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EX-32 - EX-32 - CYPRESS BIOSCIENCE INC | a54286exv32.htm |
EX-3.2 - EX-3.2 - CYPRESS BIOSCIENCE INC | a54286exv3w2.htm |
EX-31.2 - EX-31.2 - CYPRESS BIOSCIENCE INC | a54286exv31w2.htm |
EX-31.1 - EX-31.1 - CYPRESS BIOSCIENCE INC | a54286exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
þ | 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
o | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE | 22-2389839 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)
(Address of principal executive offices) (zip code)
(858) 452-2323
(Registrants telephone number including area code)
(Registrants telephone number including area code)
Indicate by check þ whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check þ whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date 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 o No o
Indicate by check þ whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
At November 4, 2009, 38,295,761 shares of Common Stock, par value $.001, of the registrant
were issued and outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
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EX-3.2 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
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ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Note) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 48,537,815 | $ | 52,490,414 | ||||
Short-term investments |
96,275,678 | 93,004,191 | ||||||
Receivable from Forest Laboratories |
5,069,012 | 165,880 | ||||||
Prepaid expenses and other current assets |
5,058,072 | 1,048,668 | ||||||
Total current assets |
154,940,577 | 146,709,153 | ||||||
Property and equipment, net |
1,395,867 | 1,088,749 | ||||||
Goodwill |
23,028,598 | 26,465,627 | ||||||
Restricted cash |
487,111 | | ||||||
Other assets |
306,494 | 328,994 | ||||||
Total assets |
$ | 180,158,647 | $ | 174,592,523 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 623,050 | $ | 2,055,567 | ||||
Accrued compensation |
4,240,626 | 1,055,056 | ||||||
Accrued liabilities |
279,666 | 377,992 | ||||||
Payable to Forest Laboratories |
951,254 | 1,118,000 | ||||||
Current portion of deferred revenue |
5,202,056 | 3,351,416 | ||||||
Total current liabilities |
11,296,652 | 7,958,031 | ||||||
Deferred rent |
20,423 | 16,452 | ||||||
Deferred revenue, net of current portion |
24,700,650 | 6,702,832 | ||||||
Other liabilities |
487,111 | | ||||||
Stockholders equity: |
||||||||
Preferred stock, $.001 par value; 15,000,000
shares authorized;
no shares issued and outstanding |
| | ||||||
Common stock, $.001 par value; 90,000,000
shares of common stock authorized; 38,295,761
and 37,906,994 shares issued and outstanding
at September 30, 2009 (unaudited) and December
31, 2008, respectively |
38,296 | 37,907 | ||||||
Additional paid-in capital |
334,741,985 | 327,595,174 | ||||||
Accumulated other comprehensive income |
311,331 | 481,154 | ||||||
Accumulated deficit |
(191,437,801 | ) | (168,199,027 | ) | ||||
Total stockholders equity |
143,653,811 | 159,915,208 | ||||||
Total liabilities and stockholders equity |
$ | 180,158,647 | $ | 174,592,523 | ||||
See accompanying notes to consolidated financial statements.
Note: The balance sheet at December 31, 2008 has been derived from the audited financial
statements at that date but does not include all of the information and disclosures required by
U.S. generally accepted accounting principles.
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Revenues under collaborative agreement |
$ | 839,905 | $ | 979,310 | $ | 9,163,152 | $ | 16,209,804 | ||||||||
Commercial revenues |
5,150,838 | | 10,432,522 | | ||||||||||||
Revenues from personalized medicine services |
74,586 | | 133,485 | | ||||||||||||
Total revenues |
6,065,329 | 979,310 | 19,729,159 | 16,209,804 | ||||||||||||
Operating expenses: |
||||||||||||||||
Cost of personalized medicine services |
562,831 | | 1,421,026 | | ||||||||||||
Research and development |
1,311,341 | 2,035,541 | 10,597,400 | 7,714,526 | ||||||||||||
Selling, general and administrative |
9,914,859 | 4,074,582 | 32,328,987 | 10,778,424 | ||||||||||||
In-process research and development |
| | | 12,590,000 | ||||||||||||
Total operating expenses |
11,789,031 | 6,110,123 | 44,347,413 | 31,082,950 | ||||||||||||
Loss from operations |
(5,723,702 | ) | (5,130,813 | ) | (24,618,254 | ) | (14,873,146 | ) | ||||||||
Interest income |
254,335 | 1,018,590 | 1,379,480 | 3,888,732 | ||||||||||||
Net loss |
$ | (5,469,367 | ) | $ | (4,112,223 | ) | $ | (23,238,774 | ) | $ | (10,984,414 | ) | ||||
Net loss per share basic and diluted |
$ | (0.14 | ) | $ | (0.11 | ) | $ | (0.61 | ) | $ | (0.29 | ) | ||||
Shares used in computing net loss per share basic and diluted |
38,257,303 | 37,883,074 | 38,100,661 | 37,683,507 | ||||||||||||
See accompanying notes to consolidated financial statements.
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CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Operating Activities |
||||||||
Net loss |
$ | (23,238,774 | ) | $ | (10,984,414 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
357,021 | 57,815 | ||||||
In-process research and development |
| 12,590,000 | ||||||
Amortization of premium/discount on short-term investments |
551,563 | (1,179,856 | ) | |||||
Share-based compensation for options issued to non-employees |
| 20,245 | ||||||
Share-based compensation for stock and options issued to employees |
6,296,061 | 5,673,619 | ||||||
Non-cash portion of asset acquisition |
487,111 | | ||||||
Changes in operating assets and liabilities, net of effects from
purchase of Proprius |
15,864,903 | (1,829,055 | ) | |||||
Net cash provided by operating activities |
317,885 | 4,348,354 | ||||||
Investing Activities |
||||||||
Cash paid to acquire Proprius, net of cash acquired |
| (39,084,627 | ) | |||||
Purchases of short-term investments |
(78,330,811 | ) | (47,694,297 | ) | ||||
Proceeds from sale of short-term investments |
74,337,938 | 137,350,000 | ||||||
Purchases of property and equipment |
(641,639 | ) | (376,901 | ) | ||||
Deposit of restricted cash |
(487,111 | ) | | |||||
Net cash (used in) provided by investing activities |
(5,121,623 | ) | 50,194,175 | |||||
Financing Activities |
||||||||
Proceeds from exercise of stock options |
851,139 | 1,972,532 | ||||||
Net cash provided by financing activities |
851,139 | 1,972,532 | ||||||
(Decrease) increase in cash and cash equivalents |
(3,952,599 | ) | 56,515,061 | |||||
Cash and cash equivalents at beginning of period |
52,490,414 | 70,093,425 | ||||||
Cash and cash equivalents at end of period |
$ | 48,537,815 | $ | 126,608,486 | ||||
See accompanying notes to consolidated financial statements.
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CYPRESS BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
We provide therapeutics and personalized medicine services, facilitating improved and
individualized patient care. Our goal is to address the evolving needs of specialist physicians and
their patients by identifying unmet medical needs in the areas of pain, rheumatology, and physical
medicine and rehabilitation, including challenging disorders such as fibromyalgia and rheumatoid
arthritis. We believe this approach to improving patient care creates a unique partnership with
physicians, and expect that offering personalized medicine services and therapeutic products
through the same sales organization will provide us with a differentiated commercial strategy and
sustainable competitive advantage.
2. Basis of Presentation
The accompanying financial statements have been prepared by our management without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S.
generally accepted accounting principles for interim financial statements. Certain information and
disclosures normally included in complete audited year end financial statements have been condensed
or omitted. In the opinion of our management, all adjustments necessary for a fair presentation of
the accompanying unaudited condensed consolidated financial statements are reflected herein. All
such adjustments are normal and recurring in nature. Interim results are not necessarily
indicative of results for the full year. For more information, these financial statements should
be read in conjunction with the audited financial statements and the related disclosures included
in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March
16, 2009. Further, in connection with the preparation of the condensed consolidated financial
statements and in accordance with the recently issued requirements regarding subsequent events, we
evaluated subsequent events after the balance sheet date of September 30, 2009 through November 9,
2009, the date of issuance of our financial statements.
The condensed consolidated financial statements include the accounts of Cypress Bioscience,
Inc. and its wholly-owned subsidiary, Proprius Pharmaceuticals, Inc. (Proprius), collectively
referred to as Cypress Bioscience, Inc. All significant intercompany accounts and transactions
have been eliminated.
3. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) established the FASB Accounting Standards
Codification (Codification) as the source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements issued for interim and annual periods ending after September
15, 2009. The Codification has changed the manner in which U.S. GAAP guidance is referenced, but
did not have an impact on our consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued authoritative guidance that requires publicly traded companies
to include in their interim financial reports certain disclosures about the carrying value and fair
value of financial instruments previously required only in annual financial statements and to
disclose changes in significant assumptions used to calculate the fair value of financial
instruments. This guidance became effective for all interim reporting periods ending after June 15,
2009, with early adoption permitted for interim reporting periods ending after March 15, 2009. The
Company adopted the provisions of the guidance in the first quarter of 2009. The adoption did not
have a material impact on the Companys consolidated financial statements.
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In May 2009, the FASB issued authoritative guidance on subsequent events, which we adopted on
a prospective basis beginning April 1, 2009. The guidance is intended to establish general
standards of accounting and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for selecting that date.
The application did not have an impact on our consolidated financial position, results of
operations or cash flows.
In October 2009, the FASB issued authoritative guidance on multiple-deliverable revenue
arrangements which establishes a selling price hierarchy for determining the selling price of a
deliverable. The selling price used for a deliverable will be based on vendor-specific objective
evidence if available, third party evidence if vendor-specific objective evidence is not available,
or estimated selling price if neither vendor-specific objective evidence nor third party evidence
is available. The standard eliminates the residual method of revenue allocation and requires
revenue to be allocated using the relative selling price method. This standard is effective for
fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for
new or materially modified arrangements. Early adoption of is permitted. The Company is currently
evaluating the potential impact of adopting the accounting guidance on its consolidated results of
operations and financial position.
4. Short-Term Investments
Our short-term investments consist of securities of the U.S. government or its agencies,
corporate debt securities, commercial paper and certificates of deposit. We have classified our
short-term investments as available-for-sale and carry them at fair value with unrealized gains and
losses, if any, reported as a separate component of stockholders equity and included in
comprehensive income or loss. The amortized cost of debt securities in this category is adjusted
for amortization of premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary, if any, on available-for-sale securities are included in interest income.
The cost of securities sold is based on the specific-identification method. Interest on securities
classified as available-for-sale is included in interest income.
At September 30, 2009 and December 31, 2008, short-term investments consisted of the
following:
September 30, 2009 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 86,904,826 | $ | 290,372 | $ | (32,702 | ) | $ | 87,162,496 | |||||||
Corporate debt securities |
9,059,521 | 53,661 | | 9,113,182 | ||||||||||||
$ | 95,964,347 | $ | 344,033 | $ | (32,702 | ) | $ | 96,275,678 | ||||||||
December 31, 2008 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 87,637,614 | $ | 468,401 | $ | (11,312 | ) | $ | 88,094,703 | |||||||
Corporate debt securities |
600,000 | 2,208 | | 602,208 | ||||||||||||
Commercial paper |
1,985,423 | 8,763 | | 1,994,186 | ||||||||||||
Certificates of deposit |
2,300,000 | 13,094 | | 2,313,094 | ||||||||||||
$ | 92,523,037 | $ | 492,466 | $ | (11,312 | ) | $ | 93,004,191 | ||||||||
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The unrealized losses on investments were primarily caused by changes in interest rates.
Based on an evaluation of the credit standing of each issuer, we believe it is probable that we
will be able to collect all amounts due according to the contractual terms.
Realized gains and losses on available-for-sale securities were immaterial during the three
and nine months ended September 30, 2009 and 2008.
Contractual maturities for short-term investments at September 30, 2009 were as follows:
Fair Value | ||||
Due within 1 year |
$ | 77,004,234 | ||
After 1 year but within 2 years |
19,271,444 | |||
Total |
$ | 96,275,678 | ||
5. Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectability is reasonably assured. Some of our agreements contain multiple
elements and in accordance with these agreements, we may be eligible for upfront license fees,
sponsored development reimbursements, funding for certain of our employees, co-promotion
reimbursement, development and commercial milestones and royalties.
Revenues under our collaborative agreement include upfront license fees, sponsored development
reimbursements, funding for certain of our employees and development milestones. Amounts received
for upfront license fees under multiple-element arrangements are deferred and recognized over the
period such arrangements require on-going services or performance. Amounts received for sponsored
development activities, including funding received for certain of our employees, are recognized as
research costs are incurred over the period specified in the related agreement or as the services
are performed. Amounts received for development milestones are recognized upon achievement of the
milestone, which requires substantive effort, was not readily assured at the inception of the
agreement and is non-refundable. Any amounts received prior to satisfying revenue recognition
criteria are recorded as deferred revenue.
Commercial revenues include royalties on product sales of Savella, revenue from commercial
milestones and reimbursement for co-promotion of Savella. Royalty revenue is recognized based on
royalties reported by Forest Laboratories during the quarter with such payment due within 45 days
after quarter end. The royalty rate as stated in our agreement with Forest Laboratories is subject
to adjustment based on Forests total payment obligations to Cypress and Pierre Fabre; however, the
royalty rate cannot be reduced below the stipulated floor. Revenue from commercial milestones
related to our New Drug Application (NDA) approval, net of sublicense fees, is recognized over the remaining patent life,
which corresponds with the term of the collaboration agreement. As this milestone payment cannot
be bifurcated from the reimbursement for the co-promotion of Savella, it has been deferred and is being recognized over the relevant
period. Revenue from commercial milestones related to sales-based milestones, net of sublicense
fees, is recognized upon the achievement of the specified milestones, which requires substantive
effort, was not readily assured at the inception of the agreement and is non-refundable. Any
milestone payments received prior to satisfying these revenue recognition criteria are recognized
as deferred revenue. Co-promotion reimbursement revenue is recognized in the period in which the
detailing calls (measured on a per physician call basis) are performed using an estimated
reimbursement rate based on historical cost information provided to us by Forest and consideration
for any changes in Forests Savella sales force productivity. We recognize this revenue as services
have been rendered, the reimbursement rate is determinable and collectability is
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reasonably assured. At the end of Forests fiscal year on March 31, an annual reconciliation
will be performed to adjust the per-detail fee to reflect the actual rate that is equal to the cost
of such effort to Forest had it been accomplished by the Forest sales
force detailing Savella. Differences in revenue resulting from
changes between the estimated rate and actual rate are adjusted for
in the period they become known. The
corresponding costs associated with our co-promotion reimbursement are included as a component of
selling, general and administrative expense on the Consolidated Statement of Operations.
In connection with our personalized medicine services, such services are performed based on a
written test requisition form. We generally bill third-party payers for these services upon
generation and delivery of a report to the ordering physician. As such, we take assignment of
benefits and the risk of collection with the third-party payer. We currently do not have any
contracts with third-party payers. We usually bill the patient directly for amounts owed after
multiple requests for payment have been denied or only partially paid by the insurance carrier as
allowed by law. As relatively new tests, the personalized medicine services offered by us may not
be covered under their reimbursement policies. Consequently, we pursue case-by-case reimbursement
where policies are not in place or payment history has not been established. As a result, at the
time of delivery of the report to the ordering physician, and in the absence of a reimbursement
contract or sufficient payment history, collectibility cannot reasonably be assured and revenues
are therefore only recognized at the time cash is collected.
6. Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel expenses
for our research and development personnel, fees paid to external service providers to conduct
clinical trials, patient enrollment costs, fees and milestone payments under our license and
development agreements, validation activities for our personalized medicine services and costs for
facilities (including our laboratory), supplies, materials and equipment. All such costs are
charged to research and development expenses as incurred. Clinical trial costs are a significant
component of research and development expenses and include costs associated with third-party
contractors. We accrue clinical trial expenses based on work performed, which relies on estimates
of total costs incurred based on patient enrollment, completion of patient studies and other
events. Actual clinical trial costs may differ from estimated clinical trial costs and are
adjusted for in the period in which they become known. There were no material adjustments for the
three and nine months ended September 30, 2009 and 2008 for a change in estimate.
7. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of common stock
outstanding and is presented for basic and diluted net loss per share. Basic net loss per share is
computed by dividing net loss by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period increased to include, if dilutive, the number
of additional common shares that would have been outstanding if the potential common shares had
been issued. The dilutive effect of outstanding stock options and warrants is reflected in diluted
net loss per share by application of the treasury stock method. We have excluded all outstanding
stock options and warrants from the calculation of diluted loss per share for the three and nine
months ended September 30, 2009 and 2008 because such securities are antidilutive for these
periods. The total number of potential common shares excluded from the calculation of diluted loss
per common share was 683,187 and 644,654 for the three months ended September 30, 2009 and 2008,
respectively, and 721,140 and 767,293 for the nine months ended September 30, 2009 and 2008,
respectively.
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8. Comprehensive Loss
The components of comprehensive loss are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss |
$ | (5,469,367 | ) | $ | (4,112,223 | ) | $ | (23,238,774 | ) | $ | (10,984,414 | ) | ||||
Unrealized loss on short-term Investments |
(20,956 | ) | (54,526 | ) | (169,823 | ) | (87,041 | ) | ||||||||
Comprehensive loss |
$ | (5,490,323 | ) | $ | (4,166,749 | ) | $ | (23,408,597 | ) | $ | (11,071,455 | ) | ||||
9. Share-Based Compensation
Total share-based compensation expense related to stock options granted to employees and
non-employee directors recognized for the three and nine months ended September 30, 2009 and 2008
was comprised as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Cost of personalized medicine services |
$ | 55,640 | $ | | $ | 129,741 | $ | | ||||||||
Research and development expenses |
344,108 | 382,271 | 1,041,496 | 1,028,112 | ||||||||||||
Selling, general and administrative expenses |
1,370,367 | 1,359,933 | 4,444,823 | 4,460,894 | ||||||||||||
$ | 1,770,115 | $ | 1,742,204 | $ | 5,616,060 | $ | 5,489,006 | |||||||||
As of September 30, 2009, there was $14.8 million of unamortized compensation cost
related to unvested stock option awards, which is expected to be recognized over a remaining
weighted average vesting period of 2.6 years.
The matching contribution in common stock to our 401(k) Plan is included as a component of our
share-based compensation to employees. Such matching contribution is made on the last day of June
and the last day of December of each plan year. For the nine months ended September 30, 2009 and
2008, the charge for the matching contribution was $680,001 and $184,613, respectively.
10. 2009 Equity Incentive Plan
On June 15, 2009, our stockholders approved the Cypress Bioscience, Inc. 2009 Equity Incentive
Plan (2009 Plan) at our 2009 Annual Meeting of Stockholders. The 2009 Plan provides for the
grant to employees, directors and consultants of incentive and non-qualified options to purchase
our common stock, as well as the granting of stock appreciation rights, restricted stock awards,
performance stock awards and other stock awards. The exercise price of stock options granted under
the 2009 Plan shall not be less than the fair market value of our common stock on the date of
grant. Options granted under the 2009 Plan have a term of up to ten years and generally vest over
four years. The total number of shares reserved for issuance under the 2009 Plan is 8,000,000
shares.
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11. Collaboration Agreement
During January 2009, the FDA approved the NDA for Savella for the treatment of fibromyalgia
filed by us and Forest Laboratories. In connection with the approval of the NDA, we received a
$25.0 million milestone payment from Forest Laboratories. Of this amount, $1.25 million was paid
to Pierre Fabre as a sublicense fee based on 5% of the milestone payment received from Forest
Laboratories. We also received $6.5 million from Forest Laboratories upon NDA approval as
reimbursement for the remaining two-thirds of the costs paid in connection with the second Phase
III trial for Savella. Additionally, we paid Pierre Fabre a $3.0 million milestone payment in
January 2009 upon the approval of the NDA filing.
12. Goodwill
During the second quarter of 2009, we determined that our accounting for contingent payments
made, in conjunction with our March 2008 acquisition of Proprius, to certain former Proprius
employees that were originally accounted for as additional purchase price of the acquired business
should have been accounted for as employee compensation for post-combination services provided to
the Company. The contingent payments, which totaled $3.4 million, are maintained in an escrow
account and will be returned to us if such employees do not fulfill their service commitment
through March 2010.
We have performed an evaluation to determine if the financial statement impacts resulting from
this error in accounting were material, considering both quantitative and qualitative factors.
Based on this materiality analysis, we concluded that correcting the cumulative error would be
immaterial to the current year financial statements and a correction of the error would not have a
material impact to any individual prior period financial statements. Accordingly, we recorded an
adjustment during the second quarter of 2009 to reduce goodwill associated with the Proprius
acquisition by $3.4 million and recognized the related entire cumulative compensation expense in
the amount of $2.3 million ($0.5 million classified as research and development expense and $1.8
million classified as selling, general and administrative expense), including $0.4 million ($0.1
million classified as research and development expense and $0.3 million classified as selling,
general and administrative expense) related to the three months ended March 31, 2009 and $1.4
million ($0.3 million classified as research and development expense and $1.1 million classified as
selling general and administrative expense) related to the year ended December 31, 2008. During
the three months ended September 30, 2009, we recognized compensation expense in the amount of $0.4
million ($0.1 million classified as research and development expense and $0.3 million classified as
selling, general and administrative expense) related to such contingent payments.
The remaining $0.7 million of unearned compensation at September 30, 2009 will be recognized
ratably through March 2010. If an employee does not fulfill the service condition and we obtain
cash from the escrow account in an amount in excess of the unearned compensation attributable to
that employee, such amount would be accounted for as a reversal of compensation expense at that
time.
13. Asset Purchase Agreement
Cellatope Transaction
In February 2009, we entered into an asset purchase agreement with Cellatope Corporation
(Cellatope) whereby we acquired Cellatopes technology platform that uses cell-bound complement
activation products (CB-CAP) to diagnose and monitor debilitating autoimmune disorders, including
systemic lupus erythematosus (SLE/Lupus). We acquired the CB-CAP technology in a transaction
that included a $2.0 million cash payment to Cellatope for the diagnostic technology, as well as an
additional
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$3.0 million potential milestone payment associated with the commercial development of the
Lupus monitoring application.
The acquisition price included $0.2 million which is held in an escrow account and will be
available to satisfy any claims for indemnification we may have until the escrow is released, which
will be 18 months following the closing of the transaction. In addition to the escrow funds, $0.5
million was withheld from the closing consideration to be paid by July 2012, subject to conditions
in the asset purchase agreement, and is classified as restricted cash.
Pursuant to the accounting treatment prescribed for business combinations, we determined that
the assets acquired from Cellatope do not constitute a business and accordingly, the transaction
has been accounted for as an asset acquisition. The $2.0 million upfront payment was charged to
research and development expenses during the first quarter of 2009 as the ultimate
commercialization of the related product is uncertain and the technology has no alternative uses.
14. Fair Value Disclosures
The following table presents information about our financial assets measured at fair value on
a recurring basis as of September 30, 2009, and indicates the fair value hierarchy of the valuation
techniques utilized by us to determine such fair value. In general, fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. We classify money market funds as Level 1 assets.
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in active markets, and inputs other than
quoted prices that are observable for the asset or liability, such as interest rates and yield
curves that are observable at commonly quoted intervals. We classify U. S. government and agency
debt, corporate debt securities and commercial paper holdings as Level 2 assets. Level 3 inputs
are unobservable inputs for the asset or liability, and include situations where there is little,
if any, market activity for the asset or liability. At September 30, 2009, we did not hold any
Level 3-classified financial assets. In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, the level in the fair value
hierarchy within which the fair value measurement in its entirety has been determined based on the
lowest level input that is significant to the fair value measurement. Our assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability.
Fair Value Measurements at September 30, 2009 | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Balance as of | Active Markets | Observable Inputs | Unobservable | |||||||||||||
Description | September 30, 2009 | (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Financial instruments owned: |
||||||||||||||||
Money market funds |
$ | 48,514,152 | $ | 48,514,152 | $ | | $ | | ||||||||
U.S. government and agency debt |
87,162,496 | | 87,162,496 | | ||||||||||||
Corporate debt securities |
9,113,182 | | 9,113,182 | | ||||||||||||
Total financial instruments owned |
$ | 144,789,830 | $ | 48,514,152 | $ | 96,275,678 | $ | | ||||||||
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for the historical information contained herein, the information contained herein
contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including, in
particular, statements about our plans, strategies and prospects. These statements, which may
include words such as may, will, expect, believe, intend, plan, anticipate,
estimate, should, or similar words, are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Although we believe that our
beliefs, expectations and assumptions reflected in these statements are reasonable, our actual
results and financial performance may prove to be very different from what we might have predicted
on the date of this Form 10-Q. Factors that could cause or contribute to differences include, but
are not specifically limited to, our ability to successfully commercialize Savella, our ability to
create a successful commercial organization, our ability to market our personalized medicine
services, our ability to acquire and develop any compounds or products to treat any other
indications we may pursue in a timely manner, or at all, as well as the other risks detailed in
this Form 10-Q and in our other SEC filings.
We undertake no obligation to publicly release revisions in such forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the occurrences of
unanticipated events or circumstances, except as required by securities and other applicable laws.
We own or have rights to various copyrights, trademarks and service marks used in our
business, including the following: Cypress Bioscience, Inc., Avise PG SM and Avise
MCV SM . Savella TM is a trademark of Forest Laboratories, Inc. This report
also includes other trademarks, service marks, and trade names of other companies.
Company Overview
Cypress Bioscience, Inc. provides therapeutics and personalized medicine services,
facilitating improved and individualized patient care. Cypress goal is to address the evolving
needs of specialist physicians and their patients by identifying unmet medical needs in the areas
of pain, rheumatology, and physical medicine and rehabilitation, including challenging disorders
such as fibromyalgia and rheumatoid arthritis. We believe our approach to improving patient care
creates a unique partnership with physicians, and expect that offering personalized medicine
services and therapeutic products through the same sales organization will provide Cypress a
differentiated commercial strategy and sustainable competitive advantage.
In January 2009, we received approval from the U.S. Food and Drug Administration (FDA) to
market Savella (milnacipran HCl) for the management of fibromyalgia (FM). Savella was shipped to
wholesalers and became available at pharmacies at the end of April 2009. Savella is a
dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher
potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role
in the symptoms for FM. We co-promote Savella for FM with our corporate partner, Forest
Laboratories, Inc., or Forest Laboratories, and by the beginning of 2009, we expanded our sales
force to 115 field based personnel in anticipation of the launch of Savella. At the beginning of
May 2009, we began detailing Savella to rheumatologists, pain centers, and physical medicine and
rehabilitation specialists in the U.S. Now that we are detailing Savella to physicians, we will be
reimbursed by Forest Laboratories for the Savella sales calls that we make based on Forest
Laboratories cost to conduct such sales calls.
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At the end of October 2008, with our initial 11 person sales force, we launched our first two
novel personalized medicine services, Avise PG and Avise MCV, which are detailed to
rheumatologists. Personalized medicine services are tests which are validated analytically and
clinically to provide physicians with actionable information to help manage their patients care,
including predicting the likelihood of developing disease or optimizing therapy. Avise PG is a test
that supports dose optimization and therapeutic decision making for patients taking methotrexate
(MTX), a widely used first-line therapy for rheumatoid arthritis (RA). Avise MCV is a test that
aids in the diagnosis and prognosis of RA. We believe that offering integrated personalized
medicine services and pharmaceutical products through the same sales organization will facilitate
physician access and improve the quality of the sales call, as well as help establish Cypress as a
leader targeting these specific specialists. We began making this offering available at the
beginning of May 2009 when we initiated promotion of Savella with our 115 field based personnel to
the same rheumatologists that we currently call upon for our first two personalized medicine
services.
We also have a number of Proof of Concept (POC) stage opportunities in development,
including two pharmaceutical candidates acquired in connection with our acquisition in March 2008
of Proprius, Inc., or Proprius, and intend to pursue these opportunities on an ongoing basis. We
continue to evaluate various other potential strategic transactions, including the acquisition of
products, product candidates, technologies and companies, and other alternatives.
Milnacipran HCl has been approved for a non-pain condition in over 50 countries, with
commercial experience outside the U.S. since 1997. We obtained an exclusive license in the U.S. and
Canada to milnacipran from Pierre Fabre Medicament, or Pierre Fabre, in 2001.
In January 2004, we entered into a collaboration agreement with Forest Laboratories, a leading
marketer of central nervous system, or CNS, drugs with a strong franchise in the primary care and
psychiatric markets. As part of this collaboration with Forest Laboratories, we sublicensed our
rights to milnacipran to Forest Laboratories for the United States, with an option to extend the
territory to include Canada, which was exercised in July 2007. As part of our agreements with both
Forest Laboratories and Pierre Fabre, we have licensed any patents that may issue from our patent
applications related to FM and milnacipran to Forest Laboratories and Pierre Fabre.
The efficacy of Savella for the management of fibromyalgia was established in two
double-blind, placebo-controlled, multicenter studies in adult patients (18-74 years of age), 888
subjects in Study 1 and 1,196 subjects in Study 2. Enrolled patients met the American College of
Rheumatology (ACR) criteria for fibromyalgia (a history of widespread pain for 3 months and pain
present at 11 or more of the 18 specific tender point sites). Approximately 35% of patients had a
history of depression. Study 1 was six months in duration and Study 2 was three months in duration.
A larger proportion of patients treated with Savella than with placebo experienced a simultaneous
reduction in pain from baseline of at least 30% (VAS) and also rated themselves as much improved or
very much improved based on the patient global impression of change (PGIC). In addition, a larger
proportion of patients treated with Savella met the criteria for treatment response, as measured by
the composite endpoint that concurrently evaluated improvement in pain (VAS), physical function
(SF-36 PCS), and patient global impression of change (PGIC), in fibromyalgia as compared to
placebo.
In December 2008, we announced positive top-line results from the third Phase III trial for
Savella, a 1,025 patient, multicenter, double-blind, placebo controlled phase III study of Savella
for the management of FM. These results, which confirm the findings from the two previous phase III
trials, showed that Savella demonstrated a highly statistically significant difference compared to
placebo in responder analyses based on a concurrent and clinically meaningful improvement in pain,
patient global impression of change, and physical functioning.
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Additional information on our ongoing post approval clinical development program for Savella
can be found at www.clinicaltrials.gov.
In March 2008, we announced the closing of the acquisition of Proprius that included an
upfront payment of approximately $37.5 million in cash, as well as up to an additional $37.5
million in potential milestone related payments associated with the development of Proprius early
clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat
rheumatoid arthritis.
In February 2009, we announced the closing of a transaction to acquire Cellatope Corporations
technology platform that uses cell-bound complement activation products (CB-CAP) to diagnose and
monitor debilitating autoimmune disorders, including systemic lupus erythematosus (SLE/Lupus).
We acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to
Cellatope for the diagnostic technology as well as an additional $3.0 million potential milestone
payment associated with the commercial development of the Lupus monitoring application.
In August 2002, we entered into a reformulation and new product agreement with Collegium
Pharmaceuticals pursuant to which Collegium was engaged to develop new products and new
formulations of milnacipran. In May 2009, we terminated this agreement with Collegium.
Results of Operations
The following discussion should be read in conjunction with the consolidated financial
statements and the related notes contained elsewhere in this quarterly report.
Comparison of Three Months Ended September 30, 2009 and 2008
Revenues Under Collaborative Agreements
We recognized revenues under our collaborative agreement with Forest Laboratories of $0.8
million for the three months ended September 30, 2009 compared to $1.0 million for the three months
ended September 30, 2008. The revenues under collaborative agreements recorded during 2009 and
2008 consist entirely of amounts earned or reimbursed to us pursuant to our collaboration agreement
with Forest Laboratories, entered into in January 2004, for the development and marketing of
Savella. Such revenues include the recognition of the $25.0 million upfront payment received in
January 2004 from Forest Laboratories on a straight-line basis over a period of 8 years, an
additional $1.0 million license payment received from Forest Laboratories in July 2007 to extend
the territory to include Canada recognized on a straight-line basis over the remainder of the 8
year amortization period, sponsored development reimbursements and funding received from Forest
Laboratories for certain of our employees devoted to the development of Savella. The amount of
sponsored development reimbursements from Forest Laboratories and funding received from Forest
Laboratories for certain of our employees devoted to the development of Savella changes
periodically and may be eliminated based on the level of development activity.
Commercial Revenues
We recognized commercial revenues of $5.2 million for the three months ended September 30,
2009 in connection with the launch of Savella during 2009.
The following table summarizes the components of commercial revenues for the three months
ended September 30, 2009 and 2008:
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Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Royalty revenue |
$ | 1,286,484 | $ | | ||||
Revenue from commercial milestones |
462,660 | | ||||||
Co-promotion reimbursement |
3,401,694 | | ||||||
$ | 5,150,838 | $ | | |||||
We recognized royalty revenue of $1.3 million for the three months ended September 30,
2009 based on net sales of Savella during the period as reported by Forest Laboratories. The
royalty rate as stated in our agreement with Forest Laboratories is subject to adjustment based on
Forests total payment obligations to Cypress and Pierre Fabre; however, the royalty rate cannot be
reduced below the stipulated floor. The $1.3 million in royalty revenue recognized during the
third quarter reflects a cumulative adjustment of approximately $248,000 recorded during the third
quarter, of which approximately $120,000 relates to the second quarter, based on Forest
Laboratories total payment obligations to Cypress and Pierre Fabre. During the third quarter, we
recognized the adjustment to royalty revenue recognized in the prior quarter as the royalty
reporting process was finalized during the current quarter. We do not expect there to be future
adjustments to royalty revenue recognized in prior periods.
Revenue from commercial milestones for the three months ended September 30, 2009 consists of
the recognition of the $25.0 million milestone payment received in January 2009 upon New Drug Application
(NDA) approval.
A $1.25 million sublicense fee paid to Pierre Fabre was deducted from the $25.0 million, and the
balance is recognized on a straight-line basis over the remaining patent life for Savella, which is
estimated to be 13 years.
Co-promotion reimbursement revenue of $3.4 million for the three months ended September 30,
2009 consists of reimbursement from Forest Laboratories for detail calls provided by our sales
force during the period, as well as reimbursement for certain marketing costs incurred by us. The
$3.4 million in co-promotion revenue recognized during the third quarter reflects a downward adjustment
of approximately $0.5 million related to the second quarter based on
the estimated reimbursement rate reflecting Forests actual detail-per-call rate achieved to date.
In subsequent
periods, the co-promotion revenue recognized in the quarter will reflect any estimated adjustments
to the reimbursement rate.
The co-promotion reimbursement for detail calls is determined based on the number of detailing
calls made by our sales force (measured on a per physician call basis) during the period, each of
which is reimbursed at a rate equal to the cost of such effort to Forest had it been accomplished
by the Forest sales force. At the end of Forests fiscal year on March 31, an annual
reconciliation will be performed to adjust the per-detail fee to reflect the actual rate achieved
by the Forest sales force detailing Savella. Based on information provided to us by Forest
tracking their call activity to date, we believe the per-detail fee utilized in our determination
of revenue from the co-promotion reimbursement is based on reasonable and supportable estimates;
however, there can be no assurance that our estimated costs will approximate the actual costs. Differences in revenue resulting from
changes between the estimated rate and actual rate are adjusted for
in the period they become known. The
corresponding costs associated with our co-promotion reimbursement are included as a component of
selling, general and administrative expense on the Consolidated Statement of Operations.
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Revenues From Personalized Medicine Services
Revenues for our personalized medicine services business are recognized as cash payments for
the services are received. We recognized revenue of approximately $75,000 during the third quarter
of 2009 in connection with our personalized medicine services business, which was launched during
the fourth quarter of 2008.
Cost of Personalized Medicine Services
Cost of personalized medicine testing services primarily consists of the compensation and
benefits (including bonuses, if any, and share-based compensation) of laboratory personnel,
laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related
expenses. We incurred costs of $0.6 million during the third quarter of 2009 in connection with
our personalized medicine services business, which was launched during the fourth quarter of 2008.
Research and Development
Research and development expenses for the three months ended September 30, 2009 were $1.3
million compared to $2.0 million for the three months ended September 30, 2008. The decrease in
research and development expenses is primarily attributable to a decrease in costs incurred during
the third quarter of 2009 in connection with our proof of concept studies for new compounds.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended September 30, 2009 and
2008 is comprised of the following:
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Sales and marketing |
$ | 5,969,639 | $ | 1,284,845 | ||||
General and administrative |
3,945,220 | 2,789,737 | ||||||
$ | 9,914,859 | $ | 4,074,582 | |||||
Sales and marketing expenses increased to $6.0 million for the three months ended
September 30, 2009 from $1.3 million for the three months ended September 30, 2008. The increase
is primarily due to the costs associated with supporting our commercial organization, including
salary, commission and benefits, travel expenses, training costs and automobile fleet costs.
General and administrative expenses increased to $3.9 million for the three months ended
September 30, 2009 from $2.8 million for the three months ended September 30, 2008. The increase
is primarily due to increased consulting costs incurred during the third quarter of 2009 in
connection with business development activities and compensation expense recognized for contingent
payments in connection with our acquisition of Proprius.
Interest Income
Interest income for the three months ended September 30, 2009 was $0.3 million compared to
$1.0 million for the three months ended September 30, 2008. The decrease in interest income for
the three months ended September 30, 2009 compared to the corresponding period in 2008 is primarily
due to
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a general decrease in interest rates and related yields experienced during the third quarter
of 2009 compared to the third quarter of 2008, as well as maturing securities being reinvested at
lower rates.
Comparison of Nine Months Ended September 30, 2009 and 2008
Revenues Under Collaborative Agreement
We recognized revenues under our collaborative agreement with Forest Laboratories of $9.2
million for the nine months ended September 30, 2009 compared to $16.2 million for the nine months
ended September 30, 2008. Revenues during the nine months ended September 30, 2009 included a $6.5
million reimbursement for the remaining two-thirds of the costs paid in advance by us in connection
with the second Phase III trial for Savella received from Forest Laboratories in January 2009 upon
approval of our NDA. This compares to a $10.0 million milestone payment
and $3.2 million reimbursement for one-third of the costs paid in connection with the second Phase
III trial for Savella received from Forest Laboratories in February 2008 upon acceptance of our
NDA. The revenues under collaborative agreements recorded during 2009 and 2008 consist entirely of
amounts earned or reimbursed to us pursuant to our collaboration agreement with Forest
Laboratories, entered into in January 2004, for the development and marketing of Savella. Such
revenues include the recognition of the $25.0 million upfront payment received in January 2004 from
Forest Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million
license payment received from Forest Laboratories in July 2007 to extend the territory to include
Canada recognized on a straight-line basis over the remainder of the 8 year amortization period,
sponsored development reimbursements and funding received from Forest Laboratories for certain of
our employees devoted to the development of Savella. The amount of sponsored development
reimbursements from Forest Laboratories and funding received from Forest Laboratories for certain
of our employees devoted to the development of Savella changes periodically and may be eliminated
based on the level of development activity.
Commercial Revenues
We recognized commercial revenues of $10.4 million for the nine months ended September 30,
2009 in connection with the launch of Savella during 2009.
The following table summarizes the components of commercial revenues for the nine months ended
September 30, 2009 and 2008:
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Royalty revenue |
$ | 2,727,837 | $ | | ||||
Revenue from commercial milestones |
1,387,980 | | ||||||
Co-promotion reimbursement |
6,316,705 | | ||||||
$ | 10,432,522 | $ | | |||||
We recognized royalty revenue of $2.7 million for the nine months ended September 30,
2009 based on net sales of Savella during the period as reported by Forest Laboratories, subject to
an adjustment by Forest Laboratories based on their total payment obligations to Cypress and Pierre
Fabre.
Revenue from commercial milestones for the nine months ended September 30, 2009 consists of
the recognition of the $25.0 million milestone payment received in January 2009 upon NDA approval.
A $1.25 million sublicense fee paid to Pierre Fabre was deducted from the $25.0 million, and the
balance is recognized straight-line basis over the remaining patent life for Savella, which is
estimated to be 13 years.
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Co-promotion reimbursement revenue of $6.3 million for the nine months ended September 30,
2009 consists of reimbursement from Forest Laboratories for detail calls provided by our sales
force during the period, as well as reimbursement for certain marketing costs incurred by us.
Revenues From Personalized Medicine Services
Revenues for our personalized medicine services business are recognized as cash payments for
the services are received. We recognized revenue of approximately $133,000 during the nine months
ended September 30, 2009 in connection with our personalized medicine services business, which was
launched during the fourth quarter of 2008.
Cost of Personalized Medicine Services
Cost of personalized medicine testing services primarily consists of the compensation and
benefits (including bonuses, if any, and share-based compensation) of laboratory personnel,
laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related
expenses. We incurred costs of $1.4 million during the nine months ended September 30, 2009 in
connection with our personalized medicine services business, which was launched during the fourth
quarter of 2008.
Research and Development
Research and development expenses for the nine months ended September 30, 2009 were $10.6
million compared to $7.7 million for the nine months ended September 30, 2008. The increase in
research and development expenses is primarily attributable to a $3.0 million milestone payment
owed to Pierre Fabre upon NDA approval in connection with our collaboration agreement with Forest
Laboratories and a $2.0 million payment recognized as research and development expense during the
first quarter of 2009 in connection with our asset purchase agreement with Cellatope. This
increase in research and development expenses was partially offset by a $1.0 million milestone
payment and $0.5 million sublicense fee owed to Pierre Fabre upon NDA acceptance in the first
quarter of 2008, as well as one-time costs owed to Forest Laboratories during 2008 as agreed upon
in the amendment to our agreement with Forest Laboratories.
Selling, General and Administrative
Selling, general and administrative expenses for the nine months ended September 30, 2009 and
2008 is comprised of the following:
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Sales and marketing |
$ | 19,428,092 | $ | 1,511,732 | ||||
General and administrative |
12,900,895 | 9,266,692 | ||||||
$ | 32,328,987 | $ | 10,778,424 | |||||
Sales and marketing expenses increased to $19.4 million for the nine months ended
September 30, 2009 from $1.5 million for the nine months ended September 30, 2008. The increase is
primarily due to the costs associated with supporting our commercial organization, including
salary, commission and benefits, travel expenses, training costs and automobile fleet costs, as
well as marketing expenses incurred during 2009.
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General and administrative expenses increased to $12.9 million for the nine months ended
September 30, 2009 from $9.3 million for the nine months ended September 30, 2008. The increase is
primarily due to increased consulting costs incurred during 2009 in connection with business
development activities, increased legal fees incurred during 2009 in connection with patent filing
activities and compensation expense recognized for contingent payments in connection with our
acquisition of Proprius.
In-Process Research and Development
We incurred in-process research and development in 2008 but not in 2009. In-process research
and development represents the fair value of acquired, to-be-completed research projects, including
those related to personalized medicine services and therapeutic candidates, obtained in connection
with the Proprius acquisition in March 2008 that had not reached technological feasibility at the
acquisition date and are not expected to have an alternative future use. Accordingly, the $12.6
million of in-process research and development, consisting of $10.2 million related to personalized
medicine services and $2.4 million related to therapeutic candidates, was charged to our
consolidated statement of operations during the first quarter of 2008. The total estimated value
of approximately $12.6 million of the research projects was determined by estimating the costs to
develop the acquired technology into a commercially viable product, estimating the future net cash
flows from the project once commercially viable, and discounting the net cash flows to their
present value using a discount rate of 30%.
The personalized medicine services required certain validation work prior to the anticipated
launch in late 2008. The validation work was completed and our laboratory was certified prior to
the October 2008 launch. The personalized medicine services are being marketed to rheumatologists.
The therapeutic products acquired from Proprius consisted of early clinical-stage candidates,
which include a product to treat pain and a product to treat rheumatoid arthritis. Substantial
additional research and development will be required prior to any of our acquired therapeutic
programs reaching technological feasibility. In addition, once proof of concept studies are
completed, each product candidate acquired will need to complete a series of clinical trials and
receive FDA or other regulatory approvals prior to commercialization. Due to the early stage of
development for these therapeutic products, we are unable to estimate with certainty the time and
investment required to develop these products. These programs may never reach technological
feasibility or develop into products that can be marketed profitably. In addition, we cannot
guarantee that we will be able to develop and commercialize products before our competitors develop
and commercialize products for the same indications. The successful development of Proprius
therapeutic products could result in potential milestone payments of up to $37.5 million.
Interest Income
Interest income for the nine months ended September 30, 2009 was $1.4 million compared to $3.9
million for the nine months ended September 30, 2008. The decrease in interest income for the nine
months ended September 30, 2009 compared to the corresponding period in 2008 is primarily due to a
general decrease in interest rates and related yields experienced during 2009 compared to 2008, as
well as maturing securities being reinvested at lower rates.
Liquidity and Capital Resources
At September 30, 2009, we had cash, cash equivalents and short-term investments of $144.8
million compared to cash, cash equivalents and short-term investments of $145.5 million at December
31, 2008. Working capital at September 30, 2009 totaled $143.6 million compared to $138.8 million
at December 31, 2008. We have invested a substantial portion of our available cash in money market
funds, marketable debt
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instruments of governmental agencies, corporate debt securities, commercial paper and
certificates of deposit, which are within federally insured limits. We have established guidelines
relating to our investments to preserve principal and maintain liquidity.
Net cash provided by operating activities as disclosed in our Condensed Consolidated Statement
of Cash Flows was $0.3 million for the nine months ended September 30, 2009, compared to $4.3
million for the nine months ended September 30, 2008. The primary source of cash from operations
during the nine months ended September 30, 2009 was the $25.0 million milestone payment and the
$6.5 million reimbursement of expenses received from Forest Laboratories, offset by cash used in
operations including $7.9 million for changes in operating assets and liabilities (excluding impact
of initial deferred revenue amount from commercial milestone payment) and non-cash charges of $7.7
million. The primary source of cash from operations during the nine months ended September 30,
2008 was the $10.0 million milestone payment and the $3.2 million reimbursement of expenses
received from Forest Laboratories, offset by cash used in operations including $1.8 million for
changes in operating assets and liabilities and non-cash charges of $17.2 million that includes
$12.6 million of the write-off of in-process research and development related to the acquisition of
Proprius.
Net cash used in investing activities as disclosed in our Condensed Consolidated Statement of
Cash Flows was $5.1 million for the nine months ended September 30, 2009, compared to net cash
provided by investing activities of $50.2 million for the nine months ended September 30, 2008.
The fluctuation in net cash from investing activities during the nine months ended September 30,
2009 compared to the corresponding prior year period was primarily a result of a net increase in
the purchases of short-term investments during 2009 compared to a net increase in proceeds from the
sale of short-term investments during the corresponding prior year period, partially offset by
$39.1 million in cash paid for the acquisition of Proprius during the nine months ended September
30, 2008.
Net cash provided by financing activities as disclosed in our Condensed Consolidated Statement
of Cash Flows was $0.9 million for the nine months ended September 30, 2009, compared to $2.0
million for the nine months ended September 30, 2008. The decrease in net cash provided by
financing activities during the nine months ended September 30, 2009 compared to the corresponding
prior year period was primarily the result of proceeds of approximately $0.9 million from the
exercise of stock options during 2009 compared to proceeds of approximately $2.0 million from the
exercise of stock options during 2008.
The following table summaries our long-term contractual obligations as of September 30, 2009:
Less than | ||||||||||||||||||||
1 year | 1 - 3 years | 3 - 5 years | More than 5 | |||||||||||||||||
Total | (2009) | (2010-2012) | (2013-2015) | years (2016 +) | ||||||||||||||||
Operating leases |
$ | 1,011,499 | $ | 95,421 | $ | 807,453 | $ | 108,625 | $ | | ||||||||||
Purchase obligations (1) |
182,384 | 182,384 | | | | |||||||||||||||
Total |
$ | 1,193,883 | $ | 277,805 | $ | 807,453 | $ | 108,625 | $ | | ||||||||||
(1) | Purchase obligations include agreements to purchase goods or services, including consulting services, that are enforceable and legally binding on us and that specify all significant terms. This includes contracts that are cancelable with notice and the payment of an early termination penalty. Purchase obligations exclude agreements that are cancelable without penalty and also exclude accrued liabilities to the extent presented on the balance sheet as of September 30, 2009. |
Other commercial and contractual commitments include potential milestone payments of up to
$0.5 million to Pierre Fabre and sublicense payments to Pierre Fabre based on 5% of any upfront and
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milestone payments received from Forest Laboratories, milestone payments up to $37.5 million
associated with the development of Proprius therapeutic candidates, milestone payments of up to
$116.0 million to AlphaRx in connection with the successful development and commercialization of a
product associated with the in-license of a topical NSAID therapy, milestone payments up to
approximately $42.0 million in connection with license agreements related to our POC programs,
milestone payments up to $3.0 million to Cellatope in connection with the commercial development of
a Lupus monitoring application and milestone payments up to $3.9 million in connection with license
agreements related to certain personalized medicine services. In the event we move forward with
development of a product or service under any of these arrangements, in most instances, we would
also be obligated to make royalty payments.
Unless and until we can consistently generate significant cash from our operations, we expect
to continue to fund our operations with existing cash resources that were primarily generated from
the proceeds of offerings of our equity securities, from revenue under our collaboration agreement
with Forest and, if available to us, cash from financings.
Our current expected primary cash needs on both a short term and long-term basis are for
supporting a commercial infrastructure, the development of candidates under our POC trials,
including the pharmaceutical candidates obtained in connection with the Proprius acquisition, our
personalized medicine services, and general research, working capital and other general corporate
purposes and the identification, acquisition or license, and development of potential future
products and services. Excluding the amounts payable under our merger agreement with Proprius and
our agreements with Pierre Fabre, AlphaRx, Cellatope and various licensors under our POC trials and
personalized medicine services business, the costs of in-licensing or acquiring additional
compounds or companies, funding clinical development for any product (other than our ongoing POC
trials) that we may in-license or acquire and the milestone payment and reimbursement for clinical
trial costs received from Forest Laboratories in January 2009, we estimate that based on our
current business plan, net cash required to fund operating expenses will approximate $45 million to
$50 million for the year 2009. If we include the milestone payment and reimbursement for clinical
trial costs received from Forest Laboratories in January 2009, we will require cash of
approximately $15 million to $20 million to fund our operations for 2009. In addition, one of our
ongoing goals is to continue to identify and in-license new products and product candidates. In the
event we acquire, license or develop any new products or product candidates, or begin any new POC,
the amount to fund our operations for 2009 would increase, possibly materially. We expect that our
net losses will continue for at least the next several years as we seek to acquire, license or
develop additional products, product candidates and services. Such losses may fluctuate, and the
fluctuations may be substantial.
Based on our current business plan, we believe our cash and cash equivalents and short-term
investments balances at September 30, 2009 are sufficient to fund operations through at least 2010.
However, we are actively continuing to evaluate various potential strategic transactions, including
the potential acquisitions of products, product candidates and companies, and other alternatives.
In order to acquire or develop additional products and product candidates, we will likely require
additional capital. The amount of capital we require is dependent upon many forward-looking factors
that could significantly increase our capital requirements, including the following:
| the costs of funding our commercial infrastructure; | ||
| the costs and timing of development and regulatory approvals for all our products and services; | ||
| the costs associated with operating a clinical laboratory; | ||
| the extent to which we acquire or invest in other products, product candidates and businesses; | ||
| the costs of in-licensing drug candidates; |
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| the ability of Forest Laboratories and us to reach sales milestones and other events under our collaboration agreement; and | ||
| the costs of commercialization of any future products and services. |
Because we are unable to predict the outcome of the foregoing factors, some of which are
beyond our control, we are unable to estimate with certainty our mid to long-term capital needs.
Unless and until we can generate a sufficient amount of product and service revenue, if ever, we
expect to finance future capital needs through public or private debt or equity offerings or
collaboration and licensing arrangements, as well as interest income earned on cash balances. We do
not currently have any commitments or specific plans for future external funding. We may not be
able to raise additional capital and the funds we raise, if any, may not allow us to maintain our
current and planned operations. If we are unable to obtain additional capital, we may be required
to delay, scale back or eliminate our sales force or some or all of our development of existing or
future product candidates and personalized medicine services and discontinue the evaluation or
completion of any proposed acquisitions or strategic transactions.
To date, we have not had any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which
are established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Critical Accounting Policies
There were no significant changes in critical accounting policies or estimates from those at
December 31, 2008 other than as follows:
Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectability is reasonably assured. Some of our agreements contain multiple
elements and in accordance with these agreements, we may be eligible for upfront license fees,
sponsored development reimbursements, funding for certain of our employees, co-promotion
reimbursement, development and commercial milestones and royalties.
Revenues under our collaborative agreement include upfront license fees, sponsored development
reimbursements, funding for certain of our employees and development milestones. Amounts received
for upfront license fees under multiple-element arrangements are deferred and recognized over the
period such arrangements require on-going services or performance. Amounts received for sponsored
development activities, including funding received for certain of our employees, are recognized as
research costs are incurred over the period specified in the related agreement or as the services
are performed. Amounts received for development milestones are recognized upon achievement of the
milestone, which requires substantive effort, was not readily assured at the inception of the
agreement and is non-refundable. Any amounts received prior to satisfying revenue recognition
criteria are recorded as deferred revenue.
Commercial revenues include royalties on product sales of Savella, revenue from commercial
milestones and reimbursement for co-promotion of Savella. Royalty revenue is recognized based on
royalties reported by Forest Laboratories during the quarter with such payment due within 45 days
after quarter end. The royalty rate as stated in our agreement with Forest Laboratories is subject
to adjustment based on Forests total payment obligations to Cypress and Pierre Fabre; however, the
royalty rate cannot
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be reduced below the stipulated floor. Revenue from commercial milestones related to our NDA
approval, net of sublicense fees, is recognized over the remaining patent life, which corresponds
with the term of the collaboration agreement. As this milestone payment cannot be bifurcated from
the reimbursement for the co-promotion of Savella, it has been deferred and is being recognized over the relevant period. Revenue from
commercial milestones related to sales-based milestones, net of sublicense fees, is recognized upon
the achievement of the specified milestones, which requires substantive effort, was not readily
assured at the inception of the agreement and is non-refundable. Any milestone payments received
prior to satisfying these revenue recognition criteria are recognized as deferred revenue.
Co-promotion reimbursement revenue is recognized in the period in which the detailing calls
(measured on a per physician call basis) are performed using an estimated reimbursement rate based
on historical cost information provided to us by Forest and consideration for any changes in
Forests Savella sales force productivity. We recognize this revenue as services have been
rendered, the reimbursement rate is determinable and collectability is reasonably assured. At the
end of Forests fiscal year on March 31, an annual reconciliation will be performed to adjust the
per-detail fee to reflect the actual rate that is equal to the cost of such effort to Forest had it
been accomplished by the Forest sales force detailing Savella. Differences in revenue resulting from
changes between the estimated rate and actual rate are adjusted for
in the period they become known. The corresponding costs associated
with our co-promotion reimbursement are included as a component of selling, general and
administrative expense on the Consolidated Statement of Operations.
In connection with our personalized medicine services, such services are performed based on a
written test requisition form. We generally bill third-party payers for these services upon
generation and delivery of a report to the ordering physician. As such, we take assignment of
benefits and the risk of collection with the third-party payer. We currently do not have any
contracts with third-party payers. We usually bill the patient directly for amounts owed after
multiple requests for payment have been denied or only partially paid by the insurance carrier as
allowed by law. As relatively new tests, the personalized medicine services offered by us may not
be covered under their reimbursement policies. Consequently, we pursue case-by-case reimbursement
where policies are not in place or payment history has not been established. As a result, at the
time of delivery of the report to the ordering physician, and in the absence of a reimbursement
contract or sufficient payment history, collectibility cannot reasonably be assured and revenues
are therefore only recognized at the time cash is collected.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have invested our excess cash in United States government securities, corporate debt
securities, commercial paper, certificates of deposit and money market funds with strong credit
ratings. As a result, our interest income is most sensitive to changes in the general level of
United States interest rates. We do not use derivative financial instruments, derivative commodity
instruments or other market risk sensitive instruments, positions or transactions in any material
fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to
changes in the financial standing of the issuer of such securities, we are not subject to any
material risks arising from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive instruments. A
hypothetical 1% adverse move in interest rates along the entire interest rate yield curve over a
three month period would not materially affect the fair value of our financial instruments that are
exposed to changes in interest rates.
ITEM 4 CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the timelines specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive
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Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving the desired control objectives, and in reaching a
reasonable level of assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
There has been no change in our internal controls over financial reporting during the period
covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
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PART II OTHER INFORMATION
Item 1 Legal Proceedings
From time to time we are involved in certain litigation arising out of our operations. We are
not currently engaged in any legal proceedings that we expect would materially harm our business or
financial condition.
Item 1A Risk Factors
We have marked with an asterisk those risk factors that reflect substantive changes from the
risk factors previously disclosed in our Form 10-K for the year ended December 31, 2008.
Risks related to our business
* | We may not be successful in creating a successful commercial infrastructure. |
In a period of a few months, we hired 115 field based sales employees to create a commercial
infrastructure in order to launch Savella along with our corporate partner, Forest Laboratories. We
initially began with an 11 person sales force which launched the first two of our personalized
medicine services in October 2008 and hired the remainder of our current sales field personnel by
January 2009. Our launch of Savella at the beginning of May 2009 is a result of us exercising our
co-promotion right which allows us to co-promote Savella under our agreement with Forest
Laboratories and be paid by Forest for the Savella portion of the sales details. While
Savella was approved by the U.S. Food and Drug Administration (FDA) on January 14, 2009, Cypress
and Forest did not commence product promotion until May 2009. The delay in launching Savella
delayed our ability to generate royalty revenues under our collaboration with Forest and prevented
us from being reimbursed for the portion of our sales force calls that would have been devoted to
the promotion of Savella, which will cause the net cost of our sales force to be a larger portion
of our expected expenses for the year 2009.
The co-promotion right is subject to our maintaining our own sales capabilities, which
includes our sales force. In the event we are unable to maintain our sales force, we would lose
our co-promotion right with respect to Savella. In addition, although we now have the number of
required sales personnel, the performance of our sales personnel as measured by actual sales may be
disappointing. Many of our competitors have significantly greater experience than we do in
selling, marketing and distributing products and services, and we may not be able to compete
successfully with them with the sales force we have developed. Even though we intend to offer
integrated personalized medicine services and therapeutic products through the same sales
organization, this may not facilitate greater physician access or improve the quality of the sales
call, and it may not help establish Cypress as a leader targeting these specific specialists. In
addition, because our initial personalized medicine services are targeted only to rheumatologists,
the potential synergies from offering personalized medicine services and therapeutic products
together exist in only a small portion of our Savella sales calls at this time.
The co-promotion reimbursement for detail calls is determined based on the number of detailing
calls made by our sales force (measured on a per physician call basis) during the period, each of
which is reimbursed at a rate equal to the cost of such effort to Forest had it been accomplished
by the Forest sales force. At the end of Forests fiscal year on March 31, an annual
reconciliation will be performed to adjust the per-detail fee to reflect the actual rate achieved
by the Forest sales force detailing Savella. It is possible that our estimated costs do not
approximate the actual costs and that the required annual reconciliation results in the payment to
us being reduced both for past details calls and future detail calls.
In the event that our agreement with Forest Laboratories is terminated, or with respect to any
other product we may develop which is not covered by our collaboration with Forest Laboratories or
is not sold to the specialists that we are currently calling upon, we may have to obtain the
assistance of a
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pharmaceutical company or other entity with a large distribution system and a large
direct sales force, or build a substantial marketing and sales force with appropriate technical
expertise and supporting distribution capabilities. We may not be able to enter into such
arrangements with third parties in a timely manner or on acceptable terms or to establish sales, marketing and distribution capabilities
of our own. To the extent that we enter into co-promotion or other licensing arrangements, our
product revenues are likely to be lower than if we directly marketed and sold our products, and any
revenues we receive will depend upon the efforts of third parties, and these efforts may not be
successful.
We may encounter challenges in our personalized medicine services business.
We launched the first of our two personalized medicine services in October 2008. These
services were acquired in March 2008, when we acquired Proprius, a formerly private San Diego-based
personalized medicine services and specialty pharmaceutical company. We have limited experience in
the personalized medicine services space. The launch of our personalized medicine services has
exposed us to potential operational and financial risks, including:
| we may be unable to drive awareness of, and to establish the clinical need for, these personalized medicine services, and therefore may be unable to successfully commercialize these products and services; | ||
| higher development or commercialization costs than we anticipate for the personalized medicine services; | ||
| challenges with running a service business; | ||
| higher than expected licensing and integration costs; | ||
| exposure to liabilities of licensed and acquired intellectual property, compounds, products and services; | ||
| disruption of our business and diversion of our managements time and attention as part of integrating Proprius business with our operations; and | ||
| potential significant impairment charges related to goodwill. |
We will devote significant resources to our new business and we may fail to realize the
anticipated benefit of this strategic transaction with Proprius and further, may decide to
terminate our personalized medicine services.
* | If third-party payers, including managed care organizations and Medicare, do not provide reimbursement for Avise PG or Avise MCV, their commercial success could be compromised. |
Avise PG has a current list price of $295 and Avise MCV has a current list price of $129.
Although we began marketing our personalized medicine services in October 2008, the cycle time for
payment is long, and we have only received payment for a small number of the tests that have been
performed. Further, physicians and patients may decide not to order our tests unless third-party
payers, such as managed care organizations as well as government payers such as Medicare and
Medicaid, establish coverage policies for the tests or pay a substantial portion of the test price.
Reimbursement by a third-party payer may depend on a number of factors, including a payers
determination that tests using our technologies are:
| not experimental or investigational, |
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| medically necessary, | ||
| appropriate for the specific patient and diagnosis, | ||
| cost-effective, | ||
| supported by peer-reviewed publications, and | ||
| included in clinical practice guidelines. |
There is significant uncertainty concerning third-party reimbursement of any test
incorporating new technology, including our Avise PG and Avise MCV tests. Several entities conduct
technology assessments of new medical tests and devices and provide the results of their
assessments for informational purposes to other parties. These assessments may be used by
third-party payers and health care providers as grounds to deny coverage for a test or procedure.
Since each payer makes its own decision as to whether to establish a policy to reimburse our
test, seeking these approvals is a time-consuming and costly process. We do not yet have any
third-party payer reimbursement agreements.
Insurers, including managed care organizations as well as government payers such as Medicare,
have increased their efforts to control the cost, utilization and delivery of health care services.
From time to time, Congress has considered and implemented changes in the Medicare fee schedules in
conjunction with budgetary legislation. Further reductions of reimbursement for Medicare services
may be implemented from time to time. Reductions in the reimbursement rates of other third-party
payers have occurred and may occur in the future. These measures have resulted in reduced prices
and decreased test utilization for the clinical laboratory industry. If we are unable to obtain
reimbursement approval from private payers and Medicare and Medicaid programs for our Avise PG and
Avise MCV tests, or if the amount reimbursed is inadequate, our ability to generate revenues from
these tests could be limited. Even if we are being reimbursed, insurers may withdraw their coverage
policies or cancel their contracts with us at any time or stop paying for our test, which would
reduce our revenue.
* | We have recently substantially increased the size of our organization and will continue to need to increase the size of our organization, and we may experience difficulties in managing growth. |
In a period of a few months in late 2008, we hired 115 field based sales employees and
management to create a commercial infrastructure in order to launch Savella along with our
corporate partner, Forest Laboratories, which contributed to an increase in our full-time employees
from 37 as of September 30, 2008 to 148 as of September 30, 2009. We will need to continue to
expand our managerial, operational and other resources in order to manage and fund our existing
business, including the development activities relating to our personalized medicine services, and
in order to perform under our co-promotion arrangement for Savella we will need to manage
activities relating to the commercialization of Savella. Our management and personnel, systems and
facilities currently in place may not be adequate to support this recent and future growth. Our
need to effectively manage our operations, growth and various projects requires that we:
| manage our internal development and commercialization efforts for our personalized medicine services and Savella effectively while carrying out our contractual obligations to collaborators and other third parties and complying with all applicable laws, rules and regulations; | ||
| continue to improve our operational, financial and management controls, reporting systems and procedures; and |
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| attract and retain sufficient numbers of talented employees. |
We may be unable to successfully implement these tasks on a larger scale and, accordingly, may
not achieve our development and commercialization goals.
We are dependent on our collaboration with Forest Laboratories to commercialize Savella and to obtain regulatory approval.
Pursuant to the terms of our collaboration agreement with Forest Laboratories, we granted
Forest Laboratories an exclusive sublicense for the development and marketing of Savella, for all
indications in the United States. Forest exercised its option to extend the territory to include
Canada. Forest Laboratories is responsible for funding the further development of Savella,
including further clinical trials and further regulatory approval. With the FDA approval of
Savella, Forest Laboratories has primary responsibility for the marketing and sale of the approved
product and will share responsibility for compliance with regulatory requirements. We have limited
control over the amount and timing of resources that Forest Laboratories will dedicate to the
further development and marketing of Savella . Our ability to generate
milestone and royalty payments from Forest Laboratories depends on Forest Laboratories ability to
achieve market acceptance of Savella for the management of FM.
We are subject to a number of additional risks associated with our dependence on our
collaboration with Forest Laboratories, including:
| Forest Laboratories could fail to devote sufficient resources to the commercialization, marketing and distribution of Savella or any other products developed under our collaboration agreement, including by failing to develop or expand sales forces if such sales forces appear necessary for the most effective promotion of Savella or any other approved product; | ||
| We and Forest Laboratories could disagree as to post approval development plans, including the number and timing of clinical trials, or as to which additional indications for Savella should be pursued, if any, and therefore Savella may never be sold for any indications other than FM; | ||
| Forest could fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing of Savella which could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production and refusal to approve any new drug applications. | ||
| Forest Laboratories could independently develop, develop with third parties or acquire products that could compete with Savella, including drugs approved for other indications used by physicians off-label for the treatment of FM; | ||
| Forest Laboratories could abandon or underfund the post approval development of Savella, repeat or conduct additional clinical trials or require a new formulation of milnacipran for further clinical testing, or delay the commencement of any post approval clinical trials for Savella for the management of FM; and | ||
| Disputes regarding the collaboration agreement that delay or terminate the post approval development or commercialization, may delay or prevent the achievement of clinical or regulatory objectives that would result in the payment of milestone payments or result in significant litigation or arbitration. |
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Furthermore, Forest Laboratories may terminate our collaboration agreement upon our material
breach or our bankruptcy and may also terminate our agreement upon 120 days notice in the event
Forest Laboratories reasonably determines that the development program indicates issues of safety
or efficacy that are likely to prevent or significantly delay the filing or approval of any future
NDA or to result in labeling or indications that would significantly adversely affect the marketing
of any product developed under the agreement. If any of these events occur, we may not be able to
find another collaborator for further development or commercialization, and even if we elected to
pursue further development and continued commercialization of Savella, we might not be able to do
so successfully on a stand-alone basis and would experience substantially increased capital
requirements that we might not be able to fund.
* | All of our personalized medicine services are performed at a single laboratory and, in the event this facility was to be affected by man-made or natural disasters, our personalized medicine services operations could be severely impaired. |
We are performing all our personalized medicine testing services in our laboratory located in
San Diego, California. Despite precautions taken by us, any future natural or man-made disaster at
this laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays
in our personalized medicine services operations, damage or destroy our equipment and biological
samples or cause us to incur additional expenses. In addition, we are leasing the facilities where
our lab operates and anytime a lab is moved, it could also cause substantial delay in our
personalized medicine services operations, damage or destroy our equipment and biological samples
or cause us to incur additional expenses. In the event of an extended shutdown of our laboratory,
we may be unable to perform our personalized medicine testing services in a timely manner or at all
and therefore would be unable to operate our personalized medicine services business in a
commercially competitive manner, which would also detract from our ability to offer integrated
personalized medicine services and therapeutic products through the same sales organization. We
cannot assure you that we could recover quickly from a serious natural or man-made disaster or that
we would not permanently lose customers as a result of any such business interruption. This could
harm our operating results and financial condition.
In order to rely on a third party to perform our personalized medicine testing services, we
could only use another facility with established state licensure and accreditation under Clinical
Laboratory Improvement Amendments (CLIA). We may not be able to find another CLIA-certified
facility and comply with applicable procedures, or find any such laboratory that would be willing
to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory
opened by us would be subject to certification under CLIA and licensure by various states, which
would take a significant amount of time and result in delays in our ability to continue our
personalized medicine services operations.
Failure to timely or accurately bill for our personalized medicine services could have a material
adverse effect on our personalized medicine services net revenues and bad debt expense.
Billing for personalized medicine testing can be extremely complicated and we have very
limited experience performing such billing. Depending on the billing arrangement and applicable
law, we must bill various payers, such as insurance companies, Medicare, Medicaid, physicians,
hospitals, employer groups and patients, all of which have different billing requirements.
Additionally, compliance with applicable laws and regulations as well as internal compliance
policies and procedures adds further complexity to the billing process. Changes in laws and
regulations could negatively impact our ability to bill our clients or increase our costs. The
Centers for Medicare and Medicaid Services (CMS) also establishes procedures and continuously
evaluates and implements changes to the reimbursement process for billing government programs.
Missing or incorrect information on test requisitions adds complexity to and slows the billing
process, creates backlogs of unbilled tests, and generally increases the aging of accounts
receivable and
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bad debt expense. Failure to timely or correctly bill may lead to our not being
reimbursed for our services or an increase in the aging of our accounts receivable, which could
adversely affect our results of operations and cash flows. Failure to comply with applicable laws
relating to billing federal healthcare programs could also lead to various penalties, including:
| exclusion from participation in Medicare/Medicaid programs; | ||
| asset forfeitures; | ||
| civil and criminal fines and penalties; and | ||
| the loss of various licenses, certificates and authorizations necessary to operate our business. |
Any of these penalties or sanctions could have a material adverse effect on our results of
operations or cash flows.
We have a financial risk related to collections for our personalized medicine services.
With respect to our personalized medicine services, we bill on a fee-for-service basis.
Billing for personalized medicine services is a complex process and we bill many different payers
such as insurance companies, governmental payer programs and patients, each of which has different
billing requirements. We have very limited experience in the collection of accounts receivable and
we face risks in our collection efforts, including potential write-offs of doubtful accounts and
long collection cycles for accounts receivable, including reimbursements by third party payers,
such as Medicare, Medicaid and other governmental payer programs, hospitals, private insurance
plans and managed care organizations. As a result of the current economic climate, we may face
increased risks in our collection efforts, which could adversely affect our business. In addition,
large write-offs of doubtful accounts (particularly in response to a recent increase in personal
bankruptcies), delays in receiving payments or potential retroactive adjustments and penalties
resulting from audits by payers could adversely affect our business, results of operations and
financial condition.
We rely upon an exclusive license from Pierre Fabre in order to develop and sell Savella,
and our ability to pursue the further development and commercialization of Savella for the management of FM
depends upon the continuation of our license from Pierre Fabre.
Our license agreement with Pierre Fabre provides us with an exclusive license to develop and
sell any products with the compound milnacipran as an active ingredient for any indication in the
United States and Canada, with a right to sublicense certain rights to Forest Laboratories under
our collaboration with Forest Laboratories. Either we or Pierre Fabre may terminate the license
agreement for cause upon 90 days prior written notice to the other party upon the bankruptcy or
dissolution of the other party, or upon a breach of any material provision of the agreement if the
breach is not cured within 90 days following the written notice. Furthermore, Pierre Fabre has the
right to terminate the agreement upon 90 days prior notice to us if we and Forest terminate our
development and marketing activities with respect to Savella, if we challenge certain patent rights
of Pierre Fabre and under specified other circumstances. If our license agreement with Pierre Fabre
were terminated, we would lose our rights to develop and commercialize products using the compound
milnacipran as an active ingredient, as the compound is manufactured under Pierre Fabre patents and
using Pierre Fabre know-how and trade secrets, and it would be unlikely that we could obtain the
active ingredient in milnacipran from any other source.
* | We rely upon Pierre Fabre as our exclusive supplier of the active ingredient in Savella and if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may delay or prevent us from further commercializing Savella. |
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Pursuant to our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive
supplier to us and Forest Laboratories of the active pharmaceutical ingredient in Savella. Neither
we nor Forest Laboratories have facilities for the manufacture of the active pharmaceutical
ingredient in Savella. Currently, Pierre Fabre manufactures milnacipran in its facility in Gaillac,
France. Pierre Fabre is the only worldwide supplier of milnacipran, which is currently approved for
sale for a non-pain indication outside the United States. Pierre Fabres facility has been
initially inspected by the FDA for compliance with current good manufacturing practices, or cGMP,
requirements and after this initial inspection, may be inspected from time to time. In addition,
Pierre Fabre has qualified an additional manufacturing facility, and the second manufacturing site
that has been identified by Pierre Fabre is also subject to inspection by the FDA for compliance
with cGMP. In the event an inspection results in written deficiencies, it may result in a
disruption or termination of the supply to Forest of milnacipran. We do not have control over
Pierre Fabres or its sublicensees compliance with cGMP requirements. If Pierre Fabre fails to
timely and economically supply us sufficient quantities for commercial sale of Savella, our product
sales and market acceptance of Savella could be adversely affected.
Furthermore, our purchase and supply agreement may be terminated for cause either by us or by
Pierre Fabre upon 90 days prior written notice to the other party upon a material breach of the
agreement if the breach is not cured within 90 days following the written notice. We have the right
to manufacture milnacipran if Pierre Fabre does not have a required buffer stock or in the event
that we terminate our license agreement with Pierre Fabre under certain circumstances. If our
purchase and supply agreement with Pierre Fabre is terminated, we are unlikely to be able to
qualify another supplier of the active ingredient within a reasonable time period, and our ability to further develop and
commercialize Savella will be significantly impaired.
Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified
compounds, which limits how we can expand our product candidates.
Under our agreements with Pierre Fabre and Forest Laboratories, Forest Laboratories has agreed
to pay Pierre Fabre and us a royalty, in the event that Forest Laboratories sells a product other
than milnacipran for FM for a specified period of time, which shall not be less than three years.
We are, in turn, obligated to pay a portion of the royalty we receive from Forest Laboratories to
Pierre Fabre. In addition, each of us is subject to limitations related to each partys development
of any serotonin norephinephrine reuptake inhibitor, or SNRI, products other than milnacipran.
These limitations include: (i) a prohibition on developing an SNRI product for specified
indications for which milnacipran is being developed; and (ii) a prohibition on developing an SNRI
product for any indication for a specified time period, and after such specified time period, a
requirement that if one of the parties launches and sells an SNRI product that is prescribed
off-label for any indication for which milnacipran is being developed, the selling party must
reimburse the other parties for lost sales due to the off-label use.
Provisions in our collaboration agreement with Forest Laboratories and our license agreement with
Pierre Fabre may prevent or delay a change in control.
Our collaboration agreement with Forest Laboratories provides that Forest Laboratories may
elect to terminate our co-promotion rights for Savella or any other product developed under the
collaboration agreement and we may lose our decision-making authority with respect to the
development of Savella if we engage in a merger, consolidation or sale of all or substantially all
of our assets, or if another person or entity acquires at least 50% of our voting capital stock.
Our license agreement with Pierre Fabre provides that Pierre Fabre may elect to terminate the
agreement upon a change in control transaction in which a third party acquirer of us controls an
SNRI product, and the acquirer does not take certain actions (e.g., divestiture of such SNRI
product) within a specified time period to cure the breach of certain restrictions in the agreement
that results from such SNRI product. These provisions may have the effect of delaying or preventing
a change in control or a sale of all or substantially all of our assets, or may reduce the number
of companies interested in acquiring us.
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* | We are at an early stage of commercialization and we may never generate any significant revenues. |
We are at an early stage of development as a biotechnology company and only recently launched
our personalized medicine services in October 2008 and only in May 2009 launched Savella. Without
a history of sales, we may not accurately predict future sales, and our sales may be much smaller
than we have forecasted, especially in light of the state of the economy. In addition, given our
increased costs associated with a laboratory and a sales force, and the fact that Forest only
reimburses for the portion of the sales calls that are made for Savella, it is likely that our
costs of running our business will exceed our sales on the personalized medicine services and the
royalty we will receive for sales of Savella in the initial years following launch. Further, our
current product and service candidates, as well as any future products and services that we may
acquire or develop, will require significant additional development, appropriate regulatory
approval, and additional investments before they can be commercialized, if ever. Our product
development and product acquisition efforts may not lead to any further commercial services or
drugs, either because the service and product candidates are not shown to be accurate and
clinically useful in the case of personalized medicine service product candidates, or safe and
effective in the case of drug product candidates, or because we have inadequate financial or other
resources to pursue clinical development of the service and product candidate or because the FDA,
CMS or state authorities do not grant or otherwise withdraw or revoke a regulatory approval.
Rheumatologists do not currently use personalized medicine services to determine the level of
methotrexate (MTX) polyglutamates among their patients on MTX. Therefore, Avise PG is not the
current standard of care. In addition, there are other tests for the diagnosis of RA that compete
with Avise MCV. We may be unable to drive awareness of, and to establish the clinical need for,
these personalized medicine services, and therefore may be unable to successfully commercialize these products
and services.
It is possible that we will never be able to realize material cash inflows from sales of our
personalized medicine services or that even if we do, such material cash flows do not occur until
after 2010. Further, if we are unable to realize significant revenues in the sale of any of our
current personalized medicine services or if Forest Laboratories and Cypress are unable to achieve
significant sales of Savella, we will be unable to generate sufficient revenues (including revenues
from royalties), may be unsuccessful in raising additional capital and may cease our operations.
Even with the launch of our two initial personalized medicine services and Savella, because of the
increased costs associated with running a commercial organization, we still may never achieve
profitability.
Our failure to comply with the HIPAA security and privacy regulations and other state regulations may increase our operational costs.
The HIPAA privacy and security regulations establish comprehensive federal standards with
respect to the uses and disclosures of personal health information, or PHI, by health plans and
healthcare providers, in addition to setting standards to protect the confidentiality, integrity
and availability of electronic PHI. The regulations establish a complex regulatory framework on a
variety of subjects, including:
| the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for services and healthcare operations activities; | ||
| a patients rights to access, amend and receive an accounting of certain disclosures of PHI; | ||
| the content of notices of privacy practices for PHI; and |
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| administrative, technical and physical safeguards required of entities that use or receive PHI electronically. |
We have implemented policies and procedures related to compliance with the HIPAA privacy and
security regulations, as required by law. The privacy regulations establish a uniform federal
floor and do not supersede state laws that are more stringent. Therefore, we are required to
comply with both federal privacy regulations and varying state privacy laws. The federal privacy
regulations restrict our ability to use or disclose patient identifiable laboratory data, without
patient authorization, for purposes other than payment, treatment or healthcare operations (as
defined by HIPAA), except for disclosures for various public policy purposes and other permitted
purposes outlined in the privacy regulations. The privacy and security regulations provide for
significant fines and other penalties for wrongful use or disclosure of PHI, including potential
civil and criminal fines and penalties. Although the HIPAA statute and regulations do not expressly
provide for a private right of damages, we also could incur damages under state laws to private
parties for the wrongful use or disclosure of confidential health information or other private
personal information.
* | Our business presents the risk of product liability claims. |
We may be subject to legal actions asserting product liability claims relating to the use of
Savella. In connection with exercising our co-promotion right, we agreed to indemnify Forest
Laboratories with respect to the promotion of Savella. Although we currently maintain $10 million
in insurance for product liability claims, litigation is inherently subject to uncertainties and we
may be required to expend substantial amounts in the defense or resolution of any product liability
claims made relating to the use of Savella, some or all of which may not be covered by insurance.
We also plan to continue conducting clinical trials on humans using milnacipran and our other
Proof of Concept stage development candidates and the use of milnacipran and these other
development candidates may result in adverse effects. Although we are aware that there are side
effects associated with milnacipran and these other development candidates, we cannot predict all possible harm or
side effects that may result from the treatment of patients with milnacipran or any of our future
product candidates, and the amount of insurance coverage we currently hold may not be adequate to
protect us from any liabilities. We may not have sufficient resources to pay any liability
resulting from such a claim beyond our insurance coverage.
The FDA approval of any future product candidate is uncertain and will involve the commitment of
substantial time and resources.
We may never receive regulatory approval from the FDA or any other regulatory body required
for the commercial sale of any future products in the United States for any number of reasons.
The regulatory approval of a new drug typically takes many years and the outcome is uncertain.
Despite the time and resources expended, regulatory approval is never guaranteed. If we fail to
obtain regulatory approval for any future therapeutic product candidates, we will be unable to
market and sell any future therapeutic products and therefore may never generate any revenues from
product sales for future therapeutic product candidates or become profitable. In addition, our
collaborators, or our third-party manufacturers failure to comply with the FDA and other
applicable United States or foreign regulations may subject us to administrative or judicially
imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product
seizure or detention, product recalls, total or partial suspension of production and refusal to
approve new drug approval applications.
As part of the regulatory approval process, we must conduct, at our own expense, preclinical
research and clinical trials for each product candidate sufficient to demonstrate its safety and
efficacy to the satisfaction of the FDA and other regulatory agencies in the United States and
other countries where
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the product candidate will be marketed if approved. The number of preclinical
studies and clinical trials that will be required varies depending on the product, the disease or
condition that the product is in development for and the regulations applicable to any particular
product. The regulatory process typically also includes a review of the manufacturing process to
ensure compliance with applicable regulations and standards, including the cGMP requirements. The
FDA can delay, limit or decline to grant approval for many reasons, including:
| a product candidate may not be safe or effective; | ||
| we may not achieve statistical significance for the primary endpoint; | ||
| FDA officials may interpret data from preclinical testing, clinical trials, and/or pharmacovigilance data in different ways than we interpret such data; | ||
| the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of any future collaborators or contract manufacturers; | ||
| the FDA may change its approval policies or adopt new regulations; and | ||
| the FDA may request additional data. |
* | In light of our regulatory approval for Savella and if we ever receive regulatory approval for any other future product candidate, and secure and maintain regulatory approvals related to our personalized medicine services, we will be subject to ongoing FDA, CLIA and state regulatory obligations and continuing regulatory review by applicable regulatory authorities. |
Our regulatory approval for Savella has been and regulatory approval for any future product
candidates will be limited to the indications, dosages and restrictions on the product label. The
FDA has approved Savella for the management of fibromyalgia, and has imposed
additional limitations on the indicated uses, has required post-marketing surveillance and the
performance of potentially costly post-marketing studies. Even though we have received FDA
approval for Savella, as we have seen with other products on the market, Savella or any of our
other future product candidates may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those
product candidates from the market. We and Forest Laboratories continue to be subject to strict FDA
regulation after approval, including regulation of product labeling and packaging, adverse event
reporting, manufacture, storage, advertising, promotion and recordkeeping. Any unforeseen problems
with an approved product or any violation of regulations could result in restrictions on the
product, including its withdrawal from the market. Federal and state regulatory approvals we have
received related to our current personalized medicine services and may receive related to planned
or future personalized medicine services mandate specific clinical laboratory approval standards in
the areas of personnel qualifications, administration, participation in proficiency testing,
patient test management, quality and inspections, and our failure to meet and maintain those
approvals could adversely affect our ability to offer personalized medicine products and services.
In addition, the FDA has in the past and may in the future claim regulatory authority over
laboratory-developed tests, in which event our personalized medicine services may directly or
indirectly become subject to FDA approval.
* | If advances in technology allow others to perform and/or provide personalized medicine services which are similar to or better than ours or to perform such services in a more efficient or cost-effective manner than is currently possible, our personalized medicine services may not meet with demand in the marketplace or the demand for these services may decrease. |
The diagnostic industry is characterized by rapidly advancing technology that may enable
clinical laboratories, hospitals, physicians or other medical providers to perform and/or provide
personalized
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medicine services similar to or better than ours in a more efficient or cost-effective
manner than is currently possible. With respect to our personalized medicine services, other
advances in technology may result in a decreased demand for our personalized medicine services. In
addition, in order for our business to be successful, we may need to develop new personalized
medicine tests or improve existing personalized medicine tests. There is no assurance, however,
that we will be able to develop or improve these personalized medicine services in the future. Even
if we successfully develop such services in a timely manner, these new tests may not be utilized by
our customers. If we fail to develop new services or release new or improved tests on a timely
basis, or if such tests do not obtain market acceptance for any reason, our financial condition and
results of operations could be harmed.
* | The FDA may decide to exercise enforcement discretion and require FDA approval or clearance of our personalized medicine services. |
Laboratory-developed tests, like Avise MCV and Avise PG, are regulated by CLIA, as
administered by the Centers for Medicare and Medicaid Service, or CMS, as well as applicable state
laws. The FDA has in the past also claimed regulatory authority over laboratory-developed tests,
but has stated that it was exercising enforcement discretion in not regulating laboratory-developed
tests performed by high complexity, CLIA-certified laboratories. Our current personalized medicine
services have not been cleared or approved by the FDA. Due to the evolving regulatory environment,
there is always the risk that the FDA could decide to exercise its oversight with respect to any
one of our tests and determine that FDA approval or clearance is required. This would require
additional time and money and could require us to cease offering our personalized medicine
services, which could have a material adverse effect on our business. If we fail to properly
develop our personalized medicine services or if we fail to validate them accurately or
inaccurately measure the performance specifications of the personalized medicine services we
develop due to human error, deficiencies in our quality control process or otherwise, we may become
subject to legal action as well as damage to our reputation with customers, which could have a
material adverse effect upon our business.
Further, in September 2006, the FDA published a draft guidance document that described certain
laboratory-developed tests that the FDA intends to regulate as in vitro diagnostic test systems
(i.e., as medical devices). The FDA calls this category of laboratory-developed tests In Vitro
Diagnostic Multivariate Index Assays, or IVDMIAs. The FDA issued a revised draft guidance
pertaining to IVDMIAs in July 2007. In the revised guidance, the FDA defines an IVDMIA as a device
that combines the values of multiple variables using an interpretation function to yield a single,
patient-specific result that is intended for use in the diagnosis of a disease or other condition,
or in the cure, mitigation, treatment, or prevention of disease, and that provides a result that
cannot be independently derived or verified by the end user and whose derivation is non-transparent. The IVDMIA draft guidance, if
adopted as published, would extend FDA oversight over laboratories that offer laboratory-developed
tests which meet this definition. It is possible that Avise MCV and Avise PG will be
subject to the recently proposed FDA regulatory guidance and even if not covered by the IVDMIA
draft, that new legislation will extend FDA oversight to our laboratory-developed tests.
* | We rely on third parties to conduct all of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for any of our other future product candidates. |
As of September 30, 2009, we had only 148 full-time employees. Although we have more employees
than we have had historically, 115 of these employees are devoted to our sales organization, and
therefore, as we have in the past, we expect to continue to rely on third parties to conduct all of
our clinical trials. Because we do not conduct our own clinical trials, we must rely on the efforts
of others and cannot always control or predict accurately the timing of such trials, the costs
associated with such trials or the procedures that are followed for such trials. We expect to
continue to rely on third parties to conduct all of our future clinical trials. If these third
parties do not successfully carry out their contractual
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duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to
their failure to adhere to our clinical protocols or for other reasons, or if they fail to maintain
compliance with applicable government regulations and standards, our clinical trials may be
extended, delayed or terminated, and we may not be able to obtain regulatory approval for or
successfully commercialize any of our future product candidates.
* | Even if our product candidates are approved, the market may not accept these products or services or our existing products and services. |
Avise PG, Avise MCV, Savella, or any future product candidates that we may develop and for
which we obtain the required regulatory approvals may not gain market acceptance among physicians,
patients, healthcare payers and the medical community. A number of factors may limit the market
acceptance of our services and products including the following:
| timing of market entry relative to competitive services and products; | ||
| extent of marketing efforts by us and with respect to Savella, the marketing efforts of Forest Laboratories; | ||
| rate of adoption by healthcare practitioners; | ||
| rate of a products acceptance by the target community; | ||
| availability of alternative therapies; | ||
| price of our services and products relative to alternative therapies; | ||
| availability of third-party reimbursement; and | ||
| the prevalence or severity of side effects or unfavorable publicity concerning our products or similar products. |
If Avise PG, Avise MCV, Savella, or any future product candidates that we may develop do not
achieve market acceptance, we may lose our investment in that product candidate, which may cause
our stock price to decline, and our financial condition and results of operations could also be
harmed.
Our competitors may develop and market products and services that are less expensive, more
effective or safer, which may diminish or eliminate the commercial success of any products or
services we may commercialize.
The pharmaceutical and personalized medicine services industries are highly competitive and
require an ongoing, extensive search for technological innovation. They also require, among other
things, the ability to effectively discover, develop, test, commercialize, market and promote
products, including communicating the effectiveness, safety and value of products to actual and
prospective customers, including medical professionals. Many of our competitors have greater
resources than we have. This enables them, among other things, to spread their marketing and
promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and
personalized medicine services industries include quality and price, product technology,
reputation, customer service and access to technical information.
It is possible that future developments by our competitors could make our products,
personalized medicine services or technologies less competitive or obsolete. Our future growth
depends, in part, on our ability to provide products and services which are more effective than
those of our competitors and to keep pace with rapid medical and scientific change. Sales of our
services and products may decline
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rapidly if a new service or product is introduced by a competitor, particularly if a new service or product represents a substantial improvement over any
of our existing services or products. In addition, the high level of competition in our industry
could force us to reduce the price at which we sell our services or products or require us to spend
more to market our services or products.
With respect to our pharmaceutical product for the management of FM, Savella (milnacipran
HC1), in June 2007, the FDA approved Pfizer Inc.s drug pregabalin (Lyrica®) for the
management of FM and in June 2008 approved Eli Lilly and Companys duloxetine
(Cymbalta®) for the management of FM. Duloxetine is a serotonin norepinephrine reuptake
inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology to Savella.
Tricyclic antidepressants, or TCAs, which are available as inexpensive generic formulations, are
also used to treat FM and are less expensive than Savella. Pfizer Inc.s drug pregabalin
(Lyrica®) and Eli Lilly and Companys duloxetine (Cymbalta®) are competitive
with Savella and these products and any other future products will affect Savellas sales and may
cause sales to be lower than anticipated.
The market potential for FM is considerable and a number of pharmaceutical companies focused
on therapies for alleviating pain or antidepressant therapies could decide to evaluate their
current product candidates for the treatment of FM at any time. Due to the prevalence and incidence
of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have
significant research and product development programs in FM. We expect to encounter significant
competition both in the United States and in foreign markets for each of the drugs that we seek to
develop.
With respect to our personalized medicine services, we compete with large, national
laboratories including Quest Diagnostics Incorporated, or Quest, and Laboratory Corporation of
America Holdings, and also compete with regional and esoteric laboratories. The larger competitors
have substantially greater financial and human resources, existing access to the medical community,
as well as a much larger infrastructure than we do. Other companies may develop personalized
medicine services that are more sensitive, specific, easy to use, or cost-effective than our
personalized medicine services, and we may therefore be unable to compete with them in the
marketplace.
Our competition for pharmaceutical products will be partially determined by the potential
indications that are ultimately cleared for marketing by regulatory authorities, the timing of any
clearances and market introductions and whether any currently available drugs, or drugs under
development by others, are effective in the same indications. Accordingly, the relative speed with
which we can develop, complete the clinical trials for, receive regulatory clearance for and supply
commercial quantities of Savella or other products to the market is expected to be an important
competitive factor. We expect that competition among products approved for sale will be based,
among other factors described above, on product efficacy, safety, tolerability, cost, reliability,
availability and patent protection.
We are subject to uncertainty relating to health care reform measures and reimbursement policies
which, if not favorable to our products or services or product candidates, could hinder or prevent
the commercial success of our products, services or product candidates.
The continuing efforts of the government, insurance and managed care organizations and other
health care payers to contain or reduce prescription drug costs may adversely affect:
| our ability to set a price we believe is fair for our products and services; | ||
| our ability to generate revenues and achieve or maintain profitability; | ||
| the future revenues and profitability of our potential customers, suppliers and collaborators; and | ||
| the availability of capital. |
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Successful commercialization of Savella in the United States will depend in part on the extent
to which government, insurance and managed care organizations and other health care payers
establish appropriate coverage for Savella and related treatments. Third-party payers are
increasingly challenging the prices charged for prescription drugs. Third-party payers are also
encouraging the use of generic drugs. These trends could influence health care coverage policies,
as well as legislative proposals to reform health care or reduce government insurance programs and
result in the exclusion of our products, services and product candidates from coverage and
reimbursement programs or lower the prices of our products, services and product candidates. Our
revenues from the sale of our products and services could be significantly reduced as a result of
these cost containment measures and reforms.
Market acceptance of our personalized medicine services and the majority of our anticipated
sales from these services will likely depend, in large part, on the availability of adequate
payment or reimbursement from insurance plans, including government plans such as Medicare, managed
care organizations, private insurance plans and other third-party payers. Reimbursement by a
third-party payer may depend on a number of factors, including a payers determination that a
service is not experimental or investigational, and that it is medically necessary, appropriate for
a specific patient or diagnosis, cost effective or supported by peer-reviewed publications. Because
each third-party payer individually approves payment or reimbursement, obtaining these approvals
can be a time-consuming and costly process that requires us to provide scientific and clinical
support for the use of each of these services to each third-party payer separately with no
assurance that approval will be obtained. We do not yet have any third-party payer reimbursement
agreements. This individualized process or any action by the government negatively affecting
payment for or reimbursement of our services can delay the market acceptance of new services and
may have a negative effect on our revenues and operating results.
We believe third-party payers are increasingly limiting coverage for personalized medicine
services, and in many instances are exerting pressure on service suppliers to reduce their prices.
Consequently, third-party payment or reimbursement may not be consistently available or adequate to
cover the cost of our services. Additionally, third-party payers who have previously approved a
specific level of payment or reimbursement may reduce that level. Under prospective payment
systems, in which healthcare providers may be paid or reimbursed a set amount based on the type of
personalized medicine service procedure performed, such as those utilized by Medicare and in many
private managed care systems, the cost of our personalized medicine services may not be justified
and reimbursed. Any limitations on payment or reimbursement for our services could limit our
ability to commercialize and sell new services or to continue to sell our existing services, or may
cause the selling prices of our existing services to be reduced, which would adversely affect our
revenues and operating results.
* | We rely on our employees and consultants for their scientific and technical expertise in connection with our business operations. |
We rely significantly on the scientific and technical expertise of our employees and
consultants to conduct our business. As of September 30, 2009, we had only 148 full-time employees
and therefore, we rely heavily on each of our employees. In addition, because we have a small
number of employees, we rely much more on consultants than do other companies. If any of our
relationships with our employees or consultants are terminated, we may lose access to scientific
knowledge and expertise necessary for the further development and commercialization of Savella, our
personalized medicine services or any future product candidates. We expect to continue to rely on consultants and our current employees for
scientific and technical knowledge and expertise essential to our business.
Our employment agreement with our chief executive officer provides for at will employment,
which means that he may terminate his services to us at any time. In addition, although we have
employment agreements with the four employees that joined us in connection with the acquisition of
Proprius, they may choose to terminate services to us at any time. Were these employees to
terminate their services with us, our ability to integrate Proprius operations with our own and
effectively direct Proprius business would be diminished, at least temporarily. There is no
guarantee that these employees
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will remain with Cypress. In addition, our scientific advisors may terminate their services to us at any time.
* | We have a history of operating losses and we may never be profitable. |
We have incurred substantial losses during our history. For the nine months ended September
30, 2009 and the years ended December 31, 2008 and 2006, we incurred net losses of $23.2 million,
$18.2 million and $8.3 million, respectively. As of September 30, 2009, we had an accumulated
deficit of $191.4 million. We do not expect to be profitable in the near future, and our ability to
become profitable will depend upon our and Forest Laboratories ability to further develop, market
and commercialize Savella, and our ability to further develop, market and commercialize our
personalized medicine services and any other products we may develop. We may not become profitable
in the foreseeable future and may never achieve profitability.
* | We will need substantial additional funding and may be unable to raise capital when needed, which could force us to scale back or eliminate our sales efforts and the development of future product candidates and personalized medicine services or to discontinue the completion of any proposed acquisitions, or which could adversely affect our ability to realize the expected benefits of any completed acquisitions. |
We will incur certain non-reimbursable expenses in connection with the sales of Savella, and
will also incur costs in the development of additional personalized medicine services. We are also
incurring expenses in connection with our Proof of Concept trials, the evaluation of potential
acquisitions or other strategic transactions and will incur additional expenses in the event we
close any such transactions or enter into any co-promotion, in-licensing or collaboration
agreements in connection with any such transactions. We may also be required to pay up to $37.5
million in potential milestone-related payments associated with the development of certain
therapeutic candidates acquired in our merger with Proprius and a $3.0 million milestone payment in
connection with our acquisition of Cellatope. We do not have any committed external sources of
funding and although we expect to have revenues, it is likely our revenues will be less than we
expect to spend in the year 2009 and that at some time in the future we will likely need to raise
additional capital through the sale of equity or debt. The amount of capital we will require will
depend upon many factors, including but not limited to, the amount we spend on our sales force that
is not reimbursed by Forest Laboratories, how much is ultimately required to develop the products
and personalized medicine services that are in development and the evaluation and potential closing
of any strategic transactions. If we are unable to raise capital when we need it, we may have to
scale back or eliminate our sales force or some or all of our development of existing or future
product candidates and personalized medicine services and discontinue the evaluation or completion
of any proposed acquisitions or strategic transactions, and we may be unable to realize the
expected benefits of any completed acquisitions or strategic transactions.
* | Raising additional funds by issuing securities, or through collaboration and licensing arrangements, may cause dilution to existing stockholders, restrict our operations, or require us to relinquish propriety rights. |
We may attempt to raise additional funds through public or private equity offerings, as we did
in June 2007 with a public equity offering, or through debt financings. However, the credit crisis
and the current economic conditions may prevent us from raising money through debt or equity
financings. We
may also issue equity or other securities in connection with corporate collaborations and
licensing arrangements, or raise funds through arrangements like these. For example, the potential
milestone payments due to the stockholders of Proprius may be paid in up to 50% stock of Cypress,
at our election. To the extent that we are able to raise additional capital by issuing equity
securities, or otherwise issue equity securities in connection with corporate collaboration and
licensing arrangements or otherwise, our
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existing stockholders ownership percentage will be diluted. Any financing or other transaction that involves our issuing securities that we do engage
in may also include provisions that restrict our operations. In addition, if we raise additional
funds through collaborations and licensing arrangements, it may be necessary to relinquish
potential valuable rights to our potential products on terms that are not favorable to us.
* | The investment of our cash balance and short-term investments are subject to risks which may cause losses and affect the liquidity of these investments. |
As of September 30, 2009, we had $48.5 million in cash and cash equivalents and $96.3 million
in short-term investments. We have historically invested these amounts in United States government
securities, corporate debt securities, commercial paper, certificates of deposit and money market
funds. Certain of these investments are subject to general credit, liquidity, market and interest
rate risks. During the quarter ended September 30, 2009, we determined that any declines in the
fair value of our investments were temporary. There may be further declines in the value of these
investments, which we may determine to be other-than-temporary. These market risks associated with
our investment portfolio may have a negative adverse effect on our results of operations, liquidity
and financial condition.
We may lose our net operating loss carryforwards, which could prevent us from offsetting future taxable income.
We have incurred substantial losses during our history and do not expect to become profitable
in 2009 and may never achieve profitability. To the extent that we continue to generate taxable
losses, unused losses will carry forward to offset future taxable income, if any, until such unused
losses expire. All unused federal net operating losses will expire 15 or 20 years after any year in
which they were generated. The carryforward period is 15 years for losses incurred prior to 1996
and 20 years for losses incurred subsequent to 1997. Our federal net operating losses will begin to
expire this year, in 2009, and our California tax loss carryforwards will begin to expire in 2012.
Additionally, the future utilization of our net operating loss carryforwards to offset future
taxable income is subject to annual limitations, pursuant to Internal Revenue Code Sections 382 and
383, as a result of ownership changes that have occurred in prior years, which could prevent us
from fully utilizing our net operating loss carryforwards.
* | Our stock price has been very volatile and will likely continue to be volatile. |
The market prices of the stock of technology companies, particularly biotechnology companies,
have been highly volatile. For the period from January 1, 2006 through December 31, 2008, the low
and high sales prices for our common stock ranged from $4.90 to $18.20. For the nine months ended
September 30, 2009, our low and high sales prices were $6.70 and $10.10, respectively. As of
September 30, 2009, the last reported sale price of our common stock was $8.17. Our stock price has
been and will likely continue to be affected by market volatility, as well as by our own
performance. We expect our stock price to be volatile in the near future. The following factors,
among other risk factors, may have a significant effect on the market price of our common stock:
| the commercial sales of Savella and our personalized medicine services; | ||
| development of our personalized medicine services and other product candidates; | ||
| developments in our relationship with Forest Laboratories, including the termination of our agreement; | ||
| developments in our relationship with Pierre Fabre, including the termination of our agreement; | ||
| our entering into, or failing to enter into, an agreement for the acquisition of any products, product candidates or companies, or an agreement with any corporate collaborator; |
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| our available cash; | ||
| announcements of technological innovations or new products by us or our competitors; | ||
| developments in our patent or other proprietary rights; | ||
| fluctuations in our operating results; | ||
| litigation initiated by or against us; | ||
| developments in domestic and international governmental policy or regulation; and | ||
| economic and other external factors or other disaster or crisis. |
* | The concentration of ownership among our existing officers, directors and principal stockholders may result in the entrenchment of management, prevent other stockholders from influencing significant corporate decisions and depress our stock price. |
As of Sepember 30, 2009, our executive officers, directors and stockholders who hold at least
5% of our stock beneficially owned and controlled approximately 50% of our outstanding common
stock. If these officers, directors and principal stockholders act together, they will be able to
help entrench management and to influence matters requiring approval by our stockholders, including
a financing in which we sell more than 20% of our voting stock at a discount to the market price,
the removal of any directors up for election, the election of the members of our board of
directors, mergers, a sale of all or substantially all of our assets, going private transactions
and other fundamental transactions. This concentration of ownership could also depress our stock
price.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
Provisions in our second amended and restated certificate of incorporation and our third
amended and restated bylaws may delay, impede or prevent an acquisition or change in control of us.
In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace
or remove our current management by making it more difficult for stockholders to replace members of
our board of directors, who are responsible for appointing the members of our management team.
These provisions include, among others, a requirement that our board of directors be divided into
three classes with directors serving three year terms and with only one class of directors being
elected in any given year, a requirement that special meetings of our stockholders may only be
called by the chairman of the board, our chief executive officer or a majority of our board of
directors and a prohibition on actions by our stockholders by written consent. In addition, because
we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of
15% of our outstanding voting stock from merging or combining with us. Finally, our charter
documents establish advance notice requirements for nominations for election to our board of
directors and for proposing matters that can be acted upon at stockholder meetings. Although we
believe these provisions together provide for an opportunity to receive higher bids by requiring
potential acquirers to negotiate with our board of directors, they would apply even if the offer
may be considered beneficial by some stockholders.
We expect to continue incurring significant costs as a result of enacted and proposed changes in
laws and regulations relating to corporate governance matters.
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Changes in the laws and regulations affecting public companies, including the provisions of
the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by
the NASDAQ Stock Market LLC, have and we expect will continue to result in significant costs to us.
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the
related regulations regarding our required assessment of our internal controls over financial
reporting and our independent registered public accounting firms audit of internal control over
financial reporting has required the commitment of significant financial and managerial resources.
We expect these efforts to require the continued commitment of significant financial resources and
management time related to compliance activities. Additionally, these laws and regulations could
make it more difficult or costly for us to obtain certain types of insurance, including director
and officer liability insurance, and we may be forced to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or similar coverage. The impact of these
events could also make it more difficult for us to attract and retain qualified persons to serve on
our board of directors, our board committees or as executive officers.
* | If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our ability to operate our business and investors view of us. |
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002,
including Section 404 related to internal controls, and the related rules and regulations of the
Securities and Exchange Commission, including expanded disclosures and accelerated reporting
requirements and more complex accounting rules. Compliance with Section 404 and other requirements
will increase our costs and will continue to require additional management resources. We may need
to continue to implement additional finance and accounting systems, procedures and controls to
satisfy reporting requirements. If we are unable to obtain future unqualified reports as to the
effectiveness of our internal control over financial reporting, investors could lose confidence in
the reliability of our internal control over financial reporting, which could adversely affect our
ability to raise financing and operate our business as well as our stock price.
Risks related to our intellectual property
* | We rely primarily on method of use patents to protect our proprietary technology for the sales of Savella, and our ability to compete may decrease or be eliminated if we are not able to protect our proprietary technology. |
Our ability to realized the full sales potential for Savella (milnacipran HCl), our only
therapeutic product, may decrease or be eliminated if we are not able to protect our proprietary
technology. The composition of matter patent for milnacipran (U.S. Patent 4,478,836) expired in
June 2002. Accordingly, we rely on the patent for the method of synthesis of milnacipran (U.S.
Patent 5,034,541), which expires on December 27, 2009 and was assigned to Pierre Fabre and licensed
to us and on patents on the method of use of milnacipran to treat symptoms of FM (U.S. Patent
6,602,911, which we refer to as the 911 patent), the method of use of milnacipran to treat pain
(U.S. Patent 6,992,110) and the method of use of milnacipran to treat symptoms of chronic fatigue
syndrome (U.S. Patent 6,635,675) issued to us, to protect our proprietary technology with respect
to the development of milnacipran. The method of use patent directly relevant to our current
milnacipran product candidate is the 911 patent; the other two method of use patents may have
future applicability. We have also filed additional patent applications related to milnacipran and
to the use of milnacipran for FM (and other related pain syndromes and disorders), although no
patents have issued on these patent applications. Because there is no patent protection for the
composition of matter of milnacipran, other companies may be able to sell milnacipran in
competition with us and Forest Laboratories for indications for which we do not have use patent
protection unless we and Forest Laboratories are able to obtain additional protection through
milnacipran-related patents or additional use patents that may issue from our pending patent
applications or from regulatory exclusivity. It may be more difficult to establish infringement of
methods of synthesis,
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formulation or use patents as compared to a patent on a compound. If we or
Forest Laboratories are not able to obtain and enforce these patents, a competitor could use
milnacipran for a treatment or use not covered by any of our patents.
In connection with our acquisition of Proprius, we acquired rights to an issued patent (U.S.
patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to the
Avise PG test and a number of patents in prosecution on the Avise MCV. Although we have the right
to one issued patent covering the Avise PG test we may not be able to secure any additional patent
protection and the
existing patent may not ensure exclusivity through the patent term. In addition, as part of
our acquisition of Proprius we acquired rights to a patent family directed to PRO-406 (the topical
NSAID therapy for the symptomatic treatment of osteoarthritis) including one issued patent (U.S.
patent No. 7,138,394, which expires in 2023) and several pending U.S. and foreign patent
applications. It is uncertain whether we will be able to obtain any claim with reasonable coverage
for PRO-406.
The validity of a United States patent depends, in part, on the novelty of the invention it
discloses. The pharmaceutical industry is characterized by constant investment in new drug
discovery and development, and this results in a steady stream of publications regarding the
product of this investment, any of which would act to defeat the novelty of later-discovered
inventions. Issued United States patents enjoy a presumption of validity that can only be overcome
by clear and convincing evidence. However, patents are nonetheless subject to challenge and can be
invalidated if a court determines, retrospectively, that despite the action of the Patent and
Trademark Office in issuing the patent, the corresponding patent application did not meet the
statutory requirements. If a competitor or other third party were to successfully challenge our
patents, and claims in these patents are narrowed or invalidated, our ability to protect the
related product from competition would be compromised.
We also expect to rely on the United States Drug Price Competition and Patent Term Restoration
Act, commonly known as the Hatch-Waxman Amendments, for protection of Savella and our other future
products. The Hatch-Waxman Amendments provide data exclusivity for new molecular entities, such as
that in Savella. Once a drug containing a new molecule is approved by the FDA, the FDA cannot
accept an abbreviated NDA for a generic drug containing that molecule for five years, although the
FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by
independent clinical data. Amendments have been proposed that would narrow the scope of
Hatch-Waxman exclusivity and permit generic drugs to compete with our drug. After the Hatch-Waxman
exclusivity period expires, assuming our patents are valid, we still expect to rely on our method
of use patents to protect our proprietary technology with respect to the development of
milnacipran. The patent positions of pharmaceutical companies are uncertain and may involve complex
legal and factual questions. We may incur significant expense in protecting our intellectual
property and defending or assessing claims with respect to intellectual property owned by others.
Any patent or other infringement litigation by or against us is likely and could result in
significant expense to us, including diversion of the resources of management.
Others may file patent applications or obtain patents on similar technology or compounds that
compete with Savella for the treatment of FM, for any of our personalized medicine services or any
of the products that may be developed under our POC trials. We cannot predict the breadth of claims
that will be allowed and issued in patent applications. Once patents have issued, we cannot predict
how the claims will be construed or enforced. We may infringe on intellectual property rights of
others without being aware of the infringement. If another party claims we are infringing their
technology, we could have to defend an expensive and time consuming lawsuit, pay a large sum if we
are found to be infringing, or be prohibited from selling or licensing our products unless we
obtain a license or redesign our product, which may not be possible.
We also rely on trade secrets and proprietary know-how to develop and maintain our competitive
position. Some of our current or former employees, consultants or scientific advisors, or current or
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prospective corporate collaborators, may unintentionally or willfully disclose our confidential
information to competitors or use our proprietary technology for their own benefit. Furthermore,
enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult
to prove, making the outcome uncertain. Our competitors may also independently develop similar
knowledge, methods and know-how or gain access to our proprietary information through some other
means.
Our ability to compete may decline if we do not adequately protect our proprietary rights.
Our commercial success depends on obtaining and maintaining proprietary rights to our products
and services and product candidates and technologies and their uses as well as successfully
defending these rights against third party challenges. We will only be able to protect our products
and services and
product candidates, proprietary technologies and their uses from unauthorized use by third
parties to the extent that valid and enforceable patents or effectively-protected trade secrets
cover them.
Our ability to obtain patent protection for our products and services and product and service
candidates and technologies is uncertain due to a number of factors, including:
| we may not have been the first to make the inventions covered by our pending patent applications or issued patents; | ||
| we may not have been the first to file patent applications for our products and services and product and service candidates or the technologies we rely upon; | ||
| others may independently develop similar or alternative technologies or duplicate any of our technologies; | ||
| our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability; | ||
| any or all of our pending patent applications may not result in issued patents; | ||
| we may not seek or obtain patent protection in all countries that will eventually provide a significant business opportunity; | ||
| any patents issued to us or our collaborators may not provide a basis for commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties; | ||
| some of our technologies may not be patentable; | ||
| others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or | ||
| others may identify prior art which could invalidate our patents. |
Even if we obtain patents covering our product and service candidates or technologies, we may
still be barred from making, using and selling our product candidates or technologies because of
the patent rights of others. Others may have filed and in the future are likely to file patent
applications covering compounds, assays, genes, gene products or therapeutic or personalized
medicine services that are similar or identical to ours. Numerous U.S. and foreign issued patents
and pending patent applications owned by others exist in the area of the fields in which we have
developed and are developing products and services. These could materially affect our ability to
develop our product and service candidates or sell our products and services. Because patent
applications can take many years to issue, there may be
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currently pending applications, unknown to
us, which may later result in issued patents that our products and services and product and service
candidates or technologies may infringe. These patent applications may have priority over patent
applications filed by us. Disputes may arise regarding the ownership or inventorship of our
inventions. It is difficult to determine how such disputes will be resolved. Others may challenge
the validity of our patents. If our patents are found to be invalid we will lose the ability to
exclude others from making, using or selling the inventions claimed therein.
Some of our research collaborators and scientific advisors have rights to publish data and
information to which we have rights. If we cannot maintain the confidentiality of our technology
and other confidential information in connection with our collaborations, then our ability to
receive patent protection or protect our proprietary information will be impaired. In addition,
in-licensed technology is important to our business. We generally will not control the patent
prosecution, maintenance or enforcement of in-licensed technology.
A dispute concerning the infringement or misappropriation of our proprietary rights or the
proprietary rights of others could be time consuming and costly and an unfavorable outcome could
harm our business.
There is significant litigation in the industry regarding patent and other intellectual
property rights. We may be exposed to future litigation by third parties based on claims that our
products and services and product and service candidates, technologies or activities infringe the
intellectual property rights of others. If our drug development or personalized medicine services
activities are found to infringe any such patents, we may have to pay significant damages. There
are many patents relating to chemical compounds and the uses thereof. If our compounds are found to
infringe any such patents, we may have to pay significant damages. A patentee could prevent us from
making, using or selling the patented compounds. We may need to resort to litigation to enforce a
patent issued to us, protect our trade secrets or determine the scope and validity of third party
proprietary rights. From time to time, we may hire scientific personnel formerly employed by other
companies involved in one or more areas similar to the activities conducted by us. Either we or
these individuals may be subject to allegations of trade secret misappropriation or other similar
claims as a result of their prior affiliations. If we become involved in litigation, it could
consume a substantial portion of our managerial and financial resources, whether we win or lose. We
may not be able to afford the costs of litigation. Any legal action against our company or our
collaborators could lead to:
| payment of damages, potentially treble damages, if we are found to have willfully infringed such parties patent rights; | ||
| injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products, services and product and service candidates; or | ||
| we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all. As a result, we could be prevented from commercializing current or future products, services and product and service candidates. |
The patent applications of pharmaceutical, biotechnology and personalized medicine companies
involve highly complex legal and factual questions, which could negatively impact our patent
position.
The patent positions of pharmaceutical and biotechnology and personalized medicine services
companies can be highly uncertain and involve complex legal and factual questions. The United
States Patent and Trademark Offices standards are uncertain and could change in the future.
Consequently, the issuance and scope of patents cannot be predicted with certainty. Patents, if
issued, may be challenged, invalidated or circumvented. United States patents and patent
applications may also be subject to interference proceedings and United States patents may be
subject to reexamination proceedings in the
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United States Patent and Trademark Office (and foreign
patents may be subject to opposition or comparable proceedings in the corresponding foreign patent
office), which proceedings could result in either loss of the patent or denial of the patent
application or loss or reduction in the scope of one or more of the claims of the patent or patent
application. In addition, such interference, reexamination and opposition proceedings may be
costly. Accordingly, rights under any issued patents may not provide us with sufficient protection
against competitive products or processes.
In addition, changes in or different interpretations of patent laws in the United States and
foreign countries may permit others to use our discoveries or to develop and commercialize our
technology and products and services without providing any compensation to us. The laws of some
countries do not protect intellectual property rights to the same extent as United States laws and
those countries may lack adequate rules and procedures for defending our intellectual property
rights. For example, some countries, including many in Europe, do not grant patent claims directed
to methods of treating humans, and in these countries patent protection may not be available at all
to protect our product, services or product and service candidates.
If we fail to obtain and maintain patent protection and trade secret protection of our
products, services and product and service candidates, proprietary technologies and their uses, we
could lose our
competitive advantage and competition we face would increase, reducing our potential revenues
and adversely affecting our ability to attain or maintain profitability.
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 Other Information
Not applicable
Item 6 Exhibits
3.1 | Second Amended and Restated Certificate of Incorporation. (1) | ||
3.2 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation. | ||
3.3 | Fourth Amended and Restated By-Laws. (2) | ||
4.1 | Form of Stock Certificate. (3) | ||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a 14(a) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as amended. | ||
31.2 | Certification of Chief Financial Officer pursuant to to Rule 13a 14(a) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as amended. | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a 14(b) or Rule 15d 14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Incorporated by reference to Appendix C of our Definitive Proxy Statement filed with the SEC on August 11, 2003 | |
(2) | Incorporated by reference to Exhibit 3.1 to Form 8-K filed with the SEC on May 6, 2009. | |
(3) | Incorporated by reference to Exhibit 4.1 to Form S-1 Registration Statement No. 33-41225 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned
thereunto duly authorized.
Cypress Bioscience, Inc. |
||||
Date: November 9, 2009 | By: | /s/ JAY D. KRANZLER | ||
Chief Executive Officer and Chairman of | ||||
the Board (Principal Executive Officer) | ||||
Date: November 9, 2009 | By: | /s/ SABRINA MARTUCCI JOHNSON | ||
Chief Financial Officer, Chief Operating | ||||
Officer and Executive Vice President (Principal Financial Officer) | ||||
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