and commercialization
responsibilities will be carried out by joint committees consisting of members
from both Ono and us. Ono may request us to perform activities related to its
development and commercialization responsibilities beyond our participation in
these committees and specified technology transfer-related tasks which will be
at its expense, and payable to us for the services it requests, at the time we
perform services for them. Revenue earned from activities we perform for Ono is
recorded in research and development revenue.
7. 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 period. For the
three months ended March 31, 2008 and 2009, we reported net losses and,
therefore, potential common shares were not included since such inclusion would
have been anti-dilutive.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
In June
2008, the FASB issued FSP EITF Issue No. 03-6-1 (“FSP EITF 03-6-1”) “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” FSP EITF 03-6-1 requires entities, when calculating
EPS, to allocate earnings to unvested and contingently issuable share-based
payment awards that have non-forfeitable rights to dividends or dividend
equivalents when calculating EPS and also present both basic EPS and diluted EPS
pursuant to the two-class method described in FASB Statement No. 128 “Earnings
per Share.” FSP EITF 03-6-1 is effective January 1, 2009 and requires
retrospective application. We adopted FSP EITF 03-6-1 on January 1, 2009 and the
adoption had no impact on basic and diluted earnings per share for the three
months ended March 31, 2008 and 2009.
The
calculations of net loss per share, basic and diluted, are as
follows:
|
|
Net
Loss
(Numerator)
|
|
|
Weighted
Average
Common
Shares
(Denominator)
|
|
|
Per
Share
Amount
|
|
Three
months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(15,485 |
) |
|
|
29,789 |
|
|
$ |
(0.52 |
) |
Three
months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(1,788 |
) |
|
|
30,707 |
|
|
$ |
(0.06 |
) |
For the
three months ended March 31, 2008 and 2009, potential common shares which have
been excluded from diluted per share amounts because their effect would have
been anti-dilutive include the following:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
Weighted
Average
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
and warrants
|
|
|
4,726 |
|
|
$ |
18.12 |
|
|
|
4,470 |
|
|
$ |
18.55 |
|
Restricted
stock
|
|
|
45 |
|
|
|
|
|
|
|
29 |
|
|
|
|
|
Total
|
|
|
4,771 |
|
|
|
|
|
|
|
4,499 |
|
|
|
|
|
8. 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 months ended
March 31, 2008 and 2009, the components of comprehensive loss were:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
Net
loss
|
|
$ |
(15,485 |
) |
|
$ |
(1,788 |
) |
Change
in net unrealized loss on marketable securities
|
|
|
386 |
|
|
|
278 |
|
Comprehensive
loss
|
|
$ |
(15,099 |
) |
|
$ |
(1,510 |
) |
9. Commitments and
Contingencies
In the
ordinary course of our business, we enter into agreements with third parties,
such as business partners, clinical sites and suppliers, that include
indemnification provisions which, in our judgment, are normal and customary for
companies in our industry sector. We generally agree to indemnify, hold harmless
and reimburse the indemnified parties for losses suffered or incurred by them
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 provisions. As a result, the estimated fair value of
liabilities relating to indemnification provisions is minimal. We have no
liabilities recorded for these provisions as of March 31, 2009.
PROGENICS PHARMACEUTICALS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – continued
(unaudited)
(amounts
in thousands, except per share amounts or unless otherwise noted)
10. Impact of Recently Issued Accounting
Standards
In April
2009, the FASB issued three FSPs related to (i) measuring fair value when market
activity declines, (ii) other-than-temporary impairments and (iii) interim fair
value disclosures.
FSP No.
FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” provides additional guidance on (1) estimating fair value
of an asset or liability when the volume and level of market activity for the
asset or liability have significantly decreased and (2) identifying transactions
that are not orderly.
FSP No.
FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary
Impairments” changes the focus of the other-than-temporary model from an
entity’s ability and intent to hold a debt security until recovery. Under FSP
FAS 115-2 and FAS 124-2, an other-than-temporary impairment occurs for debt
securities if (1) an entity has the intent to sell the security, (2) it is more
likely than not that it will be required to sell the security before recovery,
or (3) it does not expect to recover the entire amortized cost basis of the
security.
FSP No.
FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial
Instruments” expands the disclosure requirements of FASB Statement No. 107
“Disclosures about Fair Value of Financial Instruments” to interim period
financial statements and requires an entity to (1) disclose the methods and
significant assumptions used to estimate fair value and (2) highlight any
changes of the methods and significant assumptions from prior
periods.
All three
FSPs are effective for interim and annual reporting periods ending after June
15, 2009. We are currently evaluating the impact these FSPs will have on our
financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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 U.S. 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, these differences 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,
including risks from market forces and trends, such as those relating to the
recently-announced acquisition of our RELISTOR®
collaborator, Wyeth Pharmaceuticals, by Pfizer Inc.; 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 this document and other reports filed
with the U.S. Securities and Exchange Commission (SEC). 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 we
assume no obligation to update any statements as a result of new information or
future events or developments. 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.
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 supportive care, virology and
oncology. Progenics commenced principal operations in 1988, became publicly
traded in 1997 and throughout has been engaged primarily in research and
development efforts, developing manufacturing capabilities, establishing
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 continue to address a
number of technological and clinical challenges and comply with comprehensive
U.S. and non-U.S. 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.
Supportive Care.
Our first commercial product, RELISTOR®
(methylnaltrexone bromide) subcutaneous injection, was approved by the U.S. Food
and Drug Administration (FDA) in April 2008 for sale in the United States. Our
collaboration partner, Wyeth Pharmaceuticals (Wyeth), commenced sales of
RELISTOR subcutaneous injection in June, and we have begun earning royalties on
world-wide sales. Regulatory approvals have also been obtained in Canada, the
European Union, Australia, Venezuela and Chile. Marketing applications have been
approved or are pending or scheduled in other countries, and 13
markets are expected to launch in 2009, including Spain, Italy, France,
Argentina and Brazil, the largest individual markets after the U.S. In
October 2008, we out-licensed to Ono Pharmaceutical Co., Ltd. (Ono), Osaka,
Japan, the rights to subcutaneous RELISTOR in Japan where Wyeth elected not to
develop the product. We continue development and clinical trials with respect to
other indications for RELISTOR.
In
January 2009, Wyeth and Pfizer Inc. announced a definitive agreement under which
Pfizer is to acquire Wyeth. We understand that the transaction is currently
expected to close in late 2009 and is subject to a variety of conditions. The
proposed acquisition does not trigger any change-of-control provisions in our
collaboration with Wyeth, and if the acquisition is completed in the transaction
structure announced by the parties, the combined Pfizer/Wyeth organization will
continue to have the same rights and responsibilities under the Collaboration
following the acquisition as Wyeth had before. We may not, however, learn of any
plans the parties may have for RELISTOR and our Collaboration unless and until
or even after the proposed transaction closes.
We and
Wyeth are also developing subcutaneous RELISTOR for treatment of opioid-induced
constipation (OIC) outside the advanced illness setting, in individuals with
chronic pain not related to cancer, such as severe back pain that requires
treatment with opioids (a phase 3 trial conducted by Wyeth), and in individuals
rehabilitating from an orthopedic surgical procedure in whom opioids are used to
control post-operative pain (a hypothesis generating phase 2 trial conducted by
us). We are no longer enrolling patients in this latter trial and are analyzing
data from the treated population. Based on positive results from the phase 3
chronic pain trial, we and Wyeth recently initiated an FDA-required one-year,
open-label safety study in chronic, non-cancer pain patients and the study
results found RELISTOR to be generally well tolerated. Results from this phase 3
trial and open-label safety study are intended to yield a consolidated safety
database to enable filing a supplemental New Drug Application (sNDA), which is
planned for submission by the end of 2010 for treatment of OIC in the chronic,
non-cancer pain population.
We and
Wyeth also have had in development an intravenous formulation of RELISTOR for
the management of post-operative ileus (POI), a temporary impairment of the gastrointestinal
tract function. Results from two phase 3 clinical trials of this formulation
showed that treatment did not achieve primary or secondary end points. Recent
results from a third phase 3 trial evaluating an intravenous formulation of
RELISTOR in patients following abdominal hernia repair have confirmed these
earlier findings.
Wyeth is
leading development of an oral formulation of RELISTOR for the treatment of OIC
in patients with chronic, non-cancer pain. We and Wyeth are evaluating
information from optimization studies of a formulation of this product candidate
to determine the next stages of development.
Development
and commercialization of RELISTOR is being conducted under the Wyeth
Collaboration Agreement. 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 are entitled to 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 are entitled
to 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.
At
inception of the Wyeth collaboration, Wyeth paid to us a $60.0 million
non-refundable upfront payment. Wyeth has made $39.0 million in milestone
payments since that time and is obligated to make up to $295.0 million in
additional payments to us upon the achievement of milestones and contingent
events in the development and commercialization of RELISTOR, taking into account
the Ono transaction discussed below. 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, all subject to Wyeth’s audit
rights and possible reconciliation as provided in the Agreement. During the
applicable royalty periods, Wyeth is obligated to pay to us royalties on the net
sales of RELISTOR by Wyeth throughout the world other than Japan, where we have
licensed the rights to subcutaneous RELISTOR to Ono.
We
recognize 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 recognize revenue for a portion of the $60.0 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.
Under our
License Agreement with Ono, in November 2008 we received from Ono an upfront
payment of $15.0 million, and are entitled to receive potential milestones, upon
achievement of development responsibilities by Ono, of up to $20.0 million,
commercial milestones and royalties on sales by Ono of subcutaneous RELISTOR in
Japan. These payments will depend on continued success in development and
commercialization of RELISTOR, which are in turn dependent on the actions of
Wyeth, Ono, the FDA, Japanese pharmaceutical regulatory authorities and other
regulatory bodies, as well as the outcome of clinical and other testing of
RELISTOR. Many of these matters are outside our control. Ono also has the option
to acquire from us the rights to develop and commercialize in Japan other
formulations of RELISTOR, including intravenous and oral forms, on terms to be
negotiated separately. Supervision of and consultation with respect to Ono’s
development and commercialization responsibilities will be carried out by joint
committees consisting of members from both Ono and us. Ono may request us to
perform activities related to its development and commercialization
responsibilities beyond our participation in these committees and specified
technology transfer related tasks which will be at its expense, and payable to
us for the services it requests, at the time we perform services for
them.
Because
Wyeth is not developing RELISTOR in Japan, we will not receive from it
Japan-related milestone payments provided in the original Wyeth Collaboration
Agreement. These potential future milestone payments would have totaled $22.5
million (of which $7.5 million related to the subcutaneous formulation of
RELISTOR and the remainder to the intravenous and oral formulations). As a
result, we now have the potential to receive a total of $334.0 million in
development and commercialization milestone payments from Wyeth under the Wyeth
Collaboration (of which $60.0 million relate to the intravenous formulation of
RELISTOR), and of which $39.0 million ($5.0 million relating to the intravenous
formulation) have been paid to date.
Virology.
In the area of virology, we are developing two viral-entry inhibitors: a
humanized monoclonal antibody, PRO 140, for treatment of human immunodeficiency
virus (HIV), the virus that causes acquired immunodeficiency syndrome (AIDS),
and a proprietary orally-available small-molecule drug candidate, PRO 206, for
treatment of hepatitis C virus infection (HCV). Based on results from previous
phase 2 clinical trials, we are developing the subcutaneous form of PRO 140 for
treatment of HIV infection, which has the potential for convenient, weekly
self-administration, and we are conducting preclinical development activities in
preparation for filing an Investigational New Drug (IND) application for PRO
206. We are also engaged in research regarding a prophylactic vaccine against
HIV infection.
Oncology.
In the area of prostate cancer, we are conducting a phase 1 clinical
trial of a fully human monoclonal antibody-drug conjugate (ADC) directed against
prostate specific membrane antigen (PSMA), a protein found at high levels on the
surface of prostate cancer cells and also on the neovasculature of a number of
other types of solid tumors. We are also developing therapeutic vaccines
designed to stimulate an immune response to PSMA. Our PSMA programs are
conducted through our wholly owned subsidiary, PSMA Development Company (PSMA
LLC).
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.
Results of
Operations (dollars in thousands)
Revenues:
Our
sources of revenue during the three months ended March 31, 2008 and 2009
included our Collaboration with Wyeth, our License Agreement with Ono, our
research grants and contract from the National Institutes of Health (NIH) and,
to a small extent, our sale of research reagents. In June 2008, we began
recognizing royalty income from net sales by Wyeth of subcutaneous
RELISTOR.
|
|
Three
Months Ended March 31,
|
|
|
|
|
Sources
of Revenue
|
|
2008
|
|
|
2009
|
|
|
Percent
Change
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
12,110 |
|
|
$ |
20,144 |
|
|
|
66%
|
|
Royalty
income
|
|
|
- |
|
|
|
175 |
|
|
|
N/A
|
|
Research
grants and contract
|
|
|
2,613 |
|
|
|
507 |
|
|
|
(81%)
|
|
Other
revenues
|
|
|
39 |
|
|
|
78 |
|
|
|
100%
|
|
Total
|
|
$ |
14,762 |
|
|
$ |
20,904 |
|
|
|
42%
|
|
Research
and development revenue:
· Wyeth
Collaboration. During the three months ended March 31, 2008 and 2009, we
recognized $12,110 and $5,097, respectively, of revenue from Wyeth, consisting
of $3,234 and $3,182, respectively, from amortization of the $60,000 upfront
payment we received upon entering into our Collaboration in December 2005, and
$8,876 and $1,915, respectively, as reimbursement for our development
expenses.
From the
inception of the Wyeth Collaboration through March 31, 2009, we recognized
$48,619 of revenue from the $60,000 upfront payment, $101,233 as reimbursement
for our development expenses, and a total of $39,000 for non-refundable
milestone payments. We expect reimbursement revenue to decline during the
remainder of 2009 compared to 2008, as research and development for RELISTOR
decreases.
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 thru March 31, 2009. We
expect revenue from amortization of the remaining $11.4 million of
unamortized upfront premium to increase during the remainder of 2009 compared to
2008, and that the amortization will be completed by the end of
2009.
· Ono
License Agreement.
In October
2008, we entered into a License Agreement with Ono and in November 2008,
received an upfront payment of $15.0 million. We are entitled to receive
potential milestones and royalty payments. During the three months ended March
31, 2009, we recognized the upfront payment as revenue, upon satisfaction of our
performance obligations and recorded $47 of reimbursement revenue for activities
requested by Ono.
Royalty income. We began
earning royalties from net sales by Wyeth of subcutaneous RELISTOR in June 2008.
During the three
months ended March 31, 2009, we earned royalties of $280, based on net sales of
RELISTOR and recognized $175 of royalty income. As of March 31, 2009, we
have recorded a cumulative total of $624 as deferred revenue – current. The $624
of deferred royalty revenue is expected to be recognized as royalty income over
the period of our development obligations relating to RELISTOR, which we
currently estimate will terminate at the end of 2009. Our royalties from net
sales by Wyeth of RELISTOR, as defined, are based on specified royalty rates
ranging 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.
Global
net sales of RELISTOR, which began last June, were $1.9 million for the first
quarter of 2009, an increase of 23% compared to $1.5 million in the fourth
quarter of 2008. This quarterly increase includes a 42% increase in U.S.
RELISTOR sales from $0.8 million in the prior year’s fourth quarter to $1.2
million in the first quarter of 2009. Non-U.S. RELISTOR sales totaled $0.7
million in the first quarter of 2009, unchanged from the prior quarter. The
number of U.S. institutions ordering RELISTOR in the first quarter of 2009 grew
by approximately 27% over the fourth quarter of 2008 as formulary approvals
continue to increase.
Research
grants and contract. In 2003, we were awarded a contract by the NIH (NIH
Contract) 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 provided for pre-clinical research, development
and early clinical testing. These funds were 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 December 2008 amounted to $15,509. Funding under this contract
included the payment of an aggregate of $1,617 in fees, subject to achievement
of specified milestones. Through December 31, 2008, we had recognized revenue of
$15,509 from this contract, including $180 for the achievement of two
milestones. We were informed by the NIH that it has decided to fund the NIH
Contract only through December 2008. We have applied for additional awards for
this program and are currently funding it with our own resources pending a
decision on that application.
Revenues
from research grants and contract from the NIH decreased from $2,613 for the
three months ended March 31, 2008 to $507 for the three months ended March 31,
2009; $2,093 and $507 from grants and $520 and zero from the NIH Contract for
the three months ended March 31, 2008 and 2009, respectively. The decrease in
grant and contract revenue resulted from fewer active grants and reimbursable
expenses in 2009 than in 2008, and the expiration of the NIH Contract in
December 2008.
Other
revenues, primarily from orders for research reagents, increased from $39
for the three months ended March 31, 2008 to $78 for the three months ended
March 31, 2009.
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, including license fees and royalty expense, decreased from
$23,939 for the three months ended March 31, 2008 to $15,478 for the three
months ended March 31, 2009, as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Salaries
and benefits (cash)
|
|
$6,559
|
|
$6,115
|
|
(7%)
|
Salaries
and benefits (cash) decreased due to a decline in average headcount
from 200 to 190 for the three months ended March 31, 2008 and 2009,
respectively, in the research and development, manufacturing and clinical
departments due to transfers of information technology personnel from the
research and development to general and administrative departments.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Share-based
compensation (non-cash)
|
|
$2,012
|
|
$2,106
|
|
5%
|
Share-based compensation (non-cash)
increased due to higher compensation expenses from the vesting of additional
share-based compensation
awards partially offset by a decrease in employee stock purchase plan expenses
for the three months ended March 31, 2009 compared to the three months ended
March 31, 2008. See Critical Accounting
Policies − Share-Based Payment Arrangements.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Clinical
trial costs
|
|
$4,863
|
|
$975
|
|
(80%)
|
Clinical
trial costs decreased primarily due to lower expenses for (i) RELISTOR ($3,325),
from reduced clinical trial activities, (ii) HIV ($494), due to decreased PRO
140 clinical trial activities, and (iii) Cancer ($69), all for the three months
ended March 31, 2009 compared to the three months ended March 31,
2008.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Laboratory
supplies
|
|
$1,182
|
|
$889
|
|
(25%)
|
Laboratory
supplies decreased due to lower expenses for (i) HIV ($553), from a decline in
the purchases of drug supplies, and (ii) Other projects ($83), partially offset
by an increase in Cancer ($345), due to higher expenses for PSMA, all for the
three months ended March 31, 2009 compared to the three months ended March 31,
2008.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Contract
manufacturing and subcontractors
|
|
$4,646
|
|
$2,629
|
|
(43%)
|
Contract
manufacturing and subcontractors decreased due to lower (i) HIV expenses
($2,099), from a decline in manufacturing expenses for PRO 140 and
(ii) RELISTOR expenses ($724), partially offset by increases in both Cancer
($420), due to higher contract manufacturing expenses for PSMA, and Other
($386), all for the three months ended March 31, 2009 compared to the three
months ended March 31, 2008. 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 March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Consultants
|
|
$1,635
|
|
$318
|
|
(81%)
|
Consultants expenses
decreased due to lower expenses for (i) RELISTOR ($877), (ii)
Cancer ($273) and (iii) Other projects ($163), all for the three months ended
March 31, 2009 compared to the three months ended March 31, 2008. These expenses
are related to the monitoring of clinical trials as well as the analysis of data
from completed clinical trials and vary as the timing and level of such services
are required.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
License
fees
|
|
$1,149
|
|
$630
|
|
(45%)
|
License
fees decreased primarily due to a decline in HIV expenses ($779), partially
offset by an increase in Cancer ($250), all for the three months ended March 31,
2009 compared to the three months ended March 31, 2008.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Royalty
expense
|
|
$
-
|
|
$18
|
|
N/A
|
We
incurred $28 of royalty costs and recognized $18 of royalty expenses during the
three months ended March 31, 2009. As of March 31, 2009, we recorded a
cumulative total of $62 of deferred royalty charges from the royalty costs
incurred since we began earning royalties in the second quarter of 2008. The $62
of deferred royalty charges are expected to be recognized as royalty expense
over the period of our development obligations relating to RELISTOR, which we
currently estimate will terminate at the end of 2009.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Other
operating expenses
|
|
$1,893
|
|
$1,798
|
|
(5%)
|
Other
operating expenses decreased for the three months ended March 31, 2009 compared
to the three months ended March 31, 2008, primarily due to a decline in computer
expenses ($61), facilities ($43), insurance ($30), travel ($14) and other
operating expenses ($47), partially offset by an increase in rent
($100).
General and Administrative Expenses
decreased from $7,152 for the three months ended March 31,
2008 to $6,801 for the three months ended March 31, 2009, as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Salaries
and benefits (cash)
|
|
$2,258
|
|
$2,171
|
|
(4%)
|
Salaries
and benefits (cash) decreased due to lower bonus expenses partially offset by
higher salaries expenses resulting from an increase in average headcount, from
50 to 52 in the general and administrative departments for the three months
ended March 31, 2008 and 2009, respectively, due to transfers of information
technology personnel from the research and development to general and
administrative departments.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Share-based
compensation (non-cash)
|
|
$1,900
|
|
$2,036
|
|
7%
|
Share-based
compensation (non-cash) increased due to higher compensation expenses from the
vesting of additional share-based compensation awards partially offset by
a decrease in employee stock purchase plan expenses for the three months
ended March 31, 2009 compared to the three months ended March 31,
2008. See Critical
Accounting Policies −Share-Based Payment Arrangements.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Consulting
and professional fees
|
|
$1,707
|
|
$1,453
|
|
(15%)
|
Consulting
and professional fees decreased due to a decline in patent fees ($425),
consultants ($114) and other miscellaneous costs ($20), which were partially
offset by an increase in legal fees ($268) and audit and tax fees ($37), all for
the three months ended March 31, 2009 compared to the three months ended March
31, 2008.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Other
operating expenses
|
|
$1,287
|
|
$1,141
|
|
(11%)
|
Other
operating expenses decreased due to lower spending on recruiting ($130),
conferences and seminars ($29) and other operating expenses ($67), partially
offset by increases in rent ($39), taxes ($26) and investor relations
($17), all for the three months ended March 31, 2009 compared to the three
months ended March 31, 2008.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$1,114
|
|
$1,203
|
|
8%
|
Depreciation
and amortization expense increased from $1,114 for the three months ended March
31, 2008 to $1,203 for the three months ended March 31, 2009, due to fixed asset
purchases in 2008.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
Percent
Change
|
|
|
|
|
|
|
|
Interest
income
|
|
$1,958
|
|
$790
|
|
(60%)
|
Interest
income decreased from $1,958 for the three months ended March 31, 2008 to $790
for the three months ended March 31, 2009. 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 March 31, 2008 and 2009, investment income decreased from
$2,053 to $1,089, respectively, due to a decrease in interest rates and lower
average balance of cash equivalents and marketable securities in 2009 than
in 2008. Amortization of premiums, net of discounts, was ($95) and ($299) for
the three months ended March 31, 2008 and 2009, respectively.
Income
Taxes:
For the
three months ended March 31, 2008 and 2009, we had losses both for book and tax
purposes.
Net
Loss:
Our net
loss was $15,485 for the three months ended March 31, 2008 compared to $1,788
for the same period of 2009.
Liquidity
and Capital Resources
We have
to date generated only modest amounts of product and royalty revenue, and
consequently have relied principally on external funding and our Collaboration
with Wyeth to finance our operations. We have funded our 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, sale of our
common stock under our two employee stock purchase plans (Purchase Plans) and a
license agreement. We are
currently in discussions with government agencies and others to obtain pivotal
clinical trial funding to support our PRO 140 compound, and are pursuing
strategic collaborations with biopharmaceutical companies to support our
development plan for PSMA ADC.
At March 31, 2009, we had cash, cash equivalents and marketable securities,
including non-current portion, totaling $127.7 million compared with $141.4
million at December 31, 2008. We expect that our existing cash, cash equivalents
and marketable securities at March 31, 2009 are sufficient to fund current
operations beyond one year. Our cash flow from operating activities was negative
for the three months ended March 31, 2008 and 2009 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 Collaboration with Wyeth provided us with a $60.0 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 the end of 2009. For the three months ended March 31, 2008 and
2009, we recorded $8.9 million and $1.9 million, respectively, of such
reimbursement. Wyeth is obligated to make up to $295.0 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, other than that
to be conducted by Ono. We are entitled to receive royalty payments from Wyeth
as the product is sold in the various countries (other than Japan) where
marketing approval has been obtained. We are also entitled to receive royalty
payments upon the sale of all other products developed under the Wyeth
Collaboration Agreement.
Under our
License Agreement with Ono, we received from Ono, in November 2008, an upfront
payment of $15.0 million, which was recognized as
revenue during the first quarter of 2009, upon satisfaction of our performance
obligations, and are entitled to receive potential milestone payments,
upon achievement of development responsibilities by Ono, of up to $20.0 million,
commercial milestones and royalties on sales of subcutaneous RELISTOR in Japan.
Ono is also responsible for development and commercialization costs for
subcutaneous RELISTOR in Japan.
We may
also enter into other 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 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 were 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 December 2008 was $15.5 million.
Funding under this contract included the payment of an aggregate of $1.6 million
in fees, subject to achievement of specified milestones. Through December 31,
2008, we had recognized revenue of $15.5 million from this contract, including
$0.2 million for the achievement of two milestones. We were informed by the NIH
that it has decided to fund this contract only through December 2008. We have
applied for additional awards for this program and are currently funding it with
our own resources pending a decision on that application.
A
substantial portion of our revenues to date has been derived from federal
government grants. During the three months ended March 31, 2008 and 2009, we
recognized as revenue awards made to us by the NIH between 2004 and 2008, to
partially fund some of our programs. For the three months ended March 31, 2008
and 2009, we recognized $2.1 million and $0.5 million, respectively, of revenue
from all of our NIH grants.
Changes
in Accounts receivable and Accounts payable for the three months ended March 31,
2008 and 2009 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, Ono and from currently approved grants,
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. Our marketable securities, which include
corporate debt securities, securities of government-sponsored entities and
auction rate securities, are classified as available-for-sale.
A
substantial portion of our cash and cash equivalents are guaranteed by the U.S.
Treasury or Federal Deposit Insurance Corporation’s guarantee programs. Our
marketable securities, which include corporate debt securities, securities of
government-sponsored entities and auction rate securities, are classified as
available for sale and are predominantly not guaranteed. These investments,
while rated investment grade by the Standard & Poor’s and Moody’s rating
agencies and predominantly having scheduled maturities in 2009, are heavily
concentrated in the U.S. financial sector, which continues to be under extreme
stress.
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 March 31, 2009, we continue to hold approximately $4.1 million of
auction rate securities which, in the event of auction failure, are reset
according to the contractual terms in the governing instruments. To date, we
have received all scheduled interest payments on these securities. We will not
realize cash in respect of the principal amount of these securities 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
monitor markets for our investments, but cannot guarantee that additional losses
will not be required to be recorded. Valuation of securities 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, ongoing strength and quality of market credit and
liquidity and general economic and market conditions. We do not believe the
carrying values of our investments are other than temporarily 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 be held to
maturity unless authorization is obtained from us to sell earlier. In fact, we
have a history of holding all marketable securities to maturity. We, therefore,
believe 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 March 31, 2009.
Financing
Activities. During the three months ended March 31, 2008 and 2009, we
received cash of $1.5 million and $1.5 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.
In the
prior year, we obtained approvals from the FDA, as well as European Union,
Canadian, Australian, Venezuelan and other regulatory authorities, for our first
commercial product, RELISTOR. We continue development and clinical trials with
respect to RELISTOR and our other product candidates. Unless we obtain
regulatory approval from the FDA for additional product candidates and/or enter
into agreements with corporate collaborators with respect to the development of
our technologies in addition to that for RELISTOR, we will be required to fund
our operations for periods in the future, by seeking additional financing
through future offerings of equity or debt securities, through collaborative,
license or royalty financing agreements, 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 may 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 supportive care, 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
March 31, 2009 have been approximately $494.0 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 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 may be subject
to further revision, are $6.0 million, over the period from April 1, 2009 to
December 31, 2009.
For the
three months ended March 31, 2008 and 2009, research and development costs
incurred by project were as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
RELISTOR
|
|
$ |
9.3 |
|
|
$ |
2.4 |
|
HIV
|
|
|
9.7 |
|
|
|
4.4 |
|
Cancer
|
|
|
2.5 |
|
|
|
5.6 |
|
Other
programs
|
|
|
2.5 |
|
|
|
3.1 |
|
Total
|
|
$ |
24.0 |
|
|
$ |
15.5 |
|
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 are funded by Wyeth in the U.S. and
outside the U.S. except for Japan, where development, manufacturing and
commercialization expenses are required to be funded by Ono. 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 our 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 are, however, making royalty payments and are responsible for
making other payments to the University of Chicago upon the occurrence of
certain events.
Investing
Activities. During the three months ended March 31, 2008 and 2009, we
spent $0.8 million and $0.6 million, respectively, on capital expenditures.
Those expenditures have been primarily related to the purchase of additional
laboratory equipment for our ongoing and future research and development
projects.
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
March 31, 2009 for future payments under these agreements:
|
|
|
|
|
Payments
due by March 31,
|
|
|
|
Total
|
|
|
2010
|
|
|
|
2011-2012
|
|
|
|
2013-2014
|
|
|
Thereafter
|
|
|
|
(in
millions)
|
|
Operating
leases
|
|
$ |
4.2 |
|
|
$ |
2.5 |
|
|
$ |
1.0 |
|
|
$ |
0.5 |
|
|
$ |
0.2 |
|
License
and collaboration agreements (1)
|
|
|
82.3 |
|
|
|
1.8 |
|
|
|
4.7 |
|
|
|
13.0 |
|
|
|
62.8 |
|
Total
|
|
$ |
86.5 |
|
|
$ |
4.3 |
|
|
$ |
5.7 |
|
|
$ |
13.5 |
|
|
$ |
63.0 |
|
(1)
|
Assumes
attainment of milestones covered under each agreement. The timing of the
achievement of the related 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, 2008. 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 SEC’s Staff Accounting Bulletin (SAB) No. 104 (SAB 104),
Emerging Issues Task Force (EITF) 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 three months ended March 31, 2008 and
2009, we also recognized revenue from government research grants (and contract
in the 2008 period), which are used to subsidize a portion of certain of our
research projects (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 Wyeth Collaboration 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 Wyeth
Collaboration, 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, 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.
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 Wyeth
Collaboration, we have assessed the nature of our involvement with the Joint
Steering Committee, Joint Development Committee and Joint Commercialization
Committee. 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 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 is required to
continue to develop the oral formulation and to commercialize all formulations
as provided in the Wyeth Collaboration, 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. As discussed in Overview – Supportive Care,
Wyeth returned the rights to RELISTOR with respect to Japan to us in connection
with its election not to develop RELISTOR there and the transaction with Ono. As
a result, Wyeth is now responsible for the development of the oral formulation
worldwide excluding Japan and the intravenous and subcutaneous formulations
outside the U.S., other than Japan.
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
(Substantive Milestone Method). During October 2006, May 2007, April 2008 and
July 2008, we earned $5.0 million, $9.0 million, $15.0 million and $10.0
million, respectively, upon achievement of non-refundable milestones anticipated
in the Wyeth Collaboration; 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, the third for the FDA approval of subcutaneous RELISTOR and
the fourth for the European approval of subcutaneous RELISTOR. We considered
those milestones to be substantive based on the significant degree of risk at
the inception of the Collaboration 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 Wyeth Collaboration and amount of effort expended or the
risk associated with the achievement of these milestones; and the passage of
ten, 17, 28 and 31 months, respectively, from inception of the Collaboration 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 providing for the royalty. If
royalties are received when we have remaining performance obligations, they
would be attributed to the services being provided under the arrangement and,
therefore, recognized as such 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 condensed 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 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.
We
recognized the upfront payment of $15.0 million, which we received from Ono in
November 2008, as research and development revenue during the first quarter of
2009, upon satisfaction of our performance obligations.
Ono is
responsible for developing and commercializing subcutaneous RELISTOR in Japan,
including conducting the clinical development necessary to support regulatory
marketing approval. Ono is to own the subcutaneous filings and approvals
relating to RELISTOR in Japan. In addition to the $15.0 million upfront payment
from Ono, we are entitled to receive up to an additional $20.0 million, payable
upon achievement by Ono of its development milestones. Ono is also obligated to
pay to us royalties and commercialization milestones on sales by Ono of
subcutaneous RELISTOR in Japan. Ono has the option to acquire from us the rights
to develop and commercialize in Japan other formulations of RELISTOR, including
intravenous and oral forms, on terms to be negotiated separately. Supervision of
and consultation with respect to Ono’s development and commercialization
responsibilities will be carried out by joint committees consisting of members
from both Ono and us. Ono may request us to perform activities related to its
development and commercialization responsibilities beyond our participation in
these committees and specified technology transfer-related tasks which will be
at its expense, and payable to us for the services it requests, at the time we
perform services for them. Revenue earned from activities we perform for Ono is
recorded in research and development revenue.
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 and shares issued under our
Purchase Plans, which are compensatory under Statement of Financial Accounting
Standards No. 123 (revised 2004) (FAS 123(R)) “Share-Based Payment.” We account
for share-based compensation to non-employees, including non-qualified stock
options and restricted stock, in accordance with EITF 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.”
Compensation
cost for all share-based awards 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. As of March 31, 2009, there was
$13.3 million, $7.5 million and $0.1 million of total unrecognized compensation
cost related to non-vested stock options under the plans, the non-vested shares
and the Purchase Plans, respectively. Those costs are expected to be
recognized over weighted average periods of 2.5 years, 1.6 years and 0.04 years,
respectively. 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 FAS
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 three months ended March 31, 2008 and 2009, the
volatility of our common stock has been high, 66%-90% and 71%-91%,
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 three months ended
March 31, 2008 and 2009, our expected term was calculated based upon
historical data related to exercise and post-termination cancellation
activity. Accordingly, for grants made to employees and officers
(excluding our Chief Executive Officer) and directors, we are using
expected terms of 5.33 and 8.0 years and 5.3 and 7.3 years, respectively.
Beginning in the third quarter of 2008, we began estimating the expected
term of stock options granted to our Chief Executive Officer separately
from stock options granted to employees and officers, and the expected
term was 7.8 years in the first quarter of 2009. Expected term for options
granted to non-employee consultants was ten years, which is the
contractual term of those options. 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. The July 1, 2002, 2003 and
2005 awards have fully vested. 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 FAS 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). On July 1, 2008, we granted options and restricted stock
to our Chief Executive Officer which vest on the basis of the achievement of
specified performance or market-based milestones. The options have an exercise
price equal to the closing price on our common stock on the date of grant while
the restricted stock awards do not include an exercise price. The awards to our
Chief Executive Officer are valued using a Monte Carlo simulation and the
expense related to these grants will be recognized over the shortest estimated
time for the achievement of the performance or market conditions. The awards
will not vest unless one of the milestones is achieved or the market condition
is met. Changes in the estimate of probability of achievement of any performance
or market 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 Financial Accounting Standards Board (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 net losses for the three months ended March 31, 2008 and 2009, 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
three months ended March 31, 2008 and 2009, no tax benefit was recognized
related to total compensation cost for share-based payment arrangements
recognized in operations because we had net losses for those periods 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 three
months ended March 31, 2008 and 2009.
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 as incurred, and are 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, mitigates 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.
Fair Value
Measurements. Our available-for-sale investment portfolio consists of
money market funds, 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 Statement of Financial Accounting Standards 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 Statement of Financial Accounting Standards 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 in
selling an asset or paid in transferring the 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 FASB Staff Position (FSP) No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” we also adopted FAS 157 for our
nonfinancial assets and nonfinancial liabilities on January 1, 2009 and our
adoption did not have a material impact on our financial position or results of
operations.
FAS 157
establishes a three-level hierarchy for fair value measurements that
distinguishes between market participant assumptions developed from market data
obtained from sources independent of the reporting entity (“observable inputs”)
and the reporting entity’s own assumptions about market participant assumptions
developed from 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 April
2009, the FASB issued three FSPs related to (i) measuring fair value when market
activity declines, (ii) other-than-temporary impairments and (iii) interim fair
value disclosures.
FSP No.
FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” provides additional guidance on (1) estimating fair value
of an asset or liability when the volume and level of market activity for the
asset or liability have significantly decreased and (2) identifying transactions
that are not orderly.
FSP No.
FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary
Impairments” changes the focus of the other-than-temporary model from an
entity’s ability and intent to hold a debt security until recovery. Under FSP
FAS 115-2 and FAS 124-2, an other-than-temporary impairment occurs for debt
securities if (1) an entity has the intent to sell the security, (2) it is more
likely than not that it will be required to sell the security before recovery,
or (3) it does not expect to recover the entire amortized cost basis of the
security.
FSP No.
FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial
Instruments” expands the disclosure requirements of FASB Statement No. 107
“Disclosures about Fair Value of Financial Instruments” to interim period
financial statements and requires an entity to (1) disclose the methods and
significant assumptions used to estimate fair value and (2) highlight any
changes of the methods and significant assumptions from prior
periods.
All three
FSPs are effective for interim and annual reporting periods ending after June
15, 2009. We are currently evaluating the impact these FSPs will have on our
financial statements.
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 money
market funds, taxable corporate debt securities, securities of
government-sponsored entities and auction rate securities. Our investments
totaled $120.7 million at March 31, 2009. Approximately $61.3 million of these
investments had fixed interest rates, and $59.4 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 March 31, 2009 market interest rates would result in a decrease of
approximately $0.02 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 March 31, 2009, we continue to hold approximately $4.1 million (3% 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 the
impact, if any, of market conditions on the fair market value of our
investments. If the auction rate securities market conditions do not recover, we
may be required to record additional losses during the remainder of 2009, 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, ongoing strength and quality of market credit
and liquidity and general economic and market conditions. We do not believe the
carrying values of these auction rate securities are other than temporarily
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. We
re-evaluated the valuation of these securities as of March 31, 2009 and the
temporary impairment amount remained unchanged at $0.3 million. A 100 basis
point increase to our internal analysis would result in an increase of
approximately $0.042 million in the temporary impairment of these securities as
of the three months ended March 31, 2009.
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 at the reasonable assurance level.
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, 2008 and our other public reports. In addition, the following risk
factors have changed during the quarter ended March 31, 2009:
We
have a history of operating losses, and we may never be profitable.
We have
incurred substantial losses since our inception. As of March 31, 2009, we had an
accumulated deficit of $300.5 million. We have derived no significant revenues
from product sales or royalties. We may not achieve significant product sales or
royalty revenue for a number of years, if ever. 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.
Our
ability to achieve and sustain profitability is dependent in part on obtaining
regulatory approval for and then commercializing our products, either alone or
with others. We may not be able to develop and commercialize products beyond
subcutaneous RELISTOR. Our operations may not be profitable even if any of our
other products under development are commercialized.
We
are likely to need additional financing, but our access to capital funding is
uncertain.
As of
March 31, 2009, we had cash, cash equivalents and marketable securities,
including non-current portion, totaling $127.7 million. During the three months
ended March 31, 2009, we had a net loss of $1.8 million and cash used in
operating activities was $14.5 million.
Although
our spending on RELISTOR has been significant during 2007, 2008 and through the
first quarter of 2009, our net expenses for RELISTOR have been reimbursed by
Wyeth under the Collaboration Agreement. We expect our spending on RELISTOR will
decline during the remainder of 2009 and thereafter, which will result in less
reimbursement by Wyeth.
With
regard to other product candidates, we expect to continue to incur significant
development expenditures, and do not have committed external sources of funding
for most of these projects. These expenditures will be funded from cash on hand,
or we may seek additional external funding for them, most likely through
collaborative, license or royalty financing agreements with one or more
pharmaceutical companies, securities issuances or government grants or
contracts. We cannot predict when we will need additional funds, how much we
will need or if additional funds will be available, especially in light of
current conditions in global credit and financial markets. Our need for future
funding will depend on numerous factors, such as the availability of new product
development projects or other opportunities which we cannot predict, and many of
which are outside our control. In
particular, we cannot assure you that any currently-contemplated or future
initiatives for funding our product candidate programs will be
successful.
Our
access to capital funding is always uncertain. Recent turmoil in the
international capital markets has exacerbated this uncertainty. 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 would seriously 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 existing stockholders. If we raise funds by selling equity
securities, current stockholders will be diluted, and new investors could have
rights superior to existing stockholders. Raising funds by selling debt
securities often entails significant restrictive covenants and repayment
obligations.
A
substantial portion of our cash and cash equivalents are guaranteed by the U.S.
Treasury or Federal Deposit Insurance Corporation’s guarantee programs. Our
marketable securities, which include corporate debt securities, securities of
government-sponsored entities and auction rate securities, are classified as
available for sale and are predominantly not guaranteed. These investments,
while rated investment grade by the Standard & Poor’s and Moody’s rating
agencies and predominantly having scheduled maturities in 2009, are heavily
concentrated in the U.S. financial sector, which continues to be under extreme
stress.
At March
31, 2009, we continue to hold approximately $4.1 million of auction rate
securities which, in the event of auction failure, have been reset according to
the contractual terms in the governing instruments. To date, we have received
all scheduled interest payments on these securities. We will not realize cash in
respect of the principal amount of these securities 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
monitor markets for our investments, but cannot guarantee that additional losses
will not be required to be recorded. Valuation of securities 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, ongoing strength and quality of market credit and
liquidity and general economic and market conditions.
Competing
products may adversely affect our products.
We are
aware that Adolor Corporation, in collaboration with GlaxoSmithKline, received
FDA approval in May 2008 for ENTEREG®
(alvimopan), an oral form of an opioid antagonist, for postoperative ileus, “to
accelerate the time to upper and lower gastrointestinal recovery following
partial large or small bowel resection surgery with primary anastomosis.” We are
also aware that Sucampo Pharmaceuticals, Inc., in collaboration with Takeda
Pharmaceutical Company Limited, is currently conducting phase 3 pivotal clinical
trials of AMITIZA®
(lubiprostone) for the treatment of opioid-induced bowel dysfunction, and that
Nektar Therapeutics has completed a phase 2 study of an oral once-a-day
peripheral opioid antagonist in patients with OIC. In Europe, we are aware that
Mundipharma International markets TARGIN®
(oxycodone/naloxone, a combination of an opioid and systemic opioid antagonist).
Any of these drugs may achieve a significant competitive advantage relative to
our product. In any event, the considerable marketing and sales capabilities of
these competitors may impair our ability to compete effectively in the
market.
In the
case of PRO 140, five classes of products have been approved for marketing by
the FDA for the treatment of HIV infection and AIDS. These drugs have shown
efficacy in reducing the concentration of HIV in the blood and prolonging
asymptomatic periods in HIV-positive individuals. All have been required to show
efficacy in conjunction with other agents, which we have not demonstrated for
PRO 140. We are aware of two approved drugs designed to treat HIV infection by
blocking viral entry (Trimeris’ FUZEON® and
Pfizer’s SELZENTRY™). We are also aware of various HCV drugs in pre-clinical or
clinical development.
Radiation
and surgery are two principal traditional forms of treatment for prostate
cancer, to which our PSMA-based development efforts are directed. If the disease
spreads, hormone (androgen) suppression therapy is often used to slow the
cancer’s progression. This form of treatment, however, can eventually become
ineffective. We are aware of several competitors who are developing alternative
treatments for castrate-resistant prostate cancer, some of which are directed
against PSMA.
If
we are unable to negotiate collaborative agreements, our cash burn rate could
increase and our rate of product development could decrease.
Our
business strategy includes entering into collaborations with pharmaceutical and
biotechnology companies to develop and commercialize product candidates and
technologies. We may not be successful in negotiating additional collaborative
arrangements. If we do not enter into new collaborative arrangements, we would
have to devote more of our resources to clinical product development and
product-launch activities, seeking additional sources of capital, and our cash
burn rate would increase or we would need to take steps to reduce our rate of
product development. In particular, we cannot assure you that any
currently-contemplated or future collaboration or other initiatives for funding
our product candidate programs will be successfully concluded.
A
substantial portion of our funding comes from federal government grants and
research contracts. We cannot rely on these grants or contracts as a continuing
source of funds.
A
substantial portion of our revenues to date, albeit decreasing in 2007 and 2008,
has been derived from federal government grants and research contracts. During
the years ended December 31, 2006, 2007 and 2008, we generated revenues from
awards made to us by the NIH between 2003 and 2008, to partially fund some of
our programs. We cannot rely on grants or additional contracts as a continuing
source of funds. Funds available under these grants and contracts must be
applied by us toward the research and development programs specified by the
government rather than for all our programs generally. The government’s
obligation to make payments under these grants and contracts is subject to
appropriation by the U.S. Congress for funding in each year. It is possible that
Congress or the government agencies that administer these government research
programs will decide to scale back these programs or terminate them due to their
own budgetary constraints. Additionally, these grants and research contracts are
subject to adjustment based upon the results of periodic audits performed on
behalf of the granting authority. Consequently, the government may not award
grants or research contracts to us in the future, and any amounts that we derive
from existing grants or contracts may be less than those received to date.
Therefore, we will need to provide funding on our own or obtain other
funding. In particular, we cannot assure you that any
currently-contemplated or future efforts to obtain funding for our product
candidate programs through government grants or contracts will be successful, or
that any such arrangements which we do conclude will supply us with sufficient
funds to complete our development programs without providing additional funding
on our own or obtaining other funding.
Our
stock price has a history of volatility. You should consider an investment in
our stock as risky and invest only if you can withstand a significant
loss.
Our stock
price has a history of significant volatility. Between January 1, 2007 and March
31, 2009, our stock price has ranged from $4.33 to $30.31 per share. Between
April 1, 2009 and May 6, 2009, it has ranged from $5.03 to $7.05 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, and current financial and market conditions have resulted in widespread
pressures on securities of issuers throughout the world economy. Factors that
may have a significant impact on the market price of our common stock
include:
·
|
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 relationships with Wyeth, Pfizer (if its acquisition of Wyeth is
completed) and Ono 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 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
discontinued, our stock price may fall.
Our
principal stockholders are able to exert significant influence over matters
submitted to stockholders for approval.
At March
31, 2009, our directors and executive officers and stockholders affiliated with
Tudor Investment Corporation together beneficially own or control approximately
one-fifth of our outstanding shares of common stock. At that date, our five
largest stockholders, excluding our directors and executive officers and
stockholders affiliated with Tudor, beneficially own or control in the aggregate
approximately 57% of our outstanding shares. Our directors and executive
officers and Tudor-related stockholders, should they choose to act together,
could exert significant influence in determining the outcome of corporate
actions requiring stockholder approval and otherwise control our business. This
control could have the effect of delaying or preventing a change in control of
us and, consequently, could adversely affect the market price of our common
stock. Other significant but unrelated stockholders could also exert influence
in such matters.
If
there are substantial sales of our common stock, the market price of our common
stock could decline.
Sales of
substantial numbers of shares of common stock could cause a decline in the
market price of our stock. We require substantial external funding to finance
our research and development programs and may seek such funding through the
issuance and sale of our common stock. In addition, some of our other
stockholders are entitled to require us to register their shares of common stock
for offer or sale to the public. We have filed Form S-8 registration statements
registering shares issuable pursuant to our equity compensation plans and
periodically seek to increase the amount of securities available under these
plans. Any sales by existing stockholders or holders of options, or other
rights, may have an adverse effect on our ability to raise capital and may
adversely affect the market price of our common stock.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
We did
not repurchase any common shares during the three months ended March 31, 2009
(see Note 1 - Corporate
- Related Matters to our financial statements).
Item
6. Exhibits
Exhibit
Number
|
Description
|
|
|
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:
May 11, 2009
|
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)
|