WASHINGTON, DC 20549

 

FORM 10-Q

 

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

(Mark One)

 

 

Commission File #0-14732

 

ADVANCED MAGNETICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (617) 497-2070

 

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  ý    No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  o     No  ý

 

At February 10, 2004, 7,779,470 shares of registrant’s common stock (par value, $.01) were outstanding.

 

 

ADVANCED MAGNETICS, INC.

FORM 10-Q

QUARTER ENDED DECEMBER 31, 2003

PART I.  FINANCIAL INFORMATION

Item 1 — Financial Statements

 

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ADVANCED MAGNETICS, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND SEPTEMBER 30, 2003
(Unaudited)

 

		December 31, 2003			September 30, 2003
ASSETS
Current assets:
Cash and cash equivalents		$	23,810,444		$	23,901,126
Accounts receivable - trade		34,209			366,261
Inventories		186,330			267,761
Prepaid expenses		393,292			464,452
Other assets		—			761,747
Total current assets		24,424,275			25,761,347
Property, plant and equipment:
Land		360,000			360,000
Building and improvements		4,628,295			4,628,295
Laboratory equipment		6,987,396			6,933,871
Furniture and fixtures		796,998			793,552
Total property, plant and equipment		12,772,689			12,715,718
Less - accumulated depreciation and amortization		(9,160,381		)	(9,111,452		)
Net property, plant and equipment		3,612,308			3,604,266
Total assets		$	28,036,583		$	29,365,613
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	254,746		$	118,282
Accrued expenses		579,848			601,616
Deferred revenues		2,963,060			2,461,971
Total current liabilities		3,797,654			3,181,869
Long-term liabilities:
Deferred revenues		4,162,615			5,265,669
Total liabilities		7,960,269			8,447,538
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01 per share, authorized 2,000,000 shares; none issued		—			—
Common stock, par value $.01 per share, authorized 15,000,000 shares; issued and outstanding 7,776,095 shares at December 31, 2003 and 7,758,107 shares at September 30, 2003		77,761			77,581
Additional paid-in capital		53,718,398			53,619,640
Accumulated deficit		(33,719,845		)	(32,779,146		)
Total stockholders’ equity		20,076,314			20,918,075
Total liabilities and stockholders’ equity		$	28,036,583		$	29,365,613

 

The accompanying notes are an integral part of the financial statements.

 

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ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS FOR THE QUARTERS ENDED
DECEMBER 31, 2003 AND 2002
(Unaudited)

 

		First Quarter Ended December 31,
		2003			2002
Revenues:
License fees		$	601,964		$	1,406,915
Royalties		30,000			148,879
Product sales		—			—
Total revenues		631,964			1,555,794
Cost and expenses:
Cost of product sales		—			—
Research and development expenses		1,116,744			932,142
Selling, general and administrative expenses		466,005			411,567
Total costs and expenses		1,582,749			1,343,709
Operating (loss) income		(950,785		)	212,085
Other income (expenses):
Interest and dividend income		10,085			44,458
Net gains on sales of securities		—			22,246
Write-down of marketable securities		—			(644,310		)
Total other income (expenses)		10,085			(577,606		)
Net loss		$	(940,700	)	$	(365,521	)
Loss per share - basic and diluted		$	(0.12	)	$	(0.05	)
Weighted average shares outstanding used to compute loss per share - basic and diluted		7,767,101			6,652,580

 

The accompanying notes are an integral part of the financial statements.

 

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ADVANCED MAGNETICS, INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED
DECEMBER 31, 2003 AND 2002
 (Unaudited)

 

		First Quarter Ended December 31,
		2003			2002
Net loss		$	(940,700	)	$	(365,521	)
Other comprehensive income:
Unrealized gains on securities		—			259,032
Reclassification adjustment for losses included in net loss		—			622,064
Other comprehensive income		—			881,096
Comprehensive income (loss)		$	(940,700	)	$	515,575

 

The accompanying notes are an integral part of the financial statements.

 

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ADVANCED MAGNETICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED
DECEMBER 31, 2003 AND 2002
(Unaudited)

 

		First Quarter ended December 31,
		2003			2002
Cash flows from operating activities:
Cash received from customers		$	325,357		$	58,780
Cash paid to suppliers and employees		(1,242,186		)	(1,155,839		)
Dividends and interest received		10,085			44,458
Royalties received		36,695			158,510
Net cash used in operating activities		(870,049		)	(894,091		)
Cash flows from investing activities:
Life insurance policy surrender value received		761,747			—
Proceeds from sales of marketable securities		—			348,496
Purchase of marketable securities		—			(1,291,425		)
Capital expenditures		(56,972		)	(32,017		)
Net cash provided by (used in) investing activities		704,775			(974,946		)
Cash flows from financing activities:
Proceeds from the exercise of stock options		74,592			45,905
Net cash provided by financing activities		74,592			45,905
Net decrease in cash and cash equivalents		(90,682		)	(1,823,132		)
Cash and cash equivalents at beginning of the period		23,901,126			8,557,819
Cash and cash equivalents at end of the period		$	23,810,444		$	6,734,687

 

The accompanying notes are an integral part of the financial statements.

 

6

 

ADVANCED MAGNETICS, INC.
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
FOR THE QUARTERS ENDED
DECEMBER 31, 2003 AND 2002
 (Unaudited)

 

		First Quarter ended December 31,
		2003			2002
Net loss		$	(940,700	)	$	(365,521	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		48,930			50,760
Non-cash license fee revenue		(601,964		)	(1,406,915		)
Non-cash expense associated with stock options		24,347			5,642
Net realized gains on sales of marketable securities		—			(22,246		)
Write-down of marketable securities		—			644,310
Changes in operating assets and liabilities:
Accounts receivable		332,052			67,583
Inventories		81,431			(29,240		)
Prepaid expenses		71,159			37,797
Accounts payable and accrued expenses		114,696			123,739
Total adjustments		70,651			(528,570		)
Net cash used in operating activities		$	(870,049	)	$	(894,091	)

 

The accompanying notes are an integral part of the financial statements.

 

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ADVANCED MAGNETICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)

 

A.                                    Summary of Accounting Policies

 

Business

 

Founded in November 1981, Advanced Magnetics, Inc., a Delaware corporation, is a developer of superparamagnetic iron oxide nanoparticles used in pharmaceutical products.We are dedicated to the development and commercialization of our proprietary nanoparticle technology for use in therapeutic iron compounds for the treatment of chronic anemia and novel imaging agents for use in conjunction with magnetic resonance imaging to aid in the diagnosis of cancer and other diseases.

 

Basis of Presentation

 

These financial statements are unaudited and, in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been recorded.  Such adjustments consisted only of normal recurring items.

 

In accordance with accounting principles generally accepted in the United States of America for interim financial reports and the instructions for Form 10-Q and the rules of the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted.  Our accounting policies are described in the Notes to the Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003, and updated, as necessary, in this Quarterly Report on Form 10-Q.  Interim results are not necessarily indicative of the results of operations for the full year.  These interim financial statements should be read in conjunction with our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Stock-Based Compensation

We have several stock-based compensation plans.  We apply Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for qualifying options granted to our employees under our plans and apply Statement of Financial Accounting Standards No. 123 “Accounting for Stock Issued to Employees” (“SFAS 123”) for disclosure purposes only.  The SFAS 123 disclosures include pro forma net income and earnings per share as if the fair value-based method of accounting had been used.  Stock-based compensation to non-employees is accounted for in accordance with SFAS 123 and related interpretations.

 

If stock-based compensation for employees had been determined based on SFAS 123, our pro forma net loss and pro forma loss per share for the three-month periods ended December 31, 2003 and 2002 would have been as follows:

 

		Three-month period ended December 31,
		2003			2002
Reported net loss		$	(940,700	)	$	(365,521	)
Pro forma stock compensation expense		(136,354		)	(80,571		)
Pro forma net loss		$	(1,077,054	)	$	(446,092	)
Reported loss per share - basic and diluted		$	(0.12	)	$	(0.05	)
Pro forma loss per share - basic and diluted		$	(0.14	)	$	(0.07	)

 

The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts.  SFAS 123 does not apply to awards granted prior to 1995.  We anticipate granting additional awards in future years.

 

B.  Inventories

 

Our inventories consisted entirely of raw materials at December 31, 2003 and September 30, 2003.

 

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C.            Income Tax

 

There were no income tax provisions or benefits for the three-month periods ended December 31, 2003 and December 31, 2002 as we incurred a loss in both periods.  Due to the uncertainty of the realizability of deferred tax assets, a full valuation allowance has been recorded as of December 31, 2003 and December 31, 2002 against these assets.

 

D.  Earnings (Loss) per Share

 

We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the respective period.  We compute diluted earnings per share by dividing net income by the sum of weighted average common shares outstanding and common stock equivalents during the respective period.  Common stock equivalents consist of the net common shares issuable upon the exercise of in-the-money stock options under the treasury stock method.

 

The components of basic and diluted earnings (loss) per share were as follows:

 

		Three-Month Period Ended December 31,
		2003			2002
Net loss (A)		$	(940,700	)	$	(365,521	)
Weighted average common shares outstanding (B)		7,767,101			6,652,580
Common stock equivalents		—			—
Sum of weighted average common shares outstanding and common stock equivalents (C)		7,767,101			6,652,580
Earnings (loss) per share:
Basic (A/B)		$	(0.12	)	$	(0.05	)
Diluted (A/C)		$	(0.12	)	$	(0.05	)

 

Options to purchase a total of 884,847 shares and 858,597 shares of common stock were outstanding for the three-month periods ended December 31, 2003 and 2002, respectively, but were excluded from the computation of diluted earnings per share because such options were anti-dilutive as we had net losses in those periods. Warrants to purchase 261,780 shares of common stock at an exercise price of $15.50 have not been included in the computation of diluted loss per share for the three-month period ended December 31, 2003 because they were anti-dilutive.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q.

 

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that do not describe historical facts are forward-looking statements.  The forward-looking statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements.  In evaluating these statements, you should consider various important factors, including the risks identified under “Certain Factors Which May Impact Future Results” contained in this section of this report and those risks identified in our other Securities and Exchange Commission filings, including but not limited to our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.  We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made.  We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

Overview

 

Advanced Magnetics, Inc., a Delaware corporation, is the premier developer of superparamagnetic iron oxide nanoparticles used in pharmaceutical products. We are dedicated to the development and commercialization of our proprietary nanoparticle technology for use in therapeutic iron compounds for the treatment of chronic anemia and novel imaging agents for use in conjunction with magnetic resonance imaging to aid in the diagnosis of cancer and other diseases.  Ferumoxytol, the next-generation product in our development pipeline, has completed Phase II clinical studies for use as an iron replacement therapeutic in chronic kidney disease patients receiving erythropoietin.  Phase II clinical trials of ferumoxytol for use as a contrast agent in magnetic resonance angiography, also known as MRA, are currently ongoing.  In June 2000, we received an approvable letter, subject to certain conditions, from the U.S. Food and Drug Administration, the FDA, for Combidex®, our contrast agent to aid in the diagnosis of metastatic lymph nodes.  We are currently discussing the outstanding issues from the approvable letter with the FDA in an effort to bring Combidex to market.  Our liver contrast agent, Feridex I.V.®, is approved and marketed in Europe, Japan, the United States, Argentina, South Korea and Israel.  Our oral contrast agent, GastroMARK®, used for delineating the bowel in magnetic resonance imaging, is approved and marketed in Europe and the United States.  Since our inception in 1981, we have financed our operations primarily through proceeds received from our marketing and distribution partners, cash generated from our investing activities and the sale of our equity securities.

 

To date, our marketing partners have had limited commercial success in the sales and marketing of Feridex I.V. and GastroMARK and we have not generated significant revenues from royalties in connection with sales of these products to end users.  Additionally, the launch of a new competitive product to Feridex I.V. in Japan has significantly decreased our royalty revenue, which is a trend that we expect to continue.  Our long-term success will depend, in part, on our ability to obtain FDA approval of Combidex and the sales and marketing efforts of our marketing partner in the United States for Combidex, Cytogen Corporation.  Additionally, our success will depend on our ability to successfully develop and obtain FDA approval for ferumoxytol as an iron therapeutic and as a contrast agent for MRA.  The process of bringing ferumoxytol to market will involve the expenditure of significant resources, both financial and managerial, and may require that we obtain future financing or enter into strategic partnerships to support these efforts.  Our future success also depends on our ability to maintain and scale-up our manufacturing capabilities, to hire and retain key employees, and to successfully respond to technological and other changes in the marketplace.

 

Our operating results may continue to vary significantly from quarter to quarter or from year to year depending on a number of factors, including: the timing of our recognition of deferred revenue which is affected by the performance of our obligations under our license agreements; the variable nature of our product sales to our marketing partners and the batch size in which our products are manufactured; uneven demand for our products by end users which affects the royalties we receive from our marketing partners; decreasing market demand for Feridex I.V.; the timing and likelihood of FDA approval of Combidex or ferumoxytol; market acceptance of Combidex or ferumoxytol, if approved; the extent of reimbursement for the cost of our approved products from government health administration authorities, private health insurers and other third-party payors; and the fact that a significant portion of our operating expenses is relatively fixed in nature due to our administrative, research and development and manufacturing costs.  Revenue or profits in any period will not necessarily be indicative of results in subsequent periods and we may not achieve profitability or grow revenue in the future.

 

A substantial portion of our expenses consists of research and development expenses.  We may rely to a greater degree on contract research and development providers in the future as the human clinical development of ferumoxytol in iron

 

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replacement therapy moves into Phase III studies.  We expect that research and development expenses will continue to be a significant portion of our total expenses.

 

Results of Operations for the Quarter Ended December 31, 2003 as Compared to the Quarter Ended December 31, 2002

 

Revenues

 

Total revenues for the fiscal quarter ended December 31, 2003 were $631,964 compared to $1,555,794 for the fiscal quarter ended December 31, 2002.  The decrease in revenues in the fiscal quarter ended December 31, 2003, as compared to the fiscal quarter ended December 31, 2002, was due to a decrease in license fee revenue of $804,951 and a decrease in royalties of $118,879.

 

License fee revenue decreased to $601,964 in the fiscal quarter ended December 31, 2003 from $1,406,915 in the fiscal quarter ended December 31, 2002.  License fee revenue for the fiscal quarter ended December 31, 2003 included the recognition in the period of $417,525 in deferred license fee revenue from a license and marketing agreement signed with Cytogen Corporation in August 2000, compared to $1,222,476 recognized in the fiscal quarter ended December 31, 2002 in connection with this agreement.  License fees associated with the Cytogen agreement are being recognized over the development period based on costs incurred and expected remaining expenditures related to this agreement.  We expect future expenses related to this agreement to remain at current reduced levels through project completion although costs incurred may fluctuate from quarter to quarter based on the timing of expenditures related to our efforts to obtain approval of Combidex.

 

Royalties decreased to $30,000 in the fiscal quarter ended December 31, 2003 from $148,879 in the fiscal quarter ended December 31, 2002, reflecting a decrease in sales of our approved products by our strategic marketing partners to end users, in particular in Japan due to the introduction of a competitive product during 2003.  Our royalty revenues are entirely dependent on sales of our products by our marketing partners.  Although royalty payments can fluctuate from quarter to quarter based on uneven demand for our products by end users, we expect royalty payments to remain at current lower levels overall.

 

There were no product sales in either of the fiscal quarters ended December 31, 2003 and 2002.  This is a result of the variable nature of our product sales to our marketing partners from quarter to quarter based on uneven demand and the batch size in which our products are manufactured and shipped.   Although we anticipate future product sales to our marketing partners in fiscal 2004, product sales year over year have been on a downward trend and we expect them to remain at lower levels overall.

 

Costs and Expenses

 

There were no costs associated with product sales in the first fiscal quarter of 2004 and 2003 due to the absence of product sales during those periods.

 

Selling, general and administrative expenses were $466,005 for the fiscal quarter ended December 31, 2003 compared to $411,567 for the fiscal quarter ended December 31, 2002.  The increase in selling, general and administrative expenses from the quarter ended December 31, 2002 is due to overall increases in the use of our professional advisors as a result of ongoing changes in the regulatory environment.  We expect selling, general and administrative expenses to continue to increase on a going-forward basis as we continue our efforts to comply with the changing regulatory environment and as a result of additional insurance obligations.

 

Research and development expenses increased to $1,116,744 for the fiscal quarter ended December 31, 2003 as compared to $932,142 for the same period in the prior fiscal year.  The increase in expenditures is primarily the result of increased external research and development expenses and an increase in production expenses related to clinical trials for ferumoxytol in iron replacement therapy and MRA and the production of ferumoxytol and Combidex for research and development purposes during the quarter.  Research and development expenses include external expenses, such as costs of clinical trials, and internal expenses, such as compensation of employees engaged in research and development activities, the manufacture of limited quantities of product needed to support research and development efforts and related costs of facilities.  We expect research and development expenses to continue to increase as we enter into Phase III clinical trials for ferumoxytol in iron replacement therapy.

 

Our product candidate, ferumoxytol, has completed Phase II clinical trials for use in iron replacement therapy and is in Phase II clinical trials for use in MRA.  Through the end of fiscal 2000, we incurred aggregate internal and external research and development expenses of approximately $6,550,000 related to pre-clinical and toxicology studies of ferumoxytol.  In August 2000, we entered into a license and marketing agreement with Cytogen which covers Combidex for all indications and

 

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ferumoxytol solely for oncology indications.  At the end of fiscal 2000, we adopted SEC Staff Accounting Bulletin No. 101 and determined to account for the revenue associated with the Cytogen agreement over the development period based on costs incurred and expected remaining expenditures related to this agreement.  As a result, since the end of fiscal 2000, we have tracked our internal research and development expenses in relation to the Cytogen agreement and not by specific research and development project.  Since the end of fiscal 2000 and through the quarter ended December 31, 2003, we incurred aggregate external research and development expenses of approximately $2,130,000 related to pre-clinical activities and clinical trials in connection with ferumoxytol.  The estimated cost of the external efforts necessary to complete development of ferumoxytol as an iron replacement therapeutic, including costs related to ongoing and future clinical trial activities, is currently estimated to range from approximately $10,000,000 to $15,000,000.  Phase III clinical trials for ferumoxytol in iron replacement therapy are currently expected to begin in fiscal 2004.  Since we have not yet determined which clinical indications we may seek for the development of ferumoxytol in MRA, we cannot make a specific dollar estimate of the projected external efforts necessary to complete development for ferumoxytol in MRA.  We believe that Phase III clinical trials of ferumoxytol in MRA could begin before the end of calendar 2004.

 

In June 2000, we received an approvable letter, subject to certain conditions, from the FDA for Combidex, our contrast agent to aid in the diagnosis of lymph node metastases.  We are currently trying to resolve the outstanding issues from the approvable letter with the FDA in an effort to obtain marketing approval for Combidex.  We incurred aggregate internal and external research and development expenses of approximately $13,500,000, through the end of fiscal 2000, in connection with the development of Combidex.  We have not incurred any material additional external research and development expenses since fiscal 2000 related to Combidex nor do we anticipate substantial additional pre-approval clinical trial expenses related to Combidex.  We have, however, incurred internal research and development costs related to our efforts to satisfy the conditions specified in the approvable letter from the FDA since fiscal 2000.

 

The foregoing discussion includes forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from those currently anticipated depending on a variety of factors, as detailed in our periodic filings with the SEC, including but not limited to this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.  Due to these risks and uncertainties, including, but not limited to, those risks and uncertainties associated with clinical trials, the receipt of regulatory approval and third-party reimbursement policies and decisions, we may not be able to complete our research and development projects or to complete them in a timely fashion and, accordingly, we cannot estimate the anticipated completion date of each of our major research and development projects or the period in which material net cash inflows from such projects could be expected to commence.

 

Other Income and Expenses

 

Interest, dividends and net gains on sales of securities consisted of the following:

 

		First Quarter Ended December 31,
		2003			2002
Interest income		$	10,085		$	17,038
Dividend income		—			27,420
Total		$	10,085		$	44,458
Net realized gains on sales of securities		$	—		$	22,246

 

Interest income was $10,085 in the fiscal quarter ended December 31, 2003 compared to $17,038 for the fiscal quarter ended December 31, 2002.  Although our interest-bearing cash equivalent holdings increased substantially from the period ended December 31, 2002, the decrease in interest income is attributable to a decrease in the rate of return on those holdings.  There was no dividend income in the three-month period ended December 31, 2003 as compared to $27,420 in the three-month period ended December 31, 2002 because we did not hold any dividend-bearing securities during the period.  During the three-month period ended December 31, 2002, we determined that the decline in the carrying value of two securities below their original basis was an other-than-temporary decline. Accordingly, we recorded a write-down of securities of $644,310 for the fiscal quarter ended December 31, 2002 and established a new cost basis for these securities on our balance sheet. In making this determination, we considered, among other factors, the duration of the period that, and extent to which, the fair value of these securities was less than their original cost basis, the financial health and business outlook of the companies that issued the securities, including industry and sector performance, and overall market conditions and trends. We employed a methodology in evaluating whether a decline in the fair value of the marketable securities in our portfolio below cost basis was other than temporary that considered available evidence regarding such marketable securities.

 

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Income Taxes

 

There were no income tax provisions or benefits for the three-month periods ended December 31, 2003 and 2002, as we incurred a loss in each of those periods.  Due to the uncertainty of the realizability of deferred tax assets, a full valuation allowance has been recorded as of December 31, 2003 and December 31, 2002 against these assets.

 

Earnings

 

For the reasons stated above, there was a net loss of $(940,700) or ($0.12) per share for the quarter ended December 31, 2003 compared to a net loss of $(365,521) or $(0.05) per share for the quarter ended December 31, 2002.

 

13

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations primarily through proceeds received from our marketing and distribution partners, cash generated from our investing activities and the sale of our equity securities.

 

At December 31, 2003, our cash and cash equivalents totaled $23,810,444 compared to $23,901,126 at September 30, 2003. The decrease in cash and cash equivalents is primarily the result of funding operating activities, offset by the receipt of the proceeds from a terminated insurance policy described further below.

 

Over the last four quarters, net cash used in operating activities was approximately $4,900,000, and we believe that our cash and cash equivalents as of December 31, 2003, will be sufficient to cover our future operating cash flow needs for at least eighteen months.  In order to fund our longer-term cash flow needs, if necessary, we will consider from time to time various financing alternatives, including possible future strategic partnerships or additional equity or debt financing.  These financing arrangements may not be available to us on acceptable terms, if at all.

 

The money market account we utilize for the maintenance of our cash and cash equivalents is a money market mutual fund that is not insured by the Federal Deposit Insurance Corporation.  Any decline in value of this money market mutual fund would result in a substantial reduction in our total assets and cash available for daily operations.

 

Net cash used in operating activities was $870,049 in the three-month period ended December 31, 2003 compared to $894,091 in the three-month period ended December 31, 2002.  Cash received during the three-month period ended December 31, 2003 included $325,357 from customers, $36,695 from royalties and $10,085 from interest income.  Cash used in operating activities during the three-month period ended December 31, 2003 included $1,242,186 paid to suppliers and employees.   Cash received from customers increased as a result of increased collections from product sales to our marketing partners, however, this was offset by an increase in cash paid to suppliers and employees as a result of clinical studies relating to ferumoxytol, a reduction in interest income received due to the decrease in interest rates on cash equivalent holdings and a reduction in royalties received as a result of increased competition in the marketplace.  We anticipate cash used in operating activities will increase over current levels based on anticipated increases in selling, general and administrative expenses and research and development expenses.

 

We expect to incur continued research and development expenses, including costs related to clinical studies, and other costs, in order to commercialize products based on our core superparamagnetic iron oxide nanoparticle technology, including ferumoxytol as an iron replacement therapeutic and as an MRA contrast agent.  Although we have entered into strategic relationships in the past, which provided for non-refundable license fees and milestone payments while we were developing our products, we may choose not to do so or may not be able to secure similar arrangements in the future.  In addition, although we have recently generated cash through the private placement of our equity securities, we may not be able to secure such financing in the future on acceptable terms, if at all.  If we are unable to fund our future research and development expenses in the manner we anticipate, we could be forced to obtain alternative sources of financing or to curtail our development activity.

 

Cash provided by investing activities was $704,775 for the three-month period ended December 31, 2003 compared with cash used in investing activities of $974,946 for the three-month period ended December 31, 2002.  Cash provided by investing activities in the three-month period ended December 31, 2003 included capital expenditures and the receipt of $761,747 for a short term asset which represented the cash value of a split-dollar life insurance policy on our CEO that was terminated at the end of fiscal 2003.  Capital expenditures in the three-month period ended December 31, 2003 were $56,972 compared to $32,017 in the three-month period ended December 31, 2002.  The capital expenditures in both periods related to the continuation of our efforts to upgrade laboratory, production and computer equipment.  We have no current commitment for any significant expenditures on property, plant and equipment, however we expect future expenditures to increase in the short term as we continue our manufacturing scale-up of ferumoxytol and upgrade our accounting systems.

 

Cash provided by financing activities was $74,592 during the three-month period ended December 31, 2003 compared to $45,905 during the three-month period ended December 31, 2002.  The amounts in each period were comprised solely of proceeds from the issuance of our common stock through the exercise of stock options.  There was no cash used in financing activities during the three-month periods ended December 31, 2003 and December 31, 2002.

 

Our future capital requirements will depend on many factors, including, but not limited to: continued scientific progress in our research and development programs; the magnitude of our research and development programs; progress with clinical trials for our therapeutic and diagnostic products; the magnitude of product sales; the time involved in obtaining regulatory approvals; the costs involved in filing, prosecuting and enforcing patent claims; competing technological and market developments; and our ability to establish additional development and marketing arrangements or to raise additional capital through other financing activities to provide funding for research and development activities, including the management of clinical trials and engagement in efforts to obtain regulatory approvals, and to manufacture and market certain of our products.

 

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Contractual Obligations

 

We currently have no long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities reflected on our balance sheet.  Our future commitments are as follows:

 

					Payment due by period
Contractual Obligations		Total			Less than 1 year			1-3 years			3-5 years		More than 5 years
Operating Lease Obligations		$	53,805		$	26,406		$	27,399		—		—

 

We lease equipment under several agreements that expire in 2004, 2005 and 2006.

 

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Certain Factors That May Affect Future Results

 

The following is a summary description of some of the material risks and uncertainties that may affect our business, including our future financial and operational results. In addition to the other information in this Quarterly Report on Form 10-Q, the following statements should be carefully considered in evaluating our Company.

 

We may not be able to obtain the necessary regulatory approvals in order to market and sell our products; the approval process is costly and lengthy.

Prior to marketing, every product candidate must undergo an extensive regulatory approval process in the United States and in every other country in which we intend to test and market our product candidates and products.  This regulatory process includes testing and clinical trials of product candidates to demonstrate safety and efficacy and can require many years and the expenditure of substantial resources.  Data obtained from pre-clinical testing and clinical trials are subject to varying interpretations, which can delay, limit or prevent regulatory approval by the U.S. Food and Drug Administration (FDA) or similar regulatory bodies in foreign countries.  In addition, changes in FDA or foreign regulatory approval policies or requirements may occur or new regulations may be promulgated which may result in a delay or failure to receive FDA or foreign regulatory approval.  Delays and related costs in obtaining regulatory approvals could delay our product commercialization and revenue and consume our resources, both financial and managerial.

 

One of our product candidates, ferumoxytol, has completed Phase II clinical trials for use in iron replacement therapy. Phase II clinical trials of ferumoxytol for use as a contrast agent in magnetic resonance angiography (MRA) are currently ongoing.  Before applying for FDA approval to market ferumoxytol, we must conduct larger-scale human clinical trials that further demonstrate the safety and efficacy of ferumoxytol to the satisfaction of the FDA and other regulatory authorities.  We may not be able to successfully complete these clinical trials for ferumoxytol, or, if completed, we may not be able to obtain regulatory approval or obtain regulatory approval of the desired scope. We may also be required to demonstrate that ferumoxytol represents an improved form of treatment over existing therapies or diagnostics in order to receive regulatory approval and we may be unable to do so without conducting further clinical studies, if at all.  These types of clinical trials could be significantly large and expensive studies.  If we are unable to fund these clinical trials with cash generated from operations, we may need to seek other sources of financing which may not be available on acceptable terms, if at all.  If we are unable to obtain such alternate financing, we may be forced to curtail our development activities.

 

Although we have filed a New Drug Application and received an “approvable” letter from the FDA for Combidex^® for lymph node metastases, final approval remains subject to the satisfaction of certain conditions imposed by the FDA and labeling must be resolved.  We may be unable to address the conditions imposed in the “approvable” letter to the satisfaction of the FDA.  If we are unable to successfully address the concerns of the FDA, the New Drug Application for Combidex may not be approved, or, if approved, it may not be approved for the indication that we are seeking.  If we are unable to obtain approval for this indication or if the FDA requires labeling that imposes limitations on the use of Combidex, our ability to market the product to the medical community may be hindered.  Any failure to successfully market and sell Combidex would reduce the amount of cash generated from operations available to fund research and development activities which could force us to seek other financing alternatives.

 

In addition, until we or our marketing partners obtain the required regulatory approvals for Combidex or ferumoxytol in any specific foreign country, we and our marketing partners will be unable to sell these products in that country. International regulatory authorities have imposed numerous and varying regulatory requirements and the approval procedures could involve testing in addition to that required by the FDA. Furthermore, approval by one regulatory authority does not ensure approval by any other regulatory authority.

 

Final regulatory approvals may not be obtained for Combidex or ferumoxytol or any other products developed by us.  Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested could delay and may preclude us or our licensees or other collaborators from marketing our products or limit the commercial use of our products.  Alternatively, regulatory approvals may entail limitations on the indicated uses of our products and impose labeling requirements which may also adversely impact our ability to market our products.

 

Even if we obtain regulatory approval for our product candidates, a marketed product and its manufacturer are subject to continuing regulatory review.  Noncompliance with the regulatory requirements of the approval process at any stage may result in adverse consequences, including the FDA’s delay in approving or its refusal to approve a product, withdrawal of an approved product from the market or, under certain circumstances, the imposition of criminal penalties.  We may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if previously unknown problems with the product or its manufacture are subsequently discovered.  Any such adverse consequence could limit or preclude our ability to sell our products commercially which would seriously hinder our ability to generate revenue through royalties or direct sales of our products.

 

We cannot predict the results and progress of our clinical trials and our ability to complete the development of our product candidates is uncertain.

 

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The development of new pharmaceutical products is highly uncertain and subject to a variety of inherent risks of failure, including the following:

 

•                  Our products may be found to be unsafe, to have harmful side effects on humans, to be ineffective or may otherwise fail to meet regulatory standards or receive necessary regulatory approvals,

 

•                  Other parties may claim proprietary rights to our product technology that prevent us from marketing our products, and

 

•                  Our products may not be widely adopted or commercially successful.

 

Before obtaining regulatory approvals for the commercial sale of any of our product candidates, we must demonstrate through extensive pre-clinical testing and human clinical trials that the product is safe and efficacious. If our products fail in human clinical trials, we will be unable to obtain regulatory approval for, and market, our products, thereby reducing our potential future revenues.  Although we have received promising results from pre-clinical testing and early clinical trials of ferumoxytol, these results may not be predictive of results obtained in subsequent clinical trials. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development.  We cannot be sure that clinical trials for ferumoxytol will demonstrate sufficient safety and efficacy to obtain regulatory approvals.

 

The completion rate of our clinical trials also depends on patient enrollment. Clinical trials are often conducted with patients in the most advanced stages of disease. During the course of treatment, these patients can die or suffer adverse medical effects for reasons that may not be related to the product being tested, but which can nevertheless adversely affect clinical trial results or approvals by the FDA. Clinical testing of pharmaceutical products is itself subject to approvals by various governmental regulatory authorities. We may not be permitted by regulatory authorities to commence or continue clinical trials. Any delays in, or termination of, our clinical trial efforts could negatively affect our future prospects and stock price.

 

In addition, although we have dedicated significant resources to our research and development efforts, we may not be successful in finding new applications for our technology or in expanding the indications for our current products or product candidates for development into future product candidates.

 

As a result of these and other risks and uncertainties, our development programs may not be completed successfully. Any delays or failures in the development of our current or future product candidates will delay or prevent generation of revenue from such product candidates and may damage our ability to become profitable.

 

Our operating results may fluctuate so you should not rely on a good or bad quarter to predict how we will perform over time.

Our future operating results may vary from quarter to quarter or from year to year depending on a number of factors including:

 

•                  the timing of our recognition of deferred revenue which is affected by the performance of our obligations under our license agreements,

 

•                  the variable nature of our products sales to our marketing partners and the batch size in which our products are manufactured,

 

•                  uneven demand for our products by end users which affects the royalties we receive from our marketing partners,

 

•                  decreasing market demand for Feridex I.V.,

 

•                  the timing and likelihood of FDA approval of Combidex or ferumoxytol,

 

•                  market acceptance of Combidex or ferumoxytol, if approved,

 

•                  the extent of reimbursement for the cost of our approved products from government health administration authorities, private health insurers and other third-party payors, and

 

•                  a significant portion of our operating expenses is relatively fixed in nature due to our administrative, research and development and manufacturing costs which could affect our ability to quickly compensate for a revenue shortfall.

 

As a result, our quarterly operating results could fluctuate, and this fluctuation could cause the market price of our common stock to decline. Results from one quarter should not be used as an indication of future performance.

 

Our stock price has been and may continue to be volatile, and your investment in our stock could decline in value or fluctuate significantly.

The market price of our common stock has been, and may continue to be, volatile.  This price has ranged between $4.12 and $15.24 in the fifty-two week period prior to February 10, 2004.  The stock market has from time to time experienced extreme price and volume fluctuations, particularly in the biotechnology sector, which have often been unrelated to the

 

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operating performance of particular companies.  Various factors and events, including announcements by us or our competitors concerning results of regulatory actions, technological innovations, new products, clinical trial results, agreements with collaborators, governmental regulations, developments in patent or other proprietary rights, or public concern regarding the safety of products developed by us or others, may have a significant impact on the market price of our common stock.  Thus, as a result of events both within and beyond our control, our stock price could fluctuate significantly or lose value rapidly.  In addition, sales of a substantial number of shares of our common stock by stockholders could adversely affect the market price of our shares.  As of February 10, 2004, our shares had an average 90-day trading volume of approximately 25,000 shares.  Bulk sales or purchases of our stock in a short period of time could cause the market price for our shares to decline or fluctuate drastically.

 

We may need additional capital to achieve our business objectives.

We have expended and will continue to expend substantial funds to complete the research, development, clinical trials, regulatory approvals and other activities necessary to achieve final commercialization of our products.  We estimate that our existing cash resources will be sufficient to finance our operations at current and projected levels of development and general corporate activity for at least the next eighteen months.  Thereafter, we may require additional funds to continue our research and development, commence future pre-clinical and clinical trials, seek regulatory approvals, establish commercial-scale manufacturing capabilities and market and sell our products.  We may seek such financing through arrangements with collaborative partners or through public or private sales of our securities, including equity securities. We may not be able to obtain financing on acceptable terms, if at all.  Any additional equity financings could be dilutive to our stockholders.  If adequate additional funds are not available to us in the long-term, we may be required to curtail significantly one or more of our research and development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our products or product candidates on terms that we might otherwise find unacceptable.

 

We have a limited number of customers and are dependent on our collaborative relationships.

Our strategy for the development, commercialization and marketing of our product candidates has been to enter into strategic partnerships with various corporate partners, licensees, and other collaborators.  We rely on a limited number of marketing and distribution partners to market and sell our approved products, Feridex I.V.® and GastroMARK®, both in the U.S. and in foreign countries, and we depend on these strategic partners for a significant portion of our revenue.  Two companies were responsible for approximately 96% of our revenue during the fiscal quarter ended December 31, 2003.  Cytogen represented approximately 66% of our revenue in the fiscal quarter ended December 31, 2003, all of which represented recognition of deferred revenue.  A decrease in revenue from any of our significant marketing and distribution partners could seriously impair our overall revenues.  In some cases, we have granted exclusive rights to these partners.  If these partners are not successful in marketing our products, or if these partners fail to meet minimum sales requirements or projections, our ability to generate revenue would be harmed.  In addition, we might incur additional costs in an attempt to enforce our contractual rights, renegotiate agreements, find new partners or market our own products.  In some cases, we are dependent upon some of our collaborators to conduct clinical testing, to obtain regulatory approvals and to manufacture and market our products. We may not be able to derive any revenues from these arrangements.  If any of our collaborators breaches its agreement with us or otherwise fails to perform, such event could impair our revenue and impose on us additional costs.  In addition, many of our corporate partners have considerable discretion in electing whether to pursue the development of any additional products and may pursue technologies or products either on their own or in collaboration with other competitors.  Given these and other risks, our current and future collaborative efforts may not be successful.  Failure of these efforts could delay our product development or impair commercialization of our products.

 

Due to the high cost of our research and development activities, in particular the anticipated cost of future clinical trials for ferumoxytol, our inability to secure strategic partners could limit our ability to continue developing ferumoxytol or force us to raise additional capital through alternative means which may not be available to us on acceptable terms, if at all.  Any delay in, or termination of, any of our research and development projects due to insufficient funds would reduce our potential revenues.  In addition, if, in the future, we are unable to enter into collaborative agreements related to ferumoxytol, or choose not to enter into collaborative agreements, we would need to develop an internal sales and marketing department, including a direct sales force, or contract for these services from a third party, in order to market and sell ferumoxytol since we do not have the necessary sales and marketing expertise in the company at this time.  If we are unable to successfully recruit and retain the necessary sales and marketing personnel, to obtain the financing to support these efforts, if necessary, or to contract with third parties for these services on acceptable terms, if at all, our product marketing efforts and potential product launch would be delayed and the commercialization of ferumoxytol severely impaired.

 

We cannot be certain that our products will be accepted in the marketplace.

 

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For a variety of reasons, many of which are beyond our control, our products may not achieve market acceptance or become commercially successful. If our products do not receive market acceptance for any reason, it may limit sales of our products and reduce our revenues from royalties and direct sales, if any.  The degree of market acceptance of any of our products will depend on a number of factors, including:

 

•                  the establishment and demonstration in the medical community of the clinical efficacy and safety of our products,

 

•                  our products’ potential advantage over existing treatments or diagnostic methods, and

 

•                  reimbursement policies of government and third-party payors, including insurance companies.

 

For example, even if we obtain regulatory approval to sell our products, physicians and health care payors could conclude that our products are not safe or effective and decide not to use them to treat patients. Our competitors may also develop new technologies or products which are more effective or less costly, or that are perceived as more effective or cost-effective than our products. Physicians, patients, third-party payors or the medical community in general may fail to accept or choose not to use any of the products that we develop.

 

To date, we have not generated significant revenues on royalties from the sale of our approved products by our marketing partners. Although on the market since 1996 and 1997, respectively, Feridex I.V. and GastroMARK represent an alternative technology platform for physicians to adopt.  Combidex, if approved, may also represent a new technology and ferumoxytol, if approved, may represent an alternative to existing products, that might not be adopted by the medical community.  If our approved products, or future products, are not adopted by physicians, revenues will be delayed or fail to materialize.

 

We lack marketing and sales experience.

We have limited experience in marketing and selling our products and product candidates and rely on our corporate partners to market and sell Feridex I.V. and GastroMARK and have agreed to permit Cytogen to do so, pending FDA approval, for Combidex.  In order to achieve commercial success for any product candidate approved by the FDA for which we do not have a marketing partner, we may have to develop a marketing and sales force or enter into arrangements with others to market and sell our products.  If we choose to market and sell any of our product candidates ourselves, we may encounter difficulties in attracting and retaining qualified marketing and sales personnel.  In addition, in order to establish our own marketing and sales force, we would have to raise substantial amounts of additional capital to support the costs associated with such an effort.  We may not be able to secure such additional financing on terms acceptable to us, if at all.  We also may not be able to enter into marketing and sales agreements with others on acceptable terms, if at all. Furthermore, we, or our corporate partners, may not be successful in marketing and selling our products.

 

Our success depends on our ability to attract and retain key employees.

Because of the specialized nature of our business, we are highly dependent on our executive officers and senior scientists, as well as our ability to attract and retain qualified scientific and technical personnel for the research and development activities conducted or sponsored by us.  Our product development efforts could be delayed or curtailed if we lose the services of any of these people.  Furthermore, our possible expansion into areas and activities requiring additional expertise, such as late-stage clinical development and marketing and sales, may require the addition of new management personnel or the development of additional expertise by existing management personnel.  There is intense competition for qualified personnel in the areas of our activities, and we may not be able to continue to attract and retain the qualified personnel necessary for the development of our business.  The failure to attract and retain such personnel or to develop such expertise could impose significant limits on our business operations and limit our ability to expand our business.

 

We need to maintain, and possibly increase, our manufacturing capabilities in order to commercialize our products.

We manufacture bulk Feridex I.V. and GastroMARK as well as Feridex I.V. finished product, for sale by our marketing partners, and ferumoxytol for use in human clinical trials, in our Massachusetts facility. Pending FDA approval, we intend to manufacture Combidex formulated drug product at our Massachusetts facility as well.  This facility is subject to current Good Manufacturing Practices regulations prescribed by the FDA, also known as cGMP.  We may not be able to continue to operate at commercial scale in compliance with cGMP regulations.  Failure to operate in compliance with cGMP regulations and other applicable manufacturing requirements of various regulatory agencies could delay our development efforts and impede product sales due to the unavailability of our products and product candidates.  In addition, we are dependent on contract manufacturers for the final production of Combidex. In the event that we are unable to obtain or retain final manufacturing for Combidex, we will not be able to develop and commercialize this product as planned.  In addition, we may not be able to enter into agreements for the manufacture of future products with manufacturers whose facilities and procedures comply with cGMP regulations and other regulatory requirements.  Furthermore, such manufacturers may not be able to deliver required quantities of product that conform to specifications in a timely manner.

 

We currently have only one manufacturing facility at which we produce limited quantities of ferumoxytol. Some aspects of our manufacturing processes may not be easily scalable to allow for production in larger volumes, resulting in higher

 

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than anticipated material, labor and overhead costs per unit.  As a result, manufacturing and quality control problems may arise as we increase our level of production.  We may not be able to increase our manufacturing capacity in a timely and cost-effective manner and we may experience delays in manufacturing this product.  If we are unable to consistently manufacture our products on a timely basis because of these or other factors, we will not be able to meet anticipated demand.  As a result, we may lose sales and fail to generate increased revenue and become profitable.

 

An inability to obtain raw materials and our reliance on a sole source supplier could adversely impact our business.

We currently purchase the raw materials used to manufacture our products from third-party suppliers.  We do not, however, have any long-term supply contracts with these third parties.  Certain raw materials used in our products are procured from a single source.  We generally obtain raw materials from one vendor only, even where multiple sources are available, to maintain quality control and enhance working relationships with suppliers.  If we cannot obtain sufficient quantities of these raw materials on commercially reasonable terms, or in a timely manner, we would be unable to manufacture our products on a timely and cost-effective basis, which would hinder our ability to generate revenues from sales of our products and impede our development efforts with respect to our product candidates.

 

We may not be successful in competing with other companies or our technology may become obsolete.

The pharmaceutical and biopharmaceutical industries are subject to intense competition and rapid technological change. We believe that our ability to compete successfully will depend on a number of factors including the implementation of effective marketing campaigns by us or our marketing and distribution partners, development of efficacious products, timely receipt of regulatory approvals and product manufacturing at commercially acceptable costs. We may not be able to successfully develop efficacious products, obtain timely regulatory approvals, manufacture products at commercially acceptable costs, market our products alone or with our partners, gain satisfactory market acceptance, or otherwise successfully compete in the future.

 

We have many competitors, many of which have substantially greater capital and other resources than we do and represent significant competition for us.  These companies may succeed in developing technologies and products that are more effective or less costly than any that we may develop, and may be more successful than we are in developing, manufacturing and marketing products.  In addition, our collaborators are not restricted from developing and marketing certain competing products and, as a result of certain cross-license agreements with our competitors (including one of our collaborators), our competitors will be able to utilize elements of our technology in the development of certain competing contrast agents.  We may not be able to compete successfully with these companies.  Additionally, further technological and product developments may make other iron replacement therapy products more competitive than ferumoxytol or other imaging modalities more compelling than MRI, and adversely impact sales of our iron replacement and imaging products, respectively.

 

We may not be able to successfully complete Phase III clinical trials for ferumoxytol for iron replacement therapy, or, if completed, may not be able to obtain regulatory approval.  In addition, although we believe ferumoxytol will present benefits over existing products in the IV iron replacement therapy market, this market is highly sensitive to several factors including, but not limited to, reimbursement, price competitiveness and product characteristics such as perceived safety profiles and dosing regimens.  Competing IV iron therapy products may receive greater market acceptance than ferumoxytol.

 

Market acceptance of both MRI as an appropriate technique for imaging the lymphatic system and cardiac imaging, and the use of our products as part of such imaging, is critical to the success of our contrast agent products. For example, many cardiac imaging procedures are currently being performed using other imaging modalities, such as x-ray, computed tomography, also known as CT, and other imaging methods.  In addition, many contrast-enhanced MRA procedures are currently conducted with gadolinium-based contrast agents which are not specifically approved for use in MRA.  Although we believe that ferumoxytol offers advantages over competing MRI contrast agents and contrast agents used in other imaging modalities, competing contrast agents might receive greater acceptance.  Additionally, to the extent that other diagnostic techniques may be perceived as providing greater value than MRI, any corresponding decrease in the use of MRI could have an adverse effect on the demand for our contrast agent products.

 

Our success depends on our ability to maintain the proprietary nature of our technology.

We rely on a combination of patents, trademarks, copyrights and trade secrets in the conduct of our business.  The patent positions of pharmaceutical and biopharmaceutical firms are generally uncertain and involve complex legal and factual questions. We may not be successful or timely in obtaining any patents for which we submit applications.  The breadth of the claims obtained in our patents may not provide significant protection of our technology.  The degree of protection afforded by patents for licensed technologies or for future discoveries may not be adequate to protect our proprietary technology. The patents issued to us may not provide us with any competitive advantage.  We also cannot be sure that we will develop additional proprietary products that are patentable.  In addition, there is a risk that others will independently develop or duplicate similar technology or products or circumvent the patents issued to us.

 

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Moreover, patents issued to us may be contested or invalidated.  Future patent interference proceedings involving either our patents or patents of our licensors may harm our ability to commercialize our products.  Claims of infringement or violation of the proprietary rights of others may be asserted against us.  If we are required to defend against such claims or to protect our own proprietary rights against others, it could result in substantial costs to us and distraction of our management.  An adverse ruling in any litigation or administrative proceeding could prevent us from marketing and selling our products, limit our development of our product candidates or harm our competitive position and result in additional significant costs.  In addition, any successful claim of infringement asserted against us could subject us to monetary damages or injunction preventing us or our marketing partners from making or selling products.  We also may be required to obtain licenses to use the relevant technology and licenses may not be available on commercially reasonable terms, if at all.

 

In the future, we may be required to obtain additional licenses to patents or other proprietary rights of others in order to commercialize our products or continue with our development efforts.  Such licenses may not be available on acceptable terms, if at all.  The failure to obtain such licenses could result in delays in marketing our products or our inability to proceed with the development, manufacture or sale of our products or product candidates requiring such licenses.  In addition, the termination of any of our existing licensing arrangements could impair our revenues and impose additional costs which could limit our ability to sell our products commercially.

 

The laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.  In countries where we do not have or have not applied for patents on our products, we will be unable to prevent others from developing or selling similar products.  In addition, in jurisdictions outside the United States where we have patent rights, we may be unable to prevent unlicensed parties from selling or importing products or technologies derived elsewhere using our proprietary superparamagnetic iron oxide nanoparticle technology.

 

We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our corporate partners, collaborators, employees and consultants.  These agreements, however, may be breached.  We may not have adequate remedies for any such breach, and our trade secrets might otherwise become known or be independently discovered by our competitors. In addition, we cannot be certain that others will not independently develop substantially equivalent or superseding proprietary technology, or that an equivalent product will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights.

 

Our success is dependent on third-party reimbursement.

In both the United States and foreign markets, our ability to commercialize our products may depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors.  Significant uncertainty exists as to the reimbursement status of newly-approved healthcare products, products used for indications not approved by the FDA and products which have competitors for their approved indications.  If the government or third-party payors do not approve our products and related treatments for reimbursement, or for adequate levels of reimbursement, the adoption of our products may be limited, sales may suffer as some physicians or their patients will opt for a competing product that is approved for sufficient reimbursement, and our ability to generate revenue may be impaired. Even if third-party payors make reimbursement available, these payors’ reimbursement policies may negatively impact us and our corporate partners’ ability to sell our products on a profitable basis.

 

In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to reform the health care system.  The trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products which could harm our ability to profit from product sales.  In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us that may affect the marketing of our current or future products.  While we cannot predict the likelihood of any of these legislative or regulatory proposals, if the government or an agency adopts these proposals they could limit our ability to price our products at desired levels.

 

We are exposed to potential liability claims and we may not be able to maintain or obtain sufficient insurance coverage.

We maintain product liability insurance coverage for claims arising from the use of our products in clinical trials and commercial use.  However, coverage is becoming increasingly expensive and costs will continue to increase as our clinical trial activities for ferumoxytol enter Phase III and we may not be able to maintain insurance at a reasonable cost.  Furthermore, our insurance may not provide sufficient coverage amounts to protect us against liability that could deplete our capital resources.  We also may not be able to obtain commercially reasonable product liability insurance for any product approved for marketing in the future.  Our insurance coverage and our resources may not be sufficient to satisfy any liability or cover costs resulting from product liability claims.  A product liability claim or series of claims brought against us could reduce or eliminate our

 

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resources, whether or not the plaintiffs in such claims ultimately prevail.  In addition, pursuant to our certificate of incorporation and by-laws, and in order to attract competent candidates, we are obligated to indemnify our officers and directors against certain claims arising from their service to Advanced Magnetics.  We maintain directors and officers liability insurance to cover such potential claims against our officers and directors, however this insurance may not be adequate for certain claims and deductibles apply.  As a result of our indemnification obligations and in instances where insurance coverage is not available or insufficient, any liability claim or series of claims brought against our officers or directors could deplete or exhaust our resources, regardless of the ultimate disposition of such claims.

 

We are subject to environmental laws and potential exposure to environmental liabilities.

We are subject to various federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of nonhazardous and hazardous wastes, and emissions and discharges into the environment.  Failure to comply with these laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment.  Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties impacted by such contamination.  The presence of, or failure to remediate properly, these substances could adversely affect the value and the ability to transfer or encumber the property.

 

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Item 3.                                                           Quantitative and Qualitative Disclosures About Market Risk

 

During the quarter ended December 31, 2003 there was no material change to the information concerning our market-risk sensitive instruments as set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

 

Item 4.                                                           Controls and Procedures

 

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e)) with the participation of the Company’s management, have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are operating in an effective manner and are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  It should be noted that any system of controls is designed to provide reasonable, but not absolute, assurances that the system will achieve its stated goals under all reasonably foreseeable circumstances.  Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective at a level that provides such reasonable assurances.

 

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.                           OTHER INFORMATION

 

Item 6.                                                           Exhibits and Reports on Form 8-K

 

(a)  Exhibits
Exhibit Number			Description
	31.1		Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2		Certification 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:
	We filed a Current Report on Form 8-K on November 12, 2003 to furnish to the SEC under Item 12 a copy of our quarterly and year-end earnings for the fourth fiscal quarter and fiscal year ended September 30, 2003.
	We filed a Current Report on Form 8-K on November 20, 2003 under Item 5 to disclose a press release that announced the appointment of two new members to the Company’s Board of Directors.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

				ADVANCED MAGNETICS, INC.
Date:	February 12, 2004		By	/s/ Jerome Goldstein
				Jerome Goldstein, Chief Executive Officer, President, Treasurer and Chairman of the Board of Directors
Date:	February 12, 2004		By	/s/ James A. Matheson
				James A. Matheson, Vice President of Finance and Principal Accounting Officer

 

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