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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2004
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 000-51134
Favrille, Inc.
(Exact name of registrant as specified in its
charter)
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Delaware
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33-0892797
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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10421
Pacific Center Court, Suite 150
San Diego, CA 92121
(Address of principal executive offices,
including zip code)
(858) 526-8000
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b)
of the Act:
None
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock, $0.001 par value per share
(Title of class)
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 o No ý
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ý
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes o No ý
The aggregate market
value of the voting stock held by non-affiliates of the registrant based upon
the closing price of the common stock listed on the Nasdaq National Market on March 18,
2005 was $38,602,869, based on a closing price of $5.49 per share, excluding 13,270,433
shares of the registrant’s common stock held by current executive officers,
directors and stockholders whose ownership exceeds 5% of the common stock
outstanding at March 18, 2005.
Exclusion of such shares should not be construed to indicate that any
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant or that such person
is controlled by or under common control with the registrant. The registrant
has elected to use March 18, 2005 as the calculation date, as on June 30,
2004 (the last business day of the registrant’s second fiscal quarter) the
registrant was a privately held concern.
As
of March 18, 2005,
there were 20,301,921 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
FAVRILLE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
Cautionary
Note Regarding Forward-Looking Statements
This annual report on
Form 10-K contains forward-looking statements that involve many risks and
uncertainties. These statements relate to future events and our future
performance and are based on current expectations, estimates, forecasts and
projections about the industries in which we operate and the beliefs and
assumptions of our management. In some cases, you can identify forward-looking
statements by terms such as “would,” “could,” “may,” “will,” “should,” “expect,”
“intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “targets,”
“seek,” or “continue,” the negative of these terms or other variations of such
terms. In addition, any statements that refer to projections of our future
financial performance, our anticipated growth and trends in our business and
other characterizations of future events or circumstances, are forward-looking
statements. These statements are only predictions based upon assumptions made
that are believed to be reasonable at the time, and are subject to risk and
uncertainties. Therefore, actual events or results may differ materially and
adversely from those expressed in any forward-looking statement. In evaluating
these statements, you should specifically consider the risks described under
the caption “Factors That May Affect Future Operating Results” and elsewhere in
this Form 10-K. These factors may cause our actual results to differ materially
from any forward-looking statements. Except as required by law, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
PART I
Item 1. Business
Overview
We are a biopharmaceutical company focused on
the research, development and commercialization of targeted immunotherapies for
the treatment of cancer and diseases of the immune system. We have developed a
proprietary technology that enables us to manufacture active immunotherapy
products that are designed to stimulate a patient’s immune system to mount a
specific and sustained response to disease. Our lead product candidate, FavId,
is an active immunotherapy for the treatment of B-cell non-Hodgkin’s lymphoma,
or NHL. FavId entered a pivotal Phase 3 clinical trial in follicular
B-cell NHL in July 2004.
The American Cancer Society estimates that 56,390
people will be diagnosed with NHL in the United States in 2005, and the
National Cancer Institute, or NCI, has most recently estimated that
approximately 332,000 patients suffer from this disease. Approximately 85% of
NHL patients have B-cell NHL. We believe that approximately half of these
patients have the slow-growing, or indolent, form of the disease. The majority
of the remaining patients have a faster growing form of the disease, commonly
referred to as aggressive NHL. Only half
of these are cured with currently available standards of care. A number of therapies are used to treat
indolent B-cell NHL, including Rituxan, which had sales in the United States of
approximately $1.6 billion in 2004 for indolent B-cell NHL and other
indications. Despite the benefits of current therapies, patients with indolent
B-cell NHL still relapse following treatment, and the disease is considered to
be incurable.
Our lead product candidate, FavId, is being
developed to be used following treatment with existing standards of care to
extend time to disease progression, or TTP, in patients with B-cell NHL. Our
Phase 3 clinical trial is designed to evaluate FavId’s ability to extend
the time to disease progression, in patients with follicular B-cell NHL, following
treatment with Rituxan. We believe this regimen will provide patients with
B-cell NHL the option of an all-biologic therapy that avoids many of the side
effects associated with chemotherapy. To date, FavId has been evaluated in
several multi-center, open-label Phase 2 clinical trials involving over
120 patients. Preliminary results from these trials suggest that FavId can
induce remissions when used alone and may increase TTP following treatment with
Rituxan.
Researchers have been conducting clinical trials
of active immunotherapies in patients with B-cell NHL for more than a decade.
The results of clinical trials at the Stanford University Medical Center and
the NCI suggest that active immunotherapies similar to FavId, when used
following chemotherapy, may induce long-term remission and improve survival time
among indolent B-cell NHL patients. Despite the promising
2
results of these trials, we believe
manufacturing limitations have hindered commercialization of these
immunotherapies. We believe that our proprietary technology will enable us to
manufacture FavId in a timely and cost-effective manner and will therefore
allow us to offer a treatment option not currently available to physicians and
patients.
We believe FavId may be effective in treating
other types of B-cell NHL. Five additional Phase 2 clinical trials of FavId are
either ongoing or expected to begin during 2005. One of these clinical trials
will be conducted under a separate physician-sponsored IND in the United
States. A second of these will be conducted as a physician-sponsored clinical
trial in Switzerland. Moreover, we believe our active immunotherapy expertise
and proprietary manufacturing technology will enable us to develop additional
product candidates for other oncology indications, such as T-cell lymphoma, and
for autoimmune diseases, with an initial focus on multiple sclerosis. We are
currently developing a second product candidate, FAV-201, for the treatment of
T-cell lymphoma and intend to initiate a Phase 1/2 clinical trial evaluating
the safety and preliminary efficacy of FAV-201 in the second half of 2005. We
have retained exclusive worldwide commercialization rights to all of our
product candidates.
The Immune System
The immune system is the body’s major defense
against foreign pathogens, such as viruses and bacteria. The principal cells
that make up the immune system are termed white blood cells. A subset of white
blood cells known as lymphocytes is essential in generating an effective immune
response to disease-causing agents. Lymphocytes consist primarily of B-cells
and T-cells, which normally recognize and respond to antigens found within
proteins derived from foreign pathogens. The B-cell receptor that recognizes an
antigen is called an antibody. Once B-cells recognize antigens, they initiate a
sequence of events that results in the immune system’s production of large
amounts of antibodies specific to that antigen. These antibodies then circulate
throughout the body and bind to their target antigen, thereby flagging
pathogens for destruction. This type of immune response is known as the
antibody-based, or humoral, immune response.
T-cells are responsible for carrying out what is
known as the cell-mediated immune response. T-cell receptors recognize antigens
presented on the surface of other cells. When a T-cell recognizes its target,
it responds in one of two ways. Either it destroys the target directly, or it
produces a variety of proteins that cause the growth and activation of itself
and other T-cells and B-cells, which can then destroy the target.
Although any one B-cell or T-cell can recognize
and respond to only a single antigen, the human immune system has evolved such
that the collective B-cell and T-cell populations can respond to virtually
every possible foreign pathogen that a person may encounter in his or her
lifetime. Furthermore, the humoral and cell-mediated immune responses have an
additional feature of “memory,” which enables B-cells and T-cells to recall an
interaction with a foreign antigen and to respond to this antigen in a more
rapid and aggressive fashion in the future.
The immune system is generally very effective in
destroying pathogens that it recognizes as foreign. For this reason, a properly
functioning immune system is highly regulated to ensure that its destructive
power is not directed against normal tissue. If this regulation breaks down, an
immune response may be generated against normal tissue, which can lead to
autoimmune diseases, such as multiple sclerosis, rheumatoid arthritis and
lupus. In the case of cancer, this strict regulation of the immune system may
prevent an effective immune response from being mounted because of the body’s
inability to distinguish the cancer as foreign. Researchers believe that
teaching the immune system to recognize the proteins associated with cancer
cells as foreign will enable the immune system to identify and eliminate
cancers, such as lymphoma.
Immunotherapy
Immunotherapy is designed to use a person’s
immune system to fight diseases, including cancer. Immunotherapy enables the
immune system to target and destroy diseased cells and has far fewer side
effects than other therapies, such as surgery, chemotherapy and radiation
therapy. There are two types of immunotherapy used to treat cancer: passive
immunotherapy and active immunotherapy.
3
Passive immunotherapy utilizes large doses of
infused antibodies that bind to antigens primarily expressed by a tumor cell
and by few or no normal cells. These antibodies circulate throughout the
bloodstream, binding to antigens on targeted cells, thereby flagging them for
destruction. One of the most widely used passive immunotherapies for the
treatment of B-cell NHL is Rituxan. Rituxan has demonstrated the ability to
induce a clinical response—at least a 50% reduction in tumor burden—in
approximately 50% of patients with indolent B-cell NHL with few side effects.
In patients who respond to Rituxan, this response lasts on average
approximately 12 months. Despite their widespread use in fighting cancer,
passive immunotherapies such as Rituxan suffer from significant limitations,
including a limited duration of efficacy and the development of resistance.
Additional passive immunotherapies have attempted to overcome the shortcomings
of Rituxan by linking antibodies to radioactive molecules that can directly
destroy the cell to which the antibody is bound. However, improvements in time
to disease progression, if any, have been modest.
Active immunotherapy teaches the patient’s own
immune system to recognize and fight cancer. Active immunotherapy is designed
to program the immune system to generate a sustained and robust humoral and
cell-mediated immune response. Idiotype immunotherapy, including our product
candidate, FavId, for the treatment of B-cell NHL, is an example of active
immunotherapy. In the case of B-cell NHL, the antibody protein made by a person’s
B-cell NHL is used as a target for immune attack. The unique antigens in this
antibody protein are referred to as the idiotype. The immune system can
differentiate between lymphoma cells and normal B-cells based on their
idiotype. As a result, following successful idiotype immunotherapy, a patient’s
immune response is specific to their B-cell lymphoma.
Development of Active Idiotype
Immunotherapy
Active idiotype immunotherapy has been studied
in patients with B-cell NHL since the late 1980’s and has shown substantial
promise in clinical trials. Trials conducted at the Stanford University Medical
Center and the NCI evaluated the use of active idiotype immunotherapy in
treating patients with indolent B-cell NHL. The results suggest that active
idiotype immunotherapy significantly increases the duration of response in
patients previously placed into remission with chemotherapy. Remission is
defined as at least a 50% reduction in tumor burden. The immunotherapy
administered in both the Stanford and NCI trials was similar to FavId in that
it involved the combination of an idiotype protein derived from a patient’s
tumor with a foreign protein, keyhole limpet hemocyanin, or KLH. KLH is a
protein derived from shellfish that elicits a strong immune response.
In the Stanford trial, 21 of 41 patients treated
with idiotype immunotherapy mounted an immune response to their idiotype
protein. The median TTP in these patients was calculated to be 7.9 years,
compared to a median TTP of 1.3 years for the patients who failed to mount
an immune response. For purposes of this trial, TTP was defined as the interval
between the date of last dose of chemotherapy and the recurrence of disease.
The median TTP for the responding patients was calculated based on available
data using a statistical method known as Kaplan-Meier analysis, which allows
for the estimation of a median time when not all of the patients have reached
the event being measured at the time of analysis. The results from this trial
were published in the medical journal Blood
in May 1997.
In an attempt to increase the idiotype-specific
immune response, the NCI trial supplemented the idiotype immunotherapy with
GM-CSF, a white blood cell growth factor designed to enhance the immune
response. Lymphoma-specific immune responses were reported for 19 of the 20
patients in the trial, and the most recent update from this trial in August 2003
indicates that with a median follow-up time of 7.2 years, 50% of patients
remain in continuous complete remission with an overall survival rate of 90%.
The trial also showed that the immunotherapy converted eight of 11 patients
tested to a molecular remission, which means no evidence of tumor could be seen
even at the more sensitive level of DNA detection. The preliminary results from
the NCI trial were published in the medical journal Nature Medicine in October 1999, and the most recent
update from this trial was published in the medical journal Blood in November 2003.
4
Barriers to Commercialization
Although the Stanford and NCI clinical trials
demonstrated favorable results, substantial manufacturing difficulties have
limited further development of an active idiotype immunotherapeutic approach to
the treatment of B-cell NHL. The manufacturing process used to produce the
idiotype immunotherapies studied at Stanford and the NCI has lengthy and
inconsistent production timelines and is labor-intensive, with a reported
manufacturing failure rate as high as 15%. As a result, we believe this process
would be difficult to commercialize.
Our Solution for the Commercial
Production of Active Idiotype Immunotherapy
We have developed a proprietary technology that
we believe enables us to overcome historical limitations to the manufacturing
and commercialization of active idiotype immunotherapies. Our technology
utilizes an insect-cell virus that carries genetic information that is
identical to a patient’s lymphoma. By introducing this virus into an insect
cell line, we can produce sufficient quantities of idiotype protein for our
immunotherapy. We believe our manufacturing process will have the following
benefits:
•
Rapid Production Cycle. We
believe our production cycle time is a number of months shorter than previously
reported cycle times for manufacturing idiotype immunotherapies for B-cell NHL.
Our production timeline allows us to administer FavId at what we believe is the
optimal time following treatment with Rituxan.
•
Reliable Manufacturing. To date,
our success rate in providing product is approximately 95%. Our underlying
production method for each patient will not change regardless of the number of
units of FavId produced. This small-scale unit operation is easily replicated
to produce multiple patient therapies simultaneously without the risks
associated with traditional scale-up for commercial production.
•
Automation. This small-scale unit
operation is amenable to automation. The time required to identify the genetic
information used to construct the insect-cell expression vector has been
reduced by technological advances, including automation, some of which are the
result of the human genome project. We believe that many other steps in the
production of FavId can be automated.
Our production process requires only
standardized small volumes, is readily reproducible, and requires limited
production time. As a result, we believe our cost of production can allow for a
commercially viable product with gross margins similar to those seen for other
biopharmaceuticals and enable physicians to use FavId in concert with all
existing standards of care for indolent B-cell NHL, including Rituxan.
Our Development Programs
The chart below summarizes the status of
ongoing, recently completed and currently planned clinical and preclinical
development programs. We have retained exclusive worldwide commercialization
rights to all of our product candidates.
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Product
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Indication
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Patient Population
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Status
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FavId
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Following Rituxan
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Follicular B-cell NHL
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Treatment-naïve or
relapsed/refractory patients(1)
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Phase 3 trial
enrolling patients
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Following Rituxan
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Follicular B-cell NHL
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Treatment-naïve or
relapsed/refractory patients
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Phase 2 trial
enrollment complete: patients in long-term follow-up
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Single agent
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Indolent B-cell NHL
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Relapsed/refractory
patients
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Phase 2 trial
enrollment complete: patients in long-term follow-up
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Following autologous
stem cell transplant
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Indolent B-cell NHL
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Patients eligible for
autologous stem cell transplant
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Phase 2 trial
enrolling patients(2)
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With maintenance
Rituxan
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Indolent B-cell NHL
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Treatment-naïve
patients
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Phase 2 trial
enrolling patients
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Single agent
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Non-follicular B-cell
NHL
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Treatment-naïve or
relapsed/refractory patients
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Phase 2 trial
enrolling patients(2)
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Following prior therapy
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Follicular B-cell NHL
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Patients who progressed
in our Phase 3 trial without receiving FavId
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Phase 2 trial
enrolling patients
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Following
chemotherapy/Rituxan in patients with aggressive NHL
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Aggressive B-cell NHL
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Treatment-naïve
patients
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Phase 2 trial
expected start: second half 2005
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FAV-201
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T-cell lymphoma
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Previously treated
patients
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Phase 1/2 trial
expected start: second half 2005
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Autoimmune
Disease Candidate
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Multiple sclerosis
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Not applicable
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Preclinical development
expected start: second quarter 2005
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(1)
Patients are considered relapsed
if their lymphoma has returned after a response to prior therapy. Patients are
considered refractory if they have not responded to prior treatments.
(2)
This trial is
physician-sponsored, which means that a physician, rather than Favrille, will
be responsible for managing the conduct of the trial and the resulting data.
The responsible physician has filed or is expected to file an Investigational
New Drug application, or IND, with the FDA for the study and is or will be the
owner of that IND. We will provide FavId at our own expense for use in
physician-sponsored trials and, in some cases, funding.
FavId for
B-Cell NHL
Overview
Our lead product candidate, FavId, is an active
immunotherapy that is based upon unique genetic information extracted from a
patient’s tumor. We initiated a pivotal Phase 3 clinical trial evaluating
FavId in treatment-naïve or relapsed or refractory follicular B-cell NHL
patients following treatment with Rituxan in July 2004. Follicular
lymphoma accounts for the majority of all indolent B-cell NHL cases. To date,
we have conducted several multi-center, open-label Phase 2 clinical trials
of FavId involving over 120 indolent B-cell NHL patients. Five additional Phase
2 clinical trials of FavId are either ongoing or expected to begin during 2005.
One of these clinical trials is being conducted under a separate
physician-sponsored IND in the United States. A second is being conducted as a
physician-sponsored clinical trial in Switzerland. We currently retain
exclusive worldwide commercialization rights to FavId.
Market Opportunity
The American Cancer Society cites NHL as the
sixth most common form of cancer and the sixth leading cause of death among
cancers in the United States. The American Cancer Society estimated that 56,390
people will be diagnosed with NHL in the United States in 2005, and the NCI has
most recently estimated that approximately 332,000 patients suffer from this
disease. B-cell NHL is a cancer of B-cell lymphocytes, the body’s white blood
cells principally responsible for fighting disease. Approximately 85% of NHL patients
in the United States have B-cell NHL. We believe that approximately half of
these patients have
6
the indolent form of the disease. Although
indolent B-cell NHL is slow-growing, it is incurable with existing therapies
and inevitably fatal. The median survival time for patients diagnosed with
advanced stages of indolent B-cell NHL is estimated to be between seven and ten
years.
Current Treatments
Overview. The
B-cell NHLs are a diverse group of malignancies with varying patterns of
behavior and responses to treatment. Both the prognosis for patients with this
disease, and the treatment that they are likely to receive, depend on the
histologic type and stage. B-cell NHLs are commonly divided into two groups:
the indolent NHLs and the aggressive NHLs.
Indolent B-cell NHLs have a relatively good prognosis, with a median
survival as long as 10 years. Early-stage indolent B-cell NHL can be
effectively treated and often cured with radiation therapy alone. Patients with advanced stage indolent B-cell
NHL are not considered curable but generally respond to treatment with a
remission. These remissions are generally temporary, however, and patients with
indolent B-cell NHL typically relapse within 18 months to three years of
initial chemotherapy treatment. Aggressive B-cell NHLs have a shorter natural
history. Only 50% of these patients can be cured with chemotherapy alone or
with combinations of chemotherapy and Rituxan. If patients relapse after
treatment, the vast majority of relapses occur in the first two years following
therapy.
Chemotherapy. Chemotherapy has
traditionally been used as the primary therapy for most patients with B-cell
NHL. Chemotherapy is typically administered in repeated cycles over three to
eight months and can substantially reduce the amount of lymphoma and often
achieve remission. Patients receiving
chemotherapy generally experience a number of side effects, including fatigue,
nausea, hair loss and increased risk of infection. These side effects may
result in the need for supportive care, including additional therapies and
hospitalization. Patients also experience late side effects such as sterility,
myelodysplastic syndromes, second cancers, and heart dysfunction. The toxicity and inconvenience of
chemotherapy can impose a heavy strain on a patient’s overall quality of life.
Passive Immunotherapy. Several passive
immunotherapy products have been approved for the treatment of B-cell NHL,
including Rituxan, Zevalin and Bexxar. Rituxan is the leading passive
immunotherapy approved for the treatment of B-cell NHL and is being used for
both indolent and aggressive B-cell NHL. Standard treatment with Rituxan alone
involves four weekly intravenous infusions over a 22-day period. Rituxan is considered
to be significantly less toxic to the bone marrow than chemotherapy. Rituxan is
a monoclonal antibody that can induce a remission in approximately 50% of
patients with indolent B-cell NHL. In these responding patients, the remission
lasts approximately 12 months. Unfortunately, as with patients with indolent
B-cell NHL who receive chemotherapy, patients treated with Rituxan eventually
relapse. Several clinical trials have suggested that additional doses of
Rituxan as a maintenance therapy can improve the time before patients with
follicular B-cell NHL relapse. In addition, combinations of Rituxan and
chemotherapeutic or immunostimulatory drugs at various doses and schedules may
provide patients with an increase in TTP over that expected with Rituxan
alone. When administered with
chemotherapy to patients with aggressive B-cell NHL, Rituxan can increase the
cure rate and the TTP.
We believe that the
standard of care for the treatment of B-cell NHL patients will increasingly
involve the use of Rituxan. Sales of Rituxan in the United States have grown
from $162 million in 1998 to approximately $1.6 billion in 2004. Our clinical registration strategy involves
the administration of FavId to the group of patients who would otherwise
receive Rituxan. We believe this approach will provide patients with indolent
B-cell NHL the option of an all-biologic therapy that avoids many of the side
effects associated with chemotherapy.
Clinical Development
Pivotal Phase
3 Clinical Trial—FavId Following Rituxan. We
initiated a randomized, double-blind, placebo-controlled Phase 3 clinical trial
of FavId in patients with follicular B-cell NHL in July 2004. The trial is
open to patients who are treatment-naive and to patients who have relapsed
from, or are refractory to, prior therapies. The trial is being conducted at 67
centers in the United States and require at least 342 evaluable patients. The
chart below summarizes the treatment schedule of patients in this trial:
7
We obtain tumor cells via biopsy from each
patient to establish the genetic profile of the tumor for our use in
manufacturing the patient’s FavId. In addition, a CT scan is conducted in order
to measure tumor burden before Rituxan treatment. Each patient then receives
the standard four doses of Rituxan alone at one-week intervals while the
patient’s FavId is being manufactured. Five weeks after the last dose of
Rituxan is administered, the patient is re-evaluated and a CT scan is conducted
to assess the patient’s response to Rituxan. A patient whose disease remains
stable or improves following treatment with Rituxan is randomized to receive
either FavId with GM-CSF or placebo with GM-CSF. During the induction phase,
randomized patients receive monthly injections of FavId or placebo for six
months. If a patient’s lymphoma remains under control after the induction
phase, the patient receives maintenance injections of FavId or placebo given
every other month for a year and then every third month until the time of
disease progression. Throughout the trial, patients receive CT scans every
three months to determine whether their lymphoma is under control. During the
trial, patients do not receive any cancer therapy other than that administered
in the trial. However, once a patient’s disease progresses, the patient’s
participation in the trial terminates.
The primary endpoint of the trial is TTP, which
in this protocol is the time that elapses between randomization and disease
progression. The trial is designed to demonstrate a statistically significant
improvement in median TTP in those patients treated with FavId compared to
those patients treated with placebo. We estimate an 18-month patient enrollment
period and an additional 18-month evaluation period for our pivotal
Phase 3 clinical trial for FavId. The trial will include an interim
analysis based on a secondary endpoint, response rate improvement or RRI, which we
expect will occur approximately nine months into the follow-up period.
In May 2004, we received a Special Protocol
Assessment, or SPA, from the FDA for our Phase 3 clinical trial. In the SPA
process, the FDA reviewed the design, size and planned analysis of our
Phase 3 clinical trial and provided comments regarding the trial’s
adequacy to form a basis for approval of a Biologics Licensing Application, or
BLA, if the trial is successful in meeting its predetermined objectives. The
FDA’s comments are binding on its review decision, except in limited
circumstances, such as when a substantial scientific issue essential to
determining the safety or effectiveness of a product candidate is identified
after the Phase 3 clinical trial is commenced. We also intend to apply for
fast track designation from the FDA for FavId during the first half of 2005,
which, if obtained, may result in an expedited review of our BLA.
Phase 2
Clinical Trial—FavId Following Rituxan. We
initiated a Phase 2 clinical trial of FavId in patients with follicular B-cell
NHL who were candidates for Rituxan therapy in June 2002. Initially, this
8
trial was limited to relapsed or refractory
patients who had previously undergone treatment with Rituxan, chemotherapy or
both. In April 2003, we expanded the entry criteria for this trial to include
patients with no prior treatment for their lymphoma. The trial was conducted at
20 sites. Enrollment in this trial was completed in December 2003.
We obtained tumor cells via biopsy from each
patient to establish the genetic profile of the tumor for our use in
manufacturing the patient’s FavId. In addition, a CT scan was conducted in
order to measure tumor burden before Rituxan treatment. Each patient then
received four doses of Rituxan alone at one-week intervals while the patient’s
FavId was being manufactured. Approximately eight weeks after the last dose of
Rituxan, the patient was re-evaluated and a CT scan was conducted to assess the
patient’s response to Rituxan. Patients whose disease remained stable or
improved following Rituxan treatment received monthly injections of FavId and
GM-CSF for six months. If a patient remains progression free after this
induction period, the patient continues to receive maintenance injections of
FavId given every other month for a year and then every third month until the
time of disease progression. Throughout the trial, patients receive CT scans
every three months to determine whether their lymphoma is under control. During
the trial, patients do not receive any cancer therapy other than that
administered in the trial. However, once a patient’s disease progresses, the
patient’s participation in the trial terminates.
Out of a total of 103 patients who received
Rituxan in this trial, sufficient quantities of FavId were available for 99
patients, which comprised the intent to treat, or ITT, population. Eleven of
these patients had disease progression following their Rituxan treatment
resulting in an evaluable population of 88 patients. As of December 31, 2004, a median
observation time of approximately one year for ITT population,
approximately 70% were progression free.
As this Phase 2 clinical trial enrolled
both patients that were relapsed or refractory from prior treatment and
patients who had received no prior treatment for their lymphoma, we can only
compare our preliminary results for these subsets of our patient population
with available published data. One study published by Dr. Thomas E. Witzig in
the Journal of Clinical Oncology
in May 2002 reported results for 58 follicular B-cell NHL patients
relapsed from or refractory to chemotherapy who were subsequently treated with
Rituxan alone. In our Phase 2 clinical trial we treated 26 follicular
B-cell NHL patients relapsed from or refractory to chemotherapy whom we believe
to be comparable with respect to the patient characteristics in the Witzig
study. A comparison of the results published by Witzig with our preliminary
results is illustrated in the Kaplan-Meier analysis below.
9
TTP in
Patients Relapsed or Refractory from Prior Chemotherapy
The median TTP for the subset of follicular
patients in the Witzig trial was 10.2 months. At a median observation period of
11 months, approximately 70% of the 26 patients relapsed or refractory from
chemotherapy in our Phase 2 clinical trial shown in the figure above were free
from disease progression. Though it is not yet possible to estimate a median
TTP for this population, we believe these data show a positive trend to a
longer TTP in patients treated with Rituxan followed by FavId compared to
patients treated with Rituxan alone.
We have also compared our 39 treatment-naïve
patients with the results of a study published by Dr. John D. Hainsworth in the
Journal of Clinical Oncology in October 2002.
In this publication, Hainsworth reported results for treatment-naïve patients
who received Rituxan every six months for two years or until their disease
progressed.
10
TTP in
Treatment Naïve Patients
*Administered
in Hainsworth trial only
The median observation period for the
treatment-naïve patients in our Phase 2 clinical trial was 12 months and at
this time approximately 80% of these patients are free from disease
progression. We believe these data show a trend towards an equivalent TTP in
patients treated with one course of Rituxan followed by FavId compared to
patients treated with a course of Rituxan alone every six months for two years.
A secondary endpoint in this study was response
rate improvement, or RRI. RRI attempts
to measure the additional responses that occur as a result of FavId. In this study, RRI was defined as the
improvement in responses that occurred after three months from the start of
Rituxan. Improvement in response can be
seen in three different ways. Patients
who have stable disease at month three can go on to have a response (either a
complete or partial response) sometime after month three. In addition, a patient with a partial
response at month three can go on to have a complete response at some time
following month three. Using this
definition, as reported at the American Society of Hematology meeting in December of
2004, we found that 23 out of 83 or 28% of our patients experienced an
improvement in their response category after month three. The amount of RRI did not differ
significantly between those patients who were treatment naïve and those who had
relapsed from prior treatment – 29% and 27% respectively. Of the 88 patients who received, FavId, three
achieved a complete response at the first assessment following Rituxan and,
therefore, could not have an RRI and two were not yet assessable in December 2004.
The positive interim results found in this Phase
2 clinical trial do not guarantee final results, and our positive initial assessment
of FavId in this clinical trial could differ from our assessment of FavId
following completion of the clinical trial. An analysis of the characteristics
of those patients in our trial whose disease relapsed, compared to those whose
disease had not, has allowed us to refine the design of our planned Phase 3
clinical trial.
Phase 2
Clinical Trial—FavId as a Single Therapeutic Agent in Relapsed or Refractory
NHL Patients. In
September 2002, we completed enrollment of a Phase 2 clinical trial
evaluating FavId as a single therapeutic agent in indolent B-cell NHL patients
who were either relapsed from, or refractory to,
11
prior treatments. The trial was conducted at
multiple sites and was designed to determine whether use of FavId alone could
stimulate an immune response and whether this response would result in a
clinical benefit. We obtained tumor cells via biopsy from each patient to
establish the genetic profile of the tumor for our use in manufacturing the
patient’s FavId. In addition, a CT scan was conducted in order to measure tumor
burden before FavId treatment. Each patient received monthly injections of
FavId and GM-CSF for six months. If a patient’s lymphoma remains under control
after the induction period, the patient receives maintenance injections of
FavId given every other month for a year and then every third month until TTP.
Throughout the trial, patients receive CT scans every three months to determine
whether their lymphoma is under control. During the trial, patients do not
receive any cancer therapy other than that administered in the trial. However,
once a patient’s disease progresses, the patient’s participation in the trial
terminates.
Results from the 27 evaluable patients in the
trial showed one patient with a complete response and three patients with
partial responses, meaning at least a 50% reduction in tumor size, for an
overall response rate of 15%. In addition, four patients demonstrated a 25% to
50% reduction in their total lymphoma burden, a minor response, and 15 patients
demonstrated stable disease. The other four patients demonstrated disease
progression. The median TTP for the 27 patients was 12.3 months using a
Kaplan-Meier analysis. As of December 6, 2004, six patients remain
progression free and are continuing with FavId injections. The progression free
status of these patients ranges from 23 to 38 months as of December 6,
2004. Among the four patients who demonstrated a complete or partial response,
the current median TTP, defined as the time from the start of FavId until the
time that the patient has progressive disease, was estimated to be at least
29 months. Only one of these four patients’ disease had progressed as of
such date, at 26 months. The other three responding patients remained in
remission from 28 to 33 months from the start of treatment with FavId
through December 6, 2004. At 28 months from the start of FavId, one of the
three responding patients, while in remission, died from a non-
lymphoma-related cause.
These results are encouraging compared to
results from similar patients treated with other lymphoma biologic therapies.
In a clinical trial conducted by Witzig and reported in the May 2002 issue
of the Journal of Clinical Oncology,
patients with follicular NHL treated with Rituxan alone had a median TTP of
10.2 months and a median duration of response of 12.1 months. In
addition, patients with follicular NHL treated with Zevalin had a median TTP of
12.6 months with a median duration of response of 18.5 months.
Similarly, in a trial conducted by McLaughlin and reported in the August 1998
issue of the Journal of Clinical Oncology,
patients treated with Rituxan alone had a TTP of 9.0 months. Median
duration of response in that trial was 11.2 months.
|
|
|
Single
Agent
FavId
|
|
Witzig
Rituxan
|
|
McLaughlin
Rituxan
|
|
Witzig
Zevalin
|
|
|
Patients
|
|
27
|
|
58
|
|
166
|
|
58
|
|
|
TTP
(months)
|
|
12.3
|
|
10.2
|
|
9.0
|
|
12.6
|
|
This clinical trial demonstrated that FavId as a
single agent is well tolerated and has activity in pretreated patients with
relapsed indolent B-cell NHL. Patients with two or fewer prior therapies and
with tumor burdens of less than 50 square centimeters at initiation of the
trial appeared more likely to respond to administration of FavId than more
heavily pretreated patients or patients with larger tumors.
Phase 2
Clinical Trial—FavId Following Autologous Stem Cell Transplantation. Patient
enrollment for a physician-sponsored Phase 2 clinical trial evaluating
FavId in patients with indolent B-cell NHL following autologous stem cell
transplantation, began in November 2000. Autologous stem cell
transplantation involves the removal of important blood cells from a patient
before the patient receives large doses of chemotherapy. After chemotherapy,
the blood cells are returned to the patient to speed recovery from the
chemotherapy treatment. This trial is currently being conducted at two sites.
This trial is designed to evaluate the ability
of FavId to induce humoral and cell-mediated immune responses, and to induce or
maintain complete clinical or molecular remission, following autologous stem
cell transplantation. In addition, the trial will evaluate the correlation of
specific T-cell populations with
12
immune responsiveness to FavId, as well as the
safety of FavId following autologous stem cell transplantation. After we obtain
tumor cells via biopsy from each patient to establish the genetic profile of
the tumor for our use in manufacturing the patient’s FavId, patients undergo
autologous stem cell transplantation using standard regimens. At three months
following transplantation, patients receive the first of five monthly
injections of FavId. Patients are assessed at fixed intervals for safety,
development of immune responses to their tumor idiotype, and for evidence of
molecular remissions.
Interim data on the first six patients entered
in this trial were presented at the ASH meetings in December 2003. Interim
data demonstrated that patients developed a rapid immune response to both KLH
and their idiotype. As of December 10, 2004, 13 patients in this trial
have been treated with FavId. T-cell responses to both KLH and idiotype have
developed rapidly in these patients, often following a single FavId injection.
Phase 2
Clinical Trial—FavId Combined with a Maintenance Rituxan Schedule. Patient
enrollment for a multi-center, physician-sponsored Phase 2 clinical trial
evaluating FavId in combination with maintenance Rituxan for the treatment of
indolent B-cell NHL began in May 2004. We assumed sponsorship of the IND in August 2004.
The trial is open to treatment-naïve patients with indolent B-cell NHL and is
designed to enroll a total of 56 patients over a two-year period.
This trial is intended to demonstrate an improvement
over the results of prior trials using maintenance Rituxan for the treatment of
indolent B-cell NHL. These prior trials demonstrated a median TTP of
34 months for patients with indolent B-cell NHL treated with maintenance
Rituxan. Despite this long TTP, patients still experienced a high relapse rate
and do not appear to be cured of their disease. We believe that by
incorporating FavId into a schedule of maintenance Rituxan, patients may
experience an increased TTP beyond what would be expected from maintenance
Rituxan alone.
This trial is designed to evaluate the safety of
this regimen, and to assess its efficacy, based on the endpoints of response
rate and event-free survival. Event-free survival is defined as the time period
from the start of Rituxan to the time of disease progression or death. We
obtain tumor cells via biopsy from each patient to establish the genetic
profile of the tumor for our use in manufacturing the patient’s FavId. In
addition, a CT scan is conducted in order to measure tumor burden before the
start of Rituxan treatment. Patients receive the same dose and schedule of
maintenance Rituxan as was administered in the prior trials of maintenance
Rituxan. FavId is incorporated into this treatment regimen starting on the
third month and is administered monthly for the first 12 months, every
other month for the second 12 months, and every three months thereafter.
FavId is not administered during those months when patients receive Rituxan.
With each FavId administration, GM-CSF is administered on four consecutive days
beginning on the day of such FavId administration. Throughout the trial,
patients receive CT scans every three months to determine whether their
lymphoma is under control. During the trial, patients do not receive any cancer
therapy other than that administered in the trial. However, once a patient’s
disease progresses, the patient’s participation in the trial terminates.
Phase 2
Clinical Trial—FavId in Non-follicular B-cell NHL. Patient
enrollment for a physician-sponsored Phase 2 clinical trial evaluating
FavId in patients with non-follicular B-cell NHL is expected to begin in the
first quarter of 2005. This trial is expected to be conducted at two sites. The
trial is open to patients with various non-follicular lymphomas who are either
treatment-naïve for their lymphoma, relapsed or refractory following prior
chemotherapy for their lymphoma, or relapsed following a prior response to
Rituxan. The trial is expected to enroll 15 patients, but enrollment may be
expanded if activity is seen in any specific patient subset.
This trial is designed to evaluate the efficacy
of FavId in patients with non-follicular indolent NHL, based on overall
response rate, duration of response, time to progression and event-free
survival. We will obtain tumor cells via biopsy from each patient to establish
the genetic profile of the tumor for our use in manufacturing the patient’s
FavId. In addition, a CT scan will be conducted in order to measure tumor
burden before FavId treatment. FavId will be administered monthly for the first
six months, every other month for the next 12 months, and every three
months thereafter until disease progression. With each FavId administration,
GM-CSF will be administered on four consecutive days beginning on the day of
such FavId
13
administration. Patients in the trial who need
immediate therapy may receive Rituxan prior to administration of FavId and
GM-CSF, while patients with more indolent disease that is not in need of
immediate treatment may receive FavId and GM-CSF administered as a single
agent. Throughout the trial, patients will receive CT scans every three months
to determine whether their lymphoma is under control. During the trial,
patients will not receive any cancer therapy other than that administered in
the trial. However, once a patient’s disease progresses, the patient’s
participation in the trial will terminate.
Phase 2
Clinical Trial—FavId Following Prior Therapy. In
the first quarter of 2005, we enrolled the first patients in our Phase 2
clinical trial of FavId in patients who have received prior therapy for their
follicular B-cell NHL.This trial was designed primarily to provide FavId to
those patients in our registration trial who did not receive FavId. This would include patients who progressed
after receiving Rituxan, and those patients who were randomized to placebo and
later progressed. This trial is being
conducted at sites participating in our Phase 3 clinical trial.
Prior to receiving FavId, these patients will be
evaluated by their treating physician.
If the physician feels that the patient is a candidate for receiving
FavId alone, then we will provide the FavId previously manufactured for them in
the registration trial for use as a single agent. In those patients who may require a more
immediate reduction in the amount of their lymphoma, the treating physician
will have the option of administering salvage treatment such as chemotherapy
prior to the administration of FavId. We
expect that many of these patients will be candidates for retreatment with
Rituxan prior to starting FavId. In
these patients we will be able to compare the TTP which occurs following their
receipt of Rituxan on the registration trial with their TTP following the
receipt of both Rituxan and FavId on this phase 2 trial. We believe that this
comparison will provide further insight into any contribution by FavId to
extending TTP following treatment with Rituxan.
Phase 2
Clinical Trial—Following Chemotherapy/Rituxan in Patients with Aggressive
B-cell NHL. In
the second half of 2005, we expect to initiate a Phase 2 clinical trial of
FavId in patients with aggressive B-cell NHL who have received prior treatment
with a chemotherapy/Rituxan combination. This multi-center clinical trial will
serve as a pilot trial that will evaluate the ability of FavId to increase the
disease-free survival of patients with this disease compared to historical
controls.
Safety – As of March 2005,
FavId has been administered to over 120 patients in the first two Phase 2
trials that we conducted. Adverse
events in these trials have included signs and symptoms of immune activation,
such as malaise, fever, myalgias, arthralgias, nausea and injection site
reactions manifested as redness, swelling and soreness. These adverse events have generally been of
low-grade and of short duration and usually resolve without any specific
treatment.
Thirty-two serious adverse events, or SAEs, have been reported since
the start of trials with FavId. All but
three of these SAEs have been reported to be unrelated to FavId by the treating
physician. The three SAEs reported as
possibly or probably related include one case of worsening in kidney function
in a patient that had pre-existing kidney disease. This patient’s kidney function returned to
baseline following discontinuation of FavId.
The remaining two SAEs reported as related to FavId were cases of
transformation to higher grade lymphomas in patients with low-grade lymphomas. Transformation is known to occur in patients
with low-grade lymphoma at a rate of about 5% per year. We have reviewed all cases of transformation
in patients receiving FavId and have not found evidence of a rate of
transformation that exceeds 5% per year.
FAV-201 for
T-cell Lymphoma
Our product candidate FAV-201 is a
patient-specific T-cell receptor-based immunotherapy. We intend to initiate a
Phase 1/2 clinical trial evaluating the safety and preliminary efficacy of
FAV-201 in patients with T-cell lymphoma during the second half of 2005. This
trial builds upon preclinical data that suggest activity of an immunotherapy
based on a T-cell receptor. Patients will be observed for evidence of specific
cell-mediated and humoral immune responses to FAV-201, and any clinical responses
will also be documented.
14
Autoimmune
Disease Candidate
Autoimmune disease occurs when the body’s immune
system mistakenly attacks and destroys body tissue that it believes to be
foreign. In certain instances, autoimmune disease can result from an outgrowth
of a limited number of disease-causing lymphocytes that recognize self
antigens. Preclinical studies have shown that immunotherapies may prevent or
treat autoimmune diseases. In the first half of 2005, we intend to initiate
preclinical studies to evaluate whether immunotherapies manufactured in a
fashion similar to FAV-201 will be effective in preventing or treating
autoimmune disease, with an initial focus on multiple sclerosis.
Strategy
Our goal is to become a leading
biopharmaceutical company focused on the research, development and
commercialization of targeted immunotherapies for the treatment of cancer and
other diseases of the immune system. Key elements of our strategy for achieving
this goal are to:
•
Complete Clinical Development and Obtain
Regulatory Approval for FavId. We initiated a pivotal Phase 3
clinical trial evaluating FavId for the treatment of follicular B-cell NHL in July 2004
under an SPA from the FDA. We intend to seek fast track status for FavId from
the FDA during the first half of 2005, which, if obtained, may result in an
expedited review by the FDA.
•
Utilize Our Proprietary Technology to
Develop Additional Product Candidates. We believe that active
immunotherapy may have applications in a number of additional diseases beyond
B-cell NHL, such as T-cell lymphoma and autoimmune diseases, including multiple
sclerosis. For example, we are currently studying a second product candidate,
FAV-201, for the treatment of T-cell lymphoma and intend to initiate a
Phase 1/2 clinical trial in the second half of 2005. In addition, we
intend to initiate a preclinical development program to identify active
immunotherapies for the treatment of multiple sclerosis in the second quarter
of 2005.
•
Retain Commercialization Rights to Our
Oncology Products. We intend to focus our internal development
efforts on FavId and other oncology product candidates. We hold exclusive
worldwide commercialization rights to FavId without any obligation to pay
royalties to any third party on sales. We plan to retain commercialization
rights to these product candidates at least through completion of BLA filing.
At that point, we will assess whether to market and sell FavId and future
products in the United States directly through an internal sales force or
together with a co-promotion partner. We intend to seek one or more
collaborators to develop and commercialize our product candidates and programs
for chronic autoimmune diseases, such as multiple sclerosis, in exchange for
license fees, milestone payments and royalties.
•
Expand our Product Portfolio Through
In-Licensing and Acquisitions. We intend to capitalize upon our
expertise in immunology, oncology, immunotherapy, clinical development and
regulatory affairs to in-license or acquire complementary product candidates in
various stages of development.
15
Manufacturing and Supply
Our
Proprietary Manufacturing Process
Our process begins upon receipt of a patient’s
lymphoma biopsy, which the treating physician sends to our manufacturing
facility. The process can be divided into the three phases described below.
Gene Identification and
Cloning
First, we perform a genetic profile of a sample
of the patient’s tumor to identify and isolate the unique antibody genes that
correspond to the patient’s tumor idiotype. We then insert these antibody genes
into our proprietary insect cell-specific expression vectors. Our insect-cell
expression vectors are DNA fragments that have all the genetic instructions
needed for directing the production of full-length, recombinant, monoclonal
antibodies. We use manufacturing equipment and software that have been tailored
to our specific needs to automate these genetic identification and cloning
processes.
Cell Culture
The next step in the process involves the use of
an insect cell-specific expression vector to produce the recombinant idiotype
that forms the basis for FavId. We insert the expression vector into a
continually growing insect cell line, which converts this genetic information
into an insect cell virus, referred to as a baculovirus. We then add the baculovirus
culture to a second insect cell line that subsequently secretes high levels of
idiotype protein. Within a few days, milligram quantities of this idiotype
protein are harvested. The cell culture medium used to grow the insect cells is
completely devoid of any animal products, which we believe enhances the safety
of the final product.
16
Protein Purification and
Formulation
Finally, we perform a multi-step process to
purify the idiotype protein. Each step in this purification process results in
idiotype protein that is progressively more purified. In order to enhance the
immune response, purified idiotype protein is chemically linked to KLH. When
the idiotype and KLH complex is injected subcutaneously, the patient’s immune
system reacts to both the foreign KLH and the patient’s unique idiotype
protein. We believe that, once activated, the patient’s immune system will be
able to recognize the idiotype protein on the cancer cell and more effectively
fight the tumor.
Manufacturing
Facility
To support the manufacturing requirements for
our pivotal Phase 3 clinical trial, as well as all other anticipated
clinical trials of FavId for the foreseeable future, we have recently
constructed a state-of-the-art, multi-product manufacturing facility. Our
facility consists of approximately 26,000 square feet of leased space at our
corporate headquarters. We designed the facility and intend to operate it
within the FDA’s latest current Good Manufacturing Practices, or cGMP,
guidelines. In October 2003, we met with the FDA to discuss our FavId
manufacturing process and present critical design and operational features of
our facility. In September 2004, we received a manufacturing license from
the California Department of Health Sciences. Based on these two events, we are
manufacturing FavId for our Phase 3 clinical trial in this facility. We
believe this facility could also be used to manufacture FavId for initial
commercial launch. Nevertheless, we expect to secure a larger production
facility to commercially manufacture FavId, if approved.
Key Suppliers
We currently depend on single source suppliers
for critical raw materials used in the manufacture of FavId. We purchase KLH
from biosyn Arzneimittel GmbH, or biosyn, which is currently the only supplier
of KLH that has submitted the required filing, known as a drug master file,
with the FDA. In November 2004, we entered into an eight-year supply
agreement with biosyn under which biosyn has agreed to supply us with KLH and
we have committed to minimum initial and annual KLH purchase requirements. We have
made a $50,000 initial payment to biosyn under the agreement and purchased
$30,000 of raw material during 2004. We
are committed to purchase an additional $205,000 of raw material through May
2005. An additional aggregate of up to $300,000 will be due upon the
achievement of certain milestones, the timing of which is not known at this
time. Either party may terminate the supply agreement upon a breach by the
other party that is not cured within 60 days or other events relating to
insolvency or bankruptcy. There may be no other supplier of KLH of suitable
quality for our purposes. In addition, we depend on a single source supplier
for the cell growth media we use to produce FavId. We purchase this material
from Expression Systems LLC. We currently rely on purchase orders to obtain
this material and do not have a supply agreement with Expression Systems. We
intend to qualify a second source for the cell growth media but may not be able
to do so. The GM-CSF that we administer with FavId is commercially available
only from Berlex Laboratories, Inc. We currently rely on purchase orders
to purchase GM-CSF and do not have a supply agreement with Berlex. GM-CSF is an
FDA-approved and commercially available drug that may be purchased by
physicians. Our current strategy for initial commercialization of FavId
involves the administration of FavId following treatment with Rituxan. Rituxan
is a passive immunotherapy for patients with NHL, which is also FDA-approved
and is commercially available solely from Genentech and Biogen Idec. We
currently rely on physicians to order and administer Rituxan to patients prior
to the administration of FavId in our registration trial.
Sales and Marketing
We intend to market and sell FavId and future
products in the United States either directly through an internal sales force
or together with a co-promotion partner. Because the community and
institutional referral networks of cancer treatment physicians in the United
States are relatively small and well-established, we believe that a small,
focused sales and marketing organization will enable us to effectively
penetrate our target markets. Outside of the United States, we plan to
establish strategic collaborations for the development and marketing of FavId.
17
We may enter into collaboration agreements with
third parties with respect to other product candidates we develop, which may
include co-marketing or co-promotion arrangements. Alternatively, we may grant
exclusive marketing rights to our strategic collaborators in exchange for
upfront fees, milestones and royalties on future sales.
We do not presently possess the resources or
experience necessary to market FavId or our other product candidates ourselves,
and we currently have no arrangements for distribution of our product
candidates. Our future commercial success will depend on our ability to
establish our own sales and marketing infrastructure or to collaborate with
third parties that have greater sales and marketing experience and resources.
Competition
The development and commercialization of new
pharmaceutical products for the treatment of cancer and autoimmune diseases is
competitive, and we will face competition from numerous sources, including
major pharmaceutical companies, specialty pharmaceutical companies and
biotechnology companies worldwide. Many of our competitors have substantially
greater financial and technical resources and development, production and
marketing capabilities than we do. In addition, many of these companies have
more experience than we do in preclinical testing, human clinical trials and
manufacturing of biologic therapeutics, as well as in obtaining FDA and foreign
regulatory approvals. We will also compete with academic institutions,
governmental agencies and private organizations that are conducting research in
the fields of cancer and autoimmune disease. Competition among these entities
to recruit and retain highly qualified scientific, technical and professional
personnel and consultants is also intense.
We are aware of a number of companies that are
developing active immunotherapies to treat B-cell NHL. Genitope Corporation is
evaluating idiotype immunotherapies in clinical trials. Genitope is conducting
a Phase 3 clinical trial of its active idiotype immunotherapy product
candidate in patients with follicular B-cell NHL who are in remission following
prior treatment with chemotherapy. Antigenics, Inc. completed a Phase 2
clinical trial evaluating its active immunotherapy candidate in indolent B-cell
NHL patients. The NCI is also conducting a Phase 3 clinical trial of an
active idiotype immunotherapy in collaboration with Accentia
Biopharmaceuticals.
Several companies are engaged in the development
and commercialization of passive immunotherapy products for the treatment of
B-cell NHL that may compete with FavId. Genentech and Biogen Idec are
co-marketing Rituxan for the treatment of relapsed or refractory, indolent
B-cell NHL. Biogen Idec has also received FDA approval to market Zevalin, its
passive radioimmunotherapy product. GlaxoSmithKline plc and Corixa Corporation
have received FDA approval to market Bexxar, a passive radioimmunotherapy
product.
The most recent advances in the treatment of
B-cell NHL have involved the combination of existing products and changes to
approved schedules and doses, particularly for Rituxan. Numerous clinical
trials reported in recent years have indicated that additional doses of Rituxan
and maintenance dosing of Rituxan can improve the time to progression in
patients who respond to therapy. Combination therapies involving
chemotherapeutic or immuno-stimulatory drugs in combination with Rituxan at
various doses and schedules may provide patients with an increase in time to
progression over that expected with Rituxan alone. Accordingly, we may face
competition as a result of developments in this area.
Patents and Proprietary Rights
Our success will depend in large part on our
ability to obtain and maintain patent protection for our products and
technologies, preserve trade secrets and operate without infringing the
intellectual property rights of others. We intend to prosecute and defend our
intellectual property rights aggressively. Our policy is to seek patent
protection for the inventions that we consider important to the development of
our business. We have five pending United States and 19 patent applications
pending outside of the United States covering methods of treating immune system
diseases, including B-cell and T-cell lymphomas, using our proprietary
immunotherapy production methods, as well as methods for combining the idiotype
or
18
T-cell receptor-based immunotherapies with other
therapies that are used to treat diseases of the immune system. We have
received a Notice of Allowance of claims which cover a method of treating a
B-cell malignancy using an active idiotype immunotherapy produced using an
optimized insect cell expression system. Our intellectual property related to
T-cell receptor-based immunotherapies includes an exclusive royalty-free
license from the Sidney Kimmel Cancer Center to intellectual property developed
by Dr. Daniel Gold while he was employed there prior to joining us. We
have responsibility for the filing, prosecution and maintenance of patent
rights associated with this license, but the intellectual property is jointly
owned with the Sidney Kimmel Cancer Center which holds a license to use the
technology for non-commercial research and educational purposes.
Although we believe these patent applications,
if they issue as patents, will provide a competitive advantage, the patent
positions of pharmaceutical and biotechnology companies are highly uncertain
and involve complex legal and factual questions. We may not be able to develop
patentable products or processes, and may not be able to obtain patents from
pending applications. Even if patent claims are allowed, the claims may not
issue, or in the event of issuance, may not be sufficient to protect our
technology. In addition, any patents or patent rights we obtain may be
circumvented, challenged or invalidated by our competitors.
While our product candidates are in clinical
trials, and prior to commercialization, we believe our current activities in
the United States fall within the scope of the exemptions against patent
infringement provided by 35 U.S.C. Section 271(e) which covers activities
related to developing information for submission to the FDA. As our product
candidates progress toward commercialization, the possibility of an
infringement claim against us increases. While we attempt to ensure that our
product candidates and the methods we employ to manufacture them do not
infringe other parties’ patents and proprietary rights, competitors or other
parties may assert that we infringe on their patents or proprietary rights.
Competitors or third parties may be issued patents that may cover subject
matter that we use in developing, producing, or administering our products. In
particular, we are aware of the following third party patents:
•
Genentech and City of Hope National Medical Center hold patent rights relating
to the expression of recombinant antibodies;
•
Genitope holds patent rights relating to immunotherapy using idiotype proteins
produced using T lymphoid cells for the treatment of B-cell lymphoma;
•
Texas A&M University holds patent rights relating to the production of
proteins in insect cells; and
•
Schering Corp. holds patent rights relating to the use of GM-CSF as a vaccine
adjuvant for use against infectious diseases.
Additionally, because patent prosecution can
proceed in secret prior to issuance of a patent, third parties may obtain other
patents with claims of unknown scope prior to the issuance of patents relating
to our product candidates which they could attempt to assert against us.
Further, as we develop our products, we may infringe the current patents of
third parties or patents that may issue in the future.
We believe that we have valid defenses to any
assertion that our product candidates, or the methods that we employ to
manufacture them, infringe the claims of the patent held jointly by Genentech
and City of Hope National Medical Center relating to the expression of recombinant
antibodies. We also believe that the patent may be invalid and/or
unenforceable. The relevant patent was issued to Genentech in 2001 in
connection with the settlement of a district court action and an interference
proceeding in the United States Patent and Trademark Office between Genentech
and Celltech R&D Ltd. We believe other biotechnology companies are
aware of and are considering the possible impact of this patent and that other
companies have negotiated license agreements for this patent. We have not
attempted to obtain such a license because we believe that properly construed
claims do not cover activities related to the manufacture of FavId and FAV-201.
If we decide to attempt to obtain a license for this patent, we cannot
guarantee that we would be able to obtain such a license on commercially
reasonable terms, or at all. We are aware of a complaint filed
19
by MedImmune, Inc. against Genentech in April 2003
in the United States District Court for the Central District of California
seeking, among other things, judicial declarations that the patent is invalid
and that the patent is unenforceable due to the patent applicants’ inequitable
conduct before the United States Patent and Trademark Office. We are also aware
that MedImmune’s complaint has recently been dismissed on the procedural ground
of lack of subject matter jurisdiction. We cannot predict whether MedImmune
will ultimately obtain the invalidity and unenforceability declarations that it
is seeking, whether we or others would seek or be able to obtain the same or
similar declarations or whether we would otherwise be successful in
demonstrating that our product candidates, or the methods that we employ to
manufacture them, do not infringe the claims of the patent held by Genentech
and City of Hope National Medical Center or that the patent is invalid and/or
unenforceable.
We also believe that we have valid defenses to
any assertion that our product candidates infringe the claims of the patent
held by Genitope relating to immunotherapy using idiotype proteins produced
using T-lymphoid cells for treatment of B-cell lymphoma, and the claims of the
patent held by Schering Corp. relating to use of GM-CSF as a vaccine adjuvant
for use against infectious diseases. The claims of the patents held by Texas
A&M University relating to protein production in insect cells expire in
2005, which is prior to the time we could expect to receive approval from the
FDA to market FavId or FAV-201. The relevant Genitope patent issued in 1999. We
believe that FavId and FAV-201 and the methods we use to manufacture them do
not infringe the claims of the patent. The relevant Schering patent issued in
1997. We believe that FavId and FAV-201 and the methods we use to manufacture
them do not infringe the claims of the patent and that the claims of the patent
are invalid.
Although we believe that our product candidates,
production methods and other activities do not currently infringe the
intellectual property rights of these and other third parties, we cannot be
certain that a third party will not challenge our position in the future. If a
third party alleges that we are infringing its intellectual property rights, we
may need to obtain a license from that third party, but there can be no
assurance that any such license will be available on acceptable terms or at
all. Any infringement claim that results in litigation could result in
substantial cost to us and the diversion of management’s attention away from
our core business and could also prevent us from marketing our products. To
enforce patents issued to us or to determine the scope and validity of other
parties’ proprietary rights, we may also become involved in litigation or in
interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial costs to us or an adverse decision as
to the priority of our inventions. We may be involved in interference and/or
opposition proceedings in the future. We believe there will continue to be
significant litigation in the industry regarding patent and other intellectual
property rights.
We are party to license agreements which provide
us rights to use technologies in our research, development and
commercialization of our product candidates. We obtained a non-exclusive
license from Boyce Thompson Institute for Plant Research to use certain
information and materials in the field of prevention and treatment of immune
system diseases and disorders related to NHL. This party has sole responsibility
for the prosecution, maintenance and enforcement of the licensed intellectual
property.
We also rely on trade secrets to protect our
technology, particularly when we do not believe that patent protection is
appropriate or available. However, trade secrets are difficult to protect. We
attempt to protect our trade secrets by requiring each of our employees,
consultants and advisors to execute a non-disclosure and assignment of
invention agreement before beginning his or her employment, consulting or
advisory relationship with us. We cannot guarantee that these agreements will
provide meaningful protection, that these agreements will not be breached, that
we will have an adequate remedy for any such breach, or that our trade secrets
will not otherwise become known or independently developed by a third party.
Government Regulation
The testing, development, manufacturing,
labeling, storage, record keeping, advertising, promotion, export and
marketing, among other things, of our product candidates are subject to
extensive regulation by governmental authorities in the United States and other
countries. In the United States, pharmaceutical and biologic products are
regulated by the FDA under the Federal Food, Drug, and Cosmetic Act, its
implementing regulations and other laws, including, in the case of biologics,
the Public Health Service Act.
20
Our product candidates are regulated by the FDA
as biologics. Biologics require the submission of a Biologics License
Application, or BLA, and approval by the FDA prior to being marketed in the
United States. None of our product candidates has been approved by the FDA for
marketing in the United States, and we currently have no BLAs pending.
Manufacturers of biologics may also be subject to state regulation. Failure to
comply with FDA requirements, both before and after product approval, may
subject us to administrative or judicial sanctions, including, but not limited
to, FDA refusal to approve pending applications, warning letters, product
recalls, product seizures, total or partial suspension of production or
distribution, fines, injunction and criminal prosecution.
The steps required before a biologic may be
approved for marketing in the United States generally include:
•
completion of preclinical laboratory tests and animal tests;
•
the submission to the FDA of an investigational new drug, or IND, application
for human clinical testing, which must become effective before human clinical
trials may commence;
•
performance of adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product candidate for each proposed indication;
•
the submission to the FDA of a BLA;
•
FDA review of the BLA; and
•
satisfactory completion of an FDA pre-approval inspection of the manufacturing
facility or facilities at which the product candidate is made to assess
compliance with the FDA’s current Good Manufacturing Practices, or cGMP,
regulations.
The testing and approval process typically takes
several years and requires the commitment of substantial effort and financial
resources. Despite the time and expense committed, there can be no assurance
that any approval will be granted on a timely basis, or at all.
Preclinical tests include laboratory evaluation
and animal studies to assess the pharmacology and toxicology of the product
candidate. The results of the preclinical tests, together with manufacturing
information and analytical data, are submitted to the FDA as part of an IND,
which must become effective before human clinical trials may be commenced. The
IND will automatically become effective 30 days after receipt by the FDA,
unless the FDA before that time raises concerns or questions about the conduct
of the trials as outlined in the IND, including concerns that human research
subjects will be exposed to unreasonable risks. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before clinical trials can
proceed. There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials. A separate submission to an existing
IND must also be made for each successive clinical trial conducted during
product development. Further, each clinical trial must be reviewed and approved
by an independent Institutional Review Board, or IRB.
Clinical trials typically are conducted in three
sequential phases, but the phases may overlap. In Phase 1, the initial
introduction of the drug into human subjects, the drug is usually tested for
safety (adverse effects), dosage tolerance, absorption, metabolism,
distribution, excretion and pharmaocodynamics. Phase 2 usually involves
studies in a limited patient population to (i) evaluate preliminarily the
efficacy of the drug for specific, targeted indications, (ii) determine
dosage tolerance and optimal dosage and (iii) identify possible adverse
effects and safety risks. Phase 3 clinical trials generally further
evaluate clinical efficacy and test further for safety within an expanded
patient population. There can be no assurance that Phase 1, Phase 2
or Phase 3 testing will be completed successfully within any specific time
period, if at all, with respect to any of our product candidates. Furthermore,
we, the FDA or the relevant IRB may suspend clinical trials at any time on
various grounds, including a finding that the subjects or patients are being
exposed to an unacceptable health risk.
21
The results of the preclinical studies and
clinical trials, together with other detailed information, including
information on the manufacture and composition of the product, are submitted to
the FDA in the form of a BLA requesting approval to market the product. Before
approving a BLA, the FDA will inspect the facilities at which the product is
manufactured and will not approve the product unless the facility cGMP
compliance is satisfactory. The FDA may deny a BLA if applicable regulatory
criteria are not satisfied, require additional testing or information or require
postmarketing testing and surveillance to monitor the safety or efficacy of a
product. Approval entails limitations on the indicated uses for which a product
may be marketed. Also, if we seek to make certain changes to an approved
product, such as promoting or labeling a product for a new indication, making
certain manufacturing changes, or changing manufacturers or suppliers of
certain ingredients or components, we will need FDA review and approval before
the change can be implemented.
We are utilizing the procedure called “Special
Protocol Assessment” for FavId. Under this procedure, a sponsor may seek the
FDA’s agreement on the design and size of a clinical trial intended to form the
primary basis of an effectiveness claim. If the FDA agrees in writing, its
agreement may not be changed after the trial begins, except in limited
circumstances. If the outcome of the trial is successful, the sponsor will
ordinarily be able to rely on it as the primary basis for approval with respect
to effectiveness. Although we received our SPA, there can be no assurance that
any of our trials will have a successful outcome.
We intend to seek FDA designation of FavId for
treatment of patients with follicular B-cell NHL and FAV-201 for T-cell
lymphoma as “fast track products.” Fast track products are those which are
intended for the treatment of a serious or life-threatening condition and which
demonstrate the potential to address unmet medical needs for such conditions.
Fast track products are eligible for two means of potentially expediting
product development and FDA review of BLAs. First, a fast track product may be
approved on the basis of either a clinical endpoint or a surrogate endpoint
that is reasonably likely to predict clinical benefit. It is sometimes possible
to demonstrate efficacy with respect to such endpoints in a shorter period of
time than would be the case for other endpoints. Approvals of this kind may be
subject to requirements for appropriate post-approval studies to validate the
surrogate endpoint or otherwise confirm the effect of the clinical endpoint,
and to certain other conditions. Second, if the FDA determines after review of
preliminary clinical data submitted by the sponsor that a fast track product
may be effective, it may begin review of portions of a BLA before the sponsor
submits the complete BLA, thereby accelerating the date on which review of a
portion of the BLA can begin. There can be no assurance that any of our product
candidates in development will receive designation as fast track products, and
even if they are designated as fast track products, there can be no assurance
that our product candidates will be reviewed or approved more expeditiously
than would otherwise have been the case.
We intend to request priority review of our BLA
for FavId. A priority designation sets the target date for the FDA to complete
review of a BLA within six months of the date of submission. Priority review of
biologics is available for product candidates which, if approved, would be a
significant improvement in the safety or effectiveness of the treatment of a
serious or life-threatening disease. Even if priority review is granted, there
can be no assurance that FDA review will be completed within six months or any
other specific period of time, nor that the product candidate will be approved.
BLA holders must continue to comply with a
number of FDA requirements both before and after approval. For example, BLA
holders are required to report certain adverse reactions to the FDA and to
comply with certain requirements concerning advertising and promotional
labeling for their products. Also, quality control and manufacturing procedures
must continue to conform to cGMP regulations after approval, and the FDA
periodically conducts inspections of manufacturing facilities to assess
compliance with cGMP. Accordingly, manufacturers must continue to expend time,
monies and effort in the area of production and quality control to maintain
cGMP compliance. In addition, discovery of problems, such as safety problems,
may result in changes in labeling or restrictions on a product, manufacturer or
BLA holder, including removal of the product from the market.
We have applied for orphan drug designation for
the use of FavId for the treatment of certain forms of follicular B-cell NHL
and plan to seek orphan drug designation for the use of FAV-201 for T-cell
lymphoma. Under the Orphan Drug Act, the FDA may grant orphan drug designation
to drugs intended to
22
treat a “rare disease or condition,” which
generally is a disease or condition that affects fewer than 200,000 individuals
in the United States. Orphan drug designation must be requested before
submitting a BLA. After the FDA grants orphan drug designation, the generic identity
of the therapeutic agent and its potential orphan use are publicly disclosed by
the FDA. Orphan drug designation does not convey any advantage in, or shorten
the duration of, the regulatory review and approval process. If a product which
has an orphan drug designation subsequently receives the first FDA approval for
the indication for which it has such designation, the product is entitled to
orphan exclusivity, i.e., the FDA may not approve any other applications to
market the same drug for the same indication for a period of seven years,
except in limited circumstances. Our products may not be eligible for orphan
drug status or be designated as orphan drugs. Even if designated as orphan
drugs, our products may not be approved before other applications or granted
orphan drug exclusivity if approved.
Third-Party Reimbursement
We expect that sales volumes and prices of our
products will be dependent in part on the availability of coverage and
reimbursement from third-party payors. In the United States, such payors
include governmental programs, including Medicare and Medicaid, private
insurance plans and managed care programs. The Medicare program, a
federally-funded and administered health insurance program, is the nation’s
single largest payor, and provides for coverage for certain medical products
and services for certain aged and disabled individuals and individuals with
end-stage renal disease. Significantly, other third-party payors often model
their coverage and reimbursement policies after Medicare. Medicare and other
third-party payors may deny coverage and reimbursement if they determine that a
medical product or procedure is not medically necessary or used for an
unapproved indication, among other things. There can be no assurance that a new
product will be considered medically necessary or otherwise eligible for
coverage and reimbursement. Our ability to earn sufficient returns on our
products may depend in part on the extent to which adequate third-party
reimbursement is available for the costs of such products and related
treatments. Significant uncertainty exists as to the coverage and reimbursement
status of newly approved health care products, and there can be no assurance
that adequate third-party coverage and reimbursement will be available.
Fraud and Abuse Laws
If we are able to commercialize FavId or any
other product candidates that we may develop, we will be subject to various
federal and state laws pertaining to healthcare fraud and abuse, including
anti-kickback laws and physician self-referral laws. Violations of these laws
are punishable by criminal and civil sanctions, including, in some instances,
imprisonment and exclusion from participation in federal and state healthcare
programs, including Medicare, Medicaid and Veterans Administration health
programs. Healthcare fraud and abuse regulations are complex, and even minor,
inadvertent irregularities can potentially give rise to claims that a statute
or prohibition has been violated. If there is a change in law, regulation or administrative
or judicial interpretations, we may have to change our business practices or
our existing business practices could be challenged as unlawful, which could
have a material adverse effect on our business, financial condition and results
of operations. In addition, some allegations under these laws have been claimed
to violate the False Claims Act, discussed in more detail below.
In addition, if we are able to commercialize
FavId or any other product candidates that we may develop, we could become
subject to false claims litigation under federal statutes, which can lead to
civil money penalties, criminal fines and imprisonment, and exclusion from
participation in Medicare, Medicaid and other federal and state healthcare
programs. These false claims statutes include the False Claims Act, which any
person to bring suit on behalf of the federal government alleging the
submission of false or fraudulent claims, or causing to present such false or
fraudulent claims, under federal programs or contracts claims or other
violations of the statute and to share in any amounts paid by the entity to the
government in fines or settlement. These suits against biotechnology companies
have increased significantly in recent years and have increased the risk that a
healthcare company will have to defend a false claim action, pay fines or be
excluded from the Medicare, Medicaid or other federal and state healthcare
programs as a result of an investigation arising out of such action.
23
Employees
As of December 31, 2004, we had 109 full-time
equivalent employees, consisting of 60 employees in manufacturing, quality
control and quality assurance, 27 in research and development, and 22 in senior
management and administration. As of the same date, 15 of our employees had a
Ph.D., M.D. or Pharm.D. degree. None of our employees
is subject to a collective bargaining agreement. We consider our relationship
with our employees to be good.
Item 2. Properties
We lease approximately 49,000 square feet of
space in San Diego, California under a lease agreement that expires on August 31,
2018, but may be extended at our option for two additional five-year periods.
In July 2004, the lease agreement was amended to add an additional 14,000
square feet of office space in the same facility. The lease term on the
additional space expires July 31, 2008, but may be extended at our option
for two additional two-year periods. This space is used for our corporate
headquarters and manufacturing and laboratory facilities. We believe that our
facility will adequately meet our needs for our Phase 3 clinical and other
supportive trials. We expect to search for a larger production facility to
commercially manufacture FavId if it is approved.
Item 3. Legal
Proceedings
We are currently not a party to any material
legal proceeding. We may be subject to various claims and legal actions arising
in the ordinary course of business from time to time.
Item 4. Submission
of Matters to a Vote of Security Holders
On October 1, 2004, the holders of our
Series C preferred stock acted by written consent to ratify the loan facility
that we had entered into with Oxford Finance Corporation. Stockholders holding an aggregate of
3,757,052 shares of our Series C preferred stock approved the matters set
forth in the action by written consent and stockholders holding approximately
2,914,961 shares of our Series C preferred stock did not consent with
respect to such matters.
On December 31, 2004, our stockholders also
acted by written consent to take the following actions in connection with the
initial public offering of our common stock:
(1) the
approval and adoption of an Amended and Restated Certificate of Incorporation
to be filed prior to the effectiveness of our initial public offering to, among
other things, (i) adjust the conversion price of our
Series C preferred stock from $1.38 per share to $1.27 per share, and (ii)
provide that the outstanding shares of our preferred stock automatically be
converted into shares of common stock immediately prior the closing of our
initial public offering in which (A) the value of our company immediately prior
to such offering, calculated on a fully-diluted basis, is at least
$150,000,000, and (B) the
gross cash proceeds to our company (before underwriting discounts, commissions
and fees) from such offering are at least $40,000,000;
(2) the
approval and adoption of an additional Amended and Restated Certificate of
Incorporation to be filed prior to the effectiveness of our initial public
offering to implement a 1-for-5.1875 reverse stock split of our outstanding
common stock;
(3) the
approval and adoption of our Amended and Restated Certificate of Incorporation
to become effective upon the closing of our initial public offering;
(4) the
approval and adoption of our Amended and Restated Bylaws to become effective
upon the closing of our initial public offering;
(5) the
approval and adoption of our Amended and Restated 2001 Equity Incentive Plan;
24
(6) the
approval and adoption of our 2005 Employee Stock Purchase Plan;
(7) the
approval and adoption of our 2005 Non-Employee Directors’ Stock Option Plan;
and
(8) the
approval of the form of indemnity agreement between us and each of our
directors and executive officers.
Stockholders holding an aggregate of 12,098,887
shares approved the matters set forth in the action by written consent and
stockholders holding approximately 1,918,034 shares did not consent with
respect to such matters.
All of the above actions were effected
pursuant to actions by written consent of our stockholders in compliance with Section 228
of the Delaware General Corporation Law.
PART II
Item 5. Market for
the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common Stock Market Price
Our
common stock commenced trading on the Nasdaq National Market on February 2,
2005 under the symbol “FVRL.” Prior to such time, there was no public market
for our common stock.
The
closing price for our common stock as reported by the Nasdaq National Market on
March 18, 2005 was $5.49 per share. As of March 18, 2005, there
were approximately 860 stockholders of record of our common stock.
Dividends
We have never declared or
paid any cash dividends on our capital stock. The payment of dividends by us on
our common stock is limited by our debt agreements. We currently intend to
retain all of our future earnings, if any, to finance the growth and
development of our business. We do not intend to pay cash dividends on our
common stock for the foreseeable future. Any future determination related to
dividend policy will be made at the discretion of our board of directors.
Use of Proceeds from the Sale of Registered Securities
On February 2, 2005,
our registration statement on Form S-1 (Registration No. 333-114299) was
declared effective for our initial public offering. On March 7, 2005, the
underwriters exercised their right to purchase 285,000 of the over-allotment
shares. As of March 18, 2005, we had invested the $40.9 million in
net proceeds from the offering in money market funds. Through March 18, 2005, we have not used
the proceeds. We intend to use the proceeds to develop and prepare for filing
for regulatory approval of FavId, for development of our other product
candidates, for general and administrative expenses, and for working capital,
including the purchase of equipment for the expansion of our current
manufacturing capabilities to support production of clinical trial material and
prepare for commercial launch of our lead product candidate.
Securities Authorized for Issuance Under
Equity Compensation Plans
The following table sets
forth certain information with respect to all of our equity compensation plans
in effect as of December 31, 2004:
25
Equity
Compensation Plan Information
|
Plan
category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
Weighted-average exercise
price of outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
959,753
|
|
$
|
0.63
|
|
683,112
|
|
|
Equity
compensation plans not approved by security holders
|
|
—
|
|
—
|
|
—
|
|
|
Total
|
|
959,753
|
|
—
|
|
683,112
|
|
|
|
|
|
|
|
|
|
|
Recent Sales of Unregistered Securities
During the year ended December 31,
2004, we sold and issued the following securities which were not registered
under the Securities Act of 1933:
•
On March 26, 2004 and April 6, 2004,we sold
6,140,188 shares of our Series C preferred stock, convertible into an
aggregate of 6,672,014 shares of common stock, to certain institutional and
accredited investors for an aggregate of approximately $44.0 million in
gross proceeds.
•
On August 27, 2004, we issued a warrant to purchase an aggregate of 6,984
shares of our Series C preferred stock, which expired upon the closing of
our initial public offering, to Oxford Finance Corporation in connection with
an equipment financing facility.
We claimed exemption from registration under the
Securities Act for the sale and issuance of securities in the transactions
described in the paragraphs above by virtue of Section 4(2) and/or
Regulation D promulgated thereunder as transactions not involving any
public offering. We claimed such exemption on the basis that the recipients of
the securities represented that they intended to acquire the securities for
investment purposes only and not with a view to the distribution thereof and
that they either received adequate information about us or had access, through
employment with us or other relationships, to such information. Appropriate
legends were affixed to the stock certificates issued in such transactions, as
applicable.
26
Item 6. Selected
Financial Data
The following selected
financial data set forth below should be read in conjunction with Financial
Statements and Notes thereo included in Item 8 and with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7. The selected financial data for the years ended December 31,
2004, 2003, and 2002 and the selected balance sheet data as of December 31,
2004 and 2003 are derived from our audited financial statements, which are
included in Item 8. The selected financial data for the period from January 21,
2000 (inception) to December 31, 2000, and the year ended 2001 and the
selected balance sheet data as of December 31, 2002, 2001 and 2000 are
derived from our audited financial statements, which are not included in this
report. Our historical results are not necessarily indicative of our future
results.
|
|
|
Years ended December 31,
|
|
Period from
January 21,
2000
(inception) to
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
(in
thousands, except share and per share amounts)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
18,694
|
|
$
|
10,492
|
|
$
|
5,308
|
|
$
|
2,635
|
|
$
|
825
|
|
|
General and administrative
|
|
4,496
|
|
2,392
|
|
2,017
|
|
1,190
|
|
361
|
|
|
Amortization of stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
1,196
|
|
114
|
|
—
|
|
—
|
|
—
|
|
|
General and administrative
|
|
1,220
|
|
41
|
|
—
|
|
—
|
|
—
|
|
|
Total operating expenses
|
|
25,606
|
|
13,039
|
|
7,325
|
|
3,825
|
|
1,186
|
|
|
Loss from operations
|
|
(25,606
|
)
|
(13,039
|
)
|
(7,325
|
)
|
(3,825
|
)
|
(1,186
|
)
|
|
Interest income
|
|
375
|
|
108
|
|
167
|
|
134
|
|
133
|
|
|
Interest expense
|
|
(817
|
)
|
(332
|
)
|
(88
|
)
|
(67
|
)
|
—
|
|
|
Other income
|
|
12
|
|
8
|
|
—
|
|
—
|
|
—
|
|
|
Total other income (expense), net
|
|
(430
|
)
|
(216
|
)
|
79
|
|
67
|
|
133
|
|
|
Net loss
|
|
(26,036
|
)
|
(13,255
|
)
|
(7,246
|
)
|
(3,758
|
)
|
(1,053
|
)
|
|
Deemed dividend—beneficial conversion feature for
Series C redeemable convertible preferred stock
|
|
(28,103
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Accretion of Series C redeemable convertible
preferred stock issuance costs
|
|
(51
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(54,190
|
)
|
$
|
(13,255
|
)
|
$
|
(7,246
|
)
|
$
|
(3,758
|
)
|
$
|
(1,053
|
)
|
|
Historical net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(51.48
|
)
|
$
|
(16.97
|
)
|
$
|
(11.87
|
)
|
$
|
(8.51
|
)
|
$
|
(3.87
|
)
|
|
Weighted-average shares—basic and diluted
|
|
1,052,624
|
|
781,054
|
|
610,709
|
|
441,608
|
|
272,430
|
|
|
Pro forma net loss per share (unaudited) (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(4.85
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares—basic and diluted
|
|
11,182,712
|
|
|
|
|
|
|
|
|
|
27
|
|
|
As of December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
(in
thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
25,065
|
|
$
|
5,610
|
|
$
|
10,030
|
|
$
|
977
|
|
$
|
4,672
|
|
|
Short-term
investments
|
|
1,493
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Working
capital
|
|
22,176
|
|
3,466
|
|
9,226
|
|
591
|
|
4,440
|
|
|
Total
assets
|
|
39,130
|
|
14,932
|
|
11,998
|
|
2,210
|
|
5,137
|
|
|
Debt
(less current portion)
|
|
4,224
|
|
3,501
|
|
207
|
|
531
|
|
—
|
|
|
Redeemable
convertible preferred stock
|
|
43,672
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Accumulated
deficit
|
|
(79,502
|
)
|
(25,312
|
)
|
(12,057
|
)
|
(4,811
|
)
|
(1,053
|
)
|
|
Total
stockholders’ equity (deficit)
|
|
(14,654
|
)
|
8,278
|
|
10,727
|
|
1,171
|
|
4,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) See
Note 1 of Notes to Financial Statements for a description of the method
used to compute pro forma basic and diluted net loss per share and the number
of shares used in computing historical and pro forma basic and diluted net loss
per share.
28
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
You should read the following
discussion and analysis together with our financial statements and accompanying
notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties. As a result of
several factors, including those set forth under “Factors That May Affect
Future Operating Results” and elsewhere in this Report, our actual results and
the timing of selected events may differ materially from those anticipated in
these forward-looking statements.
Overview
We are a biopharmaceutical company focused on
the research, development and commercialization of targeted immunotherapies for
the treatment of cancer and diseases of the immune system. We have developed a
proprietary technology that enables us to manufacture active immunotherapy
products that are designed to stimulate a patient’s immune system to mount a
specific and sustained response to disease. Our lead product candidate, FavId,
is an active immunotherapy for the treatment of B-cell non-Hodgkin’s lymphoma,
or NHL. FavId entered a pivotal Phase 3 clinical trial in follicular
B-cell NHL in July 2004. To date,
FavId has been evaluated in several multi-center, open-label Phase 2 clinical
trials involving over 120 patients.
We believe FavId may be effective in treating
other types of B-cell NHL. Five additional Phase 2 clinical trials of FavId are
either ongoing or expected to begin during 2005. One of these clinical trials
will be conducted under a separate physician-sponsored IND in the United
States. A second of these will be conducted as a physician-sponsored clinical
trial in Switzerland. Moreover, we believe our active immunotherapy expertise
and proprietary manufacturing technology will enable us to develop additional
product candidates for other oncology indications, such as T-cell lymphoma, and
for autoimmune diseases, with an initial focus on multiple sclerosis. We are
currently developing a second product candidate, FAV-201, for the treatment of
T-cell lymphoma and intend to initiate a Phase 1/2 clinical trial
evaluating the safety and preliminary efficacy of FAV-201 in the second half of
2005. We have retained exclusive worldwide commercialization rights to all of
our product candidates.
We were incorporated in Delaware in January 2000.
As of December 31, 2004, we have not generated any revenues, and we have
financed our operations and internal growth through private placements of our
preferred stock and equipment and leasehold debt financings. We are a
development stage company and have incurred significant losses since our
inception in 2000, as we have devoted substantially all of our efforts to
research and development activities, including clinical trials. As of December 31,
2004, our accumulated deficit was approximately $79.5 million. We expect
to incur substantial and increasing losses for the next several years as we:
•
continue to develop and prepare for the commercialization of our lead product
candidate, FavId;
•
expand our research and development programs;
•
expand our current manufacturing capabilities to support our operations; and
•
acquire or in-license oncology products that are complementary to our own.
Financial Operations Overview
Research and Development Expense. Research
and development expense consists primarily of costs associated with clinical
trials of our product candidates, including the costs of manufacturing our
product candidates, compensation and other expenses related to research and
development personnel, facilities costs and depreciation. We charge all
research and development expenses to operations as they are incurred. Our
research and development activities are primarily focused on the development of
FavId. We have completed enrollment in two Phase 2 clinical trials and continue
to evaluate the results. We initiated our pivotal Phase 3 clinical trial of
FavId following Rituxan in patients with follicular B-cell NHL in July 2004.
We estimate an 18-month patient enrollment period and an additional 18-month
evaluation period for our
29
Phase 3 clinical trial.
Patient enrollment in the Phase 2 clinical trial with FavId following prior
therapy in patients who do not qualify for randomization in the Phase 3 will
depend upon the rate of completion of patient participation in the Phase 3
clinical trial. Six additional Phase 2 clinical trials of FavId are either
ongoing or expected to begin during 2005. Two of these clinical trials will be
conducted under separate physician-sponsored INDs in the United States. One of
these will be conducted as a physician-sponsored clinical trial in Switzerland.
We estimate average enrollment periods of 12 to 24 months and evaluation
periods ranging from six to 36 months for these Phase 2 clinical trials.
From inception through December 31, 2004,
we incurred costs of approximately $38.0 million associated with the
research and development of FavId which represents substantially all of our
research and development costs to date. We expect our research and development
costs to increase as we advance FavId and new product candidates into later
stages of clinical development. While difficult to predict, we estimate that
research and development costs required to complete the development of and file
a BLA for FavId will be an additional $75 million. We are unable to
estimate with any certainty the costs we will incur in the continued
development of other product candidates for commercialization. On an ongoing
basis, we expect to expand our research and development activities to include
clinical development of FAV-201 and preclinical research of treatments for
autoimmune diseases, primarily multiple sclerosis.
Clinical development timelines, likelihood of
success and total costs vary widely. Although we are currently focused
primarily on FavId, we anticipate that we will make determinations as to which
research and development projects to pursue and how much funding to direct
toward each project on an on-going basis in response to the scientific and
clinical success of each product candidate.
At this time, due to the risks inherent in the
clinical trial process, product candidate completion dates and costs vary
significantly for each product candidate and are difficult to estimate. The
lengthy process of seeking regulatory approvals and the subsequent compliance
with applicable regulations require the expenditure of substantial resources.
Any failure by us to obtain, or any delay in obtaining, regulatory approvals
for our product candidates could cause our research and development
expenditures to increase and, in turn, have a material adverse effect on our
results of operations. We cannot be certain when any cash flows from our
current product candidates will commence.
General and Administrative Expense. General
and administrative expenses consist primarily of compensation and other
expenses related to our corporate administrative employees, legal fees and
other professional services expenses. As a result of completing our initial
public offering, we anticipate increases in general and administrative expenses
as we add personnel, become subject to reporting
obligations applicable to publicly-held companies and continue to develop and
prepare for commercialization of our product candidates.
Stock-Based Compensation Expense.
Stock-based compensation expense represents the amortization of deferred
stock-based compensation resulting from options considered compensatory because
the deemed fair value of the underlying common stock for financial reporting
purposes was greater than the exercise prices determined by the board of
directors on the date of grant.
Interest Income. Interest
income primarily consists of interest earned on our cash reserves, cash
invested in money market funds, government securities and certificates of
deposit.
Interest Expense. Interest
expense represents interest on our debt, including capital leases.
30
Critical Accounting Policies
and Estimates
The discussion and analysis of our financial
condition and results of operations are based on our financial statements,
which have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, expenses and related disclosures. Actual results could differ from
those estimates. While our significant accounting policies are described in
more detail in Note 1 of Notes to Financial Statements included elsewhere
in this report, we believe the following accounting policies to be critical to
the judgments and estimates used in the preparation of our financial
statements:
Deferred Tax Asset Valuation Allowance. Our
estimate for the valuation allowance for deferred tax assets requires us to
make significant estimates and judgments about our future operating results.
Our ability to realize the deferred tax assets depends on our future taxable
income as well as limitations on utilization. A deferred tax asset must be
reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized prior to its
expiration. The projections of our operating results on which the establishment
of a valuation allowance is based involve significant estimates regarding
future demand for our products, competitive conditions, product development
efforts, approvals of regulatory agencies and product cost. We have recorded a
full valuation allowance on our net deferred tax assets as of December 31,
2004, 2003 and 2002, due to uncertainties related to our ability to utilize our
deferred tax assets in the foreseeable future. These deferred tax assets
primarily consist of certain net operating loss carryforwards and research and
development tax credits.
Deferred Stock-Based Compensation. In
connection with the grant of stock options during the years ended December 31,
2004 and 2003, we recorded $9.4 million and $1.6 million in deferred
stock-based compensation within stockholders’ equity, respectively. These
options were considered compensatory because the deemed fair value of the
underlying common stock for financial reporting purposes was greater than the
exercise prices determined by the board of directors on the date of grant. The
determination of the fair value prior to the Company’s initial public offering
of the underlying shares of common stock involves subjective judgment and the
consideration of a variety of factors, including the prices obtained in private
placement transactions of other equity securities, and as a result the amount
of the compensatory charge is not based on an objective measure such as the
trading price of the common stock since there was no public market for our
common stock prior to February 2, 2005. As of December 31, 2004, we
had an aggregate of $8.4 million of deferred stock-based compensation remaining
to be amortized. This deferred stock-based compensation balance will be
amortized as follows: $2.8 million in 2005; $2.8 million in 2006; $2.3 million
in 2007; and $504,000 in 2008. We are amortizing the deferred compensation on a
straight-line basis over the vesting period of the related options, which is
generally four years. The amount of stock-based compensation amortization
actually recognized in future periods could decrease if options for which accrued
but unvested compensation has been recorded are forfeited.
Results of Operations
Comparison of
Fiscal Years Ended December 31, 2004 to 2003
Research
and Development. Research and
development expense increased from approximately $10.5 million in 2003 to
$18.7 million in 2004. The increase of $8.2 million, or 78%, was due primarily
to an increase of $2.4 million associated with ongoing expenses for our new
manufacturing facility, which our research and development staff began
occupying in October 2003; an increase of $2.1 million associated
with an increase in personnel from 61 full-time equivalent employees to 92 full-time
equivalent employees to support our Phase 3 clinical trial initiated in July 2004;
an increase of $1.4 million associated with supplies to support continued
process and formulation development and the purchase of supplies for our
manufacturing facility in anticipation of the Phase 3 clinical trial
requirements; approximately $550,000 paid to third party vendors providing
support services for our Phase 3 clinical trial, including randomization of
patients, radiology and laboratory management services.
31
General
and Administrative. General and
administrative expense increased from approximately $2.4 million in 2003
to $4.5 million in 2004. The increase of $2.1 million, or 89%, was
primarily due to an increase of $839,000 associated with an increase in
personnel from eight full-time equivalent employees to 17 full-time equivalent
employees; an increase of $221,000 associated with our new manufacturing
facility, which our administrative staff began occupying in May 2003; and
$746,000 in deferred initial public offering costs expensed in accordance with
Staff Accounting Bulletin Topic 5A.
Amortization
of Stock-Based Compensation. We recorded deferred stock-based
compensation of $9.4 million and $1.6 million in 2004 and 2003, respectively.
We recorded these amounts as components of stockholders’ equity and are
amortizing the amounts, on a straight-line basis, as a non-cash charge to
operations over the vesting period of the options. We recorded amortization of
stock-based compensation of $2.4 million and $155,000 in 2004 and 2003,
respectively. We anticipate recording additional amortization of deferred stock-based
compensation related to employee stock option grants of approximately $2.8 million,
$2.8 million, $2.3 million and $504,000 for the years ending December 31,
2005, 2006, 2007 and 2008, respectively.
Interest
Expense.
Interest expense increased from approximately $332,000 in 2003 to
$817,000 in 2004. The increase of $485,000, or 146%, was primarily due to
interest payments associated with our debt agreements with GE Capital and
Oxford Finance.
Interest
Income.
Interest income increased from approximately $108,000 in 2003 to
$375,000 in 2004. The increase of $267,000, or 247%, was primarily a result of interest
income attributable to the $43.6 million in net proceeds received from the
sale of our Series C preferred stock in March and April 2004.
Comparison of
Fiscal Years Ended December 31, 2003 to 2002
Research
and Development. Research
and development expense increased from approximately $5.3 million in 2002
to $10.5 million in 2003. The increase of $5.2 million, or 98%, was
due primarily to costs associated with conducting two ongoing Phase 2 clinical
trials in 2002 with combined enrollment of 45 patients compared to combined
enrollment of 80 patients in 2003. As a result of increased patient enrollment,
we increased personnel from 37 full-time equivalent employees to 60 full-time
equivalent employees resulting in increased costs of $1.8 million. In
addition, there was a $1.4 million increase in depreciation expense and
facility-related costs as a result of the increase in expenditures for
leasehold improvements and equipment for our manufacturing facility.
General
and Administrative. General
and administrative expense increased from approximately $2.0 million in
2002 to approximately $2.4 million in 2003. The increase of $400,000, or
20%, was due primarily to a $90,000 increase in consulting services related to
business development, a $60,000 increase in property and liability insurance
and a $113,000 increase in the depreciation expense
and facility related costs associated with our new manufacturing facility, which
our administrative staff began occupying in May 2003.
Amortization
of Stock-Based Compensation. Deferred
stock-based compensation for stock options has been determined as the
difference between the exercise price and the deemed fair value of the common
stock on the date of grant for financial reporting purposes. In connection with the grant of stock options
to employees and non-employee directors, we recorded deferred stock-based
compensation of $1.6 million for the year ended December 31, 2003. We
recorded this amount as a component of stockholders’ equity and are amortizing
the amount, on a straight-line basis, as a non-cash charge to operations over
the vesting period of the options. We recorded amortization of stock-based
compensation of $155,000 for the year ended December 31, 2003.
Interest
Income. Interest
income decreased from approximately $167,000 in 2002 to $108,000 in 2003. The
decrease of $59,000, or 35%, was primarily attributable to lower average cash
balances and lower interest rates.
32
Interest
Expense. Interest
expense increased from approximately $88,000 in 2002 to $332,000 in 2003. The
increase of $244,000, or 277%, was a result of interest expense related to
draws in 2003 of approximately $5.4 million on a $7.0 million line of
credit.
Liquidity and Capital Resources
Sources of
Liquidity
We have historically funded our operations
primarily through the sale of our equity securities and equipment and leasehold
debt financing. As of December 31, 2004, we had received proceeds from the
sale of preferred stock of approximately $76.8 million, net of stock
issuance costs of approximately $686,000. As of December 31, 2004, we had
financed the purchase of equipment and leasehold improvements through debt
totaling approximately $10.1 million, of which $6.7 million was
outstanding at that date. The debt agreements subject us to certain non-financial
covenants. As of December 31, 2004, we were in compliance with the terms
of the debt agreements.
These obligations are secured by certain
purchased equipment and leasehold improvements and are due in monthly
installments through June 2008. They bear interest at effective rates
ranging from approximately 5.18% to 21.67% and include terminal payments at the
end of certain of the loans ranging from 7.50% to 12.75%.
Cash Flows
As of December 31, 2004, cash and cash
equivalents totaled approximately $25.1 million as compared to
$5.6 million at December 31, 2003, an increase of approximately $19.5 million.
The increase resulted primarily from net proceeds of $43.6 million from
the sale of 6.1 million shares of Series C preferred stock in March and
April 2004, partially offset by cash used in operations. As of December 31,
2003, cash and cash equivalents totaled approximately $5.6 million
compared to $10.0 million as of December 31, 2002, a decrease of
approximately $4.4 million. The decrease resulted primarily from our
operating loss of $13.3 million and principal payments of
$1.0 million on loans, partially offset by net proceeds of
$10.5 million from the sale of our Series B-2 preferred stock.
Net cash used in operating activities was
approximately $20.6 million for the year ended December 31, 2004
reflecting the net loss occurring for this period of $26.0 million, offset
primarily by non-cash charges for depreciation and amortization of
$1.4 million, issuance of options and warrants related to consulting
agreements of $169,000, stock-based compensation of $2.4 million and
deferred rent of $596,000 and an increase in accounts payable and accrued
liabilities of $913,000. Net cash used in operating activities was
approximately $12.1 million and $6.6 million for the years ended December 31,
2003 and 2002, respectively. The increase in net cash used in operating
activities was primarily due to the increase in our clinical development
activities for FavId, including enrollment and completion of two Phase 2
clinical trials and the associated costs of manufacturing product for those
trials.
Net cash used in investing activities for the
year ended December 31, 2004 totaled $5.6 million reflecting
primarily the purchase of $4.3 million of property and equipment and $1.5
million in short-term investments. Net cash used in investing activities was
approximately $7.4 million and $854,000 for the years ended December 31,
2003 and 2002, respectively. The increase in cash used from investing
activities is the result of construction of leasehold improvements for our new
manufacturing facility and the related equipment purchases of approximately
$5.6 million in 2003. In addition, in 2003 we purchased approximately
$1.6 million in money market fund investments to collateralize a letter of
credit related to the lease agreement for our new facility. For the year ended December 31, 2002,
the primary use of cash was related to the purchase of equipment used in our
operations of approximately $853,000.
Net cash provided by financing activities for
the year ended December 31, 2004 totaled $45.6 million, reflecting
primarily the net proceeds of $43.6 million from the sale of Series C
preferred stock and the net proceeds of $3.7 million from debt, offset by
$2.1 million in principal payments on the debt. Net cash
33
provided
by financing activities was approximately $15.0 million and $16.5 million
for the years ended December 31, 2003 and 2002, respectively. In 2003, the
financing activities consisted primarily of $5.4 million in proceeds from
a line of credit for certain equipment and leasehold improvements and
approximately $10.5 million in net proceeds from the sale of our
Series B-2 preferred stock, partially offset by principal payments on our
debt of $1.0 million. In 2002, these activities consisted primarily of net
proceeds of $16.1 million from the sale of our Series B preferred
stock and $650,000 in convertible bridge loans, which were converted into
Series B preferred stock, partially offset by the principal payments on
our debt of $296,000.
Funding
Requirements
Our future capital uses and requirements depend
on numerous forward-looking factors. These factors include but are not limited
to the following:
•
magnitude and cost of our product development efforts
and other research and development activities;
•
rate of progress toward obtaining regulatory approval
for our product candidates;
•
costs of filing, prosecuting, defending and enforcing
our patent claims and other intellectual property rights;
•
our ability to establish and maintain collaborative,
licensing or other arrangements for the development, sale, marketing or
distribution of our product candidates and the terms of those arrangements;
•
effects of competing technological and market
developments; and
•
the success of the commercialization of FavId.
Until we can generate significant cash from our
operations, we expect to continue to fund our operations with existing cash
resources that were primarily generated from the proceeds of offerings of our
equity securities and from equipment and leasehold improvement debt financing.
In addition, we may finance future cash needs through the sale of other equity
securities, strategic collaboration agreements and debt financing. However, we
may not be successful in obtaining collaboration agreements, or in receiving
milestone or royalty payments under those agreements. In addition, we cannot be
sure that our existing cash and cash equivalents will be adequate or that
additional financing will be available when needed or that, if available,
financing will be obtained on terms favorable to us or our stockholders. Having
insufficient funds may require us to delay, scale back or eliminate some or all
of our research or development programs or to relinquish greater or all rights
to product candidates at an earlier stage of development or on less favorable
terms than we would otherwise choose. Failure to obtain adequate financing may
also adversely affect our ability to operate as a going concern. If we raise
additional funds by issuing equity securities, substantial dilution to existing
stockholders would likely result. If we raise additional funds by incurring
debt financing, the terms of the debt may involve significant cash payment
obligations as well as covenants and specific financial ratios that may
restrict our ability to operate our business.
As of December 31, 2004, 2003
and 2002, we do not believe that we have invested in any variable interest
entities. We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. In addition, we do not engage in trading activities
involving non-exchange traded contracts. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in these relationships. We do not have relationships or transactions
with persons or entities that derive benefits from their non-independent
relationship with us or our related parties other than what is disclosed in
Note 7 of Notes to Financial Statements included elsewhere in this report.
34
Contractual
Obligations
The following summarizes our long-term
contractual obligations as of December 31, 2004:
|
|
|
Payments Due by Period
|
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 Year
|
|
1 to 3
Years
|
|
4 to 5
Years
|
|
More than
5 Years
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
obligations(1)
|
|
$
|
7,547
|
|
$
|
3,144
|
|
$
|
4,307
|
|
$
|
96
|
|
$
|
—
|
|
|
Capital lease
obligations(2)
|
|
89
|
|
44
|
|
39
|
|
6
|
|
—
|
|
|
Operating lease
obligations
|
|
30,637
|
|
1,784
|
|
3,780
|
|
4,126
|
|
20,947
|
|
|
License
obligations(3)
|
|
30
|
|
10
|
|
20
|
|
—
|
|
—
|
|
|
Supply agreement
(4)
|
|
235
|
|
235
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,538
|
|
5,217
|
|
8,146
|
|
4,228
|
|
20,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes monthly principal and
interest payments, as well as terminal payments on the loans. The effective
annual rates of interest on the loans range from 9.34% to 14.66%.
(2)
Includes monthly principal and
interest payments on capital leases. The effective annual rates of interest on
the capital leases range from 5.18% to 21.67%.
(3)
Includes an annual fee of $10,000
through our period of clinical development. Additional amounts due under the
agreement beyond the clinical development period are based upon certain events
occurring. As the timing of those events is unknown they have been excluded
from the table.
(4)
Additional amounts due under the
supply agreement of up to $300,000 are based upon certain events occurring. As
the timing of those events is unknown they have been excluded from the table.
We also enter into agreements with service
providers and clinical sites that administer and conduct our clinical trials,
respectively. We make payments to the service providers and sites based upon
the number of patients enrolled. For the years ended December 31, 2004, 2003
and 2002, we had made aggregate payments of $2.1 million, $738,000 and $457,000,
respectively, in connection with our clinical trials. At this time, due to the
variability associated with these agreements, we are unable to estimate with
certainty the future patient enrollment costs we will incur and therefore have
excluded these costs from the above table.
Purchase orders or contracts for the purchase of
raw materials and other goods and services are not included in the table
above. We are not able to determine the
aggregate amount of such purchase orders that represents contractual
obligations, as purchase orders may represent authorizations to purchase rather
than binding agreements. Our purchase orders are based on our current
manufacturing needs and are fulfilled by our vendors within relatively short time
horizons.
As of December 31, 2004, we had
$1.6 million in restricted cash associated with our facility lease.
Related Party Transactions
For a description of our related party
transactions, see “Certain Relationships and Related Transactions.”
35
Recently Issued Accounting
Pronouncements
In December 2004,
the Financial Accounting Standards Board, or FASB, issued SFAS No. 123
(revised 2004), Share-Based Payment, or
SFAS No. 123R. SFAS No. 123R, which will be effective for
our fiscal third quarter of 2005, requires that employee stock-based
compensation is measured based on its fair-value on the grant date and is
treated as an expense that is reflected in the financial statements over the
related service period. SFAS No. 123R applies to all employee equity
awards granted after adoption and to the unvested portion of equity awards
outstanding as of adoption. We currently anticipate adopting
SFAS No. 123R using the modified-prospective method effective July 1,
2005. While we are currently evaluating the impact on our financial statements
of the adoption of SFAS No. 123R, we anticipate that our adoption of
SFAS No. 123R will have a significant impact on our results of
operations for 2005 and future periods although our overall financial position
will not be effected.
Factors
that May Affect Future Operating Results
You should consider carefully
the risk factors described below, together with the other information contained
in this report. If any of the following risks actually occur, our business,
financial condition, results of operations and future growth prospects would
likely be materially and adversely affected. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of your
investment in our common stock.
Risks
Related to the Development of Our Product Candidates
We are dependent on the success
of our lead product candidate, FavId, and we cannot be certain that it will be
commercialized.
We have expended significant time, money and
effort in the development of our lead product candidate, FavId, which is still
in clinical development, has not yet received regulatory approval and may never
be commercialized. In order to commercialize FavId, we will need to demonstrate
to the FDA and other regulatory agencies that it satisfies rigorous standards
of safety and effectiveness. We initiated a pivotal Phase 3 clinical trial of
FavId following Rituxan for the treatment of follicular B-cell NHL in July 2004.
We are also evaluating FavId for use in other
B-cell NHL indications. However, even if we were to receive regulatory approval
of FavId for the treatment of indolent B-cell NHL or the other indications we
are exploring, our ability to successfully commercialize FavId could be
jeopardized by the emergence of a competitive product that exhibits greater
efficacy, longer duration of response or other benefits. In addition, because
our initial regulatory and marketing strategy contemplates the administration
of FavId to patients following treatment with Rituxan, the commercial
opportunity for FavId may be limited by the degree to which oncologists
continue to use Rituxan to treat indolent B-cell NHL. Furthermore, to the
extent FavId fails to gain market acceptance for its initial indication, it may
be more difficult for us to generate sufficient credibility with physicians and
patients to commercialize FavId for other indications.
Other than FavId, we have only two other product
development programs, which are at significantly earlier stages of development.
We plan to initiate a Phase 1/2 clinical trial evaluating the safety and
preliminary efficacy of a product candidate, FAV-201, from one of these
programs in patients with T-cell lymphoma in the second half of 2005. During
the second quarter of 2005, we intend to initiate preclinical studies to assess
the applicability of our technology to autoimmune diseases, with an initial
focus on multiple sclerosis. We cannot be certain that we will be able to
successfully develop any product candidate from these development programs. We
cannot be certain that the clinical development of FavId or any other product
candidate in preclinical testing or clinical trials will be successful, that it
will receive the regulatory approvals required to commercialize it, or that any
of our other research programs will yield a product candidate suitable for
entry into clinical trials. If we are unable to commercialize FavId or our
other product candidates, we may be unable to generate sufficient revenues to
attain or maintain profitability, our ability to raise additional capital will
be impaired and our stock price may be negatively affected.
36
Failure to obtain product
approvals by the FDA could harm our business.
We are subject to rigorous and extensive
regulation by the FDA. In the United States, our biologic product candidates,
currently in the preclinical and clinical stages of development, cannot be
marketed until they are approved by the FDA. Obtaining FDA approval involves
the submission of the results of preclinical studies and clinical trials, among
other information, of the product candidates. We may not be able to obtain FDA
approval, and, even if we are able to do so, the approval process typically
takes many years and requires the commitment of substantial effort and
financial resources. The FDA can delay, limit or deny approval of a biologic
product candidate for many reasons, including:
• the FDA may not find that the biologic product candidate is
sufficiently safe or effective;
• FDA
officials may interpret data from preclinical testing and clinical trials differently
than we do; and
• the FDA may not find our manufacturing processes or
facilities satisfactory.
In addition, the specific active immunotherapy
technology on which FavId is based is a relatively new form of cancer therapy
that presents novel issues for the FDA to consider, which may make the
regulatory process especially difficult.
We cannot assure you that any of our product
candidates in development will be approved in the United States in a timely
fashion, or at all. Failure to obtain regulatory approval of our product
candidates in a timely fashion would prevent or delay us from marketing or
selling any products and, therefore, from generating revenues from their sale.
If this occurs, we may be unable to generate sufficient revenues to attain or
maintain profitability, our ability to raise additional capital will be
impaired and our stock price may be negatively affected. In addition, both
before and after approval, we are subject to numerous FDA requirements
covering, among other things, testing, manufacturing, quality control,
labeling, advertising, promotion and export of biologics. Failure to comply
with the law, including statutes and regulations, administered by the FDA,
could result in, among others, any of the following actions:
• warning letters;
• fines and other civil penalties;
• unanticipated expenditures;
• delays in approving or refusal to approve a product
candidate;
• product recall or seizure;
• interruption of production;
• operating
restrictions;
• injunctions; and
• criminal prosecution.
Before we can seek regulatory
approval of any of our product candidates, we must successfully complete
clinical trials, which are uncertain.
Conducting clinical trials is a lengthy,
time-consuming and expensive process, and the results of these trials are
inherently uncertain. We have completed enrollment of patients in several Phase
2 clinical trials of FavId involving over 120 indolent B-cell NHL patients and
are currently conducting follow-up evaluation
37
of
those patients. We initiated a pivotal Phase 3 clinical trial of FavId for the
treatment of follicular B-cell NHL in July 2004. We estimate an 18-month
patient enrollment period and an additional 18-month evaluation period for our
pivotal Phase 3 clinical trial for FavId. Five additional Phase 2
clinical trials of FavId are either ongoing or expected to begin during the
first half of 2005. One of these clinical trials will be conducted under a
separate physician-sponsored IND in the United States. A second of these will
be conducted as a physician-sponsored clinical trial in Switzerland. Sponsorship
for a physician-sponsored IND of an ongoing Phase 2 clinical trial was
assumed in August 2004. We are also developing FAV-201 for the treatment
of T-cell lymphoma and expect to initiate a Phase 1/2 clinical trial
evaluating the safety and preliminary efficacy of FAV-201 in the second half of
2005.
We have received a Special Protocol Assessment,
or SPA, from the FDA for our recently-initiated Phase 3 clinical trial. In the
SPA process, the FDA reviewed the design, size and planned analysis of our Phase
3 clinical trial and provided comments regarding the trial’s adequacy to
form a basis with respect to effectiveness for approval of a Biologics
Licensing Application, or BLA, if the trial is successful in meeting its
predetermined objectives. The FDA’s written agreement is binding on its review
decision, except in limited circumstances, such as when a substantial
scientific issue essential to determining the safety or effectiveness of a
product candidate is identified after the Phase 3 clinical trial is commenced.
Even if a BLA is filed, there is no guarantee that the application will be
approved. Any change to the protocol for our Phase 3 clinical trial included in
the SPA would require prior FDA approval, which could delay our ability to
implement such change.
In addition, despite having received an SPA, we
may be required to conduct an additional Phase 3 clinical trial of FavId for
the treatment of indolent B-cell NHL before we can apply for regulatory
approval. Although the FDA typically requires successful results in two Phase 3
clinical trials to support marketing approval, the FDA has, on several
occasions, approved products based on a single Phase 3 clinical trial that
demonstrates a high level of statistical significance where there is an unmet need
for a life-threatening condition. We currently plan to seek FDA approval of
FavId based on our recently-initiated Phase 3 clinical trial alone. In the
event that the FDA requires the results of a second Phase 3 clinical trial
before accepting a BLA or before granting marketing approval of FavId, our
launch of FavId would be delayed, possibly by several years, and we would incur
significant costs in conducting the additional trial.
Completion of necessary clinical trials may take
several years or more. Our commencement and rate of completion of clinical
trials may be delayed by many factors, including:
• ineffectiveness of the product candidate, or perceptions by
physicians that the product candidate is not safe or effective for a particular
indication;
• inability to manufacture sufficient quantities of the
product candidate for use in clinical trials;
• delay or failure in obtaining approval of our clinical trial
protocols from the FDA;
• slower than expected rate of patient recruitment and
enrollment;
• inability to adequately follow and monitor patients after
treatment;
• difficulty in managing multiple clinical sites;
• unforeseen safety issues; and
• government or regulatory delays.
Even if we achieve positive interim results in
clinical trials, these results do not necessarily predict final results, and
positive results in early trials may not be indicative of success in later
trials. A number of companies in the pharmaceutical industry have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials. Negative or inconclusive results or adverse medical events
38
during
a clinical trial could cause us to repeat or terminate a clinical trial or
require us to conduct additional trials. Our clinical trials may be suspended
at any time for a variety of reasons, including if the FDA or we believe the
patients participating in our trials are exposed to unacceptable health risks
or if the FDA finds deficiencies in the conduct of these trials.
Failures or perceived failures in our clinical
trials will directly delay our product development and regulatory approval
process, damage our business prospects, make it difficult for us to establish
collaboration and partnership relationships, and negatively affect our
reputation and competitive position in the pharmaceutical community.
Failure to enroll patients in
our clinical trials may cause delays in developing FavId or any other product
candidate.
We may encounter delays in development and
commercialization, or fail to obtain marketing approval, of FavId or any other
product candidate that we may develop if we are unable to enroll enough
patients to complete clinical trials. Our ability to enroll sufficient numbers
of patients in our clinical trials depends on many factors, including the size
of the patient population, the nature of the protocol, the proximity of
patients to clinical sites, the eligibility criteria for the trial and
competing clinical trials. We have from time to time experienced
slower-than-expected patient enrollment in our clinical trials. Delays in
planned patient enrollment may result in increased costs and harm our ability
to complete our clinical trials and obtain regulatory approval.
The development of FavId
requires the continued availability of two FDA-approved drugs: GM-CSF and
Rituxan.
Administration of FavId requires an adjuvant to
enhance the immune response. An adjuvant is a substance that is used to enhance
the immune response. We use a white blood cell growth factor known as GM-CSF,
which is commercially available solely from Berlex Laboratories, Inc., as
an adjuvant for FavId. We currently rely on purchase orders to purchase GM-CSF
for use in our clinical trials and do not have a supply agreement with Berlex.
GM-CSF is an FDA-approved and commercially available drug that may be purchased
by physicians. Our current strategy for the initial commercialization of FavId
involves the administration of FavId following treatment with Rituxan. Rituxan
is a passive immunotherapy for patients with NHL, which is also FDA-approved
and is commercially available solely from Genentech, Inc. and Biogen Idec Inc.
We currently rely on physicians to order and administer Rituxan to patients
prior to the administration of FavId in our registration trial. If GM-CSF or
Rituxan were to become unavailable as a result of regulatory actions, supply
constraints or other reasons, our ability to continue the clinical development
of FavId would be jeopardized.
Risks
Related to Our Financial Results and Need for Financing
We have incurred significant
operating losses since inception and anticipate that we will continue to incur
substantial losses and negative cash flow from operations for the foreseeable
future.
We are a development stage company with a
limited operating history. We have financed our operations through private
placements of preferred stock and equipment and leasehold debt financing. We
have incurred losses in each year since our inception in 2000. Net losses were
$26.0 million for the year ended December 31, 2004,
$13.3 million in 2003, $7.2 million in 2002, $3.8 million in
2001 and $1.0 million in 2000. As of December 31, 2004, we had an
accumulated deficit of $79.5 million. These losses, among other things,
have had and will continue to have an adverse effect on our stockholders’
equity and working capital. We expect to incur substantial operating losses for
at least the next several years. This is due primarily to the expansion of our
clinical trials and research and development programs and, to a lesser extent,
general and administrative expenses. We also have substantial lease and debt
obligations related to our new manufacturing and headquarters facilities
impacting our operating expenses. We expect that our losses will fluctuate from
quarter to quarter and that these fluctuations may be substantial. We cannot
guarantee that we will successfully develop, manufacture, commercialize or
market any products. As a result, we cannot guarantee that we will ever achieve
or sustain product revenues or profitability.
39
We currently have no source of
revenue and may never become profitable.
Our ability to become profitable will depend
upon our ability to generate revenue. To date, FavId has not generated any
revenue, and we do not know when or if FavId will generate revenue. Our ability
to generate revenue depends on a number of factors, including our ability to:
• successfully complete clinical trials for FavId;
• obtain
regulatory approval for FavId, including regulatory approval for our commercial
scale manufacturing facility and process;
•
manufacture commercial quantities of FavId at acceptable cost levels; and
• successfully market and sell FavId.
We do not anticipate that we will generate
revenues until 2008, at the earliest. Further, we do not expect to achieve
profitability for at least several years after generating material revenues. If
we are unable to generate revenue, we will not become profitable, and we may be
unable to continue our operations.
We will need substantial
additional funds to continue operations, which we may not be able to raise on
favorable terms, or at all.
We will need substantial additional funds for
existing and planned preclinical studies and clinical trials, to continue
research and development activities, for lease and debt obligations related to
our manufacturing and headquarter facilities, and to establish manufacturing
and marketing capabilities for any products we may develop. In addition,
because we do not expect to generate revenues from the sale of our product
candidates for several years, or at all, we will also need to raise additional
capital to fund our operations.
We believe that our existing cash and cash
equivalents, together with interest thereon, will be sufficient to meet our
projected operating requirements through fiscal 2006. We will need to raise
additional funds in order to commercialize FavId, including the completion of
the construction and qualification of a commercial scale manufacturing
facility. Our forecast of the period of time through which our financial
resources will be adequate to support our operations is a forward-looking
statement and involves risks and uncertainties, and actual results could vary
as a result of a number of factors, including the factors discussed elsewhere
in this “Risk Factors” section of this report. We have based this estimate
on assumptions that may prove to be wrong, and we could utilize our available
capital resources sooner than we currently expect.
Our future capital requirements and the adequacy
of our available funds will depend on many factors, including, but not limited
to:
• magnitude and cost of our product development efforts and
other research and development activities;
• rate of progress toward obtaining regulatory approval for
our product candidates;
• costs of filing, prosecuting, defending and enforcing our
patent claims and other intellectual property rights;
• our ability to establish and maintain collaborative,
licensing or other arrangements for the development, sale, marketing or
distribution of our product candidates and the terms of those arrangements;
• effects of competing technological and market developments;
and
40
• the success of the commercialization of FavId.
Future capital requirements will also depend on
the extent to which we acquire or invest in businesses, products and
technologies, but we currently have no commitments or agreements relating to
any of these types of transactions.
We may seek to access the public or private
equity markets whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time. Additional funding may not
be available to us, and, if available, may not be on acceptable terms. If we
raise additional funds by issuing equity securities, stockholders will incur
immediate dilution. If adequate funds are not available to us, we may be
required to delay, reduce the scope of, or eliminate one or more of our
research, development and clinical activities. Alternatively, we may need to
seek funds through arrangements with collaborative partners or others that
require us to relinquish rights to technologies or product candidates that we
would otherwise seek to develop or commercialize ourselves. Any of these events
could have a material adverse effect on our business, results of operations,
financial condition or cash flow.
We are recording non-cash
compensation expense that may result in an increase of our net losses for a
given period.
Stock-based compensation represents an expense
associated with the recognition of the difference between the deemed fair value
of common stock at the time of an option grant or stock issuance and the option
exercise price or price paid for the stock. Stock-based compensation is
amortized over the vesting period of the option or issuance. As of December 31,
2004, deferred stock-based compensation related to option grants to our
employees and non-employee directors totaled $8.4 million, which is being
amortized to expense on a straight-line basis as the options or stock are
earned, generally over a period of four years. Options granted to consultants,
if any, for compensation purposes, must be remeasured at each reporting date
during the vesting period. The remeasurement and the corresponding effect on
the related expense may result in an increase in net losses for a given period.
Other
Risks Related to Our Business and Industry
We currently depend on single
source suppliers for critical raw materials for manufacturing. The loss of
these suppliers could delay our clinical trials or prevent or delay
commercialization of FavId.
We currently depend on single source suppliers
for critical raw materials used in the manufacture of FavId. In particular, our
manufacturing process for FavId requires a foreign protein derived from
shellfish that is known as keyhole limpet hemocyanin, or KLH. We purchase KLH
from biosyn Arzneimittel GmbH, or biosyn, which is currently the only supplier
of KLH that has submitted the required filing, known as a drug master file,
with the FDA. In November 2004, we entered into an eight-year supply and
license agreement with biosyn under which biosyn has agreed to supply us with
KLH and we have committed to minimum initial and annual KLH purchase
requirements. We made a $50,000 initial payment to biosyn under the agreement
and we committed to purchase $235,000 of raw material through May 2005. An
additional aggregate of up to $300,000 will be due upon the achievement of
certain milestones, the timing of which are not known
at this time. Either party may terminate the supply agreement upon a breach by
the other party that is not cured within 60 days or other events relating to
insolvency or bankruptcy. If we identify another supplier of KLH of suitable
quality for our purposes, we will not be able to use the supplier as a second
source of KLH for the commercial manufacture of FavId unless the KLH is tested
to be comparable to the existing KLH.
In addition, we depend on a single source
supplier for the cell growth media we use to produce FavId. We purchase this
material from Expression Systems LLC, which in turn obtains several of the
components used in the cell growth media from sole suppliers. We currently rely
on purchase orders to obtain this material and do not have a supply agreement
with Expression Systems. We intend to qualify a second source for the cell
growth media but may not be able to do so.
41
Establishing additional or replacement suppliers
for these materials may take a substantial amount of time. In addition, we may
have difficulty obtaining similar materials from other suppliers that are
acceptable to the FDA. If we have to switch to a replacement supplier, we may
face additional regulatory delays and the manufacture and delivery of FavId, or
any other product candidates that we may develop, could be interrupted for an
extended period of time, which may delay completion of our clinical trials or
commercialization. If we are unable to obtain adequate amounts of these
materials, our clinical trials will be delayed. In addition, we will be
required to obtain regulatory clearance from the FDA to use different materials
that may not be as safe or as effective. As a result, regulatory approval of
FavId, or any other product candidates that we may develop, may not be received
at all.
We rely on third parties to
conduct our clinical trials. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may be delayed or
may not be able to obtain regulatory approval for or commercialize FavId or any
other product candidates that we may develop.
We expect our pivotal Phase 3 clinical trial of
FavId for the treatment of follicular B-cell NHL to be conducted at 65 or more
sites in the United States and to require at least 342 evaluable patients. We
expect that at least three clinical trials of FavId will be conducted under the
direction of a physician sponsor, rather than under our supervision. We do not
have the ability to independently conduct clinical trials for FavId, or any
other product candidate that we may develop, and we must rely on third parties,
such as medical institutions and clinical investigators, including physician
sponsors, to conduct our clinical trials. In particular, we will rely on these
parties to recruit and enroll patients in our clinical trials. We also rely on
third-party couriers to transport patient tissue samples and FavId. If any of
the third parties upon whom we rely to conduct our clinical trials or transport
patient tissue samples and immunotherapies do not comply with applicable laws,
successfully carry out their obligations or meet expected deadlines, and need
to be replaced, our clinical trials may be extended, delayed or terminated.
If the quality or accuracy of the clinical data
obtained by medical institutions and clinical investigators, including
physician sponsors, is compromised due to their failure to adhere to applicable
laws, our clinical protocols or for other reasons, we may not be able to obtain
regulatory approval for or successfully commercialize FavId, or any other
product candidates that we may develop. If any of our relationships with any of
these organizations or individuals terminates, we believe that we would be able
to enter into arrangements with alternative third parties. However, replacing
any of these third parties would delay our clinical trials and could jeopardize
our ability to commercialize FavId and our other product candidates on a timely
basis, or at all.
Even if we obtain regulatory
approval, we will continue to be subject to extensive government regulation
that may cause us to delay the introduction of our products or withdraw our
products from the market.
Even if we obtain regulatory approval for FavId
or our other product candidates, we will still be subject to extensive
regulation. These regulations will impact many aspects of our operations,
including production, record keeping, quality control, adverse event reporting,
storage, labeling, advertising, promotion and personnel. In addition, the later
discovery of previously unknown problems may result in restrictions of the
product candidates, including their withdrawal from the market. Furthermore,
regulatory approval may subject us to ongoing requirements for post-marketing
studies. If we or any third party that we involve in our operations fail to
comply with any continuing regulations, we may be subject to, among other
things, product seizures, recalls, fines or other civil penalties, injunctions,
suspensions or revocations of marketing licenses, operating restrictions and
criminal prosecution.
Before we can obtain marketing
approval for or commercially distribute FavId, the FDA and the California
Department of Health Services must find our manufacturing facility and process
satisfactory.
Our manufacturing methods, equipment and
processes must comply with the FDA’s current Good Manufacturing Practices, or
cGMP, requirements. We may also need to perform extensive audits of
42
vendors,
contract laboratories and suppliers. The cGMP requirements govern, among other
things, record keeping, production processes and controls, personnel and
quality control. We have only undertaken initial steps towards achieving
compliance with these regulatory requirements. Additional steps will require
expenditure of significant time, money and effort. We cannot predict the
likelihood that the FDA will find our facility satisfactory, even if we believe
that we have taken the necessary steps to achieve compliance. If we fail to
comply with these requirements or fail to pass a pre-approval inspection of our
manufacturing facility in connection with an application to obtain marketing
approval for FavId or another product candidate, we would not receive
regulatory approval, and we would be subject to possible regulatory action.
We plan to manufacture FavId for our
recently-initiated Phase 3 and for the planned and ongoing Phase 1/2
clinical trials at our facility in San Diego. Our manufacturing facility is
subject to the licensing requirements of the California Department of Health
Services. Our facility was inspected and licensed by the California Department
of Health Services. Our facility is subject to re-inspection at any time.
Failure to maintain a license from the California Department of Health Services
or to meet the inspection criteria of the California Department of Health
Services would disrupt our manufacturing processes and prevent us from
supplying FavId to patients. If an inspection by the California Department of
Health Services indicates that there are deficiencies in our manufacturing
process, we could be required to take remedial actions at potentially
significant expense, and our facility may be temporarily or permanently closed.
We will need to construct and qualify a
commercial scale manufacturing facility in order to commercialize FavId or any
other product candidates that we may develop. Preparing a facility for
commercial manufacturing may involve unanticipated delays and the costs of
complying with FDA regulations may be significant. In addition, any material
changes we make to the manufacturing process after approval may require
approval by the FDA and state regulatory authorities. Obtaining these approvals
is a lengthy, involved process, and we may experience delays that could limit
our ability to manufacture commercial quantities, increase our costs and
adversely affect our business.
We may experience difficulties
in manufacturing FavId or any other product candidates that we may develop,
which could prevent us from completing our ongoing clinical trials and
commercializing these product candidates.
Manufacturing FavId is a complex, multi-step
process that requires us to expend significant time, money and effort in
production, record keeping and quality systems to assure that FavId will meet
product specifications and other regulatory requirements. To date, we have manufactured
FavId only for use in Phase 2 clinical trials and have no experience in
manufacturing FavId for the number of patients that we expect to enroll in our
Phase 3 clinical trial or for the commercial quantities that might be required
if we receive regulatory approval. In particular, we cannot be sure that we
will be able to manufacture FavId at a cost that would enable commercial use.
We may experience any of the following problems in our efforts to manufacture
our product candidates for our expanding clinical trials or on a commercial
scale:
• failure to obtain a sufficient supply of key raw materials;
• difficulties in completing the development and validation of
the specialized assays required to ensure the consistency of our product
candidates, including FavId;
• difficulties in obtaining adequate tumor samples from
treating physicians and hospitals;
• difficulties in manufacturing FavId for multiple patients
simultaneously;
•
difficulties in the timely shipping of tumor samples to us or in the shipping
of FavId to the treating physicians due to errors by third-party couriers,
transportation restrictions or other reasons;
• failure to ensure adequate quality control and assurance in
the manufacturing process as we
43
increase
the production quantities of FavId;
• difficulties in establishing and effectively managing a
commercial-scale manufacturing facility;
• failure to comply with regulatory requirements, such as FDA
regulations and environmental laws;
• significant changes in regulatory requirements;
• damage to or destruction of our manufacturing facility or
equipment; and
• shortages of qualified personnel.
In addition, because our manufacturing process
only begins upon our receipt of a patient’s tumor biopsy, we cannot produce
inventory reserves of our product candidate to be stored in anticipation of any
of these potential manufacturing problems. The failure to produce an adequate
supply of FavId could delay our clinical trials and, in turn, delay submission
of a BLA for FavId and commercial launch. Similarly, any difficulties we
experience in the manufacture and supply of other product candidates, such as
FAV-201, would delay the clinical trials of those product candidates.
If our manufacturing facility
is damaged or destroyed, our ability to manufacture products will be
significantly affected, which could delay or prevent completion of our clinical
trials and commercialization of FavId or any other product candidates that we
may develop.
We currently rely on the availability and
condition of our manufacturing facility in San Diego to manufacture FavId. We
lease the property where this facility is located under a lease agreement that
expires August 31, 2018 but may be extended at our option for two
additional five-year periods. After that time, we may not be able to negotiate
a new lease for our facility. If the facility or our equipment in the facility
is damaged or destroyed, we will not be able to quickly or inexpensively
replace our manufacturing capacity. This would significantly affect our ability
to complete clinical trials of, and to manufacture and commercialize, FavId, or
any other product candidates that we may develop.
In addition, our facilities have been subject to
electrical blackouts as a result of a shortage of available electrical power.
Although we have back-up emergency power generators to cover energy needs for
key support systems, a lengthy outage could disrupt the operations of our
facilities and clinical trials. While we carry business interruption insurance,
this insurance may not be adequate. Any significant business interruption could
cause delays in our product development and harm our business.
If we do not develop a
sufficient sales and marketing force or enter into agreements with third
parties to sell and market FavId, we may not be able to successfully
commercialize our products, which would limit our ability to earn product
revenues.
We plan to retain exclusive worldwide rights to
FavId for oncology indications at least through the completion of our BLA
filing with the FDA for approval to market FavId in the United States. If we
are successful in obtaining BLA approval or foreign marketing approval for
FavId, we will need to establish sales and marketing capabilities. In the
United States, we plan to do this either by establishing our own sales force or
by entering into a co-promotion arrangement with a sales and distribution
partner. Outside of the United States, we plan to establish strategic collaborations
for the development and marketing of FavId.
We do not presently possess the resources or
experience necessary to market FavId or our other product candidates ourselves,
and we currently have no arrangements for the promotion or distribution of our
product candidates. Our future commercial success will depend on our ability to
establish our own sales and marketing infrastructure or to collaborate with
third parties that have greater sales and marketing experience and resources.
Developing effective internal sales and marketing capabilities, which would
include the hiring of a sales force, would require a significant amount of our
financial resources and time.
44
We may be unable to establish and manage an
effective sales force in a timely or cost-effective manner, or at all, and any
sales force we do establish may not be capable of generating demand for FavId
or any other product candidate we may develop. In addition, if we cannot enter
into co-promotion arrangements in the United States, or other strategic
collaborations for the development and marketing of FavId in other countries,
in a timely manner and on acceptable terms, we may not be able to successfully
commercialize FavId or any other product candidate that we may develop.
To the extent that we enter into arrangements
with third parties to perform sales, marketing and distribution services, our
product revenues are likely to be lower than if we directly marketed and sold
FavId, or any other product candidates that we may develop. If we are unable to
establish adequate sales, marketing and distribution capabilities,
independently or with others, we will not be able to generate product revenue
and will not become profitable.
If physicians and patients do
not use any of our products that may be approved, our ability to generate
revenue in the future will be limited.
If approved, FavId and other product candidates
that we may develop may not gain market acceptance among physicians, healthcare
payors, patients and the medical community. Demand for any approved product
that we may develop will depend on many factors, including:
• our ability to provide acceptable evidence of safety and
efficacy;
• convenience and ease of administration;
• availability of alternative treatments;
• cost
effectiveness;
•
continuing widespread use of Rituxan to treat our initial target disease
market;
• effectiveness of our regulatory and marketing strategies;
• prevalence and severity of adverse side effects;
• publicity concerning our products or competitive products;
and
• our ability to obtain third-party coverage or reimbursement.
Furthermore, to the extent FavId fails to gain
market acceptance for its initial indication, it may be more difficult for us
to generate sufficient credibility with physicians and patients to
commercialize FavId for other indications.
If we are unable to obtain
acceptable prices or adequate coverage and reimbursement from third-party
payors for FavId, or any other product candidates that we may develop, our
revenues and prospects for profitability will suffer.
Our ability to commercialize FavId, or any other
product candidates that we may develop, depends on the extent to which coverage
and reimbursement for FavId, or any other product candidates that we may
develop, will be available from:
• governmental payors, such as Medicare and Medicaid;
• private health insurers, including managed care
organizations; and
• other third-party payors.
45
Many patients will not be capable of paying for
FavId, or any other product candidates that we may develop,
themselves and will rely on third-party payors to pay for their medical needs.
The federal and state governments, insurance companies, managed care
organizations and other third-party payors are actively seeking to contain or
reduce costs of health care in the United States and exert increasing influence
on decisions regarding the use of, and reimbursement levels for, particular
treatments. Such third-party payors, including Medicare, are scrutinizing newly
approved medical products and services and may not cover or may limit coverage
and reimbursement for our product candidates. In particular, third-party payors
may limit the indications for which they will reimburse patients who use FavId,
or any other product candidates that we may develop. Cost-control initiatives
could cause us to decrease the price we might establish for FavId, or any other
product candidates that we may develop, which would result in lower product
revenues. If the prices for FavId, or any other product candidates that we may
develop, decrease or if governmental and other third-party payors do not
provide adequate coverage and reimbursement levels for FavId, or any other product
candidates that we may develop, our revenue and prospects for profitability
will suffer.
If we are unable to establish
or manage strategic collaborations in the future, our revenue and product
development may be limited.
Our strategy may include reliance on strategic
collaborations for co-promotion of FavId in the United States. In addition, we
expect to rely on strategic collaborators for commercialization of FavId
outside of the United States and, to an even greater extent, for worldwide
development and commercialization of product candidates and programs for
chronic autoimmune diseases, such as multiple sclerosis. To date, we have not
entered into any agreements with third parties for any of these services and do
not plan to establish a collaboration for FavId until
at least completion of a BLA filing.
Establishing strategic collaborations is
difficult and time-consuming. Our discussions with potential collaborators may
not lead to the establishment of new collaborations on favorable terms, or at
all. For example, potential partners may reject collaborations based upon their
assessment of our financial, regulatory or intellectual property position. If
we successfully establish new collaborations, these relationships may never
result in the successful development or commercialization of our product
candidates or the generation of sales revenue. To the extent that we enter into
co-promotion or other collaborative arrangements, our product revenues are
likely to be lower than if we directly marketed and sold any products that we
may develop.
Management of any collaborative relationship we
may establish in the future will require:
• significant time and effort from our management team;
• coordination of our research and development programs with
the research and development priorities of our collaborators; and
• effective allocation of our resources to multiple projects.
If we enter into development or
commercialization collaborations, our success will in part depend on the
performance of our corporate collaborators. We will not directly control the
amount or timing of resources devoted by our corporate collaborators to
activities related to our product candidates. Our corporate collaborators may
not commit sufficient resources to our research and development programs or the
commercialization, marketing or distribution of our product candidates. If any
corporate collaborator fails to commit sufficient resources, our preclinical or
clinical development related to the collaboration could be delayed or terminated.
Also, our collaborators may pursue development or commercialization of other
products, product candidates or alternative technologies in preference to our
product candidates. Finally, our collaborators may terminate our relationships,
and we may be unable to establish additional corporate collaborations in the
future on acceptable terms, or at all.
46
Our efforts to discover,
develop and commercialize new product candidates beyond FavId are at an early
stage and are subject to a high risk of failure.
Our strategy is focused on the research,
development and commercialization of targeted immunotherapies for the treatment
of cancer and other diseases of the immune system. The process of successfully developing
product candidates is very time-consuming, expensive and unpredictable. We have
only recently begun to direct significant effort toward the development of
product candidates in addition to FavId, such as FAV-201 for T-cell lymphoma
and a preclinical product candidate for the treatment of multiple sclerosis. We
do not know whether our planned preclinical studies or clinical trials for
these other product candidates will begin on time or be completed on schedule,
or at all. In addition, we do not know whether these clinical trials will
result in marketable products. Typically, there is a high rate of attrition for
product candidates in preclinical and clinical trials. We do not anticipate
that any of our product candidates will reach the market for at least several
years.
We may not identify, develop or commercialize
any additional new product candidates from our proprietary active immunotherapy
technology. Our ability to develop successfully any of these product candidates
depends on our ability to demonstrate safety and efficacy in humans through
extensive preclinical testing and clinical trials and to obtain regulatory
approval from the FDA and other regulatory authorities. Development of our
product candidates will also depend substantially upon the availability of
funding for our research and development programs.
If our competitors develop and
market products that are more effective than our existing product candidates or
others we may develop, or obtain marketing approval before we do, our commercial
opportunity may be reduced or eliminated.
The development and commercialization of new
pharmaceutical products for the treatment of cancer and autoimmune diseases is
competitive, and we will face competition from numerous sources, including
major pharmaceutical companies, specialty pharmaceutical companies and
biotechnology companies worldwide. Many of our competitors have substantially
greater financial and technical resources and development, production and
marketing capabilities than we do. In addition, many of these companies have
more experience than we do in preclinical testing, clinical trials and
manufacturing of biologic therapeutics, as well as in obtaining FDA and foreign
regulatory approvals. We will also compete with academic institutions,
governmental agencies and private organizations that are conducting research in
the fields of cancer and autoimmune disease. Competition among these entities
to recruit and retain highly qualified scientific, technical and professional
personnel and consultants is also intense.
We are aware of a number of companies that are
developing active immunotherapies to treat B-cell NHL. Genitope Corporation and
Large Scale Biology Corporation, or LSBC, are evaluating idiotype
immunotherapies in clinical trials. Genitope is conducting a Phase 3 clinical
trial of its active immunotherapy product candidate in patients with follicular
B-cell NHL who are in remission following prior treatment with chemotherapy.
LSBC completed a Phase 1 clinical trial of a personalized cancer immunotherapy
candidate in B-cell NHL. Antigenics, Inc. completed a Phase 2 clinical
trial evaluating its active immunotherapy candidate in indolent NHL patients.
The NCI is also conducting a Phase 3 clinical trial of an active idiotype immunotherapy
in collaboration with Accentia Biopharmaceuticals.
Several companies are engaged in the development
and commercialization of passive immunotherapy products for the treatment of
B-cell NHL that may compete with FavId. Genentech and Biogen Idec are co-marketing
Rituxan for the treatment of relapsed or refractory, indolent B-cell NHL.
Biogen Idec has also received FDA approval to market Zevalin, its passive
radioimmunotherapy product. GlaxoSmithKline plc and Corixa Corporation have
received FDA approval to market Bexxar, a passive radioimmunotherapy product.
The most recent advances in the treatment of
B-cell NHL have involved the combination of existing products and changes to
approved schedules and doses, particularly for Rituxan. Numerous clinical trials
reported in recent years have indicated that additional doses of Rituxan and
maintenance dosing of Rituxan can improve the TTP in patients who respond to
therapy. Combination therapies involving
47
chemotherapeutic or immunostimulatory drugs in
combination with Rituxan at various doses and schedules may provide patients
with an increase in TTP over that expected with Rituxan alone. Accordingly, we
may face competition as a result of developments in this area.
We expect that our ability to compete
effectively will depend upon our ability to:
• successfully and rapidly complete clinical trials and obtain
all requisite regulatory approvals in a cost-effective manner;
• reliably and cost-effectively manufacture sufficient
quantities of our products;
• maintain
a proprietary position for our manufacturing process and other technology;
• price our
products competitively;
• obtain
appropriate reimbursement approvals for our products;
• establish
an adequate sales and marketing force for our products; and
• attract
and retain key personnel.
In addition, our ability to compete effectively
will depend on the relative efficacy and safety of other active immunotherapy
products approved for sale as compared to our own products.
We are subject to new
legislation, regulatory proposals and managed care initiatives that may
increase our costs of compliance and adversely affect our ability to market our
products, obtain collaborators and raise capital.
There have been a number of legislative and
regulatory proposals aimed at changing the healthcare system and pharmaceutical
industry, including reductions in the cost of prescription products and changes
in the levels at which consumers and healthcare providers are reimbursed for
purchases of pharmaceutical products. For example, the Prescription Drug and
Medicare Improvement Act of 2003 was recently enacted.
This legislation provides a new Medicare prescription drug benefit beginning in
2006 and mandates other reforms. Although we cannot predict the full effects on
our business of the implementation of this new legislation, it is possible that
the new benefit, which will be managed by private health insurers, pharmacy
benefit managers and other managed care organizations, will result in decreased
reimbursement for prescription drugs, which may further exacerbate
industry-wide pressure to reduce the prices charged for prescription drugs.
This could harm our ability to market our products and generate revenues.
We depend on attracting and
retaining key scientific and management personnel to advance our technology,
and the loss of these personnel could impair the development of our products.
Our success depends on
our continued ability to attract, retain and motivate highly qualified
management, clinical and scientific personnel and on our ability to develop and
maintain important relationships with leading academic institutions, clinicians
and scientists. We are highly dependent upon our senior management and
scientific staff, particularly John P. Longenecker, Ph.D., our President and
Chief Executive Officer, and Daniel P. Gold, Ph.D., one of our co-founders and
our Chief Scientific Officer. The loss of services of Dr. Longenecker or
Dr. Gold, or one or more of our other members of senior management, could
delay or prevent the successful completion of our pivotal Phase 3 clinical
trial or the commercialization of FavId. Although we have employment agreements
with each of our executives, their employment with us is “at will,” and each
executive can terminate his or her agreement with us at any time. We do not
carry “key person” insurance covering members of senior management, other than
Drs. Longenecker and Gold. This insurance may not continue to be available on
commercially reasonable terms and may prove inadequate to compensate us for the
loss of their services.
48
The competition for
qualified personnel in the biotechnology field is intense. In particular, our
manufacturing process depends on our ability to attract and retain qualified
manufacturing and quality control personnel. We will need to hire additional personnel
as we continue to expand our manufacturing, research and development
activities. We may not be able to attract and retain quality personnel on
acceptable terms given the competition for such personnel among biotechnology,
pharmaceutical and other companies. We are not aware of any key personnel
planning to retire or terminate their employment in the near future.
We
will need to increase the size of our organization, and we may experience
difficulties in managing growth.
As of December 31,
2004, we had 109 full-time equivalent employees, consisting of 60 employees in
manufacturing, quality control and quality assurance, 27 in research and
development, and 22 in senior management and administration. We will need to
expand our financial, managerial, operational and other resources in order to
continue our clinical trials and commercialize FavId, FAV-201, or any other
product candidates that we may develop. Future growth will impose significant
added responsibilities on our management team, including the need to identify,
recruit, maintain and integrate additional employees. Our ability to
commercialize FavId, FAV-201, or any other product candidates that we may
develop, and our
future financial performance in general, will depend in part on our ability to
manage any future growth effectively. In order to meet these challenges, we
will need to:
•
manage our clinical trials effectively;
•
manage our research and development efforts effectively;
•
develop our administrative, accounting and management information systems and
controls; and
•
hire, train and integrate additional management, administrative, manufacturing
and sales and marketing personnel.
We may not be able to
accomplish these tasks, and our failure to accomplish any of them could harm
our business or future prospects.
If we
use biological and hazardous materials in a manner that causes injury or
violates laws, we may be liable for damages.
Our research and
development and manufacturing activities involve the use of biological and
hazardous materials that could be dangerous to human health, safety or the
environment. Although we believe our safety procedures for handling and
disposing of these materials comply with federal, state and local laws and
regulations, we cannot entirely eliminate the risk of accidental injury or
contamination from the use, storage, handling or disposal of these materials.
In the event of contamination or injury, we could be held liable for any
resulting damages, and any liability could exceed our resources. We currently
maintain property and casualty insurance coverage in the amount of
$1.0 million per occurrence and $2.0 million in the aggregate, which
covers liability for hazardous and controlled materials, at a cost of
approximately $57,000 per year. However, this insurance coverage may not be
sufficient to cover our liability and we may not be able to obtain sufficient
coverage in the future at a reasonable cost. In addition, we may incur
significant costs complying with both existing and future environmental laws
and regulations. In particular, we are subject to regulation by the
Occupational Safety and Health Administration, or OSHA, and the Environmental
Protection Agency, or EPA, and to regulation under the Toxic Substances Control
Act and the Resource Conservation and Recovery Act. OSHA, the EPA or other
agencies may adopt regulations that adversely affect our research and
development programs.
49
We
face a risk of product liability claims and may not be able to obtain adequate
insurance.
Our business exposes
us to potential liability risks that may arise from the clinical testing of our
product candidates and the manufacture and sale of any approved products. These
risks will exist even with respect to those product candidates that are
approved for commercial sale by the FDA and manufactured in facilities
regulated by the FDA. Any product liability claim or series of claims brought
against us could significantly harm our business by, among other things, reducing
demand for our products, injuring our reputation and creating significant
adverse media attention and costly litigation. Plaintiffs have received
substantial damage awards in some jurisdictions against pharmaceutical
companies based upon claims for injuries allegedly caused by the use of their
products. Any judgment against us that is in excess of our insurance policy
limits would have to be paid from our cash reserves, which would reduce our
capital resources. We currently maintain clinical trial insurance in the amount
of $6.0 million per occurrence and in the aggregate, which covers
liability for up to 251 patients in our clinical trials, at a cost of
approximately $59,000 per year. Although we believe this insurance is adequate,
we cannot be certain that it will be sufficient. Furthermore, we cannot be
certain that our current insurance coverage will continue to be available, or
that increased coverage, which will be necessary if we are able to
commercialize our products, will be available in the future on reasonable
terms, or at all. Further, we may not have sufficient capital resources to pay
a judgment, in which case our creditors could levy claims against our assets,
including our intellectual property.
We
could be negatively impacted by future interpretation or implementation of
federal and state fraud and abuse laws, including anti-kickback laws and other
federal and state anti-referral laws.
If we are able to
commercialize FavId or any other product candidates that we may develop, we
will be subject to various federal and state laws pertaining to healthcare
fraud and abuse, including anti-kickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state healthcare programs, including Medicare, Medicaid and
Veterans Administration health programs. Because of the far-reaching nature of
these laws, we may be required to alter one or more of our practices to be in
compliance with these laws. Healthcare fraud and abuse regulations are complex,
and even minor, inadvertent irregularities can potentially give rise to claims
that a statute or prohibition has been violated. Any violations of these laws, or
any action against us for violation of these laws, even if we successfully
defend against it, could result in a material adverse effect on our business,
financial condition and results of operations. If there is a change in law,
regulation or administrative or judicial interpretations, we may have to change
our business practices or our existing business practices could be challenged
as unlawful, which could have a material adverse effect on our business,
financial condition and results of operations. In addition, some allegations
under these laws have been claimed to violate the False Claims Act, discussed
in more detail below.
In addition, if we are
able to commercialize FavId or any other product candidates that we may
develop, we could become subject to false claims litigation under federal
statutes, which can lead to civil money penalties, criminal fines and
imprisonment, and exclusion from participation in Medicare, Medicaid and other
federal and state healthcare programs. These false claims statutes include the
False Claims Act, which allows any person to bring suit on behalf of the
federal government alleging the submission of false or fraudulent claims, or
causing to present such false or fraudulent claims, under federal programs or
contracts claims or other violations of the statute and to share in any amounts
paid by the entity to the government in fines or settlement. These suits
against biotechnology companies have increased significantly in recent years
and have increased the risk that a healthcare company will have to defend a
false claim action, pay fines or be excluded from the Medicare, Medicaid or
other federal and state healthcare programs as a result of an investigation
arising out of such action. We cannot assure you that we will not become
subject to such litigation or, if we are not successful in defending against
such actions, that such actions will not have a material adverse effect on our
business, financial condition and results of operations. In addition, we cannot
assure you that the costs of defending claims or allegations under the False
Claims Act will not have a material adverse effect on our business, financial
condition and results of operations.
50
Risks Related to Our Intellectual Property and Potential
Litigation
If we
are unable to obtain and maintain protection for our intellectual property, the
value of our technology and products may be adversely affected.
Our business and
competitive positions are dependent upon our ability to protect our proprietary
technology. Because of the substantial length of time and expense associated
with development of new products, we, along with the rest of the
biopharmaceutical industry, place considerable importance on obtaining and maintaining
patent protection for new technologies, products and processes. The patent
positions of pharmaceutical, biopharmaceutical and biotechnology companies,
including us, are generally uncertain and involve complex legal and factual
questions. Our patent applications may not protect our technologies and
products because, among other things:
•
there is no guarantee that any of our pending patent applications will result
in issued patents;
•
we may develop additional proprietary technologies that are not patentable;
•
there is no guarantee that any patents issued to us, our collaborators or our
licensors will provide a basis for a commercially viable product;
•
there is no guarantee that any patents issued to us or our collaborators or our
licensors will provide us with any competitive advantage;
•
there is no guarantee that any patents issued to us or our collaborators or our
licensors will not be challenged, circumvented or invalidated by third parties;
and
•
there is no guarantee that any patents previously issued to others or issued in
the future will not have an adverse effect on our ability to do business.
We attempt to protect
our intellectual property position by filing United States patent applications
related to our proprietary technology, inventions and improvements that are
important to the development of our business. Currently we own five pending
United States patent applications covering methods of treating immune system
diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy
production methods, as well as methods for combining the idiotype or T-cell
receptor-based immunotherapies with other therapies that are used to treat
diseases of the immune system.
We also have 19 patent
applications pending outside of the United States. Limitations on patent
protection in some countries outside the United States, and the differences in
what constitutes patentable subject matter in these countries, may limit the
protection we have under patents issued to us outside of the United States. In
addition, laws of foreign countries may not protect our intellectual property
to the same extent as would laws of the United States. In determining whether
or not to seek a patent or to license any patent in a particular foreign
country, we weigh the relevant costs and benefits, and consider, among other
things, the market potential of our product candidates in the jurisdiction, and
the scope and enforceability of patent protection afforded by the law of the
jurisdiction. Failure to obtain adequate patent protection for our proprietary
product candidates and technology would impair our ability to be commercially
competitive in these markets.
We
are not able to prevent others, including potential competitors, from using
certain types of patient-specific idiotype protein-KLH conjugates, like those
we use in our lead product candidate, FavId, for the treatment of indolent
B-cell NHL.
Certain types of
patient-specific idiotype-KLH conjugates, comprising single idiotype proteins,
and their use for the treatment of indolent B-cell NHL are in the public domain
and therefore cannot be patented. Consequently, we may only be able to seek
patent protection for methods of treating immune system diseases, including
B-cell and T-cell lymphomas, using our proprietary immunotherapy production
51
methods for making
idiotype protein conjugates and compositions comprising such conjugates, as
well as methods for combining the idiotype or T-cell receptor-based immunotherapies
with other therapies that are used to treat diseases of the immune system. As a
result, we may not be able to prevent other companies using different
manufacturing processes from developing active immunotherapies that directly
compete with FavId.
We
may have to engage in costly litigation to enforce our proprietary rights or to
defend challenges to our intellectual property by our competitors, which may
harm our business, results of operations, financial condition and cash flow.
The pharmaceutical
field is characterized by a large number of patent filings involving complex
legal and factual questions, and, therefore, we cannot predict with certainty
whether our patents will be enforceable. Competitors may have filed
applications for or have been issued patents and may obtain additional patents
and proprietary rights related to products or processes that compete with or
are similar to ours. We may not be aware of all of the patents potentially
adverse to our interests that may have been issued to others. Litigation may be
necessary to protect our patent position, and we cannot be certain that we will
have the required resources to pursue litigation or otherwise to protect our
patent rights. In addition, our efforts to protect our patents may not be
successful.
Our
ability to market our products may be impaired by the intellectual property
rights of third parties.
Our commercial success
will depend in part on not infringing the patents or proprietary rights of
third parties. We are aware of competing intellectual property relating to
active idiotype immunotherapies for cancer. Competitors or third parties may be
issued patents that may cover subject matter that we use in developing the
technology required to bring our product candidates to market, that we use in
producing our product candidates, or that we use in treating patients with our
product candidates. In addition, from time to time we receive correspondence
inviting us to license patents from third parties. While we currently believe
we have freedom to operate in these areas, others may challenge our position in
the future. There has been, and we believe that there will continue to be,
significant litigation in the pharmaceutical industry regarding patent and
other intellectual property rights.
For example, we are
aware of patents held by Genentech relating to the expression of recombinant
antibodies, by Genitope relating to immunotherapy using idiotype proteins
produced using T-lymphoid cells for the treatment of B-cell lymphoma, by Texas
A&M University relating to the production of proteins in insect cells, and
by Schering Corp. relating to the use of GM-CSF as a vaccine adjuvant for use
against infectious diseases. While we believe that our pre-commercialization
activities fall within the scope of an available exemption against patent
infringement provided by 35 U.S.C. §271(e), and that our subsequent
manufacture of our commercial products will also not require the license of any
of these patents, claims may be brought against us in the future based on these
or other patents held by others. Third parties could bring legal actions
against us claiming damages and seeking to enjoin clinical testing,
manufacturing and marketing of the affected product or products. If we become
involved in any litigation, it could consume a substantial portion of our
resources, regardless of the outcome of the litigation. If any of these actions
are successful, in addition to any potential liability for damages, we could be
required to obtain a license to continue to manufacture or market the affected
product, in which case we may be required to pay substantial royalties or grant
cross-licenses to our patents. However, there can be no assurance that any such
license will be available on acceptable terms or at all. Ultimately, we could
be prevented from commercializing a product, or forced to cease some aspect of
our business operations, as a result of patent infringement claims, which could
harm our business.
If we
are not able to protect and control unpatented trade secrets, know-how and
other technological innovation, we may suffer competitive harm.
We also rely on trade
secrets to protect our technology, particularly when we do not believe that
patent protection is appropriate or available. However, trade secrets are
difficult to protect. We attempt to protect our trade secrets by requiring each
of our employees, consultants and advisors to execute a non-disclosure
52
and assignment of
invention agreement before beginning his or her employment, consulting or
advisory relationship with us. We cannot guarantee that these agreements will
provide meaningful protection, that these agreements will not be breached, that
we will have an adequate remedy for any such breach, or that our trade secrets
will not otherwise become known or independently developed by a third party.
Our trade secrets, or those of our future collaborators, may become known or
may be independently discovered by others, which could adversely affect the
competitive position of our product candidates.
Risks Related to the Securities Markets and Ownership of Our
Common Stock
There
has been no prior public market for our common stock, and the price of our
common stock may be volatile and could decline significantly.
Until our initial
public offering in February 2005, there was no public market for our
common stock, and despite our initial public offering, an active public market
for these shares may not develop or be sustained.
The stock market in
general has been experiencing dramatic fluctuations that have often been
unrelated to the operating performance of companies. The market prices for
securities of biotechnology companies in general have been highly volatile and
may continue to be highly volatile in the future. If market-based or
industry-based volatility continues, the trading price of our common stock
could decline significantly, independent of our actual operating performance,
and you could lose all or part of your investment. The market price of our
common stock could fluctuate significantly as a result of several factors,
including:
•
announcements of technological innovations or new products by us or our
competitors;
•
announcement of FDA approval or non-approval of FavId or any other product
candidates that we may develop, or delays in the FDA review process;
•
actions taken by regulatory agencies with respect to FavId and FAV-201, or any
other product candidates that we may develop, or our clinical trials,
manufacturing process or sales and marketing activities;
•
regulatory developments in the United States and foreign countries;
•
success of our research efforts and clinical trials;
•
any intellectual property infringement lawsuit in which we may become involved;
•
announcements concerning our competitors, or the biotechnology or
biopharmaceutical industries in general;
•
actual or anticipated fluctuations in our operating results;
•
changes in financial estimates or recommendations by securities analysts;
•
sales of large blocks of our common stock;
•
sales of our common stock by our executive officers, directors and significant
stockholders;
•
changes in accounting principles; and
•
loss of any of our key scientific or management personnel.
Specifically, you may
not be able to resell your shares at or above the price you paid for such
shares. In addition, class action litigation has often been instituted against
companies whose securities have experienced periods of volatility in market
price. Any such litigation brought against us could result in
53
substantial costs and
a diversion of management’s attention and resources, which could hurt our
business, operating results and financial condition.
Concentration
of ownership among our existing officers, directors and principal stockholders
may prevent other stockholders from influencing significant corporate decisions
and depress our stock price.
As of December 31,
2004, our officers, directors and those stockholders owning at least five
percent of our outstanding capital stock together beneficially held
approximately 77.1% of our outstanding common stock on an as-converted basis.
As of March 18, 2005, these stockholders beneficially own, in the
aggregate, approximately 69.6% of our common stock. If some or all of these
officers, directors and principal stockholders act together, they will be able
to exert a significant degree of influence over our management and affairs and
over matters requiring stockholder approval, including the election of
directors, the merger, consolidation or sale of all or substantially all of our
assets, and any other significant corporate transaction. The interests of this
concentration of ownership may not always coincide with our interests or the
interests of our other stockholders. For instance, officers, directors and
principal stockholders, acting together, could cause us to enter into
transactions or agreements that we would not otherwise consider. Similarly,
this concentration of ownership may have the effect of delaying or preventing a
change in control of us otherwise favored by our other stockholders. This
concentration of ownership also could depress our stock price.
Provisions
in our amended and restated certificate of incorporation and amended and
restated bylaws and applicable Delaware law may prevent or discourage third
parties or our stockholders from attempting to replace our management or
influencing significant decisions.
Provisions in our
amended and restated certificate of incorporation and amended and restated
bylaws may have the effect of delaying or preventing a change in control of us
or our management, even if doing so would be beneficial to our stockholders.
These provisions include:
•
dividing our board of directors into three classes serving staggered three-year
terms;
•
authorizing our board of directors to issue preferred stock without stockholder
approval;
•
prohibiting cumulative voting in the election of directors;
•
prohibiting stockholder actions by written consent;
•
limiting the persons who may call special meetings of stockholders;
•
prohibiting our stockholders from making certain changes to our certificate of
incorporation or bylaws except with 66.7% stockholder approval; and
•
requiring advance notice for raising business matters or nominating directors
at stockholders’ meetings.
We are also subject to
provisions of the Delaware corporation law that, in general, prohibit any
business combination with a beneficial owner of 15% or more of our common stock
for five years unless the holder’s acquisition of our stock was approved in
advance by our board of directors. Together, these charter and statutory
provisions could make the removal of management more difficult and may
discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for our common stock.
54
Because
we do not intend to pay any cash dividends on our shares of common stock, our
stockholders will not be able to receive a return on their shares unless they
sell them.
We have never paid or
declared any cash dividends on our capital stock and intend to retain any
future earnings to finance the development and expansion of our business. The
payment of dividends by us on our common stock is limited by our debt
agreements. We do not anticipate paying any cash dividends on our common stock
in the foreseeable future. Unless we pay dividends, our stockholders will not
be able to receive a return on their shares unless they sell them.
We
may incur increased costs as a result of recently enacted and proposed changes
in laws and regulations.
Recently enacted and
proposed changes in the laws and regulations affecting public companies,
including the provisions of the Sarbanes-Oxley Act of 2002 and rules related to
corporate governance and other matters subsequently adopted by the SEC and the
Nasdaq Stock Market, could result in increased costs to us. The new rules and
any related regulations that may be proposed in the future could make it more
difficult or more costly for us to obtain certain types of insurance, including
directors’ and officers’ liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified persons to serve on
our board of directors, our board committees or as executive officers. We are
presently evaluating and monitoring developments with respect to new and
proposed rules and cannot predict or estimate the amount of the additional
costs we may incur or the timing of such costs.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve
principal while maximizing income without significantly increasing risk. Some
of the securities in which we invest may be subject to market risk. This means
that a change in prevailing interest rates may cause the market value of the
investment to fluctuate. To minimize this risk, we may maintain our portfolio
of cash equivalents and short-term investments in a variety of securities,
including commercial paper, money market funds and direct or guaranteed obligations
of the United States government. The risk associated with fluctuating interest
rates is limited to our investment portfolio and we do not believe that a 1%
change in interest rates would have a significant impact on our interest
income. As of December 31, 2004, all of our short-term investments were
government agency securities and our cash equivalents were held in checking
accounts, money market funds, commercial paper and government agency
securities.
Item 8. Financial
Statements and Supplementary Data
The information required by this Item is included in Part IV
Item 15(a).
Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial Disclosure
Not
applicable.
Item 9A. Controls
and Procedures
As of the end of the period covered by this report, an evaluation was
performed under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer
(collectively, our “certifying officers”), of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on their
evaluation, our certifying officers concluded that these disclosure controls
and procedures are effective in providing reasonable assurance that the
information required to be disclosed by us in our periodic reports filed with
the Securities and Exchange Commission (“SEC”) is recorded, processed,
summarized and reported within the time periods specified by the SEC’s rules
and SEC reports.
55
We believe that a controls system, no matter how well designed and
operated, is based in part upon certain assumptions about the likelihood of
future events, and, therefore, can only provide reasonable, not absolute,
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
Item 9B. Other Information
Not
applicable.
PART III
Item 10 Directors and Executive Officers of the Registrant
Executive
Officers and Directors
The following table
sets forth information regarding our executive officers and directors as of December 31,
2004:
|
Name
|
|
Age
|
|
Positions
|
|
John P. Longenecker, Ph.D.
|
|
57
|
|
President, Chief Executive Officer and
Director
|
|
Tamara A. Seymour
|
|
46
|
|
Chief Financial Officer and Vice President,
Finance and Administration
|
|
Daniel P. Gold, Ph.D.
|
|
50
|
|
Chief Scientific Officer
|
|
Richard Murawski
|
|
56
|
|
Senior Vice President, Operations
|
|
John F. Bender, Pharm.D.
|
|
56
|
|
Vice President, Clinical Research
|
|
John C. Gutheil, M.D.
|
|
48
|
|
Vice President, Medical Affairs
|
|
Alice M. Wei
|
|
41
|
|
Vice President, Regulatory Affairs and
Quality
|
|
Cam L. Garner(2)
|
|
56
|
|
Chairman of the Board of Directors
|
|
Michael L. Eagle(1)
|
|
57
|
|
Director
|
|
Antonio J.
Grillo-Lopez, M.D.
|
|
65
|
|
Director
|
|
Peter Barton Hutt(3)
|
|
70
|
|
Director
|
|
Douglas E. Kelly, M.D.(2)
|
|
44
|
|
Director
|
|
Fred Middleton(1)
|
|
55
|
|
Director
|
|
Arda Minocherhomjee, Ph.D.(1)(2)(3)
|
|
51
|
|
Director
|
|
Wayne I. Roe(3)
|
|
54
|
|
Director
|
|
Ivor Royston, M.D.
|
|
59
|
|
Director
|
(1)
Member of the Audit Committee.
(2)
Member of the Compensation
Committee.
(3)
Member of the Nominating and
Corporate Governance Committee.
John P. Longenecker, Ph.D.
has served as a member of our board of directors and as our President and Chief
Executive Officer since February 2002. From March 1999 to February 2002,
he served as President of SkyePharma, Inc. and was a member of the
Executive Committee of SkyePharma PLC. In 1992, Dr. Longenecker joined
DepoTech Corporation as its Senior Vice President of Research, Development and
Operations and then served as its President and Chief Operating Officer from February 1998
to March 1999. From 1982 to 1992, he was at Scios, Inc. (now a
Johnson & Johnson subsidiary), and served as its Vice President and
Director of Development from 1986 to 1992. Dr. Longenecker received a
bachelor’s degree in Chemistry from Purdue University and a Ph.D. in
Biochemistry from The Australian National University in Canberra, Australia.
56
Tamara A. Seymour
has served as our Chief Financial Officer since May 2001 and also as our
Vice President of Finance and Administration since February 2004. From
1991 to May 2001, she served as consulting chief financial officer for a number
of biotechnology companies. Her client list included CancerVax Corporation, LXN
Corporation, VitaGen Incorporated and Chromagen. From 1988 through 1991,
Ms. Seymour was Director of Finance with Agouron Pharmaceuticals, Inc.
Between 1980 and 1988, she worked as an accountant with Deloitte &
Touche LLP and Coopers & Lybrand, Inc. (now
PricewaterhouseCoopers LLP). Ms. Seymour is a Certified Public Accountant
and received a bachelor’s degree in Business Administration with an emphasis in
Accounting from Valdosta State University and an M.B.A. with an emphasis in
Finance from Georgia State University.
Daniel P. Gold, Ph.D.
co-founded Favrille in January 2000, served as our Executive Vice
President of Research and Development from January 2000 to July 2003
and has served as our Chief Scientific Officer since July 2003. He was an
Associate Professor at the Sidney Kimmel Cancer Center in San Diego from 1992
through 2003, serving as Laboratory Director for both the Human Immunogene Therapy
Program and the Multiple Sclerosis Research Program. Dr. Gold currently
serves on the board of directors of the San Diego chapter of the Leukemia and
Lymphoma Society. He received a bachelor’s degree in Biology from the
University of California, Los Angeles, and a Ph.D. in Immunology from Tufts
Medical School.
Richard Murawski
has served as our Senior Vice President of Operations since June 2002.
From June 1998 to May 2002, he was the Vice President of Global Biotech
Operations of Baxter BioScience Corporation. In 1997 and 1998, he served as a
consultant. Mr. Murawski was the Vice President of Operations of Cytogen
from 1994 to 1997 and Director of Operations at Welgen (Wellcome) from 1990 to
1993. From 1971 to 1990, he served as Plant Manager for Schering-Plough.
Mr. Murawski received a bachelor’s degree in Chemical Engineering from the
Newark College of Engineering.
John F. Bender, Pharm.D.
has served as our Vice President of Clinical Research since joining us in
May 2001. From 1981 to 2001, he was at Pfizer Global Research and
Development (formerly Parke-Davis), a division of Pfizer, Inc., and served
as its Director of Clinical Research—Oncology from 1997 to 2001. At Pfizer,
Dr. Bender was involved with the development of over 20 oncology and infectious
disease compounds. He received a bachelor’s degree in Biology from Mount Saint
Mary’s College, a bachelor’s degree in Pharmacy from the University of Maryland
and a Pharm.D. from the University of Utah.
John C. Gutheil, M.D.
has served as our Vice President of Medical Affairs since September 2002.
From 1999 to September 2002, he served as Executive Director of Clinical
Research and Development at Vical Incorporated. From 1997 to 1999,
Dr. Gutheil served as Director of Clinical Research at the Sidney Kimmel
Cancer Center in San Diego where he was the principal investigator on more than
50 clinical research studies. He received a bachelor’s degree in Biology from
the University of California, San Diego, and an M.D. from the Medical College
of Wisconsin and holds board certifications in both internal medicine and
medical oncology.
Alice M. Wei
has served as our Vice President of Regulatory Affairs and Quality since October 2002.
From 1993 to September 2002, she was at IDEC Pharmaceuticals Corporation
(now Biogen Idec), most recently as Department Head/Senior Director of
Regulatory Affairs. Ms. Wei was Director of Regulatory Affairs, Quality
Assurance and Quality Control at Anesta Corp. (now Cephalon, Inc.) from
1990 through 1993 and served in various regulatory positions at Immunetech
Pharmaceuticals (now Elan Pharmaceuticals) and ICN Pharmaceuticals, Inc.
(now Valeant Pharmaceuticals) from 1984 to 1990. She received a bachelor’s
degree in Microbiology/Chemistry from the University of Texas at Arlington.
Cam L. Garner
has served as a member of our board of directors since December 2000, as
Chairman of our board of directors since May 2001, and as our acting Chief
Executive Officer from August 2001 to February 2002. He has served as
President and a director of Verus Pharmaceuticals, Inc., a pharmaceutical
company, since November 2002, and also became its Chairman and Chief
Executive Officer in July 2004. He was Chief Executive Officer of Dura
Pharmaceuticals, Inc. from 1989 to 1995 and its Chairman and Chief
Executive Officer from 1995 to 2000. In 1998, Mr. Garner co-founded DJ
Pharma, Inc., and he served as its Chairman until 2000, when it was sold
to Biovail Corporation. In 2001, he co-founded a specialty pharmaceutical
company, Xcel Pharmaceuticals, Inc., and he currently serves as its
Chairman.
57
Mr. Garner also
sits on the boards of directors of CancerVax Corporation, a biotechnology
company, and Pharmion Corporation, a pharmaceutical company, as well as a
number of privately-held companies. He received a bachelor’s degree in Biology
from Virginia Wesleyan and an M.B.A. from Baldwin-Wallace College.
Michael L. Eagle
has served as a member of our board of directors since September 2003. He
was Vice President-Manufacturing for Eli Lilly and Company from 1993 to April 2001.
Mr. Eagle is a founding member of Barnard Life Sciences and currently sits
on the board of directors of Vyrex Corporation, a pharmaceutical research and
development company. Mr. Eagle received a bachelor’s degree in Engineering
from Kettering University and an M.B.A. from the Krannert School of Management
at Purdue University.
Antonio J. Grillo-Lopez, M.D.
has served as a member of our board of directors since January 2001. He
was Chief Medical Officer and Senior Vice President of Medical and Regulatory
Affairs at IDEC Pharmaceuticals Corporation (now Biogen Idec) from 1992 to January 2001.
Prior to 1992, Dr. Grillo-Lopez served as Executive Medical Director for
International Clinical Research Development at DuPont Merck Pharmaceutical Co.
and as Vice President of Clinical Therapeutics and Director of Clinical
Oncology Research at Parke-Davis (now Pfizer). From 1980 to 1990, he was at the
University of Michigan, most recently as an Associate Professor of Medicine.
Dr. Grillo-Lopez currently serves as a director of Onyx
Pharmaceuticals, Inc., a biopharmaceutical company. He received a bachelor’s
degree in Natural Sciences from the University of Puerto Rico, College of
Natural Sciences, and an M.D. from the University of Puerto Rico School of
Medicine.
Peter Barton Hutt
has served as a member of our board of directors since November 2003.
Mr. Hutt has been a partner specializing in food and drug law in the
Washington, D.C. law firm of Covington & Burling since 1960, except
when he served as Chief Counsel for the FDA from 1971 to 1975. He is the
co-author of a casebook used to teach food and drug law throughout the country
and teaches a full course on this subject each year at Harvard Law School.
Mr. Hutt currently serves on the board of directors of CV
Therapeutics, Inc., a biopharmaceutical company, ISTA Pharmaceuticals,
Inc., a specialty pharmaceutical company, Phase Forward Incorporated, a
provider of integrated enterprise-level software products, Momenta
Pharmaceuticals, Inc., a biotechnology company, and privately-held
biopharmaceutical companies and on venture capital advisory boards, including
Polaris Venture Partners and the Sprout Group. Mr. Hutt received a
bachelor’s degree in Economics and Political Science from Yale University, an
LL.B. from Harvard Law School and an L.L.M. in Food and Drug Law from New York
University Law School.
Douglas E. Kelly, M.D.
has served as a member of our board of directors since May 2000. He is a
General Partner of Alloy Ventures, an affiliate of certain holders of our
capital stock. Prior to joining Alloy Ventures in 1993, Dr. Kelly worked
with the European venture capital firms 3i Ventures and TVM Techno Venture
Management. He was an early employee at Ligand Pharmaceuticals, Inc. from
1990 to 1991, and also worked as an independent consultant. Dr. Kelly is
also a director of Pharsight, Inc., a clinical trials simulation company,
and a number of privately-held companies. He received a bachelor’s degree in Biochemistry
and Molecular Biology from the University of California, San Diego, an M.D.
from the Albert Einstein College of Medicine and an M.B.A. from the Stanford
University Graduate School of Business.
Fred Middleton
has served as a member of our board of directors since May 2002. Since
1987, he has been a General Partner/Managing Director of Sanderling Ventures, a
firm specializing in biomedical venture capital, and an affiliate of certain
holders of our capital stock. From 1984 through 1986, he was Managing General
Partner of Morgan Stanley Ventures, an affiliate of Morgan Stanley & Co.
Prior to that, from 1978 to 1984, Mr. Middleton served as Vice President
of Finance and Corporate Development, Chief Financial Officer, and President of
Genentech Development Corporation for Genentech, Inc. He currently serves
as Chairman of the Board of Stereotaxis, Inc., a biotechnology company,
and also as a director of several privately-held companies. Mr. Middleton
received a bachelor’s degree in Chemistry from the Massachusetts Institute of
Technology and an M.B.A. with distinction from Harvard Business School.
58
Arda Minocherhomjee, Ph.D.
has served as a member of our board of directors since March 2004. He is
currently a partner of Chicago Growth Partners. Since 1992,
Dr. Minocherhomjee has served in various capacities for William
Blair & Company, L.L.C, an affiliate of certain holders of our capital
stock, including, most recently, as a Principal. Since September 1998,
Dr. Minocherhomjee has also served as a managing member of William Blair
Capital Partners, an affiliate of William Blair & Company, L.L.C. He
currently serves on the board of directors of Inhibitex, Inc., a
biopharmaceutical company, and NuVasive, Inc., a medical device company, as
well as several privately-held pharmaceutical and medical device companies.
Dr. Minocherhomjee received a master’s degree in Pharmacology from the
University of Toronto, a Ph.D. and an M.B.A. from the University of British Columbia,
and was a post-doctoral fellow in Pharmacology at the University of Washington
Medical School.
Wayne I. Roe
has served as a member of our board of directors since February 2001. He
was the founding Chief Executive Officer and Chairman of Covance Health
Economics and Outcomes Services, Inc. from 1988 to 1999 and previously
served as Vice President for Economic and Health Policy for the Health Industry
Manufacturers Association. He currently sits on the boards of directors of
Aradigm Corporation, a biopharmaceutical company, and ISTA
Pharmaceuticals, Inc., a specialty pharmaceutical company, and a number of
privately-held companies. Mr. Roe also serves on the executive committee
of the Maryland Angels Fund. Mr. Roe received a bachelor’s degree in Economics
from Union College and an M.A. in Economics from the University of Maryland.
Ivor Royston, M.D.
has served as a member of our board of directors since January 2000, and
as our acting Chief Executive Officer from January 2000 to August 2001.
He is a co-founder of Forward Ventures, a venture fund affiliated with certain
holders of our capital stock. From 1990 to 2000, Dr. Royston served as the
founding President and Chief Executive Officer of the non-profit Sidney Kimmel
Cancer Center. He remains a member of the Board of Trustees of that
organization. In 1986, Dr. Royston co-founded IDEC Pharmaceuticals
Corporation (now Biogen Idec), and in 1978 he founded Hybritech, Inc. From
1978 to 1990, Dr. Royston served on the faculty of the medical school and
cancer center at the University of California, San Diego. Dr. Royston also
serves on the board of directors of CancerVax Corporation, a biotechnology
company, and Corautus Genetics, Inc., a biopharmaceutical company.
Dr. Royston received a bachelor’s degree in Human Biology and an M.D. from
The Johns Hopkins University and completed post-doctoral training in internal
medicine and medical oncology at Stanford University.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of
1934 (the “1934 Act”) requires the Company’s directors and executive officers,
and persons who own more than ten percent of a registered class of the Company’s
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of common stock and other equity securities of the
Company. Officers, directors and greater
than ten percent stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
We did not become subject to the reporting
requirements of the 1934 Act until our initial public offering in February 2005,
and, accordingly, during the fiscal year ended December 31, 2004, our
directors and executive officers and persons owning more than 10% of our common
stock were not required to comply with Section 16(a) with respect to our
common stock.
Code of
Ethics
We have adopted the Favrille, Inc. Code of Business
Conduct and Ethics that applies to all officers, directors and employees. The Code of Business Conduct and Ethics is
available on our website at www.favrille.com. If we make any substantive
amendments to the Code of Business Conduct and Ethics or grant any waiver from
a provision of the Code to any executive officer or director, we will promptly
disclose the nature of the amendment or waiver on its website.
59
Item 11. Executive
Compensation
Compensation
Committee Interlocks and Insider Participation
No member of our
compensation committee has ever been an officer or employee of ours, except
that Mr. Garner served as our acting Chief Executive Officer from August 2001
to February 2002. None of our executive officers currently serves or
served at any time during the last completed fiscal year on the board of
directors or compensation committee of any other entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. See “Certain Transactions” for a description of
transactions between us and certain holders of our capital stock affiliated
with members of our compensation committee. Prior to establishing the
compensation committee, our full board of directors made decisions relating to
the compensation of our executive officers.
Director
Compensation
Prior to our initial
public offering in February 2005, we did not provide cash compensation to
directors for their services as directors or members of committees of the board
of directors. Subsequent to the close of
our initial public offering, we provide cash compensation in the form of an
annual retainer of $16,000 for each non-employee director, plus an additional
annual retainer of $2,500 for the chairs of the audit and compensation
committees, plus a fee of $1,500 for attendance at each board meeting and
$1,000 for attendance at each committee meeting. We reimburse our non-employee
directors for their reasonable expenses incurred in attending meetings of our
board of directors and committees of the board of directors.
During the year ended December 31,
2004, we granted to our current non-employee directors options to purchase an
aggregate of 220,483 shares of common stock under our Amended and Restated
2001 Equity Incentive Plan, or 2001 plan, at an exercise price per share of $0.62.
The fair market value of such common stock on the date of grant was
$0.62 per share (as determined in good faith by our board of directors). During
the year ended December 31, 2004, no
shares of restricted common stock were issued to our directors outside of the
2001 plan
In connection with our
initial public offering, we adopted our 2005 Non-Employee Directors’ Stock
Option Plan, or Directors’ Plan, to provide for the automatic grant of options
to purchase shares of common stock to our non-employee directors. Option
grants under the Directors’ Plan are non-discretionary. An
aggregate of 420,000 shares of our common stock are reserved for issuance under
the Directors’ Plan. This amount will be increased annually on the first day of
our fiscal year, from 2006 until 2014, by 90,000 shares of common stock.
However, the board of directors has the authority to designate a smaller number
of shares by which the authorized number of shares of common stock will be
increased. The plan is administered by our board of directors. The exercise
price of the options granted under the Directors’ Plan will be equal to 100% of
the fair market value of the common stock on the date of grant. In general, the
term of stock options granted under the Directors’ Plan may not exceed ten
years. Pursuant to the terms of the Directors’ Plan, any person who first
becomes a non-employee director after the completion of our initial public
offering will automatically be granted an option to purchase 35,000 shares of
common stock upon his or her election. In addition, any person who is a
non-employee director on the date of each annual meeting of our stockholders
will be automatically granted, on the annual meeting date, an option to
purchase 8,000 shares of common stock. However, the size of an annual grant
made to a non-employee director who has served for less than 12 months at
the time of the annual meeting will be reduced by 25% for each full quarter
prior to the date of grant during which such person did not serve as a
non-employee director. In the event of certain corporate transactions, all
outstanding options under the Directors’ Plan may be assumed or substituted for
by any surviving entity. If the surviving entity elects not to assume or
substitute for such options, the vesting provisions of such options generally
will be accelerated and such options will be terminated if not exercised before
the effective time of the corporate transaction. Our board of directors has
authority to amend or terminate the Directors’ Plan. However, no amendment or
termination of the Directors’ Plan will adversely affect any rights under
awards already granted to a participant unless agreed to by the affected
participant. We will obtain stockholder approval of any amendment to the
Directors’ Plan as required by applicable laws. As of March 18, 2005, no
options had been granted under the 2005 Non-Employee Directors’ Stock Option
Plan.
60
In addition, all of our directors are eligible to
participate in our 2001 plan and our employee directors are eligible to
participate in our 2005 Employee Stock Purchase Plan.
Executive
Compensation
The following table provides information regarding the compensation
awarded or paid to, or earned by, our Chief Executive Officer and each of our
four other most highly compensated executive officers for the fiscal year ended
December 31, 2004 whose combined salary and bonus exceeded $100,000. We
refer to our Chief Executive Officer and these other executive officers as our “named
executive officers”.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
Long-term
Compensation
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
Securities
Underlying
Options
|
|
|
|
|
|
|
|
|
|
|
All Other
Compensation(1)
|
|
|
Name and Principal Position(s)
|
|
|
|
Salary
|
|
Bonus
|
|
|
|
|
John P.
Longenecker, Ph.D
President and Chief Executive
Officer
|
|
2004
|
|
$
|
345,830
|
|
$
|
—
|
|
363,783
|
|
$
|
—
|
|
|
|
2003
|
|
313,420
|
|
25,000
|
(3)
|
44,319
|
|
—
|
|
|
|
2002
|
|
255,305
|
(2)
|
25,000
|
(4)
|
185,060
|
|
—
|
|
|
Alice M. Wei
Vice President of Regulatory Affairs and Quality
|
|
2004
|
|
239,330
|
|
—
|
|
81,252
|
|
—
|
|
|
|
2003
|
|
225,987
|
|
—
|
|
35,545
|
|
—
|
|
|
|
2002
|
|
47,091
|
(5)
|
40,000
|
(6)
|
38,554
|
|
—
|
|
|
John F. Bender, Pharm.D.
Vice President of Clinical Research
|
|
2004
|
|
236,765
|
|
30,000
|
(7)
|
67,827
|
|
—
|
|
|
|
2003
|
|
221,420
|
|
30,000
|
(7)
|
25,544
|
|
—
|
|
|
|
2002
|
|
220,166
|
|
30,000
|
(7)
|
9,638
|
|
—
|
|
|
Daniel P. Gold, Ph.D.
Chief Scientific Officer
|
|
2004
|
|
231,204
|
|
—
|
|
167,825
|
|
—
|
|
|
|
2003
|
|
210,800
|
|
—
|
|
29,102
|
|
—
|
|
|
|
2002
|
|
191,239
|
|
—
|
|
9,638
|
|
—
|
|
|
Richard Murawski
Senior Vice President of Operations
|
|
2004
|
|
230,951
|
|
—
|
|
71,183
|
|
—
|
|
|
|
2003
|
|
222,191
|
|
—
|
|
19,610
|
|
—
|
|
|
|
2002
|
|
129,700
|
(8)
|
80,000
|
(9)
|
43,373
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In
accordance with the rules of the SEC, the compensation described in this table
does not include medical, group life insurance or other benefits which are
available generally to all of our salaried employees and certain perquisites
and other personal benefits received by a named executive officer which do not
exceed the lesser of $50,000 or 10% of that officer’s salary and bonus
disclosed in this table.
(2) Mr.
Longenecker began his employment with us in February 2002.
(3) Amount
represents a bonus earned upon the closing of the Company’s Series B financing.
(4) Amount
represents a bonus earned for the year ended December 31, 2002 and paid in
January 2003.
(5) Ms.
Wei began her employment with us in October 2002.
(6) Amount
represents a signing bonus
(7) Amount
represents annual bonuses, which were earned pursuant to Dr. Bender’s
relocation package in 2001. See “Certain Transactions—Loans to Officers.”
(8) Mr.
Murawski began his employment with us in June 2002.
61
(9) Amount
represents a relocation allowance.
Stock Option Grants and Exercises
The Company grants options to its executive officers under its Amended
and Restated 2001 Equity Incentive Plan, or 2001 Plan. As of March 18, 2005, options to
purchase a total of 965,284 shares were outstanding under the 2001 Plan and
options to purchase 676,715 shares remained available for grant under the
plan. Option grants under the 2001 Plan
generally vest annually over four years, with 25% of the options vesting after
one year and the remainder vesting ratably thereafter on a monthly basis.
The following table sets forth information concerning stock option
grants made to each of the named executive officers during the fiscal year
ended December 31, 2004. The potential realizable value is calculated
based on the term of the option at the time of its grant, which is ten years
and a stock price on the date of grant of $7.00 (the Company’s initial public
offering price), as there was no public market for our stock at December 31,
2004. This value is based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the options were granted until their
expiration date. These numbers are calculated based on the requirements of the
SEC and do not reflect our estimate of future stock price growth. Actual gains,
if any, on stock option exercises will depend on the price of our common stock
on the date on which the options are ultimately exercised. All of the option
grants generally vest annually over four years, with 25% of the options vesting
after one year and the remainder vesting ratably thereafter on a monthly basis.
OPTION
GRANTS IN LAST FISCAL YEAR
|
|
|
Individual Grants
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
Securities
Under-lying
Options
Granted
(#)(112)
|
|
% of
Total
Options
Granted to
Employees in
Fiscal Year
|
|
Exercise
Or Base
Price
($/Sh)
|
|
Expiration
Date
|
|
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term
|
|
|
|
|
|
|
5% ($)
|
|
10% ($)
|
|
|
Dr.
Longenecker
|
|
357,404
|
|
25.72
|
%
|
0.63
|
|
3/18/14
|
|
$
|
3,849,241
|
|
$
|
6,265,292
|
|
|
|
|
6,379
|
|
0.46
|
|
0.73
|
|
12/30/14
|
|
68,064
|
|
111,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ms. Wei
|
|
79,582
|
|
5.73
|
|
0.63
|
|
3/18/14
|
|
857,098
|
|
1,395,072
|
|
|
|
|
1,670
|
|
0.12
|
|
0.73
|
|
12/30/14
|
|
17,819
|
|
29,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Bender
|
|
66,460
|
|
4.78
|
|
0.63
|
|
3/18/14
|
|
715,774
|
|
1,165,044
|
|
|
|
|
1,367
|
|
0.10
|
|
0.73
|
|
12/30/14
|
|
14,586
|
|
23,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Gold
|
|
164,028
|
|
11.81
|
|
0.63
|
|
3/18/14
|
|
1,766,582
|
|
2,875,411
|
|
|
|
|
3,797
|
|
0.27
|
|
0.73
|
|
12/30/14
|
|
40,514
|
|
66,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Murawski
|
|
69,740
|
|
5.02
|
|
0.63
|
|
3/18/14
|
|
751,100
|
|
1,222,542
|
|
|
|
|
1,443
|
|
0.10
|
|
0.73
|
|
12/30/14
|
|
15,397
|
|
25,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding options
granted under our 2001 plan to our named executive officers that were exercised
in 2004 and the number and value of unexercised options held by each of the
named executive officers as of December 31, 2004. There was no public
market for our common stock as of December 31, 2004. Accordingly, amounts
described in the following table under the heading “Value of Unexercised
In-the-Money Options at Fiscal Year-End” are determined by multiplying the
number of shares underlying the options by the difference between our initial
public offering price of $7.00 per share and the per share option exercise
price.
62
|
Name
|
|
Shares Acquired
on Exercise (#)
|
|
Value
Realized ($)
|
|
Number of
Securities
Underlying
Unexercised
Options at
FY-End (#)
Exercisable/ Unexercisable
|
|
Value of
Unexercised
In-the-Money
Options at
FY-End ($)
Exercisable/
Unexercisable
|
|
|
Dr.
Longenecker
|
|
—
|
|
—
|
|
408,102/—
|
|
2,598,972/—
|
|
|
Ms. Wei
|
|
153,681
|
|
980,107
|
|
1,670/—
|
|
10,471/—
|
|
|
Dr. Bender
|
|
101,643
|
|
648,228
|
|
1,367/—
|
|
8,571/—
|
|
|
Dr. Gold
|
|
154,404
|
|
984,718
|
|
52,163/—
|
|
331,899/—
|
|
|
Mr. Murawski
|
|
95,176
|
|
606,984
|
|
38,991/—
|
|
248,228/—
|
|
Employment
Contracts
Employment Agreement with Dr. Longenecker
In February 2002,
we entered into an employment agreement with Dr. Longenecker, our
President and Chief Executive Officer, which was subsequently amended and restated
in January 2005. The employment agreement sets forth Dr. Longenecker’s
initial base salary of $345,830, which is subject to adjustment upon annual
review. The agreement entitles Dr. Longenecker to receive medical benefits and
participate in our 401(k) program, as well as any executive benefit plan
adopted by us.
Pursuant to the
agreement, Dr. Longenecker was awarded a bonus of $25,000 for the fiscal year
ended December 31, 2002 and was granted an option to purchase 185,060
shares of our common stock under our 2001 plan at an exercise price of
approximately $0.52 per share, the fair market value of our common stock on the
grant date. The option vests over four years, with 25% of the options vesting
after one year and the remainder vesting ratably thereafter on a monthly basis.
He also received $25,000 upon the initial closing of our Series B preferred
stock financing in April 2002. The agreement further provided Dr.
Longenecker with the right to receive additional options to purchase shares of
our common stock in the amount necessary for him to hold at least three percent
of our outstanding voting stock. This right terminated immediately prior to the
closing of our initial public offering.
Dr. Longenecker is an “at
will” employee, and we can terminate his employment at any time, with or
without cause. Similarly, Dr. Longenecker may terminate his employment with us
at any time. Under the agreement, if we terminate his employment other than for
cause, he shall be entitled to 12 months salary and benefits and that portion
of his stock options which would have vested if he had remained employed for an
additional 12 months will immediately vest on the date of termination, provided
he executes a waiver and general release in favor of us.
For purposes of Dr. Longenecker’s
employment agreement, termination for “cause” generally means his termination
by us as a result of his conviction of a felony or a crime involving fraud or
dishonesty, his commission of an act of fraud or dishonesty upon us, conduct by
him demonstrating gross unfitness to serve, his violation of any fiduciary duty
or any duty of loyalty owed to us, a material breach by him of any material
contract between Dr. Longenecker and us or one of our affiliates, or his
violation of a material company policy.
63
Other Employment Agreements
We have also entered
into employment agreements with Tamara A. Seymour, Alice M. Wei, Richard
Murawski, John F. Bender, John Gutheil and Daniel Gold. These employment agreements
set forth the executives’ base salaries and annual cash bonus eligibility. The
initial base salaries of the executives called for by these employment
agreements are as follows: Tamara A. Seymour ($210,000), Alice M. Wei
($239,330), Richard Murawski ($230,951), John F. Bender ($236,765), John
Gutheil ($226,580) and Daniel Gold ($231,204). The salaries are subject to
adjustment upon annual review. Pursuant to the employment agreements, the
executives are entitled to receive medical benefits and participate in our
401(k) program, as well as any executive benefit plan adopted by us.
Each of the executives
is an “at will” employee, and we can terminate their employment at any time,
with or without cause. Similarly, each executive may terminate his or her
employment with us at any time. Under the agreements, if we terminate an
executive’s employment other than for cause, he or she shall be entitled to
nine months salary and benefits and that portion of the stock options which
would have vested if he or she had remained employed for an additional 9 months
will immediately vest on the date of termination, provided the executive
executes a waiver and general release in favor of us.
For purposes of these
employment agreements, termination for “cause” generally means the executive’s
termination by us as a result of the executive’s conviction of a felony or a
crime involving fraud or dishonesty, the executive’s commission of an act of
fraud or dishonesty upon us, conduct by the executive demonstrating gross unfitness
to serve, the executive’s violation of any fiduciary duty or any duty of
loyalty owed to us, a material breach by the executive of any material contract
between him or her and us or one of our affiliates, or the executive’s
violation of a material company policy.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock as of December 31,
2004, by:
• each person, or group of affiliated persons, known
by us to be the beneficial owner of more than five percent of our common stock;
• each of our directors;
• each of our named executive officers; and
• all directors and executive officers as a group.
Each stockholder’s percentage ownership in the following table is based
on 20,301,921shares of common stock outstanding as of March 18, 2005,
adjusted as required by rules promulgated by the Securities and Exchange
Commission (“SEC”). Information with respect to beneficial ownership has been
furnished by each director, officer or 5% or more stockholder. Beneficial
ownership is determined under the rules of the SEC and generally includes
voting or investment power with respect to securities. To our knowledge, except
as indicated in the footnotes to the following table and subject to community
property laws where applicable, the persons named in this table have sole
voting and investment power with respect to all shares of our common stock shown
as beneficially owned by them. Unless otherwise noted, the address for each of
the stockholders in the table below is c/o Favrille, Inc., 10421 Pacific
Center Court, Suite 150, San Diego, CA 92121.
64
|
|
|
Beneficial Ownership
|
|
|
Beneficial Owner
|
|
Number of Shares
|
|
Percent of Total
|
|
|
Alloy
Corporate 2000, L.P. and its affiliates(1)
|
|
2,832,526
|
|
14.0
|
%
|
|
De Novo (Q)
Ventures I, L.P. and its affiliate(2)
|
|
1,080,300
|
|
5.3
|
|
|
Forward
Ventures IV L.P. and its affiliates(3)
|
|
3,275,666
|
|
16.1
|
|
|
Sanderling
Venture Partners V, L.P. and its affiliates(4)
|
|
3,182,656
|
|
15.7
|
|
|
William
Blair Capital Partners VII, L.P and its affiliate(5)
|
|
1,755,384
|
|
8.7
|
|
|
John P.
Longenecker, Ph.D.(6)
|
|
593,162
|
|
2.9
|
|
|
Alice M.
Wei(7)
|
|
139,927
|
|
*
|
|
|
John F.
Bender, Pharm.D.(8)
|
|
127,105
|
|
*
|
|
|
Daniel P.
Gold, Ph.D.(9)
|
|
353,069
|
|
1.7
|
|
|
Richard
Murawski(10)
|
|
134,166
|
|
*
|
|
|
Michael L.
Eagle(11)
|
|
28,104
|
|
*
|
|
|
Cam L.
Garner(12)
|
|
72,363
|
|
*
|
|
|
Antonio J. Grillo-Lopez, M.D.(13)
|
|
116,702
|
|
*
|
|
|
Peter Barton
Hutt(14)
|
|
28,104
|
|
*
|
|
|
Douglas E.
Kelly, M.D.(15)
|
|
2,878,315
|
|
14.2
|
|
|
Fred
Middleton(16)
|
|
3,206,945
|
|
15.8
|
|
|
Arda
Minocherhomjee, Ph.D.(17)
|
|
1,779,673
|
|
8.8
|
|
|
Wayne I.
Roe(18)
|
|
35,737
|
|
*
|
|
|
Ivor
Royston, M.D.(19)
|
|
3,312,003
|
|
16.3
|
|
|
All
executive officers and directors as a group (16 persons)(20)
|
|
13,060,992
|
|
64.3
|
|
* Less
than one percent.
(1) Includes shares of common
stock owned by the following entities in the amounts indicated: (i) Alloy
Corporate 2000, 203,047 shares; (ii) Alloy Investors 2000, 348,350 shares;
(iii) Alloy Partners 2000, L.P., 86,590 shares; (iv) Alloy Ventures
2000, L.P., 1,689,487 shares; and (5) Alloy Annex I, 505,052 shares. The
address for these entities is 480 Cowpers Street, 2nd Floor, Palo Alto, CA 94301.
(2) Includes 901,847 shares of
common stock owned by De Novo (Q) Ventures I, L.P. and 178,453 shares of
common stock owned by De Novo Ventures I, L.P. Any one of the following
managing directors may make voting or investment decisions regarding the shares
held by these entities: Fred Dotzler; Jay Watkins; Rich Ferrari; John Simpson;
and David Mauney. Each of these managing directors disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest in
these entities. The address for these entities is 1550 El Camino Real, Suite
150, Menlo Park, CA 94025.
(3) Includes shares of common
stock owned by the following entities in the amounts indicated:
(i) Forward Ventures IV L.P., 2,578,372 shares; (ii) Forward Ventures
III Institutional Partners L.P., 378,713 shares; (iii) Forward Ventures
III L.P., 100,001 shares; and (iv) Forward Ventures IV B L.P.,
218,580 shares. The address for these entities is 9393 Towne Centre Drive,
Suite 200, San Diego, CA 92121.
(4) Includes shares of common
stock owned by the following entities in the following amounts:
(i) Sanderling Venture Partners V, L.P., 980,216 shares;
(ii) Sanderling V Beteiligungs GmbH & Co. KG, 186,491 shares;
(iii) Sanderling V Biomedical, L.P., 240,100 shares; (iv) Sanderling
V Limited Partnership, 209,587 shares; (v) Sanderling V Ventures
Management, 37,415 shares; (vi) Sanderling Venture Partners V
Co-Investment Fund L.P., 687,658 shares; (vii) Sanderling Venture Partners VI
Co-Investment Fund L.P., 424,286 and
(viii) Sanderling V Biomedical Co-Investment Fund L.P., 416,903
shares. The address for these entities is 400 South El Camino Real, Suite 1200,
San Mateo, CA 94402.
65
(5) Includes 65,141 shares of
common stock owned by William Blair Capital Partners VII, L.P. and 1,690,243
shares of common stock owned by William Blair Capital Partners VII QP, L.P. The
address for these entities is 227 West Monroe Street, Suite 3500, Chicago, IL
60606.
(6) Includes options to purchase
408,102 shares of common stock. Of these 593,162 shares, 350,695 were unvested
as of March 18, 2005.
(7) Includes options
to purchase 1,670 shares of common stock. Of these 139,927 shares, 88,729 were
unvested as of March 18, 2005.
(8) Includes options
to purchase 1,367 shares of common stock. Of these 127,105 shares, 70,589 were
unvested as of March 18, 2005.
(9) Includes options
to purchase 52,163 shares of common stock. Of these 353,069 shares, 149,521
were unvested as of March 18, 2005.
(10) Includes options to purchase 38,991 shares of common
stock. Of these 134,166 shares, 80,427 were unvested as of March 18, 2005.
(11) Of these 28,104 shares, 14,275 were unvested as of March 18,
2005.
(12) Of these 72,363 shares, 1,813 were unvested as of March 18,
2005.
(13) Includes options to purchase 23,016 shares of common
stock. Of these 116,702 shares, 318 were unvested as of March 18, 2005.
(14) Includes options to purchase 28,104 shares of common
stock. Of these 28,104 shares, 15,290 were unvested as of March 18, 2005.
(15) Includes the shares referred to in footnote (2)
above. Alloy Ventures 2000, LLC is the general partner of Alloy Corporate 2000,
L.P., Alloy Investors 2000, L.P., Alloy Partners 2000, L.P. and Alloy Ventures
2000, L.P. Dr. Kelly is a Managing Member of Alloy Ventures 2000, LLC.
Dr. Kelly disclaims any beneficial ownership of the shares owned by these
entities except to the extent of his proportionate interest in Alloy Ventures
2000, LLC. Also includes options held by Dr. Kelly to purchase 24,289
shares of common stock, 16,868 of which were unvested as of March 18,
2005.
(16) Includes shares referred to in footnote (5) above.
All of these entities are limited partnerships except for Sanderling V Ventures
Management. Mr. Middleton is a general partner of each of these limited
partnerships and is also a beneficial owner of Sanderling V Ventures
Management. Mr. Middleton disclaims any beneficial ownership of the shares
owned by these entities except to the extent of his pecuniary interest in these
entities arising from his role as a general partner of the limited partnerships
and his beneficial ownership of Sanderling V Ventures Management. Also includes
options held by Mr. Middleton to purchase 24,289 shares of common stock,
16,868 of which were unvested as of March 18, 2005.
(17) Includes the shares referred to in footnote (6)
above. Dr. Minocherhomjee disclaims any beneficial ownership of the shares
owned by these entities except to the extent of his pecuniary interest in these
entities. Also includes options held by Dr. Minocherhomjee to purchase
24,289 shares of common stock, 16,868 of which were unvested as of March 18,
2005.
(18) Includes options to purchase 26,099 shares of common
stock. Of these 35,737 shares, 1,612 were unvested as of March 18, 2005.
(19) Includes the shares referred to in footnote (4)
above. Dr. Royston is the managing member of Forward III Associates, LLC, which
is the general partner of Forward Ventures III Institutional Partners L.P. and
Forward Ventures III L.P. He is also the managing member of Forward IV
Associates, LLC, which is the general partner of Forward Ventures
IV B L.P. and Forward Ventures IV L.P. Dr. Royston disclaims any
beneficial ownership of the shares owned by these entities except to the extent
of his pecuniary interest in
66
these entities. Also
includes options held by Dr. Royston to purchase 24,289 shares of common
stock, 16,868 of which were unvested as of March 18, 2005.
(20) Includes the shares referred to in footnotes (1),
(3), (4) and (5) above. Also includes 12,190,133 shares of common stock and
options to purchase 870,859 shares of common stock, of which
986,462 shares were unvested as of March 18, 2005.
Additional information required by this Item is
included in Item 5 of this report.
Item 13. Certain Relationships and Related Transactions
Stock
Issuances
The following table
summarizes the number of shares of our stock purchased by our executive
officers, directors and 5% stockholders, and members of such persons’ immediate
families, in private placement transactions during the year ended December 31,
2004. Each share of Series C preferred stock converted automatically
immediately prior to the closing of our initial public offering, completed in February 2005,
into approximately 1.09 shares of common stock pursuant to a conversion and
amendment agreement between us and the holders of a majority of each
series of our preferred stock.
|
Purchaser
|
|
Common
Stock
|
|
Series C
Preferred
Stock
|
|
|
Directors and Named Executive Officers
|
|
|
|
|
|
|
John P.
Longenecker, Ph.D.
|
|
—
|
|
—
|
|
|
Alice M. Wei
|
|
153,681
|
|
—
|
|
|
John F.
Bender, Pharm.D.
|
|
101,643
|
|
—
|
|
|
Daniel P.
Gold, Ph.D.
|
|
154,404
|
|
—
|
|
|
Richard
Murawski
|
|
95,176
|
|
—
|
|
|
Cam L.
Garner
|
|
40,364
|
|
—
|
|
|
Michael L.
Eagle
|
|
28,104
|
|
—
|
|
|
Antonio J. Grillo-Lopez, M.D.
|
|
—
|
|
—
|
|
|
Wayne I. Roe
|
|
—
|
|
—
|
|
|
Ivor
Royston, M.D.
|
|
—
|
|
—
|
|
|
Fred Middleton.
|
|
—
|
|
—
|
|
|
Peter Barton
Hutt
|
|
—
|
|
—
|
|
|
Arda
Minocherhomjee.
|
|
—
|
|
—
|
|
|
Doug Kelly.
|
|
—
|
|
—
|
|
|
5% Stockholders
|
|
|
|
|
|
|
Alloy
Corporate 2000, L.P. and its affiliates
|
|
—
|
|
558,754
|
(1)
|
|
De Novo (Q)
Ventures I, L.P. and its affiliate
|
|
—
|
|
385,590
|
(2)
|
|
Forward
Ventures IV L.P. and its affiliates
|
|
—
|
|
836,964
|
(3)
|
|
Sanderling
Venture Partners V, L.P. and its affiliates
|
|
—
|
|
838,132
|
(4)
|
|
William
Blair Capital Partners VII, L.P. and its affiliates
|
|
—
|
|
1,536,580
|
(5)
|
|
Other Information
|
|
|
|
|
|
|
|
|
$
|
0.52 to
|
|
|
|
|
Approximate
price per share
|
|
$
|
0.63
|
|
$
|
7.16
|
(6)
|
|
|
|
|
|
|
|
|
(1) Also includes shares held by Alloy Investors 2000, L.P.,
Alloy Partners 2000, L.P. and Alloy Ventures 2000, L.P. Dr. Kelly, one of our
directors, is an affiliate of these entities.
67
(2) Also includes shares held by De Novo Ventures I, L.P.
(3) Also includes shares held by Forward Ventures III Institutional
Partners L.P., Forward Ventures III L.P. and Forward Ventures IV B L.P.
Dr. Royston, one of our directors, is an affiliate of these entities.
(4) Also includes shares held by Sanderling V
Beteiligungs GmbH & Co. KG, Sanderling V Biomedical, L.P.,
Sanderling V Limited Partnership, Sanderling V Ventures Management,
Sanderling Venture Partners V Co-Investment Fund, L.P. and
Sanderling V Biomedical Co-Investment Fund, L.P. Mr. Middleton, one
of our directors, is an affiliate of these entities.
(5) Also includes shares held by William Blair Capital
Partners VII QP, L.P. Dr. Minocherhomjee, one of our directors, is an
affiliate of these entities.
(6) In December 2004,
our board of directors and stockholders approved an amendment to our
certificate of incorporation to reduce the conversion price of the Series C
preferred stock from $7.16 per share to $6.59 per share. As a result of
this amendment, all holders of our Series C preferred stock, including
holders affiliated with several of our directors as disclosed in the preceding
table, were entitled to receive more shares of common stock upon conversion
than they would previously have been entitled to receive.
Participation
in Initial Public Offering
Entities affiliated with
four of our directors, including Alloy Corporate 2000, L.P., Forward Ventures
IV L.P., Sanderling Venture Partners V, L.P., William Blair Capital
Partners VII, and their affiliates, purchased an aggregate of
$18.6 million of common stock in our initial public offering in February 2005. All of such shares were purchased on the same
terms as shares sold to all other purchasers in the offering.
Option
Grants
During the year ended December 31,
2004, we granted options to purchase an aggregate of 1,147,341 shares of
common stock, with a weighted-average exercise price of $0.61, to our executive
officers and directors.
Consulting
Agreement and Warrant Issuance
On March 1, 2003,
we entered into a consulting agreement with Sanderling Management Company, LLC,
or Sanderling, for the services of Paul Grayson, one of its directors. Under
the agreement, Mr. Grayson has agreed to provide us with consulting
services related to general business issues, corporate development and
potential third party collaborations. We are obligated to pay Sanderling a
monthly consulting fee of $8,500 for one year, and a $100,000 success fee
contingent upon entering into a corporate partnership agreement on specified
terms. In March 2004, the agreement was extended through December 2004.
Sanderling is an affiliate of Sanderling Ventures and related venture funds
which hold shares of our capital stock. Fred Middleton, one of our directors,
is a General Partner of Sanderling Ventures. See “Principal Stockholders.”
In connection with the
consulting agreement, we issued a warrant to purchase up to 19,277 shares
of our common stock to Mr. Grayson. The warrant was exercisable at an
initial exercise price of approximately $0.63 per share. In March 2004,
half of the shares subject to the warrant vested and were exercised. With
respect to the remaining shares, the warrant expired unexercised upon the
completion of the Company’s initial public offering.
68
Director
and Officer Indemnification Agreements
We have
entered into indemnity agreements with certain officers and directors which
provide, among other things, that we will indemnify such officer or director,
under the circumstances and to the extent provided for therein, for expenses,
damages, judgments, fines and settlements he or she may be required to pay in
actions or proceedings which he or she is or may be made a party by reason of
his or her position as one of our directors, officers or other agents, and
otherwise to the fullest extent permitted under Delaware law and our Bylaws.
Loans
to Officers
On June 20, 2001,
in connection with a relocation package, we loaned $90,000 to Dr. John
Bender, our Vice President of Clinical Research, in exchange for a promissory
note which is secured by a deed of trust on Dr. Bender’s personal
residence. The loan was interest-free and was repaid in three annual payments
of $30,000 each. The final payment was
made and the loan expired June 20, 2004.
On April 19,
2002, Dr. John Longenecker, our President and Chief Executive Officer and
a director, early exercised an option to purchase 185,060 shares of our common
stock under our 2001 plan by delivering to us a promissory note in the
aggregate principal amount of $96,000. The note bears interest at an annual
rate of 6.75%, which is payable annually. The principal amount of the note is
due and payable in full on April 19, 2006. The note is secured by the
shares of our common stock acquired by Dr. Longenecker pursuant to the
early exercise of his option.
Lease
Agreement
In September 2000,
we entered into a lease agreement with a non-profit organization with which we
share a common director, Dr. Royston. We paid an aggregate of $124,000 and
$476,000 in rent to the organization during the years ended December 31,
2004 and 2003, respectively. The lease agreement expired on March 31,
2004.
Item 14. Principal
Accounting Fees and Services
The following table represents aggregate fees billed
to us for fiscal years ended December 31, 2004 and 2003, by Ernst &
Young LLP (Ernst & Young), Independent Registered Public Accounting Firm.
|
|
|
Fiscal Year Ended
|
|
|
|
|
(in thousands)
|
|
|
|
|
2004
|
|
2003
|
|
|
Audit of financial statements
|
|
$
|
69
|
|
$
|
35
|
(1)
|
|
Timely quarterly reviews
|
|
7
|
|
23
|
|
|
SEC filings, including comfort letters,
consents and comment letters
|
|
421
|
|
—
|
|
|
Accounting consultations on matters
addressed during the audit or interim reviews
|
|
1
|
|
2
|
|
|
Total Audit Fees
|
|
498
|
|
60
|
|
|
Audit-related Fees
|
|
—
|
|
—
|
|
|
Tax Fees
|
|
—
|
|
—
|
|
|
All Other Fees
|
|
—
|
|
—
|
|
|
Total Fees
|
|
$
|
498
|
|
$
|
60
|
|
(1) 2003 fees include expenses of $817
69
All fees described above
were approved by the Audit Committee.
During the fiscal year ended
December 31, 2004, none of the total hours expended on the Company’s
financial audit by Ernst & Young were provided by persons other than Ernst
& Young’s full-time permanent employees.
Pre-Approval
Policies and Procedures.
The
Audit Committee has adopted a policy and procedures for the pre-approval of
audit and non-audit services rendered by our independent auditor, Ernst &
Young. The policy generally pre-approves specified services in the defined
categories of audit services, audit-related services, and tax services up to
specified amounts. Pre-approval may also be given as part of the Audit
Committee’s approval of the scope of the engagement of the independent auditor
or on an individual explicit case-by-case basis before the independent auditor
is engaged to provide each service. The pre-approval of services may be delegated
to one or more of the Audit Committee’s members, but the decision must be
reported to the full Audit Committee at its next scheduled meeting.
PART IV
Item 15. Exhibits
and Financial Statement Schedules
(a) The following
documents are filed as part of, or incorporated by reference into, this Annual
Report on Form 10-K.
(1) Financial Statements
The following
Financial Statements of Favrille, Inc., including the report thereon of Ernst
& Young LLP, are included in this Annual Report on Form 10-K beginning on
page 73:
|
Report of Independent Registered Public
Accounting Firm
|
|
|
Balance
Sheets as of December 31, 2004 and 2003
|
|
|
Statements of Operations for each of the three years in the period
ended December 31, 2004 and the period from January 21, 2000
(inception) to December 31, 2004
|
|
|
Statements of Stockholders’ Equity
(Deficit) for each of the three years in the period ended December 31,
2004 and the period from January 21, 2000 (inception) to December 31,
2004
|
|
|
Statements of Cash Flows for each of the three years in the period
ended December 31, 2004 and the period from January 21, 2000
(inception) to December 31, 2004
|
|
|
Notes to Financial Statements
|
|
(2) Financial Statement
Schedules
All schedules
have been omitted because they are not applicable or the required information
is included in the financial statements or notes thereto.
(3) Exhibits
The exhibits
listed under Item 15(b) hereof are filed with, or incorporated by reference
into, this Annual Report on Form 10-K.
70
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders
Favrille, Inc.
We have audited the accompanying balance
sheets of Favrille, Inc. (a development stage company) (the Company) as of
December 31, 2004 and 2003, and the related statements of operations,
stockholders’ equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2004 and the period form January 21,
2000 (inception) to December 31, 2004. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal
control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of Favrille, Inc. at December 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004, and the period form January 21, 2000
(inception) to December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
San Diego, California
March 22, 2005
71
FAVRILLE, INC.
(a
development stage company)
BALANCE SHEETS
(in
thousands, except share and per share data)
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
25,065
|
|
$
|
5,610
|
|
|
Short-term
investments
|
|
1,493
|
|
—
|
|
|
Receivable
from employees
|
|
4
|
|
34
|
|
|
Receivable,
other
|
|
15
|
|
239
|
|
|
Prepaid
expenses and other current assets
|
|
694
|
|
539
|
|
|
Total
current assets
|
|
27,271
|
|
6,422
|
|
|
Property and
equipment, net
|
|
9,435
|
|
6,505
|
|
|
Restricted
cash
|
|
1,606
|
|
1,658
|
|
|
Other assets
|
|
818
|
|
347
|
|
|
Total assets
|
|
$
|
39,130
|
|
$
|
14,932
|
|
|
Liabilities
and stockholders’ equity (deficit)
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
2,603
|
|
$
|
1,400
|
|
|
Current
portion of debt
|
|
2,492
|
|
1,556
|
|
|
Total
current liabilities
|
|
5,095
|
|
2,956
|
|
|
Debt, less
current portion
|
|
4,224
|
|
3,501
|
|
|
Deferred
rent
|
|
793
|
|
197
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
Redeemable
convertible preferred stock, $0.001 par value:
|
|
|
|
|
|
|
Authorized
shares, 6,286,014 at December 31, 2004 and none at December 31,
2003;
|
|
|
|
|
|
|
Issued and
outstanding shares— 6,140,188 at December 31, 2004 and none at December 31,
2003; liquidation preference of $43,956 at December 31, 2004;
|
|
43,672
|
|
—
|
|
|
Stockholders’
equity (deficit):
|
|
|
|
|
|
|
Convertible
preferred stock, $0.001 par value:
|
|
|
|
|
|
|
Authorized
shares, 7,013,387 and 5,535,213 at December 31, 2004 and December 31,
2003, respectively;
|
|
|
|
|
|
|
Issued and
outstanding shares-5,505,330 at December 31, 2004 and December 31,
2003; liquidation preference of $33,522 at December 31, 2004 and December 31,
2003
|
|
6
|
|
6
|
|
|
Common
stock, $0.001 par value:
|
|
|
|
|
|
|
Authorized
shares, 15,402,410 and 8,963,855 at December 31, 2004 and December 31,
2003, respectively;
|
|
|
|
|
|
|
Issued and
outstanding shares-1,838,714 and 981,096 at December 31, 2004 and December 31,
2003, respectively
|
|
2
|
|
1
|
|
|
Additional
paid-in capital
|
|
73,324
|
|
35,119
|
|
|
Deferred
stock-based compensation
|
|
(8,386
|
)
|
(1,440
|
)
|
|
Note
receivable from stockholder
|
|
(96
|
)
|
(96
|
)
|
|
Accumulated
other comprehensive loss
|
|
(2
|
)
|
—
|
|
|
Deficit
accumulated during the development stage
|
|
(79,502
|
)
|
(25,312
|
)
|
|
Total
stockholders’ equity (deficit)
|
|
(14,654
|
)
|
8,278
|
|
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
39,130
|
|
$
|
14,932
|
|
See accompanying notes.
72
FAVRILLE, INC.
(a
development stage company)
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
|
|
|
Years ended December 31,
|
|
Period from
January 21,
2000
(inception) to
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
$
|
18,694
|
|
$
|
10,492
|
|
$
|
5,308
|
|
$
|
37,954
|
|
|
General and
administrative
|
|
4,496
|
|
2,392
|
|
2,017
|
|
10,456
|
|
|
Amortization
of stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
1,196
|
|
114
|
|
—
|
|
1,310
|
|
|
General and
administrative
|
|
1,220
|
|
41
|
|
—
|
|
1,261
|
|
|
Total
operating expenses
|
|
25,606
|
|
13,039
|
|
7,325
|
|
50,981
|
|
|
Interest
income
|
|
375
|
|
108
|
|
167
|
|
917
|
|
|
Interest
expense
|
|
(817
|
)
|
(332
|
)
|
(88
|
)
|
(1,304
|
)
|
|
Other income
|
|
12
|
|
8
|
|
—
|
|
20
|
|
|
Total other
income (expense), net
|
|
(430
|
)
|
(216
|
)
|
79
|
|
(367
|
)
|
|
Net loss
|
|
(26,036
|
)
|
(13,255
|
)
|
(7,246
|
)
|
(51,348
|
)
|
|
Deemed
dividend—beneficial conversion feature for Series C redeemable
convertible preferred stock
|
|
(28,103
|
)
|
—
|
|
—
|
|
(28,103
|
)
|
|
Accretion of
Series C redeemable convertible preferred stock issuance costs
|
|
(51
|
)
|
—
|
|
—
|
|
(51
|
)
|
|
Net loss
applicable to common stockholders
|
|
$
|
(54,190
|
)
|
$
|
(13,255
|
)
|
$
|
(7,246
|
)
|
$
|
(79,502
|
)
|
|
Historical
net loss per share:
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(51.48
|
)
|
$
|
(16.97
|
)
|
$
|
(11.87
|
)
|
|
|
|
Weighted-average
shares—basic and diluted
|
|
1,052,624
|
|
781,054
|
|
610,709
|
|
|
|
|
Pro forma
net loss per share (unaudited):
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(4.85
|
)
|
|
|
|
|
|
|
|
Weighted-average
shares—basic and diluted
|
|
11,182,712
|
|
|
|
|
|
|
|
See accompanying notes.
73
FAVRILLE, INC.
(a
development stage company)
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Period from January 21,
2000 (inception) to December 31, 2004
(in
thousands, except share and per share data)
|
|
|
Convertible Preferred Stock
|
|
Common stock
|
|
Additional
Paid-In
|
|
Deferred
Stock-Based
|
|
Note
Receivable
from
|
|
Accumulated
Other
Comprehensive
|
|
Deficit
Accumulated
During the
Development
|
|
Total
Stockholders’
Equity
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Stockholder
|
|
Loss
|
|
Stage
|
|
(Deficit)
|
|
|
Issuance of common stock
for cash, in January, April and May, at $0.001 par value
|
|
—
|
|
$
|
—
|
|
588,713
|
|
$
|
1
|
|
$
|
2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3
|
|
|
Issuance of Series A
Convertible Preferred Stock, in May and June, at approximately $5.19 per
share, net of issuance costs of $89,000
|
|
1,156,610
|
|
1
|
|
—
|
|
—
|
|
5,910
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5,911
|
|
|
Net loss and comprehensive
loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,053
|
)
|
(1,053
|
)
|
|
Balance at December 31,
2000
|
|
1,156,610
|
|
1
|
|
588,713
|
|
1
|
|
5,912
|
|
—
|
|
—
|
|
—
|
|
(1,053
|
)
|
4,861
|
|
|
Issuance of common stock
for cash, in January and May, at approximately $0.52 per share
|
|
—
|
|
—
|
|
50,119
|
|
—
|
|
26
|
|
—
|
|
—
|
|
—
|
|
—
|
|
26
|
|
|
Exercise of options to
purchase common stock at approximately $0.52 per share
|
|
—
|
|
—
|
|
39,128
|
|
—
|
|
20
|
|
—
|
|
—
|
|
—
|
|
—
|
|
20
|
|
|
Issuance of warrant, in
March, in conjunction with credit agreement
|
|
—
|
|
—
|
|
—
|
|
—
|
|
22
|
|
—
|
|
—
|
|
—
|
|
—
|
|
22
|
|
|
Repurchase of common stock
at approximately $0.005 per share
|
|
—
|
|
—
|
|
(2,120
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Net loss and comprehensive
loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(3,758
|
)
|
(3,758
|
)
|
|
Balance at December 31,
2001
|
|
1,156,610
|
|
1
|
|
675,840
|
|
1
|
|
5,980
|
|
—
|
|
—
|
|
—
|
|
(4,811
|
)
|
1,171
|
|
|
Issuance of common stock
for cash in April, 19,274 and 9,638 shares at approximately $0.62 and $0.52
per share, respectively
|
|
—
|
|
—
|
|
28,912
|
|
—
|
|
17
|
|
—
|
|
—
|
|
—
|
|
—
|
|
17
|
|
|
Issuance of Series B
Convertible Preferred Stock, in April through June, at approximately
$6.33 per share, net of issuance costs of $136,000
|
|
2,563,605
|
|
3
|
|
—
|
|
—
|
|
16,085
|
|
—
|
|
—
|
|
—
|
|
—
|
|
16,088
|
|
|
Conversion of Promissory
Notes, in April, into Series B stock at approximately $6.33 per share
|
|
103,123
|
|
—
|
|
—
|
|
—
|
|
653
|
|
—
|
|
—
|
|
—
|
|
—
|
|
653
|
|
|
Non-cash stock compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
18
|
|
—
|
|
—
|
|
—
|
|
—
|
|
18
|
|
|
Issuance of common stock,
in April, for license agreement
|
|
—
|
|
—
|
|
40,867
|
|
—
|
|
21
|
|
—
|
|
—
|
|
—
|
|
—
|
|
21
|
|
|
Issuance of options related
to consulting agreement
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
|
Exercise of options to
purchase common stock at approximately $0.52 per share
|
|
—
|
|
—
|
|
196,474
|
|
—
|
|
102
|
|
—
|
|
(96
|
)
|
—
|
|
—
|
|
6
|
|
|
Repurchase of common stock
at approximately $0.52 per share
|
|
—
|
|
—
|
|
(3,919
|
)
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
|
Net loss and comprehensive
loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(7,246
|
)
|
(7,246
|
)
|
|
Balance at December 31,
2002
|
|
3,823,338
|
|
4
|
|
938,174
|
|
1
|
|
22,875
|
|
—
|
|
(96
|
)
|
—
|
|
(12,057
|
)
|
10,727
|
|
|
Issuance of Series B-2
Convertible Preferred Stock at approximately $6.33 per share, net of issuance
costs of $122,000
|
|
1,681,992
|
|
2
|
|
—
|
|
—
|
|
10,522
|
|
—
|
|
—
|
|
—
|
|
—
|
|
10,524
|
|
|
Issuance of common stock,
in September, for license agreement
|
|
—
|
|
—
|
|
38,553
|
|
—
|
|
24
|
|
—
|
|
—
|
|
—
|
|
—
|
|
24
|
|
|
Issuance of options related
to consulting agreement
|
|
—
|
|
—
|
|
—
|
|
—
|
|
16
|
|
—
|
|
—
|
|
—
|
|
—
|
|
16
|
|
|
Issuance of warrant, in
April, in conjunction with credit agreement
|
|
—
|
|
—
|
|
—
|
|
—
|
|
84
|
|
—
|
|
—
|
|
—
|
|
—
|
|
84
|
|
|
Exercise of options to
purchase common stock at approximately $0.52 and $0.62 per share
|
|
—
|
|
—
|
|
6,056
|
|
—
|
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
|
Repurchase of common stock
at approximately $0.52 per share
|
|
—
|
|
—
|
|
(1,687
|
)
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
|
Deferred stock-based
compensation related to issuance of stock options to employees
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,595
|
|
(1,595
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Amortization of stock-based
compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
155
|
|
—
|
|
—
|
|
—
|
|
155
|
|
|
Net loss and comprehensive
loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(13,255
|
)
|
(13,255
|
)
|
|
Balance at December 31,
2003
|
|
5,505,330
|
|
6
|
|
981,096
|
|
1
|
|
35,119
|
|
(1,440
|
)
|
(96
|
)
|
—
|
|
(25,312
|
)
|
8,278
|
|
|
Issuance of options and
warrant related to consulting agreement
|
|
—
|
|
—
|
|
—
|
|
—
|
|
169
|
|
—
|
|
—
|
|
—
|
|
—
|
|
169
|
|
|
Exercise of options to
purchase common stock at approximately $0.52 and $0.62 per share
|
|
—
|
|
—
|
|
889,266
|
|
1
|
|
555
|
|
—
|
|
—
|
|
—
|
|
—
|
|
556
|
|
|
Exercise of warrant to
purchase common stock at approximately $0.62 per share
|
|
—
|
|
—
|
|
9,638
|
|
—
|
|
6
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6
|
|
|
Repurchase of common stock
at approximately $0.52 and $0.62 per share
|
|
—
|
|
—
|
|
(41,286
|
)
|
—
|
|
(26
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(26
|
)
|
|
Issuance of warrant, in
August, in conjunction with credit agreement
|
|
—
|
|
—
|
|
—
|
|
—
|
|
36
|
|
—
|
|
—
|
|
—
|
|
—
|
|
36
|
|
|
Deemed dividend—beneficial
conversion feature for Series C redeemable convertible preferred stock
|
|
—
|
|
—
|
|
—
|
|
—
|
|
28,103
|
|
—
|
|
—
|
|
—
|
|
(28,103
|
)
|
—
|
|
|
Deferred stock-based
compensation related to issuance of stock options to employees
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9,362
|
|
(9,362
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Accretion of Series C
redeemable Preferred Stock issuance costs
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(51
|
)
|
(51
|
)
|
|
Amortization of stock-based
compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,416
|
|
—
|
|
—
|
|
—
|
|
2,416
|
|
|
Comprehensivie Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash
equivalents and short-term investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
(2
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(26,036
|
)
|
(26,036
|
)
|
|
Net comprehensive loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(26,038
|
)
|
|
Balance at December 31,
2004
|
|
5,505,330
|
|
$
|
6
|
|
1,838,714
|
|
$
|
2
|
|
$
|
73,324
|
|
$
|
(8,386
|
)
|
$
|
(96
|
)
|
$
|
(2
|
)
|
$
|
(79,502
|
)
|
$
|
(14,654
|
)
|
See accompanying notes.
74
FAVRILLE, INC.
(a
development stage company)
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
Years ended December 31,
|
|
Period from
January 21, 2000
(inception) to
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2004
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,036
|
)
|
$
|
(13,255
|
)
|
$
|
(7,246
|
)
|
$
|
(51,348
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
1,426
|
|
579
|
|
317
|
|
2,522
|
|
|
Issuance of
options and warrant related to consulting agreements
|
|
169
|
|
16
|
|
1
|
|
186
|
|
|
Stock-based
compensation
|
|
2,416
|
|
155
|
|
18
|
|
2,589
|
|
|
Non-cash
interest expense
|
|
64
|
|
56
|
|
12
|
|
140
|
|
|
Issuance of restricted
common stock for license
|
|
—
|
|
24
|
|
—
|
|
24
|
|
|
Deferred
rent
|
|
596
|
|
191
|
|
(3
|
)
|
793
|
|
|
Amortization
of premium/discount on short-term investments
|
|
(1
|
)
|
—
|
|
—
|
|
(1
|
)
|
|
Accrued
interest on short-term investments
|
|
(4
|
)
|
—
|
|
—
|
|
(4
|
)
|
|
Unrealized
loss on cash and cash equivalents
|
|
(1
|
)
|
—
|
|
—
|
|
(1
|
)
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
(11
|
)
|
—
|
|
(5
|
)
|
(15
|
)
|
|
Prepaid
expenses and other assets
|
|
(154
|
)
|
(490
|
)
|
(172
|
)
|
(882
|
)
|
|
Accounts
payable and accrued liabilities
|
|
913
|
|
666
|
|
522
|
|
2,313
|
|
|
Net cash
used in operating activities
|
|
(20,623
|
)
|
(12,058
|
)
|
(6,556
|
)
|
(43,684
|
)
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
(4,347
|
)
|
(5,558
|
)
|
(853
|
)
|
(11,941
|
)
|
|
Purchases of
short-term investments
|
|
(1,493
|
)
|
—
|
|
—
|
|
(1,493
|
)
|
|
Receivable,
other
|
|
239
|
|
(239
|
)
|
—
|
|
—
|
|
|
Receivable
from employee
|
|
30
|
|
30
|
|
30
|
|
—
|
|
|
Other assets
|
|
(50
|
)
|
(20
|
)
|
—
|
|
(70
|
)
|
|
Restricted
cash
|
|
—
|
|
(1,582
|
)
|
(31
|
)
|
(1,710
|
)
|
|
Sale of
restricted cash
|
|
52
|
|
—
|
|
—
|
|
104
|
|
|
Net cash
used in investing activities
|
|
(5,569
|
)
|
(7,369
|
)
|
(854
|
)
|
(15,110
|
)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
3,675
|
|
5,432
|
|
—
|
|
10,107
|
|
|
Payments on
debt
|
|
(2,119
|
)
|
(952
|
)
|
(296
|
)
|
(3,585
|
)
|
|
Issuance of
preferred stock, net
|
|
43,621
|
|
10,524
|
|
16,088
|
|
76,144
|
|
|
Deferred IPO
issuances costs, net
|
|
(66
|
)
|
—
|
|
—
|
|
(66
|
)
|
|
Proceeds
from issuance of convertible promissory note
|
|
—
|
|
—
|
|
650
|
|
650
|
|
|
Issuance of
common stock
|
|
562
|
|
4
|
|
23
|
|
638
|
|
|
Repurchase
of restricted common stock
|
|
(26
|
)
|
(1
|
)
|
(2
|
)
|
(29
|
)
|
|
Net cash
provided by financing activities
|
|
45,647
|
|
15,007
|
|
16,463
|
|
83,859
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
19,455
|
|
(4,420
|
)
|
9,053
|
|
25,065
|
|
|
Cash and
cash equivalents at beginning of period
|
|
5,610
|
|
10,030
|
|
977
|
|
—
|
|
|
Cash and
cash equivalents at end of period
|
|
$
|
25,065
|
|
$
|
5,610
|
|
$
|
10,030
|
|
$
|
25,065
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid
for interest
|
|
$
|
732
|
|
$
|
220
|
|
$
|
51
|
|
$
|
1,038
|
|
|
Supplemental
non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrant
related to line of credit agreement
|
|
$
|
36
|
|
$
|
84
|
|
$
|
—
|
|
$
|
142
|
|
|
Issuance of
options and warrant related to consulting agreement
|
|
$
|
169
|
|
$
|
16
|
|
$
|
1
|
|
$
|
186
|
|
|
Issuance of
preferred stock upon conversion of promissory note
|
|
$
|
—
|
|
$
|
—
|
|
$
|
650
|
|
$
|
650
|
|
|
Issuance of
restricted common stock for license agreements
|
|
$
|
—
|
|
$
|
24
|
|
$
|
21
|
|
$
|
45
|
|
|
Deemed
dividend—beneficial conversion feature for Series C redeemable
convertible preferred stock
|
|
$
|
28,103
|
|
$
|
—
|
|
$
|
—
|
|
$
|
28,103
|
|
|
Accretion of
Series C redeemable convertible preferred stock issuance costs
|
|
$
|
51
|
|
$
|
—
|
|
$
|
—
|
|
$
|
51
|
|
See accompanying notes.
75
Favrille, Inc.
Notes to Financial Statements
1. Organization and Summary of Significant
Accounting Policies
Organization and
Business
Favrille, Inc. (the Company or Favrille)
was incorporated in Delaware on January 21, 2000. The Company is a
biopharmaceutical company focused on the research, development and
commercialization of targeted immunotherapies for the treatment of cancer and
diseases of the immune system. The Company’s lead product candidate, FavId, is
based upon unique genetic information extracted from a patient’s tumor. FavId is currently under investigation in a
pivotal Phase III clinical trial for patients with follicular B-cell NHL and
Phase II clinical trials in other B-cell NHL indications. The Company is
developing additional applications based on its immunotherapy expertise and
proprietary manufacturing technology, including a second product candidate,
FAV-201, for the treatment of T-cell lymphoma.
The Company is a development stage company in
the initial stage of its operations, and since inception, the Company has been
engaged in organizational activities, including: recruiting personnel;
establishing office facilities; conducting research and development and
obtaining financing. From inception through December 31, 2004, the Company
has incurred net losses of $51.3 million and has a deficit accumulated during
the development stage of approximately $79.5 million.
Financial Statements
Preparation
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts in the Company’s financial statements and the accompanying notes.
Actual results could differ from those estimates. Certain prior year amounts
have been reclassified for consistency with the current year presentation.
These reclassifications had no effect on reported results of operations. The
2004 presentation of 2003 deferred income tax assets and liabilities, reflects
reclassifications to these balances to conform to the allocation and
classification methodology applied in 2004.
Cash Equivalents and
Short-Term Investments
Highly liquid investments with insignificant
interest rate risk and original maturities of three months or less, when
purchased, are classified as cash and cash equivalents. Cash equivalents are
comprised of commercial paper and U.S. government debt securities. The carrying
amounts approximate fair value due to the short maturities of these
instruments. Investments with maturities greater than three months are
classified as short-term investments. All of the Company’s short-term
investments are classified as available-for-sale and are reported at fair
value, as determined by quoted market prices, with any unrealized gains and
losses, net of tax, recorded as a separate component of accumulated other
comprehensive income (loss) in stockholders’ equity. Unrealized gains and
losses on investments accounted for all of the accumulated other comprehensive
income (loss) balance in the Statement of Stockholders’ Equity (Deficit).
The Company manages its cash equivalents and short-term investments as a single
portfolio of highly marketable securities, all of which are intended to be
available for the Company’s current operations.
Concentration of
Credit Risk
Financial instruments, that potentially
subject the Company to significant credit risk, consist primarily of cash and
cash equivalents, short-term investments and restricted cash. The Company
maintains deposits in federally insured financial institutions in excess of
federally insured limits. Management believes that the Company is not exposed
to significant credit risk due to the financial position of the depository
institutions in which those deposits are held. In addition, the Company invests
in a variety of financial instruments and, by policy, limits the amount of
credit exposure with any one issuer.
76
Favrille, Inc.
Notes to Financial Statements (continued)
Fair Value of
Financial Instruments
The carrying amount of cash equivalents,
short-term investments accounts payable and accrued expenses are considered to
be representative of their respective fair value because of the short-term
nature of those items. Based on the borrowing rates currently available to the
Company for loans with similar terms, management believes the fair value of the
long-term debt approximates its carrying value.
Property and
Equipment
Property and equipment are stated on the
basis of cost less accumulated depreciation. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets (three
to seven years). Leasehold improvements are stated at cost and amortized over
the shorter of the life of the lease term or the useful life of the asset.
Impairment of
Long-Lived Assets
In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the Company
assesses the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through the
undiscounted future operating cash flows. If impairment is indicated, the
Company measures the amount of such impairment by comparing the fair value to
the carrying value. While the Company’s current and historical operating losses
and cash flows are indicators of impairment, the Company believes the future
cash flows to be received from the long-lived assets will exceed the assets’
carrying value. Accordingly, there have been no indicators of impairment
through December 31, 2004 or 2003.
Deferred Rent
Rent expense is recorded on a straight-line
basis over the term of the lease. The difference between rent expense and
amounts paid under the lease agreements is recorded as deferred rent in the
accompanying balance sheets.
Research and
Development
Research and development are expensed as
incurred, and costs consist primarily of costs associated with the clinical
trials of the Company’s product candidates, compensation and other expenses for
research and development personnel, supplies and development materials, costs
for consultants, facility costs, amortization of purchased technology and
depreciation.
Patent Costs
Costs related to filing and pursuing patent
applications are expensed as incurred as recoverability of such expenditures is
uncertain.
Comprehensive Income
(Loss)
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income (loss) are reported in the financial
statements in the period in which they are recognized. Comprehensive income
(loss) is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including foreign currency translation
adjustments and unrealized gains and losses on investments, are reported, net
of their related tax effect, to arrive at comprehensive income (loss). The
Company has disclosed its comprehensive income (loss) in the statement of
stockholders’ equity (deficit).
77
Favrille, Inc.
Notes to Financial Statements (continued)
Series C Redeemable
Convertible Preferred Stock Deemed Dividend
The Series C financing, involved the sale of
preferred stock at a price per share below the Company’s anticipated initial
public offering price. Accordingly, pursuant to EITF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features, the Company recorded a deemed dividend on the
Series C shares of $28.1 million, which is the difference in the
gross proceeds from the Series C offering and the underlying value of the
conversion shares (adjusted for a conversion price adjustment feature). The
$28.1 million deemed dividend has been entirely recognized as an
adjustment to the net loss applicable to common stockholders since the
preferred stock is convertible, at any time, at the option of the holder, and
is not mandatorily redeemable. In accordance with EITF 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments, the Company calculated the deemed dividend
of $28.1 million using the most favorable conversion price of
$6.33 per conversion share.
Stock-Based
Compensation
The Company records compensation expense for
employee stock options based upon their intrinsic value on the date of grant
pursuant to Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
The Company establishes the exercise price based on the fair value of the
Company’s stock at the date of grant as determined by the Board of Directors
(the Board). In determining the fair value of the common stock, the Board
considered (i) the advancement of the Company’s technology, (ii) the
Company’s financial position and (iii) the fair value of the Company’s
preferred stock as determined in arm’s-length transactions. Therefore, the
options have no intrinsic value upon grant and no expense is recorded upon
issuance. With respect to certain options granted during 2004 and 2003, the
Company has recorded deferred compensation of $9.4 million and $1.6 million,
respectively, for the incremental difference at the grant date between the fair
value per share determined by the Board and the deemed fair value per share
determined solely for financial reporting purposes. Deferred stock-based
compensation is recognized and amortized on a straight-line basis over the
vesting period of the related options, generally four years.
In December 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition
and Disclosure—an amendment of FASB No. 123. SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by APB No. 25. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123. The Company adopted the disclosure requirements of SFAS
No. 148 effective December 31, 2003.
Pro forma information regarding net loss is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its stock-based employee compensation under the fair value method
prescribed in SFAS No. 123. The fair value of the options was estimated at
the date of grant using the Black-Scholes option pricing model with the
following assumptions for the years ended December 31, 2004, 2003 and
2002: weighted-average risk-free interest rates of 2.83%, 3.04%, and 3.88%,
respectively, dividend yields of 0%, expected volatility of 70%, and a weighted-average
expected life of four years for the year ended December 31, 2004 and a
weighted-average expected life of the option of five years for the years ended December 31,
2003 and 2002. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period of the related
options.
The Company accounts for stock option grants
and similar equity instruments granted to non-employees under the fair value
method, in accordance with Emerging Issues Task Force (EITF) Issue
No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and SFAS No. 123.
Had compensation cost for the Company’s
outstanding employee stock options been determined based on the fair value at
the grant dates for those options consistent with the provisions of SFAS
No. 123, the pro forma effects of stock-based compensation on net loss and
basic and diluted net loss per share would have been changed to the following:
78
Favrille, Inc.
Notes to Financial Statements (continued)
|
|
|
Years ended December 31,
|
|
Period from
January 21,
2000
(inception) to
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2004
|
|
|
|
|
(in thousands, except per share
data)
|
|
|
Net loss
applicable to common stockholders as reported:
|
|
$
|
(54,190
|
)
|
$
|
(13,255
|
)
|
$
|
(7,246
|
)
|
$
|
(79,502
|
)
|
|
Add:
Stock-based employee compensation expense included in net loss
|
|
2,416
|
|
155
|
|
—
|
|
2,571
|
|
|
Deduct:
Stock-based employee compensation expense determined under fair value method
for all awards
|
|
(2,564
|
)
|
(192
|
)
|
(23
|
)
|
(2,783
|
)
|
|
Pro forma
net loss applicable to common stockholders
|
|
$
|
(54,338
|
)
|
$
|
(13,292
|
)
|
$
|
(7,269
|
)
|
$
|
(79,714
|
)
|
|
Net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
As reported—Basic
and Diluted
|
|
$
|
(51.48
|
)
|
$
|
(16.97
|
)
|
$
|
(11.87
|
)
|
$
|
(75.53
|
)
|
|
Pro forma—Basic
and Diluted
|
|
$
|
(51.62
|
)
|
$
|
(17.02
|
)
|
$
|
(11.90
|
)
|
$
|
(75.73
|
)
|
The pro forma effect on net loss for all
periods presented may not be representative of the pro forma effect on reported
net income or loss in future years due to the uncertainty of stock option grant
volume and potential change in assumptions driven by market factors.
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured on the
balance sheet date based upon enacted tax rates, which will be in effect when
these differences reverse. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in the period such tax rate changes are
enacted. A valuation allowance is established when necessary to reduce deferred
tax assets when it is more likely than not that the assets will not be
realized.
Net Loss per Common
Share
Net loss per share in calculated in
accordance with SFAS No. 128, Earnings
Per Share and Staff Accounting Bulletin (SAB) No. 98. Basic
loss per share is calculated using the weighted average number of common shares
outstanding during each period, without consideration for common stock
equivalents. Diluted loss per share includes the dilutive effect of common
equivalent shares outstanding for the period determined using the treasury-stock
method. For purposes of this calculation, common stock subject to repurchase by
the Company, preferred stock, options and warrants are considered to be common
stock equivalents and are only included in the calculation of diluted earnings
per share when their effect is dilutive.
Pro forma net loss per share has been
calculated as described above. The pro forma shares used to compute basic and
diluted net loss per share represent the weighted-average common shares
outstanding, reduced by the weighted-average unvested common shares subject to
repurchase, and include the assumed automatic conversion of all outstanding
shares of preferred stock that automatically converted into shares of common
stock upon the closing of our initial public offering (IPO), in February 2005, (Note 9)
using the as-if converted method as of January 1, 2003 or the date of
issuance, if later.
79
Favrille, Inc.
Notes to Financial Statements (continued)
|
|
|
Years ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
(in thousands, except per share
data)
|
|
|
Historical:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,036
|
)
|
$
|
(13,255
|
)
|
$
|
(7,246
|
)
|
|
Deemed
dividend—beneficial conversion feature for Series C redeemable
convertible preferred stock
|
|
(28,103
|
)
|
—
|
|
—
|
|
|
Accretion of
Series C redeemable convertible stock issuance costs
|
|
(51
|
)
|
—
|
|
—
|
|
|
Net loss
applicable to common stockholders
|
|
$
|
(54,190
|
)
|
$
|
(13,255
|
)
|
$
|
(7,246
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
|
|
1,539,072
|
|
950,600
|
|
862,824
|
|
|
Weighted-average
unvested common shares subject to repurchase
|
|
(486,448
|
)
|
(169,546
|
)
|
(252,115
|
)
|
|
Denominator
for basic and diluted earnings per share
|
|
1,052,624
|
|
781,054
|
|
610,709
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted net loss per share
|
|
$
|
(51.48
|
)
|
$
|
(16.97
|
)
|
$
|
(11.87
|
)
|
|
Pro forma:
|
|
|
|
|
|
|
|
|
Net loss
applicable to common stockholders
|
|
$
|
(54,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
basic and diluted net loss per share (unaudited)
|
|
$
|
(4.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used
above
|
|
1,052,624
|
|
|
|
|
|
|
Pro forma
adjustments to reflect weighted-average affect of conversion of preferred
stock (unaudited)
|
|
10,130,088
|
|
|
|
|
|
|
Pro forma
shares used to compute basic and diluted net loss per share (unaudited)
|
|
11,182,712
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Historical
outstanding antidilutive securities not included in diluted net loss per
share calculation:
|
|
|
|
|
|
|
|
|
Common stock
equivalents:
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock
|
|
6,672,014
|
|
—
|
|
—
|
|
|
Convertible
preferred stock
|
|
5,505,330
|
|
5,505,330
|
|
3,823,338
|
|
|
Stock
warrants
|
|
47,057
|
|
49,108
|
|
7,710
|
|
|
Options to
purchase common stock
|
|
959,753
|
|
469,301
|
|
191,139
|
|
|
Common stock
subject to repurchase
|
|
599,325
|
|
127,865
|
|
242,831
|
|
|
|
|
13,783,479
|
|
6,151,604
|
|
4,265,018
|
|
Segment Information
The Company adopted the provisions of SFAS
No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 requires
public companies to report financial and descriptive information about their
reportable operating segments. The Company identifies its operating segments
based on how management internally evaluates separate financial information,
business activities and management responsibility. The Company believes it
operates in a single business segment, therefore this standard did not have a
material impact on the Company’s financial statements.
80
Favrille, Inc.
Notes to Financial Statements (continued)
Recent Accounting
Pronouncements
As permitted by SFAS
No. 123, we currently account for share-based payments to employees using APB
No. 25’s intrinsic value method and as such, generally recognize no
compensation cost for employee stock options.
Accordingly, the adoption of fair value method required under SFAS
123(R), Share-Based Payment, will have a significant impact on our result
of operations, although it will have no impact on our overall financial
position. The impact of adoption
of Statement 123(R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in
prior periods, the impact of that standard would have approximately the impact
of SFAS No. 123 as described in the disclosure of pro forma net income and earnings
per share included in Note 1 to the financial statements. Statement 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows by the same amount
in periods after adoption. We cannot estimate what those amounts will be in the
future, because they depend on, among other things, when employees exercise
stock options.
2. Financial Statement Information
Short-term Investments
Short-term investments by security type at December 31,
2004, were as follows (in thousands):
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
U.S.
Government Securities
|
|
$
|
1,494
|
|
$
|
—
|
|
$
|
1
|
|
$
|
1,493
|
|
|
|
|
$
|
1,494
|
|
$
|
—
|
|
$
|
1
|
|
$
|
1,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All investments that have gross unrealized losses have been held for
less than twelve months. At December 31, 2004, the Company had unrealized
losses on cash equivalents of approximately $1,000. These unrealized losses are
included in the statement of stockholders’ equity. Contractual maturities of short-term
investments are due in one year or less.
Property and
Equipment
Property and equipment consisted of the
following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Lab
equipment
|
|
$
|
3,538
|
|
$
|
2,471
|
|
|
Manufacturing
equipment
|
|
2,489
|
|
1,137
|
|
|
Computer,
software and office equipment
|
|
1,584
|
|
785
|
|
|
Leasehold
improvements
|
|
4,243
|
|
2,674
|
|
|
Construction
in process
|
|
—
|
|
527
|
|
|
|
|
11,854
|
|
7,594
|
|
|
Accumulated
depreciation and amortization
|
|
(2,419
|
)
|
(1,089
|
)
|
|
|
|
$
|
9,435
|
|
$
|
6,505
|
|
Total depreciation expense, including
amortization for assets under capital lease, for the years ended December 31,
2004, 2003 and 2002, and the period from January 21, 2000 (inception) to December 31,
2004 was $1.4 million, $575,000, $315,000 and $2.5 million, respectively.
81
Favrille, Inc.
Notes to Financial Statements (continued)
Accounts Payable and
Accrued Liabilities
Accounts payable and accrued liabilities
consisted of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Accounts
payable
|
|
$
|
872
|
|
$
|
463
|
|
|
Accrued
clinical trial costs
|
|
325
|
|
132
|
|
|
Accrued
compensation
|
|
505
|
|
337
|
|
|
Accrued
liabilities
|
|
611
|
|
468
|
|
|
Accrued IPO
expenses
|
|
290
|
|
—
|
|
|
|
|
$
|
2,603
|
|
$
|
1,400
|
|
3. Commitments and Contingencies
Equipment Lines of
Credit
During 2001, the Company borrowed
$1.0 million under an equipment line of credit facility through three
draws. Borrowings under the line of credit bore interest at rates ranging from
9.84% to 11.07% per annum. As of December 31, 2003, the Company was in
compliance with the terms of the line of credit agreement. In October 2004, in accordance with the
terms of the line of credit agreement the Company repaid all principal and
interest.
During March 2003, the Company entered
into a loan and security agreement under which the lender agreed to extend to
the Company a line of credit equal to $7.0 million. The agreement states
that any proceeds are to be used solely for the purchase of eligible equipment
and certain leasehold improvements. As of December 31, 2004 and 2003, the
Company had borrowings under the loan and security agreement totaling $4.6
million and $5.4 million, respectively. Borrowings under the line of
credit bear interest at rates ranging from 11.44% to 14.66% per annum and are
collateralized by certain items of the financed equipment and leasehold
improvements. Principal and interest, related to each draw, are payable monthly
over 36 months or 42 months, and the Company is required to make
final terminal payments equal to 7.50% or 12.75% of the original principal
amount of each drawdown. The loan and security agreement subjects the Company
to certain financial and non-financial covenants. As of December 31, 2004
and 2003, the Company was in compliance with the terms of the loan and security
agreement.
During July 2004, the Company entered
into a loan and security agreement under which the lender agreed to extend to
the Company a line of credit equal to $2.5 million. The agreement states
that any proceeds are to be used solely for the purchase of eligible equipment
and certain leasehold improvements. As of December 31, 2004, the Company
had borrowings under the loan and security agreement totaling
$1.9 million. Borrowings under the line of credit bear interest at 9.34%
and 9.58% per annum and are collateralized by certain of the financed
equipment. Principal and interest, related to each draw, are payable monthly
over 36 months or 42 months. The loan and security agreement subjects
the Company to certain financial and non-financial covenants. As of December 31,
2004, the Company was in compliance with the terms of the loan and security agreement.
Future minimum principal payments due under
the above line of credit and loan and security agreements are as follows at December 31
(in thousands):
|
2005
|
|
$
|
2,501
|
|
|
2006
|
|
2,494
|
|
|
2007
|
|
1,405
|
|
|
2008
|
|
94
|
|
|
Total
|
|
6,494
|
|
|
Less:
Amounts representing debt discount
|
|
(60
|
)
|
|
Net loan
|
|
6,434
|
|
|
Less:
Current portion
|
|
2,455
|
|
|
Long-term
portion
|
|
$
|
3,979
|
|
82
Favrille, Inc.
Notes to Financial Statements (continued)
The current portion and long-term portion,
above, excludes $37,000 and $41,000, respectively, in capital leases payments,
included in the capital lease disclosures. In addition, the long-term portion
excludes $202,000 related to the last payment on each loan, pursuant to the
respective loan agreements, which was prepaid and is included in other assets
in the accompanying balance sheets.
Leases
The Company leased its research facilities
from a related party (Note 7) under a non-cancelable operating lease that
expired on March 31, 2004. The lease required the Company to pay for its
share of maintenance, insurance and property taxes. As a security deposit for
the facility lease, the Company executed a letter of credit in favor of the
landlord, secured by a certificate of deposit for approximately $45,000. The
certificate of deposit is included in restricted cash in the balance sheet for
the year ended December 31, 2003. The certificate of deposit matured in
March 2004 and was not renewed.
In January 2003, the Company entered
into a 15 and one-half year lease for approximately 49,000 square feet of
manufacturing, laboratory and office space. The lease has stated increases over
the lease term. Under the terms of the lease agreement, the Company was
required to pay a security deposit of approximately $152,000 and execute a
$1.5 million letter of credit in favor of the landlord, which is secured
by a restricted investment in money market funds. The restricted investment is
included in restricted cash in the accompanying balance sheets. Beginning February 1,
2006, the letter of credit will increase under the terms of the lease, unless
the Company meets certain financial criteria, which will result in the letter
of credit amount being decreased. The lease requires the Company to pay for its
share of maintenance, insurance and property taxes. In July 2004, the
Company amended its current facility lease to add an additional 14,000 square
feet of office space. The lease term on the additional space expires July 31,
2008, but may be extended at the Company’s option for two additional two year
periods.
In May 2003, the Company entered into a 36-month capital lease for the
purchase of certain property and equipment.
The lease bears an annual interest rate of 6.57%, with interest and
principal due monthly. In January 2004,
the Company entered into two capital leases, for the purchase of certain
property and equipment, with terms of 60 months and 36 months, respectively.
The capital leases bear effective annual interest rates of 5.18% and 21.67%,
respectively, with interest and principal due monthly.
Future annual minimum payments under capital
leases and non-cancelable operating leases are as follows at December 31
(in thousands):
|
|
|
Operating
Leases
|
|
Capital
Leases
|
|
|
2005
|
|
$
|
1,784
|
|
$
|
44
|
|
|
2006
|
|
1,853
|
|
34
|
|
|
2007
|
|
1,927
|
|
5
|
|
|
2008
|
|
2,079
|
|
5
|
|
|
2009
|
|
2,047
|
|
1
|
|
|
Thereafter
|
|
20,947
|
|
—
|
|
|
Total
minimum lease payments
|
|
$
|
30,637
|
|
89
|
|
|
Less: Amount
representing interest
|
|
|
|
11
|
|
|
Present
value of future minimum lease payments
|
|
|
|
78
|
|
|
Less:
Current portion
|
|
|
|
37
|
|
|
Long-term
portion
|
|
|
|
$
|
41
|
|
The long-term portion excludes $2,000 related
to the last payment, pursuant to the lease agreement, which was prepaid and is
included in other assets in the accompanying balance sheets.
Rental expense, including equipment rental,
for the years ended December 31, 2004, 2003 and 2002, and the period from January 21,
2000 (inception) to December 31, 2004 and was $2.5 million,
$1.3 million, $429,000 and $4.7 million, respectively.
83
Favrille, Inc.
Notes to Financial Statements (continued)
4. License Agreements
In April 2002, the Company issued 40,867
shares of restricted common stock to a company whose major stockholder is a
founder of Favrille, in exchange for a worldwide, perpetual, royalty-free
license for certain technology. The fair value attributed to the license of
$21,000 was based on the fair value of the common stock as determined by the
Board and is included in other assets and is being amortized over the estimated
life of the technology, which is five years. Amortization of approximately
$4,200, $4,200, $2,800 and $11,200 has been recorded as research and
development expense during the years ended December 31, 2004, 2003 and
2002, and the period from January 21, 2000 (inception) to December 31,
2004, respectively.
In September 2003, the Company entered
into an exclusive license and intellectual property assignment agreement with a
non-profit organization with which the Company shares a common director (the License
Agreement). Under the terms of the License Agreement, the Company licensed
certain intellectual property developed and or acquired by one of the Company’s
founders while he was an employee of the licensor. In consideration for the
licensed technology, the Company issued an aggregate of 38,553 shares of common
stock to the licensor and one of its collaborators. The fair value attributed
to the license of $24,000 was based on the fair value of the common stock as
determined by the Board. The fair value of the license was charged to research
and development expense in the accompanying statements of operations in 2003
due to the early stage of development of the technology and the lack of
alternative future uses for it.
In December 2003, the Company entered
into a non-exclusive worldwide fee-bearing royalty-free license agreement for
certain patent rights. In consideration for the patent rights, the Company paid
an initial fee of $20,000 and the first annual payment of $10,000 upon
execution of the agreement in 2003 and is committed to annual payments of
$10,000 through the Company’s clinical development period (anticipated to end
in 2007) and, after commercialization of its first product candidate, an
aggregate of $225,000 in annual fees and a milestone payment. The annual
payment is recorded as research and development expense. The initial fee has
been recorded as a license fee and is amortized to research and development
expense over a five-year period, the estimated life of the technology. Expense
related to the license agreement for the years ended December 31, 2004 and
2003 and the period from January 21, 2000 (inception) to December 31,
2004 totaled approximately $14,000, $1,200 and $15,200, respectively.
In November 2004, the Company entered
into a supply and license agreement with one of its vendors in which it made a
$50,000 milestone payment, upon execution of the agreement, and is committed to
purchase $235,000 of raw material through May 2005. An additional aggregate of
$300,000 may be due upon the occurrence of certain events. The initial term of
the agreement is 96 months and is automatically renewable for 12 month periods
unless terminated by written notice by either party. Either party may terminate the agreement
earlier upon a breach by the other party that is not cured within 60 days or
other events relating to insolvency or bankruptcy. The initial milestone
payment has been recorded as a license fee and is amortized to research and
development expense over an eight-year period, the initial term of the
agreement. Expense related to the agreement for the year ended December 31,
2004 and the period from January 21, 2000 (inception) to December 31,
2004 totaled approximately $1,000.
5. Stockholders’ Equity
Reverse Stock Split
In December 2004, the Company’s Board of
Directors and stockholders approved a reverse stock split of 1-for-5.1875 of
its capital stock. The certificate of amendment as filed with the Secretary of
State of the State of Delaware affecting the 1-for-5.1875 reverse stock split
of the Company’s capital stock January 21, 2005. All share, per share and
stock option data information in the accompanying financial statements and the
notes thereto has been retroactively restated for all periods to reflect the
reverse stock split.
84
Favrille, Inc.
Notes to Financial Statements (continued)
Convertible
Preferred Stock
The authorized, issued and outstanding shares
of convertible preferred stock (Preferred Stock) by series are as follows as of
December 31, 2004 (in thousands):
|
|
|
Shares
Authorized
|
|
Shares Issued and
Outstanding
|
|
Liquidation
Preference
|
|
|
Series A
|
|
1,164
|
|
1,156
|
|
$
|
6,000
|
|
|
Series B
|
|
2,689
|
|
2,667
|
|
16,877
|
|
|
Series B-2
|
|
3,160
|
|
1,682
|
|
10,645
|
|
|
Series C
|
|
6,286
|
|
6,140
|
|
43,956
|
|
|
|
|
13,299
|
|
11,645
|
|
$
|
77,478
|
|
In May and June 2000, the Company issued
1.2 million shares of Series A Preferred Stock (Series A) for
proceeds of $5.9 million, net of issuance costs of approximately $89,000.
In April through June 2002, the Company
issued 2.7 million shares of Series B Preferred Stock (Series B)
for proceeds of $16.1 million, net of issuance costs of approximately
$136,000. In addition, 535,000 Series B shares were issued upon the
conversion of a bridge loan of $650,000 plus accrued interest of $2,657.
In June through August 2003, the
Company issued 1.7 million shares of Series B-2 Preferred Stock
(Series B-2) for proceeds of $10.5 million, net of stock issuance
costs of approximately $122,000.
In March and April 2004, the Company
issued 6,140,188 shares of its Series C redeemable convertible preferred
stock (Series C) for proceeds of approximately $43.7 million, net of
stock issuance costs of approximately $335,000.
Voting
Each holder of the Preferred Stock shall be
entitled to the number of votes equal to the number of shares of common stock
issuable upon conversion of such shares of Preferred Stock and shall have
voting rights and powers equal to the voting rights and powers of the common
stock (except as required by law), voting together with the common stock as a
single class. Each holder of common stock shall be entitled to one vote for
each share of common stock held.
With regard to certain issues, the holder of
the Series C shares will vote as a separate class and not together with the
holders of the Series A, Series B and B-2 shares or common stock, except
as required by law. Similarly, with regard to certain issues, the holders of
the Series B and B-2 shares will vote as a separate class and not together
with the holders of the Series C and Series A shares or common stock,
except as required by law. Similarly, with regard to certain issues, the
holders of the Series A shares will vote as a separate class and not
together with the holders of the Series B, B-2 and Series C shares or
common stock, except as required by law.
Conversion
Series A, Series B, Series B-2 and
Series C stock are convertible into shares of common stock at the option
of the holder, initially, on a one-for-one basis. The Company’s outstanding
Preferred Stock will automatically convert into shares of common stock upon the
closing of a firm-commitment underwritten public offering (IPO) in which
(i) the value of the Company immediately prior to the public offering is
at least $208.0 million (the Required Valuation) and (ii) the gross
cash proceeds of the offering (before underwriting fees, commissions and
discounts) are at least $40.0 million (a Qualifying IPO), or upon the vote
of at least 51% of each of the Series A, Series B, Series B-2 and
Series C shares. In December 2004,
the Company’s Board of Directors and stockholders approved an amendment to the
Company’s certificate of incorporation to reduce the conversion price of the
Series C preferred stock from $7.16 per share to $6.59 per share and to reduce
the Qualifying IPO valuation for the automatic conversion of all series of
preferred stock from $208.0 million to $150.0 million. The Company’s Board of Directors approved
these amendments based on its judgment that the Company’s ability to consummate
a public offering at a valuation of at least $208.0 million was uncertain in
light of then-current market conditions and of the automatic reduction in the
Series C preferred stock conversion price to $6.33 per share that would
nevertheless have occurred if the Company did not complete a Qualifying IPO or
another qualifying private financing on or before June 30, 2005. As a result, the reduction of the Series C
preferred stock conversion price will not require an accounting charge to the
Company’s financial statements. The
conversion price per share in effect as of December 31, 2004 was approximately
$5.19, $6.33, $6.33 and $6.59 per share for the Company’s Series A, Series B,
Series B-2 and Series C Preferred Stock, respectively.
85
Favrille, Inc.
Notes to Financial Statements (continued)
Pursuant to a conversion and amendment
agreement executed on December 31, 2004, a majority of the holders of each
Series of Preferred Stock agreed to the conversion of the preferred shares into
common stock, effective immediately prior to an IPO that does not constitute a
Qualifying IPO. All preferred shares
were converted into common shares immediately prior to the Company’s IPO in February 2005
(Note 9).
Redemption of Redeemable Convertible
Preferred Stock
The redemption provisions of the
Series C stipulate that, upon the request of holders of at least 51% of
the then outstanding Series C shares, the Company is required to redeem
(i) up to 50% of the outstanding Series C shares at any time after March 26,
2009 and (ii) up to all of the outstanding Series C shares at any
time after March 26, 2010. The redemption price is equal to the greater of
(a) approximately $7.16 per share of Series C and (b) the fair
market value of the Series C shares, as determined by the Board, at the
date of the redemption request, in each case plus declared and unpaid dividends
with respect to such shares. Effective immediately prior to the closing of the
Company’s IPO, in February 2005, the Series C shares converted into
6,672,014 common shares (Note 9).
Dividends
Holders of the Series C redeemable
convertible preferred stock are entitled to receive non-cumulative dividends,
when and as declared by the Board, in preference to the holders of
Series A, Series B, Series B-2 shares and common stock. The
dividends are to be paid out of legally available funds at the rate of eight
percent of the applicable original issuance price (approximately $7.16), per
annum on each outstanding share of Series C shares (as adjusted for any
stock dividends, combinations or splits with respect to such shares). Following
payment of Series C dividends, holders of Series B and Series B-2
Preferred, in preference to the holders of Series A and common stock, shall be entitled
to receive, when and as declared by the Board, but only out of funds that are
legally available therefor, cash dividends at the rate of eight percent (8%) of
the applicable Original Issue Price (approximately $6.33), per annum on each
outstanding share of Series B and Series B-2 Preferred (as adjusted for
any stock dividends, combinations, splits, recapitalizations and the like with
respect to such shares). The holders of
the Series B, Series B-2 and Series C shares are entitled to participate
pro rata in any dividends paid on the common stock. To date, the Company has
not declared any dividends. All preferred shares were converted into common
shares immediately prior to the Company’s IPO in February 2005 (Note 9).
Liquidation
In the event of liquidation, the
Series C stockholders are entitled to receive, in preference to the
holders of the Series A, Series B, Series B-2 and common stock,
a liquidation preference equal to approximately $7.16 per outstanding Series C
share plus declared but unpaid dividends. After payment of the liquidation
preference to Series C stockholders, the Series B and Series B-2
stockholders are entitled to receive a liquidation preference equal to
approximately $6.33 per outstanding Series B and Series B-2 share plus
declared but unpaid dividends. After
payment of the liquidation preference to Series C, the Series B and Series
B-2 stockholders, the Series A stockholders are entitled to receive a
liquidation preference equal to approximately $5.19 per outstanding Series
A share plus declared but unpaid dividends. After such liquidation preference
payments, all remaining assets from liquidation are to be paid to the common
stockholders according to the number of shares held All preferred shares were
converted into common shares immediately prior to the Company’s IPO in February 2005
(Note 9).
Common Stock
The majority of the outstanding shares of
common stock have been issued to the founders, directors, employees and
consultants to the Company.
Restricted Stock
In January 2000, the Company issued
approximately 396,000 restricted shares of the Company’s common stock to
certain employees with vesting over a three-year period. During 2002 and 2001,
the Company issued an additional 9,638 and 50,119, respectively, of restricted shares
of common stock to certain directors and consultants. The restricted stock
vests monthly, over a period of two to four years. In addition, during 2004,
2003, 2002 and the period from January 21, 2000 (inception) to December 31,
2004, the Company issued 706,268, 5,065, 194,180 and
86
Favrille, Inc.
Notes to Financial Statements (continued)
941,514 shares, respectively, of restricted shares of common stock
upon the early exercise of stock options, as noted below. The options generally
vest over four years. Included in the restricted stock issued in 2002 are
185,060 shares of common stock issued upon the early exercise of options by an
officer of the Company through a full recourse promissory note for $96,000. The
note receivable from stockholder is reflected in stockholders’ equity in the
accompanying balance sheets. During the years ended December 31, 2004,
2003, 2002 and the period from January 21, 2000 (inception) to December 31,
2004, the Company had repurchased approximately 41,286, 1,687, 3,919 and
46,892 unvested shares, respectively. As of December 31, 2004 and
2003, 599,994 shares and 128,581 shares, respectively, were unvested and
subject to repurchase by the Company. In addition to the above noted restricted
stock, the Company issued 79,420 shares of restricted stock under certain
license agreements, which are not subject to vesting restrictions.
Stock Options
As amended, the 2001 Equity Incentive Plan
(the Equity Incentive Plan) is authorized to issue approximately 2.8 million
shares of common stock under various instruments and years. Options granted
under the Equity Incentive Plan generally expire no later than ten years from
the date of grant (five years for a 10% stockholder). Options generally vest
over a period of four years. In 2004, 2003 and 2002 all options granted under
the Equity Incentive Plan allowed for early exercise prior to the option
becoming fully vested.
The exercise price of incentive stock options
must be equal to at least the fair value of the Company’s common stock on the
date of grant, and the exercise price of non-statutory stock options may be no
less than 85% of the fair value of the Company’s common stock on the date of
grant. The exercise price of any option granted to a 10% stockholder may not be
less than 110% of the fair value of the Company’s common stock on the date of
grant.
The stock option activity is summarized below
(shares in thousands):
|
|
|
Shares
|
|
Approximate
Weighted-average
exercise price
|
|
|
Outstanding
at December 31, 2000
|
|
—
|
|
$
|
—
|
|
|
Granted
|
|
69
|
|
0.52
|
|
|
Exercised
|
|
(39
|
)
|
0.52
|
|
|
Cancelled
|
|
—
|
|
—
|
|
|
Outstanding
at December 31, 2001
|
|
30
|
|
0.52
|
|
|
Granted
|
|
361
|
|
0.57
|
|
|
Exercised
|
|
(196
|
)
|
0.53
|
|
|
Cancelled
|
|
(4
|
)
|
0.54
|
|
|
Outstanding
at December 31, 2002
|
|
191
|
|
0.61
|
|
|
Granted
|
|
312
|
|
0.63
|
|
|
Exercised
|
|
(6
|
)
|
0.60
|
|
|
Cancelled
|
|
(28
|
)
|
0.62
|
|
|
Outstanding
at December 31, 2003
|
|
469
|
|
0.62
|
|
|
Granted
|
|
1,389
|
|
0.64
|
|
|
Exercised
|
|
(889
|
)
|
0.63
|
|
|
Cancelled
|
|
(10
|
)
|
0.62
|
|
|
Outstanding
at December 31, 2004
|
|
959
|
|
0.63
|
|
|
|
|
|
|
|
|
The weighted-average fair value of options
granted during 2004, 2003 and 2002, and for the period from January 31,
2000 (inception) to December 31, 2004 was $6.88, $6.14, $0.35 and $5.45,
respectively. At December 31, 2004 and 2003, all outstanding options were
exercisable, and options to purchase 226,477 and 88,559 shares shares,
respectively, were vested. Exercise prices of outstanding options at December 31,
2004 and 2003 ranged from approximately $0.52 to $0.73 and $0.52 to $0.63 per
share, respectively. The weighted-average remaining contractual life of the
options outstanding at December 31, 2004 and 2003 was 9.18 years and
9.23 years, respectively.
87
Favrille, Inc.
Notes to Financial Statements (continued)
At December 31, 2004 and 2003,
approximately 683,000 shares and 399,000 shares, respectively, remained
available for future issuance or grant under the Equity Incentive Plan.
The employment agreement with the Company’s
President and CEO provides for him to receive additional stock option grants to
purchase the Company’s common stock in an amount necessary to maintain a
minimum of a 3% equity ownership on a fully-diluted basis (including conversion
of preferred stock into common stock, conversion of preferred stock warrants
into common stock, common stock outstanding, warrants outstanding for the
purchase of common stock and the Company’s 2001 Equity Incentive Plan pool).
This right to additional stock option grants will not extend beyond certain events
including the effective date of an initial public offering of the Company’s
common stock (February 2, 2005). To effectuate the right, the Company may
be required to grant additional options to purchase the Company’s common stock
to maintain this 3% ownership. For the years ended December 31, 2004 and
2003, the Company issued options in excess of that required to maintain this
percentage ownership.
Non-Employee
Directors’ Stock Option Plan
In December 2004, the Board approved the
2005 Non-Employee Directors’ Stock Option Plan (the Directors’ Plan), which
becomes effective on the closing date (February 7, 2005) of the
registration statement filed in connection with the Company’s IPO (Note 9).
The Directors’ Plan provides for the
automatic grant of non-statutory options to purchase shares of common stock to
non-employee directors. An aggregate of
420,000 shares of common stock have been reserved for future issuance under the
Directors’ Plan. This amount will be
increased annually on the first day of the Company’s fiscal year, from 2005 to
2013, by 90,000 shares of common stock.
Employee Stock Purchase Plan
In December 2004, the Board approved the
2005 Employee Stock Purchase Plan (the Purchase Plan) which becomes effective
on the closing date (February 7, 2005) of the registration statement filed
in connection with the Company’s IPO (Note 9).
Under the Purchase Plan, the Company may
issue up to 300,000 shares of common stock to eligible employees who elect to
participate in the plan. This amount will
be increased annually on the first day of the Company’s fiscal year, from 2005
to 2013. Employees participating in the
Purchase Plan will obtain the right to purchase shares of common stock at the
lower of 85% of the common stock closing price on the first day of the offering
period or 85% of the common stock closing price on the purchase date. The initial offering period commenced upon
the closing date (February 7, 2005) and will be approximately 24 months in
duration, with purchase dates occurring every six months. Subsequent offering
periods will be up to 27 months in duration.
Warrants
In March 2001, in conjunction with its
line of credit agreement, the Company issued a warrant to purchase up to an
aggregate of 7,710 shares of the Company’s Series A Preferred Stock at an
exercise price of approximately $5.19 per share. The warrant is exercisable
through the later of March 15, 2008 or five years after the Company’s
initial public offering. The Company determined the fair value of the warrant
on the grant date, using the Black-Scholes pricing model, of $22,400, which is
recorded as a debt discount and is being amortized over the term of the line of
credit. The assumptions used in determining the fair value of the warrants were
a risk-free interest rate of 4.3%; dividend yield of 0%; expected volatility of
60%; and an expected life of five years. Amortization of approximately $500,
$4,900, $9,100 and $22,400 was recorded as interest expense during the years
ended December 31, 2004, 2003 and 2002, and for the period from January 21,
2000 (inception) to December 31, 2004, respectively. As of December 31,
2004, the warrant remained outstanding.
88
Favrille, Inc.
Notes to Financial Statements (continued)
In March 2003, in conjunction with its
loan and security agreement, the Company issued warrants to purchase up to an
aggregate of approximately 22,121 shares of the Company’s Series B
Preferred Stock at an exercise price of approximately $6.33 per share. The warrants
are exercisable through March 20, 2010. The Company determined the fair
value of the warrants on the grant date, using the Black-Scholes pricing model,
of $83,796, which is recorded as a debt discount and is being amortized over
the term of the loan and security agreement. The assumptions used in
determining the fair value of the warrants were a risk-free interest rate of
3.0%; dividend yield of 0%; expected volatility of 70%; and an expected life of
five years. Amortization of approximately $35,000, $32,000 and $67,000 was
recorded as interest expense during the years ended December 31, 2004 and
2003, and for the period from January 21, 2000 (inception) to December 31,
2004, respectively. As of December 31, 2004, the warrants remained
outstanding.
In April 2003, in conjunction with the
execution of a consulting agreement with one of the Company’s investors, the
Company issued a warrant for the purchase of up to 19,277 shares of the Company’s
common stock at an exercise price of approximately $0.63 per share. The warrant
expires upon the earlier of seven years or (i) an initial public offering
of securities registered under the Act, (ii) a sale of all or
substantially all of the assets of the Company or (iii) another
termination event as defined in the warrant agreement. During the term of the
consulting agreement, 50% of the shares vest subject to the consultant
providing the Company with a qualifying transaction, an agreement with one or
more corporate partners under which the Company is entitled to a minimum of
$10.0 million that the Company can properly recognize as “Revenue”,
determined in accordance with generally accepted accounting principles, over
the first three-year period following the effective date of such agreement. The
remaining 50% of the shares vests at the sole and exclusive discretion of the
Board. As of December 31, 2003, no vesting had occurred and no expense has
been recorded in the financial statements. In March 2004, the Board
exercised its discretion and vested 50% of the warrant. The Company determined
the fair value of the warrant on the vesting date, using the Black-Scholes
pricing model, of $63,072, which is recorded as consulting expense in the
accompanying statements of operations. The assumptions used in determining the
fair value of the warrant were a risk free interest rate of 1.19%; a dividend
yield of 0%; expected volatility of 70%; and an expected life of one year. In March 2004,
the warrant was exercised with respect to the vested shares. As of December 31,
2004, a warrant to purchase 9,638 shares remained outstanding.
In August 2004, in conjunction with a
loan and security agreement, the Company issued a warrant to purchase up to an
aggregate of approximately 6,984 shares of the Company’s Series C
Preferred Stock, convertible into an aggregate of 7,588 shares of common stock,
at an exercise price of approximately $6.59 per share. The warrant expired upon
the closing of the Company’s IPO (Note 9). The Company determined the fair
value of the warrants on the grant date, using the Black-Scholes pricing model,
of $35,870, which is recorded as a debt discount and is being amortized over
the term of the loan and security agreement. The assumptions used in
determining the fair value of the warrants were a risk-free interest rate of
3.43%; dividend yield of 0%; expected volatility of 70%; and an expected life
of eight years. Amortization of approximately $7,000 was recorded as interest
expense during the year ended December 31, 2004, and for the period from January 21,
2000 (inception) to December 31, 2004. As of December 31, 2004, the
warrant remained outstanding.
The weighted-average exercise price of
warrants outstanding as of December 31, 2004, 2003 and 2002 was
approximately $5.02, $3.91 and $5.19, respectively. The weighted-average fair
value of warrants granted during 2004, 2003, 2002 and for the period from January 31,
2000 (inception) to December 31, 2004 was $5.14, $3.79, $0 and $3.02,
respectively. The weighted-average remaining contractual life of the warrants
outstanding at December 31, 2004 and 2003 was 5.29 years and
5.71 years, respectively.
89
Favrille, Inc.
Notes to Financial Statements (continued)
Common Stock
Reserved for Future Issuance
The following shares of common stock were
reserved for future issuance at December 31, (in thousands):
|
|
|
2004
|
|
2003
|
|
|
Conversion
of Series A preferred stock
|
|
1,156
|
|
1,156
|
|
|
Conversion
of Series B preferred stock
|
|
2,667
|
|
2,667
|
|
|
Conversion
of Series B-2 preferred stock
|
|
1,682
|
|
1,682
|
|
|
Conversion
of Series C redeemable preferred stock
|
|
6,672
|
|
—
|
|
|
Warrants for
the purchase of Series A preferred stock
|
|
8
|
|
8
|
|
|
Warrants for
the purchase of Series B preferred stock
|
|
22
|
|
22
|
|
|
Warrants for
the purchase of Series C redeemable preferred stock
|
|
7
|
|
—
|
|
|
Warrant for
the purchase of common stock
|
|
10
|
|
19
|
|
|
Common stock
options
|
|
|
|
|
|
|
Granted and
outstanding
|
|
959
|
|
469
|
|
|
Reserved for
future issuance
|
|
683
|
|
399
|
|
|
|
|
13,866
|
|
6,422
|
|
6. Income Taxes
Significant components of the Company’s
deferred tax assets and liabilities as of December 31, 2004 and 2003 are
shown below. A valuation allowance of $21.2 million and $11.1 million
as of December 31, 2004 and 2003 has been recognized to offset the net
deferred tax assets as realization of such net assets has not met “the more
likely than not” threshold required under SFAS No. 109.
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
(in thousands)
|
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
19,333
|
|
$
|
9,997
|
|
|
Tax credits
|
|
1,878
|
|
1,058
|
|
|
Deferred
rent
|
|
323
|
|
80
|
|
|
Deferred
compensation
|
|
212
|
|
131
|
|
|
Other
|
|
6
|
|
53
|
|
|
Total
deferred tax assets
|
|
21,752
|
|
11,319
|
|
|
Valuation
allowance for deferred tax assets
|
|
(21,165
|
)
|
(11,066
|
)
|
|
Net deferred
tax assets
|
|
587
|
|
253
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
(587
|
)
|
(253
|
)
|
|
Net deferred
taxes
|
|
$
|
—
|
|
$
|
—
|
|
Reconciliation of the statutory federal
income tax to the Company’s effective tax:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
(in thousands)
|
|
|
Tax at
federal statutory rate
|
|
$
|
(9,113
|
)
|
$
|
(4,639
|
)
|
$
|
(2,521
|
)
|
|
State, net
of federal benefit
|
|
(1,327
|
)
|
(735
|
)
|
(414
|
)
|
|
Tax credits
|
|
(800
|
)
|
(522
|
)
|
(324
|
)
|
|
Change in
valuation allowance
|
|
10,100
|
|
5,663
|
|
3,164
|
|
|
Permanent
differences – Stock based compensation
|
|
883
|
|
55
|
|
4
|
|
|
Permanent
differences – Other
|
|
242
|
|
120
|
|
—
|
|
|
Other
|
|
15
|
|
58
|
|
91
|
|
|
Provision
for income taxes
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
90
Favrille, Inc.
Notes to Financial Statements (continued)
At December 31, 2004, 2003 and 2002, the
Company had federal tax net operating loss carryforwards of approximately $47.5
million, $24.5 million and $12.0 million, respectively. At December 31,
2004, 2003 and 2002, the Company had California tax net operating loss
carryforwards of approximately $47.3 million, $24.5 million and $11.9
million, respectively. The federal and California tax loss carryforwards will
begin expiring in 2020 and 2012, respectively, unless previously utilized. At December 31,
2004, the Company also had federal and California research and development tax
credit carryforwards totaling approximately $1.3 million and $817,000,
respectively. The federal research and development tax credit carryforward will
begin expiring in 2020 unless previously utilized. At December 31, 2004,
the Company had a California manufacturer’s investment credit carryforward of
approximately $140,000.
Internal Revenue Code § 382 and § 383
limit the availability of income tax net operating losses and tax credit
carryforwards that arise prior to certain cumulative changes in a corporation’s
ownership resulting in change of control of the Company should such changes in
ownership occur. Pursuant to Internal Revenue Code § 382 and § 383,
use of the Company’s net operating loss and credit carryforwards may be limited
if a cumulative change in ownership of more than 50% occurs within a three-year
period.
7. Related Party Transactions
In September 2000, the Company entered
into a lease agreement with a non-profit organization with which the Company
shares a common director. The related rent expense was $124,000, $476,000,
$456,000 and $1.6 million for the years ended December 31, 2004,
2003, 2002, and for the period from January 21, 2000 (inception) to December 31,
2004, respectively. The lease agreement expired on March 31, 2004.
In February 2001 and April 2003,
the Company entered into consulting agreements with one of its directors (the
Director). Under the terms of the consulting agreements the Director would
provide agreed upon services to the Company and receive compensation based upon
an hourly rate. The initial term of the consulting agreements are one year but
the agreements automatically renew in one year increments unless otherwise
terminated by the parties. The Director is no longer providing services under
the February 2001 agreement. For the years ended December 31, 2004,
2003 and 2002, and the period from January 21, 2000 (inception) to December 30,
2004, the Director received compensation of approximately $7,000, $12,000, $0
and $55,000, respectively.
In March 2003, the Company entered into
a consulting agreement with one of its major investors (the Investor). The
Investor designated a consultant to provide certain administrative, business
and technical support to the Company. Compensation under the agreement included
a fee of $8,500 per month to be paid to the Investor for performance of
services provided by the consultant. In addition, a warrant for the purchase of
up to 19,277 shares of the Company’s common stock was issued to the consultant
(Note 5). The term of the consulting agreement is one year, unless
terminated earlier under the provisions provided therein. For the years ended December 31,
2004, 2003, and the period from January 21, 2000 (inception) to December 31,
2004, the Company paid the Investor approximately $150,000, $93,000 and
$243,000 respectively, including reimbursement of ordinary business expenses.
91
Favrille, Inc.
Notes to Financial Statements (continued)
8. Quarterly Financial Data (unaudited)
The following table
summarizes certain of the Company’s operating results by quarter for 2004 and
2003:
|
|
|
2004
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
|
Net loss:
|
|
$
|
(5,174
|
)
|
$
|
(5,963
|
)
|
$
|
(7,294
|
)
|
$
|
(7,605
|
)
|
$
|
(26,036
|
)
|
|
Deemed
Dividend
|
|
(16,156
|
)
|
(11,947
|
)
|
—
|
|
—
|
|
(28,103
|
)
|
|
Accretion of
Series C redeemable convertible preferred stock issuance costs (a):
|
|
—
|
|
(16
|
)
|
(17
|
)
|
(17
|
)
|
(51
|
)
|
|
Net loss
applicable to common stockholders (a):
|
|
$
|
(21,330
|
)
|
$
|
(17,926
|
)
|
$
|
(7,311
|
)
|
$
|
(7,622
|
)
|
$
|
(54,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per
share excluding deemed dividend (a):
|
|
$
|
(5.86
|
)
|
$
|
(5.69
|
)
|
$
|
(6.63
|
)
|
$
|
(6.46
|
)
|
$
|
(24.73
|
)
|
|
Loss per
share applicable to deemed dividend (a):
|
|
(18.29
|
)
|
(11.40
|
)
|
—
|
|
—
|
|
(26.70
|
)
|
|
Accretion of
Series C redeemable convertible preferred stock issuance costs
|
|
—
|
|
(0.02
|
)
|
(0.01
|
)
|
(0.02
|
)
|
(0.05
|
)
|
|
Net loss per
share applicable to common stockholders (a):
|
|
$
|
(24.15
|
)
|
$
|
(17.11
|
)
|
$
|
(6.64
|
)
|
$
|
(6.48
|
)
|
$
|
(51.48
|
)
|
|
|
|
2003
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
|
Net loss
applicable to common stockholders (a):
|
|
$
|
(2,682
|
)
|
$
|
(2,878
|
)
|
$
|
(3,505
|
)
|
$
|
(4,189
|
)
|
$
|
(13,255
|
)
|
|
Net loss per
share applicable to common stockholders (a):
|
|
$
|
(3.71
|
)
|
$
|
(3.74
|
)
|
$
|
(4.45
|
)
|
$
|
(4.97
|
)
|
$
|
(16.97
|
)
|
(a) The sum of the
four quarters will not agree to the year total due to rounding within a
quarter.
9. Subsequent Events
Initial Public
Offering
In February 2005 the Company sold
6,000,000 shares of its common stock in an underwritten initial public
offering, raising proceeds of approximately $39.1 million, net of the
underwriters’ commission. As a result of the initial public offering, all
outstanding shares of Preferred Stock converted to 12,177,344 shares of common
stock as of that date. In March 2005,
the underwriters exercised their right to purchase 285,000 shares of the over
allotment resulting in proceeds of approximately $1.8 million, net of the
underwriters’ commission.
92
Index
to Exhibits
15. (b) The following
exhibits are filed as part of, or incorporated into, the 2004 Favrille, Inc.
Annual Report on Form 10-K:
|
Exhibit
Number
|
|
Description
of Document
|
|
|
|
|
|
|
|
3.1
|
|
Registrant’s Amended and Restated
Certificate of Incorporation.(1)
|
|
|
|
|
|
|
|
3.2
|
|
Registrant’s Amended and Restated Bylaws.(1)
|
|
|
|
|
|
|
|
4.1
|
|
Form of Common Stock Certificate of
Registrant.(2)
|
|
|
|
|
|
|
|
4.2
|
|
Amended and Restated Investor Rights
Agreement dated March 26, 2004 between the Registrant and certain of its
stockholders.(1)
|
|
|
|
|
|
|
|
4.3
|
|
Amendment No. 1 to Amended and Restated
Investor Rights Agreement dated April 6, 2004 between the Registrant and
certain of its stockholders.(1)
|
|
|
|
|
|
|
|
10.1
|
|
Form of Indemnity Agreement for Registrant’s
directors and officers.(1)(2)
|
|
|
|
|
|
|
|
10.2
|
|
Amended and Restated 2001 Equity Incentive Plan
and Form of Stock Option Agreement thereunder.(1)(2)
|
|
|
|
|
|
|
|
10.3
|
|
2005 Non-Employee Directors’ Stock Option
Plan and Form of Stock Option Agreement thereunder.(1)(2)
|
|
|
|
|
|
|
|
10.4
|
|
2005 Employee Stock Purchase Plan and Form
of Offering Document thereunder.(1)(2)
|
|
|
|
|
|
|
|
10.5
|
|
Employment Agreement dated January 6,
2005 between the Registrant and John P. Longenecker, Ph.D.(1)(2)
|
|
|
|
|
|
|
|
10.6
|
|
Office Lease dated January 31, 2003
between the Registrant and Kilroy Realty, L.P.(1)
|
|
|
|
|
|
|
|
10.7
|
|
First Amendment to Lease dated July 7,
2004 between the Registrant and Kilroy Realty, L.P.(1)
|
|
|
|
|
|
|
|
10.8
|
|
Master Security Agreement dated July 26,
2004 between the Registrant and Oxford Finance Corporation.(1)
|
|
|
|
|
|
|
|
10.9
|
|
Loan and Security Agreement
No. 24-0117 dated March 20, 2003 among the Registrant, Heller
Financial Leasing, Inc. and Lighthouse Capital Partners IV, L.P.(1)
|
|
|
|
|
|
|
|
10.10
|
|
Supply Agreement made on November 12,
2004 between the Registrant and Biosyn Arzneimittel GmbH.(1)(3)
|
|
|
|
|
|
|
|
10.11
|
|
Employment Agreement dated January 6,
2005 between the Registrant and Tamara A. Seymour.(1)(2)
|
|
93
|
10.12
|
|
Employment Agreement dated January 6,
2005 between the Registrant and Daniel P. Gold, Ph.D.(1)(2)
|
|
|
|
|
|
|
|
10.13
|
|
Employment Agreement dated January 6,
2005 between the Registrant and Alice Wei.(1)(2)
|
|
|
|
|
|
|
|
10.14
|
|
Employment Agreement dated January 6,
2005 between the Registrant and John F. Bender, Pharm.D.(1)(2)
|
|
|
|
|
|
|
|
10.15
|
|
Employment Agreement dated January 6,
2005 between the Registrant and Richard Murawski.(1)(2)
|
|
|
|
|
|
|
|
10.16
|
|
Employment Agreement dated January 6,
2005 between the Registrant and John G. Gutheil, M.D.(1)(2)
|
|
|
|
|
|
|
|
10.17
|
|
Form of Employment Agreement between the
Registrant and its executive officers.(1)(2)
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public
Accounting Firm.
|
|
|
|
|
|
|
|
24.1
|
|
Power of Attorney. Reference is made to the
signature page of this report.
|
|
|
|
|
|
|
|
31.1
|
|
Certification of principal executive
officer required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
|
|
31.2
|
|
Certification of principal accounting
officer required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
|
|
32.1
|
|
Certification by the Chief Executive
Officer and the Chief Financial Officer of Favrille, Inc., as required by
Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C.1350)
|
|
(1) Previously filed as an Exhibit to
Favrille, Inc.’s Registration Statement on Form S-1 (No. 333-114299),
as amended (the “Registration Statement”), and incorporated by reference
herein.
(2) Indicates management contract or compensatory
plan.
(3) Confidential treatment has been granted with
respect to certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
94
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) 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.
|
|
FAVRILLE, INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ JOHN P. LONGENECKER,
PH.D.
|
|
|
John P. Longenecker
President
and Chief Executive Officer
|
Dated:
March 29, 2005
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints John P. Longenecker,
Ph.D. and Tamara Seymour, and each of them, acting individually, as his or her
attorney-in-fact, each with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this annual report on Form 10-K, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ JOHN P. LONGENECKER,
PH.D.
|
|
President, Chief Executive
Officer and
|
|
March 29, 2005
|
|
John P. Longenecker
|
|
Director (Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ TAMARA SEYMOUR
|
|
Chief Financial Officer
|
|
March 29, 2005
|
|
Tamara Seymour
|
|
(Principal Financial and
Accounting
Officer)
|
|
|
|
|
|
|
|
|
|
/s/
CAM L. GARNER
|
|
Director
|
|
March 29, 2005
|
|
Cam
L. Garner
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL L. EAGLE
|
|
Director
|
|
March 29, 2005
|
|
Michael L. Eagle
|
|
|
|
|
|
|
|
|
|
|
|
/s/
ANTONIO J. GRILLO-LOPEZ, M.D.
|
|
Director
|
|
March 29, 2005
|
|
Antonio
J. Grillo-Lopez
|
|
|
|
|
|
|
|
|
|
|
|
/s/ PETER BARTON HUTT
|
|
Director
|
|
March 29, 2005
|
|
Peter Barton Hutt
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DOUGLAS E. KELLY, M.D.
|
|
Director
|
|
March 29, 2005
|
|
Douglas E. Kelly, M.D.
|
|
|
|
|
95
|
/s/ FRED MIDDLETON
|
|
Director
|
|
March 29, 2005
|
|
Fred Middleton
|
|
|
|
|
|
|
|
|
|
|
|
/s/
ARDA MINOCHERHOMJEE, PH.D.
|
|
Director
|
|
March 29, 2005
|
|
Arda Minocherhomjee, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ WAYNE I. ROE
|
|
Director
|
|
March 30, 2005
|
|
Wayne I. Roe
|
|
|
|
|
|
|
|
|
|
|
|
/s/ IVOR ROYSTON, M.D.
|
|
Director
|
|
March 29, 2005
|
|
Ivor Royston, M.D.
|
|
|
|
|
96
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Description
of Document
|
|
|
|
|
|
|
|
3.1
|
|
Registrant’s Amended and Restated
Certificate of Incorporation.(1)
|
|
|
|
|
|
|
|
3.2
|
|
Registrant’s Amended and Restated Bylaws.(1)
|
|
|
|
|
|
|
|
4.1
|
|
Form of Common Stock Certificate of
Registrant.(2)
|
|
|
|
|
|
|
|
4.2
|
|
Amended and Restated Investor Rights
Agreement dated March 26, 2004 between the Registrant and certain of its
stockholders.(1)
|
|
|
|
|
|
|
|
4.3
|
|
Amendment No. 1 to Amended and
Restated Investor Rights Agreement dated April 6, 2004 between the
Registrant and certain of its stockholders.(1)
|
|
|
|
|
|
|
|
10.1
|
|
Form of Indemnity Agreement for Registrant’s
directors and officers.(1)(2)
|
|
|
|
|
|
|
|
10.2
|
|
Amended and Restated 2001 Equity Incentive
Plan and Form of Stock Option Agreement thereunder.(1)(2)
|
|
|
|
|
|
|
|
10.3
|
|
2005 Non-Employee Directors’ Stock Option
Plan and Form of Stock Option Agreement thereunder.(1)(2)
|
|
|
|
|
|
|
|
10.4
|
|
2005 Employee Stock Purchase Plan and Form
of Offering Document thereunder.(1)(2)
|
|
|
|
|
|
|
|
10.5
|
|
Employment Agreement dated January 6,
2005 between the Registrant and John P. Longenecker, Ph.D.(1)(2)
|
|
|
|
|
|
|
|
10.6
|
|
Office Lease dated January 31, 2003
between the Registrant and Kilroy Realty, L.P.(1)
|
|
|
|
|
|
|
|
10.7
|
|
First Amendment to Lease dated July 7,
2004 between the Registrant and Kilroy Realty, L.P.(1)
|
|
|
|
|
|
|
|
10.8
|
|
Master Security Agreement dated July 26,
2004 between the Registrant and Oxford Finance Corporation.(1)
|
|
|
|
|
|
|
|
10.9
|
|
Loan and Security Agreement
No. 24-0117 dated March 20, 2003 among the Registrant, Heller
Financial Leasing, Inc. and Lighthouse Capital Partners IV, L.P.(1)
|
|
|
|
|
|
|
|
10.10
|
|
Supply Agreement made on November 12,
2004 between the Registrant and Biosyn Arzneimittel GmbH.(1)(3)
|
|
|
|
|
|
|
|
10.11
|
|
Employment Agreement dated January 6,
2005 between the Registrant and Tamara A. Seymour.(1)(2)
|
|
|
|
|
|
|
|
10.12
|
|
Employment Agreement dated January 6,
2005 between the Registrant and Daniel P. Gold, Ph.D.(1)(2)
|
|
|
10.13
|
|
Employment Agreement dated January 6,
2005 between the Registrant and Alice Wei.(1)(2)
|
|
|
|
|
|
|
|
10.14
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Employment Agreement dated January 6,
2005 between the Registrant and John F. Bender, Pharm.D.(1)(2)
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10.15
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Employment Agreement dated January 6,
2005 between the Registrant and Richard Murawski.(1)(2)
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10.16
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Employment Agreement dated January 6,
2005 between the Registrant and John G. Gutheil, M.D.(1)(2)
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10.17
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Form of Employment Agreement between the
Registrant and its executive officers.(1)(2)
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23.1
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Consent of Independent Registered Public
Accounting Firm.
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24.1
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Power of Attorney. Reference is made to the
signature page of this report.
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31.1
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Certification of principal executive
officer required by Rule 13a-14(a) or Rule 15d-14(a).
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31.2
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Certification of principal accounting
officer required by Rule 13a-14(a) or Rule 15d-14(a).
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32.1
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Certification by the Chief Executive
Officer and the Chief Financial Officer of Favrille, Inc., as required by
Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C.1350)
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(1) Previously filed as an Exhibit to
Favrille, Inc.’s Registration Statement on Form S-1 (No. 333-114299),
as amended (the “Registration Statement”), and incorporated by reference
herein.
(2) Indicates management contract or compensatory
plan.
(3) Confidential treatment has been granted with
respect to certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.