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EX-32 - EX-32 - CYPRESS BIOSCIENCE INC | a56065exv32.htm |
EX-31.2 - EX-31.2 - CYPRESS BIOSCIENCE INC | a56065exv31w2.htm |
EX-31.1 - EX-31.1 - CYPRESS BIOSCIENCE INC | a56065exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Mark One) |
þ | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2010,
or
o | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE | 22-2389839 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)
(Address of principal executive offices) (zip code)
(858) 452-2323
(Registrants telephone number including area code)
(Registrants telephone number including area code)
Indicate by check þ whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check þ whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check þ whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
At May 5, 2010, 38,375,206 shares of Common Stock, par value $.001, of the registrant were
issued and outstanding.
Table of Contents
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Note) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 30,575,057 | $ | 38,617,954 | ||||
Short-term investments |
106,717,495 | 103,055,417 | ||||||
Receivable from Forest Laboratories |
6,623,123 | 5,611,476 | ||||||
Prepaid expenses and other current assets |
1,312,664 | 4,792,134 | ||||||
Total current assets |
145,228,339 | 152,076,981 | ||||||
Property and equipment, net |
1,197,415 | 1,273,026 | ||||||
Goodwill |
21,928,598 | 21,928,598 | ||||||
Restricted cash |
487,111 | 487,111 | ||||||
Other assets |
291,494 | 298,994 | ||||||
Total assets |
$ | 169,132,957 | $ | 176,064,710 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 694,065 | $ | 1,172,916 | ||||
Accrued compensation |
1,610,153 | 4,640,265 | ||||||
Accrued liabilities |
481,743 | 221,487 | ||||||
Payable to Forest Laboratories |
477,938 | 336,313 | ||||||
Current portion of deferred revenue |
5,202,056 | 5,202,056 | ||||||
Total current liabilities |
8,465,955 | 11,573,037 | ||||||
Deferred rent |
20,423 | 20,423 | ||||||
Deferred revenue, net of current portion |
22,099,622 | 23,400,136 | ||||||
Other liabilities |
487,111 | 487,111 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $.001 par value; 15,000,000 shares authorized;
no shares issued and outstanding |
| | ||||||
Common stock, $.001 par value; 90,000,000 shares of common
stock authorized; 38,375,206 shares issued and outstanding at
March 31, 2010 (unaudited) and December 31, 2009 |
38,375 | 38,375 | ||||||
Additional paid-in capital |
339,004,003 | 336,825,601 | ||||||
Accumulated other comprehensive income |
36,280 | 171,017 | ||||||
Accumulated deficit |
(201,018,812 | ) | (196,450,990 | ) | ||||
Total stockholders equity |
138,059,846 | 140,584,003 | ||||||
Total liabilities and stockholders equity |
$ | 169,132,957 | $ | 176,064,710 | ||||
See accompanying notes to consolidated financial statements.
Note: The balance sheet at December 31, 2009 has been derived from the audited financial
statements at that date but does not include all of the information and disclosures required by
U.S. generally accepted accounting principles.
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CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Revenues under collaborative agreement |
$ | 851,106 | $ | 7,392,897 | ||||
Commercial revenues |
7,072,700 | 462,660 | ||||||
Revenues from personalized medicine services |
195,713 | 2,837 | ||||||
Total revenues |
8,119,519 | 7,858,394 | ||||||
Operating expenses: |
||||||||
Cost of personalized medicine services |
569,097 | 359,392 | ||||||
Research and development |
977,859 | 7,237,392 | ||||||
Selling, general and administrative |
11,330,173 | 10,057,251 | ||||||
Total operating expenses |
12,877,129 | 17,654,035 | ||||||
Loss from operations |
(4,757,610 | ) | (9,795,641 | ) | ||||
Interest income |
189,788 | 635,137 | ||||||
Net loss |
$ | (4,567,822 | ) | $ | (9,160,504 | ) | ||
Net loss per share basic and diluted |
$ | (0.12 | ) | $ | (0.24 | ) | ||
Shares used in computing net loss per share basic and diluted |
38,375,206 | 37,981,814 | ||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net loss |
$ | (4,567,822 | ) | $ | (9,160,504 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities: |
||||||||
Depreciation and amortization |
142,391 | 104,162 | ||||||
Amortization of premium/discount on short-term investments |
328,817 | (60,488 | ) | |||||
Stock-based compensation for stock and options issued to employees |
2,178,402 | 2,126,760 | ||||||
Non-cash portion of asset acquisition |
| 487,100 | ||||||
Changes in operating assets and liabilities |
(1,939,773 | ) | 21,922,932 | |||||
Net cash (used in) provided by operating activities |
(3,857,985 | ) | 15,419,962 | |||||
Investing Activities |
||||||||
Purchases of short-term investments |
(37,259,337 | ) | (37,061,706 | ) | ||||
Proceeds from sale of short-term investments |
33,133,705 | 27,231,474 | ||||||
Purchases of property and equipment |
(59,280 | ) | (224,505 | ) | ||||
Deposit of restricted cash |
| (487,100 | ) | |||||
Net cash used in investing activities |
(4,184,912 | ) | (10,541,837 | ) | ||||
Financing Activities |
||||||||
Proceeds from exercise of stock options |
| 378,975 | ||||||
Net cash provided by financing activities |
| 378,975 | ||||||
(Decrease) increase in cash and cash equivalents |
(8,042,897 | ) | 5,257,100 | |||||
Cash and cash equivalents at beginning of period |
38,617,954 | 52,490,414 | ||||||
Cash and cash equivalents at end of period |
$ | 30,575,057 | $ | 57,747,514 | ||||
See accompanying notes to consolidated financial statements.
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Table of Contents
CYPRESS BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. Business
We provide therapeutics and personalized medicine services, facilitating improved and
individualized patient care. Our goal is to address the evolving needs of specialist physicians and
their patients by identifying unmet medical needs in the areas of pain, rheumatology, and physical
medicine and rehabilitation, including challenging disorders such as fibromyalgia and rheumatoid
arthritis. We believe this approach to improving patient care creates a unique partnership with
physicians, and expect that offering personalized medicine services and therapeutic products
through the same sales organization will provide us with a differentiated commercial strategy and
sustainable competitive advantage.
2. Basis of Presentation
The accompanying financial statements have been prepared by our management without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S.
generally accepted accounting principles for interim financial statements. Certain information and
disclosures normally included in complete audited year end financial statements have been condensed
or omitted. In the opinion of our management, all adjustments necessary for a fair presentation of
the accompanying unaudited condensed consolidated financial statements are reflected herein. All
such adjustments are normal and recurring in nature. Interim results are not necessarily
indicative of results for the full year. For more information, these financial statements should
be read in conjunction with the audited financial statements and the related disclosures included
in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March
31, 2010.
Further, in connection with the preparation of the condensed consolidated financial statements
and in accordance with the applicable accounting standards for the disclosure of events that occur
after the balance sheet date but before the financial statements are issued, we evaluated all
events or transactions that occurred after the balance sheet date of March 31, 2010 and have
determined that no material subsequent events requiring recognition or disclosure in our financial
statements occurred during this time period.
The condensed consolidated financial statements include the accounts of Cypress Bioscience,
Inc. and its wholly-owned subsidiary, Proprius Pharmaceuticals, Inc., collectively referred to as
Cypress Bioscience, Inc. All significant intercompany accounts and transactions have been
eliminated.
3. Recent Accounting Pronouncements
In March 2010, the Financial Accounting Standards Board (FASB) ratified the authoritative
guidance regarding the milestone method of revenue recognition. It was concluded that the
milestone method is a valid application of the proportional performance model when applied to
research or development arrangements. The guidance states than an entity can make an accounting
policy election to recognize a payment that is contingent upon the achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The guidance is
effective for fiscal years beginning on or after June 15, 2010, although early adoption is
permitted. We are currently evaluating the effect that this guidance will have on our consolidated
financial position and results of operations.
In February 2010, the FASB issued amended guidance on subsequent events. Under this amended
guidance, SEC filers are no longer required to disclose the date through which subsequent events
have
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been evaluated in originally issued and revised financial statements. This guidance was
effective immediately and we adopted these new requirements upon issuance of this guidance.
In October 2009, the FASB amended its authoritative guidance regarding multiple-deliverable
revenue arrangements. This guidance addresses how to separate deliverables and how to measure and
allocate consideration to one or more units of accounting. Specifically, the guidance requires that
consideration be allocated among multiple deliverables based on relative selling prices. The
guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2)
third-party evidence and (3) estimated selling price. We will be required to adopt this amended
guidance effective for the fiscal year beginning January 1, 2011, although earlier adoption is
permitted. We are currently evaluating the effect that this guidance will have on our consolidated
financial position and results of operations.
4. Short-Term Investments
Our short-term investments consist of securities of the U.S. government or its agencies and
corporate debt securities. We have classified our short-term investments as available-for-sale and
carry them at fair value with unrealized gains and losses, if any, reported as a separate component
of stockholders equity and included in comprehensive income or loss. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary, if any, on available-for-sale securities are
included in interest income. The cost of securities sold is based on the specific-identification
method. Interest on securities classified as available-for-sale is included in interest income.
At March 31, 2010 and December 31, 2009, short-term investments consisted of the following:
March 31, 2010 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 97,551,072 | $ | 43,592 | $ | (58,647 | ) | $ | 97,536,017 | |||||||
Corporate debt securities |
9,130,143 | 51,468 | (133 | ) | 9,181,478 | |||||||||||
$ | 106,681,215 | $ | 95,060 | $ | (58,780 | ) | $ | 106,717,495 | ||||||||
December 31, 2009 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 93,037,626 | $ | 159,185 | $ | (28,944 | ) | $ | 93,167,867 | |||||||
Corporate debt securities |
9,846,774 | 45,410 | (4,634 | ) | 9,887,550 | |||||||||||
$ | 102,884,400 | $ | 204,595 | $ | (33,578 | ) | $ | 103,055,417 | ||||||||
Contractual maturities for short-term investments at March 31, 2010 were as follows:
Fair Value | ||||
Due within 1 year |
$ | 78,458,997 | ||
After 1 year but within 2 years |
28,258,498 | |||
Total |
$ | 106,717,495 | ||
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5. Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectability is reasonably assured. Some of our agreements contain multiple
elements and in accordance with these agreements, we may be eligible for upfront license fees,
sponsored development reimbursements, funding for certain of our employees, co-promotion
reimbursement, development and commercial milestones and royalties. Consideration received for
milestones under research and development arrangements will be recognized at the date of
achievement if the milestone is non-refundable, substantive in nature, and the achievement was not
reasonably assured at the inception of the agreement. Milestone payments are not considered
substantive if any portion of the associated milestone payment is determined to not relate solely
to past performance or if a portion of the consideration earned from achieving the milestone may be
refunded.
Revenues under our collaborative agreement include upfront license fees, sponsored development
reimbursements, funding for certain of our employees, and development milestones. Amounts received
for upfront license fees under multiple-element arrangements are deferred and recognized over the
period such arrangements require on-going services or performance. Amounts received for sponsored
development activities, including funding received for certain of our employees, are recognized as
research costs are incurred over the period specified in the related agreement or as the services
are performed. Amounts received for development milestones are recognized upon achievement if they
meet the research and development milestone recognition policy. Any amounts received prior to
satisfying revenue recognition criteria are recorded as deferred revenue.
Commercial revenues include royalties on product sales of Savella, revenue from the New Drug
Application (NDA) approval milestone, sales-based milestones, and reimbursement for co-promotion
of Savella. Royalty revenue is recognized based on royalties reported by Forest Laboratories, Inc.
(Forest Laboratories) during the quarter with such payment due within 45 days after quarter end.
The royalty rate as stated in the agreement with Forest Laboratories is subject to prospective
adjustment based on Forest Laboratories total payment obligations to us and Pierre Fabre
Medicament (Pierre Fabre); however, the royalty rate cannot be reduced below the stipulated
floor. Revenue from the NDA approval milestone achieved in January 2009, net of sublicense fees, is
being recognized ratably over the period of 13 years from the date the milestone was achieved,
which corresponds with the obligation period (which is equivalent to the patent life). As we have
an obligation to reimburse Forest Laboratories for a portion of the cost for samples of Savella,
this milestone was not considered substantive and therefore, we determined that the consideration
received from Forest Laboratories was inseparable from the on-going obligation. We regularly
review the period of time that we expect to be satisfying these obligations, and if there are
changes in facts and circumstances, we reassess the period of time that revenue is being recognized
and adjust the period accordingly. Revenue related to sales-based milestones, net of sublicense
fees, is recognized upon the achievement of the specified milestones, which is substantive, was not
readily assured at the inception of the agreement and is non-refundable. Co-promotion
reimbursement revenue is recognized in the period in which the detailing calls (measured on a per
physician call basis) are performed using an estimated reimbursement rate based on historical cost
information provided to us by Forest Laboratories. We recognize this revenue as services have been
rendered, the reimbursement rate is determinable and collectability is reasonably assured. The
corresponding costs associated with the co-promotion reimbursement are included as a component of
selling, general and administrative expense on the Condensed Consolidated Statement of Operations.
In connection with our personalized medicine services, such services are performed based on a
written test requisition form. We generally bill third-party payers for these services upon
generation and delivery of a report to the ordering physician. As such, we take assignment of
benefits and the risk of
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collection with the third-party payer. We currently do not have any contracts with private
third-party payers. As relatively new tests, the personalized medicine services offered by us may
not be covered under third-party payer reimbursement policies. Consequently, we pursue case-by-case
reimbursement where policies are not in place or payment history has not been established. We
usually bill the patient directly for amounts owed after multiple requests for payment have been
denied or only partially paid by the insurance carrier as allowed by law. As a result, at the time
of delivery of the report to the ordering physician, and in the absence of a reimbursement contract
or sufficient payment history, collectibility cannot reasonably be assured and revenues are
therefore only recognized at the time cash is collected.
6. Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel expenses
for our research and development personnel, fees paid to external service providers to conduct
clinical trials, patient enrollment costs, fees and milestone payments under our license,
collaboration and development agreements, validation activities for our personalized medicine
services and costs for facilities (including our laboratory), supplies, materials and equipment.
All such costs are charged to research and development expenses as incurred. Clinical trial costs
are a significant component of our research and development expenses and include costs associated
with third-party contractors. We accrue clinical trial expenses based on work performed, which
relies on estimates of total costs incurred based on patient enrollment, completion of patient
studies and other events. Actual clinical trial costs may differ from estimated clinical trial
costs and are adjusted during the period in which they become known. There were no material
adjustments for the three months ended March 31, 2010 and 2009 for a change in clinical trial cost
estimates.
7. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of common stock
outstanding and is presented for basic and diluted net loss per share. Basic net loss per share is
computed by dividing net loss by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period increased to include, if dilutive, the number
of additional common shares that would have been outstanding if the potential common shares had
been issued. The dilutive effect of outstanding stock options, restricted stock units and warrants
is reflected in diluted net loss per share by application of the treasury stock method. We have
excluded all outstanding stock options, restricted stock units and warrants from the calculation of
diluted loss per share for the three months ended March 31, 2010 and 2009 because such securities
are antidilutive for these periods. The total number of potential common shares excluded from the
calculation of diluted loss per common share was 200,454 and 745,078 for the three months ended
March 31, 2010 and 2009, respectively.
During the three months ended March 31, 2010, we granted 100,000 restricted stock units to our
chief executive officer. The restricted stock units vest in full after three years subject to our
chief executive officers continuous service through such date. Such securities were not included
in the computation of basic earnings per share for the three months ended March 31, 2010 as the
effect would be antidilutive.
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8. Comprehensive Loss
The components of comprehensive loss are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (4,567,822 | ) | $ | (9,160,504 | ) | ||
Unrealized loss on short-term Investments |
(134,737 | ) | (279,597 | ) | ||||
Comprehensive loss |
$ | (4,702,559 | ) | $ | (9,440,101 | ) | ||
9. Stock-Based Compensation
Total stock-based compensation expense, which relates to stock options granted to employees
and non-employee directors and restricted stock awards recognized for the three months ended March
31, 2010 and 2009, was comprised as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Cost of personalized medicine services |
$ | 51,222 | $ | 36,796 | ||||
Research and development expenses |
(87,578 | ) | 357,165 | |||||
Selling, general and administrative expenses |
2,214,758 | 1,732,799 | ||||||
$ | 2,178,402 | $ | 2,126,760 | |||||
During March 2010, certain employees who were granted performance-based stock options
resigned from their employment with us and accordingly, the performance conditions for such stock
options will no longer be achieved. In accordance with the accounting treatment for stock-based
compensation, the stock-based compensation expense previously recognized was reversed in the period
of change by recording a cumulative adjustment. Accordingly, during the three months ended March
31, 2010, we recognized an adjustment related to such performance-based options in the amount of
$0.6 million, consisting of $0.3 million related to research and development expenses and $0.3
million related to selling, general and administrative expenses.
As of March 31, 2010, we had $11.8 million of unamortized compensation cost related to
unvested stock option awards, which is expected to be recognized over a remaining weighted average
vesting period of 2.3 years.
As of March 31, 2010, we had $0.6 million of unamortized compensation cost related to unvested
restricted stock awards, which is expected to be recognized over a remaining weighted average
vesting period of 2.8 years.
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10. Fair Value Disclosures
The following table presents information about our financial assets measured at fair value on
a recurring basis as of March 31, 2010, and indicates the fair value hierarchy of the valuation
techniques utilized by us to determine such fair value. In general, fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. We classify money market funds as Level 1 assets.
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in active markets, and inputs other than
quoted prices that are observable for the asset or liability, such as interest rates and yield
curves that are observable at commonly quoted intervals. We classify U. S. government and agency
debt and corporate debt securities as Level 2 assets. Level 3 inputs are unobservable inputs for
the asset or liability, and include situations where there is little, if any, market activity for
the asset or liability. At March 31, 2010, we did not hold any Level 3-classified financial assets.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety has been determined based on the lowest level input that is significant
to the fair value measurement. Our assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment, and considers factors specific to the asset or
liability.
Fair Value Measurements at March 31, 2010 | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Balance as of | Active Markets | Observable Inputs | Unobservable | |||||||||||||
Description | March 31, 2010 | (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Financial instruments owned: |
||||||||||||||||
Money market funds |
$ | 30,531,318 | $ | 30,531,318 | $ | | $ | | ||||||||
U.S. government and agency debt |
97,536,017 | | 97,536,017 | | ||||||||||||
Corporate debt securities |
9,181,478 | | 9,181,478 | | ||||||||||||
Total financial instruments owned |
$ | 137,248,813 | $ | 30,531,318 | $ | 106,717,495 | $ | | ||||||||
11. Segment Information
During the three months ended September 30, 2009, we made the determination that our two
product lines, consisting of therapeutic products (Savella) and the personalized medicine services
(Avise products), met the criteria to be reported as separate operating segments. Prior to the
three months ended September 30, 2009, we operated in a single operating segment with revenues
generated from our License and Collaboration Agreement with Forest Laboratories and financial
results prepared and reviewed by management as a single operating segment.
As noted above, we have two reportable business segments: therapeutic products and
personalized medicine services. The therapeutic products segment includes Savella for the
management of fibromyalgia. The personalized medicine services segment includes specialized
diagnostic tests to provide physicians with actionable information to help manage their patients
care, including predicting the likelihood of developing disease or optimizing therapy.
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We manage the commercial organization and related support organizations through a centralized
management team. Our business segment performance is managed and evaluated on net revenues, cost of
personalized medicine services and research and development expenses. We do not allocate selling,
general and administrative expenses to our business segments for performance assessment.
The following table reports net revenues, cost of personalized medicine services and research
and development expenses for our reportable segments for the three months ended March 31, 2010 and
2009:
Therapeutic | Personalized | ||||||||||||
Products | Medicine Services | Total | |||||||||||
Three months ended March 31, 2010: |
|||||||||||||
Revenues |
$ | 7,923,806 | $ | 195,713 | $ | 8,119,519 | |||||||
Cost of personalized medicine services |
| 569,097 | 569,097 | ||||||||||
Research and development |
725,867 | 251,992 | 977,859 | ||||||||||
Segment operating income (loss) |
7,197,939 | (625,376 | ) | 6,572,563 | |||||||||
Operating expenses: |
|||||||||||||
Selling, general and administrative |
11,330,173 | ||||||||||||
Loss from operations |
$ | (4,757,610 | ) | ||||||||||
Three months ended March 31, 2009: |
|||||||||||||
Revenues |
$ | 7,855,557 | $ | 2,837 | $ | 7,858,394 | |||||||
Cost of personalized medicine services |
| 359,392 | 359,392 | ||||||||||
Research and development |
5,111,518 | 2,125,874 | 7,237,392 | ||||||||||
Segment operating income (loss) |
2,744,039 | (2,482,429 | ) | 261,610 | |||||||||
Operating expenses: |
|||||||||||||
Selling, general and administrative |
10,057,251 | ||||||||||||
Loss from operations |
$ | (9,795,641 | ) | ||||||||||
The following table reports assets that are identifiable to our therapeutic products and
personalized medicine services segments as of March 31, 2010 and December 31, 2009:
Therapeutic | Personalized | Corporate and | ||||||||||||||
Products | Medicine Services | Unallocated | Total | |||||||||||||
As of March 31, 2010 |
||||||||||||||||
Receivable from Forest Laboratories |
$ | 6,623,123 | $ | | $ | | $ | 6,623,123 | ||||||||
Prepaid expenses and other current
assets |
| 7,242 | 1,305,422 | 1,312,664 | ||||||||||||
Property and equipment, net |
| 446,254 | 751,161 | 1,197,415 | ||||||||||||
Goodwill |
| | 21,928,598 | 21,928,598 | ||||||||||||
Other assets |
| 271,994 | 20,000 | 291,994 | ||||||||||||
As of December 31, 2009: |
||||||||||||||||
Receivable from Forest Laboratories |
$ | 5,611,476 | $ | | $ | | $ | 5,611,476 | ||||||||
Prepaid expenses and other current
assets |
| 7,242 | 4,784,892 | 4,792,134 | ||||||||||||
Property and equipment, net |
| 471,602 | 801,424 | 1,273,026 | ||||||||||||
Goodwill |
| | 21,928,598 | 21,928,598 | ||||||||||||
Other assets |
| 278,994 | 20,000 | 298,994 |
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ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Except for the historical information contained herein, the information contained herein
contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange
Act), including, in particular, statements about our plans, strategies and prospects. These
statements, which may include words such as may, will, expect, believe, intend, plan,
anticipate, estimate, should, or similar words, are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and uncertainties. Although we
believe that our beliefs, expectations and assumptions reflected in these statements are
reasonable, our actual results and financial performance may prove to be very different from what
we might have predicted on the date of this Form 10-Q. Factors that could cause or contribute to
differences include, but are not specifically limited to, our ability to successfully commercialize
Savella, our ability to create a successful commercial organization, our ability to market our
personalized medicine services, our ability to acquire and develop any compounds or products to
treat any other indications we may pursue in a timely manner, or at all, as well as the other risks
detailed in this Form 10-Q and in our other Securities and Exchange Commission (SEC) filings.
We undertake no obligation to publicly release revisions in such forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the occurrences of
unanticipated events or circumstances, except as required by securities and other applicable laws.
We own or have rights to various copyrights, trademarks and service marks used in our
business, including the following: Cypress Bioscience, Inc., Avise PG SM and Avise
MCV SM. Savella TM is a trademark of Forest Laboratories, Inc. This report
also includes other trademarks, service marks, and trade names of other companies.
Company Overview
Cypress Bioscience, Inc., which was incorporated in Delaware in 1981, provides therapeutics
and personalized medicine services, facilitating improved and individualized patient care. Our goal
is to address the evolving needs of specialist physicians and their patients by identifying unmet
medical needs in the areas of pain, rheumatology, and physical medicine and rehabilitation,
including challenging disorders such as fibromyalgia and rheumatoid arthritis. We believe our
approach to improving patient care creates a unique partnership with physicians, and expect that
offering personalized medicine services and therapeutic products through the same sales
organization will provide us with a differentiated commercial strategy and sustainable competitive
advantage.
In January 2009, we received approval from the U.S. Food and Drug Administration (FDA) to
market Savella (milnacipran HCl) for the management of fibromyalgia (FM). Milnacipran HCl has
been approved for a non-pain condition in over 50 countries, with commercial experience outside the
U.S. since 1997. We obtained an exclusive license in the U.S. and Canada to milnacipran from Pierre
Fabre Medicament (Pierre Fabre) in 2001. In January 2004, we entered into a collaboration
agreement with Forest Laboratories, Inc. (Forest Laboratories), a leading marketer of central
nervous system (CNS) drugs with a strong franchise in the primary care and psychiatric markets.
As part of this collaboration with Forest Laboratories, we sublicensed our rights to milnacipran to
Forest Laboratories for the United States, with an option to extend the territory to include
Canada, which was exercised in July 2007. As part of our agreements with both Forest Laboratories
and Pierre Fabre, we have licensed any patents that may issue from our patent applications related to FM and milnacipran to Forest Laboratories and
Pierre Fabre.
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Additional information on our ongoing post approval clinical development program for
Savella can be found at www.clinicaltrials.gov.
Following the January 2009 FDA approval to market Savella for the management of FM, Savella
was shipped to wholesalers and became available at pharmacies at the end of April 2009. Savella is
a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher
potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role
in the symptoms for FM. We co-promote Savella for FM with our corporate partner, Forest
Laboratories, and by the beginning of 2009, we expanded our sales force to 115 field based
personnel in anticipation of the launch of Savella. At the beginning of May 2009, we began
detailing Savella to rheumatologists, pain centers, and physical medicine and rehabilitation
specialists in the U.S. In addition to receiving a royalty on total net sales of Savella, we are
reimbursed by Forest Laboratories for the Savella sales calls that we make based on Forest
Laboratories cost to conduct such sales calls.
At the end of October 2008, with our initial 11 person sales force, we launched our first two
novel personalized medicine services, Avise PG and Avise MCV, which are detailed to
rheumatologists. Personalized medicine services are tests which are validated analytically and
clinically to provide physicians with actionable information to help manage their patients care,
including predicting the likelihood of developing disease or optimizing therapy. Avise PG is a test
that supports dose optimization and therapeutic decision making for patients taking methotrexate
(MTX), a widely used first-line therapy for rheumatoid arthritis (RA). Avise MCV is a test that
aids in the diagnosis and prognosis of RA. We believe that offering integrated personalized
medicine services and pharmaceutical products through the same sales organization will facilitate
physician access and improve the quality of the sales call, as well as help establish us as a
leader targeting these specific specialists. When we began promoting Savella in May 2009 with our
115 field based personnel we called on the same rheumatologists that we began calling upon in
October 2008 for our first two personalized medicine services.
From time to time we have ongoing Proof of Concept (POC) stage therapeutic product
opportunities in development. At the present time, we are not funding any POC stage development
programs, including the two pharmaceutical candidates acquired in connection with our acquisition
in March 2008 of Proprius, Inc. (Proprius), although we continue to evaluate the merit of future
investment in POC stage development programs. We are also actively continuing to evaluate various
other potential strategic transactions for development stage and commercial product opportunities
where we can leverage our broad technical, clinical and regulatory expertise or our excess sales
force capacity, and are considering a variety of potential transaction structures.
In February 2009, we announced the closing of a transaction to acquire Cellatope Corporations
(Cellatope) technology platform that uses cell-bound complement activation products (CB-CAP) to
diagnose and monitor debilitating autoimmune disorders, including systemic lupus erythematosus
(SLE/Lupus). We acquired the CB-CAP technology in a transaction that included a $2.0 million
cash payment to Cellatope for the diagnostic technology as well as an additional $3.0 million
potential milestone payment associated with the commercial development of the SLE/Lupus monitoring
application.
In March 2008, we announced the closing of the acquisition of Proprius that included an
upfront payment of approximately $37.5 million in cash, as well as up to an additional $37.5
million in potential milestone related payments associated with the development of Proprius early
clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat
rheumatoid arthritis. We are not currently in active development with respect to either product
candidate.
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Results of Operations
The following discussion should be read in conjunction with the consolidated financial
statements and the related notes contained elsewhere in this quarterly report.
Comparison of Three Months Ended March 31, 2010 and 2009
Revenues Under Collaborative Agreements
We recognized revenues under our collaborative agreement with Forest Laboratories of $0.9
million for the three months ended March 31, 2010 compared to $7.4 million for the three months
ended March 31, 2009. Revenues for the three months ended March 31, 2009 included a $6.5 million
reimbursement for the remaining two-thirds of the costs paid in advance by us in connection with
the second Phase III trial for Savella received from Forest Laboratories in January 2009 upon
approval of our New Drug Application (NDA). The revenues under collaborative agreements recorded
during the three months ended March 31, 2010 and 2009 consisted entirely of amounts earned or
reimbursed to us pursuant to our license and collaboration agreement with Forest Laboratories,
entered into in January 2004, for the development and marketing of Savella. Such revenues included
the recognition of the $25.0 million upfront payment received in January 2004 from Forest
Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million license
payment received from Forest Laboratories in July 2007 to extend the territory to include Canada
recognized on a straight-line basis over the remainder of the 8 year amortization period, sponsored
development reimbursements and funding received from Forest Laboratories for certain of our
employees devoted to the development of Savella. The amount of sponsored development
reimbursements from Forest Laboratories and funding received from Forest Laboratories for certain
of our employees devoted to the development of Savella changes periodically and may be eliminated
based on the level of development activity.
Commercial Revenues
We recognized commercial revenues of $7.1 million for the three months ended March 31, 2010
compared to $0.5 million for the three months ended March 31, 2009.
The following table summarizes the components of commercial revenues for the three months
ended March 31, 2010 and 2009:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Royalty revenue |
$ | 2,608,772 | $ | | ||||
Revenue from milestones |
375,215 | 462,660 | ||||||
Co-promotion reimbursement |
4,088,713 | | ||||||
$ | 7,072,700 | $ | 462,660 | |||||
We recognized royalty revenue of $2.6 million for the three months ended March 31, 2010
based on net sales of Savella during the period as reported by Forest Laboratories, subject to an
adjustment by Forest Laboratories based on their total payment obligations to us and Pierre Fabre.
As Savella was launched during the second quarter of 2009, we did not earn any royalties on net
sales of Savella during the three months ended March 31, 2009.
Revenue from milestones for the three months ended March 31, 2010 and 2009 consisted of the
recognition of $0.5 million related to the $25.0 million milestone payment, net of the $1.25
million
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sublicense payment to Pierre Fabre, received in January 2009 upon NDA approval, and net of
sampling obligations of $0.1 million for the three months ended March 31, 2010. The milestone will
be recognized on a straight-line basis, net of sampling obligations, over the ongoing commercial
obligation period, which is estimated to be 13 years.
Co-promotion reimbursement revenue of $4.1 million for the three months ended March 31, 2010
consisted of reimbursement from Forest Laboratories for detail calls provided by our sales force
during the period, as well as reimbursement for certain marketing costs incurred by us. As Savella
was launched during the second quarter of 2009, we did not promote Savella during the of the three
months ended March 31, 2009.
The co-promotion reimbursement for detail calls is determined based on the number of detailing
calls made by our sales force (measured on a per physician call basis) during the period, each of
which is reimbursed at a rate equal to the cost of such effort to Forest Laboratories had it been
accomplished by the Forest Laboratories sales force. The corresponding costs associated with our
co-promotion reimbursement are included as a component of selling, general and administrative
expense on the Consolidated Statement of Operations.
Revenues From Personalized Medicine Services
We recognized revenue from personalized medicine services of $0.2 million during the three
months ended March 31, 2010 compared to approximately $3,000 during the three months ended March
31, 2009. Our personalized medicine services business was launched during the fourth quarter of
2008 with revenues from personalized medicine services recognized as cash payments for the services
are received. The personalized medicine services business has long collection cycles for accounts
receivables, including reimbursements by third-party payers, such as Medicare and other
governmental payer programs, hospitals, private insurance plans and managed care organizations.
Cost of Personalized Medicine Services
Cost of personalized medicine testing services primarily consisted of the compensation and
benefits (including bonuses, if any, and stock-based compensation) of laboratory personnel,
laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related
expenses. We incurred costs of $0.6 million during the three months ended March 31, 2010 compared
to $0.4 million during the three months ended March 31, 2009. The increase in cost of personalized
medicine services during the of the three months ended March 31, 2010 is primarily due to an
increase in compensation and benefit costs associated with an increase in laboratory personnel, as
well as increased shipping and laboratory costs related to an increase in the volume of tests
performed during the period.
Research and Development
Research and development expenses for the three months ended March 31, 2010 were $1.0 million
compared to $7.2 million for the three months ended March 31, 2009. The decrease in research and
development expenses is primarily attributable to a $3.0 million milestone payment owed to Pierre
Fabre upon NDA approval in January 2009 and a $2.0 million payment recognized as research and
development expense during the three months ended March 31, 2009 in connection with our asset
purchase agreement with Cellatope, as well as a decrease in costs incurred during the of the three
months ended March 31, 2010 in connection with our proof of concept studies for new compounds.
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Selling, General and Administrative
Selling, general and administrative expenses for the three months ended March 31, 2010 and
2009 is comprised of the following:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Sales and marketing |
$ | 5,707,506 | $ | 6,543,532 | ||||
General and administrative |
5,622,667 | 3,513,719 | ||||||
$ | 11,330,173 | $ | 10,057,251 | |||||
Sales and marketing expenses decreased to $5.7 million for the three months ended March
31, 2010 from $6.5 million for the three months ended March 31, 2009. The decrease in sales and
marketing expenses is primarily due to a decrease in costs incurred in connection with marketing
and promotional activities for our personalized medicine services business, as well as costs
incurred during the the three months ended March 31, 2009 in connection with training our sales
force for the launch of Savella.
General and administrative expenses increased to $5.6 million for the three months ended March
31, 2010 from $3.5 million for the three months ended March 31, 2009. The increase in general and
administrative expenses was primarily due to costs incurred during the three months ended March 31,
2010 in connection with the resignation of certain employees, increased consulting costs incurred
in connection with business development activities, higher legal fees due to increased patent
filing activity and increased stock-based compensation expense related to the acceleration of
certain stock option grants as per the employment agreements of certain employees who resigned
during the period.
Interest Income
Interest income for the three months ended March 31, 2010 was $0.2 million compared to $0.6
million for the three months ended March 31, 2009. The decrease in interest income for the three
months ended March 31, 2010 compared to the corresponding period in 2009 was primarily due to a
general decrease in interest rates and related yields experienced during the of the three months
ended March 31, 2010 compared to the three months ended March 31, 2009, as well as lower average
balances available for investment during the three months ended March 31, 2010.
Liquidity and Capital Resources
At March 31, 2010, we had cash, cash equivalents and short-term investments of $137.3 million
compared to cash, cash equivalents and short-term investments of $141.7 million at December 31,
2009. Working capital at March 31, 2010 totaled $136.8 million compared to $140.5 million at
December 31, 2009. We have invested a substantial portion of our available cash in money market
funds, marketable debt instruments of governmental agencies and corporate debt securities. We have
established guidelines relating to our investments to preserve principal and maintain liquidity.
Net cash used in operating activities as disclosed in our Condensed Consolidated Statement of
Cash Flows was $3.9 million for the three months ended March 31, 2010 compared to net cash provided
by operating activities of $15.4 million for the three months ended March 31, 2009. The primary
source of cash from operations during the three months ended March 31, 2010 was commercial
revenues, including royalty revenue and the co-promotion reimbursement received from Forest
Laboratories, offset by cash used in operations including $1.9 million for changes in operating
assets and liabilities and non-cash charges of $2.6 million. The primary source of cash from
operations during the three months ended March 31, 2009 was the
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$25.0 million milestone payment and the $6.5 million reimbursement of expenses received from Forest
Laboratories, offset by cash used in operations including $1.8 million for changes in operating
assets and liabilities (excluding impact of initial deferred revenue amount from milestone payment)
and non-cash charges of $2.7 million.
Net cash used in investing activities as disclosed in our Condensed Consolidated Statement of
Cash Flows was $4.2 million for the three months ended March 31, 2010 compared to $10.5 million for
the three months ended March 31, 2009. The fluctuation in net cash used in investing activities
resulted primarily from timing differences in investment purchases, sales and maturities and the
fluctuations in our portfolio mix between cash equivalents and short-term investment holdings. We
expect similar fluctuations to continue in future periods.
As disclosed in our Condensed Consolidated Statement of Cash Flows, we had no cash from
financing activities for the three months ended March 31, 2010 compared to $0.4 million for the
three months ended March 31, 2009. The decrease in net cash provided by financing activities during
the three months ended March 31, 2010 compared to the corresponding prior year period was primarily
the result of no exercises of stock options during the three months ended March 31, 2010 compared
to proceeds of approximately $0.4 million from the exercise of stock options during the the three
months ended March 31, 2009.
The following table summaries our long-term contractual obligations as of March 31, 2010:
Less than | ||||||||||||||||||||
1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||||||||||||||
Total | (2010) | (2011-2013) | (2014-2015) | (2016 +) | ||||||||||||||||
Operating leases |
$ | 2,135,257 | $ | 668,430 | $ | 1,459,603 | $ | 7,224 | $ | | ||||||||||
Total |
$ | 2,135,257 | $ | 668,430 | $ | 1,459,603 | $ | 7,224 | $ | | ||||||||||
Other commercial and contractual commitments include potential milestone payments of up
to $0.5 million to Pierre Fabre and sublicense payments to Pierre Fabre based on 5% of any upfront
and milestone payments received from Forest Laboratories, milestone payments of up to $116.0 million to AlphaRx, Inc. (AlphaRx) in
connection with the successful development and commercialization of a product associated with the
in-license of a topical non-steroidal anti-inflammatory drug (NSAID) therapy, which is not
currently in active development, milestone payments up to approximately $37.0 million in connection
with license agreements related to our POC programs that are not currently in active development,
milestone payments up to $3.0 million to Cellatope in connection with the commercial development of
an SLE/Lupus monitoring application and milestone payments up to $3.9 million in connection with
license agreements related to certain personalized medicine services. Additionally, we are
obligated to reimburse Forest Laboratories for a portion of the active ingredient costs for the
samples of Savella. The amount of such obligation will vary depending on Forest Laboratories
annual marketing plan. We estimate our portion of sampling costs over the term of the agreement
could range from approximately 20% to 40% of the milestone payment received upon NDA approval. In
the event we move forward with development of a product or service under any of these arrangements,
in most instances, we would also be obligated to make royalty payments.
Unless and until we can consistently generate significant cash from our operations, we expect
to continue to fund our operations with existing cash resources that were primarily generated from
the proceeds of offerings of our equity securities, from revenue under our license and
collaboration agreement with Forest Laboratories and, if available to us, cash from financings.
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Our current expected primary cash needs on both a short-term and long-term basis are for
supporting a commercial infrastructure, the development of candidates under our POC trials, if any,
our personalized medicine services, and general research, working capital and other general
corporate purposes and the identification, acquisition or license, and development of, potential
future products and services. Excluding the amounts payable under our agreements with Pierre Fabre, AlphaRx, Cellatope and various licensors under our
POC trials and personalized medicine services, and the costs of in-licensing or acquiring
additional compounds or companies and funding clinical development for any product (other than our
ongoing POC trials) that we may in-license or acquire, we estimate that based on our current
business plan, net cash required to fund operating expenses will approximate $15.0 million to $20.0
million for the year 2010. In addition, one of our ongoing goals is to continue to identify and
in-license new products and product candidates. In the event we acquire, license or develop any new
products or product candidates, or begin any new POC, the amount to fund our operations for 2010
would increase, possibly materially. We expect that our net losses will continue for at least the
next several years as we seek to acquire, license or develop additional products, product
candidates and services. Such losses may fluctuate, the fluctuations may be substantial, and we may
never become profitable.
Based on our current business plan, we believe our cash and cash equivalents and short-term
investments balances at March 31, 2010 are sufficient to fund operations through at least 2011.
However, we are actively continuing to evaluate various potential strategic transactions, including
the potential acquisitions of products, product candidates and companies, and other alternatives.
In order to acquire or develop additional products and product candidates, we will likely require
additional capital. The amount of capital we require is dependent upon many forward-looking factors
that could significantly increase our capital requirements, including the following:
| the costs of maintaining a commercial infrastructure; | ||
| the costs and timing of development and regulatory approvals for all our products and services; | ||
| the costs associated with operating a clinical laboratory; | ||
| the extent to which we acquire or invest in other products, product candidates and businesses; | ||
| the costs of in-licensing drug candidates; | ||
| the ability of Forest Laboratories and us to reach sales milestones and other events under our collaboration agreement; and | ||
| the costs of commercialization of any future products and services. |
Because we are unable to predict the outcome of the foregoing factors, some of which are
beyond our control, we are unable to estimate with certainty our mid to long-term capital needs.
Unless and until we can generate a sufficient amount of product and service revenue, if ever, we
expect to finance future capital needs through public or private equity or debt offerings or
collaboration and licensing arrangements, as well as interest income earned on cash balances. We do
not currently have any commitments or specific plans for future external funding. We may not be
able to raise additional capital and the funds we raise, if any, may not allow us to maintain our
current and planned operations. If we are unable to obtain additional capital, we may be required
to delay, scale back or eliminate our sales force or some or all of our development of existing or
future product candidates and personalized medicine services and discontinue the evaluation or
completion of any proposed acquisitions or strategic transactions.
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To date, we have not had any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which
are established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Critical Accounting Policies
There were no significant changes in critical accounting policies or estimates from those at
December 31, 2009.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have invested our excess cash in U.S. government securities, corporate debt securities and
money market funds with strong credit ratings. As a result, our interest income is most sensitive
to changes in the general level of U.S. interest rates. We do not use derivative financial
instruments, derivative commodity instruments or other market risk sensitive instruments, positions
or transactions in any material fashion. Accordingly, we believe that, while the investment-grade
securities we hold are subject to changes in the financial standing of the issuer of such
securities, we are not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market changes that
affect market risk sensitive instruments. A hypothetical 1% adverse move in interest rates along
the entire interest rate yield curve over a three month period would not materially affect the fair
value of our financial instruments that are exposed to changes in interest rates.
ITEM 4 CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the timelines specified in the SECs rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can only provide reasonable
assurance of achieving the desired control objectives, and in reaching a reasonable level of
assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
There has been no change in our internal controls over financial reporting during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
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PART II OTHER INFORMATION
Item 1 Legal Proceedings
From time to time we are involved in certain litigation arising out of our operations. We are
not currently engaged in any legal proceedings that we expect would materially harm our business or
financial condition.
Item 1A Risk Factors
We have marked with an asterisk those risk factors that reflect substantive changes from the
risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009.
Risks related to our business
* We may not be successful in creating a successful commercial infrastructure.
In a period of a few months, we hired 115 field based sales employees to create a commercial
infrastructure in order to launch Savella along with our corporate partner, Forest Laboratories. We
initially began with an 11 person sales force which launched the first two of our personalized
medicine services in October 2008 and hired the remainder of our current sales field personnel by
January 2009. Our launch of Savella at the beginning of May 2009 is a result of us exercising our
co-promotion right which allows us to co-promote Savella under our agreement with Forest
Laboratories and be paid by Forest Laboratories for the Savella portion of the sales
details. While Savella was approved by the FDA on January 14, 2009, we did not and Forest
Laboratories did not commence product promotion until May 2009. The delay in launching Savella
delayed our ability to generate royalty revenues under our collaboration with Forest Laboratories
and prevented us from being reimbursed for the portion of our sales force calls that would have
been devoted to the promotion of Savella, which caused the net cost of our sales force to be a
larger portion of our expenses for the year 2009.
The co-promotion right is subject to our maintaining our own sales capabilities, which
includes our sales force. In the event we are unable to maintain our sales force, we would lose
our co-promotion right with respect to Savella. In addition, although we now have the number of
required sales personnel, the performance of our sales personnel as measured by actual sales may be
disappointing. Many of our competitors have significantly greater experience than we do in
selling, marketing and distributing products and services, and we may not be able to compete
successfully with them with the sales force we have developed. Even though we intend to offer
integrated personalized medicine services and therapeutic products through the same sales
organization, this may not facilitate greater physician access or improve the quality of the sales
call, and it may not help establish us as a leader targeting these specific specialists. In
addition, because our initial personalized medicine services are targeted only to rheumatologists,
the potential synergies from offering personalized medicine services and therapeutic products
together exist in only a small portion of our Savella sales calls at this time.
In the event that our agreement with Forest Laboratories is terminated, or, with respect to
any other product we may develop which is not covered by our collaboration with Forest
Laboratories, such product is not sold to the specialists that we are currently calling upon, we
may have to obtain the assistance of a pharmaceutical company or other entity with a large
distribution system and a large direct sales force, or build a substantial marketing and sales
force with appropriate technical expertise and supporting distribution capabilities. We may not be
able to enter into such arrangements with third parties in a timely manner or on acceptable terms
or to establish sales, marketing and distribution capabilities of our own. To the extent that we
enter into co-promotion or other licensing arrangements, our product revenues are likely to be
lower than if we directly marketed and sold our products, and any revenues we receive will depend
upon the efforts of third parties, and these efforts may not be successful.
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* We may encounter challenges in our personalized medicine services.
We launched the first two of our personalized medicine services in October 2008. These
services were acquired in March 2008, when we acquired Proprius, a formerly private San Diego-based
personalized medicine services and specialty pharmaceutical company. We have limited experience in
the personalized medicine services space. The launch of our personalized medicine services has
exposed us to potential operational and financial risks, including:
| we may be unable to drive awareness of, and to establish the clinical need for, these personalized medicine services, and therefore may be unable to successfully commercialize these products and services; | ||
| higher development or commercialization costs than we anticipate for the personalized medicine services; | ||
| challenges with running a service business; | ||
| higher than expected licensing and integration costs; and | ||
| exposure to liabilities of licensed and acquired intellectual property, compounds, products and services. |
In addition, the launch of our personalized medicine services has exposed us to significant
impairment charges related to goodwill, and we incurred a $1.1 million non-cash goodwill impairment
charge related to our personalized medicine services business in the fourth quarter of 2009. We
will continue to devote significant resources to our personalized medicine services business and we
may fail to realize the anticipated benefit of this strategic transaction with Proprius and
further, may decide to terminate our personalized medicine services.
* If third-party payers, including managed care organizations and Medicare, do not provide
reimbursement for Avise PG or Avise MCV, their commercial success could be compromised.
We began marketing our personalized medicine services in October 2008 and the cycle time for
payment is long and, further, we might not ever receive payment for some of the services provided.
We have only received payment for a small number of the tests that have been performed, and the
value of the cash collected has been significantly less than the gross value of the testing
services performed. Further, physicians and patients may decide not to order our tests unless
third-party payers, such as managed care organizations as well as government payers such as
Medicare and Medicaid, establish coverage policies for the tests or pay a substantial portion of
the test price. Reimbursement by a third-party payer may depend on a number of factors, including a
payers determination that tests using our technologies are:
| not experimental or investigational; | ||
| medically necessary; | ||
| appropriate for the specific patient and diagnosis; | ||
| cost-effective; | ||
| supported by peer-reviewed publications; and | ||
| included in clinical practice guidelines. |
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There is significant uncertainty concerning third-party reimbursement of any test
incorporating new technology, including our Avise PG and Avise MCV tests. Several entities conduct
technology assessments of new medical tests and devices and provide the results of their
assessments for informational purposes to other parties. These assessments may be used by
third-party payers and health care providers as grounds to deny coverage for a test or procedure.
Since each payer makes its own decision as to whether to establish a policy to reimburse our
test, seeking these approvals is a time-consuming and costly process. We do not yet have any
private third-party payer reimbursement agreements.
Insurers, including managed care organizations as well as government payers such as Medicare,
have increased their efforts to control the cost, utilization and delivery of health care services.
From time to time, the U.S. Congress has considered and implemented changes in the Medicare fee
schedules in conjunction with budgetary legislation. Further reductions of reimbursement for
Medicare services may be implemented from time to time. Reductions in the reimbursement rates of
other third-party payers have occurred and may occur in the future. These measures have resulted in
reduced prices and decreased test utilization for the clinical laboratory industry. If we are
unable to obtain reimbursement approval from private payers and Medicare and Medicaid programs for
our Avise PG and Avise MCV tests, or if the amount reimbursed is inadequate, our ability to
generate revenues from these tests could be limited. Even if we are being reimbursed, insurers may
withdraw their coverage policies or cancel their contracts with us at any time or stop paying for
our test, which would reduce our revenue.
* We have recently substantially increased the size of our organization and may need to continue to
increase the size of our organization, and we may experience difficulties in managing growth.
In a period of a few months in late 2008, we hired 115 field based sales employees and
management to create a commercial infrastructure in order to launch Savella along with our
corporate partner, Forest Laboratories, which contributed to an increase in our full-time employees
from 37 as of September 30, 2008 to 145 as of March 31, 2010. We may need to continue to expand
our managerial, operational and other resources in order to grow, manage and fund our existing
business, including the development activities relating to our personalized medicine services, and
in order to perform under our co-promotion arrangement for Savella we will need to manage
activities relating to the commercialization of Savella. Our management and personnel, systems and
facilities currently in place may not be adequate to support this recent and future growth. Our
need to effectively manage our operations, growth and various projects requires that we:
| manage our internal development and commercialization efforts for our personalized medicine services and Savella effectively while carrying out our contractual obligations to collaborators and other third parties and complying with all applicable laws, rules and regulations; | ||
| continue to improve our operational, financial and management controls, reporting systems and procedures; and | ||
| attract and retain sufficient numbers of talented employees. |
We may be unable to successfully implement these tasks on a larger scale and, accordingly, may
not achieve our development and commercialization goals.
We are dependent on our collaboration with Forest Laboratories to commercialize Savella and to
obtain additional regulatory approvals.
Pursuant to the terms of our license and collaboration agreement with Forest Laboratories, we
granted Forest Laboratories an exclusive sublicense for the development and marketing of Savella,
for all indications in the United States. Forest Laboratories exercised its option to extend the
territory to include
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Canada. Forest Laboratories is responsible for funding the further development
of Savella, including further clinical trials and further regulatory approval. With the FDA
approval of Savella, Forest Laboratories has primary responsibility for the marketing and sale of
the approved product and will share responsibility for compliance with regulatory requirements. We
have limited control over the amount and timing of resources that Forest Laboratories will dedicate
to the further development and marketing of Savella. Our ability to generate milestone and royalty
payments from Forest Laboratories depends on Forest Laboratories ability to achieve market
acceptance of Savella for the management of FM.
We are subject to a number of additional risks associated with our dependence on our
collaboration with Forest Laboratories, including:
| Forest Laboratories could fail to devote sufficient resources to the commercialization, marketing and distribution of Savella or any other products developed under our collaboration agreement, including by failing to develop or expand sales forces if such sales forces appear necessary for the most effective promotion of Savella or any other approved product; | ||
| We and Forest Laboratories could disagree as to post approval development plans, including the number and timing of clinical trials, or as to which additional indications for Savella should be pursued, if any, and therefore Savella may never be sold for any indications other than FM; | ||
| Forest Laboratories could fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing of Savella which could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production and refusal to approve any new drug applications; | ||
| Forest Laboratories could independently develop, develop with third parties or acquire products that could compete with Savella, including drugs approved for other indications used by physicians off-label for the treatment of FM; | ||
| Forest Laboratories could abandon or underfund the post approval development of Savella, repeat or conduct additional clinical trials or require a new formulation of milnacipran for further clinical testing, or delay the commencement of any post approval clinical trials for Savella for the management of FM; and | ||
| Disputes regarding the collaboration agreement that delay or terminate the post approval development or commercialization, may delay or prevent the achievement of clinical or regulatory objectives that would result in the payment of milestone payments or result in significant litigation or arbitration. |
Furthermore, Forest Laboratories may terminate our collaboration agreement upon our material
breach or our bankruptcy and may also terminate our agreement upon 120 days notice in the event
Forest Laboratories reasonably determines that the development program indicates issues of safety
or efficacy that are likely to prevent or significantly delay the filing or approval of any future
NDA or to result in labeling or indications that would significantly adversely affect the marketing
of any product developed under the agreement. If any of these events occur, we may not be able to
find another collaborator for further development or commercialization, and even if we elected to
pursue further development and continued commercialization of Savella, we might not be able to do
so successfully on a stand-alone basis and would experience substantially increased capital
requirements that we might not be able to fund.
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All of our personalized medicine services are performed at a single laboratory and, in the event
this facility was to be affected by man-made or natural disasters, our personalized medicine
services operations could be severely impaired.
We are performing all our personalized medicine testing services in our laboratory located in
San Diego, California. Despite precautions taken by us, any future natural or man-made disaster at
this laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays
in our personalized medicine services operations, damage or destroy our equipment and biological
samples or cause us to incur additional expenses. In addition, we are leasing the facilities where
our lab operates and anytime a lab is moved, it could also cause substantial delay in our
personalized medicine services operations, damage or destroy our equipment and biological samples
or cause us to incur additional expenses. In the event of an extended shutdown of our laboratory,
we may be unable to perform our personalized medicine testing services in a timely manner or at all
and therefore would be unable to operate our personalized medicine services in a commercially
competitive manner, which would also detract from our ability to offer integrated personalized
medicine services and therapeutic products through the same sales organization. We cannot assure
you that we could recover quickly from a serious natural or man-made disaster or that we would not
permanently lose customers as a result of any such business interruption. This could harm our
operating results and financial condition.
In order to rely on a third party to perform our personalized medicine testing services, we
could only use another facility with established state licensure and accreditation under Clinical
Laboratory Improvement Amendments (CLIA). We may not be able to find another CLIA-certified
facility and comply with applicable procedures, or find any such laboratory that would be willing
to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory
opened by us would be subject to certification under CLIA and licensure by various states, which
would take a significant amount of time and result in delays in our ability to continue our
personalized medicine services operations.
Failure to timely or accurately bill for our personalized medicine services could have a material
adverse effect on our personalized medicine services net revenues and bad debt expense.
Billing for personalized medicine testing can be extremely complicated and we have very
limited experience performing such billing. Depending on the billing arrangement and applicable
law, we must bill various payers, such as insurance companies, Medicare, Medicaid, physicians,
hospitals, employer groups and patients, all of which have different billing requirements.
Additionally, compliance with applicable laws and regulations as well as internal compliance
policies and procedures adds further complexity to the billing process. Changes in laws and
regulations could negatively impact our ability to bill our clients or increase our costs. The
Centers for Medicare and Medicaid Services (CMS) also establishes procedures and continuously
evaluates and implements changes to the reimbursement process for billing government programs.
Missing or incorrect information on test requisitions adds complexity to and slows the billing
process, creates backlogs of unbilled tests, and generally increases the aging of accounts
receivable and bad debt expense. Our experience to date has been that our collection cycles
continue to be prolonged, with the amount of cash collected significantly less than the gross value
of testing services performed. Failure to timely or correctly bill may lead to our not being
reimbursed for our services or an increase in the aging of our accounts receivable, which could
adversely affect our results of operations and cash flows. Failure to comply with applicable laws
relating to billing federal healthcare programs could also lead to various penalties, including:
| exclusion from participation in Medicare/Medicaid programs; | ||
| asset forfeitures; |
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| civil and criminal fines and penalties; and | ||
| the loss of various licenses, certificates and authorizations necessary to operate our business. |
Any of these penalties or sanctions could have a material adverse effect on our results of
operations or cash flows.
We have a financial risk related to collections for our personalized medicine services.
With respect to our personalized medicine services, we bill on a fee-for-service basis.
Billing for personalized medicine services is a complex process and we bill many different payers
such as insurance companies, governmental payer programs and patients, each of which has different
billing requirements. We have very limited experience in the collection of accounts receivable and
we face risks in our collection efforts, including potential write-offs of doubtful accounts and
long collection cycles for accounts receivable, including reimbursements by third-party payers,
such as Medicare, Medicaid and other governmental payer programs, hospitals, private insurance
plans and managed care organizations. In addition, as a result of the current economic climate, we
may face increased risks in our collection efforts, which could adversely affect our business.
Also, large write-offs of doubtful accounts (particularly in response to a recent increase in
personal bankruptcies), delays in receiving payments or potential retroactive adjustments and
penalties resulting from audits by payers could adversely affect our business, results of
operations and financial condition. Our experience to date has been that our collection cycles
continue to be prolonged, with the amount of cash collected significantly less than the gross value
of testing services performed.
We rely upon an exclusive license from Pierre Fabre in order to develop and sell Savella, and our
ability to pursue the further development and commercialization of Savella for the management of FM
depends upon the continuation of our license from Pierre Fabre.
Our license agreement with Pierre Fabre provides us with an exclusive license to develop and
sell any products with the compound milnacipran as an active ingredient for any indication in the
United States and Canada, with a right to sublicense certain rights to Forest Laboratories under
our collaboration with Forest Laboratories. Either we or Pierre Fabre may terminate the license
agreement for cause upon 90 days prior written notice to the other party upon the bankruptcy or
dissolution of the other party, or upon a breach of any material provision of the agreement if the
breach is not cured within 90 days following the written notice. Furthermore, Pierre Fabre has the
right to terminate the agreement upon 90 days prior notice to us if we and Forest terminate our
development and marketing activities with respect to Savella, if we challenge certain patent rights
of Pierre Fabre and under specified other circumstances. If our license agreement with Pierre Fabre
were terminated, we would lose our rights to develop and commercialize products using the compound
milnacipran as an active ingredient, as the compound is manufactured under Pierre Fabre patents and
using Pierre Fabre know-how and trade secrets, and it would be unlikely that we could obtain the
active ingredient in milnacipran from any other source.
We rely upon Pierre Fabre as our exclusive supplier of the active ingredient in Savella
and if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may
delay or prevent us from further commercializing Savella.
Pursuant to our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive
supplier to us and Forest Laboratories of the active pharmaceutical ingredient in Savella. Neither
we nor Forest Laboratories have facilities for the manufacture of the active pharmaceutical
ingredient in Savella. Currently, Pierre Fabre manufactures milnacipran in its facility in Gaillac,
France. Pierre Fabre is the only worldwide supplier of milnacipran, which is currently approved for
sale for a non-pain indication outside the United States. Pierre Fabres facility has been
initially inspected by the FDA for compliance with current good manufacturing practices (cGMP)
requirements and after this initial inspection, may be inspected
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from time to time. In addition, Pierre Fabre has qualified an additional manufacturing facility, and the second manufacturing site
that has been identified by Pierre Fabre is also subject to inspection by the FDA for compliance
with cGMP. In the event an inspection results in written deficiencies, it may result in a
disruption or termination of the supply to Forest Laboratories of milnacipran. We do not have
control over Pierre Fabres or its sublicensees compliance with cGMP requirements. If Pierre Fabre
fails to timely and economically supply us sufficient quantities for commercial sale of Savella,
our product sales and market acceptance of Savella could be adversely affected.
Furthermore, our purchase and supply agreement may be terminated for cause either by us or by
Pierre Fabre upon 90 days prior written notice to the other party upon a material breach of the
agreement if the breach is not cured within 90 days following the written notice. We have the right
to manufacture milnacipran if Pierre Fabre does not have a required buffer stock or in the event
that we terminate our license agreement with Pierre Fabre under certain circumstances. If our
purchase and supply agreement with Pierre Fabre is terminated, we are unlikely to be able to
qualify another supplier of the active ingredient within a reasonable time period, and our ability
to further develop and commercialize Savella will be significantly impaired.
Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified
compounds, which limits how we can expand our product candidates.
Under our agreements with Pierre Fabre and Forest Laboratories, Forest Laboratories has agreed
to pay Pierre Fabre and us a royalty, in the event that Forest Laboratories sells a product other
than milnacipran for FM for a specified period of time, which shall not be less than three years.
We are, in turn, obligated to pay a portion of the royalty we receive from Forest Laboratories to
Pierre Fabre. In addition, each of us is subject to limitations related to each partys development of any serotonin norephinephrine
reuptake inhibitor (SNRI) products other than milnacipran. These limitations include: (i) a
prohibition on developing an SNRI product for specified indications for which milnacipran is being
developed; and (ii) a prohibition on developing an SNRI product for any indication for a specified
time period, and after such specified time period, a requirement that if one of the parties
launches and sells an SNRI product that is prescribed off-label for any indication for which
milnacipran is being developed, the selling party must reimburse the other parties for lost sales
due to the off-label use.
* Provisions in our collaboration agreement with Forest Laboratories and our license agreement with
Pierre Fabre may prevent or delay a change in control.
We lose our decision-making authority with respect to the development of Savella if we engage
in a merger, consolidation or sale of all or substantially all of our assets, or if another person
or entity acquires at least 50% of our voting capital stock. In addition, in the event that we have
a change of control that is not approved by our Board or in the event the surviving entity has an
FM product and does not divest such product within 12 months, Forest Laboratories may elect to
terminate our co-promotion rights for Savella or any other product developed under the
collaboration agreement. Our license agreement with Pierre Fabre provides that Pierre Fabre may
elect to terminate the agreement upon a change in control transaction in which a third party
acquirer of us controls an SNRI product, and the acquirer does not take certain actions (e.g.,
divestiture of such SNRI product) within a specified time period to cure the breach of certain
restrictions in the agreement that results from such SNRI product. These provisions may have the
effect of delaying or preventing a change in control or a sale of all or substantially all of our
assets, or may reduce the number of companies interested in acquiring us.
* We are at an early stage of commercialization and we may never generate any significant revenues.
We are at an early stage of development as a biotechnology company and only recently launched
our personalized medicine services in October 2008 and only in May 2009 launched Savella. Without
a history of sales, we may not accurately predict future sales, and our sales may be much smaller
than we have
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forecasted, especially in light of the state of the economy. In addition, given our
increased costs associated with a laboratory and a sales force, and the fact that Forest only
reimburses for the portion of the sales calls that are made for Savella, it is likely that our
costs of running our business will exceed our sales on the personalized medicine services and the
royalty we will receive for sales of Savella in the initial years following launch. Further, our
current product and service candidates, as well as any future products and services that we may
acquire or develop, will require significant additional development, appropriate regulatory
approval, and additional investments before they can be commercialized, if ever. Our product
development and product acquisition efforts may not lead to any further commercial services or
drugs, either because the service and product candidates are not shown to be accurate and
clinically useful in the case of personalized medicine service product candidates, or safe and
effective in the case of drug product candidates, or because we have inadequate financial or other
resources to pursue clinical development of the service and product candidate or because the FDA,
CMS or state authorities do not grant or otherwise withdraw or revoke a regulatory approval.
Rheumatologists do not currently use personalized medicine services to determine the level of
methotrexate (MTX) polyglutamates among their patients on MTX. Therefore, Avise PG is not the
current standard of care. In addition, there are other tests for the diagnosis of RA that compete
with Avise MCV. We may be unable to drive awareness of, and to establish the clinical need for,
these personalized medicine services, and therefore may be unable to successfully commercialize
these products and services.
It is possible that we will never be able to realize material cash inflows from sales of our
personalized medicine services. Further, if we are unable to realize significant revenues in the
sale of any of our current personalized medicine services or if we and Forest Laboratories are
unable to achieve significant sales of Savella, we will be unable to generate sufficient revenues
(including revenues from royalties), may be unsuccessful in raising additional capital and may
cease our operations.
Our failure to comply with the HIPAA security and privacy regulations and other state regulations
may increase our operational costs.
The Health Insurance Portability and Accountability Act (HIPAA) privacy and security
regulations establish comprehensive federal standards with respect to the uses and disclosures of
personal health information (PHI) by health plans and healthcare providers, in addition to
setting standards to protect the confidentiality, integrity and availability of electronic PHI. The
regulations establish a complex regulatory framework on a variety of subjects, including:
the circumstances under which uses and disclosures of PHI are permitted or required
without a specific authorization by the patient, including but not limited to treatment
purposes, activities to obtain payments for services and healthcare operations activities;
a patients rights to access, amend and receive an accounting of certain disclosures of
PHI;
the content of notices of privacy practices for PHI; and
administrative, technical and physical safeguards required of entities that use or receive PHI
electronically.
We have implemented policies and procedures related to compliance with the HIPAA privacy and
security regulations, as required by law. The privacy regulations establish a uniform federal
floor and do not supersede state laws that are more stringent. Therefore, we are required to
comply with both federal privacy regulations and varying state privacy laws. The federal privacy
regulations restrict our ability to use or disclose patient identifiable laboratory data, without
patient authorization, for purposes other than payment, treatment or healthcare operations (as
defined by HIPAA), except for disclosures for various public policy purposes and other permitted
purposes outlined in the privacy regulations. The privacy and
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security regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI, including potential
civil and criminal fines and penalties. Although the HIPAA statute and regulations do not expressly
provide for a private right of damages, we also could incur damages under state laws to private
parties for the wrongful use or disclosure of confidential health information or other private
personal information.
Our business presents the risk of product liability claims.
We may be subject to legal actions asserting product liability claims relating to the use of
Savella. In connection with exercising our co-promotion right, we agreed to indemnify Forest
Laboratories with respect to the promotion of Savella. Although we currently maintain $10.0
million in insurance for product liability claims, litigation is inherently subject to
uncertainties and we may be required to expend substantial amounts in the defense or resolution of
any product liability claims made relating to the use of Savella, some or all of which may not be
covered by insurance.
We also plan to continue conducting clinical trials on humans using milnacipran and from time
to time, and to conduct clinical trials on humans in POC stage development candidates, and the use
of milnacipran and these other development candidates may result in adverse effects. Although we
are aware that there are side effects associated with milnacipran and other potential development
candidates, we will never be able to predict all possible harm or side effects that may result from
the treatment of patients with milnacipran or any of our future product candidates, and the amount
of insurance coverage we currently hold may not be adequate to protect us from any liabilities. We
may not have sufficient resources to pay any liability resulting from such a claim beyond our
insurance coverage.
The FDA approval of any future product candidate is uncertain and will involve the commitment of
substantial time and resources.
We may never receive regulatory approval from the FDA or any other regulatory body required
for the commercial sale of any future products in the United States for any number of reasons.
The regulatory approval of a new drug typically takes many years and the outcome is uncertain.
Despite the time and resources expended, regulatory approval is never guaranteed. If we fail to
obtain regulatory approval for any future therapeutic product candidates, we will be unable to market
and sell any future therapeutic products and therefore may never generate any revenues from product
sales for future therapeutic product candidates or become profitable. In addition, our
collaborators, or our third-party manufacturers failure to comply with the FDA and other
applicable United States or foreign regulations may subject us to administrative or judicially
imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product
seizure or detention, product recalls, total or partial suspension of production and refusal to
approve new drug approval applications.
As part of the regulatory approval process, we must conduct, at our own expense, preclinical
research and clinical trials for each product candidate sufficient to demonstrate its safety and
efficacy to the satisfaction of the FDA and other regulatory agencies in the United States and
other countries where the product candidate will be marketed if approved. The number of preclinical
studies and clinical trials that will be required varies depending on the product, the disease or
condition that the product is in development for and the regulations applicable to any particular
product. The regulatory process typically also includes a review of the manufacturing process to
ensure compliance with applicable regulations and standards, including the cGMP requirements. The
FDA can delay, limit or decline to grant approval for many reasons, including:
| a product candidate may not be safe or effective; | ||
| we may not achieve statistical significance for the primary endpoint; |
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| FDA officials may interpret data from preclinical testing, clinical trials, and/or pharmacovigilance data in different ways than we interpret such data; | ||
| the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of any future collaborators or contract manufacturers; | ||
| the FDA may change its approval policies or adopt new regulations; and | ||
| the FDA may request additional data. |
In light of our regulatory approval for Savella and if we ever receive regulatory approval for any
other future product candidate, and secure and maintain regulatory approvals related to our
personalized medicine services, we will be subject to ongoing FDA, CLIA and state regulatory
obligations and continuing regulatory review by applicable regulatory authorities.
Our regulatory approval for Savella has been and regulatory approval for any future product
candidates will be limited to the indications, dosages and restrictions on the product label. The
FDA has approved Savella for the management of fibromyalgia, and has imposed additional
limitations on the indicated uses, has required post-marketing surveillance and the performance of
potentially costly post-marketing studies. Even though we have received FDA approval for Savella,
as we have seen with other products on the market, Savella or any of our other future product
candidates may later exhibit adverse effects that limit or prevent their widespread use or that
force us to withdraw those product candidates from the market. We and Forest Laboratories continue
to be subject to strict FDA regulation after approval, including regulation of product labeling and
packaging, adverse event reporting, manufacture, storage, advertising, promotion and recordkeeping.
Any unforeseen problems with an approved product or any violation of regulations could result in
restrictions on the product, including its withdrawal from the market. Federal and state regulatory
approvals we have received related to our current personalized medicine services and may receive
related to planned or future personalized medicine services mandate specific clinical laboratory
approval standards in the areas of personnel qualifications, administration, participation in
proficiency testing, patient test management, quality and inspections, and our failure to meet and
maintain those approvals could adversely affect our ability to offer personalized medicine products
and services. In addition, the FDA has in the past and may in the future claim regulatory authority
over laboratory-developed tests, in which event our personalized medicine services may directly or
indirectly become subject to FDA approval.
If advances in technology allow others to perform and/or provide personalized medicine services
which are similar to or better than ours or to perform such services in a more efficient or
cost-effective manner than is currently possible, our personalized medicine services may not meet
with demand in the marketplace or the demand for these services may decrease.
The diagnostic industry is characterized by rapidly advancing technology that may enable
clinical laboratories, hospitals, physicians or other medical providers to perform and/or provide
personalized medicine services similar to or better than ours in a more efficient or cost-effective
manner than is currently possible. With respect to our personalized medicine services, other
advances in technology may result in a decreased demand for our personalized medicine services. In
addition, in order for our business to be successful, we may need to develop new personalized
medicine tests or improve existing personalized medicine tests. There is no assurance, however,
that we will be able to develop or improve these personalized medicine services in the future. Even
if we successfully develop such services in a timely manner, these new tests may not be utilized by
our customers. If we fail to develop new services or release new or improved tests on a timely
basis, or if such tests do not obtain market acceptance for any reason, our financial condition and
results of operations could be harmed.
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The FDA may decide to exercise enforcement discretion and require FDA approval or clearance of our
personalized medicine services.
Laboratory-developed tests, like Avise MCV and Avise PG, are regulated by CLIA, as
administered by the Centers for Medicare and Medicaid Service, or CMS, as well as applicable state
laws. The FDA has in the past also claimed regulatory authority over laboratory-developed tests,
but has stated that it was exercising enforcement discretion in not regulating laboratory-developed
tests performed by high complexity, CLIA-certified laboratories. Our current personalized medicine
services have not been cleared or approved by the FDA. Due to the evolving regulatory environment,
there is always the risk that the FDA could decide to exercise its oversight with respect to any
one of our tests and determine that FDA approval or clearance is required. This would require
additional time and money and could require us to cease offering our personalized medicine
services, which could have a material adverse effect on our business. If we fail to properly
develop our personalized medicine services or if we fail to validate them accurately or
inaccurately measure the performance specifications of the personalized medicine services we
develop due to human error, deficiencies in our quality control process or otherwise, we may become
subject to legal action as well as damage to our reputation with customers, which could have a
material adverse effect upon our business.
Further, in September 2006, the FDA published a draft guidance document that described certain
laboratory-developed tests that the FDA intends to regulate as in vitro diagnostic test systems
(i.e., as medical devices). The FDA calls this category of laboratory-developed tests In Vitro
Diagnostic Multivariate Index Assays (IVDMIAs). The FDA issued a revised draft guidance
pertaining to IVDMIAs in July 2007. In the revised guidance, the FDA defines an IVDMIA as a device
that combines the values of multiple variables using an interpretation function to yield a single,
patient-specific result that is intended for use in the diagnosis of a disease or other condition,
or in the cure, mitigation, treatment, or prevention of disease, and that provides a result that
cannot be independently derived or verified by the end user and whose derivation is
non-transparent. The IVDMIA draft guidance, if adopted as published, would extend FDA oversight
over laboratories that offer laboratory-developed tests which meet this definition. It is possible
that Avise MCV and Avise PG will be subject to the proposed FDA regulatory guidance and
even if not covered by the IVDMIA draft, that new legislation will extend FDA oversight to our
laboratory-developed tests.
* We rely on third parties to conduct all of our clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we may not be able to
obtain regulatory approval for any of our other future product candidates.
As of March 31, 2010, we had only 145 full-time employees. Although we have more employees
than we have had historically, 110 of these employees are devoted to our sales organization, and
therefore, as we have in the past, we expect to continue to rely on third parties to conduct all of
our clinical trials. Because we do not conduct our own clinical trials, we must rely on the efforts
of others and cannot always control or predict accurately the timing of such trials, the costs associated with such trials
or the procedures that are followed for such trials. We expect to continue to rely on third parties
to conduct all of our future clinical trials. If these third parties do not successfully carry out
their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy
of the clinical data they obtain is compromised due to their failure to adhere to our clinical
protocols or for other reasons, or if they fail to maintain compliance with applicable government
regulations and standards, our clinical trials may be extended, delayed or terminated, and we may
not be able to obtain regulatory approval for or successfully commercialize any of our future
product candidates.
Even if our product candidates are approved, the market may not accept these products or services
or our existing products and services.
Avise PG, Avise MCV, Savella, or any future product candidates that we may develop and for
which we obtain the required regulatory approvals may not gain market acceptance among physicians,
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patients, healthcare payers and the medical community. A number of factors may limit the market acceptance of our services and products including the following: |
| timing of market entry relative to competitive services and products; | ||
| extent of marketing efforts by us and with respect to Savella, the marketing efforts of Forest Laboratories; | ||
| rate of adoption by healthcare practitioners; | ||
| rate of a products acceptance by the target community; | ||
| availability of alternative therapies; | ||
| price of our services and products relative to alternative therapies; | ||
| availability of third-party reimbursement; and | ||
| the prevalence or severity of side effects or unfavorable publicity concerning our products or similar products. |
If Avise PG, Avise MCV, Savella, or any future product candidates that we may develop do not
achieve market acceptance, we may lose our investment in that product candidate, which may cause
our stock price to decline, and our financial condition and results of operations could also be
harmed.
Our competitors may develop and market products and services that are less expensive, more
effective or safer, which may diminish or eliminate the commercial success of any products or
services we may commercialize.
The pharmaceutical and personalized medicine services industries are highly competitive and
require an ongoing, extensive search for technological innovation. They also require, among other
things, the ability to effectively discover, develop, test, commercialize, market and promote
products, including communicating the effectiveness, safety and value of products to actual and
prospective customers, including medical professionals. Many of our competitors have greater
resources than we have. This enables them, among other things, to spread their marketing and
promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and
personalized medicine services industries include quality and price, product technology,
reputation, customer service and access to technical information.
It is possible that future developments by our competitors could make our products,
personalized medicine services or technologies less competitive or obsolete. Our future growth
depends, in part, on our ability to provide products and services which are more effective than
those of our competitors and to keep pace with rapid medical and scientific change. Sales of our
services and products may decline rapidly if a new service or product is introduced by a
competitor, particularly if a new service or product represents a substantial improvement over any of our existing services or products. In addition, the high
level of competition in our industry could force us to reduce the price at which we sell our
services or products or require us to spend more to market our services or products.
With respect to our pharmaceutical product for the management of FM, Savella (milnacipran
HC1), in June 2007, the FDA approved Pfizer Inc.s drug pregabalin (Lyrica®) for the
management of FM and in June 2008 approved Eli Lilly and Companys duloxetine
(Cymbalta®) for the management of FM. Duloxetine is a serotonin norepinephrine reuptake
inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology to Savella.
Tricyclic antidepressants (TCAs), which are available as inexpensive generic formulations, are
also used to treat FM and are less expensive than Savella, as are other generic
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antidepressants and pain products commonly used to treat FM. Pfizer Inc.s drug pregabalin (Lyrica®) and Eli
Lilly and Companys duloxetine (Cymbalta®) are competitive with Savella and these
products and any other future products will affect Savellas sales and may cause sales to be lower
than anticipated, as can the numerous generic antidepressants and pain products commonly used
off-label to treat FM.
The market potential for FM is considerable and a number of pharmaceutical companies focused
on therapies for alleviating pain or antidepressant therapies could decide to evaluate their
current product candidates for the treatment of FM at any time. Due to the prevalence and incidence
of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have
significant research and product development programs in FM. We expect to encounter significant
competition both in the United States and in foreign markets for Savella and each of the drugs that
we seek to develop.
With respect to our personalized medicine services, we compete with large, national
laboratories including Quest Diagnostics Incorporated and Laboratory Corporation of America
Holdings, and also compete with regional and esoteric laboratories. The larger competitors have
substantially greater financial and human resources, existing access to the medical community, as
well as a much larger infrastructure than we do. Other companies may develop personalized medicine
services that are more sensitive, specific, easy to use, or cost-effective than our personalized
medicine services, and we may therefore be unable to compete with them in the marketplace.
Our competition for pharmaceutical products will be partially determined by the potential
indications that are ultimately cleared for marketing by regulatory authorities, the timing of any
clearances and market introductions and whether any currently available drugs, or drugs under
development by others, are effective in the same indications. Accordingly, the relative speed with
which we can develop, complete the clinical trials for, receive regulatory clearance for and supply
commercial quantities of products to the market is expected to be an important competitive factor.
We expect that competition among products approved for sale will be based, among other factors
described above, on product efficacy, safety, tolerability, cost, reliability, availability, payer
reimbursement policies and patent protection.
* We are subject to uncertainty relating to health care reform measures and reimbursement policies
which, if not favorable to our products or services or product candidates, could hinder or prevent
the commercial success of our products, services or product candidates.
The continuing efforts of the government, insurance and managed care organizations and other
health care payers to contain or reduce prescription drug costs may adversely affect:
| our ability to set a price we believe is fair for our products and services; | ||
| our ability to generate revenues and achieve or maintain profitability; | ||
| the future revenues and profitability of our potential customers, suppliers and collaborators; and | ||
| the availability of capital. |
Successful commercialization of Savella in the United States will depend in part on the extent
to which government, insurance and managed care organizations and other health care payers
establish appropriate coverage for Savella and related treatments. Third-party payers are
increasingly challenging the prices charged for prescription drugs. Third-party payers are also
encouraging the use of generic drugs. These trends could influence health care coverage policies, as well as legislative proposals
to reform health care or reduce government insurance programs and result in the exclusion of our
products, services and product candidates from coverage and reimbursement programs or lower the
prices of our products, services and product candidates. Our revenues from the sale of our products
and services could be significantly reduced as a result of these cost containment measures and
reforms.
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Market acceptance of our personalized medicine services and the majority of our anticipated
sales from these services will likely depend, in large part, on the availability of adequate
payment or reimbursement from insurance plans, including government plans such as Medicare, managed
care organizations, private insurance plans and other third-party payers. Reimbursement by a
third-party payer may depend on a number of factors, including a payers determination that a
service is not experimental or investigational, and that it is medically necessary, appropriate for
a specific patient or diagnosis, cost effective or supported by peer-reviewed publications. Because
each third-party payer individually approves payment or reimbursement, obtaining these approvals
can be a time-consuming and costly process that requires us to provide scientific and clinical
support for the use of each of these services to each third-party payer separately with no
assurance that approval will be obtained. We do not yet have any private third-party payer
reimbursement agreements. This individualized process or any action by the government negatively
affecting payment for or reimbursement of our services can delay the market acceptance of new
services and may have a negative effect on our revenues and operating results.
We believe third-party payers are increasingly limiting coverage for personalized medicine
services, and in many instances are exerting pressure on service suppliers to reduce their prices.
Consequently, third-party payment or reimbursement may not be consistently available or adequate to
cover the cost of our services. Additionally, third-party payers who have previously approved a
specific level of payment or reimbursement may reduce that level. Under prospective payment
systems, in which healthcare providers may be paid or reimbursed a set amount based on the type of
personalized medicine service procedure performed, such as those utilized by Medicare and in many
private managed care systems, the cost of our personalized medicine services may not be justified
and reimbursed. Any limitations on payment or reimbursement for our services could limit our
ability to commercialize and sell new services or to continue to sell our existing services, or may
cause the selling prices of our existing services to be reduced, which would adversely affect our
revenues and operating results.
* We rely on our employees and consultants for their scientific and technical expertise in
connection with our business operations.
We rely significantly on the scientific and technical expertise of our employees and
consultants to conduct our business. As of March 31, 2010, we had only 145 full-time employees, 110
of which are sales field based and therefore, we rely heavily on each of our employees. In
addition, because we have a small number of employees, we rely much more on consultants than do
other companies. If any of our relationships with our employees or consultants are terminated, we
may lose access to scientific knowledge and expertise necessary for the further development and
commercialization of Savella, our personalized medicine services or any future product candidates.
We expect to continue to rely on consultants and our current employees for scientific and technical
knowledge and expertise essential to our business. Additionally, our employment agreement with our
chief executive officer provides for at will employment, which means that he may terminate his
services to us at any time.
* We have a history of operating losses and we may never be profitable.
We have incurred substantial losses during our history. For the three months ended March 31,
2010 and the years ended December 31, 2009 and 2008, we incurred net losses of $4.6 million, $28.3
million and $18.2 million, respectively. As of March 31, 2010, we had an accumulated deficit of
$201.0 million. We do not expect to be profitable in the near future, and our ability to become
profitable will depend upon our and Forest Laboratories ability to further develop, market and
commercialize Savella, and our ability to further develop, market and commercialize our
personalized medicine services and any other products we may develop. We may not become profitable
in the foreseeable future and may never achieve profitability.
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We will need substantial additional funding and may be unable to raise capital when needed, which
could force us to scale back or eliminate our sales efforts and the development of future product
candidates and personalized medicine services or to discontinue pursuing any proposed
acquisitions, or which could adversely affect our ability to realize the expected benefits of any
completed acquisitions.
We will incur certain non-reimbursable expenses in connection with the sales of Savella, and
will also incur costs in the development of additional personalized medicine services, such as our
CB-CAP technology. We are also incurring expenses in connection with the evaluation of potential
acquisitions or other strategic transactions and will incur additional expenses in the event we
close any such transactions or enter into any co-promotion, in-licensing or collaboration
agreements in connection with any such transactions, or invest in any POC studies. We may also be
required to pay $3.0
million milestone payment in connection with our acquisition of Cellatope. We do not have any
committed external sources of funding and although we expect to have revenues, it is likely our
revenues will be less than we expect to spend in the year 2010 and that at some time in the future
we will likely need to raise additional capital through the sale of equity or debt. The amount of
capital we will require will depend upon many factors, including but not limited to, the amount we
spend on our sales force that is not reimbursed by Forest Laboratories, how much is ultimately
required to develop the products and personalized medicine services that are in development and the
evaluation, pursuit and potential closing of any strategic transactions. If we are unable to raise
capital when we need it, we may have to scale back or eliminate our sales force or some or all of
our development of existing or future product candidates and personalized medicine services and
discontinue the evaluation, pursuit or completion of any proposed acquisitions or strategic
transactions, and we may be unable to realize the expected benefits of any completed acquisitions
or strategic transactions.
* Raising additional funds by issuing securities, or through collaboration and licensing
arrangements, may cause dilution to existing stockholders, restrict our operations, or require us
to relinquish propriety rights.
We may attempt to raise additional funds through public or private equity offerings, as we did
in June 2007 with a public equity offering, or through debt financings. However, the recent credit
crisis and the current economic conditions may prevent us from raising money through debt or equity
financings. We may also issue equity or other securities in connection with corporate
collaborations and licensing arrangements, or raise funds through arrangements like these. To the extent that we are able to raise additional
capital by issuing equity securities, or otherwise issue equity securities in connection with
corporate collaboration and licensing arrangements or otherwise, our existing stockholders
ownership percentage will be diluted. Any financing or other transaction that involves our issuing
securities that we do engage in may also include provisions that restrict our operations. In
addition, if we raise additional funds through collaborations and licensing arrangements, it may be
necessary to relinquish potential valuable rights to our potential products on terms that are not
favorable to us.
* The investment of our cash balance and short-term investments are subject to risks which may
cause losses and affect the liquidity of these investments.
As of March 31, 2010, we had $30.6 million in cash and cash equivalents and $106.7 million in
short-term investments. We have historically invested these amounts in U.S. government securities,
corporate debt securities, commercial paper, certificates of deposit and money market funds.
Certain of these investments are subject to general credit, liquidity, market and interest rate
risks. During the three months ended March 31, 2010, we determined that any declines in the fair
value of our investments were temporary. There may be further declines in the value of these
investments, which we may determine to be
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other-than-temporary. These market risks associated with our investment portfolio may have a negative adverse effect on our results of operations, liquidity
and financial condition.
We may lose our net operating loss carryforwards, which could prevent us from offsetting future
taxable income.
We have incurred substantial losses during our history and do not expect to become profitable
in 2010 and may never achieve profitability. To the extent that we continue to generate taxable
losses, unused losses will carry forward to offset future taxable income, if any, until such unused
losses expire. All unused federal net operating losses will expire 15 or 20 years after any year in
which they were generated. The carryforward period is 15 years for losses incurred prior to 1996
and 20 years for losses incurred subsequent to 1997. Our federal net operating losses wil begin to
expire in 2010, and our California tax loss carryforwards will begin to expire in 2012.
Additionally, the future utilization of our net operating loss carryforwards to offset future
taxable income is subject to annual limitations, pursuant to Internal Revenue Code Sections 382 and
383, as a result of ownership changes that have occurred in prior years, which could prevent us
from fully utilizing our net operating loss carryforwards.
* Our stock price has been very volatile and will likely continue to be volatile.
The market prices of the stock of technology companies, particularly biotechnology companies,
have been highly volatile. For the period from January 1, 2007 through December 31, 2009, the low
and high sales prices for our common stock ranged from $4.90 to $18.20. For the three months ended
March 31, 2010, our low and high sales prices were $4.72 and $6.22, respectively. As of March 31,
2010, the last reported sale price of our common stock was $4.89. Our stock price has been and will
likely continue to be affected by market volatility, as well as by our own performance. We expect
our stock price to be volatile in the near future. The following factors, among other risk factors,
may have a significant effect on the market price of our common stock:
| the commercial sales of Savella and our personalized medicine services; | ||
| development of our personalized medicine services and other product candidates; | ||
| developments in our relationship with Forest Laboratories, including the termination of our agreement; | ||
| developments in our relationship with Pierre Fabre, including the termination of our agreement; | ||
| our entering into, or failing to enter into, an agreement for the acquisition of any products, product candidates or companies, or an agreement with any corporate collaborator; | ||
| our available cash; | ||
| announcements of technological innovations or new products by us or our competitors; | ||
| developments in our patent or other proprietary rights; | ||
| fluctuations in our operating results; | ||
| litigation initiated by or against us; | ||
| developments in domestic and international governmental policy or regulation; and | ||
| economic and other external factors or other disaster or crisis. |
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* The concentration of ownership among our existing officers, directors and principal stockholders
may result in the entrenchment of management, prevent other stockholders from influencing
significant corporate decisions and depress our stock price.
As of March 31, 2010, our executive officers, directors and stockholders who hold at least 5%
of our stock beneficially owned and controlled approximately 60% of our outstanding common stock.
If these officers, directors and principal stockholders act together, they will be able to help
entrench management and to control matters requiring approval by our stockholders, including a financing in which
we sell more than 20% of our voting stock at a discount to the market price, the removal of any
directors up for election, the election of the members of our board of directors, mergers, a sale
of all or substantially all of our assets, going private transactions and other fundamental
transactions. This concentration of ownership could also depress our stock price.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
Provisions in our second amended and restated certificate of incorporation and our third
amended and restated bylaws may delay, impede or prevent an acquisition or change in control of us.
In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace
or remove our current management by making it more difficult for stockholders to replace members of
our board of directors, who are responsible for appointing the members of our management team.
These provisions include, among others, a requirement that our board of directors be divided into
three classes with directors serving three year terms and with only one class of directors being
elected in any given year, a requirement that special meetings of our stockholders may only be
called by the chairman of the board, our chief executive officer or a majority of our board of
directors and a prohibition on actions by our stockholders by written consent. In addition, because
we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of
15% of our outstanding voting stock from merging or combining with us. Finally, our charter
documents establish advance notice requirements for nominations for election to our board of
directors and for proposing matters that can be acted upon at stockholder meetings. Although we
believe these provisions together provide for an opportunity to receive higher bids by requiring
potential acquirers to negotiate with our board of directors, they would apply even if the offer
may be considered beneficial by some stockholders.
We expect to continue incurring significant costs as a result of enacted and proposed changes in
laws and regulations relating to corporate governance matters.
Changes in the laws and regulations affecting public companies, including the provisions of
the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and by The NASDAQ Stock Market LLC,
have resulted and we expect will continue to result in significant costs to us. In particular, our
efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations
regarding our required assessment of our internal controls over financial reporting and our
independent registered public accounting firms audit of internal control over financial reporting
has required the commitment of significant financial and managerial resources. We expect these
efforts to require the continued commitment of significant financial resources and management time
related to compliance activities. Additionally, these laws and regulations could make it more
difficult or costly for us to obtain certain types of insurance, including director and officer
liability insurance, and we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact of these events could
also make it more difficult for us to attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers.
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If we fail to maintain proper and effective internal controls, our ability to produce accurate
financial statements could be impaired, which could adversely affect our ability to operate our
business and investors view of us.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002,
including Section 404 related to internal controls, and the related rules and regulations of the
SEC, including expanded disclosures and accelerated reporting requirements and more complex
accounting rules. Compliance with Section 404 and other requirements will increase our costs and
will continue to require additional management resources. We may need to continue to implement
additional finance and accounting systems, procedures and controls to satisfy reporting
requirements. If we are unable to obtain future unqualified reports as to the effectiveness of our
internal control over financial reporting, investors could lose confidence in the reliability of our internal control over financial reporting, which
could adversely affect our ability to raise financing and operate our business as well as our stock
price.
Risks related to our intellectual property
* We rely primarily on method of use patents to protect our proprietary technology for the sales of
Savella, and our ability to compete may decrease or be eliminated if we are not able to protect our
proprietary technology.
Our ability to realize the full sales potential for Savella (milnacipran HCl), our only
therapeutic product, may decrease or be eliminated if we are not able to protect our proprietary
technology. The composition of matter patent for milnacipran (U.S. Patent 4,478,836) expired in
June 2002, and a method of synthesis patent (U.S. Patent 5,034,041) expired in December 2009.
Accordingly, we rely on the patent for the method of use of milnacipran to treat FM (U.S. patent
6,602,911), pain (U.S. Patent 6,992,110) and the method of use of milnacipran to treat symptoms of
chronic fatigue syndrome (U.S. Patent 6,635,675) issued to us, to protect our proprietary
technology with respect to the development of milnacipran. The method of use patent directly
relevant to our current milnacipran product candidate is the U.S. patent 6,602,911; the other two
method of use patents may have future applicability. We have also filed additional patent
applications related to milnacipran and to the use of milnacipran for FM (and other related pain
syndromes and disorders), although no patents have issued on these patent applications. Because
there is no patent protection for the composition of matter of milnacipran, other companies may be
able to sell milnacipran in competition with us and Forest Laboratories for indications for which
we do not have use patent protection unless we and Forest Laboratories are able to obtain
additional protection through milnacipran-related patents or additional use patents that may issue
from our pending patent applications or from regulatory exclusivity. It may be more difficult to
establish infringement of methods of synthesis, formulation or use patents as compared to a patent
on a compound. If we or Forest Laboratories are not able to obtain and enforce these patents, a
competitor could use milnacipran for a treatment or use not covered by any of our patents.
In connection with our acquisition of Proprius, we acquired rights to an issued patent (U.S.
patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to the
Avise PG test (U.S. Patent 7,582,282 issued September 1, 2009) and a number of patents in
prosecution on the Avise MCV. Although we have the right to two issued patents covering the Avise
PG test, we may not be able to secure any additional patent protection and the existing patent may
not ensure exclusivity through the patent term.
The validity of a United States patent depends, in part, on the novelty of the invention it
discloses. The pharmaceutical industry is characterized by constant investment in new drug
discovery and
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development, and this results in a steady stream of publications regarding the
product of this investment, any of which would act to defeat the novelty of later-discovered
inventions. Issued United States patents enjoy a presumption of validity that can only be overcome
by clear and convincing evidence. However, patents are nonetheless subject to challenge and can be
invalidated if a court determines, retrospectively, that despite the action of the U.S. Patent and
Trademark Office in issuing the patent, the corresponding patent application did not meet the
statutory requirements. If a competitor or other third party were to successfully challenge our
patents, and claims in these patents are narrowed or invalidated, our ability to protect the
related product from competition would be compromised.
We also expect to rely on the United States Drug Price Competition and Patent Term Restoration
Act, commonly known as the Hatch-Waxman Amendments, for protection of Savella and our other future
products. The Hatch-Waxman Amendments provide data exclusivity for new molecular entities, such as
that in Savella. Once a drug containing a new molecule is approved by the FDA, the FDA cannot
accept an abbreviated NDA for a generic drug containing that molecule for five years, although the
FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by
independent clinical data. Amendments have been proposed that would narrow the scope of Hatch-Waxman exclusivity and
permit generic drugs to compete with our drug. After the Hatch-Waxman exclusivity period expires,
assuming our patents are valid, we still expect to rely on our method of use patents to protect our
proprietary technology with respect to the development of milnacipran. The patent positions of
pharmaceutical companies are uncertain and may involve complex legal and factual questions. We may
incur significant expense in protecting our intellectual property and defending or assessing claims
with respect to intellectual property owned by others. Any patent or other infringement litigation
by or against us is likely and could result in significant expense to us, including diversion of
the resources of management.
Others may file patent applications or obtain patents on similar technology or compounds that
compete with Savella for the treatment of FM, for any of our personalized medicine services or any
of the products that may be developed under any POC trials we conduct. We cannot predict the
breadth of claims that will be allowed and issued in patent applications. Once patents have issued,
we cannot predict how the claims will be construed or enforced. We may infringe on intellectual
property rights of others without being aware of the infringement. If another party claims we are
infringing their technology, we could have to defend an expensive and time consuming lawsuit, pay a
large sum if we are found to be infringing, or be prohibited from selling or licensing our products
unless we obtain a license or redesign our product, which may not be possible.
We also rely on trade secrets and proprietary know-how to develop and maintain our competitive
position. Some of our current or former employees, consultants or scientific advisors, or current
or prospective corporate collaborators, may unintentionally or willfully disclose our confidential
information to competitors or use our proprietary technology for their own benefit. Furthermore,
enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult
to prove, making the outcome uncertain. Our competitors may also independently develop similar
knowledge, methods and know-how or gain access to our proprietary information through some other
means.
Our ability to compete may decline if we do not adequately protect our proprietary rights.
Our commercial success depends on obtaining and maintaining proprietary rights to our products
and services and product candidates and technologies and their uses as well as successfully
defending these rights against third party challenges. We will only be able to protect our products
and services and product candidates, proprietary technologies and their uses from unauthorized use
by third parties to the extent that valid and enforceable patents or effectively-protected trade
secrets cover them.
Our ability to obtain patent protection for our products and services and product and service
candidates and technologies is uncertain due to a number of factors, including:
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| we may not have been the first to make the inventions covered by our pending patent applications or issued patents; | ||
| we may not have been the first to file patent applications for our products and services and product and service candidates or the technologies we rely upon; | ||
| others may independently develop similar or alternative technologies or duplicate any of our technologies; | ||
| our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability; | ||
| any or all of our pending patent applications may not result in issued patents; | ||
| we may not seek or obtain patent protection in all countries that will eventually provide a significant business opportunity; | ||
| any patents issued to us or our collaborators may not provide a basis for commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties; | ||
| some of our technologies may not be patentable; | ||
| others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or | ||
| others may identify prior art which could invalidate our patents. |
Even if we obtain patents covering our product and service candidates or technologies, we may
still be barred from making, using and selling our product candidates or technologies because of
the patent rights of others. Others may have filed and in the future are likely to file patent
applications covering compounds, assays, genes, gene products or therapeutic or personalized
medicine services that are similar or identical to ours. Numerous U.S. and foreign issued patents
and pending patent applications owned by others exist in the area of the fields in which we have
developed and are developing products and services. These could materially affect our ability to
develop our product and service candidates or sell our products and services. Because patent
applications can take many years to issue, there may be currently pending applications, unknown to
us, which may later result in issued patents that our products and services and product and service
candidates or technologies may infringe. These patent applications may have priority over patent
applications filed by us. Disputes may arise regarding the ownership or inventorship of our
inventions. It is difficult to determine how such disputes will be resolved. Others may challenge
the validity of our patents. If our patents are found to be invalid we will lose the ability to
exclude others from making, using or selling the inventions claimed therein.
Some of our research collaborators and scientific advisors have rights to publish data and
information to which we have rights. If we cannot maintain the confidentiality of our technology
and other confidential information in connection with our collaborations, then our ability to
receive patent protection or protect our proprietary information will be impaired. In addition,
in-licensed technology is important to our business. We generally will not control the patent
prosecution, maintenance or enforcement of in-licensed technology.
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A dispute concerning the infringement or misappropriation of our proprietary rights or the
proprietary rights of others could be time consuming and costly and an unfavorable outcome could
harm our business.
There is significant litigation in the industry regarding patent and other intellectual
property rights. We may be exposed to future litigation by third parties based on claims that our
products and services and product and service candidates, technologies or activities infringe the
intellectual property rights of others. If our drug development or personalized medicine services
activities are found to infringe any such patents, we may have to pay significant damages. There
are many patents relating to chemical compounds and the uses thereof. If our compounds are found to
infringe any such patents, we may have to pay significant damages. A patentee could prevent us from
making, using or selling the patented compounds. We may need to resort to litigation to enforce a
patent issued to us, protect our trade secrets or determine the scope and validity of third party
proprietary rights. From time to time, we may hire scientific personnel formerly employed by other
companies involved in one or more areas similar to the activities conducted by us. Either we or
these individuals may be subject to allegations of trade secret misappropriation or other similar
claims as a result of their prior affiliations. If we become involved in litigation, it could
consume a substantial portion of our managerial and financial resources, whether we win or lose. We
may not be able to afford the costs of litigation. Any legal action against our company or our
collaborators could lead to:
| payment of damages, potentially treble damages, if we are found to have willfully infringed such parties patent rights; | ||
| injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products, services and product and service candidates; or | ||
| we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all. As a result, we could be prevented from commercializing current or future products, services and product and service candidates. |
The patent applications of pharmaceutical, biotechnology and personalized medicine companies
involve highly complex legal and factual questions, which could negatively impact our patent
position.
The patent positions of pharmaceutical and biotechnology and personalized medicine services
companies can be highly uncertain and involve complex legal and factual questions. The U.S. Patent
and Trademark Offices standards are uncertain and could change in the future. Consequently, the
issuance and scope of patents cannot be predicted with certainty. Patents, if issued, may be
challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject
to interference proceedings and U.S. patents may be subject to reexamination proceedings in the
U.S. Patent and Trademark Office (and foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent office), which proceedings could result in either
loss of the patent or denial of the patent application or loss or reduction in the scope of one or
more of the claims of the patent or patent application. In addition, such interference,
reexamination and opposition proceedings may be costly. Accordingly, rights under any issued
patents may not provide us with sufficient protection against competitive products or processes.
In addition, changes in or different interpretations of patent laws in the United States and
foreign countries may permit others to use our discoveries or to develop and commercialize our
technology and products and services without providing any compensation to us. The laws of some
countries do not protect intellectual property rights to the same extent as United States laws and
those countries may lack adequate rules and procedures for defending our intellectual property
rights. For example, some countries, including many in Europe, do not grant patent claims directed
to methods of treating humans, and in these countries patent protection may not be available at all
to protect our product, services or product and service candidates.
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If we fail to obtain and maintain patent protection and trade secret protection of our
products, services and product and service candidates, proprietary technologies and their uses, we
could lose our competitive advantage and competition we face would increase, reducing our potential
revenues and adversely affecting our ability to attain or maintain profitability.
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 5 Other Information
Not applicable
Item 6 Exhibits
3.1 | Second Amended and Restated Certificate of Incorporation. (1) | ||
3.2 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation. (2) | ||
3.3 | Fourth Amended and Restated By-Laws. (3) | ||
4.1 | Form of Stock Certificate. (4) | ||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a 14(a) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as amended. | ||
31.2 | Certification of Chief Financial Officer pursuant to to Rule 13a 14(a) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as amended. | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a 14(b) or Rule 15d 14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Incorporated by reference to Appendix C of our Definitive Proxy Statement filed with the SEC on August 11, 2003 | |
(2) | Incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 2009 filed with the SEC on November 9, 2009. | |
(3) | Incorporated by reference to Exhibit 3.1 to Form 8-K filed with the SEC on May 6, 2009. | |
(4) | Incorporated by reference to Exhibit 4.1 to Form S-1 Registration Statement No. 33-41225 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned
thereunto duly authorized.
Cypress Bioscience, Inc. |
||||
Date: May 10, 2010 | By: | /s/ JAY D. KRANZLER | ||
Chief Executive Officer and Chairman of the | ||||
Board (Principal Executive Officer) | ||||
Date: May 10, 2010 | By: | /s/ SABRINA MARTUCCI JOHNSON | ||
Chief Financial Officer, Chief Operating | ||||
Officer and Executive Vice President (Principal Financial Officer) |
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