e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| |
|
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal year ended December 31, 2005 |
|
Commission File Number 000-51768 |
VALERA PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| |
|
|
|
Delaware |
|
13-4119931 |
(State or Other Jurisdiction
of Incorporation or Organization) |
|
(I.R.S. Employer
Identification No.) |
7 Clarke Drive
Cranbury, New Jersey 08512
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code:
(609) 235-3000
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act: common stock $0.001 par value
(Title of
class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of
the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
| Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer þ |
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
As of March 1, 2006, the aggregate market value of the
common stock of registrant held by non-affiliates of registrant
was approximately $50.0 million. The common stock of the
registrant did not trade on a public market as of June 30,
2005.
As of March 1, 2006, there were 14,885,546 shares of
registrant’s common stock, $0.001 par value, outstanding.
Documents
Incorporated by Reference: None
Valera Pharmaceuticals
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005
Table of Contents
i
Part I
Forward-Looking Statements
We have included, and from time to time may make in our public
filings, press releases or other public statements, certain
statements, including (without limitation) those under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7 (“MD&A”), and “Quantitative and
Qualitative Disclosures about Market Risk” in Part II,
Item 7A, that may constitute forward-looking statements. In
addition, our management may make forward-looking statements to
analysts, investors, representatives of the media and others.
These forward-looking statements are not historical facts and
represent only Valera Pharmaceuticals’ beliefs regarding
future events, many of which, by their nature, are inherently
uncertain and beyond our control.
The nature of Valera Pharmaceuticals’ business makes
predicting the future trends of our revenues, expenses and net
income difficult. The risks and uncertainties involved in our
businesses could affect the matters referred to in such
statements and it is possible that our actual results may differ
from the anticipated results indicated in these forward looking
statements. Important factors that could cause actual results to
differ from those in the forward-looking statements include
(without limitation):
|
|
|
| |
• |
changes in reimbursement rates for Vantas and any future
products; |
| |
| |
• |
the actions and initiatives of current and potential competitors; |
| |
| |
• |
the impact of current, pending and future legislation,
regulation and legal actions in the U.S. and worldwide affecting
the pharmaceutical and healthcare industries; |
| |
| |
• |
our ability to manufacture our Vantas product; |
| |
| |
• |
our ability to develop products, receive regulatory approvals,
and market our products; and |
| |
| |
• |
other risks and uncertainties detailed under “Risk
Factors” in Part I, Item 1A,
“Competition” and “Regulation” in
Part I, Item 1 and elsewhere throughout this report. |
Accordingly, you are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date on
which they are made. Valera Pharmaceuticals undertakes no
obligation to update publicly or revise any forward-looking
statements to reflect the impact of circumstances or events that
arise after the dates they are made, whether as a result of new
information, future events or otherwise except as required by
applicable law. You should, however, consult further disclosures
Valera Pharmaceuticals may make in future filings of its Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K, and any amendments thereto.
1
Overview
Valera Pharmaceuticals is a specialty pharmaceutical company
concentrating on the development, acquisition and
commercialization of products for the treatment of urological
and endocrine conditions, diseases and disorders, including
products that utilize our proprietary technology. Our first
product, Vantas, was approved by the FDA in October 2004. Vantas
is a 12-month implant
indicated for the palliative treatment of advanced prostate
cancer. Vantas slows prostate tumor growth by delivering
histrelin, a luteinizing hormone-releasing hormone agonist, or
LHRH agonist. We began marketing Vantas in November 2004
utilizing our sales force that is currently calling on
urologists in the U.S. that account for the majority of LHRH
agonist product sales. In addition to Vantas, we are developing
a pipeline of product candidates for indications that include
central precocious puberty, acromegaly, opioid addiction,
interstitial cystitis, nocturnal enuresis and bladder cancer.
Total U.S. sales of LHRH agonist products for the
palliative treatment of prostate cancer were approximately
$900 million in 2005 based on our estimates and IMS Health
Incorporated data, with the leading products being three- and
four-month injection formulations. We believe that total U.S.
sales of LHRH agonist products declined by
approximately 10% in 2005, primarily as a result of lower
prices due to changes in Medicare reimbursement rates. We
believe that Vantas has a competitive advantage over other
products because it delivers an even, controlled dose of LHRH
agonist over a 12-month
period, and is the only product indicated for the palliative
treatment of advanced prostate cancer that delivers histrelin,
the most potent LHRH agonist available on the market.
Vantas is a hydrogel implant based on our patented Hydron
Technology, which is a drug delivery system that allows us to
control the amount and timing of the release of drugs into the
body for up to 12 months. Several of our product candidates
utilize our Hydron Technology delivery system. We intend to
leverage our specialized sales force to market certain of our
product candidates, if approved, since the indications of these
product candidates are treated by many of the same physicians we
are calling on for Vantas.
Our Competitive Strengths
We believe that our key competitive strengths that distinguish
us from our competitors include:
|
|
|
| |
• |
Technology. We believe that Hydron Technology offers
significant advantages over existing drug delivery systems.
Implants using Hydron Technology can be adapted to deliver many
kinds of drugs over an extended period of time. Currently, we
only have regulatory approvals for Vantas. We will have to
obtain approval for each product we develop, including products
using Hydron Technology. In addition, our implants are soft and
flexible, enhancing patient comfort. Further, because we own the
manufacturing know-how to develop products utilizing Hydron
Technology, we are able to control and maximize the potential
commercial uses of this technology. |
| |
| |
• |
Development Capability. As demonstrated by Vantas, we
have succeeded in developing a product, successfully taking it
through the regulatory process to market in the U.S. in less
than a year from the submission of a new drug application
without utilizing an accelerated approval process. However, we
may not be able to obtain FDA approval for our product
candidates as quickly as we did for Vantas. Over the past three
years, we have advanced two other product candidates into
late-stage clinical development. We expect to continue to
utilize this capability to efficiently develop future products. |
| |
| |
• |
Manufacturing Ability. We manufacture Vantas and our
product candidates utilizing Hydron Technology using a patented
process. In addition, we have developed proprietary equipment
and scalable manufacturing methods to achieve cost-effective
commercial production. Further, because we control the
manufacture of Vantas and our product candidates that use Hydron
Technology, we can ensure high quality and fully realize any
manufacturing cost efficiencies. |
2
|
|
|
| |
• |
Sales and Marketing. We are currently calling on
urologists that account for the majority of LHRH agonist product
sales in the U.S. By adjusting our current sales force structure
slightly, we will be able to call on physicians in additional
specialty areas, such as endocrinology. These therapeutic areas
are attractive because a small, focused sales force can
effectively target them. We also believe that the direct
physician distribution channel of Vantas may present a barrier
to the future entry of competition from generic products because
generic drug companies do not typically have field sales forces.
Outside the U.S., we intend to partner with companies with a
local presence and proven distribution channels in the urology
market for distribution of Vantas. |
Product Development
The following table summarizes certain information regarding
Vantas and our product candidates:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Therapeutic |
|
Delivery |
|
|
|
Next Anticipated |
| |
|
Indication |
|
Area |
|
Method |
|
Status |
|
Milestone |
| Product |
|
|
|
|
|
|
|
|
|
|
| |
|
Vantas |
|
|
Prostate Cancer |
|
|
Urology |
|
Implant |
|
U.S. Commercial Sales |
|
Commence Mutual Recognition Process in Europe in Second Quarter
of 2006 |
| |
|
Supprelin®-LA |
|
Central Precocious Puberty (early onset of puberty) |
|
Endocrinology |
|
Implant |
|
Phase III |
|
New Drug Application Filing in Second Quarter of 2006 |
| |
VP003
(Octreotide) |
|
|
Acromegaly (giantism) |
|
|
Endocrinology |
|
Implant |
|
Phase I/II |
|
Phase IIb Clinical Trial in First Half of 2006 |
| |
VP004
(Naltrexone) |
|
|
Addiction Disorders |
|
|
Central Nervous System |
|
Implant |
|
Pre-clinical |
|
Phase I/II Clinical Trial in First Half of 2006 |
| |
VP005
(Anti-inflammatory) |
|
Interstitial Cystitis (bladder inflammation) |
|
Urology |
|
Bladder Instillation |
|
Pre-clinical |
|
Phase I/II Clinical Trial in Second Half of 2006 |
| |
VP006
(Peptide) |
|
Nocturnal Enuresis (bed-wetting) |
|
Urology |
|
Oral Tablet |
|
Phase I |
|
Clinical Trials in First Half of 2006 |
| |
|
Valrubicin |
|
|
Bladder Cancer |
|
|
Urology |
|
Bladder Instillation |
|
Acquisition Pending |
|
Closing of Asset Purchase in First Quarter of 2006 |
| |
Vantas
Vantas is a soft and flexible implant utilizing Hydron
Technology to deliver histrelin over a
12-month period for the
palliative treatment of advanced prostate cancer. The total
number of patients with advanced prostate cancer in the
U.S. was 666,300 in 2004, and we estimate that
approximately 50% of these patients are receiving treatment with
LHRH therapy. We estimate the patient population to be similar
in Europe. We received regulatory approval to commercialize
Vantas in Denmark in November 2005, and we expect to commence
the mutual recognition process for regulatory approval in other
European countries in the second quarter of 2006. We received
regulatory approval in Canada in March 2006. In addition, one of
our marketing partners has applied for regulatory approval in
Thailand, Singapore, Malaysia, and Taiwan.
The current standard of care for the palliative treatment of
prostate cancer is LHRH agonist therapy. An agonist is a
chemical substance capable of activating a receptor to induce a
full or partial pharmacological response. LHRH agonist therapies
for advanced prostate cancer are designed to suppress the
production of testosterone because testosterone promotes and
accelerates the growth of tumors
3
associated with prostate cancer. Histrelin, a powerful inhibitor
of testosterone production, is the most potent LHRH agonist
available.
Total U.S. sales of LHRH agonist products for the
palliative treatment of prostate cancer were approximately
$900 million in 2005 based on our estimates and IMS Health
market data. We believe that amount represents a decline of
approximately 10% from 2004, primarily as a result of lower
prices due to changes in Medicare reimbursement rates. The most
common dosage forms for the administration of LHRH agonists for
this indication involve three- and four-month injection
formulations such as Lupron and Eligard, which deliver
leuprolide, Trelstar, which delivers triptorelin, and Zoladex, a
biodegradable rod, which delivers goserelin. Another product is
Viadur, a rigid metal implant that releases leuprolide over a
12-month period. We
believe that Vantas is a more comfortable and convenient
alternative to competing products because it eliminates the
requirement of multiple physician visits and repeated injections
and is smaller, softer and more flexible than other implants.
Implantation, however, may be less well-received by some
patients than injection therapy. In addition, in our
Phase III clinical trial for Vantas, 100% of the evaluable
patients achieved chemical castration at week four and
testosterone suppression was maintained throughout the
52-week study period
for 99% of the patients. Based on these data, we believe Vantas
is a highly effective product for the palliative treatment of
advanced prostate cancer. During the Phase III clinical
trial, side effects included hot flashes, fatigue and implant
site reactions, such as swelling and redness.
Prostate cancer is the most common cancer for men and the second
leading cause of cancer death in men. According to the American
Cancer Society, every year approximately 200,000 men are
diagnosed with prostate cancer and 30,000 die from this disease.
The National Cancer Institute’s SEER Program and the
National Oncology Database each project that this patient group
will grow at an annual rate of 2% to 3% per year through
2008 and beyond.
Our sales force is currently selling and marketing Vantas to the
urologists that account for the majority of LHRH agonist product
sales in the U.S. Our product specialists utilize various
promotional materials when making clinical presentations,
including instructional videos on proper implantation technique.
In remote areas where our product specialists cannot make
personal visits, we conduct direct mail programs to selected
physicians. We also supply physicians, health plan
administrators and specialty pharmacies with a pharmaco-economic
model to demonstrate the cost effectiveness of Vantas compared
to other LHRH agonist products due to decreased utilization of
staff time for repeated injections and a single reimbursement
claim per year as opposed to three or four. Additionally, we
support our sales efforts by employing a wide range of marketing
programs to promote Vantas, including journal advertising,
industry publications, medical educational conferences and
internet initiatives.
Supprelin-LA
Supprelin-LA is an implant utilizing Hydron Technology to
deliver histrelin over a
12-month period for the
treatment of central precocious puberty, or CPP. The prevalence
of this condition is estimated to be between one in 5,000 to
10,000 children. This yields a potential population of up to
11,700 children with this condition who are 14 or younger in the
U.S. CPP is the early onset of puberty in young children,
resulting in the development of secondary sexual characteristics
and short stature, if left untreated. The development of these
secondary sexual characteristics is due to an increase in the
secretion of sex hormones, the cause of which is unknown. The
standard of care of CPP involves the use of LHRH agonists to
suppress the secretion of sex hormones in order to delay the
onset of puberty.
One therapy currently marketed to treat CPP is Lupron Depot-PED,
which is manufactured and marketed by TAP Pharmaceutical
Products, Inc. According to IMS Health market data, sales of
Lupron Depot-PED generated revenues in excess of
$76 million in the U.S. in 2005. The monthly cost of
Lupron Depot-PED is in excess of $1,000 per month. CPP treatment
using Lupron Depot-PED consists of intramuscular injections of
leuprolide every four weeks to hormonally suppress these
children. Our research indicates that, in many cases, hormonal
suppression may not be achieved by a four-week injection
schedule, and leuprolide needs to be administered more
frequently. Supprelin-LA delivers histrelin, which
4
has ten times the relative potency of leuprolide, and which
has been previously approved for this condition as a daily
injection for children. Supprelin-LA is formulated to release a
higher daily dose of histrelin than Vantas because children with
CPP need higher doses of LHRH agonist to achieve hormonal
suppression. If approved, Supprelin-LA would provide hormonal
suppression over a
12-month period. We
believe Supprelin-LA
would have a competitive advantage over Lupron Depot-PED because
it eliminates the monthly injections given to these children and
offers increased convenience and reduced costs by eliminating
the need for monthly physician visits. Depending on the age of
diagnosis, typical therapy may last three to five years.
In a survey conducted by D2 Market Research on our behalf at the
2004 Pediatric Academic Society conference, over 50% of the
pediatric endocrinologists who completed a self-administered
questionnaire indicated they would be likely to use a one-year
implant like Supprelin-LA. There are approximately 700 pediatric
endocrinologists in the U.S., and most of them are located in
the same major metropolitan areas as the urologists we are
calling on for Vantas. We intend to market Supprelin-LA, if
approved, by leveraging our existing sales force and hiring only
a small number of additional product specialists.
Results from our Phase II clinical trial of Supprelin-LA
showed that all patients achieved clinically relevant levels of
hormonal suppression, which is less than 4 mlU/ml, for the
entire 12-month period.
As demonstrated by blood tests, the primary efficacy endpoints
of our Phase II clinical trial were the suppression of
testosterone in boys and estradiol in girls. During the
Phase II clinical trial, side effects included implant site
reactions. Based on the successful outcome of our Phase II
clinical trial, we are currently conducting a single
Phase III clinical trial with 36 patients and plan on
filing a new drug application with the FDA in the second quarter
of 2006. Because the patient population for CPP is small,
clinical studies with smaller sample sizes are permitted by the
FDA. The endpoints of this clinical trial, as agreed with the
FDA, will be the suppression of luteinizing hormone upon a
gonadotropin releasing hormone challenge. All patients in the
Phase III clinical trial have met their first efficacy endpoint,
which is hormone suppression below pubertal levels. This was
true for both patient groups; those who were being treated with
a competitive therapy as well as those who had not started
therapy prior to the clinical trial. There were no serious side
effects for any patients and no patient discontinuations from
the clinical trial. Monthly assessments of efficacy and safety
will be gathered until the end of the study, which is scheduled
for April 2006. In November 2005, we received notification from
the FDA that Supprelin-LA was granted orphan drug designation
for the treatment of central precocious puberty. Orphan drug
designation provides us with certain economic benefits and tax
credits, and exclusivity in the marketplace for a period of
seven years.
VP003 (Octreotide)
VP003 is an implant utilizing Hydron Technology to deliver
octreotide over a six-month period for the treatment of
acromegaly, or giantism. We believe there are approximately
1,000 new acromegalic patients per year and 16,000 total
patients in the U.S. Acromegaly is a chronic hormonal disorder
that occurs when a pituitary tumor produces excess growth
hormone, or GH. It most commonly affects middle-aged adults, and
if untreated, causes enlargement of certain bones, cartilage,
muscles, organs and other tissue, leading to serious illness and
potential premature death.
Octreotide is a treatment used to substantially reduce GH levels
and insulin-like growth factor levels, or IGF-1 levels, in
patients with acromegaly. Octreotide is also approved to treat
the symptoms associated with metastatic carcinoid tumors and
vasoactive intestinal peptide secreting adenomas, which are
gastrointestinal tumors. Octreotide is currently being marketed
by Novartis as Sandostatin injections in several strengths in
both daily and monthly formulations.
Worldwide sales of Sandostatin generated revenues of
$896 million in 2005 according to Scrip World
Pharmaceuticals News. We estimate the U.S. acromegalic
market to be approximately $200 million annually,
consisting mostly of monthly injections of octreotide. We
believe there is a market for a longer-acting octreotide
formulation such as VP003 in order to reduce the number of
physician visits for injections of octreotide. In addition,
since there are a limited number of endocrinologists dispensing
5
octreotide and patients are dispersed throughout the country, we
believe patient compliance would also be significantly improved
by longer-acting treatment with VP003.
Research conducted by Verispan Market Research on our behalf
shows that a longer-acting octreotide product would be favorably
received in the endocrinology market. The endocrinologists
interviewed by Verispan cited the poor compliance of
acromegalics who are required to visit a doctor every month to
get injections for a disease in which patients rarely notice the
changes being caused by the condition. Another reason cited for
poor compliance was the long distances many patients have to
travel for treatment because of the limited number of physicians
willing to administer the monthly formulation of Sandostatin due
to the complexity of the technique involved.
There are about 4,400 endocrinologists practicing in the U.S.,
and most of them are located in the same metropolitan areas
where we are marketing Vantas to urologists. We intend to market
VP003 by leveraging our existing sales force and hiring only a
small number of additional product specialists. Furthermore, we
may already have a presence with endocrinologists to market
VP003, if approved, as a result of the potential marketing of
Supprelin-LA, our histrelin implant to treat CPP.
In 2004, we initiated and completed a Phase I/ II
pharmacokinetic clinical trial with 11 acromegalic patients to
evaluate the release characteristics of VP003 and examine safety
and efficacy parameters. The endpoints achieved in this clinical
trial were the reductions in GH and IGF-1 levels in the blood in
these patients. During the Phase I/II clinical trial, side
effects included diarrhea, low blood sugar and implant site
reactions. We plan to initiate a Phase IIb clinical trial
in the first half of 2006 to evaluate the efficacy of VP003 as
compared to the monthly formulation of Sandostatin. This study
will be conducted in both the U.S. and Brazil and the goal is to
enroll 45 patients for at least six months. The endpoints of our
Phase IIb clinical trial will be the reductions in GH and
IGF-1 levels in the blood in these patients, which were the
endpoints in the Phase III clinical trial of Sandostatin.
VP004 (Naltrexone)
VP004 is an implant utilizing Hydron Technology to deliver
naltrexone for the treatment of opioid addiction over a
six-month period. The National Institute for Drug Addiction
estimates that there are approximately one million heroin
addicts in the U.S. of which only 25% seek treatment.
Naltrexone is an opiate antagonist currently approved as an oral
daily formulation in the U.S. for the treatment of opiate
dependence. Naltrexone competitively binds at the opiate
receptor sites in the brain, thereby blocking the euphoric
effects of opiates such as heroin.
Although naltrexone is effective, the addict population is
typically non-compliant. We believe that this creates an
attractive opportunity for VP004 because it provides controlled
release of naltrexone over a six-month period. There are over
200 registered addiction medicine specialists practicing in the
U.S. Further, a significant number of primary care
providers treat opioid addicts. In addition to opioid addiction,
naltrexone is also currently approved in the U.S. for the
treatment of alcoholism.
VP004 has completed animal testing for evaluation of safety and
pharmacokinetics. We intend to file an investigational new drug
application and initiate a pilot Phase I/ II clinical trial
among an opioid addict population in the first half of 2006. The
purpose of the study is to evaluate the extent of opiate
blockade following a morphine challenge. While we are currently
developing VP004 for the treatment of opioid addiction, we may
decide in the future to pursue an indication for the treatment
of alcoholism as well. We plan to license the rights to use
VP004 to an addiction specialty firm prior to conducting
Phase III clinical trials.
VP005
(Anti-inflammatory)
VP005 is a proprietary polymer solution instillation for the
treatment of symptoms associated with interstitial cystitis, a
chronic inflammatory condition of the bladder. Interstitial
cystitis, or IC, affects approximately one million people in the
U.S. IC is characterized by frequent urination and pain
above the
6
pubic region. The cause of IC is unknown but is believed to
involve inflammation of the lining of the bladder.
We believe that IC is a disease that has been poorly served by
the pharmaceutical industry. Elmiron is the only product
currently approved for the relief of bladder pain or discomfort
associated with IC. Elmiron is marketed by Bayer HealthCare LLC
and is an oral formulation containing 100 milligrams of pentosan
polysulfate sodium, a semi-synthetic molecule that is taken
three times a day. According to IMS Health market data, sales of
Elmiron generated revenues in excess of $100 million in the
U.S. in 2004. Our discussions with urologists indicate that
Elmiron is only occasionally effective and that many patients
require instillation therapy, a more invasive form of treatment
utilizing a catheter to fill up the bladder with various
solutions. Instillation therapy has been shown to abate the
symptoms of IC in some patients. VP005 is an instillation
therapy that forms a temporary coating on the internal lining of
the bladder and facilitates the slow, controlled release of the
drug in VP005 into the bladder. We intend to license the drug
delivery technology used in VP005 and intend to apply for patent
protection for this application of that technology.
VP005 has been successful in animal models in treating what we
believe to be the major contributing factor in producing the
painful symptoms of IC. We have drafted a Phase I/II
protocol to evaluate VP005 in humans. In March 2005, we met with
a panel of IC experts from the U.S. to help refine the protocol.
We expect to file an investigational new drug application with
the FDA and initiate a Phase I/II clinical trial in the
second half of 2006.
VP006 (rapid dissolve
desmopressin)
VP006 is a proprietary modified release oral formulation of
desmopressin for the treatment of nocturnal enuresis, commonly
referred to as bed-wetting. Nocturnal enuresis affects
approximately five to seven million children in the U.S.
We believe that nocturnal enuresis has been poorly served by the
pharmaceutical industry. DDAVP, Tofranil and several generics
are the products currently approved for the management of
nocturnal enuresis. The most common pharmaceutical treatment is
DDAVP, which is manufactured and marketed by Sanofi-Aventis.
According to IMS, sales of DDAVP for 2004 were approximately
$220 million. It is available as an oral tablet or a nasal
spray containing
0.1-0.2 milligrams of
desmopressin acetate, an antidiuretic hormone affecting renal
water conservation. We believe that the rapidly dissolving
formulation of desmopressin would be preferred by children and
their parents because young children can have difficulty
swallowing solid tablets.
VP006 is currently in Phase I clinical trials. Depending on
the results of these studies and the regulatory pathway, we
anticipate entering further clinical trials in the first half of
2006, followed by a regulatory filing in the second half of 2006.
We have entered into an agreement to acquire certain assets from
Anthra Pharmaceuticals, Inc. associated with Anthra’s
valrubicin business in the U.S. and Canada. The valrubicin
product, formerly marketed in the U.S. under the trademark
Valstar, is a bladder instillation approved to treat bladder
cancer that is no longer responsive to conventional treatment
such as surgery and/or topical drug application. This product
was previously administered and billed as an office procedure,
and predominantly covered under Medicare reimbursement. We
believe that it will continue to be administered and billed as
an office procedure and that the Medicare reimbursement per
course of treatment will be approximately $8,500. The product is
not covered by any patents and its orphan drug status has
expired. If the transaction closes as planned, we will make:
(i) installment payments totaling $600,000; (ii) additional
payments of up to 13.5% of net sales depending upon the
product’s formulation, indication and market share; and
(iii) certain milestone payments based upon achieving certain
sales levels.
7
According to the National Institutes of Health data, bladder
cancer has an incidence of 499,000 patients in the U.S.
Market research conducted by Verispan on our behalf and
performed at the May 2002 American Urology Association meeting
found that approximately 31% of bladder cancer patients are
treated with BCG (Bacillus Calmette-Guerin), the most common
form of topical treatment. The research further shows that about
17% of the BCG patients become unresponsive, or refractory, to
treatment each year and must now either have a cystectomy, the
medical term for bladder removal, or stand the chance of disease
progression. Urologists surveyed in the study further stated
that 69% of these refractory patients go on to have their
bladder removed, resulting in a patient population of
approximately 8,200 with this type of cancer who could be
candidates for valrubicin.
Anthra’s product was withdrawn from the market in 2002 due
to a manufacturing problem and a lack of resources to address
the problem. We believe that we have identified the cause of the
manufacturing problem and that we will be able to correct it. We
initiated discussions with the FDA in the fourth quarter of 2005
regarding our plan to reintroduce the product in the
U.S. market, and in January 2006, the FDA agreed to our
plan. Our acquisition of the product and related assets is
expected to close during the first quarter of 2006, subject to
various conditions. Subject to closing occurring in the first
quarter of 2006 and our successful implementation of the
reintroduction plan, we anticipate being able to re-launch the
product in the U.S. in the fourth quarter of 2006. We expect to
address reintroduction of the product in Canada following
reintroduction in the U.S. and expect distribution to be handled
by Paladin Labs, the existing Canadian distributor.
|
|
|
Research and Development Expenditures |
Research and development expense for the years ended
December 31, 2005, 2004 and 2003 was $5.9 million,
$6.4 million and $5.2 million, respectively.
Our Drug Delivery System
Human implantable drug delivery is a relatively new therapeutic
drug delivery approach in which drugs are administered directly
into the circulatory system through a biocompatible, non-toxic
device. We believe this type of drug delivery is suitable for
certain drugs that are not amenable to oral delivery, such as
therapeutic peptides that are destroyed in the gastrointestinal
tract, or GI tract, or drugs poorly absorbed by the GI tract or
destroyed in the liver. In such cases, increasing the dosage of
these drugs to increase absorption may result in harmful side
effects. As a result, we believe that implantable drug delivery
systems may provide safer and more effective administration of
therapy by delivering the drug directly to the bloodstream at
even, controlled rates.
Hydron Technology, our proprietary drug delivery technology, is
the basis of our patented hydrogel implant, which is inserted
under a patient’s skin. This technology, which evolved from
similar technology used in soft contact lenses, is flexible and
can be adapted to deliver many types of drugs. Currently, we
only have FDA approval for Vantas. We will need to obtain
approval for each product we develop, including products using
Hydron Technology. Our implant is designed to allow release of
drugs continuously, at even, controlled rates for up to a
12-month period. We
believe that such predictable release over a period of
12 months has not been achieved by most other drug delivery
systems, including sustained release injections, bioerodible
implants and transdermal devices. In addition, implants
utilizing Hydron Technology are smaller, softer and more
flexible than other implants and eliminate the requirement of
multiple physician visits and repeated injections.
Utilizing Hydron Technology, we are able to manufacture implants
to the exact chemical and physical specifications required by
the particular drugs to be released. By modifying the geometric
characteristics (wall thickness, diameter and length) and the
polymer make-up of the implants, we can vary the release rates
of a broad spectrum of drugs according to the therapeutic levels
required for a particular indication. Once filled with an active
ingredient, sealed and sterilized, the implant is inserted into
a patient in a minor outpatient procedure generally performed in
a physician’s office. The procedure to insert the implant
takes approximately 7 to 10 minutes. First, the insertion
site is swabbed with an antiseptic. Next, the physician
8
injects an anesthetic immediately under the skin in the upper
arm along the path where the implant is to be inserted. Then the
physician makes a small incision and inserts the implant using
an insertion tool. The tool is then retracted, leaving the
implant under the skin. The incision is then closed with
adhesive tape and a bandage is applied for one day. Lastly, the
patient is given home care instructions and sent home. If
necessary, the physician can easily remove the implant from the
body in a similar procedure.
We believe that advantages of our Hydron Technology include:
|
|
|
| |
• |
Increased Patient Compliance. Hydron Technology releases
drugs for up to a
12-month period. As a
result, the need for multiple physician visits and the
inconvenience associated with frequent injections are
eliminated, reducing the risk that a patient will miss a
treatment. |
| |
| |
• |
Adaptability. Hydron Technology can be adapted to deliver
many types of drugs. In addition, it provides a controlled and
even drug release over a period of time that can result in
increased efficacy and safety. Currently, we only have FDA
approval for Vantas. We will need to obtain approval for each
additional product we develop including products using our
Hydron Technology. |
| |
| |
• |
Decreased Cost. As a result of the reduced number of
patient visits to doctors’ offices, the overall costs
associated with such visits, including scheduling, office visit
and reimbursement claim costs, are significantly lowered. In
addition, use of Hydron Technology lessens the administrative
burden on private insurance and Medicare by reducing the number
of reimbursement claims processed per year. |
Finally, since Vantas is based on Hydron Technology, we believe
that the regulatory approval of Vantas may be helpful in
obtaining approval of our product candidates that utilize this
technology.
Hydron Technology is limited by the amount of drug which can be
loaded into an implant due to its small size, the inability of
the technology to deliver drugs that are water insoluble, the
inability to deliver molecules with a large molecular weight and
the need for a minor surgical procedure to insert and remove the
implant.
Our Business Strategy
In addition to increasing sales of our approved product, Vantas,
our goal is to develop, acquire and commercialize products for
the treatment of urological and endocrine conditions, diseases
and disorders. To achieve this goal, our strategy includes the
following key elements:
|
|
|
| |
• |
Continue to Focus on Urological and Endocrine Conditions,
Diseases and Disorders. We intend to continue to focus on
the development, acquisition and commercialization of products
for the treatment of urological and endocrine conditions,
diseases and disorders. Our aim is to build our urological and
endocrine product portfolio and opportunistically acquire or
in-license later-stage urological and endocrine products that
are currently on the market or require minimal development
expenditures, or have some patent protection or potential for
market exclusivity or product differentiation. We intend to
collaborate with major and specialty pharmaceutical companies to
develop and commercialize products that are outside of our core
urology and endocrinology focus. |
| |
| |
• |
Develop Proprietary Pharmaceutical Portfolio. We are
building a product portfolio based on Hydron Technology. We have
demonstrated the utility of Hydron Technology through Vantas,
and we believe that we can utilize this technology to bring
additional products to market. We intend to apply Hydron
Technology to the delivery of drugs with established safety and
efficacy profiles to reduce product development risk and speed
time to market. |
| |
| |
• |
Develop or Acquire New Drug Delivery Technologies. In
addition to our Hydron Technology, we intend to continue to
evaluate other drug delivery technologies as candidates for
in-license, acquisition and development, including various
implantable technologies and other drug delivery systems. We
believe that, by devoting our resources to continued development
of new drug delivery technologies, we can develop a broader base
that will enable us to deliver a greater variety of drugs than
would be possible using a single drug delivery technology. |
9
|
|
|
| |
• |
Leverage Sales and Marketing Expertise. We will continue
to expand our commercialization efforts by leveraging our
existing sales and marketing expertise to market new products as
they are approved. We intend to expand our commercial
organization, which consisted of approximately 41 employees
as of January 1, 2006, incrementally in a cost-effective
manner and expand or realign territories as products emerge from
our development pipeline or are acquired. |
| |
| |
• |
Partner Outside the U.S. to Reach New Geographic Markets.
To reach markets outside the U.S., we are pursuing primarily a
licensing strategy, whereby we partner with companies with a
local presence and proven distribution channels in the urology
and endocrinology markets for distribution of our products. We
may retain full or co-marketing rights, however, on a select
territory-by-territory basis to further leverage our sales and
marketing expertise. |
Sales, Marketing and Distribution
As of January 1, 2006, our commercial organization
consisted of approximately 41 employees, and we expect to
hire approximately ten additional employees in this area. As of
January 1, 2006, we had 31 product specialists. Our
product specialists have an average of seven years of
pharmaceutical sales experience and the majority of our sales
force have sold other LHRH agonist products prior to joining us.
Each product specialist is responsible for marketing Vantas to
physicians in an assigned geographic territory. At present, we
are calling on the urologists that account for the majority of
LHRH agonist products in the U.S. As revenue increases and
resources become available, we intend to scale up our sales
force to market new products which emerge from our pipeline. We
continue to analyze physician prescribing habits so that we can
direct our product specialists to physicians who maintain the
largest prostate cancer practices. We will also evaluate the
need to hire additional product specialists as we get closer to
acquiring a new product or launching Supprelin-LA, our histrelin
implant for CPP. By adjusting our current sales force structure
slightly, we will be able to call on our current physician base
and on physicians in additional specialty areas, such as
endocrinology. Further, we believe that the direct physician
distribution channel of Vantas may present a barrier to the
future entry of competition from generic products because
generic drug companies do not typically have a field sales force.
Our product specialists utilize various promotional materials
when making clinical presentations, including, instructional
videos on proper implantation technique. In remote areas where
our product specialists cannot productively make personal
visits, we conduct direct mail programs. We also supply
physicians, health plan administrators and specialty pharmacies
with a pharmaco-economic model to demonstrate the cost
effectiveness of Vantas compared to other LHRH agonist products
due to decreased utilization of staff time for repeated
injections and one reimbursement claim per patient per year as
opposed to three or four.
Additionally, we support our sales efforts by employing a wide
range of marketing programs to promote Vantas, including journal
advertising, industry publications, medical educational
conferences and internet initiatives. We hold meetings in major
cities where a Vantas clinical investigator presents data about
Vantas, relates his own impressions and demonstrates proper
implantation technique. In addition, our product specialists
utilize local thought leaders as peer influence speakers in
their specific markets.
As part of our marketing strategy, we entered into two group
purchasing agreements with International Urology Networks, LLC,
or IUN, a subsidiary of AmerisourceBergen Corporation. IUN was
founded in 2001 as a group purchasing organization for over 40%
of practicing urologists in the U.S. This network designs and
supports practice management, business planning and accredited
continuing medical education for all of its members. Our
agreements with IUN provided for access to their physician
members, support from their strategic account managers and
services from two other AmerisourceBergen subsidiaries: US
Bioservices Corporation, a specialty pharmacy, and Besse
Medical, a wholesale distributor for many GPOs, including IUN.
Under the agreements, physician practices and clients who are
members of IUN or US Bioservices were eligible to purchase
Vantas from Besse Medical. In addition, US Bioservices could
dispense Vantas purchased under the agreements to patients of
member physicians upon request by healthcare providers,
patients, or third party payors, as well as provide drug
management and
10
patient care support services. Our agreements with IUN and Besse
expired on November 30, 2005. However, we have extended the
term of the distribution services of Besse Medical and are
currently discussing potential new arrangements with IUN.
Outside the U.S., we are primarily pursuing a licensing
strategy, whereby we partner with companies with a local
presence and proven distribution channels in the urology or
other market for distribution of Vantas or other products we may
offer. We may retain co-marketing rights, however, on a select
territory-by-territory, basis. For example, we have executed an
agreement with Paladin Labs, Inc., a Canadian company, under
which it will distribute Vantas and file all required regulatory
applications in Canada, and have signed similar agreements with
each of Key Oncologics (Pty) Ltd., a South African company,
BioPro Pharmaceutical, Inc., an organization specializing in
marketing oncology drugs in the pan Asian region, and
Teva-Tuteur, an organization specializing in marketing oncology
drugs in Argentina. We are actively seeking relationships or
distribution arrangements with additional GPOs, specialty
pharmacies and local companies abroad.
Reimbursement
Advanced prostate cancer is generally treated by urologists in
their offices. LHRH agonist products are sold directly from the
pharmaceutical manufacturer to the physician and are
administered in the office through injections or a
12-month implant. Once
a physician acquires and administers the LHRH agonist product,
he files a claim with Medicare or the patient’s private
insurance for reimbursement.
Approximately 70% of patients diagnosed with prostate cancer and
receiving LHRH agonist therapy are over the age of 65 and
therefore covered by Medicare. In light of this, we have
retained a group of Medicare experts to monitor pricing of LHRH
agonist products and the Medicare reimbursement environment.
Medicare reimbursement for LHRH agonist therapy is comprised of
two parts. The first part of the reimbursement is based on
reimbursement for the LHRH agonist product. In some states, the
reimbursement rate is based on the manufacturers’ average
sales price, or ASP. This ASP method was introduced in 2005 for
all products covered by Medicare. Under the ASP method, each
LHRH agonist product manufacturer must calculate a quarterly
average unit sales price for its product and report it to the
Centers for Medicare and Medicaid Services, or CMS. CMS will
then post the ASP for that product on its web page for the
physicians to reference. A physician will be reimbursed by
Medicare at 106% of the ASP for that product. In most states,
however, the reimbursement rates for Vantas are even lower
because the Medicare carriers in those states now apply the
Least Costly Alternative, or LCA, methodology to Vantas. LCA is
a payment methodology that allows Medicare carriers to pay the
same reimbursement for drugs that have been determined by
Medicare to be “medically equivalent”. The
reimbursement rate for Vantas, as determined by the Medicare
carriers, is lower in LCA states than the reimbursement rate in
non-LCA states, resulting in a lower sales price in LCA states.
The second part of the reimbursement is derived from the actual
procedure the physician completes to administer the LHRH agonist
product. A physician can expect to receive approximately $125
for an implant procedure, such as implanting Vantas, as compared
to approximately $28 per injection procedure. In fact, a
physician can expect to receive approximately $240 when
explanting a Vantas implant and implanting a new Vantas implant.
Reimbursement is often confusing and requires exacting
procedures in order to be honored by Medicare or private
insurance carriers. As a result, we have set up a toll-free
phone number for physicians to call for help in resolving any
billing issues concerning reimbursement for Vantas. In addition,
effective January 1, 2006, Vantas has an assigned J-code
from CMS which will further facilitate the physician’s
reimbursement by Medicare.
11
Intellectual Property
Our success will depend in large part on our ability to maintain
a proprietary position in our products and product candidates
through patents, trade secrets and FDA exclusivity. We rely upon
patents, trade secrets, know-how and continuing technological
innovation to develop and maintain our competitive position. We
plan to aggressively protect and defend our proprietary position.
As of December 2005, we own three issued U.S. patents and
24 issued foreign patents relating to our Hydron Technology. We
own three pending foreign patent applications relating to our
Hydron Technology. Our patents and patent applications cover a
variety of novel pharmaceutical formulations, methods of use,
and processes to manufacture hydrogel polymers and implants
incorporating active agents. Within the Hydron Technology patent
portfolio, we own two issued U.S. patents and 23 issued
foreign patents relating to Vantas.
The following table sets forth information related to U.S. and
foreign patents and patent applications owned by us:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
Date of |
| |
|
No. of | |
|
No. of Pending | |
|
Grant/ |
| Technology Family |
|
Brief Description of Coverage |
|
Patents | |
|
Applications | |
|
Expiration |
| |
|
Water-Swellable Hydrophilic Articles |
|
Method of preparing a hydrophilic plastic cartridge |
|
|
15 |
|
|
|
0 |
|
|
1994/2011 |
| |
|
Homogenous Hydrogel Copolymers |
|
Method of preparing homogeneous copolymers having a
predetermined equilibrium water content value |
|
|
10 |
|
|
|
0 |
|
|
1993/2010 |
| |
|
Hydrogel Composition |
|
Method of preparing homogenous porous hydrogel |
|
|
2 |
|
|
|
3 |
|
|
2002/2020 |
| |
|
Implanting Device |
|
Device for inserting implantable objects under the skin |
|
|
0 |
|
|
|
16 |
|
|
Not Applicable/ 2023 |
| |
|
Implanting Device Design |
|
Design for an implanting device |
|
|
4 |
|
|
|
1 |
|
|
2004/2017 |
| |
|
Compositions and Treatments for Central Precocious Puberty |
|
Controlled delivery of gonadotropin- release hormone agonists
for the treatment of central precocious puberty |
|
|
0 |
|
|
|
2 |
|
|
Not Applicable/ 2025 |
| |
|
Polyurethane Implant Formulations |
|
Polyurethane implant formulations and methods of preparing |
|
|
0 |
|
|
|
3 |
|
|
Not Applicable/ 2024 |
| |
|
Total |
|
|
|
|
31 |
|
|
|
25 |
|
|
|
| |
We have filed a U.S. and a foreign patent application covering
pharmaceutical formulations, processes and methods of use
relating to Supprelin-LA. In addition, as of December 2005, we
also own four other issued patents and have approximately
18 other patent applications pending worldwide relating to
other areas, including implanting devices and designs thereof.
Our commercial success will depend in part on obtaining this
patent protection. Other intellectual property and know-how,
including the Hydron Technology, that we have produced and own,
are safeguarded through copyrights, trademarks, trade secret
protections and contractual safeguards such as confidentiality
and proprietary information agreements. The development of our
technology and many of our processes are dependent upon the
knowledge, experience and skills of key scientific and technical
personnel. To protect our rights to this proprietary information
and technology, which are not patentable,
12
we require all employees, consultants and advisors to enter into
confidentiality agreements that prohibit the disclosure of
confidential information to anyone outside our company. As a
matter of company policy, all scientific employees are
“hired to invent” and all have executed agreements
that recognize this policy and generally require disclosure and
assignment to us of ideas, developments, discoveries and
inventions made by employees. However, these agreements may not
effectively prevent disclosure of our confidential information
or provide meaningful protection for our confidential
information if there is unauthorized use or disclosure.
Material Agreements
We are a party to certain material agreements including:
|
|
|
GP Strategies Corporation |
In June 2000, we entered into a contribution agreement with GP
Strategies Corporation, our former parent. Under this
contribution agreement, GP Strategies contributed, assigned,
transferred and conveyed to us the assets of GP Strategies’
drug delivery business, including all intellectual property and
certain agreements with Hydron Technologies, Inc., formerly
known as Dento-Med Industries, Inc., The Population Council,
Inc., and Shire US, Inc., successor to Roberts Laboratories Inc.
We assumed all assets, liabilities and obligations of GP
Strategies relating or arising from the operation of the drug
delivery business and the assets.
|
|
|
Hydron Technologies, Inc. |
In November 1989, National Patent Development Corporation
entered into an agreement with Dento-Med Industries, Inc., now
known as Hydron Technologies. Under the contribution agreement
in June 2000 between us and GP Strategies, GP Strategies
transferred its rights and obligations under the agreement with
Hydron Technologies to us.
Under the agreement, Hydron Technologies was granted an
exclusive, worldwide license, with the right to grant
sublicenses, in and to presently owned or subsequently issued
patents and the Hydron trademark, to manufacture, market or use
products composed of the Hydron polymer or produced with the use
of the Hydron polymer in certain consumer and oral health
fields, excluding prescription and non-prescription drugs. The
agreement purports to continue indefinitely, unless terminated
earlier by the parties. We have the exclusive right to
manufacture, sell or distribute any prescription drug or medical
device as defined under the Federal Food, Drug and Cosmetic Act
made with the Hydron polymer, however, we will not have the
right to sell or distribute any Hydron polymer product in the
oral health field, except for prescription drug products for lip
sores and oral ulcers. We also have the exclusive right to
manufacture, sell or distribute certain other excepted Hydron
products from Hydron Technologies’ license. Neither party
is prohibited from manufacturing, exploiting, using or
transferring the rights to any new non-prescription drug product
containing the Hydron polymer, subject to certain exceptions,
for limited exclusivity periods.
In the event we withdraw from the business of manufacturing the
Hydron polymer, we shall assign all of our right and interest in
the Hydron trademark to Hydron Technologies. Upon request from
Hydron Technologies, we may provide certain research services,
including limited use of our facilities, for Hydron
Technologies’ research activities, for which we will be
reimbursed a specified amount. In addition, subject to certain
conditions and exceptions, Hydron Technologies has the right to
purchase from us and we are obligated to supply to Hydron
Technologies certain types of Hydron polymers.
Subject to certain exceptions (including Vantas), each party
will pay to the other a 5% royalty on net sales for Hydron
polymer products marketed by us or Hydron Technology, as
applicable, or a third party. Subject to certain excepted Hydron
polymer products, in the event either party sells any
non-prescription Hydron polymer drug products itself, such party
will pay a 5% royalty fee on net sales, including research
payments, to the other party. Subject to certain Hydron polymer
excepted products, if either party sells
13
non-prescription drug products to a third party and receives
up-front license fees, royalties or similar payments, such party
will pay a 25% royalty on such payments to the other.
In September 1990, National Patent Development Corporation
entered into a joint development agreement with The Population
Council regarding the development of hydrogel implants
containing LHRH. Under the contribution agreement entered into
in June 2000 between us and GP Strategies,
GP Strategies transferred its rights and obligations under
the agreement with The Population Council to us.
By amendment to the agreement dated October 1, 1997, the
Joint Development Agreement was terminated in its entirety and
superseded by the terms and conditions of the amendment. Under
the amendment, The Population Council concluded all ongoing
prostate cancer clinical studies and provided us with all data
and records relating to those trials to enable us to advance the
clinical trials and seek regulatory approval to commercially
develop and market any polymer implant containing any LHRH
analog or any polymer implant containing any other active agent,
other than an LHRH analog. We can enter into licensing and
marketing agreements for the commercial development of those
implants without the consent of The Population Council. The term
of the agreement is the shorter of twenty-five years from the
date of the amendment or until the date on which The Population
Council receives approximately $40 million in payments from
us. Either party may terminate the agreement if the other party
becomes insolvent or is involved in bankruptcy proceedings or
if, after receiving written notice the other party is in default
of a material term and such default has not been cured within
thirty days of the notice.
By a further amendment to the agreement dated August 2004, The
Population Council is entitled to 30% of certain revenues
received by us from the licensing of Vantas or any other polymer
implant containing an LHRH analog and 5% of certain revenues
received by us from the licensing of any other polymer implant
to the extent those revenues are related to the use or sale of
implants in all areas other than the European Union and certain
Southeast Asian countries. We are required to pay to The
Population Council 3% of our net sales of Vantas and any polymer
implant containing an LHRH analog and 0.5% of our net sales of
any other polymer implant. The Population Council is also
entitled to 4% of any licensee’s net sales of Vantas and
any other polymer implant containing an LHRH analog within the
European Union and certain Southeast Asian countries and 0.667%
of any licensee’s net sales for any other polymer implant
within the European Union and certain Southeast Asian countries.
In addition, we are required to establish a patient assistance
program within one year after the first commercial sale of
Vantas in the U.S. and maintain the program for a period ending
on the earlier of ten years after establishment of the program
or the cessation of the marketing of Vantas.
|
|
|
Shire Pharmaceuticals Group plc |
In March 1998, GP Strategies entered into a license
agreement and a related manufacturing and supply agreement with
Roberts Laboratories Inc. under which Roberts was responsible
for conducting Phase III clinical trials, managing the
regulatory approval process and marketing the product now known
as Vantas. When Roberts was acquired by Shire Pharmaceuticals
Group in December 1999, Shire took over the development of
Vantas. In December 2001, we entered into a termination,
license back and option agreement with Shire US, a
subsidiary of Shire Pharmaceuticals Group, which terminated and
released all claims of the parties under the previous license
and manufacturing agreements. Under this agreement, Shire
transferred to us all on-going activities under the development
program for Vantas, including all data, know-how and other
information with respect to Vantas generated in connection with
the development program, and granted us an exclusive license to
such data, know-how and information for the development,
manufacture, use, supply and sale of Vantas in the designated
territory, including, but not limited to, the U.S., Canada, and
various European and other countries.
The term of the license continues for ten years from the date of
the first commercial sale of Vantas. Thereafter, we will have a
fully paid up license in the designated territory with respect
to all data, know-
14
how and other information related to Vantas generated under
Shire’s previous development program for Vantas.
We are required to pay Shire 2% of net sales of Vantas in the
designated territory. However, for the purposes of this
agreement, net sales are reduced by the amount of any royalty
payments we make to The Population Council with respect to sales
of Vantas. If we sublicense Vantas to another entity in the
designated territory, we will pay Shire fees of 20% of royalty
income and 20% of any milestone payments we receive, up to a
maximum of $5 million, relating to any sublicensing of Vantas.
Royalty income does not include amounts paid to The Population
Council with respect to sales of Vantas by a sublicensee.
However, the $5 million cap on our royalties payments with
respect to milestone payments is only applicable if we are
entitled to receive at least 10% of net sales under the
sublicense agreement.
We also granted Shire an exclusive, irrevocable option, on a
country-by-country basis in the designated territory, to
exclusively market and distribute Vantas in each country of the
designated territory, other than in the U.S. This option,
with respect to each country, will expire on the earlier of the
date we enter into a sublicense agreement for that particular
country or 180 days following the date of regulatory
approval in that particular country for Vantas. We may market
Vantas in any country at the expiration of the option with
respect to that country. Upon exercise of the option, with
respect to a particular county, Shire is obligated to pay us
milestone payments of $0.2 million in respect of the European
Union and $500,000 in respect of any other countries within the
designated territory. This amount will be reduced by $250,000 if
we enter into a sublicense agreement within the European Union.
These milestone payments are payable with respect to a
particular country when Vantas is approved for marketing in the
applicable country. If Shire exercises the option with respect
to a particular country, we will supply Vantas at the cost of
manufacture. Shire will pay us 13.5% of its net sales within the
option territory. Each marketing and distribution arrangement
requested by Shire under its option will have a term of
10 years. Either party may terminate if either party
becomes insolvent or there is a material breach of the agreement.
In October 2002, we entered into a license and distribution
agreement with Paladin Labs under which we granted Paladin Labs
an exclusive, royalty bearing license under our intellectual
property, including our patents, trademarks and know-how, to
seek regulatory approval for the marketing, distribution and
sale in Canada and its territories of (i) Vantas for the
treatment of prostate cancer and (ii) any other Hydron
histrelin implant, which is, or may be, developed by us for
other indications, such as our histrelin implant for CPP.
Paladin Labs is obligated to use commercially reasonable efforts
to apply for and maintain regulatory approval for Vantas and any
other Hydron histrelin implant and to sell, market and
distribute those implants in Canada and its territories. The
initial term of the agreement is for fifteen years from March
2006 the date on which regulatory approval for Vantas in Canada
was obtained for the treatment of advanced prostate cancer and
will automatically renew for subsequent three year terms, unless
terminated earlier. Either party may terminate the agreement if
the other party becomes insolvent or is involved in bankruptcy
proceedings, or if, after receiving written notice the other
party commits a material breach that has not been cured within
thirty days of the notice or the other party is unable to fully
perform its obligations as a result of a force majeure event. We
also granted Paladin Labs an exclusive license to use the
trademarks owned by us, including all trademarks and trade names
approved by us, in connection with the marketing, distribution
and sale of Vantas or any other Hydron histrelin implant in the
designated territory. We have given Paladin Labs the exclusive
right, but not the obligation, to conduct Phase IV clinical
trials relating to the use of Vantas for the treatment of
prostate cancer in the designated territory. If Paladin Labs
does not conduct such trials within one year of our request to
do so, we will have the right to conduct such Phase IV
clinical trials on our own.
We have the sole right and responsibility for the manufacturing,
assembling, packaging and labeling of Vantas or any other Hydron
histrelin implant in such quantities required for Paladin
Labs’ demand forecast and we must use all reasonable
efforts to supply those products. In addition, Paladin granted
us a non-exclusive license to use its trademarks on labeling of
Vantas or any other Hydron histrelin implant. We have agreed not
to supply Vantas or any other Hydron histrelin implant for
distribution or sale in
15
Canada and its territories for use in any indication to any
other party except Paladin Labs. Paladin Labs will pay us a flat
transfer fee of $190 per unit and a royalty of 8% of its
net sales of Vantas or any other Hydron histrelin implant.
We are obligated to use commercially reasonable efforts to
complete all necessary pre-clinical and clinical trials that are
required by the Therapeutic Products Directorate of Health
Canada, Canada’s federal regulatory authority for
pharmaceutical drugs, for use of Vantas in the treatment of
prostate cancer in Canada. However, we are not required to
undertake any pre-clinical or clinical trials beyond those
activities conducted in the U.S. and Canada.
Under the terms of the agreement, we and Paladin have agreed not
to develop, market, distribute or sell in Canada or its
territories any products that contain the same active ingredient
as that which is contained in Vantas, or any products similar to
or competitive with Vantas or any other Hydron histrelin implant
approved in Canada during the term of the agreement and for a
period of three years following the expiration or termination of
the agreement; provided that we are permitted to make, market,
distribute and sell Vantas in the designated territory for all
indications following the expiration or termination of the
agreement.
|
|
|
Key Oncologics (Pty) Ltd. |
In September 2003, we entered into a license and
distribution agreement with Key Oncologics, under which we
appointed Key Oncologics as the exclusive agent to apply for
regulatory approval for and distribute Vantas in South Africa
and its territories for use in the treatment of prostate cancer.
The initial term of the agreement is for five years after the
date on which regulatory approval for Vantas for the treatment
of prostate cancer is obtained in South Africa, subject to
automatic one-year renewal periods unless terminated earlier.
Either party may terminate the agreement if the other party
becomes insolvent or is involved in bankruptcy proceedings, or
if, after receiving written notice, the other party commits a
material breach that has not been cured within thirty days of
the notice or the other party is unable to fully perform its
obligations as a result of a force majeure event. Key Oncologics
may terminate the agreement if regulatory approval of Vantas for
the treatment of prostate cancer is finally denied by South
Africa’s regulatory authority. Terminations with respect to
one or more, but not all forms or dosages, will only apply to
the affected forms or dosages. Key Oncologics is obligated to
use commercially reasonable efforts to apply for and maintain
regulatory approval in South Africa for Vantas for use in the
treatment of prostate cancer. Key Oncologics is required to use
its best efforts to market, distribute and sell Vantas in South
Africa.
We have agreed to supply Vantas, as well as containers for and
components of Vantas, to Key Oncologics exclusively in South
Africa. We are obligated to supply Key Oncologics with all data
and information in our possession or control as is necessary for
the purpose of obtaining regulatory approval of Vantas for use
in the treatment of prostate cancer in South Africa. We have
given Key Oncologics the exclusive right, but not the
obligation, to conduct Phase IV clinical trials relating to
the use of Vantas for the treatment of prostate cancer in the
designated territory. If Key Oncologics does not conduct such
trials within one year of our request to do so, we will have the
right to conduct such Phase IV clinical trials on our own.
We will receive a perpetual, fully-paid, royalty-free license to
use any data developed by Key Oncologics in the Phase IV
trials.
Under the terms of the agreement, Key Oncologics has agreed not
to develop, market, distribute or sell in South Africa any
products that contain the same active ingredient contained in
Vantas, or any products similar to or competitive with Vantas
that are used to treat prostate cancer during the term of the
agreement and for a period of three years following the
expiration or termination of the agreement, except that Key
Oncologics may market, distribute and sell a certain product
under a previous third party license agreement.
We have granted Key Oncologics an exclusive license to use our
trademarks owned by us, including all trademarks and trade names
approved by us, in connection with the marketing, distribution
and sale of Vantas in South Africa in connection with the
treatment of prostate cancer. Key Oncologics has granted
16
us a non-exclusive license to use Key Oncologics’
trademarks on labeling of Vantas. We have the sole right and
responsibility for manufacturing, assembling, packaging and
labeling Vantas and we are required to supply Vantas in
sufficient quantities to meet Key Oncologics’ demand
forecast. We have agreed not to supply Vantas for distribution
or sale in any of the designated countries for use in the
treatment of prostate cancer to any other party except Key
Oncologics. For a period of twelve months following the receipt
of regulatory approval, Key Oncologics will pay us a flat
transfer fee of $250 per unit of Vantas, plus 10% of the
net sales collected by Key Oncologics. After the end of the
first twelve-month period, we will have the right to adjust the
price per unit once per year, subject to certain exceptions.
|
|
|
International Urology Network |
To supplement our own marketing and distribution efforts, we
entered into two group purchasing agreements in November 2004
with the group purchasing organization, IUN. These agreements
made Vantas available for purchase to IUN members with respect
to facilities located in the U.S. The agreements were amended in
March and July of 2005 and expired on November 30, 2005. We
are currently discussing potential new arrangements with IUN.
Under the agreements, physician practices and clients who are
members of IUN or US Bioservices, Inc. a specialty
pharmacy, were eligible to purchase Vantas from Besse Medical,
IUN’s wholesale distributor. In addition,
US Bioservices could dispense Vantas purchased under the
agreements to patients of member physicians upon request by
healthcare providers, patients, or third party payors, as well
as provide drug management and patient care support services.
In connection with the amended IUN agreements described above,
we entered into a separate letter agreement with Besse Medical
in March 2005, with respect to Besse Medical’s distribution
of Vantas. Under this agreement, we designated Besse Medical as
an authorized specialty distributor of Vantas to those
purchasers eligible to buy Vantas under the IUN agreements.
Besse Medical was responsible for services customarily provided
by a wholesale distributor under the agreement, including the
stocking, packing and shipment of our products, and was paid a
distribution services fee based on the purchases of Vantas
through Besse Medical. The agreement with Besse Medical expired
on November 30, 2005, together with the amended IUN
agreements. Since November 30, 2005, and notwithstanding
the termination of the written agreement with Besse Medical, we
have continued to use the distribution services of Besse Medical
and expect to continue use of such services through March 2006.
We are currently considering both the need for, as well as our
options with respect to, wholesale distribution of Vantas for
the period after March 2006.
|
|
|
BioPro Pharmaceutical, Inc. |
In January 2005, we entered into an exclusive license and
distribution agreement with BioPro. The initial term of the
agreement is for ten years after the date on which the first
regulatory approval allowing sales of Vantas to proceed in any
country of the designated territory is issued, unless terminated
earlier and automatically renews for additional periods of one
year unless notice of termination is given. Either party may
terminate the agreement if the other party becomes insolvent or
is involved in bankruptcy proceedings, or if, after receiving
written notice, the other party commits a material breach that
has not been cured within thirty days of the notice or the other
party is unable to fully perform its obligations as a result of
a force majeure event. Either party may terminate the agreement
on a country-by-country basis if regulatory approval of Vantas
for the treatment of prostate cancer is finally denied by the
regulatory authority within that country. Terminations with
respect to one or more, but not all, forms, dosages, countries
or indications will apply to the affected forms, dosages,
countries or indications. Additionally, we may terminate the
agreement if BioPro fails to achieve minimum net sales and then
fails to make minimum required payments to us, or we may
terminate the agreement on a country-by-country basis and on an
indications-by-indications basis if BioPro fails to file
necessary marketing approval applications.
17
Under the agreement, BioPro will be the exclusive distributor of
Vantas in the designated territory consisting of Brunei,
Cambodia, China (including Hong Kong), Laos, India, Indonesia,
Malaysia, the Philippines, Singapore, South Korea, Taiwan,
Thailand and Vietnam. BioPro is required to use commercially
reasonable efforts to apply for and maintain regulatory approval
for Vantas for the treatment of prostate cancer in the
designated territory. In connection with obtaining regulatory
approval for Vantas, we are required to supply BioPro with all
data and information in our possession or control as is
necessary for that purpose. We also granted BioPro an exclusive
license to use the trademarks owned by us, including all
trademarks and trade names approved by us, in connection with
the marketing, distribution and sale of Vantas in the designated
territory. We have given BioPro the non-exclusive right, but not
the obligation, to conduct Phase IV clinical trials
relating to the use of Vantas for the palliative treatment of
prostate cancer in each country of the designated territory.
BioPro has applied for regulatory approval for the
commercialization of Vantas in Thailand, Singapore, Malaysia,
and Taiwan.
BioPro granted us the right to use BioPro’s trademarks on
labeling of Vantas. We have the sole right and responsibility to
manufacture, assemble, package and label Vantas and are required
to supply Vantas in quantities sufficient to meet BioPro’s
demand forecast. We have agreed not to supply Vantas for
distribution or sale in any of the countries in the designated
territory for use in any indication to any other party except
BioPro. BioPro shall pay us a flat transfer fee of $250 per
unit and a royalty of 25% of net sales of Vantas, in addition to
various milestone payments. BioPro must pay us a minimum amount
if it fails to achieve certain minimum net sales. In addition,
BioPro is obligated to pay a royalty of 2% of net sales of
Vantas directly to The Population Council or a minimum payment
if certain minimum net sales are not achieved. Twelve months
following the first commercial sales of Vantas in the designated
territory, we will have the right, subject to certain
exceptions, to adjust the price per unit once per year.
Affiliates of Sanders Morris Harris, Inc., of which James
Gale, the Chairman of our Board of Directors, is a managing
director, own approximately 40% of BioPro. Affiliates of Sanders
Morris Harris, Inc. own approximately 37% of our Company.
In April 2005, we entered into a collaboration and development
agreement with Alpex Pharma to research and develop a rapid
dissolve desmopressin product. Under the agreement, we have an
exclusive, royalty-bearing license, based in part on
Alpex’s intellectual property, including the right to
sublicense, to make, use, sell, and otherwise commercialize the
rapid dissolve desmopressin product in the United States,
Canada, and Mexico. The agreement continues in effect until the
expiration of all Alpex patents related to Alpex’s platform
technology that cover the rapid dissolve desmopressin product.
Upon expiration of all Alpex patents related to Alpex’s
platform technology that cover the rapid dissolve desmopressin
product, we will have a fully paid-up, royalty-free,
non-exclusive, irrevocable license, including the right to
sublicense, to make, use, sell, and otherwise commercialize the
product in the United States, Canada and Mexico.
Under the agreement, Alpex is obligated to use commercially
reasonable efforts to diligently perform its obligations under
the agreement, including developing the rapid dissolve
desmopressin product. We are obligated to use commercially
reasonable efforts to perform our obligations under the
agreement, including to obtain and maintain all regulatory
approval for the rapid dissolve desmopressin product in the
United States, Canada, and Mexico. If we do not file for
regulatory approval in the United States within six months after
satisfaction of certain product success criteria, as agreed upon
by us and Alpex, Alpex may elect to transform our license into a
non-exclusive, royalty-free license. Alpex is required to make
all intellectual property and technical information available to
us as may reasonably be necessary for regulatory approval. Alpex
owns all intellectual property related to the platform
technology, and will own any intellectual property developed
pursuant to the collaboration that relates to the platform
technology. We will own all intellectual property related to the
rapid dissolve desmopressin product in the United States,
Canada and Mexico. Alpex will own all intellectual property
related to the rapid dissolve desmopressin product outside of
the United States, Canada and Mexico.
We are obligated to use our commercially reasonable efforts to
market, distribute and sell the rapid dissolve desmopressin
product in the United States, Canada and Mexico. Alpex has
agreed not to, directly
18
or indirectly develop, market, distribute or sell a product that
contains desmopressin in the United States, Canada or Mexico.
Alpex shall manufacture and supply sufficient quantities of the
rapid dissolve desmopressin product for clinical trials and
commercial sale to meet our needs. Both parties must use best
efforts to enter into such a manufacturing and supply agreement
prior to the first commercial shipment of the rapid dissolve
desmopressin product.
We may terminate the agreement and obligations of the parties if
we determine, in our sole discretion, that the development
and/or commercialization of the rapid dissolve desmopressin
product has been impaired due to (i) difficulties in
development or formulation; (ii) unfavorable action by the
FDA; (iii) likelihood of failure to obtain regulatory
approval; (iv) concerns of possible third party
infringement; and (v) unfavorable market conditions for the
rapid dissolve desmopressin product. In the event we discontinue
the development and/or commercialization of the product, Alpex
may continue or resume the development and/or commercialization
of the rapid dissolve desmopressin product, provided that it
reimburses us for at least a portion of our development costs,
including any license or milestone payments.
We are required to pay Alpex one-time milestone payments related
to the development of the rapid dissolve desmopressin product
and lump-sum payments upon regulatory filing in the United
States and upon approval in the United States. We are also
required to pay Alpex a range of royalty payments based on net
sales of the rapid dissolve desmopressin product and a
percentage of all sublicensing income. Our royalty payment
obligations will expire twenty years from the date of the first
commercial shipment of the rapid dissolve desmopressin product,
and the license will become a royalty-free, non-exclusive,
perpetual, worldwide license to make, have made, use, import,
export, sell, offer to sell and otherwise commercialize the
rapid dissolve desmopressin product in the U.S., Canada and
Mexico.
James Gale, the Chairman of our Board of Directors, is also on
the Board of Directors of Alpex. Affiliates of Sanders Morris
Harris, Inc. of which Mr. Gale is a managing director, own
approximately 37% of our Company and more than 90% of Alpex.
In September 2005, we entered into an agreement with Anthra
Pharmaceuticals, Inc. to acquire certain assets of Anthra
associated with its valrubicin business in the U.S. and Canada.
Anthra’s valrubicin business involved the manufacture and
sale of valrubicin for use in the treatment of bladder cancer.
The product was distributed in the U.S. and Canada by third
party partners of Anthra. In the U.S., the product was
distributed under the trademark Valstar. The product is not
covered by any patents and its orphan drug status has expired.
Anthra’s valrubicin product was taken off the market in
2002 due to a manufacturing problem and a lack of resources to
address the problem. We have analyzed the manufacturing issues
and believe that we have determined the cause of, and a solution
to, the problem. As such, we have agreed to acquire certain
assets of Anthra required for the manufacture, marketing and
sale of valrubicin in the U.S. and Canada including the NDA
filed with the FDA, the drug master file, the Canadian
regulatory submission and all data produced by or on behalf of
Anthra in support of the NDA and other governmental approvals,
or in any other scientific experiment or clinical trial relating
to valrubicin. The acquisition is expected to close during the
first quarter of 2006, subject to various conditions. We
initiated discussions with the FDA in the fourth quarter of 2005
regarding our plan to reintroduce the product into the U.S.
market, and in January 2006, the FDA agreed to our plan.
The purchase price payable for the product consists of
guaranteed payments, totalling $600,000, revenue sharing
payments of up to 13.5% of our sales and receipt of license fees
and additional payments based on our sales performance. Subject
to certain exceptions, Anthra’s indemnification obligations
survive for two years after closing and are funded by
setoff against the purchase price payable to Anthra under the
agreement.
In December 2005, we entered into an exclusive distribution
agreement with Teva-Tuteur for distribution of Vantas in
Argentina. The initial term of the agreement ends on the date
that is ten years
19
after the date on which the first regulatory approval allowing
sales of Vantas to proceed in Argentina, is granted, unless
terminated earlier. The agreement automatically renews for
additional periods of one year each unless notice of termination
is given. Either party may terminate the agreement if the other
party becomes insolvent or is involved in bankruptcy proceedings
or if the other party fails to cure a material breach within a
specified time period after receipt of notice or the other party
is unable to fully perform its obligations for one hundred-fifty
days as a result of a force majeure event. Either party may
terminate the agreement on an indication-by-indication basis if
regulatory approval of Vantas for such indication is finally
denied by the regulatory authority within Argentina.
Terminations with respect to one or more, but not all, forms,
dosages or indications will apply to the affected forms, dosages
or indications. Additionally, we may terminate the agreement if
Teva-Tuteur fails to purchase a specified number of units of
Vantas in a calendar year. We may also terminate the agreement
on an indications-by-indications basis if Teva-Tuteur fails to
file necessary marketing approval applications within the
required time.
Under the agreement, Teva-Tuteur will be the exclusive
distributor of Vantas in Argentina. Teva-Tuteur is required to
use commercially reasonable efforts to apply for and maintain
regulatory approval for Vantas in Argentina for each indication
for which we own or hold a regulatory approval anywhere in the
world. In connection with obtaining regulatory approval for
Vantas, we are required to supply Teva-Tuteur with all data and
information in our possession or control as is necessary for
that purpose. We also granted Teva-Tuteur an exclusive license
to use the trademarks owned and approved by us, in connection
with the marketing, distribution and sale of Vantas. We have
given Teva-Tuteur the non-exclusive right, but not the
obligation, to conduct Phase IV clinical trials relating to
the use of Vantas in each approved indication in Argentina.
Teva-Tuteur granted us the right to use Teva-Tuteur’s
trademarks on labeling of Vantas. We have the sole right and
responsibility to manufacture, assemble, package and label
Vantas; provided that Teva-Tuteur is responsible for any and all
Argentinean-specific labeling. We have agreed not to supply
Vantas for distribution or sale for use in any indications to
any other party except Teva-Tuteur. Teva-Tuteur shall pay us a
flat transfer fee per unit, which fee is subject to an
index-based adjustment. Beginning in the first calendar year
after the first commercial sale of Vantas in Argentina,
Teva-Tuteur must make certain minimum purchases during each
calendar year unless it provides written notice one hundred and
twenty (120) days prior to the end of any such calendar
year, in which case Teva-Tuteur is relieved of the minimum
purchase requirement for such calendar year. If Teva-Tuteur
provides such notice, we have the option to (i) convert the
exclusive right granted to Teva-Tuteur into a non-exclusive
right effective as early as the date of the receipt of such
written notice from Teva-Tuteur or (ii) terminate the
agreement effective as early as the date of the receipt of such
written notice from Teva-Tuteur.
Competition
The biotechnology and pharmaceutical industries are very
competitive. In particular, competition for the development and
marketing of urological and endocrine pharmaceutical products is
intense and is expected to increase. Many of our competitors
have substantially greater financial and other resources, larger
research and development staffs and more experience developing
products, obtaining FDA and other regulatory approval of
products and manufacturing and marketing products. We compete
against all pharmaceutical companies that manufacture or market
LHRH agonist products. In addition, we compete against
biotechnology companies, universities, government agencies, and
other research institutions in the development of urological and
endocrine products, technologies and processes that are, or in
the future may be, the basis for competitive commercial products.
In particular, we compete against the following LHRH agonist
products for the palliative treatment of advanced prostate
cancer: TAP Pharmaceutical Products’ Lupron and
Sanofi-Aventis’ Eligard, both multiple injection
formulations that deliver leuprolide; Watson
Pharmaceuticals’ Trelstar that delivers triptorelin;
AstraZeneca’s Zoladex, a biodegradable rod that delivers
goserelin for up to three months; and Bayer
Pharmaceuticals’ Viadur, a rigid metal implant that
releases leuprolide over a
12-month period. With
respect to our endocrine pharmaceuticals in late-stage
development for the treatment of CPP and acromegaly, our
competitors currently include TAP Pharmaceutical Products’
Lupron Depot-PED and
20
Novartis’ Sandostatin injections and Sandostatin LAR Depots
and Pfizer’s Somavert. We believe that Vantas represents a
more comfortable and convenient alternative to competing
products because it eliminates the requirement of multiple
physician visits and repeated injections, and is smaller, softer
and more flexible than other implants.
Regulatory Matters
The production, distribution and marketing of products employing
our technology, and our research and development activities, are
subject to extensive governmental regulation in the U.S. and in
other countries. In the U.S., our product candidates are
regulated as drugs, and are subject to the Federal Food, Drug
and Cosmetic Act, the Public Health Service Act and the
regulations promulgated under these statutes, as well as to
other federal, state and local statutes and regulations. These
laws govern the clinical and non-clinical testing, manufacture,
safety, effectiveness, approval, labeling, distribution, import,
export, storage, record keeping, reporting, advertising and
promotion of our products. Product development and approval
within this regulatory framework, if successful, will take many
years and involve the expenditure of substantial resources.
Violation of regulatory requirements at any stage may result in
various adverse consequences, including FDA’s delay in
approving or refusal to approve a product. Violations of
regulatory requirements also may result in enforcement actions
including withdrawal of approval, labeling restrictions, seizure
of products, fines, injunctions and civil or criminal penalties.
|
|
|
Research, Development and Product Approval Process |
The research, development and approval process in the U.S. is
intensive and rigorous, and generally takes many years. The
typical process required by the FDA before a therapeutic drug
may be marketed in the U.S. includes:
|
|
|
| |
• |
pre-clinical laboratory and animal tests and analysis; |
| |
| |
• |
submission to the FDA of an application for an investigational
new drug application, which must become effective before human
clinical trials may commence; |
| |
| |
• |
preliminary human clinical studies to evaluate the drug and its
manner of use; |
| |
| |
• |
adequate and well-controlled human clinical trials to establish
whether the drug is safe and effective for its intended uses; |
| |
| |
• |
FDA review of whether the facility in which the drug is
manufactured, processed, packed or held meets standards designed
to assure the product’s continued quality; and |
| |
| |
• |
submission and approval of an appropriate product application to
the FDA, and approval of the application by the FDA. |
During pre-clinical testing, studies are performed with respect
to the chemical and physical properties of candidate
formulations. Biological testing is typically done in animal
models to demonstrate the activity of the compound against the
targeted disease or condition and to assess the apparent effects
of the new product candidate on various organ systems, as well
as its relative therapeutic effectiveness and safety. An
investigational new drug application must be submitted to the
FDA and become effective before studies in humans may commence.
In the U.S., clinical trial programs in humans generally follow
a three-phase process:
|
|
|
| |
• |
Phase I studies are typically conducted in small numbers of
healthy volunteers or, on occasion, in patients afflicted with
the target disease, to determine the metabolic and
pharmacological action of the product candidate in humans, the
side effects associated with increasing doses, and, if possible,
to gain early evidence of effectiveness. |
21
|
|
|
| |
• |
Phase II studies are generally conducted in larger groups
of patients having the target disease or condition in order to
validate the clinical endpoint and to obtain preliminary data on
both the effectiveness of the product candidate and optimal
dosage. This phase also helps determine further the safety
profile of the product candidate. |
| |
| |
• |
Phase III large-scale clinical trials are generally
conducted in hundreds of patients having the target disease or
condition to provide sufficient data for the statistical proof
of effectiveness and safety of the product candidate. |
In the case of products for cancer and certain other
life-threatening diseases, however, the initial Phase I
testing may be done in patients with the disease rather than in
healthy volunteers. Because these patients are already afflicted
with the target disease or condition, it is possible that such
studies will provide results traditionally obtained in
Phase II studies. These studies are often referred to as
“Phase I/II” studies. Even if patients are used
in initial human testing in a Phase I/II study, the sponsor
is still responsible for obtaining all the data usually obtained
in both Phase I and Phase II studies.
U.S. law requires that studies conducted to support
approval for product marketing be “adequate and well
controlled.” In general, this means that either a placebo
or a product already approved for the treatment of the disease
or condition under study must be used as a reference control.
Studies must also be conducted in compliance with the FDA’s
good clinical practice regulations.
The clinical trial process can take up to ten years or more to
complete, and the data may not be collected in compliance with
good clinical practice regulations, demonstrate that the product
is safe or effective, or be sufficient to support FDA approval
of the product candidate. The FDA may place clinical trials on
hold at any point in this process if, among other reasons, it
concludes that clinical subjects are being exposed to an
unacceptable health risk. Trials may also be terminated by
institutional review boards, which must review and approve all
research involving human subjects. Side effects or adverse
events that are reported during clinical trials can delay,
impede or prevent marketing authorization. Similarly, adverse
events that are reported after marketing authorization can
result in additional limitations being placed on a
product’s use and, potentially, withdrawal of the product
from the market. Any adverse event, either before or after
marketing authorization, can result in liability claims against
us.
During the course of, and following the completion of clinical
trials, the data are analyzed to determine whether the trials
successfully demonstrated safety and effectiveness and whether a
product approval application may be submitted. In the U.S., if
the product is regulated as a drug, a new drug application must
be submitted and approved before commercial marketing may begin.
The FDA Center for Drug Evaluation and Research, known as CDER,
has responsibility for the review and approval of drugs. The new
drug application must include a substantial amount of data and
other information concerning the safety and effectiveness of the
compound from laboratory, animal and clinical testing, as well
as data and information on manufacturing, product stability and
proposed product labeling.
Each domestic and foreign biopharmaceutical manufacturing
establishment, including any contract manufacturers we may
decide to use must be listed in the new drug application and
must be registered with the FDA. The application will not be
approved until the FDA conducts a manufacturing inspection,
approves the applicable manufacturing process for the drug
product and determines that the facility is in compliance with
the FDA’s current good manufacturing practice requirements.
If the manufacturing facilities and processes fail to pass the
FDA inspection, we will not receive approval to market these
products.
Under the Prescription Drug User Fee Act, the FDA receives fees
for reviewing a new drug application and supplements thereto, as
well as annual fees for both commercial manufacturing
establishments and approved products. These fees can be
significant. The new drug application review fee alone can
exceed $0.6 million, although certain deferrals, waivers
and reductions may be available.
Under applicable laws and FDA regulations, each new drug
application submitted for FDA approval is usually reviewed for
administrative completeness and reviewability within 45 to
60 days following submission of the application. If deemed
complete, the FDA will “file” the new drug
application, thereby
22
triggering substantive review of the application. The FDA can
refuse to file any new drug application that it deems incomplete
or not properly reviewable. If the FDA refuses to file an
application, the FDA will retain 25% percent of the user fee as
a penalty. The FDA has established performance goals for the
review of new drug applications — six months for
priority applications and ten months for regular applications.
However, the FDA is not legally required to complete its review
within these periods and these performance goals may change over
time. Moreover, the outcome of the review, even if generally
favorable, typically is not an actual approval but an
“action letter” that describes additional work that
must be done before the application can be approved. The
FDA’s review of an application may involve review and
recommendations by an independent FDA advisory committee. Even
if the FDA approves a product, it may limit the approved
therapeutic uses for the product as described in the product
labeling, require that warning statements be included in the
product labeling, require that additional studies be conducted
following approval as a condition of the approval or otherwise
limit the scope of any approval.
Significant legal and regulatory requirements also apply after
FDA approval to market under a new drug application. These
include, among other things, requirements related to adverse
events and other reporting, product advertising and promotion
and ongoing adherence to current good manufacturing practices,
as well as the need to submit appropriate new or supplemental
applications and obtain FDA approval for certain changes to the
approved product, product labeling or manufacturing process. The
FDA also enforces the requirements of the Prescription Drug
Marketing Act, which, among other things, imposes various
requirements in connection with the distribution of product
samples to physicians.
Overall research, development and approval times depend on a
number of factors, including the period of review at the FDA,
the number of questions posed by the FDA during review, how long
it takes to respond to the FDA questions, the severity of
life-threatening nature of the disease in question, the
availability of alternative treatments, the availability of
clinical investigators and eligible patients, the rate of
enrollment of patients in clinical trials and the risks and
benefits demonstrated in the clinical trials.
|
|
|
Drugs for Serious or Life-threatening Illnesses |
The Federal Food, Drug and Cosmetic Act and FDA regulations
provide certain mechanisms for the accelerated “Fast
Track” approval of products intended to treat serious or
life-threatening illnesses which have been studied for safety
and effectiveness and which demonstrate the potential to address
unmet medical needs. The procedures permit early consultation
and commitment from the FDA regarding the pre-clinical and
clinical studies necessary to gain marketing approval.
Provisions of this regulatory framework also permit, in certain
cases, new drug applications to be approved on the basis of
valid surrogate markers of product effectiveness, thus
accelerating the normal approval process. We have not applied
for fast track status for any of our current product candidates.
However, certain product candidates employing our Hydron
Technology might qualify for this accelerated regulatory
procedure. However, the FDA may not agree, and even if the FDA
agrees that these products qualify for accelerated approval
procedures, the FDA may deny approval of our drugs or may
require that additional studies be required before approval. The
FDA may also require us to perform post-approval, or
Phase IV, studies as a condition of such early approval. In
addition, the FDA may impose restrictions on distribution and
promotion in connection with any accelerated approval and may
withdraw approval if post-approval studies do not confirm the
intended clinical benefit or safety of the product candidates.
|
|
|
Other U.S. Regulatory Requirements |
In the U.S., the research, manufacturing, distribution, sale and
promotion of drugs may also be subject to regulation by various
federal, state and local authorities including the Centers for
Medicare and Medicaid Services (formerly the Health Care
Financing Administration), the U.S. Department of Health
and Human Services and state and local governments. For example,
sales, marketing and scientific and educational grant programs
must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act,
and False Claims Act and similar state laws. Pricing and rebate
programs must comply with the Medicaid rebate requirements of
the Omnibus Budget Reconciliation Act of 1990. If products are
made available to
23
authorized users of the Federal Supply Schedule of the General
Services Administration, additional laws and requirements apply.
All of these activities are also potentially subject to federal
and state consumer protection and unfair competition laws.
Moreover, we are now, and may become, subject to additional
federal state and local laws, regulations and policies relating
to safe working conditions, laboratory practices, and
experimental use of animals, and the use, storage, handling,
transportation and disposal of human tissue, waste and hazardous
substances, including radioactive and toxic materials and
infectious disease agents used in conjunction with our research
work.
|
|
|
European Union Regulatory Requirements |
Our ability to market our products outside the U.S. will be
contingent upon receiving marketing authorizations from the
appropriate regulatory authorities and compliance with
applicable post-approval regulatory requirements. Although the
specific requirements and restrictions vary from country to
country, as a general matter, foreign regulatory systems include
risks similar to those associated with FDA regulation, described
above. We received regulatory approval to commercialize Vantas
in Denmark in November 2005. We expect to commence the mutual
recognition process for regulatory approval in other European
countries in the second quarter of 2006.
Under the European Union regulatory systems, marketing
authorizations may be submitted either under a centralized or
decentralized procedure. Under the centralized procedure, a
single application to the European Medicines Agency, known as
the EMEA, leads to an approval granted by the European
Commission which permits the marketing of the product throughout
the European Union. We assume that the centralized procedure
will apply to our products that are developed by means of a
biotechnology process. The decentralized procedure provides for
mutual recognition of nationally approved decisions and is used
for product that do not qualify under the centralized procedure.
Under the decentralized procedure, the holders of a national
marketing authorization may submit further applications to the
competent authorities of the remaining member states, which will
then be requested to recognize the original authorization based
upon an assessment report prepared by the original authorizing
competent authority. The recognition process should take no
longer than 90 days, but if one member state made an
objection, which under the legislation can only be based on a
possible risk to human health, we have the option to withdraw
the application from that country or take the application to
arbitration by the Committee for Proprietary Medicinal Products,
known as CPMP, of the EMEA. If a referral for arbitration is
made, the procedure is suspended, and in the intervening time,
the only European Union country in which the product can be
marketed will be the country where the original authorization
has been granted, even if all the other designated countries are
ready to recognize the product. The opinion of the CPMP, which
is binding, could support or reject the objection or
alternatively could reach a compromise position acceptable to
all European Union countries concerned. Arbitration can be
avoided if the application is withdrawn in the objecting
country, but once the application has been referred to
arbitration, it cannot be withdrawn. The arbitration procedure
may take an additional year before a final decision is reached
and may require the delivery of additional data.
As with FDA approval, we may not be able to secure regulatory
approvals in certain European countries in a timely manner, if
at all. Additionally, as in the U.S., post-approval regulatory
requirements, such as those regarding product manufacturers,
marketing or distribution, would apply to any product that is
approved in Europe, and failure to comply with such obligations
could have a material adverse effect on our ability to
successfully commercialize any product.
There has recently been introduced in Europe new legislation
designed to harmonize the regulation of clinical trials across
the European Union, and that legislation is currently being
implemented on a country-by-country basis. In addition, new
proposals are under advanced consideration which, if brought
into law, will effect substantial and material changes in the
regulation of medicinal products in Europe. Accordingly,
24
in seeking approval for our products in Europe we face a marked
degree of chance and uncertainty both in the regulation of
clinical trials and in respect of marketing authorizations.
|
|
|
Other Foreign Regulatory Requirements |
We and our collaborative partners are subject to widely varying
foreign regulations, which may be quite different from those of
the FDA, governing clinical trials, product registration and
approval and pharmaceutical sales. Whether or not FDA approval
has been obtained, we must obtain a separate approval for a
product by the comparable regulatory authorities of foreign
countries prior to the commencement of product marketing in
these countries. In certain countries, regulatory authorities
also establish pricing and reimbursement criteria. The approval
process varies from country to country, and the time may be
longer or shorter than that required for FDA approval. In
addition, under current U.S. law, there are significant
restrictions on the export of products not approved by the FDA,
depending on the country involved and the status of the product
in that country.
Employees
As of January 1, 2006, we had 100 full-time employees,
consisting of 13 individuals in management and
administration, 41 individuals in sales and marketing,
12 individuals in research and development,
19 individuals in manufacturing and distribution and 15
individuals in quality assurance and quality control. We expect
to hire approximately ten additional employees in sales and
marketing. From time to time, we also employ independent
contractors or consultants to support our clinical and
regulatory efforts. None of our employees are represented by a
collective bargaining unit and we have never experienced a work
stoppage. We believe that our relations with our employees are
good.
Available Information
Valera Pharmaceuticals files annual, quarterly and current
reports, proxy statements and other information with the
Securities and Exchange Commission (the “SEC”). You
may read and copy any document we file with the SEC at the
SEC’s public reference room at 100 F Street, NE,
Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for information on the public reference room. The SEC maintains
an internet site that contains annual, quarterly and current
reports, proxy and information statements and other information
that issuers (including Valera Pharmaceuticals) file
electronically with the SEC. Valera Pharmaceuticals electronic
SEC filings are available to the public at the SEC’s
internet site,www.sec.gov.
Valera Pharmaceuticals’ internet site is
www.valerapharma.com. You can access Valera
Pharmaceuticals’ Investor Relations webpage through our
internet site, www.valerapharma.com, by clicking on the
“Corporate Information” link to the heading
“Investors.” You can also access our Investor
Relations webpage directly at
www.valerapharma.com/investors.asp. Valera
Pharmaceuticals makes available free of charge, on or through
our Investor Relations webpage, its proxy statements, Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to those
reports filed or furnished pursuant to the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), as soon
as reasonably practicable after such material is electronically
filed with, or furnished to, the SEC. Valera Pharmaceuticals
also makes available, through our Investor Relations webpage,
via a link to the SEC’s internet site, statements of
beneficial ownership of Valera Pharmaceuticals’ equity
securities filed by its directors, officers, 10% or greater
shareholders and others under Section 16 of the Exchange
Act.
25
Valera Pharmaceuticals has a webpage with its Corporate Code of
Business Conduct and Ethics and certain Corporate Governance
information. You can access this information on Valera
Pharmaceuticals’ webpage through our internet site,
www.valerapharma.com, by clicking on the “Corporate
Information” link to the heading “Investors.” You
can also access our Investor Relations webpage directly at
www.valerapharma.com/investors.asp. We will post any
amendments to the Code of Business Conduct and Ethics, and any
waivers that are required to be disclosed by the rules of either
the SEC or The NASDAQ National Market, on our internet site.
You can request a copy of these documents, excluding exhibits,
at no cost, by contacting Investor Relations, 7 Clarke Drive,
Cranbury, NJ 08512 or (609-235-3000). The information on Valera
Pharmaceuticals’ internet site is not incorporated by
reference into this report.
26
You should carefully consider the risk factors described
below and all other information contained in this
Form 10-K,
including our historical financial statements and related notes
and schedule, before you decide to invest in our common stock.
If any of the following risk factors actually occur, our
business, financial condition and results of operations could be
materially and adversely affected. In that case, the trading
price of our common stock could decline, and you may lose part
or all of your investment.
Risks Related to Our Business
|
|
|
We are largely dependent on the success of Vantas, our
first product to be approved for commercial sale by the FDA, and
we cannot be certain that we will be able to successfully expand
the commercialization of Vantas. |
We have invested and will invest a significant portion of our
time and resources in the commercialization of Vantas, which was
approved for commercial use by the FDA in October 2004. The
commercial success of Vantas is dependent on many factors,
including building and maintaining a focused sales force,
generating commercial sales, gaining acceptance of Vantas by
patients and the medical community, and obtaining reimbursement
from third party payors. All of our net product sales to date
have been generated solely from sales of Vantas. Until our
product candidates are approved for commercial use, our only
source of revenue will be sales of Vantas. If we are unable to
successfully expand the commercialization of Vantas, we may be
required to cease or reduce our operations.
|
|
|
We have a history of operating losses and may not achieve
or sustain profitability. |
The extent of our future operating losses or profits is highly
uncertain, and we may not achieve or sustain profitability. Our
product development and clinical activities will require
significant continuing expenditures. Vantas is our only product
that has been approved for commercial use by the FDA and that
may generate any significant revenues. From our inception
through December 31, 2005 we have incurred annual operating
losses, and as of December 31, 2005, we had an accumulated
deficit of approximately $39.7 million. The majority of the
deficit is attributable to research and development expenditures
of $25.6 million, primarily for Vantas. We may incur
additional operating losses, and we anticipate that our expenses
will increase in the foreseeable future as we make expenditures
to expand our sales of Vantas, continue our product development
and clinical research, acquire or in-license other
pharmaceutical products and expand our infrastructure. Although
we expect our net product sales, together with borrowings under
our line of credit and the proceeds from our initial public
offering, to fund these expenses, we may not generate sufficient
revenue from sales of Vantas to meet all of our expenses.
|
|
|
We are dependent on single suppliers for certain services
and raw materials, including histrelin, that are necessary for
the manufacture of our Hydron implants. If any of these
suppliers fail or are unable to perform in a timely and
satisfactory manner, we may be unable to manufacture Vantas or
some of our product candidates, which could delay sales of
Vantas and hinder research and development of our product
candidates that use Hydron Technology. |
We currently rely on single suppliers for histrelin, the active
ingredient in Vantas, for our implantation devices and for
sterilization services for our implants, including Vantas. We
currently have no written agreements with any of these
suppliers. Although we have identified alternate sources of
these raw materials and services, these raw materials and
services may not be immediately available to us. Further, even
if these alternative raw materials are immediately available,
they must first meet our internal specifications. Consequently,
if any of our suppliers are unable or unwilling to supply us
with these raw materials in sufficient quantities with the
correct specifications, or provide services on commercially
acceptable terms, we may not be able to manufacture Vantas or
our product candidates in a timely manner or at all, which could
delay the production or sale of Vantas and hinder the research
and development of some of our product candidates. Our inability
to obtain these raw materials and services for the manufacture
of our implants may force us to cease or reduce operations.
27
|
|
|
We have previously experienced disruptions in our
manufacturing of Vantas due to issues caused by our supply of
histrelin, the active ingredient in Vantas, including a
manufacturing disruption during the second and third quarters of
2005 that caused a material decrease in our sales for the third
quarter of 2005 and may have an adverse impact on our sales of
Vantas in the future. Further interruptions in our manufacturing
process for Vantas or our product candidates may have an adverse
impact on our sales of Vantas and the development of our product
candidates in the future. |
We have experienced two separate disruptions in our
manufacturing of Vantas due to issues caused by our supply of
histrelin, the active ingredient in Vantas. In the fourth
quarter of 2004, we experienced difficulties processing
histrelin in its raw, powder form. These difficulties delayed
the manufacturing of Vantas for several weeks as our supplier
reformulated the histrelin. In the second and third quarters of
2005, we experienced an issue with the histrelin used to produce
five lots of Vantas. This issue, which was caused by the method
by which our supplier formulated the histrelin, ultimately
resulted in these five lots not meeting certain quality control
specifications and caused a delay in production of approximately
six weeks. We have resolved each of these issues and have
developed additional specifications with our supplier of
histrelin in an effort to ensure a more consistent supply of
histrelin that meets our needs. However, the disruption we
experienced in the second and third quarters of 2005 directly
impacted our supply of Vantas in the third quarter of 2005 by
limiting the amount of finished product available for sale in
the quarter to three lots, or approximately 2,400 units.
Our third quarter sales were 1,747 units, which was less than
our sales in the first and second quarters of 2005, in which we
sold 2,925 units and 3,974 units, respectively. As a result
of this decrease in sales, we had a net loss in the third
quarter of 2005.
The interruption in our supply of Vantas in the second and third
quarters of 2005 may have an adverse effect on our ability to
sell Vantas in the future. The lack of supply during that period
may have an adverse impact on our future sales because
physicians may have elected to use alternative treatments during
this time frame or may, as a result of this interruption,
permanently switch to another product. Additionally, in the
future, we may experience other disruptions in our manufacturing
process for Vantas or our product candidates. Any disruptions we
may experience may adversely impact sales of Vantas or the
development of our product candidates.
|
|
|
The successful commercialization of Vantas and any other
products we develop will depend on obtaining reimbursement at
adequate levels from private health insurers and
Medicare/Medicaid for patient use of these products. We expect
the reimbursement levels for Vantas to decline, which will have
an adverse effect on our net product sales. |
Sales of pharmaceutical products largely depend on the
reimbursement of patients’ medical expenses by government
healthcare programs, such as Medicare and Medicaid, and private
health insurers. These third party payors control healthcare
costs by limiting both coverage and the level of reimbursement
for healthcare products. Third party payors are increasingly
challenging the price and examining the cost effectiveness of
medical products and services and altering reimbursement levels.
The levels at which government authorities and private health
insurers reimburse physicians or patients for the price they pay
for Vantas and other products we may develop could affect the
extent to which we are able to commercialize these products.
Vantas is currently eligible for insurance reimbursement
coverage. Sales of Vantas in the first half of 2005 were
supported, in part, by favorable reimbursement rates, which
decreased at the beginning of the third quarter of 2005. The
favorable reimbursement rates we experienced in the first half
of 2005 were due to the fact that Vantas was a new product that
did not yet have an established average selling price, or ASP.
As a result, Vantas was reimbursed at wholesale acquisition
cost, which is typically higher than ASP. Vantas received an
established ASP effective July 2005, which resulted in a lower
reimbursement rate for Vantas.
We expect the reimbursement levels for Vantas to continue to
decline, which will have an adverse effect on our net product
sales. In some states, where the reimbursement rate for Vantas
is based on ASP, the reimbursement levels will continue to
decline because the ASP for Vantas will decline as we sell
Vantas at prices below the reimbursement rate. In most states,
however, the reimbursement rates for Vantas are even
28
lower because the Medicare carriers in those states now apply
the Least Costly Alternative, or LCA, methodology to Vantas. LCA
is a payment methodology that allows Medicare carriers to pay
the same reimbursement for drugs that have been determined by
Medicare to be “medically equivalent”. The
reimbursement rate for Vantas, as determined by the Medicare
carriers, is lower in LCA states than the reimbursement rate in
non-LCA states, resulting in a lower sales price in
LCA states.
Significant uncertainty generally exists as to the reimbursement
status of newly approved healthcare products. Our ability to
achieve acceptable levels of reimbursement for product
candidates will affect our ability to successfully
commercialize, and attract collaborative partners to invest in
the development of, our product candidates. Reimbursement may
not be available for Vantas or any other products that we
develop and reimbursement or coverage levels may reduce the
demand for, or the price of, Vantas or any other products that
we may develop. If we cannot maintain coverage for Vantas and
obtain adequate reimbursement for other products we develop, the
market for those products may be limited.
In both the U.S. and certain foreign jurisdictions, there
have been a number of legislative and regulatory proposals in
recent years to change the healthcare system in ways that could
impact our ability to profitably sell Vantas and any other
products that we develop. These proposals include prescription
drug benefit proposals for Medicare beneficiaries and measures
that would limit or prohibit payments for certain medical
treatments or subject the pricing of drugs to government
control. Legislation creating a prescription drug benefit and
making certain changes in Medicaid reimbursement has been
enacted by Congress and signed by the President. Additionally,
Medicare regulations implementing the prescription drug benefit
became effective as of January 1, 2006. These and other
regulatory and legislative changes or proposals may affect our
ability to raise capital, obtain additional collaborators and
market Vantas and any other products that we may develop. In
addition, in many foreign countries, particularly the countries
of the European Union, the pricing of prescription drugs is
subject to government control. If our products are or become
subject to government regulation that limits or prohibits
payment for our products, or that subject the price of our
products to governmental control, our ability to sell Vantas and
other products we develop in commercially acceptable quantities
at profitable prices may be harmed.
|
|
|
As a manufacturer of our products, we are subject to
regulatory requirements. If we do not comply with such
requirements, the development and sales of our products and our
financial performance may be materially harmed. |
Pharmaceutical products are required to be manufactured under
regulations known as current good manufacturing practice, or
cGMP. Before commercializing a new product, manufacturers must
demonstrate compliance with the applicable cGMP regulations,
which include quality control and quality assurance
requirements, as well as the maintenance of extensive records
and documentation. Manufacturing facilities are subject to
ongoing periodic inspection by the FDA and corresponding foreign
and state authorities, including unannounced inspections, and
must be licensed before they can be used in commercial
manufacturing for products generated through the use of their
technology. In addition, cGMP requirements are constantly
evolving, and new or different requirements may apply in the
future. After regulatory approvals are obtained, the subsequent
discovery of previously unknown problems or the failure to
maintain compliance with existing or new regulatory requirements
may result in restrictions on the marketing of a product,
withdrawal of the product from the market, seizures, the
shutdown of manufacturing facilities, injunctions, monetary
fines and civil or criminal sanctions.
We may also encounter problems with the following:
|
|
|
| |
• |
production yields; |
| |
| |
• |
raw materials; |
| |
| |
• |
shortages of qualified personnel; |
| |
| |
• |
compliance with FDA regulations, including the demonstration of
purity and potency; |
| |
| |
• |
changes in FDA requirements; |
29
|
|
|
| |
• |
controlling production costs; and |
| |
| |
• |
development of advanced manufacturing techniques and process
controls. |
In addition, we are required to register our manufacturing
facilities with the FDA and other regulatory authorities. The
facilities are subject to inspections confirming compliance with
cGMP or other regulations. If we fail to maintain regulatory
compliance, the FDA can impose regulatory sanctions including,
among other things, refusal to approve a pending application for
a new drug product, or revocation of pre-existing approval for a
product, such as Vantas, which would eliminate our sole source
of revenue.
|
|
|
We may not be able to complete our acquisition of the
assets associated with the valrubicin product or realize a
return on our investment in this product candidate. |
We have entered into an agreement with Anthra Pharmaceuticals,
Inc. to acquire certain assets associated with its valrubicin
product for the treatment of bladder cancer, including the right
to sell the product in the U.S. and Canada. This product was
withdrawn from the market in 2002 due to a manufacturing
problem. We may not be able to complete our acquisition of these
assets or realize a return on our investment in such assets due
to risks related to the lack of intellectual property protection
and potential manufacturing difficulties. Our acquisition of the
assets is expected to close during the first quarter of 2006,
subject to various conditions. Even though the FDA has agreed to
our reintroduction plan, there is no assurance that we will be
able to successfully implement the plan. Further, we will not
have exclusive rights with respect to the sale of the valrubicin
product, because the product is not covered by any patents or
orphan drug exclusivity. As a result, competitors may compete
with us by, among other things, introducing a generic version of
the product or a similar product that contains the active
ingredient, valrubicin.
Although we believe that we have identified the cause of the
previous manufacturing problem and that we will be able to
correct it, there can be no assurance that we will be able to
correct the problem or that there will not be manufacturing
problems in the future. We plan to contract with third-parties
to manufacture the valrubicin as well as the finished product.
Even if we establish an acceptable manufacturing protocol, our
third-party manufacturers may be unable to manufacture the
product in sufficient quantities with the correct specifications
or in compliance with cGMP or other applicable regulatory
requirements. As a result of these risks, we may be unable to
complete our acquisition of this product or realize a return on
our investment in this product.
|
|
|
We have limited sales, marketing and distribution
experience and may be unable to successfully commercialize our
products. |
We have limited experience in marketing, selling, and
distributing our products in the U.S. and abroad. To achieve
commercial success, we must build on our current marketing and
sales force or contract with other parties, including
collaborators, to perform these services for us. We may not be
able to negotiate favorable distribution or marketing
arrangements. To the extent that we enter into co-promotion or
other arrangements, any revenues we receive will depend upon the
efforts of third parties which may not be successful and are
only partially within our control. We will be competing with
companies that have experienced and well-funded marketing and
sales operations. The failure to adequately sell and distribute
Vantas or our product candidates, if approved, could impair our
net product sales, cash flows from operations and our cash
position.
|
|
|
We may not be able to obtain additional capital that may
be necessary for growth and market penetration or to continue
our operations. |
We believe that the net proceeds we received from our initial
public offering, together with our existing cash, cash generated
from future sales of Vantas, and our line of credit will be
sufficient to meet our projected operating requirements for at
least the next 12 months. However, we may need to raise
additional funds through public or private debt or equity
financings in order to acquire new products or product
candidates, significantly expand our sales and marketing
capabilities, expand our manufacturing capacity, develop product
candidates, obtain FDA approval of our product candidates and
continue our commercial growth. Any additional equity financings
may be on terms that are dilutive or potentially
30
dilutive to our stockholders. Any debt financing we enter into
may involve incurring significant interest expense and include
covenants that restrict our operations. If we raise additional
funds through collaborations and licensing arrangements, it may
be necessary to relinquish some rights to our technologies,
product candidates or products, or grant licenses on terms that
are not favorable to us. Our ability to raise additional funds
will depend on financial, economic and market conditions and
other factors, many of which are beyond our control. We may not
be able to obtain financing on terms acceptable to us or at all.
If financing is insufficient or unavailable, we will have to
modify our growth and marketing strategies and scale back
operations by delaying, reducing the scope of, or eliminating
one or more of our planned development, commercialization or
expansion activities. This may negatively affect our ability to
expand our commercialization of Vantas and develop and bring new
products to market, which could have a material adverse effect
on our business, financial condition and results of operations.
Our future capital requirements may be significantly greater
than we expect and depend on many factors, including:
|
|
|
| |
• |
costs associated with conducting pre-clinical and clinical
testing; |
| |
| |
• |
costs associated with commercializing Vantas and other products
we may develop, including expanding sales and marketing
functions; for example, in connection with Supprelin-LA, we
expect to increase our sales force; |
| |
| |
• |
costs of establishing arrangements for manufacturing; |
| |
| |
• |
costs of acquiring new pharmaceutical products and drug delivery
systems; |
| |
| |
• |
payments required under our current and any future license
agreements and collaborations; for example, we are required to
make certain royalty payments, which are tied to sales of Vantas; |
| |
| |
• |
costs, timing and outcome of regulatory reviews; |
| |
| |
• |
costs of obtaining, maintaining and defending patents on
proprietary technology; and |
| |
| |
• |
costs of increased general and administrative expenses. |
As of December 31, 2005, the cumulative amount of royalty
expense incurred by us as a result of sales of Vantas was
$1.6 million.
If
products utilizing our technology fail to gain market
acceptance, we may be unable to generate significant
revenue.
Even if clinical trials demonstrate the safety and efficacy of
products developed utilizing our technology and all regulatory
approvals are obtained, such products may not gain market
acceptance among physicians, patients, third party payors or the
medical community. The current method of administration for our
product candidates in late-stage development is implantation,
which may be less well received by some patients than injection
therapy. The degree of market acceptance of any product
employing our technology will depend on a number of factors,
including:
|
|
|
| |
• |
establishment and demonstration of clinical efficacy and safety; |
| |
| |
• |
cost-effectiveness; |
| |
| |
• |
adequate reimbursement by third parties; |
| |
| |
• |
relative convenience and ease of administration; |
| |
| |
• |
timing of market introduction of competitive products; |
| |
| |
• |
alternative treatment methods, for example, injections and oral
formulations; and |
| |
| |
• |
marketing and distribution support. |
If our products do not achieve significant market acceptance, we
may be unable to generate significant revenue, which could have
a material adverse effect on our business, cash flows and
results of operations.
31
|
|
|
Our failure to recruit, retain, and motivate qualified
management and scientific personnel could adversely affect
us. |
Our success depends, in part, on our continued ability to
attract, retain and motivate highly qualified management,
scientific and clinical and sales and marketing personnel. We
are substantially dependent on our senior management and key
scientific and technical personnel, particularly David S.
Tierney, M.D., Matthew L. Rue, III, Pete J. Perron and
Petr F. Kužma, each of whose services are critical to the
successful implementation of our development, regulatory and
commercialization strategies. We will need to expand our
employee base as we continue to commercialize Vantas and develop
our product candidates. The loss of the services of any member
of our senior management, scientific or technical staff may
significantly delay or prevent the achievement of drug
development and other business objectives, and could have a
material adverse effect on our business, financial condition and
results of operations. We may not be able to recruit and retain
qualified personnel in the future due to intense competition for
personnel among pharmaceutical businesses, and our failure to do
so could delay or curtail our product development efforts,
impair our ability to execute our business strategy and
adversely affect us. We have entered into an employment
agreement with Dr. Tierney. Following July 1, 2006,
unless this employment agreement is renewed, Dr. Tierney
will become an “at-will” employee. In addition, we
have entered into change of control agreements with each of our
other executive officers. We have not purchased any key man life
insurance for any of our employees.
We also utilize consultants and advisors to assist us with
research and development. All of our consultants and advisors
are either self-employed or employed by other organizations, and
they may have conflicts of interest or other commitments, such
as consulting or advisory contracts with other organizations,
that may affect their ability to contribute to us, which could
have a material adverse effect on our business, financial
condition and results of operations.
|
|
|
We face substantial competition and our competitors may
discover, develop or commercialize products similar to ours
before or more successfully than we do. |
The biotechnology and pharmaceutical industries are very
competitive. We compete against all pharmaceutical companies
that manufacture or market LHRH agonist products. We also
compete against biotechnology companies, universities,
government agencies, and other research institutions in the
development of urological and endocrine products, technologies
and processes that are, or in the future may be, the basis for
competitive commercial products.
In particular, we compete against the following LHRH agonist
products for the palliative treatment of advanced prostate
cancer: TAP Pharmaceutical Products’ Lupron and
Sanofi-Aventis’ Eligard, both multiple injection
formulations that deliver leuprolide; Watson
Pharmaceuticals’ Trelstar, a multiple injection formulation
that delivers triptorelin; AstraZeneca’s Zoladex, a
biodegradable rod that delivers goserelin for up to three
months; and Bayer Pharmaceuticals’ Viadur, a rigid metal
implant that releases leuprolide over a 12-month period. With
respect to our endocrine pharmaceuticals in late-stage
development for the treatment of central precocious puberty and
acromegaly, our competitors currently include TAP Pharmaceutical
Products’ Lupron Depot-PED, Novartis’ Sandostatin
injections and Sandostatin LAR Depots and Pfizer’s Somavert.
Many of our competitors have substantially greater financial and
other resources, larger research and development staffs and more
experience developing products, obtaining FDA and other
regulatory approvals and manufacturing and marketing products.
Consequently, competition for the development and marketing of
urological and endocrine pharmaceutical products is intense and
is expected to increase. For example, in the past we have
received communications from Bayer Pharmaceuticals regarding our
sales and marketing techniques for Vantas. Our practice has been
to review these communications with counsel to determine whether
any remedial or corrective action needs to be made. These
communications have not resulted in any notice of violations or
other action by any government authority or agency.
Our competitors may discover, develop or commercialize products
similar to ours before or more successfully than we do and may
compete with us in establishing clinical trial sites and patient
registration for clinical trials, as well as in acquiring
technologies and technology licenses complementary to our
32
programs or advantageous to our business. In addition, there may
be product candidates of which we are not aware at an earlier
stage of development that may compete with our product
candidates. If any of them are successfully developed and
approved, they could compete directly with our product
candidates. This could result in reduced sales and pricing
pressure on any similar products that we develop, which in turn
would reduce our ability to generate revenue and could have a
material adverse effect on our net product sales, gross margin
and cash flows from operations.
|
|
|
Our sales of Vantas and any other products we may develop
could suffer from competition by generic products. |
Although we have proprietary protection for Vantas and other
products we are developing, we could face competition from
generic substitutes of these products if generics are developed
by other companies and approved by the FDA. Because generic
manufacturers are not exposed to development risks for such
generic substitutes, these manufacturers can capture market
share by selling generic products at lower prices, which can
reduce the market share held by the original product.
Competition from the sale of generic products may cause a
decrease in our selling price or units sold, and could have a
material adverse effect on our net product sales, gross margin
and cash flows from operations.
|
|
|
We may encounter difficulties managing our growth, which
could adversely affect our results of operations. |
In connection with our commercial launch of Vantas, we may
experience rapid and significant growth in the number of our
employees and the scope of our operations. As of January 1,
2006, we had approximately 41 employees devoted to sales
and marketing, and we expect to hire approximately ten
additional employees in this area. Our future financial
performance and our ability to commercialize Vantas and any
other products that we develop and to compete effectively will
depend, in part, on our ability to manage any future growth
effectively. This growth and expansion is expected to place a
significant demand on our financial, managerial and operational
resources.
Our success in managing our growth will also depend on the
ability of our executive officers and senior management to
continue to implement and improve our operational, management,
information and financial control systems and to expand, train
and manage our employee base. Our inability to manage growth
effectively could cause our operating costs to grow at a faster
pace than is currently anticipated and could have a material
adverse effect on our business, financial condition and results
of operations.
|
|
|
We face a risk of product liability claims and may not be
able to obtain adequate insurance. |
Our business exposes us to potential liability risks that may
arise from the clinical testing of our product candidates and
the manufacture and sale of Vantas and other products that we
may develop. Plaintiffs have received substantial damage awards
in some jurisdictions against pharmaceutical companies based
upon claims for injuries allegedly caused by the use of their
products. Such liability claims may be expensive to defend and
may result in large judgments against us. Although we have
liability insurance with a coverage limit of $10 million,
our insurance may not reimburse us, or this coverage may not be
sufficient to cover claims that may be made against us. In
addition, if we are no longer able to maintain this coverage or
have to obtain additional coverage, we may not be able to obtain
liability insurance on acceptable terms or at all. Whether or
not we are ultimately successful in any product liability
litigation, such litigation could consume substantial amounts of
our financial and managerial resources and could result in:
|
|
|
| |
• |
significant awards against us; |
| |
| |
• |
substantial litigation costs; |
| |
| |
• |
recall of the product; |
| |
| |
• |
injury to our reputation; and |
| |
| |
• |
withdrawal of clinical trial participants; |
all of which could have a material adverse effect on our
business, financial condition and results of operations.
33
The
approved drugs used in Vantas and our product candidates, as
well as the implant itself, may cause side effects and we may
not be able to achieve an acceptable level of side effect risks,
compared to the potential therapeutic benefits, for our product
candidates.
The active compound in Vantas and each of our product candidates
has been approved by the FDA for the treatment of the
conditions, diseases and disorders that we are seeking to treat.
Each of these compounds, as well as the implant itself, is
associated with certain side effects. Although we have not
experienced any difficulties with the side effects profile of
Vantas, the implant or our product candidates to date, the side
effects of the approved drugs in our product candidates may be
acceptable when a drug is used in its approved dosage to achieve
a therapeutic benefit for its currently approved indications,
but the side effect risk compared to the therapeutic benefit may
not be acceptable when used for the intended indications for the
product candidate. Side effects of the approved drugs, the
implant or the combination of these elements, could prevent
successful development and commercialization of some or all of
our product candidates.
Further, the development of a product candidate could be
adversely affected by safety or efficacy issues that
subsequently arise regarding use of the approved drug, similar
drugs or the implant. We could be forced to abandon a product
candidate or an approved product, such as Vantas, due to adverse
side effects from long-term or other use of the implant or the
active pharmaceutical ingredients in the product candidate or
product.
|
|
|
Because we operated as a private company prior to our
initial public offering in February 2006, we have no experience
attempting to comply with public company obligations, including
recently enacted changes in securities laws and regulations;
attempting to comply with these requirements will increase our
costs and require additional management resources and we still
may fail to comply. |
We are a small company with limited resources. We operated as a
private company prior to our initial public offering in February
2006, not subject to many of the requirements applicable to
public companies. The number and qualifications of our finance
and accounting staff are consistent with those of a private
company. While we have plans to expand our staff, we may
encounter substantial difficulty attracting qualified staff with
requisite experience due to the high level of competition for
experienced financial professionals.
As a public reporting company, we will need to comply with the
Sarbanes-Oxley Act of 2002 and the related rules and regulations
of the SEC, including expanded periodic reports, disclosures and
accelerated reporting requirements and more complex accounting
rules.
As directed by Section 404 of the Sarbanes-Oxley Act of
2002, the SEC adopted rules requiring public companies to
include a report of management on the company’s internal
control over financial reporting in their annual reports on
Form 10-K. In
addition, the independent registered public accounting firm
auditing the company’s financial statements must attest to
and report on management’s assessment of the effectiveness
of the company’s internal control over financial reporting.
This requirement will first apply to our annual report on Form
10-K for our fiscal year ending December 31, 2007. If we
are unable to conclude that we have effective internal control
over financial reporting or, if our independent registered
public accounting firm is unable to provide us with an
unqualified report as to the effectiveness of our internal
control over financial reporting as of December 31, 2007
and future year ends as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in
the reliability of our financial statements, which could result
in a decrease in the value of our common stock.
Risks Related to Clinical Trials and Other Regulatory
Matters
|
|
|
If our clinical trials are unsuccessful or significantly
delayed, or if we do not complete our clinical trials, we may
not be able to commercialize our product candidates. |
We must provide the FDA and similar foreign regulatory
authorities with pre-clinical and clinical data to demonstrate
that our product candidates are safe and effective for each
indication before they can be approved for commercialization.
The pre-clinical testing and clinical trials of any product
candidates that we develop must comply with the regulations of
numerous federal, state and local government authorities
34
in the U.S., principally the FDA, and by similar agencies in
other countries. Clinical development is a long, expensive and
uncertain process and is subject to delays. We may encounter
delays or rejections for various reasons, including our
inability to enroll enough patients to complete our clinical
trials.
We have one product candidate currently in Phase I clinical
trials and expect to have two product candidates in
Phase I/II clinical trials in 2006 and one product
candidate in a Phase IIb clinical trial in the first half of
2006. We expect to file a new drug application for Supprelin-LA
in the second quarter of 2006. It may take several years to
complete the testing of a product candidate, and failure can
occur at any stage of development, for many reasons, including:
|
|
|
| |
• |
interim results of pre-clinical or clinical studies do not
necessarily predict their final results, and acceptable results
in early studies might not be seen in later studies; |
| |
| |
• |
product candidates that appear promising at early stages of
development may ultimately fail because the products may be
ineffective, may be less effective than competitors’
products or may cause harmful side effects; |
| |
| |
• |
any pre-clinical or clinical test may fail to produce results
satisfactory to the FDA or foreign regulatory authorities; |
| |
| |
• |
pre-clinical or clinical data can be interpreted in different
ways, which could delay, limit or prevent regulatory approval; |
| |
| |
• |
negative or inconclusive results from a pre-clinical study or
clinical trial or adverse medical events during a clinical trial
could cause a pre-clinical study or clinical trial to be
repeated or a program to be terminated, even if other studies or
trials relating to the program are successful; |
| |
| |
• |
the FDA can place a clinical hold on a trial if, among other
reasons, it finds that patients enrolled in the trial are or
would be exposed to an unreasonable and significant risk of
illness or injury; |
| |
| |
• |
we may encounter delays or rejections based on changes in
regulatory agency policies during the period in which we are
developing a product candidate or the period required for review
of any application for regulatory agency approval; |
| |
| |
• |
our clinical trials may not demonstrate the safety and efficacy
of any product candidates or result in marketable products; |
| |
| |
• |
the FDA may change its approval policies or adopt new
regulations that may negatively affect or delay our ability to
bring a product candidate to market; and |
| |
| |
• |
a product candidate may not be approved for all the indications
which we request. |
|
|
|
The development and approval process may take many years,
require substantial resources and may never lead to the approval
of a product. With the exception of Vantas, we do not have, and
may never obtain, the regulatory approvals we need to market our
product candidates. Our failure to obtain, or delays in
obtaining, regulatory approvals would have a material adverse
effect on our business, financial condition and results of
operations. |
Product candidates are subject to extensive and rigorous
government regulation by the FDA, other regulatory agencies, and
their respective foreign equivalents. The FDA regulates the
research, development, pre-clinical and clinical testing,
manufacture, safety, effectiveness, record keeping, reporting,
labeling, storage, approval, advertising, promotion, sale,
distribution, import and export of pharmaceutical products. Any
of our products marketed abroad will also be subject to
extensive regulation by foreign governments, whether or not we
have obtained FDA approval for a given product and its uses.
Government regulation substantially increases the cost of
researching, developing, manufacturing and selling
pharmaceutical products. The regulatory review and approval
process, which includes pre-clinical testing and clinical trials
of each product candidate, is lengthy, expensive and uncertain.
We must obtain regulatory approval for each product we intend to
market, and the manufacturing facilities used for the products
must be inspected and meet legal requirements. Securing
regulatory approval requires the submission of extensive
pre-clinical and clinical data and other supporting information
for each proposed therapeutic indication in order to establish
the product’s safety, efficacy, potency and purity for each
35
intended use. Moreover, approval policies or regulations may
change. We will not be able to commercialize our product
candidates until we obtain FDA approval in the U.S. or
approval by comparable authorities in other countries. The
development and approval process takes many years, requires
substantial resources and may never lead to the approval of a
product. In October 2004, we received FDA approval for the
commercial sale of Vantas in the United States. In November
2005, we received approval to market Vantas in Denmark. In March
2006, we received approval to market Vantas in Canada. Approval
of any of our product candidates is not anticipated until 2007
and thereafter. Failure to obtain, or delays in obtaining,
regulatory approvals may:
|
|
|
| |
• |
adversely affect the commercialization of any products that we
develop; |
| |
| |
• |
impose additional costs on us; |
| |
| |
• |
diminish any competitive advantages that we may attain; and |
| |
| |
• |
adversely affect our receipt of revenues or royalties. |
|
|
|
Even if we receive regulatory approval for our product
candidates, our approval may be limited and, we will be subject
to significant ongoing regulatory obligations and
oversight. |
Even if we are able to obtain regulatory approval for a
particular product, the approval may limit the indicated uses
for the product, may otherwise limit our sales practices and our
ability to promote, sell and distribute the product, may require
that we conduct costly post-marketing surveillance and may
require that we conduct ongoing post-marketing studies. Material
changes to an approved product, such as manufacturing changes or
revised labeling, may require further regulatory review and
approval. Once obtained, any approvals may be withdrawn for a
number of reasons, including the later discovery of previously
unknown problems with the product. If we or our contract
manufacturers fail to comply with applicable regulatory
requirements at any stage during the regulatory process, such
noncompliance could result in:
|
|
|
| |
• |
refusals or delays in the approval of applications or
supplements to approved applications; |
| |
| |
• |
refusal of a regulatory authority, including the FDA, to review
pending market approval applications or supplements to approved
applications; |
| |
| |
• |
warning letters; |
| |
| |
• |
fines; |
| |
| |
• |
import or export restrictions; |
| |
| |
• |
product recalls or seizures; |
| |
| |
• |
injunctions; |
| |
| |
• |
total or partial suspension of clinical trials or production; |
| |
| |
• |
civil penalties; |
| |
| |
• |
withdrawals of previously approved marketing applications or
licenses; |
| |
| |
• |
recommendations by the FDA or other regulatory authorities
against entering into governmental contracts with us; or |
| |
| |
• |
criminal prosecutions. |
|
|
|
The regulatory approval process outside the
U.S. varies depending on foreign regulatory requirements,
and failure to obtain regulatory approval in foreign
jurisdictions would prevent the marketing of our products in
those jurisdictions. |
We intend to also market our products outside of the U.S. For
example, we have executed agreements to license Vantas in
Canada, South Africa, Asia and Argentina. To market our products
in the European Union and many other foreign jurisdictions, we
must obtain separate regulatory approvals and comply with
numerous and varying regulatory requirements. Approval of a
product by the comparable regulatory authorities of foreign
countries must still be obtained prior to manufacturing or
marketing that product in those countries. The approval
procedure varies among countries and can involve additional
testing, and the time required to obtain approval may differ
from that required to obtain FDA approval. The foreign
regulatory approval process includes all of the risks associated
with obtaining FDA approval
36
set forth above, and approval by the FDA does not ensure
approval by the regulatory authorities of any other country, nor
does the approval by foreign regulatory authorities in one
country ensure approval by regulatory authorities in other
foreign countries or the FDA. We may not be able to file for
regulatory approvals and may not receive necessary approvals to
commercialize our products in any foreign market. If we fail to
comply with these regulatory requirements or obtain and maintain
required approvals, our target market will be reduced and our
ability to generate revenue from abroad will be adversely
affected.
|
|
|
We rely on third parties to conduct certain of the
clinical trials for our product candidates, and if they do not
perform their obligations to us, we may not be able to obtain
regulatory approvals for our product candidates. |
We design the clinical trials for our product candidates, but we
rely on academic institutions, corporate partners, contract
research organizations and other third parties to assist us in
managing, monitoring and otherwise carrying out these trials.
Accordingly, we may have less control over the timing and other
aspects of these clinical trials than if we conducted them
entirely on our own. We are currently conducting the clinical
trials for Supprelin-LA for CPP, however, the data management
will be contracted to an outside data management firm. We are
also conducting certain clinical trials for VP003
(octreotide) in Brazil, however, we have employed a local
contract research organization to monitor the trials for us, and
we will contract with a third party to handle the data
management. Although we rely on these third parties to manage
the data from these clinical trials, we are responsible for
confirming that each of our clinical trials is conducted in
accordance with its general investigational plan and protocol.
Moreover, FDA and foreign regulatory agencies require us to
comply with regulations and standards, commonly referred to as
good clinical practice, for conducting, recording and reporting
the results of clinical trials to assure that the data and
results are credible and accurate and that the trial
participants are adequately protected. Our reliance on third
parties does not relieve us of these responsibilities and
requirements, and we may fail to obtain regulatory approval for
our product candidates, if these requirements are not met.
Risks Related to Intellectual Property
|
|
|
Our success depends on the protection of our intellectual
property rights, and our failure to secure these rights would
materially harm our business. |
We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our
proprietary rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets. We protect our
proprietary position by filing U.S. and foreign patent
applications related to our proprietary technology, inventions
and improvements that are important to the development of our
business. We may not be able to obtain patent protection for our
pending patent applications, those we may file in the future, or
those we may license from third parties. Moreover, patents
issued or that may be issued or licensed may not be enforceable
or valid or may expire prior to the commercialization of our
product candidates. The patent position of a pharmaceutical
company involves complex legal and factual questions and,
therefore, enforceability or validity cannot be predicted with
certainty. Patents, if issued, may be challenged, invalidated or
circumvented. Thus, any patents that we own or license from
third parties may not provide sufficient protection against our
competitors. Also, patent rights may not provide us with
proprietary protection or competitive advantages against
competitors with similar technology. Further, the laws of
foreign countries may not protect our intellectual property
rights to the same extent as do the laws of the U.S.
|
|
|
If we are unable to protect the confidentiality of our
proprietary information and know-how, our competitive position
would be impaired and our business could be adversely
affected. |
In addition to patent protection, we also rely on the protection
of trade secrets, know-how and confidential and proprietary
information. To maintain the confidentiality of trade secrets
and proprietary information, we have entered into
confidentiality agreements with our employees, consultants and
collaborators upon the commencement of their relationships with
us. These agreements require that all confidential information
developed by the individual or made known to the individual by
us during the course of the individual’s relationship with
us be kept confidential and not disclosed to third parties. Our
37
agreements with employees also provide that inventions conceived
by the individual in the course of rendering services to us
shall be our exclusive property. However, we may not obtain
these agreements in all circumstances, and individuals with whom
we have these agreements may not comply with the terms of these
agreements. In the event of unauthorized use or disclosure of
their trade secrets or proprietary information, these
agreements, even if obtained, may not provide meaningful
protection for our trade secrets or other confidential
information. Further, to the extent that our employees,
consultants or contractors use technology or know-how owned by
others in their work for us, disputes may arise as to the rights
in related inventions.
Adequate remedies may not exist in the event of unauthorized use
or disclosure of our confidential information. The disclosure of
our trade secrets would impair our competitive position and
could harm our business.
|
|
|
Our commercial success depends significantly on our
ability to operate without infringing the patents and other
proprietary rights of third parties. |
Others may obtain patents that could limit our ability to use,
import, manufacture, market or sell products or impair our
competitive position. No patent can protect its holder from a
claim of infringement of another patent. Therefore, our patent
position cannot and does not provide any assurance that the
commercialization of our products would not infringe the patent
rights of another. In the event our technologies infringe or
violate the proprietary rights of third parties, we may be
prevented from pursuing the development, manufacturing or
commercialization of our products that utilize such
technologies. While we know of no actual or threatened claim of
infringement that would be material to us, there can be no
assurance that such a claim will not be asserted. If such a
claim is asserted, the resolution of the claim may not permit us
to continue marketing the relevant product, such as Vantas, on
commercially reasonable terms, if at all.
|
|
|
Protecting our intellectual property is expensive and time
consuming and could harm our business. |
Third parties may challenge the validity of our patents and
other intellectual property rights, resulting in costly
litigation or other time-consuming and expensive proceedings,
which could deprive us of valuable rights. If we become involved
in any intellectual property litigation, interference or other
judicial or administrative proceedings, we will incur
substantial expenses and the diversion of financial resources
and technical and management personnel. An adverse determination
may subject us to significant liabilities or require us to seek
licenses that may not be available from third parties on
commercially favorable terms, if at all. Further, if such claims
are proven valid, through litigation or otherwise, we may be
required to pay substantial financial damages, which can be
tripled if the infringement is deemed willful, or be required to
discontinue or significantly delay development, marketing,
selling and licensing of the affected products and intellectual
property rights. In addition, an adverse determination in a
proceeding involving our owned or licensed intellectual property
may allow entry of generic substitutes for our products.
Risks Related to Our Common Stock
|
|
|
The trading price of the shares of our common stock could
be highly volatile. |
The trading price of the shares could be highly volatile in
response to various factors, many of which are beyond our
control, including:
|
|
|
| |
• |
developments concerning Vantas or any of our product candidates; |
| |
| |
• |
announcements of technological innovations by us or our
competitors; |
| |
| |
• |
new products introduced or announced by us or our competitors; |
| |
| |
• |
changes in reimbursement levels; |
| |
| |
• |
changes in financial estimates by securities analysts; |
| |
| |
• |
actual or anticipated variations in operating results; |
| |
| |
• |
expiration or termination of licenses, research contracts or
other collaboration agreements; |
| |
| |
• |
conditions or trends in the regulatory climate and the
biotechnology and pharmaceutical industries; |
38
|
|
|
| |
• |
intellectual property, product liability or other litigation
against us; |
| |
| |
• |
changes in the market valuations of similar companies; and |
| |
| |
• |
sales of shares of our common stock, particularly sales by our
officers, directors and significant stockholders. |
In addition, equity markets in general, and the market for
biotechnology and life sciences companies in particular, have
experienced substantial price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of companies traded in those markets. In addition,
changes in economic conditions in the U.S., Europe or globally,
could impact upon our ability to grow profitably. Adverse
economic changes are outside our control and may result in
material adverse impacts on our business or results. These broad
market and industry factors may materially affect the market
price of the shares, regardless of our development and operating
performance. In the past, following periods of volatility in the
market price of a company’s securities, securities
class-action litigation has often been instituted against that
company. Such litigation, if instituted against us could cause
us to incur substantial costs and divert management’s
attention and resources, which could have a material adverse
effect on our business, financial condition and results of
operations.
|
|
|
The ownership interests of our officers, directors and
largest stockholders could conflict with the interests of our
other stockholders. |
Our directors, executive officers and holders of 5% or more of
our outstanding common stock beneficially own approximately 61%
of our common stock as of March 1, 2006. As a result, these
stockholders, acting together, are able to significantly
influence all matters requiring approval by our stockholders,
including the election of directors and approval of mergers or
other significant corporate transactions. The interests of this
group of stockholders may not always coincide with our interests
or the interests of other stockholders.
|
|
|
Our use of our initial public offering proceeds may not
yield a favorable return on your investment. |
We will use the net proceeds from our initial public offering to
expand our sales and marketing capabilities, fund our research
and development activities, expand our manufacturing
capabilities, and for general corporate purposes, including the
potential acquisition or in-license of additional urological and
endocrine products. We used a portion of the net proceeds from
our initial public offering to repay amounts outstanding under
our line of credit. In addition, we may use a portion of the net
proceeds to acquire businesses, products or technologies that
are complementary to our current or future business and product
lines. Our management has broad discretion over how these
proceeds are used and could spend the proceeds in ways with
which you may not agree. We also plan to invest the proceeds
from our initial public offering. However, the proceeds may not
be invested effectively or in a manner that yields a favorable
or any return, and consequently, this could result in financial
losses that could have a material adverse effect on our
business, cause the price of our common stock to decline and/or
delay the development of our product candidates.
|
|
|
Our common stock has been publicly traded for a short time
and an active trading market may not be sustained. |
Although we are currently listed for trading on The NASDAQ
National Market, an active trading market for our common stock
may not be sustained. An inactive market may impair your ability
to sell shares at the time you wish to sell them or at a price
that you consider reasonable. Furthermore, an inactive market
may impair our ability to raise capital by selling shares and
may impair our ability to acquire other businesses, products and
technologies by using our shares as consideration.
|
|
|
Delaware law and our amended and restated certificate of
incorporation and amended and restated bylaws contain provisions
that could delay and discourage takeover attempts that
stockholders may consider favorable. |
Certain provisions of our amended and restated certificate of
incorporation, or certificate of incorporation, and amended and
restated bylaws, or bylaws, and applicable provisions of
Delaware corporate
39
law may make it more difficult for or prevent a third party from
acquiring control of us or changing our board of directors and
management. These provisions include:
|
|
|
| |
• |
the ability of our board of directors to issue preferred stock
with voting or other rights or preferences; |
| |
| |
• |
limitations on the ability of stockholders to amend our charter
documents, including stockholder supermajority voting
requirements; |
| |
| |
• |
the inability of stockholders to act by written consent or to
call special meetings; |
| |
| |
• |
a classified board of directors with staggered three-year terms; |
| |
| |
• |
requirements that special meetings of our stockholders may only
be called by the chairman of our board of directors, our
president, or upon a resolution adopted by, or an affirmative
vote of, a majority of our board of directors; and |
| |
| |
• |
advance notice procedures our stockholders must comply with in
order to nominate candidates for election to our board of
directors or to place stockholders’ proposals on the agenda
for consideration at meetings of stockholders. |
We will also be afforded the protections of Section 203 of
the Delaware General Corporation Law, which will prevent us from
engaging in a business combination with a person who acquires at
least 15% of our common stock for a period of three years from
the date such person acquired such common stock, unless board or
stockholder approval were obtained.
Any delay or prevention of a change of control transaction or
changes in our board of directors or management could deter
potential acquirors or prevent the completion of a transaction
in which our stockholders could receive a substantial premium
over the then current market price for their shares.
|
|
|
Future sales of our common stock may depress our stock
price. |
Persons who were our stockholders prior to the sale of shares in
our initial public offering continue to hold a substantial
number of shares of our common stock that they will be able to
sell in the public market in the near future. Significant
portions of these shares are held by a small number of
stockholders. Sales by our current stockholders of a substantial
number of shares, or the expectation that such sales may occur,
could significantly reduce the market price of our common stock.
Moreover, the holders of approximately 11,022,380 shares of
our common stock as of March 1, 2006, will have rights,
subject to certain conditions, to require us to file
registration statements to permit the resale of their shares in
the public market or to include their shares in registration
statements that we may file for ourselves or other stockholders.
The holders of approximately 11,034,380 shares of our
outstanding common stock as of March 1, 2006 have agreed
with the underwriters of our initial public offering to be bound
by a 180-day lock-up
agreement that generally prohibits these holders from selling or
transferring their stock until August 1, 2006, the end of
the 180-day period,
subject to specified exceptions. If we issue an earnings release
or material news or if a material event relating to us occurs
during the 15 calendar days plus 3 business days before the last
day of the lock-up period, or if prior to the expiration of the
lock-up period, we announce that we will release earnings
results during the 16 days following the last day of the
lock-up period, the restrictions provided in the lock-up
agreements will continue to apply until 18 days after the
issuance of the earnings release or the occurrence of material
news or a material event. At any time and without public notice
our underwriters, UBS Securities LLC and Banc of America
Securities LLC, may in their sole discretion release all or some
of the securities from these lock-up agreements. If the
restrictions of the lock-up agreements are waived, shares of our
common stock will be available for sale into the market, subject
only to applicable securities rules and regulations, which may
cause our stock price to decline.
40
|
|
|
Our quarterly financial results are likely to fluctuate
significantly because our sales prospects are uncertain and, as
a result, our stock price may decline. |
Our quarterly operating results are difficult to predict and may
fluctuate significantly from period to period. For example, as
described above, less favorable reimbursement rates of Vantas
became effective at the beginning of the third quarter of 2005,
as the basis for determining reimbursement rates switched from
wholesale acquisition cost to the typically lower ASP. In
addition, as described above, we anticipate that the number of
states that provide reimbursement for Vantas under the Medicare
program using the LCA methodology will increase in future
quarters, leading to a decline in our sales price for Vantas.
The level of our revenues and results of operations at any given
time will be based primarily on the following factors:
|
|
|
| |
• |
success of the commercialization of Vantas and any other product
candidates that may be approved; |
| |
| |
• |
changes in our ability to obtain FDA approval for our product
candidates; |
| |
| |
• |
results of our clinical trials; |
| |
| |
• |
timing of new product offerings, acquisitions, licenses or other
significant events by us or our competitors; |
| |
| |
• |
regulatory approvals and legislative changes affecting the
products we may offer or those of our competitors; |
| |
| |
• |
our ability to establish, grow and maintain a productive sales
force; |
| |
| |
• |
demand and pricing of Vantas and other products we may offer; |
| |
| |
• |
physician and patient acceptance of Vantas and other products we
may offer; |
| |
| |
• |
levels of third-party reimbursement for Vantas and other
products we may offer; |
| |
| |
• |
interruption in the manufacturing or distribution of Vantas and
other products we may offer; and |
| |
| |
• |
the effect of competing technological and market developments. |
It will be difficult for us to forecast demand for Vantas and
our product candidates that may be approved with any degree of
certainty, and therefore, our sales prospects are uncertain. In
addition, we will be increasing our operating expenses as we
expand our commercial capabilities. Accordingly, we may
experience significant, unanticipated quarterly losses. Because
of these factors, our operating results in one or more future
quarters may fail to meet the expectations of securities
analysts or investors, which could cause our stock price to
decline significantly.
|
|
| Item 1B. |
Unresolved Staff Comments |
Not applicable
41
We maintain our headquarters and manufacturing facility in
Cranbury, New Jersey in two leased facilities consisting of
a total of 51,046 square feet. The following table sets
forth more information regarding our facilities.
| |
|
|
|
|
|
|
|
|
|
|
| Address |
|
Square Feet | |
|
Function |
|
Lease Expiration | |
| |
|
| |
|
|
|
| |
|
7 Clarke Drive
Cranbury, NJ
|
|
|
21,274 |
|
|
Research and Development;
Administration |
|
|
2015 |
|
| |
|
8 Clarke Drive
Cranbury, NJ
|
|
|
29,772 |
|
|
Manufacturing |
|
|
2015 |
|
Our manufacturing facility is subject to periodic inspections by
the FDA and other federal and state regulatory agencies and is
subject to cGMP regulations. Despite the relative complexity and
length of our manufacturing process, we believe that our
existing manufacturing facilities are capable of producing
commercial quantities of our implants. In order to achieve
cost-effective production, we have developed proprietary
equipment and scalable commercial manufacturing methods that we
use in our production line.
In May 2005, we began a construction project at our headquarters
to increase the size of our manufacturing facility. We believe
that our current manufacturing facilities, as supplemented by
the space under construction, will provide sufficient capacity
to meet our current needs and support the introduction of new
products over the next several years, and that suitable
additional space will be available in the future on commercially
reasonable terms as needed.
|
|
| Item 3. |
Legal Proceedings |
We are not subject to any pending or, to our knowledge,
threatened litigation.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of our security
holders in the fourth quarter of 2005.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock is quoted on The NASDAQ National Market under
the symbol “VLRX.” We began trading on The NASDAQ
National Market on February 2, 2006. As such, our common
stock was not traded during the period covered by this annual
report.
As of March 1, 2006, there were approximately 21 holders of
record of our common stock. On March 1, 2006, the last
reported sale price of our common stock as reported on The
NASDAQ National Market was $9.95 per share.
We have not declared or paid any dividends on our stock since
our inception and do not anticipate paying any dividends on our
common stock in the foreseeable future. We currently intend to
retain future earnings, if any, to fund the development and
expansion of our business and do not anticipate paying cash
dividends on our common stock in the foreseeable future. Under
our credit agreement with Merrill Lynch Capital, we agreed to
not declare or pay any cash dividends. Any future determination
to pay dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of
operations, capital requirements, restrictions contained in
future financing instruments and other factors our board of
directors deems relevant.
Recent Sales of Unregistered Securities
Since our inception, we have issued the following securities
that were not registered under the Securities Act of 1933, as
amended (the “Securities Act”) (the option, share and
price numbers below
42
give effect, where applicable to the one-for-six reverse stock
split of our common stock, which was completed prior to the
closing of our initial public offering:
Since our inception until our initial public offering, we issued
an aggregate of 1,667,082 shares of common stock, par value
$0.001 per share, of which 1,666,666 shares were issued to
MXL Industries in June 2000 as a result of our spinout from
GP Strateges Corporation and 416 shares were issued as a result
of the exercise of options in October 2005.
Since our inception, we also issued an aggregate of
40,669,000 shares of preferred stock, par value of $0.001
per share. These shares included 7,000,000 shares of
series A convertible preferred stock issued in
January 2002 at $1.00 per share for gross proceeds of
$7 million, 22,069,000 shares of series B convertible
preferred stock issued between May 2003 and June 2004, at a
purchase price per share of $0.725, for gross proceeds of
$16 million, and 11,600,000 shares of series C
convertible preferred stock issued in August 2004 at a
purchase price per share of $1.00, for gross proceeds of
$11 million. In connection with our IPO, all shares of
preferred stock were converted into common stock at
pre-determined rates and were subject to the one-for-six reverse
split.
No underwriters were involved in the foregoing sales of
securities. The securities described in this Item 5 were
issued to United States investors in reliance upon the exemption
from the registration requirements of the Securities Act, as set
forth in Section 4(2) under the Securities Act and
Rule 506 of Regulation D promulgated thereunder
relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was
required. All purchasers of shares of our convertible preferred
stock described above represented to us in connection with their
purchase that they were accredited investors and were acquiring
the shares for investment and not distribution, that they could
bear the risks of the investment and could hold the securities
for an indefinite period of time. The purchasers received
written disclosures that the securities had not been registered
under the Securities Act and that any resale must be made
pursuant to a registration or an available exemption from such
registration.
Use of Proceeds from Sales of Registered Securities
On February 7, 2006, we closed the sale of 3,862,500 shares
of our common stock in our initial public offering. The
Registration Statement on Form S-1 (Reg.
No. 333-123288) (the “Registration Statement”) we
filed to register our common stock in the initial public
offering was declared effective by the Securities and Exchange
Commission on February 1, 2006. The initial public offering
commenced as of February 1, 2006 and did not terminate
before any securities were sold. The initial public offering was
completed and all shares were sold at an initial price per share
of $9.00. The aggregate purchase price of the common stock
registered in the initial public offering was $34.8 million.
The managing underwriters for the initial public offering were
UBS Investment Bank, Banc of America Securities LLC, First
Albany Capital and Fortis Securities LLC. We incurred expenses
in connection with the initial public offering of approximately
$4.5 million, which consisted of direct payments of: (i)
$1.9 million in legal, accounting and printing fees; (ii)
$2.4 million in underwriters’ discounts, fees and
commissions; and (iii) $0.2 million in miscellaneous
expenses.
After deducting expenses of the initial public offering, we
received net offering proceeds of approximately
$30.3 million. We used $1.6 million of the proceeds to
repay borrowings we had under our line of credit. We intend to
use these remaining proceeds to advance our product candidates
through preclinical and clinical trials, for commercialization
of our products, for general corporate purposes including
acquisition or in-licensing of products or product candidates,
and for working capital. We regularly assess the specific uses
and allocations for these funds.
43
Equity Compensation Plan Information as of December 31,
2005
The following table sets forth information as of the end of the
Company’s 2005 fiscal year with respect to compensation
plans under which the Company is authorized to issue shares.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Shares | |
| |
|
|
|
|
|
Remaining Available for | |
| |
|
|
|
|
|
Future Issuance under | |
| |
|
|
|
|
|
Equity Compensation | |
| |
|
Number of Shares to be | |
|
Weighted-Average | |
|
Plans (Excluding | |
| |
|
Issued Upon Exercise of | |
|
Exercise Price of | |
|
Securities in 1st | |
| Plan Category |
|
Outstanding Options | |
|
Outstanding Options ($) | |
|
Column) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plan approved by security holders(1)
|
|
|
1,265,849 |
|
|
$ |
4.25 |
|
|
|
567,484 |
|
|
Equity compensation plans not
approved by security holders(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,265,849 |
|
|
$ |
4.25 |
|
|
|
567,484 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
2003 Equity Incentive Plan. |
| |
| (2) |
The Company does not maintain any equity compensation plans that
have not been approved by its stockholders. |
In September 2002, we adopted our Equity Incentive Plan, which
was approved by our stockholders in May 2003. Our Equity Plan
provides for the award of:
|
|
|
| |
• |
restricted shares of our common stock; |
| |
| |
• |
incentive stock options; |
| |
| |
• |
non-qualified stock options; or |
| |
| |
• |
any combination of the foregoing. |
Grants of restricted shares and non-qualified stock options can
be made to our employees, directors, consultants, and other
individuals who perform services for us. Grants of incentive
stock options may only be made to our employees. The principal
features of our Equity Incentive Plan are summarized below, but
the summary is qualified in its entirety by reference to our
Equity Incentive Plan, which was filed as exhibit 10.14 to the
Registration Statement in connection with our initial public
offering.
Number of shares of our
common stock available under our Equity Plan
We have reserved a total of 1,833,333 shares of our common
stock for issuance pursuant to our Equity Plan. Shares subject
to forfeited, cancelled, or expired awards and shares received
in satisfaction of the exercise price of an option become
available for grant again under our Equity Plan. In addition,
shares withheld in payment of any exercise price or in
satisfaction of any withholding obligation arising in connection
with an award granted under our Equity Plan become available for
grant again under our Equity Plan. In connection with
recapitalizations, stock splits, combinations, stock dividends,
and other events affecting our common stock, the compensation
committee of our board of directors (the “Compensation
Committee”) may make adjustments or equitable substitutions
it deems appropriate in its sole discretion to the maximum
number, type and issuer of the securities reserved for issuance
under the Equity Plan, to the maximum number, type and issuer of
shares of our common stock subject to outstanding options, to
the exercise price of the options and to the number, type and
issuer of restricted shares.
Administration of our Equity
Plan
The Compensation Committee administers our Equity Plan under
authority granted to it by our board of directors in accordance
with the terms of our Equity Plan. To administer our Equity
Plan, the Compensation Committee must consist of at least two
members of our board of directors, each of whom is a
“non-employee director” for purposes of
Rule 16b-3 under the Securities Exchange Act of 1934, or
the Exchange Act and, with respect to awards that are intended
to constitute performance-based compensation under
Section 162(m) of the Internal Revenue Code of 1986, an
“outside director” for the purposes of
44
Section 162(m). The Compensation Committee, among other
things, interprets our Equity Plan, selects award recipients,
determines the type of awards to be granted to such recipients
and determines the number of shares subject to each award and
the terms and conditions thereof. The Compensation Committee may
also determine if or when the exercise price of an option may be
paid in the form of shares of our common stock and the extent to
which shares or other amounts payable with respect to an award
can be deferred by the participant. Our board of directors may
amend or modify our Equity Plan at any time. In addition, our
board of directors is also authorized to adopt, alter and repeal
any rules relating to the administration of our Equity Plan and
to rescind the authority of the Compensation Committee and
thereafter directly administer our Equity Plan. However, subject
to certain exceptions, no amendment or modification will impair
the rights and obligations of a participant with respect to an
award unless the participant consents to that amendment or
modification.
Our Equity Plan will continue in effect until terminated by us
in accordance with its terms, although incentive stock options
may not be granted more than 10 years after the adoption of
our Equity Plan.
Transfer Agent and Registrar
Our transfer agent and registrar is Computershare Trust Company,
N.A. Their address is 250 Royall Street, Canton, MA 02021 and
their telephone number is (781) 575-2000.
|
|
|
Stockholder action by written consent |
Our certificate of incorporation provides that our stockholders
may not act by written consent without a meeting.
Our certificate of incorporation and bylaws provide that, except
as otherwise required by law and subject to the rights of
holders of any series of preferred stock, special meetings of
stockholders may be called at any time, but only by the chairman
of our board of directors, our president, or upon a resolution
adopted by, or affirmative vote of, a majority of our board of
directors, and not by the stockholders.
|
|
|
Requirements for advance notification of stockholder
nominations and proposals |
Our bylaws establish advance notice procedures with respect to
stockholder proposals and nomination of candidates for election
as directors other than nominations made by or at the direction
of our board of directors or a committee of our board of
directors.
45
|
|
| Item 6. |
Selected Financial Data |
The following tables set forth our selected historical financial
data as of December 31, 2005 and 2004 and for the years
ended December 31, 2005, 2004 and 2003, which have been
derived from our audited financial statements, included
elsewhere in this Form 10-K. The selected historical
financial data as of December 31, 2003, 2002 and 2001 and
for the years ended December 31, 2002 and 2001 have been
derived from our audited financial statements, which are not
included in this
Form 10-K. It is
important that you read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, “Risk
Factors” and our financial statements and related notes and
schedule to these financial statements beginning on page 60
of this Form 10-K.
The historical results presented below are not necessarily
indicative of the results to be expected in any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands, except per share amounts) | |
|
Net product sales
|
|
$ |
26,798 |
|
|
$ |
5,511 |
|
|
$ |
7 |
|
|
$ |
15 |
|
|
$ |
8 |
|
|
Licensing revenue
|
|
|
34 |
|
|
|
135 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
26,832 |
|
|
|
5,646 |
|
|
|
7 |
|
|
|
15 |
|
|
|
8 |
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of product sales
|
|
|
5,966 |
|
|
|
608 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Research and development
|
|
|
5,930 |
|
|
|
6,376 |
|
|
|
5,230 |
|
|
|
4,320 |
|
|
|
2,616 |
|
| |
Selling and marketing
|
|
|
10,754 |
|
|
|
5,025 |
|
|
|
509 |
|
|
|
270 |
|
|
|
— |
|
| |
General and administrative
|
|
|
5,500 |
|
|
|
5,897 |
|
|
|
1,838 |
|
|
|
1,324 |
|
|
|
1,522 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,150 |
|
|
|
17,906 |
|
|
|
7,577 |
|
|
|
5,914 |
|
|
|
4,138 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,318 |
) |
|
|
(12,260 |
) |
|
|
(7,570 |
) |
|
|
(5,899 |
) |
|
|
(4,130 |
) |
|
Interest income (expense), net
|
|
|
49 |
|
|
|
(6 |
) |
|
|
13 |
|
|
|
16 |
|
|
|
(30 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,269 |
) |
|
|
(12,266 |
) |
|
|
(7,557 |
) |
|
|
(5,883 |
) |
|
|
(4,160 |
) |
|
Provision for (benefit from) income taxes
|
|
|
75 |
|
|
|
(243 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,344 |
) |
|
|
(12,023 |
) |
|
|
(7,557 |
) |
|
|
(5,883 |
) |
|
|
(4,160 |
) |
|
Deemed dividend
|
|
|
— |
|
|
|
(5,861 |
) |
|
|
(1,139 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(1,344 |
) |
|
$ |
(17,884 |
) |
|
$ |
(8,696 |
) |
|
$ |
(5,883 |
) |
|
$ |
(4,160 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to common stockholders
per share
|
|
$ |
(0.81 |
) |
|
$ |
(10.73 |
) |
|
$ |
(5.22 |
) |
|
$ |
(3.53 |
) |
|
$ |
(8.06 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic and diluted
|
|
|
1,667 |
|
|
|
1,667 |
|
|
|
1,667 |
|
|
|
1,667 |
|
|
|
516 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
2,340 |
|
|
$ |
5,053 |
|
|
$ |
5,241 |
|
|
$ |
641 |
|
|
$ |
6,621 |
|
|
Working capital
|
|
|
2,845 |
|
|
|
8,306 |
|
|
|
4,585 |
|
|
|
(404 |
) |
|
|
5,658 |
|
|
Total assets
|
|
|
16,532 |
|
|
|
13,667 |
|
|
|
6,665 |
|
|
|
1,296 |
|
|
|
7,172 |
|
|
Long-term liabilities
|
|
|
300 |
|
|
|
17 |
|
|
|
33 |
|
|
|
67 |
|
|
|
124 |
|
|
Convertible preferred stock
|
|
|
39,925 |
|
|
|
39,925 |
|
|
|
20,469 |
|
|
|
6,604 |
|
|
|
6,604 |
|
|
Total stockholders’ deficit
|
|
|
(31,593 |
) |
|
|
(29,887 |
) |
|
|
(15,158 |
) |
|
|
(6,465 |
) |
|
|
(582 |
) |
46
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with our financial statements and the related notes
and schedule thereto appearing elsewhere in this
Form 10-K. This
discussion and analysis may contain forward-looking statements
based upon current expectations that involve risks and
uncertainties. Our actual results may differ materially as a
result of various factors, including those set forth under
“Risk Factors” or elsewhere in this
Form 10-K.
Overview
We are a specialty pharmaceutical company concentrating on the
development, acquisition and commercialization of products for
the treatment of urological and endocrine conditions, diseases
and disorders, including products that utilize our proprietary
technology. Our first product, Vantas, was approved by the FDA
in October 2004. Vantas is a
12-month implant
indicated for the palliative treatment of advanced prostate
cancer that delivers histrelin, a luteinizing hormone-releasing
hormone agonist, or LHRH agonist. We began selling Vantas in
November 2004 utilizing our sales force that is currently
calling on urologists in the U.S. that account for the majority
of LHRH agonist product sales.
Total U.S. sales of LHRH agonist products for the palliative
treatment of prostate cancer were approximately
$900 million in 2005 based on our estimates and IMS Health
Incorporated data, with the leading products being the three-
and four-month injection formulations. We believe that total
U.S. sales of LHRH agonist products declined by 10% in 2005,
primarily as a result of lower prices due to changes in Medicare
reimbursement rates. We expect future reimbursement levels to
continue to decline, which will have an adverse effect on our
net product sales. We believe that Vantas has a competitive
advantage over other LHRH agonist products because it delivers
an even, controlled dose of LHRH agonist over a
12-month period, and is
the only product indicated for the palliative treatment of
advanced prostate cancer that delivers histrelin, the most
potent LHRH agonist available.
In addition to Vantas, a hydrogel implant based on our patented
Hydron Technology, we are developing a pipeline of proprietary
product candidates for indications that include central
precocious puberty, acromegaly, opioid addiction, interstitial
cystitis, nocturnal enuresis and bladder cancer. Several of our
product candidates also utilize our Hydron Technology delivery
system. We intend to leverage our existing specialized sales
force to market certain of our product candidates, if approved,
since the indications of these product candidates are treated by
many of the same physicians we are calling on for Vantas.
We expect to continue to spend significant amounts, including
for clinical trial costs, on the development of our product
candidates. We plan to seek marketing approvals for our products
in various countries throughout the world, particularly in the
United States, Canada and Europe. We expect our costs to
increase significantly as we continue to develop and ultimately
commercialize our product candidates. While we will be focusing
on the clinical development of our later stage product
candidates in the near term, we expect to increase our spending
on earlier stage clinical candidates as well. We also aim to
build our urological and endocrine product portfolio and
opportunistically acquire or in-license later-stage urological
and endocrine products that are currently on the market or
require minimal development expenditures, or have some patent
protection or potential for market exclusivity or product
differentiation. Further, we intend to collaborate with major
and specialty pharmaceutical companies to develop and
commercialize products that are outside of our core urology and
endocrinology focus. Accordingly, we will need to generate
significant revenues to achieve or maintain profitability.
Drug development in the United States and most countries
throughout the world is a multi-stage process defined by the FDA
and similar regulatory authorities in foreign countries. In the
United States, the FDA approval process for a new drug involves
completion of pre-clinical studies and the submission of the
results of these studies to the FDA, together with proposed
clinical protocols, manufacturing information, analytical data
and other information in an investigational new drug
application, which must become effective before human clinical
trials may begin. Clinical development typically involves three
phases of study: Phase I, II and III. The most
significant expenses associated with clinical development are
the Phase III clinical trials as they tend to be the
longest and largest studies conducted during the
47
drug development stage. In responding to a new drug application,
the FDA may refuse to accept the application, or if accepted for
filing, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the
application does not provide an adequate basis for approval. In
order to commence clinical trials or marketing of a product
outside the United States, we must obtain approval of the
applicable foreign regulatory authorities. Although governed by
the laws and regulations of the applicable country, clinical
trials conducted outside the United States typically are
administered in a similar three-phase sequential process.
The successful development of our product candidates is highly
uncertain. We cannot reasonably estimate or know the nature,
timing and estimated expenses of the efforts necessary to
complete the development of, or the period in which material net
cash inflows are expected to commence from any of our product
candidates due to the numerous risks and uncertainties
associated with developing drugs, including the uncertainty of:
|
|
|
| |
• |
the scope, rate of progress and expense of our clinical trials
and other research and development activities; |
| |
| |
• |
future clinical trial results; |
| |
| |
• |
the expense of clinical trials for additional indications; |
| |
| |
• |
the terms and timing of any collaborative, licensing and other
arrangements that we may establish; |
| |
| |
• |
the expense and timing of regulatory approvals; |
| |
| |
• |
the expense of establishing clinical and commercial supplies of
our product candidates and any products that we may develop; |
| |
| |
• |
the effect of competing technological and market
developments; and |
| |
| |
• |
the expense of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights. |
Research and development expenses in the aggregate, represented
approximately 21% of our total operating expenses for the year
ended December 31, 2005, approximately 36% of our total
operating expenses for the year ended December 31, 2004 and
approximately 69% of our total operating expenses for the year
ended December 31, 2003. Research and development expenses
consist primarily of costs incurred for clinical trials and
manufacturing development costs related to our clinical product
candidates, personnel and related costs related to our research
and product development activities and outside professional fees
related to clinical development and regulatory matters.
We expect our research and development expenses to continue to
decline, when measured as a percentage of total operating
expenses, due to the fact we will be selling our products and
growing our infrastructure. We do not disclose estimated
research and development costs for product candidates that are
not yet in Phase III clinical trials. We estimate that we
will incur approximately $1.0 million to $1.5 million
of expenses, in addition to costs previously incurred, in order
to complete Phase III trials for our Supprelin-LA implant
and to complete the regulatory process in the U.S. These
estimates assume the completion of a single Phase III trial
which is currently underway.
Basis of Presentation
We generate revenues from sales of Vantas, our lead product. We
began commercial sales of Vantas in November 2004. Currently,
all sales are in the U.S. We distribute Vantas directly to
physicians, or through Besse Medical Distribution Company, or
Besse Medical, which is a subsidiary of AmerisourceBergen
Corporation. Approximately 9% and 6% of our unit sales went
through Besse Medical in 2004 and 2005, respectively. Our
business may be affected by physician utilization, pricing
pressure and Medicare or third party reimbursement, as well as
other factors which may cause variances in our revenue.
We sold 2,925, 3,974, 1,747 and 2,868 units of Vantas during the
first, second, third and fourth quarters of 2005, respectively.
The third quarter number of units sold was affected by a
manufacturing disruption due to issues caused by our supply of
histrelin, which issues were resolved in June 2005.
48
Our sales of Vantas from launch in November 2004 through
June 30, 2005 were supported, in part, by favorable
reimbursement rates, which decreased beginning in the third
quarter of 2005. Our initial favorable reimbursement rates were
due to the fact that Vantas was a new product that did not yet
have an established ASP in connection with Medicare
reimbursement. As a result, Vantas was reimbursed at wholesale
acquisition cost, which is typically higher than ASP. Vantas
received an established ASP effective July 2005, which resulted
in lower reimbursement rates and a corresponding lower sales
price to our customers. Our net average selling price to our
customers was $2,604 for the six months ended June 30,
2005, it declined to $2,099 during the three months ended
September 30, 2005 and further declined to $1,801 per unit
in the fourth quarter of 2005.
We expect future reimbursement levels to continue to decline,
which will have an adverse effect on our net product sales. In
some states, where the reimbursement rate for Vantas is based on
ASP, the reimbursement levels will continue to decline because
the ASP for Vantas will decline as we sell Vantas at prices
below the reimbursement rate. In most states, however, the
reimbursement rates for Vantas are even lower because the
Medicare carriers in those states now apply the least costly
alternative, or LCA, methodology to Vantas. The reimbursement
rate for Vantas, as determined by Medicare carriers, is lower in
LCA states than the reimbursement rate in non-LCA states,
resulting in a lower sales price in LCA states. We describe the
factors affecting reimbursement in more detail in the section
entitled “Business — Reimbursement” in this
Form 10-K.
In prior years, we received all of our revenue from the sale of
certain polymer products. We discontinued manufacturing these
polymers in 1996, as they were no longer profitable, so that we
could concentrate all of our efforts on developing
pharmaceutical products.
Our cost of product sales are all related to the production of
Vantas and represent the cost of materials, overhead associated
with the manufacture of Vantas, direct labor, distribution
charges and royalties. Prior to approval of Vantas in October
2004, we expensed all of our manufacturing costs as research and
development. Aggregate royalty costs were $0.3 million or
5.4% of net revenue for the year ended December 31, 2004
and $1.3 million or 4.9% of net revenue for the year ended
December 31, 2005. No royalties were due in prior years.
For a more complete description of our royalty arrangements, see
“Business — Material Agreements.”
|
|
|
Research and Development Expenses |
Our research and development expenses consist of costs incurred
for company-sponsored and collaborative research and development
activities. These expenses consist primarily of direct and
research-related allocated overhead expenses such as facilities
costs, salaries and benefits and material supply costs. We do
not track or report our research and development expenses on a
project basis as we do not have the internal resources or
systems to do so. To date, the vast majority of our research and
development resources have been devoted to the development of
Vantas.
|
|
|
Selling and Marketing Expenses |
Selling and marketing expenses consist primarily of sales and
marketing personnel compensation, sales force incentive
compensation, travel, tradeshows, promotional materials and
programs, advertising and healthcare provider education
materials and events.
|
|
|
General and Administrative Expenses |
Our general and administrative expenses consist primarily of
personnel expenses for accounting, human resources, outside
consulting, information technology and corporate administration
functions. Other costs include administrative facility costs,
regulatory fees, and professional fees for legal and accounting
services.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based on our financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. The preparation of
these financial statements requires us to make judgments,
estimates and
49
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as
the reported revenue and expenses during the reporting periods.
We continually evaluate our judgments, estimates and
assumptions. We base our estimates on the terms of underlying
agreements, the expected course of development, historical
experience and other factors that we believe are reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
The list below is not intended to be a comprehensive list of all
of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by GAAP. There are also areas in which our management’s
judgment in selecting any available alternative would not
produce a materially different result. Our audited financial
statements and the related notes and schedule thereto included
in Item 8 of the Form 10-K contain accounting policies
and other disclosures required by GAAP.
Our revenue recognition policies are in accordance with
Securities and Exchange Commission Staff Accounting Bulletin
No. 104, or SAB No. 104, Revenue Recognition
in Financial Statements, which provides guidance on revenue
recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and
Exchange Commission. SAB 104 requires that four basic
criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered;
(3) the seller’s price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on our
management’s judgments regarding the fixed nature of the
fee charged for products delivered and the collectibility of
those fees. Should changes in conditions cause our management to
determine that these criteria are not met for certain future
transactions, revenue recognition for those transactions will be
delayed and our revenues could be adversely affected.
Allowances have been recorded for any potential returns or
adjustments in accordance with our policies. We historically
have recorded allowances based upon a percentage of gross sales.
To date, we have not changed our percentage estimates of product
returns, and, therefore, have not made any adjustments to date
in this allowance. We distribute our product directly to
physicians or through our distributor, Besse Medical. The
majority of our sales are made directly to physicians by our
product specialists. We believe that physicians typically order
product on an as needed basis, and, therefore, typically
maintain inventory of our product only to cover their immediate
and short-term future requirements. In addition, our product
specialists routinely confirm product utilization and inventory
levels, if any, as part of their normal sales calls with
physicians. We continue to monitor our distribution channels in
order to assess the adequacy of our allowances. We do not
believe that it is reasonably likely that a material change will
occur in the allowance as of December 31, 2005.
|
|
|
Pre-clinical Study and Clinical Trial Expenses |
Research and development expenditures are charged to operations
as incurred. Our expenses related to clinical trials are based
on actual and estimates of the services received and efforts
expended pursuant to contracts with multiple research
institutions and clinical research organizations that conduct
and manage clinical trials on our behalf. The financial terms of
these agreements are subject to negotiation and vary from
contract to contract and may result in uneven payment flows.
Generally, these agreements set forth the scope of work to be
performed at a fixed fee or unit price. Payments under the
contracts depend on factors such as the successful enrollment of
patients or the completion of clinical trial milestones.
Expenses related to clinical trials generally are accrued based
on contracted amounts applied to the level of patient enrollment
and activity according to the protocol. If timelines or
contracts are modified based upon changes in the clinical trial
protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.
50
In December 2002, Statement of Financial Accounting
Standards, or SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure —
an Amendment of FASB Statement No. 123 was issued.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by
Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, or
APB No. 25. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123,
Accounting for Stock Based Compensation. We adopted the
disclosure requirements of SFAS No. 148 effective
December 31, 2002. As allowed by SFAS No. 123, we
have elected to continue to apply the intrinsic value-based
method of accounting prescribed in APB No. 25 and,
accordingly, do not recognize compensation expense for employee
stock option grants made at an exercise price equal to or in
excess of the estimated fair value of the stock at the date of
grant. To the extent the company granted options with an
exercise price below the estimated fair value of the stock on
the date of grant, deferred compensation was recognized and
amortized over the vesting period of the related options.
In December 2003, the exercise price of all options issued prior
to 2003 was amended to $3.00, the fair market value at that
time. In accordance with FASB Interpretation (“FIN”)
No. 44, the repriced options were accounted for as variable
from the date of the modification to the date the options are
exercised, forfeited, or expire. Under SFAS 123R, which the
Company adopted on January 1, 2006, there will be no
additional compensation expense for these repriced options as
the vesting is complete and the requisite service period has
ended.
We account for options issued to non-employees under
SFAS No. 123 and Emerging Issues Task Force, or EITF,
Issue 96-18,
Accounting for Equity Investments that are Issued to Other
than Employees for Acquiring or in Conjunction with Selling
Goods or Services. As such, the value of such options is
periodically remeasured and income or expense is recognized
during their vesting terms. The amount of stock-based
compensation expense to be recorded in future periods may
decrease if unvested options, for which stock compensation
expense has been recorded, are subsequently canceled.
In addition, please refer to the discussion of
SFAS No. 123(R), Share Based Payment, in the
recent accounting pronouncements section.
Results of Operations
|
|
|
Comparison of the Years Ended December 31, 2005 and
2004 |
Net Product Sales. Net product sales for the year ended
December 31, 2005 were $26.8 million, during which
period we sold 11,514 units of Vantas at a net average selling
price per unit of $2,327. Net product sales for the year ended
December 31, 2004 were $5.5 million during which
period we sold 2,187 units of Vantas at a net average selling
price per unit of $2,520. The increase in net product sales of
$21.3 million, or 386%, was primarily due to the fact we
launched Vantas, our only commercialized product, in
November 2004 and as a result, we had only two months of
sales in 2004.
Our net average selling price to our customers was $2,604 for
the six months ended June 30, 2005. The net average selling
price declined to $2,099 during the three months ended
September 30, 2005 and further declined to $1,801 per unit
during the three months ended December 31, 2005. We expect
our net average selling price to continue to decline in future
periods as a result of an expected decrease in Medicare
reimbursement rates for Vantas. The expected decrease in our net
average selling price will negatively impact our net product
sales, gross margins, and our cash flows from operations.
However, we are unable to quantify the extent of such declines
beyond the fourth quarter of 2005. Please refer to “Basis
of Presentation — Product Sales and Costs”.
In the second and third quarters of 2005, we experienced a
disruption in our manufacturing of Vantas due to issues caused
by our supply of histrelin as described in “Risk
Factors — Risks Related to Our Business”. This
manufacturing disruption which occurred in May and June of 2005
limited the amount of finished product available for sale in the
third quarter of 2005 to three lots, or approximately
2,400 units. The issue was resolved in June and we released
approved finished product in August. Our third quarter sales of
1,747 units were less than our sales in the first and
second quarters of 2005, in which we sold
51
2,925 units and 3,974 units, respectively. As a result
of this decrease in sales, we had a net loss in the third
quarter of 2005. Our production of Vantas in the fourth quarter
of 2005 was sufficient to meet demand as well as to continue to
build quantities of finished goods inventory.
Licensing Revenue. During the year ended
December 31, 2005, we recorded $34,000 in licensing revenue
from Hydron Technologies under a licensing arrangement. In
addition, in January 2005 we received $300,000 from BioPro, our
distribution partner for certain countries in Asia. The BioPro
payment is reflected as deferred revenue on the
December 31, 2005 balance sheet. We will recognize this
payment ratably over a ten-year period once Vantas is approved
in the licensed territory. In 2004, back fees of $135,000 were
paid, as an agreement with Hydron Technologies to terminate the
cross licensing agreement could not be reached.
Cost of Product Sales. Our cost of product sales for the
year ended December 31, 2005 was $6.0 million
resulting in a gross margin of 78%. In 2004, cost of product
sales was $0.6 million and the gross margin percentage was 89%
due to higher selling prices and lower costs on a per unit
level. The 2004 gross margin percentage includes the benefit of
the sale of units that were partially manufactured prior to FDA
approval and, as such, were previously partially expensed. As
discussed previously, during the second quarter of 2005, due to
an issue regarding our supply of histrelin, the active
ingredient in Vantas, several lots of Vantas that we produced
did not meet our quality control specifications. Specifically,
we acquired a supply of histrelin in January 2005 from our
single-source supplier
and we used that histrelin during February, March and April in
the production of Vantas. In May and June of 2005, we discovered
that the histrelin had lower than normal solubility. This caused
the lots made with that histrelin to fail to meet our quality
control specifications and, as a result, those lots were not
available for sale. This resulted in the write-off of five lots
of Vantas in May and June of 2005 which had an unfavorable
impact of approximately $1 million. The issue was resolved in
June and we released approved finished product in August. We
expect the gross margin percentage to decrease in future periods
as we expect our net average selling price of Vantas to decrease
as a result of declining reimbursement rates.
The cost of product sales calculation includes royalty expense
of $1.3 million and $0.3 million for the years ended
December 31, 2005 and 2004, respectively. Freight and
distribution expense is also included in the cost of product
sales for all periods presented.
Research and Development Expense. Research and
development expense for the years ended December 31, 2005
and 2004 was $5.9 million and $6.4 million,
respectively. Expenses related to clinical trials pursuant to
contracts with research institutions and clinical research
organizations represented 46% of our total research and
development expense for the year ended December 31, 2005
and 23% of our research and development expense for the year
ended December 31, 2004. The overall decrease in research
and development expense in 2005 was attributable to lower stock
compensation expense and lower material costs as all costs
associated with producing Vantas are carried in inventory and
expensed to cost of product sales as Vantas is sold. We expect
to continue to spend significant amounts, including for clinical
trial costs, on the development of our product candidates. We
plan to seek marketing approvals for our products in various
countries throughout the world, particularly in the United
States, Canada and Europe. We expect our costs to increase
significantly as we continue to develop and ultimately
commercialize our product candidates.
Selling and Marketing Expense. Selling and marketing
expense for the years ended December 31, 2005 and 2004 was
$10.8 million and $5.0 million, respectively. The
increase in the 2005 period over the 2004 period was
predominantly the result of an increase in payroll and the
related expenses of adding employees to our sales force as well
as increased promotional costs resulting from a full year of
Vantas promotions. Our commercial organization consisted of 41
individuals at December 31, 2005. We expect our selling and
marketing expense to increase in future periods as we continue
to grow our commercial organization and marketing activities in
support of our lead product, Vantas.
General and Administrative Expense. General and
administrative expense was $5.5 million for the year ended
December 31, 2005, and $5.9 million for the year ended
December 31, 2004. The decrease from 2004 to 2005 was
attributable to a decrease in stock-based compensation. For the
years ended December 31, 2005 and 2004, general and
administrative expense included a stock-based compensation
charge of ($0.3) million and $2.3 million,
respectively. Without stock-based compensation expense, general
and administrative expenses increased by approximately
$2.2 million from 2004 to 2005 because of hiring
52
of additional personnel, increased regulatory fees, increased
legal fees associated with pursuing and maintaining patent
protection for our product candidates and other corporate
matters, increased accounting fees relative to the increased
size of our business and the scope of the audit, bad debt
expense and other professional services required to support the
hiring of personnel.
Stock-Based Compensation. We recorded non-cash
compensation charges of $164,000 and $51,000 for the years ended
December 31, 2005 and 2004, respectively, relative to stock
options granted to non-employees. In December 2003, the exercise
price of all options issued prior to that date were amended to
$3.00, the estimated fair market value at that date. In
connection with this re-pricing of grants and in accordance with
FASB Interpretation (“FIN”) No. 44, the re-priced
options will be accounted for as variable from the date of the
modification to the date the options are exercised, forfeited,
or expire. As a result, we recorded stock-based compensation of
($770,000) and $3.0 million for the years ended
December 31, 2005 and 2004, respectively. Under SFAS 123R,
which we adopted on January 1, 2006, there will be no
additional compensation expense for these re-priced options as
the vesting is complete and the requisite service period has
ended.
The years ended December 31, 2005 and 2004 stock-based
compensation charges also include stock-based compensation of
$243,000 and $73,000, respectively, for stock options granted in
2005 and 2004 at prices below the deemed fair value on the
option grant dates.
Total stock-based compensation expense (benefit) is included in
the following line items in the statement of operations:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
General and administrative
|
|
$ |
(331 |
) |
|
$ |
2,278 |
|
|
Sales and marketing
|
|
|
1 |
|
|
|
580 |
|
|
Research and development
|
|
|
(37 |
) |
|
|
297 |
|
|
Cost of product sales
|
|
|
4 |
|
|
|
— |
|
Net Interest Income (Expense). Net interest income
(expense) was $49,000 for the year ended December 31, 2005
and ($6,000) for the year ended December 31, 2004. The
variance was primarily attributable to slightly greater cash
balances, improved cash management and less borrowing under
capital leases.
Income Taxes. We have incurred net operating losses since
inception. However, in 2005 we generated taxable income as a
result of certain temporary and permanent differences between
book income and taxable income. As a result we recorded an
alternative minimum tax provision of $20,000 for federal
purposes and $55,000 for state taxes.
Our deferred tax assets primarily consist of net operating loss
carryforwards and research and development tax credits. We have
recorded a valuation allowance for the full amount of our
deferred tax asset, as the realization of the deferred tax asset
is uncertain. As of December 31, 2005, we had federal net
operating loss carryforwards of approximately
$19.4 million. These federal loss carryforwards will begin
expiring in 2022 for federal purposes. Annual limitations may
result in the expiration of net operating loss and credit
carryforwards before they are used. Under the provisions of the
Internal Revenue Code, substantial changes in our ownership may
limit the amount of net operating loss carryforwards that could
be utilized annually in the future to offset taxable income.
|
|
|
Comparison of Years Ended December 31, 2004 and
2003 |
Net Product Sales. After receiving FDA approval in
October 2004 for our lead product Vantas, we commenced
commercial sales in November 2004. Net sales for the year
ended December 31, 2004 were $5.5 million. We sold
2,187 units of Vantas at an average net selling price of
$2,520. Net sales for the year ended December 31, 2003 were
$7,000 and were completely derived from the sale of certain
polymer products.
53
Licensing Revenue. During the year ended
December 31, 2003 through September 2004, we did not
recognize any licensing revenue, as we were attempting to
eliminate the cross licensing arrangement we have with Hydron
Technologies. During this time, no licensing fees were paid to
us. In 2004, back fees of $135,000 were paid, as an agreement
with Hydron Technologies to terminate the cross licensing
agreement could not be reached.
Cost of Product Sales. Our cost of product sales for the
year ended December 31, 2004 was $0.6 million
resulting in a gross margin of 89%. Such gross margin included
the benefit of the sale of units that were partially
manufactured prior to FDA approval and, as such, were previously
partially expensed. The cost of product sales calculation
includes an accrued royalty expense of $307 thousand for
the year ended December 31, 2004. Through
October 2004, all manufacturing costs were included in
research and developments costs. There were no sales for the
year ended December 31, 2003 that were subject to a
royalty. For the year ended December 31, 2003, there was no
cost of product sales, as the value of the polymer products were
written off in prior years.
Research and Development Expense. Research and
development expense for the years ended December 31, 2004
and 2003 was $6.4 million and $5.2 million, respectively.
The 21.9% increase from 2003 to 2004 was primarily attributable
to manufacturing costs of Vantas through October 2004, and
a stock-based compensation charge of $297,000.
Expenses related to clinical trials pursuant to contracts with
research institutions and clinical research organizations
represented 24% of our total research and development expenses
in 2004 and 55% of our research and development expenses in 2003.
Selling and Marketing Expense. Selling and marketing
expense for the years ended December 31, 2004 and 2003 was
$5.0 million and $0.5 million, respectively. The
increase in 2004 over 2003 was primarily the result of expenses
related to the launch of our lead product Vantas in November
2004. We hired a national sales force consisting of
approximately thirty experienced individuals. In addition,
marketing expense was increased due to the promotion of Vantas
and a stock-based compensation charge of $580 thousand.
General and Administrative Expense. General and
administrative expense was $5.9 million for 2004, and
$1.8 million for 2003. The increase from 2003 to 2004 was
primarily attributable to a stock-based compensation charge of
$2.3 million, the hiring of additional personnel, increased
legal fees associated with pursuing and maintaining patent
protection for our product candidates and other corporate
matters, accounting fees relative to our expanding business, and
other professional services required to support the hiring of
personnel.
Stock-Based Compensation. We recorded non-cash
compensation charges of $51,000 and $3,000 in 2004 and 2003,
respectively, relative to non-employee stock options. In
December 2003, the exercise price of all options issued prior to
that date were amended to $3.00, the estimated fair market value
at that date. In connection with the grant of stock options to
employees, we recorded stock-based compensation of
$3.0 million in 2004 which was related to a repricing of
grants made in 2002. In accordance with FIN No. 44, the
re-priced options will be accounted for as variable from the
date of the modification to the date the accruals are exercised,
forfeited, or expire.
The 2004 stock-based compensation charge also includes
stock-based compensation of $73,000 for stock options granted in
2004 at prices below the deemed fair value on the option grant
dates. The stock-based compensation is included in the following
line items in the statement of operations (in thousands):
| |
|
|
|
|
|
General and administration
|
|
$ |
2,278 |
|
|
Sales and marketing
|
|
|
580 |
|
|
Research and development
|
|
|
297 |
|
Net Interest Income (Expense). Net interest income was
($6,000) in 2004 and net interest expense was $13,000 in 2003.
The variance was primarily attributable to fluctuations in our
average cash balances and lower interest rates.
54
Income Taxes. We have incurred net operating losses since
inception and, consequently, have not recorded any federal or
state income tax benefit. In 2004, the New Jersey Economic
Development Authority approved our application to sell New
Jersey State income tax benefits under the New Jersey Technology
Tax Transfer Program. During the fourth quarter of 2004, we
recognized $0.2 million from the sale of State of New
Jersey income tax benefits. The program requires that we
maintain certain employment levels in New Jersey and that the
proceeds from the sale of the tax benefits be spent in New
Jersey.
Our deferred tax assets primarily consist of net operating loss
carryforwards and research and development tax credits. We have
recorded a valuation allowance for the full amount of our
deferred tax asset, as the realization of the deferred tax asset
is uncertain.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily
through the net proceeds from private and public placements of
our equity securities. As of December 31, 2005, we had
received net proceeds of approximately $33 million from the
issuance of our series A, B, and C convertible preferred
stock. In February 2006, we completed our initial public
offering of our common stock in which we issued approximately
3.9 million shares and received approximately
$34.8 million in gross proceeds. After expenses, we expect
the net proceeds from our initial public offering to be
approximately $30.3 million.
As of December 31, 2005, cash and cash equivalents were
$2.3 million, compared to $5.1 million as of
December 31, 2004.
Net cash provided by operating activities was $0.3 million
for the year ended December 31, 2005. Operating cash flows
in the year ended December 31, 2005 primarily consisted of
an increase in accrued expenses, collections of accounts
receivable and collections of monies related to deferred
revenue, offset by the increase in prepaid expenses, the
building of inventory and the reduction in accounts payable.
Net cash used in investing activities was $3.0 million for
the year ended December 31, 2005. The primary investing
activities for the year ended December 31, 2005 were
related to a $7.5 million construction project to increase
our capacity, plus equipment for the increase in production
demand. We expect to use an additional $5.5 million of
funds in 2006 to complete the expansion project.
Net cash used in financing activities was $4,000 for the year
ended December 31, 2005. Cash provided by financing
activities for the year ended December 31, 2005 was
primarily related to proceeds from our line of credit offset by
costs that were incurred in connection with our line of credit
and our initial public offering.
In October 2005, we entered into a two-year, $7.5 million
line of credit with Merrill Lynch Capital. Under the line of
credit, the amount we may borrow at any given time is dependent
upon our accounts receivable balance and related aging of such
accounts. Borrowings under the line of credit bear an initial
interest rate at the sum of the
one-month
LIBOR rate plus 3.75%. We are subject to certain
covenants under the credit agreement. These covenants restrict
our ability to incur additional debt, grant liens, carry out
mergers, acquisitions and asset sales, make investments and
place limitations on our ability to pay dividends or make other
restricted distributions. In addition, we will be required to
maintain a minimum fixed charge coverage ratio. In connection
with the credit agreement, we have pledged all of our assets,
with the exception of intellectual property, to Merrill Lynch.
As of December 31, 2005, we had $1.5 million
outstanding under the line of credit. In February 2006, we used
a portion of the net proceeds from our initial public offering
to repay amounts outstanding under our line of credit.
We anticipate that cash flows from sales of Vantas will reduce
our need for additional financing. We expect our cash
requirements to continue to increase in the foreseeable future
as we continue to sponsor additional clinical trials, seek
regulatory approvals of, and develop, manufacture and market our
current product candidates. As we continue to expand our
commercial organization to include the development of our field
sales force, expand our research and development efforts and
pursue additional opportunities, we anticipate significant cash
requirements for hiring of personnel, capital expenditures and
investment in additional internal systems and infrastructure.
55
The amount and timing of cash requirements will depend on market
acceptance of our lead product, Vantas, and regulatory as well
as market acceptance of our product candidates, if any, and the
resources we devote to researching, developing, formulating,
manufacturing, commercializing and supporting our product
candidates, and our ability to enter into third-party
collaborations.
We believe that our existing cash, the cash generated from our
initial public offering, cash generated from future sales of
Vantas, and our line of credit will be sufficient to fund our
operations for at least the next 12 months. Until we can
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. In addition, we may receive revenue from
our sublicense agreements with Paladin Labs Inc., Key Oncologics
(Pty) Ltd., BioPro Pharmaceutical, Inc. and Teva-Tuteur.
We may finance future cash needs through strategic collaboration
agreements, the sale of other equity securities or debt
financing. In fact, we established a line of credit in the
October 2005 to partially fund the expansion of our
manufacturing facility. We may not be successful in obtaining
collaboration agreements or additional debt financing or in
receiving milestone or royalty payments under those agreements.
In addition, we cannot be sure that in the future our existing
cash resources will be adequate or that additional financing
will be available when needed or that, if available, financing
will be obtained on terms favorable to us or our stockholders.
Insufficient funds may require us to delay, scale back or
eliminate some or all of our research or development programs or
delay the launch of our product candidates.
Intrinsic Value of Stock Options in the Twelve Months Prior
to December 31, 2005
The fair value of our common stock for options granted from
January 1, 2005 through December 31, 2005 was
originally estimated by our board of directors with input from
management. We did not obtain contemporaneous valuations by an
unrelated valuation specialist. However, to the extent
available, we used third party indications of our enterprise
value, such as the price at which we sold shares of our
series C convertible preferred stock to unrelated parties.
In determining the fair value of our common stock at each grant
date, our board of directors drew on the knowledge of its
directors who have experience as venture capitalists
specializing in early-stage life sciences companies and its
directors who have experience with pharmaceutical and other life
sciences companies. Factors considered by the directors in
establishing the fair value of our common stock at the various
grant dates have included the following: (i) the lack of a
public market for our common stock and the considerable
uncertainty of such a market developing; (ii) the
uncertainty of our capital requirements prior to achieving
product approvals, generating revenue and ultimately achieving
profitability; (iii) the significant risks associated with
our early stage of development, economic viability and market
acceptance of our product candidates; (iv) our available
cash, financial condition and results of operations;
(v) the most recent sales of our convertible preferred
stock to unaffiliated third parties; (vi) the preferential
rights of the outstanding convertible preferred stock with
respect to liquidation preferences, voting control and
anti-dilution rights; and (vii) market conditions for life
science company stocks in general.
As disclosed more fully in Note 10 to the financial
statements included in Item 8 of this Form 10-K, we granted
stock options with an exercise price of $6.00 during the three
months ended March 31, 2005. During the following nine
months ended December 31, 2005, we granted stock options at
$12.00 per share. We determined that the fair value of our
common stock increased from $6.00 to $12.00 per share
during that period. The reasons for the difference between the
$6.00 and $12.00 grant prices, the fair market values, and the
initial public offering price of $9.00 per share are as
follows:
|
|
|
| |
• |
During the quarter ended September 30, 2004, we raised
$11.6 million through the issuance of our series C
convertible preferred stock at $6.00 per share. Approximately
43% of the funds were received from outside, unrelated investors
and as such the prices of the series C convertible
preferred stock issued was used to determine our fair market
value. |
| |
| |
• |
During the quarter ended December 31, 2004, our new drug
application for Vantas was approved by the FDA. In addition, we
hired a sales force and commenced sales of Vantas in the
U.S. Initial |
56
|
|
|
| |
|
sales of the product in November and December 2004 exceeded
$5.0 million, which were above our expectations. |
| |
| |
• |
During the quarter ended March 31, 2005, we engaged
investment bankers to commence our initial public offering
process and we continued to experience strong sales performance. |
| |
| |
• |
During the quarter ended June 30, 2005, we continued to
experience strong sales performance, however we experienced a
product outage in mid-June (that lasted until early August),
which resulted from issues with certain raw materials. |
| |
| |
• |
During the six months ended December 31, 2005, we recovered
from the product outage and recorded total net revenue of
$8.8 million, primarily from the sales of Vantas. |
Based on the initial public offering price of $9.00, the
intrinsic value of the in-the-money options outstanding at
December 31, 2005, was $6.5 million, of which
$3.6 million related to vested options and
$2.9 million related to unvested options.
Contractual Obligations and Commitments
The following table summarizes our long-term annual contractual
obligations as of December 31, 2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due in | |
| |
|
| |
| Contractual Obligations |
|
Total | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
After 2010 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Operating leases
|
|
$ |
13,000 |
|
|
$ |
1,342 |
|
|
$ |
1,319 |
|
|
$ |
1,319 |
|
|
$ |
1,315 |
|
|
$ |
1,399 |
|
|
$ |
6,306 |
|
|
Capital lease obligations
|
|
|
19 |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Line of credit
|
|
|
1,525 |
|
|
|
1,525 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Accrued royalties(1)
|
|
|
438 |
|
|
|
438 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
14,982 |
|
|
$ |
3,324 |
|
|
$ |
1,319 |
|
|
$ |
1,319 |
|
|
$ |
1,315 |
|
|
$ |
1,399 |
|
|
$ |
6,306 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Royalty payments have only been determined for 2006 based upon
2005 sales. Future royalties have not been estimated as they are
based on future sales levels. |
In October 2005, we entered into a two year,
$7.5 million line of credit with Merrill Lynch Capital.
Under the line of credit, the amount we may borrow at any given
time is dependent upon its accounts receivable balance and
related aging of such accounts. Borrowings under the line of
credit bear an initial interest rate at the sum of the one-month
LIBOR rate plus 3.75%. We are subject to certain covenants under
the credit agreement. These covenants restrict our ability to
incur additional debt, grant liens, carry out mergers,
acquisitions and asset sales, make investments and place
limitations on our ability to pay dividends or make other
restricted distributions. In addition, we will be required to
maintain a minimum fixed charge coverage ratio. In connection
with the credit agreement, we have pledged all of our assets,
with the exception of intellectual property, to
Merrill Lynch. As of December 31, 2005, we had
$1.5 million outstanding under the line of credit. In
February 2006, we used a portion of the net proceeds from our
initial public offering to repay amounts outstanding under our
line of credit.
Off-balance Sheet Arrangements
As of December 31, 2005, we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
Recent Accounting Pronouncements
On December 16, 2004, FASB issued SFAS No. 123
(revised 2004), Share-Based Payment, which is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123(R) supersedes
APB No. 25 and amends SFAS No. 95
Statement of Cash Flows. Generally, the approach in
SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all
57
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative.
Under SFAS 123(R), the options we granted in prior years as
a non-public company
(prior to the initial filing of our Registration Statement in
March 2005) that were valued using the minimum value method,
will not be expensed in 2006 or future periods. Options granted
as a non-public company
and accounted for using the intrinsic value method (cheap
stock), will continue to be expensed over the vesting period.
Options granted as a public company will be expensed under the
modified prospective method. We expect the adoption of
SFAS 123(R) will have an impact of approximately
$0.3 million on our results of operations. The adoption
will not have an impact on our financial position or cash flows.
The ultimate impact of the adoption can not be quantified as it
is dependent on future option grants. We adopted
SFAS 123(R) on January 1, 2006.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, which replaces APB Opinion
No. 20, Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements. This pronouncement applies to all voluntary
changes in accounting principle, and revises the requirements
for accounting for and reporting a change in accounting
principle. SFAS No. 154 requires retrospective application
to prior periods’ financial statements of a voluntary
change in accounting principle, unless it is impracticable to do
so. This pronouncement also requires that a change in the method
of depreciation, amortization, or depletion for long-lived,
non-financial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the
effective date of SFAS No. 154. The adoption of this
accounting pronouncement is not expected to have a material
effect on the financial statements.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs — an Amendment of ARB No. 43,
Chapter 4. The standard requires abnormal amounts of idle
facility and related expenses to be recognized as current period
charges and also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this
accounting pronouncement is not expected to have a material
effect on the financial statements.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
To date, all of our sales have been denominated in
U.S. dollars, although we do conduct some clinical and
safety studies with vendors located outside the U.S. All of
these expenses are paid in U.S. dollars. If the exchange
rate undergoes a change of 10%, we do not believe that it would
have a material impact on our results of operations or cash
flows. Accordingly, we believe that there is no material
exposure to risk from changes in foreign currency exchange rates.
We hold no derivative financial instruments and do not currently
engage in hedging activities.
Our exposure to interest rate risk is related to the investment
of our excess cash into highly liquid financial investments with
original maturities of three months or less. We invest in money
market funds in accordance with our investment policy. The
primary objectives of our investment policy are to preserve
principal, maintain proper liquidity to meet operating needs and
maximize yields. Our investment policy specifies credit quality
standards for our investments. Due to the short term nature of
our investments, we have assessed that there is no material
exposure to interest rate risk arising from them.
58
Item 8. Financial Statements
and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
| |
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
61 |
|
|
|
|
|
62 |
|
|
|
|
|
63 |
|
|
|
|
|
64 |
|
|
|
|
|
65 |
|
|
Financial Statement Schedule
|
|
|
84 |
|
59
VALERA PHARMACEUTICALS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Valera Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Valera
Pharmaceuticals, Inc. as of December 31, 2005 and 2004, and
the related statements of operations, shareholders’
deficit, and cash flows for each of the three years in the
period ended December 31, 2005. Our audits also included
the financial statement schedule listed in the index as
Item 15(b). These financial statements and schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Valera Pharmaceuticals, Inc. at December 31, 2005 and
2004, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting
principles. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
March 3, 2006
MetroPark, New Jersey
60
VALERA PHARMACEUTICALS, INC.
BALANCE SHEETS
(in thousands, except par value)
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
2,340 |
|
|
$ |
5,053 |
|
| |
Accounts receivable, net of allowances of $385 at
December 31, 2005 and $91 at December 31, 2004
|
|
|
4,488 |
|
|
|
5,258 |
|
| |
Inventories, net
|
|
|
3,191 |
|
|
|
1,365 |
|
| |
Prepaid and other current assets
|
|
|
726 |
|
|
|
142 |
|
| |
Restricted cash
|
|
|
— |
|
|
|
100 |
|
| |
|
|
|
|
|
|
|
Total current assets
|
|
|
10,745 |
|
|
|
11,918 |
|
|
Fixed assets, net
|
|
|
4,194 |
|
|
|
1,704 |
|
|
Deferred offering costs
|
|
|
1,378 |
|
|
|
— |
|
|
Deferred financing costs
|
|
|
124 |
|
|
|
— |
|
|
Security deposits
|
|
|
91 |
|
|
|
45 |
|
| |
|
|
|
|
|
|
|
Total assets
|
|
$ |
16,532 |
|
|
$ |
13,667 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
1,421 |
|
|
$ |
2,042 |
|
| |
Accrued liabilities
|
|
|
4,607 |
|
|
|
1,552 |
|
| |
Note payable
|
|
|
1,525 |
|
|
|
— |
|
| |
Deferred revenue — current
|
|
|
329 |
|
|
|
— |
|
| |
Capital lease obligations — current
|
|
|
18 |
|
|
|
18 |
|
| |
|
|
|
|
|
|
| |
|
|
7,900 |
|
|
|
3,612 |
|
|
Capital lease obligations — long term
|
|
|
— |
|
|
|
17 |
|
|
Deferred revenue — long term
|
|
|
300 |
|
|
|
— |
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
Series A 6% Cumulative Convertible Preferred Stock,
$0.001 par value; 7,000 shares authorized,
7,000 shares issued and outstanding; liquidation
preference — $7,598 and $7,161 at December 31,
2005 and 2004, respectively
|
|
|
13,604 |
|
|
|
13,604 |
|
|
Series B 10% Cumulative Convertible Preferred Stock,
$0.001 par value; 24,500 shares authorized,
22,069 shares issued and outstanding; liquidation
preference — $20,221 and $18,363 at December 31,
2005, 2004, respectively
|
|
|
15,082 |
|
|
|
15,082 |
|
|
Series C 6% Cumulative Convertible Preferred Stock,
$0.001 par value; 11,600 shares authorized, issued and
outstanding; liquidation preference — $12,590 and
$11,866 at December 31, 2005 and 2004, respectively
|
|
|
11,239 |
|
|
|
11,239 |
|
|
Shareholders’ deficit:
|
|
|
|
|
|
|
|
|
| |
Common stock, $0.001 par value; 30,000 shares
authorized, 1,667 shares issued and outstanding at
December 31, 2005 and 2004
|
|
|
2 |
|
|
|
2 |
|
| |
Additional paid-in capital
|
|
|
8,696 |
|
|
|
9,961 |
|
| |
Deferred stock-based compensation
|
|
|
(630 |
) |
|
|
(1,533 |
) |
| |
Accumulated deficit
|
|
|
(39,661 |
) |
|
|
(38,317 |
) |
| |
|
|
|
|
|
|
|
Total shareholders’ deficit
|
|
|
(31,593 |
) |
|
|
(29,887 |
) |
| |
|
|
|
|
|
|
|
Total liabilities and shareholders’ deficit
|
|
$ |
16,532 |
|
|
$ |
13,667 |
|
| |
|
|
|
|
|
|
See accompanying notes.
61
VALERA PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net product sales
|
|
$ |
26,798 |
|
|
$ |
5,511 |
|
|
$ |
7 |
|
|
Licensing revenue
|
|
|
34 |
|
|
|
135 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
26,832 |
|
|
|
5,646 |
|
|
|
7 |
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of product sales
|
|
|
5,966 |
|
|
|
608 |
|
|
|
— |
|
| |
Research and development
|
|
|
5,930 |
|
|
|
6,376 |
|
|
|
5,230 |
|
| |
Selling and marketing
|
|
|
10,754 |
|
|
|
5,025 |
|
|
|
509 |
|
| |
General and administrative
|
|
|
5,500 |
|
|
|
5,897 |
|
|
|
1,838 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,150 |
|
|
|
17,906 |
|
|
|
7,577 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,318 |
) |
|
|
(12,260 |
) |
|
|
(7,570 |
) |
|
Interest income
|
|
|
70 |
|
|
|
65 |
|
|
|
27 |
|
|
Interest expense
|
|
|
(21 |
) |
|
|
(71 |
) |
|
|
(14 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,269 |
) |
|
|
(12,266 |
) |
|
|
(7,557 |
) |
|
Provision for (benefit from) income taxes
|
|
|
75 |
|
|
|
(243 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,344 |
) |
|
|
(12,023 |
) |
|
|
(7,557 |
) |
|
Deemed dividend
|
|
|
— |
|
|
|
(5,861 |
) |
|
|
(1,139 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$ |
(1,344 |
) |
|
$ |
(17,884 |
) |
|
$ |
(8,696 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to common shareholders
per share
|
|
$ |
(0.81 |
) |
|
$ |
(10.73 |
) |
|
$ |
(5.22 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic and diluted
|
|
|
1,667 |
|
|
|
1,667 |
|
|
|
1,667 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
VALERA PHARMACEUTICALS, INC.
STATEMENTS OF SHAREHOLDERS’ DEFICIT
For the Years Ended December 31, 2003, 2004 and 2005
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
|
|
|
|
|
| |
|
| |
|
Additional | |
|
|
|
|
|
Total | |
| |
|
|
|
Par | |
|
Paid-in | |
|
Deferred | |
|
Accumulated | |
|
Shareholders’ | |
| |
|
Shares | |
|
Value | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
Deficit | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at December 31, 2002
|
|
|
1,667 |
|
|
$ |
2 |
|
|
$ |
5,270 |
|
|
|
|
|
|
$ |
(11,737 |
) |
|
$ |
(6,465 |
) |
| |
Expense related to options granted to non-employees
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
| |
Deemed dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,139 |
) |
|
|
(1,139 |
) |
| |
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,557 |
) |
|
|
(7,557 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
1,667 |
|
|
|
2 |
|
|
|
5,273 |
|
|
|
|
|
|
|
(20,433 |
) |
|
|
(15,158 |
) |
| |
Deferred compensation related to stock options, net of
cancellations
|
|
|
|
|
|
|
|
|
|
|
4,637 |
|
|
$ |
(4,637 |
) |
|
|
|
|
|
|
— |
|
| |
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,104 |
|
|
|
|
|
|
|
3,104 |
|
| |
Expense related to options granted to non-employees
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
51 |
|
| |
Deemed dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,861 |
) |
|
|
(5,861 |
) |
| |
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,023 |
) |
|
|
(12,023 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,667 |
|
|
|
2 |
|
|
|
9,961 |
|
|
|
(1,533 |
) |
|
|
(38,317 |
) |
|
|
(29,887 |
) |
| |
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
| |
Deferred compensation related to stock options, net of
cancellations
|
|
|
|
|
|
|
|
|
|
|
(1,430 |
) |
|
|
1,430 |
|
|
|
|
|
|
|
— |
|
| |
Amortization of deferred stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(527 |
) |
|
|
|
|
|
|
(527 |
) |
| |
Expense related to options granted to non-employees
|
|
|
|
|
|
|
|
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
164 |
|
| |
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,344 |
) |
|
|
(1,344 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
|
1,667 |
|
|
$ |
2 |
|
|
$ |
8,696 |
|
|
$ |
(630 |
) |
|
$ |
(39,661 |
) |
|
$ |
(31,593 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
63
VALERA PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,344 |
) |
|
$ |
(12,023 |
) |
|
$ |
(7,557 |
) |
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
502 |
|
|
|
257 |
|
|
|
153 |
|
| |
Amortization of deferred financing costs
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
| |
Allowances for accounts receivable
|
|
|
294 |
|
|
|
91 |
|
|
|
— |
|
| |
Expense related to options granted to non-employees
|
|
|
164 |
|
|
|
51 |
|
|
|
3 |
|
| |
Stock-based compensation
|
|
|
(527 |
) |
|
|
3,104 |
|
|
|
— |
|
| |
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
476 |
|
|
|
(5,006 |
) |
|
|
— |
|
| |
|
Other accounts receivable
|
|
|
— |
|
|
|
574 |
|
|
|
(573 |
) |
| |
|
Inventories
|
|
|
(1,826 |
) |
|
|
(1,365 |
) |
|
|
— |
|
| |
|
Restricted cash
|
|
|
100 |
|
|
|
(100 |
) |
|
|
— |
|
| |
|
Prepaid and other current assets
|
|
|
(584 |
) |
|
|
(50 |
) |
|
|
(45 |
) |
| |
|
Security deposits
|
|
|
(46 |
) |
|
|
362 |
|
|
|
(155 |
) |
| |
|
Accounts payable
|
|
|
(621 |
) |
|
|
856 |
|
|
|
201 |
|
| |
|
Accrued liabilities
|
|
|
3,055 |
|
|
|
1,107 |
|
|
|
66 |
|
| |
|
Deferred revenue
|
|
|
629 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
283 |
|
|
|
(12,142 |
) |
|
|
(7,907 |
) |
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,992 |
) |
|
|
(1,610 |
) |
|
|
(148 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,992 |
) |
|
|
(1,610 |
) |
|
|
(148 |
) |
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
Payment of capital lease obligations
|
|
|
(17 |
) |
|
|
(31 |
) |
|
|
(71 |
) |
|
Proceeds from note
|
|
|
1,525 |
|
|
|
— |
|
|
|
— |
|
|
Deferred offering costs
|
|
|
(1,378 |
) |
|
|
— |
|
|
|
— |
|
|
Deferred financing costs
|
|
|
(135 |
) |
|
|
— |
|
|
|
— |
|
|
Proceeds from officer loan
|
|
|
— |
|
|
|
200 |
|
|
|
— |
|
|
Repayment of officer loan
|
|
|
— |
|
|
|
(200 |
) |
|
|
— |
|
|
Net proceeds from issuance of convertible preferred stock
|
|
|
— |
|
|
|
13,595 |
|
|
|
12,726 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(4 |
) |
|
|
13,564 |
|
|
|
12,655 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(2,713 |
) |
|
|
(188 |
) |
|
|
4,600 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,053 |
|
|
|
5,241 |
|
|
|
641 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
2,340 |
|
|
$ |
5,053 |
|
|
$ |
5,241 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information and Non-Cash
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deemed dividends on preferred stock
|
|
|
— |
|
|
$ |
5,861 |
|
|
$ |
1,139 |
|
| |
Cash paid for interest
|
|
$ |
20 |
|
|
$ |
65 |
|
|
$ |
13 |
|
| |
Cash paid for income taxes
|
|
$ |
11 |
|
|
|
— |
|
|
|
— |
|
See accompanying notes.
64
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
|
|
| 1. |
Organization and Description of Business |
|
|
|
Nature of Operations and Basis of Presentation |
Valera Pharmaceuticals, Inc. (“Valera” or the
“Company”), is a specialty pharmaceutical company
focused on the development, acquisition and commercialization of
products for the treatment of urological and endocrine
conditions, diseases and disorders. Valera was incorporated in
the state of Delaware on May 30, 2000. On July 1,
2003, Valera changed its name from Hydro Med Sciences, Inc.
Prior to May 30, 2000, the Company operated as a division
of GP Strategies, and was included in their consolidated
financial statements and federal tax returns. The Company’s
headquarters and manufacturing operations are located in
Cranbury, New Jersey. In May 2005, the Company created Valera
Pharmaceuticals Ireland Limited, a wholly owned subsidiary. The
Company operates in a single business segment and through
December 31, 2005 all of its product sales and assets were
in the United States.
On February 7, 2006, the Company closed its initial public
offering. The Company issued 3,862,500 shares at $9.00 per
share resulting in net proceeds of $30.3 million after
underwriters discounts and offering expenses. As a result of the
initial public offering, all shares of the Company’s
preferred stock converted into 9,355,714 shares of common stock.
Thus, immediately following the offering the Company had
14,885,296 common shares outstanding. In February 2006, the
Company paid in full its note payable to Merrill Lynch in the
amount of $1.5 million.
The Company incurred operating losses in each annual period from
inception through December 31, 2005. The Company has been
able to fund its cash needs to date through initial funding from
one of its investors, GP Strategies Corporation, through the
sale of its preferred stock, through the sales of its product
and most recently through its initial public offering in
February 2006.
Prior to November 2004, the Company operated as a
development-stage company and did not generate any substantial
revenue. In November 2004, the Company exited the development
stage when it began selling its initial product Vantas.
On January 27, 2006, the Company effected a one-for-six reverse
stock split. In connection with the reverse stock split, every
outstanding six shares of the Company’s common stock
were replaced with one share of the Company’s common stock.
All references to common stock, common shares outstanding,
average number of common shares outstanding and per share
amounts in these consolidated financial statements and notes to
consolidated financial statements prior to the effective date of
the reverse stock split have been restated to reflect the
one-for-six reverse stock split on a retroactive basis.
Effective upon consummation of the initial public offering, the
Company reduced the number of common shares authorized for
issuance to 30,000,000 and the number of preferred shares
authorized for issuance to 5,000,000.
|
|
| 2. |
Basis of Presentation and Significant Accounting Policies |
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
65
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Certain reclassifications of prior year amounts have been made
to conform to current year presentation.
|
|
|
Cash and Cash Equivalents |
The Company considers all highly liquid instruments purchased
with a maturity of three months or less to be cash and cash
equivalents. At December 31, 2005, the Company had
substantially all of its cash and cash equivalents deposited
with one financial institution.
|
|
|
Allowances for Accounts Receivable |
The Company maintains allowances for accounts receivable, which
include an allowance for doubtful accounts related to the
estimated losses that may result from the inability of its
customers to make required payments. This allowance is
determined based upon historical experience and any specific
customer collection issues that have been identified. The
Company began selling its first product on November 8, 2004
and has not experienced significant credit losses related to an
individual customer or groups of customers in any particular
industry or geographic area. Also included in the allowances for
accounts receivable is an allowance for early payment discounts.
Upon regulatory approval of Vantas, the Company’s initial
product, on October 12, 2004 the Company began capitalizing
all costs associated with the manufacturing of Vantas. Inventory
is valued at the lower of cost or market, on a first in first
out (“FIFO”) basis. For all periods presented
prior to October 12, 2004, the Company expensed all of its
manufacturing costs as research and development.
Restricted cash at December 31, 2004 collateralized an
outstanding letter of credit associated with the firm that
manages some of the Company’s credit card processing. This
letter of credit was released during the second quarter of 2005.
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
respective assets, generally three to seven years.
Leasehold improvements and capitalized leases are recorded at
the fair market value at the inception of the leases and are
amortized over the shorter period of their estimated useful life
or the lease ranging from five to ten years. Amortization of
assets recorded under capital leases is included in depreciation
and amortization expense.
|
|
|
Deferred Offering and Financing Costs |
Costs incurred in relation to the Company’s initial public
offering have been deferred as of December 31, 2005 and
will be recognized and netted against gross proceeds raised in
the offering that was completed in February 2006. Costs incurred
in relation to the Company’s line of credit were deferred
and are being amortized over the two-year term of the loan.
66
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Net product sales are presented net of estimated returns and
price adjustments, fast pay discounts, group purchasing fees and
credit card fees.
Licensing revenue from royalty arrangements are recorded on a
cash basis due to the uncertainties regarding calculations,
timing and collections. Royalty expense is recorded as the
corresponding revenue is recognized. Royalty expense is included
in cost of goods sold.
Costs incurred in connection with research and development
activities are expensed as incurred. These costs consist of
direct and indirect costs associated with specific projects as
well as fees paid to various entities that perform research for
the Company.
|
|
|
Shipping and Handling Costs |
Shipping and handling costs incurred for inventory purchases and
product shipments are included within cost of product sales in
the statements of operations.
As allowed by Statement of Financial Accounting Standards
(“SFAS”) No. 123, “Accounting for
Stock-Based Compensation” (SFAS 123), the Company has
elected to continue to apply the intrinsic value-based method of
accounting prescribed in Accounting Principles Board
(“APB”) Opinion No. 25 “Accounting for Stock
Issued to Employees” (“APB 25”) and,
accordingly, does not recognize compensation expense for stock
option grants made at an exercise price equal to or in excess of
the estimated fair value of the stock at the date of grant. The
Company adopted SFAS 123(R) on January 1, 2006. Please
refer to the recently issued accounting pronouncements in this
footnote.
The Company accounts for options issued to non-employees under
SFAS No. 123 and EITF Issue 96-18, “Accounting
for Equity Investments that are Issued to Other than Employees
for Acquiring or in Conjunction with Selling Goods or
Services” (“EITF 96-18”). As such, the value of
such options is periodically remeasured and income or expense is
recognized during their vesting terms.
Had compensation cost for the Company’s outstanding
employee stock options been determined based on the
Black-Scholes model for
options granted since the Company became a public company (the
initial filing of its Registration Statement in connection with
its initial public offering in March 2005) or based on the
minimum value for options granted as a non-public entity
67
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
under SFAS 123, the Company’s net loss and basic and
diluted net loss per share, would have been changed to the
following pro forma amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Net loss attributable to common shareholders as reported
|
|
$ |
(1,344 |
) |
|
$ |
(17,884 |
) |
|
$ |
(8,696 |
) |
|
Add non-cash employee compensation as reported
|
|
|
(527 |
) |
|
|
3,104 |
|
|
|
— |
|
|
Deduct total stock-based employee compensation expense
determined under fair value based method for all awards
|
|
|
(750 |
) |
|
|
(302 |
) |
|
|
(47 |
) |
| |
|
|
|
|
|
|
|
|
|
|
SFAS 123 pro forma net loss attributable to common
shareholders
|
|
$ |
(2,621 |
) |
|
$ |
(15,082 |
) |
|
$ |
(8,743 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to common shareholders
per share, as reported
|
|
$ |
(0.81 |
) |
|
$ |
(10.73 |
) |
|
$ |
(5.22 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to common shareholders
per share, SFAS 123 pro forma
|
|
$ |
(1.57 |
) |
|
$ |
(9.05 |
) |
|
$ |
(5.25 |
) |
| |
|
|
|
|
|
|
|
|
|
SFAS 123 pro forma information regarding net loss is
required by SFAS 123. The fair value of the options was
estimated at the date of grant using the minimum value pricing
model with the following assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
|
| |
|
| |
|
|
| |
|
Public | |
|
Non-Public | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Risk-free interest rate
|
|
|
4.27 |
% |
|
|
3.90 |
% |
|
|
4.24 |
% |
|
|
4.58 |
% |
|
Dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
Volatility
|
|
|
61 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
Expected lives (in years)
|
|
|
6.3 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future amounts. Stock option
grants are expensed ratably over their respective vesting
periods.
|
|
|
Deferred Stock Compensation |
During the year ended December 31, 2004, in connection with
options granted to employees and directors, the Company recorded
deferred stock compensation totaling $4.6 million. Included in
this amount was $3.7 million, net of forfeitures, for
options that were granted in 2001 and repriced in 2003. These
repriced options are marked to market, using the estimated fair
value of the Company’s common stock at the end of each
reporting period. Such deferred compensation for these repriced
options is amortized over the remaining vesting period for the
options. In addition, included in the total amount was $0.9
million, net of forfeitures, recorded for options that were
granted below fair market value on the date of grant. The
deferred compensation for these options will be recognized
ratably over the vesting period of these options, which is
typically four years. During the year ended December 31,
2004, the Company amortized $3.1 million of deferred stock
compensation expense, of which $3.0 million was for the repriced
options and $0.1 million was for the options granted below fair
market value.
During the year ended December 31, 2005, the Company
recorded deferred stock compensation of $0.1 million, net of
forfeitures, for options that were granted below fair market
value on the date of grant. During the year ended
December 31, 2005, the Company amortized $0.2 million of
deferred stock compensation related to all options that were
granted below fair market value at the date of grant. In
addition, the Company marked to market the repriced options. In
the Company’s determination the fair
68
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
value of its common stock had declined from $16.20 per share
during the first quarter of 2005 to $11.00 per share at
December 31, 2005 because of the delay in the timing of its
initial public offering, resulting lack of near term liquidity
for such options, and the temporary disruption in supply of
Vantas due to issues with the supply of histrelin, the active
ingredient in Vantas. The result of this mark to market, was the
reversal of $0.8 million of previously recorded stock
option compensation.
The Company utilizes the asset and liability method of
accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws
that will be in effect when the differences are expected to
reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset
will not be realized.
The Company computes its basic net loss per share in accordance
with SFAS No. 128, “Earnings per Share”
(“SFAS 128”). Under the provisions of
SFAS 128, basic net loss per common share (“Basic
EPS”) is computed by dividing net loss by the
weighted-average number of shares of common stock outstanding.
Diluted net loss per share of common stock (“Diluted
EPS”) is computed by dividing net loss by the
weighted-average number of shares of common stock and dilutive
common equivalent shares then outstanding as long as such impact
would not be anti-dilutive. At December 31, 2005, common
stock equivalent shares consisted of 9,279,399 incremental
common shares issuable upon the conversion of preferred stock
and the 1,265,849 shares of common stock issuable upon the
exercise of stock options. Diluted EPS is identical to Basic EPS
for the three years ended December 31, 2005 since common
equivalent shares are excluded from the calculation, as their
effect is anti-dilutive.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,344 |
) |
|
$ |
(12,023 |
) |
|
$ |
(7,557 |
) |
|
Deemed dividend
|
|
|
— |
|
|
|
(5,861 |
) |
|
|
(1,139 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net loss attributable to common
shareholders per share
|
|
$ |
(1,344 |
) |
|
$ |
(17,884 |
) |
|
$ |
(8,696 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net loss attributable to
common shareholders per share — weighted-average shares
|
|
|
1,667 |
|
|
|
1,667 |
|
|
|
1,667 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributable to common shareholders
per share
|
|
$ |
(0.81 |
) |
|
$ |
(10.73 |
) |
|
$ |
(5.22 |
) |
| |
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”
(“SFAS 144”), the Company assesses the
recoverability of long-lived assets by determining whether the
carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by
comparing the fair value to the carrying value. There have been
no indicators of impairment through December 31, 2005.
69
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The financial instrument that potentially subjects the Company
to concentration of credit risk is cash. The Company places its
cash with high-credit quality financial institutions.
Concentrations of credit risk, with respect to this financial
instrument, exist to the extent of amounts presented in the
financial statements.
In 2005 and 2004, the Company generated all of its product sales
from Vantas and all of the sales were in the U.S. In addition,
for the years ended December 31, 2005 and 2004, one
customer accounted for 6% and 9%, respectively, of the
Company’s net unit sales and 0% and 11.6% of its
outstanding receivables at December 31, 2005 and 2004,
respectively.
The Company is dependent on single suppliers for certain raw
materials, including histrelin, the active pharmaceutical
ingredient in Vantas. The Company does not have an agreement
with the supplier of histrelin.
|
|
|
Fair Value of Financial Instruments |
The carrying amounts of the Company’s financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
their fair values.
The Company’s revenue recognition policies are in
accordance with Securities and Exchange Commission Staff
Accounting Bulletin (“SAB”) No. 104,
“Revenue Recognition in Financial Statements”
(“SAB 104”), and SFAS No. 48, “Revenue
Recognition When Right of Return Exists”
(“SFAS 48”), which provides guidance on revenue
recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and
Exchange Commission. SFAS 48 and SAB 104 require that
four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered;
(3) the seller’s price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on
management’s judgments regarding the fixed nature of the
fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause
management to determine that these criteria are not met for
certain future transactions, revenue recognition for those
transactions will be delayed and the Company’s revenue
could be adversely affected.
Allowances have been recorded for any potential returns or
adjustments in accordance with the Company’s policy.
Returns are allowed for damaged or outdated goods. As of
December 31, 2005, we had a reserve of $339,000 for returns
and adjustments, of which $51,000 related to sales made in 2004
and $288,000 related to sales made in 2005. During the year
ended December 31, 2005, there was no change in return and
adjustment reserve estimates related to the December 31,
2004 balance. As of December 31, 2004 and December 31,
2005, there was approximately $570,000 and $300,000 of Vantas,
respectively, at distributors and there were no returns of these
products subsequent to those dates.
70
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Distributors | |
|
Physicians | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at 12/31/2003
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Provision related to sales made in current period
|
|
$ |
28 |
|
|
$ |
370 |
|
|
$ |
398 |
|
|
Provision related to sales made in prior periods
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Returns and adjustments
|
|
|
— |
|
|
|
(54 |
) |
|
|
(54 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/2004
|
|
|
28 |
|
|
|
316 |
|
|
|
344 |
|
|
Provision related to sales made in current period
|
|
|
20 |
|
|
|
2,175 |
|
|
|
2,195 |
|
|
Provision related to sales made in prior periods
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Returns and adjustments
|
|
|
(29 |
) |
|
|
(2,171 |
) |
|
|
(2,200 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/2005
|
|
$ |
19 |
|
|
$ |
320 |
|
|
$ |
339 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Customer Sales — Urologists |
The Company’s revenue from product sales is recognized when
there is persuasive evidence an arrangement exists, the price is
fixed in accordance with the Company’s Customer Price List
and/or approved exception pricing, or determinable from executed
contracts, delivery to the customer has occurred and
collectibility is reasonably assured. The Company uses
contracts, purchase orders, sales orders directly taken by
product specialists and sales order confirmations to determine
the existence of an arrangement. Title to the product is taken
upon delivery of the product, at which time risk of loss shifts
to the customer. Billing does not take place until the day after
shipment has occurred. The Company uses shipping documents and,
the Company is provided with third party proof of delivery to
verify delivery to its customers.
|
|
|
Customer Sales — Distributor Sales |
With respect to sales to distributors, revenue is recognized
upon shipment, as the title, risks and rewards of ownership of
the products pass to the distributors and the selling price of
the Company’s product is fixed and determinable at that
point, as long as the Company believes the product will be sold
by the distributor within one to three months from the shipment
of the product by the Company to the distributor. If the Company
believes the product will not be resold within
three months, revenue will be deferred until the product is
sold and the product held by the distributor will be classified
as an asset on the Company’s financial statements until it
is sold by the distributor. At December 31, 2005 the
Company deferred $329,000 of revenue and recorded $44,000 of
assets related to product sold to distributors in 2005 that were
not resold by distributors in accordance with the Company’s
policy. Payment is due based upon the agreed terms of the
contract. The distributor is responsible for selling and
distributing the product to its customer base and the rights for
return are restricted to the Company’s published return
policy in effect for all customers.
In December 2004, the Company entered into two group purchasing
agreement with International Physicians Networks, LLC d/b/a
International Urology Network (IUN) which were subsequently
amended in March and July of 2005. Under the agreements, IUN
will sell to eligible members within their group purchasing
organization. Under the terms of the agreement, pricing is fixed
and subsequently adjusted to reflect the established price list
published for IUN members. Allowances have been recorded for any
potential returns in accordance with the Company’s policy,
as well as an estimate for uncollectible receivables.
71
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Preferred Stock
Dividends
The Company records deemed dividends when modifications to its
preferred stock are required in accordance with
EITF 98-5 and
EITF 00-27. Such
modifications occurred in 2003 and 2004 resulting in deemed
dividends of $1.1 million in 2003 and $5.9 million in 2004.
There were no modifications in the year ended December 31,
2005.
|
|
|
Recently Issued Accounting Pronouncements |
On December 16, 2004, the Financial Accounting Standards
Board (“FASB”) issued SFAS No. 123 (revised
2004), “Share-Based Payment”
(“SFAS 123(R)”), which is a revision of SFAS
No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). SFAS 123(R)
supersedes APB 25, and amends FASB Statement No. 95
“Statement of Cash Flows”. Generally, the approach in
SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative.
Under SFAS 123(R), the options the Company granted in prior
years as a non-public
company (prior to the initial filing of its Registration
Statement in March 2005) that were valued using the minimum
value method, will not be expensed in 2006 or future periods.
Options granted as a
non-public company and
accounted for using the intrinsic value method (cheap stock),
will continue to be expensed over the vesting period. Options
granted as a public company will be expensed under the modified
prospective method. The Company expects the adoption of
SFAS 123(R) will have an impact of approximately
$0.3 million on the Company’s results of operations.
The adoption will not have an impact on the Company’s
financial position or its cash flows. The ultimate impact of the
adoption can not be quantified as it is dependent on future
option grants.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, which replaces APB Opinion
No. 20, Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements. This pronouncement applies to all voluntary
changes in accounting principle, and revises the requirements
for accounting for and reporting a change in accounting
principle. SFAS No. 154 requires retrospective application
to prior periods’ financial statements of a voluntary
change in accounting principle, unless it is impracticable to do
so. This pronouncement also requires that a change in the method
of depreciation, amortization, or depletion for long-lived,
non-financial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the
effective date of SFAS No. 154. The adoption of this
accounting pronouncement is not expected to have a material
effect on the financial statements.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs — an Amendment of ARB No. 43,
Chapter 4. The standard requires abnormal amounts of
idle facility and related expenses to be recognized as current
period charges and also requires that allocation of fixed
production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS No. 151
is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this
accounting pronouncement is not expected to have a material
effect on the financial statements.
72
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Raw Materials
|
|
$ |
463 |
|
|
$ |
708 |
|
|
Work in process
|
|
|
2,426 |
|
|
|
597 |
|
|
Finished goods
|
|
|
302 |
|
|
|
60 |
|
| |
|
|
|
|
|
|
| |
|
$ |
3,191 |
|
|
$ |
1,365 |
|
| |
|
|
|
|
|
|
The inventory balances at December 31, 2005 and 2004 are
presented net of reserves of $1.2 million and $91,000,
respectively, for certain raw materials and for certain products
that failed to meet the Company’s quality control
specifications.
|
|
| 4. |
Property and Equipment |
Property and equipment consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, | |
| |
|
|
|
| |
| |
|
Useful Lives | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In thousands) | |
|
Laboratory equipment
|
|
|
5 years |
|
|
$ |
1,531 |
|
|
$ |
1,390 |
|
|
Furniture and fixtures
|
|
|
7 years |
|
|
|
161 |
|
|
|
60 |
|
|
Office equipment
|
|
|
5 years |
|
|
|
108 |
|
|
|
42 |
|
|
Computer equipment
|
|
|
3 years |
|
|
|
417 |
|
|
|
326 |
|
|
Computer software
|
|
|
3 years |
|
|
|
200 |
|
|
|
159 |
|
|
Construction in process
|
|
|
|
|
|
|
2,526 |
|
|
|
— |
|
|
Leasehold improvements
|
|
|
1-10 years |
|
|
|
625 |
|
|
|
599 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
5,568 |
|
|
|
2,576 |
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(1,374 |
) |
|
|
(872 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
|
|
|
$ |
4,194 |
|
|
$ |
1,704 |
|
| |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $502,000, $257,000 and
$153,000, for the years ended December 31, 2005, 2004 and
2003, respectively. There were fixed assets totaling $68,000 at
December 31, 2005 and $162,000 at December 31, 2004 subject
to capital lease obligations with accumulated amortization of
$54,000 and $134,000 as of December 31, 2005 and 2004,
respectively.
73
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Accrued liabilities consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Accrued royalties
|
|
$ |
396 |
|
|
$ |
307 |
|
|
Accrual for sales returns and adjustments
|
|
|
339 |
|
|
|
344 |
|
|
Accrued auditing fees
|
|
|
251 |
|
|
|
133 |
|
|
Accrued distributor chargebacks
|
|
|
621 |
|
|
|
— |
|
|
Accrued legal fees
|
|
|
769 |
|
|
|
20 |
|
|
Accrued marketing expenses
|
|
|
316 |
|
|
|
25 |
|
|
Accrued compensation, bonus and benefits
|
|
|
587 |
|
|
|
411 |
|
|
Accrued commissions
|
|
|
451 |
|
|
|
246 |
|
|
Accrued printing fees
|
|
|
254 |
|
|
|
— |
|
|
Accrued income taxes
|
|
|
75 |
|
|
|
— |
|
|
Accrued clinical fees
|
|
|
312 |
|
|
|
— |
|
|
Accrued other
|
|
|
236 |
|
|
|
66 |
|
| |
|
|
|
|
|
|
| |
|
$ |
4,607 |
|
|
$ |
1,552 |
|
| |
|
|
|
|
|
|
|
|
| 6. |
Capital Lease Obligations |
The minimum future lease payments related to capital leases at
December 31, 2005 are as follows (in thousands):
| |
|
|
|
|
|
| |
2006
|
|
$ |
19 |
|
| |
|
|
|
|
Total minimum lease payments
|
|
|
19 |
|
|
Less amount representing interest payments
|
|
|
1 |
|
| |
|
|
|
|
Present value of minimum lease payments
|
|
$ |
18 |
|
| |
|
|
|
7. Credit Line Agreement
In October 2005, the Company entered into a two-year, $7,500,000
line of credit with Merrill Lynch Capital. Under the line of
credit, the amount the Company may borrow at any given time is
dependent upon its accounts receivable balance and related aging
of such accounts. Borrowings under the line of credit bear an
initial interest rate at the sum of the
one-month
LIBOR rate plus 3.75%. The Company is subject to
certain covenants under the credit agreement. In connection with
the credit agreement, the Company pledged all of its assets,
with the exception of intellectual property, to Merrill Lynch.
As of December 31, 2005, the Company had $1.5 million
outstanding under the line of credit. The interest rate on the
outstanding balance was 8.14% at December 31, 2005. In
February 2006, the Company used a portion of the net
proceeds from its initial public offering to repay amounts
outstanding under the line of credit.
74
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The Company leases its facilities and certain equipment under
noncancellable operating lease agreements. The minimum future
lease payments under these leases are as follows (in thousands):
| |
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
| |
2006
|
|
$ |
1,342 |
|
| |
2007
|
|
|
1,319 |
|
| |
2008
|
|
|
1,319 |
|
| |
2009
|
|
|
1,315 |
|
| |
2010
|
|
|
1,399 |
|
| |
Thereafter
|
|
|
6,306 |
|
Total rent expense was approximately $1.4 million,
$0.7 million, and $0.4 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The
Company’s building lease expires March 31, 2015, and
the equipment lease expires October 2006. The Company’s
building lease includes escalation clauses that go into effect
in 2009 and 2010, which will result in greater rent expense from
2009 to 2015. The Company records rent expense on a
straight-line basis over the term of the lease. The Company has
two 5-year renewal options under its building lease.
The Company is a party to certain agreements that require the
Company to pay royalties to third parties based on certain net
product sales. For the years ended December 31, 2005 and
2004, the Company incurred royalty expense of $1.3 million
and $0.3 million, respectively. Future royalties are
dependent on future sales levels.
9. Capitalization
On January 27, 2006, the Company effected a one-for-six reverse
stock split. In connection with the reverse stock split, every
outstanding six shares of the Company’s common stock
were replaced with one share of the Company’s common stock.
All references to common stock, common shares outstanding,
average number of common shares outstanding and per share
amounts in these consolidated financial statements and notes to
consolidated financial statements prior to the effective date of
the reverse stock split have been restated to reflect the
one-for-six reverse stock split on a retroactive basis.
Effective upon consummation of the initial public offering, the
Company reduced the number of common shares authorized for
issuance to 30,000,000 and the number of preferred shares
authorized for issuance to 5,000,000.
The Company had 1,667,082 shares of common stock
outstanding at December 31, 2005 and its par value was
$0.001. The Company is authorized to issue
30,000,000 shares of common stock with a par value of
$0.001 per share. Each holder of common stock is entitled
to one vote of each share of common stock held of record on all
matters on which stockholders generally are entitled to vote.
In February 2006, the Company closed its initial public offering
in which it issued 3,862,500 shares of its common stock at
$9.00 per share. In conjunction with this offering all of
the Company’s preferred stock converted into 9,355,714
shares of common stock. As a result, the Company had
14,885,296 shares of common stock outstanding after the
closing its initial public offering.
75
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Holders of shares of the Company’s common stock are
entitled to one vote for each share held of record on all
matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors. The holders of
the Company’s common stock are entitled to receive
dividends when, as and if declared by the board of directors out
of funds legally available therefore subject to the rights of
any class of stock having a preference as to dividends. Under
our credit agreement with Merrill Lynch Capital, we agreed to
not declare or pay any cash dividends.
In the event of a liquidation, dissolution or winding up of us,
the holders of the Company’s common stock are entitled to
share ratably in all assets remaining available for distribution
to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference
over the common stock. Holders of common stock have no
conversion, preemptive or other subscription rights, and there
are no redemption provisions applicable to the common stock. The
rights, preferences and privileges of holders of common stock
are subject to and may be affected by, the rights of the holders
of any shares of preferred stock that we may designate and issue
in the future.
|
|
|
Convertible Preferred Stock |
At December 31, 2005, the Company was authorized to issue
43,100,000 shares of $0.001 par value convertible
preferred stock of which 7,000,000 shares had been
designated Series A Preferred Stock, 24,500,000 shares
had been designated Series B Preferred Stock and
11,600,000 shares had been designated Series C 6%
Cumulative Convertible Preferred Stock (“Series C
Preferred Stock”). Such preferred stock was subject to the
following rights and privileges:
Preferred stockholders were entitled to cast the number of votes
equal to the number of shares of common stock into which such
shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock (together referred to as
the “Convertible Preferred Stock”) could then be
converted and had full voting rights and powers equal to the
voting rights and powers of the common stock on all matters
submitted to the stockholders.
The Convertible Preferred Stock was entitled to receive
dividends on an as-converted basis with shares of common stock
when, as and if declared by the Board of Directors out of funds
legally available therefore.
In addition to the foregoing provision, each share of
Series A Preferred Stock and Series C Preferred Stock
accrued dividends at the rate of 6% of its respective Preferred
Stock Stated Value, and each share of the Series B
Preferred Stock accrued dividends at the rate of 10% of the
Series B Stated Value per share (as such stated value was
adjustable for any stock dividends, combinations or splits with
respect to such shares) per annum, which accrued daily based on
a 360-day year, payable
when and as declared by the Board of Directors of the Company
out of funds legally available. The Series A Preferred
Stock dividends only accrued from the date of the first issuance
of the shares of Series C Preferred Stock, August 16,
2004. No dividends were declared by the Board of Directors
through December 31, 2005. Under our credit agreement with
Merrill Lynch Capital, we agreed to not declare or pay any cash
dividends.
In the event of any voluntary or involuntary liquidation, sale,
dissolution or winding up of the Company, subject to the rights
of the series of preferred stock that may from time to time have
come into
76
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
existence, the holders of the Convertible Preferred Stock then
outstanding were entitled to receive, out of the assets of the
Company available for distribution to its stockholders, before
any payment made in respect of the common stock, an amount per
share of Convertible Preferred Stock equal to the Series A
Stated Value, Series B Stated Value or the Series C
Stated Value, as the case may be, plus all accrued but unpaid
dividends thereon to the date fixed for distribution (the
“Convertible Preferred Liquidation Amount”). If upon
the liquidation, dissolution or winding up of the Company, the
assets of the Company available for distribution to its
stockholders were insufficient to pay the full Convertible
Preferred Liquidation Amount, then all the assets so available
for distribution to its stockholders were to be distributed
ratably to the holders of the Convertible Preferred Stock in
proportion to the aggregate amounts that would have been payable
to such holders if the assets of the Company were sufficient to
pay the full amount to which they were entitled pursuant to this
section and nothing more.
Each share of Convertible Preferred Stock was convertible, at
the option of the holder thereof, at any time and from time to
time after the issuance of such share, at the office of the
Company or any transfer agent for such stock, into fully paid
and nonassessable shares of common stock of the Company. The
number of shares of common stock to which a holder of
Convertible Preferred Stock was entitled upon conversion was the
product obtained by multiplying the Convertible Preferred
Conversion Rate then in effect by the number of shares of
Convertible Preferred Stock, being converted. The Convertible
Preferred Conversion Rate in effect at any time for conversion
of any series of the Convertible Preferred was the quotient
obtained by dividing (i) the Convertible Preferred Stated
Value for such series of Convertible Preferred Stock plus an
amount equal to all accrued and unpaid dividends per share of
such Convertible Preferred Stock as of the conversion date (the
“Dividend Amount”) by (ii) the Conversion Price
for such series of Convertible Preferred Stock; provided,
however that a holder of Convertible Preferred Stock was
permitted to elect to receive all or a portion of the Dividend
Amount in cash upon conversion of the Convertible Preferred
Stock, in which event the portion of the Dividend Amount paid in
cash was not to be added to the Convertible Preferred Stated
Value in determining the Conversion Rate for such holder of
Convertible Preferred Stock. The initial conversion price for
the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock was $3.00, $4.35 and $6.00
respectively.
The initial Conversion Price for each series of Convertible
Preferred Stock was adjustable from time to time in accordance
with the agreement. In accordance with the anti-dilution feature
in the Series A Preferred Stock, there was a deemed
dividend for the years ended December 31, 2003 and 2004 of
$1.1 million and $5.9 million, respectively. Conversion could
occur automatically concurrent with a firm underwritten public
offering of not less than $25.0 million, or on the date
specified by vote or written consent or agreement of holders of
at least 80% of the then outstanding shares of Convertible
Preferred Stock voting together as a class on an as-if-converted
basis.
The following table summarizes certain information about the
Convertible Preferred Stock for each series at December 31,
2005 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Shares | |
|
Undeclared | |
| |
|
Authorized | |
|
Issued and | |
|
Liquidation | |
|
Reserved for | |
|
Accrued | |
| |
|
Shares | |
|
Outstanding | |
|
Preference | |
|
Conversion | |
|
Dividends | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Series A
|
|
|
7,000 |
|
|
|
7,000 |
|
|
$ |
7,598 |
|
|
|
2,533 |
|
|
$ |
598 |
|
|
Series B
|
|
|
24,500 |
|
|
|
22,069 |
|
|
|
20,221 |
|
|
|
4,649 |
|
|
|
4,221 |
|
|
Series C
|
|
|
11,600 |
|
|
|
11,600 |
|
|
|
12,590 |
|
|
|
2,098 |
|
|
|
990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
43,100 |
|
|
|
40,669 |
|
|
$ |
40,409 |
|
|
|
9,280 |
|
|
$ |
5,809 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
In February 2006, the Company completed its initial public
offering in which the Company issued 3,862,500 shares of
its common stock at $9.00 per share. In conjunction with
this offering all of the Company’s preferred stock
converted into 9,355,714 shares of common stock. As a result we
had 14,885,296 shares of common stock outstanding after the
closing the offering. Further, on February 6, 2006, the
Company filed an amended and restated Certificate of
Incorporation that removed the designations, rights and
obligations of the convertible preferred stock described in this
note to the financial statements.
In September 2002, the Company adopted the Valera
Pharmaceuticals Equity Incentive Plan, which provides for the
granting of nonqualified and incentive stock options, as defined
by the Internal Revenue Code, to key employees of the Company at
prices not less than the fair market value at the date of grant
for incentive stock options granted. The option price for each
share of common stock for non-qualified options is determined by
the Board of Directors and may be more or less than the fair
market value of a share of common stock. The options granted by
the Company generally have a life of ten years and vest over a
period as determined by the Board of Directors, which is
typically four years.
In March 2005, the Company increased the number of shares of its
common stock reserved for issuance pursuant to the
Company’s Equity Incentive Plan to 1,833,333.
In December 2003, the exercise price of all options issued prior
to 2003 was amended to $3.00, the fair market value at that
time. In accordance with FASB Interpretation (“FIN”)
No. 44, the repriced options were accounted for as variable
from the date of the modification to the date the options are
exercised, forfeited, or expire. Under SFAS 123R, which the
Company adopted on January 1, 2006, there will be no
additional compensation expense for these repriced options as
the vesting is complete and the requisite service period has
ended. In connection with these options, the Company recorded
$3.7 million, net of forfeitures, in deferred stock-based
compensation in 2004. Non-cash compensation expense related to
these repriced options was $3.0 million in 2004 and
$(0.8) million in 2005.
The following table summarizes option activity for the
Company’s common stock for the years ended
December 31, 2003, 2004, and 2005:
| |
|
|
|
|
|
|
|
|
|
| |
|
Common | |
|
Weighted- | |
| |
|
Stock | |
|
Average | |
| |
|
Options | |
|
Exercise Price | |
| |
|
| |
|
| |
|
Outstanding at December 31, 2002
|
|
|
286,750 |
|
|
|
|
|
| |
Granted
|
|
|
489,276 |
|
|
$ |
3.00 |
|
| |
Exercised
|
|
|
— |
|
|
|
|
|
| |
Forfeited
|
|
|
(3,833 |
) |
|
$ |
3.00 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
772,193 |
|
|
|
|
|
| |
Granted
|
|
|
353,832 |
|
|
$ |
3.00 |
|
| |
Exercised
|
|
|
— |
|
|
|
|
|
| |
Forfeited
|
|
|
(6,600 |
) |
|
$ |
3.00 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
1,119,425 |
|
|
|
|
|
| |
Granted
|
|
|
193,594 |
|
|
$ |
11.55 |
|
| |
Exercised
|
|
|
(417 |
) |
|
$ |
3.00 |
|
| |
Forfeited
|
|
|
(46,753 |
) |
|
$ |
4.45 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
1,265,849 |
|
|
|
|
|
| |
|
|
|
|
|
|
78
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about vested stock
options outstanding:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Vested Stock Options
|
|
|
141,464 |
|
|
|
334,164 |
|
|
|
605,032 |
|
|
Weighted average exercise price
|
|
$ |
3.00 |
|
|
$ |
3.00 |
|
|
$ |
3.11 |
|
The following table summarizes information about stock options
outstanding at December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- | |
|
Weighted- | |
| Range of | |
|
|
|
|
|
Average | |
|
Average | |
| Exercise | |
|
Options | |
|
Options | |
|
Remaining | |
|
Exercise | |
| Prices | |
|
Outstanding | |
|
Vested | |
|
Contractual Life | |
|
Price | |
| | |
|
| |
|
| |
|
| |
|
| |
| $ |
3.00 |
|
|
|
1,081,007 |
|
|
|
597,532 |
|
|
|
7.9 |
|
|
$ |
3.00 |
|
| $ |
6.00 |
|
|
|
12,666 |
|
|
|
— |
|
|
|
9.1 |
|
|
$ |
6.00 |
|
| $ |
12.00 |
|
|
|
172,176 |
|
|
|
7,500 |
|
|
|
9.6 |
|
|
$ |
12.00 |
|
The weighted average fair value of options granted and
outstanding as of December 31, 2005 was $4.25.
In connection with the granting of employee stock options below
fair market value in 2004 and 2005, the Company recorded
deferred compensation of $0.9 million and
$0.1 million, respectively, net of forfeitures. Deferred
compensation is being amortized over the vesting period of the
options resulting in non-cash stock-based compensation expense
of $0.1 million and $0.2 million for the years ended
December 31, 2004 and 2005, respectively. There was no
deferred compensation recorded in prior years.
For the years ended December 31, 2003, 2004 and 2005 the
Company granted a total of 10,833, 5,000 and 10,833
respectively, in stock options to certain consultants. The
Company has accounted for these options in accordance with
EITF 96-18 and,
accordingly, recorded non-cash expense of $3,000, $51,000 and
$164,000 for the years ended December 31, 2003, 2004 and
2005, respectively.
During the twelve month period ended December 31, 2005, the
Company granted stock options with exercise prices as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number | |
|
|
|
Weighted | |
|
Weighted | |
| |
|
of | |
|
Weighted | |
|
Average | |
|
Average | |
| |
|
Options | |
|
Average | |
|
Fair Value | |
|
Intrinsic Value | |
| Grants Made During Quarter Ended |
|
Granted | |
|
Exercise Price | |
|
per Share | |
|
per Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
March 31, 2005
|
|
|
14,499 |
|
|
$ |
6.00 |
|
|
$ |
16.20 |
|
|
$ |
10.20 |
|
|
June 30, 2005
|
|
|
143,594 |
|
|
$ |
12.00 |
|
|
$ |
12.00 |
|
|
$ |
— |
|
|
September 30, 2005
|
|
|
4,334 |
|
|
$ |
12.00 |
|
|
$ |
12.00 |
|
|
$ |
— |
|
|
December 31, 2005
|
|
|
31,167 |
|
|
$ |
12.00 |
|
|
$ |
12.00 |
|
|
$ |
— |
|
The intrinsic value per share is being recognized as
compensation expense over the applicable vesting period (which
equals the service period).
79
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting and the amount used for
income tax purposes. The Company’s deferred tax assets
relate primarily to net operating loss carryforwards, research
and development tax credits, and non-cash stock-based
compensation. At December 31, 2005 and 2004, a valuation
allowance was recorded to fully offset the net deferred tax
asset. The change in the valuation allowance for the years ended
December 31, 2005 and 2004 was approximately
$0.6 million and $4.9 million, respectively.
Significant components of the Company’s deferred tax assets
were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
$ |
7,770 |
|
|
$ |
8,050 |
|
| |
Research and development credits
|
|
|
1,423 |
|
|
|
1,131 |
|
| |
Stock-based compensation
|
|
|
904 |
|
|
|
1,085 |
|
| |
Amortization of stock-based compensation
|
|
|
126 |
|
|
|
156 |
|
| |
Non-employee stock compensation
|
|
|
87 |
|
|
|
22 |
|
| |
Other
|
|
|
1,049 |
|
|
|
353 |
|
| |
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
11,359 |
|
|
|
10,797 |
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
134 |
|
|
|
151 |
|
| |
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
134 |
|
|
|
151 |
|
|
Valuation allowance for deferred tax assets
|
|
|
(11,225 |
) |
|
|
(10,646 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
As of December 31, 2005, the Company had federal net
operating loss carryforwards of approximately
$19.4 million. The net operating loss carryforwards will
expire at various dates beginning in 2022, if not utilized. The
Company had research and development tax credit carry forwards
at December 31, 2005, of approximately $1.4 million,
which will begin to expire in 2022. If an ownership change, as
defined under Internal Revenue Code Section 382, occurs the
use of these carry forwards may be subject to limitation.
Provision for (benefit from) income tax consists of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year |
| |
|
December 31, |
| |
|
|
| |
|
2005 | |
|
2004 | |
|
2003 |
| |
|
| |
|
| |
|
|
| |
|
(in thousands) |
|
Federal
|
|
$ |
20 |
|
|
$ |
— |
|
|
$ |
— |
|
|
State
|
|
|
55 |
|
|
|
(243 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
75 |
|
|
$ |
(243 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
In 2004, the New Jersey Economic Development Authority approved
the Company’s application to sell New Jersey State income
tax benefits under the New Jersey Technology Tax Transfer
Program (the “Program”). During the fourth quarter of
2004, the Company recognized $243,000 from the sale of State of
New Jersey income tax benefits. The Program requires that the
Company maintain certain employment levels in New Jersey and
that the proceeds from the sale of the tax benefits be spent in
New Jersey.
80
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The Company has incurred net operating losses since inception.
However, in 2005 the Company generated taxable income as a
result of certain temporary and permanent differences between
book income and taxable income. As a result, the Company
recorded an alternative minimum tax provision of $20,000 for
federal purposes and $55,000 for state purposes.
A reconciliation of the statutory tax rates and the effective
tax rates for the periods ended:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Statutory rate
|
|
|
(34 |
)% |
|
|
(34 |
)% |
|
|
(34 |
)% |
|
State and local income taxes (net of federal tax benefit)
|
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(6 |
) |
|
Research and development tax credits
|
|
|
(11 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
Alternative minimum tax
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
Other permanent items
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance
|
|
|
46 |
|
|
|
42 |
|
|
|
44 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
6 |
% |
|
|
0 |
% |
|
|
0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
| 12. |
Related Party Transactions |
In June 2004, David S. Tierney, the Company’s President and
CEO, loaned the Company $200,000 at prime plus 1% above the UBS
Margin Interest Rate. The loan was repaid in November 2004.
Interest in the amount of $2,000 is included in interest expense
for 2004.
In August 2004, in connection with the sale of the
Company’s Series C Convertible Preferred Stock, the
Company paid Sanders Morris Harris, Inc. a fee of $280,000 for
its services as placement agent. James C. Gale, the
Chairman of the Company’s board of directors, is a managing
director of Sanders Morris Harris, Inc.
Sanders Morris Harris, Inc. and its affiliates own approximately
40% of BioPro Pharmaceutical, Inc. and over 90% of Alpex Pharma
S.A., two companies that we have agreements with to distribute
product and develop and market product, respectively. During
2005, we received a payment of $0.3 million from BioPro and we
made payments of $0.4 million to Alpex.
|
|
| 13. |
Defined Contribution Plan |
The Company sponsors a 401(k) plan for eligible employees. The
Company’s contributions to the plan are discretionary and
are 50% of the employee’s contribution, not to exceed 5% of
total compensation. The total Company 401(k) contributions
amounted to approximately $164,000, $55,000 and $49,000 for the
years ended December 31, 2005, 2004 and 2003, respectively.
|
|
| 14. |
Acquisition of Product |
In September 2005, the Company entered into an agreement with
Anthra Pharmaceuticals, Inc. to acquire certain assets of Anthra
associated with its valrubicin business in the U.S. and Canada.
If the transaction closes as planned, the Company will make:
(i) installment payments totaling $0.6 million;
(ii) additional payments of up to 13.5% of net sales
depending upon the product’s formulation, indication and
market share; and (iii) certain milestone payments based
upon achieving certain sales levels. Anthra’s valrubicin
business involved the manufacture and sale of valrubicin for use
in the treatment of bladder cancer. The product was distributed
in the U.S. and Canada by third party partners of Anthra. In the
U.S., the product was distributed under the trademark Valstar.
The product is not covered by any patents and its orphan drug
status has expired.
Anthra’s valrubicin product was taken off the market in
2002 due to a manufacturing problem and a lack of resources to
address the problem. The Company has analyzed the manufacturing
issues and believe
81
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
that it has determined the cause of, and a solution to, the
problem. As such, the Company has agreed to acquire certain
assets of Anthra required for the manufacture, marketing and
sale of valrubicin in the U.S. and Canada including the NDA
filed with the FDA, the drug master file, the Canadian
regulatory submission and all data produced by or on behalf of
Anthra in support of the NDA and other governmental approvals,
or in any other scientific experiment or clinical trial relating
to valrubicin. The acquisition is expected to close during the
first quarter of 2006, subject to various conditions. The
Company initiated discussions with the FDA in the fourth quarter
of 2005 regarding the Company’s plan to reintroduce the
product into the U.S. market and in January 2006, the FDA
accepted the Company’s plan. The Company expects to address
reintroduction of the product in Canada following reintroduction
in the U.S. and expect distribution to be handled by the
existing Canadian distributor.
The purchase price payable for the product consists of
guaranteed payments, revenue sharing payments based on our sales
and receipt of license fees and additional payments based on the
Company’s sales performance. Subject to certain exceptions,
Anthra’s indemnification obligations survive for
two years after closing and are funded by setoff against
the purchase price payable to Anthra under the agreement.
|
|
| 15. |
Selected Quarterly Financial Data (Unaudited) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$ |
7,695 |
|
|
$ |
10,286 |
|
|
$ |
3,678 |
|
|
$ |
5,173 |
|
|
Cost of product sales
|
|
|
1,023 |
|
|
|
2,951 |
|
|
|
809 |
|
|
|
1,183 |
|
|
Total operating expenses
|
|
|
5,972 |
|
|
|
8,777 |
|
|
|
6,805 |
|
|
|
6,596 |
|
|
Income (loss) from operations
|
|
|
1,723 |
|
|
|
1,509 |
|
|
|
(3,127 |
) |
|
|
(1,423 |
) |
|
Provision for income taxes
|
|
|
160 |
|
|
|
140 |
|
|
|
(300 |
) |
|
|
75 |
|
|
Net income (loss) attributable to common shareholders
|
|
|
1,577 |
|
|
|
1,382 |
|
|
|
(2,808 |
) |
|
|
(1,495 |
) |
|
Basic net income (loss) attributable to common shareholders per
common share
|
|
$ |
0.95 |
|
|
$ |
0.83 |
|
|
$ |
(1.68 |
) |
|
$ |
(0.90 |
) |
|
Diluted net income (loss) attributable to common shareholders
per common share
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
|
$ |
(1.68 |
) |
|
$ |
(0.90 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$ |
— |
|
|
|
— |
|
|
$ |
135 |
|
|
$ |
5,511 |
|
|
Cost of product sales
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
608 |
|
|
Total operating expenses
|
|
|
2,018 |
|
|
|
3,540 |
|
|
|
3,704 |
|
|
|
8,644 |
|
|
Loss from operations
|
|
|
(2,018 |
) |
|
|
(3,540 |
) |
|
|
(3,569 |
) |
|
|
(3,133 |
) |
|
Benefit for income taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
243 |
|
|
Net loss
|
|
|
(2,016 |
) |
|
|
(3,545 |
) |
|
|
(3,568 |
) |
|
|
(2,894 |
) |
|
Net loss attributable to common shareholders
|
|
|
(2,016 |
) |
|
|
(3,641 |
) |
|
|
(9,333 |
) |
|
|
(2,894 |
) |
|
Basic and diluted net loss attributable to common shareholders
per common share
|
|
$ |
(1.21 |
) |
|
$ |
(2.18 |
) |
|
$ |
(5.60 |
) |
|
$ |
(1.74 |
) |
Diluted EPS is identical to basic EPS since common stock
equivalent shares are excluded from the calculation, as their
effect is anti-dilutive in all periods presented.
82
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
In February 2006, the Company closed its initial public offering
in which the Company issued 3,862,500 shares of the
Company’s common stock at $9.00 per share. In
conjunction with this offering all of the Company’s
preferred stock converted into 9,355,714 shares of common stock.
As a result the Company had 14,885,296 shares of common
stock outstanding after the closing the offering. In
February 2006, the Company used a portion of the net
proceeds from its initial public offering to repay amounts
outstanding under the line of credit.
83
VALERA PHARMACEUTICALS, INC.
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
Charged to | |
|
|
|
Balance at | |
| |
|
Beginning of | |
|
Cost and | |
|
Other | |
|
|
|
End of | |
| |
|
Period | |
|
Expenses | |
|
Accounts | |
|
Deductions | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
For the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Sales Returns and Adjustments
|
|
$ |
344 |
|
|
$ |
2,195 |
|
|
|
— |
|
|
$ |
2,200 |
|
|
$ |
339 |
|
|
For the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Sales Returns and Adjustments
|
|
|
|
|
|
|
398 |
|
|
|
— |
|
|
|
54 |
|
|
|
344 |
|
|
For the year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Sales Returns and Adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
For the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts and Cash Discounts
|
|
$ |
91 |
|
|
$ |
557 |
|
|
|
— |
|
|
$ |
263 |
|
|
$ |
385 |
|
|
For the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts and Cash Discounts
|
|
|
— |
|
|
|
91 |
|
|
|
— |
|
|
|
— |
|
|
|
91 |
|
|
For the year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowanced for Doubtful Accounts and Cash Discounts
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
For the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tax Valuation Allowance
|
|
$ |
10,646 |
|
|
$ |
579 |
|
|
|
— |
|
|
|
— |
|
|
$ |
11,225 |
|
|
For the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tax Valuation Allowance
|
|
|
5,733 |
|
|
|
4,913 |
|
|
|
— |
|
|
|
— |
|
|
|
10,646 |
|
|
For the year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tax Valuation Allowance
|
|
|
2,521 |
|
|
|
3,212 |
|
|
|
— |
|
|
|
— |
|
|
|
5,733 |
|
|
For the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Inventory Valuation Reserve
|
|
$ |
91 |
|
|
$ |
1,083 |
|
|
$ |
138 |
|
|
$ |
114 |
|
|
$ |
1,198 |
|
|
For the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Inventory Valuation Reserve
|
|
|
— |
|
|
|
91 |
|
|
|
— |
|
|
|
— |
|
|
|
91 |
|
|
For the year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Inventory Valuation Reserve
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
84
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures |
None
|
|
| Item 9A. |
Controls and Procedures |
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we have evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures as of December 31, 2005 and, based on that
evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls
and procedures are effective. Disclosure controls and procedures
are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act
of 1934, as amended (the “Securities Exchange Act”),
is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
us in the reports that we file under the Securities Exchange Act
is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2005 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
| Item 9B. |
Other Information |
None
Part III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The following sets forth information for each of our directors
and executive officers as of March 1, 2006.
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position |
| |
|
| |
|
|
|
David S. Tierney, M.D.
|
|
|
42 |
|
|
President, Chief Executive Officer and Director |
|
Andrew T. Drechsler
|
|
|
34 |
|
|
Chief Financial Officer and Secretary |
|
Petr F. Kužma
|
|
|
62 |
|
|
Vice President of Research and Development |
|
Pete J. Perron
|
|
|
39 |
|
|
Vice President of Sales |
|
Matthew L. Rue, III
|
|
|
55 |
|
|
Vice President of Marketing and Commercial Development |
|
James C. Gale
|
|
|
56 |
|
|
Chairman of the Board of Directors |
|
David R. Dantzker, M.D.
|
|
|
62 |
|
|
Director |
|
Jerome Feldman
|
|
|
77 |
|
|
Director |
|
Hubert Huckel, M.D.
|
|
|
74 |
|
|
Director |
|
Jeffrey M. Krauss
|
|
|
49 |
|
|
Director |
|
Ogden R. Reid
|
|
|
80 |
|
|
Director |
|
Howard Silverman
|
|
|
70 |
|
|
Director |
|
John T. Spitznagel
|
|
|
64 |
|
|
Director |
David S. Tierney, M.D. joined us in August 2000 as
our President and Chief Executive Officer. In December 2001,
Dr. Tierney became a member of our board of directors.
Prior to joining us, Dr. Tierney was president of Biovail
Technologies, a division of Biovail Corporation, a Canadian drug
delivery
85
company, from January 2000 to August 2000. Prior to Biovail,
Dr. Tierney spent three years at Roberts Pharmaceutical
Corporation as senior vice president of drug development from
March 1997 to January 2000. Prior to joining Roberts,
Dr. Tierney spent eight years at Elan Corporation, plc, a
pharmaceutical company, in a variety of management positions.
Dr. Tierney currently serves as a director on the boards of
Able Laboratories, a pharmaceutical company, and Catalyst
Pharmaceutical Partners, a pharmaceutical company.
Dr. Tierney received a medical degree from the Royal
College of Surgeons in Dublin, Ireland and was subsequently
trained in internal medicine.
Andrew T. Drechsler joined us in April 2005 as our Chief
Financial Officer and Secretary. Prior to joining us, from May
2001 to April 2005, Mr. Drechsler served as controller of
i-STAT Corporation, a point of care diagnostics company and a
division of Abbott Laboratories subsequent to its acquisition in
January 2004. He also served as controller for HydraWEB
Technologies, a software development firm, from September 2000
to May 2001. From April 1997 to September 2000,
Mr. Drechsler served in various senior financial positions
at Biomatrix, a biotech company focused on the orthopedic and
ophthalmic markets until the company was acquired by Genzyme in
2000. From August 1994 to April 1997, Mr. Drechsler was a
senior associate with the public accounting firm Coopers &
Lybrand LLP. Mr. Drechsler graduated magna cum laude from
Villanova University with a B.S. in Accountancy.
Mr. Drechsler obtained his qualification as a certified
public accountant in the state of New Jersey.
Petr F. Kužma is our Vice President of Research and
Development. Mr. Kužma has been with us since 1987
serving in various roles and became Vice President of Research
and Development in March 2000. Mr. Kužma has over
thirty years of experience in the polymer, medical device and
pharmaceutical industries. He joined GP Strategies, our former
parent and a global provider of training,
e-Learning solutions,
management consulting, engineering and simulation services in
1975. During his tenure at GP Strategies, he held numerous
research and development positions of increasing scope and
responsibility with various divisions of GP Strategies.
Mr. Kužma received a M.S. in chemical engineering from
Slovak University of Technology in Slovakia, a B.S. in chemistry
from St. Peter’s College, and a B.S. in chemical technology
from the Institute of Industrial Chemistry in the Czech Republic.
Pete J. Perron joined us in April 2004 as our Vice
President of Sales. Prior to joining us, Mr. Perron was at
Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson
company from July 2001 to April 2004, where he served as product
director for several brands, including two with combined annual
sales in excess of $500 million, and as a regional business
director responsible for overseeing several district managers
and more than 75 sales representatives. Prior to Ortho-McNeil,
Mr. Perron was product manager at G.D. Searle/
Pharmacia from October 1999 to July 2001. Mr. Perron
received a B.A. and an M.S. in business communications from the
University of North Texas.
Matthew L. Rue, III joined us as our Vice President
of Marketing and Commercial Development in January 2002.
Mr. Rue served as a consultant of ours from August 2000 to
December 2001. Prior to joining us, Mr. Rue previously
served as director of marketing, product manager, and consultant
at Roberts Pharmaceuticals Corporation from 1996 to July 2000.
Mr. Rue’s expertise is in prescription marketing and
product launches and he has launched or re-launched three
prescription brands. Prior to joining Roberts, Mr. Rue
served as an account supervisor at Cline, Davis & Mann,
an advertising company, and was a senior product manager at
Reed & Carnick, a specialty pharmaceutical firm, where
he developed and launched numerous over-the-counter and
prescription pharmaceuticals. Mr. Rue received a B.F.A. in
English from Emerson College.
James C. Gale is the Chairman of our board of directors
and has served as a member of our board of directors since
December 2001. Mr. Gale is a managing director of Sanders
Morris Harris, Inc., a national investment management and
investment banking company and affiliate of several stockholders
of ours, and is the managing partner of LOF Partners, an
affiliate of Sanders Morris Harris that manages several
stockholders of ours and has served in this capacity since 1998.
From 1992 to 1998, Mr. Gale was head of investment banking
at Gruntal & Co., L.L.C., a large brokerage and
investment banking company. Prior to joining Gruntal,
Mr. Gale originated and managed private equity investments
for the Home Insurance Co., Gruntal’s parent, from 1989 to
1992. Mr. Gale also serves on the board of directors of
Relm Wireless Corporation.
86
David R. Dantzker, M.D. has served as a member of
our board of directors since June 2003. Dr. Dantzker has
been a general partner at Wheatley Partners, L.P., a New
York-based venture capital firm and one of our stockholders,
since January 2001. He has served on the faculty and in
leadership positions of four major research-oriented medical
schools and has authored or co-authored 130 research papers and
five textbooks. He is an internationally recognized expert in
the area of pulmonary medicine and critical care. Prior to
serving with Wheatley Partners, Dr. Dantzker served as
chief executive officer of Redox Pharmaceuticals Corporation
from November 2000 until October 2001. Dr. Dantzker served
as Chief Executive Officer of Long Island Jewish Medical Center
from October 2004 and President of North Shore — LIJ
Health System from October 1997 until may 2000.
Dr. Dantzker is currently chairman of the board of
directors of Versamed, Inc. and
Q-RNA, Inc. and a
director of CNS, Visionsense, Ltd., and Advanced Biohealing Inc.
Jerome I. Feldman has served as a member of our board of
directors since January 2005. Mr. Feldman is chairman of
the board of directors and chief executive officer of National
Patent Development Corporation, the parent of one of our
stockholders, MXL Industries, Inc., and a holding company
with interests in optical plastics, paint and hardware
distribution and pharmaceuticals. Mr. Feldman was the
founder of GP Strategies Corporation, and from 1959 to 2005
served as its chief executive officer. He has also served as
chairman of the board of directors of GP Strategies Corporation
from 1999 to 2005. Mr. Feldman was president of GP
Strategies from 1959 until 2001. Mr. Feldman is currently
the Chairman of the Executive Committee of GP Strategies
Corporation. He has been chairman of the board of directors of
Five Star Products, Inc., a wholesale distributor of home
decorating, hardware and finishing products, since 1994, a
director of GSE Systems, Inc., a global provider of real-time
simulation and training solutions, since 1994, and chairman of
the board of directors of GSE since 1997. Mr. Feldman is
also chairman of the New England Colleges Fund and a Trustee of
Northern Westchester Hospital Center.
Hubert E. Huckel, M.D. has served as a member of our
board of directors since January 2002. From 1964 until his
retirement in December 1992, Dr. Huckel served in various
positions with the Hoechst Group, an agri-chemical company. At
the time of his retirement, he was chairman of the board of
Hoechst-Roussel Pharmaceuticals, Inc., chairman and president of
Hoechst-Roussel Agri-Vet Company and a member of the executive
committee of Hoechst Celanese Corporation. Dr. Huckel
currently serves as a director on the boards of Titan
Pharmaceuticals, Inc., Thermogenesis Corporation, a
biotechnology firm, Concordia Pharmaceuticals, Inc. and Catalyst
Pharmaceutical Partners.
Jeffrey M. Krauss has served as a member of our board of
directors since August 2004. Mr. Krauss has been a managing
member of the Psilos Group, a New York-based venture capital
firm since 2000 and one of our stockholders since August 2004.
Prior to joining Psilos, Mr. Krauss spent ten years at
Nazem & Company as a general partner of three venture
capital funds from 1990 to 2000. Prior to joining Nazem,
Mr. Krauss was an attorney at the law firm of Simpson
Thacher & Bartlett LLP, where he specialized in private
equity transactions. Mr. Krauss is currently a member of
the Healthcare Sector Group of the New York City Investment
Fund. Mr. Krauss is also a certified public accountant.
Mr. Krauss currently serves as a director on the boards of
Quovadx, Inc. and Tegal Corporation.
Ogden R. Reid has served as a member of our board of
directors since December 2001. Mr. Reid was formerly vice
chairman of GTS Duratek, Inc. and is currently a director of GP
Strategies Corporation. From 1953 to 1959, he was president and
executive editor of both the New York Herald Tribune Inc. and
the New York Herald Tribune S.A. As a member of the
U.S. Congress from 1961 to 1974, he served on the Foreign
Affairs, Education and Labor, and Government Operations
Committees. A candidate for Governor of New York in 1974, he
later became Commissioner of the New York State Department of
Environmental Conservation. He was also chairman of the
executive committee for the Board of MGM from 1956 to 1957.
Mr. Reid is currently chairman of the Council of American
Ambassadors.
Howard Silverman has served as a member of our board of
directors since December 2001. From 1974 to 1995,
Mr. Silverman was chairman, president and chief executive
officer of Gruntal and Company, a large brokerage and investment
banking company. While at Gruntal, Mr. Silverman served on
numerous
87
committees for the New York Stock Exchange. Mr. Silverman
formerly served as a director on the boards of Getty Petroleum,
Work Wear Corp., Inc., and Carteret Savings Bank. He has also
served as a trustee of Long Island University and Chemotherapy
Foundation. Mr. Silverman currently serves as a charter
member for the Financial Analysts Federation and The New York
Society of Analysts.
John T. Spitznagel has served as a member of our board of
directors since December 2001. Since May 2005 Mr.
Spitznagel has served as chairman and chief executive officer of
Esprit Pharma, Inc., a specialty pharmaceutical firm. From 2002
until March 2005, Mr. Spitznagel was the chairman and
chief executive officer of ESP Pharmaceuticals, Inc. Previously,
from 1996 to 1999, Mr. Spitznagel served as president and
chief executive officer of Roberts Pharmaceutical Corporation, a
specialty pharmaceutical firm, which merged with Shire
Pharmaceuticals Group plc in 1999. Prior to joining Roberts,
Mr. Spitznagel was president of Reed and Carnick, a
specialty pharmaceutical firm, from 1990 to 1995.
Mr. Spitznagel is a director of Saturn Pharmaceuticals,
Barbeau Pharma, Inc. and IRX Therapeutics, Inc. and a trustee of
Rider University.
Board Composition
Our amended and restated certificate of incorporation provides
for a classified board of directors consisting of three
staggered classes of directors, as nearly equal in number as
possible. At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the
directors of the same class whose terms are then expiring. The
terms of the directors will expire upon election and
qualification of successor directors at the annual meeting of
stockholders to be held during the years 2007 for the
Class I directors, 2008 for the Class II directors and
2009 for the Class III directors. Currently:
|
|
|
| |
• |
our Class I directors are Mr. Feldman, Dr. Huckel
and Mr. Reid; |
| |
| |
• |
our Class II directors are Dr. Dantzker, Mr. Gale and
Mr. Silverman; and |
| |
| |
• |
our Class III directors are Mr. Krauss, Mr. Spitznagel
and Dr. Tierney. |
The board and each committee of the board observe all criteria
for independence established by The NASDAQ National Market, or
Nasdaq, and other governing laws and regulations. No director
will be deemed to be independent unless the board affirmatively
determines that the director has no material relationship with
us directly, or as an officer, stockholder or partner of an
organization that has a relationship with us.
Appointment of Directors
Pursuant to our second amended and restated investor rights
agreement dated August 16, 2004, or investor rights
agreements, the following persons were elected to our board of
directors: James C. Gale as representative of the Corporate
Opportunities Fund, L.P., David R. Dantzker, M.D., as
representative of Wheatley MedTech Partners L.P.,
Jeffrey M. Krauss as representative of Psilos Group
Managers, LLC, and Jerome Feldman as representative of
MXL Industries, Inc. The rights to appoint directors under
the investor rights agreement terminated upon the effective date
of the registration statement pertaining to our initial public
offering. However, pursuant to our amended and restated
certificate of incorporation, which became effective upon the
completion of our initial public offering, we have a classified
board and Messrs. Gale (Class II), Feldman
(Class I), Krauss (Class III) and Dr. Dantzker
(Class II) will each continue to serve as a director for
his respective term and until his respective successor is duly
elected and qualified. The initial terms of the directors will
expire upon election and qualification of successor directors at
the annual meeting of stockholders to be held during the years
2007 for the Class I directors, 2008 for the Class II
directors and 2009 for the Class III directors.
Board Committees
The standing committees of our board of directors consist of the
Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee. These committees are described
below. Our board of directors may also establish various other
committees to assist it in its responsibilities.
88
Audit Committee
The Audit Committee is primarily concerned with the accuracy and
effectiveness of the audits of our financial statements by our
internal audit staff and by our independent auditors. Its duties
include:
|
|
|
| |
• |
selecting independent auditors; |
| |
| |
• |
reviewing the scope of the audit to be conducted by them and the
results of their audit; |
| |
| |
• |
approving non-audit services provided to us by the independent
auditor; |
| |
| |
• |
reviewing the integrity, adequacy and effectiveness of our
financial reporting process and internal controls; assessing our
financial reporting practices, including the disclosures in our
annual and quarterly reports and the accounting standards and
principles followed; and |
| |
| |
• |
conducting other reviews relating to compliance by our employees
with our policies and applicable laws. |
Currently, the Audit Committee is comprised of
Messrs. Krauss and Reid and Dr. Huckel, each of whom
is independent as defined under Nasdaq rules. Mr. Krauss
currently serves as Chairman of the committee. The board of
directors has determined that Mr. Krauss qualifies as
“audit committee financial expert” as that term is
defined under the rules of the Securities and Exchange
Commission, or SEC.
Compensation Committee
The Compensation Committee’s primary responsibility is to
discharge our board of director’s responsibilities relating
to compensation of our senior executives. Its duties include:
|
|
|
| |
• |
developing guidelines and reviewing the compensation and
performance of our executive officers; |
| |
| |
• |
setting the compensation of the chief executive officer and
evaluating his performance based on corporate goals and
objectives; |
| |
| |
• |
making recommendations to the board of directors with respect to
incentive compensation plans, equity-based plans and deferred
compensation plans; and |
| |
| |
• |
reviewing director compensation levels and practices, and
recommending, from time to time, changes in such compensation
levels and practices to the board of directors. |
Currently, the Compensation Committee is comprised of
Messrs. Spitznagel and Silverman and Dr. Dantzker,
each of whom is independent as defined under Nasdaq rules.
Mr. Silverman currently serves as Chairman of the committee.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee’s
responsibilities include the selection of potential candidates
for our board of directors and the development and annual review
of our governance principles. This committee also annually
reviews director compensation and benefits, and oversees the
annual self-evaluations of our board of directors and its
committees. It also makes recommendations to our board of
directors concerning the structure and membership of the other
board committees.
The Nominating and Corporate Governance Committee is comprised
of Messrs. Gale, Krauss and Feldman, each of whom is
independent as defined under Nasdaq rules. Mr. Gale
currently serves as Chairman of the committee.
Compensation Committee Interlocks and Insider
Participation
None of the members of our Compensation Committee were at any
time an officer or employee of ours. In addition, none of our
executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors
or Compensation Committee. Dr. Dantzker has voting control
over 591,949 shares of common stock that were received by
Wheatley Med Tech Partners, L.P. upon conversion of the
Series C convertible preferred stock. Mr. Silverman
invested $126,846 in SMH Valera LLC, which purchased shares of
our series C convertible preferred stock in 2004. In
addition, Dr. Dantzker was elected a director
89
as a representative of Wheatley Med Tech Partners, L.P. under
our second amended and restated investor rights agreement dated
August 16, 2004. Their right to have a representative on
our board of directors terminated in February 2006, when
our Registration Statement for our initial public offering was
declared effective.
Compensation of Directors
Our directors currently do not receive, and have not received,
any cash compensation for serving on our board of directors, but
are eligible to receive options and restricted shares of our
common stock under the Valera Pharmaceutical Equity Incentive
Plan. No options were granted to our non-employee directors
during 2005.
Code of Conduct
We have a Code of Business Conduct and Ethics, which is attached
as an exhibit to this Annual Report on
Form 10-K. We
require all employees, officers and directors to adhere to this
Code in addressing the legal and ethical issues encountered in
conducting their work. The Code of Business Conduct and Ethics
requires that our employees, officers and directors avoid
conflicts of interest, comply with all laws and other legal
requirements, conduct business in an honest and ethical manner,
and otherwise act with integrity and in our best interest. Our
Code of Business Conduct and Ethics is intended to comply with
Item 406 of the SEC’s
Regulation S-K and
the rules of The NASDAQ National Market.
The Code of Business Conduct and Ethics includes procedures for
reporting violations of the Code, which are applicable to all
employees, officers and directors. The Sarbanes-Oxley Act of
2002 requires companies to have procedures to receive, retain
and treat complaints received regarding accounting, internal
accounting controls or auditing matters and to allow for the
confidential and anonymous submission by employees of concerns
regarding questionable accounting or auditing matters. The Code
of Business Conduct and Ethics also includes these required
procedures.
We have a webpage with our Corporate Code of Business Conduct
and Ethics and certain Corporate Governance information. You can
access this information on our webpage through our internet
site, www.valerapharma.com, by clicking on the “Corporate
Information” link to the heading “Investors.” You
can also access our Investor Relations webpage directly at
www.valerapharma.com/investors.asp. We will post any amendments
to the Code of Business Conduct and Ethics, and any waivers that
are required to be disclosed by the rules of either the SEC or
The NASDAQ National Market, on our internet site. You can
request a copy of our Code of Business Conduct and Ethics, at no
cost, by contacting Investor Relations, 7 Clarke Drive,
Cranbury, NJ 08512 or
(609-235-3000).
90
|
|
| Item 11. |
Executive Compensation |
The following table summarizes the compensation earned in the
years ended December 31, 2004 and 2005 by our Chief
Executive Officer and the other four most highly paid executive
officers whose total salary and bonus awards exceeded $100,000
for the year ended December 31, 2005. In this
Form 10-K we refer
to these individuals as our “named executive officers.”
Summary Compensation Table
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Long-term | |
|
|
| |
|
|
|
|
|
Compensation | |
|
|
| |
|
|
|
Annual Compensation | |
|
Awards | |
|
|
| |
|
|
|
| |
|
| |
|
|
| |
|
|
|
|
|
Shares | |
|
|
| |
|
|
|
|
|
Underlying | |
|
Other | |
| Name and Principal Position |
|
Fiscal Year | |
|
Salary ($) | |
|
Bonus ($)(1) | |
|
Options | |
|
Compensation(2) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
David S. Tierney, M.D.
|
|
|
2005 |
|
|
$ |
312,500 |
|
|
$ |
117,188 |
|
|
|
— |
|
|
$ |
7,000 |
|
| |
President and Chief Executive |
|
|
2004 |
|
|
$ |
287,500 |
|
|
$ |
75,000 |
|
|
|
79,167 |
|
|
$ |
6,500 |
|
| |
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew T. Drechsler(3)
|
|
|
2005 |
|
|
$ |
142,500 |
|
|
$ |
42,577 |
|
|
|
79,166 |
|
|
$ |
— |
|
| |
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petr F. Kužma
|
|
|
2005 |
|
|
$ |
156,327 |
|
|
$ |
28,125 |
|
|
|
— |
|
|
$ |
7,438 |
|
| |
Vice President of Research and |
|
|
2004 |
|
|
$ |
135,000 |
|
|
$ |
20,000 |
|
|
|
25,000 |
|
|
$ |
4,801 |
|
| |
Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pete J. Perron(4)
|
|
|
2005 |
|
|
$ |
186,667 |
|
|
$ |
54,875 |
|
|
|
6,667 |
|
|
$ |
7,000 |
|
| |
Vice President of Sales |
|
|
2004 |
|
|
$ |
119,109 |
|
|
$ |
30,000 |
|
|
|
83,333 |
|
|
$ |
— |
|
|
Matthew L. Rue, III
|
|
|
2005 |
|
|
$ |
186,333 |
|
|
$ |
54,875 |
|
|
|
— |
|
|
$ |
8,800 |
|
| |
Vice President of Marketing and |
|
|
2004 |
|
|
$ |
168,000 |
|
|
$ |
25,000 |
|
|
|
33,333 |
|
|
$ |
6,324 |
|
| |
Commercial Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Bonus amounts represent the bonus earned in the year stated. The
actual bonus payment was made in the subsequent year. |
| |
| (2) |
Such amounts represent matching contributions made by Valera
under our 401(k) plan. |
| |
| (3) |
Mr. Drechsler joined Valera in April 2005 at an annual salary of
$190,000. |
| |
| (4) |
Mr. Perron joined Valera in April 2004. |
91
Option Grants
The following table contains information concerning the grant of
options to purchase shares of our common stock to each of the
named executive officers during the year ended December 31,
2005. The percentage of total options granted to employees set
forth below is based on an aggregate of 193,594 shares
subject to options granted in 2005, including options granted to
named executive officers.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Option Grants in Last Fiscal Year(1) | |
|
|
| |
|
| |
|
Potential Realizable | |
| |
|
|
|
Percent of | |
|
|
|
Value at Assumed | |
| |
|
Number of | |
|
Total | |
|
|
|
Annual Rates of Stock | |
| |
|
Securities | |
|
Options | |
|
|
|
Fair Market | |
|
|
|
Price Appreciation for | |
| |
|
Underlying | |
|
Granted to | |
|
Exercise or | |
|
Value on | |
|
|
|
Option Term | |
| |
|
Options | |
|
Employees | |
|
Base Price | |
|
Date of | |
|
Expiration | |
|
| |
| Name |
|
Granted | |
|
in 2005 | |
|
($/share) | |
|
Grant(2) | |
|
Date | |
|
5%(3) | |
|
10%(3) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
David S. Tierney, M.D.
|
|
|
— |
|
|
|
— |
% |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Andrew T. Drechsler
|
|
|
79,166 |
|
|
|
40.9 |
% |
|
$ |
12.00 |
|
|
$ |
12.00 |
|
|
|
6/27/2015 |
|
|
$ |
210,588 |
|
|
$ |
898,045 |
|
|
Petr F. Kužma
|
|
|
— |
|
|
|
— |
% |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Pete J. Perron
|
|
|
6,667 |
|
|
|
3.4 |
% |
|
$ |
12.00 |
|
|
$ |
12.00 |
|
|
|
6/27/2015 |
|
|
$ |
17,735 |
|
|
$ |
75,628 |
|
|
Matthew L. Rue, III
|
|
|
— |
|
|
|
— |
% |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
These options vest at a rate of 25% on each yearly anniversary
of the date of grant. |
| |
| (2) |
There was no public trading market for our common stock during
2005. Accordingly, these prices represent the fair market value,
as established by our board of directors, of our common stock on
the date of grant of the options. |
| |
| (3) |
Potential realizable values are computed by multiplying the
number of shares of common stock subject to a given option by
the initial public offering price of $9.00 per share
assuming that the aggregate stock value derived from that
calculation compounds at an annual 5% or 10% rate shown in the
table for the entire ten-year term of the option and subtracting
from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock appreciation are mandated by
the rules of the SEC and do not reflect our estimate or
projection of future stock price growth. |
Aggregated Options Values at December 31, 2005
The following table sets forth the number and value of
securities underlying unexercised options held by the named
executive officers at December 31, 2005. Because there was
no public market for our common stock as of December 31,
2005, amounts described in the following table under the heading
“Value of Unexercised
In-the-Money Options at
December 31, 2005” are determined by multiplying the
number of shares issued or issuable upon exercise of the option
by the difference between the initial public offering price of
$9.00 per share and the per share option exercise price. In
2005, none of our named executive officers exercised any options.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Value of Unexercised | |
| |
|
Number of | |
|
In-the-money Options at | |
| |
|
Unexercised Options at | |
|
December 31, 2005 | |
| |
|
December 31, 2005 | |
|
($)(1) | |
| |
|
| |
|
| |
| Name |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
David S. Tierney, M.D.
|
|
|
294,793 |
|
|
|
167,707 |
|
|
$ |
1,768,758 |
|
|
$ |
1,006,242 |
|
|
Andrew T. Drechsler
|
|
|
— |
|
|
|
79,166 |
|
|
|
— |
|
|
|
— |
|
|
Petr F. Kužma
|
|
|
43,751 |
|
|
|
39,583 |
|
|
|
262,506 |
|
|
|
237,498 |
|
|
Pete J. Perron
|
|
|
20,834 |
|
|
|
69,166 |
|
|
|
125,004 |
|
|
|
374,994 |
|
|
Matthew L. Rue, III
|
|
|
75,001 |
|
|
|
41,665 |
|
|
|
450,006 |
|
|
|
249,990 |
|
|
|
| (1) |
Based upon the initial public offering price of $9.00 per share. |
Employment Agreements
We entered into an employment agreement with David S.
Tierney, M.D., our President and Chief Executive Officer,
on September 16, 2003. In connection with the employment
agreement, Dr. Tierney also entered into an employee
confidentiality and non-competition agreement with us setting
forth his obligations not to compete with us or disclose
confidential information of ours. Pursuant to his employment
92
agreement, Dr. Tierney is required to devote his full time,
attention, skill and efforts to our business and affairs.
Dr. Tierney’s current base salary, as adjusted by our
board of directors in accordance with the terms of the
agreement, is $325,000. In addition, Dr. Tierney is
eligible to participate in any annual bonus program or benefit
plans and programs adopted by our board of directors. Following
July 1, 2006, unless this employment agreement is renewed,
Dr. Tierney will become an “at-will” employee.
The employment agreement provides that we may terminate
Dr. Tierney’s employment with or without cause and
that Dr. Tierney may terminate his employment with or
without good reason.
In the event that Dr. Tierney’s employment is
terminated as a result of his death or permanent disability,
Dr. Tierney and/or his spouse or dependents, as applicable,
will receive 24 months in the case of death and
29 months in the case of permanent disability, of
healthcare and dental insurance continuation at our expense.
In the event Dr. Tierney’s employment is terminated by
us other than for cause or if he resigns with good reason,
Dr. Tierney will receive any earned and accrued but unpaid
annual bonus and the continuation of his current base salary
until the last day of the
12-month period
following such termination or resignation, or
18-month period, if
following a change in control.
For purposes of the employment agreement, “cause”
means (i) the commission by the executive of an act of
fraud, misappropriation or personal dishonesty relating to or
involving us in any way; (ii) the executive’s arrest
for, conviction of, or plea of no contest to a felony, the
willful failure, neglect or refusal to perform, or gross
negligence, in the performance of duties and responsibilities;
(iii) the violation by the executive of our rules,
regulations, policies or plans regarding the conduct of our
employees, where such violation continues for 10 days
following the executive’s receipt of notice from our board
of directors; or (iv) the violation of any obligations
under the employee confidentiality and non-competition agreement
or the employment agreement, where such violation continues for
10 days following the executive’s receipt of notice
from our board of directors.
In addition, for purposes of the employment agreement,
“good reason” means (i) a change by us in the
executive’s position that materially reduces his duties or
responsibilities (where such change continues for 10 days
following our receipt of notice from the executive); (ii) a
reduction by us in the executive’s base salary (other than
pursuant to a company-wide reduction of base salaries for
executives generally); (iii) an executive’s relocation
by us to a facility or location more than 50 miles from the
greater Cranbury, New Jersey area, or (iv) our failure to
perform any obligations under the employment agreement (where
such failure continues for 10 days following our receipt of
notice from the executive).
Change in Control Agreements
We have entered into change in control agreements with the
following named executive officers: Andrew Drechsler, Petr
Kužma, Pete Perron and Matthew Rue. Under the agreements,
if an executive’s employment is terminated by us without
cause, or by the executive following a demotion, relocation or
certain other similar reasons, within the period that is between
30 days prior to, and one year following, the date we
consummate a “change in control” (as defined in the
agreements), then the executive will be entitled to a severance
payment equal to the sum of his or her annual base salary and
“bonus amount.” “Bonus amount” is defined in
the agreements as the executive’s target annual bonus or,
if after the first anniversary of the date the agreement was
entered into, the highest annual bonus received by the executive
during the past three years (or such lesser number of years the
executive was employed by us). The agreements also provide for
payment of any unpaid bonus earned with respect to the year
ended prior to the date the executive’s employment
terminated and the waiver of any applicable COBRA premiums for
the executive (and, if applicable, his or her spouse and
dependents) for a period of twelve months following termination
of employment. Under the agreements, all payments to an
executive in connection with a change in control are subject to
reduction to the extent that the reduction would avoid the
imposition of certain “golden parachute” excise taxes
and thereby increase the executive’s net after-tax
proceeds. Payment of benefits are conditioned upon execution by
the executive of a release and the executives are subject to
confidentiality and proprietary information covenants following
cessation of employment.
93
Valera Pharmaceuticals, Inc. Equity Incentive Plan
In September 2002, we adopted our Equity Plan, which was
approved by our stockholders in May 2003. Our Equity Plan
provides for the award of:
|
|
|
| |
• |
restricted shares of our common stock; |
| |
| |
• |
incentive stock options; |
| |
| |
• |
non-qualified stock options; or |
| |
| |
• |
any combination of the foregoing. |
Grants of restricted shares and non-qualified stock options can
be made to our employees, directors, consultants, and other
individuals who perform services for us. Grants of incentive
stock options may only be made to our employees. The principal
features of our Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to our Equity
Plan, which was filed as exhibit 10.14 to the Registration
Statement in connection with our initial public offering.
Number of shares of our
common stock available under our Equity Plan
We have reserved a total of 1,833,333 shares of our common
stock for issuance pursuant to our Equity Plan. Shares subject
to forfeited, cancelled, or expired awards and shares received
in satisfaction of the exercise price of an option become
available for grant again under our Equity Plan. In addition,
shares withheld in payment of any exercise price or in
satisfaction of any withholding obligation arising in connection
with an award granted under our Equity Plan become available for
grant again under our Equity Plan. In connection with
recapitalizations, stock splits, combinations, stock dividends,
and other events affecting our common stock, the Compensation
Committee may make adjustments or equitable substitutions it
deems appropriate in its sole discretion to the maximum number,
type and issuer of the securities reserved for issuance under
the Equity Plan, to the maximum number, type and issuer of
shares of our common stock subject to outstanding options, to
the exercise price of the options and to the number, type and
issuer of restricted shares.
Administration of our Equity
Plan
Our Compensation Committee administers our Equity Plan under
authority granted to it by our board of directors in accordance
with the terms of our Equity Plan. To administer our Equity
Plan, our Compensation Committee must consist of at least two
members of our board of directors, each of whom is a
“non-employee director” for purposes of
Rule 16b-3 under the Securities Exchange Act of 1934, or
the Exchange Act and, with respect to awards that are intended
to constitute performance-based compensation under
Section 162(m) of the Internal Revenue Code of 1986, an
“outside director” for the purposes of
Section 162(m). Our Compensation Committee, among other
things, interprets our Equity Plan, selects award recipients,
determines the type of awards to be granted to such recipients
and determines the number of shares subject to each award and
the terms and conditions thereof. Our Compensation Committee may
also determine if or when the exercise price of an option may be
paid in the form of shares of our common stock and the extent to
which shares or other amounts payable with respect to an award
can be deferred by the participant. Our board of directors may
amend or modify our Equity Plan at any time. In addition, our
board of directors is also authorized to adopt, alter and repeal
any rules relating to the administration of our Equity Plan and
to rescind the authority of the Compensation Committee and
thereafter directly administer our Equity Plan. However, subject
to certain exceptions, no amendment or modification will impair
the rights and obligations of a participant with respect to an
award unless the participant consents to that amendment or
modification.
Our Equity Plan will continue in effect until terminated by us
in accordance with its terms, although incentive stock options
may not be granted more than 10 years after the adoption of
our Equity Plan.
Restricted shares under our
Equity Plan
Under the Equity Plan, we may issue restricted shares under a
restricted share agreement, the terms and conditions of which
will be set forth by our Compensation Committee at the time of
the grant. Restricted shares are shares of our common stock
issued to a participant that may not be sold or otherwise
94
transferred by the participant until certain vesting conditions
established by our Compensation Committee, in its discretion, at
the time of grant (such as a specified period of continued
employment or the fulfillment of specified individual or
corporate performance goals) are met or until such time as set
by our Compensation Committee. Holders of the restricted shares
will not have voting rights with respect to such restricted
shares until the lapse of the transfer restrictions described
above. If a participant’s service with us terminates prior
to the end of the transfer restrictions, all of that
participant’s restricted shares which have not vested will
be forfeited. Restricted shares may be sold under our Equity
Plan (at their full value or at a discount) or may be granted
solely in consideration for services.
Upon or in anticipation of a change in control, our Compensation
Committee may, in its discretion:
|
|
|
| |
• |
cause restrictions on all outstanding shares of restricted stock
to lapse; |
| |
| |
• |
cancel restricted stock in exchange for shares of restricted
stock of a successor corporation; or |
| |
| |
• |
redeem restricted shares for cash or other substitute
consideration. |
Stock options under our
Equity Plan
Our Equity Plan permits the grant of incentive stock options and
non-qualified stock options. The exercise price of any incentive
stock options granted under our Equity Plan may not be less than
100% of the fair market value of our common stock on the date of
grant. In the case of any incentive stock option granted to a
participant who owns at least 10% of the total combined voting
power of all classes of our capital stock, our Equity Plan
provides that the exercise price must be at least 110% of the
fair market value of our common stock on the date of the grant
and the incentive stock option must expire on the fifth
anniversary of the date of the grant. In addition, the aggregate
fair market value of shares of our common stock into which
incentive stock options are exercisable, for the first time by a
participant, in any calendar year may not exceed $100,000.
Options granted under our Equity Plan may be exercised for cash
and/or in exchange for previously acquired shares of our common
stock owned by the option holder having a combined value on the
date of exercise equal to the option exercise price.
Under our Equity Plan, each option will vest and be exercisable
at such time and to such extent as specified in the pertinent
option agreement between us and the option recipient. However,
no award will be exercisable with respect to any shares of our
common stock more than 10 years after the date of such
award. Unless otherwise specified by our Compensation Committee
with respect to a particular option, all options are
non-transferable, except upon death. If a participant’s
service with us terminates due to death or disability, any
options held by the participant may be exercised until
(i) such time specified by the Compensation Committee,
(ii) if not specified by the Compensation Committee,
12 months from termination of service, or (iii) if
earlier than the foregoing, the expiration for the stated term
of the option. If a participant’s service with us is
terminated for cause, any unexercised options will be
automatically forfeited, and any shares of our common stock into
which options are exercisable but for which certificates have
not been issued, will be automatically forfeited and any
exercise price paid for such shares will be refunded. In
addition, if a participant’s service with us is terminated
for any other reason, any option held by the participant may be
exercised until (i) such time specified by the Compensation
Committee, (ii) if not specified by the Compensation
Committee, 90 days from termination of service, or
(ii) if earlier than the foregoing, the expiration of the
stated term of the option.
Upon our change in control, our Compensation Committee may:
|
|
|
| |
• |
cause outstanding options to become immediately and fully vested
and exercisable; |
| |
| |
• |
require that the grantees surrender their outstanding options in
exchange for a payment by us of an amount equal to the amount by
which the fair market value of the shares of stock subject to
the option exceeds the option exercise price; or |
| |
| |
• |
cancel any outstanding option in exchange for an option to
purchase common stock of any successor corporation. |
Effective upon the pricing of our initial public offering in
February 2006, we granted options to purchase shares of our
common stock under our Equity Plan to all of our employees. The
exercise price of
95
these options was $9.00, equal to the initial public offering
price of the shares offered, and, subject to the terms and
conditions of the Equity Plan, will fully vest on the fourth
anniversary of the grant date. Pursuant to these grants, we
granted Dr. Tierney options to purchase 40,000 shares of our
common stock, Mr. Drechsler options to purchase 30,000 shares of
our common stock, Mr. Kužma options to purchase 10,000
shares of our common stock, and Messrs. Perron and Rue options
to purchase 20,000 shares of our common stock each. We also
granted our other employees options to purchase an aggregate of
up to 85,700 shares of our common stock under our Equity Plan.
401(k) plan
We maintain a retirement plan for all employees who satisfy
certain eligibility requirements, including requirements,
including requirements relating to age and length of service.
The retirement plan is intended to qualify as a tax-qualified
plan under Section 401 of the Internal Revenue Code. The
retirement plan provides that each participant may contribute up
to a statutory limit, which for most employees is $14,000 in
2005 and $15,000 in 2006. Under the plan, each employee is fully
vested in his or her deferred salary contributions. Employee
contributions are held and invested by the plan’s trustee
at the direction of the employee. The retirement plan also
permits us to make discretionary contributions and matching
contributions, subject to established limits and vesting
schedule. To date, we have not made any discretionary
contributions to the retirement and deferred savings plan on
behalf of participating employees.
96
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The following table sets forth information regarding the
beneficial ownership of our common stock as of March 1,
2006, for the following individuals, entities or groups:
|
|
|
| |
• |
each person or entity who we know beneficially owns more than 5%
of our outstanding common stock; |
| |
| |
• |
each of the named executive officers; |
| |
| |
• |
each of our directors; and |
| |
| |
• |
all directors and named executive officers as a group. |
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to the shares. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person
that are currently exercisable or will become exercisable within
60 days of March 1, 2006 are deemed outstanding and
are included in the number of shares beneficially owned and are
also are shown separately in the column below entitled
“Options Exercisable within 60 Days of March 1,
2006”, while the shares are not deemed outstanding for
purposes of computing percentage ownership of any other person.
Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of
common stock held by them.
Applicable percentage ownership in the following table is based
on 14,885,546 shares of common stock outstanding as of
March 1, 2006. Unless otherwise indicated, the address for
each stockholder listed in the table is c/o Valera
Pharmaceuticals, Inc., 7 Clarke Drive, Cranbury, New Jersey
08512.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Options Exercisable | |
|
Percentage of | |
| |
|
Number of Shares | |
|
within 60 Days of | |
|
Shares | |
| Name |
|
Beneficially Owned | |
|
March 1, 2006 | |
|
Outstanding | |
| |
|
| |
|
| |
|
| |
|
Five Percent Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanders Morris Harris, Inc.(1)
|
|
|
5,453,730 |
|
|
|
3,750 |
|
|
|
36.6 |
% |
|
MXL Industries, Inc.(2)
|
|
|
2,070,670 |
|
|
|
— |
|
|
|
13.9 |
% |
|
Wheatley Partners(3)
|
|
|
1,293,518 |
|
|
|
— |
|
|
|
8.7 |
% |
|
Wasatch Advisors Inc.
|
|
|
1,000,000 |
|
|
|
— |
|
|
|
6.7 |
% |
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Tierney, M.D.
|
|
|
300,293 |
|
|
|
294,793 |
|
|
|
2.0 |
% |
|
Andrew T. Drechsler
|
|
|
21,393 |
|
|
|
19,793 |
|
|
|
* |
|
|
Petr F. Kužma
|
|
|
44,851 |
|
|
|
43,751 |
|
|
|
* |
|
|
Pete J. Perron
|
|
|
21,334 |
|
|
|
20,834 |
|
|
|
* |
|
|
Matthew L. Rue, III
|
|
|
75,001 |
|
|
|
75,001 |
|
|
|
* |
|
|
James C. Gale(4)
|
|
|
5,456,439 |
|
|
|
6,459 |
|
|
|
36.6 |
% |
|
David R. Dantzker, M.D.(5)
|
|
|
599,449 |
|
|
|
7,500 |
|
|
|
4.0 |
% |
|
Jerome I. Feldman(6)
|
|
|
2,074,420 |
|
|
|
3,750 |
|
|
|
13.9 |
% |
|
Hubert Huckel, M.D.
|
|
|
24,550 |
|
|
|
21,250 |
|
|
|
* |
|
|
Jeffrey M. Krauss(7)
|
|
|
731,787 |
|
|
|
3,750 |
|
|
|
4.9 |
% |
|
Ogden R. Reid
|
|
|
25,703 |
|
|
|
25,703 |
|
|
|
* |
|
|
Howard Silverman
|
|
|
7,500 |
|
|
|
7,500 |
|
|
|
* |
|
|
John T. Spitznagel
|
|
|
21,250 |
|
|
|
21,250 |
|
|
|
* |
|
|
All Directors and Named Executive Officers as a group
|
|
|
9,403,970 |
|
|
|
551,334 |
|
|
|
60.9 |
% |
|
|
| * |
Less than 1%. |
| |
| (1) |
Represents shares held by SMH Hydro Med, LLC, SMH Hydro
Med II, LLC, SMH Valera, LLC, Corporate Opportunities Fund,
L.P., by Corporate Opportunities Fund (Institutional), L.P., Life |
97
|
|
|
Sciences Opportunities Fund, L.P., Life Sciences Opportunities
Fund (Institutional), L.P., each an affiliate of Sanders Morris
Harris, Inc., or SMH. Mr. Gale has sole voting and dispositive
power over the shares held by Sanders Morris Harris Inc. The
address for Sanders Morris Harris, Inc. is
3100 JP Morgan Chase Tower, 600 Travis,
Suite 3100, Houston, TX 77002. |
| |
| (2) |
MXL Industries, Inc. is a wholly-owned subsidiary of National
Patent Development Corporation, a publicly held corporation.
Mr. Feldman is the chairman of the board of directors and
chief executive officer of National Patent Development
Corporation. The address for MXL Industries, Inc. is
777 Westchester Avenue, Fourth Floor, White Plains, NY
10604. |
| |
| (3) |
Represents shares held by Wheatley MedTech Partners, L.P.,
Wheatley Partners III, L.P., Wheatley Associates III, L.P.,
Wheatley Foreign Partners III, L.P., each an affiliate of
Wheatley Partners. Mr. David Dantzker shares voting and
dispositive power as to 591,949 shares held by Wheatley MedTech
Partners, L.P. with Barry Rubenstein, Irwin Lieber, Barry
Fingerhut, Jonathan Lieber, Seth Lieber, Nancy Casey and Brian
Rubenstein. Barry Rubenstein, Irwin Lieber, Barry Fingerhut,
Jonathan Lieber, Seth Lieber and Nancy Casey share voting and
dispositive power over the remaining 701,569 shares held by
the other Wheatley entities. The address for Wheatley Partners
is 80 Cuttermill Road, Great Neck, NY 11021. |
| |
| (4) |
Includes 5,453,730 shares held by Sanders Morris Harris
Inc. described in footnote 1 above. The number of options
exercisable within 60 days of March 1, 2006 includes 3,750
options held by affiliates of SMH. Mr. Gale is an affiliate
of SMH and manages the funds described in footnote 1 above.
Mr. Gale disclaims beneficial ownership of the
5,453,730 shares held by SMH except to the extent of his
pecuniary interest in the funds described in footnote 1
above. |
| |
| (5) |
Includes 591,949 shares held by Wheatley MedTech Partners,
L.P. described in footnote 3 above. Dr. Dantzker is a
voting member of Wheatley MedTech Partners LLC, the general
partner of Wheatley MedTech Partners, L.P. Dr. Dantzker
disclaims beneficial ownership of the 591,949 shares held
by Wheatley MedTech Partners, L.P. except to the extent of his
pecuniary interest in that fund. |
| |
| (6) |
Includes 2,070,670 shares held by MXL Industries, Inc.
Mr. Feldman is the chairman of the board of directors and
chief executive officer of National Patent Development
Corporation, the parent of MXL Industries, Inc. Mr. Feldman
disclaims beneficial ownership of the 2,070,670 shares held
by MXL Industries, Inc. |
| |
| (7) |
Includes 728,037 shares held by Psilos Group.
Mr. Krauss is a managing director of Psilos Group.
Mr. Krauss disclaims beneficial ownership of the
728,037 shares held by Psilos Group, except to the extent
of his pecuniary interest in the fund. |
98
|
|
| Item 13. |
Certain Relationships and Related Transactions |
We have entered into certain agreements or transactions with
certain officers, directors and 5% stockholders. These
agreements or transactions are each summarized below. The
following description is only a summary of what we believe are
the material provisions of the agreements.
Loan from Our President and Chief Executive Officer
We issued a promissory note to our President and Chief Executive
Officer, David S. Tierney, M.D. for the aggregate principal
amount of $200,000 on June 23, 2004. The note bore interest
at the UBS Margin Interest Rate charged to Dr. Tierney plus
1.0% and was due and immediately payable upon our receipt of at
least $1,000,000 in other debt or subscriptions to purchase
shares of our series B or series C convertible
preferred stock. We satisfied our obligations under this note on
November 3, 2004.
Preferred Stock Issuances
In 2004, we sold 11,600,000 shares of our series C
convertible preferred stock at a price of $1.00 per share
to the following holders of more than 5% of our securities and
their affiliated entities: Sanders Morris Harris,
Inc. — 4,500,000; Wheatley Partners —
1,000,000; Psilos Group — 4,000,000; and NJTC Venture
Fund — 1,000,000. All of our shares of series C
convertible preferred stock were sold at the same price, which
was determined by our board of directors to be the fair market
value based upon arm’s length negotiations between us and
those purchasers and a managing director of Sanders Morris
Harris Inc., who at the time were not our stockholders. Sanders
Morris Harris Inc. acted as placement agent with respect to the
shares of series C convertible preferred stock that we sold
to SMH Valera LLC, an affiliate of Sanders Morris Harris, Inc.
for which we paid Sanders Morris Harris Inc. a fee of $280,000.
James C. Gale, one of our directors and a managing director of
Sanders Morris Harris Inc., has voting and dispositive power
over all of the shares of common stock that were received upon
conversion of the series C convertible preferred stock
purchased by Sanders Morris Harris Inc; David R. Dantzker, a
director, has voting control over 591,949 shares of common
stock that were received upon conversion of the series C
convertible preferred stock purchased by Wheatley MedTech
Partners, L.P.; and Howard Silverman, a director, invested
$126,846, and David S. Tierney, M.D., our
President and Chief Executive Officer and a director, invested
$50,000 in SMH Valera LLC. All of the shares of preferred stock
described above were converted into common stock in
February 2006, when we closed our initial public offering.
Appointment of Directors
Pursuant to our second amended and restated investor rights
agreement dated August 16, 2004, or investor rights
agreements, the following persons were elected to our board of
directors: James C. Gale as representative of the Corporate
Opportunities Fund, L.P., David R. Dantzker, M.D., as
representative of Wheatley MedTech Partners L.P.,
Jeffrey M. Krauss as representative of Psilos Group
Managers, LLC, and Jerome Feldman as representative of
MXL Industries, Inc. The rights to appoint directors under
the investor rights agreement terminated upon the effective date
of the registration statement pertaining to our initial public
offering. However, pursuant to our amended and restated
certificate of incorporation, which became effective upon the
completion of our initial public offering, we have a classified
board and Messrs. Gale (Class II), Feldman
(Class I), Krauss (Class III) and Dr. Dantzker
(Class II) will each continue to serve as a director for
his respective term and until his respective successor is duly
elected and qualified. The initial terms of the directors will
expire upon election and qualification of successor directors at
the annual meeting of stockholders to be held during the years
2007 for the Class I directors, 2008 for the Class II
directors and 2009 for the Class III directors.
The purchasers of our preferred stock are entitled to certain
registration rights under the investor rights agreement.
99
|
|
| Item 14. |
Principal Accountant Fees and Services |
Fees for Ernst & Young LLP for the years ended December 31,
2005 and 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Audit Fees
|
|
$ |
566 |
|
|
$ |
144 |
|
|
Audit-Related Fees
|
|
|
— |
|
|
|
— |
|
|
Tax Fees
|
|
|
— |
|
|
|
— |
|
|
All Other Fees
|
|
|
2 |
|
|
|
— |
|
|
Total
|
|
$ |
568 |
|
|
$ |
144 |
|
“Audit Fees” consists of fees for the audit of
our annual financial statements, review of the financial
statements and services that are normally provided by the
independent auditors in connection with statutory and regulatory
filings or engagements for those fiscal years. This category
also includes advice on audit and accounting matters that arose
during, or as a result of, the audit or the review of interim
financial statements and the preparation of an annual
“management letter” on internal control matters. The
2005 fees include $371,000 related to the Company’s initial
public offering.
“Audit-Related Fees” consists of assurance and
related services by Ernst & Young LLP that are reasonably
related to the performance of the audit or review of our
financial statements and are not reported above under
“Audit Fees.”
“Tax Fees” consists of professional services
rendered by Ernst & Young LLP for tax compliance and tax
planning. The services for the fees disclosed under this
category include tax return preparation and technical tax advice.
“All Other Fees” for fiscal year 2005 was
related to accounting research software.
Pre-approval Policy. The Audit Committee has established
a policy governing our use of Ernst & Young LLP for
non-audit services. Under the policy, the Audit Committee is
required to pre-approve all audit and non-audit services
performed by the Company’s independent auditors in order to
ensure that the provision of such services does not impair the
auditors’ independence. The Audit Committee pre-approves
certain Audit and Audit-Related Services, subject to certain fee
levels. Any proposed services that are not a type of service
that has been pre-approved or that exceed pre-approval cost
levels require specific approval by the Audit Committee in
advance. The Committee periodically revises the lists of
pre-approved service types set forth in the policy as required.
In fiscal years 2005 and 2004, all fees identified above under
the captions “Audit Fees,” “Audit-Related
Fees,” “Tax Fees” and “All Other Fees”
that were billed by Ernst & Young LLP were approved by the
Audit Committee in accordance with SEC requirements.
Part IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) Exhibits.
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit |
| |
|
|
| |
3 |
.1 |
|
Amended and Restated Certificate of Incorporation(2) |
| |
| |
3 |
.2 |
|
Amended and Restated Bylaws(2) |
| |
| |
4 |
.1 |
|
Specimen Common Stock Certificate(2) |
| |
| |
4 |
.2 |
|
Second Amended and Restated Investor Rights Agreement dated
August 16, 2004(6) |
| |
| |
4 |
.3 |
|
Form of Incentive Stock Award Agreement(6) |
| |
| |
4 |
.4 |
|
Form of Non-Qualified Stock Option Agreement(6) |
100
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit |
| |
|
|
| |
| |
10 |
.1 |
|
Executive Employment Agreement between Valera Pharmaceuticals,
Inc. and David S. Tierney dated September 16, 2003(6) |
| |
| |
10 |
.2 |
|
License and Distribution Agreement between Hydro Med Sciences,
Inc. and Paladin Labs, Inc. dated October 3, 2002(5) |
| |
| |
10 |
.3 |
|
Investment Agreement between Hydro Med Sciences, Inc. and
Paladin Labs, Inc. dated October 3, 2002(5) |
| |
| |
10 |
.4 |
|
License and Distribution Agreement between Valera
Pharmaceuticals, Inc. and Key Oncologics dated
September 17, 2003(5) |
| |
| |
10 |
.5 |
|
Termination Agreement, License Back and Option between Hydro Med
Sciences, Inc. and Shire US Inc. dated December 21,
2001(6) |
| |
| |
10 |
.6 |
|
Termination of Agreement dated September 12, 1990 between
National Patent Development Corporation and The Population
Council, Inc. dated October 1, 1997(6) |
| |
| |
10 |
.7 |
|
Amendment to the Termination of the Joint Development Agreement
between GP Strategies Corporation and The Population Council,
Inc. dated November 29, 2001(6) |
| |
| |
10 |
.8 |
|
Amendment No. 2 to Termination Agreement between Valera
Pharmaceuticals, Inc. and The Population Council, Inc. dated
August 31, 2004(6) |
| |
| |
10 |
.9 |
|
Lease Agreement between National Patent Development Corporation
and Cedar Brook Corporate Center, L.P. dated October 6,
1997(6) |
| |
| |
10 |
.10 |
|
Amendment to Lease between Valera Pharmaceuticals, Inc. and
Cedar Brook Corporate Center, L.P. dated January 7, 2004(6) |
| |
| |
10 |
.11 |
|
Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar
Brook 7 Corporate Center, L.P. dated March 8, 2005(6) |
| |
| |
10 |
.12 |
|
Contribution Agreement between Hydro Med Sciences, Inc. and GP
Strategies Corporation dated June 30, 2000(6) |
| |
| |
10 |
.13 |
|
License and Distribution Agreement between Valera
Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated
January 28, 2005(6) |
| |
| |
10 |
.14 |
|
Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan(6) |
| |
| |
10 |
.15 |
|
Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
and International Physician Networks, LLC dated as of
March 21, 2005**(5) |
| |
| |
10 |
.16 |
|
Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
and International Physician Networks, LLC (on behalf of
U.S. Urology Practices) dated as of March 21, 2005**(5) |
| |
| |
10 |
.17 |
|
Agreement between National Patent Development Corporation and
Dento-Med Industries, Inc. dated November 30, 1989(6) |
| |
| |
10 |
.18 |
|
Fee for Services Agreement between Valera Pharmaceuticals, Inc.
and Besse Medical Supply dated as of March 21, 2005**(5) |
| |
| |
10 |
.19 |
|
Collaboration and Development Agreement between Valera
Pharmaceuticals, Inc. and Alpex Pharma S.A. dated April 6,
2005**(5) |
| |
| |
10 |
.20 |
|
Form of Change in Control Agreement with Executive Officers(4) |
| |
| |
10 |
.21 |
|
Asset Purchase Agreement between Valera Pharmaceuticals, Inc.
and Anthra Pharmaceuticals, Inc. dated as of September 28,
2005**(1) |
| |
| |
10 |
.22 |
|
Credit Agreement between Valera Pharmaceuticals, Inc. and
Merrill Lynch Capital dated October 20, 2005(3) |
| |
| |
10 |
.23 |
|
Distribution Agreement between Valera Pharmaceuticals, Inc. and
Teva-Tuteur dated December 9, 2005(3) |
| |
| |
14 |
.1 |
|
Corporate Code of Business Conduct and Ethics* |
| |
| |
21 |
.1 |
|
List of Subsidiary(4) |
| |
| |
31 |
.1 |
|
Certificate of the Chief Executive Officer of Valera
Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.* |
101
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit |
| |
|
|
| |
| |
31 |
.2 |
|
Certificate of the Chief Financial Officer of Valera
Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.* |
| |
| |
32 |
|
|
Certificate of the Chief Executive Officer and the Chief
Financial Officer of Valera Pharmaceuticals, Inc. pursuant
to Rule 13a-14(b) under the Securities Exchange Act of 1934 and
18 U.S.C. § 1350.* |
|
|
| ** |
Portions omitted pursuant to a request for confidential
treatment under Rule 406. |
|
|
| (1) |
Filed as an Exhibit to Amendment No. 6 to Registration
Statement on
Form S-1 (File
No. 333-123288) filed on January 30, 2006. |
| |
| (2) |
Filed as an Exhibit to Amendment No. 5 to Registration
Statement on
Form S-1 (File
No. 333-123288) filed on January 17, 2006. |
| |
| (3) |
Filed as an Exhibit to Amendment No. 4 to Registration
Statement on
Form S-1 (File
No. 333-123288) filed on December 9, 2005. |
| |
| (4) |
Filed as an Exhibit to Amendment No. 3 to Registration
Statement on
Form S-1 (File
No. 333-123288) filed on September 29, 2005. |
| |
| (5) |
Filed as an Exhibit to Amendment No. 2 to Registration
Statement on
Form S-1 (File
No. 333-123288) filed on April 20, 2005. |
| |
| (6) |
Filed as an Exhibit to Registration Statement on
Form S-1 (File
No. 333-123288) filed on March 14, 2005. |
(b) Financial Statement Schedules.
Financial statements and schedule filed as a part of this
Form 10-K are
listed in the Index to Financial Statements on page 59. All
other financial statement schedules are omitted because they are
not applicable or not required, or because the required
information is included in the financial statements or notes
thereto.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 20, 2006.
|
|
| |
VALERA PHARMACEUTICALS, INC. |
|
|
|
| |
By: |
/s/ Andrew T. Drechsler
|
|
|
| |
|
| |
Name: Andrew T.
Drechsler |
|
|
|
| |
Title: |
Chief Financial Officer |
|
|
| |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated. |
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
|
| |
|
|
|
|
| |
|
|
|
Date |
| |
|
|
|
|
| |
/s/ David S.
Tierney, M.D.
David S. Tierney, M.D. |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
March 20, 2006 |
| |
/s/ Andrew T. Drechsler
Andrew T. Drechsler |
|
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer) |
|
March 20, 2006 |
| |
/s/ James C. Gale
James C. Gale |
|
Chairman of the Board of Directors |
|
March 20, 2006 |
| |
/s/ David
Dantzker, M.D.
David Dantzker, M.D. |
|
Director |
|
March 20, 2006 |
| |
/s/ Jerome Feldman
Jerome Feldman |
|
Director |
|
March 20, 2006 |
| |
/s/ Hubert
Huckel, M.D.
Hubert Huckel, M.D. |
|
Director |
|
March 20, 2006 |
| |
/s/ Jeffrey Krauss
Jeffrey Krauss |
|
Director |
|
March 20, 2006 |
| |
/s/ Ogden R. Reid
Ogden R. Reid |
|
Director |
|
March 20, 2006 |
| |
/s/ Howard Silverman
Howard Silverman |
|
Director |
|
March 20, 2006 |
| |
/s/ John T. Spitznagel
John T. Spitznagel |
|
Director |
|
March 20, 2006 |
103