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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x Annual Report pursuant to Section 13
or 15(d)
of
the Securities Exchange Act of 1934
For
the fiscal year ended December 31, 2004
o Transition report pursuant to Section 13 or
15(d)
of
the Securities Exchange Act of 1934
For the
transition period from _______ to
________
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE |
94-3171943 |
(State
or other jurisdiction of |
(I.R.S.
Employer |
incorporation
or organization) |
Identification
No.) |
2600
KELLY ROAD, SUITE 100, WARRINGTON, PENNSYLVANIA 18976-3646
(Address
of principal executive offices) (Zip
Code)
(215)
488-9300
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
Name
of each exchange on which registered |
None |
None |
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value and,
Preferred
Stock Purchase Rights
(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 x NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the 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. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). YES x NO o
The
aggregate market value of shares of voting and non-voting common equity held by
non-affiliates of the registrant computed using the closing price of common
equity as reported on NASDAQ National Market under the symbol DSCO on June 30,
2004, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $381 million. For the purposes of determining
this amount only, the registrant has defined affiliates to include: (a) the
executive officers named in Part III of this Annual Report on Form 10-K; (b) all
directors of the registrant; and (c) each shareholder that has informed the
registrant by February 29, 2004 that it is the beneficial owner of 10% or more
of the outstanding shares of common stock of the registrant.
As of
March 14, 2005, 53,511,946 shares of the registrant’s common stock were
outstanding.
Portions
of the information required by Items 10 through 14 of Part III of this Annual
Report on Form 10-K are incorporated by reference to the extent described herein
from our definitive proxy statement, which is expected to be filed by us with
the Commission within 120 days after the close of our 2004 fiscal
year.
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc. (Discovery), and its
wholly-owned, presently inactive subsidiary, Acute Therapeutics,
Inc.
FORWARD
LOOKING STATEMENTS
The
statements set forth under Item 1: “Business” and elsewhere in this report,
including in Item 7: “Management’s Discussion and Analysis of Financial
Condition and Results of Operation - Risks Related to Our Business” and those
incorporated by reference herein which are not historical, including, without
limitation, statements concerning our research and development programs and
clinical trials, the possibility of submitting regulatory filings for our
products under development, the seeking of collaboration arrangements with
pharmaceutical companies or others to develop, manufacture and market products,
the research and development of particular compounds and technologies and the
period of time for which our existing resources will enable us to fund our
operations, constitute “Forward Looking Statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We intend that all forward-looking statements be subject
to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are only predictions and reflect our
views as of the date they are made with respect to future events and financial
performance. Forward-looking statements are subject to many risks and
uncertainties which could cause our actual results to differ materially from any
future results expressed or implied by the forward-looking statements.
Examples
of the risks and uncertainties include, but are not limited to: risk that
financial conditions may change; risks relating to the progress of our research
and development; the risk that we will not be able to raise additional capital
or enter into additional collaboration agreements (including strategic alliances
for our aerosol and Surfactant Replacement Therapies); risk that we will not be
able to develop a successful sales and marketing organization in a timely
manner, if at all; risk that our internal sales and marketing organization will
not succeed in developing market awareness of our products; risk that our
internal sales and marketing organization will not be able to attract or
maintain qualified personnel; risk of delay in the FDA’s or other health
regulatory authorities’ approval of any applications we file; risks that any
such regulatory authority will not approve the marketing and sale of a drug
product even after acceptance of an application we file for any such drug
product; risks relating to the ability of our third party contract manufacturers
to provide us with adequate supplies of drug substance and drug products for
completion of any of our clinical studies; risks relating to the lack of
adequate supplies of drug substance and drug product for completion of any of
our clinical studies, and risks relating to the development of competing
therapies and/or technologies by other companies; and the
other risks and certainties detailed in Item 7: “Management’s Discussion and
Analysis of Financial Condition and Results of Operation - Risks Related to Our
Business,” and in the documents incorporated by reference in this report.
Companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after obtaining promising earlier
trial results. Data obtained from tests are susceptible to varying
interpretations, which may delay, limit or prevent regulatory
approval.
Except to
the extent required by applicable laws or rules, we do not undertake to update
any forward-looking statements or to publicly announce revisions to any of the
forward-looking statements, whether as a result of new information, future
events or otherwise.
DISCOVERY
LABORATORIES, INC.
Table
of contents to Form 10-K
For
the Fiscal Year Ended December 31, 2004
PART
I |
|
|
|
|
|
ITEM
1. |
BUSINESS |
1 |
ITEM
2. |
PROPERTIES |
18 |
ITEM
3. |
LEGAL
PROCEEDINGS |
18 |
ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS |
18 |
|
|
|
PART
II |
|
|
|
|
|
ITEM
5. |
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES |
19 |
ITEM
6. |
SELECTED
FINANCIAL DATA |
20 |
ITEM
7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION |
22 |
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
58 |
ITEM
8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA |
59 |
ITEM
9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
59 |
ITEM
9A. |
CONTROLS
AND PROCEDURES |
59 |
ITEM
9B. |
OTHER
INFORMATION |
60 |
|
|
|
PART
III |
|
|
|
|
|
ITEM
10. |
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT |
61 |
ITEM
11. |
EXECUTIVE
COMPENSATION |
61 |
ITEM
12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS |
61 |
ITEM
13. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS |
61 |
ITEM
14. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES |
61 |
|
|
|
PART
IV |
|
|
|
|
|
ITEM
15. |
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES |
62 |
|
SIGNATURES |
63 |
PART
I
COMPANY
SUMMARY
Discovery
Laboratories, Inc. is a biopharmaceutical company developing its proprietary
precision-engineered lung surfactant technology as Surfactant Replacement
Therapies (SRTs) for respiratory diseases. Surfactants are compositions produced
naturally in the lungs and are essential to the lungs’ ability to absorb oxygen
and to maintain proper airflow through the respiratory system. The absence or
depletion of surfactants is involved in a number of respiratory
diseases.
Our
technology produces a precision-engineered, peptide-containing surfactant that
is designed to closely mimic the function of human lung surfactant. We believe
that through this SRT technology, pulmonary surfactants have the potential, for
the first time, to be developed into a series of respiratory therapies for
patients in the Neonatal Intensive Care Unit (NICU), critical care unit and
other hospitalized settings, where there are few or no approved therapies
available.
In
February 2005, we received an Approvable Letter from the U.S. Food and Drug
Administration (FDA) for clearance to market SurfaxinÒ
(lucinactant), our lead product, for the prevention and treatment of Respiratory
Distress Syndrome (RDS) in premature infants. The Approvable Letter is an
official notification that the FDA is prepared to approve the Surfaxin New Drug
Application and contains conditions that the applicant must meet prior to
obtaining final U.S. marketing approval. The conditions that we must meet
primarily involve finalizing labeling and correcting previously reported
manufacturing issues. Most notably, the FDA is not requiring additional
preclinical or clinical trials for final approval. Based on the nature of the
observations contained in the Approvable Letter, we currently anticipate that we
will respond to the FDA with a “Class 2” response. A “Class 2” response allows
the FDA up to six months following the completion of the labeling and
manufacturing issues outlined in the Approvable Letter. We have also filed a
Marketing Authorization Application (MAA) with the European Medicines Evaluation
Agency (EMEA) for clearance to market Surfaxin for the same indication in
Europe.
In
addition to the New Drug Application (NDA) we filed for Surfaxin for RDS, we are
conducting several NICU therapeutic programs in an effort to enhance the
potential commercial and medical value of our SRT by addressing the most
prevalent respiratory disorders affecting infants in the NICU. The programs we
are conducting include therapeutic programs targeting respiratory conditions
cited as some of the most significant unmet medical needs confronting the
neonatal community. We are conducting three Phase 2 clinical trials - Surfaxin
for Bronchopulmonary Dysplasia (BPD) in premature infants, aerosolized SRT
administered through nasal continuous positive airway pressure (nCPAP) for
Neonatal Respiratory Failures, and a prophylactic/early treatment trial for
Surfaxin for the treatment of Meconium Aspiration Syndrome (MAS) in full term
infants.
In an
effort to enhance the potential commercial and medical value of our SRT, we are
also developing SRT to address unmet respiratory conditions affecting pediatric,
young adult and adult patients in the critical care and other hospital settings.
We are conducting a Phase 2 clinical trial for the treatment of ARDS in adults
in the intensive care unit (ICU), for which we announced preliminary data on
December 7, 2004. With our aerosolized surfactant formulations, we have
completed a Phase 1b trial and are preparing to initiate a Phase 2 trial for
patients with moderate to severe asthma (development name DSC-104). In addition,
we are evaluating the development of aerosolized formulations of our
precision-engineered SRT to potentially treat Acute Lung Injury (ALI), Chronic
Obstructive Pulmonary Disease (COPD) and rhinitis/sinusitis.
In
anticipation of the potential approval of Surfaxin for RDS in the United States,
we are presently building sales and marketing capabilities to execute the launch
of Surfaxin. This specialty pulmonary United States sales and marketing
organization will focus initially on opportunities in the NICU and, as products
may be developed, the focus will be expanded to critical care and hospital
settings. We plan on implementing our commercialization strategy for Surfaxin in
Europe and the rest of the world through corporate partnerships.
In
addition, our long-term commercial strategy includes building manufacturing
capabilities for the production of our precision-engineered surfactant drug
products to meet anticipated clinical and commercial needs in the United States
and Europe. To support a long-term manufacturing strategy for the production of
clinical and commercial supply of our precision-engineered surfactant drug
product, we are evaluating further development and scale-up of our current
contract manufacturer, Laureate Pharma, Inc. (Laureate), alternative contract
manufacturers and building our own manufacturing operations in order to secure
additional manufacturing capabilities to meet our production needs as they
expand. Upon marketing approval, if at all, we intend to rely on outside
manufacturers for production of our products.
SURFACTANT
TECHNOLOGY
Our
precision-engineered surfactant replacement technology was invented at The
Scripps Research Institute and was exclusively licensed to Johnson & Johnson
which, together with its wholly-owned subsidiary, Ortho Pharmaceutical
Corporation, developed it further. We acquired the exclusive worldwide
sublicense to the technology in October 1996.
Surfactants
are protein and lipid (fat) compositions that are produced naturally in the
lungs and are critical to all air-breathing mammals. They cover the entire
alveolar surface, or air sacs, of the lungs and the terminal conducting airways
which lead to the air sacs. Surfactants facilitate respiration by continually
modifying the surface tension of the fluid normally present within the alveoli,
or air sacs, that line the inside of the lungs. In the absence of sufficient
surfactant or should the surfactant degrade, these air sacs tend to collapse,
and, as a result, the lungs do not absorb sufficient oxygen. In addition to
lowering aveolar surface-tension, surfactants play other important roles in
human respiration including, but not limited to, lowering the surface tension of
the conducting airways and maintaining airflow and airway patency (keeping the
airways open and expanded). Human surfactants include four known surfactant
proteins, A, B, C and D. It has been established, through numerous studies, that
surfactant protein B (SP-B) is essential for respiratory function.
Presently,
the FDA has approved surfactants as replacement therapy only for RDS in
premature infants, a condition in which infants are born too soon and thus have
an insufficient amount of their own natural surfactant. The most commonly used
of these approved replacement surfactants are derived from pig and cow lungs.
Although they are clinically effective, they have drawbacks and cannot readily
be scaled or developed to treat broader populations for RDS in premature infants
and other respiratory diseases. There is presently only one approved synthetic
surfactant available, however, this product does not contain surfactant
proteins, is not widely used and is not actively marketed by its
manufacturer.
Animal-derived
surfactant products are prepared using a chemical extraction process from minced
cow and pig lung. Because of the animal-sourced materials and the chemical
extraction processes, there can potentially be significant variation in
production lots and, consequently, product quality specifications must be broad.
In addition, the protein levels of these animal-derived surfactants are
inherently lower than the protein levels of native human surfactant. The
production costs of these animal-derived surfactants are high, relative to other
analogous pharmaceutical products, generation of large quantities is severely
limited, and these products cannot readily be reformulated for aerosol delivery
to the lungs.
Our
precision-engineered surfactant product candidates, including Surfaxin, are
engineered versions of natural human lung surfactant and contain a
precision-engineered peptide, sinapultide. Sinapultide is a 21 amino acid
protein-like substance that is designed to closely mimic the essential
attributes of human surfactant protein B (SP-B), the surfactant protein that is
most important for the proper functioning of the respiratory system. Our
products have the ability to be precisely formulated, either as a liquid
instillate, aerosolized liquid or dry powder, to address various medical
indications.
We
believe that our precision-engineered surfactant can be manufactured in
sufficient quantities, in more exact and consistent pharmaceutical grade
quality, less expensively than the animal-derived surfactants and has no
potential to cause adverse immunological responses in young and older adults,
all important attributes for our products to potentially fulfill significant
unmet medical needs. In addition, we believe that our precision-engineered
surfactants might possess other pharmaceutical benefits not currently found with
the animal surfactants such as longer shelf-life, reduced number of
administrations to the patient’s lungs and elimination of the risk of
animal-borne diseases including the brain-wasting bovine spongiform
encephalopathy (commonly called “mad-cow disease”).
Aerosolized
Surfactant Formulations
Many
respiratory diseases are associated with an inflammatory event that causes
surfactant dysfunction and a loss of patency of the conducting airways.
Scientific data support the premise that the therapeutic use of surfactants in
aerosol form has the ability to reestablish airway patency, improve pulmonary
mechanics and act as an anti-inflammatory. Surfactant normally prevents moisture
from accumulating in the airways’ most narrow sections and thereby maintains the
patency of the conducting airways.
We are
currently developing aerosolized formulations of our precision-engineered
surfactant to potentially treat patients who could benefit from surfactant-based
therapy to improve lung function and maintain proper airflow through the
respiratory system. We are conducting a Phase 2 trial for aerosolized SRT
administered through nasal continuous positive airway pressure (nCPAP) for
Neonatal Respiratory Failures. In addition, we have completed a Phase 1b trial
using a proprietary aerosolized surfactant formulation and are preparing to
initiate a Phase 2 trial for patients with moderate to severe asthma
(development name DSC-104). We are also evaluating the development of
aerosolized formulations of our precision-engineered SRT to potentially treat
ALI, COPD, and rhinitis/sinusitis.
SURFACTANT
THERAPY FOR RESPIRATORY MEDICINE
Products
for the Neonatal Intensive Care Unit
Surfaxin®
(Lucinactant) for Respiratory Distress Syndrome in Premature
Infants
RDS is a
condition in which premature infants are born with an insufficient amount of
their own natural surfactant. Premature infants born prior to 32 weeks gestation
have not fully developed their own natural lung surfactant and therefore need
treatment to sustain life. This condition often results in the need for the
infant to undergo surfactant replacement therapy or mechanical ventilation. RDS
is experienced in approximately half of the babies born between 28 and 32 weeks
gestational age. The incidence of RDS approaches 100% in babies born less than
26 weeks gestational age. Surfaxin is the first precision-engineered, protein
B-based agent that mimics the surface-active properties of human surfactant. To
treat premature infants suffering from RDS, surfactants, including Surfaxin, are
delivered in a liquid form and injected through an endotracheal tube (a tube
inserted into the infant’s mouth and down the trachea).
For RDS,
we conducted a Phase 3 pivotal trial, which formed the basis of our New Drug
Application to the FDA that was filed in April 2004, and a supportive Phase 3
trial.
The
pivotal Phase 3 trial enrolled 1,294 patients and was designed as a
multinational, multicenter, randomized, masked, controlled, prophylaxis,
event-driven, superiority trial to demonstrate the safety and efficacy of
Surfaxin over Exosurf®, an
approved, non-protein containing synthetic surfactant. Survanta®, a
cow-derived surfactant and the leading surfactant used in the United States,
served as a reference arm in the trial. Key trial results were assessed by an
independent adjudication committee comprised of leading neonatologists and
pediatric radiologists. This committee provided a consistent and standardized
method for assessing critical efficacy data in the trial. An independent Data
Safety Monitoring Board (DSMB) was responsible for monitoring the overall safety
of the trial and no major safety issues were identified. We anticipate the
publication of the results of this trial in a leading, peer reviewed journal in
April 2005.
The
supportive, multinational Phase 3 clinical trial enrolled 252 patients and was
designed as a non-inferiority trial comparing Surfaxin to Curosurf®, a
porcine (pig) derived surfactant and the leading surfactant used in Europe. This
trial demonstrated the overall safety and non-inferiority of Surfaxin to
Curosurf.
In
February 2005, we received an Approvable Letter from the FDA for clearance to
market Surfaxin, our lead product, for the prevention and treatment of RDS in
premature infants. The Approvable Letter is an official notification that the
FDA is prepared to approve the Surfaxin New Drug Application and contains
conditions that the applicant must meet prior to obtaining final U.S. marketing
approval. The conditions that we must meet primarily involve finalizing labeling
and correcting certain manufacturing issues. Most notably, the FDA is not
requiring additional preclinical or clinical trials for final approval. Based on
the nature of the observations contained in the Approvable Letter, we currently
anticipate that we will respond to the FDA with a “Class 2” response. A “Class
2” response allows the FDA up to six months following the completion of the
labeling and manufacturing issues outlined in the letter to complete its review
of our response.
With
respect to the manufacturing issues mentioned above, in January 2005, the FDA
issued an inspection report (Form FDA-483) to Laureate, our contract
manufacturer of Surfaxin, citing certain observations concerning Laureate’s
compliance with current Good Manufacturing Practices (cGMPs) in connection with
its review of our NDA for Surfaxin for RDS. The general focus of the inspection
observations relates to basic quality controls, process assurances and
documentation requirements to support the commercial production process. In
response, a cGMP Action Plan was submitted to the FDA on January 31, 2005,
outlining corrective measures anticipated to be completed by July 2005. Assuming
the adequacy of such corrective actions and the approval of marketing clearance
for Surfaxin, we anticipate that the potential approval and commercial launch of
Surfaxin for the United States will occur in the first quarter of 2006. Our
other clinical programs currently in progress are not affected by this
inspection report and remain on track. However, if the inspection observations
noted in the Form 483 are not resolved in the time period stated above, a delay
may occur in these programs.
In
October 2004, the European Medicines Evaluation Agency validated our Marketing
Authorization Application that we had filed previously for clearance to market
Surfaxin for the same indication in Europe. This validation indicated that the
Marketing Authorization Application was complete and that the review process had
begun. We
anticipate the potential approval of Surfaxin for Europe will occur in the first
quarter of 2006.
There are
over 3,000,000 premature infants born annually worldwide. More than 750,000 of
these premature infants are considered “very low birth weight” infants (less
than 1,250 grams), of which, approximately 550,000 are considered at significant
risk for RDS. Due to limitations associated with the animal-derived surfactant
products that are currently approved to treat RDS in premature infants, access
to such therapy is mainly limited to the approximately 150,000 very low birth
weight infants born in the United States and Western Europe. This results in
hundreds of thousands of premature infants born in the world each year who need,
but do not receive, effective surfactant replacement therapy.
The FDA
has granted us Orphan Drug Designation for Surfaxin for RDS. Orphan drugs are
pharmaceutical products that are intended to treat diseases affecting fewer than
200,000 patients in the United States. The Office of Orphan Product Development
of the FDA grants certain advantages to the sponsors of orphan drugs including,
but not limited to, seven years of market exclusivity upon approval of the drug,
certain tax incentives for clinical research and grants to fund testing of the
drug. Most recently, the Commission of the European Communities has designated
Surfaxin as an Orphan Medicinal Product for the prevention and treatment of RDS
in premature infants. This designation allows us exclusive marketing rights for
Surfaxin for indications of RDS in Europe for 10 years (subject to revision
after six years) following marketing approval by the European Medicines
Evaluation Agency. In addition, the designation enables us to receive regulatory
assistance in the further development process of Surfaxin, and to access reduced
regulatory fees throughout its marketing life.
Surfaxin®
for the Prevention of Bronchopulmonary Dysplasia
BPD is a
costly syndrome associated with surfactant and SP-B deficiency, and the
prolonged use of
mechanical ventilation and oxygen supplementation, usually associated with a
premature infant being treated for RDS. Presently there are no approved drugs
for the treatment of BPD. These babies suffer from abnormal lung development and
typically have a need for respiratory assistance - oftentimes, for many months,
as well as comprehensive care spanning years. It is estimated that the cost of
treating an infant with BPD in the United States can approach $250,000 with
approximately 50,000 infants developing BPD in the United States and Europe each
year.
We are
currently conducting a double-blind, controlled Phase 2 BPD clinical trial that
will enroll up to 210 very low birth weight premature infants born at risk for
developing BPD. The study objective is to determine the safety and tolerability
of a series of Surfaxin doses administered in the first weeks of life as a
therapeutic approach for the prevention of BPD and to determine whether such
treatment can decrease the proportion of infants on mechanical ventilation or
oxygen or the incidence of death or BPD. Infants will be randomized to receive
several doses of Surfaxin which will be administered in liquid form and injected
through
the patient’s endotracheal tube, or the current standard of care - mechanical
ventilation and support therapies. The trial will be conducted at approximately
25 sites throughout the United States, as well as sites in Latin America and
Europe. The results
of this trial are expected to be available in the first quarter of
2006.
Aerosolized
Surfactant Replacement Therapy for Respiratory Dysfunction in Premature
Infants
Serious
respiratory problems are some of the most prevalent medical issues facing
premature infants in Neonatal Intensive Care Units. On top of the approximately
550,000 premature infants born annually worldwide at risk for RDS, there are
another approximately 1 million premature infants, 300,000 of which are in the
US and Europe, born annually at risk for a range of other respiratory problems
associated with surfactant dysfunction. These infants are usually at a birth
weight greater than 1,250 grams and neonatologists generally try to avoid
mechanically ventilating these patients because doing so requires intubation
(the highly invasive process of inserting a breathing tube down the patient’s
trachea). This reluctance is due to the perceived risks by many neonatologists
regarding the intubation of these larger babies, such as the risk of trauma and
the need of paralytic agents and sedation. As a result, many neonatologists will
only intubate in cases of severe respiratory disease, where the benefits clearly
outweigh the risks. We believe that there is growing recognition by the neonatal
medical community for the potential utility of a non-invasive method of
delivering SRT to treat premature infants suffering from respiratory disorders
including BPD, bronchiolitis, acute hypoxia, pneumonia, and transient
tachypnea.
We are
currently conducting an open label, Phase 2, multicenter pilot study to evaluate
aerosolized SRT delivered via nasal continuous positive airway pressure (nCPAP)
in premature infants. This trial will be conducted at up to four centers in the
United States and will enroll approximately 20 infants with a gestational age of
28-32 weeks who are suffering from RDS. Patients will receive, in two treatment
regimens, aerosolized SRT delivered via nCPAP within thirty minutes of birth.
Our overall program is to begin with a pilot study to evaluate the safety and
tolerability of aerosolized SRT delivered via our proprietary nCPAP technology,
initially within patients who suffer from RDS followed by additional studies to
include other neonatal respiratory failures within the NICU. Results of this
Phase 2 pilot study are anticipated to be available in the third quarter of
2005.
SurfaxinÒ for
Meconium Aspiration Syndrome in Full-Term Infants
Meconium
Aspiration Syndrome (often referred to as MAS) is an inflammatory condition in
which full-term infants are born with meconium in their lungs that depletes the
natural surfactant in their lungs. Meconium is a baby’s first bowel movement in
its mother’s womb and, when inhaled, MAS can occur. MAS can be life-threatening
as a result of the failure of the lungs to absorb sufficient oxygen. There are
no approved therapies for this condition and the standard of care principally
consists of mechanical ventilation. Surfaxin has been shown to not only remove
inflammatory and infectious infiltrates from the lungs when using our
proprietary lavage (or “lung wash”) but to also replenish the vital surfactant
levels in the babies’ lungs.
We are
conducting a Phase 2 clinical trial of our proprietary Surfaxin lavage in up to
60 full-term infants for use as a prophylactic or early treatment for patients
who are at risk of developing MAS but have not shown symptoms of compromised
respiratory function. Surfaxin is administered as a liquid bolus through an
endotracheal tube as well as by our proprietary lavage (lung-wash)
technique.
Products
for the Critical Care Unit and other Hospital Settings
SurfaxinÒ
for
Acute Respiratory Distress Syndrome in Adults
ARDS is a
life-threatening disorder for which no approved therapies exist anywhere in the
world. It is characterized by an excess of fluid in the lungs and decreased
oxygen levels in the patient. One prominent characteristic of this disorder is
the destruction of surfactants naturally present in lung tissue. The conditions
are caused by illnesses including pneumonia and septic shock (a toxic condition
caused by infection) and events such as smoke inhalation, near drowning,
industrial accidents and other traumas.
We are
presently conducting a Phase 2 open-label, controlled, multi-center clinical
trial of Surfaxin for the treatment of adults with ARDS. In December 2004, we
announced what we believe to be encouraging preliminary data from this trial and
that we were modifying the trial protocol to allow for increased enrollment of
up to 160 patients. Patients will be randomized to either receive Surfaxin or
the current standard of care, which is mechanical ventilation and support
therapies.
Surfaxin
is administered to patients in high concentration and large volume via a
proprietary sequential lavage technique, or lung wash, delivered through a
bronchoscope to each of the 19 segments of the lung. The procedure is intended
to cleanse and remove inflammatory substances and debris from the lungs, while
leaving sufficient amounts of Surfaxin behind to
help re-establish the lungs’ capacity to absorb oxygen. The objective is to
restore functional surfactant levels and to allow critically ill patients to be
removed from mechanical ventilation sooner. The primary endpoint of this trial
is the incidence rate of patients being alive and off mechanical ventilation at
Day 28. Key secondary endpoints include mortality at the end of Day 28 and
safety and tolerability of Surfaxin and the bronchoscopic lavage procedure.
Results of the Phase 2 trial are anticipated to be available in the first
quarter of 2006.
The
current standard of care for ARDS includes placing patients on mechanical
ventilators in intensive care units at a cost per patient of approximately
$8,500 per day, typically for an average of 21 to 28 days. There are
estimated to be between 150,000 and 200,000 adults per year in the United States
suffering from ARDS with similar numbers afflicted in Europe. Presently, the
mortality rate is estimated to be between 30% to 40%.
The FDA
has granted us Fast-Track Status and Orphan Drug Designation for Surfaxin for
the treatment of ARDS in adults. The EMEA has granted us Orphan Product
designation for Surfaxin for the treatment of ALI in adults (which in this
circumstance is a larger patient population that encompasses ARDS). We were
awarded and received a $1 million Fast-Track Small Business Innovative Research
Grant by the National Institutes of Health to develop Surfaxin for the treatment
of ARDS and ALI in adults.
Aerosolized
Surfactant (development name DSC 104) for Severe, Acute Asthma
Asthma is
a common disease characterized by sudden constriction and inflammation of the
lungs. Constriction of the upper airway system occurs when the airway muscles
tighten, while inflammation is a swelling of the airways usually due to an
allergic reaction caused by an airborne irritant. Both of these events cause
airways to narrow and may result in wheezing, shortness of breath and chest
tightness. Several studies have shown that surfactant damage and dysfunction is
a significant component of asthma — airway constriction occurs when there is a
surfactant dysfunction in the airways of the deep lung of the type that develops
during an asthma attack. We believe that surfactant replacement therapy has the
potential to relieve the constriction in the airways associated with
asthma.
According
to information provided by the American Lung Association, asthma afflicts more
than 20 million people in the United States and its incidence rate continues to
rise. Asthma is a chronic disease; it is prevalent in people of all ages and an
estimated 12 million people have experienced an asthma attack within the past
year. In the United States alone, there are roughly 1 million hospital
outpatient visits, approximately 1.8 million emergency room visits and 9.3
million physician visits each year due to asthma. Asthma ranks within the top 10
prevalent activity-limiting health conditions costing $14 billion in United
States healthcare costs annually.
Asthma
may require life-long therapy to prevent or treat episodes. Ten percent of
patients are considered severe asthmatics and require moderate to high doses of
drugs. Currently available asthma medications include inhaled and oral steroids,
bronchodilators and leukotriene antagonists. Bronchodilators cannot be used to
control severe episodes or chronic, severe asthma. Oral steroids can cause
serious side effects when used for prolonged periods and, thus, are typically
limited to severe asthmatic episodes and chronic, severe asthma. We believe that
supplying surfactant as an inhaled aerosol may relieve airway obstruction in the
deep lung and lead to a more rapid improvement in asthmatic
symptoms.
In 2004,
we completed a Phase 1b clinical trial to evaluate the safety and lung
tolerability and deposition characteristics of our precision-engineered lung
surfactant, delivered as an inhaled aerosol to treat individuals who suffer from
asthma. This masked, placebo-controlled, randomized, Phase 1b study included six
healthy subjects and eight mild-persistent asthmatic patients. Results
demonstrated that DSC-104 was safe and well tolerated, did not induce
bronchospasm and was deposited to both the central and peripheral regions of the
lungs in the mild-persistent asthmatic group and the healthy volunteers. We are
preparing a Phase 2 trial for patients with moderate to severe asthma
(development name DSC-104). We initially anticipated initiating this trial in
the first half of 2005. Recently, we have reordered our aerosolized SRT pipeline
development programs to prioritize our Phase 2, pilot study to evaluate
aerosolized SRT delivered via nCPAP in premature infants. We now expect to
initiate our DSC-104 trial for moderate to severe asthma in the fourth quarter
of 2005.
Aerosolized
Surfactant for Acute Lung Injury
ALI is
associated with conditions that either directly or indirectly injure the air
sacs of the lung. ALI is a syndrome of inflammation and increased permeability
of the lungs with an associated breakdown of the lungs’ surfactant layer. The
most serious manifestation of ALI is ARDS.
Among the
causes of ALI are complications typically associated with certain major
surgeries, mechanical ventilator induced lung injury (often referred to as
VILI), smoke inhalation, pneumonia and sepsis. There are an estimated 1 million
patients at risk in the United States for Acute Lung Injury annually and there
are no currently-approved therapies.
We are
evaluating aerosolized formulations of our precision-engineered surfactant to
potentially treat ALI. We believe that our proprietary precision-engineered
aerosol surfactant may be effective as a preventive measure for patients at risk
for ALI. This prophylactic approach may result in fewer patients requiring
costly intensive care therapy, thereby eliminating long periods of therapy and
offering cost savings in the hospital setting.
STRATEGIC
ALLIANCES
Quintiles
Transnational Corp. (Quintiles), and PharmaBio Development Inc.
(PharmaBio)
In
November 2004, we reached an agreement with Quintiles Transnational Corp. to
restructure our business arrangements and terminate our commercialization
agreements for Surfaxin in the United States. We now have full commercialization
rights for Surfaxin in the United States. Under the commercialization agreement
we entered into with Quintiles in 2001, Quintiles and its affiliates would have
provided commercialization services for seven years post-launch, with an
obligation to fund such services up to $10 million per year. Quintiles was
entitled to a commission on net sales in the United States of Surfaxin for the
treatment of RDS and MAS for 10 years following launch. Pursuant to the
restructuring, Quintiles is no longer obligated to provide any commercialization
services and our obligation to pay a commission on net sales in the United
States of Surfaxin for the treatment of RDS and MAS to Quintiles has been
terminated. In addition, we have entered into a three-year limited
preferred-provider arrangement with Quintiles. The existing secured revolving
credit facility of $8.5 million with PharmaBio, Quintiles strategic investment
group affiliate, will remain available to us and the original maturity date of
December 10, 2004, is now extended until December 31, 2006. In connection with
the restructuring of the business arrangements with Quintiles and termination of
the commercialization agreement, we issued 850,000 warrants to QFinance, Inc., a
subsidiary of Quintiles, for no additional consideration, to purchase shares of
our common stock at an exercise price equal to $7.19 per share. The warrants
have a 10-year term and are exercisable for cash only.
Laboratorios
del Dr. Esteve, S.A. (Esteve)
In
December 2004, we restructured our strategic alliance with Laboratorios del Dr.
Esteve S.A. for the development, marketing and sales of our products in Europe
and Latin America. Under the revised collaboration, we have regained full
commercialization rights in key European markets, Central America and South
America. Esteve will focus on Andorra, Greece, Italy, Portugal and Spain, and
now has development and marketing rights to a broader portfolio of our potential
SRT products. Under the restructured collaboration, Esteve will pay us a
transfer price on sales of Surfaxin and our other Surfactant Replacement
Therapies that is increased from those provided for in our previous
collaborative arrangement. We will be responsible for the manufacture and supply
of all of the covered products and Esteve will be responsible for all sales and
marketing in the revised territory.
Esteve
has also agreed to make stipulated cash payments to us upon our achievement of
certain milestones, primarily upon receipt of marketing regulatory approvals for
the covered products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the revised territory.
In
consideration for regaining commercial rights in the restructuring, we issued to
Esteve 500,000 shares of common stock for no cash consideration and granted to
Esteve rights to additional potential SRT products in our pipeline. We also
agreed to pay to Esteve 10% of up-front cash and milestone fees that we receive
in connection with any future strategic collaborations for the development and
commercialization of Surfaxin for RDS, ARDS or certain of our other Surfactant
Replacement Therapies in the territory for which we had previously granted a
license to Esteve. Any such up-front and milestone fees that we may pay to
Esteve are not to exceed $20 million in the aggregate. This restructured
collaboration supersedes the existing sublicense and supply agreements we had
entered into with Esteve in March 2002.
LICENSING
ARRANGEMENTS; PATENTS AND PROPRIETARY RIGHTS
Patents
and Proprietary Rights
Johnson
& Johnson and The Scripps Research Institute
Our
precision-engineered surfactant platform technology, including Surfaxin, is
based on the proprietary peptide, sinapultide, (a 21 amino acid protein-like
substance that closely mimics the essential human lung protein SP-B). This
technology was invented at The Scripps Research Institute and was exclusively
licensed to, and further developed by, Johnson & Johnson and its wholly
owned subsidiary, Ortho Pharmaceutical. We have received an exclusive, worldwide
sublicense from Johnson & Johnson and Scripps for, and have rights to, a
series of over 30 patents and patent filings (worldwide) which are important,
either individually or collectively, to our strategy for commercializing our
precision-engineered surfactant technology for the diagnosis, prevention and
treatment of disease. The sublicense gives us the exclusive rights to such
patents for the life of the patents.
Patents
covering our proprietary precision-engineered surfactant technology that have
been issued or are pending worldwide include composition of matter, formulation,
manufacturing and uses, including the pulmonary lavage, or “lung wash”
techniques. Our most significant patent rights principally consist of five
issued United States patents: U.S. Patent No. 5,407,914; U.S. Patent No.
5,260,273; U.S. Patent No. 5,164,369; U.S. Patent No. 5,789,381; and U.S. Patent
No. 6,013,619 (along with corresponding issued and pending foreign
counterparts). These patents relate to precision-engineered pulmonary
surfactants (including Surfaxin), certain related peptides (amino acid
protein-like substances) and compositions, methods of treating respiratory
distress syndromes with these surfactants and compositions, and our
proprietary pulmonary lavage method of treating RDS with these surfactants. We
also have certain pending United States and foreign patent applications that
relate to methods of manufacturing certain peptides which may be used in the
manufacture of Surfaxin and other
aspects of our precision-engineered surfactant technology.
In
September 2003, we were issued United States Patent No. 6,613,734, which
covers a wide
variety of combinations of peptides, proteins and other molecules related to our
proprietary precision-engineered pulmonary surfactant technology. The patent
also includes methods of making and using these molecules.
In
September 2002, we were granted European Patent No. 0590006, which covers claims
directed to compositions that contain sinapultide for use as a therapeutic
surfactant for treating RDS and related conditions. We also have been granted
European Patent Nos. 0350506 and 0593094 covering certain other surfactant
peptides, including sinapultide and related peptides.
U.S.
Patent No. 6,013,619 was issued to Scripps and licensed to us, and covers
methods of using any engineered surfactants (including Surfaxin) or animal- or
human-derived surfactants in pulmonary lavage for RDS. Our proprietary pulmonary
lavage techniques (using surfactant) include lavage via a bronchoscope in adults
as well as direct pulmonary lung lavage via an endotracheal tube in newborn
babies with MAS. Scientific rationale supports the premise that our proprietary
lavage technique may provide a clinical benefit to the treatment of ALI and ARDS
in adults and MAS in full-term infants by decreasing the amount of infectious
and inflammatory debris in the lungs, restoring the air sacs to a more normal
state and possibly resulting in patients getting off mechanical ventilation
sooner.
All such
patents, including our relevant European patents, expire on various
dates beginning in 2008 and ending in 2017 or, in some cases, possibly
later.
The
Scripps Research Institute Research Agreement
Our
research funding and option agreement with Scripps expired in February 2005.
Pursuant to this agreement, we funded a portion of Scripps' research efforts and
are entitled to an option to acquire an exclusive worldwide license to the
technology developed from the research program during the term of the agreement.
Scripps owns all of the technology that it developed pursuant to work performed
under the agreement. To the extent we do not exercise our option, we have the
right to receive 50% of the net royalty income received by Scripps for
inventions that we jointly develop under the agreement.
See Item
7: “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Risks Related to Our Business”: “ - If we cannot protect our
intellectual property, other companies could use our technology in competitive
products. If we infringe the intellectual property rights of others, other
companies could prevent us from developing or marketing our products”; “ - Even
if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us”; “ - Intellectual property
rights of third parties could limit our ability to market our products”; and “ -
If we cannot meet requirements under our license agreements, we could lose the
rights to our products.”
MANUFACTURING
AND DISTRIBUTION - THIRD PARTY SUPPLIERS
Manufacturing
Our
precision-engineered surfactant product candidates, including
Surfaxin, must be
manufactured in a sterile environment and in compliance with current good
manufacturing practice requirements (cGMPs) set by the FDA and other relevant
worldwide regulatory authorities. These product candidates are manufactured
through the combination of sinapultide, which is provided by BACHEM California,
Inc., and PolyPeptides Laboratories, Inc., and certain other active ingredients,
including certain lipids, that are provided by other suppliers such as Genzyme
Pharmaceuticals, a division of the Genzyme Corporation, and Avanti Polar Lipids
with our own specialized equipment under the direction and supervision of our
manufacturing and quality control personnel. Our surfactant drug products,
including Surfaxin, are manufactured at the sterile facilities of our contract
manufacturer, Laureate, using these ingredients with our own specialized
equipment under the direction and supervision of our manufacturing and quality
control personnel. The termination, disruption or expiration of the
manufacturing relationships with any of these parties would have a material
adverse effect on our business.
In
January 2005, the FDA issued an inspection report (Form FDA-483) to Laureate,
our contract manufacturer of Surfaxin, citing certain observations concerning
Laureate’s compliance with current Good Manufacturing Practices (cGMPs) in
connection with its review of our NDA for Surfaxin for the prevention of RDS in
premature infants. The general focus of the inspection observations relates to
basic quality controls, process assurances and documentation requirements to
support the commercial production process. In response, a cGMP Action Plan was
submitted to the FDA on January 31, 2005, outlining corrective measures
anticipated to be completed by July 2005. Assuming the adequacy of such
corrective actions and the approval of our NDA for Surfaxin, we anticipate that
the commercial launch of Surfaxin for the United States will occur in the fourth
quarter of 2005. Our other clinical programs currently in progress are not
affected by this inspection report and remain on track. However, if the
inspection observations noted in the Form 483 are not resolved in the time
period stated above, a delay may occur in these programs. We do not expect that
the foregoing will have an effect on our European regulatory filings.
We
anticipate that our manufacturing capabilities through Laureate, upon successful
completion and implementation of our cGMP Action Plan dated January 31, 2005,
should allow sufficient commercial production of Surfaxin, if approved, to
supply the present worldwide demand for the treatment of RDS in premature
infants. We expect these capabilities to allow us to provide adequate supply of
Surfaxin and our other Surfactant Replacement Therapies for our planned clinical
trials.
To
support a long-term manufacturing strategy for the production of clinical and
commercial supply of our precision-engineered surfactant drug product, we are
evaluating further development and scale-up of our current contract
manufacturer, Laureate, alternative contract manufacturers and building our own
manufacturing operations in order to secure additional manufacturing
capabilities to meet our production needs as they expand. Upon marketing
approval, if at all, we intend to rely on outside manufacturers for
production of our products after marketing approval.
Should
the proper financial and other resources be available, our manufacturing process
for our precision-engineered surfactant drug product allows us to scale-up
production of our precision-engineered surfactant drug product, including
Surfaxin. The scaling up of the currently-approved, animal-derived products is
significantly less efficient, if at all possible. By scaling up our production,
we should be able to produce sufficient drug products to potentially treat
diseases with larger patient populations, such as ARDS in adults, Neonatal
Respiratory Failures in premature infants, asthma, ALI, COPD and other broader
respiratory diseases and upper airway disorders.
Manufacturing
or quality control problems have already and may again occur at Laureate or our
other contract manufacturers, causing production and shipment delays or a
situation where the contractor may not be able to maintain compliance with the
FDA’s GMP requirements necessary to continue manufacturing our ingredients or
drug product. If any such suppliers or manufacturers of our products fail to
comply with cGMP requirements or other FDA and comparable foreign regulatory
requirements, it could adversely affect our clinical research activities and our
ability to market and develop our products. See Item 7: “Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Risks Related to
Our Business”: “ - We currently have a limited sales and marketing team and,
therefore, must develop a sales and marketing team or enter into distribution
arrangements and marketing alliances, which could require us to give up rights
to our product candidates. Our limited sales and marketing experience may
restrict our success in commercializing our product candidates”; “ - If the
parties we depend on for manufacturing our pharmaceutical products do not timely
supply these products, it may delay or impair our ability to develop and market
our products”; and “ - In order to conduct our clinical trials we need adequate
supplies of our drug substance and drug product and competitor’s drug product,
which may not be readily available.”
Distribution
We are
currently evaluating third party distribution capability in order to
commercialize Surfaxin in the United States.
Our
collaboration with Esteve provides that Esteve has the responsibility for
distribution in Andorra, Greece, Italy, Portugal and Spain. We will need to
evaluate third party distribution capabilities in other parts of the world prior
to commercializing those regions. See Item 7: “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Risks Related to Our
Business - We currently have a limited sales and marketing team and, therefore,
must develop a sales and marketing team or enter into distribution arrangements
and marketing alliances, which could require us to give up rights to our product
candidates. Our limited sales and marketing experience may restrict our success
in commercializing our product candidates” and “ - If the parties we depend on
for manufacturing our pharmaceutical products do not timely supply these
products, it may delay or impair our ability to develop and market our
products”.
COMPETITION
We are
engaged in highly competitive fields of pharmaceutical research. Competition
from numerous existing companies and others entering the fields in which we
operate is intense and expected to increase. We expect to compete with, among
others, conventional pharmaceutical companies. Most of these companies have
substantially greater research and development, manufacturing, marketing,
financial, technological personnel and managerial resources than we do.
Acquisitions of competing companies by large pharmaceutical or health care
companies could further enhance such competitors’ financial, marketing and other
resources. Moreover, competitors that are able to complete clinical trials,
obtain required regulatory approvals and commence commercial sales of their
products before we do may enjoy a significant competitive advantage over us.
There are also existing therapies that may compete with the products we are
developing. See Item 7: “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Risks Related to Our Business - Our
industry is highly competitive and we have less capital and resources than many
of our competitors, which may give them an advantage in developing and marketing
products similar to ours or make our products obsolete.”
Currently,
the FDA has approved surfactants as replacement therapy only for the treatment
of RDS in premature infants, a condition in which infants are born with an
insufficient amount of their own natural surfactant. The most commonly used of
these approved replacement surfactants are derived from a chemical extraction
process of pig and cow lungs. Curosurf® is a
porcine lung extract that is marketed in Europe by Chiesi Farmaceutici S.p.A.,
and in the United States by Dey Laboratories, Inc. Survanta®,
marketed by the Ross division of Abbott Laboratories, Inc., is derived from
minced cow lung that contains the cow version of surfactant protein B. Forest
Laboratories, Inc., markets its calf lung surfactant extract,
Infasurf®, in the
United States.
There is
presently only one approved synthetic surfactant available, Exosurf®,
marketed by GlaxoSmithKline, plc. However, this product does not contain any
surfactant proteins, is not widely used and its active marketing recently has
been discontinued by its manufacturer.
With
respect to the development of lung surfactants for the treatment of other
respiratory diseases and upper airway disorders, with the exception of one
porcine-derived surfactant drug candidate under development by Leo Pharma A/S in
Denmark, we are not aware of any other lung surfactant currently under
development.
There are
no drugs currently approved that are specifically indicated for the treatment of
ARDS in adults or MAS in full-term infants. Current therapy consists of general
supportive care and mechanical ventilation. There are a significant number of
other potential therapies in development for the treatment of ARDS in adults
that are not surfactant related. Any of these various drugs or devices could
significantly impact the commercial opportunity for Surfaxin.
Our
precision-engineered surfactant product candidates, including Surfaxin, are
engineered versions of natural human lung surfactant and contain our
precision-engineered peptide, sinapultide. We believe that our
precision-engineered surfactant can be manufactured less expensively than the
animal-derived surfactants, in sufficient quantities, in exact and consistent
pharmaceutical grade quality, and has no potential to cause adverse
immunological responses in young and older adults, all important attributes to
potentially meet significant unmet medical needs. Our products also have the
ability to be more precisely formulated, such as in the form of aerosolized
liquids or dry powders to address various medical indications. In addition, we
believe that our precision-engineered surfactant might possess other
pharmaceutical benefits not currently found with the animal surfactants such as
longer shelf-life, reduced number of administrations to the patient’s lungs and
elimination of the risk of animal-borne diseases including the brain-wasting
bovine spongiform encephalopathy (commonly called “mad-cow
disease”).
GOVERNMENT
REGULATION
The
testing, manufacture, distribution, advertising and marketing of drug products
are subject to extensive regulation by federal, state and local governmental
authorities in the United States, including the FDA, and by similar agencies in
other countries. Any product that we develop must receive all relevant
regulatory approvals or clearances before it may be marketed in a particular
country.
The
regulatory process, which includes preclinical studies and clinical trials of
each pharmaceutical compound to establish its safety and efficacy and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over us. Delays or
terminations of clinical trials we undertake would likely impair our development
of product candidates. Delays or terminations could result from a number of
factors, including stringent enrollment criteria, slow rate of enrollment, size
of patient population, having to compete with other clinical trials for eligible
patients, geographical considerations and others.
The FDA
review process can be lengthy and unpredictable, and we may encounter delays or
rejections of our applications when submitted. Generally, in order to gain FDA
approval, we first must conduct preclinical studies in a laboratory and in
animal models to obtain preliminary information on a compound’s efficacy and to
identify any safety problems. The results of these studies are submitted as part
of an IND (Investigational New Drug) application that the FDA must review before
human clinical trials of an investigational drug can start.
Clinical
trials are normally done in three sequential phases and generally take two to
five years or longer to complete. Phase 1 consists of testing the drug product
in a small number of humans, normally healthy volunteers, to determine
preliminary safety and tolerable dose range. Phase 2 usually involves studies in
a limited patient population to evaluate the effectiveness of the drug product
in humans having the disease or medical condition for which the product is
indicated, determine dosage tolerance and optimal dosage and identify possible
common adverse effects and safety risks. Phase 3 consists of additional
controlled testing at multiple clinical sites to establish clinical safety and
effectiveness in an expanded patient population of geographically dispersed test
sites to evaluate the overall benefit-risk relationship for administering the
product and to provide an adequate basis for product labeling. Phase 4 clinical
trials may be conducted after approval to gain additional experience from the
treatment of patients in the intended therapeutic indication.
After
completion of clinical trials of a new drug product, FDA and foreign regulatory
authority marketing approval must be obtained. A New Drug Application submitted
to the FDA generally takes one to three years to obtain approval. If questions
arise during the FDA review process, approval may take a significantly longer
period of time. The testing and approval processes require substantial time and
effort and we may not receive approval on a timely basis, if at all. Even if
regulatory clearances are obtained, a marketed product is subject to continual
review, and later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions. For marketing outside the United States,
we also will be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. None of our
products under development have been approved for marketing in the United States
or elsewhere. We may not be able to obtain regulatory approval for any such
products under development. Failure to obtain requisite governmental approvals
or failure to obtain approvals of the scope requested will delay or preclude us,
or our licensees or marketing partners, from marketing our products, or limit
the commercial use of our products, and thereby would have a material adverse
effect on our business, financial condition and results of operations. See Item
7: “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Risks Related to Our Business”: “ - Our technology platform is
based solely on our proprietary precision-engineered surfactant technology. Our
ongoing clinical trials for our lead surfactant replacement technologies may be
delayed, or fail, which will harm our business”; and “ - The clinical trial and
regulatory approval process for our products is expensive and time consuming,
and the outcome is uncertain.”
The FDA
has granted us Fast-Track Approval Designation for the indications of ARDS and
MAS. Fast-Track Status facilitates the development and expedites the review of
new drugs intended for treatment of life-threatening conditions for which there
are presently no medical options or an unmet medical need by providing for the
FDA’s review of the New Drug Application within six months following filing. We
have also received Orphan Drug Designation from the FDA’s Office of Orphan
Products Development for Surfaxin as a treatment for RDS in premature infants,
MAS in full-term infants, and ARDS in adults. Surfaxin has
received designation as an Orphan Product for MAS and ALI (which, in this
circumstance, encompasses ARDS) from the EMEA.
EMPLOYEES
We have
approximately 90 full-time employees, primarily employed in the United States,
Europe and Latin America. Our future success depends in significant part upon
the continued service of our key scientific personnel and executive officers and
our continuing ability to attract and retain highly qualified scientific and
managerial personnel. There is a competitive market for such personnel and we
may not be able to retain our key employees or attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. See
Item 7: “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Risks Related to Our Business - We depend upon key employees and
consultants in a competitive market for skilled personnel. If we are unable to
attract and retain key personnel, it could adversely affect our ability to
develop and market our products.”
AVAILABLE
INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the Commission at the Commission’s public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549, 233 Broadway, New York, New York
10279, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661- 2511. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Our Commission filings are also
available to the public from the Commission’s Website at “http://www.sec.gov.”
We make available free of charge our annual, quarterly and current reports,
proxy statements and other information upon request. To request such materials,
please send an e-mail to ir@DiscoveryLabs.com or
contact John G. Cooper, our Executive Vice President, Chief Financial Officer at
our address as set forth above.
We
maintain a Website at “http://www.DiscoveryLabs.com”
(this is not a
hyperlink, you must visit this website through an Internet browser). Our Website
and the information contained therein or connected thereto are not incorporated
into this Annual Report on Form 10-K.
Our
principal offices are leased and located at 2600 Kelly Road, Suite
100,Warrington, Pennsylvania 18976-3646. The telephone number of our executive
office is (215) 488-9300 and the facsimile number is (215) 488-9301. We also
lease space in Doylestown, Pennsylvania, for our analytical laboratory. We
currently lease our research facility, which is located in Mountain View,
California, to principally develop aerosolized formulations of our proprietary
precision-engineered surfactant.
ITEM
3. |
LEGAL
PROCEEDINGS. |
We are
not aware of any pending or threatened legal actions other than disputes arising
in the ordinary course of our business that would not, if determined adversely
to us, have a material adverse effect on our business and
operations.
ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS. |
No
matters were submitted to a vote of security holders during the fourth quarter
of 2004.
PART
II
ITEM
5. |
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES. |
Our
common stock is traded on the Nasdaq National Market under the symbol “DSCO.” As
of February 7, 2005, the number of stockholders of record of shares of our
common stock was 173 and the number of beneficial owners of shares of our common
stock was approximately 12,000. As of February 7, 2005, there were 48,444,690
shares of our common stock issued and outstanding; and as of March 14, 2005,
53,511,946 shares of our common stock were issued and outstanding.
The
following table sets forth the quarterly price ranges of our common stock for
the periods indicated, as reported by Nasdaq.
|
|
|
|
|
|
Low |
|
High |
|
|
|
|
|
First
Quarter 2003 |
$1.32 |
|
$2.94 |
|
Second
Quarter 2003 |
$1.56 |
|
$7.40 |
|
Third
Quarter 2003 |
$6.12 |
|
$8.50 |
|
Fourth
Quarter 2003 |
$5.40 |
|
$10.75 |
|
First
Quarter 2004 |
$9.94 |
|
$13.90 |
|
Second
Quarter 2004 |
$8.25 |
|
$13.22 |
|
Third
Quarter 2004 |
$5.75 |
|
$9.90 |
|
Fourth
Quarter 2004 |
$6.42 |
|
$9.52 |
|
First
Quarter 2005 (through February 7, 2005) |
$5.84 |
|
$8.60 |
|
We have
not paid dividends on our common stock. It is anticipated that we will not pay
dividends on our common stock in the foreseeable future.
Sales
of Unregistered Securities
In the quarter ended December 31, 2004, pursuant to the exercise
of outstanding warrants and options, we issued an aggregate of 3,167 shares of
our common stock at various exercise prices ranging from $7.00 to $8.32 per
share. We claimed the exemption from registration provided by Section 4(2) of
the Securities Act for these transactions. No broker-dealers were involved in
the sale and no commissions were paid by us. Information relating to
compensation plans under which our common stock is authorized for issuance is
set forth in Part III, Item 12 of this Annual Report on Form 10-K.
We have a
voluntary 401(k) savings plan covering eligible employees. Effective January 1,
2003, we allowed for periodic discretionary matches of newly issued shares of
common stock to be made by the Company with the amount of any such match
determined as a percentage of each individual participant’s cash contribution.
For the quarter ended December 31, 2004, shares issued by us as a discretionary
match totaled 8,116 shares of common stock.
ITEM
6. SELECTED
FINANCIAL DATA
The
selected consolidated financial data set forth below with respect to our
consolidated statement of operations for the years ended December 31, 2004, 2003
and 2002 and with respect to the consolidated balance sheets as of December 31,
2004 and 2003 have been derived from audited consolidated financial statements
included as part of this Annual Report on Form 10-K (“Form 10-K”). The statement
of operations data for the years ended December 31, 2001 and 2000 and the
balance sheet data as of December 31, 2002 and 2001 and 2000 are derived
from audited financial statements not included in this Form 10-K. The following
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K.
Consolidated
Statement of Operations Data:
(in
thousands, except per share data) |
|
|
|
|
|
|
|
|
|
For
the year ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
Revenues
from collaborative agreements |
|
$ |
1,209 |
|
$ |
1,037 |
|
$ |
1,782 |
|
$ |
1,112 |
|
$ |
741 |
|
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
25,793 |
|
|
19,750
|
|
|
14,347
|
|
|
8,007
|
|
|
7,494
|
|
General
and administrative |
|
|
13,322 |
|
|
5,722
|
|
|
5,458
|
|
|
5,067
|
|
|
5,145
|
|
Corporate
partnership restructuring charges |
|
|
8,126 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
expenses |
|
|
47,241 |
|
|
25,472
|
|
|
19,805
|
|
|
13,074
|
|
|
12,639
|
|
Operating
loss |
|
|
(46,032 |
) |
|
(24,435 |
) |
|
(18,023 |
) |
|
(11,962 |
) |
|
(11,898 |
) |
Other
income and expense |
|
|
(171 |
) |
|
155
|
|
|
580
|
|
|
816
|
|
|
1,037
|
|
Net
loss |
|
$ |
(46,
203 |
) |
$ |
(24,280 |
) |
$ |
(17,443 |
) |
$ |
(11,146 |
) |
$ |
(10,861 |
) |
Net
loss per common share - basic and diluted |
|
$ |
(1.00 |
) |
$ |
(0.65 |
) |
$ |
(0.64 |
) |
$ |
(0.51 |
) |
$ |
(0.58 |
) |
Weighted
average number of common
shares
outstanding |
|
|
46,179 |
|
|
37,426
|
|
|
27,351
|
|
|
22,038
|
|
|
18,806
|
|
Consolidated
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
(in
thousands) |
|
For
the year ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash/cash
equivalents and marketable securities |
|
$ |
32,654 |
|
$ |
29,422 |
|
$ |
19,152 |
|
$ |
16,696 |
|
$ |
18,868 |
|
Prepaid
expenses and other current assets |
|
|
688 |
|
|
668
|
|
|
327
|
|
|
1,582
|
|
|
149
|
|
Total
Current Assets |
|
|
33,342 |
|
|
30,090
|
|
|
19,479
|
|
|
18,278
|
|
|
19,017
|
|
Property
and equipment, net of depreciation |
|
|
4,063 |
|
|
2,414
|
|
|
1,231
|
|
|
822
|
|
|
697
|
|
Other
assets |
|
|
232 |
|
|
211
|
|
|
352
|
|
|
965
|
|
|
3
|
|
Total
Assets |
|
$ |
37,637 |
|
$ |
32,715 |
|
$ |
21,062 |
|
$ |
20,065 |
|
$ |
19,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility, current portion |
|
$ |
- |
|
$ |
2,436 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
Other
current liabilities |
|
|
8,823 |
|
|
4,593
|
|
|
3,202
|
|
|
1,794
|
|
|
2,399
|
|
Total
Current Liabilities |
|
|
8,823 |
|
|
7,029
|
|
|
3,202
|
|
|
1,794
|
|
|
2,399
|
|
Deferred
revenue |
|
|
134 |
|
|
672
|
|
|
1,393
|
|
|
615
|
|
|
851
|
|
Credit
facility, non-current portion |
|
|
5,929 |
|
|
-
|
|
|
1,450
|
|
|
-
|
|
|
-
|
|
Capitalized
lease |
|
|
1,654 |
|
|
711
|
|
|
256
|
|
|
33
|
|
|
31
|
|
Total
Liabilities |
|
|
16,540 |
|
|
8,412
|
|
|
6,301
|
|
|
2,442
|
|
|
3,281
|
|
Stockholders'
Equity |
|
|
21,097 |
|
|
24,303
|
|
|
14,761
|
|
|
17,623
|
|
|
16,436
|
|
Total
Liabilities and Stockholders' Equity |
|
$ |
37,637 |
|
$ |
32,715 |
|
$ |
21,062 |
|
$ |
20,065 |
|
$ |
19,717 |
|
Common
Stock, $0.001 par value, issued and outstanding |
|
|
48,434 |
|
|
42,491 |
|
|
32,818 |
|
|
25,546 |
|
|
20,871 |
|
ITEM
7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION |
This Item
7: “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” should be read in connection with our Consolidated Financial
Statements. See Item 15: “Exhibits and Financial Statement
Schedules.”
Overview
Discovery
Laboratories, Inc. is a biopharmaceutical company developing its proprietary
surfactant technology as precision-engineered Surfactant Replacement Therapies
(SRT) for respiratory diseases. Surfactants are produced naturally in the lungs
and are essential for breathing. Our technology produces a precision-engineered
surfactant that is designed to mimic the essential properties of natural human
lung surfactant. We believe that through our technology, pulmonary surfactants
have the potential, for the first time, to be developed into a series of
respiratory therapies for patients in the neonatal intensive care unit, critical
care unit and other hospital settings, where there are few or no approved
therapies available.
We have
received an Approvable Letter from the U.S. FDA for SurfaxinÒ
(lucinactant), our lead product, for the prevention of RDS in premature infants,
and have filed a Marketing Authorization Application with the EMEA for clearance
to market Surfaxin in Europe. We anticipate potential approval and commercial
launch of Surfaxin in the United States and potential EMEA approval to occur in
the first quarter of 2006.
In
addition to Surfaxin for RDS, in an effort to enhance the potential commercial
and medical value of our SRT by addressing the most prevalent respiratory
disorders affecting infants in the NICU, we are conducting several NICU
therapeutic programs targeting respiratory conditions cited as some of the most
significant unmet medical needs for the neonatal community. We are conducting
three Phase 2 clinical trials - Surfaxin for BPD in premature infants,
aerosolized SRT administered through nCPAP for Neonatal Respiratory Failures,
and Surfaxin for the prophylactic/early treatment of MAS in full term infants.
In an
effort to enhance the potential commercial and medical value of our SRT, we are
also developing SRT to address unmet respiratory conditions affecting pediatric,
young adult and adult patients in the critical care and other hospital settings.
We are conducting a Phase 2 clinical trial for the treatment of ARDS in adults
in the intensive care unit (ICU), for which we announced preliminary data in
December 2004. With our aerosolized surfactant formulations, we have completed a
Phase 1b trial and are preparing to initiate a Phase 2 trial for patients with
moderate to severe asthma (development name DSC-104). In addition, we are
evaluating the development of aerosolized formulations of our
precision-engineered SRT to potentially treat Acute Lung Injury, COPD and
rhinitis/sinusitis.
In
anticipation of the potential approval of Surfaxin for RDS in the United States,
we are presently implementing a long-term commercial strategy which
includes:
(i) |
manufacturing
for the production of our precision-engineered surfactant drug products to
meet anticipated clinical and commercial needs, if approved, in the United
States and Europe. We are investing in the further development and
scale-up of our current contract manufacturer of our SRT, Laureate, and
securing additional manufacturing capabilities to meet production needs as
they expand, including alternative contract manufacturers and building our
own manufacturing facility. In January 2005, the FDA issued an inspection
report (Form FDA-483) to Laureate citing certain observations concerning
Laureate’s compliance with current Good Manufacturing Practices (cGMPs) in
connection with the FDA’s review of our NDA for Surfaxin for the
prevention of RDS in premature infants. The general focus of the
inspection observations relates to basic quality controls, process
assurances and documentation requirements to support the commercial
production process. In response, Discovery and Laureate submitted a cGMP
Action Plan to the FDA on January 31, 2005, outlining corrective measures
anticipated to be completed by July 2005. Assuming the adequacy of such
corrective actions and the approval of our NDA, we anticipate that the
commercial launch of Surfaxin will occur in the first quarter of 2006. Our
other clinical programs currently in progress are not affected by this
inspection report and remain on track. However, if the inspection
observations noted in the Form 483 are not resolved in the time period
stated above, a delay may occur in these programs. We do not expect that
the foregoing will have an effect on our European regulatory filings;
|
(ii) |
building
sales and marketing capabilities to execute the launch of Surfaxin in the
United States, if approved. We are building
our own specialty pulmonary United States sales and marketing organization
to focus initially on opportunities in the NICU and, as products are
developed, to expand to critical care and hospital settings. This
strategic initiative, led by the anticipated launch of Surfaxin, is
intended to allow us to fully control our own sales and marketing
operation, establish a strong presence in the NICU, and optimize company
economics; and |
(iii) |
implementing
our commercialization strategy for Surfaxin in Europe and the rest of the
world through corporate partnerships. |
Since our
inception, we have incurred significant losses and, as of December 31, 2004, we
had an accumulated deficit of $143,061,000 (including historical results of
predecessor companies). The majority of our expenditures to date have been for
research and development activities. Research and development expenses represent
costs incurred for scientific and clinical personnel, clinical trials,
regulatory filings and manufacturing efforts (including raw material costs). We
expense our research and development costs as they are incurred. General and
administrative expenses consist primarily of executive management, financial,
business development, pre-launch commercialization sales and marketing, legal
and general corporate activities and related expenses. See Item 7: “Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Plan
of Operations.”
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings and strategic collaborations. As of
December 31, 2004, we had cash and investments of $32,654,000, a secured
revolving credit facility of $8,500,000 with PharmaBio, of which $2,571,000 was
available for borrowing and $5,929,000 was outstanding, and a $9,000,000 capital
equipment lease financing arrangement, of which $5,958,000 was available for
borrowing, $3,042,000 has been drawn, and $2,454,000 was outstanding. We also
had up to $67.8 million available under the Committed Equity Financing Facility
(CEFF), subject to the terms and conditions thereof and to the terms and
conditions of the Placement Agent Agreement we entered into with SG Cowen &
Co. LLC (as discussed below). See Item 7: “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources.”
Research
and Development
Research
and development expenses for the years ended December 31, 2004, 2003 and 2002
were $25,793,000, $19,750,000, and $14,347,000, respectively. Our research and
development expenses are charged to operations as incurred and we track such
costs by category rather than by project. Our research and development costs
consist primarily of expenses associated with research and pre-clinical
operations, manufacturing development, clinical and regulatory operations, and
other direct clinical trials activities. These cost categories typically include
the following expenses:
Research
and Pre-Clinical Operations
Research
and pre-clinical operations reflects activities associated with research prior
to the initiation of any potential human clinical trials. These activities
predominantly represent projects associated with the development of aerosolized
and other related formulations of our precision-engineered lung surfactant and
aerosol delivery systems to potentially treat a range of respiratory disorders
prevalent in the NICU and the hospital. Research and pre-clinical operations
costs primarily reflect expenses incurred for personnel, consultants, facilities
and research and development arrangements with collaborators.
Manufacturing
Development
Manufacturing
development primarily reflects costs incurred to prepare current good
manufacturing procedures (cGMP) manufacturing capabilities in order to provide
clinical and commercial scale drug supply. Included in manufacturing development
are activities with external contract manufacturing resources (including further
development and scale-up of our current contract manufacturer of our SRT,
Laureate, and securing additional manufacturing capabilities to meet production
needs as they expand, including alternative contract manufacturers and building
our own manufacturing facility), personnel costs, depreciation, and expenses
associated with technology transfer, process development and validation, quality
control and assurance activities, and analytical services.
Unallocated
Development — Clinical and Regulatory Operations
Clinical
and regulatory operations reflect the preparation, implementation, and
management of our clinical trial activities in accordance with current good
clinical practices (cGCPs). Included in unallocated clinical development and
regulatory operations are costs associated with personnel, supplies, facilities,
fees to consultants, and other related costs for clinical trial implementation
and management, clinical quality control, and regulatory compliance activities,
data management and biostatistics.
Direct
Expenses — Clinical Trials
Direct
expenses of clinical trials includes patient enrollment costs, external site
costs, expense of clinical drug supply, and external costs such as contract
research consultant fees and expenses.
The
following summarizes our research and development expenses by the foregoing
categories for the years ended December 31, 2004, 2003 and 2002:
(Dollars
in thousands) |
|
Year
Ended December 31, |
|
|
|
|
|
|
|
|
|
Research
and Development Expenses: |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Research
and pre-clinical operations |
|
$ |
2,916 |
|
$ |
1,958 |
|
$ |
1,683 |
|
Manufacturing
development |
|
|
7,010
|
|
|
4,268
|
|
|
834
|
|
Unallocated
development - clinical and regulatory operations |
|
|
8,588
|
|
|
5,966
|
|
|
3,275
|
|
Direct
clinical trial expenses |
|
|
7,279
|
|
|
7,558
|
|
|
8,555
|
|
Total
Research and Development Expenses |
|
$ |
25,793 |
|
$ |
19,750 |
|
$ |
14,347 |
|
Due to
the significant risks and uncertainties inherent in the clinical development and
regulatory approval processes, the nature, timing and costs of the efforts
necessary to complete projects in development are not reasonably estimable.
Results from clinical trials may not be favorable. Data from clinical trials are
subject to varying interpretation and may be deemed insufficient by the
regulatory bodies reviewing applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.
Currently,
none of our drug product candidates are available for commercial sale. All of
our potential products are in regulatory review, clinical or pre-clinical
development and the status and anticipated completion date of each of our lead
SRT programs is discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operation - Plan of Operations,” below. Successful
completion of development of our Surfactant Replacement Therapies is contingent
on numerous risks, uncertainties and other factors, which are described in
detail in the section entitled “Risk Factors”.
These
factors include:
· |
Completion
of pre-clinical and clinical trials of the product candidate with the
scientific results that support further development and/or regulatory
approval; |
· |
Receipt
of necessary regulatory approvals; |
· |
Obtaining
adequate supplies of surfactant raw materials on commercially reasonable
terms; |
· |
Obtaining
capital necessary to fund our operations, including our research and
development efforts, manufacturing requirements and clinical
trials; |
· |
Performance
of third-party collaborators on whom we rely for the commercialization and
manufacture of Surfaxin; |
· |
Timely
resolution of the cGMP-related matters at Laureate, our contract
manufacturer for Surfaxin and certain of our other Surfactant Replacement
Therapies presently under development, that were noted by the FDA in its
inspectional report on Form FDA-483; and |
· |
Obtaining
manufacturing, sales and marketing capabilities for which we presently
have limited resources. |
As a
result of the amount and nature of these factors, many of which are outside our
control, the success, timing of completion, and ultimate cost, of development of
any of our product candidates is highly uncertain and cannot be estimated with
any degree of certainty. The timing and cost to complete drug trials alone may
be impacted by, among other things,
·
|
Slow
patient enrollment; |
· |
Long
treatment time required to demonstrate
effectiveness; |
· |
Lack
of sufficient clinical supplies and material; |
· |
Adverse
medical events or side effects in treated
patients; |
· |
Lack
of effectiveness of the product candidate being tested;
and |
· |
Lack
of sufficient funds. |
If we do
not successfully complete clinical trials, we will not receive regulatory
approval to market our SRT products. If we do not obtain and maintain regulatory
approval for our products, we will not generate any revenues from the sale of
our products and the value of our company and our financial condition and
results of operations will be substantially harmed.
Corporate
Partnership Agreements
Quintiles
Transnational Corp., and PharmaBio Development Inc.
In 2001,
we entered into a commercialization agreement with Quintiles Transnational
Corp., and its strategic investment group affiliate, PharmaBio Development Inc.,
to provide certain commercialization services in the United States for Surfaxin
for the treatment of RDS in premature infants and MAS in full-term infants.
Quintiles was obligated to hire and train a dedicated United States sales force
that would have been branded in the market as Discovery’s. PharmaBio agreed to
fund up to $70 million of the sales and marketing costs for commercialization of
Surfaxin in the United States for seven years. Additionally, the collaboration
allowed for this sales force to transfer to us at the end of the seven year
term, with an option to acquire it sooner. Under the agreement, we were to
receive 100% of the revenues from sales of Surfaxin and agreed to pay PharmaBio
a commission on net sales in the United States of Surfaxin for the treatment of
RDS in premature infants and MAS in full-term infants and all “off-label” uses
for 10 years following first launch of the product in the United States.
PharmaBio also extended to us a secured revolving credit facility of up to $8.5
to $10.0 million to fund pre-marketing activities associated with the launch of
Surfaxin in the United States as we achieved certain milestones.
In
November 2004, we reached an agreement with Quintiles to restructure our
business arrangements and terminate the commercialization agreement for Surfaxin
in the United States. We now have full commercialization rights for Surfaxin in
the United States. Pursuant to the restructuring, Quintiles is no longer
obligated to provide any commercialization services and our obligation to pay a
commission on net sales in the United States of Surfaxin for the treatment of
RDS and MAS to Quintiles has been terminated.
In
connection with obtaining full commercialization rights for Surfaxin, we issued
850,000 warrants to PharmaBio to purchase shares of our common stock at an
exercise price equal to $7.19 per share. The warrants have a 10-year term and
shall be exercisable for cash only with expected total proceeds to us, if
exercised, equal to approximately $6.0 million. We valued the warrants at their
fair value on the date of issuance and incurred a non-cash charge of $4.0
million in connection with the issuance. This charge is a component of Corporate
Partnership Restructuring Charges on the Income Statement that were realized
during the fourth quarter of fiscal year 2004. The existing secured revolving
credit facility of $8.5 million with PharmaBio, will remain available and the
original maturity date of December 10, 2004 is now extended until December 31,
2006. See “Liquidity and Capital Resources”.
Laboratorios
del Dr. Esteve, S.A. (Esteve)
In 1999,
we entered into a corporate partnership with Esteve to develop, market and sell
Surfaxin, primarily in southern Europe. In 2002, we significantly expanded our
relationship with Esteve by entering into a new collaboration arrangement, which
superseded the 1999 agreement, and expanded the territory covered by those
original agreements to all of Europe, Central and South America, and Mexico.
Esteve was obligated to provide certain commercialization services for Surfaxin
for the treatment of RDS in premature infants, MAS in full-term infants and ARDS
in adult patients. Our exclusive supply agreement with Esteve provided that
Esteve would purchase all of its Surfaxin drug product requirements at an
established transfer price based on sales of Surfaxin by Esteve and/or its
sublicensee(s). Esteve also agreed to sponsor certain clinical trial costs
related to obtaining regulatory approval in Europe for ARDS and make certain
milestone payments to us upon the attainment of European marketing regulatory
approval for Surfaxin. In connection with the 2002 expanded agreement, Esteve
purchased 821,862 shares of our common stock at $4.867 per share for $4.0
million in gross proceeds and paid us a non-refundable licensing fee of
$500,000. We have accounted for the license fees and reimbursement of research
and development expenditures associated with the Esteve collaboration as
deferred revenue.
In
December 2004, we reached an agreement with Esteve to restructure our corporate
partnership for the development, marketing and sales of our products in Europe
and Latin America. This restructured partnership supersedes the existing
sublicense and supply agreements we had entered into with Esteve in March 2002.
Under the revised partnership, we have regained full commercialization rights in
key European markets, Central America and South America for SRT, including
Surfaxin for RDS in premature infants and ARDS in adults. Esteve will focus on
Andorra, Greece, Italy, Portugal, and Spain, and now has development and
marketing rights to a broader portfolio of our potential SRT products. Under the
restructured collaboration, Esteve will pay us a transfer price on sales of
Surfaxin and our other Surfactant Replacement Therapies that is increased from
those provided for in our previous collaborative arrangement. We will be
responsible for the manufacture and supply of all of the covered products and
Esteve will be responsible for all sales and marketing in the revised territory.
Esteve has agreed to make stipulated cash payments to us upon our achievement of
certain milestones, primarily upon receipt of marketing regulatory approvals for
the covered products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the revised territory.
In
consideration for regaining commercial rights in the 2004 restructured
partnership, we issued to Esteve 500,000 shares of common stock for no cash
consideration, valued at $3.5 million. We incurred a non-cash charge, including
the value of the shares issued and other costs related to the restructuring, of
$4.1 million. This charge is a component of Corporate Partnership Restructuring
Charges on the Income Statement. We also granted to Esteve rights to additional
potential SRT products in our pipeline. We also agreed to pay to Esteve 10% of
cash up-front and milestone fees that we may receive in connection with any
future strategic collaborations for the development and commercialization of
Surfaxin for RDS, ARDS or certain of our other SRTs in the territory for which
we had previously granted a license to Esteve. Payments to Esteve in respect of
any such up-front and milestone fees are not to exceed $20 million in the
aggregate.
Plan
of Operations
We expect
to continue to incur increasing operating losses for the foreseeable future,
primarily due to our continued research and development activities attributable
to new and existing products, manufacturing, commercialization, and general and
administrative activities.
We
anticipate that during the next 12 to 24 months we will:
(i) |
increase
our research, development and regulatory activities in an effort to
develop a broad pipeline of potential SRT for respiratory diseases. The
drug development, clinical trial and regulatory process is lengthy,
expensive and uncertain and subject to numerous risks including, without
limitation, the following risks discussed in the “Risks Related to Our
Business” - “Our technology platform is based solely on our proprietary,
precision-engineered surfactant technology. Our ongoing clinical trials
for our lead surfactant replacement therapies may be delayed, or fail,
which will harm our business”; - “The clinical trial and regulatory
approval process for our products is expensive and time consuming, and the
outcome is uncertain.” |
Our major
research and development projects include:
SRT
for Neonatal Respiratory Failures
In
addition to Surfaxin for RDS, in an effort to enhance the potential commercial
and medical value of our SRT by addressing the most prevalent respiratory
disorders affecting infants in the NICU, we are conducting several NICU
therapeutic programs targeting respiratory conditions cited as some of the most
significant unmet medical needs for the neonatal community. We are conducting
three Phase 2 clinical trials - Surfaxin for BPD in premature infants,
aerosolized SRT administered through nasal continuous positive airway pressure
(nCPAP) for Neonatal Respiratory Failures, and Surfaxin for the
prophylactic/early treatment of MAS in full term infants.
The Phase
2 BPD clinical trial is a double-blind, controlled trial (that will enroll up to
210 very low birth weight premature infants born at risk for developing BPD) to
determine the safety and tolerability of Surfaxin administration in the first
weeks of life as a therapeutic approach for the prevention of BPD. This study is
designed to determine whether such treatment can decrease the proportion of
infants on mechanical ventilation or oxygen or the incidence of death or BPD.
The results of this trial are expected to be available in the first quarter of
2006.
We are
currently conducting an open label, Phase 2, multicenter pilot study to evaluate
aerosolized SRT delivered via nCPAP in premature infants. This trial will be
conducted at up to four centers in the United States and will enroll
approximately 20 infants with a gestational age of 28-32 weeks who are suffering
from RDS. Patients will receive, in two treatment regimens, aerosolized SRT
delivered via nCPAP within thirty minutes of birth. Our overall program is to
begin with a pilot study to evaluate the safety and tolerability of aerosolized
SRT delivered via our proprietary nCPAP technology, initially within patients
who suffer from RDS followed by additional studies to include other neonatal
respiratory failures within the NICU. Results of this Phase 2 pilot study are
anticipated to be available in the third quarter of 2005.
We are
conducting a Phase 2 clinical trial of our proprietary Surfaxin lavage in
up to 60 full-term infants for use as a prophylactic or early treatment for
patients who are at risk of developing MAS but have not shown symptoms of
compromised respiratory function. Surfaxin is
administered as a liquid bolus through an endotracheal tube as well as by our
proprietary lavage (lung-wash) technique.
SRT
for Critical Care and Hospital indications
In an
effort to enhance the potential commercial and medical value of our SRT, we are
also developing SRT to address unmet respiratory conditions affecting pediatric,
young adult and adult patients in the critical care and other hospital settings.
We are conducting a Phase 2 clinical trial for the treatment of ARDS in adults
in the intensive care unit (ICU), for which we announced preliminary data in
December 2004. Based on that data, the current ARDS Phase 2 protocol was
modified to better establish the endpoint signal in key clinical outcomes in
order to properly power and design a potential Phase 3 clinical trial. The
modified protocol allows for increased enrollment of up to 160 patients. The
remainder of the trial will be comprised of Surfaxin Dose Group B (lavage with
bolus) and Standard of Care. Results of the Phase 2 trial are anticipated to be
available in the first quarter of 2006.
During
2004, we completed a successful Phase 1b clinical trial intended to evaluate the
tolerability and lung deposition of our precision-engineered lung surfactant,
delivered as an inhaled aerosol (development name DSC-104), to treat patients
with asthma and are currently preparing to initiate a follow-on Phase 2 clinical
trial in the fourth quarter of 2005.
In
addition, we are evaluating the development of aerosolized formulations of our
precision-engineered surfactant to potentially treat ALI, COPD, rhinitis,
sinusitis, sleep apnea and otitis media (inner ear infection);
(ii) |
invest
in and support a long-term manufacturing strategy for the production of
our precision-engineered surfactant drug product including: (i) further
development and scale-up of our current contract manufacturer, Laureate;
(ii) corrective measures related to the observations cited by the FDA
concerning
Laureate’s compliance with cGMPs in connection with its review of our NDA
for Surfaxin for the prevention of RDS; (iii) securing additional
manufacturing capabilities to meet production needs as they expand,
including alternative contract manufacturers and building our own
manufacturing facility. We anticipate that our manufacturing capabilities
through Laureate, upon successful completion and implementation of our
cGMP Action Plan dated January 31, 2005, should allow sufficient
commercial production of Surfaxin, if approved, to supply the present
worldwide demand for the treatment of RDS in premature infants and all of
our anticipated clinical-scale production requirements including Surfaxin
for the treatment of ARDS in adults. See “Risks Related to Our Business” -
“In order to conduct our clinical trials we need adequate supplies of our
drug substance and drug product which may not be readily available” and
“If the parties we depend on for manufacturing our pharmaceutical products
do not timely supply these products, it may delay or impair our ability to
develop and market our products”; |
(iii) |
build
our sales and marketing capabilities to execute the launch of Surfaxin in
the U.S., if approved. We are building its own specialty pulmonary United
States sales and marketing organization to focus initially on
opportunities in the NICU and, as products are developed, to expand to
critical care and hospital settings. This strategic initiative, led by the
anticipated launch of Surfaxin, is intended to allow us to fully control
our own sales and marketing operation, establish a strong presence in the
NICU, and optimize company economics; |
(iv) |
implement
our commercialization strategy for Surfaxin in Europe and the rest of the
world through corporate partnerships; and |
(v) |
invest
in additional general and administrative resources primarily to support
our business development initiatives, financial systems and controls and
management information technologies. |
We will
need to generate significant revenues from product sales and or related
royalties and transfer prices to achieve and maintain profitability. Through
December 31, 2004, we had no revenues from any product sales, and have not
achieved profitability on a quarterly or annual basis. Our ability to achieve
profitability depends upon, among other things, our ability to develop products,
obtain regulatory approval for products under development and enter into
agreements for product development, manufacturing and commercialization. In
addition, our results are dependent upon the performance of our strategic
partners and third party contract manufacturers and suppliers. Moreover, we may
never achieve significant revenues or profitable operations from the sale of any
of our products or technologies.
Through
December 31, 2004, we had not generated taxable income. On December 31, 2004,
net operating losses available to offset future taxable income for Federal tax
purposes were approximately $140,652,000. The future utilization of such loss
carryforwards may be limited pursuant to regulations promulgated under Section
382 of the Internal Revenue Code. In addition, we have a research and
development tax credit carryforward of $2,558,000. The Federal net operating
loss and research and development tax credit carryforwards expire beginning in
2008 and continuing through 2023.
Critical
Accounting Policies
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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
We have
identified below some of our more critical accounting policies and changes to
accounting policies. For further discussion of our accounting policies see Note
2 “Summary of Significant Accounting Policies” in the Notes to Consolidated
Financial Statements. See Item 15: “Exhibits and Financial Statement
Schedules.”
Revenue
Recognition- research and development collaborative agreements
For
up-front payments and licensing fees related to our contract research or
technology, we defer and recognize revenue as earned over the life of the
related agreement. Milestone payments are recognized as revenue upon achievement
of contract-specified events and when there are no remaining performance
obligations.
Revenue
earned under our research and development collaborative agreement contracts is
recognized over a number of years as we perform research and development
activities. For up-front payments and licensing fees related to our contract
research or technology, we defer and recognize revenue as earned over the
estimated period in which the services are expected to be
performed.
Research
and Development Costs
Research
and development costs are expensed as incurred. We will continue to incur
research and development costs as we continue to expand our product development
activities. Our research and development costs have included, and will continue
to include, expenses for internal development personnel, supplies and
facilities, clinical trials, regulatory compliance and reviews, validation of
processes and start up costs to establish commercial manufacturing capabilities.
Once a product candidate is approved by the FDA, if at all, and we begin
commercial manufacturing, we will no longer expense certain manufacturing costs
as research and development costs for any such product.
Results
of Operations
The net
loss for the years ended December 31, 2004, 2003 and 2002 were $46,203,000 (or
$1.00 per share), $24,280,000 (or $0.65 per share) and $17,443,000 (or $0.64 per
share), respectively.
Revenue
Revenue
for the years ended December 31, 2004, 2003 and 2002 were $1,209,000, $1,037,000
and $1,782,000, respectively. These revenues are primarily associated with our
corporate partnerships agreement with Esteve to develop, market and sell
Surfaxin in Southern Europe. Additional collaborative revenues relate to our
Small Business Innovative Research (SBIR) grant to develop Surfaxin for ALI and
ARDS in adults and our Orphan Products Development grant to develop Surfaxin for
MAS.
The
increase from 2003 to 2004 reflects revenues associated with our alliance with
Esteve to develop, market and sell Surfaxin in Southern Europe. The decrease
from 2002 to 2003 reflects: (i) the conclusion of our SBIR grant for research
for treatments of ALI and ARDS in adults and our Orphan Products Development
grant to develop Surfaxin for MAS; and (ii) the extension of the amortization
period and related revenue recognition of the funding previously provided to us
in connection with our strategic alliance with Esteve.
Research
and Development Expenses
Research
and development expenses for the years
ended December 31, 2004, 2003 and 2002 were $25,793,000, $19,750,000 and
$14,347,000, respectively.
The
increase in research and development expenses for the years ended December 31,
2004, 2003 and 2002 primarily reflect:
(i) |
manufacturing
activities, including manufacturing personnel costs to support further
development and scale-up of our current contract manufacturer, Laureate
and securing additional manufacturing capabilities to meet production
needs as they expand, including alternative contract manufacturers and
building our own manufacturing facility. Also included in manufacturing
activities are expenses associated with the transfer and validation of our
manufacturing equipment to Laureate (completed in 2004), to support the
production of clinical and commercial drug supply of Surfaxin in
conformance with cGMPs. Expenses related to manufacturing activities were
$7,010,000, $4,268,000 and $834,000 for the years ended December 31, 2004,
2003 and 2002, respectively; |
(ii) |
non-cash
compensation charges associated with stock options granted to certain
employees and non-employees of $832,000, $89,000, and $34,000 for the
years ended December 31, 2004, 2003 and 2002, respectively;
|
(iii) |
development
and regulatory efforts for Surfaxin - primarily the Phase 3 clinical
trials for Surfaxin for the prevention of RDS in premature
infants; |
(iv) |
development
activities, including drug supply, for the Phase 2 clinical trial of
Surfaxin for the treatment of ARDS in adults;
|
(v) |
investment
in our clinical and regulatory capabilities to manage multiple Phase 2 and
anticipated Phase 3 clinical trials for other SRT products in several
geographic areas, including the United States, western and eastern Europe,
and South America; and |
(iv) |
research
and development activities of aerosolized formulations of our SRT
technology. |
General
and Administrative Expenses
General
and administrative expenses for the years ended December 31, 2004, 2003 and 2002
were $13,322,000, $5,722,000 and $5,458,000, respectively. General and
administrative expenses consist primarily of the costs of executive management,
finance and accounting, business and commercial development, pre-launch
commercial sales and marketing, legal, facility and other administrative costs.
The
increase in general and administrative expenses for the years ended December 31,
2004, 2003 and 2002 primarily reflects:
(i) |
commercialization
activities, including building a sales and marketing senior management
team, in anticipation of the launch of Surfaxin for RDS in the United
States and Europe, if approved. Expenses for commercialization activities
were $5,886,000, $986,000 and $1,450,000 for the years ended December 31,
2004, 2003 and 2002, respectively. These commercialization expenses were
financed by use of the secured, revolving credit facility with PharmaBio
in the amounts of $2,693,000, $986,000 and $1,450,000, during the years
ended December 31, 2004, 2003 and 2002, respectively. See “Liquidity and
Capital Resources”; |
(ii) |
non-cash
compensation charges associated with stock options granted to certain
employees and non-employees of $432,000, $119,000, and $368,000 for the
years ended December 31, 2004, 2003 and 2002, respectively;
|
(iii) |
financial
and information technology capabilities in preparation for the potential
approval and launch of Surfaxin for RDS; |
(iv) |
corporate
governance and other regulatory compliance initiatives related to the
Sarbanes-Oxley Act and other recent regulatory changes concerning public
companies generally; and |
(v) |
legal
activities related to the preparation and filing of patents and other
activities associated with our intellectual property in connection with
the expansion of our SRT pipeline. |
Corporate
Partnership Restructuring Charges
In 2004,
we incurred a non-cash charge of $8,126,000 related to the restructuring of our
corporate partnerships with Quintiles and Esteve. There were no such charges in
2003 and 2002.
In
November 2004, we reached an agreement with Quintiles to restructure our
business arrangements and terminate our commercialization agreements for
Surfaxin in the United States. We now have full commercialization rights for
Surfaxin in the United States. Pursuant to the restructuring, Quintiles is no
longer obligated to provide any commercialization services and our obligation to
pay a commission on net sales in the United States of Surfaxin for the treatment
of RDS and MAS to Quintiles has been terminated. See “Corporate Partnership
Agreements”. In connection with obtaining full commercialization rights for
Surfaxin, we issued a warrant to purchase 850,000 shares of our common stock at
an exercise price equal to $7.19 per share, which resulted in a non-cash charge
of $4.0 million.
In
December 2004, we restructured our strategic alliance with Esteve for the
development, marketing and sales of our products in Europe and Latin America.
Under the revised collaboration, we have regained full commercialization rights
in key European markets, Central America and South America for our SRT,
including Surfaxin for RDS in premature infants and ARDS in adults. See
“Corporate Partnership Agreements”. In consideration for regaining commercial
rights in the restructuring, we issued to Esteve 500,000 shares of common stock
for no cash consideration. We incurred a non-cash charge of $3.5 million related
to the shares of common stock issued to Esteve and $0.6 million for other
expenses associated with the restructuring, primarily the reversal of Esteve’s
funding of research and development costs for ARDS under our prior agreement.
Other
Income and (Expense)
Other
income and (expense) for the years ended December 31, 2004, 2003 and 2002 were
$(171,000), $155,000 and $580,000, respectively.
Interest
income for the years ended December 31, 2004, 2003 and 2002 was $711,000,
$452,000, and $724,000, respectively. The
increase from 2003 to 2004 is primarily due to a higher average cash, cash
equivalent and marketable securities balance. The decrease from 2002 to 2003 was
primarily due to a reduction in interest earned on our cash, cash equivalents,
and marketable securities due to a general reduction in earned market interest
rates.
Interest
expense and amortization expense for the years ended December 31, 2004, 2003 and
2002 was $882,000, $297,000, and $144,000, respectively. The increase is
primarily due to interest expense associated with our secured, revolving credit
facility, and capital lease financing arrangements (See “Liquidity and Capital
Resources”) and amortization of premiums associated with our marketable
securities.
Liquidity
and Capital Resources
Cash,
Cash Equivalents and Marketable Securities
As of
December 31, 2004, we had cash, cash equivalents, restricted cash and marketable
securities of $32,654,000 as compared to $29,422,000 as of December 31, 2003.
The increase from December 31, 2003, is primarily due to: (i) an underwritten
public offering with net proceeds of $22,795,000, resulting in the issuance of
2,200,000 shares of common stock; (ii) use of the CEFF resulting in net proceeds
of $7,091,000 and the issuance of 901,742 shares of common stock; (iii)
$4,321,000 received from the exercise of outstanding options and warrants; and
(iv) $5,421,000 from our secured, revolving credit facility and capital lease
financing arrangements. These increases were offset by approximately $35.5
million used in operating activities and purchases of equipment during the
year.
Subsequent
to December 31, 2004, in February 2005, we completed a registered direct
offering of 5,060,000 shares of common stock. The shares were priced at $5.75
per share resulting in our receipt of gross and net proceeds equal to $29.1
million and $27.5 million, respectively.
Committed
Equity Financing Facility (CEFF)
In July
2004, we entered into a CEFF with Kingsbridge, pursuant to which Kingsbridge
committed to finance up to $75,000,000 of capital to support our future growth.
Subject to certain conditions and limitations, from time to time under the CEFF,
we may require Kingsbridge to purchase newly-issued shares of our common stock
at a discount between 6% and 10% of the volume weighted average price of our
common stock and thus raise capital as required, at the time, price and in
amounts deemed suitable to us. In connection with the CEFF, we issued a Class B
Investor warrant to Kingsbridge to purchase up to 375,000 shares of common stock
at an exercise price equal to $12.0744 per share.
In
December 2004, we entered into a financing, pursuant to the CEFF, resulting in
proceeds of $7,200,000 and the issuance of 901,742 shares of common stock at an
average price of $7.98, after taking into account the applicable discount rate
provided for by the CEFF. As of December 31, 2004, $67,800,000 remained
available under the CEFF.
In
connection with a registered public offering that we conducted in February 2005,
we entered into a Placement Agent Agreement with SG Cowen & Co. LLC (SG
Cowen) pursuant to which we agreed not to access funds under the CEFF until May
26, 2005, or in an amount greater than $5 million for an additional 90-day
period thereafter.
Secured,
Revolving Credit Facility and Capital Lease Arrangement
Secured
Credit Facility with Quintiles
We
entered into a collaboration arrangement with Quintiles, in 2001, to provide
certain commercialization services in the United States for Surfaxin for the
treatment of RDS in premature infants and MAS in full-term infants. In
connection with the commercialization agreement, Quintiles extended to us a
secured, revolving credit facility of up to $8.5 to $10.0 million to fund
pre-marketing activities associated with the launch of Surfaxin in the United
States as we achieve certain milestones. We were obligated to use a significant
portion of the funds borrowed under the credit facility for pre-launch marketing
services provided by Quintiles. Principal amounts owed by us under the credit
facility may have been repaid out of the proceeds of milestone payments to be
paid to us by Quintiles upon the achievement of certain corporate milestones.
Interest was payable quarterly in arrears at a rate of 8% annually. Outstanding
principal was originally due on December 10, 2004; however, certain terms and
conditions of the credit facility have been restructured as described
immediately below.
In
November 2004, we restructured our business arrangements with Quintiles and
terminated the commercialization agreement for Surfaxin in the United States. By
virtue of the termination of the commercialization agreements, we are no longer
obligated to use funds advanced under the credit facility for services provided
by Quintiles, and Quintiles is no longer obligated to make milestone payments to
us. The existing secured, revolving credit facility remained available to borrow
up to $8.5 million. The original maturity date of December 10, 2004, was
extended until December 31, 2006. The interest rate remains 8% annually and
payments are due quarterly in arrears. As of December 31, 2004, $5,929,000 was
outstanding under the credit facility, including $3,493,000 used in 2004.
Subsequent to December 31, 2004, in February 2005, we borrowed the remaining
available funds and have an outstanding balance of $8.5 million. Outstanding
principal and interest due under the credit facility are due and payable as a
balloon payment on December 31, 2006.
Capital
Lease Financing Arrangement with GECC
We have a
capital lease financing arrangement with the Life Science and Technology Finance
Division of General Electric Capital Corporation. Under this arrangement, we
purchase capital equipment, including manufacturing, information technology
systems, laboratory, office and other related capital assets and subsequently
finances those purchases through this capital lease financing arrangement. The
arrangement was originally for financing of up to $1,000,000 with an interest
rate of 12.50% per annum. In 2003, the arrangement was expanded to provide,
subject to certain conditions, up to an aggregate of $4,000,000 in financing for
capital purchases with an interest rate of 9.50% per annum for all lab and
manufacturing equipment and 10.50% per annum on all other equipment. In 2004,
the arrangement was once again expanded to provide, subject to certain
conditions, up to $6.5 million in addition to the $2.5 million outstanding at
that time, for total available financing of up to $9.0
million.
Under the
terms of the expanded financing arrangement, $5.0 million of the $6.5 million
increase is immediately available to us with the remaining $1.5 million subject
to FDA approval to market our lead product, Surfaxin, for the prevention of RDS
in premature infants. The funds may be drawn down through September 2005. Laboratory
and manufacturing equipment is leased over 48 months with an interest rate equal
to 9.39% per annum and all other equipment is leased over 36 months with an
interest rate equal to 9.63% per annum. As of
December 31, 2004, we had used $3,042,000 of the financing available under the
line of credit and, after giving effect to principal payments, $2,454,000 was
outstanding.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania and California.
We
maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594
square feet and serves as the main operating facility for clinical development,
regulatory, sales and marketing, and administration. The lease expires in
February 2010 with total aggregate payments of $4.6 million.
We also
lease approximately 18,000 square feet of office and laboratory space in
Doylestown, Pennsylvania. We intend to maintain a portion of the Doylestown
facility for the continuation of analytical laboratory activities and sublease
the remaining portions to the greatest extend possible. To the extent that
subleasing is not possible, the leases will expire according to their terms. The
leases expire in March 2005 and August 2005.
We lease
office and laboratory space in Mountain View, California. The facility is 16,800
square feet and houses our aerosol development operations. The lease expires in
June 2008 with total aggregate payments of $804,000.
Prior to
the Mountain View facility, we leased office and laboratory space in Redwood
City, California. The facility was approximately 5,000 square feet and housed
our aerosol development operations. In December 2004, we vacated the Redwood
City facility and moved to the Mountain View facility. In February 2005, the
sublease agreement for the Redwood City facility was terminated.
Working
Capital
We
believe our current working capital, including the net proceeds from the
February 2005 registered direct public offering, is sufficient to meet our
planned activities into 2006, before taking into account any amounts that may be
available through use of the CEFF. In connection with a registered public
offering that we conducted in February 2005, we entered into a Placement Agent
Agreement with SG Cowen pursuant to which we agreed not to offer to sell any
additional shares of our common stock until May 29, 2005 without the consent of
SG Cowen, subject to certain exceptions. Pursuant to the Placement Agent
Agreement, we also agreed to not access funds under the CEFF until May 26, 2005,
or in an amount greater than $5 million for an additional 90-day period
thereafter.
We will
need additional financing from investors or collaborators to complete research
and development and commercialization of our current product candidates under
development. Our
working capital requirements will depend upon numerous factors, including,
without limitation, the progress of our research and development programs,
clinical trials, timing and cost of obtaining regulatory approvals, timing and
cost of sales and marketing activities, levels of resources that we devote to
the development of manufacturing and marketing capabilities, technological
advances, status of competitors, our ability to establish collaborative
arrangements with other organizations, the ability to defend and enforce our
intellectual property rights and the establishment of additional strategic or
licensing arrangements with other companies or acquisitions.
Historically,
our working capital has been provided from the proceeds of private financings
and strategic alliances:
December
2003 Shelf Registration Statement
In 2003,
we filed a shelf registration statement with the SEC for the proposed offering
from time to time of up to an aggregate 6,500,000 shares of our common stock. In
February 2005, we amended the original shelf registration statement, increasing
the shares available by 1,468,592 shares.
In April
2004, we completed an underwritten registered direct public offering of
2,200,000 million shares of common stock priced at $11.00 per share pursuant to
the shelf registration statement, resulting in gross and net proceeds of $24.2
million and $22.8 million, respectively. As of December 31, 2004, we had
4,300,000 shares reserved for issuance under the shelf registration statement
which does not take into account the amendment thereto that we filed in February
2005
In
February 2005, we completed a registered
direct public offering of 5,060,000 shares of our common stock. The shares were
priced at $5.75 per share resulting in our receipt of gross and net proceeds
equal to $29.1 million and $27.5 million, respectively. There are currently
708,592 shares reserved for potential future issuance under the shelf
registration statement, as amended.
Committed
Equity Financing Facility (CEFF)
In
December 2004, we entered into a financing pursuant to the CEFF resulting in
proceeds of $7.2 million from the issuance of 901,742 shares at an average price
of $7.98, after taking into account the applicable discount rate provided
for by the CEFF. Currently, there is up to $67.8 million available under the
CEFF, subject to the conditions and limitations thereof and the terms of the
Placement Agent Agreement with SG Cowen.
Other
Financing Transactions
In June
and July 2003, our common stock attained certain price performance thresholds on
the Nasdaq SmallCap Market that permitted us to redeem (and thereby effectively
compel the exercise thereof) three of our outstanding classes of warrants which
represented, in aggregate, the right to purchase approximately 3.6 million
shares of common stock. Such warrants (i.e., the Class I, Class F and Class C
warrants) were previously issued by us in connection with certain private
placement financings that occurred in November 2002, October 2001, and April
1999, respectively. These warrants were exercised, in accordance with their
respective terms, either cashlessly or for cash, resulting in the issuance to
the holders of approximately 3.3 million shares of common stock and our receipt
of aggregate cash proceeds of $6.1 million.
In June
2003, we completed the sale of securities in a private placement to selected
institutional and accredited investors for net proceeds of approximately
$26,100,000. We issued 4,997,882 shares of common stock and 999,577 Class A
Investor Warrants to purchase shares of common stock at an exercise price equal
to $6.875 per share. The Class A Investor Warrants have a seven-year
term.
In
November 2002, we received approximately $11.9 million in net proceeds from the
sale of 6,397,517 shares of Common Stock and 2,878,883 Class I Warrants to
purchase shares of Common Stock at an exercise price of $2.425 per share. In
connection with this private placement, the placement agent received fees of
approximately $766,000. The Class I Warrants had a five-year term and we were
entitled to redeem the Class I Warrants upon the attainment of certain price
performance thresholds of the common stock. In June 2003, the price performance
criteria was met and all of the Class I Warrants were redeemed, resulting in
2,506,117 shares issued and proceeds of approximately $4.3 million.
We will
require substantial additional funding to conduct our business, including our
expanded research and product development activities. Based on our current
operating plan, we believe that our currently available resources, including
amounts that may be available under our revolving credit facility with
PharmaBio, our CEFF with Kingsbridge and our capital lease financing arrangement
with General Electric Capital Corporation, will be adequate to satisfy our
capital needs into 2006. Our future capital requirements will depend on the
results of our research and development activities, clinical studies and trials,
competitive and technological advances and the regulatory process. Our
operations will not become profitable before we exhaust our current resources;
therefore, we will need to raise substantial additional funds through additional
debt or equity financings or through collaborative ventures with potential
corporate partners. We may in some cases elect to develop products on our own
instead of entering into collaboration arrangements and this would increase our
cash requirements. Other than our revolving credit facility with PharmaBio, our
CEFF with Kingsbridge and our capital lease financing arrangement with General
Electric Capital Corporation, we have not entered into any additional
arrangements to obtain additional financing. The sale of additional equity and
debt securities may result in additional dilution to our shareholders, and we
cannot be certain that additional financing will be available in amounts or on
terms acceptable to us, if at all. If we fail to enter into collaborative
ventures or to receive additional funding, we may have to reduce significantly
the scope of or discontinue our planned research, development and
commercialization activities, which could significantly harm our financial
condition and operating results. Furthermore, we could cease to qualify for
listing of our common stock on the NASDAQ National Market if the market price of
our common stock declines as a result of the dilutive aspects of such potential
financings. See “Risks
Related to Our Business - “We will need additional capital, and our ability to
continue all of our existing planned research and development activities is
uncertain. Any additional financing could result in equity dilution”; “ - The
market price of our stock may be adversely affected by market volatility”; and “
- - A substantial number of our securities are eligible for future sale and this
could affect the market price for our stock and our ability to raise
capital.”
Contractual
Obligations
Our
long-term contractual obligations include commitments and estimated purchase
obligations entered into in the normal course of business.
Payments
due under contractual obligations at December 31, 2004 are as
follows:
(Dollars
in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009
|
|
Thereafter |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility with corporate partner (1) |
|
$ |
— |
|
$ |
5,929 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
5,929 |
|
Capital
lease obligations (1) |
|
|
1,073 |
|
|
886 |
|
|
747 |
|
|
225 |
|
|
— |
|
|
— |
|
|
2,931 |
|
Operating
lease obligations (2) |
|
|
1,214 |
|
|
1,161 |
|
|
1,193 |
|
|
1,078 |
|
|
957 |
|
|
160 |
|
|
5,763 |
|
Purchase
obligations (3) |
|
|
4,947 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,947 |
|
Employment
agreements (3) |
|
|
2,203 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
2,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,437 |
|
$ |
7,976 |
|
$ |
1,940 |
|
$ |
1,303 |
|
$ |
957 |
|
$ |
160 |
|
$ |
21,773 |
|
(1) |
See
Item 7: “Management’s
Discussion and Analysis of Financial Condition and Operations - Liquidity
and Capital Resources - Secured Revolving Credit Facility and Capital
Lease Arrangement”. |
(2) |
See
Item 7: “Management’s
Discussion and Analysis of Financial Condition and Operations - Liquidity
and Capital Resources - Lease Agreements”. |
(3) |
See discussion below. |
Our
purchase obligations include commitments entered in the ordinary course of
business, primarily commitments to purchase manufacturing equipment and services
for the enhancement of our manufacturing capabilities for Surfaxin and sales and
marketing services related to the potential launch of Surfaxin in the United
States.
Employment
Agreements
On
December 31, 2004, we had employment agreements with eight officers providing
for an aggregate annual salary of $2,203,000. The agreements expire in December
2005. However, commencing on January 1, 2006, and on each January 1st
thereafter, the term of each agreement shall automatically be extended for one
additional year, unless at least 90 days prior to such January 1st date, either
we or the respective officer that is a party thereto shall have given notice
that any such extension is not desired. All of the foregoing agreements provide
for the issuance of annual bonuses and the granting of options subject to
approval by the Board of Directors. In addition, the employment agreements
contain severance arrangements providing for, in certain circumstances, cash
payments, equity benefits and the continuation of certain other employee
benefits.
In
addition to the contractual obligations above, we have certain milestone payment
obligations, aggregating $2,500,000, and royalty payment obligations to Ortho
Pharmaceutical, Inc. related to our product licenses. To date, we have paid
$450,000 with respect to such milestones.
Risks
Related to Our Business
The
following risks, among others, could cause our actual results, performance,
achievements or industry results to differ materially from those expressed in
our forward-looking statements contained herein and presented elsewhere by
management from time to time.
Because
we are a biopharmaceutical company, we may not successfully develop and market
our products, and even if we do, we may not generate enough revenue or become
profitable.
We are a
biopharmaceutical company, therefore, you must evaluate us in light of the
uncertainties and complexities present in such companies. We currently have no
products approved for marketing and sale and are conducting research and
development on our product candidates. As a result, we have not begun to market
or generate revenues from the commercialization of any of our products. Our
long-term viability will be impaired if we are unable to obtain regulatory
approval for, or successfully market, our product candidates.
To date,
we have only generated revenues from investments, research grants and
collaborative research and development agreements. We will need to engage in
significant, time-consuming and costly research, development, pre-clinical
studies, clinical testing and regulatory approval for our products under
development prior to their commercialization. In addition, pre-clinical or
clinical studies may show that our products are not effective or safe for one or
more of their intended uses. We may fail in the development and
commercialization of our products. As of December 31, 2004, we have an
accumulated deficit of approximately $143 million and we expect to continue to
incur significant increasing operating losses over the next several years. If we
succeed in the development of our products, we still may not generate sufficient
or sustainable revenues or we may not be profitable.
Our
precision-engineered surfactant platform technology is based on the scientific
rationale of SRT to treat life threatening respiratory disorders and as the
foundation for the development of novel respiratory therapies and products. Our
business is dependent upon the successful development and approval of our
product candidates based on this platform technology. Recently, we completed and
filed an NDA with the FDA and an MAA with the EMEA based on results from a
pivotal Phase 3 clinical trial and supportive Phase 3 clinical trial with our
lead product, Surfaxin, for the prevention of RDS in premature infants. In
addition, we are conducting a Phase 2 clinical trial for the treatment of ARDS
in adults and a Phase 2 trial for the prevention of MAS in full-term infants. We
are preparing for the initiation of a Phase 2 clinical trial using aerosolized
SRT via nCPAP to potentially treat premature infants in the NICU suffering from
neonatal respiratory failures, a Phase 2 clinical trial using Surfaxin for the
prevention of BPD, and a Phase 2 trial using DSC-104 to treat patients with
moderate to severe asthma.
Companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after obtaining promising results in
earlier trials. Data obtained from tests are susceptible to varying
interpretations which may delay, limit or prevent regulatory approval. In
addition, we may be unable to enroll patients quickly enough to meet our
expectations for completing any or all of these trials. The timing and
completion of current and planned clinical trials of our product candidates
depend on, among other factors, the rate at which patients are enrolled, which
is a function of many factors, including:
— |
the
number of clinical sites; |
— |
the
size of the patient population; |
— |
the
proximity of patients to the clinical sites; |
— |
the
eligibility criteria for the study; |
— |
the
existence of competing clinical trials; and |
— |
the
existence of alternative available products. |
Delays in
patient enrollment in clinical trials may occur, which would likely result in
increased costs, program delays or both.
If
the parties we depend on for manufacturing our pharmaceutical products do not
timely supply these products, it may delay or impair our ability to develop and
market our products.
We rely
on outside manufacturers for our drug substance and other active ingredients for
Surfaxin and to produce material that meets appropriate standards for use in
clinical studies of our products. Presently, Laureate is our sole clinical
manufacturing facility that has been qualified to produce appropriate clinical
grade material of our drug product for use in our ongoing clinical studies.
In
January 2005, the FDA issued an inspection report (Form FDA-483) to Laureate,
citing certain observations concerning Laureate’s compliance with current cGMPs
in connection with the FDA’s review of our NDA for Surfaxin for the prevention
of RDS in premature infants. The general focus of the inspection observations
relates to basic quality controls, process assurances and documentation
requirements to support the commercial production process. In response, a cGMP
Action Plan was submitted to the FDA on January 31, 2005, outlining corrective
measures anticipated to be completed by July 2005. Assuming the adequacy of such
corrective actions and the approval of our NDA for Surfaxin, we anticipate that
the commercial launch of Surfaxin will occur in the fourth quarter of 2005. We
anticipate that our manufacturing capabilities through Laureate, upon successful
completion and implementation of our Action Plan should allow sufficient
commercial production of Surfaxin, if approved, to supply the present worldwide
demand for the treatment of RDS in premature infants and our other Surfactant
Replacement Therapies for our planned clinical trials. If the FDA does not
accept the cGMP Action Plan, or we or Laureate do not adequately address the
initiatives set forth therein, the FDA may delay its approval of our NDA for
Surfaxin or reject our NDA. Any delay in the approval of the NDA, or the
rejection thereof, will have a material adverse effect on our
business.
Laureate
or other outside manufacturers may not be able to (i) produce our drug substance
or drug product to appropriate standards for use in clinical studies, (ii)
comply with remediation activities set forth in the cGMP Action Plan (iii)
perform under any definitive manufacturing agreements with us or (iv) remain in
the contract manufacturing business for a sufficient time to successfully
produce and market our product candidates. If we do not maintain important
manufacturing relationships, we may fail to find a replacement manufacturer or
develop our own manufacturing capabilities which could delay or impair our
ability to obtain regulatory approval for our products and substantially
increase our costs or deplete profit margins, if any. If we do find replacement
manufacturers, we may not be able to enter into agreements with them on terms
and conditions favorable to us and, there could be a substantial delay before a
new facility could be qualified and registered with the FDA and foreign
regulatory authorities.
We may in
the future elect to manufacture some of our products on our own. Although we own
certain specialized manufacturing equipment, are considering an investment in
additional manufacturing equipment and employ certain manufacturing managerial
personnel, we do not presently maintain a complete manufacturing facility and we
do not anticipate manufacturing on our own any of our products during the next
12 months. If we decide to manufacture products on our own and do not
successfully develop manufacturing capabilities, it will adversely affect sales
of our products.
The FDA
and foreign regulatory authorities require manufacturers to register
manufacturing facilities. The FDA and corresponding foreign regulators also
inspect these facilities to confirm compliance with cGMPs or similar
requirements that the FDA or corresponding foreign regulators establish.
Contract manufacturers may face manufacturing or quality control problems
causing product production and shipment delays or a situation where the
contractor may not be able to maintain compliance with the FDA’s cGMP
requirements, or those of comparable foreign regulatory authorities, necessary
to continue manufacturing our drug substance. Any failure to comply with cGMP
requirements or other FDA and comparable foreign regulatory requirements could
adversely affect our clinical research activities and our ability to market and
develop our products. See also “Risks Related to Our Business - In order to
conduct our clinical trials we need adequate supplies of our drug substance and
drug product, which may not be readily available.”
In
order to conduct our clinical trials we need adequate supplies of our drug
substance and drug product, which may not be readily
available.
To
succeed, clinical trials require adequate supplies of drug substance and drug
product, which may be difficult or uneconomical to procure or manufacture. We
rely on third party contract manufacturers for our drug substance and other
active ingredients for Surfaxin and to produce material that meets appropriate
standards for use in clinical trials of our products. Laureate, our contract
manufacturer, may not be able to produce Surfaxin to appropriate standards for
use in clinical studies. Manufacturing or quality control problems have already
and may again occur at Laureate or our other contract manufacturers, causing
production and shipment delays or a situation where the contractor may not be
able to maintain compliance with the FDA’s cGMP requirements necessary to
continue manufacturing our ingredients or drug product. If any such suppliers or
manufacturers of our products fail to comply with cGMP requirements or other FDA
and comparable foreign regulatory requirements, it could adversely affect our
clinical research activities and our ability to market and develop our products.
See also “Risks Related to Our Business - If the parties we depend on for
manufacturing our pharmaceutical products do not timely supply these products,
it may delay or impair our ability to develop and market our
products.”
We
will need additional capital and our ability to continue all of our existing
planned research and development activities is uncertain. Any additional
financing could result in equity dilution.
We will
need substantial additional funding to conduct our presently planned research
and product development activities. Based on our current operating plan, we
believe that our currently available financial resources will be adequate to
satisfy our capital needs into the second half of 2005. Our future capital
requirements will depend on a number of factors that are uncertain, including
the results of our research and development activities, clinical studies and
trials, competitive and technological advances and the regulatory process, among
others. We will likely need to raise substantial additional funds through
collaborative ventures with potential corporate partners and through additional
debt or equity financings. We may also continue to seek additional funding
through capital lease transactions. We may in some cases elect to develop
products on our own instead of entering into collaboration arrangements. This
would increase our cash requirements for research and development.
We have
not entered into arrangements to obtain any additional financing, except for the
CEFF with Kingsbridge, our revolving credit facility with PharmaBio
and our capital equipment lease financing arrangement with GECC. In
connection with a registered public offering that we conducted in February 2005,
we entered into a Placement Agent Agreement with SG Cowen pursuant to which we
agreed not to offer to sell any additional shares of our common stock until May
29, 2005 without the consent of SG Cowen, subject to certain exceptions.
Pursuant to the Placement Agent Agreement, we also agreed to not access funds
under the CEFF until May 26, 2005, or in an amount greater than $5 million for
an additional 90-day period thereafter. Any additional financing could include
unattractive terms or result in significant dilution of stockholders’ interests
and share prices may decline. If we fail to enter into collaborative ventures or
to receive additional funding, we may have to delay, scale back or discontinue
certain of our research and development operations, and consider licensing the
development and commercialization of products that we consider valuable and
which we otherwise would have developed ourselves. If we are unable to raise
required capital, we may be forced to limit many, if not all, of our research
and development programs and related operations, curtail commercialization of
our product candidates and, ultimately, cease operations. See “Risks
Related to Our Business - Our Committed Equity Financing Facility may have a
dilutive impact on our stockholders”.
Furthermore,
we could cease to qualify for listing of our securities on the NASDAQ National
Market if the market price of our common stock declines as a result of the
dilutive aspects of such potential financings. See “Risks
Related to Our Business - The market price of our stock may be adversely
affected by market volatility”.
Our
Committed Equity Financing Facility may have a dilutive impact on our
stockholders.
There are
14,473,000 shares of our common stock that are reserved for issuance under the
CEFF arrangement with Kingsbridge, 375,000 of which are issuable under the
warrant we granted to Kingsbridge. The issuance of shares of our common stock
under the CEFF and upon exercise of the warrant will have a dilutive impact on
our other stockholders and the issuance or even potential issuance of such
shares could have a negative effect on the market price of our common stock. In
addition, if we access the CEFF, we will issue shares of our common stock to
Kingsbridge at a discount of between 6% and 10% of the daily volume weighted
average price of our common stock during a specified period of trading days
after we access the CEFF. Issuing shares at a discount will further dilute the
interests of other stockholders.
To the
extent that Kingsbridge sells shares of our common stock issued under the CEFF
to third parties, our stock price may decrease due to the additional selling
pressure in the market. The perceived risk of dilution from sales of stock to or
by Kingsbridge may cause holders of our common stock to sell their shares, or it
may encourage short sales of our common stock or either similar transactions.
This could contribute to a decline in the stock price of our common
stock.
We may
not be able to meet the conditions we are required to meet under CEFF and we may
not be able to access any portion of the remaining $67.8 million available under
the CEFF. In addition, we are dependent upon the financial ability of
Kingsbridge to fund the CEFF. Any failure by Kingsbridge to perform its
obligations under the CEFF could have a material adverse effect upon us.
The
clinical trial and regulatory approval process for our products is expensive and
time consuming, and the outcome is uncertain.
In order
to sell Surfaxin and our other products that are under development, we must
receive regulatory approvals for each product. The FDA and comparable agencies
in foreign countries extensively and rigorously regulate the testing,
manufacture, distribution, advertising, pricing and marketing of drug products
like our products. This approval process includes preclinical studies and
clinical trials of each pharmaceutical compound to establish the safety and
effectiveness of each product and the confirmation by the FDA and comparable
agencies in foreign countries that the manufacturer of the product maintains
good laboratory and manufacturing practices during testing and manufacturing.
Although we are involved in certain late-stage clinical trials, pharmaceutical
and biotechnology companies have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier clinical trials or in
preliminary findings for such clinical trials. Further, even if favorable
testing data is generated by clinical trials of drug products, the FDA or EMEA
may not accept or approve an NDA or MAA filed by a pharmaceutical or
biotechnology company for such drug product. On April 13, 2004, we filed an NDA
for Surfaxin for the prevention of RDS in premature infants. The FDA accepted
the NDA filing and in February 2005 we received an Approvable Letter from the
FDA with respect to our NDA. The Approvable Letter contains conditions that we
must meet prior to obtaining final U.S. marketing approval for Surfaxin. The
conditions that we must meet primarily involve finalizing labeling and
correcting previously reported manufacturing issues, however, the FDA might
still reject the NDA. We have also submitted an MAA with the EMEA for clearance
to market Surfaxin for the prevention and treatment of RDS in premature infants.
The EMEA has validated the MAA indicating that the application is complete and
that the review process has begun. However, the EMEA may not complete the review
or may reject the MAA.
The
approval process is lengthy, expensive and uncertain. It is also possible that
the FDA or comparable foreign regulatory authorities could interrupt, delay or
halt any one or more of our clinical trials for any of our product candidates.
If we, or any regulatory authorities, believe that trial participants face
unacceptable health risks, any one or more of our trials could be suspended or
terminated. We also may not reach agreement with the FDA and/or comparable
foreign agencies on the design of any one or more of the clinical studies
necessary for approval. Conditions imposed by the FDA and comparable agencies in
foreign countries on our clinical trials could significantly increase the time
required for completion of such clinical trials and the costs of conducting the
clinical trials. Data obtained from clinical trials are susceptible to varying
interpretations which may delay, limit or prevent regulatory
approval.
Delays
and terminations of the clinical trials we conduct could result from
insufficient patient enrollment. Patient enrollment is a function of several
factors, including the size of the patient population, stringent enrollment
criteria, the proximity of the patients to the trial sites, having to compete
with other clinical trials for eligible patients, geographical and geopolitical
considerations and others. Delays in patient enrollment can result in greater
costs and longer trial timeframes. Patients may also suffer adverse medical
events or side effects that are common to this class of drug such as a decrease
in the oxygen level of the blood upon administration.
Clinical
trials generally take two to five years or more to complete, and, accordingly,
our first product is not expected to be commercially available in the United
States until at least the first quarter of 2006, and our other product
candidates will take longer. The FDA has notified us that two of our intended
indications for our precision-engineered surfactant-based therapy, MAS in
full-term infants and ARDS in adults, have been granted designation as
“fast-track” products under provisions of the Food and Drug Administration
Modernization Act of 1997. The FDA has also granted us Orphan Drug Designation
for three of our intended indications for Surfaxin: ARDS in adults; RDS in
infants; and MAS in full-term infants. To support our development of Surfaxin
for the treatment of MAS, the FDA has awarded us an Orphan Products Development
Grant. Fast-Track Status does not accelerate the clinical trials nor does it
mean that the regulatory requirements are less stringent. The Fast-Track Status
provisions are designed to expedite the FDA’s review of new drugs intended to
treat serious or life-threatening conditions. The FDA generally will review the
New Drug Application for a drug granted Fast-Track Status within six months
instead of the typical one to three years.
The EMEA
has granted Orphan Medicinal Product designation for three of our intended
indications for Surfaxin; RDS in premature infants, MAS in full-term infants and
ALI in adults.
Our
products may not, however, continue to qualify for expedited review and our
other drug candidates may fail to qualify for fast track development or
expedited review. Even though some of our drug candidates have qualified for
expedited review, the FDA may not approve them at all or any sooner than other
drug candidates that do not qualify for expedited review.
The FDA
and comparable foreign agencies could withdraw any approvals we obtain, if any.
Further, if there is a later discovery of unknown problems or if we fail to
comply with other applicable regulatory requirements at any stage in the
regulatory process, the FDA may restrict or delay our marketing of a product or
force us to make product recalls. In addition, the FDA could impose other
sanctions such as fines, injunctions, civil penalties or criminal prosecutions.
To market our products outside the United States, we also need to comply with
foreign regulatory requirements governing human clinical trials and marketing
approval for pharmaceutical products. The FDA and foreign regulators have not
yet approved any of our products under development for marketing in the United
States or elsewhere. If the FDA and other regulators do not approve our
products, we will not be able to market our products.
Our
strategy, in many cases, is to enter into collaboration agreements with third
parties with respect to our products and we may require additional collaboration
agreements. If we fail to enter into these agreements or if we or the third
parties do not perform under such agreements, it could impair our ability to
commercialize our products.
Our
strategy for the completion of the required development and clinical testing of
our products and for the manufacturing, marketing and commercialization of our
products, in many cases, depends upon entering into collaboration arrangements
with pharmaceutical companies to market, commercialize and distribute our
products. We have a collaboration arrangement with Esteve for Surfaxin and
certain other of our product candidates that is focused on key Southern European
markets. Esteve will be responsible for the marketing of Surfaxin for the
prevention/treatment of RDS in premature infants, MAS in full-term infants and
ALI/ARDS in adults. Esteve will also be responsible for the sponsorship of
certain clinical trial costs related to obtaining EMEA approval for
commercialization of Surfaxin in Europe for the indications of ALI/ARDS. We will
be responsible for the remainder of the regulatory activities relating to
Surfaxin, including with respect to EMEA filings.
If Esteve
or us breach or terminate the agreements that make up such collaboration
arrangements or Esteve otherwise fails to conduct their Surfaxin-related
activities in a timely manner or if there is a dispute about their obligations,
we may need to seek other partners or we may have to develop our own internal
sales and marketing capability for the indications of Surfaxin which Esteve.
Accordingly, we may need to enter into additional collaboration agreements and
our success, particularly outside of the United States, may depend upon
obtaining additional collaboration partners. In addition, we may depend on our
partners’ expertise and dedication of sufficient resources to develop and
commercialize our proposed products. We may, in the future, grant to
collaboration partners rights to license and commercialize pharmaceutical
products developed under collaboration agreements. Under these arrangements, our
collaboration partners may control key decisions relating to the development of
the products. The rights of our collaboration partners would limit our
flexibility in considering alternatives for the commercialization of our
products. If we fail to successfully develop these relationships or if our
collaboration partners fail to successfully develop or commercialize any of our
products, it may delay or prevent us from developing or commercializing our
products in a competitive and timely manner and would have a material adverse
effect on the commercialization of Surfaxin. See “Risks Related to Our Business
- - We currently have a limited sales and marketing team and, therefore, must
develop a sales and marketing team or enter into distribution arrangements and
marketing alliances, which could require us to give up rights to our product
candidates. Our limited sales and marketing experience may restrict our success
in commercializing our product candidates.”
If
we cannot protect our intellectual property, other companies could use our
technology in competitive products. If we infringe the intellectual property
rights of others, other companies could prevent us from developing or marketing
our products.
We seek
patent protection for our drug candidates so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend in part on our ability and that
of parties from whom we license technology to:
— |
defend
our patents and otherwise prevent others from infringing on our
proprietary rights; |
— |
protect
trade secrets; and |
— |
operate
without infringing upon the proprietary rights of others, both in the
United States and in other countries. |
The
patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved. To date, the United States Patent and Trademark
Office has not adopted a consistent policy regarding the breadth of claims that
the United States Patent and Trademark Office allows in biotechnology patents or
the degree of protection that these types of patents afford. As a result, there
are risks that we may not develop or obtain rights to products or processes that
are or may seem to be patentable.
Even
if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us.
We, and
the parties licensing technologies to us, have filed various United States and
foreign patent applications with respect to the products and technologies under
our development, and the United States Patent and Trademark Office and foreign
patent offices have issued patents with respect to our products and
technologies. These patent applications include international applications filed
under the Patent Cooperation Treaty. Our pending patent applications, those we
may file in the future or those we may license from third parties may not result
in the United States Patent and Trademark Office or foreign patent office
issuing patents. Also, if patent rights covering our products are not
sufficiently broad, they may not provide us with sufficient proprietary
protection or competitive advantages against competitors with similar products
and technologies. Furthermore, if the United States Patent and Trademark Office
or foreign patent offices issue patents to us or our licensors, others may
challenge the patents or circumvent the patents, or the patent office or the
courts may invalidate the patents. Thus, any patents we own or license from or
to third parties may not provide any protection against
competitors.
Furthermore,
the life of our patents is limited. We have licensed a series of patents from
Johnson & Johnson and its wholly owned subsidiary, Ortho Pharmaceutical
Corporation, which are important, either individually or collectively, to our
strategy of commercializing our surfactant technology. Such patents, which
include relevant European patents, expire on various dates beginning in 2009 and
ending in 2017 or, in some cases, possibly later. We have filed, and when
possible and appropriate, will file, other patent applications with respect to
our products and processes in the United States and in foreign countries. We may
not be able to develop additional products or processes that will be patentable
or additional patents may not be issued to us. See also “Risks Related to Our
Business - If we cannot meet requirements under our license agreements, we could
lose the rights to our products.”
Intellectual
property rights of third parties could limit our ability to market our
products.
Our
commercial success also significantly depends on our ability to operate without
infringing the patents or violating the proprietary rights of others. The United
States Patent and Trademark Office keeps United States patent applications
confidential while the applications are pending. As a result, we cannot
determine which inventions third parties claim in pending patent applications
that they have filed. We may need to engage in litigation to defend or enforce
our patent and license rights or to determine the scope and validity of the
proprietary rights of others. It will be expensive and time consuming to defend
and enforce patent claims. Thus, even in those instances in which the outcome is
favorable to us, the proceedings can result in the diversion of substantial
resources from our other activities. An adverse determination may subject us to
significant liabilities or require us to seek licenses that third parties may
not grant to us or may only grant at rates that diminish or deplete the
profitability of the products to us. An adverse determination could also require
us to alter our products or processes or cease altogether any related research
and development activities or product sales.
If
we cannot meet requirements under our license agreements, we could lose the
rights to our products.
We depend
on licensing agreements with third parties to maintain the intellectual property
rights to our products under development. Presently, we have licensed rights
from Johnson & Johnson and Ortho Pharmaceutical. These agreements require us
to make payments and satisfy performance obligations in order to maintain our
rights under these licensing agreements. All of these agreements last either
throughout the life of the patents, or with respect to other licensed
technology, for a number of years after the first commercial sale of the
relevant product.
In
addition, we are responsible for the cost of filing and prosecuting certain
patent applications and maintaining certain issued patents licensed to us. If we
do not meet our obligations under our license agreements in a timely manner, we
could lose the rights to our proprietary technology.
Finally,
we may be required to obtain licenses to patents or other proprietary rights of
third parties in connection with the development and use of our products and
technologies. Licenses required under any such patents or proprietary rights
might not be made available on terms acceptable to us, if at all.
We
rely on confidentiality agreements that could be breached and may be difficult
to enforce.
Although
we believe that we take reasonable steps to protect our intellectual property,
including the use of agreements relating to the non-disclosure of confidential
information to third parties, as well as agreements that purport to require the
disclosure and assignment to us of the rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, the agreements can be difficult and costly to enforce. Although we seek to
obtain these types of agreements from our consultants, advisors and research
collaborators, to the extent that they apply or independently develop
intellectual property in connection with any of our projects, disputes may arise
as to the proprietary rights to this type of information. If a dispute arises, a
court may determine that the right belongs to a third party, and enforcement of
our rights can be costly and unpredictable. In addition, we will rely on trade
secrets and proprietary know-how that we will seek to protect in part by
confidentiality agreements with our employees, consultants, advisors or others.
Despite the protective measures we employ, we still face the risk
that:
— |
they
will breach these agreements; |
— |
any
agreements we obtain will not provide adequate remedies for the applicable
type of breach or that our trade secrets or proprietary know-how will
otherwise become known or competitors will independently develop similar
technology; and |
— |
our
competitors will independently discover our proprietary information and
trade secrets. |
We
currently have a limited sales and marketing team and, therefore, must develop a
sales and marketing team or enter into distribution arrangements and marketing
alliances, which could require us to give up rights to our product candidates.
Our limited sales and marketing experience may restrict our success in
commercializing our product candidates.
If we
successfully develop and obtain regulatory approval for Surfaxin and the other
product candidates that we are currently developing, we may: (1) market and sell
them through our sales force, (2) license some of them to large pharmaceutical
companies and/or (3) market and sell them through other arrangements, including
co-promotion arrangements.
We
currently have a limited sales and marketing team and we plan to further develop
our marketing and sales team as we expect to rely primarily on such team to
market Surfaxin in the United States, if Surfaxin is approved by the FDA.
Recruiting, training and retaining qualified sales personnel is therefore
critical to our success. Competition for skilled personnel is intense, and we
may be unable to attract and retain a sufficient number of qualified individuals
to successfully launch Surfaxin. Additionally, we may not be able to provide
adequate incentive to our sales force. Accordingly, we may be unable to
establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for Surfaxin or our other product
candidates.
Developing
a marketing and sales team to market and sell products is a difficult,
significantly expensive and time-consuming process. We have no prior experience
developing a marketing and sales team and may be unsuccessful in our attempt to
do so. If we are unable to develop an internal sales and marketing operation, we
may not be able to increase market awareness and sell our products.
Establishing
the expertise necessary to successfully market and sell Surfaxin, or any other
product, will require a substantial capital investment. We expect to incur
significant expenses in developing our marketing and sales team. Our ability to
make that investment and also execute our current operating plan is dependent on
numerous factors, including, the performance of third party collaborators with
whom we may contract. Accordingly, we may not have sufficient funds to
successfully commercialize Surfaxin or any other potential product in the United
States or elsewhere.
We may
also need to enter into additional co-promotion arrangements with third parties
where our own sales force is neither well situated nor large enough to achieve
maximum penetration in the market. We may not be successful in entering into any
co-promotion arrangements, and the terms of any co-promotion arrangements may
not be favorable to us. In addition, if we enter into co-promotion arrangements
or market and sell additional products directly, we may need to further expand
our sales force and incur additional costs.
We may
also rely on third-party distributors to distribute our products or enter into
marketing alliances to sell our products. We may not be successful in entering
into distribution arrangements and marketing alliances with third parties. Our
failure to successfully develop a marketing and sales team or to enter into
these arrangements on favorable terms could delay or impair our ability to
commercialize our product candidates and could increase our costs of
commercialization. Dependence on distribution arrangements and marketing
alliances to commercialize our product candidates will subject us to a number of
risks, including:
· |
we
may be required to relinquish important rights to our products or product
candidates; |
· |
we
may not be able to control the amount and timing of resources that our
distributors or collaborators may devote to the commercialization of our
product candidates; |
· |
our
distributors or collaborators may experience financial difficulties;
|
· |
our
distributors or collaborators may not devote sufficient time to the
marketing and sales of our products thereby exposing us to potential
expenses in terminating such distribution agreements; and
|
· |
business
combinations or significant changes in a collaborator’s business strategy
may also adversely affect a collaborator’s willingness or ability to
complete its obligations under any
arrangement. |
If we
fail to establish marketing and sales capabilities or fail to enter into
arrangements with third parties in a timely manner or if they fail to perform,
it could adversely affect sales of our products. We and any of our third-party
collaborators must also market our products in compliance with federal, state
and local laws relating to the providing of incentives and inducements.
Violation of these laws can result in substantial penalties. If we are unable to
successfully motivate and expand our marketing and sales force and further
develop our sales and marketing capabilities, or if our distributors fail to
promote our products, we will have difficulty maintaining and increasing the
sales of our products.
We
may be unable to either establish marketing and sales capabilities or enter into
corporate collaborations necessary to successfully commercialize Surfaxin or our
other potential products.
We have
limited experience in marketing or selling pharmaceutical products and have
limited marketing and sales resources. To achieve commercial success for
Surfaxin, or any other approved product, we must either rely upon our limited
marketing and sales force and related infrastructure, or enter into arrangements
with others to market and sell our products. We intend to promote Surfaxin in
the United States through our own dedicated marketing and sales team.
Recruiting, training and retaining qualified sales personnel is therefore
critical to our success. Competition for skilled personnel is intense, and we
may not be able to attract and retain a sufficient number of qualified
individuals to successfully launch Surfaxin. Accordingly, we may be unable to
establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for Surfaxin.
In
addition, establishing the expertise necessary to successfully market and sell
Surfaxin, or any other product, will require a substantial capital investment.
Our ability to make that investment and also execute our current operating plan
and attain profitability by 2006 is dependent on numerous factors, including, as
described above, partnering of clinical programs at opportune times and
continued prudent fiscal management. Accordingly, we may not have the funds to
successfully commercialize Surfaxin or any other potential product in the United
States or elsewhere.
Moreover,
Surfaxin competes, and our product candidates in development are likely to
compete, with products of other companies that currently have extensive and
well-funded marketing and sales operations. Because these companies are capable
of devoting significantly greater resources to their marketing and sales
efforts, our marketing and sales efforts may not compete successfully against
the efforts of these other companies.
We have
also announced our intention to market and sell Surfaxin outside of the United
States through one or more marketing partners upon receipt of approval abroad.
Although our agreement with Esteve provides for collaborative efforts in
directing a global commercialization effort, we have somewhat limited influence
over the decisions made by Esteve or their sublicensees or the resources they
devote to the marketing and distribution of Surfaxin products in their licensed
territory, and Esteve or their sublicensees may not meet their obligations in
this regard. Our marketing and distribution arrangement with Esteve may not be
successful, and we may not receive any revenues from it. Also, we may not be
able to enter into marketing and sales agreements on acceptable terms, if at
all, for Surfaxin in territories not covered by the Esteve agreement, or for any
of our other product candidates.
We
depend upon key employees and consultants in a competitive market for skilled
personnel. If we are unable to attract and retain key personnel, it could
adversely affect our ability to develop and market our
products.
We are
highly dependent upon the principal members of our management team, especially
our Chief Executive Officer, Dr. Capetola, and our directors, as well as our
scientific advisory board members, consultants and collaborating scientists.
Many of these people have been involved in our formation or have otherwise been
involved with us for many years, have played integral roles in our progress and
we believe that they will continue to provide value to us. A loss of any of
these personnel may have a material adverse effect on aspects of our business
and clinical development and regulatory programs.
At December 31, 2004, we had employment agreements with eight officers expiring
in December 2005. However, commencing on January 1, 2006, and on each January
1st thereafter, the term of these agreements shall automatically be extended for
one additional year, unless at least 90 days prior to such January 1st date,
either we or the officer shall have given notice that such party does not wish
to extend the agreement. Although these employment agreements generally provide
for severance payments that are contingent upon the applicable employee’s
refraining from competition with us, the loss of any of these persons’ services
would adversely affect our ability to develop and market our products and obtain
necessary regulatory approvals, and the applicable noncompete provisions can be
difficult and costly to monitor and enforce. Further, we do not maintain key-man
life insurance.
Our
future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel, including marketing and sales staff. We experience intense
competition for qualified personnel, and the existence of non-competition
agreements between prospective employees and their former employers may prevent
us from hiring those individuals or subject us to suit from their former
employers.
While we
attempt to provide competitive compensation packages to attract and retain key
personnel, some of our competitors are likely to have greater resources and more
experience than we have, making it difficult for us to compete successfully for
key personnel.
Our
industry is highly competitive and we have less capital and resources than many
of our competitors, which may give them an advantage in developing and marketing
products similar to ours or make our products obsolete.
Our
industry is highly competitive and subject to rapid technological innovation and
evolving industry standards. We compete with numerous existing companies
intensely in many ways. We intend to market our products under development for
the treatment of diseases for which other technologies and treatments are
rapidly developing and, consequently, we expect new companies to enter our
industry and that competition in the industry will increase. Many of these
companies have substantially greater research and development, manufacturing,
marketing, financial, technological, personnel and managerial resources than we
have. In addition, many of these competitors, either alone or with their
collaborative partners, have significantly greater experience than we do
in:
— |
undertaking
preclinical testing and human clinical trials; |
— |
obtaining
FDA and other regulatory approvals or products;
and |
— |
manufacturing
and marketing products. |
Accordingly,
our competitors may succeed in obtaining patent protection, receiving FDA or
comparable foreign approval or commercializing products before us. If we
commence commercial product sales, we will compete against companies with
greater marketing and manufacturing capabilities who may successfully develop
and commercialize products that are more effective or less expensive than ours.
These are areas in which, as yet, we have limited or no experience. In addition,
developments by our competitors may render our product candidates obsolete or
noncompetitive.
Presently,
there are no approved drugs that are specifically indicated for the prevention
and treatment of MAS in full-term infants or ALI/ARDS in adults. Current therapy
consists of general supportive care and mechanical ventilation.
Four
products, three that are animal-derived and one that is a synthetic, are
specifically approved for the treatment of RDS in premature infants.
Exosurf® is
synthetic and is marketed by GlaxoSmithKline, plc, outside the United States and
contains only phospholipids (the fats normally present in the lungs) and
synthetic organic detergents and no stabilizing protein or peptides. This
product, however, does not contain any surfactant proteins, is not widely used
and its active marketing recently has been discontinued by its manufacturer.
Curosurf® is a
porcine lung extract that is marketed in Europe by Chiesi Farmaceutici S.p.A.,
and in the United States by Dey Laboratories, Inc. Survanta®,
marketed by the Ross division of Abbott Laboratories, Inc., is an extract of
bovine lung that contains the cow version of surfactant protein C. Forest
Laboratories, Inc., markets its calf lung surfactant, Infasurf® in the
United States for the treatment of RDS in premature infants. Although none of
the four approved surfactants for RDS in premature infants is approved for ALI
or ARDS in adults, which are significantly larger markets, there are a
significant number of other potential therapies in development for these
indications that are not surfactant-related. Any of these various drugs or
devices could significantly impact the commercial opportunity for Surfaxin. We
believe that engineered precision-engineered surfactants such as Surfaxin will
be far less expensive to produce than the animal-derived products approved for
the treatment of RDS in premature infants and will have no capability of
transmitting the brain-wasting bovine spongiform encephalopathy (commonly called
“mad-cow disease”) or causing adverse immunological responses in young and older
adults.
We also
face, and will continue to face, competition from colleges, universities,
governmental agencies and other public and private research organizations. These
competitors are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. Some of these technologies may compete directly with the technologies
that we are developing. These institutions will also compete with us in
recruiting highly qualified scientific personnel. We expect that therapeutic
developments in the areas in which we are active may occur at a rapid rate and
that competition will intensify as advances in this field are made. As a result,
we need to continue to devote substantial resources and efforts to research and
development activities.
If
product liability claims are brought against us, it may result in reduced demand
for our products or damages that exceed our insurance
coverage.
The
clinical testing of, marketing and use of our products exposes us to product
liability claims in the event that the use or misuse of those products causes
injury, disease or results in adverse effects. Use of our products in clinical
trials, as well as commercial sale, could result in product liability claims. In
addition, sales of our products through third party arrangements could also
subject us to product liability claims. We presently carry product liability
insurance with coverages of up to $10.0 million per occurrence and $10.0 million
in the aggregate, an amount we consider reasonable and customary relating to our
clinical trials of Surfaxin. However, this insurance coverage includes various
deductibles, limitations and exclusions from coverage, and in any event might
not fully cover any potential claims. We may need to obtain additional product
liability insurance coverage prior to initiating other clinical trials. We
expect to obtain product liability insurance coverage before commercialization
of our proposed products; however, the insurance is expensive and insurance
companies may not issue this type of insurance when we need it. We may not be
able to obtain adequate insurance in the future at an acceptable cost. Any
product liability claim, even one that was not in excess of our insurance
coverage or one that is meritless and/or unsuccessful, could adversely affect
our cash available for other purposes, such as research and development. In
addition, the existence of a product liability claim could affect the market
price of our common stock.
We
expect to face uncertainty over reimbursement and healthcare
reform.
In both
the United States and other countries, sales of our products will depend in part
upon the availability of reimbursement from third party payors, which include
government health administration authorities, managed care providers and private
health insurers. Third party payors are increasingly challenging the price and
examining the cost effectiveness of medical products and services.
Directors,
executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that
you do not consider to be in your best interest.
As of
December 31, 2004, our directors, executive officers, principal stockholders and
affiliated entities beneficially owned, in the aggregate, approximately 16% of
our outstanding voting securities. As a result, if some or all of them acted
together, they would have the ability to exert substantial influence over the
election of our Board of Directors and the outcome of issues requiring approval
by our stockholders. This concentration of ownership may have the effect of
delaying or preventing a change in control of our Company that may be favored by
other stockholders. This could prevent transactions in which stockholders might
otherwise recover a premium for their shares over current market
prices.
The
market price of our stock may be adversely affected by market
volatility.
The
market price of our common stock, like that of many other development stage
pharmaceutical or biotechnology companies, has been and is likely to be
volatile. In addition to general economic, political and market conditions, the
price and trading volume of our stock could fluctuate widely in response to many
factors, including:
— |
announcements
of the results of clinical trials by us or our
competitors; |
— |
adverse
reactions to products; |
— |
governmental
approvals, delays in expected governmental approvals or withdrawals of any
prior governmental approvals or public or regulatory agency concerns
regarding the safety or effectiveness of our
products; |
— |
changes
in the United States or foreign regulatory policy during the period of
product development; |
— |
developments
in patent or other proprietary rights, including any third party
challenges of our intellectual property rights; |
— |
announcements
of technological innovations by us or our
competitors; |
— |
announcements
of new products or new contracts by us or our competitors;
|
— |
actual
or anticipated variations in our operating results due to the level of
development expenses and other factors; |
— |
changes
in financial estimates by securities analysts and whether our earnings
meet or exceed the estimates; |
— |
conditions
and trends in the pharmaceutical and other
industries; |
— |
new
accounting standards; and |
— |
the
occurrence of any of the risks described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Risks Related
to Our Business”. |
Our
common stock is listed for quotation on the NASDAQ National Market. During the
12-month period ended December, 2004, the price of our common stock has ranged
from $5.75 to $13.90. We expect the price of our common stock to remain
volatile. The average daily trading volume in our common stock varies
significantly. For the 12-month period ended December 31, 2004, the average
daily trading volume in our common stock was approximately 505,000 shares and
the average number of transactions per day was approximately 1,600. Our
relatively low average volume and low average number of transactions per day may
affect the ability of our stockholders to sell their shares in the public market
at prevailing prices and a more active market may never develop.
In
addition, we may not be able to continue to adhere to the strict listing
criteria of the National Market. If the common stock were no longer listed on
the National Market, investors might only be able to trade on the Nasdaq
SmallCap Market, in the over-the-counter market in the Pink Sheets® (a
quotation medium operated by the National Quotation Bureau, LLC) or on the OTC
Bulletin Board® of the
National Association of Securities Dealers, Inc. This would impair the liquidity
of our securities not only in the number of shares that could be bought and sold
at a given price, which might be depressed by the relative illiquidity, but also
through delays in the timing of transactions and reduction in media
coverage.
In the
past, following periods of volatility in the market price of the securities of
companies in our industry, securities class action litigation has often been
instituted against companies in our industry. If we face securities litigation
in the future, even if meritless or unsuccessful, it would result in substantial
costs and a diversion of management attention and resources, which would
negatively impact our business.
A
substantial number of our securities are eligible for future sale and this could
affect the market price for our stock and our ability to raise
capital.
The
market price of our common stock could drop due to sales of a large number of
shares of our common stock or the perception that these sales could occur. As of
December
31, 2004, we had
48,434,438 shares of common stock issued and outstanding. In addition, as of
December 31, 2004, up to 9,684,327 shares of our common stock were issuable upon
exercise of outstanding options and warrants. In December 2003, we filed a Form
S-3 shelf registration statement with the Commission for the proposed offering
from time to time of up to 6,500,000 shares of common stock. In February 2005,
we filed a post-effective amendment to such registration statement registering
an additional 1,468,592 shares of our common stock. In February 2005 we
completed a registered direct offering of 5,060,000 shares of our common stock
under the two registration statements leaving 708,592 shares of our common stock
available for us to sell in registered transactions under the shelf registration
statement. We have no immediate plans to sell any securities under the shelf
registration. However, subject to the effectiveness of the shelf registration
statement, we may issue securities from time to time in response to market
conditions or other circumstances on terms and conditions that will be
determined at such time. Additionally, there are 14,098,000 shares of our common
stock that are reserved for issuance under the CEFF arrangement with
Kingsbridge. See “Risks Related to Our Business - Our Committed Equity Financing
Facility may have a dilutive impact on our stockholders.
Holders
of our stock options and warrants are likely to exercise them, if ever, at a
time when we otherwise could obtain a price for the sale of our securities that
is higher than the exercise price per security of the options or warrants. This
exercise, or the possibility of this exercise, may impede our efforts to obtain
additional financing through the sale of additional securities or make this
financing more costly, and may reduce the price of our common
stock.
Provisions
of our Certificate of Incorporation, Shareholders Rights Agreement and Delaware
law could defer a change of our management which could discourage or delay
offers to acquire us.
Provisions
of our Restated Certificate of Incorporation, as amended, our Shareholders
Rights Agreement and Delaware law may make it more difficult for someone to
acquire control of us or for our stockholders to remove existing management, and
might discourage a third party from offering to acquire us, even if a change in
control or in management would be beneficial to our stockholders. For example,
our Restated Certificate of Incorporation, as amended, allows us to issue shares
of preferred stock without any vote or further action by our stockholders. Our
Board of Directors has the authority to fix and determine the relative rights
and preferences of preferred stock. Our Board of Directors also has the
authority to issue preferred stock without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In addition, our Board of Directors, without further stockholder
approval, could issue large blocks of preferred stock. We have adopted a
shareholders rights agreement which under certain circumstances would
significantly impair the ability of third parties to acquire control of us
without prior approval of our Board of Directors thereby discouraging
unsolicited takeover proposals. The rights issued under the shareholders rights
agreement would cause substantial dilution to a person or group that attempts to
acquire us on terms not approved in advance by our Board of
Directors.
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers and, by
policy, limit the amount of credit exposure to any one issuer. We currently do
not hedge interest rate or currency exchange exposure. We classify highly liquid
investments purchased with a maturity of three months or less as “cash
equivalents” and commercial paper and fixed income mutual funds as “available
for sale securities.” Fixed income securities may have their fair market value
adversely affected due to a rise in interest rates and we may suffer losses in
principal if forced to sell securities that have declined in market value due to
a change in interest rates.
ITEM
8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA. |
See Index
to Consolidated Financial Statements on Page F-1.
ITEM
9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE. |
Not
applicable.
ITEM
9A. |
CONTROLS
AND PROCEDURES. |
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal control over
financial reporting will prevent all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this
Annual
Report on Form
10-K. Based
on this
evaluation, our
Chief Executive Officer and our Chief Financial Officer
concluded that as of the
end of the period covered by this report our
disclosure controls and procedures were
effective in their
design to ensure that
information required
to be disclosed by us
in the
reports that
we file
or submit
under the
Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
(b)
Management’s Report on the Company’s Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
promulgated under the Exchange Act. Our internal control system is designed to
provide reasonable assurance to the Company's management and board of directors
regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on our assessment, we
believe that our internal control over financial reporting is effective based on
those criteria, as of December 31, 2004.
Our
independent auditors have issued an audit report on our assessment of our
internal control over financial reporting, which is included
herein.
(c) Changes
in internal controls
There
were no changes in our internal controls or other factors that could materially
affect those controls subsequent to the date of our evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM
9B. |
OTHER
INFORMATION |
Not
applicable.
PART
III
The
information required by Items 10 through 14 of Part III is incorporated by
reference to our definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal
year.
We have
adopted a Code of Ethics that applies to our officers, including our principal
executive, financial and accounting officers, and our directors and employees.
We have posted the Code of Ethics on our Internet Website at “http://www.DiscoveryLabs.com”
(this is not a
hyperlink, you must visit this website through an Internet browser) under the
Investor Information, Corporate Policies section. We intend to make all required
disclosures on a Current Report on Form 8-K concerning any amendments to, or
waivers from, our Code of Ethics with respect to our executive officers and
directors. Our Website and the information contained therein or connected
thereto are not incorporated into this Annual Report on Form 10-K.
PART
IV
ITEM
15. |
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES |
Exhibits
are listed on the Index to Exhibits at the end of this Annual Report. The
exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
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.
DISCOVERY
LABORATORIES, INC.
Date:
March 16, 2005 |
By: |
/s/
Robert J. Capetola |
|
|
Robert
J. Capetola, Ph.D. |
|
|
President
and |
|
|
Chief
Executive Officer |
In
accordance with the Exchange Act, 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 |
Name
& Title |
Date |
|
|
|
/s/
Robert J. Capetola |
Robert
J. Capetola, Ph.D.
President
and Chief Executive Officer |
March
16, 2005 |
|
|
|
/s/
John G. Cooper |
John
G. Cooper
Senior
Vice President and Chief Financial Officer |
March
16, 2005 |
|
|
|
/s/
Kathleen A. McGowan |
Kathleen
A. McGowan
Controller
(Principal
Accounting Officer) |
March
16, 2005 |
|
|
|
/s/
Herbert H. McDade, Jr. |
Herbert
H. McDade, Jr.
Chairman
of the Board of Directors |
March
16, 2005 |
|
|
|
/s/
Marvin E. Rosenthale, Ph.D. |
Marvin
E. Rosenthale, Ph.D.
Director |
March
16, 2005 |
|
|
|
/s/
Max E. Link, Ph.D. |
Max
E. Link, Ph.D.
Director |
March
16, 2005 |
|
|
|
/s/
Antonio Esteve, Ph.D. |
Antonio
Esteve, Ph.D.
Director |
March
16, 2005 |
|
|
|
/s/
W. Thomas Amick |
W.
Thomas Amick
Director |
March
16, 2005 |
INDEX
TO EXHIBITS
The
following exhibits are included with this Annual Report. All management
contracts or compensatory plans or arrangements are marked with an
asterisk.
Exhibit
No. |
|
Description |
|
Method
of Filing |
|
|
|
|
|
3.1 |
|
Restated
Certificate of Incorporation of Discovery, dated September 18,
2002. |
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on March
31, 2003. |
|
|
|
|
|
3.2 |
|
Amended
and Restated By-laws of Discovery. |
|
Incorporated
by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, as filed with the SEC on March
15, 2004. |
|
|
|
|
|
3.3 |
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004. |
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004. |
|
|
|
|
|
3.4 |
|
Certificate
of Amendment to the Certificate of Incorporation of Discovery, dated as of
May 28, 2004. |
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August 9,
2004. |
|
|
|
|
|
4.1 |
|
Form
of Class E Warrant. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on March 29, 2000. |
|
|
|
|
|
4.2 |
|
Form
of Unit Purchase Option issued to Paramount Capital, Inc. |
|
Incorporated
by reference to Exhibit 4.4 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the SEC on
March 30, 2000. |
|
|
|
|
|
4.3 |
|
Class
G Warrant issued to PharmaBio Development Inc., dated as of December 10,
2001. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 19, 2001. |
Exhibit
No. |
|
Description |
|
Method
of Filing |
|
|
|
|
|
4.4 |
|
Class
H Warrant issued to PharmaBio Development Inc., dated as of December 10,
2001. |
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 19, 2001. |
|
|
|
|
|
4.5 |
|
$284,657.37
Promissory Note, dated December 27, 2002, issued to General Electric
Capital Corporation. |
|
Incorporated
by reference to Exhibit 4.9 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on March
31, 2003. |
|
|
|
|
|
4.6 |
|
Form
of Class A Investor Warrant. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003. |
|
|
|
|
|
4.7 |
|
Class
B Investor Warrant issued to Kingsbridge Capital Limited. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004. |
|
|
|
|
|
4.9 |
|
$8,500,000
Amended and Restated Promissory Note, amended and restated as of November
3, 2004, by and between Discovery and PharmaBio Development
Inc. |
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004. |
|
|
|
|
|
4.10 |
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery and
QFinance, Inc. |
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004. |
|
|
|
|
|
10.1 |
|
Form
of Registration Rights Agreement between Discovery, Johnson & Johnson
Development Corporation and The Scripps Research
Institute. |
|
Incorporated
by reference to Exhibit F to Exhibit 2.1 to Discovery’s Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, as filed with the
SEC on March 31, 1998. |
|
|
|
|
|
10.2+ |
|
Sublicense
Agreement, dated as of October 28, 1996, between Johnson & Johnson,
Ortho Pharmaceutical Corporation and Acute Therapeutics,
Inc. |
|
Incorporated
by reference to Exhibit 10.6 to Discovery’s Registration Statement on Form
SB-2, as filed with the SEC on January 7, 1997 (File No.
333-19375). |
Exhibit
No. |
|
Description |
|
Method
of Filing |
|
|
|
|
|
10.3 |
|
*Restated
1993 Stock Option Plan of Discovery. |
|
Incorporated
by reference to Discovery’s Registration Statement on Form SB-2 (File No.
33-92-886). |
|
|
|
|
|
10.4 |
|
*1995
Stock Option Plan of Discovery. |
|
Incorporated
by reference to Discovery’s Registration Statement on Form SB-2 (File No.
33-92-886). |
|
|
|
|
|
10.5 |
|
*Amended
and Restated 1998 Stock Incentive Plan of Discovery (amended as of May 11,
2004). |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Registration Statement on Form
S-8, as filed with the SEC on June 8, 2004 (File No.
333-116268). |
|
|
|
|
|
10.6 |
|
Registration
Rights Agreement, dated June 16, 1998, among Discovery, Johnson &
Johnson Development Corporation and The Scripps Research
Institute. |
|
Incorporated
by reference to Exhibit 10.28 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC on
April 9, 1999. |
|
|
|
|
|
10.7 |
|
Stock
Exchange Agreement, dated June 16, 1998, between Discovery and Johnson
& Johnson Development Corporation. |
|
Incorporated
by reference to Exhibit 10.29 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC on
April 9, 1999. |
|
|
|
|
|
10.8 |
|
Form
of Proprietary Information and Inventions, Non-Solicitation and Non
Competition Agreement. |
|
Incorporated
by reference to Exhibit 10.50 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC on
April 9, 1999. |
|
|
|
|
|
10.9* |
|
Form
of Notice of Grant of Stock Option under the 1998 Stock Incentive
Plan. |
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999, as filed with the SEC on
November 17, 1999. |
|
|
|
|
|
10.10+ |
|
Research
Funding and Option Agreement, dated March 1, 2000, between The Scripps
Research Institute and Discovery. |
|
Incorporated
by reference to Exhibit 10.55 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the SEC on
March 31, 2000. |
|
|
|
|
|
Exhibit
No. |
|
Description |
|
Method
of Filing |
|
|
|
|
|
10.11 |
|
Master
Security Agreement, dated as of December 23, 2002, between General
Electric Capital Corporation and Discovery. |
|
Incorporated
by reference to Exhibit 10.32 to Discovery’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed with the SEC on
March 31, 2003. |
|
|
|
|
|
10.12 |
|
Amendment,
dated as of December 23, 2002, to the Master Security Agreement between
General Electric Capital Corporation and Discovery. |
|
Incorporated
by reference to Exhibit 10.33 to Discovery’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed with the SEC on
March 31, 2003. |
|
|
|
|
|
10.13+ |
|
Technology
Transfer and Manufacturing Agreement dated as of October 3, 2003, between
Discovery and Laureate Pharma, L.P. (now Laureate Pharma,
Inc.). |
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 22, 2003. |
|
|
|
|
|
10.14 |
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between Discovery
and Continental Stock Transfer & Trust Company. |
|
Incorporated
by reference to Exhibit 2.4 to Discovery’s Form 8-A12G, as filed with the
SEC on February 6, 2004. |
|
|
|
|
|
10.15 |
|
Common
Stock Purchase Agreement, dated as of July 7, 2004, by and between
Kingsbridge Capital Limited and Discovery. |
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004. |
|
|
|
|
|
10.16 |
|
Registration
Rights Agreement, dated as of July 7, 2004, by and between Kingsbridge
Capital Limited and Discovery. |
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004. |
|
|
|
|
|
10.17 |
|
Agreement,
dated as of November 3, 2004, by and between Discovery, Quintiles
Transnational Corp. and PharmaBio Development Inc.
|
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004. |
|
|
|
|
|
10.18 |
|
Amended
and Restated Loan Agreement, dated as of December 10, 2001, amended and
restated as of November 3, 2004, by and between Discovery and PharmaBio
Development Inc. |
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004. |
Exhibit
No. |
|
Description |
|
Method
of Filing |
|
|
|
|
|
10.19 |
|
Amended
and Restated Security Agreement, dated as of December 10, 2001, amended
and restated as of November 3, 2004, by and between Discovery and
PharmaBio Development Inc. |
|
Incorporated
by reference to Exhibit 10.3 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004. |
|
|
|
|
|
10.21 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Robert J.
Capetola, Ph.D. |
|
Filed
herewith. |
|
|
|
|
|
10.22 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and John G.
Cooper. |
|
Filed
herewith. |
|
|
|
|
|
10.23 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and David L.
Lopez, Esq., CPA. |
|
Filed
herewith. |
|
|
|
|
|
10.24 |
|
Employment
Agreement, dated as of May 24, 2004, between Discovery and Mark
Osterman. |
|
Filed
herewith. |
|
|
|
|
|
10.25 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Christopher
J. Schaber, Ph.D. |
|
Filed
herewith. |
|
|
|
|
|
10.26 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Robert
Segal, M.D. |
|
Filed
herewith. |
|
|
|
|
|
10.27 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Deni M.
Zodda, Ph.D. |
|
Filed
herewith. |
|
|
|
|
|
10.28+ |
|
Amended
and Restated Sublicense and Collaboration Agreement made as of December 3,
2004, between Discovery and Laboratorios Del Dr. Esteve,
S.A. |
|
Filed
herewith. |
Exhibit
No. |
|
Description |
|
Method
of Filing |
|
|
|
|
|
10.29+ |
|
Amended
and Restated Supply Agreement, dated as of December 3, 2004, by and
between Discovery and Laboratorios Del Dr. Esteve, S.A. |
|
Filed
herewith. |
|
|
|
|
|
21.1 |
|
Subsidiaries
of Discovery. |
|
Incorporated
by reference to Exhibit 21.1 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997, as filed with the SEC on
March 31, 1998. |
|
|
|
|
|
23.1 |
|
Consent
of Ernst & Young LLP. |
|
Filed
herewith. |
|
|
|
|
|
31.1 |
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange
Act. |
|
Filed
herewith. |
|
|
|
|
|
31.2 |
|
Certification
of Chief Financial Officer and Principal Accounting Officer Pursuant to
Rule 13a-14(a) of the Exchange Act. |
|
Filed
herewith. |
|
|
|
|
|
32.1 |
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
Filed
herewith. |
+ |
Confidential
treatment requested as to certain portions of these exhibits. Such
portions have been redacted and filed separately with the
Commission. |
CONTENTS |
Page |
|
|
Consolidated
Financial Statements |
|
|
|
Report
of Independent Registered Public Accounting Firm |
F-2 |
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting |
F-3 |
|
|
Balance
Sheets as of December 31, 2004 and December 31, 2003 |
F-4 |
|
|
Statements
of Operations for the years ended December 31, 2004, 2003 and
2002 |
F-5 |
|
|
Statements
of Changes in Stockholders' Equity for the years ended December 31, 2004,
2003 and 2002 |
F-6 |
|
|
Statements
of Cash Flows for the years ended December 31, 2004, 2003 and
2002 |
F-7 |
|
|
Notes
to consolidated financial statements: |
|
|
|
Note
1 - |
The
Company and Basis of Presentation |
F-8 |
Note
2 - |
Summary
of Significant Accounting Policies |
F-8 |
Note
3 - |
Investments |
F-11 |
Note
4 - |
Restricted
Cash |
F-11 |
Note
5 - |
Note
Receivable |
F-11 |
Note
6 - |
Property
and Equipment |
F-11 |
Note
7 - |
Secured
Credit Facility and Capital Lease Financing Arrangement |
F-12 |
Note
8 - |
Corporate
Partnership Agreements |
F-13 |
Note
9 - |
Licensing
and Research Funding Agreements |
F-15 |
Note
10 - |
Stockholders’
Equity |
F-15 |
Note
11 - |
Stock
Options |
F-19 |
Note
12 - |
401(k)
Match |
F-22 |
Note
13 - |
Commitments |
F-22 |
Note
14 - |
Recently
Issued Accounting Standards |
F-23 |
Note
15 - |
Related
Party Transactions |
F-23 |
Note
16 - |
Income
Taxes |
F-25 |
Note
17 - |
Subsequent
Events |
F-26 |
Note
18 - |
Selected
Quarterly Financial Data (unaudited) |
F-27 |
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Discovery
Laboratories, Inc.
Warrington,
Pennsylvania
We have
audited the accompanying consolidated balance sheets of Discovery Laboratories,
Inc. and subsidiary (the “Company”) as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for each of the three years in the period ended 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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 consolidated financial position of the Company at
December 31, 2004 and 2003, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 11, 2005, expressed an unqualified opinion thereon.
/s/Ernst
& Young LLP
Philadelphia,
Pennsylvania
March 11,
2005
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Discovery
Laboratories, Inc.
Warrington,
Pennsylvania
We have
audited management’s assessment, included in the accompanying Management’s
Report on the Company’s Internal Control over Financial Reporting, that
Discovery Laboratories, Inc. and subsidiary (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over financial reporting based
on our audit.
We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balances sheets of the Company
as of December 31, 2004 and 2003, and the related consolidated statement of
operations, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2004 of the Company and our report dated
March 11, 2005 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Philadelphia,
Pennsylvania
March 11,
2005
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
|
|
December
31, |
|
December
31, |
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
29,264,000 |
|
$ |
29,422,000 |
|
Restricted
cash |
|
|
646,000 |
|
|
— |
|
Available-for-sale
marketable securities |
|
|
2,744,000 |
|
|
— |
|
Note
receivable, current portion |
|
|
3,000
|
|
|
3,000
|
|
Prepaid
expenses and other current assets |
|
|
685,000
|
|
|
665,000
|
|
Total
Current Assets |
|
|
33,342,000 |
|
|
30,090,000
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation |
|
|
4,063,000 |
|
|
2,414,000
|
|
Note
receivable, non-current portion |
|
|
190,000 |
|
|
192,000
|
|
Other
assets |
|
|
42,000 |
|
|
19,000
|
|
Total
Assets |
|
$ |
37,637,000 |
|
$ |
32,715,000 |
|
LIABILITIES
& STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
|
|
Accounts
payable and accrued expenses |
|
$ |
7,969,000 |
|
$ |
4,210,000 |
|
Credit
facility, current portion |
|
|
—
|
|
|
2,436,000
|
|
Capitalized
leases, current portion |
|
|
854,000 |
|
|
383,000
|
|
Total
Current Liabilities |
|
|
8,823,000 |
|
|
7,029,000
|
|
|
|
|
|
|
|
|
|
Deferred
revenue |
|
|
134,000 |
|
|
672,000
|
|
Credit
facility, non-current portion |
|
|
5,929,000 |
|
|
— |
|
Capitalized
leases, non-current portion |
|
|
1,654,000 |
|
|
711,000
|
|
Total
Liabilities |
|
|
16,540,000 |
|
|
8,412,000
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity: |
|
|
|
|
|
|
|
Common
stock, $.001 par value; 80,000,000 authorized;
48,434,438
and 42,491,438 issued and outstanding
at
December 31, 2004 and December 31, 2003, respectively |
|
|
49,000 |
|
|
43,000
|
|
Additional
paid-in capital |
|
|
167,627,000 |
|
|
122,409,000
|
|
Unearned
portion of compensatory stock options |
|
|
(461,000 |
) |
|
(2,000 |
) |
Accumulated
deficit |
|
|
(143,061,000 |
) |
|
(96,858,000 |
) |
Treasury
stock (at cost; 313,383 and 167,179 shares of common
stock
at December 31, 2004 and 2003, respectively) |
|
|
(3,054,000 |
) |
|
(1,289,000 |
) |
Accumulated
other comprehensive income |
|
|
(3,000 |
) |
|
— |
|
Total
Shareholders' Equity |
|
|
21,097,000 |
|
|
24,303,000
|
|
Total
Liabilities & Shareholders’ Equity |
|
$ |
37,637,000 |
|
$ |
32,715,000 |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
|
|
Year
Ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts,
licensing, milestones and grants |
|
$ |
1,209,000 |
|
$ |
1,037,000 |
|
$ |
1,782,000 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
& development |
|
|
25,793,000 |
|
|
19,750,000
|
|
|
14,347,000
|
|
General
& administrative |
|
|
13,322,000 |
|
|
5,722,000
|
|
|
5,458,000
|
|
Corporate
partnership restructuring charges |
|
|
8,126,000 |
|
|
— |
|
|
— |
|
Total
expenses |
|
|
47,241,000 |
|
|
25,472,000
|
|
|
19,805,000
|
|
Operating
Loss |
|
|
(46,032,000 |
) |
|
(24,435,000 |
) |
|
(18,023,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
income and expenses: |
|
|
|
|
|
|
|
|
|
|
Interest
income, dividends, realized
gains,
and other income |
|
|
711,000 |
|
|
452,000
|
|
|
724,000
|
|
Interest
expense |
|
|
(882,000 |
) |
|
(297,000 |
) |
|
(144,000 |
) |
Other
(expense) / income, net |
|
|
(171,000 |
) |
|
155,000 |
|
|
580,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss |
|
|
(46,203,000 |
) |
|
(24,280,000 |
) |
$ |
(17,443,000 |
) |
Net
loss per common share - basic and diluted |
|
|
(1.00 |
) |
|
(0.65 |
) |
$ |
(0.64 |
) |
Weighted
average number of common shares
outstanding - basic and diluted |
|
|
46,178,981 |
|
|
37,426,034 |
|
|
27,350,835
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Changes in Stockholders' Equity
For
Years Ended December 31, 2004,
2003, and 2002
|
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock |
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Additional
Paid-in
Capital |
|
|
Unearned
Portion
of
Compensatory
Stock
Options |
|
|
Accumulated
Deficit |
|
|
Shares |
|
|
Amount |
|
|
Accumulated
Other
Comprehensive
(Loss) |
|
|
Total |
|
Balance
- January 1, 2002 |
|
|
25,546,293
|
|
$ |
26,000 |
|
$ |
73,163,000 |
|
$ |
(264,000 |
) |
$ |
(55,135,000 |
) |
|
(38,243 |
) |
$ |
(239,000 |
) |
$ |
72,000 |
|
$ |
17,623,000 |
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,443,000 |
) |
|
|
|
|
|
|
|
|
|
|
(17,443,000 |
) |
Other
comprehensive loss - unrealized loss on marketable
securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,000 |
|
|
105,000
|
|
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,338,000 |
) |
Issuance
of common stock, stock option exercises |
|
|
77,925
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
Issuance
of common stock, payment for services |
|
|
6,086
|
|
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,000
|
|
Compensation
charge on modification of options |
|
|
|
|
|
|
|
|
171,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,000
|
|
Compensation
charge on vesting of options and warrants |
|
|
|
|
63,000
|
|
|
169,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,000
|
|
Issuance
of common stock, March 2002 private financing |
|
|
821,862
|
|
|
|
|
|
2,666,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,666,000
|
|
Private
financing expenses |
|
|
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000 |
) |
Issuance
of common stock, November 2002 private financing |
|
|
6,397,517
|
|
|
7,000
|
|
|
11,937,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,944,000
|
|
Change
in value of Class H warrants |
|
|
|
|
|
|
|
|
(618,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(618,000 |
) |
Issuance
of common stock, warrant exercises |
|
|
6,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2002 |
|
|
32,856,526
|
|
|
33,000
|
|
|
87,463,000
|
|
|
(95,000 |
) |
|
(72,578,000 |
) |
|
(38,243 |
) |
|
(239,000 |
) |
|
177,000 |
|
|
14,761,000
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,280,000 |
) |
|
|
|
|
|
|
|
|
(
24,280,000 |
) |
Other
comprehensive loss - unrealized gain on marketable
securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177,
000 |
) |
|
(177,000 |
) |
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,457,000 |
) |
Issuance
of common stock, stock option exercises |
|
|
993,001 |
|
|
1,000 |
|
|
1,940,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,941,000 |
|
Issuance
of common stock, warrant exercises |
|
|
3,789,875 |
|
|
4,000 |
|
|
6,846,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,850,000 |
|
Compensatory
stock options and warrants granted/earned |
|
|
|
|
|
|
|
|
20,000 |
|
|
(17,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Compensation
charge on modification of options |
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Compensation
charge on vesting of options and warrants |
|
|
|
|
|
|
|
|
79,000
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,000
|
|
Earned
portion of compensatory stock options |
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Issuance
of common stock, June 2003 private financing |
|
|
4,997,882
|
|
|
5,000
|
|
|
25,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,930,000
|
|
Issuance
of common stock, 401k employer match |
|
|
21,333
|
|
|
|
|
|
86,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,000 |
|
Change
in value of Class H warrants |
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
Shares
tendered for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,936 |
) |
|
(1,050,000 |
) |
|
|
|
|
(1,050,000 |
) |
Balance
- December 31, 2003 |
|
|
42,658,617
|
|
|
43,000
|
|
|
122,409,000 |
|
|
(2,000 |
) |
|
(96,858,000 |
) |
|
(167,179 |
) |
|
(1,289,000 |
) |
|
__ |
|
|
24,303,000
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,203,000 |
) |
|
|
|
|
|
|
|
|
|
|
(46,203,000 |
) |
Other
comprehensive loss - unrealized gain on marketable
securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,000 |
) |
|
(3,000 |
) |
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,206,000 |
) |
Issuance
of common stock, stock option exercises
|
|
|
1,271,493 |
|
|
1,000 |
|
|
2,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,501,000 |
|
Issuance
of common stock, warrant exercises
|
|
|
1,193,405 |
|
|
1,000 |
|
|
1,819,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820,000 |
|
Issuance
of common stock, 401(k) employer match |
|
|
22,564 |
|
|
|
|
|
196,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,000 |
|
Expense
related to stock options |
|
|
|
|
|
|
|
|
1,723,000 |
|
|
(459,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,264,000 |
|
Issuance
of common stock, April 2004 financing
|
|
|
2,200,000 |
|
|
2,000 |
|
|
22,793,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,795,000 |
|
Issuance
of warrants, October 2004 Quintiles restructuring |
|
|
|
|
|
|
|
|
3,978,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,978,000 |
|
Issuance
of common stock, December 2004 Esteve restructuring |
|
|
500,000 |
|
|
1,000 |
|
|
3,465,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,466,000 |
|
Issuance
of common stock, December 2004 draw on CEFF |
|
|
901,742 |
|
|
1,000 |
|
|
7,090,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,091,000 |
|
Financing
expenses |
|
|
|
|
|
|
|
|
(63,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,000 |
) |
Change
in value of Class H warrants |
|
|
|
|
|
|
|
|
(48,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,000 |
) |
Shares
tendered for exercise of stock options |
|
|
|
|
|
1,765,000 |
|
|
|
|
|
|
|
|
(146,204 |
) |
|
(1,765,000 |
) |
|
|
|
|
— |
|
Balance
- December 31, 2004 |
|
|
48,747,821 |
|
$ |
49,000 |
|
$ |
167,627,000 |
|
$ |
(461,000 |
) |
$ |
(143,061,000 |
) |
$ |
(313,383 |
) |
|
(3,054,000 |
) |
$ |
(3,000 |
) |
$ |
21,097,000 |
|
See notes to consolidated financial statements
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
Cash
flow from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(46,203,000 |
) |
$ |
(24,280,000 |
) |
$ |
(17,443,000 |
) |
Adjustments
to reconcile net loss to net cash used
In
operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
816,000 |
|
|
416,000
|
|
|
285,000
|
|
Realized
(gains) losses on marketable securities |
|
|
— |
|
|
(114,000 |
) |
|
(174,000 |
) |
Non-cash
charge for issuance of common stock and
warrants
related to corporate partnership restructurings |
|
|
7,443,000 |
|
|
— |
|
|
— |
|
Non-cash
stock compensation expense |
|
|
1,264,000 |
|
|
192,000
|
|
|
403,000
|
|
Stock
issued for 401(k) match |
|
|
196,000 |
|
|
86,000 |
|
|
— |
|
Expenses
paid using treasury stock and Common Stock |
|
|
— |
|
|
— |
|
|
26,000
|
|
Loss
on disposal of fixed assets |
|
|
12,000 |
|
|
— |
|
|
— |
|
Changes
in: |
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses, inventory and other current assets |
|
|
(68,000 |
) |
|
(340,000 |
) |
|
1,255,000
|
|
Accounts
payable and accrued expenses |
|
|
3,759,000 |
|
|
1,197,000
|
|
|
1,263,000
|
|
Other
assets |
|
|
(23,000 |
) |
|
103,000
|
|
|
(40,000 |
) |
Proceeds
from research and development
collaborative
agreements |
|
|
— |
|
|
— |
|
|
1,833,000
|
|
Amortization
of deferred revenue |
|
|
(538,000 |
) |
|
(721,000 |
) |
|
(1,055,000 |
) |
Net
cash used in operating activities |
|
|
(33,342,000 |
) |
|
(23,461,000 |
) |
|
(13,647,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment |
|
|
(2,207,000 |
) |
|
(1,514,000 |
) |
|
(661,000 |
) |
Restricted
cash |
|
|
(646,000 |
) |
|
— |
|
|
— |
|
Related
party loan payments received |
|
|
2,000 |
|
|
2,000
|
|
|
2,000
|
|
Purchase
of marketable securities |
|
|
(18,483,000 |
) |
|
(284,000 |
) |
|
(8,569,000 |
) |
Proceeds
from sale or maturity of marketable securities |
|
|
15,465,000 |
|
|
10,873,000
|
|
|
11,134,000
|
|
Net
cash (used in) / provided by investing activities |
|
|
(5,869,000 |
) |
|
9,077,000
|
|
|
1,906,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of securities, net of expenses |
|
|
35,911,000 |
|
|
34,721,000
|
|
|
14,665,000
|
|
Proceeds
from use of credit facility |
|
|
3,493,000 |
|
|
986,000
|
|
|
1,450,000
|
|
Purchase
of treasury stock |
|
|
(1,765,000 |
) |
|
(1,050,000 |
) |
|
— |
|
Equipment
subsequently financed through capital lease |
|
|
1,928,000 |
|
|
908,000 |
|
|
434,000 |
|
Principal
payments under capital lease obligation |
|
|
(514,000 |
) |
|
(259,000 |
) |
|
(66,000 |
) |
Net
cash provided by financing activities |
|
|
39,053,000 |
|
|
35,305,000
|
|
|
16,483,000
|
|
Net
(decrease) / increase in cash and cash equivalents |
|
|
(158,000 |
) |
|
20,922,000
|
|
|
4,742,000
|
|
Cash
and cash equivalents - beginning of year |
|
|
29,422,000 |
|
|
8,500,000
|
|
|
3,758,000
|
|
Cash
and cash equivalents - end of year |
|
$ |
29,264,000 |
|
$ |
29,422,000 |
|
$ |
8,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosure of cash flows information: |
|
|
|
|
|
|
|
|
|
|
Interest
Paid |
|
$ |
186,000 |
|
$ |
167,000 |
|
$ |
88,000 |
|
Noncash
transactions: |
|
|
|
|
|
|
|
|
|
|
Class
H warrants issued/revalued |
|
$ |
(48,000 |
) |
$ |
50,000 |
|
$ |
(618,000 |
) |
Unrealized
gain / (loss) on marketable securities |
|
|
(3,000 |
) |
|
(177,000 |
) |
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note
1 - The Company and Basis of Presentation
Discovery
Laboratories, Inc. (the “Company”) is a biopharmaceutical company developing its
proprietary surfactant technology as Surfactant Replacement Therapies (SRT) for
respiratory diseases. Surfactants are produced naturally in the lungs and are
essential for breathing. The Company’s technology produces a
precision-engineered surfactant that is designed to closely mimic the essential
properties of natural human lung surfactant. The Company believes that through
its technology, pulmonary surfactants have the potential, for the first time, to
be developed into a series of respiratory therapies for patients in the neonatal
intensive care unit, critical care unit and other hospital settings, where there
are few or no approved therapies available.
The
Company has received an Approvable Letter from the FDA for SurfaxinÒ, the
Company’s lead product, for the prevention of Respiratory Distress Syndrome
(RDS) in premature infants, and has filed a Marketing Authorization Application
with the EMEA for clearance to market Surfaxin in Europe. The Company is also
conducting various clinical programs to address Acute Respiratory Distress
Syndrome (ARDS) in adults, Bronchopulmonary Dysplasia (BPD) in premature
infants, Neonatal Respiratory Disorders in premature infants, severe asthma in
adults, and Meconium Aspiration Syndrome (MAS) in full-term
infants.
Management’s
Plans and Financings
The
Company has incurred substantial losses since inception. The Company funds its
operations primarily through the issuance of equity and through strategic
alliances. The Company expects to continue to expend substantial amounts for
continued product research, development and commercialization activities for the
foreseeable future. Management plans to fund its research, development and
commercialization activities with the issuance of additional equity and entering
into strategic alliances, if possible, that will provide funding for operations,
including increased commercialization efforts this year. Continuation of the
Company is dependent on its ability to obtain additional financing and,
ultimately, on its ability to achieve profitable operations. There is no
assurance, however, that such financing will be available or that the Company's
efforts ultimately will be successful.
Note
2 - Summary of Significant Accounting Policies
Cash
and cash equivalents
The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Available-for-sale
marketable securities
The
investments are classified as available for sale and are comprised of shares of
high quality fixed income commercial paper and mutual funds. Investments are
carried at fair market value. Realized gains and losses are computed using the
average cost of securities sold. Any appreciation/depreciation on these
investments is recorded as other comprehensive income (loss) in the statements
of changes in stockholders' equity until realized.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Property
and equipment
|
Property
and equipment is recorded at cost. Depreciation of furniture and equipment
is computed using the straight-line method over the estimated useful lives
of the assets (five to seven years). Leasehold improvements are amortized
over the lower of the (a) term of the lease or (b) useful life of the
improvements. |
Use
of estimates
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 of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Long-lived
assets
Under
Statement of Financial Accounting Standards (SFAS) No. 144, the Company is
required to recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flows and measure
any impairment loss as the difference between the carrying amount and the fair
value of the asset. No impairment was recorded during the years ended December
31, 2004, 2003 and 2002, as management of the Company believes the sum of its
future undiscounted cash flows will exceed the carrying amount of the
assets.
Research
and development
Research
and development costs are charged to operations as incurred.
Revenue
recognition - research and development collaborative
agreements
The
Company received nonrefundable fees from companies under license, sublicense,
collaboration and research funding agreements. The Company initially records
such funds as deferred revenue and recognizes research and development
collaborative contract revenue when the amounts are earned, which occurs over a
number of years as the Company performs research and development activities. See
Note 8 - Corporate Partnerships Agreements for a detailed description of the
Company’s revenue recognition methodology under these agreements.
Additionally,
the Company has been awarded grants from certain third party organizations to
help fund research for the drugs that the Company is currently developing. Once
research and development expenditures qualifying under the grant are incurred,
grant reports are periodically completed and submitted to the granting agency
for review. If approved, the granting agency remits payment to the Company,
which is recorded as revenue upon receipt.
DISCOVERY LABORATORIES, INC. AND
SUBSIDIARY
Stock-based
compensation
The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation -
Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for
Stock-Based Compensation” to provide alternative methods of transition to a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on the reported results.
The Company continues to account for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, “Accounting for Stock Options Issued
to Employees” and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying Common Stock and the
exercise price of the option at the date of grant. The effect of applying SFAS
No. 148 on pro forma net loss is not necessarily representative of the effects
on reported net income or loss for future years due to, among other things, (i)
the vesting period of the stock options and (ii) the fair value of additional
stock options in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value of the options at the
grant date of awards under the plans consistent with the methodology prescribed
under SFAS No. 148, the pro forma net loss for the years ended December 31,
2004, 2003, and 2002 would have been as follows:
|
|
Years
Ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Net
Loss as reported |
|
$ |
(46,203,000 |
) |
$ |
(24,280,000 |
) |
$ |
(17,443,000 |
) |
Additional
stock-based
employee
compensation |
|
$ |
(3,996,000 |
) |
$ |
(3,738,000 |
) |
$ |
(2,264,000 |
) |
Pro
forma net loss |
|
$ |
(50,199,000 |
) |
$ |
(28,018,000 |
) |
$ |
(19,707,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net loss per share |
|
$ |
(1.09 |
) |
$ |
(0.75 |
) |
$ |
(0.72 |
) |
The net
loss as reported on the income statement for the year ended December 31, 2004
includes compensation
costs for stock-based employee compensation awards of
$1,264,000. These costs include a non-cash charge of $483,000 for the
modification of options held by a former member of management. These
compensation costs also include a non-cash charge related to the vested portion
of employee stock options granted and approved by the Company’s Board of
Directors in December 2003, but were subject to subsequent shareholder approval.
These employee options were granted at fair market value on the date of approval
by the Board of Directors. These options were expressly subject to the requisite
approval of the Company’s shareholders for an amendment to the 1998 Plan
authorizing an increase in the number of shares of Common Stock issuable under
the plan in an amount equal to or greater than the aggregate amount of such
options. Approval was obtained at the Company’s Annual Meeting of Shareholders
for 2004, at which time the fair market value of our Common Stock was greater
than the fair market value on the date the options were granted. The difference
in fair market value on the date of grant versus the date of subsequent
shareholder approval was recorded as unearned portion of compensatory stock
options and will be recognized into expense as the options vest. The Company
incurred a non-cash charge of $461,000 related to the vesting of such options in
2004.
The
weighted average fair value of the options granted were estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
|
|
Years
Ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Expected
dividend yield |
|
|
0 |
% |
|
0 |
% |
|
0 |
% |
Expected
stock price volatility |
|
|
81 |
% |
|
86 |
% |
|
95 |
% |
Risk-free
interest rate |
|
|
3.5 |
% |
|
2.4 |
% |
|
2.5 |
% |
Expected
option term |
|
|
3.5
years |
|
|
3.5
years |
|
|
3.5
years |
|
In
December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which establishes standards for transactions in which an
entity exchanges its equity instruments for goods or services. See Note 14 -
Recently Issued Accounting
Standards
Net
loss per common share
Net loss
per common share is computed pursuant to the provisions of SFAS No. 128,
"Earnings per Share", and is based on the weighted average number of common
shares outstanding for the periods. For the years ended December 31, 2004, 2003
and 2002, 9,684,000, 8,753,000 and 4,032,000 shares of Common Stock,
respectively, were potentially issuable upon the exercise of certain of the
Company’s stock options and warrants and were not included in the calculation of
net loss per share as the effect would be anti-dilutive.
Reclassification
Certain
prior year balances have been reclassified to conform with the current
presentation.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
3 - Investments
The
available-for-sale marketable securities held by the Company at December 31,
2004 consisted of high-quality, corporate bonds with an aggregate cost of
$2,737,000 and gross unrealized losses of $3,000 included in accumulated other
comprehensive income. As of December 31, 2003, the Company did not hold
marketable securities. As of December 31, 2002, the Company had marketable
securities with an aggregate cost of $10,475,000 and a net unrealized holding
gain of $177,000 included in accumulated other comprehensive income. All
available-for-sale marketable securities have a maturity period of less than one
year.
Note
4 - Restricted Cash
The
Company has cash balances that are restricted as to use and discloses such
amounts separately on the Balance Sheet. The primary component of Restricted
Cash is a security deposit in the amount of $600,000 in the form of a letter of
credit related to the lease agreement dated May 26, 2004 for the Company’s
office space in Bucks County, Pennsylvania. The letter of credit is secured by
cash and is included in the Balance Sheet as “Restricted Cash.” Beginning in
March 2008, the security deposit and the letter of credit will be reduced to
$400,000. That balance will remain in effect through the remainder of the lease
term. Subject to certain conditions, upon expiration of the lease in November
2009, the letter of credit will expire.
Note
5 - Note Receivable
Note
receivable pertains to a $200,000, 7% per annum mortgagor’s note due from an
executive of the Company. This note is secured by a mortgage agreement dated
July 24, 2001. The note calls for monthly payments of principal and interest
over a 360-month period. The principal balance outstanding at December 31, 2004,
2003 and 2002 was approximately $193,000, $195,000 and $197,000,
respectively.
Note
6 - Property and Equipment
Property
and equipment as of December 31, 2004 and 2003 was comprised of the
following:
|
|
December 31, |
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Equipment
(1) |
|
$ |
3,589,000 |
|
$ |
2,217,000 |
|
Furniture |
|
|
869,000 |
|
|
314,000
|
|
Leasehold
improvements |
|
|
330,000 |
|
|
174,000
|
|
Construction
in progress |
|
|
891,000 |
|
|
792,000
|
|
|
|
|
|
|
|
|
|
Property
and equipment before accumulated depreciation |
|
|
5,679,000 |
|
|
3,497,000
|
|
Accumulated
depreciation |
|
|
(1,616,000 |
) |
|
(1,083,000 |
) |
Net
property and equipment |
|
|
4,063,000 |
|
$ |
2,414,000 |
|
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(1) |
The
equipment balance consists of (i) manufacturing equipment to produce
Surfaxin for use in the Company’s clinical trials and for anticipated
commercial needs; (ii) laboratory equipment for research and development
activities, including aerosol development; and (iii) computers and office
equipment to support the research, development, administrative and
commercialization activities of the Company. |
The
property and equipment balance as of December 31, 2004 and 2003 includes
$3,396,000 and $1,468,000, respectively, of property and equipment subject to a
capital lease. The related accumulated depreciation was $546,000 and $194,000 as
of December 31, 2004 and 2003, respectively.
The
balance of Construction in Progress at December 31, 2003 primarily consisted of
manufacturing equipment and related installation and validation costs associated
with the transfer of the Company’s manufacturing capabilities to its contract
manufacturer, Laureate Pharma, Inc. (“Laureate”). This project was completed in
2004 and the assets were transferred from Construction in Progress to Equipment.
The balance of Construction in Progress at December 31, 2004 primarily consists
of new manufacturing equipment that will ultimately serve as the Company’s
back-up manufacturing capability.
In
addition to the balance in Construction in Progress, the Company had additional
construction purchase commitments, yet to be fulfilled, totaling $891,000 as of
December 31, 2004. As of December 31, 2003, the Company had $554,000 of
construction purchase commitments, yet to be fulfilled, which were subsequently
fulfilled in 2004.
Depreciation
expense for the years ended December 31, 2004, 2003, and 2002 was $546,000,
$331,000, and $252,000, respectively.
Note
7 - Secured Credit Facility and Capital Lease Financing
Arrangement
Secured
Credit Facility with Quintiles Transnational Corp.
(“Quintiles”)
The
Company entered into a collaboration arrangement with Quintiles, in 2001, to
provide certain commercialization services in the United States for Surfaxin for
the treatment of RDS in premature infants and MAS in full-term infants. In
connection with the commercialization agreement, Quintiles extended to the
Company a secured, revolving credit facility of up to $8.5 to $10.0 million to
fund pre-marketing activities associated with the launch of Surfaxin in the
United States certain milestones were achieved. The Company was obligated to use
a significant portion of the funds borrowed under the credit facility for
pre-launch marketing services provided by Quintiles. Principal amounts owed by
us under the credit facility may have been repaid out of the proceeds of
milestone payments to be paid to the Company by Quintiles upon the achievement
of certain corporate milestones. Interest was payable quarterly in arrears at a
rate of 8% annually. Outstanding principal was due on December 10, 2004.
DISCOVERY LABORATORIES, INC. AND
SUBSIDIARY
In
November 2004, the Company restructured its business arrangements with Quintiles
and terminated the commercialization agreement for Surfaxin in the United
States. The existing secured, revolving credit facility remained available to
borrow up to $8.5 million. By virtue of the termination of the commercialization
agreements, the Company is no longer obligated to use funds advanced under the
credit facility for services provided by Quintiles, and Quintiles is no longer
obligated to make milestone payments. The original maturity date of December 10,
2004, is now extended until December 31, 2006. The interest rate remains 8%
annually and payments are due quarterly in arrears. As of December 31, 2004,
$5,929,000 was outstanding under the credit facility, including $3,493,000 used
in 2004. Subsequent to December 31, 2004, in February 2005, the Company borrowed
the remaining available funds and has an outstanding balance of $8.5 million.
Outstanding principal and interest due under the credit facility are due and
payable as a balloon payment on December 31, 2006.
Capital
Lease Financing Arrangement with General Electric Capital Corporation
(GECC)
Capital
lease liabilities for the years ended December 31, 2004 and 2003 are as
follows:
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
GECC |
|
$ |
828,000 |
|
$ |
305,000 |
|
All
Other |
|
|
26,000
|
|
|
78,000
|
|
Capital
Leases, Current |
|
|
854,000
|
|
|
383,000
|
|
|
|
|
|
|
|
|
|
Long
Term |
|
|
|
|
|
|
|
GECC |
|
|
1,626,000
|
|
|
658,000
|
|
All
Other |
|
|
28,000
|
|
|
52,000
|
|
Capital
Leases, Long Term |
|
|
1,654,000
|
|
|
711,000
|
|
|
|
|
|
|
|
|
|
Total
Capital Leases |
|
$ |
2,508,000 |
|
$ |
1,094,000 |
|
The
Company has a capital lease financing arrangement with the Life Science and
Technology Finance Division of General Electric Capital Corporation (“GECC”).
Under this arrangement, the Company purchases capital equipment, including
manufacturing, information technology systems, laboratory, office and other
related capital assets and subsequently finances those purchases through this
capital lease financing arrangement. The arrangement originally provided for
financing up to $1,000,000 with an interest rate of 12.50% per annum. In 2003,
the arrangement was expanded to provide, subject to certain conditions, up to an
aggregate $4,000,000 in financing for capital purchases with an interest rate of
9.50% per annum for all lab and manufacturing equipment and 10.50% per annum on
all other equipment. In 2004, the arrangement was expanded again to provide,
subject to certain conditions, up to $6.5 million in addition to the $2.5
million outstanding at that time, for total available financing of up to $9.0
million. Under the terms of the expanded financing arrangement, $5.0 million of
the $6.5 million increase is immediately available to the Company with the
remaining $1.5 million subject to FDA approval to market the Company’s lead
product Surfaxin, for the prevention of RDS in premature infants. The funds may
be drawn through September 2005. Laboratory and manufacturing equipment is
leased over 48 months with an interest rate equal to 9.39% per annum and all
other equipment is leased over 36 months with an interest rate equal to 9.63%
per annum. As of December 31, 2004, the Company had used $3,042,000 of the
available financing under the line of credit and, after giving effect to
principal payments made by the Company, $2,454,000 was outstanding.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
8 - Corporate Partnership Agreements
Laboratorios
del Dr. Esteve, S.A. (Esteve)
In 1999,
the Company entered into a corporate partnership with Esteve to develop, market
and sell Surfaxin in portions of Europe. In 2002, the Company significantly
expanded its relationship with Esteve by entering into a new collaboration
arrangement, which superseded the 1999 agreement, and expanded the territory
covered by those original agreements to all of Europe, Central and South
America, and Mexico. Esteve was obligated to provide certain commercialization
services for Surfaxin for the treatment of RDS in premature infants, MAS in
full-term infants and ARDS in adult patients. The Company’s exclusive supply
agreement with Esteve provided that Esteve would purchase all of its Surfaxin
drug product requirements at an established transfer price based on sales of
Surfaxin by Esteve and/or its sublicensee(s). Esteve also agreed to sponsor
certain clinical trial costs related to obtaining regulatory approval in Europe
for ARDS and make certain milestone payments to the Company upon the attainment
of European marketing regulatory approval for Surfaxin. In connection with the
2002 expanded agreement, Esteve purchased 821,862 shares of Common Stock at
$4.867 per share for $4.0 million in gross proceeds and paid the Company a
non-refundable licensing fee of $500,000. The Company has accounted for the
license fees and reimbursement of research and development expenditures
associated with the Esteve collaboration as deferred revenue. The balance in
deferred revenue of $134,000 at December 31, 2004 relates entirely to the
license agreement with Esteve for which the Company will recognize revenue using
a straight-line method through the anticipated date of FDA approval for RDS.
In
December 2004, the Company and
Esteve restructured their corporate partnership for the development, marketing
and sales of the Company’s products in Europe and Latin America. Under the
revised partnership, the Company has regained full commercialization rights in
key European markets, Central America and South America for its SRT, including
Surfaxin® for RDS in premature infants and ARDS in adults. Esteve will focus on
Andorra, Greece, Italy, Portugal and Spain, and now has development and
marketing rights to a broader portfolio of the Company’s potential SRT products.
This restructured partnership supersedes the existing sublicense and supply
agreements we had entered into with Esteve in March 2002.
Esteve
has also agreed to pay the Company stipulated cash fees upon achieving certain
milestones, primarily upon marketing regulatory approvals for the covered
products. In addition, Esteve has agreed to contribute to Phase 3 clinical
trials for the covered products by conducting and funding development performed
in the revised territory.
In
consideration for regaining commercial rights in the 2004 restructured
partnership, the Company issued to Esteve 500,000 shares of Common Stock for no
cash consideration, valued at $3.5 million. The Company incurred a non-cash
charge, including the value of the shares issued and other costs related to the
restructuring, of $4.1 million. This charge is a component of Corporate
Partnership Restructuring Charges on the Income Statement. The Company also
granted to Esteve rights to additional potential SRT products in the Company’s
pipeline. The Company also agreed to pay to Esteve 10% of cash up-front and
milestone fees that the Company may receive in connection with any future
strategic collaborations for the development and commercialization of Surfaxin
for RDS, ARDS or certain of our other Surfactant Replacement Therapies in the
territory for which the Company had previously granted a license to Esteve. Any
such up-front and milestone fees that the Company may pay to Esteve are not to
exceed $20 million in the aggregate.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Quintiles
Transnational Corp., and PharmaBio Development Inc.
In 2001,
the Company entered into a commercialization agreement with Quintiles, and its
affiliate, PharmaBio Development Inc. (PharmaBio), to provide certain
commercialization services in the United States for Surfaxin for the treatment
of RDS in premature infants and MAS in full-term infants. Quintiles was
obligated to hire and train a dedicated United States sales force that would
have been branded in the market as Discovery’s. PharmaBio agreed to fund up to
$70 million of the sales force costs as well as other sales and marketing costs
for commercialization of Surfaxin in the United States for seven years.
Additionally, the collaboration allowed for this sales force to be transferred
to the Company at the end of the seven year term, with an option for the Company
to acquire it sooner. Under the agreement, the Company was to receive 100% of
the revenues from sales of Surfaxin and agreed to pay PharmaBio a commission on
net sales in the United States of Surfaxin for the treatment of RDS in premature
infants and MAS in full-term infants and all “off-label” uses for 10 years
following first launch of the product in the United States. PharmaBio also
extended to the Company a secured revolving credit facility of up to $8.5 to
$10.0 million to fund pre-marketing activities associated with the launch of
Surfaxin in the United States as the Company achieved certain milestones. See
Note 7 - Secured Credit Facility and Capital Lease Financing
Arrangement.
In
November 2004, the Company reached an agreement with Quintiles to restructure
its business arrangements and terminate the commercialization agreements for
Surfaxin in the United States. The Company now has full commercialization rights
for Surfaxin in the United States. Pursuant to the restructuring, Quintiles is
no longer obligated to provide any commercialization services and the Company’s
obligation to pay a commission on net sales in the United States of Surfaxin for
the treatment of RDS and MAS to Quintiles has been terminated.
In
connection with obtaining full commercialization rights for Surfaxin, the
Company issued 850,000 warrants to PharmaBio, Quintiles’ strategic investment
group, to purchase shares of Common Stock at an exercise price equal to $7.19
per share. The warrants have a 10-year term and shall be exercisable for cash
only with expected total proceeds to the Company if exercised equal to
approximately $6.0 million. The Company valued the warrants at this fair value
on the date of issuance and incurred a non-cash charge of $4.0 million in
connection with the issuance. This charge is a component of Corporate
Partnership Restructuring Charges on the Income Statement. The existing secured
revolving credit facility of $8.5 million with PharmaBio will remain available
and the original maturity date of December 10, 2004 is now extended until
December 31, 2006. See Note 7 - Secured Credit Facility and Capital Lease
Financing Arrangement.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
9 - Licensing and Research Funding Agreements
Ortho
Pharmaceutical, Inc.
The
Company and Ortho Pharmaceutical, Inc. (Ortho Pharmaceutical), a wholly-owned
subsidiary of Johnson & Johnson, Inc., are parties to an agreement granting
an exclusive license of the Surfaxin technology to the Company in exchange for
certain license fees, future milestone payments (aggregating $2,500,000) and
royalties. To date, the Company has paid $450,000 for milestones
achieved.
The
Scripps Research Institute
The
Company and The Scripps Research Institute (Scripps) were parties to a research
funding and option agreement which expired in February 2005. Pursuant to this
agreement, the Company was obligated to fund a portion of Scripps' research
efforts and thereby had the option to acquire an exclusive worldwide license to
the technology developed from the research program during the term of the
agreement. Scripps owned all of the technology that it developed pursuant to
work performed under the agreement. To the extent the Company did not exercise
its option to technology developed under the agreement, the Company had the
right to receive 50% of the net royalty income received by Scripps for
inventions that were jointly developed under the agreement. Payments to Scripps
under this agreement were $600,000, $649,000 and $572,000 in 2004, 2003, and
2002, respectively.
Note
10 - Stockholders’ Equity
2005
Registered
Public Offering
Subsequent
to December 31, 2004, in
February 2005, the Company completed a registered direct offering of 5,060,000
shares of Common Stock. The shares were priced at $5.75 per share resulting in
gross and net proceeds to the Company equal to $29.1 million and $27.5 million,
respectively.
2004
Committed Equity Financing Facility (CEFF)
In July
2004, the Company entered into a Committed Equity Financing Facility (“CEFF”)
with Kingsbridge Capital Ltd. (“Kingsbridge”), pursuant to which Kingsbridge has
committed to finance up to $75.0 million of capital for newly-issued shares of
Common Stock. The exact timing, amount and price of any CEFF financings is
subject to the Company’s ultimate determination, and certain conditions of the
facility agreement. See - Liquidity and Capital Resources “Committed Equity
Financing Facility (“CEFF”)”. In connection with the CEFF, the Company issued a
Class B Investor warrant to Kingsbridge to purchase up to 375,000 shares of
Common Stock at an exercise price equal to $12.0744 per share. The warrant,
which expires in January 2010, must be exercised for cash, except in limited
circumstances, for total proceeds equal to approximately $4.5 million, if
exercised. As of December 31, 2004, the Class B Investor Warrant had not been
exercised in whole or in part. In
connection with the 2005 Registered Public Offering, the Company entered into a
Placement Agent Agreement with SG Cowen & Co. LLC (“SG Cowen”) pursuant to
which the Company agreed not to access funds under the CEFF for the 90-day
period ending May 26, 2005, or in an amount greater than $5 million for an
additional 90-day period thereafter.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In
December 2004, the Company entered into a financing pursuant to the CEFF
resulting in aggregate cash proceeds to the Company of $7.2 million from the
issuance of 901,742 shares of Common Stock at an average price of $7.98, after
taking into account the applicable discount rate provided for by the CEFF. As of
December 31, 2004, $67.8 million remained available under the CEFF.
2004
Restructuring of the Corporate Partnership with Esteve
In
December 2004, the Company restructured its strategic alliance with Esteve for
the development, marketing and sales of our products in Europe and Latin
America. Under the revised collaboration, the Company has regained full
commercialization rights in key European markets, Central America and South
America for its SRT, including Surfaxin for RDS in premature infants and ARDS in
adults. The Company granted to Esteve rights to additional potential SRT
products in its pipeline. See Note 8 - Corporate Partnership Agreements. In
consideration for regaining commercial rights in the restructuring, the Company
issued to Esteve 500,000 shares of common stock for no cash consideration, and
for accounting purposes, incurred a non-cash charge of $3.5 million,
representing the fair market value of the shares on the date of issuance. This
charge, including other costs associated with the restructuring, is a component
of Corporate Partnership Restructuring Charges on the Income Statement.
2004
Restructuring of Corporate Partnership with Quintiles
In
November 2004, the Company agreed with Quintiles to restructure its business
arrangements and terminate the commercialization agreements for Surfaxin in the
United States. The Company regained full commercialization rights for Surfaxin
in the United States. Pursuant to the restructuring, Quintiles is no longer
obligated to provide any commercialization services and the Company’s obligation
to pay a commission on net sales in the United States of Surfaxin for the
treatment of RDS and MAS to Quintiles has been terminated. See Note 8 -
Corporate Partnership Agreements. In connection with obtaining full
commercialization rights for Surfaxin, the Company issued to Quintiles a warrant
to purchase 850,000 shares of Common Stock at an exercise price equal to $7.19
per share. The warrant has a 10-year term and is exercisable for total proceeds
equal to approximately $6 million in cash or as an offset to cancel indebtedness
of the Company in connection with the existing secured revolving credit facility
of $8.5 million. For accounting purposes, the Company incurred a non-cash charge
of $4.0 million, representing the fair market value of the warrant on the date
of issuance. This charge is a component of Corporate Partnership Restructuring
Charges on the Income Statement.
2004
Private Placement
In April
2004, the Company completed an underwritten public offering of 2,200,000 shares
of common stock. The shares were priced at $11.00 per share resulting in the
Company’s receipt of gross and net proceeds equal to $24.2 million and $22.8
million, respectively.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
2004
Redemption of Warrants
Pursuant
to an equity investment from Quintiles and PharmaBio in December 2001, the
Company issued Class G Warrants to purchase 357,143 shares of Common Stock at an
exercise price equal to $3.485 per share (subject to adjustment). The Class G
Warrants had a 10-year term and the Company was entitled to redeem the Class G
Warrants upon the attainment of certain price performance thresholds of the
common stock. In February 2004, the price performance criteria was met and the
warrants were redeemed. The warrants were cashlessly exercised resulting in the
issuance of 249,726 shares of Common Stock.
Pursuant
to a credit facility from Quintiles and PharmaBio in December 2001, the Company
issued Class H Warrants to purchase 320,000 shares of Common Stock. The Class H
Warrants were exercisable at $3.03 per share and were exercisable
proportionately only upon availability of the credit facility. The Class H
Warrants had a 10-year term and the Company was entitled to redeem the Class H
warrants upon the attainment of certain price performance thresholds of the
Common Stock. In 2004, the price performance criteria was met and the warrants
were redeemed. The Class H Warrants were cashlessly exercised resulting in the
issuance of 228,402 shares of Common Stock.
2003
Private Placement
In June
2003, the Company completed the sale of securities in a private placement to
selected institutional and accredited investors for net proceeds of
approximately $25.9 million. The Company issued 4,997,882 shares of Common Stock
and 999,577 Class A Investor Warrants to purchase shares of Common Stock at an
exercise price equal to $6.875 per share. The Class A Investor Warrants have a
seven-year term. As of December 31, 2004, approximately 946,000 of the Class A
Investor Warrants remain unexercised.
2002
Private Placement
In
November 2002, the Company received approximately $11.9 million in net proceeds
from the sale of 6,397,517 shares of Common Stock and 2,878,883 Class I Warrants
to purchase shares of Common Stock at an exercise price equal to $2.425 per
share. In connection with this private placement, the placement agent received
fees of approximately $766,000. The Class I Warrants had a five-year term and
the Company was entitled to redeem the Class I Warrants upon the attainment of
certain price performance thresholds of the Common Stock. In June 2003, the
price performance criteria was met and all of the Class I Warrants were
redeemed, resulting in 2,506,117 shares of Common Stock issued and proceeds of
approximately $4.3 million.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Common
shares reserved for future issuance
Common
shares reserved for potential future issuance upon exercise of
warrants
The chart
below details shares of Common Stock reserved for future issuance upon the
exercise of warrants.
|
|
Shares
Reserved for Issuance upon Exercise of Warrants |
|
|
|
|
|
|
|
December
31, |
|
|
|
|
|
|
|
2004
|
|
2003
|
|
Exercise
Price |
|
Expiration
Date |
|
|
|
|
|
|
|
|
|
|
|
Quintiles
Warrant
(2004
business restructuring) |
|
|
850,000
|
|
|
— |
|
$ |
7.19 |
|
|
11/3/2014 |
|
Class
B Investor Warrants
(2004
Kingsbridge CEFF) |
|
|
375,000
|
|
|
— |
|
$ |
12.07 |
|
|
1/6/2010 |
|
Class
A Investor Warrants (2003) |
|
|
945,745
|
|
|
954,717
|
|
$ |
6.88 |
|
|
2/19/2010 |
|
Class
G Quintiles Warrants (2001) |
|
|
— |
|
|
357,143
|
|
$ |
3.49 |
|
|
12/9/2011 |
|
Class
H Quintiles Warrants (2001) |
|
|
— |
|
|
320,000
|
|
$ |
3.03 |
|
|
12/9/2011 |
|
Class
E Investor Warrants (2000) |
|
|
310,567
|
|
|
549,029
|
|
$ |
7.38 |
|
|
3/21/2005 |
|
Placement
Agent (2000) |
|
|
214,794
|
|
|
348,341
|
|
$ |
8.11 |
|
|
9/21/2007 |
|
Placement
Agent Warrants (1999) |
|
|
— |
|
|
193,100
|
|
$ |
0.67 |
|
|
1/1/2010 |
|
Placement
Agent Warrants (1996) |
|
|
4,615
|
|
|
41,454
|
|
$ |
0.64 |
|
|
11/15/2006 |
|
Placement
Agent Warrants (1996) |
|
|
138,953
|
|
|
433,670
|
|
$ |
3.53 |
|
|
11/15/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,839,674
|
|
|
3,197,454
|
|
|
|
|
|
|
|
Common
shares reserved for potential future issuance upon exercise of stock
options
The
Company’s
has a Stock Incentive Plan, which includes three equity programs. See Note 11 -
Stock Options. The Company had shares reserved for potential future issuance
under the Stock Incentive Plan of 7,331,000 and 5,587,000 as of December 31,
2004 and 2003, respectively, for stock options outstanding and stock options
available for future grants.
Common
shares reserved for potential future issuance under the
CEFF
The
Company entered into a CEFF with Kingsbridge pursuant to which Kingsbridge has
committed to finance up to $75.0 million of capital for newly-issued shares of
common stock. See - Liquidity and Capital Resources “Committed Equity Financing
Facility (CEFF)”. In October 2004, the Company filed a registration statement
pursuant to the CEFF, which reserved 15,000,000 shares of common stock for
future issuance under the CEFF calculated as the full amount available, $75.0
million, divided by the lowest price per share as determined by the CEFF
agreement, $5.00 per share. In December 2004, the Company entered into a
financing pursuant to the CEFF resulting in the issuance of 901,742 shares for
gross proceeds of $7.2 million. After giving effect to the shares issued in the
December CEFF financing, the Company had 14,098,000 shares of Common Stock
reserved for issuance under of the CEFF as of December 31, 2004. In connection
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Common
shares reserved for future issuance under the Shelf Registration
Statement
In 2003,
the Company filed a shelf registration statement with the SEC for the proposed
offering from time to time of up to an aggregate 6,500,000 million shares of
Common Stock. In April
2004, the Company completed an underwritten public offering of 2,200,000 million
shares of Common Stock pursuant to the shelf registration statement, resulting
in gross proceeds of $24.2 million. As of December 31, 2004 and 2003, the
Company had 4,300,000 and 6,500,000 shares reserved for issuance under the shelf
registration statement.
In
February 2005, the Company amended the original shelf registration statement,
increasing the shares of Common Stock available by 1,468,592 shares. Also in
February 2005, the Company completed a registered direct offering of 5,060,000
shares of Common Stock pursuant to the shelf registration statement, resulting
in gross proceeds of $29.1 million. There are currently 708,592 shares of Common
Stock reserved for potential future issuance under the shelf registration
statement.
Common
shares reserved for potential future issuance under the Company’s 401(k)
Plan
The
Company has a voluntary 401(k) savings plan covering eligible employees.
Effective January 1, 2003, the Company allows for periodic discretionary matches
as a percentage of each participant’s contributions in newly issued shares of
Company Stock. The Company match resulted in the issuance of 22,564 and 21,333
shares of common stock for the years ended December 31, 2004 and 2003,
respectively. The Company had shares reserved for potential future issuance
under the Company’s 401(k) Plan of 106,103 and 128,667 for the years ended
December 31, 2004 and 2003, respectively.
Treasury
stock/Common Stock issued for services
The
Company has a stock repurchase program wherein the Company may buy its own
shares on the open market and use such shares to settle indebtedness. Such
shares are accounted for as treasury stock. During the years ended December 31,
2004, 2003 and 2002, the Company did not repurchase its own shares on the open
market.
During
the twelve months ended December 31, 2004, certain members of the Company’s
management and certain consultants, pursuant to terms set forth in the Company’s
Amended and Restated 1998 Stock Incentive Plan, tendered shares of Common Stock
then held by such members in lieu of cash for payment for the exercise of
certain stock options previously granted to such parties. For the twelve months
ended December 31, 2004, 146,204 shares of our Common Stock were tendered to us
by such parties in lieu of cash at a weighted average price of $12.07 per share.
These shares are accounted for as treasury stock as follows.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
The
following chart details shares tendered to the Company in lieu of cash for the
exercise of stock options:
|
|
Number of shares
received in lieu of
cash for the exercise
of stock options |
|
|
Average price
Per share |
|
January
2004 |
|
97,226 |
|
$ |
12.44 |
|
March
2004 |
|
18,497 |
|
|
12.08 |
|
May
2004 |
|
24,702 |
|
|
11.27 |
|
July
2004 |
|
5,779 |
|
|
9.30 |
|
Total |
|
146,204 |
|
$ |
12.07 |
|
Note
11 - Stock Options
In March
1998, the Company adopted its 1998 Stock Incentive Plan, which includes three
equity programs (the "1998 Plan"):
Discretionary
Option Grant Program
Under the
Discretionary Option Grant Program, options to acquire shares of the Common
Stock may be granted to eligible persons who are employees, non-employee
directors, consultants and other independent advisors. Options granted under the
Discretionary Option Grant Program are granted at no less than one hundred
percent (100%) of the fair market value of the common stock on the date of the
grant; generally vest over a period of three years; and expire no later than 10
years from the date of the grant, subject to certain conditions. Options granted
and outstanding through November 2003 are exercisable immediately upon grant,
however, the shares issuable upon the exercise of such options are subject to
repurchase by the Company. Any such repurchase rights lapse as the options vest
according to their stated terms. All shares of Common Stock issuable upon such
non-vested options are subject to restrictions on transferability. Options
granted under the 1998 Plan after November 2003 are only exercisable upon
vesting.
Stock
Issuance Program
Under the
Stock Issuance Program, such eligible persons may be issued shares of the Common
Stock. The Company has not issued any such shares for the years ended December
31, 2004, 2003 and 2002.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Automatic
Option Grant Program
Under the
Automatic Option Grant Program, eligible non-employee directors will
automatically receive option grants at periodic intervals at an exercise price
equal to the fair market value per share on the date of the grant. Such options
usually vest upon the first anniversary of the date of the grant and expire no
later than 10 years from the date of the grant.
The
Company currently has 9,570,000 shares of Common Stock under the 1998 Stock
Incentive Plan, of which 7,331,000 remain reserved for issuance over the term of
the plan. The 1998 Plan was successively amended at each of the Annual Meetings
of Shareholders for the years 2004, 2003, and 2002, to increase the maximum
number of shares of Common Stock reserved for issuance over the term of the plan
by 3,000,000 shares, 1,420,000 shares, and 1,000,000 shares, respectively. In
addition, in 2002, the Board of Directors approved amendments to the 1998 Plan
that (i) increased the exercise price of options granted to non-employee
directors pursuant to the Automatic Option Grant Program from 60% to 100% of the
fair market value per share on the date of the grant and (ii) removed the Plan
Administrator’s authority to effect the cancellation and regrant of any
outstanding options under the Discretionary Option Grant Program.
A summary
of the Company’s stock option activity and related information is as
follows:
|
Price
Per Share |
|
Shares |
|
Weighted
Average
Exercise
Price |
|
|
Weighted
Average Remaining
Contractual
Life |
Balance
at January 1, 2002 |
$0.0026
- $7.00 |
|
4,246,959 |
|
$3.15 |
|
8.01
years |
Options
granted |
1.26
- 3.65 |
|
1,786,000 |
|
2.14 |
|
|
Options
exercised |
0.0821
- 2.10 |
|
(77,925) |
|
0.77 |
|
|
Options
forfeited |
.3205
- 7.00 |
|
(349,850) |
|
3.34 |
|
|
Balance
at December 31, 2002 |
0.0026
- 5.375 |
|
5,605,184 |
|
2.85 |
|
7.81
years |
Options
granted |
1.70
- 9.17 |
|
1,111,750 |
|
6.75 |
|
|
Options
exercised |
0.0026
- 4.22 |
|
(993,001) |
|
1.95 |
|
|
Options
forfeited |
0.1923
- 5.06 |
|
(168,611) |
|
2.76 |
|
|
Balance
at December 31, 2003 |
0.0026
- 9.17 |
|
5,555,322 |
|
3.80 |
|
7.44
years |
Options
granted |
5.92
- 10.60 |
|
2,681,250 |
|
8.60 |
|
|
Options
exercised |
.3205
- 9.17 |
|
(1,271,493) |
|
3.41 |
|
|
Options
forfeited |
1.42
- 10.60 |
|
(120,425) |
|
5.64 |
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
$.0026
- $10.60 |
|
6,844,654 |
|
$5.69 |
|
7.76
years |
Options
granted and outstanding through November 2003 are exercisable immediately upon
grant, however, the shares issuable upon the exercise of such options are
subject to repurchase by the Company. Any such repurchase rights lapse as the
options vest according to their stated terms. The following table provides
detail with regard to options outstanding and exercisable at December 31,
2004:
DISCOVERY LABORATORIES, INC. AND
SUBSIDIARY
Price
per share |
|
Shares
Outstanding |
|
Weighted
Average
Price
per
Share |
|
Weighted
Average
Remaining
Contractual
Life |
|
Shares
Exercisable |
|
Weighted
Average
Price
per
Share |
|
$0.0026
- $2.00 |
|
|
749,831 |
|
$ |
1.59 |
|
|
6.97
years |
|
|
749,831 |
|
$ |
1.59 |
|
$2.01
- $4.00 |
|
|
1,681,348 |
|
$ |
2.63 |
|
|
7.01
years |
|
|
1,681,348 |
|
$ |
2.63 |
|
$4.00
- $6.00 |
|
|
1,052,021 |
|
$ |
4.69 |
|
|
5.29
years |
|
|
1,050,021 |
|
$ |
4.68 |
|
$6.01
- $8.00 |
|
|
856,501 |
|
$ |
6.74 |
|
|
9.45
years |
|
|
341,488 |
|
$ |
6.84 |
|
$8.01
- $10.00 |
|
|
2,252,953 |
|
$ |
8.90 |
|
|
8.92
years |
|
|
1,342,203 |
|
$ |
8.67 |
|
$10.01
- $12.00 |
|
|
252,000 |
|
$ |
10.12 |
|
|
9.38
years |
|
|
25,000 |
|
$ |
10.43 |
|
|
|
|
6,844,654 |
|
|
|
|
|
|
|
|
5,189,891 |
|
|
|
|
The
following table provides further detail with regard to options that are
exercisable and vested (therefore, not subject to repurchase rights and related
restrictions on transferability by the Company) at December 31,
2004:
Price
per share |
|
Shares
Exercisable |
|
Weighted
Average
Price
per
Share |
|
Vested
Shares not subject to Repurchase Rights |
|
Weighted
Average
Price
per
Share |
|
$0.0026
- $2.00 |
|
|
749,831 |
|
$ |
1.59 |
|
|
557,085 |
|
$ |
1.53 |
|
$2.01
- $4.00 |
|
|
1,681,348 |
|
$ |
2.63 |
|
|
854,273 |
|
$ |
2.52 |
|
$4.00
- $6.00 |
|
|
1,050,021 |
|
$ |
4.68 |
|
|
1,007,689 |
|
$ |
4.66 |
|
$6.01
- $8.00 |
|
|
341,488 |
|
$ |
6.84 |
|
|
322,720 |
|
$ |
6.81 |
|
$8.01
- $10.00 |
|
|
1,342,203 |
|
$ |
8.67 |
|
|
1,177,668 |
|
$ |
8.75 |
|
$10.01
- $12.00 |
|
|
25,000 |
|
$ |
10.43 |
|
|
25,000 |
|
$ |
10.43 |
|
|
|
|
5,189,891 |
|
|
|
|
|
3,944,435 |
|
|
|
|
Prior to
2002, under the Automatic Option Grant Program, eligible directors automatically
received option grants at periodic intervals at an exercise price equal to 60%
of fair market value per share on the date of the grant. Since 2002, all stock
option grants to non-employee directors pursuant to the Automatic Option Grant
Program are required to be at 100% of the fair market value per share on the
date of the grant.
The
following table pertains to options granted to non-employee directors at less
than fair market value prior to 2002 that remain outstanding:
|
|
December
31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Shares
outstanding |
|
|
200,000 |
|
|
240,000 |
|
|
480,000 |
|
Weighted
average exercise price |
|
$ |
2.11 |
|
$ |
2.09 |
|
$ |
2.00 |
|
Weighted
average fair value |
|
$ |
3.52 |
|
$ |
3.49 |
|
$ |
3.33 |
|
In
December 2004, the Board of Directors approved the issuance of options to
management to purchase up to 1,148,500 shares of Common Stock at an exercise
price of $9.02 per share. Such options are expressly subject to the requisite
approval of the Company’s shareholders, to be obtained no later than the
Company’s Annual Meeting of Shareholders for 2005, for an amendment to the 1998
Plan authorizing an increase in the number of shares issuable under the plan in
an amount equal to or greater than the aggregate amount of such options and an
increase in the total shares authorized for use by the Company. Accordingly,
such options are not included in the options outstanding at December 31, 2004.
Provided the shareholders of the Company approve such amendment, such options
shall vest over a three year period from the date of the grant.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In
December 2003, the Board of Directors approved the issuance of options to
management to purchase up to 1,464,500 shares of Common Stock at an exercise
price of $9.17 per share, the fair market value on the
date the Board of Directors approved the grant. Such options were expressly
subject to the requisite approval of the Company’s shareholders, to be obtained
no later than the Company’s Annual Meeting of Shareholders for 2004, for an
amendment to the 1998 Plan authorizing an increase in the number of shares
issuable under the plan in an amount equal to or greater than the aggregate
amount of such options. Approval was obtained at the Company’s Annual Meeting of
Shareholders for 2004, at which time the fair market value of our Common Stock
was $9.80, which was greater than the fair market value on the date the options
were granted. The difference in fair market value on the date of grant versus
the date of subsequent shareholder approval was recorded as unearned portion of
compensatory stock options and will be recognized into expense as the options
vest. The Company incurred a non-cash charge of $461,000 related to the vesting
of such options in 2004.
In
December 2002, the Board of Directors approved the issuance of options to
management to purchase up to 800,000 shares of Common Stock at an exercise price
of $2.75 per share. Such options had been subject to the approval of the
Company’s shareholders, which was obtained at the time of the Company’s Annual
Meeting of Shareholders for 2003. Accordingly, such options are now included in
the options outstanding at December 31, 2002. Such options shall vest in their
entirety upon the fourth anniversary of the date of grant or at such earlier
time, if ever, upon the receipt by the Company of a NDA approval by the FDA for
Surfaxin for either RDS in premature infants, MAS in full-term infants or ARDS
in adults.
Note
12 - 401(k) Match
The
Company has a voluntary 401(k) savings plan covering eligible employees.
Effective January 1, 2003, the Company allows for periodic discretionary matches
as a percentage of each participant’s contributions in newly issued shares of
Common Stock. The total match for the year ended December 31, 2004 was $215,000,
resulting in the issuance of 25,683 shares. The total match for the year ending
December 31, 2003 was $119,000, resulting in the issuance of 25,470 shares.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
13 - Commitments
The
Company’s long-term contractual obligations include commitments and estimated
purchase obligations entered into in the normal course of business.
Payments
due under contractual obligations at December 31, 2004 are as
follows:
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009
|
|
Thereafter |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility |
|
$ |
— |
|
$ |
5,929,000 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
5,929,000 |
|
Capital
lease obligations |
|
|
1,073,000 |
|
|
886,000 |
|
|
747,000 |
|
|
225,000 |
|
|
— |
|
|
— |
|
|
2,931,000 |
|
Operating
lease obligations
|
|
|
1,214,000 |
|
|
1,161,000 |
|
|
1,193,000 |
|
|
1,078,000 |
|
|
957,000 |
|
|
160,000 |
|
|
5,763,000 |
|
Purchase
obligations |
|
|
4,947,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,947,000 |
|
Employment
agreements |
|
|
2,203,000 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
2,203,000 |
|
Total |
|
$ |
9,437,000 |
|
$ |
7,976,000 |
|
$ |
1,940,000 |
|
$ |
1,303,000 |
|
$ |
957,000 |
|
$ |
160,000 |
|
$ |
21,773,000 |
|
The
Company has a secured revolving credit facility of up to $8,500,000 with
Quintiles available for use until December 31, 2006, of which $5,929,000 was
outstanding at December 31, 2004. See Note 7 - Secured Credit Facility and
Capital Lease Financing Arrangement.
The
Company has a capital lease financing arrangement with the General Electric
Capital Corporation. The arrangement provides, subject to certain conditions, up
to an aggregate $9.0 million in financing for capital purchases. See Note 7 -
Secured Credit Facility and Capital Lease Financing Arrangement. As of December
31, 2004, approximately $2.5 million was outstanding under this financing
arrangement. Total future payments under the arrangement, including interest,
are approximately $2.9 million.
The
Company’s operating leases consist primarily of facility leases for the
Company’s operations in Pennsylvania and California.
The
Company maintains its headquarters in Warrington, Pennsylvania. The facility is
39,594 square feet and serves as the main operating facility for clinical
development, regulatory, sales and marketing, and administration. The lease
expires in February 2010 with total aggregate payments of $4.6 million.
The
Company also leases approximately 18,000 square feet of office and laboratory
space in Doylestown, PA. The Company intends to maintain a portion of the
Doylestown facility for the continuation of analytical laboratory activities and
sublease the remaining portions to the greatest extend possible. To the extent
that subleasing is not possible, the leases will expire according to their
terms. The leases expire in March 2005 and August 2005.
The
Company leases office and laboratory space in Mountain View, California. The
facility is 16,800 square feet and houses the Company’s aerosol development
operations. The lease expires in June 2008 with total aggregate payments of
$804,000.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Prior to
the Mountain View facility, the Company leased office and laboratory space in
Redwood City, CA. The facility was approximately 5,000 square feet and housed
the Company’s aerosol development operations. In December 2004, the Company
vacated the Redwood City facility and moved to the Mountain View facility. In
February 2005, the sublease agreement for the Redwood City facility was
terminated.
Payments
made under all of these existing leases for the years ended December 31, 2004,
2003, and 2002 were $585,000, $590,000 and $481,000, respectively.
The
Company’s purchase obligations include commitments entered in the ordinary
course of business, primarily commitments to purchase manufacturing equipment
and services for the enhancement of the Company’s manufacturing capabilities for
Surfaxin and sales and marketing services related to the potential launch of
Surfaxin in the United States.
At
December 31, 2004, the Company had employment agreements with eight officers
providing for an aggregate annual salary equal to $2,203,000. The agreements
expire in December 2005, however, commencing on January 1, 2006, and on each
January 1st thereafter, the term of these agreements shall automatically be
extended for one additional year, unless at least 90 days prior to such January
1st date, the Company or the Executive shall have given notice that it does not
wish to extend the agreement. All of the foregoing agreements provide for the
issuance of annual bonuses and the granting of options subject to approval by
the Board of Directors. All of the foregoing agreements provide that in the
event that the employment of any such officers is terminated without Cause or
should any such officers terminate employment for Good Reason, as defined in the
respective agreements, including in circumstances of a change of control, such
officer shall be entitled to certain cash compensation and benefits
continuation.
In
addition to the contractual obligations above, the Company has future milestone
commitments, aggregating $2,500,000, and royalty obligations to Johnson &
Johnson, Inc., and Ortho Pharmaceutical, a wholly-owned subsidiary of Johnson
& Johnson, Inc., related to the Company’s product licenses. To date, the
Company has paid $450,000 for milestones achieved.
Note
14 - Recently Issued Accounting Standards
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (SFAS No. 123(R)), which replaces SFAS No. 123 and supersedes APB
Opinion NO. 25. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first interim period
after June 15, 2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS No. 123 win no longer be an alternative to
financial statement recognition. The Company is required to adopt SFAS No.
123(R) in the third quarter of 2005. Under SFAS No. 123(R), the Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at the date of adoption. The permitted transition methods
include either retrospective or prospective adoption. Under the retrospective
option, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options at the beginning
of the first quarter of adoption of SFAS No. 123F, while the retrospective
methods would record compensation expense for all unvested stock options
beginning with the first period presented. The Company is currently evaluating
the requirements of SFAS No. 123(R) and expects that adoption of SFAS No. 123(R)
will have a material impact on the Company's financial position and results of
operations. The Company has not yet determined the method of adoption or the
effect of adopting SFAS No. 123(R), and it has not determined whether the
adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS No. 123. See Note 2 - Summary of Significant Accounting
Policies - Stock-based Compensation.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
15 - Related Party Transactions
Laboratorios
del Dr. Esteve, S.A.
Dr.
Esteve serves as a member of the Company’s Board of Directors and is an
executive officer of Esteve. In December 2004, the Company and Laboratorios
Esteve restructured their corporate partnership for the development, marketing
and sales of Discovery’s products in Europe and Latin America. Under
the revised
collaboration, Discovery has regained full commercialization rights in key
European markets, Central America and South America for its SRT, including
Surfaxin for RDS in premature infants and ARDS in adults. Laboratorios Esteve
will focus on Andorra,
Greece, Italy, Portugal and Spain and now has development and marketing rights
to a broader portfolio of the Company’s potential SRT products. See Note 8 -
Corporate Partnership Agreements.
Note
16 - Income Taxes
Since its
inception, the Company has never recorded a provision or benefit for Federal and
state income taxes.
The
reconciliation of the income tax benefit computed at the Federal statutory rates
to the Company’s recorded tax benefit for the years ended December 31, 2004,
2003 and 2004 are as follows:
|
|
December
31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
Income
tax benefit, statutory rates |
|
$ |
15,739,000 |
|
$ |
8,255,000 |
|
$ |
5,938,000 |
|
State
taxes on income, net of federal benefit |
|
|
2,776,000 |
|
|
2,015,000 |
|
|
1,088,000
|
|
Research
and development tax credit |
|
|
623,000
|
|
|
441,000
|
|
|
274,000
|
|
Other |
|
|
(87,000 |
) |
|
92,000
|
|
|
(755,000 |
) |
Income
tax benefit |
|
|
19,051,000
|
|
|
10,803,000
|
|
|
6,545,000
|
|
Valuation
allowance |
|
|
(19,051,000 |
) |
|
(10,803,000 |
) |
|
(6,545,000 |
) |
Income
tax benefit |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
The tax
effects of temporary differences that give rise to deferred tax assets and
deferred tax liabilities, at December 31, 2004 and 2003, are as
follows:
|
|
December
31, |
|
|
|
2004 |
|
2003 |
|
Long-term
deferred tax assets: |
|
|
|
|
|
Net
operating loss carryforwards
(federal
and state) |
|
|
|
|
|
|
|
Research
and development tax credits |
|
|
2,832,000
|
|
|
1,868,000
|
|
Compensation
Expense on Stock |
|
|
524,000 |
|
|
— |
|
Charitable
Contribution Carryforward |
|
|
5,000 |
|
|
— |
|
Other
Accrued |
|
|
161,000 |
|
|
70,000 |
|
Deferred
Revenue |
|
|
55,000 |
|
|
273,000 |
|
Capitalized
research and development |
|
|
38,000
|
|
|
122,000
|
|
Total
long-term deferred tax assets |
|
|
59,440,000
|
|
|
37,940,000
|
|
Long-term
deferred tax liabilities: |
|
|
|
|
|
|
|
Property
and equipment |
|
|
(651,000 |
) |
|
(272,000 |
) |
Net
deferred tax assets |
|
|
58,789,000
|
|
|
37,668,000
|
|
Less:
valuation allowance |
|
|
(58,789,000 |
) |
|
(37,668,000 |
) |
|
|
$ |
— |
|
$ |
— |
|
The
Company was in a net deferred tax asset position at December 31, 2004 and 2003
before the consideration of a valuation allowance. Due to the fact that the
Company has never realized a profit, management has fully reserved the net
deferred tax asset since realization is not assured.
At
December 31, 2004 and 2003, the Company had available carryforward net operating
losses for Federal tax purposes of $140,652,000 and $91,585,000, respectively,
and a research and development tax credit carryforward of $2,832,000 and
$1,868,000, respectively. The Federal net operating loss and research and
development tax credit carryforwards expire beginning in 2009 and continuing
through 2023. At December 31, 2004, the Company had available carryforward
federal and state net operating losses of $1,744,000 and $326,000 respectively
related to stock based compensation. Additionally, at December 31, 2004 and
2003, the Company had available carryforward losses of approximately
$121,876,000 and $82,483,000, respectively, for state tax purposes. The
utilization of the Federal net operating loss carryforwards is subject to annual
limitations in accordance with Section 382 of the Internal Revenue Code. Certain
state carryforward net operating losses are also subject to annual
limitations.
Federal
and state net operating losses, $5,129,000 and $4,969,000, respectively, relate
to stock based compensation, the tax effect of which will result in a credit to
equity as opposed to income tax expense to the extent these losses are utilized
in the future.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
17 - Subsequent Events
On
February 24, 2005, the Company completed
a registered direct offering of 5,060,000 shares of Common Stock. The shares
were priced at $5.75 per share resulting in the Company’s receipt of gross and
net proceeds equal to $29.1 million and $27.5 million,
respectively.
In
February 2005, the Company received an Approvable Letter from the FDA for
Surfaxin® for the prevention of RDS in premature infants. The Approvable Letter
is an official notification that the FDA is prepared to approve the Surfaxin New
Drug Application for Surfaxin and contains conditions that the applicant must
meet prior to obtaining final U.S. marketing approval. The conditions that the
Company must meet primarily involve finalizing labeling and correcting certain
manufacturing issues associated with an inspection report (Form FDA-483) from
the FDA issued to the Company’s contract manufacturer, Laureate. Most notably,
the FDA is not requiring additional preclinical or clinical trials for final
approval. Based on the nature of the observations contained in the Approvable
Letter, the Company currently anticipates that it will respond to the FDA with a
“Class 2” response. A “Class 2” response allows the FDA up to six months
following the completion of the labeling and manufacturing issues outlined in
the PDUFA letter. Therefore, the Company anticipates that the potential approval
of Surfaxin for RDS may occur in the fourth quarter of 2005 or the first quarter
of 2006.
In
February 2005, the Company borrowed the remaining available funds under the
secured credit facility with Quintiles and now has an outstanding balance of
$8.5 million. Outstanding principal and accrued interest is due and payable as a
balloon payment on December 31, 2006.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
18 - Selected Quarterly Financial Data (unaudited)
The
following table contains unaudited statement of operations information for each
quarter of 2004 and 2003. The operating results for any quarter are not
necessarily indicative of results for any future period.
2004 Quarters Ended: |
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data) |
|
|
|
|
Mar.
31 |
|
|
June
30 (1) |
|
|
Sept.
30 |
|
|
Dec.
31 |
|
|
Total
Year |
|
Revenues
from collaborative agreements |
|
$ |
142 |
|
$ |
697 |
|
$ |
236 |
|
$ |
134 |
|
$ |
1,209 |
|
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
6,710
|
|
|
6,373
|
|
|
5,673
|
|
|
7,037 |
|
|
25,793 |
|
General
and administrative |
|
|
2,281
|
|
|
3,175
|
|
|
2,908
|
|
|
4,958 |
|
|
13,322 |
|
Corporate
partnership restructuring charge |
|
|
— |
|
|
— |
|
|
— |
|
|
8,126 |
|
|
8,126 |
|
Total
expenses |
|
|
8,991 |
|
|
9,548 |
|
|
8,581 |
|
|
20,121 |
|
|
47,241 |
|
Operating
loss |
|
|
(8,849 |
) |
|
(8,851 |
) |
|
(8,345 |
) |
|
(19,987 |
) |
|
(46,032 |
) |
Other
expense, net |
|
|
(23 |
) |
|
(46 |
) |
|
(37 |
) |
|
(65 |
) |
|
(171 |
) |
Net
loss |
|
|
(8,872 |
) |
|
(8,897 |
) |
|
(8,382 |
) |
|
(20,052 |
) |
$ |
(46,203 |
) |
Net
loss per common share - basic and diluted |
|
|
(0.20 |
) |
|
(0.19 |
) |
|
(0.18 |
) |
|
(0.42 |
) |
$ |
(1.00 |
) |
Weighted
average number of common shares
outstanding |
|
|
43,320
|
|
|
46,683
|
|
|
46,988
|
|
|
47,236 |
|
|
46,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Quarters Ended: |
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data) |
|
|
|
|
Mar.
31 |
|
|
June
30 |
|
|
Sept.
30 |
|
|
Dec.
31 |
|
|
Total
Year |
|
Revenues
from collaborative agreements |
|
$ |
393 |
|
$ |
263 |
|
$ |
198 |
|
$ |
183 |
|
$ |
1,037 |
|
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
3,844
|
|
|
4,011
|
|
|
5,096
|
|
|
6,799
|
|
|
19,750
|
|
General
and administrative |
|
|
1,167
|
|
|
1,137
|
|
|
1,375
|
|
|
2,043
|
|
|
5,722
|
|
Total
expenses |
|
|
5,011 |
|
|
5,148 |
|
|
6,471 |
|
|
8,842 |
|
|
25,472 |
|
Operating
loss |
|
|
(4,618 |
) |
|
(4,885 |
) |
|
(6,273 |
) |
|
(8,659 |
) |
|
(24,435 |
) |
Other
income and (expense), net |
|
|
113
|
|
|
36
|
|
|
54
|
|
|
(48 |
) |
|
155
|
|
Net
loss |
|
|
(4,505 |
) |
|
(4,849 |
) |
|
(6,219 |
) |
|
(8,707 |
) |
$ |
(24,280 |
) |
Net
loss per common share - basic and diluted |
|
|
(0.14 |
) |
|
(0.14 |
) |
|
(0.15 |
) |
|
(0.21 |
) |
$ |
(0.65 |
) |
Weighted
average number of common shares
outstanding |
|
|
32,857
|
|
|
33,487
|
|
|
41,084
|
|
|
42,391
|
|
|
37,426
|
|
(1) |
A
reclassification has been made to the presentation of operating expenses
in the current second quarter of 2004. The expense associated with a
milestone payment related to the license of Surfaxin has been reclassifed
from general and administrative expenses and is currently reflected in
research and development expenses. |