Celldex Therapeutics, Inc. - Quarter Report: 2010 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number:  0-15006

 

CELLDEX THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

119 Fourth Avenue, Needham, Massachusetts 02494

(Address of principal executive offices) (Zip Code)

 

(781) 433-0771

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x

 

As of August 2, 2010, 31,886,930 shares of common stock, $.001 par value per share, were outstanding.

 

 

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CELLDEX THERAPEUTICS, INC.

 

FORM 10-Q

Quarter Ended June 30, 2010

Table of Contents

 

		Page
Part I—Financial Information
Item 1. Unaudited Financial Statements.
Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009		3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009		4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		31
Item 4. Controls and Procedures.		32
Part II — Other Information
Item 1. Legal Proceedings.		32
Item 1A. Risk Factors.		32
Item 6. Exhibits.		33
Signatures		34
Exhibit Index		35

 

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PART I—FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

 

CELLDEX THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share and per share amounts)

 

		June 30, 2010			December 31, 2009
ASSETS
Current Assets:
Cash and Cash Equivalents		$	15,158		$	57,002
Marketable Securities		50,674			25,451
Accounts and Other Receivables		738			544
Prepaid and Other Current Assets		1,681			979
Total Current Assets		68,251			83,976
Property and Equipment, Net		10,972			11,489
Intangible Assets, Net		27,801			29,979
Other Assets		5,582			5,955
Goodwill		8,965			8,965
Total Assets		$	121,571		$	140,364
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	1,073		$	1,445
Accrued Expenses		4,134			5,615
Current Portion of Deferred Revenue		5,285			5,191
Current Portion of Long-Term Liabilities		1,174			2,156
Convertible Subordinated Debt		12,048			—
Total Current Liabilities		23,714			14,407
Deferred Revenue		32,057			34,191
Convertible Subordinated Debt		—			11,684
Other Long-Term Liabilities		5,798			6,315
Total Liabilities		61,569			66,597
Commitments and Contingent Liabilities
Stockholders’ Equity:
Convertible Preferred Stock, $.01 Par Value; 3,000,000 Shares Authorized; No Shares Issued and Outstanding at June 30, 2010 and December 31, 2009		—			—
Common Stock, $.001 Par Value; 297,000,000 Shares Authorized; 31,886,930 and 31,685,061 Shares Issued and Outstanding at June 30, 2010 and December 31, 2009, respectively		32			32
Additional Paid-In Capital		231,093			228,863
Accumulated Other Comprehensive Income		2,658			2,546
Accumulated Deficit		(173,781		)	(157,674		)
Total Stockholders’ Equity		60,002			73,767
Total Liabilities and Stockholders’ Equity		$	121,571		$	140,364

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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CELLDEX THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

(In thousands, except per share amounts)

 

		Three Months Ended						Six Months Ended
		June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
REVENUE:
Product Development and Licensing Agreements		$	1,399		$	1,497		$	2,746		$	2,999
Contracts and Grants		—			—			220			139
Product Royalties		1,552			1,188			3,698			3,279
Total Revenue		2,951			2,685			6,664			6,417
OPERATING EXPENSE:
Research and Development		7,256			6,433			13,694			12,890
Royalty		1,732			1,369			4,059			3,598
General and Administrative		2,591			3,511			5,426			6,851
Gain on Sale of Assets		—			—			—			(604		)
Amortization of Acquired Intangible Assets		658			95			2,178			191
Total Operating Expense		12,237			11,408			25,357			22,926
Operating Loss		(9,286		)	(8,723		)	(18,693		)	(16,509		)
Investment and Other Income, Net		95			55			3,257			179
Interest Expense		(334		)	(37		)	(671		)	(78		)
Net Loss		$	(9,525	)	$	(8,705	)	$	(16,107	)	$	(16,408	)
Basic and Diluted Net Loss Per Common Share (Note 4)		$	(0.30	)	$	(0.55	)	$	(0.51	)	$	(1.04	)
Shares Used in Calculating Basic and Diluted Net Loss per Share (Note 4)		31,815			15,834			31,755			15,826

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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CELLDEX THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(In thousands)

 

		Six Months Ended
		June 30, 2010			June 30, 2009
Cash Flows from Operating Activities:
Net Loss		$	(16,107	)	$	(16,408	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and Amortization		1,608			1,336
Amortization of Intangible Assets		2,178			191
Amortization and Accretion of Marketable Securities		(520		)	—
Loss on Sales and Maturities of Marketable Securities		31			—
(Gain) loss on Sale or Disposal of Assets		38			(599		)
Stock-Based Compensation Expense		1,614			1,864
Non-Cash Interest Expense		364			—
Changes in Operating Assets and Liabilities:
Accounts and Other Receivables		(194		)	814
Prepaid and Other Current Assets		(702		)	129
Other Assets		373			361
Accounts Payable and Accrued Expenses		(1,853		)	(1,346		)
Deferred Revenue		(2,040		)	86
Other Long-Term Liabilities		(1,405		)	50
Net Cash Used in Operating Activities		(16,615		)	(13,522		)
Cash Flows from Investing Activities:
Sales and Maturities of Marketable Securities		19,252			—
Purchases of Marketable Securities		(43,875		)	—
Acquisition of Property and Equipment		(1,129		)	(325		)
Proceeds from Sale or Disposal of Assets		—			850
Net Cash (Used in) Provided by Investing Activities		(25,752		)	525
Cash Flows from Financing Activities:
Net Proceeds from Stock Issuances		616			478
Payments of Other Long-Term Liabilities		(94		)	(90		)
Net Cash Provided by Financing Activities		522			388
Effect of Exchange Rate Changes on Cash and Cash Equivalents		1			(15		)
Net Decrease in Cash and Cash Equivalents		(41,844		)	(12,624		)
Cash and Cash Equivalents at Beginning of Period		57,002			44,257
Cash and Cash Equivalents at End of Period		$	15,158		$	31,633
Supplemental Disclosure of Non-Cash Flow Information
Shares Issued to Executive Officers		$	—		$	250

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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CELLDEX THERAPEUTICS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2010

 

(1)  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Celldex Therapeutics, Inc. (the “Company” or “Celldex”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the operations of the Company and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

 

These interim financial statements do not include all the information and footnotes required by U.S. GAAP for annual financial statements and should be read in conjunction with the audited financial statements for the year ended December 31, 2009, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2010.  In the opinion of management, the interim financial statements reflect all normal recurring adjustments necessary to fairly state the Company’s financial position and results of operations for the interim periods presented.  The year-end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

 

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future interim period or the fiscal year ending December 31, 2010.

 

AVANT Merger

 

On March 7, 2008, the Company (formerly known as AVANT Immunotherapeutics, Inc.) (“AVANT”) merged with Celldex Research Corporation (formerly known as Celldex Therapeutics, Inc.) (“Celldex Research”), a privately-held company, (the “AVANT Merger”). Effective October 1, 2008, the Company changed its name from AVANT Immunotherapeutics, Inc. to Celldex Therapeutics, Inc.  The AVANT Merger was accounted for using the former purchase method of accounting and was treated as an acquisition by Celldex Research of AVANT, with Celldex Research being considered the accounting acquirer even though AVANT was the issuer of common stock and the surviving legal entity in the transaction.

 

Acquisition of CuraGen Corporation (“CuraGen”)

 

As more fully discussed in Note 12, on October 1, 2009, CuraGen, a former publicly-traded company, merged with a wholly-owned subsidiary (“Merger Sub”) of the Company (the “CuraGen Merger”). Following the CuraGen Merger, the financial statements reflect the financial position, results of operation and cash flows of the combined companies.  On December 31, 2009, the Company completed the merger of the Merger Sub with and into Celldex pursuant to a short-form merger effected under Delaware law. As a result, the separate corporate existence of CuraGen has ceased and the Company has succeeded to all rights, privileges, powers and franchises of CuraGen.

 

(2)  Significant Accounting Policies

 

The significant accounting policies used in preparation of these condensed consolidated financial statements for the six months ended June 30, 2010 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009, except for the adoption of new accounting standards during the first six months of 2010 as discussed below.

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

 

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In January 2010, the Company adopted a new U.S. GAAP accounting standard which requires additional disclosure about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements. This standard also clarifies existing disclosure requirements related to the level of disaggregation of fair value measurements for each class of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 measurements. As this newly issued accounting standard only requires enhanced disclosure, the adoption of this standard did not impact the Company’s financial position or results of operations. In addition, effective for interim and annual periods beginning January 1, 2011, this standard will require additional disclosure and require an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis, rather than as one net amount.

 

In January 2010, the Company adopted a new U.S. GAAP accounting standard which amends existing revenue recognition accounting guidance to provide accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This new guidance eliminates the requirement to establish objective evidence of fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. The old guidance previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. Under the old guidance, if the fair value of all of the undelivered elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. The adoption of the new standard was done on a prospective basis and did not impact the Company’s financial position or results of operations.   This standard may impact the Company in the event it completes future transactions or modifies existing collaborative relationships.

 

(3)  Comprehensive Loss

 

For the three and six months ended June 30, 2010 and 2009, comprehensive loss was as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2010			2009			2010			2009
		(In thousands)
Net loss		$	(9,525	)	$	(8,705	)	$	(16,107	)	$	(16,408	)
Other comprehensive loss:
Unrealized (loss) gain on marketable securities		(7		)	—			111			—
Unrealized foreign exchange translation gain (loss)		2			(3		)	1			(15		)
Total other comprehensive (loss) gain		(5		)	(3		)	112			(15		)
Total comprehensive loss		$	(9,530	)	$	(8,708	)	$	(15,995	)	$	(16,423	)

 

(4)  Net Loss Per Share

 

Basic net loss per common share is based upon the weighted-average number of common shares outstanding during the period, excluding restricted stock that has been issued but is not yet vested. Diluted net loss per common share is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average potentially dilutive common shares outstanding during the period when the effect is dilutive.

 

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The potentially dilutive common shares that have not been included in the net loss per common share calculations because the effect would have been anti-dilutive are as follows:

 

		Six months ended June 30,
		2010		2009
Stock options		4,176,328		2,719,983
Convertible debt		353,563		—
Restricted stock		8,000		—
		4,537,891		2,719,983

 

(5)  Fair Value Measurements

 

The fair value of the Company’s assets and liabilities reflects the Company’s estimate of the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

 

In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the Company’s assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:

 

Level 1:		Observable inputs such as quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:		Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:		Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.

 

The following tables set forth the Company’s financial assets subject to fair value measurements:

 

		As of June 30, 2010			Level 1			Level 2			Level 3
		(In thousands)
Cash equivalents		$	13,710		$	13,710		—			—
Marketable securities		50,674			—			$	50,674		—
		$	64,384		$	13,710		$	50,674		—

 

		As of December 31, 2009			Level 1			Level 2			Level 3
		(In thousands)
Cash equivalents		$	53,780		$	53,780		—			—
Marketable securities		25,451			—			$	25,451		—
		$	79,231		$	53,780		$	25,451		—

 

There have been no transfers of assets or liabilities between the fair value measurement classifications.  The Company’s financial instruments consist mainly of cash and cash equivalents, marketable securities, short-term accounts receivable, accounts payable and debt obligations. Marketable securities have been valued by a third party pricing service at each balance sheet date, using observable market inputs that may include trade information, broker or dealer quotes, bids, offers or a combination of these data sources. Short-term accounts receivable and accounts payable are reflected in the accompanying consolidated financial statements at cost, which approximates fair value due to the short-term nature of these instruments. Based on current market interest rates available to the Company for long-term liabilities with similar terms and maturities, the Company believes the fair value of the loan payable and note payable approximates its carrying value at June 30, 2010.

 

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At June 30, 2010, the estimated fair value of the Company’s outstanding $12.5 million in CuraGen Debt was approximately $11.3 million based on quoted market prices.

 

(6)  Marketable Securities

 

A summary of cash, cash equivalents and marketable securities is shown below:

 

June 30, 2010		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
		(In thousands)
Cash and cash equivalents
Cash and money market funds		$	15,158		$	—		$	—		$	15,158
Total cash and cash equivalents		$	15,158		$	—		$	—		$	15,158
Marketable securities
U.S. government obligations
Maturing in one year or less		$	15,860		$	23		$	—		$	15,883
Maturing after one year through two years		13,546			113			—			13,659
Total U.S. government obligations		$	29,406		$	136		$	—		$	29,542
Corporate debt securities
Maturing in one year or less		$	14,277		$	—		$	(34	)	$	14,243
Maturing after one year through two years		6,928			29			(68		)	6,889
Total corporate debt securities		$	21,205		$	29		$	(102	)	$	21,132
Total marketable securities		$	50,611		$	165		$	(102	)	$	50,674
Total cash, cash equivalents and marketable securities		$	65,769		$	165		$	(102	)	$	65,832

 

December 31, 2009		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
		(In thousands)
Cash and cash equivalents
Cash and money market funds		$	57,002		$	—		$	—		$	57,002
Total cash and cash equivalents		$	57,002		$	—		$	—		$	57,002
Marketable securities
U.S. government obligations
Maturing in one year or less		$	9,698		$	5		$	—		$	9,703
Maturing after one year through two years		7,129			6			(22		)	7,113
Total U.S. government obligations		$	16,827		$	11		$	(22	)	$	16,816
Corporate debt securities
Maturing in one year or less		$	—		$	—		$	—		$	—
Maturing after one year through two years		8,672			—			(37		)	8,635
Total corporate debt securities		$	8,672		$	—		$	(37	)	$	8,635
Total marketable securities		$	25,499		$	11		$	(59	)	$	25,451
Total cash, cash equivalents and marketable securities		$	82,501		$	11		$	(59	)	$	82,453

 

As of June 30, 2010, unrealized losses in the portfolio were primarily due to increases in interest rates. The marketable securities held by the Company were high investment grade and the Company did not consider any investments to be other-than-temporarily impaired as of June 30, 2010.

 

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(7)  Stock-Based Compensation

 

At June 30, 2010, the Company had two stock-based compensation plans: the 2004 Employee Stock Purchase Plan (the “2004 ESPP Plan”) and the 2008 Stock Option and Incentive Plan (the “2008 Plan”).

 

Employee Stock Purchase Plan

 

At June 30, 2010, a total of 62,500 shares of common stock are reserved for issuance under the 2004 ESPP Plan. Under the 2004 ESPP Plan, each participating employee may purchase up to 250 shares of common stock per year, through payroll deductions, at a purchase price equal to 85% of the lower of the fair market value of the common stock at either the beginning of the offering period or the applicable exercise date.  During the six months ended June 30, 2010 and 2009, the Company issued 4,753 and 1,497 shares under the 2004 ESPP Plan, respectively. At June 30, 2010, 52,153 shares were available for issuance under the 2004 ESPP Plan.

 

Employee Stock Option and Incentive Plan

 

The 2008 Plan permits the granting of incentive stock options (intended to qualify as such under Section 422A of the Internal Revenue Code of 1986, as amended), non-qualified stock options, stock appreciation rights, performance share units, restricted stock and other awards of restricted stock in lieu of cash bonuses to employees, consultants and outside directors.

 

At June 30, 2010, the 2008 Plan allowed for a maximum of 3,900,000 shares of common stock to be issued prior to October 19, 2017. The Company’s board of directors determines the term of each option, option price, and number of shares for which each option is granted and the rate at which each option vests. Options generally vest over a period not to exceed four years. The term of each option cannot exceed ten years (five years for options granted to holders of more than 10% of the voting stock of the Company) and the exercise price of stock options cannot be less than the fair market value of the common stock at the date of grant (110% of fair market value for incentive stock options granted to holders of more than 10% of the voting stock of the Company).  Vesting of all employee and non-employee director stock option awards is accelerated upon a change in control as defined in the 2008 Plan.

 

In connection with the CuraGen Merger, the Company assumed the obligations of CuraGen under CuraGen’s 2007 Stock Plan (the “CuraGen 2007 Plan”) and each outstanding option to purchase CuraGen common stock (a “CuraGen Stock Option”) granted under the CuraGen 2007 Plan. Each CuraGen Stock Option assumed by the Company is deemed to constitute an option to acquire, on the same terms and conditions as were applicable under the CuraGen 2007 Plan, shares of the Company’s common stock that have been adjusted consistent with the ratio at which the Company’s common stock was issued in exchange for CuraGen’s common stock in the CuraGen Merger. As of October 1, 2009, the Company assumed options to acquire 931,315 shares of its common stock with a weighted average exercise price of $3.17.  As of October 1, 2009, all of the CuraGen Stock Options were fully vested except for 8,993 shares which generally vest over a two year period. No additional awards will be issued under the CuraGen 2007 Plan. The fair value of the CuraGen Stock Options that were attributed to precombination service was included in the CuraGen Merger consideration.

 

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A summary of stock option activity for the six months ended June 30, 2010 is as follows:

 

		Shares		Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term (In Years)
Options Outstanding at December 31, 2009		3,576,159		$	7.10		6.6
Granted		805,000		4.54
Exercised		(197,116	)	3.03
Canceled/forfeited		(1,500	)	5.84
Expired		(6,215	)	2.57
Options Outstanding at June 30, 2010		4,176,328		$	6.81		7.0
Options Vested and Expected to Vest at June 30, 2010		4,115,409		$	6.82
Options Exercisable at June 30, 2010		2,646,291		$	7.13
Shares Available for Grant under the 2008 Plan		1,691,147

 

The total intrinsic value of stock options exercised during the six months ended June 30, 2010 and 2009 was $0.8 million and $0.1 million, respectively. The weighted average grant-date fair value of stock options granted during the six months ended June 30, 2010 and 2009 was $2.81 and $5.33, respectively. The total fair value of stock options that vested during the six months ended June 30, 2010 and 2009 was $1.9 million.

 

The aggregate intrinsic value of stock options outstanding at June 30, 2010 was $1.1 million. The aggregate intrinsic value of stock options vested and expected to vest at June 30, 2010 was $1.1 million. As of June 30, 2010, total compensation cost related to non-vested employee and non-employee director stock options not yet recognized was approximately $4.9 million, net of estimated forfeitures, which is expected to be recognized as expense over a weighted average period of 2.9 years.

 

Restricted Stock

 

A summary of restricted stock activity under the 2008 Plan for the six months ended June 30, 2010 is as follows:

 

		Shares		Weighted Average Grant Date Fair Value (per share)
Outstanding and unvested at December 31, 2009		16,000		$	4.48
Granted		—		—
Vested		(8,000	)	4.48
Canceled		—		—
Outstanding and unvested at June 30, 2010		8,000		$	4.48

 

Valuation and Expenses Information

 

Stock-based compensation expense related to employee and non-employee stock options, restricted stock and employee stock purchases for the three and six months ended June 30, 2010 and 2009 was recorded as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2010			2009			2010			2009
		(In thousands)
Research and development		$	393		$	421		$	909		$	821
General and administrative		251			330			705			1,043
Total stock-based compensation expense		$	644		$	751		$	1,614		$	1,864

 

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The fair values of employee and non-employee director stock options and employee stock purchases granted during the three and six months ended June 30, 2010 and 2009 were valued using the Black-Scholes option-pricing model with the following assumptions:

 

		Three months ended June 30,				Six months ended June 30,
		2010		2009		2010		2009
Expected stock price volatility (options)		66	%	68	%	65-66	%	68	%
Expected stock price volatility (2004 ESPP)		—		—		51	%	98	%
Expected option term (options)		6.2 years		6.1 years		6.2 years		6.1-6.3 years
Expected option term (2004 ESPP)		—		—		0.5 years		0.5 years
Risk-free interest rate (options)		2.9	%	2.8	%	2.9-3.2	%	1.9-2.8	%
Risk-free interest rate (2004 ESPP)		—		—		0.2	%	0.3	%
Expected dividend yield		None		None		None		None

 

Prior to January 1, 2010, the Company used the simplified method of estimating the expected term for share-based compensation.  Starting January 1, 2010, the Company ceased using the simplified method, and now uses the average of expected terms for industry peers.  Due to the AVANT Merger and the CuraGen Merger, historical exercise patterns do not provide a reasonable basis to estimate expected term of current option grants.  Industry peers consist of several public companies that are similar in size in the biopharmaceutical industry.  The Company uses its historical stock price volatility consistent with the expected term of grant as the basis for its expected volatility assumption. The risk-free interest rate is based upon the yield of U.S. Treasury securities consistent with the expected term of the option. The dividend yield assumption is based on the Company’s history of zero dividend payouts and expectation that no dividends will be paid in the foreseeable future.

 

(8)  Intangible Assets and Goodwill

 

Intangible assets, net of accumulated amortization, and goodwill are as follows:

 

				June 30, 2010									December 31, 2009
		Estimated Life		Cost			Accumulated Amortization			Net			Cost			Accumulated Amortization			Net
				(In thousands)
Intangible Assets:
IPR&D		Indefinite		$	11,800		—			$	11,800		$	11,800		—			$	11,800
Amgen Amendment		16 years		14,500			$	(673	)	13,827			14,500			$	(224	)	14,276
TopoTarget Agreement		1.75 years		2,400			(1,714		)	686			2,400			(343		)	2,057
Core Technology		4.5-11 years		1,948			(905		)	1,043			2,193			(832		)	1,361
Strategic Partner Agreement		8 years		630			(185		)	445			630			(145		)	485
Total Intangible Assets				$	31,278		$	(3,477	)	$	27,801		$	31,523		$	(1,544	)	$	29,979
Goodwill		Indefinite		$	8,965		—			$	8,965		$	8,965		—			$	8,965

 

In January 2009, the Company entered into a purchase agreement (the “LAHI Agreement”) with Lohmann Animal Health International (“LAHI”) to sell its poultry vaccines assets to LAHI. Under the LAHI Agreement, LAHI paid an upfront fee of $0.8 million and agreed to pay potential milestone payments. The Company recorded a gain of $0.6 million during the three months ended March 31, 2009 related to the LAHI Agreement based on the upfront fee less the net book value of the related asset.

 

The estimated fair value attributed to the April 2008 agreement (“TopoTarget Agreement”) between the Company (as a successor to CuraGen) and TopoTarget A/S (“TopoTarget”) relates to the Company’s rights under the TopoTarget Agreement to receive up to $6 million in either potential commercial milestone payments related to future net sales of Belinostat or 10% of any sublicense income received by TopoTarget (“TopoTarget Payments”).  In February 2010, TopoTarget entered into a co-development and commercialization agreement for Belinostat with Spectrum Pharmaceuticals, Inc. which resulted in the Company’s receipt of $3 million of the TopoTarget Payments.  The Company recorded this cash receipt as Other Income for the three months ended March 31, 2010 and recorded amortization expense related to the TopoTarget Agreement of $0.2 million and $1.4 million for the three and six months ended June 30, 2010, respectively.

 

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During the three months ended June 30, 2010, the Company wrote-off $0.2 million in Core Technology to amortization of intangible asset expense.

 

(9)  Income Taxes

 

Massachusetts, New Jersey and Connecticut are the three states in which the Company primarily operates or has operated and has income tax nexus. The Company is currently under examination for sales and use taxes by the State of Connecticut for CuraGen’s operations for the period from July 1, 2006 through June 30, 2009 and by the Internal Revenue Service with respect to 2008.  The Company is not currently under examination by any other jurisdictions for any tax year.

 

The Company has evaluated the positive and negative evidence bearing upon the realizability of its net deferred tax assets, which are comprised principally of net operating loss carryforwards, capitalized R&D expenditures and R&D tax credit carryforwards. The Company has determined that it is more likely than not that it will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance was maintained at June 30, 2010 and December 31, 2009 against the Company’s net deferred tax assets.

 

(10)  Significant Revenue Arrangements

 

A summary of the Company’s significant revenue contracts and arrangements follows:

 

GlaxoSmithKline plc (“Glaxo”) and Paul Royalty Fund II, L.P. (“PRF”)

 

In 1997, the Company entered into an agreement with Glaxo to collaborate on the development and commercialization of the Company’s oral rotavirus strain and Glaxo assumed responsibility for all subsequent clinical trials and all other development activities. The Company licensed-in the rotavirus strain that was used to develop Glaxo’s Rotarix® rotavirus vaccine in 1995 and owes a license fee of 30% to Cincinnati Children’s Hospital Medical Center (“CCH”) on net royalties received from Glaxo. The Company is obligated to maintain a license with CCH with respect to the Glaxo agreement. The term of the Glaxo agreement is through the expiration of the last of the relevant patents covered by the agreement, although Glaxo may terminate the agreement upon 90 days prior written notice.

 

In May 2005, the Company entered into an agreement whereby an affiliate of PRF purchased an interest in the net royalties the Company will receive on worldwide sales of Rotarix®. The Company’s retained interests in Rotarix® net royalties which were not sold to PRF are recorded as product royalty revenue and a corresponding amount that is payable to CCH is recorded as royalty expense. Product royalty revenue and royalty expense related to the Company’s retained interest in Rotarix® was $1.6 million and $1.2 million for the three months ended June 30, 2010 and 2009 and $3.7 million and $3.2 million for the six months ended June 30, 2010 and 2009, respectively.

 

Royalty rates on Rotarix® escalate from 7% to 10% based on net product sales in countries that have valid patent protection. These royalty rates are discounted by 30% for “non-patent” countries (primarily international markets). In September 2006, the Company received notice from Glaxo that Glaxo would begin paying royalties on sales of Rotarix® at the lower of the two royalty rates under their 1997 license agreement. Glaxo’s decision to pay the lower royalty rate (which is 70% of the full rate) is based upon Glaxo’s assertion that Rotarix® is not covered by the patents Glaxo licensed from the Company in Australia and certain European countries. If Glaxo’s position stands, the royalties to which PRF is entitled will no longer be limited by a $27.5 million annual threshold, which the Company projected may have been reached in later years as sales of Rotarix® increased.  Irrespective of Glaxo’s position, the Company will still retain approximately 65% of the royalties on worldwide sales of Rotarix® once PRF receives 2.45 times the aggregate cash payments of $60 million it made to the Company, though the potential amount of such residual royalties will be lower if Glaxo’s position stands. The Company has received $60 million in total milestone payments under the PRF agreement. No additional milestone payments are due from PRF under the agreement.  In late March 2010, the FDA temporarily suspended the use of Rotarix® in the United States as a precautionary measure following the discovery of PCV-1 DNA material in the vaccine.  In May 2010, the FDA determined that healthcare practitioners could resume the use of Rotarix®.

 

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Pfizer Inc. (“Pfizer”) License and Development Agreement

 

On April 16, 2008, the Company and Pfizer entered into a License and Development Agreement (the “Pfizer Agreement”) under which Pfizer was granted an exclusive worldwide license to a therapeutic cancer vaccine candidate, Rindopepimut (PF-04948568) (formerly CDX-110), in Phase 2 development for the treatment of glioblastoma multiforme. The Pfizer Agreement also gives Pfizer exclusive rights to the use of EGFRvIII vaccines in other potential indications. Under the Pfizer Agreement, Pfizer made an upfront payment to the Company of $40 million and made a $10 million equity investment in the Company. Pfizer will fund all development costs for these programs. The Company is also eligible to receive potential milestone payments exceeding $390 million for the successful development and commercialization of Rindopepimut and additional EGFRvIII vaccine products, as well as royalties on any product sales. The Pfizer Agreement became effective after clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) on May 19, 2008.

 

On May 27, 2008, the Company received $10 million from Pfizer in exchange for 781,250 shares of the Company’s common stock having a fair value of $10.9 million, or $13.91 per share, on that date. The $0.9 million over the amount received from Pfizer was recorded as a reduction to deferred revenue of the $40 million upfront payment received from Pfizer on June 18, 2008.

 

The Company has determined that its performance obligations under this collaboration should be accounted for as a single unit of accounting. The Company’s deliverables under this collaboration primarily include an exclusive license to its Rindopepimut product candidate and its EGFRvIII technologies, research and development services as required under the collaboration and participation in the joint clinical development committee. The Company has estimated that its performance period under the collaboration will be 9.5 years based on an assessment of the period over which the Company will have met its performance obligations under the collaboration. Revenue, including research and development reimbursements, is being recognized on a straight-line basis over this period using the Contingency Adjusted Performance Model (“CAPM”). The $40 million up-front payment, less the $0.9 million in excess fair value for the Company’s common stock discussed above, was recorded as deferred revenue and is being amortized over the 9.5-year performance period at a rate of $1.0 million per quarter.

 

The Pfizer Agreement also provides for reimbursement by Pfizer of all costs incurred by the Company in connection with the collaboration since the effective date. The Company invoices Pfizer monthly for its reimbursable costs and records the invoiced amount as deferred revenue. These deferred revenue amounts are amortized to revenue over the estimated 9.5-year performance period on a straight-line basis using the CAPM model. The Company incurred and invoiced Pfizer reimbursable costs related to the Pfizer collaboration of $0.3 million and $1.1 million for the three months ended June 30, 2010 and 2009, respectively, and $0.5 million and $2.6 million for the six months ended June 30, 2010 and 2009, respectively.

 

The Company recorded product development and licensing agreements revenue under the Pfizer Agreement as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2010			2009			2010			2009
		(In thousands)
Up-front portion		$	1,030		$	1,030		$	2,060		$	2,060
Reimbursable costs portion		276			297			542			569
		$	1,306		$	1,327		$	2,602		$	2,629

 

At June 30, 2010, the Company had total deferred revenue of $37.1 million related to the Pfizer Agreement.

 

In connection with the Pfizer Agreement, the Company paid a total of $6.9 million in sublicense fees to Duke University and Thomas Jefferson University. The Company recorded these deferred sublicense fees to other assets in the consolidated balance sheets and is amortizing them to royalty expense over the 9.5-year performance period at a rate of $0.2 million per quarter.  At June 30, 2010 and December 31, 2009, the unamortized balance of deferred costs was $5.3 million and $5.7 million, respectively.

 

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Rockefeller University (“Rockefeller”)

 

The Company is providing research and development support to Rockefeller on the development of their vaccine, DCVax-001, which the Company refers to as CDX-2401, aimed at providing protection from infection with HIV, the virus known to cause AIDS. This program is in a Bill & Melinda Gates Foundation funded partnership called the Grand Challenges initiative. Preclinical studies and manufacturing development are in progress and payments to the Company are made on a time and materials basis. The Company recorded grant revenue from Rockefeller of $0.2 million and $0.1 million for the six months ended June 30, 2010 and 2009, respectively, and no grant revenue for the three months ended June 30, 2010 and 2009.

 

(11)  Other Long-Term Liabilities

 

Other long-term liabilities include the following:

 

		June 30, 2010			December 31, 2009
		(In thousands)
Deferred Rent		$	435		$	377
CuraGen Merger Severance		1,160			2,623
Deferred Tax Liabilities		4,661			4,661
Loan Payable		606			632
Note Payable		110			178
Total		6,972			8,471
Less Current Portion		(1,174		)	(2,156		)
Long-Term Portion		$	5,798		$	6,315

 

(12) CuraGen Acquisition

 

In connection with the CuraGen Merger, effective October 1, 2009, the Company (i) issued 15,722,713 shares of common stock of the Company, or 0.2739 shares, in exchange for each share of outstanding CuraGen common stock, plus cash in lieu of fractional shares (the “CuraGen Exchange Ratio”), (ii) assumed all of the CuraGen Stock Options and (iii) assumed the CuraGen Debt. The Company acquired CuraGen to gain access to a pipeline of oncology-focused antibody-drug conjugates, including CDX-011 currently in Phase 2 clinical development for the treatment of breast cancer and melanoma, and cash, cash equivalents and marketable securities of $70.3 million.

 

The transaction was accounted for under the acquisition method of accounting. All of the assets acquired and liabilities assumed in the transaction are recognized at their acquisition-date fair values, while transaction costs associated with the transaction are expensed as incurred.

 

Purchase Price

 

The purchase price for CuraGen was based on the acquisition-date fair value of the consideration transferred, which was calculated based on the closing price of the Company’s common stock of $5.43 per share on October 1, 2009. The acquisition-date fair value of the consideration transferred consisted of the following (in thousands):

 

Fair value of common stock issued		$	85,374
Fair value of CuraGen Stock Options		2,868
Total consideration transferred		$	88,242

 

U.S. GAAP requires that the fair value of replacement awards attributable to precombination service be included in the consideration transferred. Of the CuraGen Stock Options assumed, all but 1%, were immediately vested upon closing in accordance with the terms of the stock option agreements and employment agreements. The fair value of the CuraGen Stock Options that has been attributed to precombination service was included in the consideration transferred.

 

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Allocations of Assets and Liabilities

 

The Company allocated the consideration transferred for CuraGen to net tangible assets, intangible assets, goodwill and a severance obligation. The difference between the aggregate consideration transferred and the fair value of assets acquired and liabilities assumed was allocated to goodwill. This goodwill relates to the potential synergies from the CuraGen Merger and a deferred tax liability related to acquired IPR&D intangible assets. None of the goodwill is expected to be deductible for income tax purposes. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

Cash and cash equivalents		$	51,654
Marketable securities		18,638
Identifiable intangible assets:
IPR&D		11,800
Amgen Amendment		14,500
TopoTarget Agreement		2,400
Other current and long-term assets		756
Goodwill		8,965
CuraGen Debt		(11,503		)
Deferred tax liabilities, net		(5,190		)
Other assumed liabilities		(3,778		)
Total		$	88,242

 

(13) Stockholders’ Equity

 

In April 2010, the Company filed a shelf registration statement with the Securities and Exchange Commission to register for sale any combination of the types of securities described in the filing up to a dollar amount of $150 million.  The shelf registration went effective on April 22, 2010.  No securities have been sold by the Company from this shelf registration.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:  This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.

 

There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:

 

·                  our ability to successfully complete product research and further development, including animal, preclinical and clinical studies, and commercialization of Rindopepimut, CDX-011, CDX-1307, CDX-1401, CDX-1135, and other products and the growth of the markets for those product candidates;

 

·                  our ability to raise sufficient additional capital on terms acceptable to us, or at all;

 

·                  the cost, timing, scope and results of ongoing safety and efficacy trials of Rindopepimut, CDX-011, CDX-1307, CDX-1401, CDX-1135, and other preclinical and clinical testing;

 

·                  our ability to adapt our APC Targeting Technology™ to develop new, safe and effective vaccines against oncology and infectious disease indications;

 

·                  the ability to negotiate strategic partnerships or other disposition transactions for our non-core programs;

 

·                  our ability to manage multiple clinical trials for a variety of product candidates at different stages of development;

 

·                  the strategies and business plans of our partners, such as Pfizer’s plans for Rindopepimut, GlaxoSmithKline’s plans with respect to Rotarix® and Vaccine Technologies’ plans concerning the CholeraGarde® (Peru-15) and ETEC E. coli vaccines, which are not within our control, and our ability to maintain strong, mutually beneficial relationships with those partners;

 

·                  our ability to develop technological capabilities and expand our focus to broader markets for vaccines;

 

·                  the availability, cost, delivery and quality of clinical and commercial grade materials produced by our own manufacturing facility or supplied by contract manufacturers and partners;

 

·                  the timing, cost and uncertainty of obtaining regulatory approvals for product candidates;

 

·                  our ability to develop and commercialize products before competitors that are superior to the alternatives developed by such competitors;

 

·                  the validity of our patents and our ability to avoid intellectual property litigation, which can be costly and divert management time and attention; and

 

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·                  the factors listed under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s annual report on Form 10-K for the year ended December 31, 2009 and other reports that Celldex files with the Securities and Exchange Commission.

 

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.

 

OVERVIEW

 

We are an integrated biopharmaceutical company that applies our comprehensive Precision Targeted Immunotherapy Platform to generate a pipeline of candidates to treat cancer and other difficult-to-treat diseases. Our immunotherapy platform includes a complementary portfolio of monoclonal antibodies, antibody-targeted vaccines, antibody-drug conjugates and immunomodulators to create novel disease-specific drug candidates.

 

Our strategy is to develop and demonstrate proof-of-concept for our product candidates before leveraging their value through partnerships or, in appropriate situations, continuing late stage development through commercialization ourselves. Demonstrating proof-of-concept for a product candidate generally involves bringing it through Phase 1 clinical trials and one or more Phase 2 clinical trials so that we are able to demonstrate, based on human trials, good safety data for the product candidate and some data indicating its effectiveness. We thus leverage the value of our technology portfolio through corporate, governmental and non-governmental partnerships. This approach allows us to maximize the overall value of our technology and product portfolio while best ensuring the expeditious development of each individual product.

 

Our current collaborations include the commercialization of an oral human rotavirus vaccine and the development of oncology vaccines. Our product candidates address market opportunities for which we believe current therapies are inadequate or non-existent.

 

Acquisition of CuraGen

 

In connection with the CuraGen Merger, effective October 1, 2009, we (i) issued 15,722,713 shares of our common stock, or 0.2739 shares, in exchange for each share of outstanding CuraGen common stock, plus cash in lieu of fractional shares (the “CuraGen Exchange Ratio”), (ii) assumed all of the CuraGen Stock Options and (iii) assumed the CuraGen Debt. We acquired CuraGen to gain access to a pipeline of oncology-focused antibody-drug conjugates, including CDX-011 (formerly CR011) currently in Phase 2 clinical development for the treatment of breast cancer and melanoma, and cash, cash equivalents and marketable securities of $70.3 million.

 

The transaction was accounted for under the acquisition method of accounting. All of the assets acquired and liabilities assumed in the transaction are recognized at their acquisition-date fair values, while transaction costs associated with the transaction are expensed as incurred.

 

CURRENT PROGRAMS AND PARTNERSHIPS

 

Our products are derived from a broad set of complementary technologies which have the ability to utilize the human immune system and enable the creation of preventative and therapeutic agents. We are using these technologies to develop targeted immunotherapeutics comprised of antibodies, adjuvants and monotherapies and antibody-drug conjugates that prevent or treat cancer and other diseases that modify undesirable activity by the body’s own proteins or cells. A number of our immunotherapeutic and antibody-drug conjugate product candidates are in various stages of clinical trials. We expect that a large percentage of our research and development expenses will be incurred in support of our current and future clinical trial programs.

 

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The following table includes the programs that we currently believe are material to our business:

 

Product		Indication/Field		Partner		Status
CLINICAL
Rindopepimut (formerly CDX-110)		Glioblastoma multiforme		Pfizer (PF-04948568)		Phase 2b
CDX-011 (glembatumumab vedotin)		Metastatic melanoma and breast cancer		—		Phase 2
CDX-1307		Invasive bladder cancer		—		Phase 2
CDX-1401		Multiple solid tumors		—		Phase 1/2
CDX-1135		Renal disease		—		Pilot Study
PRECLINICAL
CDX-301		Cancer, autoimmune disease and transplant		—		Preclinical
CDX-1127		Immuno-modulation, multiple tumors		—		Preclinical
CDX-014		Renal and ovarian cancer		—		Preclinical
CDX-1189		Renal disease		—		Preclinical
MARKETED PRODUCTS
Rotarix®		Rotavirus infection		GlaxoSmithKline		Marketed

 

The expenditures that will be necessary to execute our business plan are subject to numerous uncertainties. Completion of clinical trials may take several years or more, and the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate. It is not unusual for the clinical development of these types of product candidates to each take five years or more, and for total development costs to exceed $100 million for each product candidate. Our estimates that clinical trials of the type we generally conduct are typically completed over the following timelines:

 

Clinical Phase		Estimated Completion Period
Phase 1		1 - 2 Years
Phase 2		1 - 5 Years
Phase 3		1 - 5 Years

 

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

 

·                  the number of patients that ultimately participate in the trial;

 

·                  the duration of patient follow-up that seems appropriate in view of results;

 

·                  the number of clinical sites included in the trials;

 

·                  the length of time required to enroll suitable patient subjects; and

 

·                  the efficacy and safety profile of the product candidate.

 

We test potential product candidates in numerous preclinical studies for safety, toxicology and immunogenicity. We may then conduct multiple clinical trials for each product candidate. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain product candidates in order to focus our resources on more promising product candidates.

 

An element of our business strategy is to pursue the research and development of a broad portfolio of product candidates within our therapeutic categories and consistent with our technology and capabilities.  This is intended to allow us to diversify the risks associated with our research and development expenditures. As a result, we believe our future capital requirements and our future financial success are not substantially dependent on any

 

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