Attached files
file | filename |
---|---|
EX-32.1 - S.DAVIS SOX CERTIFICATION - NEUROGEN CORP | exhibit321.htm |
EX-31.1 - S.DAVIS CERTIFICATION - NEUROGEN CORP | exhibit311.htm |
EX-10.1 - PURCHASE AND SALE AGREEMENT - NEUROGEN CORP | exhibit101.htm |
EX-31.2 - T. PITLER CERTIFICATION - NEUROGEN CORP | exhibit312.htm |
EX-32.2 - T. PITLER SOX CERTIFICATION - NEUROGEN CORP | exhibit322.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended
September 30, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
File Number 000-18311
NEUROGEN
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
22-2845714
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
45
Northeast Industrial Road, Branford, CT 06405
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (203) 488-8201
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.
x Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
|
Accelerated filer
¨
|
|
Non-accelerated filer ¨
|
Smaller reporting company x
|
|
(Do
not check if smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes x
No
FORM
10-Q
FOR
THE SECOND QUARTER ENDED
SEPTEMBER
30, 2009
PAGE
|
||
PART
I - FINANCIAL INFORMATION
|
||
ITEM
1.
|
Financial
Statements
|
|
Condensed
Consolidated Statements of Operations for the three-month and nine-month
periods ended September 30, 2009 and 2008 (unaudited)
|
1 | |
Condensed
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 2009 and 2008 (unaudited)
|
2 | |
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
3 | |
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
4 |
ITEM
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
11 |
ITEM
4T.
|
Controls
and Procedures
|
18 |
PART
II - OTHER INFORMATION
|
||
ITEM
1.
|
Legal
Proceedings
|
20 |
ITEM
1A.
|
Risk
Factors
|
20 |
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22 |
ITEM
3.
|
Defaults
upon Senior Securities
|
22 |
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
22 |
ITEM
5.
|
Other
Information
|
22 |
ITEM
6.
|
Exhibits
|
22 |
Signatures
|
23 |
ITEM
1 – FINANCIAL STATEMENTS
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
(Amounts
in thousands, except per share data)
|
||||||||
(unaudited)
|
||||||||
September
30,
2009
|
December
31,
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
15,312
|
$
|
24,106
|
||||
Marketable
securities
|
-
|
6,967
|
||||||
Receivables
from corporate partners
|
-
|
61
|
||||||
Assets
held for sale
|
3,170
|
5,108
|
||||||
Other
current assets, net
|
773
|
1,394
|
||||||
Total
current assets
|
19,255
|
37,636
|
||||||
Restricted
cash
|
121
|
-
|
||||||
Property,
plant & equipment:
|
||||||||
Land,
building and improvements
|
-
|
7,868
|
||||||
Equipment
and furniture
|
1,025
|
3,253
|
||||||
1,025
|
11,121
|
|||||||
Less
accumulated depreciation and amortization
|
1,020
|
4,019
|
||||||
Net
property, plant and equipment
|
5
|
7,102
|
||||||
Other assets, net
|
-
|
30
|
||||||
Total
assets
|
$
|
19,381
|
$
|
44,768
|
||||
Liabilities
and Stockholders’ Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$
|
3,216
|
$
|
4,555
|
||||
Loans
payable, current portion
|
353
|
4,692
|
||||||
Total
current liabilities
|
3,569
|
9,247
|
||||||
Tenant
security deposit
|
121
|
-
|
||||||
Loans
payable, net of current portion
|
2,540
|
2,807
|
||||||
Total
liabilities
|
6,230
|
12,054
|
||||||
Commitments
and Contingencies (Note 8)
|
||||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, par value $0.025 per share
|
||||||||
Authorized
10,000 shares; none issued
|
-
|
-
|
||||||
Common
stock, par value $0.025 per share
|
||||||||
Authorized
150,000 shares; issued and outstanding 68,974 and 68,044
|
||||||||
shares
at September 30, 2009 and December 31, 2008, respectively
|
1,724
|
1,701
|
||||||
Additional
paid-in capital
|
354,141
|
353,420
|
||||||
Accumulated
deficit
|
(342,714
|
)
|
(322,424
|
)
|
||||
Accumulated
other comprehensive income (loss)
|
-
|
17
|
||||||
Total
stockholders’ equity
|
13,151
|
32,714
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
19,381
|
$
|
44,768
|
||||
See
accompanying notes to condensed consolidated financial
statements.
|
Page
1
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||
(Amounts
in thousands, except per share data)
|
||||||||||||||||
(unaudited)
|
||||||||||||||||
Three
months ended September 30,
|
Nine
months ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Operating
revenues:
|
||||||||||||||||
Sale
of patent estates
|
$ | - | $ | - | $ | 2,650 | $ | - | ||||||||
Total
operating revenues
|
- | - | 2,650 | - | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
959 | 6,277 | 7,010 | 26,326 | ||||||||||||
General
and administrative
|
1,567 | 1,987 | 4,881 | 4,906 | ||||||||||||
Asset
impairment charges
|
(410 | ) | 3,173 | 8,766 | 10,373 | |||||||||||
Restructuring
of workforce
|
(3 | ) | (20 | ) | 2,674 | 5,110 | ||||||||||
Total
operating expenses
|
2,113 | 11,417 | 23,331 | 46,715 | ||||||||||||
Operating
loss
|
(2,113 | ) | (11,417 | ) | (20,681 | ) | (46,715 | ) | ||||||||
Gain
on warrants to purchase common stock
|
- | 4,746 | - | 16,700 | ||||||||||||
Other
income (expense):
|
||||||||||||||||
Investment
and other income
|
233 | 242 | 585 | 869 | ||||||||||||
Interest
expense
|
(68 | ) | (121 | ) | (244 | ) | (402 | ) | ||||||||
Total
other income, net
|
165 | 121 | 341 | 467 | ||||||||||||
Loss
before income taxes
|
(1,948 | ) | (6,550 | ) | (20,340 | ) | (29,548 | ) | ||||||||
Tax
benefit
|
5 | 23 | 50 | 69 | ||||||||||||
Net
loss
|
(1,943 | ) | (6,527 | ) | (20,290 | ) | (29,479 | ) | ||||||||
Deemed
preferred dividends
|
- | (25,213 | ) | - | (30,620 | ) | ||||||||||
Net
loss attributable to common stockholders
|
$ | (1,943 | ) | $ | (31,740 | ) | $ | (20,290 | ) | $ | (60,099 | ) | ||||
Basic
and diluted loss per share attributable to common
stockholders
|
$ | (0.03 | ) | $ | (0.52 | ) | $ | (0.30 | ) | $ | (1.24 | ) | ||||
Shares
used in calculation of basic and diluted loss per share attributable to
common stockholders
|
68,974 | 61,116 | 68,653 | 48,451 | ||||||||||||
See
accompanying notes to condensed consolidated financial
statements.
|
Page
2
NEUROGEN
CORPORATION
|
||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
(Amounts
in thousands)
|
||||||||
(unaudited)
|
||||||||
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net loss
|
$ | (20,290 | ) | $ | (29,479 | ) | ||
Adjustments to reconcile net loss
to net cash used in operating activities:
|
||||||||
Depreciation
expense
|
148 | 795 | ||||||
Amortization of investment
premium/discount
|
- | 68 | ||||||
Non-cash compensation
expense
|
553 | (459 | ) | |||||
Non-cash gain on warrants to
purchase common stock
|
- | (16,700 | ) | |||||
Non-cash 401(k)
match
|
191 | 580 | ||||||
Impairment
loss on assets held for sale and held for use
|
8,766 | 10,373 | ||||||
(Gain)
loss on disposal of assets
|
(114 | ) | 155 | |||||
Changes in operating assets and
liabilities:
|
||||||||
Decrease in receivables from
corporate partners
|
61 | 166 | ||||||
Decrease in other assets,
net
|
651 | 1,543 | ||||||
Decrease in accounts payable and
accrued expenses
|
(1,339 | ) | (3,915 | ) | ||||
Increase in tenant security
deposit
|
121 | - | ||||||
Net cash used in operating
activities
|
(11,252 | ) | (36,873 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases of property, plant and
equipment
|
- | (194 | ) | |||||
Restricted
cash for lease of property
|
(121 | ) | - | |||||
Proceeds on sales of
assets
|
235 | 1,507 | ||||||
Maturities and sales of marketable
securities
|
6,950 | 10,039 | ||||||
Net cash provided by investing
activities
|
7,064 | 11,352 | ||||||
Cash
flows from financing activities:
|
||||||||
Principal payments under loans payable
|
(4,606 | ) | (1,105 | ) | ||||
Proceeds from issuance of
Series A Exchangeable Preferred Stock and
Warrants, net of issuance costs
|
- | 28,373 | ||||||
Net cash (used in) provided by
financing activities
|
(4,606 | ) | 27,268 | |||||
Net (decrease) increase in cash
and cash equivalents
|
(8,794 | ) | 1,747 | |||||
Cash
and cash equivalents at beginning of period
|
24,106 | 21,227 | ||||||
Cash
and cash equivalents at end of period
|
$ | 15,312 | $ | 22,974 | ||||
See
accompanying notes to condensed consolidated financial
statements.
|
Page
3
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
(1)
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
unaudited condensed consolidated financial statements have been prepared from
the books and records of Neurogen Corporation (“Neurogen” or the “Company”) in
accordance with generally accepted accounting principles for interim financial
information pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete consolidated
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair statement of
the Company's financial position and operations have been included. The
condensed consolidated balance sheet at December 31, 2008 was derived from
audited financial statements but does not include all disclosures required by
accounting principles generally accepted in the United States of America.
Therefore, the unaudited interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including the significant accounting policies described in Note 2,
for the year ended December 31, 2008, included in the Company's Annual Report on
Form 10-K. Interim results are not necessarily indicative of the results that
may be expected for the full fiscal year.
(2)
NATURE OF THE BUSINESS
Neurogen,
incorporated under the laws of the State of Delaware in 1987, is a company that
has historically engaged in the development of new drugs for a broad range of
pharmaceutical uses. Neurogen has focused on advancing new small molecule drugs
where existing therapies achieve limited therapeutic effects or produce
unsatisfactory side effects. As a result of dramatic increases in the cost of
capital for the biotechnology industry and the very unfavorable environment for
biotechnology companies, Neurogen announced in the second quarter of 2009 that
the Company suspended enrollment of new patients in Phase 2 studies for
Parkinson’s disease and restless legs syndrome, or RLS, and is pursuing
strategic options, including a sale of the Company or a sale of major
assets. Furthermore, the Company has eliminated approximately 75% of
its staff positions since December 31, 2008 (Note 5). Excluding employees who
have received a notice of termination and are in the process of transferring
responsibilities, the Company currently has six active, full-time
employees.
On August
23, 2009, Neurogen entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Ligand Pharmaceuticals Incorporated (“Ligand”) and a special
purpose subsidiary of Ligand (“Merger Sub”), as amended by Amendment No. 1 to
the Merger Agreement dated September 18, 2009 and Amendment No. 2 to the Merger
Agreement dated November 2, 2009. The Merger Agreement provides that, upon the
terms and subject to the conditions set forth in the Merger Agreement, the
Merger Sub will merge with and into Neurogen, with Neurogen continuing as the
surviving entity (the “Merger”). The Company will no longer be a standalone
entity at that time but will be a wholly-owned subsidiary of Ligand. The Company
currently expects the merger transaction to close in the fourth quarter of 2009,
subject to approval by the Company’s stockholders, certain regulatory clearances
and the satisfaction of other customary closing conditions (see Note
3).
The
Company has not derived any revenue from product sales to date. If the Company
were to resume development of its drug candidates, it would expect to incur
substantial and increasing losses for at least the next several years and would
need substantial additional financing to obtain regulatory approvals, fund
operating losses, and if deemed appropriate, establish manufacturing and sales
and marketing capabilities, which the Company would seek to raise through equity
or debt financings, collaborative or other arrangements with third parties or
through other sources of financing. In such scenario, there could be no
assurance that such funds would be available on terms favorable to the Company,
if at all. There could be no assurance that the Company would successfully
complete its research and development, obtain adequate patent protection for its
technology, obtain necessary government regulatory approval for drug candidates
the Company develops or that any approved drug candidates would be commercially
viable. In addition, the Company may not be profitable even if it succeeds in
developing and commercializing any of its drug candidates. These circumstances
raise substantial doubt about the Company's ability to continue as a going
concern. Additionally, the Report of the Independent Registered Public
Accounting Firm to the Company’s audited financial statements for the period
ended December 31, 2008 filed in the Annual Report on Form 10-K indicates that
there are a number of factors that raise substantial doubt about its ability to
continue as a going concern. These financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. While the Company believes its current cash and short-term
securities resources would be sufficient to fund its planned pursuit of
strategic options beyond 2010, it is not its intention to do so; the Company
plans to conclude a strategic option as soon as possible. If the Company
became unable to continue as a going concern or was unable to complete a
strategic transaction, it would have to liquidate its assets and might
receive significantly less than the value at which those assets are carried on
the consolidated financial statements.
Page
4
(3) AGREEMENT
AND PLAN OF MERGER
On August
23, 2009, Neurogen entered into the Merger Agreement with Ligand and the Merger
Sub, as amended by Amendment to the Merger Agreement dated September 18, 2009
and Amendment No. 2 to the Merger Agreement dated November 2, 2009. The Merger
Agreement provides that, upon the terms and subject to the conditions set forth
in the Merger Agreement, Merger Sub will merge with and into the Company, with
the Company continuing as the surviving entity. The Company will no longer be a
standalone entity at that time but will be a wholly-owned subsidiary of Ligand.
The Company’s and Ligand’s Boards of Directors have each approved the Merger and
the Merger Agreement. The Company currently expects the Merger to close in the
fourth quarter of 2009 subject to approval by the Company’s stockholders,
certain regulatory clearances and satisfaction of other customary closing
conditions.
If the
Merger is approved by Neurogen’s stockholders and the other conditions to the
Merger are satisfied or waived, upon completion of the Merger, Ligand would
issue to Neurogen’s stockholders a number of shares of its common stock equal to
an approximate aggregate market value of up to $11,000,000, as adjusted to
reflect Neurogen’s net cash position as of the third trading day before the date
of the special meeting of Neurogen stockholders. However, Ligand is
not required to issue more than 4,200,000 shares of its common stock in the
Merger, and Neurogen may terminate the Merger Agreement if application of the
share cap would cause Neurogen stockholders to receive less than $11,000,000 and
the share cap is not waived by Ligand. Currently, Ligand’s stock is trading at a
level where application of the share cap would limit the amount of stock Ligand
is obligated to issue to less than $11,000,000. Ligand’s share price
of $1.75 on November 3, 2009 would require Ligand to issue approximately 6.3
million shares, in order to provide Neurogen stockholders with an approximate
aggregate market value of $11,000,000, which exceeds 4,200,000 shares and would
cause the share cap to apply. If Neurogen’s Board of Directors
decided not to terminate the Merger agreement and the closing of the merger had
occurred on November 3, 2009, Neurogen’s stockholders would receive the number
of Ligand shares with an approximate aggregate market value of $7,350,000, based
on Ligand’s share price of $1.75 on such date. The Neurogen Board of Directors
has not made a decision at this time on the course of action the Company will
take when and if the share cap is applied. In addition, Neurogen’s
stockholders may receive cash or other consideration in respect of each of the
four Contingent Value Rights (“CVRs”) described below.
At the
closing of the Merger, the Company, Ligand and a rights agent will enter into a
Contingent Value Rights Agreement (the “CVR Agreement”) for each of the CVRs
described below, which will set forth the rights that the former Company
stockholders will have with respect to each CVR to be held by them after the
closing of the Merger:
-
|
Aplindore CVR. If
the Aplindore program is not sold or cancelled before the Merger, each
Neurogen stockholder shall be issued, for each Neurogen share owned, one
Aplindore CVR entitling the holder to receive (i) if the Aplindore
program is sold before the six month anniversary of the Merger, a pro-rata
share of the cash and/or number of shares of third-party stock received by
Ligand from the buyer of the Aplindore program less the reasonable costs
and expenses of sale, plus any amount remaining in an operating expense
reserve account, or (ii) if the Aplindore program is not sold before
the six month anniversary of the Merger, a pro-rata share of any amount
remaining in the operating expense reserve
account.
|
-
|
H3 CVR. The H3 CVR
agreement provides for the payment of a pro rata portion of (i) $4
million in cash if Ligand licenses the Neurogen antagonist program
intended to create an H3 receptor drug on or before the third anniversary
of the Merger, (ii) 50% of the net cash proceeds from a sale of such
program if Ligand sells the program before the third anniversary of the
Merger or (iii) 50% of the net proceeds if an option agreement to
either license or sell the H3 antagonist program is entered into, in each
case before the third anniversary of the Merger. If any such option to
license is exercised, the CVR holders would receive a pro rata portion of
an additional amount up to $4 million (taking into account the option
proceeds previously received by the CVR holders) or if any such option to
sell is exercised, the CVR holders would receive a pro rata portion of 50%
of the net sale proceeds.
|
-
|
Merck CVR. The Merck
CVR agreement provides for the payment of a pro rata portion of
(i) $3 million if a milestone payment from Merck is received upon the
initiation of a Phase 3 clinical trial of a vanilloid receptor subtype 1,
or VR1, antagonist drug for the treatment of pain, or (ii) 50% of the
net proceeds if such program is sold back to Merck before the milestone
payment is made.
|
-
|
Real Estate CVR. If the
real estate, as included in the Condensed Consolidated Balance Sheet
caption “Assets held for sale” at approximately $3,100,000, is not sold
before the Merger, each Neurogen stockholder will be issued one real
estate CVR. The real estate CVR agreement provides for the payment of a
pro rata portion of the cash paid by any buyer of the real estate
currently owned by Neurogen and received by Ligand on or before the six
month anniversary of the Merger, less any costs and expenses reasonably
incurred by Ligand in connection with such
sale.
|
Under the
Merger Agreement, the market price of Ligand’s common stock during the twenty
consecutive trading days ending at the close of trading on the third trading day
prior to the date of the special meeting of Neurogen’s stockholders will be used
for purposes of calculating the price of Ligand’s stock to be used in the final
exchange ratio.
Page
5
As
described above, Neurogen has the right to terminate the Merger Agreement at
least three days prior to closing if application of the share cap would cause
Neurogen stockholders to receive less than $11,000,000 and pay Ligand a
termination fee of $225,000. If Neurogen decides not to terminate the
Merger Agreement for reasons determined by the Neurogen Board of Directors at
the time, based on the current trading price of Ligand’s common stock, Neurogen
stockholders will receive in the aggregate less than $11,000,000 (as described
above). If Neurogen exercises such termination right, Ligand can
waive application of the share cap and nullify such termination, but Ligand is
under no obligation to do so. In the event Ligand chooses not to
waive application of the share maximum under those circumstances, there would be
no merger with Ligand.
(4)
ASSET IMPAIRMENT CHARGES
Buildings
In April
2008, Neurogen placed two of its three properties, or approximately 64% of its
square footage, up for sale and classified the buildings as held for
sale on its balance sheet causing management to assess its assets held for sale
for impairment under the FASB Accounting Standards Codification (“ASC”).
Neurogen reduced the carrying value of those facilities by recording an
impairment charge of $7,200,000 in the second quarter of 2008 based on guidance
from its realtor. In the third and fourth quarters of 2008, the
Company recorded additional impairment charges of $2,600,000 and $600,000,
respectively, based on two separate third party offers received to purchase the
properties. Additionally, in the first quarter of 2009, the Company
recorded an incremental charge of $370,000 on the two held for sale properties
based on then current market conditions and status of negotiations with a third
party buyer.
During
the first quarter of fiscal 2009, market developments caused the Company to
change its business plan and management to assess its assets held for use for
impairment. The held for use long-lived assets consisted primarily of a building
currently occupied by the Company, as well as certain laboratory and office
equipment. As a result of such assessment, the Company determined that the
carrying value of these long-lived assets exceeded the expected future
undiscounted cash flows. Accordingly, the Company recognized a $4,833,000
impairment loss in the first quarter of 2009, $4,496,000 of which was associated
with the building that was held for use at that time, based on the difference
between the carrying value of these long-lived assets and the estimated fair
value of $2,112,000. This represented the Company’s best estimate at that
time.
In the
second quarter of 2009, the Company placed its remaining land and buildings,
which had been previously considered as held for use, up for sale. Additionally,
the Company recorded a further impairment charge on all land and buildings of
$3,930,000 based on a verbal offer of $3,100,000 (estimated net proceeds of
$2,760,000) from a potential buyer to purchase all of the Company’s
property. In the fourth quarter of 2009, the Company and the
potential buyer reached several roadblocks while negotiating a purchase and sale
agreement. The Company then revived discussions with parties that had earlier
expressed an interest in acquiring the properties but had dropped out of the
bidding. As a result of these discussions, the Company received a
higher offer from a second bidder. On November 5, 2009, the Company entered into
an agreement with the second bidder, a commercial real estate developer, to sell
these properties for a gross selling price of $3,500,000, resulting in estimated
net proceeds of $3,100,000. The Company recorded a credit to impairment charges
of $410,000 in the third quarter of 2009. The $3,100,000 net carrying value of
the assets held for sale as of September 30, 2009 represents management’s
expected selling price less direct costs to sell.
Equipment
In the
third quarter of 2008, the Company recorded an impairment charge of $573,000
based on a review of equipment that would be sold with the
buildings.
As
mentioned above, the Company recognized a $4,833,000 impairment loss in the
first quarter of 2009, $337,000 of which is associated with laboratory and
office equipment that was held for use at that time. During the first quarter of
2009, the Company recorded an additional $43,000 impairment charge related to
equipment that was held for sale and not to be disposed with the sale of the
properties.
During
the second quarter of 2009, much of the Company’s lab and office equipment was
listed for sale. The Company has not recorded a further impairment charge on its
equipment. As a result of sales of these assets in the third quarter of 2009,
primarily from the auction held in July 2009, the Company received cash proceeds
of approximately $147,000 and recorded a gain of approximately $105,000. The
remaining held for use long-lived assets at September 30, 2009 consist of
computer and office equipment with an estimated fair value of
$5,000.
Page
6
(5)
RESTRUCTURING OF WORKFORCE
In early
2008, the Company commenced a restructuring plan, including reductions in
workforce, to focus the Company’s resources on advancing its clinical assets.
Affected employees have been and are eligible for a severance package
that includes severance pay, continuation of benefits and outplacement
services.
In the
first half of 2008, the Company announced reductions in its workforce in which
it eliminated approximately 115 employee positions, inclusive of both
administrative and research functions, representing approximately 80% of its
total workforce at the time. Accordingly, a charge of $2,490,000 was recorded in
the first quarter of 2008, including $2,390,000 related to employee separation
costs and $100,000 related to outplacement and administrative fees. A charge of
$2,640,000 was recorded in the second quarter of 2008, including $2,550,000
related to employee separation costs and $90,000 related to outplacement and
administrative fees. The majority of these severance costs were paid during
2008.
In May
2008, the Company provided confirmation letters to all benefit-eligible
employees indicating that each terminated employee would receive stated
severance benefits if severed prior to December 31, 2009. The issuance of these
letters changed the Company’s accounting guidance for further severance
activities and required that employee separation costs, as well as any related
outplacement and administrative fees, be accrued on the balance sheet and
recognized as expense in the statement of operations once the obligation became
probable provided that the amount can be reasonably estimated. All charges are
shown on the Restructuring of
workforce line item in the Company’s Statement of Operations, except for
those that reflect the portion of an employee’s severance post-notification
which applies to required transitional performance obligations. That portion is
included within the Research
and development and
General and administrative line items.
In the
first nine months of 2009, the Company further reduced its workforce by 21
employees, representing 71% of its total workforce, which resulted in
approximately $322,000, $989,000, and $(3,000) of restructuring expense in the
first, second and third quarters of 2009, respectively. In addition, subsequent
to June 30, 2009 but prior to the filing of the second quarter Form 10-Q,
management deemed it probable that further reductions would occur prior to
year-end as evidenced by its announced plans in May 2009 to pursue strategic
options for the Company (see Note 2). In accordance with accounting guidance
governing restructuring plans, the Company accrued for the probable future
severance costs as of June 30, 2009. As of September 30, 2009, the total
remaining amount of the future commitment to employees not notified by
quarter-end pursuant to the May 2008 confirmation letters was approximately
$1,504,000, including approximately $1,309,000 that will be paid pursuant to
existing employment contracts and $195,000 that will be paid to employees
without an employment agreement. Of this $1,504,000 severance accrual,
$1,366,000 was previously included as Restructuring of workforce
expense and $138,000 was previously included within Research and development
expense and General and
administrative expense in the accompanying statement of operations. It is
expected that the majority of this severance will be paid during
2009.
(6)
FAIR VALUE MEASUREMENTS
The
following tables represent the Company’s fair value hierarchy for its assets
(investments and long-lived assets), which are measured at fair value (in
thousands):
September
30, 2009
|
||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||
Assets
held for sale
|
$
|
-
|
$
|
3,170
|
$
|
-
|
$
|
3,170
|
||||||
Total
|
$
|
-
|
$
|
3,170
|
$
|
-
|
$
|
3,170
|
December
31, 2008
|
||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||
U.S
government notes
|
$
|
-
|
$
|
1,513
|
$
|
-
|
$
|
1,513
|
||||||
Corporate
notes and bonds
|
5,454
|
-
|
5,454
|
|||||||||||
Assets
held for sale
|
-
|
-
|
5,108
|
5,108
|
||||||||||
Total
|
$
|
-
|
$
|
6,967
|
$
|
5,108
|
$
|
12,075
|
The
Company has no marketable securities at September 30, 2009.
Page
7
The
Company’s long-lived assets held for sale at September 30, 2009 are measured at
fair value based on an agreement signed on November 5, 2009. As such, the inputs
are observable and are classified within Level 2 of the valuation
hierarchy. Long-lived assets held for sale with a carrying amount
of $6,732,000 were written down to their fair value of $2,802,000, net of costs
to sell, resulting in a loss of $3,930,000 during the quarter ended June 30,
2009, which was included in earnings for the nine months ended September 30,
2009. During the third quarter of 2009, the Company recorded a credit
to impairment charges of $410,000 and disposed of assets held for sale with an
approximate fair value of $42,000, resulting in a remaining fair value of
$3,170,000.
(7) NET LOSS PER COMMON SHARE
With
respect to net loss per common shares, basic loss per share reflects no dilution
for common equivalent shares and is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted net
loss per share is computed by dividing net loss by the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options and unvested restricted stock and are
calculated using the treasury stock method. Since the Company is in a loss
position for all periods presented, the effect of potential common equivalent
shares would have been anti-dilutive; therefore, the calculation of diluted loss
per share does not consider the effect of stock options and unvested restricted
stock.
Stock
options of 3,876,240 and 5,940,217 (including 25,000 unvested restricted stock
shares in 2008) in aggregate outstanding as of September 30, 2009 and 2008,
respectively, represented all potentially dilutive securities that were excluded
for the calculation of diluted loss per share.
(8)
COMMITMENTS AND CONTINGENCIES
Tenant lease. In March 2009,
a three-year lease commenced between Neurogen and a tenant for approximately
22,000 square feet of laboratory and office space. The monthly rental
income is approximately $40,000. The security deposit of approximately $121,000,
which is classified as restricted cash and tenant security deposit on the
Company’s balance sheet, is being held in an interest-bearing bank
account.
Future severance. As of
September 30, 2009, the Company has a future commitment of $1,504,000 relating
to the restructuring of workforce as accrued on the accompanying balance sheet
and described in Note 5.
Legal proceedings. On August
31, 2009, a putative class action complaint was filed in the Connecticut
Superior Court for the New Haven Judicial District by Gabriel Guzman, one of
Neurogen’s stockholders, against Neurogen, the members of its board of
directors, Ligand and Merger Sub. The complaint generally alleges that
Neurogen’s board of directors’ decision to enter into the proposed transaction
with Ligand on the terms contained in the merger agreement constitutes a breach
of their fiduciary duties and gives rise to other unspecified state law claims.
The complaint also alleges that Ligand and Merger Sub aided and abetted
Neurogen’s board of directors’ breach of their fiduciary duties. In addition,
the complaint alleges that the named plaintiff will seek "equitable relief",
including among other things, an order preliminarily and permanently enjoining
the proposed transaction. On October 2, 2009, the plaintiff filed an amended
complaint, adding certain claims that the directors had not properly disclosed
all relevant information relating to the proposed merger. On October 22, 2009,
the director defendants moved to dismiss the Amended Complaint on the basis that
the individual defendants had not been properly served. In addition, the Company
and the director defendants filed a motion to strike the Amended Complaint for
failure to state a claim upon which relief could be granted. On that same date,
Ligand filed a motion to strike the amended complaint for failure to state a
claim upon which relief could be granted.
Neurogen
can provide no assurance as to the outcome of the foregoing legal proceeding and
its potential effect on the completion of the merger.
The
defense of this or any future legal proceeding could divert management’s
attention and resources from the needs of Neurogen's business. Neurogen may be
required to make substantial payments or incur other adverse effects in the
event of adverse judgments or settlements of any such proceedings. In addition,
the merger may be delayed or prohibited as a result of this legal
proceeding. The Company has not accrued any potential charges that
may result from this legal proceeding as of the balance sheet date since they
are neither probable nor reasonably estimable.
Page
8
(9)
SALE OF PATENT ESTATES
Also in
April 2009, Neurogen satisfied all obligations under a previously announced sale
to a large pharmaceutical company of its C5a patent estate, received all
remaining proceeds, and recognized the $2,250,000 sale in the second quarter of
2009.
(10)
LOANS PAYABLE
Under the
terms of its loan agreement with Webster Bank, Neurogen was required to comply
with certain covenants, including a requirement that it maintain at least
$25,000,000 in cash and marketable securities. Since the Company’s
cash balance declined below $25,000,000 during the second quarter of 2009 and
Webster Bank requested full repayment, the entire loan balance was classified as
current debt on the financial statements as of June 30, 2009. On August 5, 2009,
the Company paid off its mortgage loan with Webster Bank in the amount of
$3,682,000 million, which represented all principle and interest owed through
the date of payoff.
Below is
a summary of Neurogen’s existing debt facility as of September 30,
2009:
Lender
|
Date
|
Interest
Rate (per annum)
|
Original
Principal Amount
|
Outstanding
Principal Amount
|
Maturity
Date
|
|||||||||
Connecticut
Innovations, Inc.
|
October
1999
|
7.5
|
%
|
$
|
5,000,000
|
$
|
2,893,000
|
April
2016
|
||||||
(11)
INCOME TAXES
As
disclosed within the Company’s Form 10-K for the year ended December 31, 2008,
the Company believed that it was entitled to a larger cash refund for tax credit
carryovers from the state of Connecticut for certain prior years. In the
second quarter of 2006, the Company filed five complaints in Superior Court (for
the tax years 2000-2004) seeking cash refunds of certain unused research and
development tax credits that it alleges were wrongfully disallowed by the State
of Connecticut. All five cases are entitled Neurogen Corporation v. Pam Law,
Commissioner of Revenue Services of the State of Connecticut and are
filed in Superior Court, Tax Session, for the State of Connecticut sitting in
the Judicial District of New Britain and have case numbers HHB-CV-06-4010825S
HAS, HHB-CV-06-4010826S HAS, HHB-CV-06-4010827S HAS, HHB-CV-06-4010828S HAS, and
HHB-CV-06-4010882S HAS. Other Connecticut biotechnology companies also filed
similar complaints. Those companies, together with the Department of Revenue
Services agreed to use the appeal of one of those companies as a representative
case for trial. After protracted litigation, the Tax Session of the
Superior Court held that the representative company was entitled to exchange the
balance of its unpaid research and development credits with the State, but that
representative company had applied prematurely to exchange credits from later
years before it had fully exchanged credits from earlier years. The
representative company had appealed that decision to the Connecticut Supreme
Court. On May 12, 2009, the Supreme Court announced its decision to
uphold the decision of the trial court. As such, no refunds will be
received. The assets that were reserved in connection with this matter have been
written off.
(12)
SUBSEQUENT EVENTS
The
Company has performed an evaluation of subsequent events through November 6,
2009, which is the date the condensed, consolidated financial statements were
filed.
Agreement to sell buildings.
On November 5, 2009, the Company entered into an agreement with a
commercial real estate developer to sell the Company’s properties for a gross
selling price of $3,500,000. These properties are held for sale on
its condensed consolidated balance sheet at carrying value of $3,100,000 net of
estimated costs to sell. Neurogen expects to close the deal, subject to the
satisfaction of customary closing conditions, in the first quarter of 2010. Net
proceeds from the sale will be eligible for payment to Neurogen’s stockholders
through the CVR discussed in Note 3 in connection with the Company’s pending
merger with Ligand.
Page
9
In May
2009, the FASB issued Statement No. 165, Subsequent Events (“SFAS
165”), which establishes general standards of accounting for, and requires
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. As of
September 30, 2009, SFAS 165 has been incorporated within the FASB ASC 855. Its
adoption in the second quarter ended June 30, 2009 did not have a material
effect on the Company’s financial position, results of operations or cash
flows.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and Hierarchy of Generally Accepted
Accounting Priniciples – a replacement of FASB Statement No. 162 (“SFAS
168”). SFAS 168 establishes the FASB Accounting Standard
Codification ™
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with generally accepted accounting principles
in the United States. All guidance contained in the Codification carries an
equal level of authority. As of September 30, 2009, the Codification superseded
all then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
became nonauthoritative. Its adoption in the third quarter ended
September 30, 2009 did not have a material effect on the Company’s
financial position, results of operations or cash flows.
Page
10
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
discussion is intended to further the reader’s understanding of the consolidated
financial condition and results of operations of Neurogen Corporation
(“Neurogen,” “the Company,” “we,” “us,” “our”). It should be read in conjunction
with the financial statements in this quarterly report on Form 10-Q and our
annual report on Form 10-K for the year ended December 31, 2008.
Note
Regarding Forward-looking Statements
Statements
that are not historical facts, including statements about the our confidence and
strategies, the status of various product development programs, the
opportunities to sell assets or the Company, including the Merger, the
sufficiency of cash to fund future operations and our expectations concerning
our development compounds, drug development technologies and opportunities in
the pharmaceutical marketplace are “forward-looking statements” within the
meaning of the Private Securities Litigations Reform Act of 1995 that involve
risks and uncertainties and are not guarantees of future performance. These
risks include, but are not limited to, the risk that the Merger may not close,
including the risk that the required Neurogen stockholder approval for the
Merger and related transactions may not be obtained, the possibility that
expected synergies and cost savings will not be obtained or that litigation may
delay the Merger, difficulties or delays in development, testing, regulatory
approval, production and marketing of any of our drug
candidates, collaborations and alliances, acquisitions or business
combinations, the failure to attract or retain key personnel, any unexpected
adverse side effects or inadequate therapeutic efficacy of our drug candidates
which could slow or prevent product development efforts, competition within our
anticipated product markets, our dependence on corporate partners with respect
to research and development funding, regulatory filings and manufacturing and
marketing expertise, the uncertainty of product development in the
pharmaceutical industry, inability to obtain sufficient funds through future
collaborative arrangements, equity or debt financings or other sources to
continue the operation of our business, risk that patents and confidentiality
agreements will not adequately protect our intellectual property or trade
secrets, dependence upon third parties for the manufacture of potential
products, inexperience in manufacturing and lack of internal manufacturing
capabilities, dependence on third parties to market potential products, lack of
sales and marketing capabilities, potential unavailability or inadequacy of
medical insurance or other third-party reimbursement for the cost of purchases
of our products our recent operational restructuring and other risks detailed
our Securities and
Exchange
Commission filings, including our Annual Report on Form 10-K for the year ended
December 31, 2008, each of which could adversely affect our business and the
accuracy of the forward-looking statements contained herein. Any new
material changes in risk factors since the Annual Report on Form 10-K for the
year ended December 31, 2008 are discussed further in Part II, Item
1A.
Overview
On August
23, 2009, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Ligand Pharmaceuticals Incorporated (“Ligand”) and a special
purpose subsidiary of Ligand (“Merger Sub”), as amended by Amendment to the
Merger Agreement dated September 18, 2009 and Amendment No. 2 to the Merger
Agreement dated November 2, 2009. The Merger Agreement provides that, upon the
terms and subject to the conditions set forth in the Merger Agreement, Merger
Sub will merge with and into Neurogen, with Neurogen continuing as the surviving
entity (the “Merger”). We will no longer be a standalone entity at that time but
will be a wholly-owned subsidiary of Ligand. We currently expect the merger
transaction to close in the fourth quarter of 2009, subject to approval by our
stockholders, certain regulatory clearances and satisfaction of other customary
closing conditions (see Borrowings and Contractual Obligations and Footnote 3 to
our condensed consolidated financial statements).
Since our
inception in September 1987, we historically have been engaged in the discovery
and development of drugs. In May 2009, we announced that we were pursuing
strategic options, including a sale of the Company or its major assets, and that
we were taking additional steps to conserve capital while we pursue these
options. In connection with this announcement, we suspended the enrollment of
patients in the only two drug development programs that were active at that
time. We have not derived any revenue from product sales. If we resumed the
development of our drug candidates, we expect to continue to incur significant
losses prior to deriving any such product revenues or earnings. Operating
revenues historically have come from multiple prior collaborations and license
agreements under which we shared our technology and rights to our drug
candidates with large pharmaceutical companies. However, proceeds of prior
collaborations were not sufficient to sustain the drug research capabilities
that were the source of these collaborations and we discontinued our research
operations in 2008. The Company has considered and will continue to consider a
liquidation of the Company if a suitable sale of the Company or its assets is
not achieved. In the first nine months of 2009, we have also recorded operating
income for the sales of certain non-core patent estates.
Page
11
In the
fourth quarter, Neurogen announced its analysis of results from the previously
suspended Phase 2 study of aplindore in Restless Legs Syndrome (RLS). The Phase
2 RLS study was a randomized, placebo-controlled, double-blind, multi-center,
parallel-group study designed to assess the efficacy, safety and tolerability of
multiple doses of aplindore compared to placebo. The 5 treatment groups in the
study were aplindore 0.05 mg, 0.1 mg, 0.25 mg, 0.5 mg and placebo, and subjects
received a total of 4 weeks of treatment. The lowest doses (0.05 mg
and 0.1 mg) were not titrated, while the higher doses were titrated over 4 days
(0.25 mg) and 7 days (0.5 mg). The 0.5 mg treatment group was
discontinued after approximately 2 months of enrollment. Enrollment
of patients in the study was suspended after randomization of 60% of the planned
195 subjects. The primary efficacy endpoint was the mean change in the
International Restless Legs Syndrome Rating Scale (IRLS) from baseline. In this
study, aplindore achieved statistically significant results versus placebo
overall and at the 0.05 mg and 0.25 mg doses, but not at the 0.1 mg dose. In
this study, aplindore was well tolerated at the lower doses.
The study
enrolled 118 subjects with moderate-to-severe RLS. The Modified Intent to Treat
(mITT) population was 116 subjects with 14 early terminations, of which 6 were
due to aplindore-related adverse events. Eighteen subjects received
the discontinued 0.5 mg dose. These subjects were not included in the
efficacy analysis, but were included in the safety population. The
primary outcome (IRLS) showed a statistically significant improvement overall
(ANCOVA p=0.0355) with statistically significant pairwise comparisons to placebo
for the 0.05 mg dose (-5.8; p=0.0168) and the 0.25 mg dose (-6.3;
p=0.0097). The 0.1 mg dose showed a lower numeric improvement over
placebo (-3.1; p=0.2025), which did not reach statistical significance,
resulting in a “V”-shaped dose-response curve. The most common adverse events
included nausea, somnolence, headache, and fatigue. The incidence of
these events in the non-titrated doses was considered comparable to or higher
than those reported with the dopamine full agonists currently on the
market. In a single subject there were two Serious Adverse Events
(“SAE’s”). Neither SAE was considered to be
drug-related.
The
Company has concluded that while it saw indications of efficacy in the RLS study
of aplindore, analysis of both efficacy and tolerability - when considered in
the context of observations from similar clinical studies with drugs currently
on the market - suggest the partial agonist profile of aplindore would not be
differentiated from the full agonists which either are or will be generic by the
time aplindore could be launched.
With
respect to the Phase 2 study of aplindore in Parkinson’s disease suspended in
the second quarter of 2009, due to the fact that at the time of suspending
enrollment in that study only nine of an expected 169 Parkinson’s patients were
enrolled, no analysis of that partial study will be performed.
We have
not derived any revenue from product sales to date. If we were to resume
development of our drug candidates, we would expect to incur
substantial and increasing losses for at least the next several years and would
need substantial additional financing to obtain regulatory approvals, fund
operating losses, and if deemed appropriate, establish manufacturing and sales
and marketing capabilities, which we would seek to raise through equity or debt
financings, collaborative or other arrangements with third parties or through
other sources of financing. In such scenario, there could be no assurance that
such funds will be available on terms favorable to us, if at all. There could be
no assurance that we would successfully complete our research and development,
obtain adequate patent protection for our technology, obtain necessary
government regulatory approval for drug candidates we develop or that any
approved drug candidates would be commercially viable. In addition, we may not
be profitable even if we succeed in developing and commercializing any of our
drug candidates. These circumstances raise substantial doubt about our ability
to continue as a going concern. Additionally, the Report of the Independent
Registered Public Accounting Firm to our audited financial statements for the
period ended December 31, 2008 filed in the Annual Report on Form 10-K indicates
that there are a number of factors that raise substantial doubt about our
ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. If we became unable to continue as a going concern or
were unable to complete a strategic transaction, we would have to liquidate our
assets and might receive less than the value at which those assets are
carried on the consolidated financial statements.
As
mentioned above, we announced during the second quarter of 2009 that we had
suspended the enrollment of patients in ongoing Phase 2 studies for Parkinson’s
disease and RLS. The costs incurred since this announcement have been
associated with the continuation of previously enrolled subjects in the clinical
studies. During the first nine months of 2009, we further reduced our
development and administrative staff by 21 employees down to six full-time
employees while we focus on strategic options.
Results
of Operations
Results
of operations may vary from period to period depending on numerous factors,
including the timing of income earned under existing or future collaborative
agreements, the progress of our independent and partnered research and
development projects, the size of our staff and the level of preclinical and
clinical development spending on drug candidates in unpartnered
programs.
Page
12
Three
Months Ended September 30, 2009 and 2008
Operating revenues. We had no
operating revenues for the three months ended September 30, 2009 and
2008.
We do not
anticipate any future revenues at this time other than potential income upon the
sale or partnership, if any, of additional assets; however, we are eligible to
receive potential future milestone payments and royalties under our agreement
with Merck upon Merck’s achievement of certain development
milestones.
Research and development
expenses. We ceased research and development activities in the second
quarter of 2009; all remaining costs are a result of wrapping up our prior
activities. Research and development expenses were $1.0 million and $6.3 million
for the three months ended September 30, 2009 and 2008, respectively. The $5.3
million decrease in research and development costs was primarily due to a $2.4
million reduction in outsourced clinical trials. The reduction is attributable
to a $0.9 million decrease in the insomnia program that we are no longer
pursuing as well as a $1.5 million decrease for the Parkinson’s disease and RLS
programs as a result of the suspension of enrollment of patients in May 2009.
Additionally, we had an overall decrease of $1.3 million in outsourced
non-clinical development expenses, such as toxicology studies, chemical
manufacturing, formulations and stability studies for all of our unpartnered
programs. The reduction of internal research and development expenses of $1.7
million is primarily associated with a decrease in salary and benefits expenses
of $0.9 million and facilities and utilities expenses of $0.4 million due to the
restructuring plans that occurred in 2009 and 2008. Salary and benefits expenses
associated with the 2009 and 2008 restructurings are excluded from the table
below and discussed further in
Restructuring of workforce. (See also Footnote 5 to our condensed
consolidated financial statements.)
Three
Months Ended September 30,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
(in
thousands)
|
||||||||||||
Outsourced
clinical expenses
|
||||||||||||
Insomnia
and anxiety
|
$ | - | $ | 879 | $ | (879 | ) | |||||
Parkinson’s
disease and RLS
|
486 | 1,982 | (1,496 | ) | ||||||||
Total
outsourced clinical expenses
|
486 | 2,861 | (2,375 | ) | ||||||||
Outsourced
non-clinical development expenses
|
15 | 1,289 | (1,274 | ) | ||||||||
Internal
expenses
|
||||||||||||
Salary
and benefits
|
225 | 1,145 | (920 | ) | ||||||||
Supplies
and research
|
42 | 232 | (190 | ) | ||||||||
Computer
and office supplies
|
27 | 100 | (73 | ) | ||||||||
Facilities
and utilities
|
47 | 456 | (409 | ) | ||||||||
Travel
and other costs
|
117 | 194 | (77 | ) | ||||||||
Total
internal expenses
|
458 | 2,127 | (1,669 | ) | ||||||||
Total
research and development expenses
|
$ | 959 | $ | 6,277 | $ | (5,318 | ) | |||||
Unless
currently unpartnered programs are partnered, we retain all rights to our
programs, and we expect that development costs would increase as each program
progresses if we were to resume any research and development
efforts.
Page
13
General and administrative
expenses. General and administrative expenses were $1.6 million and $2.0
million for the three months ended September 30, 2009 and 2008, respectively.
The decrease was primarily a result of a reduction in salaries and benefits
expense due to a smaller staff in 2009 compared to 2008.
Three
Months Ended September 30,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
(in
thousands)
|
||||||||||||
Salary
and benefits
|
$ | 430 | $ | 873 | $ | (443 | ) | |||||
Patents
|
95 | 228 | (133 | ) | ||||||||
Facilities
and utilities
|
154 | 128 | 26 | |||||||||
Administrative
|
794 | 612 | 182 | |||||||||
Travel,
supplies and other costs
|
94 | 146 | (52 | ) | ||||||||
Total
general and administrative expenses
|
$ | 1,567 | $ | 1,987 | $ | (420 | ) | |||||
Asset impairment charges.
There was an asset impairment credit of $0.4 million for the three months ended
September 30, 2009 compared to asset impairment charges of $3.2 million for the
three months ended September 30, 2008. The 2009 impairment credit was a result
of the signed agreement to sell the three properties held for sale for an
estimated net sales price of $3.1 million. The 2008 impairment charge was the
initial impairment based on market conditions and realtor guidance when only two
of our three properties were listed for sale.
Gain on warrants to purchase common
stock. In the third quarter of 2008, we recorded a non-recurring gain on
warrants to purchase common stock of $4.7 million in connection with our April
2008 financing. There was no related gain in the same period of
2009. The financing is discussed further in Liquidity and Capital
Resources.
Other income, net of interest
expense. Other income, net of interest expense, was approximately $0.2
million for the three months ended September 30, 2009, compared to $0.1 million
for the same period in 2008. The increase is due to a reduction in interest
payments on debt obligations after the August 2009 payoff of our Webster
mortgage.
Net loss attributable to common
stockholders. The Company recognized a net loss attributable to common
stockholders of $1.9 million for the three months ended September 30, 2009
compared to $31.7 million for the same period in 2008. The $29.8 million
decrease in net loss was primarily a result of the recognition of deemed
preferred dividends offset by a gain on warrants to purchase common stock, both
of which were included in the three months ended September 30, 2008; there was
no similar gain or dividends in the same period in 2009. Additionally, there was
a significant decrease in operating expenses for the 2009 period.
Nine
Months Ended September 30, 2009 and 2008
Operating revenues. We had
$2.7 million in operating revenues for the nine months ended September 30, 2009
compared to no operating revenues for the same period in 2008. The
increase is a result of two patent sales in the second quarter of
2009. The first was the sale of a non-core patent estate for $0.4
million to a global pharmaceutical company. The second was the sale of our C5a
patent estate to a large pharmaceutical company for $2.3 million. Payments of
the proceeds from these sales were subject to customary conditions relating to
delivery of the compounds and related information. Neurogen satisfied all
obligations under the sales, received all proceeds, and recognized income in the
second quarter of 2009.
We have
no future revenues anticipated at this time other than potential revenues upon
the sale or partnership, if any, of additional assets; however, we are eligible
to receive potential future milestone payments and royalties from the Merck
Collaboration upon their achievement of certain development
milestones.
Page
14
Research and development
expenses. We ceased research and development activities in the second
quarter of 2009; all remaining costs are a result of wrapping up our prior
activities. Research and development expenses were $7.0 million and $26.3
million for the nine months ended September 30, 2009 and 2008, respectively. The
$19.3 million decrease in research and development costs was primarily due to a
reduction in outsourced clinical trials. The reduction is
attributable to a $3.3 million decrease in costs for the insomnia and anxiety
program and a $0.1 million decrease in costs for the obesity program, both of
which we are no longer pursuing, as well as a $3.5 million decrease for the
Parkinson’s disease and RLS programs as a result of our suspension of enrollment
of patients in May 2009. Outsourced non-clinical development expenses, such as
toxicology studies, chemical manufacturing, formulations and stability studies
for all of our unpartnered programs decreased by $5.9 million in 2009 compared
to the same period in 2008 primarily as a result of our elimination of the
insomnia, anxiety and obesity programs referred to above. Finally, there
was a reduction in internal research and development work as a result of the
restructuring plans that occurred in 2008, which were of greater magnitude than
restructurings completed in 2009. Salary and benefits expenses associated with
the 2009 and 2008 restructurings are excluded from the table below and discussed
further in Restructuring of
workforce. Additionally, see the discussion below in General and administrative
expenses for an explanation of how the allocation of facility expenses
shifted from research and development expenses to general and administrative
expenses once the facilities were classified as held for sale.
Nine
Months Ended September 30,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
(in
thousands)
|
||||||||||||
Outsourced
clinical expenses
|
||||||||||||
Insomnia
and anxiety
|
$ | - | $ | 3,307 | $ | (3,307 | ) | |||||
Obesity
|
- | 138 | (138 | ) | ||||||||
Parkinson’s
disease and RLS
|
3,057 | 6,566 | (3,509 | ) | ||||||||
Total
outsourced clinical expenses
|
3,057 | 10,011 | (6,954 | ) | ||||||||
Outsourced
non-clinical development expenses
|
815 | 6,752 | (5,937 | ) | ||||||||
Internal
expenses
|
||||||||||||
Salary
and benefits
|
2,217 | 5,328 | (3,111 | ) | ||||||||
Supplies
and research
|
298 | 1,162 | (864 | ) | ||||||||
Computer
and office supplies
|
97 | 335 | (238 | ) | ||||||||
Facilities
and utilities
|
288 | 1,915 | (1,627 | ) | ||||||||
Travel
and other costs
|
238 | 823 | (585 | ) | ||||||||
Total
internal expenses
|
3,138 | 9,563 | (6,425 | ) | ||||||||
Total
research and development expenses
|
$ | 7,010 | $ | 26,326 | $ | (19,316 | ) | |||||
Unless
currently unpartnered programs are partnered, we retain all rights to our
programs, and we expect that development costs would increase as each program
progresses if we were to resume any research and development efforts in the
future.
Page
15
General and administrative expenses. General and administrative expenses were $4.9 million for the nine months ended September 30, 2009 and 2008. Salaries and benefits expense was $1.7 million for the nine month period in 2009 versus $2.1 million in the comparable period in 2008 due to a significantly smaller staff in 2009 compared to 2008. This decrease was offset by an increase in costs associated with our facilities. During the time the facilities were in use for research and development activities, facility expenses were recognized as research and development expenses. Once the facilities were classified as held for sale, the expenses associated with those facilities shifted to general and administrative costs. Due primarily to the fact that the facilities were held for sale in the first nine months of 2009, the facilities- and utilities-related expenses component of general and administrative expenses increased year over year while the facilities and utilities related expenses component of research and development expenses decreased year over year. For the total Company, facilities and utilities costs have decreased by $1.4 million, down from $2.3 million for the nine months ended September 30, 2008 to $0.9 million for the same period in 2009 as a result of the decrease in operating activities in facilities not in use.
Nine
Months Ended September 30,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
(in
thousands)
|
||||||||||||
Salary
and benefits
|
$ | 1,721 | $ | 2,074 | $ | (353 | ) | |||||
Patents
|
320 | 469 | (149 | ) | ||||||||
Facilities
and utilities
|
591 | 429 | 162 | |||||||||
Administrative
|
1,771 | 1,519 | 252 | |||||||||
Travel,
supplies and other costs
|
478 | 415 | 63 | |||||||||
Total
general and administrative expenses
|
$ | 4,881 | $ | 4,906 | $ | (25 | ) | |||||
Asset impairment
charges. Asset impairment charges were $8.8 million and $10.4
million for the nine months ended September 30, 2009 and 2008. In the first
quarter of 2009, market developments caused us to change our business plan and
assess our assets held for use for impairment. At the time of the assessment,
the held for use long-lived assets consisted primarily of a building currently
occupied by the Company, as well as certain laboratory and office equipment. As
a result of such assessment, we determined that the carrying value of these
long-lived assets exceeded the expected future undiscounted cash flows.
Accordingly, we recognized a $4.8 million impairment loss in the first quarter
of 2009, based on the difference between the carrying value of these long-lived
assets and the estimated fair value of $2.1 million. Additionally, we recorded
an impairment charge of $0.4 million and $0.1 million for buildings and
equipment held for sale, respectively. In the second quarter of 2009, we placed
substantially all of our remaining property, which had been previously
considered held for use, up for sale and recorded a further impairment charge on
all land and buildings of $3.9 million based on an offer of $3.1 million from a
potential buyer of our property. In the third quarter of 2009, we recorded a
credit of $0.4 million as a result of the signed agreement to sell the three
properties held for sale. The $3.1 million net carrying value of the assets held
for sale as of September 30, 2009, represents our expected selling price of $3.5
million less direct costs to sell. The 2008 impairment charge was based on the
two impairment assessments of market conditions and realtor guidance conducted
in connection with the listing of two of our three properties for
sale.
Restructuring of
workforce. Restructuring of workforce charges were $2.7 million and
$5.1 million for the nine months ended September 30, 2009 and 2008. The
restructuring charge in 2009 includes reductions in workforce in which we
eliminated 21 employee positions inclusive of both administrative and research
functions, representing approximately 71% of our total workforce at that
time. Expenses associated with these workforce reductions were $1.3
million. These expenses related primarily to employee separation
costs as well as outplacement and administrative fees, which will be paid prior
to the conclusion of the first quarter of 2010. Additionally, we
recognized $1.4 million in future severance payments, which are included in the
total remaining $1.5 million future severance commitment, accrued for on the
balance sheet as of September 30, 2009, since payout of these amounts became
probable for the remaining six active, full-time employees. The restructuring
charge in 2008 is associated with the reductions in workforce announced on
February 5, 2008 and April 8, 2008. As part of these plans, we eliminated
approximately 115 employee positions inclusive of both administrative and
research functions, which represented approximately 78% of our total workforce
at that time. Affected employees were eligible for a severance package that
included severance pay, continuation of benefits and outplacement
services.
Gain on
warrants to purchase common stock. In the nine months ended September 30,
2008, we recorded a nonrecurring gain on warrants to purchase common stock of
$16.7 million in connection with our April 2008 financing. There was
no similar gain in the same period of 2009. The financing is
discussed further in Liquidity
and Capital Resources.
Page
16
Other income, net of interest expense. Other income, net of interest expense, was $0.3 million for the nine months ended September 30, 2009, compared to $0.5 million for the same period in 2008. The decrease is associated with our lower investment balance during 2009 offset in part by a decrease in interest rates associated with our debt obligations as well as fewer interest payments due to the August 2009 payoff of the Webster mortgage.
Net loss attributable to common
stockholders. The Company recognized a net loss attributable to common
stockholders of $20.3 million for the nine months ended September 30, 2009
compared to $60.1 million for the same period in 2008. The $39.8 million
decrease in net loss was primarily a result of the recognition of deemed
preferred dividends partially offset by a gain on warrants to purchase common
stock, both of which were included in the nine months ended September 30, 2008;
there was no similar gain or dividends in the same period of 2009. Additionally,
there was a significant decrease in operating expenses partially offset by the
increase in income for the 2009 period.
Liquidity
and Capital Resources
On August
23, 2009, we entered into the Merger Agreement with Ligand and the Merger Sub,
as amended by Amendment to the Merger Agreement dated September 18, 2009 and
Amendment No. 2 to the Merger Agreement dated November 2, 2009. The Merger
Agreement provides that, upon the terms and subject to the conditions set forth
in the Merger Agreement, the Merger Sub will merge with and into Neurogen, with
Neurogen continuing as the surviving entity (“the Merger”). We will no longer be
a standalone entity at that time but will be a wholly-owned subsidiary of
Ligand. We currently expect the Merger to close in the fourth quarter of 2009,
subject to stockholder approval, certain regulatory clearances and other closing
conditions. If the Merger is not consummated and we remain an independent
company, we will seek to consummate other strategic options including a sale of
the Company or its major assets or a liquidation of the Company.
At
September 30, 2009 and December 31, 2008, cash, cash equivalents and marketable
securities in the aggregate were $15.3 million and $31.1 million, respectively.
At September 30, 2009, all of our liquid assets were in cash and cash
equivalents; we had no marketable securities. Our combined cash and other
short-term investments decreased due to funding of operations, expenses related
to the advancement of our clinical programs, and repayment of outstanding loans,
offset in part by the receipt of $2.7 million in connection with the sale of
certain non-core patent estates and $0.2 million in connection with the sale of
property, plant and equipment held for sale on our balance sheet.
The
levels of cash, cash equivalents and marketable securities have fluctuated
significantly in the past. Our current plan is to conserve our cash
resources while we pursue closing the Merger or other strategic options,
including a sale of the Company or a sale of our major assets, if the Merger
Agreement with Ligand is terminated and the Merger is not
consummated. Accordingly, in May 2009, we suspended enrolling new
patients in our clinical studies for Parkinson’s disease and
RLS. Consistent with these plans, we have also reduced our staff
positions by approximately 71% percent since December 31, 2008 down to six
full-time employees at September 30, 2009. As of September 30, 2009,
our working capital was $15.7 million compared to $28.4 million at December 31,
2008.
Cash used
in operating activities was $11.3 million for the nine months ended September
30, 2009 and was primarily attributable to our $20.3 million net loss, offset by
$8.8 million of non-cash charges related to an impairment loss on assets held
for sale and held for use. Cash used in operating activities was $36.9 million
for the nine months ended September 30, 2008. This was primarily
attributable to our $29.5 million net loss, which included a $16.7 million
non-cash gain on warrants to purchase Common Stock and $10.5 million in non-cash
charges related to fixed asset impairments and losses on sale of
equipment.
Cash
provided by investing activities was $7.1 million for the nine months ended
September 30, 2009 and was primarily attributable to the maturities of
marketable securities. Cash provided by investing activities was $11.4 million
for the nine months ended September 30, 2008 and was attributable to the
maturities of marketable securities and proceeds received for the sale of assets
offset by minimal purchases of property, plant and equipment.
Cash used
in financing activities was $4.6 million for the nine months ended September 30,
2009 and was attributable to the payoff of the Webster mortgage in August 2009
as well as the principal payments of our CII loan balance. Cash provided by
financing activities was $27.3 million for the nine months ended September 30,
2008 and was attributable to proceeds received for the issuance of the Company’s
non-voting Series A Exchangeable Preferred Stock (the “Preferred Stock”), net of
issuance costs, offset by principal payments of loan balances. On April 7,
2008, the Company entered into a financing transaction pursuant to a
Securities Purchase Agreement (the “Securities Purchase Agreement”) among the
Company and selected institutional investors (the “Purchasers”). Under the
Securities Purchase Agreement, the Company agreed to issue and
Page
17
sell to the Purchasers (i) an aggregate of 981,411 shares of its Preferred Stock, par value $0.025 per share and (ii) warrants (the “Warrants”) to acquire a number of shares of common stock, par value $0.025 per share (the “Common Stock”) equal to 50% of the number of shares of Common Stock into which one share of Preferred Stock was exchangeable at the time the Warrant is exercised. Each share of the Preferred Stock was automatically exchangeable for 26 shares of common stock at $1.20 per share upon stockholder approval of the transaction terms. The total purchase price paid by the Purchasers was $30.6 million resulting in net proceeds to the Company of approximately $28.4 million, after deducting placement agent fees and other offering expenses paid by the Company. On July 25, 2008, the Company's stockholders voted to approve the exchange of Preferred Stock for Common Stock, and all of the Company's outstanding Preferred Stock was exchanged for 25,516,686 shares of Common Stock.
Our cash
requirements to date have been met primarily by the proceeds of our equity
financing activities, amounts received pursuant to collaborative research,
licensing or technology transfer arrangements, certain debt arrangements,
interest earned on invested funds, and most recently, the sale of certain
non-core assets. Our equity financing activities have included underwritten
public offerings of common stock, private placement offerings of common stock
and private sales of common stock in connection with collaborative research and
licensing agreements. Our expenditures have funded research and development,
general and administrative expenses, and the construction and outfitting of our
research and development facilities
Currently,
we plan to continue our reduced operations while pursuing the Merger with
Ligand or if the Merger does not close other strategic options, including a sale
of the Company or a sale of major assets or a liquidation of the
Company. We believe we will be able to realize our assets and
discharge our liabilities in the normal course of business. At September 30,
2009, there was a substantial doubt about our ability to continue as a going
concern without raising additional financial resources if we were to resume
development or our clinical assets. The accompanying unaudited financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. While we believe
our current cash and short-term securities resources would be sufficient to fund
our planned pursuit of strategic options beyond 2010, it is not our intention to
do so, and we plan to conclude a strategic option as soon as
possible.
Borrowings
and Contractual Obligations
The
disclosure of payments we have committed to make under our contractual
obligations are summarized in Form 10-K for the twelve-month period ended
December 31, 2008 in the section titled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under the caption Contractual
Obligations. There has been no material change in our
contractual obligations since December 31, 2008, except as described below.
Below is a summary of our existing debt facility as of September 30,
2009:
Lender
|
Date
|
Interest
Rate (per annum)
|
Original
Principal Amount
|
Outstanding
Principal Amount
|
Maturity
Date
|
|||||||||
Connecticut
Innovations, Inc.
|
October
1999
|
7.5
|
%
|
$
|
5,000,000
|
$
|
2,893,000
|
April
2016
|
||||||
Under the
terms of our loan agreement with Webster Bank, we were required to comply with
certain covenants, including a requirement that we maintain at least $25.0
million in cash and marketable securities. Since our cash balance
declined below $25.0 million during the second quarter of 2009 and Webster Bank
requested full repayment, the entire loan balance was previously classified as
current debt on the financial statements. On August 5, 2009, we paid off our
mortgage loan with Webster Bank in the amount of $3.7 million, which represented
all principle and interest owed through the date of payoff.
As of
September 30, 2009, we do not have any significant lease or capital expenditure
commitments.
Critical
Accounting Judgments and Estimates
The
discussion and analysis of financial condition and results of operations are
based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The presentation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities. We make estimates in the areas of revenue recognition, accrued
expenses, income taxes, stock-based compensation, and marketable securities, and
base the estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. For a complete
description of our accounting policies, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting
Policies,” and “Notes to Consolidated Financial
Page
18
Statements” in Neurogen Corporation’s Form 10-K for the year ended December 31, 2008. There were no new significant accounting estimates in the third quarter of 2009, nor were there any material changes to the critical accounting policies and estimates discussed in our Form 10-K for the year ended December 31, 2009.
Recently
Issued Accounting Pronouncements
In May 2009, the FASB issued Statement No.
165, Subsequent Events
(“SFAS 165”), which establishes general standards of accounting for, and
requires disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. As of
September 30, 2009, SFAS 165 has been incorporated within the FASB ASC 855. Its
adoption in the second quarter ended June 30, 2009 did not have a material
effect on our financial position, results of operations or cash
flows.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and Hierarchy of Generally Accepted
Accounting Priniciples – a replacement of FASB Statement No. 162 (“SFAS
168”). SFAS 168 establishes the FASB Accounting Standard
Codification ™
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with generally accepted accounting principles
in the United States. All guidance contained in the Codification carries an
equal level of authority. As of September 30, 2009, the Codification superseded
all then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
became nonauthoritative. Its adoption in the third quarter ended
September 30, 2009 did not have a material effect on our financial
position, results of operations or cash flows.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4T. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Business and Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of September 30, 2009. Based on this evaluation, the
Company's Chief Executive Officer and Chief Business and Financial Officer
concluded that, as of September 30, 2009, the Company's disclosure controls and
procedures were effective to provide reasonable assurance that information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Business and Financial Officer, as appropriate to
allow timely decisions regarding required disclosure, and ensure that
information required to be disclosed in the reports the Company files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
Although
the Company’s management, including the Chief Executive Officer and the Chief
Business and Financial Officer, believes that the Company’s disclosure controls
and internal controls currently provide reasonable assurance that the desired
control objectives have been met, management does not expect that the Company’s
disclosure controls or internal controls will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are 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. Additionally, controls can 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 also based in
part upon 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.
Changes
in Internal Control over Financial Reporting
There has
been no change in the Company's internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the Company's fiscal quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting. As a part of our recent
restructuring, we have reduced the size of our accounting and finance
staff. However, despite these changes, we believe our system of
internal controls remains adequate and sound and we have not made changes to our
system of internal controls
that we believe are material considering our current
operations.
Page
19
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Neurogen
can provide no assurance as to the outcome of the foregoing legal proceeding and
its potential effect on the completion of the merger.
The
defense of this or any future legal proceeding could divert management’s
attention and resources from the needs of Neurogen's business. Neurogen may be
required to make substantial payments or incur other adverse effects in the
event of adverse judgments or settlements of any such proceedings. In addition,
the merger may be delayed or prohibited as a result of this legal proceeding.
Neurogen has not accrued any potential charges that may result from this legal
proceeding as of September 30, 2009 since they are neither probable nor
reasonably estimable.
ITEM
1A. RISK FACTORS
The
following is an addition for the nine months ended September 30, 2009 to the
risks previously disclosed in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2008.
Our
company is in a transition phase, and the future of our company is
uncertain.
In May
2009, we announced that we were exploring strategic options, including a sale of
the Company or a sale of our major assets, while taking additional steps to
conserve capital. In connection with this announcement, we suspended enrollment
of new patients in Phase 2 studies for our lead product candidate, aplindore for
Parkinson’s disease and RLS. Since December 31, 2008, we have eliminated
approximately 70% of our staff positions and currently have a full time staff of
six employees. We have engaged an independent strategic advisor to
review these strategic opportunities, and as a result of this review, we entered
into the Merger Agreement with Ligand. However, we may be unsuccessful in
consummating any such transaction on terms acceptable to us, and if at any
point during the review, it becomes evident to our Board of Directors that a
favorable transaction is unlikely to be consummated, we intend to continue to
consider other options, such as a full or partial distribution of cash to
stockholders. Absent an extraordinary transaction, however, we may not be able
to continue our operations.
The
number of shares of Ligand common stock and the CVRs that Neurogen stockholders
will receive in connection with the Merger will fluctuate and based upon the
current value of Ligand shares, Neurogen stockholders would receive less than
$11,000,000 in shares of Ligand common stock at the closing.
The
number of shares and precise value of the merger consideration to be received by
Neurogen stockholders at the effective time of the Merger cannot be determined
at the present time. The exchange ratio, which determines the number
of shares of Ligand common stock that Neurogen stockholders will receive in
connection with the Merger, will not be determined until shortly before the
special meeting of Neurogen stockholders. The price of Ligand common stock at
the closing of the Merger may vary from its price on the date the Merger
Agreement was executed, on the date hereof and on the date of the special
meeting of Neurogen stockholders. Stock price changes may result from
a variety of factors beyond Ligand’s control, including general economic and
market conditions.
If the
Merger is approved by Neurogen’s stockholders and the other conditions to the
Merger are satisfied or waived, upon completion of the Merger, Ligand would
issue to Neurogen’s stockholders a number of shares of its common stock equal to
an approximate aggregate market value of up to $11,000,000, as adjusted to
reflect Neurogen’s net cash position as of the third trading day before the date
of the special meeting of Neurogen stockholders. However, Ligand is
not required to issue
Page
20
more than 4,200,000 shares of its common stock in the Merger, and Neurogen may terminate the Merger Agreement if application of the share cap would cause Neurogen stockholders to receive less than $11,000,000 in Ligand common stock and Ligand does not waived the share cap. Currently, Ligand’s stock is trading at a level where application of the share cap would limit the amount of stock Ligand is obligated to issue to less than $11,000,000. Ligand’s share price of $1.75 on November 3, 2009 would require Ligand to issue approximately 6.3 million shares in order to provide Neurogen stockholders with an approximate aggregate market value of $11,000,000, which exceeds 4,200,000 shares and would cause the share cap to apply. If the closing of the merger occurred on November 3, 2009 and Neurogen’s Board of Directors decided not to terminate the Merger agreement, Neurogen’s stockholders would receive the number of Ligand shares with an approximate aggregate market value of $7,350,000, based on Ligand’s share price of $1.75 on such date. The Neurogen Board of Directors has not made a decision at this time on the course of action the Company will take when and if the share cap is applied.
In
addition, there will be a period of time between completion of the Merger and
the time at which former Neurogen stockholders actually receive stock
certificates evidencing the Ligand common stock. Until stock
certificates are received, former Neurogen stockholders may not be able to sell
their Ligand shares in the open market and, therefore, may not be able to avoid
losses from any decrease in the trading price of Ligand common stock during that
period.
The
Ligand merger is subject to closing conditions that could result in the
completion of the merger being delayed or not consummated, which could
negatively impact Neurogen’s stock price and future options.
Completion
of the Merger is conditioned upon Ligand and Neurogen satisfying closing
conditions, including adoption of the merger agreement by Neurogen’s
stockholders, all as set forth in the merger agreement. The required conditions
to closing may not be satisfied in a timely manner, if at all, or, if
permissible, waived, and the merger may not be consummated. Failure to
consummate the Merger could negatively impact Neurogen’s stock price, future
business and operations, financial condition and strategic
options. Also, any delay in the consummation of the Merger or any
uncertainty about the consummation of the Merger may adversely affect the future
business options and share price of Neurogen’s stock.
If the
Merger is not completed for any reason, the ongoing business of Neurogen may be
adversely affected and will be subject to a number of risks,
including:
|
•
|
Neurogen
may be required, under some circumstances, to pay Ligand a termination fee
of up to $475,000.
|
|
•
|
the
potential for employee attrition from Neurogen’s small staff and other
affirmative and negative covenants in the merger agreement restricting
Neurogen’s business pre-closing;
|
|
•
|
failure
to pursue other beneficial opportunities as a result of the focus of
management on the Merger, without realizing any of the anticipated
benefits of the Merger;
|
|
•
|
the
market price of Ligand common stock or Neurogen common stock may decline
to the extent that the current market price reflects a market assumption
that the Merger will be completed;
|
|
•
|
Neurogen
may experience negative reactions to the termination of the merger from
licensors, collaborators, suppliers, or other strategic partners;
and
|
|
•
|
Neurogen’s
costs incurred related to the Merger, such as legal and accounting fees,
must be paid even if the Merger is not
completed.
|
If the
Merger Agreement is terminated and Neurogen’s board of directors seeks another
merger or business combination, Neurogen stockholders cannot be certain that
Neurogen will be able to find a party willing to pay a price equivalent to or
more attractive than the price Ligand has agreed to pay in the
merger.
Consistent
with our plan to pursue a sale of the Company or another strategic option, we
have reduced our staff accordingly.
Since the
beginning of 2009 we have been engaged in staff reduction and we currently have
only six full time employees. While the reductions in staff have been
consistent with our plan to sell the Company or pursue another strategic option,
it limits our ability to engage in other operational options. In
addition, the impact of any employee attrition is relatively greater for a
company of our current size.
Page
21
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not
applicable for the quarter ended September 30, 2009.
Not
applicable for the quarter ended September 30, 2009.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable for the quarter ended September 30, 2009.
ITEM
5. OTHER INFORMATION
None.
Exhibit
10.1
|
Purchase
and Sale Agreement between Neurogen Corporation, Neurogen Properties LLC,
and Investment Capital Partners, LTD. dated as of November 5,
2009.
|
Exhibit
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
Exhibit
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
Exhibit
32.1
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Exhibit
32.2
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Page
22
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NEUROGEN
CORPORATION
|
||
By:
|
/s/
THOMAS A. PITLER
|
|
Thomas
A. Pitler
Senior
Vice President and Chief Business and Financial Officer (Duly Authorized
Officer)
Date:
November 6, 2009
|
Page
23