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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-25544
Miravant Medical Technologies
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(Exact name of Registrant as specified in its charter)
Delaware 77-0222872
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
336 Bollay Drive, Santa Barbara, California 93117
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(Address of principal executive offices, including zip code)
(805) 685-9880
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements
Condensed consolidated balance sheets as of June 30, 2004 and
December 31, 2003.......................................................... 3
Condensed consolidated statements of operations for the three and
six months ended June 30, 2004 and 2003..................................... 4
Condensed consolidated statement of stockholders' equity (deficit)
for the six months ended June 30, 2004...................................... 5
Condensed consolidated statements of cash flows for the six
months ended June 30, 2004 and 2003......................................... 6
Notes to condensed consolidated financial statements......................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 12
Item 3. Qualitative and Quantitative Disclosures About Market Risk................... 39
Item 4. Controls and Procedures...................................................... 39
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................... 40
Item 4. Submission of Matters to a Vote of Security Holders.......................... 40
Item 6. Exhibits and Reports on Form 8-K............................................. 42
Signatures................................................................... 42
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
Assets 2004 2003
------------------ -------------------
Current assets: (Unaudited)
Cash and cash equivalents............................................... $ 5,390,000 $ 1,030,000
Marketable securities................................................... 2,994,000 --
Prepaid expenses and other current assets............................... 164,000 298,000
------------------ -------------------
Total current assets....................................................... 8,548,000 1,328,000
Property, plant and equipment:
Vehicles................................................................ 28,000 28,000
Furniture and fixtures.................................................. 1,392,000 1,393,000
Equipment............................................................... 4,672,000 5,200,000
Leasehold improvements.................................................. 2,721,000 2,720,000
------------------ -------------------
8,813,000 9,341,000
Accumulated depreciation................................................ (8,668,000) (9,125,000)
------------------ -------------------
145,000 216,000
Patents, net............................................................... 890,000 707,000
Other assets............................................................... 95,000 154,000
------------------ -------------------
Total assets............................................................... $ 9,678,000 $ 2,405,000
================== ===================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable........................................................ $ 1,110,000 $ 1,456,000
Accrued payroll and expenses............................................ 770,000 536,000
------------------ -------------------
Total current liabilities.................................................. 1,880,000 1,992,000
Long-term liabilities:
Convertible debt:
Face value of convertible debt......................................... 11,845,000 12,916,000
Deferred financing costs and beneficial conversion value............... (3,163,000) (5,476,000)
------------------ -------------------
Total long-term liabilities................................................ 8,682,000 7,440,000
Stockholders' equity (deficit):
Common stock, 75,000,000 shares authorized; 35,111,810 and 25,564,904 shares
issued and outstanding at June 30, 2004 and December 31, 2003,
respectively......................................................... 205,822,000 190,586,000
Notes receivable from officers.......................................... (516,000) (603,000)
Deferred compensation................................................... -- (16,000)
Accumulated deficit..................................................... (206,190,000) (196,994,000)
------------------ -------------------
Total stockholders' equity (deficit)....................................... (884,000) (7,027,000)
------------------ -------------------
Total liabilities and stockholders' equity (deficit)....................... $ 9,678,000 $ 2,405,000
================== ===================
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
2004 2003 2004 2003
----------------- ----------------- ---------------- ----------------
Revenues................................. $ -- $ -- $ -- $ --
Costs and expenses:
Research and development.............. 1,647,000 1,859,000 3,908,000 3,733,000
General and administrative............ 1,587,000 1,578,000 3,311,000 2,951,000
----------------- ----------------- ---------------- ----------------
Total costs and expenses................. 3,234,000 3,437,000 7,219,000 6,684,000
Loss from operations..................... (3,234,000) (3,437,000) (7,219,000) (6,684,000)
Interest and other income (expense):
Interest and other income............. 24,000 18,000 44,000 38,000
Interest expense...................... (517,000) (262,000) (2,056,000) (368,000)
Gain (loss) on sale of property, plant
and equipment....................... 26,000 (42,000) 35,000 (60,000)
----------------- ----------------- ------------- ----------------
Total net interest and other income
(expense)............................... (467,000) (286,000) (1,977,000) (390,000)
----------------- ----------------- ---------------- ----------------
Net loss................................. $ (3,701,000) $ (3,723,000) $ (9,196,000) $ (7,074,000)
================== ================= ================ ================
Net loss per share - basic and diluted... $ (0.11) $ (0.15) $ (0.30) $ (0.29)
================== ================= ================ ================
Shares used in computing net loss per
share.................................. 33,048,546 24,281,353 30,158,452 24,266,128
================= ================= ================ ================
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICT)
(Unaudited)
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICT)
(Unaudited)
Notes
Receivable
Common Stock from Deferred Accumulated
Shares Amount Officers Compensation Deficit Total
------------ --------------- ------------- --------------- -------------- --------------
Balance at January 1, 2004...........25,564,904 $ 190,586,000 $ (603,000) $ (16,000) $(196,994,000) $(7,027,000)
Comprehensive loss:
Net loss....................... -- -- -- -- (9,196,000) (9,196,000)
--------------
Total comprehensive loss.......... (9,196,000)
Issuance of shares for restricted
shares, stock awards and stock
option and warrant exercises...... 331,578 389,000 -- -- -- 389,000
Issuance of stock at $2.25 per
share............................ 4,564,000 10,269,000 -- -- -- 10,269,000
Beneficial conversion value....... -- 300,000 -- -- -- 300,000
Issuance of stock related to
debt conversions, warrant
exercises and interest payments
on debt, net of deferred
financing costs................... 4,512,578 3,923,000 -- -- -- 3,923,000
Value of warrants and stock awards
issued to consultants............. 138,750 355,000 -- (73,000) -- 282,000
Non-cash interest on officer
notes.............................. -- -- (30,000) -- -- (30,000)
Repayments on officer notes, net
of reserve for officer
notes.............................. -- -- 117,000 -- -- 117,000
Amortization of deferred
compensation....................... -- -- -- 89,000 -- 89,000
------------ --------------- ------------- --------------- -------------- --------------
Balance at June 30, 2004..............35,111,810 $ 205,822,000 $(516,000) $ -- $ (206,190,000) $ (884,000)
============ =============== ============= =============== ============== ==============
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
Operating activities: 2004 2003
------------------- ----------------------
Net loss.......................................................... $ (9,196,000) $ (7,074,000)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization.................................. 144,000 331,000
Amortization of deferred compensation.......................... 89,000 271,000
(Gain) loss on sale of equipment............................... (36,000) 60,000
Reserve for patents............................................ 24,000 257,000
Stock awards, restricted stock grants and ESOP match........... 345,000 30,000
Non-cash interest and amortization of deferred
financing costs on long-term debt............................ 2,034,000 349,000
Provision (reduction) for employee and officer loans, net of
non-cash interest on related loans........................... 16,000 --
Changes in operating assets and liabilities:
Prepaid expenses and other assets.......................... 137,000 451,000
Accounts payable and accrued payroll........................ (110,000) 237,000
------------------- ----------------------
Net cash used in operating activities............................. (6,553,000) (5,088,000)
Investing activities:
Purchases of marketable securities................................ (2,994,000) --
Purchases of patents.............................................. (254,000) (48,000)
Proceeds from the sale of property, plant and equipment........... 62,000 --
Purchases of property, plant and equipment........................ (51,000) (119,000)
------------------- ----------------------
Net cash used in investing activities............................. (3,237,000) (167,000)
Financing activities:
Proceeds from sale of Common Stock................................ 10,269,000 --
Proceeds from convertible note arrangements....................... 2,000,000 4,838,000
Proceeds from issuance of common stock and exercise of warrants
and stock options................................................. 1,753,000 --
Payment on short-term debt........................................ -- (230,000)
Proceeds from repayment of note to officers....................... 128,000 --
------------------- ----------------------
Net cash provided by financing activities......................... 14,150,000 4,608,000
Net increase (decrease) in cash and cash equivalents.............. 4,360,000 (647,000)
Cash and cash equivalents at beginning of period.................. 1,030,000 723,000
------------------- ----------------------
Cash and cash equivalents at end of period........................ $ 5,390,000 $ 76,000
=================== ======================
Supplemental disclosures:
Cash paid for:
State taxes..................................................... $ 3,000 $ 3,000
=================== ======================
Interest ....................................................... $ 1,000 $ 250,000
=================== ======================
Supplemental disclosures on non-cash transactions:
During the six months ended June 30, 2004, $2.6 million of the 2003
Convertible Debt, net of related deferred financing costs of $1.1 million,
converted into 2.6 million shares of Common Stock, and $500,000 of the
February 2004 Convertible Debt converted into approximately 250,000 shares
of Common Stock.
See accompanying notes.
MIRAVANT MEDICAL TECHNOLOGIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The information contained herein has been prepared in accordance with Rule
10-01 of Regulation S-X. The information at June 30, 2004 and for the three
and six month periods ended June 30, 2004 and 2003, is unaudited. In the
opinion of management, the information reflects all adjustments necessary
to make the results of operations for the interim periods a fair statement
of such operations. All such adjustments are of a normal recurring nature.
Interim results are not necessarily indicative of results for a full year.
For a presentation including all disclosures required by accounting
principles generally accepted in the United States, these consolidated
financial statements should be read in conjunction with the audited
condensed consolidated financial statements for the year ended December 31,
2003 included in the Miravant Medical Technologies Annual Report on Form
10-K filed with the Securities and Exchange Commission.
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of business. The
Company's independent auditors, Ernst & Young LLP, have indicated in their
report accompanying the December 31, 2003 consolidated financial statements
that, based on generally accepted auditing standards, our viability as a
going concern is in question. Through June 30, 2004, the Company had an
accumulated deficit of $206.2 million and expects to continue to incur
substantial, and possibly increasing, operating losses for the next few
years due to continued spending on research and development programs, the
cost associated with the regulatory review process for the New Drug
Application, or an NDA, that we submitted, pre-commercialization expenses
for SnET2, the funding of preclinical studies, clinical trials and
regulatory activities and the costs of manufacturing and administrative
activities. The Company also expects these operating losses to fluctuate
due to its ability to fund the research and development programs as well as
the operating expenses of the Company.
The Company is continuing its scaled-back efforts, which we implemented in
2002, in research and development and the preclinical studies and clinical
trials of our products. These efforts, along with the cost of following up
on our submitted NDA, obtaining requisite regulatory approval, and
commencing pre-commercialization activities prior to receiving regulatory
approval, will require substantial expenditures. Once requisite regulatory
approval has been obtained, if at all, substantial additional financing
will be required for the manufacture, marketing and distribution of our
product in order to achieve a level of revenues adequate to support the
Company's cost structure. In July 2004, as discussed in Note 9, the Company
entered into a Collaboration Agreement and Securities Purchase Agreement
with Guidant Corporation, or Guidant, which will invest up to $7.0 million
to support the Company's cardiovascular program. In April 2004, as
discussed in Note 6, the Company entered into a $10.3 million Securities
Purchase Agreement, or the 2004 Equity Agreement, with a group of
institutional investors. In February 2004, the Company entered into a $2.0
million Unsecured Convertible Debenture Purchase Agreement, or the February
2004 Debt Agreement, with certain accredited investors, or the February
2004 Lenders, which provided proceeds of $2.0 million. In August 2003, the
Company entered into a Convertible Debt and Warrant Purchase Agreement, or
the 2003 Debt Agreement, with a group of private accredited investors, or
the 2003 Lenders, pursuant to which the Company issued securities to the
Lenders in exchange for gross proceeds of $6.0 million. In addition, in
December 2002, the Company entered into a $12.0 million Convertible Debt
and Warrant Agreement, or 2002 Debt Agreement, with a group of private
accredited investors, or the 2002 Lenders. The Company has borrowed $6.3
million under the 2002 Debt Agreement and there are no further borrowings
available under the 2002 Debt Agreement. The Company believes it can raise
additional funding to support operations through corporate collaborations
or partnerships, licensing of SnET2 or new products and additional equity
or debt financings prior to December 31, 2004. If additional funding is not
available when required, the Company's executive management believes that
as long as the Company's debt is not accelerated, then the Company has the
ability to conserve cash required for operations through December 31, 2004
and into the first quarter of 2005. If the additional funding is not
available or only a portion thereof is available, the Company believes that
it will have cash required for operations beyond December 31, 2004 by the
delay or reduction in scope of one or more of our research and development
programs and adjusting, deferring or reducing salaries of employees and by
reducing operating facilities and overhead expenditures. There can be no
assurance that the Company will be successful in obtaining additional
financing or that financing will be available on favorable terms.
Effective April 21, 2004, the Company is authorized to issue up to
75,000,000 shares of Common Stock and up to 30,000,000 shares of Preferred
Stock. The Board of Directors has authority to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares of
preferred stock without any future vote or action by the shareholders. As
of the date of this report, there were 35,111,810 shares of Common Stock
issued outstanding; 5,163,741 shares of Common Stock reserved for issuance
pursuant to our equity compensation plans; 10,023,750 shares of Common
Stock reserved for issuance pursuant to outstanding warrants; 1,112,966
shares of Series A Preferred Stock issued and outstanding; and 75,000
shares of Series B Junior Participating Stock authorized and reserved for
issuance.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the amounts reported in the condensed consolidated financial statements and
the accompanying notes. Actual results may differ from those estimates and
such differences may be material to the condensed consolidated financial
statements.
2. Marketable Securities
Marketable securities consist of short-term, interest-bearing corporate
bonds. There were no marketable security balances as of December 31, 2003.
The Company has established investing guidelines relative to concentration,
maturities and credit ratings that maintain safety and liquidity.
In accordance with Statement of Financial Accounting Standards, or SFAS,
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company determines the appropriate classification of debt
and equity securities at the time of purchase and re-evaluates such
designation as of each balance sheet date. As of June 30, 2003, all
marketable securities and certain investments in affiliates were classified
as "available-for-sale." Available-for-sale securities and investments are
carried at fair value with unrealized gains and losses reported as a
separate component of stockholders' equity. Realized gains and losses on
investment transactions are recognized when realized based on settlement
dates and recorded as interest income. Interest and dividends on securities
are recognized when earned. Declines in value determined to be
other-than-temporary on available-for-sale securities are listed separately
as a non-cash loss in investment in the consolidated financial statements.
3. Comprehensive Loss
For the six months ended June 30, 2004 and 2003, comprehensive loss
amounted to approximately $9.2 million and $6.6 million, respectively.
There was no difference between net loss and comprehensive loss for the six
months ended June 30, 2004. The difference between net loss and
comprehensive loss for the six months ended June 30, 2003, related to the
change in the unrealized loss or gain the Company recorded for its
available-for-sale securities on its investment in its former affiliate,
Xillix Technologies Corp.
4. Per Share Data
Basic loss per common share is computed by dividing the net loss by the
weighted average shares outstanding during the period. Diluted earnings per
share reflect the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted to common
stock. Since the effect of the assumed exercise of common stock options and
other convertible securities was anti-dilutive, basic and diluted loss per
share as presented on the condensed consolidated statements of operations
are the same.
5. Convertible Debt Agreements
In February 2004, the Company entered into an Unsecured Convertible
Debenture Purchase Agreement, or the February 2004 Debt Agreement, with
certain private accredited investors, or the February 2004 Lenders. Under
the February 2004 Debt Agreement, the Company issued $2.0 million worth of
convertible debentures maturing on February 5, 2008 with interest accruing
at 8% per year, due and payable quarterly, with the first interest payment
due on April 1, 2004. At the Company's option, and subject to certain
restrictions, the Company may make interest payments in cash or in shares
of its Common Stock, or the interest can be added to the outstanding
principal of the note. Each convertible debenture issued pursuant to the
February 2004 Debt Agreement is convertible at the holder's option into
shares of the Company's Common Stock at $2.00 per share. Upon the
occurrence of certain events of default, the holders of the convertible
debentures may require that they be repaid prior to maturity. These events
of default include the Company's failure to pay amounts due under the
debentures or to otherwise perform any material covenant in the February
2004 Debt Agreement or other related documents.
Additionally, under the Emerging Issues Task Force, or EITF, No. 98-5, the
Company was required to determine the beneficial conversion value for the
notes related to the February 2004 Debt Agreement, or the February 2004
Notes. The beneficial conversion value represents the difference between
the fair value of the Company's February 2004 Notes as of the date of
issuance and the intrinsic value, which is the value of the 2004 Notes as
converted, as described above. If the intrinsic value of the February 2004
Notes exceeds the fair value of the February 2004 Notes, then a beneficial
conversion value is determined to have been received by the
securityholders. Any beneficial conversion value determined is recorded as
equity and a reduction to the convertible debt outstanding, which is
subsequently amortized to interest expense. The beneficial conversion value
was calculated as follows:
Fair value of the February 2004 Debt converted to Common Stock on
February 5, 2004 at $2.30 per share, a 10% discount from the fair value
of the Common Stock on the date of issuance as the underlying shares
are unregistered........................................................$ 2,300,000
Less: Intrinsic value of the February 2004 Debt converted to Common
Stock at $2.00 per share................................................(2,000,000)
--------------
Beneficial conversion value.............. $ 300,000
=============
The beneficial conversion value for the February 2004 Notes was amortized
over the period from the date of note issuance to the period of first
available note conversion which was March 25, 2004, therefore the $300,000
of beneficial conversion value was amortized during the quarter ended March
31, 2004. Additionally, the beneficial conversion value remaining as of
December 31, 2003 from the 2002 Debt Agreement and the 2003 Debt Agreement
of $681,000 was amortized during the three months ended March 31, 2004. The
amortization on the beneficial conversion value is included in interest
expense in the condensed consolidated statement of operations.
Additionally, certain of the February 2004 Lenders converted their Notes
into shares of the Company's Common Stock. As of June 30, 2004, $500,000 of
the $2.0 million face value of the February 2004 Notes outstanding have
been converted into 250,000 shares of Common Stock.
In connection with the Company's 2003 Debt Agreement, during the six months
of 2004, certain of the 2003 Lenders converted their Notes into shares of
the Company's Common Stock. As of June 30, 2004, $2.6 million of the $6.0
million face value of the 2003 Notes outstanding have been converted into
2.6 million shares of Common Stock. The $2.6 million was net of $1.1
million of deferred financing costs. In addition, of the warrants to
purchase 4.5 million shares of Common Stock related to the 2003 Debt
Agreement, 1,425,000 warrants have been exercised, resulting in proceeds to
the Company of $1.4 million.
In connection with the Company's 2002 Debt Agreement, in May 2004, the
Company and the 2002 Lenders agreed to terminate the available borrowing
provisions of the 2002 Debt Agreement, which were to expire by June 30,
2004. As of June 30, 2004, the Company has outstanding $6.3 million in
convertible promissory notes under the 2002 Debt Agreement.
6. Equity Agreements
In April 2004, the Company entered in a Securities Purchase Agreement, or
the 2004 Equity Agreement, with a group of institutional investors, whereby
the Company sold 4,564,000 shares of Common Stock at $2.25 per share,
resulting in proceeds to the Company of $10.3 million. There were no
placement fees associated with the offering.
7. Stock-Based Compensation
Statement of Financial Accounting Standard, or SFAS, No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require, companies
to record compensation expense for stock-based employee compensation plans
at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion, or APB Opinion, No. 25 and related
interpretations including Financial Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of
APB Opinion No. 25" in accounting for its stock option plans.
If the Company had elected to recognize stock compensation expense based on
the fair value of the options granted at grant date for its stock-based
compensation plans consistent with the method of SFAS No. 123, the
Company's net loss and loss per share would have been increased to the pro
forma amounts indicated below:
Three months ended June 30, Six months ended June 30,
2004 2003 2004 2003
----------------- ----------------- ---------------- ----------------
Net loss as reported $ (3,701,000) $ (3,723,000) $ (9,196,000) $ (7,074,000)
Pro forma stock-based employee compensation
cost under SFAS No. 123 (219,000) (185,000) (439,000) (444,000)
----------------- ----------------- ---------------- ----------------
Pro forma net loss $ (3,920,000) $ (3,908,000) $ (9,635,000) $ (7,518,000)
================= ================= ================ ================
Loss per share - basic and diluted:
----------------- ----------------- ---------------- ----------------
As reported $ (0.11) $ (0.15) $ (0.30) $ (0.29)
================= ================= ================ ================
Pro forma $ (0.12) $ (0.16) $ (0.32) $ (0.31)
================= ================= ================ ================
8. Reclassifications
Certain reclassifications have been made to the 2003 condensed consolidated
financial statements to conform to the current period presentation.
9. Subsequent Event
In July 2004, the Company entered into a Collaboration Agreement and a
Securities Purchase Agreement with Guidant. The Securities Purchase
Agreement provides for Guidant to invest up to $7.0 million in
non-cumulative convertible Series A Preferred Stock of the Company. The
Series A Preferred Stock has voting rights and liquidation preferences of
$2.70 per share over the common stockholders. The investments will be made
upon the completion of certain milestones through completion of Phase I
clinical trials with the first investment of $3.0 million made upon the
signing of the agreements. The first Series A Preferred Stock investment is
convertible into the Company's Common Stock at $2.70 per share or 1,112,966
shares. The remaining preferred stock investments will be convertible into
the Company's Common Stock based on a ten day average price prior to the
investment date. The Company is required to provide additional funding of
at least $5.0 million over the period of the collaboration and the funds
invested by Guidant must be spent on specified cardiovascular programs. The
Company also granted Guidant registration rights with respect to the shares
of Common Stock into which the Series A Preferred Stock is convertible. The
agreements also contain various covenant and termination provisions as
defined by the agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section of the Quarterly Report on Form 10-Q contains forward-looking
statements, which involve known and unknown risks and uncertainties. These
statements relate to our future plans, objectives, expectations and intentions.
These statements relate to our future plans, objectives, expectations and
intentions. These statements may be identified by the use of words such as
"may," "will," "should," "potential," "expects," "anticipates," "intends,"
"plans," "believes" and similar expressions. These statements which are based on
our current beliefs, expectations and assumptions and are subject to a number of
risks and uncertainties, including but not limited to statements regarding: our
general beliefs concerning the efficacy and potential benefits of photodynamic
therapy; our ability to raise funds to continue operations; the use of SnET2 to
treat wet age-related macular degeneration, or AMD; our ability to meet the
covenants of the August 2003 Unsecured Convertible Debt and Warrant Purchase
Agreement, or the 2003 Debt Agreement; our ability to meet the covenants of the
February Unsecured Convertible Debt Purchase Agreement, or the February 2004
Debt Agreement; our ability to resolve any issues or contingencies associated
with our New Drug Application, or an NDA, submission with the Food Drug and
Administration, or FDA; the assumption that we will continue as a going concern;
our ability to regain our listing status on Nasdaq or other national stock
market exchanges; our plans to collaborate with other parties and/or license
SnET2; our ability to meet the requirements of our July 2004 Collaboration and
Securities Purchase Agreement with Guidant Corporation; our ability to continue
to retain employees under our current financial circumstances; our ability to
use our laser and delivery devices in future clinical trials; our expected
research and development expenditures; our patent prosecution strategy; and our
expectations concerning the government exercising its rights to use certain of
our licensed technology. Our actual results could differ materially from those
discussed in these statements due to a number of risks and uncertainties
including but not limited to: failure to obtain additional funding in a timely
manner, if at all; our failure to comply with the covenants in our 2003 Debt
Agreement and/or our February 2004 Debt Agreement, or to the extent we are
unable to comply with these covenants, obtain waivers from these covenants,
which could lead to a default under those agreements; a failure of our drugs and
devices to receive regulatory approval; other parties declining to collaborate
with us due to our financial condition or other reasons beyond our control; the
failure of our existing laser and delivery technology to prove to be applicable
or appropriate for future studies; our failure to obtain the necessary funding
to further our research and development activities; and unanticipated changes by
the government in its past practices by exercising its rights contrary to our
expectations. For a more complete description of the risks that may impact our
business, see "Risk Factors", for a discussion of certain risks, including those
relating to our ability to obtain additional funding, our ability to establish
new strategic collaborations, our operating losses, risks related to our
industry and other forward-looking statements.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto.
General
We are a pharmaceutical research and development company specializing in
photodynamic therapy, or PDT, a treatment modality based on drugs that respond
to light. When activated by light, these drugs induce a photochemical reaction
in the presence of oxygen that can be used to locally destroy diseased cells and
abnormal blood vessels. We have branded our novel version of PDT technology with
the trademark PhotoPoint(R). Our drugs and devices are in various stages of
development and require regulatory approval prior to sales, marketing or
clinical use. Our most advanced drug, PhotoPoint SnET2, has completed Phase III
clinical trials for the treatment of wet age-related macular degeneration, or
AMD, and we have submitted a New Drug Application, or an NDA, to the FDA for its
marketing approval on March 31, 2004, which was accepted for filing on June 1,
2004.
We have been unprofitable since our founding and have incurred a cumulative
net loss of approximately $206.2 million as of June 30, 2004. We expect to
continue to incur significant, and possibly increasing, operating losses over
the next few years, and we believe we will be required to obtain substantial
additional debt or equity financing to fund our operations during this time as
we seek to achieve a level of revenues sufficient to support our anticipated
cost structure. Our independent auditors, Ernst & Young LLP, have indicated in
their report accompanying our December 31, 2003 consolidated financial
statements that, based on generally accepted auditing standards, our viability
as a going concern is in question.
Although we continue to incur costs for research and development,
preclinical studies, clinical trials and general corporate activities, we have
continued to adhere to our cost restructuring program implemented in 2002 which
has helped reduce our overall costs. Our ability to achieve and sustain
profitability depends upon our ability, alone or with others, to receive
regulatory approval on our NDA submission for SnET2 in AMD, to successfully
complete the development of our proposed products, obtain the required
regulatory clearances and manufacture and market our proposed products. No
revenues have been generated from commercial sales of SnET2 and only limited
revenues have been generated from sales of our devices. Our ability to achieve
significant levels of revenues within the next few years is dependent on the
timing of receiving regulatory approval, if at all, for SnET2 in AMD and our
ability to establish a collaboration, with a corporate partner or other sales
organization, to commercialize SnET2 once regulatory approval is received, if at
all. Our revenues to date have consisted of license reimbursements, grants
awarded, royalties on our devices, sales of SnET2 bulk active pharmaceutical
ingredient, or bulk API sales, milestone payments, payments for our devices, and
interest income. We do not expect any significant revenues until we have
established a collaborative partnering agreement, receive regulatory approval
and commence commercial sales.
Our significant funding activities over the last eighteen months have
consisted of the following:
* A Collaboration Agreement and Securities Purchase Agreement with
Guidant Corporation, or Guidant, completed July 1, 2004, providing an
equity investment of $3.0 million upon signing and up to $4.0 million
upon the completion of certain milestones related to our
cardiovascular program;
* A $10.3 million equity financing completed April 23, 2004;
* A $2.0 million convertible debt financing completed February 5, 2004;
* Warrant exercises through August 9, 2004 providing proceeds of $1.4
million;
* The sale of our investment in an affiliate, Xillix Technologies Corp.,
or Xillix, in December 2003, providing net cash proceeds of $1.6
million;
* A $6.0 million convertible debt financing completed in August 2003;
and
* Settlement of our $10.0 million debt with Pharmacia AB, a wholly owned
subsidiary of Pfizer, Inc., or Pharmacia, that required a cash payment
of $1.0 million.
We believe we can raise additional funding to support operations through
corporate collaborations or partnerships, through licensing of SnET2 or new
products and through public or private equity or debt financings prior to
December 31, 2004. However, there can be no assurance that the Company will be
successful in obtaining additional financing or that financing will be available
on favorable terms. If additional funding is not available when required, and if
our debt does not go into default and become immediately due, then we believe we
have the ability to conserve cash required for operations through December 31,
2004 and into the first quarter of 2005 by the delay or reduction in scope of
one or more of its research and development programs, and adjusting, deferring
or reducing salaries of employees and by reducing operating facilities and
overhead expenditures.
Ongoing Operations
We have continued our scaled-back efforts, which we implemented in 2002, in
research and development and the preclinical studies and clinical trials of our
products. Our primary efforts in 2003 and the first half of 2004 have been in
preparing a submission of an NDA for marketing approval in AMD for SnET2 and
responding to the FDA regarding their review requirements. We expect that over
the next year or so, our likely activities and costs will consist of the
following:
* Continuation of work related to the regulatory review of our NDA;
* Pre-commercialization activities such as pre-marketing and possible
drug and device manufacturing prior to receiving a decision from the
FDA regarding marketing approval;
* Increasing development activities for our cardiovascular program;
* Preparation of an Investigational New Drug application, or IND, for a
clinical trial in AV access disease; and
* Review and follow-up of our Phase II dermatology clinical trial.
The extent of each of these activities will depend on the available funding
and resources. Additionally, once requisite regulatory approval has been
obtained for SnET2, if at all, substantial additional funding will be required
for the manufacture, marketing and distribution of our product in order to
achieve a level of revenues adequate to support our cost structure.
In ophthalmology, our primary focus from 2003 through June 30, 2004 was
the preparation and filing of our NDA for marketing approval of PhotoPoint
SnET2, a new drug for the treatment of AMD and the related responses to requests
by the FDA. In January 2002, Pharmacia, after a top-line review of the Phase III
AMD clinical data, determined that the clinical data results indicated that
SnET2 did not meet the primary efficacy endpoint in the study population, as
defined by the clinical trial protocol, and that they would not be preparing an
NDA with the FDA. In March 2002, we regained the license rights to SnET2 as well
as the related data and assets from the Phase III AMD clinical trials from
Pharmacia. Additionally, in March 2002 we terminated our license collaboration
with Pharmacia. In January 2003, we announced our plans to move forward with
preparing our first NDA submission of SnET2 for the treatment of AMD. Our
decision came after we completed our analyses of the Phase III AMD clinical
data, which we believed showed positive results in a significant number of
PhotoPoint SnET2 treated patients versus placebo control patients, and after
holding discussions with regulatory consultants and the ophthalmic division of
the FDA. We submitted the NDA on March 31, 2004, seeking marketing approval
based on clinical results in the "per protocol" study population. The per
protocol population consists of those patients who received the exposure to the
SnET2 treatment regimen pre-specified in the clinical study protocol, comprising
a smaller number of patients than the total study population. Although there is
precedent for FDA approval of drugs based on subgroup populations, including
Visudyne(R), the currently approved competitive PDT product for wet AMD, we
cannot assure you that the FDA will grant approval for SnET2 based on our per
protocol group of patients. The NDA was accepted by the FDA for filing on June
1, 2004 and has received a priority review designation. Besides the possible use
of SnET2 alone or in combination with other therapies, we have identified
potential next generation drug compounds for use in various eye diseases. These
drugs are in the early stage of development and will not likely begin further
development until we obtain additional funding and/or a corporate partner or
other collaboration in ophthalmology.
In our dermatology program, we use a topical gel formulation to deliver
MV9411, a proprietary photoreactive drug, directly to the skin. In July 2001, we
completed a Phase I dermatology clinical trial and, in January 2002, we
commenced a Phase II clinical trial with MV9411 for potential use in the
treatment of plaque psoriasis, a chronic dermatological condition for which
there is no known cure. Plaque psoriasis is a disease marked by
hyperproliferation of the epidermis, resulting in inflamed and scaly skin
plaques. The Phase II clinical trial is expected to be closed out in 2004 with
an analysis of the clinical trial results to follow. Our continuation of the
dermatology development program will depend on the results of the clinical
trials and other factors such as available funding and personnel.
We have conducted numerous preclinical studies with new photoselective
drugs for cardiovascular diseases, in particular for the prevention and
treatment of vulnerable plaque and restenosis. Vulnerable plaque, or VP, is an
unstable, rupture-prone inflammatory plaque within the artery walls, and
restenosis is the renarrowing of an artery that commonly occurs after balloon
angioplasty for obstructive artery disease. Based on our collaboration with
Guidant, we have begun the process of formulating a new lead drug, MV0633, and,
pending the outcome of any additional preclinical studies required and other
factors, we expect to prepare an IND in cardiovascular disease for MV0633. The
timing of the IND is dependent on numerous factors including preclinical
results, available funding and personnel.
Synthetic arteriovenous, or AV, grafts are placed in patients with End
Stage Renal Disease to provide access for hemodialysis. While these grafts are
critical to the health of the patient, their functional lifetime is limited due
to stenosis, or narrowing, caused by cell overgrowth in the vein. As a result of
our preclinical studies in cardiovascular disease and our discussions with the
FDA, we decided to further develop the use of PhotoPoint PDT for the prevention
and/or treatment of vascular access disease. Additionally, we are currently
pursuing potential strategic partners in this field. We are planning to prepare
and file an IND for the commencement of clinical trials in this field, pending
financial considerations, corporate collaborations and other factors.
In our oncology research program, we have performed various preclinical
studies in solid tumors to target tumor cells and tumor neovasculature. The
focus of our preclinical research is to evaluate the utility of PhotoPoint PDT
as a stand-alone treatment or as a combination therapy with experimental or
conventional therapies. Our research efforts have focused on the use of
PhotoPoint PDT in treating cancers such as those of the brain, breast, lung and
prostate. We have an existing oncology IND for SnET2, under which we may choose
to submit protocols for clinical trials in the future. We have also investigated
our novel compound MV6401 for solid tumors in oncology applications.
Below is a summary of the disease programs and their related stages of
development. The information in the column labeled "Estimate of Completion of
Phase" is forward-looking in nature and the actual timing of completion of those
phases could differ materially from the estimates provided in the table.
Additionally, due to the uncertainty of the scientific results of any of these
programs as well as the uncertainty regarding our ability to fund these
programs, we are unable to provide an accurate estimate as to the costs, capital
requirements or the specific timing necessary to complete any of these programs.
For a discussion of the risks and uncertainties associated with the timing of
completing a product development phase for our company as well as our industry
as a whole, see the "Risk Factors" section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Estimate of Completion
Program Indication (Primary Drug) Phase of Development of Phase
--------------------- --------------------------------- ------------------------------ --------------------------
Ophthalmology AMD (SnET2) Results of the FDA review of Q3/Q4 2004
our NDA filing
New drug compounds Research studies Completed
Dermatology Psoriasis (MV9411) Phase II 2004
Cardiovascular VP and Restenosis (MV0633) Drug formulation and 2004-2005
disease preclinical studies
Vascular disease AV Graft (MV2101) IND submission Q4 2004/Q1 2005
Oncology Tumor research (MV 6401) Research studies **
** Based on the early development stage of these programs we cannot
reasonably estimate the time at which these programs may move from a
research or preclinical development phase to the clinical trial phase. The
decision and timing of whether these programs will move to the clinical
trial phase will depend on a number of factors including the results of the
preclinical studies, the estimated costs of the programs, the availability
of alternative therapies and our ability to fund or obtain additional
financing or to obtain new collaborative partners to help fund the
programs.
Based on our ability to successfully obtain additional funding, our ability
to obtain new collaborative partners, our ability to license and pursue further
development of SnET2 for AMD or other disease indications, our ability to reduce
operating costs as needed, our ability to regain our listing status on Nasdaq or
other national stock market exchanges and various other economic and development
factors, such as the cost of the programs, reimbursement and the available
alternative therapies, we may or may not elect or be able to further develop
PhotoPoint PDT procedures in ophthalmology, cardiovascular disease, dermatology,
oncology or in any other indications.
Results of Operations
Revenues. We had no revenues for the three and six months ended June 30,
2004 and 2003.
Historically, we have recorded limited revenues for the sale of our bulk
active pharmaceutical ingredient and license income for the reimbursement of
out-of-pocket expenses incurred under license agreements. Any future revenue
will likely be related to new collaborative agreements, and royalties or
revenues from drug and device sales upon regulatory approval and subsequent
commercial sales, if any.
Research and Development. Research and development costs are expensed as
incurred. Research and development expenses are comprised of direct and indirect
costs. Direct costs consist of costs incurred by outside providers and
consultants for preclinical studies, clinical trials and related clinical drug
and device development and manufacturing costs, drug formulation expenses, NDA
preparation services and other research and development expenditures. Indirect
costs consist of internally generated costs from salaries and benefits, overhead
and facility costs, and other support services. Our research and development
expenses for the six months ended June 30, 2003 was $3.7 million compared to
$3.9 million for the same period in 2004. Research and development expenses
decreased from $1.9 million for the three months ended June 30, 2003 to $1.6
million for the same period in 2004. The slight increase in research and
development expenses for the six months ended June 30, 2004 compared to the same
period in 2003 is specifically related to the activities associated with the
preparation and compilation of the submission of our NDA. The decrease for the
three months ended June 30, 2004 related to a decrease in the NDA submission
activities and costs due to the NDA submission on March 31, 2004 and a decrease
in indirect costs resulting from the downsizing of our facility and a related
reduction in overhead costs. Research and development expenses for the three and
six months ended June 30, 2003 and 2004 related primarily to payroll, payroll
taxes, employee benefits and allocated operating costs. Additionally, the
Company incurred research and development expenses for these periods for:
* Preparation of our NDA submission for SnET2 in AMD;
* Work associated with the development of new devices, delivery systems,
drug compounds and formulations for the dermatology and cardiovascular
programs; and
* Preclinical studies and clinical trial costs for our Phase II
dermatology program.
As previously disclosed, we have four research and development programs
which we have focused our efforts: ophthalmology, dermatology, cardiovascular
disease and oncology. Research and development costs are initially identified as
direct costs and indirect costs, with only direct costs tracked by specific
program. These direct costs consist of clinical, preclinical, drug and
formulation development, device development and research costs. We do not track
our indirect research and development costs by program. These indirect costs
consist of labor, overhead and other indirect costs. The research and
development costs for specific programs represent the direct costs incurred. The
direct research and development costs by program are as follows:
Three months ended June 30, Six months ended June 30,
-------------------------------- -------------------------------------- ------------------------------------
Program 2004 2003 2004 2003
-------------------------------- ---------------- ------------------ --------------- ----------------
Direct costs:
Ophthalmology.............. $ 462,000 $ 360,000 $ 1,157,000 $ 556,000
Dermatology................ 5,000 46,000 47,000 202,000
Cardiovascular disease..... 61,000 75,000 96,000 260,000
Oncology................... -- 8,000 -- 15,000
---------------- ------------------ --------------- ----------------
Total direct costs.............. $ 528,000 $ 489,000 $ 1,300,000 $ 1,033,000
Indirect costs ................. $ 1,119,000 $ 1,370,000 $ 2,608,000 $ 2,700,000
---------------- ------------------ --------------- ----------------
Total research and development
costs........................... $ 1,647,000 $ 1,859,000 $ 3,908,000 $ 3,733,000
================ ================== =============== ================
Ophthalmology. For the six months ended June 30, 2003, our direct
ophthalmology program costs have increased from $556,000 to $1.2 million for the
six months ended June 30, 2004. For the three months ended June 30, 2003, our
direct ophthalmology program costs have increased from $360,000 to $462,000 for
the three months ended June 30, 2004. Costs incurred for the ophthalmology
program in 2004 have consisted of costs incurred from consultants and contract
research organizations for assistance in the preparation and related follow-up
work associated with our NDA filed and the commencement of pre-commercialization
activities. The costs incurred for the six month period ended June 30, 2003 are
specifically related to the analysis of the clinical trial data for SnET2 in
AMD.
Dermatology. For the six months ended June 30, 2003, our direct dermatology
program costs decreased from $202,000 to $47,000 for the six months ended June
30, 2004. For the three months ended June 30, 2003, our direct dermatology
program costs have decreased from $46,000 to $5,000 for the same period in 2004.
Costs incurred in the dermatology program include expenses for drug development
and drug formulation, internal and external preclinical study costs, and Phase
II clinical trial expenses. The decrease for the three and six months ended June
30, 2004 as compared to the same periods in 2003 is related to the decrease in
patient treatments in the Phase II clinical trial compared to 2003.
Cardiovascular Disease. For the six months ended June 30, 2003, our direct
cardiovascular disease program costs decreased from $260,000 to $96,000 for same
period in 2004. For the three months ended June 30, 2003, our direct
cardiovascular disease program costs have decreased from $75,000 to $61,000 for
the same period in 2004. Our cardiovascular disease program costs include
expenses for the development of new drug compounds and light delivery devices,
drug formulation costs, drug and device manufacturing expenses and internal and
external preclinical study costs. The decrease from 2003 to 2004 is related to a
decrease in the development and manufacturing activities for drug and devices
used in the preclinical studies and a reduction in the preclinical studies
performed while corporate financing was completed during the 2004. Based on the
Guidant investment and collaboration entered into in July 2004, we expect to
incur an increase in development costs for this program in the future.
Oncology. For the six months ended June 30, 2003, our direct oncology
program costs have decreased from $15,000 to no costs for the same period in
2004. For the three months ended June 30, 2003, our direct oncology program
costs have decreased from $8,000 to no costs for the same period in 2004. Our
oncology program costs had primarily consisted of costs for internal and
external preclinical studies and expenses for the early development of new drug
compounds. The decrease in oncology program costs from 2003 to 2004 is related
to our decision to temporarily utilize resources toward our preparation of our
NDA for ophthalmology rather than for discovery and research programs in
oncology.
Indirect Costs. For the six months ended June 30, 2003, our indirect costs
have slightly decreased from $2.7 million to $2.6 million for the same period in
2004. For the three months ended June 30, 2003, our indirect costs have
decreased from $1.4 million to $1.1 million for the same period in 2004.
Generally, the decrease from 2003 to 2004 was attributed to a decrease in costs
related to the downsizing of facilities and related reduction in overhead costs,
which was slightly offset by an increase in employee compensation which were
adjusted for the first time since 2001.
We expect that future research and development expenses may fluctuate
depending on available funds, continued expenses incurred related to our
regulatory review process for the NDA, pre-commercialization costs for drug and
devices manufacturing, costs for preclinical studies and clinical trials in our
ophthalmology, dermatology, cardiovascular, oncology and other programs, costs
associated with the purchase of raw materials and supplies for the production of
devices and drug for use in preclinical studies and clinical trials, results
obtained from our ongoing preclinical studies and clinical trials and the
expansion of our research and development programs, which includes the increased
hiring of personnel, the continued expansion of existing or the commencement of
new preclinical studies and clinical trials and the development of new drug
compounds and formulations.
General and Administrative. For the six months ended June 30, 2003, our
general and administrative expenses have increased from $3.0 million to $3.3
million for the same period in 2004. For the three months ended June 30, 2003
and 2004 general and administrative expenses remained consistent at $1.6
million. Expenses for the three and six months ended June 30, 2003 and 2004
related primarily to payroll related expenses, operating costs such as rent,
utilities, professional services and insurance costs and non-cash expenses such
as stock compensation and depreciation. For the six months ended June 30 2004,
the employee and overhead related expenses increased as compared to the same
period in 2003 due to the increase in employee wages which were adjusted for the
first time since 2001 and an increase in stock compensation costs. The increase
in costs was offset by a decrease in facility related costs due to the reduction
in facilities.
We expect future general and administrative expenses to remain consistent
with the three and six month periods ended June 30, 2004 although they may
fluctuate depending on available funds, and the need to perform our own
pre-marketing, marketing and sales activities, the support required for research
and development activities, the costs associated with potential financing and
partnering activities, continuing corporate development and professional
services, facility and overhead costs, compensation expense associated with
employee stock bonuses and stock options and warrants granted to consultants and
expenses for general corporate matters.
Interest and Other Income. For the six months ended June 30, 2003, interest
and other income increased from $38,000 to $44,000 for the same period in 2004.
For the three months ended June 30, 2003, interest and other income increased
from $18,000 to $24,000 for the same period in 2004. Interest and other income
amounts are derived from interest earned on cash and marketable securities
earning interest. The level of future interest and other income will primarily
be subject to the level of cash balances we maintain from period to period and
the interest rates earned.
Interest Expense. Interest expense significantly increased from $368,000
for the six months ended June 30, 2003 to $2.1 million for the six months ended
June 30, 2004. For the three months ended June 30, 2003, interest expense
increased from $262,000 to $517,000 for the same period in 2004. The increase is
primarily related to the continued amortization of the beneficial conversion
value from the 2004, 2003 and 2002 Debt Agreements. Under the EITF No. 98-5, we
were required to determine the beneficial conversion value for the February 2004
Debt Agreement, the 2003 Debt Agreement and the 2002 Debt Agreement. The
beneficial conversion value represents the difference between the fair value of
our Common Stock on the date of the first available conversion and the intrinsic
value, which is the value of the various notes on as converted assumption and
the value of detachable warrant issued. The remaining beneficial conversion
value from the 2003 Debt Agreement and 2002 Debt Agreement of $681,000 was
amortized during the six months ended June 30, 2004. Additionally, a $300,000
beneficial conversion value associated with the 2004 February Debt Agreement was
recorded and amortized during the six months ended June 30, 2004. These amounts
were recorded as interest expense. The remaining increase in interest expense
for the six months ended June 30, 2004 compared to the same period in 2003
related to an increase in interest expense from borrowings under the 2002 Debt
Agreement, 2003 Debt Agreement and the 2004 February Debt Agreement and the
related amortization of deferred financing costs associated with those
agreements of $1.1 million. Interest expense for the three and six months ended
June 30, 2003 consisted primarily of interest expense related to the 2002 Debt
Agreement. The level of interest expense in future periods is expected to
fluctuate depending on the levels of outstanding debt.
Liquidity and Capital Resources
Since inception through June 30, 2004, we have accumulated a deficit of
approximately $206.2 million and expect to continue to incur substantial, and
possibly increasing, operating losses for the next few years. We have financed
our operations primarily through private placements of Common Stock and
Preferred Stock, private placements of convertible notes and short-term notes,
our initial public offering, a secondary public offering and credit
arrangements. As of June 30, 2004, we have received proceeds from the sale of
equity securities, convertible notes and credit arrangements of approximately
$251.6 million. We do not anticipate achieving profitability in the next few
years, as such we expect to continue to rely on external sources of financing to
meet our cash needs for the foreseeable future. As of June 30, 2004, our
condensed consolidated financial statements have been prepared assuming we will
continue as a going concern. Our independent auditors, Ernst & Young LLP, have
indicated in their report accompanying our December 31, 2003 consolidated
financial statements that, based on generally accepted auditing standards, our
viability as a going concern is in question.
In July 2004, we entered into a Collaboration Agreement and Securities
Purchase Agreement with Guidant Corporation, issuing $3.0 million of Series A
Convertible Preferred Stock upon signing of the agreements and we can receive up
to $4.0 million in additional convertible preferred stock investments upon the
completion of certain milestones related to our cardiovascular program. The $3.0
million of Preferred Stock sold is convertible into our Common Stock at $2.70
per share and includes registration rights for the underlying Common Stock.
In April 2004, we entered in a Securities Purchase Agreement, or the 2004
Equity Agreement, with a group of institutional investors, whereby we sold
4,564,000 shares of Common Stock at $2.25 per share, resulting in proceeds to us
of $10.3 million. There were no placement fees associated with the offering and
the shares issued were unregistered. On April 29, 2004, we filed a registration
statement with the SEC to cover the resale of these shares of Common Stock with
the SEC.
In February 2004, we entered into an Unsecured Convertible Debenture
Purchase Agreement, or the February 2004 Debt Agreement, with certain private
accredited investors, or the February 2004 Lenders. Under the February 2004 Debt
Agreement we issued $2.0 million worth of convertible debentures maturing on
February 5, 2008 with interest accruing at 8% per year, due and payable
quarterly, with the first interest payment due on April 1, 2004. At our option
and subject to certain restrictions, we may make interest payments in cash or in
shares of our Common Stock, or the interest can be added to the outstanding
principal of the note. Each convertible debenture issued pursuant to the
February 2004 Debt Agreement is convertible at the holder's option into shares
of our Common Stock at $2.00 per share. Upon the occurrence of certain events of
default, the holders of the convertible debentures may require that they be
repaid prior to maturity. These events of default include our failure to pay
amounts due under the debentures or to otherwise perform any material covenant
in the February 2004 Debt Agreement or other related documents. In connection
with our February 2004 Debt Agreement, during the three and six months ended
June 30, 2004, certain of the February 2004 Lenders converted their Notes into
shares of our Common Stock. As of August 9, 2004, $500,000 of the Notes have
been converted into 250,000 shares Common Stock.
In August 2003, we entered into a Convertible Debt and Warrant Purchase
Agreement, or the 2003 Debt Agreement, with a group of private accredited
investors, or the 2003 Lenders, pursuant to which we issued securities to the
2003 Lenders in exchange for gross proceeds of $6.0 million. Under the 2003 Debt
Agreement, the debt can be converted, at the 2003 Lender's option after the
registration of the underlying stock, at $1.00 per share into our Common Stock.
We issued separate convertible promissory notes, which are referred to as the
2003 Notes, to each 2003 Lender and the 2003 Notes earn interest at 8% per annum
and are due August 28, 2006, unless converted earlier or paid early under the
prepayment or default provisions. The interest on each 2003 Note is due
quarterly beginning October 1, 2003 and can be paid in cash or in-kind at our
option. Under certain circumstances each 2003 Note can be prepaid by us prior to
the maturity date or prior to conversion. The 2003 Notes also have certain
default provisions which can cause the 2003 Notes to become accelerated and due
immediately upon notice by the 2003 Lenders. If the 2003 Notes are declared to
be due prior to their scheduled maturity date, it is unlikely we will be able to
repay these notes and it may force us to significantly reduce or cease
operations or negotiate unfavorable terms for repayment. In connection with our
2003 Debt Agreement, during the three and six months ended June 30, 2004,
certain of the 2003 Lenders converted their Notes into shares of our Common
Stock. As of August 9, 2004, $2.6 million of the Notes have been converted into
2.6 million shares Common Stock.
In connection with the 2003 Debt Agreement, we also issued to the 2003
Lenders warrants to purchase an aggregate of 4,500,000 shares of our Common
Stock. Each Lender received two warrants. The first warrant is for the purchase
of one-half (1/2) of a share of our Common Stock for every $1.00 principal
amount of debt under the 2003 Debt Agreement. The second warrant is for the
purchase of one-quarter (1/4) of a share of our Common Stock for every $1.00
principal amount of debt under the 2003 Debt Agreement. The exercise price of
each warrant is $1.00 per share and the warrants will terminate on August 28,
2008, unless previously exercised. We can force the exercise of the one-quarter
share warrant under certain circumstances. In accordance with the registration
rights related to the 2003 Debt Agreement, in October 2003 we registered, as
required, certain shares underlying the convertible promissory notes and the
shares underlying the warrants for certain note holders. In addition, of the 4.5
million warrants issued, 1,425,000 warrants have been exercised through August
9, 2004, resulting in proceeds to Miravant of $1.4 million.
In December 2002, we entered into a $12.0 million Convertible Debt and
Warrant Agreement, or the 2002 Debt Agreement, with a group of private
accredited investors, or the 2002 Lenders. This available borrowing provisions
of this agreement were terminated in May 2004. As of June 30, 2004, we have
borrowed $6.3 million and there will be no further borrowings under this
agreement. Additionally, in connection with each borrowing we have issued
warrants to purchase a total of 1,575,000 shares of our Common Stock at an
exercise price of $1.00 per share. We also issued an origination warrant for the
purchase of 250,000 shares at an exercise price of $0.50 per share. All of these
warrant issued expire on December 31, 2008.
In connection with the execution of the 2003 Debt Agreement, certain of the
2002 Lenders, to whom we issued notes to under our 2002 Debt Agreement, as
described above, agreed to subordinate their debt security position to that of
the 2003 Lenders. In exchange for the subordinated security position, the 2002
Lenders received additional warrants to purchase an aggregate of 1,575,000
shares of our Common Stock at an exercise price of $1.00 per share, and these
additional warrants will terminate on August 28, 2008, unless previously
exercised. Additionally, under the anti-dilution provision of the 2002 Debt
Agreement, the conversion price of the five notes issued thereunder to the 2002
Lenders during the period February 2003 through July 2003 was reduced to $1.00
and the exercise price of the related warrants issued to the 2002 Lenders during
the same period was reduced to $1.00 per share.
Statement of Cash Flows
For the six months ended June 30, 2003 net cash used in operations was $5.1
million compared to $6.6 million used during the six months ended June 30, 2004.
The increase in cash used for operations from 2004 compared to 2003 was due to
an increase in operating costs from the preparation and related follow-up on the
NDA filed with the FDA and increased employee wages which were adjusted for the
first time since 2001. These costs were offset by the use of common stock for
payment of interest expense and compensation as well the non-cash cost
associated with beneficial conversion amortization.
For the six months ended June 30, 2003, net cash used in investing
activities was $167,000 compared to $3.2 million for the same period in 2004.
The increase in cash used in investing activities from 2004 compared to 2003 was
due to purchases of marketable securities and the increase in the purchases of
patents and property, plant and equipment.
The net cash provided by financing activities for the six months ended June
30, 2003 was $4.6 million compared to $14.1 million for the same period in 2004.
The cash provided by financing activities for 2003 primarily related to the net
proceeds received from the borrowings under the December 2002 Debt Agreement
received during the six months ended June 30, 2003. The cash provided by
financing activities for 2004 primarily related to the $10.3 million from the
April 2004 Equity Agreement, the $2.0 million from the 2004 Debt Agreement and
the $1.8 million received from warrant and stock option exercises.
We will need substantial additional resources to develop our products. The
timing and magnitude of our future capital requirements will depend on many
factors, including:
* Our ability to obtain regulatory acceptance of the NDA submission and
subsequent approval;
* The cost of performing pre-commercialization activities;
* Our ability to establish additional collaborations and/or license
SnET2 or our other new products;
* Our ability to continue our efforts to conserve our use of cash, while
continuing to advance programs;
* Our ability to meet our obligations under the 2002 Debt Agreement,
2003 Debt Agreement and February 2004 Debt Agreement;
* Our ability to receive future equity investments from Guidant by
meeting the milestones established under our collaboration agreement;
* The viability of SnET2 for future use;
* Our ability to raise equity financing or use common stock for employee
and consultant compensation;
* Our ability to regain our listing status on Nasdaq or other national
stock market exchanges;
* The pace of scientific progress and the magnitude of our research and
development programs;
* The scope and results of preclinical studies and clinical trials;
* The costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
* The costs involved in any potential litigation;
* Competing technological and market developments; and
* Our dependence on others for development and commercialization of our
potential products.
As of June 30, 2004, our condensed consolidated financial statements have
been prepared assuming we will continue as a going concern. We are continuing
our scaled-back efforts, we implemented in 2002, in research and development and
the preclinical studies and clinical trials of our products. These efforts,
along with the cost of following up on our submitted NDA, obtaining requisite
regulatory approval, and commencing pre-commercialization activities prior to
receiving regulatory approval, will require substantial expenditures. Once
requisite regulatory approval has been obtained, if at all, substantial
additional financing will be required for the manufacture, marketing and
distribution of our product in order to achieve a level of revenues adequate to
support our cost structure. We believe we can raise additional funding to
support operations through corporate collaborations or partnerships, licensing
of SnET2 or new products and additional equity or debt financings prior to
December 31, 2004. If additional funding is not available when required, we
believe that as long as our debt is not accelerated, then we have the ability to
conserve cash required for operations through December 31, 2004 and into the
first quarter of 2005. If the additional funding is not available or only a
portion thereof is available, we believe that we will have cash required for
operations beyond December 31, 2004 by the delay or reduction in scope of one or
more of our research and development programs and adjusting, deferring or
reducing salaries of employees and by reducing operating facilities and overhead
expenditures. There can be no assurance that the Company will be successful in
obtaining additional financing or that financing will be available on favorable
terms.
Our ability to raise funds has become more difficult as our stock has been
delisted from trading on the Nasdaq National Market. Any inability to obtain
additional financing would adversely affect our business and could cause us to
significantly reduce or cease operations. Our ability to generate substantial
additional funding to continue our research and development activities,
preclinical studies and clinical trials and manufacturing, and administrative
activities and to pursue any additional investment opportunities is subject to a
number of risks and uncertainties and will depend on numerous factors including:
* Our ability to receive approval of our NDA submission for SnET2;
* The potential future use of SnET2 for ophthalmology or other disease
indications;
* Our ability to raise funds in the near future through public or
private equity or debt financings, or establish collaborative
arrangements or raise funds from other sources;
* The potential for equity investments, collaborative arrangements,
license agreements or development or other funding programs that are
at terms acceptable to us, in exchange for manufacturing, marketing,
distribution or other rights to products developed by us;
* Our ability to meet the milestones and covenants established under our
collaboration agreement with Guidant;
* The future development and results of our Phase II dermatology
clinical trial and our ongoing cardiovascular and oncology preclinical
studies;
* The amount of funds received from outstanding warrant and stock option
exercises, if any; and
* Our ability to maintain, renegotiate, or terminate our existing
collaborative arrangements.
We cannot guarantee that additional funding will be available to us now,
when needed, or if at all. If additional funding is not available in the near
term, we will be required to scale back our research and development programs,
preclinical studies and clinical trials and administrative activities or cease
operations. As a result, we would not be able to successfully develop our drug
candidates or commercialize our products and we would never achieve
profitability. Our independent auditors, Ernst & Young LLP, have indicated in
their report accompanying our December 31, 2003 consolidated financial
statements that, based on generally accepted auditing standards, our viability
as a going concern is in question.
RISK FACTORS
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following section of this report describes material risks and
uncertainties relating to Miravant and our business. Our business operations may
be impaired by additional risks and uncertainties that we are not aware of or
that we currently consider immaterial. Our business, results of operations or
cash flows may be adversely affected if any of the following risks actually
occur. In such case, the trading price of our Common Stock could decline.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND EXPECT TO CONTINUE TO HAVE
LOSSES IN THE FUTURE, WHICH MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NEVER ACHIEVE
PROFITABILITY.
We have incurred significant losses since our inception in 1989 and, as of
June 30, 2004, had an accumulated deficit of approximately $206.2 million. In
each of the last three years, we have increased our borrowings through the sale
of various debt instruments in order to sustain our business operations. We
expect to continue to incur significant, and possibly increasing, operating
losses over the next few years, and we believe we will be required to obtain
substantial additional debt or equity financing to fund our operations during
this time as we seek to achieve a level of revenues sufficient to support our
anticipated cost structure. Our independent auditors, Ernst & Young LLP, have
indicated in their report accompanying our December 31, 2003 consolidated
financial statements that, based on generally accepted auditing standards, our
viability as a going concern is in question.
Although we continue to incur costs for research and development,
preclinical studies, clinical trials and general corporate activities, we have
continued to adhere to our cost restructuring program we implemented in 2002
which has helped reduce our overall costs. Our ability to achieve and sustain
profitability depends upon our ability, alone or with others, to receive
regulatory approval on our NDA submission for SnET2 in AMD, to successfully
complete the development of our proposed products, obtain the required
regulatory clearances and manufacture and market our proposed products. No
revenues have been generated from commercial sales of SnET2 and only limited
revenues have been generated from sales of our devices. Our ability to achieve
significant levels of revenues within the next few years is dependent on the
timing of receiving regulatory approval, if at all, for SnET2 in AMD and our
ability to establish a collaboration with a corporate partner or other sales
organization to commercialize SnET2 once regulatory approval is received, if at
all. Our revenues to date have consisted of license reimbursements, grants
awarded, royalties on our devices, SnET2 bulk active pharmaceutical ingredient,
or bulk API sales, milestone payments, payments for our devices, and interest
income. We do not expect any significant revenues until we have established a
collaborative partnering agreement, receive regulatory approval and commence
commercial sales.
EVEN THOUGH WE RAISED $10.3 MILLION IN APRIL 2004 AND ENTERED INTO A
COLLABORATION AND SECURITIES PURCHASE AGREEMENT WHICH MAY PROVIDE UP TO $7.0
MILLION IN EQUITY CAPITAL TO SUPPORT OUR CARDIOVASCULAR PROGRAM, WE WILL LIKELY
NEED ADDITIONAL FUNDS IN 2005 TO CONTINUE OUR OPERATIONS, AND IF WE FAIL TO
OBTAIN ADDITIONAL FUNDING, WE WOULD BE FORCED TO SIGNIFICANTLY SCALE BACK OR
CEASE OPERATIONS.
We are continuing our scaled-back efforts, we implemented in 2002, in
research and development and the preclinical studies and clinical trials of our
products. These efforts, along with the cost of preparing and the follow-up work
associated with the NDA submission for SnET2, obtaining requisite regulatory
approval, and commencing pre-commercialization and manufacturing activities
prior to receiving regulatory approval, has required and will require
substantial expenditures. Once requisite regulatory approval has been obtained,
if at all, substantial additional financing will likely be required for the
manufacture, marketing and distribution of our product in order to achieve a
level of revenues adequate to support our cost structure.
The timing and magnitude of our future capital requirements will depend on
many factors, including:
* Our ability to obtain regulatory acceptance of the NDA submission and
subsequent approval;
* The cost of performing pre-commercialization activities;
* Our ability to establish additional collaborations and/or license
SnET2 or our other new products;
* Our ability to continue our efforts to conserve our use of cash, while
continuing to advance programs;
* Our ability to meet our obligations under the 2002 Debt Agreement,
2003 Debt Agreement and February 2004 Debt Agreement;
* Our ability to receive future equity investments from Guidant by
meeting the milestones established under our collaboration agreement;
* The viability of SnET2 for future use;
* Our ability to raise equity financing or use common stock for employee
and consultant compensation;
* Our ability to regain our listing status on Nasdaq or other national
stock market exchanges;
* The pace of scientific progress and the magnitude of our research and
development programs;
* The scope and results of preclinical studies and clinical trials;
* The costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
* The costs involved in any potential litigation;
* Competing technological and market developments; and
* Our dependence on others for development and commercialization of our
potential products.
Although we can make no assurances, we believe that as a result of our
$10.3 million funding in April 2004 and the July 2004 Collaboration and
Securities Purchase Agreement with Guidant investing $3.0 million in equity to
support our cardiovascular program, we will have sufficient cash to fund
operations through December 31, 2004 and into the first quarter of 2005. If we
are unable to raise funds when we may need them, we believe we can delay or
reduce in scope one or more of our research and development programs and to
adjust, defer or reduce salaries of employees and to reduce operating facilities
and overhead expenditures.
We continue to seek additional capital needed to fund our operations
through corporate collaborations or partnerships, through licensing of SnET2 or
new products and through public or private equity or debt financings. Our
inability to obtain additional financing would adversely affect our business and
could cause us to significantly scale back or cease operations. If we are
successful in obtaining additional equity or convertible debt financing,
including from our existing agreements with Guidant, this is likely to result in
significant dilution to our stockholders. In addition, any new securities issued
may have rights, preferences or privileges senior to those securities held by
our current stockholders.
WE ARE HIGHLY LEVERAGED, OUR RECENT DEBT AND EQUITY AGREEMENTS HAVE FURTHER
DILUTED OUR EXISTING STOCKHOLDERS AND OUR DEBT SERVICE REQUIREMENTS MAKE US
VULNERABLE TO ECONOMIC DOWNTURN AND IMPOSE RESTRICTIONS ON OUR OPERATIONS.
The aggregate face amount of our debt outstanding was approximately $11.8
million as of August 9, 2004. There is no certainty that our cash balance and
our financing arrangements, will be sufficient to finance our operating
requirements, and our indebtedness may restrict our ability to obtain additional
financing in the future. The issuance of additional shares of Common Stock in
July 2004, April 2004 and warrants to purchase Common Stock in connection with
the 2002 and 2003 Debt Agreements and related negotiations with existing debtors
has resulted in the issuance of significant amounts of securities which has a
dilutive effect on our existing stockholders. Also, we are highly leveraged,
which may place us at a competitive disadvantage and makes us more susceptible
to downturns in our business in the event our cash balances are not sufficient
to cover our debt service requirements. In addition, the July 2004 Collaboration
and Securities Purchase Agreement with Guidant, the February 2004 Debt
Agreement, the 2003 Debt Agreement and the 2002 Debt Agreement contain certain
covenants that impose operating and financial restrictions on us. These
covenants may affect our ability to conduct operations to raise additional
financing or to engage in other business activities that may be in our interest.
In addition, if we cannot achieve the financial results necessary to maintain
compliance with these covenants, we could be declared in default.
Our future success is highly dependent on regulatory approval and
successful commercialization of SnET2. If our submission for SnET2 does not
support the approval of the NDA by the FDA for any reason, our business will be
substantially harmed.
On June 1, 2004, the FDA notified us that they accepted our submission for
filing. Even though the FDA accepted our submission for filing, the FDA may not
ultimately approve our NDA for SnET2. This approval process may take a
significant amount of time and the FDA's approval, if any, may be contingent
upon satisfying additional requirements. For instance, the FDA may require
follow-up clinical trials or pre-clinical studies prior to final approval, which
may be costly and may cause a significant delay in the timing of receiving FDA
approval. If the FDA does approve this NDA, the approved label claims could be
for a limited market, resulting in smaller than expected markets and revenue.
Any delay in receiving FDA approval further limits our ability to begin market
commercialization and harms our on-going funding requirements and our business.
Additionally, we might be forced to substantially scale down our operations or
sell certain of our assets, and it is likely the price of our stock would
decline precipitously.
EVEN IF WE RECEIVE REGULATORY APPROVAL OF SNET2 FOR THE TREATMENT OF AMD, SNET2
MAY NOT BE COMMERCIALLY SUCCESSFUL.
Even if SnET2 receives regulatory approval, patients and physicians may not
readily accept it, which would result in lower than projected sales and
substantial harm to our business. Acceptance will be a function of SnET2 being
clinically useful and demonstrating superior therapeutic effect with an
acceptable side-effect profile, as compared to currently existing or future
treatments. In addition, even if SnET2 does achieve market acceptance, we may
not be able to maintain that market acceptance over time if new products are
introduced that are more favorably received than SnET2 or render SnET2 obsolete.
WE FACE INTENSE COMPETITION AND OUR FAILURE TO COMPETE EFFECTIVELY, PARTICULARLY
AGAINST LARGER, MORE ESTABLISHED PHARMACEUTICAL AND MEDICAL DEVICE COMPANIES,
WILL CAUSE OUR BUSINESS TO SUFFER.
Many of our competitors have substantially greater financial, technical and
human resources than we do, and may also have substantially greater experience
in developing products, conducting preclinical studies or clinical trials,
obtaining regulatory approvals and manufacturing and marketing and distribution.
Further, our competitive position could be harmed by the establishment of patent
protection by our competitors. The existing competitors or other companies may
succeed in developing technologies and products that are more safe, effective or
affordable than those being developed by us or that would render our technology
and products less competitive or obsolete.
We are aware that other companies are marketing or developing certain
products to prevent, diagnose or treat diseases for which we are developing
PhotoPoint PDT. These products, as well as others of which we may not be aware,
may adversely affect the existing or future market for our products. Competitive
products may include, but are not limited to, drugs such as those designed to
inhibit angiogenesis or otherwise target new blood vessels, certain medical
devices, such as drug-eluting stents and other photodynamic therapy treatments.
We are aware of various competitors involved in the photodynamic therapy or
AMD sector. We understand that these companies are conducting preclinical
studies and/or clinical trials in various countries and for a variety of disease
indications. Our direct competitors in our sector include QLT Inc., or QLT, DUSA
Pharmaceuticals, or DUSA, Axcan Pharm Inc., or Axcan, Eyetech Pharmacueticals
Inc., or Eyetech, Pharmacyclics, Alcon Inc., or Alcon, and Genentech Inc.,
Genentech. QLT's drug Visudyne(R) has received marketing approval in the United
States and certain other countries for the treatment of AMD and has been
commercialized by Novartis. Axcan and DUSA have photodynamic therapy drugs, both
of which have received marketing approval in the United States - Photofrin(R)
(Axcan) for the treatment of certain oncology indications and Levulan(R) (DUSA
Pharmaceuticals) for the treatment of actinic keratoses, a dermatological
condition. Pharmacyclics has a photodynamic therapy drug that has not received
marketing approval, which is being used in certain preclinical studies and/or
clinical trials for ophthalmology, oncology and cardiovascular indications.
Eyetech is currently completing a Phase III clinical trial in AMD and is
expected to submit an NDA before the end of Q3 2004. Alcon and Genentech have
ongoing late stage clinical trials in AMD. We are aware of other drugs and
devices under development by these and other competitors in additional disease
areas for which we are developing PhotoPoint PDT. These competitors as well as
others that we are not aware of, may develop superior products or reach the
market prior to PhotoPoint PDT and render our products non-competitive or
obsolete.
AS A RESULT OF OUR SHARES BEING DELISTED FROM TRADING ON NASDAQ, OUR ABILITY TO
RAISE ADDITIONAL CAPITAL MAY BE LIMITED OR IMPAIRED.
We were delisted by Nasdaq on July 11, 2002 and our Common Stock began
trading on the Over-The-Counter Bulletin Board(R), or OTCBB, effective as of the
opening of business on July 12, 2002. Our management continues to review our
ability to regain our listing status with Nasdaq or other national stock market
exchanges, however, we cannot guarantee we will be able to raise the additional
capital needed or to increase the current trading price of our Common Stock to
allow us to meet the relisting requirements for the Nasdaq National Market or
the Nasdaq Small Cap Market or other national stock market exchanges on a timely
basis, if at all, and there is no guarantee that any of the stock market
exchanges would approve our relisting request even if we met all the listing
requirements. Our ability to obtain additional funding, beyond our current
funding agreements is impeded by a number of factors including that fact that
our Common Stock is currently being traded on the OTCBB and may prevent us from
obtaining additional financing as required in the near term on favorable terms
or at all.
OUR FINANCIAL CONDITION AND COST REDUCTION EFFORTS COULD RESULT IN DECREASED
EMPLOYEE MORALE AND LOSS OF EMPLOYEES AND CONSULTANTS WHO ARE CRITICAL TO OUR
SUCCESS.
Our success in the future will depend in large part on our ability to
attract and retain highly qualified scientific, management and other personnel
and to develop and maintain relationships with leading research institutions and
consultants. We are highly dependent upon principal members of our management,
key employees, scientific staff and consultants, which we may retain from time
to time. We currently have limited cash and capital resources and our ability to
raise funds is questionable, causing our business outlook to be uncertain.
Additionally, due to our ongoing limited cash balances, we try to utilize stock
options and stock awards as a key component of short-term and long-term
compensation. However, given the volatility of our stock and the uncertainty of
our long-term prospects, our ability to use stock options and stock awards as
compensation may be limited. These measures, along with our financial condition,
may cause employees to question our long-term viability and increase our
turnover. These factors may also result in reduced productivity and a decrease
in employee morale causing our business to suffer. We do not have insurance
providing us with benefits in the event of the loss of key personnel. Our
consultants may be affiliated with or employed by others, and some have
consulting or other advisory arrangements with other entities that may conflict
or compete with their obligations to us.
IF WE ARE NOT ABLE TO MAINTAIN AND SUCCESSFULLY ESTABLISH NEW COLLABORATIVE AND
LICENSING ARRANGEMENTS WITH OTHERS, OUR BUSINESS WILL BE HARMED.
Our business model is based on establishing collaborative relationships
with other parties both to license compounds upon which our products and
technologies are based and to manufacture, market and sell our products. As a
development company we may need access to compounds and technologies to license
for further development. For example, we are party to a License Agreement with
the University of Toledo, the Medical College of Ohio and St. Vincent Medical
Center, of Toledo, Ohio, collectively referred to as Toledo, to license or
sublicense certain photoselective compounds, including SnET2. Similarly, we must
also establish relationships with suppliers and manufacturers to build our
medical devices and to manufacture our compounds. We have partnered with Iridex
for the manufacture of certain light sources and have entered into an agreement
with Hospira, Inc. (formerly Fresenius) for supply of the final dose formulation
of SnET2. Due to the expense of the drug approval process it is beneficial for
us to have relationships with established pharmaceutical companies to offset
some of our development costs in exchange for a combination of manufacturing,
marketing and distribution rights. We formerly had a significant relationship
with Pharmacia for the development of SnET2 for the treatment of AMD, which was
terminated in March 2002. To commercialize and further develop SnET2 for AMD or
other indications we likely need to establish a new collaborative relationship
with a corporate partner or a sales organization.
We are currently at various stages of discussions with various companies
regarding the establishment of new collaborations. If we are not successful in
establishing new collaborative partners for the potential development of SnET2
or our other molecules, we may not be able to pursue further development of such
drugs and/or may have to reduce or cease our current development programs, which
would materially harm our business. Even if we are successful in establishing
new collaborations, they are subject to numerous risks and uncertainties
including the following:
* Our ability to negotiate acceptable collaborative arrangements;
* Future or existing collaborative arrangements may not be successful or
may not result in products that are marketed or sold; o Collaborative
partners are free to pursue alternative technologies or products
either on their own or with others, including our competitors, for the
diseases targeted by our programs and products;
* Our partners may fail to fulfill their contractual obligations or
terminate the relationships described above, and we may be required to
seek other partners, or expend substantial resources to pursue these
activities independently; and
* Our ability to manage, interact and coordinate our timelines and
objectives with our strategic partners may not be successful.
WE HAVE LIMITED MANUFACTURING CAPABILITY AND EXPERIENCE AND THUS RELY HEAVILY
UPON THIRD PARTIES. IF WE ARE UNABLE TO MAINTAIN AND DEVELOP OUR PAST
MANUFACTURING CAPABILITY, OR IF WE ARE UNABLE TO FIND SUITABLE THIRD PARTY
MANUFACTURERS AND OUR OPERATING RESULTS COULD SUFFER.
Prior to our being able to supply drugs for commercial use, our
manufacturing facilities must comply with Good Manufacturing Practices, or GMPs.
In addition, if we elect to outsource manufacturing to third-party
manufacturers, these facilities also have to satisfy GMP and FDA manufacturing
requirements. To be successful, our products must be manufactured in commercial
quantities under current GMPs and must be at acceptable costs. Although we
intend to manufacture drugs and devices at clinical manufacturing levels, we
have not yet manufactured any products under GMPs which can be released for
commercial use, and we have limited experience in manufacturing in commercial
quantities. We were licensed by the State of California to manufacture bulk API
at one of our Santa Barbara, California facilities for clinical trial and other
use. This particular manufacturing facility was closed in 2002 and has been
reconstructed in our existing operating facility. Although the manufacturing
facility at the new location recently completed production of site qualification
and stability batches and is operational, it is still pending required
regulatory approvals by the State of California and federal regulatory agencies.
In the original manufacturing facility, we have manufactured bulk API, the
process up to the final formulation and packaging step for SnET2, which we
currently have in inventory. We believe the quantities we have in inventory are
enough to support an initial commercial launch of SnET2, though there can be no
assurance that SnET2 and our new manufacturing facility will be approved by the
FDA or that if such approval is received, the existing commercial bulk API
inventory will be approved for commercial use. We also have the ability to
manufacture light delivery devices, and conduct other production and testing
activities to support current research programs, at this location. However, we
have limited capabilities, personnel and experience in the manufacture of
finished drug product, and light producing and light delivery devices and need
to utilize outside suppliers, contracted or otherwise, for certain materials and
services related to our manufacturing activities.
We currently have the capacity, in conjunction with our manufacturing
suppliers Hospira, Inc, or Hospira, which acquired the manufacturing operations
from Fresenius in 2004, and Iridex, to manufacture products at certain
commercial levels and we believe we will be able to do so under GMPs with
subsequent FDA approval. If we receive FDA or other regulatory approval, we may
need to expand our manufacturing capabilities and/or depend on our
collaborators, licensees or contract manufacturers for the expanded commercial
manufacture of our products. If we expand our manufacturing capabilities, we may
need to expend substantial funds, hire and retain additional personnel and
comply with extensive regulations. We may not be able to expand successfully or
we may be unable to manufacture products in increased commercial quantities for
sale at competitive prices. Further, we may not be able to enter into future
manufacturing arrangements with collaborators, licensees, or contract
manufacturers on acceptable terms or at all. If we are not able to expand our
manufacturing capabilities or enter into additional commercial manufacturing
agreements, our commercial product sales, as well as our overall business growth
could be limited, which in turn could prevent us from becoming profitable or
viable as a business. We are currently the sole manufacturer of bulk API for
SnET2, Hospira is the sole manufacturer of the final dose formulation of SnET2
and Iridex is currently the sole supplier of the light producing devices used in
our AMD clinical trials. All currently have commercial quantity capabilities. At
this time, we have no readily available back-up manufacturers to produce the
bulk API for SnET2, or the final formulation of SnET2 at commercial levels or
back-up suppliers of the light producing devices. If Hospira could no longer
manufacture for us or Iridex was unable to supply us with devices, we could
experience significant delays in production or may be unable to find a suitable
replacement, which would reduce our revenues and harm our ability to
commercialize our products and become profitable.
WE HAVE LIMITED MARKETING CAPABILITY AND EXPERIENCE AND THUS RELY HEAVILY UPON
THIRD PARTIES IN THIS REGARD. ADDITIONALLY, DUE TO OUR FINANCIAL CONDITION, WE
HAVE PERFORMED LIMITED PRE-MARKETING ACTIVITIES WHICH MAY DELAY THE COMMENCEMENT
OF MARKETING OUR PRODUCT, SNET2, IF APPROVED FOR IMMEDIATE COMMERCIALIZATION.
We have no direct experience in marketing, distributing and selling our
pharmaceutical or medical device products. We will need to develop a sales force
or rely on our collaborators or licensees or make arrangements with others to
provide for the marketing, distribution and sale of our products. We are
currently in discussion with several companies to market, distribute and sell
SnET2. We currently intend to rely on Iridex for any light device needs for the
AMD program. If SnET2 is approved for immediate commercialization, we expect to
commence commercializing our drug and device products within six months from the
date of FDA marketing approval. However, we have performed limited pre-marketing
activities, which may delay the launch of the commercialization of SnET2. Our
marketing, distribution and sales capabilities or current or future arrangements
with third parties for such activities may not be adequate for the initial
commercial launch or the successful commercialization of our products.
OUR PRODUCTS MAY EXHIBIT ADVERSE SIDE EFFECTS THAT PREVENT THEIR WIDESPREAD
ADOPTION OR THAT NECESSITATE WITHDRAWAL FROM THE MARKET.
Our PhotoPoint PDT drug and device products may exhibit undesirable and
unintended side effects that may prevent or limit their commercial adoption and
use. One such side effect upon the adoption of our PhotoPoint PDT drug and
device products as potential therapeutic agents may be a period of
photosensitivity for a certain period of time after receiving PhotoPoint PDT.
This period of photosensitivity is generally dose dependent and typically
declines over time. Even upon receiving approval by the FDA and other regulatory
authorities, our products may later exhibit adverse side effects that prevent
widespread use or necessitate withdrawal from the market. The manifestation of
such side effects could cause our business to suffer.
ALL OF OUR PRODUCTS, EXCEPT SNET2 AND MV9411, ARE IN AN EARLY STAGE OF
DEVELOPMENT AND ALL OF OUR PRODUCTS, INCLUDING SNET2 AND MV9411, MAY NEVER BE
SUCCESSFULLY COMMERCIALIZED.
Our products, except SnET2 and MV9411, are at an early stage of development
and our ability to successfully commercialize these products, including SnET2
and MV9411, is dependent upon:
* Successful completion of our research or product development efforts
or those of our collaborative partners;
* Successfully transforming our drugs or devices currently under
development into marketable products;
* Obtaining the required regulatory approvals;
* Manufacturing our products at an acceptable cost and with appropriate
quality;
* Favorable acceptance of any products marketed; and
* Successful marketing and sales efforts of our corporate partner(s).
We may not be successful in achieving any of the above, and if we are not
successful, our business, financial condition and operating results would be
adversely affected. The time frame necessary to achieve these goals for any
individual product is long and uncertain. Most of our products currently under
development will require significant additional research and development and
preclinical studies and clinical trials, and all will require regulatory
approval prior to commercialization. The likelihood of our success must be
considered in light of these and other problems, expenses, difficulties,
complications and delays.
OUR PRODUCTS, INCLUDING SNET2 AND MV9411, MAY NOT SUCCESSFULLY COMPLETE THE
CLINICAL TRIAL PROCESS AND WE MAY BE UNABLE TO PROVE THAT OUR PRODUCTS ARE SAFE
AND EFFICACIOUS.
All of our drug and device products currently under development will
require extensive preclinical studies and/or clinical trials prior to regulatory
approval for commercial use, which is a lengthy and expensive process. None of
our products, except SnET2, have completed testing for efficacy or safety in
humans, and none of our products, including SnET2, have been approved for any
purpose by the FDA. Some of the risks and uncertainties related to safety and
efficacy testing and the completion of preclinical studies and clinical trials
include:
* Our ability to demonstrate to the FDA that our products are safe and
efficacious;
* Our products may not be as efficacious as our competitors' products;
* Our ability to successfully complete the testing for any of our
compounds within any specified time period, if at all;
* Clinical outcomes reported may change as a result of the continuing
evaluation of patients;
* Data obtained from preclinical studies and clinical trials are subject
to varying interpretations which can delay, limit or prevent approval
by the FDA or other regulatory authorities;
* Problems in research and development, preclinical studies or clinical
trials that will cause us to delay, suspend or cancel clinical trials;
and
* As a result of changing economic considerations, competitive or new
technological developments, market approvals or changes, clinical or
regulatory conditions, or clinical trial results, our focus may shift
to other indications, or we may determine not to further pursue one or
more of the indications currently being pursued.
Data already obtained from preclinical studies and clinical trials of our
products under development do not necessarily predict the results that will be
obtained from future preclinical studies and clinical trials. A number of
companies in the pharmaceutical industry, including biotechnology companies like
us, have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier clinical trials. Moreover, our clinical trials may
not demonstrate the sufficient levels of safety and efficacy necessary to obtain
the requisite regulatory approval or may not result in marketable products. The
failure to adequately demonstrate the safety and effectiveness of a product
under development could delay or prevent regulatory approval of the potential
product and would materially harm our business.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
From time to time and in particular during the year ended December 31,
2003, the price of our Common Stock has been highly volatile. These fluctuations
create a greater risk of capital losses for our stockholders as compared to less
volatile stocks. From January 1, 2003 to August 9, 2004, our Common Stock price,
per Nasdaq and OTCBB closing prices, has ranged from a high of $4.10 to a low of
$0.71.
The market prices for our Common Stock, and the securities of emerging
pharmaceutical and medical device companies, have historically been highly
volatile and subject to extreme price fluctuations, which may reduce the market
price of the Common Stock. Extreme price fluctuations in the future could be the
result of any number of factors, including:
* The results of the FDA review of our NDA submission and our ability to
receive approval from the FDA for commercialization;
* Announcements concerning Miravant or our collaborators, competitors or
industry;
* Our ability to successfully establish new collaborations and/or
license SnET2 or our other new products;
* The impact of dilution from past or future equity or convertible debt
financings;
* Our ability to meet the milestones and covenants established under our
collaboration agreement with Guidant;
* The results of our testing, technological innovations or new
commercial products;
* The results of preclinical studies and clinical trials by us or our
competitors;
* Technological innovations or new therapeutic products;
* Our ability to regain our listing status on Nasdaq or other national
stock market exchanges;
* Public concern as to the safety, efficacy or marketability of products
developed by us or others;
* Comments by securities analysts;
* The achievement of or failure to achieve certain milestones;
* Litigation, such as from stockholder lawsuits or patent infringement;
and
* Governmental regulations, rules and orders, or developments concerning
safety of our products.
In addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many emerging pharmaceutical and medical device companies for
reasons frequently unrelated or disproportionate to the performance of the
specific companies. If these broad market fluctuations cause the trading price
of our Common Stock to decline further, we may be unable to obtain additional
capital that we may need through public or private financing activities and our
stock may not be relisted on Nasdaq, further exacerbating our ability to raise
funds and limiting our stockholders' ability to sell their shares. Because
outside financing is critical to our future success, large fluctuations in our
share price that harm our financing activities could cause us to significantly
alter our business plans or cease operations altogether.
WE MAY RELY ON THIRD PARTIES TO ASSIST US WITH THE REGULATORY REVIEW PROCESS FOR
THE NDA, IF NEEDED, AND TO CONDUCT CLINICAL TRIALS ON OUR PRODUCTS, AND IF THESE
RESOURCES FAIL, OUR ABILITY TO COMPLETE THE NDA REVIEW PROCESS OR SUCCESSFULLY
COMPLETE CLINICAL TRIALS WILL BE ADVERSELY AFFECTED AND OUR BUSINESS WILL
SUFFER.
To date, we have limited experience in conducting clinical trials. We have
relied on Parexel International, a large clinical research organization, or CRO,
as well as numerous other consultants, to assist in preparation of our NDA,
which we submitted to the FDA on March 31, 2004. Additionally, we relied on
Pharmacia, our former corporate partner, and Inveresk, Inc., formerly ClinTrials
Research, Inc., a CRO, to complete our Phase III AMD clinical trials and we
currently rely on a Parexel International for our Phase II dermatology clinical
trials. We may need to rely on Parexel International and other consultants and
third parties to complete the review of the NDA by the FDA. We will either need
to rely on third parties, including our collaborative partners, to design and
conduct any required clinical trials or expend resources to hire additional
personnel or engage outside consultants or contract research organizations to
administer current and future clinical trials. We may not be able to find
appropriate third parties to design and conduct clinical trials or we may not
have the resources to administer clinical trials in-house. The failure to have
adequate resources for completing the review process of the NDA, and conducting
and managing clinical trials will have a negative impact on our ability to
develop marketable products and would harm our business. Other CROs may be
available in the event that our current CROs fail; however there is no guarantee
that we would be able to engage another organization in a timely manner, if at
all. This could cause delays in our clinical trials and our development
programs, which could materially harm our business.
WE RELY ON PATIENT ENROLLMENT TO CONDUCT CLINICAL TRIALS, AND OUR INABILITY TO
CONTINUE TO ATTRACT PATIENTS TO PARTICIPATE WILL HAVE A NEGATIVE IMPACT ON OUR
CLINICAL TRIAL RESULTS.
Our ability to complete clinical trials is dependent upon the rate of
patient enrollment. Patient enrollment is a function of many factors including:
* The nature of our clinical trial protocols;
* Existence of competing protocols or treatments;
* Size and longevity of the target patient population;
* Proximity of patients to clinical sites; and
* Eligibility criteria for the clinical trials.
A specific concern for potential future AMD clinical trials, if any, is
that there currently is an approved treatment for AMD and patients enrolled in
future AMD clinical trials, if any, may choose to drop out of the trial or
pursue alternative treatments. This could result in delays or incomplete
clinical trial data.
We cannot make assurances that we will obtain or maintain adequate levels
of patient enrollment in current or future clinical trials. Delays in planned
patient enrollment may result in increased costs, delays or termination of
clinical trials, which could result in slower introduction of our potential
products, a reduction in our revenues and may prevent us from becoming
profitable. In addition, the FDA may suspend clinical trials at any time if,
among other reasons, it concludes that patients participating in such trials are
being exposed to unacceptable health risks. Failure to obtain and keep patients
in our clinical trials will delay or completely impede test results, which will
negatively impact the development of our products and prevent us from becoming
profitable.
WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS,
OUR PATENTS AND OUR PROPRIETARY TECHNOLOGY, WHICH WILL MAKE IT EASIER FOR OTHERS
TO MISAPPROPRIATE OUR TECHNOLOGY AND INHIBIT OUR ABILITY TO BE COMPETITIVE.
Our success will depend, in part, on our and our licensors' ability to
obtain, assert and defend our patents, protect trade secrets and operate without
infringing the proprietary rights of others. The exclusive license relating to
various drug compounds, including our leading drug candidate SnET2, may become
non-exclusive if we fail to satisfy certain development and commercialization
objectives. The termination or restriction of our rights under this or other
licenses for any reason would likely reduce our future income, increase our
costs and limit our ability to develop additional products.
The patent position of pharmaceutical and medical device firms generally is
highly uncertain. Some of the risks and uncertainties include:
* The patent applications owned by or licensed to us may not result in
issued patents;
* Our issued patents may not provide us with proprietary protection or
competitive advantages;
* Our issued patents may be infringed upon or designed around by others;
* Our issued patents may be challenged by others and held to be invalid
or unenforceable;
* The patents of others may prohibit us from developing our products as
planned; and
* Significant time and funds may be necessary to defend our patents.
We are aware that our competitors and others have been issued patents
relating to photodynamic therapy. In addition, our competitors and others may
have been issued patents or filed patent applications relating to other
potentially competitive products of which we are not aware. Further, our
competitors and others may in the future file applications for, or otherwise
obtain proprietary rights to, such products. These existing or future patents,
applications or rights may conflict with our or our licensors' patents or
applications. Such conflicts could result in a rejection of our or our
licensors' applications or the invalidation of the patents.
Further exposure could arise from the following risks and uncertainties:
* We do not have contractual indemnification rights against the
licensors of the various drug patents;
* We may be required to obtain licenses under dominating or conflicting
patents or other proprietary rights of others;
* Such licenses may not be made available on terms acceptable to us, if
at all; and
* If we do not obtain such licenses, we could encounter delays or could
find that the development, manufacture or sale of products requiring
such licenses is foreclosed.
We also seek to protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. These agreements could be breached and we may not have adequate
remedies for any breach.
The occurrence of any of these events described above could harm our
competitive position. If such conflicts occur, or if we believe that such
products may infringe on our proprietary rights, we may pursue litigation or
other proceedings, or may be required to defend against such litigation. We may
not be successful in any such proceeding. Litigation and other proceedings are
expensive and time consuming, regardless of whether we prevail. This can result
in the diversion of substantial financial, managerial and other resources from
other activities. An adverse outcome could subject us to significant liabilities
to third parties or require us to cease any related research and development
activities or product sales.
ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN, AND FAILURE TO
ACHIEVE MARKET ACCEPTANCE WILL HARM OUR BUSINESS.
Even if approved for marketing, our products may not achieve market
acceptance. The degree of market acceptance will depend upon a number of
factors, including:
* The establishment and demonstration in the medical community of the
safety and clinical efficacy of our products and their potential
advantages over existing therapeutic products and diagnostic and/or
imaging techniques. For example, if we are able to eventually obtain
approval of our drugs and devices to treat cardiovascular restenosis
we will have to demonstrate and gain market acceptance of this as a
method of treatment over use of drug coated stents and other
restenosis treatment options;
* Pricing and reimbursement policies of government and third-party
payors such as insurance companies, health maintenance organizations
and other plan administrators; and
* The possibility that physicians, patients, payors or the medical
community in general may be unwilling to accept, utilize or recommend
any of our products.
If our products are not accepted due to these or other factors our business
will not develop as planned and may be harmed.
OUR ABILITY TO ESTABLISH AND MAINTAIN AGREEMENTS WITH OUTSIDE SUPPLIERS MAY NOT
BE SUCCESSFUL AND OUR FAILURE TO DO SO COULD ADVERSELY AFFECT OUR BUSINESS.
We depend on outside suppliers for certain raw materials and components for
our products. Although most of our raw materials and components are available
from various sources, such raw materials or components may not continue to be
available to our standards or on acceptable terms, if at all, and alternative
suppliers may not be available to us on acceptable terms, if at all. Further, we
may not be able to adequately produce needed materials or components in-house.
We are currently dependent on single, contracted sources for certain key
materials or services used by us in our drug development, light producing and
light delivery device development and production operations. We are seeking to
establish relationships with additional suppliers, however, we may not be
successful in doing so and may encounter delays or other problems. If we are
unable to produce our potential products in a timely manner, or at all, our
sales would decline, our development activities could be delayed or cease and as
a result we may never achieve profitability.
WE MAY NOT HAVE ADEQUATE PROTECTION AGAINST PRODUCT LIABILITY OR RECALL, WHICH
COULD SUBJECT US TO LIABILITY CLAIMS THAT COULD MATERIALLY HARM OUR BUSINESS.
The testing, manufacture, marketing and sale of human pharmaceutical
products and medical devices entail significant inherent, industry-wide risks of
allegations of product liability. The use of our products in clinical trials and
the sale of our products may expose us to liability claims. These claims could
be made directly by patients or consumers, or by companies, institutions or
others using or selling our products. The following are some of the risks
related to liability and recall:
* We are subject to the inherent risk that a governmental authority or
third party may require the recall of one or more of our products;
* We have not obtained product liability insurance that would cover a
claim relating to the clinical or commercial use or recall of our
products;
* In the absence of product liability insurance, claims made against us
or a product recall could result in our being exposed to large damages
and expenses;
* If we obtain product liability insurance coverage in the future, this
coverage may not be available at a reasonable cost and in amounts
sufficient to protect us against claims that could cause us to pay
large amounts in damages; and
* Liability claims relating to our products or a product recall could
negatively affect our ability to obtain or maintain regulatory
approval for our products.
We currently do not expect to obtain product liability insurance until we
have an approved product and begin distributing the product for commercial use.
We plan to obtain product liability insurance to cover our indemnification
obligations to Iridex for third party claims relating to any of our potential
negligent acts or omissions involving our SnET2 drug technology or PhotoPoint
PDT light device technology. A successful product liability claim could result
in monetary or other damages that could harm our business, financial condition
and additionally cause us to cease operations.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN INTEGRATING BUSINESS
COMBINATIONS AND STRATEGIC ALLIANCES.
We may expand our operations and market presence by entering into business
combinations, joint ventures or other strategic alliances with other companies.
These transactions create risks, such as:
* The difficulty assimilating the operations, technology and personnel
of the combined companies;
* The disruption of our ongoing business, including loss of management
focus on existing businesses and other market developments;
* Problems retaining key technical and managerial personnel; expenses
associated with the amortization of goodwill and other purchased
intangible assets;
* Additional operating losses and expenses of acquired businesses;
* The impairment of relationships with existing employees, customers and
business partners; and
* Additional losses from any equity investments we might make.
We may not succeed in addressing these risks, and we may not be able to
make business combinations and strategic investments on terms that are
acceptable to us. In addition, any businesses we may acquire may incur operating
losses.
WE RELY ON THE AVAILABILITY OF CERTAIN UNPROTECTED INTELLECTUAL PROPERTY RIGHTS,
AND IF ACCESS TO SUCH RIGHTS BECOMES UNAVAILABLE, OUR BUSINESS COULD SUFFER.
Our trade secrets may become known or be independently discovered by
competitors. Furthermore, inventions or processes discovered by our employees
will not necessarily become our property and may remain the property of such
persons or others.
In addition, certain research activities relating to the development of
certain patents owned by or licensed to us were funded, in part, by agencies of
the United States Government. When the United States Government participates in
research activities, it retains certain rights that include the right to use the
resulting patents for government purposes under a royalty-free license.
We also rely upon unpatented trade secrets, and no assurance can be given
that others will not independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to our trade secrets or
disclose such technology, or that we can meaningfully protect our rights to our
unpatented trade secrets and know-how.
In the event that the intellectual property we do or will rely on becomes
unavailable, our ability to be competitive will be impeded and our business will
suffer.
OUR PREFERRED STOCKHOLDER RIGHTS PLAN MAKES EFFECTING A CHANGE OF CONTROL OF
MIRAVANT MORE DIFFICULT, WHICH MAY DISCOURAGE OFFERS FOR SHARES OF OUR COMMON
STOCK.
Our Board of Directors has adopted a Preferred Stockholder Rights Plan, or
Rights Plan. The Rights Plan may have the effect of delaying, deterring, or
preventing changes in our management or control of Miravant, which may
discourage potential acquirers who otherwise might wish to acquire us without
the consent of the Board of Directors. Under the Rights Plan, if a person or
group acquires 20% or more of our Common Stock, all holders of rights (other
than the acquiring stockholder) may, upon payment of the purchase price then in
effect, purchase Common Stock having a value of twice the purchase price. In
April 2001, the Rights Plan was amended to increase the trigger percentage from
20% to 25% as it applies to Pharmacia and excluded shares acquired by Pharmacia
in connection with our 2001 Credit Agreement with Pharmacia, and from the
exercise of warrants held by Pharmacia. We also waived the provisions of the
Rights Plan with respect to the securities issued to the 2003 Lenders pursuant
to the 2003 Debt Agreement, including the shares of Common Stock issuable upon
conversion or exercise of such securities and any other securities that may in
the future be issued to the 2003 Lenders pursuant to their participation rights
under the 2003 Debt Agreement with respect to future financings by Miravant. In
the event that we are involved in a merger or other similar transaction where we
are not the surviving corporation, all holders of rights (other than the
acquiring stockholder) shall be entitled, upon payment of the then in effect
purchase price, to purchase Common Stock of the surviving corporation having a
value of twice the purchase price. The rights will expire on July 31, 2010,
unless previously redeemed.
OUR CHARTER AND BYLAWS CONTAIN PROVISIONS THAT MAY PREVENT TRANSACTIONS THAT
COULD BE BENEFICIAL TO STOCKHOLDERS.
Our charter and bylaws restrict certain actions by our stockholders. For
example:
* Our stockholders can act at a duly called annual or special meeting
but they may not act by written consent;
* Special meetings of stockholders can only be called by our chief
executive officer, president, or secretary at the written request of a
majority of our Board of Directors; and
* Stockholders also must give advance notice to the secretary of any
nominations for director or other business to be brought by
stockholders at any stockholders' meeting.
Some of these restrictions can only be amended by a super-majority vote of
members of the Board and/or the stockholders. These and other provisions of our
charter and bylaws, as well as certain provisions of Delaware law, could prevent
changes in our management and discourage, delay or prevent a merger, tender
offer or proxy contest, even if the events could be beneficial to our
stockholders. These provisions could also limit the price that investors might
be willing to pay for our Common Stock.
In addition, our charter authorizes our Board of Directors to issue shares
of undesignated preferred stock without stockholder approval on terms that the
Board may determine. The issuance of preferred stock could decrease the amount
of earnings and assets available for distribution to our other stockholders or
otherwise adversely affect their rights and powers, including voting rights.
Moreover, the issuance of preferred stock may make it more difficult or may
discourage another party from acquiring voting control of us.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are vulnerable to interruption in the event of war,
terrorism, fire, earthquake, power loss, floods, telecommunications failure and
other events beyond our control. We do not have a detailed disaster recovery
plan. Our facilities are all located in the State of California and were subject
to electricity blackouts in 2002 as a consequence of a shortage of available
electrical power. There is no guarantee that this electricity shortage has been
permanently resolved, as such, we may again in the future experience unexpected
blackouts. Though we do have back-up electrical generation systems in place,
they are for use for a limited time and in the event these blackouts continue or
increase in severity, they could disrupt the operations of our affected
facilities. In addition, we may not carry adequate business interruption
insurance to compensate us for losses that may occur and any losses or damages
incurred by us could be substantial.
RISKS RELATED TO OUR INDUSTRY
WE ARE SUBJECT TO UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM.
Our products may not be covered by the various health care providers and
third party payors. If they are not covered, our products may not be purchased
or sold as expected. Our ability to commercialize our products successfully will
depend, in part, on the extent to which reimbursement for these products and
related treatment will be available from government health administration
authorities, private health insurers, managed care entities and other
organizations. These payers are increasingly challenging the price of medical
products and services and establishing protocols and formularies, which
effectively limit physicians' ability to select products and procedures.
Uncertainty exists as to the reimbursement status of health care products,
especially innovative technologies. Additionally, reimbursement coverage, if
available, may not be adequate to enable us to achieve market acceptance of our
products or to maintain price levels sufficient for realization of an
appropriate return on our products.
The efforts of governments and third-party payors to contain or reduce the
cost of healthcare will continue to affect our business and financial condition
as a biotechnology company. In foreign markets, pricing or profitability of
medical products and services may be subject to government control. In the
United States, we expect that there will continue to be federal and state
proposals for government control of pricing and profitability. In addition,
increasing emphasis on managed healthcare has increased pressure on pricing of
medical products and will continue to do so. These cost controls may prevent us
from selling our potential products profitability, may reduce our revenues and
may affect our ability to raise additional capital.
In addition, cost control initiatives could adversely affect our business
in a number of ways, including:
* Decreasing the price we, or any of our partners or licensees, receive
for any of our products;
* Preventing the recovery of development costs, which could be
substantial; and
* Minimizing profit margins.
Further, our commercialization strategy depends on our collaborators. As a
result, our ability to commercialize our products and realize royalties may be
hindered if cost control initiatives adversely affect our collaborators.
FAILURE TO OBTAIN PRODUCT APPROVALS OR COMPLY WITH ONGOING GOVERNMENTAL
REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
The production and marketing of our products and our ongoing research and
development, preclinical studies and clinical trial activities are subject to
extensive regulation and review by numerous governmental authorities in the
United States, including the FDA, and in other countries. All drugs and most
medical devices we develop must undergo rigorous preclinical studies and
clinical trials and an extensive regulatory approval process administered by the
FDA under the Food, Drug and Cosmetic Act, or FDC Act, and comparable foreign
authorities, before they can be marketed. These processes involve substantial
cost and can often take many years. We have limited experience in, and limited
resources available for regulatory activities and we rely on our collaborators
and outside consultants. Failure to comply with the applicable regulatory
requirements can, among other things, result in non-approval, suspensions of
regulatory approvals, fines, product seizures and recalls, operating
restrictions, injunctions and criminal prosecution. To date, none of our product
candidates being developed have been submitted for approval or have been
approved by the FDA or any other regulatory authority for marketing.
Some of the risks and uncertainties relating to United States Government
regulation include:
* Delays in obtaining approval or rejections due to regulatory review of
each submitted new drug, device or combination drug/device application
or product license application, as well as changes in regulatory
policy during the period of product development;
* If regulatory approval of a product is granted, such approval may
entail limitations on the uses for which the product may be marketed;
* If regulatory approval is obtained, the product, our manufacturer and
the manufacturing facilities are subject to continual review and
periodic inspections;
* If regulatory approval is obtained, such approval may be conditional
on the satisfaction of the completion of clinical trials or require
additional clinical trials;
* Later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market and
litigation; and
* Photodynamic therapy products have been categorized by the FDA as
combination drug-device products. If current or future photodynamic
therapy products do not continue to be categorized for regulatory
purposes as combination products, then:
- The FDA may require separate drug and device submissions; and
- The FDA may require separate approval by regulatory authorities.
Some of the risks and uncertainties of international governmental
regulation include:
* Foreign regulatory requirements governing testing, development,
marketing, licensing, pricing and/or distribution of drugs and devices
in other countries;
* Our drug products may not qualify for the centralized review procedure
or we may not be able to obtain a national market application that
will be accepted by other European Union, or EU, member states;
* Our devices must also meet the European Medical Device Directive
effective in 1998. The Directive requires that our manufacturing
quality assurance systems and compliance with technical essential
requirements be certified with a CE Mark authorized by a registered
notified body of an EU member state prior to free sale in the EU; and
* Registration and approval of a photodynamic therapy product in other
countries, such as Japan, may include additional procedures and
requirements, preclinical and clinical studies, and may require the
assistance of native corporate partners.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND
PHARMACEUTICAL INDUSTRIES THAT COULD MAKE SOME OR ALL OF OUR PRODUCTS
NON-COMPETITIVE OR OBSOLETE. COMPETING PRODUCTS AND TECHNOLOGIES MAY MAKE SOME
OR ALL OF OUR PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE.
Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Well-known pharmaceutical,
biotechnology, device and chemical companies are marketing other therapies for
the treatment of AMD. Doctors may prefer familiar methods that they are
comfortable using rather than try our products. Many companies are also seeking
to develop new products and technologies for medical conditions for which we are
developing treatments. Our competitors may succeed in developing products that
are safer or more effective than ours and in obtaining regulatory marketing
approval of future products before we do. We anticipate that we will face
increased competition as new companies enter our markets and as the scientific
development of PhotoPoint PDT evolves.
We expect that our principal methods of competition with other photodynamic
therapy companies will be based upon such factors as:
* The ease of administration of our photodynamic therapy;
* The degree of generalized skin sensitivity to light;
* The number of required doses;
* The safety and efficacy profile;
* The selectivity of our drug for the target lesion or tissue of
interest;
* The type, cost and price of our light systems;
* The cost and price of our drug; and
* The amount reimbursed for the drug and device treatment by third-party
payors.
We cannot give any assurance that new drugs or future developments in
photodynamic therapy or in other drug technologies will not harm our business.
Increased competition could result in:
* Price reductions;
* Lower levels of third-party reimbursements;
* Failure to achieve market acceptance; and
* Loss of market share.
Any of the above could have an adverse effect on our business. Further, we
cannot give any assurance that developments by our competitors or future
competitors will not render our technology obsolete.
OUR INDUSTRY IS SUBJECT TO TECHNOLOGICAL UNCERTAINTY, WHICH MAY RENDER OUR
PRODUCTS AND DEVELOPMENTS OBSOLETE AND OUR BUSINESS MAY SUFFER.
The pharmaceutical industry is subject to rapid and substantial
technological change. Developments by others may render our products under
development or our technologies noncompetitive or obsolete, or we may be unable
to keep pace with technological developments or other market factors.
Technological competition in the industry from pharmaceutical, biotechnology and
device companies, universities, governmental entities and others diversifying
into the field is intense and is expected to increase. These entities represent
significant competition for us. Acquisitions of, or investments in, competing
pharmaceutical or biotechnology companies by large corporations could increase
such competitors' financial, marketing, manufacturing and other resources.
We are engaged in the development of novel therapeutic technologies,
specifically photodynamic therapy. As a result, our resources are limited and we
may experience technical challenges inherent in such novel technologies.
Competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing
similar therapeutic, diagnostic and imaging effects compared to our products. We
are aware that three of our competitors in the market for photodynamic therapy
drugs have received marketing approval of their product for certain uses in the
United States or other countries. Our competitors may develop products that are
safer, more effective or less costly than our products and, therefore, present a
serious competitive threat to our product offerings.
The widespread acceptance of therapies that are alternatives to ours may
limit market acceptance of our products even if commercialized. The diseases for
which we are developing our therapeutic products can also be treated, in the
case of cancer, by surgery, radiation and chemotherapy, and in the case of
restenosis, by surgery, angioplasty, drug therapy and the use of devices to
maintain and open blood vessels. These treatments are widely accepted in the
medical community and have a long history of use. The established use of these
competitive products may limit the potential for our products to receive
widespread acceptance if commercialized.
Our understanding of the market opportunities for our PhotoPoint PDT is
derived from a variety of sources, and represents our best estimate of the
overall market sizes presented in certain disease areas. The actual market size
and market share which we may be able to obtain may vary substantially from our
estimates, and is dependent upon a number of factors, including:
* Competitive treatments or diagnostic tools, either existing or those
that may arise in the future;
* Performance of our products and subsequent labeling claims; and
* Actual patient population at and beyond product launch.
OUR PRODUCTS ARE SUBJECT TO OTHER STATE AND FEDERAL LAWS, FUTURE LEGISLATION AND
REGULATIONS SUBJECTING US TO COMPLIANCE ISSUES THAT COULD CREATE SIGNIFICANT
ADDITIONAL EXPENDITURES AND LIMIT THE PRODUCTION AND DEMAND FOR OUR POTENTIAL
PRODUCTS.
In addition to the regulations for drug or device approvals, we are subject
to regulation under state, federal or other law, including regulations for
worker occupational safety, laboratory practices, environmental protection and
hazardous substance control. We continue to make capital and operational
expenditures for protection of the environment in amounts which are not
material. Some of the risks and uncertainties related to laws and future
legislation or regulations include:
* Our future capital and operational expenditures related to these
matters may increase and become material;
* We may also be subject to other present and possible future local,
state, federal and foreign regulation;
* Heightened public awareness and concerns regarding the growth in
overall health care expenditures in the United States, combined with
the continuing efforts of governmental authorities to contain or
reduce costs of health care, may result in the enactment of national
health care reform or other legislation or regulations that impose
limits on the number and type of medical procedures which may be
performed or which have the effect of restricting a physician's
ability to select specific products for use in certain procedures;
* Such new legislation or regulations may materially limit the demand
and manufacturing of our products. In the United States, there have
been, and we expect that there will continue to be, a number of
federal and state legislative proposals and regulations to implement
greater governmental control in the health care industry;
* The announcement of such proposals may hinder our ability to raise
capital or to form collaborations; and
* Legislation or regulations that impose restrictions on the price that
may be charged for health care products or medical devices may
adversely affect our results of operations.
We are unable to predict the likelihood of adverse effects which might
arise from future legislative or administrative action, either in the United
States or abroad.
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL PROTECTION LAWS AND REGULATIONS, AND IN
THE EVENT OF AN ENVIRONMENTAL LIABILITY CLAIM, WE COULD BE HELD LIABLE FOR
DAMAGES AND ADDITIONAL SIGNIFICANT UNEXPECTED COMPLIANCE COSTS, WHICH COULD HARM
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are subject to federal, state, county and local laws and regulations
relating to the protection of the environment. In the course of our business, we
are involved in the handling, storage and disposal of materials that are
classified as hazardous. Our safety procedures for the handling, storage and
disposal of such materials are designed to comply with applicable laws and
regulations. However, we may be involved in contamination or injury from these
materials. If this occurs, we could be held liable for any damages that result,
and any such liability could cause us to pay significant amounts of money and
harm our business. Further, the cost of complying with these laws and
regulations may increase materially in the future.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk disclosures involve forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements. We are exposed to market risk related to changes in interest rates.
The risks related to foreign currency exchange rates are immaterial and we do
not use derivative financial instruments.
From time to time, we maintain a portfolio of highly liquid cash
equivalents maturing in three months or less as of the date of purchase. Given
the short-term nature of these investments, we are not subject to significant
interest rate risk.
The convertible notes issued under the 2002 and 2003 Debt Agreements have
fixed interest rates of 9.4% and 8%, respectively, which is payable quarterly in
cash or Common Stock. The principal amounts of the 2002 and 2003 Notes will be
due December 31, 2008 and August 28, 2006, respectively, and these notes can be
converted to Common Stock at the option of the holder. The Company believes it
is not subject to significant interest risk due to its fixed rates on its debt.
ITEM 4. CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our chief executive
officer and our chief financial officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our chief executive officer and
our chief financial officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
In July 2004, we entered into a Collaboration Agreement and a Securities
Purchase Agreement with Guidant. The Securities Purchase Agreement provides for
Guidant to invest up to $7.0 million in non-cumulative convertible Series A
Preferred Stock of the Company. The Series A Preferred Stock has voting rights
and liquidation preferences of $2.70 per share over the common stockholders. The
investments will be made upon the completion of certain milestones through
completion of Phase I clinical trials with the first investment of $3.0 million
made upon the signing of the agreements. The first Series A Preferred Stock
investment is convertible into our Common Stock at $2.70 per share or 1,112,966
shares. The remaining preferred stock investments will be convertible into our
Common Stock based on a ten day average price prior to the investment date. We
are required to provide additional funding of at least $5.0 million over the
period of the collaboration and the funds invested by Guidant must be spent on
specified cardiovascular programs. We also granted Guidant registration rights
with respect to the shares of Common Stock into which the Series A Preferred
Stock is convertible. The agreements also contain various covenant and
termination provisions as defined by the agreements.The shares were issued in
reliance on the exemption from registration provided by Rule 506 of Regulation D
promulgated under the Securities Act.
On July 1 2004, in connection with the Securities Purchase Agreement, we
filed a Certificate of Designation with the Secretary of State of Delaware
authorizing the Series A Preferred Stock we issued to Guidant. Among the terms
of the Series A Preferred Stock, holders of the Series A Preferred Stock will be
paid prior and in preference to holders of our Common Stock if certain liquidity
events occur.
In April 2004, the Company entered in a Securities Purchase Agreement, or
the 2004 Equity Agreement, with a group of institutional investors, whereby the
Company sold 4,564,000 shares of Common Stock at $2.25 per share, resulting in
proceeds to the Company of $10.3 million. There were no placement fees
associated with the offering and the shares issued were unregistered. The shares
were issued in reliance on the exemption from registration provided by Rule 506
of Regulation D promulgated under the Securities Act.
Our Board of Directors and in March 2004, our stockholders, approved and
amendment and restatement to our certificate of incorporation to increase the
number of shares of common stock and preferred stock we are authorized to issue
to 75,000,000 and 30,000,000 shares, respectively. The amended and restated
certificate was filed with and accepted by the Secretary of State of Delaware on
April 21, 2004. The Board of Directors has authority to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares of preferred stock without any future vote or action by the shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 24, 2004, the Company held its Annual Meeting of Stockholders. The
following individuals were elected to the Board of Directors:
Votes Votes
For Withheld
--------------- --------------
Barry Johnson 21,413,530 101,884
Charles T. Foscue 20,362,075 1,153,339
Gary S. Kledzik, Ph.D. 20,194,928 1,320,486
David E. Mai 20,353,957 1,161,457
In addition, the stockholders also approved the following proposals:
Votes Votes Broker
For Against Abstained Non-Votes
-------------- -------------- --------------- ----------------
1. Proposal to approve an amendment to the Company's
2000 Stock Compensation Plan to increase the
number of shares of Common Stock reserved for issuance
thereunder by 2,000,000 shares. 5,130,535 1,392,094 22,810 14,969,975
2. Proposal to ratify the selection of
the Company's independent auditors. 21,480,192 27,016 8,206 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Description
Exhibit 3.1 Amended and Restated Articles of Incorporation dated April 21,
2004 (incorporated by reference to Exhibit 3.1 of Registrant's
Pre-Effective Amendment No. 1 to Registration Statement on Form S-2
filed on April 29, 2004) (SEC File No. 333-114698).
Exhibit 3.2 Certificate of Designation relating to Series A Preferred Stock
dated July 1, 2004.
Exhibit 4.1 Securities Purchase Agreement dated July 1, 2004 between
Advanced Cardiovascular Systems, Inc., a wholly owned subsidiary of
Guidant Corporation, and the Registrant.
Exhibit 4.2 Registration Rights Agreement dated July 1, 2004 between
Advanced Cardiovascular Systems, Inc., a wholly owned subsidiary of
Guidant Corporation, and the Registrant.
Exhibit 10.1 Collaboration Agreement dated July 1, 2004 between Advanced
Cardiovascular Systems, Inc., a wholly owned subsidiary of Guidant
Corporation, and the Registrant.
Exhibit 31.1 Certification Of Chief Executive Officer Pursuant To Section
13(A) Or 15(D) Of The Securities Exchange Act Of 1934As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002.
Exhibit 31.2 Certification Of Chief Financial Officer Pursuant To Section
13(A) Or 15(D) Of The Securities Exchange Act Of 1934As Adopted
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002.
Exhibit 32.1 Certification of the Chief Executive Officer and the Chief
Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002.
(b) Reports on Form 8-K.
On April 1, 2004, we filed a Form 8-K to report that
on March 31, 2004 we submitted a New Drug Application
(NDA) to the U.S. Food and Drug Administration (FDA)
seeking marketing approval of SnET2-PDT as a new
treatment for patients with wet age-related macular
degeneration (AMD).
On April 28, 2004, we filed a Form 8-K to report the
sale of 4,564,000 shares of Common Stock at a per
share purchase price of $2.25.
On June 2, 2004, we filed a Form 8-K to report that
our NDA was accepted for filing by the FDA.
On July 6, 2004, we filed a Form 8-K to report our
Collaboration and Securities Purchase Agreement with
Guidant Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Miravant Medical Technologies
Date: August 12, 2004 By: /s/ John M. Philpott
-----------------------
John M. Philpott
Chief Financial Officer
(on behalf of the Company and as
Principal Financial Officer and
Principal Accounting Officer)