Attached files
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EX-32.2 - KERYX BIOPHARMACEUTICALS INC | v165354_ex32-2.htm |
EX-31.2 - KERYX BIOPHARMACEUTICALS INC | v165354_ex31-2.htm |
EX-31.1 - KERYX BIOPHARMACEUTICALS INC | v165354_ex31-1.htm |
EX-32.1 - KERYX BIOPHARMACEUTICALS INC | v165354_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended September 30, 2009
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from
to
.
Commission
File Number 000-30929
(Exact
name of registrant as specified in its charter)
Delaware
|
13-4087132
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
750
Lexington Avenue
New
York, New York 10022
(Address
including zip code of principal executive offices)
(212)
531-5965
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do not check if
smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes ¨ No x
There
were 55,980,530 shares of the registrant’s common stock, $0.001 par value,
outstanding as of November 9, 2009.
KERYX
BIOPHARMACEUTICALS, INC.
FORM
10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE
OF CONTENTS
Page
|
||
SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
|
2
|
|
PART
I
|
FINANCIAL
INFORMATION
|
3
|
Item
1
|
Financial
Statements
|
3
|
Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
3
|
|
Consolidated
Statements of Operations for the three and nine months ended September 30,
2009 and 2008 (unaudited)
|
4
|
|
Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency) for the nine
months ended September 30, 2009 (unaudited)
|
5
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009 and
2008 (unaudited)
|
6
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
7
|
|
Item
2
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
Item
4
|
Controls
and Procedures
|
34
|
PART
II
|
OTHER
INFORMATION
|
35
|
Item
1
|
Legal
Proceedings
|
35
|
Item
1A
|
Risk
Factors
|
35
|
Item
6
|
Exhibits
|
46
|
1
SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain
matters discussed in this report, including matters discussed under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by such
forward-looking statements. The words "anticipate," "believe," "estimate,"
"may," "expect" and similar expressions are generally intended to identify
forward-looking statements. Our actual results may differ materially from the
results anticipated in these forward-looking statements due to a variety of
factors, including, without limitation, those discussed under the captions “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this report, as well as other factors
which may be identified from time to time in our other filings with the
Securities and Exchange Commission, or the SEC, or in the documents where such
forward-looking statements appear. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by these
cautionary statements. Such forward-looking statements include, but are not
limited to, statements about our:
|
·
|
expectations
for increases or decreases in
expenses;
|
|
·
|
expectations
for the development, manufacturing, regulatory approval, and
commercialization of KRX-0401 (perifosine), ZerenexTM
(ferric citrate), and our additional product candidates or any other
products we may acquire or
in-license;
|
|
·
|
expectations
for incurring capital expenditures to expand our research and development
and manufacturing capabilities;
|
|
·
|
expectations
for generating revenue or becoming profitable on a sustained
basis;
|
|
·
|
expectations
or ability to enter into marketing and other partnership
agreements;
|
|
·
|
expectations
or ability to enter into product acquisition and in-licensing
transactions;
|
|
·
|
expectations
or ability to build our own commercial infrastructure to manufacture,
market and sell our drug
candidates;
|
|
·
|
estimates
of the sufficiency of our existing cash and cash equivalents and
investments to finance our business strategy, including expectations
regarding the value and liquidity of our investments, including auction
rate securities;
|
|
·
|
expected
losses; and
|
|
·
|
expectations
for future capital requirements.
|
The
forward-looking statements contained in this report reflect our views and
assumptions only as of the date this report is signed. Except as required by
law, we assume no responsibility for updating any forward-looking
statements.
We
qualify all of our forward-looking statements by these cautionary statements. In
addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
2
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
Keryx
Biopharmaceuticals, Inc.
Consolidated
Balance Sheets as of September 30, 2009 and December 31, 2008
September 30, 2009
|
December 31, 2008
|
|||||||
|
(Unaudited)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash and cash
equivalents
|
$ | 33,682 | $ | 13,143 | ||||
Short-term investment
securities
|
— | 2,299 | ||||||
Interest
receivable
|
5 | 25 | ||||||
Other current
assets
|
1,035 | 508 | ||||||
Total current
assets
|
34,722 | 15,975 | ||||||
Long-term
investment securities
|
7,333 | 7,185 | ||||||
Property,
plant and equipment, net
|
114 | 182 | ||||||
Goodwill
|
3,208 | 3,208 | ||||||
Other
assets, net
|
81 | 84 | ||||||
Total assets
|
$ | 45,458 | $ | 26,634 | ||||
Liabilities
and stockholders’ equity (deficiency)
|
||||||||
Current
liabilities:
|
||||||||
Accounts payable and accrued
expenses
|
$ | 3,781 | $ | 4,613 | ||||
Accrued offering
costs
|
1,551 | — | ||||||
Accrued compensation and related
liabilities
|
820 | 496 | ||||||
Current portion of deferred
revenue
|
156 | 1,464 | ||||||
Liabilities of discontinued
operations
|
120 | 120 | ||||||
Total current
liabilities
|
6,428 | 6,693 | ||||||
Deferred
revenue, net of current portion
|
— | 17,308 | ||||||
Contingent
equity rights
|
4,004 | 4,004 | ||||||
Other
liabilities
|
67 | 118 | ||||||
Total liabilities
|
10,499 | 28,123 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity (deficiency):
|
||||||||
Preferred
stock, $0.001 par value per share (5,000,000 shares authorized, no shares
issued and outstanding)
|
— | — | ||||||
Common
stock, $0.001 par value per share (95,000,000 shares authorized,
55,961,304 and 47,729,507 shares issued, 55,881,356 and 47,649,559 shares
outstanding at September 30, 2009 and December 31, 2008,
respectively)
|
56 | 48 | ||||||
Additional
paid-in capital
|
351,785 | 330,738 | ||||||
Treasury
stock, at cost, 79,948 shares at September 30, 2009 and December 31, 2008,
respectively
|
(357 | ) | (357 | ) | ||||
Accumulated
other comprehensive income
|
250 | — | ||||||
Accumulated
deficit
|
(316,775 | ) | (331,918 | ) | ||||
Total stockholders’ equity
(deficiency)
|
34,959 | (1,489 | ) | |||||
Total liabilities and
stockholders’ equity (deficiency)
|
$ | 45,458 | $ | 26,634 |
The
accompanying notes are an integral part of the consolidated financial
statements.
3
Keryx
Biopharmaceuticals, Inc.
Consolidated
Statements of Operations
for the
three and nine months ended September 30, 2009 and 2008 (Unaudited)
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue:
|
||||||||||||||||
License
revenue
|
$ | — | $ | 327 | $ | 21,616 | $ | 853 | ||||||||
Service
revenue
|
— | 41 | 3 | 103 | ||||||||||||
Other
revenue
|
3,500 | — | 3,575 | — | ||||||||||||
Total
revenue
|
3,500 | 368 | 25,194 | 956 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of services
|
— | 13 | — | 27 | ||||||||||||
Research
and development:
|
||||||||||||||||
Non-cash
compensation
|
388 | 334 | 950 | (395 | ) | |||||||||||
Other research and
development
|
1,527 | 2,208 | 4,357 | 37,277 | ||||||||||||
Total
research and development
|
1,915 | 2,542 | 5,307 | 36,882 | ||||||||||||
Selling,
general and administrative:
|
||||||||||||||||
Non-cash
compensation
|
250 | 1,662 | 1,648 | 5,146 | ||||||||||||
Other selling, general and
administrative
|
904 | 2,284 | 3,473 | 6,249 | ||||||||||||
Total
selling, general and administrative
|
1,154 | 3,946 | 5,121 | 11,395 | ||||||||||||
Total
operating expenses
|
3,069 | 6,501 | 10,428 | 48,304 | ||||||||||||
Operating
income (loss)
|
431 | (6,133 | ) | 14,766 | (47,348 | ) | ||||||||||
Interest
and other income (expense), net
|
129 | (622 | ) | 377 | (1,551 | ) | ||||||||||
Income
(loss) from continuing operations before income taxes
|
560 | (6,755 | ) | 15,143 | (48,899 | ) | ||||||||||
Income
taxes
|
— | — | — | — | ||||||||||||
Income
(loss) from continuing operations
|
560 | (6,755 | ) | 15,143 | (48,899 | ) | ||||||||||
Loss
from discontinued operations
|
— | (86 | ) | — | (175 | ) | ||||||||||
Net
income (loss)
|
$ | 560 | $ | (6,841 | ) | $ | 15,143 | $ | (49,074 | ) | ||||||
Basic
net income (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.32 | $ | (1.11 | ) | ||||||
Discontinued
operations
|
— | (— | )* | — | (— | )* | ||||||||||
Basic
net income (loss) per common share
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.32 | $ | (1.11 | ) | ||||||
Diluted
net income (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.31 | $ | (1.11 | ) | ||||||
Discontinued
operations
|
— | (— | )* | — | (— | )* | ||||||||||
Diluted
net income (loss) per common share
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.31 | $ | (1.11 | ) | ||||||
Weighted
average shares used in computing
basic
net income (loss) per common share
|
47,932,029 | 45,222,053 | 47,880,737 | 44,348,537 | ||||||||||||
Weighted
average shares used in computing
diluted
net income (loss) per common share
|
49,028,254 | 45,222,053 | 48,326,718 | 44,348,537 |
* Amount
less than one cent.
The
accompanying notes are an integral part of the consolidated financial
statements.
4
Keryx
Biopharmaceuticals, Inc.
Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency)
for the
nine months ended September 30, 2009 (Unaudited)
(in
thousands, except share amounts)
|
Common stock
|
Additional
paid-in
|
Treasury stock
|
|||||||||||||||||
Shares
|
Amount
|
capital
|
Shares
|
Amount
|
||||||||||||||||
Balance
at December 31, 2008
|
47,729,507 | $ | 48 | $ | 330,738 | 79,948 | $ | (357 | ) | |||||||||||
Changes
during the period:
|
||||||||||||||||||||
Issuance
of common stock in public offering (net of offering costs of
$1,557)
|
8,000,000 | 8 | 15,558 | — | — | |||||||||||||||
Issuance
of common stock warrants in public offering
|
— | — | 2,877 | — | — | |||||||||||||||
Issuance
of restricted stock
|
578,539 | — | * | — | — | — | ||||||||||||||
Forfeiture
of restricted stock
|
(361,742 | ) | (— | )* | — | — | — | |||||||||||||
Issuance
of common stock in connection with the exercise of options
|
15,000 | — | * | 14 | — | — | ||||||||||||||
Compensation
in respect of options and restricted stock granted to employees, directors
and third-parties
|
— | — | 2,598 | — | — | |||||||||||||||
Unrealized
gain on long-term investment securities
|
— | — | — | — | — | |||||||||||||||
Net
income
|
— | — | — | — | — | |||||||||||||||
Balance
at September 30, 2009
|
55,961,304 | $ | 56 | $ | 351,785 | 79,948 | $ | (357 | ) |
Accumulated
Other
Comprehensive
Income
|
Accumulated
deficit
|
Total
|
|||||||||
Balance
at December 31, 2008
|
$ | — | $ | (331,918 | ) | $ | (1,489 | ) | |||
Changes
during the period:
|
|||||||||||
Issuance
of common stock in public offering (net of offering costs of
$1,557)
|
— | — | 15,566 | ||||||||
Issuance
of common stock warrants in public offering
|
— | — | 2,877 | ||||||||
Issuance
of restricted stock
|
— | — | — | * | |||||||
Forfeiture
of restricted stock
|
— | — | (— | )* | |||||||
Issuance
of common stock in connection with the exercise of options
|
— | — | 14 | ||||||||
Compensation
in respect of options and restricted stock granted to employees, directors
and third-parties
|
250 | — | 2,598 | ||||||||
Unrealized
gain on long-term investment securities
|
— | — | 250 | ||||||||
Net
income
|
— | 15,143 | 15,143 | ||||||||
Balance
at September 30, 2009
|
$ | 250 | $ | (316,775 | ) | $ | 34,959 |
* Amount
less than one thousand dollars.
The
accompanying notes are an integral part of the consolidated financial
statements.
5
Keryx
Biopharmaceuticals, Inc.
Consolidated
Statements of Cash Flows
for the
nine months ended September 30, 2009 and 2008 (Unaudited)
(in
thousands)
Nine months ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | 15,143 | $ | (49,074 | ) | |||
Loss
from discontinued operations
|
— | (175 | ) | |||||
Income
(loss) from continuing operations
|
15,143 | (48,899 | ) | |||||
Adjustments
to reconcile income (loss) from continuing operations to cash flows used
in
operating
activities in continuing operations:
|
||||||||
Stock
compensation expense
|
2,598 | 4,751 | ||||||
Depreciation
and amortization
|
72 | 85 | ||||||
Gain
on sale of available-for-sale securities
|
(16 | ) | — | |||||
Impairment
of investment securities
|
68 | 2,787 | ||||||
Other
impairment charges
|
— | 11,037 | ||||||
Changes
in assets and liabilities:
|
||||||||
(Increase)
decrease in other current assets
|
(527 | ) | 573 | |||||
Decrease
in accrued interest receivable
|
20 | 61 | ||||||
Decrease
in security deposits
|
— | 261 | ||||||
Decrease
in other assets
|
3 | — | ||||||
Decrease
in accounts payable and accrued expenses
|
(832 | ) | (12,666 | ) | ||||
Increase
(decrease) in accrued compensation and related liabilities
|
324 | (236 | ) | |||||
Decrease
in other liabilities
|
(51 | ) | (67 | ) | ||||
(Decrease)
increase in deferred revenue
|
(18,616 | ) | 7,054 | |||||
Net
cash used in operating activities in continuing operations
|
(1,814 | ) | (35,259 | ) | ||||
Net
cash used in operating activities in discontinued
operations
|
— | (132 | ) | |||||
Net
cash used in operating activities
|
(1,814 | ) | (35,391 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of property, plant and equipment
|
(4 | ) | (146 | ) | ||||
Investment
in held-to-maturity short-term securities
|
(1 | ) | (33 | ) | ||||
Proceeds
from maturity of held-to-maturity short-term securities
|
2,300 | 12,863 | ||||||
Investment
in available-for-sale short-term securities
|
— | (12,000 | ) | |||||
Proceeds
from sale of available-for-sale short-term securities
|
— | 22,200 | ||||||
Proceeds
from sale of available-for-sale long-term securities
|
50 | — | ||||||
Investment
in held-to-maturity long-term securities
|
— | (1 | ) | |||||
Net
cash provided by investing activities
|
2,345 | 22,883 | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Gross
proceeds from public offering
|
20,000 | — | ||||||
Offering
costs paid
|
(6 | ) | — | |||||
Proceeds
from exercise of options and warrants
|
14 | 222 | ||||||
Net
cash provided by financing activities
|
20,008 | 222 | ||||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
20,539 | (12,286 | ) | |||||
Cash
and cash equivalents at beginning of period
|
13,143 | 19,065 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 33,682 | $ | 6,779 | ||||
NON-CASH
TRANSACTIONS
|
||||||||
Accrued
offering costs
|
$ | 1,551 | $ | — | ||||
Issuance
of warrants to placement agent in public offering
|
100 | — | ||||||
Sale
of manufacturing facility assets in settlement of
liability
|
— | 300 |
The
accompanying notes are an integral part of the consolidated financial
statements.
6
Keryx
Biopharmaceuticals, Inc.
Notes to
Consolidated Financial Statements (unaudited)
NOTE
1 - GENERAL
Basis
of Presentation
Keryx
Biopharmaceuticals, Inc. and subsidiaries (“Keryx” or the “Company”) is a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including cancer and renal disease. Most
of the Company's biopharmaceutical development and substantially all of its
administrative operations during the three and nine months ending September 30,
2009 and 2008 were conducted in the United States of America.
The
accompanying unaudited consolidated financial statements were prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they may not include all of
the information and footnotes required by GAAP for complete financial
statements. All adjustments that are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the consolidated
financial statements have been included. Nevertheless, these financial
statements should be read in conjunction with the Company's audited consolidated
financial statements contained in its Annual Report on Form 10-K for the year
ended December 31, 2008. The results of operations for the three and nine months
ended September 30, 2009 are not necessarily indicative of the results that may
be expected for the entire fiscal year or any other interim period.
The
Company has incurred substantial operating losses since its inception and,
except for the three and nine months ended September 30, 2009, expects to
continue to incur operating losses for the foreseeable future and may never
become profitable. As of September 30, 2009, the Company has an accumulated
deficit of $316.8 million. The Company is dependent upon significant financing
to provide the working capital necessary to execute its business plan. The
actual amount of funds that the Company will need to operate is subject to many
factors, including the timing, design and conduct of clinical trials for the
Company’s drug candidates. The Company has not yet commercialized any of its
drug candidates and cannot be sure if it will ever be able to do so. Even if the
Company commercializes one or more of its drug candidates, the Company may not
become profitable. The Company’s ability to achieve profitability depends on a
number of factors, including its ability to obtain regulatory approval for its
drug candidates, successfully complete any post-approval regulatory obligations
and successfully commercialize its drug candidates alone or in partnership. The
Company may continue to incur substantial operating losses even if it begins to
generate revenues from its drug candidates, if approved.
On
September 30, 2009, the Company completed a registered direct offering to
certain investors of 8,000,000 shares of its common stock and warrants to
purchase up to a total of 2,800,000 shares of its common stock for gross
proceeds of approximately $20 million. The common stock and warrants were sold
in units, with each unit consisting of one share of common stock and a warrant
to purchase 0.35 of a share of common stock. The purchase price per unit was
$2.50. Subject to certain ownership limitations, the warrants are exercisable at
any time on or after the initial issue date and on or prior to October 1, 2010,
at an exercise price of $2.65 per warrant share. In addition, the placement
agent received a warrant to purchase up to 108,000 shares of common stock at an
exercise price of $3.125 per warrant share, exercisable at any time on or prior
to October 1, 2010. Total proceeds to the Company from this public offering were
approximately $18.4 million, net of offering costs of approximately $1.6
million. The shares and warrants were sold under a shelf registration statement
on Form S-3 (File No. 333-161607) filed with the SEC on August 28, 2009, and
declared effective by the SEC on September 23, 2009. The registration statement
provides for the offering of up to $40 million of the Company's common stock and
warrants. Subsequent to this registered direct offering, there remains
approximately $12.2 million of the Company's common stock and warrants available
for sale under the shelf registration statement. The Company may offer the
remaining securities under its shelf registration from time to time in response
to market conditions or other circumstances if it believes such a plan of
financing is in the best interest of the Company and its
stockholders. The Company believes that the shelf registration
provides it with the flexibility to raise additional capital to finance its
operations as needed.
The
Company’s common stock is listed on the NASDAQ Capital Market and trades
under the symbol “KERX.”
7
Recently
Issued Accounting Standards
On
September 30, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (“FASB”) to the authoritative hierarchy of GAAP.
These changes establish the FASB Accounting Standards Codification
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the Securities and Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
FASB will no longer issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue
Accounting Standards Updates (“ASUs”). ASUs will not be authoritative in their
own right as they will only serve to update the Codification. These changes and
the Codification itself do not change GAAP. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes had no impact
on the Company’s consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements. This ASU eliminates the requirement to establish the fair
value of undelivered products and services and instead provides for separate
revenue recognition based upon management’s estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. The ASU also eliminates the use of the residual method
and instead requires an entity to allocate revenue using the relative selling
price method. Additionally, the guidance expands disclosure requirements with
respect to multiple-deliverable revenue arrangements. This ASU is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The Company is currently
evaluating the potential impact of this standard on its consolidated financial
statements.
Changes
in Company Management
On April
23, 2009, the Company’s Board of Directors voted to terminate the employment of
Michael S. Weiss as the Company’s Chairman and Chief Executive Officer. Under
the terms of Mr. Weiss’ employment agreement with the Company dated December 23,
2002, as amended on December 26, 2008 (the “Employment Agreement”), he remained
an employee of the Company for a period of 90 days; however, during such notice
period, he did not serve as the Company’s Chairman and Chief Executive
Officer.
The
Employment Agreement provided that Mr. Weiss was entitled to receive as
severance (i) a lump-sum payment equal to one year's base salary, payable after
a six-month delay, as required under Section 409A of the tax code, (ii) payment
of his salary during the 90 days following formal notice of termination of
employment, and (iii) a pro rata bonus for the year of termination, determined
with respect to the amount to which Mr. Weiss would have been entitled for the
year of termination (based upon the achievement of corporate goals and
objectives) if he had remained employed throughout the calendar year, payable at
the time bonuses are paid to other executives. In addition, under the terms of
the Employment Agreement, all of Mr. Weiss’ outstanding stock options and shares
of restricted stock vested, and all stock options will remain exercisable for
two years following termination. In the second quarter of 2009, the Company
recorded approximately $551,000 of expense, in other selling, general and
administrative expenses, associated with the cash severance and salary during
the notice period (excluding a pro rata bonus, if any, which is not determinable
at this time), and approximately $660,000 in non-cash compensation expense
(selling, general and administrative) associated with the equity modifications
of Mr. Weiss’ outstanding stock options and shares of restricted
stock.
On
May 20, 2009, the Company announced that it appointed Ron Bentsur as Chief
Executive Officer of the Company. The terms of Mr. Bentsur’s employment are set
forth in an employment agreement with the Company dated September 14,
2009. As an inducement to his employment, on May 20, 2009, the
Company granted Mr. Bentsur options to purchase 600,000 shares of Company common
stock at an exercise price of $0.35, the fair market value of the stock as of
the date of grant. The options will vest in equal annual installments over
a four-year period or upon an earlier change in control of the
Company. The options were granted as an inducement award and were not
issued under the Company’s 2007 Incentive Plan.
On June
16, 2009, Ron Bentsur was appointed to the Board of Directors of the Company by
unanimous vote of the Board of Directors, and Michael P. Tarnok was
appointed Chairman of the Board by unanimous vote of the Board of
Directors.
8
Cash
and Cash Equivalents
The
Company treats liquid investments with original maturities of less than three
months when purchased as cash and cash equivalents.
Investment
Securities
The
Company records its investments as either held-to-maturity or
available-for-sale. Held-to-maturity investments are recorded at amortized cost.
Available-for-sale investment securities (which are comprised of auction rate
securities) are recorded at fair value. See Note 2 – Fair Value Measurements.
Other-than-temporary impairment charges are included in interest and other
income (expense), net, and unrealized gains, if determined to be temporary, are
included in accumulated other comprehensive income in stockholders’
equity.
The
following table summarizes the Company’s investment securities at September 30,
2009 and December 31, 2008:
(in thousands)
|
September 30, 2009
|
December 31, 2008
|
||||||
Short-term
investment securities:
|
||||||||
Obligations
of domestic governmental agencies (matured May 2009)
(held-to-maturity)
|
$ | — | $ | 2,299 | ||||
Long-term
investment securities:
|
||||||||
Auction
rate securities (mature between 2037 and 2047) (available-for-sale) ($10.0
million par value)
|
$ | 7,333 | $ | 7,185 |
See Note
2 for information regarding the subsequent disposition of a portion of the
available-for-sale investment securities.
Revenue
Recognition
The
Company recognizes license revenue in accordance with the revenue recognition
guidance of the Codification. The Company analyzes each element of its licensing
agreement to determine the appropriate revenue recognition. The terms of the
license agreement may include payment to the Company of non-refundable up-front
license fees, milestone payments if specified objectives are achieved, and/or
royalties on product sales. The Company recognizes revenue from upfront payments
over the period of significant involvement under the related agreements unless
the fee is in exchange for products delivered or services rendered that
represent the culmination of a separate earnings process and no further
performance obligation exists under the contract. The Company recognizes
milestone payments as revenue upon the achievement of specified milestones only
if (1) the milestone payment is non-refundable, (2) substantive effort
is involved in achieving the milestone, (3) the amount of the milestone is
reasonable in relation to the effort expended or the risk associated with
achievement of the milestone, and (4) the milestone is at risk for both
parties. If any of these conditions are not met, the Company defers the
milestone payment and recognizes it as revenue over the estimated period of
performance under the contract (see Note 5).
Service
revenue consists of clinical trial management and site recruitment services.
Revenues generated from providing clinical trial management and site recruitment
services are recognized at the time such services are provided. Deferred revenue
is incurred when the Company receives a deposit or prepayment for services to be
performed at a later date.
Other
revenue consists of fees and payments arising from technology transfer,
termination and settlement agreements related to the Company’s prior license
agreements. Other revenues are recognized at the time such fees and payments are
earned.
9
Stock-Based
Compensation
The
Company recognizes all share-based payments to employees and to non-employee
directors as compensation for service on the Board of Directors as compensation
expense in the consolidated financial statements based on the fair values of
such payments. Stock-based compensation expense recognized each period is based
on the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
For
share-based payments to consultants and other third-parties, compensation
expense is determined at the “measurement date.” The expense is recognized over
the vesting period of the award. Until the measurement date is reached, the
total amount of compensation expense remains uncertain. The Company records
compensation expense based on the fair value of the award at the reporting date.
The awards to consultants and other third-parties are then revalued, or the
total compensation is recalculated based on the then current fair value, at each
subsequent reporting date.
Income
Taxes
As of
September 30, 2009, the Company has U.S. net operating loss carryforwards of
approximately $266 million which expire from 2019 through 2028. The Company has
established a valuation allowance against its net deferred tax assets due to the
Company’s history of pre-tax losses and the resulting likelihood that the
deferred tax assets are not realizable. Due to the Company’s various equity
transactions, the utilization of certain tax loss carryforwards could be subject
to annual limitations imposed by Internal Revenue Code Section 382 relating to
the change of control provision.
The
Company has not recorded any income tax provision for the three and nine months
ended September 30, 2009, since the Company has estimated that its estimated
annual effective income tax rate will be zero.
The
Company is not aware of any unrecorded tax liabilities which would impact the
financial statements.
Basic
and Diluted Net Income (Loss) per Common Share
Basic net
income or loss per share is based upon the weighted average number of common
shares outstanding during the period. Diluted net income or loss per share is
based upon the weighted average number of common shares outstanding during the
period, plus the effect of additional weighted average common equivalent shares
outstanding during the period when the effect of adding such shares is dilutive.
Common equivalent shares result from the assumed exercise of outstanding stock
options and warrants (the proceeds of which are then assumed to have been used
to repurchase outstanding stock using the treasury stock method). In addition,
the assumed proceeds under the treasury stock method include the average
unrecognized compensation expense of stock options that are in-the-money. This
results in the “assumed” buyback of additional shares, thereby reducing the
dilutive impact of stock options and warrants. Common equivalent shares have not
been included in the net loss per share calculations for the three and nine
months ended September 30, 2008 because the effect of including them would have
been anti-dilutive.
Basic and
diluted net income (loss) per share were determined as follows:
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
(in thousands, except share and per share
amounts)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Basic:
|
||||||||||||||||
Income
(loss) from continuing operations
|
$ | 560 | $ | (6,755 | ) | $ | 15,143 | $ | (48,899 | ) | ||||||
Loss
from discontinued operations
|
— | (86 | ) | — | (175 | ) | ||||||||||
Net
income (loss)
|
$ | 560 | $ | (6,841 | ) | $ | 15,143 | $ | (49,074 | ) | ||||||
Weighted
average shares outstanding
|
47,932,029 | 45,222,053 | 47,880,737 | 44,348,537 | ||||||||||||
Basic
net income (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.32 | $ | (1.11 | ) | ||||||
Discontinued
operations
|
— | (— | )* | — | (— | )* | ||||||||||
Basic
net income (loss) per common share
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.32 | $ | (1.11 | ) | ||||||
Diluted:
|
||||||||||||||||
Income
(loss) from continuing operations
|
$ | 560 | $ | (6,755 | ) | $ | 15,143 | $ | (48,899 | ) | ||||||
Loss
from discontinued operations
|
— | (86 | ) | — | (175 | ) | ||||||||||
Net
income (loss)
|
$ | 560 | $ | (6,841 | ) | $ | 15,143 | $ | (49,074 | ) | ||||||
Weighted
average shares outstanding
|
47,932,029 | 45,222,053 | 47,880,737 | 44,348,537 | ||||||||||||
Effect
of dilutive options and warrants
|
1,096,225 | — | 445,981 | — | ||||||||||||
Weighted
average shares outstanding assuming dilution
|
49,028,254 | 45,222,053 | 48,326,718 | 44,348,537 | ||||||||||||
Diluted
net income (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.31 | $ | (1.11 | ) | ||||||
Discontinued
operations
|
— | (— | )* | — | (— | )* | ||||||||||
Diluted
net income (loss) per common share
|
$ | 0.01 | $ | (0.15 | ) | $ | 0.31 | $ | (1.11 | ) |
* Amount
less than one cent.
10
The
Company did not include the following securities in the table below in the
computation of diluted net income (loss) per common share because the securities
were anti-dilutive during the periods presented:
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
2009
|
|
2008
|
2009
|
2008
|
||||||||||||
Stock
options
|
4,816,050 | 9,139,459 | 8,431,050 | 9,139,459 | ||||||||||||
Warrants
|
2,908,000 | 321,976 | 2,908,000 | 321,976 | ||||||||||||
Total
|
7,724,050 | 9,461,435 | 11,339,050 | 9,461,435 |
Comprehensive
Income (Loss)
Comprehensive
income (loss) is composed of net income (loss) and other comprehensive income.
Other comprehensive income, for the three and nine months ended September 30,
2009, is comprised of unrealized gains on the Company’s available-for-sale
long-term investment securities that are excluded from net income and reported
separately in stockholders’ equity. Comprehensive income (loss) and its
components are as follows (unaudited):
Three
months ended
September 30,
|
Nine
months ended
September 30,
|
|||||||||||||||
(in thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
income (loss)
|
$ | 560 | $ | (6,841 | ) | $ | 15,143 | $ | (49,074 | ) | ||||||
Unrealized
gain on available-for-sale long-term investment securities
|
250 | — | 250 | — | ||||||||||||
Comprehensive
income (loss)
|
$ | 810 | $ | (6,841 | ) | $ | 15,393 | $ | (49,074 | ) |
Accounting
for Manufacturing Suite
The
Company spent approximately $11.3 million in capital expenditures building a
manufacturing suite for Sulonex. With the cessation of the Company’s development
of Sulonex in March 2008, the Company took an impairment charge of $11.0
million, which is included in other research and development expenses in the
nine months ended September 30, 2008, to write the assets down to their fair
value of $300,000, the amount for which the assets were subsequently sold during
2008. The sale of the assets offset a related payable and, therefore, cash was
not received by the Company. In addition, the Company recognized a $2.1 million
expense, which is included in other research and development expenses in the
nine months ended September 30, 2008, for costs related to the required
restoration of the leased facility to its original condition. See Note 4 –
Restructuring.
Impairment
of Goodwill
Goodwill
is reviewed for impairment annually, or when events arise that could indicate
that an impairment exists. The Company tests for goodwill impairment using a
two-step process. The first step compares the fair value of the reporting unit
with the unit's carrying value, including goodwill. When the carrying value of
the reporting unit is greater than fair value, the unit’s goodwill may be
impaired, and the second step must be completed to measure the amount of the
goodwill impairment charge, if any. In the second step, the implied fair value
of the reporting unit’s goodwill is compared with the carrying amount of the
unit’s goodwill. If the carrying amount is greater than the implied fair value,
the carrying value of the goodwill must be written down to its implied fair
value. The negative outcome of the Company’s pivotal SUN-MICRO Phase 3 clinical
trial of Sulonex™ (sulodexide) for the treatment of diabetic nephropathy,
announced on March 7, 2008, and the Company’s subsequent decision to terminate
the ongoing SUN-MACRO Phase 4 clinical trial triggered an impairment test. As of
March 31, 2008, management concluded that there was no impairment of the
Company’s goodwill. Additionally, as of December 31, 2008, management conducted
its annual assessment of goodwill and concluded that there was no impairment to
its goodwill. The Company will continue to perform impairment tests annually, at
December 31, and whenever events or changes in circumstances suggest that the
carrying value of an asset may not be recoverable.
Subsequent
Events
The
Company has performed a review of events subsequent to the balance sheet date
through November 10, 2009, the date the financial statements were available for
issuance.
11
NOTE
2 – FAIR VALUE MEASUREMENTS
The
Company measures certain financial assets and liabilities at fair value on a
recurring basis in the financial statements. The hierarchy ranks the quality and
reliability of inputs, or assumptions, used in the determination of fair value
and requires financial assets and liabilities carried at fair value to be
classified and disclosed in one of the following three categories:
|
·
|
Level
1 – quoted prices in active markets for identical assets and
liabilities;
|
|
·
|
Level
2 – inputs other than Level 1 quoted prices that are directly or
indirectly observable; and
|
|
·
|
Level
3 – unobservable inputs that are not corroborated by market
data.
|
As of
September 30, 2009, $7.3 million of the Company’s investment securities were
auction rate securities and represent interests in student loan-backed
securities. The auction rate securities are recorded at their fair value and
classified as long-term investments. Auction rate securities are structured to
provide liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals, generally every 28 days.
This mechanism has historically allowed existing investors either to rollover
their holdings, whereby they would continue to own their respective securities,
or liquidate their holdings by selling such securities at par. This auction
process has historically provided a liquid market for these securities; however,
the uncertainties in the credit markets have affected all of the Company’s
holdings in auction rate securities. Since February 2008, the auctions for the
auction rate securities held by the Company have not had sufficient buyers to
cover investors’ sell orders, resulting in unsuccessful auctions. When an
auction is unsuccessful, the interest rate is re-set to a level pre-determined
by the loan documents and remains in effect until the next auction date, at
which time the process repeats. While all but one of these investments were
rated A or higher at September 30, 2009, the Company is uncertain as to when, or
if, the liquidity issues relating to these investments will improve. The Company
assessed the fair value of its auction rate securities portfolio. As a result of
this valuation process, as described below, the Company recorded impairment
charges totaling $0 and $0.9 million during the three months ended September 30,
2009 and 2008, respectively, and $0.1 and $2.8 million during the nine months
ended September 30, 2009 and 2008, respectively, for other-than-temporary
declines in the value of its auction rate securities. These other-than-temporary
impairment charges were included in interest and other income (expense), net.
For the three and nine months ended September 30, 2009, the Company reported
other comprehensive income of $0.3 million for a temporary unrealized gain
related to the increase in estimated fair value for its auction rate securities.
The estimated fair value of the Company’s auction rate securities ($10.0 million
par value) is $7.3 million at September 30, 2009.
In
October 2009, the Company sold three of its auction rate security investments.
The securities had a combined par value of $5.0 million and a combined adjusted
book value of $3.8 million. Proceeds to the Company from the sale of these
securities were $3.9 million, representing a gain of $0.1 million over adjusted
book value.
The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value of the Company’s auction rate securities. In addition,
the estimated fair value of the auction rates securities may differ from the
values that would have been used had a ready market existed, and the differences
could be material to the consolidated financial statements.
12
The fair
value of the Company’s auction rate securities could change significantly based
on market conditions and continued uncertainties in the credit markets. If these
uncertainties continue or if these securities experience credit rating
downgrades, the Company may incur additional impairment charges with respect to
its auction rate securities portfolio. The Company continues to monitor the fair
value of its auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges.
The
Company reviews investment securities for impairment and to determine the
classification of the impairment as temporary or other-than-temporary. Losses
are recognized in the Company’s consolidated statement of operations when a
decline in fair value is determined to be other-than-temporary. The Company
reviews its investments on an ongoing basis for indications of possible
impairment. Once identified, the determination of whether the impairment is
temporary or other-than-temporary requires significant judgment. The Company
believes that the impairment charges related to its auction rate securities
investments are other-than-temporary. The primary factors the Company
considers in classifying an impairment include the extent and time the fair
value of each investment has been below cost and the Company’s ability to hold
such investment to maturity.
The
following table provides the fair value measurements of applicable Company
financial assets as of September 30, 2009:
Financial assets at fair value
as of September 30, 2009
|
||||||||||||
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
Money
market funds (1)
|
$ | 31,066 | $ | — | $ | — | ||||||
Auction
rate securities (2)
|
— | — | 7,333 | |||||||||
Total
|
$ | 31,066 | $ | — | $ | 7,333 |
(1)
|
Included
in cash and cash equivalents on the Company’s consolidated balance sheet.
The carrying amount of money market funds is a reasonable estimate of fair
value.
|
(2)
|
Included
in long-term investment securities on the Company’s consolidated balance
sheet.
|
The
following table summarizes the change in carrying value associated with Level 3
financial assets for the nine months ended September 30, 2009:
(in thousands)
|
Available-for-sale
long-term
investments
|
|||
Balance
at January 1, 2009
|
$ | 7,185 | ||
Total
impairment charges included in net income (loss)
|
(68 | ) | ||
Partial
redemption of security at par
|
(50 | ) | ||
Realized
gain on partial redemption of security
|
16 | |||
Other
comprehensive income (temporary unrealized gain)
|
250 | |||
Balance
at September 30, 2009
|
$ | 7,333 |
13
NOTE
3 – STOCKHOLDERS' EQUITY
Common
Stock
On
September 30, 2009, the Company completed a registered direct offering to
certain investors of 8,000,000 shares of its common stock and warrants to
purchase up to a total of 2,800,000 shares of its common stock for gross
proceeds of approximately $20 million. The common stock and warrants were sold
in units, with each unit consisting of one share of common stock and a warrant
to purchase 0.35 of a share of common stock. The purchase price per unit was
$2.50. Subject to certain ownership limitations, the warrants are exercisable at
any time on or after the initial issue date and on or prior to October 1, 2010,
at an exercise price of $2.65 per warrant share. In addition, the placement
agent received a warrant to purchase up to 108,000 shares of common stock at an
exercise price of $3.125 per warrant share, exercisable at any time on or prior
to October 1, 2010. Total proceeds to the Company from this public offering were
approximately $18.4 million, net of offering costs of approximately $1.6
million. The shares and warrants were sold under a shelf registration statement
on Form S-3 (File No. 333-161607) filed with the SEC on August 28, 2009, and
declared effective by the SEC on September 23, 2009. The registration statement
provides for the offering of up to $40 million of the Company's common stock and
warrants.
Subsequent
to this registered direct offering, there remains approximately $12.2 million of
the Company's common stock and warrants available for sale under the shelf
registration statement. The Company may offer the remaining securities under its
shelf registration from time to time in response to market conditions or other
circumstances if it believes such a plan of financing is in the best interest of
the Company and its stockholders. The Company believes that the shelf
registration provides it with the flexibility to raise additional capital to
finance its operations as needed.
Equity
Incentive Plans
Shares
available for the issuance of stock options or other stock-based awards under
the Company’s stock option and incentive plans were 2,629,888 shares at
September 30, 2009.
Stock
Options
The
following table summarizes stock option activity for the nine months ended
September 30, 2009:
Number
of shares
|
Weighted-
average
exercise price
|
Weighted-
average
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
(in
years)
|
||||||||||||||||
Outstanding
at December 31, 2008
|
9,114,459 | $ | 7.19 | |||||||||||||
Granted
|
670,000 | 0.47 | 4.8 | |||||||||||||
Exercised
|
(15,000 | ) | 0.96 | $ | 11,800 | |||||||||||
Forfeited
|
(159,467 | ) | 6.75 | |||||||||||||
Expired
|
(223,290 | ) | 11.87 | |||||||||||||
Outstanding
at September 30, 2009
|
9,386,702 | $ | 6.61 | 3.5 | $ | 5,821,594 | ||||||||||
Vested
and expected to vest at September 30, 2009
|
9,353,943 | $ | 6.62 | 3.4 | $ | 5,780,530 | ||||||||||
Exercisable
at September 30, 2009
|
8,323,729 | $ | 6.79 | 2.8 | $ | 4,595,794 |
Upon the
exercise of stock options, the Company issues new shares of its common stock. As
of September 30, 2009, 3,328,833 options issued to employees, and 93,000 options
issued to consultants, are milestone-based, of which 3,203,833 options issued to
employees, and 43,000 options issued to consultants, are vested and
exercisable.
On May
20, 2009, the Company granted Ron Bentsur, the Company’s newly appointed Chief
Executive Officer, options to purchase 600,000 shares of Company common stock at
an exercise price of $0.35, the fair market value of the stock on the date of
grant. The options will vest in equal annual installments over a four-year
period or upon an earlier change in control of the Company. The options
were granted as an inducement award and were not issued under the Company’s 2007
Incentive Plan.
14
Restricted
Stock
Certain
employees, directors and consultants have been awarded restricted stock under
the 2004 Long-Term Incentive Plan and 2007 Incentive Plan. Generally, the
restricted stock vests over a period of two to four years. The following table
summarizes restricted share activity for the nine months ended September 30,
2009:
Number of
Shares
|
Weighted
Average
Grant Date
Fair Value
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
at December 31, 2008
|
3,982,572 | $ | 0.36 | |||||||||
Granted
|
578,539 | 0.76 | ||||||||||
Vested
|
(2,700,567 | ) | 0.30 | $ | 1,307,712 | |||||||
Forfeited
|
(361,742 | ) | 0.34 | |||||||||
Outstanding
at September 30, 2009
|
1,498,802 | $ | 0.63 | $ | 3,507,197 |
On
September 14, 2009, the Company entered in an employment agreement with Ron
Bentsur, its Chief Executive Officer. The agreement terminates on May 20, 2012,
provided, however, that Mr. Bentsur’s opportunity to earn the milestone awards
described below will be effective until May 20, 2014, subject to certain early
termination events. Mr. Bentsur has the opportunity to earn certain
milestone awards as follows:
(1)
100,000 shares of restricted stock were granted to Mr. Bentsur on September 22,
2009, for the achievement of a $1.00 share price of the Company’s common stock
for 120 consecutive days (based upon the average closing price of the
Company’s common stock for a 120-day period after May 20, 2009). The
restricted stock will vest in equal installments over each of the first three
anniversaries of the date of grant provided that Mr. Bentsur remains an employee
of the Company during such vesting period, or immediately upon achievement of
milestone #2 below.
(2)
250,000 shares of restricted stock will be granted to Mr. Bentsur upon the
achievement of a $2.50 share price of the Company’s common stock for 120
consecutive days (based upon the average closing price of the Company’s common
stock for a 120-day period after May 20, 2009). Such restricted stock will
vest in equal installments over each of the first three anniversaries of the
date of grant provided that Mr. Bentsur remains an employee of Keryx during such
vesting period.
(3)
400,000 shares of restricted stock will be granted to Mr. Bentsur upon the
first to occur of (a) the Company’s filing of an accepted new drug application,
or NDA, with the U.S. Food and Drug Administration for Zerenex or Perifosine, or
(b) the Company’s outlicensing of Zerenex or Perifosine in the U.S. to a
third party. Such restricted stock will vest in equal installments
over each of the first three anniversaries of the date of grant provided that
Mr. Bentsur remains an employee of the Company during such vesting
period. This milestone #3 may be achieved with respect to NDAs or
qualifying outlicenses for multiple indications of the same product, but not for
subsequent outlicenses of the product relating to an indication for which the
milestone is met. Upon achievement of milestone #4 below with respect to a
product, the restricted stock granted for one indication of the product under
milestone #3 above will vest in full.
(4) 500,000
shares of restricted stock will be granted to Mr. Bentsur, upon the first
to occur of (a) the Company’s first commercial sale of Zerenex or Perifosine in
the U.S. off an approved NDA, (b) the Company’s receipt of the first royalty
upon the commercial sale of Zerenex or Perifosine in the U.S. by a partner to
whom the Company has sold exclusive or non-exclusive commercial rights, or (c)
the Company’s complete outlicensing of the entire product rights of Zerenex or
Perifosine in the U.S. Such restricted stock will vest on the first
anniversary of the date of grant provided that Mr. Bentsur remains an employee
of the Company during such vesting period.
(5) 100,000
shares of restricted stock will be granted to Mr. Bentsur upon each event
of the Company’s outlicensing Zerenex in a foreign market, other than Japan,
resulting in a greater than $10 million non-refundable cash payment to the
Company with a gross deal value to the Company of at least $50
million. Such restricted stock will vest in equal installments over
each of the first three anniversaries of the date of grant provided that Mr.
Bentsur remains an employee of the Company during such vesting
period.
As of
September 30, 2009, Mr. Bentsur has been granted a total of 100,000 shares of
restricted stock based on the milestone awards listed above.
15
Warrants
Warrants
|
Weighted-
average
exercise price
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
at December 31, 2008
|
72,564 | $ | 0.01 | |||||||||
Issued
|
2,908,000 | 2.67 | — | |||||||||
Exercised
|
— | — | ||||||||||
Canceled
|
— | — | ||||||||||
Outstanding
at September 30, 2009
|
2,980,564 | $ | 2.60 | $ | 169,314 |
As
discussed above, as part of the registered direct offering completed on
September 30, 2009, the Company issued warrants to purchase up to 2,800,000
shares of the Company's common stock. The warrants have an exercise price of
$2.65 per warrant share and, subject to certain ownership limitations, are
exercisable at any time on or after the initial issue date and on or prior to
October 1, 2010. The grant date fair value was $1.03 per warrant, for a total
fair value of $2,877,000, which is included in additional paid-in capital on the
consolidated balance sheet. In addition, the Company issued to the placement
agent in the transaction warrants to purchase up to 108,000 shares of its common
stock at an exercise price of $3.125 per warrant share, exercisable at any time
on or prior to October 1, 2010, with a grant date fair value of $0.93 per
warrant. The fair value of the warrants described above is estimated at the date
of grant using the Black-Scholes pricing model. For as long as the warrants
issued in the registered direct offering are outstanding, if there is no
effective registration statement covering the resale of the warrant shares by
the holders, such warrants may be exercisable, in whole or in part, at such time
by means of a “cashless exercise.”
Stock-Based
Compensation
The
Company incurred $638,000 and $1,996,000 of non-cash compensation expense
related to equity incentive grants during the three months ended September 30,
2009 and 2008, respectively, and $2,598,000 and $4,751,000 during the nine
months ended September 30, 2009 and 2008, respectively. The fair value of stock
options granted is estimated at the date of grant using the Black-Scholes
pricing model. The expected term of options granted is derived from historical
data and the expected vesting period. Expected volatility is based on the
historical volatility of the Company’s common stock. The risk-free interest rate
is based on the U.S. Treasury yield for a period consistent with the expected
term of the option in effect at the time of the grant. The Company has assumed
no expected dividend yield, as dividends have never been paid to stock or option
holders and will not be paid for the foreseeable future.
Black-Scholes Option Valuation Assumptions
|
Three months ended September 30,
|
Nine months ended September 30,
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Risk-free
interest rates
|
2.0 | % | — | 2.0 | % | 2.6 | % | |||||||||
Dividend
yield
|
— | — | — | — | ||||||||||||
Volatility
|
125.8 | % | — | 123.4 | % | 76.3 | % | |||||||||
Weighted-average
expected term
|
4.0
years
|
— |
4.8
years
|
4.3
years
|
The
weighted average grant date fair value of options granted for the three months
ended September 30, 2009 was $1.71. There were no grants of options during the
three months ended September 30, 2008. The weighted average grant date fair
value of options granted for the nine months ended September 30, 2009 and 2008
was $0.38 and $2.40 per option, respectively. The Company used historical
information to estimate forfeitures within the valuation model. As of September
30, 2009, there was $1.3 million and $0.9 million of total unrecognized
compensation cost related to non-vested stock options and restricted stock,
respectively, which is expected to be recognized over weighted-average periods
of 1.7 years and 2.2 years, respectively. These amounts do not include, as of
September 30, 2009, 175,000 options outstanding which are milestone-based and
vest upon certain corporate milestones, such as FDA approval of the Company’s
drug candidates, market capitalization targets, and change in control.
Stock-based compensation will be measured and recorded if and when a milestone
occurs.
On April
23, 2009, the Company’s Board of Directors voted to terminate the employment of
Michael S. Weiss as the Company’s Chairman and Chief Executive Officer (see Note
1). Under the terms of Mr. Weiss’ employment agreement, 1,800,000 shares of
restricted stock vested, which is included in the restricted share activity
table above. In addition, all of Mr. Weiss’ outstanding stock options vested and
will remain exercisable for two years following termination. In the second
quarter of 2009, the Company recorded approximately $660,000 in non-cash
compensation expense (selling, general and administrative) associated with the
equity modifications of Mr. Weiss’ outstanding stock options and shares of
restricted stock.
16
NOTE
4 – RESTRUCTURING
On March 26, 2008, the Company
implemented a strategic restructuring plan to reduce its cash burn rate and
re-focus its development efforts (the “2008 Restructuring”). The 2008
Restructuring, which was prompted by the negative outcome of the Company’s
pivotal SUN-MICRO Phase 3 clinical trial of Sulonex™ (sulodexide) for the
treatment of diabetic nephropathy, announced on March 7, 2008, and subsequent
decision by the Company to terminate the ongoing SUN-MACRO Phase 4 clinical
trial, was intended to conserve the financial resources of the Company and
enable it to focus its efforts on programs and opportunities that management
believed were most likely to provide long-term shareholder value. The 2008
Restructuring included a workforce reduction of approximately 50% as compared to
the Company’s workforce at December 31, 2007. Following the workforce reduction,
the Company had approximately 25 full and part-time employees.
As part
of the 2008 Restructuring, on March 26, 2008, the Company notified its
President, I. Craig Henderson, M.D., that the Company was terminating his
employment, effective April 15, 2008. Dr. Henderson remained in his position as
a member of the Company’s Board of Directors until the annual meeting in June
2008. The Company recognized a $1,569,000 credit to expense, in the nine months
ended September 30, 2008, related to the forfeiture of stock options and
restricted stock issued to Dr. Henderson. In addition, the Company reached a
mutual agreement with its Chief Accounting Officer, Mark Stier, that Mr. Stier
resigned effective September 30, 2008. His responsibilities were assumed by
James F. Oliviero, the Company’s current Chief Financial Officer, who was
appointed Principal Financial and Accounting Officer on May 6,
2008.
The
following table summarizes restructuring costs that were provided for and/or
incurred by the Company during the comparable nine months ended September 30,
2008:
Nine months ended
|
||||
(in thousands)
|
September 30, 2008
|
|||
Research
and development
|
||||
Impairment
of manufacturing facility
|
$ | 11,037 | ||
Manufacturing
facility restoration provision
|
2,063 | |||
Severance
|
624 | |||
Non-cash
compensation
|
(1,569 | ) | ||
Total
research and development
|
12,155 | |||
Selling,
general and administrative
|
||||
Severance
|
99 | |||
Total
selling, general and administrative
|
99 | |||
Total
restructuring costs
|
$ | 12,254 |
At
December 31, 2008, and September 30, 2009, there were no remaining restructuring
liabilities.
NOTE
5 - LICENSE AGREEMENTS
In
September 2007, the Company entered into a Sublicense Agreement with Japan
Tobacco Inc. (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's
pharmaceutical business subsidiary, under which JT and Torii obtained the
exclusive sublicense rights for the development and commercialization of ferric
citrate in Japan, which is being developed in the United States under the trade
name Zerenex. JT and Torii are responsible for the future development and
commercialization costs in Japan. Effective as of June 8, 2009, the Company
entered into an Amended and Restated Sublicense Agreement (the “Revised
Agreement”) with JT and Torii, which, among other things, provided for the
elimination of all significant on-going obligations under the sublicense
agreement. Accordingly, in accordance with the Company’s revenue recognition
policies, all remaining deferred revenue pertaining to this sublicense has been
recognized in the nine months ended September 30, 2009.
Prior to
the Revised Agreement, an upfront payment of $12.0 million, which was received
in October 2007, was being recognized as license revenue on a straight-line
basis over the life of the agreement, which is through the expiration of the
last-to-expire patent covered by the agreement in 2023, and represented the
estimated period over which the Company had certain significant ongoing
responsibilities under the original sublicense agreement. An additional
milestone payment of $8.0 million, for the achievement of certain milestones
reached in March 2008, was received in April 2008, and was being recognized as
license revenue on a straight-line basis over the life of the original agreement
(as discussed above). As a result of the signing of the Revised Agreement, as
discussed above, the unamortized portion of the upfront payment of $12.0 million
and the additional milestone payment of $8.0 million, approximately $18.0
million, was recognized in the nine months ended September 30,
2009.
17
In March
2009, JT and Torii informed the Company that they had initiated a Phase 2
clinical study of Zerenex in Japan, which triggered a $3.0 million
non-refundable milestone payment, which was received by the Company in March
2009. As a result, the Company recorded license revenue of $3.0 million in
accordance with its revenue recognition policy, which is included in the nine
months ended September 30, 2009.
The
Company may receive up to an additional $77.0 million in payments upon the
achievement of pre-specified milestones. In addition, upon commercialization, JT
and Torii will make royalty payments to the Company on net sales of ferric
citrate in Japan.
In July
2009, the Company settled a dispute with Alfa Wassermann S.p.A. over issues
arising from the terminated license agreement for Sulonex (sulodexide). Under
the terms of the settlement agreement, Alfa Wassermann will pay the Company
$3,500,000 (of which $2,750,000 was received on July 31, 2009, and $750,000 will
be paid on or before July 30, 2010), and the Company is required to deliver to
Alfa Wassermann all of its data, information and other intellectual property
related to Sulonex.
NOTE
6 – DISCONTINUED OPERATIONS
In
September 2008, the Company terminated its license agreement related to the
Accumin product and ceased all operations related to the Diagnostic segment. The
results of the Company’s Diagnostic segment and the related financial position
have been reflected as discontinued operations in the consolidated financial
statements. The consolidated financial statements have been reclassified to
conform to discontinued operations presentation for all historical periods
presented.
Summarized
selected financial information for discontinued operations are as
follows:
(in thousands)
|
Three months ended
September 30, 2008
|
Nine months ended
September 30, 2008
|
||||||
Diagnostic
revenue
|
$ | — | $ | — | ||||
Operating
expenses:
|
||||||||
Cost
of diagnostics sold
|
57 | 57 | ||||||
Research
and development
|
2 | 4 | ||||||
Selling,
general and administrative
|
27 | 114 | ||||||
Total
operating expenses
|
86 | 175 | ||||||
Loss
from discontinued operations
|
$ | (86 | ) | $ | (175 | ) |
The
assets and liabilities of discontinued operations are stated separately as of
September 30, 2009, and December 31, 2008, on the accompanying consolidated
balance sheets. The major assets and liabilities categories are as
follows:
(in thousands)
|
September 30, 2009
|
December 31, 2008
|
||||||
Assets
|
||||||||
Assets
of discontinued operations
|
$ | — | $ | — | ||||
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 120 | $ | 120 | ||||
Liabilities
of discontinued operations
|
$ | 120 | $ | 120 |
18
NOTE
7 – SEGMENT INFORMATION
The
Company has two reportable segments: Services and Products. The Services
business provides clinical trial management and site recruitment services to
other biotechnology and pharmaceutical companies. The Products business focuses
on the acquisition, development and commercialization of medically important
pharmaceutical products for the treatment of life-threatening diseases,
including cancer and renal disease, and also includes license revenue, other
revenue and associated costs.
Segment
information for the three month and nine month periods were as
follows:
Revenue
|
||||||||||||||||
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
(in thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Services
|
$ | — | $ | 41 | $ | 3 | $ | 103 | ||||||||
Products
|
3,500 | 327 | 25,191 | 853 | ||||||||||||
Total
|
$ | 3,500 | $ | 368 | $ | 25,194 | $ | 956 |
Operating income (loss)
|
||||||||||||||||
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
(in thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Services
|
$ | — | $ | 28 | $ | 3 | $ | 76 | ||||||||
Products
|
431 | (6,161 | ) | 14,763 | (47,424 | ) | ||||||||||
Total
|
$ | 431 | $ | (6,133 | ) | $ | 14,766 | $ | (47,348 | ) |
A
reconciliation of the totals reported for the operating segments to the
consolidated income (loss) from continuing operations is as
follows:
Income (loss) from continuing operations
|
||||||||||||||||
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
(in thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
income (loss) of reportable segments
|
$ | 431 | $ | (6,133 | ) | $ | 14,766 | $ | (47,348 | ) | ||||||
Interest
and other income (expense), net
|
129 | (622 | ) | 377 | (1,551 | ) | ||||||||||
Income
taxes
|
— | — | — | — | ||||||||||||
Consolidated
income (loss) from continuing operations
|
$ | 560 | $ | (6,755 | ) | $ | 15,143 | $ | (48,899 | ) |
Assets (1)
|
||||||||
(in thousands)
|
September 30, 2009
|
December 31, 2008
|
||||||
Services
|
$ | — | $ | — | ||||
Products
|
4,438 | 3,982 | ||||||
Total
assets of reportable segments
|
4,438 | 3,982 | ||||||
Cash,
cash equivalents, interest receivable and investment
securities
|
41,020 | 22,652 | ||||||
Consolidated
total assets
|
$ | 45,458 | $ | 26,634 |
(1)
|
Assets
for the Company’s reportable segments include fixed assets, goodwill,
accounts receivable and prepaid
expenses.
|
The
carrying amount of goodwill by reportable segment as of September 30, 2009 and
December 31, 2008 was as follows:
Goodwill
|
||||||||
(in thousands)
|
September 30, 2009
|
December 31, 2008
|
||||||
Services
|
$ | — | $ | — | ||||
Products
|
3,208 | 3,208 | ||||||
Total
|
$ | 3,208 | $ | 3,208 |
19
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Unless
the context requires otherwise, references in this report to “Keryx,” the
“Company,” “we,” “us” and “our” refer to Keryx Biopharmaceuticals, Inc., its
predecessor company and our subsidiaries.
The
following discussion and analysis contains forward-looking statements about our
plans and expectations of what may happen in the future. Forward-looking
statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, and our results could
differ materially from the results anticipated by our forward-looking statements
as a result of many known or unknown factors, including, but not limited to,
those factors discussed in “Risk Factors.” See also the “Special Cautionary
Notice Regarding Forward-Looking Statements” set forth at the beginning of this
report.
You
should read the following discussion and analysis in conjunction with the
unaudited consolidated financial statements, and the related footnotes thereto,
appearing elsewhere in this report, and in conjunction with management’s
discussion and analysis and the audited consolidated financial statements
included in our annual report on Form 10-K for the year ended December 31,
2008.
OVERVIEW
We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including cancer and renal disease. We
are developing KRX-0401 (perifosine), a novel, potentially first-in-class, oral
anti-cancer agent that inhibits the phosphoinositide 3-kinase (PI3K)/Akt
pathway, a key signaling cascade that has been shown to induce cell growth and
cell transformation. KRX-0401 has demonstrated both safety and clinical efficacy
in several tumor types, both as a single agent and in combination with novel
therapies. KRX-0401 also modulates a number of other key signal transduction
pathways, including the JNK and MAPK pathways, which are pathways associated
with programmed cell death, cell growth, cell differentiation and cell survival.
KRX-0401 is currently in Phase 2 clinical development for multiple tumor types,
with a Phase 3 in multiple myeloma, under Special Protocol Assessment, or SPA,
pending commencement by year-end.
We are
also developing Zerenex™ (ferric citrate), an oral, iron-based compound that has
the capacity to bind to phosphate and form non-absorbable complexes. Zerenex has
recently completed a U.S. Phase 2 clinical program as a treatment for
hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal
disease, or ESRD, and we are in the process of finalizing the design for our
Phase 3 program for Zerenex in consultation with the FDA. Zerenex is also in
Phase 2 development in Japan by our Japanese partner, Japan Tobacco Inc. (“JT”)
and Torii Pharmaceutical Co., Ltd. (“Torii”).
We also
actively engage in business development activities that include seeking
strategic relationships for our product candidates, as well as evaluating
compounds and companies for in-licensing or acquisition. To date, we have not
received approval for the sale of any of our drug candidates in any market and,
therefore, have not generated any product sales from our drug candidates. We
have generated, and expect to continue to generate, revenue from the licensing
of rights to Zerenex in Japan to our Japanese partner, JT and
Torii.
The table
below summarizes the status of our product pipeline.
Product candidate
|
Target indication
|
Development status
|
||
KRX-0401
(perifosine)
|
Multiple
myeloma
|
Phase
3 pending, under SPA
|
||
Multiple
other forms of cancer
|
Phase
2 trials ongoing
|
|||
Zerenex™
(ferric citrate)
|
Hyperphosphatemia
in patients with
|
U.S.
Phase 2 complete
|
||
end-stage
renal disease
|
U.S.
Phase 3 program pending
|
|||
Japan
Phase 2 ongoing by sublicensee (JT and
Torii)
|
20
KRX-0401
(perifosine)
Multiple
Myeloma
On August
3, 2009, we announced that we had reached agreement with the FDA regarding an
SPA on the design of a Phase 3 trial for KRX-0401 (perifosine) in relapsed or
relapsed / refractory multiple myeloma patients previously treated with
bortezomib (VELCADE®). The
SPA provides agreement that the Phase 3 study design adequately addresses
objectives in support of a regulatory submission. The trial, entitled, “A Phase
3 Randomized Study to Assess the Efficacy and Safety of Perifosine Added to the
Combination of Bortezomib and Dexamethasone in Multiple Myeloma Patients
Previously Treated with Bortezomib” will be a double-blind, placebo-controlled
trial comparing the efficacy and safety of KRX-0401 versus placebo when combined
with bortezomib and dexamethasone. The trial, powered at 90%, will enroll
approximately 400 patients with relapsed or relapsed / refractory multiple
myeloma. The primary endpoint is progression-free survival and secondary
endpoints include overall response rate, overall survival and safety. Drs. Paul
Richardson and Kenneth Anderson, from the Jerome Lipper Multiple Myeloma Center,
Dana-Farber Cancer Institute, have agreed to lead the Phase 3 trial, which is
pending commencement by year-end.
On
September 16, 2009, we announced that KRX-0401 (perifosine) has received
Orphan-Drug designation from the FDA for the treatment of multiple myeloma.
Orphan-drug designation is granted by the FDA Office of Orphan Drug Products to
novel drugs or biologics that treat a rare disease or condition affecting fewer
than 200,000 patients in the U.S. The designation provides the drug developer
with a seven-year period of U.S. marketing exclusivity if the drug is the first
of its type approved for the specified indication or if it demonstrates superior
safety, efficacy, or a major contribution to patient care versus another drug of
its type previously granted the designation for the same indication, as well as
with tax credits for clinical research costs, the ability to apply for annual
grant funding, clinical research trial design assistance and waiver of
Prescription Drug User Fee Act (PDUFA) filing fees.
Metastatic Colon
Cancer
In June
2009, we announced positive data from a randomized, multi-center,
placebo-controlled, Phase 2 study of KRX-0401 (perifosine) in combination with
capecitabine (Xeloda(R))
versus capecitabine plus placebo in patients with second- or third-line
metastatic colon cancer. The data was presented in a poster during the
Gastrointestinal Cancer — Colorectal session at the 45th Annual
Meeting of the American Society of Clinical Oncology (ASCO), held in Orlando,
Florida. In this randomized, double-blind, placebo-controlled study conducted at
11 centers across the United States, patients with 2nd or
3rd
line metastatic colon cancer were randomized to receive capecitabine
(Xeloda(R)), an
approved drug for metastatic colon cancer, at a dose of 825 mg/m2 BID
(total daily dose of 1650 mg/m2) on days
1 to 14 every 21 days, plus either KRX-0401 (perifosine) or placebo at 50 mg
daily. Treatment was continued until progression. The study enrolled a total of
38 patients, of which 35 patients were evaluable for response (20 patients on
the capecitabine plus perifosine arm and 15 patients on the capecitabine plus
placebo arm). The three patients not evaluable for response were all in the
capecitabine plus placebo arm; 2 patients were inevaluable due to toxicity (days
14, 46) and 1 patient was inevaluable due to a new malignancy on day
6.
The
median prior treatment regimens was two, with prior treatment regimens as
follows: 91% of the patients received prior FOLFIRI (Irinotecan + 5FU +
Leucovorin); 74% prior FOLFOX (Oxaliplatin + 5FU + Leucovorin); 63% were
previously treated with both FOLFIRI and FOLFOX; 77% received prior Avastin(R); and
43% prior Erbitux(R). Prior
treatment with single agent capecitabine was excluded.
The
primary endpoints of this study were to measure 1) Time to Progression (TTP); 2)
Overall Response Rate (ORR), defined as the percentage of patients achieving a
Complete Response (CR) or Partial Response (PR) by RECIST, and 3) Clinical
Benefit Rate (CBR) defined as the percentage of patients on treatment for
greater than three months with at least Stable Disease. Safety of perifosine
plus capecitabine vs. capecitabine + placebo in this patient population was
evaluated as a secondary endpoint. Perifosine in combination with capecitabine
was well tolerated with hand/foot syndrome (14%) and anemia (11%) as the highest
reported grade 3/4 adverse events.
21
Best
response and median time to progression of capecitabine plus perifosine vs.
capecitabine plus placebo were as follows:
Group
|
n
|
CR
n
(%)
|
PR
n
(%)
|
ORR
n
(%)
|
Stable
Disease
>
12 wks
n
(%)
|
CBR*
n
(%)
|
Median
TTP
|
Xeloda
+ Perifosine
|
20
|
1
(5%)
|
3
(15%)
|
4
(20%)
|
11
(55%)
|
15
(75%)
|
28.9
weeks
{95%
CI (13, 48.1)}
|
Xeloda
+ Placebo
|
15
|
0
|
1
(7%)
|
1
(7%)
|
5
(33%)
|
6
(40%)
|
11
weeks
{95%
CI (9, 15.9)}
|
*
|
CBR: Clinical
Benefit Rate as defined by ORR + Stable
Disease
|
Perifosine
plus capecitabine more than doubled time to progression vs. capecitabine +
placebo with a statistically significant p-value = 0.0006. In addition,
perifosine plus capecitabine more than doubled the ORR and almost doubled the
Clinical Benefit Rate vs. capecitabine plus placebo.
Although
not a primary endpoint in the study, overall survival was analyzed with results
as follows:
Group
|
Median
Overall Survival*
|
%
Change
|
Xeloda
+ Perifosine
|
22
months [95% CI (12.1, NR)]
|
35%
increase**
|
Xeloda
+ Placebo
|
16.3
months [95% CI (5.3, 17.1)]
|
*
|
Survival
calculated from date of randomization until date of death from any cause,
whether or not additional therapies were received after removal from
treatment.
|
**
|
As
of September 2009, median overall survival in the perifosine plus
capecitabine patient group is ongoing with 9 of the 20 patients in this
arm still alive.
|
Renal Cell
Carcinoma
On
September 26, 2009, Dr. Thomas E. Hutson, Director of the Genitourinary Oncology
Program at Baylor-Sammons Cancer Center in Dallas, TX, presented updated Phase 2
results demonstrating KRX-0401 (perifosine) single agent efficacy in patients
with metastatic renal cell carcinoma, in a presentation entitled, "Phase 2 study
of perifosine in patients with metastatic renal cell carcinoma progressing after
prior therapy with both a VEGF Receptor Inhibitor and an mTOR inhibitor." Data
from this study was first presented at the American Society of Clinical Oncology
(ASCO) annual meeting in May 2009. The presentation included results from a
subgroup of patients who failed both a VEGF receptor inhibitor (sunitinib or
sorafenib) and an mTOR inhibitor (temsirolimus or everolimus). Evaluable
patients (n=16) were defined as those who had greater than 7 days of treatment
(2 additional patients withdrew consent within 7 days). Patients received 100 mg
of perifosine daily until progression or unacceptable toxicity. The primary
endpoint of this study was clinical benefit, defined as response rate (CR / PR
by RECIST) or percent of patients progression-free for at least 3 months. Median
progression-free survival (PFS) and overall survival were also analyzed for
efficacy. Safety was a secondary endpoint. Perifosine was well-tolerated with
the most common adverse events being gastrointestinal discomfort and fatigue.
Best response to single agent perifosine was as follows:
N
|
PR
N
(%)
|
SD
> 12 wks
N
(%)
|
PD
< 12 wks
N
(%)
|
Median
PFS
|
Overall
Survival
|
16
|
1
(6%)
|
7
(44%)
|
8
(50%)
|
16
wks [95% CI (11.7, 28)]
|
Not
Reached
(14/16
alive) at 22+ months
|
PR:
Partial response; SD: Stable disease; PD: Progressive
disease
22
Other
Indications
In July
2009, we announced the initiation of a Phase 1 clinical study to evaluate
KRX-0401 (perifosine) as a single agent treatment for recurrent solid tumors in
pediatric patients. This Phase 1 study is now open for enrollment at Memorial
Sloan-Kettering Cancer Center in New York City. The study is being fully funded
by an external grant provided by a private organization.
In
October 2009, we announced the initiation of a Phase 2 clinical study to
evaluate KRX-0401 (perifosine) as a single agent treatment for relapsed or
refractory Chronic Lymphocytic Leukemia (CLL) and Small Lymphocytic Lymphoma
(SLL). This Phase 2 study is currently open for enrollment at Duke University
and is being externally funded.
Zerenex
(ferric citrate)
Effective
on June 8, 2009, we entered into an Amended and Restated Sublicense Agreement
(the “Revised Agreement”) with JT and Torii. The parties had originally
entered into a sublicense agreement on September 26, 2007. As a result of the
Revised Agreement, we no longer have significant on-going involvement or
obligations under the sublicense agreement. As such, in accordance with our
revenue recognition policies, all deferred revenue balances pertaining to this
sublicense agreement have been recognized as revenue in the nine months ended
September 30, 2009.
In June
2009, we announced results of the U.S. Phase 2 study of Zerenex for the
treatment of elevated serum phosphorous levels, or hyperphosphatemia, in
patients with end-stage renal disease (ESRD) on thrice weekly
hemodialysis. The study was a multicenter, open-label clinical trial,
which enrolled 55 patients. The primary objective of this study was to assess
the tolerability and safety of Zerenex with doses ranging from approximately 1
gram per day to 12 grams per day.
The top
line efficacy and safety results from this Phase 2 study were submitted to the
FDA, and discussed at a recent face to face meeting with the Division of
Cardiovascular and Renal Drug Products. The FDA also reviewed the final reports
for the 90-day rat and 16-week canine toxicology studies. The FDA indicated that
the results of the Phase 2 study and the toxicology studies were adequate to
support entry into a Phase 3 program. Keryx is in the process of finalizing the
Phase 3 program in consultation with the FDA.
The FDA
also reviewed the protocols for the ongoing chronic toxicology studies (6-month
rat and 42-week canine), which can be completed after the U.S. Phase 3 program
has begun.
In the
first part of the Phase 2 study, 34 ESRD patients who were taking approximately
6 to 15 tablets/capsules per day of calcium acetate, calcium carbonate,
lanthanum carbonate or sevelamer hydrochloride or any combination of these
agents were eligible for enrollment and immediately switched to a starting dose
of 4.5 grams per day of Zerenex. In the second part of the study, 21 ESRD
patients who were taking greater than 12 tablets/capsules per day of calcium
acetate, calcium carbonate, lanthanum carbonate or sevelamer hydrochloride or
any combination of these agents were eligible for enrollment and immediately
switched to a starting dose of 6.0 grams per day of Zerenex. Patients
were treated with Zerenex for four weeks and were titrated weekly to achieve and
maintain normal serum phosphorus levels, between 3.5 to 5.5 mg/dL, the
therapeutic goal.
Although
designed primarily as a safety study, key efficacy parameters were evaluated,
with results as follows:
At
baseline:
|
·
|
Baseline
mean +/- standard deviation (SD) serum phosphorus was approximately 5.9
+/- 1.5 mg/dL immediately prior to the switch to
Zerenex;
|
|
·
|
The
average daily dose of PhosLo(R)
(calcium acetate) was 6.9 grams per day and for Renagel(R)
(sevelamer hydrochloride) was 9.9 grams per day, for patients not on
combination therapy prior to the switch to
Zerenex.
|
Following the treatment
period (four weeks on Zerenex):
|
·
|
At
the end of the treatment period (after four weeks on Zerenex) the mean +/-
SD serum phosphorus was approximately 5.4 +/- 1.3
mg/dL;
|
|
·
|
The
average daily dose of Zerenex at the end of four weeks of treatment was
6.8 grams per day;
|
23
In the
subset of 29 patients who had a serum phosphorus above the normal range (>
5.5 mg/dL) at baseline, immediately prior to the switch to Zerenex, the mean
(SD) baseline serum phosphorus was 7.0 (1.1) mg/dL, and at the end of treatment
with Zerenex the mean (SD) serum phosphorus was 5.6 (1.6) mg/dL;
In the
Phase 2 study, there were four serious adverse events which were deemed
unrelated to Zerenex. Darkened stool was reported in the study and
was associated with the presence of iron in the gastrointestinal tract. With the
exception of the reporting of darkened stool as an (asymptomatic) adverse event,
the gastrointestinal adverse event profile was similar in incidence to that
reported for other currently marketed phosphate binders. There was no
increase in serum calcium noted in the study.
On
September 23, 2009, we announced results of the Open Label Extension (OLE) trial
of Zerenex for the treatment of elevated serum phosphorous levels, or
hyperphosphatemia, in patients with ESRD on dialysis. The OLE trial, conducted
in Taiwan, enrolled 29 of the 37 Taiwanese patients that had completed the
randomized, multi-center, multi-national (United States and Taiwan) dose-ranging
Phase 2 study. This OLE represents the first trial to examine the long-term
safety and efficacy of Zerenex as a phosphate binder. The treatment period in
all previous Zerenex Phase 2 clinical trials did not exceed 28
days.
The OLE
trial provided for a daily dose, ranging from 2 to 6 g/day of Zerenex, for a
period of up to one year following completion of the 28-day, dose-ranging Phase
2 study. The average duration of the patients' participation in the OLE trial
was 306 +/- 85 days.
Data from
the OLE trial indicate that the mean serum phosphorus level throughout the trial
was 5.22 +/- 0.18 mg/dL, and the mean product of calcium times phosphate (CaxP)
was 49.06 +/- 2.15 mg(2)/dL(2), both within the normal range as recommended by
the KDOQI guidelines. In addition, during the OLE trial, the administration of
IV iron as a supplement was withheld in 8 patients (27.6%) for periods ranging
from 3 to 6 months and the administration of EPO was withheld in 8 patients
(27.6%) for short periods because the hemoglobin, hematocrit, and iron
parameters were within normal clinical ranges as assessed by the investigator.
There were no signs of potential iron overload in the study patients, and there
were no Zerenex-related serious adverse events as noted by either the patient or
investigator.
We are in
the process of finalizing the design for our Phase 3 program for Zerenex in
consultation with the FDA.
General
Corporate
On
September 30, 2009, we completed a registered direct offering to certain
institutional investors of 8,000,000 shares of common stock and warrants to
purchase up to a total of 2,800,000 shares of common stock to such investors for
gross proceeds of approximately $20 million. The common stock and warrants were
sold in units, with each unit consisting of one share of common stock and a
warrant to purchase 0.35 of a share of common stock. The purchase price per unit
was $2.50. Subject to certain ownership limitations, the warrants are
exercisable at any time on or after the initial issue date and on or prior to
October 1, 2010, at an exercise price of $2.65 per warrant share. In addition,
the placement agent received a warrant to purchase up to 108,000 shares of our
common stock at an exercise price of $3.125 per warrant share, exercisable at
any time on or prior to October 1, 2010. Total proceeds to us from this public
offering were approximately $18.4 million, net of offering costs of
approximately $1.6 million. The shares and warrants were sold under a shelf
registration statement on Form S-3 (File No. 333-161607) filed with the
Securities and Exchange Commission, or SEC, on August 28, 2009, and declared
effective by the SEC on September 23, 2009. The registration statement provides
for the offering of up to $40 million of our common stock and
warrants.
Subsequent
to the registered direct offering that was completed in September 2009, there
remains approximately $12.2 million of our common stock and warrants available
for sale on the shelf registration statement.
On
September 14, 2009, we entered into an employment agreement with Ron Bentsur,
our Chief Executive Officer. The full agreement and the terms of the
agreement were filed on Form 8-K on September 14, 2009. Under the employment
agreement, Mr. Bentsur’s base salary will be equal to $300,000 per year, which
amount will be reviewed annually by the Compensation Committee of the Board of
Directors (the “Compensation Committee”) and may be increased from year to year
or decreased in an amount up to 10% in the aggregate. Mr. Bentsur
also is eligible to receive an annual bonus, not to exceed 75% of his base
salary, if certain performance objectives agreed to by the Compensation
Committee and Mr. Bentsur are met.
24
As an
inducement to his employment, on May 20, 2009, we granted Mr. Bentsur options to
purchase 600,000 shares of our common stock at an exercise price of $0.35, the
fair market value of the stock on the date of grant. The options will vest
in equal annual installments over a four-year period or upon an earlier change
in control of Keryx. The options were granted as an inducement award and
were not issued under our 2007 Incentive Plan. Mr. Bentsur is eligible for
additional stock-based awards under Keryx’s long-term incentive plan, as
determined by the Compensation Committee. In addition, Mr. Bentsur
has the opportunity to earn certain milestone awards as follows:
(1) 100,000
shares of restricted stock will be granted to Mr. Bentsur upon the achievement
of a $1.00 share price of Keryx’s common stock for 120 consecutive days (based
upon the average closing price of our common stock for a 120-day period after
May 20, 2009). Such restricted stock will vest in equal installments over
each of the first three anniversaries of the date of grant provided that Mr.
Bentsur remains an employee of Keryx during such vesting period, or immediately
upon achievement of milestone #2.
(2) 250,000
shares of restricted stock will be granted to Mr. Bentsur upon the
achievement of a $2.50 share price of Keryx’s common stock for 120 consecutive
days (based upon the average closing price of our common stock for a 120-day
period after May 20, 2009). Such restricted stock will vest in equal
installments over each of the first three anniversaries of the date of grant
provided that Mr. Bentsur remains an employee of Keryx during such vesting
period.
(3) 400,000
shares of restricted stock will be granted to Mr. Bentsur upon the first to
occur of (a) Keryx’s filing of an accepted new drug application (an “NDA”) with
the U.S. Food and Drug Administration for Zerenex or Perifosine, or (b) Keryx’s
outlicensing of Zerenex or Perifosine in the U.S. to a third
party. Such restricted stock will vest in equal installments over
each of the first three anniversaries of the date of grant provided that Mr.
Bentsur remains an employee of Keryx during such vesting period. This
milestone #3 may be achieved with respect to NDAs or qualifying outlicenses for
multiple indications of the same product, but not for subsequent outlicenses of
the product relating to an indication for which the milestone is met. Upon
achievement of milestone #4 below with respect to a product, the restricted
stock granted for one indication of the product under milestone #3 above will
vest in full.
(4) 500,000
shares of restricted stock will be granted to Mr. Bentsur, upon the first
to occur of (a) Keryx’s first commercial sale of Zerenex or Perifosine in the
U.S. off an approved NDA, (b) Keryx’s receipt of the first royalty upon the
commercial sale of Zerenex or Perifosine in the U.S. by a partner to whom Keryx
has sold exclusive or non-exclusive commercial rights, or (c) Keryx’s complete
outlicensing of the entire product rights of Zerenex or Perifosine in the
U.S. Such restricted stock will vest on the first anniversary of the
date of grant provided that Mr. Bentsur remains an employee of Keryx during such
vesting period.
(5) 100,000
shares of restricted stock will be granted to Mr. Bentsur upon each event
of Keryx’s outlicensing Zerenex in a foreign market, other than Japan, resulting
in a greater than $10 million non-refundable cash payment to Keryx with a gross
deal value to Keryx of at least $50 million. Such restricted stock
will vest in equal installments over each of the first three anniversaries of
the date of grant provided that Mr. Bentsur remains an employee of Keryx during
such vesting period.
Our major
sources of working capital have been proceeds from various private placements of
equity securities, option and warrant exercises, public offerings of our common
stock, interest income, and, beginning in 2007, from the upfront and milestone
payments from our Sublicense Agreement with JT and Torii and miscellaneous
payments from our other prior licensing activities. We have devoted
substantially all of our efforts to the identification, in-licensing,
development and partnering of drug candidates. We have incurred negative cash
flow from operations each year since our inception. We anticipate incurring
negative cash flows from operating activities for the foreseeable future. We
have spent, and expect to continue to spend, substantial amounts in connection
with implementing our business strategy, including our product development
efforts, our clinical trials, partnership and licensing
activities.
25
Our
license revenues currently consist of license fees and milestone payments
arising from our agreement with JT and Torii. We recognize upfront license fee
revenues ratably over the estimated period which we will have certain
significant ongoing responsibilities under the sublicense agreement, with
unamortized amounts recorded as deferred revenue. We recognize milestone
payments as revenue upon the achievement of specified milestones only if
(1) the milestone payment is non-refundable, (2) substantive effort is
involved in achieving the milestone, (3) the amount of the milestone is
reasonable in relation to the effort expended or the risk associated with
achievement of the milestone, and (4) the milestone is at risk for both
parties. If any of these conditions are not met, we defer the milestone payment
and recognize it as revenue over the estimated period of performance under the
contract as we complete our performance obligations.
Our
service revenues consist entirely of clinical trial management and site
recruitment services. Revenues from providing these services are recognized as
the services are provided. Deferred revenue is recorded when we receive a
deposit or prepayment for services to be performed at a later date.
Our other
revenues consist of fees and payments arising from technology transfer,
termination and settlement agreements related to our prior license
agreements.
We have
not earned any revenues from the commercial sale of any of our drug
candidates.
Our
research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
clinical and laboratory development, facilities-related and other expenses
relating to the design, development, manufacture, testing, and enhancement of
our drug candidates and technologies, as well as expenses related to
in-licensing of new product candidates. We expense our research and development
costs as they are incurred.
Our
general and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including investor
relations, legal activities and facilities-related expenses.
Our
results of operations include non-cash compensation expense as a result of the
grants of stock options, restricted stock and warrants. Compensation expense for
awards of options and restricted stock granted to employees and directors
represents the fair value of the award recorded over the respective vesting
periods of the individual awards. The expense is included in the respective
categories of expense in the consolidated statements of operations. We expect to
continue to incur significant non-cash compensation expenses.
For
awards of options and warrants to consultants and other third-parties,
compensation expense is determined at the “measurement date.” The expense is
recognized over the vesting period of the award. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. We record
compensation expense based on the fair value of the award at the reporting date.
The awards to consultants and other third-parties are then revalued, or the
total compensation is recalculated based on the then current fair value, at each
subsequent reporting date.
In
addition, certain options and restricted stock issued to employees, consultants
and other third-parties vest upon the achievement of certain milestones,
therefore the total expense is uncertain until the milestone is
met.
Our
ongoing clinical trials will be lengthy and expensive. Even if these trials show
that our drug candidates are effective in treating certain indications, there is
no guarantee that we will be able to record commercial sales of any of our drug
candidates in the near future. In addition, we expect losses to continue as we
continue to fund in-licensing and development of new drug candidates. As we
continue our development efforts, we may enter into additional third-party
collaborative agreements and may incur additional expenses, such as licensing
fees and milestone payments. In addition, we may need to establish the
commercial infrastructure required to manufacture, market and sell our drug
candidates following approval, if any, by the FDA, which would result in us
incurring additional expenses. As a result, our quarterly results may fluctuate
and a quarter-by-quarter comparison of our operating results may not be a
meaningful indication of our future performance.
26
RESULTS
OF OPERATIONS
Three
months ended September 30, 2009 and September 30, 2008
License Revenue. License
revenue decreased by $327,000 to $0 for the three months ended September 30,
2009, as compared to $327,000 for the three months ended September 30, 2008. The
decrease in license revenue during the three months ended September 30, 2009,
was due to the recognition in the second quarter of 2009 of the remaining
deferred revenue related to the JT and Torii sublicense agreement originally
signed in September 2007, and amended and restated on June 8, 2009. The Amended
and Restated Sublicense Agreement, among other things, provided for the
elimination of all significant on-going obligations under the sublicense
agreement. We do not expect to recognize additional license revenue
during the remainder of 2009.
Service Revenue. There was no
service revenue in the three months ended September 30, 2009, as compared to
service revenue of $41,000 for the three months ended September 30, 2008. We do
not expect our service revenue to have a material impact on our financial
results during the remainder of 2009.
Other Revenue. Other revenue
of $3,500,000 for the three months ended September 30, 2009 was due to the
settlement of our dispute with Alfa Wassermann S.p.A., in July 2009, over issues
arising from the terminated license agreement for Sulonex (sulodexide). There
was no other revenue for the three months ended September 30, 2008. We do not
expect to recognize additional other revenue during the remainder of
2009.
Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants increased by $54,000 to $388,000
for the three months ended September 30, 2009, as compared to $334,000 for the
three months ended September 30, 2008. The increase in non-cash compensation
expense in the three months ended September 30, 2009, as compared to September
30, 2008, was primarily related to grants of equity awards to research and
development personnel and the recording of the related fair value of the awards
over the respective vesting periods of the individual awards.
Other Research and Development
Expenses. Other research and development expenses decreased by $681,000
to $1,527,000 for the three months ended September 30, 2009, as compared to
$2,208,000 for the three months ended September 30, 2008. The decrease in other
research and development expenses was due primarily to a $1,006,000 reduction in
research and development expenses related to KRX-0401, primarily due to
reductions in headcount and other research and development expenses related to
this development program, partially offset by a $206,000 increase in research
and development expenses related to Zerenex. We expect our other research and
development costs to increase for the remainder of 2009 due to the preparation
for, and initiation of, our expected Phase 3 clinical programs for our drug
candidates.
Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling, general and administrative) related to equity incentive grants
decreased by $1,412,000 to $250,000 for the three months ended September 30,
2009, as compared to an expense of $1,662,000 for the three months ended
September 30, 2008. The decrease was primarily due to a $1,380,000 decrease in
non-cash compensation related to equity incentive grants previously issued to
Mr. Weiss, our former chief executive officer, who was terminated on April 23,
2009.
Other Selling General and
Administrative Expenses. Other selling, general and administrative
expenses decreased by $1,380,000 to $904,000 for the three months ended
September 30, 2009, as compared to an expense of $2,284,000 for the three months
ended September 30, 2008. The decrease was due primarily to a one-time premium
payment for insurance of $1,151,000 in the three months ended September 30,
2008. We expect our other selling, general and administrative expenses in the
fourth quarter of 2009 to remain at a comparable level to those reported in the
third quarter of 2009.
Interest and Other Income (Expense),
Net. Interest and other income (expense), net, increased by $751,000 to
income of $129,000 for the three months ended September 30, 2009, as compared to
an expense of $622,000 for the three months ended September 30, 2008. The three
months ended September 30, 2008, includes a $912,000 impairment charge related
to our investments in auction rate securities. Interest income related to our
investments decreased in the three months ended September 30, 2009, as compared
to the three months ended September 30, 2008, due a lower level of invested
funds and lower interest rates as compared to the comparable period last
year.
27
Nine
months ended September 30, 2009 and September 30, 2008
License Revenue. License
revenue increased by $20,763,000 to $21,616,000 for the nine months ended
September 30, 2009, as compared to $853,000 for the nine months ended September
30, 2008. The increase in license revenue during the nine months ended September
30, 2009, was primarily due to the recognition of all remaining deferred revenue
related to the JT and Torii sublicense agreement originally signed in September
2007, and amended and restated on June 8, 2009, as discussed above. In addition,
during the nine months ended September 30, 2009, we recognized $3.0 million in
license revenue from a milestone received from JT and Torii due to their
initiation of a Phase 2 clinical study of Zerenex in Japan. We do not
expect to recognize additional license revenue during the remainder of
2009.
Service Revenue. Service
revenue decreased by $100,000 to $3,000 for the nine months ended September 30,
2009, as compared to service revenue of $103,000 for the nine months ended
September 30, 2008. We do not expect our service revenue to have a material
impact on our financial results during the remainder of 2009.
Other Revenue. Other revenue
for the nine months ended September 30, 2009 was $3,575,000, of which $3,500,000
was due to the settlement of our dispute with Alfa Wassermann, in July 2009,
over issues arising from the terminated license agreement for Sulonex
(sulodexide) and $75,000 was related to a payment earned in June 2009 from a
December 2008 license termination agreement for KRX-0501. Payments associated
with this license termination agreement are recognized as earned since we have
no on-going responsibilities under the terminated license agreement or the
termination agreement. There was no other revenue for the nine months ended
September 30, 2008. We do not expect to recognize additional other revenue
during the remainder of 2009.
Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants increased by $1,345,000 to
$950,000 for the nine months ended September 30, 2009, as compared to a credit
of $395,000 for the nine months ended September 30, 2008. Non-cash compensation
expense in the nine months ended September 30, 2008 included a $1,233,000 credit
to expense related to stock options and restricted stock issued to our former
President, who was terminated as part of the 2008 Restructuring.
Other Research and Development
Expenses. Other research and development expenses decreased by
$32,920,000 to $4,357,000 for the nine months ended September 30, 2009, as
compared to $37,277,000 for the nine months ended September 30, 2008. The
decrease in other research and development expenses was due primarily to a
$26,909,000 reduction in research and development expenses related to the
cessation of the development of Sulonex in March 2008. Included in the research
and development expenses related to Sulonex for the nine months ended September
30, 2008 are an $11,037,000 impairment charge related to the write-down of the
assets of the Sulonex manufacturing suite to their fair value following the
cessation of our development of Sulonex, and a $2,063,000 expense for costs
relating to the required restoration of the leased manufacturing facility to its
original condition. For more information regarding these expenses please see
“Note 4 - Restructuring” above. In addition to the $26,909,000 decrease in other
research and development expenses related to Sulonex discussed above, there was
a decrease of $5,432,000 in research and development expenses related to
KRX-0401, primarily due to reductions in headcount and other research and
development expenses related to the development program. We expect our other
research and development costs to increase for the remainder of 2009 due to the
preparation for, and initiation of, our expected Phase 3 clinical programs for
our drug candidates.
Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling, general and administrative) related to equity incentive grants
decreased by $3,498,000 to $1,648,000 for the nine months ended September 30,
2009, as compared to an expense of $5,146,000 for the nine months ended
September 30, 2008. The decrease was primarily due to a $3,906,000 decrease in
non-cash compensation related to equity incentive grants previously issued to
Mr. Weiss, our former chief executive officer, who was terminated on April 23,
2009, offset by $660,000 in non-cash compensation associated with the equity
modifications of Mr. Weiss’ outstanding stock options and shares of restricted
stock.
Other Selling General and
Administrative Expenses. Other selling, general and administrative
expenses decreased by $2,776,000 to $3,473,000 for the nine months ended
September 30, 2009, as compared to an expense of $6,249,000 for the nine months
ended September 30, 2008. The decrease was due primarily to a one-time premium
payment for insurance of $1,151,000 in the nine months ended September 30, 2008
and a reduction of expenses in the nine months ended September 30, 2009, as
compared to the comparable period last year as a result of the 2008
Restructuring, offset by approximately $551,000 of expense in the nine months
ended September 30, 2009, for severance and notice pay related to the
termination of our former chief executive officer on April 23, 2009. We expect
our other selling, general and administrative expenses in the fourth quarter of
2009 to remain at a comparable level to those reported in the third quarter of
2009.
28
Interest and Other Income (Expense),
Net. Interest and other income (expense), net, increased by $1,928,000 to
income of $377,000 for the nine months ended September 30, 2009, as compared to
an expense of $1,551,000 for the nine months ended September 30, 2008. The nine
months ended September 30, 2008, includes $2,787,000 of impairment charges
related to our investments in auction rate securities. Interest income related
to our investments decreased in the nine months ended September 30, 2009, as
compared to the nine months ended September 30, 2008, due a lower level of
invested funds and lower interest rates as compared to the comparable period
last year.
LIQUIDITY
AND CAPITAL RESOURCES
We have
financed our operations from inception primarily through public offerings of our
common stock, various private placement transactions, option and warrant
exercises, interest income, and, beginning in 2007, from the upfront and
milestone payments from our sublicense agreement with JT and Torii and
miscellaneous payments from our other prior licensing activities.
On
September 30, 2009, we completed a registered direct offering to certain
investors of 8,000,000 shares of our common stock and warrants to purchase up to
a total of 2,800,000 shares of our common stock for gross proceeds of
approximately $20 million. The common stock and warrants were sold in units,
with each unit consisting of one share of common stock and a warrant to purchase
0.35 of a share of common stock. The purchase price per unit was $2.50. Subject
to certain ownership limitations, the warrants are exercisable at any time on or
after the initial issue date and on or prior to October 1, 2010, at an exercise
price of $2.65 per warrant share. In addition, the placement agent received a
warrant to purchase up to 108,000 shares of our common stock at an exercise
price of $3.125 per warrant share, exercisable at any time on or prior to
October 1, 2010. Total proceeds to us from this public offering were
approximately $18.4 million, net of offering costs of approximately $1.6
million. The shares and warrants were sold under a shelf registration statement
on Form S-3 (File No. 333-161607) filed with the SEC on August 28, 2009, and
declared effective by the SEC on September 23, 2009. The registration statement
provides for the offering of up to $40 million of our common stock and warrants.
Subsequent to this registered direct offering, there remains approximately $12.2
million of our common stock and warrants available for sale under the shelf
registration statement. We may offer the remaining securities under our shelf
registration from time to time in response to market conditions or other
circumstances if we believe such a plan of financing is in our best interests
and the best interests of our stockholders. We believe that the shelf
registration provides us with the flexibility to raise additional capital to
finance our operations as needed.
As of
September 30, 2009, we had $33.7 million in cash, cash equivalents, interest
receivable, and short-term investment securities (before disbursement of
approximately $1.6 million of offering costs related to our registered direct
offering discussed above), an increase of $18.2 million from December 31, 2008.
Approximately $1.6 million of offering costs were disbursed subsequent to
September 30, 2009. In addition, at September 30, 2009, we had $7.3 million in
non-current auction rate securities, as discussed below. We currently anticipate
that our cash, cash equivalents and investment securities as of September 30,
2009, exclusive of our holdings in auction rate securities, are sufficient to
meet our anticipated working capital needs and fund our business plan for at
least the next 24 months.
Cash used
in operating activities in continuing operations for the nine months ended
September 30, 2009 was $1.8 million, as compared to $35.3 million for the nine
months ended September 30, 2008. This decrease in cash used in operating
activities was due primarily to the cessation of the Sulonex program in March
2008, the 2008 Restructuring, a $3.0 million non-refundable milestone payment
received from JT and Torii associated with their initiation of a Phase 2 trial
for Zerenex in Japan, and $2.75 million of the $3.5 million settlement award
received from Alfa Wassermann.
For the
nine months ended September 30, 2009, net cash provided by investing activities
of $2.3 million was primarily the result of proceeds from the maturity of our
investments in short-term securities. For the nine months ended September 30,
2009, net cash provided by financing activities totaled $20.0 million and was
primarily due to our registered direct offering of common stock and warrants
completed in September 2009.
29
As of
September 30, 2009, $7.3 million of our investment securities were auction rate
securities and represent interests in student loan-backed securities. The
auction rate securities are recorded at their fair value and classified as
long-term investments. Auction rate securities are structured to provide
liquidity through a Dutch auction process that resets the applicable interest
rate at pre-determined calendar intervals, generally every 28 days. This
mechanism has historically allowed existing investors either to rollover their
holdings, whereby they would continue to own their respective securities, or
liquidate their holdings by selling such securities at par. This auction process
has historically provided a liquid market for these securities; however, the
uncertainties in the credit markets have affected all of our holdings in auction
rate securities. Since February 2008, the auctions for our auction rate
securities have not had sufficient buyers to cover investors’ sell orders,
resulting in unsuccessful auctions. When an auction is unsuccessful, the
interest rate is re-set to a level pre-determined by the loan documents and
remains in effect until the next auction date, at which time the process
repeats. While all but one of these investments were rated A or higher at
September 30, 2009, we are uncertain as to when, or if, the liquidity issues
relating to these investments will improve. We assessed the fair value of our
auction rate securities portfolio. As a result of this valuation process, we
recorded impairment charges totaling $0.1 and $2.8 million during the nine
months ended September 30, 2009 and 2008, respectively, for other-than-temporary
declines in the value of our auction rate securities. These other-than-temporary
impairment charges were included in interest and other income (expense), net.
For the three and nine months ended September 30, 2009, we reported other
comprehensive income of $0.3 million for a temporary unrealized gain related to
the increase in estimated fair value for our auction rate securities. The
estimated fair value of our auction rate securities ($10.0 million par value) is
$7.3 million at September 30, 2009.
In
October 2009, we sold three of our auction rate security investments. The
securities had a combined par value of $5.0 million and a combined adjusted book
value of $3.8 million. Proceeds to us from the sale of these securities were
$3.9 million, representing a gain of $0.1 million over adjusted book value. We
will continue to attempt to sell our auction rate securities until the auctions
are successful; however, there is no assurance as to when, or if, the market for
auction rate securities will stabilize. The fair value of our auction rate
securities could change significantly based on market conditions and continued
uncertainties in the credit markets. If these uncertainties continue or if these
securities experience credit rating downgrades, we may incur additional
impairment charges with respect to our auction rate securities portfolio, which
could negatively affect our financial condition, cash flow and reported
earnings, and the lack of liquidity of our auction rate securities could have a
material impact on our ability to fund our operations.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities and related disclosure of
contingent assets and liabilities at the date of our financial statements and
the reported amounts of revenues and expenses during the applicable period.
Actual results may differ from these estimates under different assumptions or
conditions.
We define
critical accounting policies as those that are reflective of significant
judgments and uncertainties and which may potentially result in materially
different results under different assumptions and conditions. In applying these
critical accounting policies, our management uses its judgment to determine the
appropriate assumptions to be used in making certain estimates. These estimates
are subject to an inherent degree of uncertainty. Our critical accounting
policies include the following:
Stock Compensation. We have
granted stock options and restricted stock to employees, directors and
consultants, as well as warrants to other third parties. For employee and
director grants, the value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model. The Black-Scholes model
takes into account volatility in the price of our stock, the risk-free interest
rate, the estimated life of the option, the closing market price of our stock
and the exercise price. We base our estimates of our stock price volatility on
the historical volatility of our common stock and our assessment of future
volatility; however, these estimates are neither predictive nor indicative of
the future performance of our stock. For purposes of the calculation, we assumed
that no dividends would be paid during the life of the options and warrants. The
estimates utilized in the Black-Scholes calculation involve inherent
uncertainties and the application of management judgment. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for
those equity awards expected to vest. As a result, if other assumptions had been
used, our recorded stock-based compensation expense could have been materially
different from that reported. In addition, because some of the
options and warrants issued to employees, consultants and other third-parties
vest upon the achievement of certain milestones, the total expense is
uncertain.
30
Total
compensation expense for options and restricted stock issued to consultants is
determined at the “measurement date.” The expense is recognized over the vesting
period for the options and restricted stock. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. We record
stock-based compensation expense based on the fair value of the equity awards at
the reporting date. These equity awards are then revalued, or the total
compensation is recalculated based on the then current fair value, at each
subsequent reporting date. This results in a change to the amount previously
recorded in respect of the equity award grant, and additional expense or a
reversal of expense may be recorded in subsequent periods based on changes in
the assumptions used to calculate fair value, such as changes in market price,
until the measurement date is reached and the compensation expense is
finalized.
Accruals for Clinical Research
Organization and Clinical Site Costs. We make estimates of
costs incurred in relation to external clinical research organizations, or CROs,
and clinical site costs. We analyze the progress of clinical trials, including
levels of patient enrollment, invoices received and contracted costs when
evaluating the adequacy of the amount expensed and the related prepaid asset and
accrued liability. Significant judgments and estimates must be made and used in
determining the accrued balance and expense in any accounting period. In
addition, administrative costs related to external CROs are recognized on a
straight-line basis over the estimated contractual period. With respect to
clinical site costs, the financial terms of these agreements are subject to
negotiation and vary from contract to contract. Payments under these contracts
may be uneven, and depend on factors such as the achievement of certain events,
the successful recruitment of patients, the completion of portions of the
clinical trial or similar conditions. The objective of our policy is to match
the recording of expenses in our financial statements to the actual services
received and efforts expended. As such, expense accruals related to clinical
site costs are recognized based on our estimate of the degree of completion of
the event or events specified in the specific clinical study or trial
contract.
Revenue Recognition. We
recognize license revenue in accordance with the revenue recognition guidance of
the Codification. We analyze each element of our licensing agreement to
determine the appropriate revenue recognition. The terms of the license
agreement may include payment to us of non-refundable up-front license fees,
milestone payments if specified objectives are achieved, and/or royalties on
product sales. We recognize revenue from upfront payments over the period of
significant involvement under the related agreements unless the fee is in
exchange for products delivered or services rendered that represent the
culmination of a separate earnings process and no further performance obligation
exists under the contract. We recognize milestone payments as revenue upon the
achievement of specified milestones only if (1) the milestone payment is
non-refundable, (2) substantive effort is involved in achieving the
milestone, (3) the amount of the milestone is reasonable in relation to the
effort expended or the risk associated with achievement of the milestone, and
(4) the milestone is at risk for both parties. If any of these conditions
are not met, we defer the milestone payment and recognize it as revenue over the
estimated period of performance under the contract.
Prior to
discontinuing the sale of our diagnostic product, we had recognized diagnostic
revenue when persuasive evidence of an arrangement existed, the product had been
shipped, title and risk of loss had passed to the customer and collection from
the customer was reasonably assured. Diagnostic revenue is included in
discontinued operations.
We
recognize service revenues as the services are provided. Deferred revenue is
recorded when we receive a deposit or prepayment for services to be performed at
a later date.
We
recognize other revenues at the time such fees and payments are
earned.
Accounting Related to
Goodwill. As of September 30, 2009, there was approximately $3.2 million
of goodwill on our consolidated balance sheet. Goodwill is reviewed for
impairment annually, or when events arise that could indicate that an impairment
exists. We test for goodwill impairment using a two-step process. The first step
compares the fair value of the reporting unit with the unit's carrying value,
including goodwill. When the carrying value of the reporting unit is greater
than fair value, the unit’s goodwill may be impaired, and the second step must
be completed to measure the amount of the goodwill impairment charge, if any. In
the second step, the implied fair value of the reporting unit’s goodwill is
compared with the carrying amount of the unit’s goodwill. If the carrying amount
is greater than the implied fair value, the carrying value of the goodwill must
be written down to its implied fair value.
31
We are
required to perform impairment tests annually, at December 31, and whenever
events or changes in circumstances suggest that the carrying value of an asset
may not be recoverable. For all of our acquisitions, various analyses,
assumptions and estimates were made at the time of each acquisition that were
used to determine the valuation of goodwill and intangibles. In future years,
the possibility exists that changes in forecasts and estimates from those used
at the acquisition date could result in impairment indicators.
Impairment of Long-Lived
Assets. We recognize an impairment loss when circumstances
indicate that the carrying value of long-lived tangible and intangible assets
with finite lives may not be recoverable. Management’s policy in determining
whether an impairment indicator exists, a triggering event, comprises measurable
operating performance criteria as well as qualitative measures. If an analysis
is necessitated by the occurrence of a triggering event, we make certain
assumptions in determining the impairment amount. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future cash flows expected to be generated by the asset or used in its disposal.
If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the excess of the carrying value of the
asset above its fair value.
We had
entered into a relationship with SPL, a U.S.-based contract manufacturer, for
Sulonex to build a larger scale manufacturing suite within their current
facility, which they would operate on our behalf. We spent approximately $11.3
million in capital expenditures building the suite. With the cessation of our
development of Sulonex in March 2008, we recognized an impairment charge of
$11.0 million, which is included in other research and development expenses in
the nine months ended September 30, 2008, to write the assets down to their fair
value of $300,000, the amount for which the assets were sold during June 30,
2008.
Impairment of Investment
Securities. As of September 30, 2009, $7.3 million of our investment
securities were auction rate securities and represent interests in student
loan-backed securities. The auction rate securities are recorded at their fair
value and classified as long-term investments. The uncertainties in the credit
markets have affected all of our holdings in auction rate securities. Since
February 2008, the auctions for our auction rate securities have not had
sufficient buyers to cover investors’ sell orders, resulting in unsuccessful
auctions. When an auction is unsuccessful, the interest rate is re-set to a
level pre-determined by the loan documents and remains in effect until the next
auction date, at which time the process repeats. While all but one of these
investments were rated A or higher at September 30, 2009, we are uncertain as to
when, or if, the liquidity issues relating to these investments will improve. We
assessed the fair value of our auction rate securities portfolio. As a result of
this valuation process, as described below, we recorded impairment charges
totaling $0.1 and $2.8 million during the nine months ended September 30, 2009
and 2008, respectively, for other-than-temporary declines in the value of our
auction rate securities. These other-than-temporary impairment charges were
included in interest and other income (expense), net. For the nine months ended
September 30, 2009, we reported comprehensive income of $0.3 million related to
temporary unrealized gain on our auction rate securities. The estimated fair
value of our remaining auction rate securities ($10.0 million par value) is $7.3
million at September 30, 2009.
The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value of our auction rate securities. In addition, the
estimated fair value of the auction rates securities may differ from the values
that would have been used had a ready market existed, and the differences could
be material to the consolidated financial statements.
The fair
value of our auction rate securities could change significantly based on market
conditions and continued uncertainties in the credit markets. If these
uncertainties continue or if these securities experience credit rating
downgrades, we may incur additional impairment charges with respect to our
auction rate securities portfolio. We continue to monitor the fair value of our
auction rate securities and relevant market conditions and will recognize
additional impairment charges if future circumstances warrant such
charges.
32
We review
investment securities for impairment and to determine the classification of the
impairment as temporary or other-than-temporary. Losses are recognized in our
consolidated statement of operations when a decline in fair value is determined
to be other-than-temporary. We review our investments on an ongoing basis for
indications of possible impairment. Once identified, the determination of
whether the impairment is temporary or other-than-temporary requires significant
judgment. The primary factors we consider in classifying an impairment include
the extent and time the fair value of each investment has been below cost and
our ability to hold such investment to maturity.
Accounting For Income Taxes.
In preparing our consolidated financial statements, we are required to estimate
our income taxes in each of the jurisdictions in which we operate. This process
involves management estimation of our actual current tax exposure and assessment
of temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the consolidated statement
of operations. Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. We have fully
offset our deferred tax assets with a valuation allowance. Our lack of earnings
history and the uncertainty surrounding our ability to generate taxable income
prior to the reversal or expiration of such deferred tax assets were the primary
factors considered by management in maintaining the valuation
allowance.
RECENTLY
ISSUED ACCOUNTING STANDARDS
On
September 30, 2009, we adopted changes issued by the Financial Accounting
Standards Board, or FASB, to the authoritative hierarchy of GAAP. These changes
establish the FASB Accounting Standards Codification, or Codification, as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates, or ASUs. ASUs will not
be authoritative in their own right as they will only serve to update the
Codification. These changes and the Codification itself do not change GAAP.
Other than the manner in which new accounting guidance is referenced, the
adoption of these changes had no impact on our consolidated financial
statements.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements. This ASU eliminates the requirement to establish the fair
value of undelivered products and services and instead provides for separate
revenue recognition based upon management’s estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. The ASU also eliminates the use of the residual method
and instead requires an entity to allocate revenue using the relative selling
price method. Additionally, the guidance expands disclosure requirements with
respect to multiple-deliverable revenue arrangements. This ASU is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. We are currently evaluating
the potential impact of this standard on our consolidated financial
statements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
primary objective of our investment activities is to preserve principal while
maximizing our income from investments and minimizing our market risk. We invest
in government and investment-grade corporate debt in accordance with our
investment policy, and also currently have illiquid investments in auction rate
securities. Some of the securities in which we invest have market risk. This
means that a change in prevailing interest rates, and/or credit risk, may cause
the fair value of the investment to fluctuate. For example, if we hold a
security that was issued with a fixed interest rate at the then-prevailing rate
and the prevailing interest rate later rises, the fair value of our investment
will probably decline. As of September 30, 2009, our portfolio of financial
instruments consists of cash equivalents and long-term auction rate securities.
Due to the short-term nature of our money market funds, we believe we have no
material exposure to interest rate risk, and/or credit risk, arising from our
money market funds.
33
As of
September 30, 2009, $7.3 million of our investment securities were auction rate
securities and represent interests in student loan-backed securities. The
auction rate securities are recorded at their fair value and classified as
long-term investments. The uncertainties in the credit markets have affected all
of our holdings in auction rate securities. Since February 2008, the auctions
for our auction rate securities have not had sufficient buyers to cover
investors’ sell orders, resulting in unsuccessful auctions. When an auction is
unsuccessful, the interest rate is re-set to a level pre-determined by the loan
documents and remains in effect until the next auction date, at which time the
process repeats. While all but one of these investments were rated A or higher
at September 30, 2009, we are uncertain as to when, or if, the liquidity issues
relating to these investments will improve. We will continue to attempt to sell
our auction rate securities until the auctions are successful. If uncertainties
in the credit and capital markets continue, these markets deteriorate further or
we experience any credit rating downgrades on the auction rate securities in our
portfolio, we may incur additional impairment charges with respect to our
auction rate securities portfolio, which could negatively affect our financial
condition, cash flow and reported earnings. We continue to monitor the fair
value of our auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges.
The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value. Assuming a 10% adverse change in the fair value of
these securities overall, the fair value of our auction rate securities would
decline approximately $730,000. However, each of our auction rate security
investments have different features and are subject to different risks and
therefore, any market decline would impact these securities to a different
degree. In addition, the estimated fair value of the auction rates
securities may differ from the values that would have been used had a ready
market existed, and the differences could be material to the consolidated
financial statements.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
September 30, 2009, management carried out, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Our disclosure controls and procedures are designed to provide
reasonable assurance that information we are required to disclose in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable rules and forms.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of September 30, 2009, our disclosure controls and
procedures were effective.
Internal
Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2009, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
34
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
We, and
our subsidiaries, are not a party to, and our property is not the subject of,
any material pending legal proceedings, other than as noted below.
We are
presently engaged in an arbitration proceeding with ICON Central Laboratories
(“ICON”), the central laboratory we used for the clinical development of Sulonex
(sulodexide), concerning certain fees related mainly to the provision of storage
services pursuant to a series of service agreements. In March 2008, we
terminated the agreements. ICON is claiming that we owe it $816,647
in unpaid invoices, much of which is made up of charges for annual storage fees
incurred after the effective date of termination of the agreements. We intend to
vigorously defend this proceeding, and have asserted a counterclaim for a refund
of the unused portions of the annual storage fees already paid to
ICON.
In
October 2009, we filed a statement of claim with the Financial Institution
Regulatory Authority (“FINRA”) to commence an arbitration proceeding against an
SEC registered broker-dealer. In this arbitration proceeding, we seek
damages arising from that broker-dealer’s fraudulent, unsuitable and negligent
recommendations and purchases of auction rate securities for our cash management
account. The claim will be determined by a panel of three FINRA
arbitrators. We seek an award of direct, consequential, and punitive
damages, as well as the costs of the arbitration hearing and attorneys’
fees.
ITEM
1A. RISK FACTORS
You
should carefully consider the following risks and uncertainties. If any of the
following occurs, our business, financial condition or operating results could
be materially harmed. These factors could cause the trading price of our common
stock to decline, and you could lose all or part of your
investment.
Risks Related to Our
Business
We
have a limited operating history and have incurred substantial operating losses
since our inception. We expect to continue to incur losses in the future and may
never become profitable.
We have a
limited operating history. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies. In
addition, we have incurred substantial operating losses since our inception and
expect to continue to incur operating losses for the foreseeable future and may
never become profitable. As of September 30, 2009, we had an accumulated deficit
of approximately $316.8 million. As we continue our research and development
efforts, we will incur increasing losses. We may continue to incur substantial
operating losses even if we begin to generate revenues from our drug
candidates.
We have
not yet commercialized any of our drug candidates and cannot be sure we will
ever be able to do so. Even if we commercialize one or more of our drug
candidates, we may not become profitable. Our ability to achieve profitability
depends on a number of factors, including our ability to complete our
development efforts, obtain regulatory approval for our drug candidates,
successfully complete any post-approval regulatory obligations and successfully
commercialize our drug candidates.
Risks Associated with Our
Product Development Efforts
If
we are unable to successfully complete our clinical trial programs, or if such
clinical trials take longer to complete than we project, our ability to execute
our current business strategy will be adversely affected.
Whether
or not and how quickly we complete clinical trials is dependent in part upon the
rate at which we are able to engage clinical trial sites and, thereafter, the
rate of enrollment of patients, and the rate we collect, clean, lock and analyze
the clinical trial database. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials, and whether existing or new drugs are approved for
the indication we are studying. We are aware that other companies are planning
clinical trials that will seek to enroll patients with the same diseases as we
are studying. Certain clinical trials are designed to continue until a
pre-determined number of events have occurred to the patients enrolled. Trials
such as this are subject to delays stemming from patient withdrawal and from
lower than expected event rates and may also incur increased costs if enrollment
is increased in order to achieve the desired number of events. If we experience
delays in identifying and contracting with sites and/or in patient enrollment in
our clinical trial programs, we may incur additional costs and delays in our
development programs, and may not be able to complete our clinical trials on a
cost-effective or timely basis. In addition, conducting multi-national studies
adds another level of complexity and risk as we are subject to events affecting
countries outside the United States. Negative or inconclusive results from
the clinical trials we conduct or adverse medical events could cause us to have
to repeat or terminate the clinical trials. We may change the delivery method or
dosage levels which could affect efficacy results for the drug candidate. For
example, our new one gram caplet formulation for Zerenex has not been tested in
previous clinical trials, and therefore, there is no assurance that this new
formulation will be safe and efficacious in a clinical trial setting.
Accordingly, we may not be able to complete the clinical trials within an
acceptable time frame, if at all.
35
On August
3, 2009, we announced that we had reached agreement with the FDA regarding an
SPA on the design of a Phase 3 trial for KRX-0401 (perifosine) in relapsed or
relapsed / refractory multiple myeloma patients previously treated with
bortezomib (VELCADE®). Many
companies who have been granted an SPA and/or the right to utilize an
accelerated approval approach have failed to obtain approval. Since we are
seeking accelerated approval under an SPA, we may be subject to enhanced
scrutiny. Additionally, even if the primary endpoint is achieved, an SPA does
not guarantee approval. The FDA may raise issues of safety, study conduct,
changes in scientific or medical evidence or sentiment or internal inconsistency
in the data prior to making their final decision. The FDA may also seek the
guidance of an advisory panel prior to making their final decision.
Additionally,
we have never filed a new drug application, or NDA, or similar application for
approval in the United States or in any country, which may result in a delay in,
or the rejection of, our filing of an NDA or similar application. During the
drug development process, regulatory agencies will typically ask questions of
drug sponsors. While we endeavor to answer all such questions in a timely
fashion, or in the NDA filing, some questions may not be answered by the time we
file our NDA. Unless the FDA waives the requirement to answer any such
unanswered questions, submission of an NDA may be delayed or
rejected.
Pre-clinical
testing and clinical development are long, expensive and uncertain processes. If
our drug candidates do not receive the necessary regulatory approvals, we will
be unable to commercialize our drug candidates.
We have
not received, and may never receive, regulatory approval for the commercial sale
of any of our drug candidates. We will need to conduct significant additional
research and human testing before we can apply for product approval with the FDA
or with regulatory authorities of other countries. Pre-clinical testing and
clinical development are long, expensive and uncertain processes. Satisfaction
of regulatory requirements typically depends on the nature, complexity and
novelty of the product and requires the expenditure of substantial resources.
Data obtained from pre-clinical and clinical tests can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. It may
take us many years to complete the testing of our drug candidates and failure
can occur at any stage of this process. Negative or inconclusive results or
medical events during a clinical trial could cause us to delay or terminate our
development efforts.
Furthermore,
interim results of preclinical or clinical studies do not necessarily predict
their final results, and acceptable results in early studies might not be
obtained in later studies. Safety signals detected during clinical studies and
pre-clinical animal studies, such as the gastrointestinal bleeding that has been
seen in some high-dose, ferric citrate canine studies, may require us to do
additional studies, which could delay the development of the drug or lead to a
decision to discontinue development of the drug. Drug candidates in the later
stages of clinical development may fail to show the desired safety and efficacy
traits despite positive results in initial clinical testing. Results from
earlier studies may not be indicative of results from future clinical trials and
the risk remains that a pivotal program may generate efficacy data that will be
insufficient for the approval of the drug, or may raise safety concerns that may
prevent approval of the drug. Interpretation of the prior pre-clinical and
clinical safety and efficacy data of our drug candidates may be flawed and there
can be no assurance that safety and/or efficacy concerns from the prior data
were overlooked or misinterpreted, which in subsequent, larger studies appear
and prevent approval of such drug candidates. We may not be able to replicate in
our planned Phase 3 clinical program for Zerenex, the efficacy and safety
results for Zerenex observed in the previous Phase 2 clinical trials and the
Open Label Extension (OLE) clinical trial, or the effects of Zerenex on IV iron
and EPO use observed in the OLE clinical trial. We will need to re-input our
safety information on KRX-0401 into a Good Clinical Practice-compliant database
and can provide no assurance that safety concerns will not subsequently
arise.
36
Clinical
trials have a high risk of failure. A number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant setbacks
in advanced clinical trials, even after achieving what appeared to be promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process. Though we may engage a
clinical research organization with experience in conducting regulatory trials,
errors in the conduct, monitoring and/or auditing could invalidate the results
from a regulatory perspective.
Because
all of our proprietary technologies are licensed to us by third parties,
termination of these license agreements would prevent us from developing our
drug candidates.
We do not
own any of our drug candidates. We have licensed the rights, patent or
otherwise, to our drugs candidates from third parties. These license agreements
require us to meet development milestones and impose development and
commercialization due diligence requirements on us. In addition, under these
agreements, we must pay royalties on sales of products resulting from licensed
technologies and pay the patent filing, prosecution and maintenance costs
related to the licenses. If we do not meet our obligations in a timely manner or
if we otherwise breach the terms of our license agreements, our licensors could
terminate the agreements, and we would lose the rights to our drug candidates.
From time to time, in the ordinary course of business, we may have disagreements
with our licensors or collaborators regarding the terms of our agreements or
ownership of proprietary rights, which could lead to delays in the research,
development and commercialization of our drug candidates or could require or
result in litigation or arbitration, which would be time-consuming and
expensive.
We
rely on third parties to manufacture and analytically test our products. If
these third parties do not successfully manufacture and test our products, our
business will be harmed.
We have
limited experience in manufacturing products for clinical or commercial
purposes. We intend to continue, in whole or in part, to use third parties to
manufacture and analytically test our products for use in clinical trials and
for future sales. We may not be able to enter into future contract agreements
with these third-parties on terms acceptable to us, if at all.
Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving raw material supplies, production yields, quality control and
assurance, shortage of qualified personnel, compliance with FDA and foreign
regulations, production costs and development of advanced manufacturing
techniques and process controls. These risks become more acute as we
scale up for commercial quantities, where a reliable source of raw material
supplies becomes critical to commercial success. For example, given
the large quantity of materials required for ferric citrate production, as we
approach commercialization for Zerenex we will need to ensure an adequate supply
of starting materials that meet quality, quantity and cost
standards. Failure to achieve this level of supply can jeopardize the
successful commercialization of the product. Moreover, issues that
may arise in our current transition to a commercial batch manufacturer for
Zerenex can lead to delays in our planned clinical trials and development
timelines, and could affect our ability to complete our clinical trials on a
cost-effective or timely basis, if at all.
Our
third-party manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required by us to successfully
produce and market our drug candidates. In addition, our contract manufacturers
will be subject to ongoing periodic and unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with
current Good Manufacturing Practices, as well as other governmental regulations
and corresponding foreign standards. The same issues apply to contract
analytical services which we use for testing of our products. We will not have
control over, other than by contract and periodic oversight, third-party
manufacturers' compliance with these regulations and standards. We are currently
developing analytical tools for ferric citrate active pharmaceutical ingredient
and drug product testing. Failure to develop effective analytical tools could
result in regulatory or technical delay or could jeopardize our ability to begin
Phase 3 clinical trials and/or obtain FDA approval. Switching or engaging
multiple third-party contractors to produce our products may be difficult
because the number of potential manufacturers may be limited and the process by
which multiple manufacturers make the drug substance must be identical at each
manufacturing facility. It may be difficult for us to find and engage
replacement or multiple manufacturers quickly and on terms acceptable to us, if
at all. For Zerenex, we currently rely on a sole source of ferric citrate active
pharmaceutical ingredient. The loss of this sole source of supply would result
in significant additional costs and delays in our development program. Moreover,
if we need to change manufacturers after commercialization, the FDA and
corresponding foreign regulatory agencies must approve these manufacturers in
advance, which will involve testing and additional inspections to ensure
compliance with FDA and foreign regulations and standards.
37
If
we do not establish or maintain manufacturing, drug development and marketing
arrangements with third parties, we may be unable to commercialize our
products.
We do not
possess all of the capabilities to fully commercialize our products on our own.
From time to time, we may need to contract with third parties to:
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manufacture
our product candidates;
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assist
us in developing, testing and obtaining regulatory approval for and
commercializing some of our compounds and technologies;
and
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market
and distribute our drug products.
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We can
provide no assurance that we will be able to successfully enter into agreements
with such third parties on terms that are acceptable to us, if at all. If we are
unable to successfully contract with third parties for these services when
needed, or if existing arrangements for these services are terminated, whether
or not through our actions, or if such third parties do not fully perform under
these arrangements, we may have to delay, scale back or end one or more of our
drug development programs or seek to develop or commercialize our products
independently, which could result in delays. Furthermore, such failure could
result in the termination of license rights to one or more of our products. If
these manufacturing, development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of our
products. Accordingly, to the extent that we rely on third parties to research,
develop or commercialize our products, we are unable to control whether such
products will be scientifically or commercially successful. Additionally, if
these third parties fail to perform their obligations under our agreements with
them or fail to perform their work in a satisfactory manner, in spite of our
efforts to monitor and ensure the quality of such work, we may face delays in
achieving the regulatory milestones required for commercialization of one or
more drug candidates.
If, in
the future, the market conditions for raising capital deteriorate, we may be
forced to rely predominantly or entirely on our ability to contract with third
parties for our manufacturing, drug development and marketing. If we are unable
to contract with such third parties, we may be forced to limit or suspend or
terminate the development of some or all of our product candidates.
Our
reliance on third parties, such as clinical research organizations, or CROs, may
result in delays in completing, or a failure to complete, clinical trials if
such CROs fail to perform under our agreements with them.
In the
course of product development, we engage CROs to conduct and manage clinical
studies and to assist us in guiding our products through the FDA review and
approval process. If the CROs fail to perform their obligations under
our agreements with them or fail to perform clinical trials in a satisfactory
manner, we may face delays in completing our clinical trials, as well as
commercialization of one or more drug candidates. Furthermore, any loss or delay
in obtaining contracts with such entities may also delay the completion of our
clinical trials and the market approval of drug candidates.
38
Other Risks Related to Our
Business
If
we are unable to develop adequate sales, marketing or distribution capabilities
or enter into agreements with third parties to perform some of these functions,
we will not be able to commercialize our products
effectively.
In the
event that one or more of our drug candidates are approved by the FDA, we
currently plan to conduct our own sales and marketing effort to support the
drugs. We currently have limited experience in sales, marketing or distribution.
To directly market and distribute any products, we must build a sales and
marketing organization with appropriate technical expertise and distribution
capabilities. We may attempt to build such a sales and marketing organization on
our own or with the assistance of a contract sales organization. For some market
opportunities, we may want or need to enter into co-promotion or other licensing
arrangements with larger pharmaceutical or biotechnology firms in order to
increase the commercial success of our products. We may not be able to establish
sales, marketing and distribution capabilities of our own or enter into such
arrangements with third parties in a timely manner or on acceptable terms. 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 some or all of the revenues we receive will depend upon the
efforts of third parties, and these efforts may not be successful. Additionally,
building marketing and distribution capabilities may be more expensive than we
anticipate, requiring us to divert capital from other intended purposes or
preventing us from building our marketing and distribution capabilities to the
desired levels.
Notwithstanding
our current plans to commercialize our drug candidates, from time to time we may
consider offers or hold discussions with companies for partnerships or the
acquisition of our company or any of our products. Any accepted offer may
preclude us from the execution of our current business plan.
Even
if we obtain FDA approval to market our drug products, if they fail to achieve
market acceptance, we may never record meaningful revenues.
Even if
our products are approved for sale, they may not be commercially successful in
the marketplace. Market acceptance of our drug products will depend on a number
of factors, including:
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perceptions
by members of the health care community, including physicians, of the
safety and efficacy of our product
candidates;
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the
rates of adoption of our products by medical practitioners and the target
populations for our products;
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the
potential advantages that our products offer over existing treatment
methods;
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the
cost-effectiveness of our products relative to competing
products;
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the
availability of government or third-party payor reimbursement for our
products;
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the
side effects or unfavorable publicity concerning our products or similar
products; and
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the
effectiveness of our sales, marketing and distribution
efforts.
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Because
we expect sales of our products, if approved, to generate substantially all of
our revenues in the long-term, the failure of our drugs to find market
acceptance would harm our business and could require us to seek additional
financing or other sources of revenue.
If
our competitors develop and market products that are less expensive, more
effective or safer than our drug products, our commercial opportunities may be
reduced or eliminated.
The
pharmaceutical industry is highly competitive. Our competitors include
pharmaceutical companies and biotechnology companies, as well as universities
and public and private research institutions. In addition, companies that are
active in different but related fields represent substantial competition for us.
Many of our competitors have significantly greater capital resources, larger
research and development staffs and facilities and greater experience in drug
development, regulation, manufacturing and marketing than we do. These
organizations also compete with us to recruit qualified personnel, attract
partners for joint ventures or other collaborations, and license technologies
that are competitive with ours. As a result, our competitors may be able to more
easily develop technologies and products that could render our drug products
obsolete or noncompetitive. To compete successfully in this industry we must
identify novel and unique drugs or methods of treatment and then complete the
development of those drugs as treatments in advance of our
competitors.
39
The drugs
that we are attempting to develop will have to compete with existing therapies.
For example, Zerenex, if approved in the United States, would compete with other
FDA approved phosphate binders such as Renagel® (sevelamer hydrochloride) and
Renvela® (sevelamer carbonate), both marketed by Genzyme Corporation, PhosLo®
(calcium acetate), marketed by Fresenius Medical Care, and Fosrenol® (lanthanum
carbonate), marketed by Shire Pharmaceuticals Group plc, as well as
over-the-counter calcium carbonate products such as TUMS® and metal-based
options such as aluminum and magnesium. A generic formulation of PhosLo®
manufactured by Roxane Laboratories, Inc. was launched in the United States in
October 2008. KRX-0401 (perifosine), if approved in the United States would
compete with other anti-cancer agents, such as mTOR inhibitors. Wyeth Corp.,
Novartis AG and Ariad Pharmaceuticals are developing mTOR inhibitors for use in
cancer and Wyeth’s mTOR inhibitor, temsirolimus, and Novartis’ mTOR inhibitor,
everolimus, have been approved to treat patients with advanced kidney disease.
Biotechnology companies such as Amgen Inc., Biogen-Idec, Inc., ImClone Systems,
Inc. (a wholly-owned subsidiary of Eli Lilly and Company), Millennium
Pharmaceuticals, Inc. (a wholly-owned subsidiary of Takeda Pharmaceutical
Company), Onyx Pharmaceuticals, Inc., OSI Pharmaceuticals, Inc. and Vertex
Pharmaceuticals, Inc. are developing and, in some cases, marketing drugs to
treat various diseases, including cancer, by inhibiting cell-signaling pathways.
In addition, we are aware of a number of small and large companies developing
competitive products that target the phosphoinositide 3-kinase (PI3K)/Akt
pathway.
Our
commercial opportunities may be reduced or eliminated if our competitors develop
and market products that are less expensive, more effective or safer than our
drug products. Other companies have drug candidates in various stages of
pre-clinical or clinical development to treat diseases for which we are also
seeking to discover and develop drug products. Some of these potential competing
drugs are further advanced in development than our drug candidates and may be
commercialized earlier. Even if we are successful in developing effective drugs,
our products may not compete successfully with products produced by our
competitors.
If
we lose our key personnel or are unable to attract and retain additional
personnel, our operations could be disrupted and our business could be
harmed.
As of
October 31, 2009, we had 14 full and part-time employees. To successfully
develop our drug candidates, we must be able to attract and retain highly
skilled personnel. Our limited resources may hinder our efforts to attract and
retain highly skilled personnel. In addition, if we lose the services of our
current personnel, in particular, Ron Bentsur, our Chief Executive Officer, our
ability to continue to execute on our business plan could be materially
impaired.
Any
acquisitions we make may require a significant amount of our available cash and
may not be scientifically or commercially successful.
As part
of our business strategy, we may effect acquisitions to obtain additional
businesses, products, technologies, capabilities and personnel. If we make one
or more significant acquisitions in which the consideration includes cash, we
may be required to use a substantial portion of our available cash.
Acquisitions involve a number of
operational risks, including:
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difficulty
and expense of assimilating the operations, technology and personnel of
the acquired business;
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our
inability to retain the management, key personnel and other employees of
the acquired business;
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our
inability to maintain the acquired company's relationship with key third
parties, such as alliance partners;
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exposure
to legal claims for activities of the acquired business prior to the
acquisition;
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the
diversion of our management's attention from our core business;
and
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the
potential impairment of goodwill and write-off of in-process research and
development costs, adversely affecting our reported results of
operations.
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The
status of reimbursement from third-party payors for newly approved health care
drugs is uncertain and failure to obtain adequate reimbursement could limit our
ability to generate revenue.
Our
ability to commercialize pharmaceutical products may depend, in part, on the
extent to which reimbursement for the products will be available
from:
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government
and health administration authorities;
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private
health insurers;
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managed
care programs; and
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other
third-party payors.
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Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. Third-party payors, including Medicare, are challenging the prices
charged for medical products and services. Government and other third-party
payors increasingly are attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new drugs and by refusing, in some
cases, to provide coverage for uses of approved products for disease indications
for which the FDA has not granted labeling approval. Third-party insurance
coverage may not be available to patients for our products. If government and
other third-party payors do not provide adequate coverage and reimbursement
levels for our products, their market acceptance may be reduced.
Health care
reform measures could adversely affect our business.
The
business and financial condition of pharmaceutical and biotechnology companies
are affected by the efforts of governmental and third-party payors to contain or
reduce the costs of health care. In the United States and in foreign
jurisdictions there have been, and we expect that there will continue to be, a
number of legislative and regulatory proposals aimed at changing the health care
system, such as proposals relating to the pricing of healthcare products and
services in the United States or internationally, the reimportation of drugs
into the U.S. from other countries (where they are then sold at a lower price),
and the amount of reimbursement available from governmental agencies or other
third party payors. Health care reform legislation currently being considered in
the U.S. House of Representatives and the Senate could have a substantial impact
on the pharmaceutical industry. For example, proposals to impose an annual fee
on manufacturers of branded prescription pharmaceuticals could impact our
products. The pendency or approval of such proposals could result in a decrease
in our stock price or limit our ability to raise capital or to obtain strategic
partnerships or licenses.
For
example, the Centers for Medicare & Medicaid Services has proposed that
Medicare payment for phosphate binders be bundled into the packaged composite
rate paid by Medicare to dialysis clinics as reimbursement for most of the
dialysis-related services provided to Medicare patients. If these product
classes are bundled into the composite rate as proposed, separate Medicare
reimbursement will no longer be available for phosphate binders. It is too early
to project the impact bundling may have on the phosphate binder
industry.
On
September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was
enacted, giving the FDA enhanced post-market authority, including the authority
to require post-marketing studies and clinical trials, labeling changes based on
new safety information, and compliance with risk evaluations and mitigation
strategies approved by the FDA. The FDA's exercise of its new authority could
result in delays or increased costs during the period of product development,
clinical trials and regulatory review and approval, increased costs to assure
compliance with new post-approval regulatory requirements, and potential
restrictions on the sale or distribution of approved products.
We
face product liability risks and may not be able to obtain adequate
insurance.
The use
of our drug candidates in clinical trials, the future sale of any approved drug
candidates and new technologies, and our sale of Accumin prior to its
discontinuation, exposes us to liability claims. Although we are not aware of
any historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to cease clinical trials of our drug
candidates or limit commercialization of any approved products.
We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials and the sale of Accumin prior to its discontinuation. We
intend to expand our insurance coverage to include the commercial sale of any
approved products if marketing approval is obtained; however, insurance coverage
is becoming increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost. We also may not be able to obtain additional
insurance coverage that will be adequate to cover product liability risks that
may arise. Regardless of merit or eventual outcome, product liability claims may
result in:
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decreased
demand for a product;
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injury
to our reputation;
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our
inability to continue to develop a drug
candidate;
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withdrawal
of clinical trial volunteers; and
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loss
of revenues.
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Consequently,
a product liability claim or product recall may result in losses that could be
material.
In
connection with providing our clinical trial management and site recruitment
services, we may be exposed to liability that could have a material adverse
effect on our financial condition and results of operations.
The
Online Collaborative Oncology Group, Inc., or OCOG, a subsidiary we acquired
through our acquisition of ACCESS Oncology in 2004, provides clinical trial
management and site recruitment services to us as well as other biotechnology
and pharmaceutical companies. In conducting the activities of OCOG, any failure
on our part to comply with applicable governmental regulations or contractual
obligations could expose us to liability to our clients and could have a
material adverse effect on us. We also could be held liable for errors or
omissions in connection with the services we perform. In addition, the wrongful
or erroneous delivery of health care information or services may expose us to
liability. If we were required to pay damages or bear the costs of defending any
such claims, the losses could be material.
Our
corporate compliance efforts cannot guarantee that we are in compliance with all
potentially applicable regulations.
The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a relatively small company with 14
full and part-time employees as of October 31, 2009. We also have significantly
fewer employees than many other companies that have a product candidate in
clinical development, and we rely heavily on third parties to conduct many
important functions. While we believe that our corporate compliance program is
sufficient to ensure compliance with applicable regulations, we cannot assure
you that we are or will be in compliance with all potentially applicable
regulations. If we fail to comply with any of these regulations we could be
subject to a range of regulatory actions, including suspension or termination of
clinical trials, the failure to approve a product candidate, restrictions on our
products or manufacturing processes, withdrawal of products from the market,
significant fines, or other sanctions or litigation.
Risks Related to Our
Financial Condition
Our
current cash, cash equivalents and investment securities may not be adequate to
support our operations for the length of time that we have
estimated.
We
currently anticipate that our cash, cash equivalents and investment securities
as of September 30, 2009, exclusive of our holdings in auction rate securities,
are sufficient to meet our anticipated working capital needs and fund our
business plan for at least the next 24 months. Our forecast of the period of
time through which our cash, cash equivalents and investment securities will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties. The actual amount of funds we will need to operate is
subject to many factors, some of which are beyond our control. These factors
include the following:
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the
timing, design and conduct of, and results from, clinical trials for our
drug candidates;
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the
timing of expenses associated with manufacturing and product development
of the proprietary drug candidates within our portfolio and those that may
be in-licensed, partnered or
acquired;
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the
timing of the in-licensing, partnering and acquisition of new product
opportunities;
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the
progress of the development efforts of parties with whom we have entered,
or may enter, into research and development
agreements;
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our
ability to achieve our milestones under our licensing
arrangements;
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the
value and liquidity of our investment securities, including our
investments in auction rate securities;
and
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the
costs involved in prosecuting and enforcing patent claims and other
intellectual property rights.
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If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds. If we are unable to obtain additional funds on
terms favorable to us or at all, we may be required to cease or reduce our
operating activities or sell or license to third parties some or all of our
intellectual property. If we raise additional funds by selling additional shares
of our capital stock, the ownership interests of our stockholders will be
diluted. If we need to raise additional funds through the sale or license of our
intellectual property, we may be unable to do so on terms favorable to us, if at
all.
With
respect to our auction rate securities, we will continue to attempt to sell
these securities until the auctions are successful. If uncertainties in the
credit and capital markets continue, these markets deteriorate further or we
experience any credit rating downgrades on the auction rate securities in our
portfolio, we may incur additional impairment charges with respect to our
auction rate securities portfolio, which could negatively affect our financial
condition, cash flow and reported earnings. We continue to monitor the fair
value of our auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges. In addition, the lack of liquidity of our auction rate securities could
have a material impact on our ability to fund our operations.
Risks Related to Our
Intellectual Property and Third-Party Contracts
If
we are unable to adequately protect our intellectual property, third parties may
be able to use our intellectual property, which could adversely affect our
ability to compete in the market.
Our
commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents against third-party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, the patents we use may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Furthermore, others may independently develop
similar or alternative drug products or technologies or design around our
patented drug products and technologies. The patents we use may be challenged or
invalidated or may fail to provide us with any competitive
advantage.
We rely
on trade secrets to protect our intellectual property where we believe patent
protection is not appropriate or obtainable. Trade secrets are difficult to
protect. While we require our employees, collaborators and consultants to enter
into confidentiality agreements, this may not be sufficient to adequately
protect our trade secrets or other proprietary information. In addition, we
share ownership and publication rights to data relating to some of our drug
products and technologies with our research collaborators and scientific
advisors. If we cannot maintain the confidentiality of this information, our
ability to receive patent protection or protect our trade secrets or other
proprietary information will be at risk.
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The
intellectual property that we own or have licensed relating to our product
candidates are limited, which could adversely affect our ability to compete in
the market and adversely affect the value of our product
candidates.
The
patent rights that we own or have licensed relating to our product candidates
are limited in ways that may affect our ability to exclude third parties from
competing against us if we obtain regulatory approval to market these product
candidates. In particular:
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Our
composition of matter patent covering KRX-0401 (perifosine) expires in
2013 and we cannot assure you that we can obtain an extension to 2018 (the
maximum term of extension under the patent term restoration program). We
do not hold a composition of matter patent covering Zerenex. Composition
of matter patents can provide protection for pharmaceutical products to
the extent that the specifically covered compositions are important. Upon
expiration of our composition of matter patent for KRX-0401, or for
Zerenex, where we do not have a composition of matter patent, competitors
who obtain the requisite regulatory approval can offer products with the
same composition as our products so long as the competitors do not
infringe any method of use patents that we may
hold.
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For
our product candidates, the principal patent protection that covers or
those we expect will cover, our product candidate is a method of use
patent. This type of patent only protects the product when used or sold
for the specified method. However, this type of patent does not limit a
competitor from making and marketing a product that is identical to our
product that is labeled for an indication that is outside of the patented
method, or for which there is a substantial use in commerce outside the
patented method.
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Moreover,
physicians may prescribe such a competitive identical product for indications
other than the one for which the product has been approved, or off-label
indications, that are covered by the applicable patents. Although such off-label
prescriptions may infringe or induce infringement of method of use patents, the
practice is common and such infringement is difficult to prevent or
prosecute.
In
addition, the limited patent protection described above may adversely affect the
value of our product candidates and may inhibit our ability to obtain a
corporate partner at terms acceptable to us, if at all.
In
addition to patent protection, we may utilize orphan drug regulations or other
provisions of the Food, Drug and Cosmetic Act to provide market exclusivity for
certain of our drug candidates. Orphan drug regulations provide incentives to
pharmaceutical and biotechnology companies to develop and manufacture drugs for
the treatment of rare diseases, currently defined as diseases that exist in
fewer than 200,000 individuals in the United States, or, diseases that affect
more than 200,000 individuals in the United States but that the sponsor does not
realistically anticipate will generate a net profit. Under these provisions, a
manufacturer of a designated orphan drug can seek tax benefits, and the holder
of the first FDA approval of a designated orphan product will be granted a
seven-year period of marketing exclusivity for such FDA-approved orphan product.
On September 16, 2009, we announced that KRX-0401 (perifosine) has received
Orphan-Drug designation from the FDA for the treatment of multiple myeloma. We
believe that KRX-0401 (perifosine) may be eligible for additional orphan drug
designations; however, we cannot assure that KRX-0401, or any other drug
candidates we may acquire or in-license, will obtain such orphan drug
designations.
Litigation
or third-party claims could require us to spend substantial time and money
defending such claims and adversely affect our ability to develop and
commercialize our products.
We may be
forced to initiate litigation to enforce our contractual and intellectual
property rights, or we may be sued by third parties asserting claims based on
contract, tort or intellectual property infringement. In addition, third parties
may have or may obtain patents in the future and claim that our drug products or
technologies infringe their patents. If we are required to defend against suits
brought by third parties, or if we sue third parties to protect our rights, we
may be required to pay substantial litigation costs, and our management's
attention may be diverted from operating our business. In addition, any legal
action against our licensors or us that seeks damages or an injunction of our
commercial activities relating to our drug products or technologies could
subject us to monetary liability and require our licensors or us to obtain a
license to continue to use our drug products or technologies. We cannot predict
whether our licensors or we would prevail in any of these types of actions or
that any required license would be made available on commercially acceptable
terms, if at all.
Risks Related to Our Common
Stock
Future
sales or other issuances of our common stock could depress the market for our
common stock.
Sales of
a substantial number of shares of our common stock, or the perception by the
market that those sales could occur, could cause the market price of our common
stock to decline or could make it more difficult for us to raise funds through
the sale of equity in the future.
44
On August
28, 2009, we filed with the SEC a shelf registration statement on Form S-3 (File
No. 333-161607)), that was declared effective by the SEC on September 23, 2009,
providing for the offering of up to $40 million of our common stock and warrants
to purchase our common stock. Subsequent to the registered direct offering that
was completed on September 30, 2009, there remains approximately $12.2 million
of our common stock and warrants available for sale on this shelf registration
statement. Future sales pursuant to this registration statement could depress
the market for our common stock.
If we
make one or more significant acquisitions in which the consideration includes
stock or other securities, our stockholders’ holdings may be significantly
diluted. In addition, we may enter into arrangements with third parties
permitting us to issue shares of common stock in lieu of certain cash payments
upon the achievement of milestones.
In
addition, we may be required to issue up to 3,372,422 shares of our common stock
to former stockholders of ACCESS Oncology upon the achievement of certain
milestones, of which 500,000 shares may be payable in the next 12 months if we
reach the first milestone, which is enrollment of the first patient in a Phase 3
(or other pivotal) clinical trial for KRX-0401 (perifosine). We may also
conclude, under certain circumstances, that it is in our best interest to settle
this contingent share obligation for all or substantially all of such shares in
advance of reaching any milestones.
Our
stock price can be volatile, which increases the risk of litigation, and may
result in a significant decline in the value of your investment.
The
trading price of our common stock is likely to be highly volatile and subject to
wide fluctuations in price in response to various factors, many of which are
beyond our control. These factors include:
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developments
concerning our drug candidates;
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announcements
of technological innovations by us or our
competitors;
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introductions
or announcements of new products by us or our
competitors;
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announcements
by us of significant acquisitions, strategic partnerships, joint ventures
or capital commitments;
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changes
in financial estimates by securities
analysts;
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actual
or anticipated variations in quarterly operating results and
liquidity;
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expiration
or termination of licenses, research contracts or other collaboration
agreements;
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conditions
or trends in the regulatory climate and the biotechnology and
pharmaceutical industries;
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changes
in the market valuations of similar companies;
and
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additions
or departures of key personnel.
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In
addition, equity markets in general, and the market for biotechnology and life
sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management's attention and resources, which
could seriously harm our business.
45
Certain
anti-takeover provisions in our charter documents and Delaware law could make a
third-party acquisition of us difficult. This could limit the price investors
might be willing to pay in the future for our common
stock.
Provisions
in our amended and restated certificate of incorporation and bylaws could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, or control us. These
factors could limit the price that certain investors might be willing to pay in
the future for shares of our common stock. Our amended and restated certificate
of incorporation allows us to issue preferred stock with the approval of our
stockholders. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to the holders of our common
stock or could adversely affect the rights and powers, including voting rights,
of such holders. In certain circumstances, such issuance could have the effect
of decreasing the market price of our common stock. Our amended and restated
bylaws eliminate the right of stockholders to call a special meeting of
stockholders, which could make it more difficult for stockholders to effect
certain corporate actions. Any of these provisions could also have the effect of
delaying or preventing a change in control.
ITEM 6. EXHIBITS
The exhibits listed on the Exhibit Index are included with this
report.
3.1
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Amended
and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
Inc., filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-Q
for the quarter ended September 30, 2004, filed on August 12, 2004, and
incorporated herein by reference.
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3.2
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Amended
and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit
3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2001, filed on March 26, 2002, and incorporated herein by
reference.
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3.3
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Amendment
to Amended and Restated Certificate of Incorporation of Keryx
Biopharmaceuticals, Inc., dated July 24, 2007, filed as Exhibit 3.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2007, filed on August 9, 2007 and incorporated herein by
reference.
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10.1
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Employment
Agreement with Ron Bentsur dated September 14, 2009, filed as Exhibit 10.1
to the Registrant's Current Report on Form 8-K, filed on September 16,
2009 and incorporated herein by reference.
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31.1
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
November 10, 2009.
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31.2
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
November 10, 2009.
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32.1
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Certification
of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 10,
2009.
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32.2
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Certification
of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 10,
2009.
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46
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KERYX
BIOPHARMACEUTICALS, INC.
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Date: November 10,
2009
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By:
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/s/ James F.
Oliviero
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Chief
Financial Officer
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Principal
Financial and Accounting
Officer
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47
EXHIBIT
INDEX
The following exhibits are included as
part of this Quarterly Report on Form 10-Q:
31.1
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
November 10, 2009.
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31.2
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
November 10, 2009.
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32.1
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Certification
of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 10,
2009.
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32.2
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Certification
of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 10,
2009.
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48