HALOZYME THERAPEUTICS, INC. - Quarter Report: 2009 June (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 001-32335
HALOZYME THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 88-0488686 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
11388 Sorrento Valley Road, San Diego, CA | 92121 | |
(Address of principal executive offices) | (Zip Code) |
(858) 794-8889
(Registrants telephone number, including area code)
(Registrants 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
þ 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):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of outstanding shares of the registrants common stock, par value $0.001 per share, was 89,723,189 as of
August 3, 2009.
HALOZYME THERAPEUTICS, INC.
INDEX
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3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
14 | ||||||||
35 | ||||||||
36 | ||||||||
36 | ||||||||
36 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
40 | ||||||||
EXHIBIT 10.17 | ||||||||
EXHIBIT 10.18 | ||||||||
EXHIBIT 10.20 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
2
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PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
HALOZYME
THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Note) | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 89,240,763 | $ | 63,715,906 | ||||
Accounts receivable |
893,093 | 7,264,410 | ||||||
Inventory |
803,534 | 441,323 | ||||||
Prepaid expenses and other assets |
2,711,585 | 2,591,149 | ||||||
Total current assets |
93,648,975 | 74,012,788 | ||||||
Property and equipment, net |
2,646,666 | 2,549,925 | ||||||
Total Assets |
$ | 96,295,641 | $ | 76,562,713 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 5,430,644 | $ | 6,668,791 | ||||
Accrued expenses |
4,721,593 | 3,995,897 | ||||||
Deferred revenue |
5,016,178 | 3,553,730 | ||||||
Total current liabilities |
15,168,415 | 14,218,418 | ||||||
Deferred revenue, net of current portion |
53,667,269 | 45,894,726 | ||||||
Deferred rent, net of current portion |
1,025,399 | 1,069,573 | ||||||
Commitments and contingencies (Note 11) |
||||||||
Stockholders equity: |
||||||||
Preferred stock $0.001 par value; 20,000,000 shares
authorized;
no shares issued and outstanding |
| | ||||||
Common stock $0.001 par value; 150,000,000 shares
authorized;
89,656,578 and 81,553,654 shares issued and
outstanding at
June 30, 2009 and December 31, 2008, respectively |
89,657 | 81,554 | ||||||
Additional paid-in capital |
171,779,912 | 128,948,064 | ||||||
Accumulated deficit |
(145,435,011 | ) | (113,649,622 | ) | ||||
Total stockholders equity |
26,434,558 | 15,379,996 | ||||||
Total Liabilities and Stockholders Equity |
$ | 96,295,641 | $ | 76,562,713 | ||||
Note: | The balance sheet at December 31, 2008 has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by US generally accepted accounting principles for complete financial statements. |
See accompanying notes to condensed consolidated financial statements.
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HALOZYME
THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Revenues under collaboration agreements |
$ | 1,246,205 | $ | 1,351,492 | $ | 3,940,369 | $ | 3,015,572 | ||||||||
Product sales |
179,951 | 82,727 | 258,158 | 224,165 | ||||||||||||
Total revenues |
1,426,156 | 1,434,219 | 4,198,527 | 3,239,737 | ||||||||||||
Operating expenses: |
||||||||||||||||
Cost of product sales |
45,097 | 37,126 | 49,301 | 74,316 | ||||||||||||
Research and development |
14,561,137 | 8,925,488 | 28,601,224 | 17,369,679 | ||||||||||||
Selling, general and administrative |
3,903,642 | 3,846,175 | 7,390,464 | 8,003,778 | ||||||||||||
Total operating expenses |
18,509,876 | 12,808,789 | 36,040,989 | 25,447,773 | ||||||||||||
Operating loss |
(17,083,720 | ) | (11,374,570 | ) | (31,842,462 | ) | (22,208,036 | ) | ||||||||
Interest income |
23,695 | 372,180 | 57,073 | 1,251,649 | ||||||||||||
Net loss |
$ | (17,060,025 | ) | $ | (11,002,390 | ) | $ | (31,785,389 | ) | $ | (20,956,387 | ) | ||||
Basic and diluted net loss per share |
$ | (0.21 | ) | $ | (0.14 | ) | $ | (0.38 | ) | $ | (0.27 | ) | ||||
Shares used in computing basic and diluted
net loss per share |
82,990,107 | 79,454,496 | 82,807,253 | 78,923,520 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
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HALOZYME
THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(UNAUDITED)
Six Months Ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (31,785,389 | ) | $ | (20,956,387 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Share-based compensation |
1,870,766 | 1,929,793 | ||||||
Depreciation and amortization |
680,071 | 476,585 | ||||||
Loss on disposal of equipment |
2,685 | 9,029 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
6,371,317 | (381,165 | ) | |||||
Inventory |
(362,211 | ) | 54,214 | |||||
Prepaid expenses and other assets |
(120,436 | ) | 118,860 | |||||
Accounts payable and accrued expenses |
(616,029 | ) | 366,311 | |||||
Deferred rent |
26,616 | 310,990 | ||||||
Deferred revenue |
9,234,991 | 2,362,140 | ||||||
Net cash used in operating activities |
(14,697,619 | ) | (15,709,630 | ) | ||||
Investing activities: |
||||||||
Purchases of property and equipment |
(746,709 | ) | (472,023 | ) | ||||
Net cash used in investing activities |
(746,709 | ) | (472,023 | ) | ||||
Financing activities: |
||||||||
Proceeds from issuance of common stock, net |
38,174,371 | | ||||||
Proceeds from exercise of warrants, net |
2,213,515 | 247,482 | ||||||
Proceeds from exercise of stock options, net |
581,299 | 665,225 | ||||||
Net cash provided by financing activities |
40,969,185 | 912,707 | ||||||
Net increase (decrease) in cash and cash equivalents |
25,524,857 | (15,268,946 | ) | |||||
Cash and cash equivalents at beginning of period |
63,715,906 | 97,679,085 | ||||||
Cash and cash equivalents at end of period |
$ | 89,240,763 | $ | 82,410,139 | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Accounts payable for purchases of property and equipment |
$ | 32,788 | $ | 170,040 |
See accompanying notes to condensed consolidated financial statements.
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HALOZYME THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
1. Organization and Business
Halozyme Therapeutics, Inc. (Halozyme or the Company) is a biopharmaceutical company
dedicated to the development and commercialization of products targeting the extracellular matrix
for the endocrinology, oncology, dermatology and drug delivery markets. The Companys existing
products and products under development are primarily based on intellectual property covering the
family of human enzymes known as hyaluronidases.
The Companys operations to date have involved organizing and staffing the Company, acquiring,
developing and securing its technology and undertaking product development for its existing
products and a limited number of product candidates. The Company currently has four proprietary
programs in various stages of research and development, including three programs in clinical
development. The Company also has three partnered programs. The Companys key partnerships are with
F. Hoffmann-La Roche, Ltd and Hoffmann-La Roche, Inc. (Roche) to apply EnhanzeÔ
Technology to Roches biological therapeutic compounds for up to 13 targets and with Baxter
Healthcare Corporation (Baxter) to apply Enhanze Technology to Baxters biological therapeutic
compound, GAMMAGARD LIQUIDÔ and to develop and supply active pharmaceutical
ingredient (API) for HYLENEX, a registered trademark of Baxter International, Inc. There are two
marketed products that utilize the Companys technology: HYLENEX, a product used as an adjuvant to
increase the dispersion and absorption of other injected drugs and fluids, and
Cumulase®, a product used for in vitro fertilization. Currently, the Company receives
only limited revenue from the sales of HYLENEX and from the sales of bulk materials to the third
party that produces Cumulase, in addition to revenues from its partnerships with Baxter and Roche.
2. Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting principles (U.S. GAAP)
and with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) related
to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and
disclosures required by U.S. GAAP for a complete set of financial statements. These interim
unaudited condensed consolidated financial statements and notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2008. The unaudited
consolidated financial information for the interim periods presented herein reflects all
adjustments which, in the opinion of management, are necessary for a fair presentation of the
financial condition and results of operations for the periods presented, with such adjustments
consisting only of normal recurring adjustments. Operating results for interim periods are not
necessarily indicative of the operating results for an entire fiscal year. Further, in connection
with the preparation of the interim unaudited condensed financial statements and in accordance with
the recently issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent
Events, the Company evaluated subsequent events after the balance sheet date of June 30, 2009
through August 7, 2009.
The consolidated financial statements include the accounts of Halozyme and its wholly owned
subsidiary, Halozyme, Inc. All intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts, as well as disclosures of
commitments and contingencies in the financial statements and accompanying notes. Actual results
could differ from those estimates.
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3. Accounting Pronouncements
Adoption of Recent Accounting Pronouncements
Effective April 1, 2009, the Company adopted SFAS No. 165, Subsequent Events. SFAS No. 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. The
adoption of SFAS No. 165 did not have a material impact on the Companys consolidated financial
position or results of operations.
Effective January 1, 2009, the Company adopted Emerging Issues Task Force (EITF) Issue No.
07-01, Accounting for Collaboration Arrangements. Issue No. 07-1 focuses on how the parties to a
collaborative agreement should account for costs incurred and revenue generated on sales to third
parties, how sharing payments pursuant to a collaboration agreement should be presented in the
statement of operations and certain related disclosure questions. The adoption of Issue No. 07-01
did not have a material impact on the Companys consolidated financial position or results of
operations.
Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in
connection with business combinations. SFAS No. 141(R) also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business combination. The adoption
of SFAS No. 141(R) did not have a material effect on the Companys consolidated financial condition
and results of operations.
Effective January 1, 2009 the Company adopted the FASB Staff Position (FSP) No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. FSP No. EITF 03-6-1 clarified that all outstanding unvested share-based payment awards
that contain rights to nonforfeitable dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating securities and the two-class
method of computing basic and diluted earnings per share must be applied. The adoption of FSP EITF
03-6-1 did not have a material impact on the Companys consolidated financial position or results
of operations.
Effective January 1, 2009, the Company adopted EITF Issue No. 07-5, Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock. EITF Issue No. 07-5
provides that an entity should use a two-step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions. It also clarifies the impact of foreign
currency denominated strike prices and market-based employee stock option valuation instruments on
the evaluation. The adoption of EITF Issue No. 07-5 did not have a material impact on the Companys
consolidated financial position or results of operations.
Pending Adoption of Recent Accounting Pronouncement
In June 2009, the Financial Accounting Standards Board (FASB) issued an Accounting Standards
Update (ASU) No. 2009-01, which amends the FASB Accounting Standards Codification for the
issuance of SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles. ASU No. 2009-01 includes SFAS No. 168 in its entirety. SFAS No. 168
identifies the sources of accounting principles and the framework for selecting the principles used
in the preparation of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States. SFAS No. 168
replaces SFAS No. 162, Hierarchy of Generally Accepted Accounting Principles. ASU No. 2009-01 will
be effective for financial statements issued for interim and annual periods ending after September
15, 2009. The Company does not expect the adoption of ASU No. 2009-01 to have a material impact on
its consolidated financial position or results of operations.
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4. Summary of Significant Accounting Policies
Fair Value Measurements
The Company determines fair value measurements in accordance with SFAS No. 157, Fair Value
Measurements, and FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. FSP
No. FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active.
SFAS No. 157 prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities; |
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and |
Level 3 | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
Cash and cash equivalents of approximately $89.2 million at June 30, 2009 are carried at fair
value based on quoted market prices for identical securities (Level 1 inputs).
Revenue Recognition
The Company generates revenues from product sales and collaborative agreements. Payments
received under collaborative agreements may include nonrefundable fees at the inception of the
agreements, license fees, milestone payments for specific achievements designated in the
collaborative agreements, reimbursements of research and development services and/or royalties on
sales of products resulting from collaborative agreements.
The Company recognizes revenues in accordance with SEC Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition, and EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. The Company recognizes revenue when all of the following criteria are met: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been
rendered; (3) the sellers price to the buyer is fixed and determinable; and (4) collectibility is
reasonably assured.
Product Sales Revenues from the sales of Cumulase are recognized when the transfer of
ownership occurs, which is upon shipment to the Companys distributor. The Company is obligated to
accept returns for product that does not meet product specifications. Historically, the Company has
not had any product returns as a result of not meeting product specifications.
In accordance with the Amended and Restated Development and Supply Agreement (the HYLENEX
Partnership) with Baxter, the Company supplies Baxter with API for HYLENEX at its fully burdened
cost plus a margin. Baxter fills and finishes HYLENEX and holds it for subsequent distribution, at
which time the Company ensures it meets product specifications and releases it as available for
sale. Because of the Companys continued involvement in the development and production process of
HYLENEX, the earnings process is not considered to be complete. Accordingly, the Company defers the
revenue and related product costs on the API for HYLENEX until the product is filled, finished,
packaged and released. Baxter may only return the API for HYLENEX to the Company if it does not
conform to the specified criteria set forth in the HYLENEX Partnership or upon termination of such
agreement. The Company has historically demonstrated that the API shipped to Baxter has
consistently met the specified criteria, therefore, no allowance for product returns has been
established. In addition, the Company receives product-based payments upon the sale of HYLENEX by
Baxter, in accordance with the terms of the HYLENEX Partnership. Product sales revenues are
recognized as the Company earns such revenues based on Baxters shipments of HYLENEX to its
distributors when such amounts can be reasonably estimated.
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Collaborative Agreements The Company analyzes each element of its collaborative agreements
to determine the appropriate revenue recognition. The Company recognizes revenue on nonrefundable
upfront payments and license fees in which it has an ongoing involvement or performance obligation
over the period of significant involvement under the related agreements. The Company recognizes
milestone payments upon the achievement of specified milestones if: (1) the milestone is
substantive in nature and the achievement of the milestone was not reasonably assured at the
inception of the agreement, (2) the fees are nonrefundable and (3) our performance obligations
after the milestone achievement will continue to be funded by our collaborator at a level
comparable to the level before the milestone achievement. Any milestone payments received prior to
satisfying these revenue recognition criteria are recorded as deferred revenue. Reimbursements of
research and development services are recognized as revenue during the period in which the services
are performed. Royalties to be received based on sales of licensed products by the Companys
collaborators incorporating the Companys products will be recognized as earned.
Cost of Product Sales
Cost of product sales consists primarily of raw materials, third-party manufacturing costs,
fill and finish costs and freight costs associated with the sales of Cumulase, and the API for
HYLENEX.
Research and Development Expenses
Research and development expenses include salaries and benefits, facilities and other overhead
expenses, external clinical trials, research-related manufacturing services, contract services and
other outside expenses. Research and development expenses are charged to operations as incurred
when these expenditures relate to the Companys research and development efforts and have no
alternative future uses.
Advance payments, including nonrefundable amounts, for goods or services that will be used or
rendered for future research and development activities are deferred and capitalized. Such amounts
will be recognized as an expense as the related goods are delivered or the related services are
performed or such time when the Company does not expect the goods to be delivered or services to be
performed.
Milestone payments that the Company makes in connection with in-licensed technology or product
candidates are expensed as incurred when there is uncertainty in receiving future economic benefits
from the licensed technology or product candidates. The Company considers the future economic
benefits from the licensed technology or product candidates to be uncertain until such licensed
technology or product candidates are approved for marketing by the U.S. Food and Drug
Administration or when other significant risk factors are abated. For expense accounting purposes,
management has viewed future economic benefits for all of our licensed technology or product
candidates to be uncertain.
Clinical Trial Expenses
Expenses related to clinical trials are accrued based on the Companys estimates and/or
representations from service providers regarding work performed, including actual level of patient
enrollment, completion of patient studies and clinical trials progress. Other incidental costs
related to patient enrollment or treatment are accrued when reasonably certain. If the contracted
amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope
of work to be performed), the Company modifies its accruals accordingly on a prospective basis.
Revisions in the scope of a contract are charged to expense in the period in which the facts that
give rise to the revision become reasonably certain. Historically, the Company has had no material
changes in its clinical trial expense accruals that would have had a material impact on its
consolidated results of operations or financial position.
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Share-Based Compensation
The Company accounts for share-based awards exchanged for employee services in accordance with
SFAS No. 123(R), Share-Based Payment. Under SFAS No. 123(R), share-based compensation expense is
measured at the grant date, based on the estimated fair value of the award, and is recognized as
expense, net of estimated forfeitures, over the employees requisite service period. Total
share-based compensation expense related to all of the Companys share-based awards was allocated
as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Research and development |
$ | 506,762 | $ | 347,123 | $ | 968,008 | $ | 610,769 | ||||||||
Selling, general and administrative |
542,048 | 719,154 | 902,758 | 1,319,024 | ||||||||||||
Share-based compensation expense
before tax |
1,048,810 | 1,066,277 | 1,870,766 | 1,929,793 | ||||||||||||
Related income tax benefit |
| | | | ||||||||||||
Share-based compensation expense,
net of tax |
$ | 1,048,810 | $ | 1,066,277 | $ | 1,870,766 | $ | 1,929,793 | ||||||||
Net share-based compensation expense
per basic and diluted share |
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.02 | ||||||||
Share-based compensation expense from: |
||||||||||||||||
Stock options |
$ | 737,474 | $ | 725,615 | $ | 1,418,465 | $ | 1,345,478 | ||||||||
Restricted stock awards |
311,336 | 340,662 | 452,301 | 584,315 | ||||||||||||
$ | 1,048,810 | $ | 1,066,277 | $ | 1,870,766 | $ | 1,929,793 | |||||||||
Since the Company has a net operating loss carryforward as of June 30, 2009, no excess tax
benefits for the tax deductions related to share-based awards were recognized in the interim
unaudited condensed consolidated statement of operations. For the three months ended June 30, 2009
and 2008, employees exercised stock options to purchase 320,313 and 75,379 shares of common stock,
respectively, for aggregate proceeds of approximately $347,000 and $71,000, respectively. For the
six months ended June 30, 2009 and 2008, employees exercised stock options to purchase 448,430 and
1,708,032 shares of common stock, respectively, for aggregate proceeds of approximately $581,000
and $665,000, respectively.
As of June 30, 2009, total unrecognized estimated compensation cost related to non-vested
stock options and non-vested restricted stock awards granted prior to that date was approximately
$7.9 million and $673,000, respectively, which is expected to be recognized over a weighted-average
period of 2.9 years and 7 months, respectively.
5. Inventory
Inventory is stated at the lower of cost or market and consists of the following:
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials |
$ | 745,347 | $ | 435,386 | ||||
Work in process |
48,088 | | ||||||
Finished goods |
10,099 | 5,937 | ||||||
$ | 803,534 | $ | 441,323 | |||||
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6. Property and Equipment
Property and equipment, net consists of the following:
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
Research equipment |
$ | 3,233,925 | $ | 2,699,706 | ||||
Computer and office equipment |
1,164,414 | 1,079,034 | ||||||
Leasehold improvements |
930,738 | 814,067 | ||||||
5,329,077 | 4,592,807 | |||||||
Accumulated depreciation and amortization |
(2,682,411 | ) | (2,042,882 | ) | ||||
$ | 2,646,666 | $ | 2,549,925 | |||||
Depreciation and amortization expense totaled approximately $351,000 and $248,000 for the
three months ended June 30, 2009 and 2008, respectively, and $680,000 and $477,000 for the six
months ended June 30, 2009 and 2008, respectively.
7. Accrued Expenses
Accrued expenses consist of the following:
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
Accrued compensation and payroll taxes |
$ | 2,103,110 | $ | 2,060,866 | ||||
Accrued research and development expenses |
2,057,646 | 1,543,321 | ||||||
Accrued expenses |
560,837 | 391,710 | ||||||
$ | 4,721,593 | $ | 3,995,897 | |||||
8. Deferred Revenue
Deferred revenue consists of the following:
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
Collaborative agreements |
$ | 48,443,427 | $ | 44,905,031 | ||||
Product sales |
10,240,020 | 4,543,425 | ||||||
Total deferred revenue |
58,683,447 | 49,448,456 | ||||||
Less current portion |
5,016,178 | 3,553,730 | ||||||
Deferred revenue, net of current portion |
$ | 53,667,269 | $ | 45,894,726 | ||||
Roche
Partnership In December 2006, the Company and Roche entered into a license and
collaborative agreement for Enhanze Technology (the Roche Partnership). Under the
terms of the Roche Partnership, Roche obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20, the Companys proprietary recombinant human
hyaluronidase, with up to thirteen Roche target compounds resulting from the collaboration. Roche
paid $20.0 million to the Company in December 2006 as an initial upfront payment for the
application of rHuPH20 to three pre-defined Roche biologic targets. In addition, through June 30,
2009 Roche paid an aggregate of approximately $13.5 million in connection with Roches election of
the fourth and fifth exclusive target and annual designation maintenance fees for the remaining
eight Roche targets.
Due to the Companys continuing involvement obligations, revenues from the upfront payment,
exclusive designation fees and annual designation maintenance fees were deferred and are being
recognized over the term of the Roche Partnership. The Company recognized revenue from the upfront
payment, exclusive designation fees and annual maintenance designation fees under the Roche
Partnership in the amounts of approximately $458,000 and $290,000 for the three months ended June
30, 2009 and 2008, respectively, and $900,000 and $580,000 for the six months ended June 30, 2009
and 2008, respectively.
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Baxter
Partnerships In September 2007, the Company and Baxter entered into an Enhanze
Technology License and Collaboration Agreement (the Gammagard Partnership). Under the terms of
the Gammagard Partnership, Baxter paid the Company a nonrefundable upfront payment of $10.0
million. Due to the Companys continuing involvement obligations, the $10.0 million upfront payment
was deferred and is being recognized over the term of the Gammagard Partnership. The Company
recognized revenue from the upfront payment under the Gammagard Partnership in the amount of
approximately $152,000 for the three months ended June 30, 2009 and 2008 and $303,000 for the six
months ended June 30, 2009 and 2008.
In February 2007, the Company and Baxter amended certain existing agreements for HYLENEX and
entered into a new agreement for kits and formulations with rHuPH20 (the HYLENEX Partnership).
Under the terms of the HYLENEX Partnership, Baxter paid the Company a nonrefundable upfront payment
of $10.0 million. Due to the Companys continuing involvement obligations, the $10.0 million
upfront payment was deferred and is being recognized over the term of the HYLENEX Partnership. The
Company recognized revenue from the upfront payment under the HYLENEX Partnership in the amount of
approximately $147,000 for the three months ended June 30, 2009 and 2008 and $293,000 for the six
months ended June 30, 2009 and 2008.
In addition, Baxter will make payments to the Company based on sales of the products covered
under the HYLENEX Partnership. Baxter has prepaid $10.0 million of such product-based payments. The
prepaid product-based payments are deferred and are being recognized as product sales revenues as
the Company earns such revenues from the sales of HYLENEX by Baxter.
9. Net Loss Per Share
The Company calculates basic and diluted net loss per common share in accordance with SFAS No.
128, Earnings Per Share, and SAB No. 98. Basic net loss per common share is computed by dividing
net loss for the period by the weighted average number of common shares outstanding during the
period, without consideration for common stock equivalents. Stock options, unvested stock awards
and warrants are considered to be common equivalents and are only included in the calculation of
diluted earnings per common share when their effect is dilutive. Because of the Companys net loss,
all outstanding stock options, unvested stock awards and warrants were excluded from the
calculation. The Company has excluded the following stock options, unvested stock awards and
warrants from the calculation of diluted net loss per common share because their effect is
anti-dilutive:
As of June 30, | ||||||||
2009 | 2008 | |||||||
Stock options and awards |
8,010,845 | 6,875,569 | ||||||
Warrants |
1,756,286 | 4,536,242 | ||||||
9,767,131 | 11,411,811 | |||||||
10. Stockholders Equity
In June 2009, the Company issued 6,150,000 shares of common stock in a public offering at a
price of $6.50 per share, generating approximately $38.2 million in net proceeds.
During the six months ended June 30, 2009 and 2008, holders of the Companys outstanding
options exercised rights to purchase approximately 448,000 and 1.7 million common shares,
respectively, at weighted exercise prices of $1.30 and $0.49 per share, respectively, for net
proceeds of approximately $581,000 and $665,000, respectively. Options to purchase approximately
7.8 million and 7.3 million shares of the Companys common stock were outstanding as of June 30,
2009 and December 31, 2008, respectively.
During the six months ended June 30, 2009 and 2008, holders of the Companys outstanding
warrants exercised to purchase approximately 1.4 million and 323,000 shares of common stock,
respectively, at weighted exercise prices of $1.81 and $0.77 per share, respectively, for net
proceeds of approximately $2.2 million and $247,000, respectively. Warrants to purchase
approximately 1.8 million and 3.2 million shares of the Companys common stock at weighted exercise
prices of $2.25 and $2.05 per share, respectively, were outstanding as of June 30, 2009 and
December 31, 2008, respectively.
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11. Commitments and Contingencies
From time to time the Company is involved in legal actions arising in the normal course of its
business. The Company is not presently subject to any material litigation nor, to managements
knowledge, is any litigation threatened against the Company that collectively is expected to have a
material adverse effect on the Companys consolidated cash flows, financial condition or results of
operations.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
As used in this report, unless the context suggests otherwise, the terms we, our, ours,
and us refer to Halozyme Therapeutics, Inc., and its wholly owned subsidiary, Halozyme, Inc.,
which are sometimes collectively referred to herein as the Company.
The following information should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q. Past financial or operating performance is not necessarily a reliable indicator of
future performance, and our historical performance should not be used to anticipate results or
future period trends.
Except for the historical information contained herein, this report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements reflect managements current forecast of certain aspects of our future. Words such as
expect, anticipate, intend, plan, believe, seek, estimate, think, may, could,
will, would, should, continue, potential, likely, opportunity and similar expressions
or variations of such words are intended to identify forward-looking statements, but are not the
exclusive means of indentifying forward-looking statements in this report. Additionally, statements
concerning future matters such as the development or regulatory approval of new products,
enhancements of existing products or technologies, third party performance under key collaboration
agreements, revenue and expense levels and other statements regarding matters that are not
historical are forward-looking statements. Such statements are based on currently available
operating, financial and competitive information and are subject to various risks, uncertainties
and assumptions that could cause actual results to differ materially from those anticipated or
implied in our forward-looking statements due to a number of factors including, but not limited to,
those set forth below under the section entitled Risks Factors and elsewhere in this Quarterly
Report on Form 10-Q.
Overview
We are a biopharmaceutical company dedicated to the development and commercialization of
products targeting the extracellular matrix for the endocrinology, oncology, dermatology and drug
delivery markets. Our existing products and our products under development are primarily based on
intellectual property covering the family of human enzymes known as hyaluronidases. Hyaluronidases
are enzymes (proteins) that break down hyaluronan, or HA, which is a naturally occurring
space-filling, gel-like substance that is a major component of tissues throughout the body, such as
skin and cartilage. Our primary technology is based on our proprietary recombinant human
PH20 enzyme, or rHuPH20, a human synthetic version of hyaluronidase. The rHuPH20 enzyme is a
naturally occurring enzyme that digests HA to temporarily break down the gel, thereby facilitating
the penetration and diffusion of other drugs and fluids that are injected under the skin or in the
muscle. Our proprietary rHuPH20 technology is applicable to multiple therapeutic areas and may be
used to both expand existing markets and create new ones for the development of our own proprietary
products. The rHuPH20 technology may also be applied to existing and developmental products of
third parties through key partnerships.
Our operations to date have involved organizing and staffing our operating subsidiary,
Halozyme, Inc., acquiring, developing and securing our technology and undertaking product
development for our existing products and a limited number of product candidates. We continue to
increase our focus on our proprietary product pipeline and have expanded investments in our
proprietary product candidates. We currently have four proprietary programs in various stages of
research and development, including three programs in clinical development. We also have three
partnered programs. Our key partnerships are with F. Hoffmann-La Roche, Ltd and Hoffmann-La Roche,
Inc., or Roche, to apply EnhanzeÔ Technology to Roches biological therapeutic
compounds for up to 13 targets and with Baxter Healthcare Corporation, or Baxter, to apply Enhanze
Technology to Baxters biological therapeutic compound, GAMMAGARD LIQUIDÔ and to
develop and supply active pharmaceutical ingredient, or API, for HYLENEX, a registered trademark of
Baxter International, Inc. There are two marketed products that utilize our technology: HYLENEX, a
product used as an adjuvant to increase the dispersion and absorption of other injected drugs and
fluids, and Cumulase®, a product used for in vitro fertilization, or IVF. Currently, we
receive only limited revenue from the sales of HYLENEX and from the sales of bulk materials to the
third party that produces Cumulase, in addition to revenues from our partnerships with Baxter and
Roche.
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We have product candidates in the research, preclinical and clinical stages, but future
revenues from the sales of these product candidates will depend on our ability to develop,
manufacture, obtain regulatory approvals for and successfully commercialize product candidates. It
may be years, if ever, before we are able to obtain regulatory approvals for these product
candidates. We have incurred net operating losses each year since inception, with an accumulated
deficit of approximately $145.4 million as of June 30, 2009.
In November 2008, we filed a shelf registration statement on Form S-3 (Registration No.
333-155787) which allowed us, from time to time, to offer and sell up to $50.0 million of equity or
debt securities. In June 2009, we sold approximately $40.0 million of our common stock in a public
offering at a price of $6.50 per share. We may utilize this universal shelf in the future to raise
capital to fund the continued development of our product candidates, the commercialization of our
products or for other general corporate purposes.
Our Current Products and Product Candidates
We have two marketed products and multiple product candidates targeting several indications in
various stages of development. The following table summarizes our proprietary product and product
candidates as well as our partnered product and product candidates:
![(PRODUCTS AND PRODUCT CANDIDATES DAIGRAM)](https://www.sec.gov/Archives/edgar/data/0001159036/000095012309031517/a53275a5327501.gif)
Insulin-PH20
Our lead proprietary program focuses on the formulation of rHuPH20 with insulin for the
treatment of diabetes mellitus. Diabetes mellitus is an increasingly prevalent, costly condition
associated with substantial morbidity and mortality. Attaining and maintaining normal blood sugar
levels to minimize the long-term clinical risks is a key treatment goal for diabetic patients.
Combining rHuPH20 with either regular or analog insulin may facilitate faster insulin dispersion
and absorption from the subcutaneous space into the vascular compartment leading to faster insulin
response and improved glycemic control, potentially resulting in fewer hypoglycemic episodes. By
making mealtime insulin onset faster, i.e., providing earlier insulin to the blood and thus earlier
glucose
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lowering activity, a combination of insulin with rHuPH20 may yield a better profile of
insulin effect, more like that found in healthy, non-diabetic people.
We
have initiated multiple clinical trials in connection with our
Insulin-PH20 program and we plan on initiating additional trials. Our
strategy is to develop a best in class insulin product with demonstrated clinical benefits for type
1 and 2 diabetes mellitus patients. The status and/or results from some of these trials are
summarized below:
| In July 2009, we initiated a Phase 2 clinical study in patients with type 2 diabetes mellitus. This randomized cross-over design study is designed to compare the postprandial glycemic excursions following a standardized test meal for three treatment regimens: insulin lispro (Humalog®, a mealtime insulin analog) with rHuPH20, regular insulin (Humulin® R, a non-analog insulin) with rHuPH20 and lispro alone. This Phase 2 study will also investigate the pharmacokinetics and glucodynamics of each treatment. |
| In June 2009, we announced preliminary results from our Phase 2 clinical trial in type 1 diabetic patients comparing Humalog with and without rHuPH20. These results demonstrated faster insulin absorption and increased peak insulin concentrations after co-administration of rHuPH20 with Humalog. Study results also showed a significant reduction in postprandial blood glucose levels following administration of a standardized test meal, with improvements in both peak glycemic response and total hyperglycemic exposure compared to Humalog alone. Mean glucose levels after the meal challenge remained within current treatment targets throughout the eight hour post meal observation period. We presented these results at the American Diabetes Association (ADA) 69th Scientific Sessions in New Orleans. |
| In May 2009, we initiated a Phase 2 clinical trial to compare regular insulin with rHuPH20 to lispro alone. After a one-month observation period that includes dose optimization, patients will be randomized to regular insulin with rHuPH20 or lispro and treated for three months. At the end of three months, patients will crossover to the other study treatment for another three months. The study will evaluate safety and efficacy. |
PEGPH20
We are investigating PEGylated-rHuPH20, or PEGPH20, a new molecular entity, as a candidate for
the systemic treatment of tumors rich in HA. PEGylation refers to the attachment of polyethylene
glycol to our rHuPH20 enzyme, which extends its half life in the blood from less than 30 seconds to
more than 24 hours. An estimated 20% to 40% of solid tumors including prostate, breast, pancreas
and colon may produce significant amounts of HA that forms a halo-like coating over the surface of
the tumor cell. The quantity of HA produced by the tumor cells correlates with increased tumor
growth and metastasis and has been linked with tumor progression in some studies.
In preclinical studies, PEGPH20 has been shown to remove the HA coating surrounding several
tumor cell lines. Treatment of PC3 (a prostate cancer cell line that produces HA) tumor-bearing
mice with PEGPH20 as a single agent demonstrated a slowing of tumor growth relative to controls.
Repeat dosing with PEGPH20 produced a sustained depletion of HA in the tumor microenvironment. For
tumor models that did not produce HA, the presence of PEGPH20 had no effect. Administration of the
combination of PEGPH20 with docetaxel or with liposomal doxorubicin in HA producing animal tumor
models produced a significant survival advantage for the combination relative to either
chemotherapeutic agent alone.
Additional studies have demonstrated that PEGPH20 can significantly reduce tumor interstitial
fluid pressure (IFP) in an animal cancer model in a dose dependent fashion, achieving more than 85%
reduction in IFP following IV administration. Elevated tumor IFP has been associated with poor
patient prognosis and resistance to chemotherapeutic regimens. Therefore, based on these animal
studies and other tests conducted by Halozyme, PEGPH20 may represent a potentially innovative
treatment approach against tumors that produce HA.
In the first quarter of 2009, we initiated a Phase 1 clinical trial for our PEGPH20 program.
This first in human trial with PEGPH20 is a dose-evaluating, multicenter, pharmacokinetic and
pharmacodynamic, safety study, in which patients with advanced solid tumors will receive
intravenous administration of PEGPH20 as a single agent.
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Based on initial data from this trial, and
after consultation with the FDA, we have revised the original trial design to allow for lower doses
of PEGPH20 to be administered with the same frequency. We do not expect this revision of the trial
design to delay the completion of this trial.
Chemophase
Chemophase is an investigative drug being developed for potential use in the treatment of
patients with superficial bladder cancer. Our Chemophase program combines our rHuPH20 enzyme with
mitomycin C, a cytotoxic drug, for direct administration into the bladder immediately after
transurethral resection of bladder tumors, a standard surgical treatment for the disease. Many
bladder tumor cells produce high quantities of HA and thus treatment to remove the HA coating could
increase their exposure to mitomycin C. This may lead to a lower recurrence of the cancer and a
better prognosis for patients.
During the first quarter of 2009, we decided to reallocate certain resources previously
budgeted for Chemophase to other higher priority programs, such as our Insulin-PH20 and PEGPH20
programs. We are currently exploring strategic alternatives that will allow the Chemophase program
to continue its clinical development.
Enhanze Technology
Enhanze Technology, a proprietary drug enhancement approach using rHuPH20, is a broad
technology that we have licensed to other pharmaceutical companies. When formulated with other
injectable drugs, Enhanze Technology can facilitate the subcutaneous dispersion and absorption of
these drugs by temporarily opening flow channels under the skin. Molecules as large as 200
nanometers may pass freely through the extracellular matrix, which recovers its normal density
within approximately 24 hours, leading to a drug delivery platform which does not permanently alter
the architecture of the skin. The principal focus of our Enhanze Technology platform is the use of
rHuPH20 to facilitate subcutaneous route of administration for large molecule biological
therapeutics. Potential benefits of subcutaneous administration of these biologics include life
cycle management, patient convenience and benefits to payors.
We currently have Enhanze Technology partnerships with Roche and Baxter and we are currently
pursuing additional partnerships with pharmaceutical companies that market or develop drugs that
could benefit from injection via the subcutaneous route of administration.
Roche Partnership
In December 2006, Halozyme and Roche entered into an Enhanze Technology partnership, or the
Roche Partnership. Under the terms of the Roche Partnership, Roche obtained a worldwide, exclusive
license to develop and commercialize product combinations of rHuPH20 with up to thirteen Roche
target compounds resulting from the collaboration. Roche initially had the exclusive right to apply
rHuPH20 to only three pre-defined Roche biologic targets with the option to exclusively develop and
commercialize rHuPH20 with an additional ten targets. In December 2008, we announced that Roche
elected to add a fourth exclusive target to the three original exclusive targets, and in June 2009
we announced that Roche elected to add a fifth exclusive target. We also previously announced the
commencement of Phase 1 clinical trials for products directed at two of the exclusive targets.
Roche retains the option to exclusively develop and commercialize rHuPH20 with an additional eight
targets through the payment of annual license maintenance fees. Pending the successful completion
of various clinical, regulatory and sales events, Roche will be obligated to make milestone
payments to us as well as royalty payments on the sales of products that result from the
partnership.
Baxter Gammagard Partnership
GAMMAGARD LIQUID is a current Baxter product that is indicated for the treatment of primary
immunodeficiency disorders associated with defects in the immune system. In September 2007,
Halozyme and Baxter entered into an Enhanze Technology partnership, or the Gammagard Partnership.
Under the terms of this partnership, Baxter obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20 with GAMMAGARD LIQUID. Pending the successful
completion of various regulatory and sales milestones, Baxter will be obligated to make milestone
payments to us as well as royalty payments on the sales of products that result from the
partnership. Baxter is responsible for all development, manufacturing, clinical,
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regulatory, sales
and marketing costs under the Gammagard Partnership, while we will be responsible for the supply of
the rHuPH20 enzyme. In addition, Baxter has certain product development and commercialization
obligations in major markets identified in the Gammagard License. In January of 2009, we announced
the commencement of a Phase 3 clinical trial for GAMMAGARD LIQUID with rHuPH20, and in July 2009,
we announced the completion of enrollment for this study.
HYLENEX Partnership
HYLENEX is a formulation of rHuPH20 that, when injected under the skin, facilitates the
dispersion and absorption of other injected drugs or fluids. In February 2007, Halozyme and Baxter
amended certain existing agreements relating to HYLENEX and entered into a new agreement for kits
and formulations with rHuPH20, or the HYLENEX Partnership. Pending the successful completion of a
series of regulatory and sales events, Baxter will be obligated to make milestone payments to us as
well as royalty payments on the sales of products that result from the partnership. Baxter is
responsible for development, manufacturing, clinical, regulatory, sales and marketing costs of the
products covered by the HYLENEX Partnership. We will continue to supply Baxter with API for
HYLENEX, and Baxter will prepare, fill, finish and package HYLENEX and hold it for subsequent
distribution. Baxter has indicated that the HYLENEX product launch will occur in the fourth quarter
of 2009. In addition, under the HYLENEX Partnership, Baxter has a worldwide, exclusive license to
develop and commercialize product combinations of rHuPH20 with Baxter hydration fluids and generic
small molecule drugs, with the exception of combinations with (i) bisphosphonates, as well as (ii)
cytostatic and cytotoxic chemotherapeutic agents, the rights to which have been retained by
Halozyme.
Cumulase
Cumulase is an ex vivo (used outside of the body) formulation of rHuPH20 to replace the bovine
(bull) enzyme currently used for the preparation of oocytes (eggs) prior to IVF during the process
of intracytoplasmic sperm injection (ICSI), in which the enzyme is an essential component. Cumulase
strips away the HA that surrounds the oocyte, allowing the clinician to then perform the ICSI
procedure.
Revenues
Revenues from product sales depend on our ability to develop, manufacture, obtain regulatory
approvals for and successfully commercialize our products and product candidates.
Revenues from license and collaboration agreements are recognized based on the performance
requirements of the underlying agreements. Revenue is deferred for fees received before they are
earned. Nonrefundable upfront payment and license fees, where we have an ongoing involvement or
performance obligation, are recorded as deferred revenue and recognized as revenue over the
contract or development period. Milestone payments are generally recognized as revenue upon the
achievement of the milestones as specified in the underlying agreement, assuming we meet certain
criteria. Royalty revenues from the sale of licensed products are recognized upon the sale of such
products.
During 2006 and 2007, we entered into the Roche Partnership, the HYLENEX Partnership and the
Gammagard Partnership. Elements of these partnerships include nonrefundable license fees,
reimbursements of research and development services, various clinical, development, regulatory or
sales milestones and future product-based or royalty payments, as applicable. Due to our ongoing
involvement obligations under these partnerships, we recorded the nonrefundable license fees and
annual designation maintenance fees as deferred revenues. Such revenues are being recognized over
the terms of the underlying agreements that define the terms of the partnerships.
Costs and Expenses
Cost of Sales. Cost of sales consists primarily of raw materials, third-party manufacturing
costs, fill and finish costs, and freight costs associated with the sales of Cumulase, and the API
for HYLENEX.
Research and Development. Our research and development expenses consist primarily of costs
associated with the development and manufacturing of our product candidates, compensation and other
expenses for research and development personnel, supplies and materials, costs for consultants and
related contract research, clinical trials,
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facility costs and depreciation. We charge all research
and development expenses to operations as they are incurred. Our research and development
activities are primarily focused on the development of our various product candidates.
Since our inception in 1998 through June 30, 2009, we have incurred research and development
expenses of $121.7 million. From January 1, 2006 through June 30, 2009, approximately 9% of our
research and development
expenses were associated with the research and development of our rHuPH20 enzyme used in our
HYLENEX product, and approximately 14% and 13% of our research and development expenses were
associated with the development of our PEGPH20 and Insulin-PH20 product candidates, respectively.
Due to the uncertainty in obtaining the U.S. Food and Drug Administration, or FDA, approval, our
reliance on third parties and competitive pressures, we are unable to estimate with any certainty
the additional costs we will incur in the continued development of our proprietary product
candidates for commercialization. However, we expect our research and development expenses to
increase substantially if we are able to advance our product candidates into later stages of
clinical development.
Clinical development timelines, likelihood of success and total costs vary widely. We
anticipate that we will make ongoing determinations as to which research and development projects
to pursue and how much funding to direct to each project on an ongoing basis in response to the
scientific and clinical progress of each product candidate and other market and regulatory
developments. We plan on focusing our resources on those proprietary and partnered product
candidates that represent the most valuable economic and strategic opportunities.
Product candidate completion dates and costs vary significantly for each product candidate and
are difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequent
compliance with applicable regulations require the expenditure of substantial resources. Any
failure by us to obtain, or any delay in obtaining, regulatory approvals could cause our research
and development expenditures to increase and, in turn, have a material adverse effect on our
results of operations. We cannot be certain when, or if, our product candidates will receive
regulatory approval or whether any net cash inflow from our other product candidates, or
development projects, will commence.
Selling, General and Administrative. Selling, general and administrative, or SG&A, expenses
consist primarily of compensation and other expenses related to our corporate operations and
administrative employees, accounting and legal fees, other professional services expenses,
marketing expenses, as well as other expenses associated with operating as a publicly traded
company. We anticipate continued increases in SG&A expenses as our operations continue to expand.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We
review our estimates on an ongoing basis. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or conditions. We
believe the following accounting policies to be critical to the judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue Recognition
We generate revenues from product sales and collaborative agreements. Payments received under
collaborative agreements may include nonrefundable fees at the inception of the agreements, license
fees, milestone payments for specific achievements designated in the collaborative agreements,
reimbursements of research and development services and/or royalties on sales of products resulting
from collaborative arrangements.
We recognize revenue in accordance with SEC Staff Accounting Bulletin, or SAB, No. 104,
Revenue Recognition, and Emerging Issues Task Force, or EITF, Issue No. 00-21, Revenue Arrangements
with Multiple Deliverables. Revenue is recognized when all of the following criteria are met: (1)
persuasive evidence of an
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arrangement exists; (2) delivery has occurred or services have been rendered; (3) the sellers
price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.
Product Sales
Revenues from the sale of Cumulase are recognized when the transfer of ownership occurs, which
is upon shipment to our distributor. We are obligated to accept returns for product that does not
meet product specifications. Historically, we have not had any product returns as a result of not
meeting product specifications.
Under the terms of the HYLENEX Partnership, we supply Baxter the API for HYLENEX at our fully
burdened cost plus a margin. Baxter fills and finishes HYLENEX and holds it for subsequent
distribution, at which time we ensure it meets product specifications and release it as available
for sale. Because of our continued involvement in the development and production process of
HYLENEX, the earnings process is not considered to be complete. Accordingly, we defer the revenue
and related product costs on the API for HYLENEX until the product is filled, finished, packaged
and released. Baxter may only return the API for HYLENEX to us if it does not conform to certain
specified criteria set forth in the HYLENEX Partnership or upon termination of such agreement. We
have historically demonstrated that the API shipped to Baxter has consistently met the specified
criteria; therefore, no allowance for product returns has been established. In addition, we receive
product-based payments upon the sale of HYLENEX by Baxter, in accordance with the terms of the
HYLENEX Partnership. Product sales revenues are recognized as we earn such revenues based on
Baxters shipments of HYLENEX to its distributors when such amounts can be reasonably estimated.
Baxter has prepaid $10.0 million of product-based payments. The prepaid product-based payments were
initially deferred and are being recognized as product sales revenue as the Company earns such
revenue from the sales of HYLENEX by Baxter.
Revenues under Collaborative Agreements
Revenues from collaborative and licensing agreements are recognized based on the performance
requirements of the underlying agreements. Revenue is deferred for fees received before they are
earned. Nonrefundable upfront payments and license fees, in which we have an ongoing involvement or
performance obligation, are recorded as deferred revenue and recognized as revenue over the
contract or development period. We recognize milestone payments upon the achievement of specified
milestones if: (1) the milestone is substantive in nature and the achievement of the milestone was
not reasonably assured at the inception of the agreement, (2) the fees are nonrefundable and (3)
our performance obligations after the milestone achievement will continue to be funded by our
collaborator at a level comparable to the level before the milestone achievement. Any milestone
payments received prior to satisfying these revenue recognition criteria are recorded as deferred
revenue. Reimbursements of research and development services are recognized as revenue during the
period in which the services are performed. Royalties to be received based on sales of licensed
products by our collaborators incorporating our products are recognized as earned in accordance
with the terms of the underlying agreements.
Share-Based Payments
We account for share-based awards exchanged for employee services in accordance with Statement
of Financial Accounting Standards, or SFAS, No. 123(R), Share-Based Payment, which we adopted
effective January 1, 2006, including the provisions of the SAB No. 107 and 110. We use the fair
value method to account for share-based payments with a modified prospective application which
provides for certain changes to the method for valuing share-based compensation. The valuation
provisions of SFAS No. 123(R) apply to new awards and awards that are outstanding on the effective
date and subsequently modified or cancelled. Under the modified prospective application, prior
periods were not revised for comparative purposes.
The fair value of each option award is estimated on the date of grant using a
Black-Scholes-Merton option pricing model, or Black-Scholes model, that uses assumptions regarding
a number of complex and subjective variables. These variables include, but are not limited to, our
expected stock price volatility, actual and projected employee stock option exercise behaviors,
risk-free interest rate and expected dividends. Expected volatilities are based on the historical
volatility of our common stock and our peer group. The expected term of options granted is based on
analyses of historical employee termination rates and option exercises. The risk-free
interest rates are based on the U.S. Treasury yield in effect at the time of the grant. Since we do
not expect to pay dividends on our common
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stock in the foreseeable future, we estimated the
dividend yield to be 0%. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We estimate pre-vesting forfeitures based on our historical experience and those of our peer group.
If factors change and we employ different assumptions in the application of SFAS No. 123(R) in
future periods, the share-based compensation expense that we record under SFAS No. 123(R) may
differ significantly from what we have recorded in the current period. There is a high degree of
subjectivity involved when using option pricing models to estimate share-based compensation under
SFAS No. 123(R). Certain share-based payments, such as employee stock options, may expire worthless
or otherwise result in zero intrinsic value as compared to the fair values originally estimated on
the grant date and reported in our consolidated financial statements. Alternatively, values may be
realized from these instruments that are significantly in excess of the fair values originally
estimated on the grant date and reported in our consolidated financial statements. There is
currently no market-based mechanism or other practical application to verify the reliability and
accuracy of the estimates stemming from these valuation models, nor is there a means to compare and
adjust the estimates to actual values. Although the fair value of employee share-based awards is
determined in accordance with SFAS No. 123(R) and SAB No. 107 and 110 using an option-pricing
model, that value may not be indicative of the fair value observed in a willing buyer/willing
seller market transaction.
Research and Development Expenses
Research and development expenses include salaries and benefits, facilities and other overhead
expenses, clinical trials, research-related manufacturing services, contract services and other
outside expenses. Research and development expenses are charged to operations as they are incurred.
Advance payments, including nonrefundable amounts, for goods or services that will be used or
rendered for future research and development activities are deferred and capitalized. Such amounts
will be recognized as an expense as the related goods are delivered or the related services are
performed or such time that the Company does not expect the goods to be delivered or services to be
rendered.
Milestone payments that we make in connection with in-licensed technology or product
candidates are expensed as incurred when there is uncertainty in receiving future economic benefits
from the licensed technology or product candidates. We consider the future economic benefits from
the licensed technology or product candidates to be uncertain until such licensed technology or
product candidates are approved for marketing by the FDA or when other significant risk factors are
abated. For expense accounting purposes, management has viewed future economic benefits for all of
our licensed technology or product candidates to be uncertain.
Payments in connection with our clinical trials are often made under contracts with multiple
contract 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, unit price or on a time-and-material basis. Payments under these
contracts depend on factors such as the successful enrollment or treatment of patients or the
completion of other clinical trial milestones. Expenses related to clinical trials are accrued
based on our estimates and/or representations from service providers regarding work performed,
including actual level of patient enrollment, completion of patient studies and clinical trials
progress. Other incidental costs related to patient enrollment or treatment are accrued when
reasonably certain. If the contracted amounts are modified (for instance, as a result of changes in
the clinical trial protocol or scope of work to be performed), we modify our accruals accordingly
on a prospective basis. Revisions in scope of contract are charged to expense in the period in
which the facts that give rise to the revision become reasonably certain. Because of the
uncertainty of possible future changes to the scope of work in clinical trials contracts, we are
unable to quantify an estimate of the reasonably likely effect of any such changes on our
consolidated results of operations or financial position. Historically, we have had no material
changes in our clinical trial expense accruals that would have had a material impact on our
consolidated results of operations or financial position.
Inventory
Inventory consists of API for our Cumulase and HYLENEX products. Inventory primarily
represents raw materials used in production, work in process and finished goods inventory on hand,
valued at actual cost. Inventory is reviewed periodically for slow-moving or obsolete items. If a
launch of a new product is delayed, inventory may
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not be fully utilized and could be subject to
impairment, at which point we would record a reserve to adjust inventory to its net realizable
value.
Fair Value Measurements
We determine fair value measurements in accordance with SFAS No. 157, Fair Value Measurements,
and FASB Staff Position, or FSP, No. FAS 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value
measurements. FSP No. FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not
active and provides an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active.
SFAS No. 157 prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities; | |||
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and | |||
Level 3 | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
Cash and cash equivalents of approximately $89.2 million at June 30, 2009 are carried at fair
value based on quoted market prices for identical securities (Level 1 inputs).
The above listing 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 U.S. GAAP. There are also areas in which our managements judgment in selecting any
available alternative would not produce a materially different result. Refer to our audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2008, which contain accounting policies and other disclosures required
by U.S. GAAP.
Results of Operations
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Revenues Under Collaborative Agreements Revenues under collaborative agreements were
approximately $1.2 million for the three months ended June 30, 2009 compared to $1.4 million for
the three months ended June 30, 2008. Revenues under collaborative agreements primarily consisted
of the amortization of license fees received from Baxter and Roche of approximately $756,000 and
$588,000 for the three months ended June 30, 2009 and 2008, respectively. Revenues under
collaborative agreements also included reimbursements for research and development services from
Baxter of $276,000 and $554,000 and Roche of $214,000 and $210,000 for the three months ended June
30, 2009 and 2008, respectively. Such reimbursements are for research and development
services rendered by us at the request of Baxter and Roche and the amount of future revenues
related to reimbursable research and development services is uncertain. We expect the
non-reimbursement revenues under our collaborative agreements to continue to increase in future
periods provided that we meet various clinical and regulatory milestones set forth in such
agreements.
Product Sales Product sales were $180,000 for the three months ended June 30, 2009 compared
to $83,000 for the three months ended June 30, 2008. The increase of $97,000 was primarily due to
the increase in sales of Cumulase and API for HYLENEX. Based upon
representations made to us by Baxter regarding the resources to be
allocated to the launch of HYLENEX
in the fourth quarter of 2009, we expect product sales to increase in future periods due to
increased HYLENEX sales.
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Cost of Sales Cost of sales were $45,000 for the three months ended June 30, 2009 compared
to $37,000 for the three months ended June 30, 2008.
Research and Development Research and development expenses were $14.6 million for the three
months ended June 30, 2009 compared to $8.9 million for the three months ended June 30, 2008. The
increase of $5.7 million, or 64%, was primarily due to the increase in clinical trial expenses of
$2.0 million, outsourced research and development costs of $1.9 million related to our various
preclinical programs and the manufacturing scale-up of our rHuPH20 enzyme, and increased
compensation costs of $1.5 million, of which $160,000 related to increased share-based
compensation, primarily due to the increase in our research and development headcount. At June 30,
2009, our headcount for research and development functions totaled 98 employees, compared with 83
employees at June 30, 2008. We expect certain research and development costs to increase in future
periods as we increase our research efforts, expand our clinical trials and continue to develop and
manufacture our product candidates.
Selling, General and Administrative SG&A expenses were $3.9 million for the three months
ended June 30, 2009 compared to $3.8 million for the three months ended June 30, 2008. We expect
SG&A expenses to increase in future periods as we continue to expand our operations.
Interest Income Interest income was $24,000 for the three months ended June 30, 2009
compared to $372,000 for the three months ended June 30, 2008. The decrease in interest income was
primarily due to lower interest rates and lower average cash and cash equivalent balances in 2009
as compared to the same period in 2008.
Net Loss Net loss was $17.1 million, or $0.21 per common share, for the three months ended
June 30, 2009 compared to $11.0 million, or $0.14 per common share for the three months ended June
30, 2008. The increase in net loss was primarily due to an increase in operating expenses.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenues Under Collaborative Agreements Revenues under collaborative agreements were
approximately $3.9 million for the six months ended June 30, 2009 compared to $3.0 million for the
six months ended June 30, 2008. Revenues under collaborative agreements primarily consisted of the
amortization of license fees and milestone payments received from Baxter and Roche of approximately
$2.5 million and $1.2 million for the six months ended June 30, 2009 and 2008, respectively.
Revenues under collaborative agreements also included reimbursements for research and development
services from Baxter of $700,000 and $1.0 million and Roche of $744,000 and $834,000 for the six
months ended June 30, 2009 and 2008, respectively. Such reimbursements are for research
and development services rendered by us at the request of Baxter and Roche and the amount of future
revenues related to reimbursable research and development services is uncertain. We expect the
non-reimbursement revenues under our collaborative agreements to continue to increase in future
periods provided that we meet various clinical and regulatory milestones set forth in such
agreements.
Product Sales Product sales were $258,000 for the six months ended June 30, 2009 compared
to $224,000 for the six months ended June 30, 2008. The increase of $34,000 was primarily due to an
increase in the sales of HYLENEX API. Based upon representations made to us by Baxter regarding the resources to be
allocated to the launch of HYLENEX in the fourth
quarter of 2009, we expect product sales to increase in future periods due to increased HYLENEX
sales.
Cost of Sales Cost of sales were $49,000 for the six months ended June 30, 2009 compared to
$74,000 for the six months ended June 30, 2008.
Research and Development Research and development expenses were $28.6 million for the six
months ended June 30, 2009 compared to $17.4 million for the six months ended June 30, 2008. The
increase of $11.2 million, or 64%, was primarily due to the increase in outsourced research and development
costs of $4.5 million related to our various preclinical programs and the manufacturing scale-up of
our rHuPH20 enzyme, and increased compensation costs of $3.2 million, of which $357,000 related to
increased share-based compensation, primarily due to the increase in our research and development
headcount. At June 30, 2009, our headcount for research and development functions totaled 98
employees, compared with 83 employees at June 30, 2008. Additionally, our clinical trial expenses
increased by $2.7 million for the six months ended June 30, 2009. We expect certain research and
development costs to increase in future periods as we increase our research efforts, expand our
clinical trials and continue to develop and manufacture our product candidates.
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Selling, General and Administrative SG&A expenses were $7.4 million for the six months
ended June 30, 2009 compared to $8.0 million for the six months ended June 30, 2008. The decrease
of approximately $613,000, or 8%, was primarily due to the decrease in corporate legal expenses of
$1.2 million. Legal expenses for the six months ended June 30, 2008 included $635,000 related to
the settlement of an arbitration matter. The decrease was also due to a $416,000 decrease in
share-based compensation. The decrease was partially offset by a $848,000 increase in compensation
costs, excluding share-based compensation. We expect SG&A expenses to increase in future periods as
we continue to expand our operations.
Interest Income Interest income was $57,000 for the six months ended June 30, 2009 compared
to $1.3 million for the six months ended June 30, 2008. The decrease in interest income was
primarily due to lower interest rates and lower average cash and cash equivalent balances in 2009
as compared to the same period in 2008.
Net Loss Net loss was $31.8 million, or $0.38 per common share, for the six months ended
June 30, 2009 compared to $21.0 million, or $0.27 per common share for the six months ended June
30, 2008. The increase in net loss was primarily due to an increase in operating expenses and a
decrease in interest income, partially offset by increases in revenues.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are our existing cash and cash equivalents. As of June 30,
2009, we had cash and cash equivalents of approximately $89.2 million. We expect our cash
requirements to increase as we continue to increase our research and development for, seek
regulatory approvals of, and develop and manufacture our current product candidates. As we expand
our research and development efforts and pursue additional product opportunities, we anticipate
additional cash requirements for hiring of personnel, capital expenditures and investment in
additional internal systems and infrastructure. The amount and timing of cash requirements will
depend on the research, development, manufacture, regulatory and market acceptance of our product
candidates, if any, and the resources we devote to researching, developing, manufacturing,
commercializing and supporting our product candidates.
We believe that our current cash and cash equivalents will be sufficient to fund our
operations for at least the next twelve months. Currently, we anticipate total net cash burn of
approximately $30.0 to $35.0 million for the year ending December 31, 2009, depending on the
progress of various preclinical and clinical programs, the timing of our manufacturing scale up and
the achievement of various milestones under our existing collaborative agreements. We do not expect
our revenues to be sufficient to fund operations for several years. We expect to fund our
operations going forward with existing cash resources, anticipated revenues from our existing
collaborations and cash that we will raise through future transactions. We may finance future cash
needs through any one of the following financing vehicles: (i) the public offering of securities;
(ii) new collaborative agreements; (iii) expansions or revisions to existing collaborative
relationships; (iv) private financings and/or (v) other equity or debt financings.
In November 2008, we filed a shelf registration statement on Form S-3 (Registration No.
333-155787) which allowed us, from time to time, to offer and sell up to $50.0 million of equity or
debt securities. In June 2009, we sold approximately $40.0 million of our common stock in a public
offering at a price of $6.50 per share. We cannot be certain that our existing cash and cash
equivalents will be adequate for our anticipated needs 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. Having insufficient funds will require us to
delay, scale back or eliminate some or all of our research and development programs or delay the
launch of our product candidates. If we raise additional funds by issuing equity securities,
substantial dilution to existing stockholders could result. If we raise additional funds by
incurring debt financing, the terms of the debt may involve significant cash payment obligations as
well as covenants and specific financial ratios that may restrict our ability to operate our
business.
Cash Flows
Net cash used in operations was $14.7 million for the six months ended June 30, 2009 compared
to $15.7 million of net cash used in operations for the six months ended June 30, 2008.
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Net cash used in investing activities was $747,000 for the six months ended June 30, 2009
compared to $472,000 for the six months ended June 30, 2008. This was primarily due to an increase
in purchases of property and equipment during 2009.
Net cash provided by financing activities was $41.0 million for the six months ended June 30,
2009 compared to $913,000 for the six months ended June 30, 2008. Net cash provided by financing
activities primarily consisted of net proceeds of $38.2 million from the sale of our common stock
in June 2009 and $2.8 million from warrant and stock option exercises.
Off-Balance Sheet Arrangements
As of June 30, 2009, 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 did 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
See Note 3, Accounting Pronouncements, in the Notes to Condensed
Consolidated Financial Statements for discussions of new accounting pronouncements and their
effect, if any on us.
Risk Factors
The following information sets forth factors that could cause our actual results to differ
materially from those contained in forward-looking statements we have made in this Quarterly Report
on Form 10-Q and those we may make from time to time. In addition to the risk factors discussed
below, we are also subject to additional risks and uncertainties not presently known to us or that
we currently deem immaterial. If any of these known or unknown risks or uncertainties actually
occurs, our business, financial position and results of operations could be materially and
adversely affected and the value of our securities could decline significantly.
Risks Related To Our Business
We have generated only minimal revenue from product sales to date; we have a history of net losses
and negative cash flow, and we may never achieve or maintain profitability.
We have generated only minimal revenue from product sales, licensing fees and milestone
payments to date and may never generate significant revenues from future product sales, licensing
fees and milestone payments. Even if we do achieve significant revenues from product sales,
licensing fees and/or milestone payments, we expect to incur significant operating losses over the next few years. We have never been profitable,
and we may never become profitable. Through June 30, 2009, we have incurred aggregate net losses of
approximately $145.4 million.
If our contract manufacturers are unable to manufacture significant amounts of the API used in our
products and product candidates, our product development and commercialization efforts could be
delayed or stopped and our collaborative partnerships could be damaged.
We have existing supply agreements with contract manufacturing organizations Avid Bioservices,
Inc., or Avid, and Cook Pharmica LLC, or Cook, to produce bulk API. These manufacturers each
produce API under current Good Manufacturing Practices, or cGMP, for clinical uses. In addition,
Avid currently produces API for commercialized products. Avid and Cook will also provide support
for the chemistry, manufacturing and controls sections for FDA regulatory filings. We rely on their
ability to successfully manufacture these batches according to product specifications and Cook has
relatively limited experience manufacturing our API. In addition, as a result of our contractual
obligations to Roche, we will be required to significantly scale up our commercial API production
at Cook during the next few years. If Cook is unable to obtain status as an FDA-approved
manufacturing facility, or if either Avid or Cook: (i) are unable to retain status as FDA-approved
manufacturing facilities; (ii) are unable to otherwise successfully scale up our API production; or
(iii) fail to manufacture the API required by our proprietary and partnered products and product
candidates for any other reason, our business will be adversely affected. We
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have not yet established, and may not be able to establish, favorable arrangements with additional API
manufacturers and suppliers of the ingredients necessary to manufacture the API should the existing
manufacturers and suppliers become unavailable or in the event that our existing manufacturers and
suppliers are unable to adequately perform their responsibilities. Any delays, interruptions or
other problems regarding the ability of Avid and/or Cook to supply API on a timely basis could: (i)
cause the delay of clinical trials or otherwise delay or prevent the regulatory approval of
proprietary or partnered product candidates; and (ii) delay or prevent the effective
commercialization of proprietary or partnered products. Such delays would likely damage our
relationship with our partners under our key collaboration agreements and they would have a
material adverse effect on our business and financial condition.
If any party to a key collaboration agreement, including us, fails to perform material obligations
under such agreement, or if a key collaboration agreement is terminated for any reason, our
business would significantly suffer.
We have entered into key collaboration agreements under which we may receive significant
future payments in the form of maintenance fees, milestone payments and royalties. In the event
that a party fails to perform under a key collaboration agreement, or if a key collaboration
agreement is terminated, the reduction in anticipated revenues could delay or suspend our product
development activities for some of our product candidates as well as our commercialization efforts
for some or all of our products. In addition, the termination of a key collaboration agreement by
one of our partners could materially impact our ability to enter into additional collaboration
agreements with new partners on favorable terms, if at all. In certain circumstances, the
termination of a key collaboration agreement would require us to revise our corporate strategy
going forward and reevaluate the applications and value of our technology.
If we are unable to sufficiently develop our sales, marketing and distribution capabilities or
enter into successful agreements with third parties to perform these functions, we will not be able
to fully commercialize our products.
We may not be successful in marketing and promoting our existing product candidates or any
other products we develop or acquire in the future. We are currently in the process of developing
our sales, marketing and distribution capabilities. However, our current capabilities in these
areas are very limited. In order to commercialize any products successfully, we must internally
develop substantial sales, marketing and distribution capabilities or establish collaborations or
other arrangements with third parties to perform these services. We do not have extensive
experience in these areas, and we may not be able to establish adequate in-house sales, marketing
and distribution capabilities or engage and effectively manage relationships with third parties to
perform any or all of such services. To the extent that we enter into co-promotion or other
licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and any revenues we receive will
depend upon the efforts of third parties, whose efforts may not meet our expectations or be
successful.
We depend upon the efforts of third parties, such as Baxter for HYLENEX, to promote and sell
our current products, but there can be no assurance that the efforts of these third parties will
meet our expectations or result in any significant product sales. While these third parties are
largely responsible for the speed and scope of sales and marketing efforts, they may not dedicate
the resources necessary to maximize product opportunities and our ability to cause these third
parties to increase the speed and scope of their efforts may be limited. In addition, sales and
marketing efforts could be negatively impacted by the delay or failure to obtain additional
supportive clinical trial data for our products. In some cases, third party partners are
responsible for conducting these additional clinical trials and our ability to increase the efforts
and resources allocated to these trials may be limited.
If we have problems with third parties that prepare, fill, finish and package our products and
product candidates for distribution, our product commercialization and development efforts for
these products and product candidates could be delayed or stopped.
We rely on third parties to prepare, fill, finish and package our products and product
candidates prior to their distribution. If we are unable to locate third parties to perform these
functions on terms that are economically acceptable to us, the progress of clinical trials could be
delayed or even suspended and the commercialization of approved product candidates could be delayed
or prevented. We currently utilize a subsidiary of Baxter to prepare, fill, finish and package
HYLENEX under a development and supply agreement. Baxter has limited experience
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manufacturing HYLENEX batches, and we rely on its ability to successfully manufacture HYLENEX batches according
to product specifications. Any delays or interruptions in Baxters ability to manufacture HYLENEX
batches in amounts necessary to meet product demand could have a material adverse impact on our
business and financial condition.
Most of our current proprietary and partnered products and product candidates rely on the rHuPH20
enzyme.
The rHuPH20 enzyme is a key technological component of Enhanze Technology, our insulin
program, HYLENEX and other proprietary and partnered products and product candidates. An adverse
development for rHuPH20 (e.g., we are unable to obtain sufficient quantities of rHuPH20, we are
unable to obtain or maintain material proprietary rights to rHuPH20, or we discover negative
characteristics of rHuPH20) would substantially impact multiple areas of our business, including
current and potential partnerships as well as proprietary programs.
If our proprietary and partnered product candidates do not receive and maintain regulatory
approvals, they will not be commercialized, and this failure would substantially impair our ability
to generate revenues.
Approval from the FDA is necessary to manufacture and market pharmaceutical products in the
United States. Most other countries in which we may do business have similar requirements. To date,
two of our product candidates have received regulatory approval from the FDA.
The process for obtaining FDA approval is extensive, time-consuming and costly, and there is
no guarantee that the FDA will approve any new drug applications, or NDAs, that may be filed with
respect to any of our proprietary or partnered product candidates, or that the timing of any such
approval will be appropriate for our desired product launch schedule and other business priorities,
which are subject to change. There are no proprietary or partnered product candidates currently in
the NDA approval process, and we and our partners may not be successful in obtaining such approvals
for any potential products.
Our proprietary and partnered product candidates may not receive regulatory approvals for a variety
of reasons, including unsuccessful clinical trials.
Clinical testing of pharmaceutical products is a long, expensive and uncertain process and the
failure of a clinical trial can occur at any stage. Even if initial results of preclinical studies
or clinical trial results are promising, we or our partners may obtain different results that fail to show the desired levels of safety
and efficacy, or we may not, or our partners may not, obtain FDA approval for a variety of other
reasons. Clinical trials for any of our proprietary or partnered product candidates could be
unsuccessful, which would delay or prohibit regulatory approval and commercialization of the
product candidates. FDA approval can be delayed, limited or not granted for many reasons,
including, among others:
| FDA review may not find a product candidate safe or effective enough to merit either continued testing or final approval; | ||
| FDA review may not find that the data from preclinical testing and clinical trials justifies approval, or they may require additional studies that would make it commercially unattractive to continue pursuit of approval; | ||
| the FDA may reject our trial data or disagree with our interpretations of either clinical trial data or applicable regulations; | ||
| the cost of a clinical trial may be greater than what we originally anticipate, and we may decide to not pursue FDA approval for such a trial; | ||
| the FDA may not approve our manufacturing processes or facilities, or the processes or facilities of our contract manufacturers or raw material suppliers; | ||
| the FDA may change its formal or informal approval requirements and policies, act contrary to previous guidance, or adopt new regulations; or |
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| the FDA may approve a product candidate for indications that are narrow or under conditions that place the product at a competitive disadvantage, which may limit our sales and marketing activities or otherwise adversely impact the commercial potential of a product. |
If the FDA does not approve a proprietary or partnered product candidate in a timely fashion
on commercially viable terms, or if development of any product candidate is terminated due to
difficulties or delays encountered in the regulatory approval process, it could have a material
adverse impact on our business and we will become more dependent on the development of other
proprietary or partnered product candidates and/or our ability to successfully acquire other
products and technologies. There can be no assurances that any proprietary or partnered product
candidate will receive regulatory approval in a timely manner, or at all.
We anticipate that certain proprietary and partnered products will be marketed, and perhaps
manufactured, in foreign countries. The process of obtaining regulatory approvals in foreign
countries is subject to delay and failure for many of the same reasons set forth above as well as
for reasons that vary from jurisdiction to jurisdiction. The approval process varies among
countries and jurisdictions and can involve additional testing. The time required to obtain
approval may differ from that required to obtain FDA approval. Foreign regulatory agencies may not
provide approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by
regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in other foreign countries or
jurisdictions or by the FDA.
If we or our partners fail to comply with regulatory requirements, regulatory agencies may take
action against us or them, which could significantly harm our business.
Any approved products, along with the manufacturing processes, post-approval clinical data,
labeling, advertising and promotional activities for these products, are subject to continual
requirements and review by the FDA and other regulatory bodies. Regulatory authorities subject a
marketed product, its manufacturer and the manufacturing facilities to continual review and
periodic inspections. We will be subject to ongoing FDA requirements, including required
submissions of safety and other post-market information and reports, registration requirements,
cGMP regulations, requirements regarding the distribution of samples to physicians and
recordkeeping requirements. The cGMP regulations include requirements relating to quality control
and quality assurance, as well as the corresponding maintenance of records and documentation. We
rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to
the manufacture of our products. We and our partners are also subject to state laws and
registration requirements covering the distribution of our products. Regulatory agencies may change
existing requirements or adopt new requirements or policies. We or our partners may be slow to
adapt or may not be able to adapt to these changes or new requirements.
Regulatory requirements applicable to pharmaceutical products make the substitution of
suppliers and manufacturers costly and time consuming. We have minimal internal manufacturing
capabilities and are, and expect to be in the future, entirely dependent on contract manufacturers
and suppliers for the manufacture of our products and for their active and other ingredients. The
disqualification of these manufacturers and suppliers through their failure to comply with
regulatory requirements could negatively impact our business because the delays and costs in
obtaining and qualifying alternate suppliers (if such alternative suppliers are available, which we
cannot assure) could delay clinical trials or otherwise inhibit our ability to bring approved
products to market, which would have a material adverse effect on our business and financial
condition.
Later discovery of previously unknown problems with our proprietary or partnered products,
manufacturing processes or failure to comply with regulatory requirements, may result in any of the
following:
| restrictions on our products or manufacturing processes; | ||
| warning letters; | ||
| withdrawal of the products from the market; | ||
| voluntary or mandatory recall; | ||
| fines; |
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| suspension or withdrawal of regulatory approvals; | ||
| suspension or termination of any of our ongoing clinical trials; | ||
| refusal to permit the import or export of our products; | ||
| refusal to approve pending applications or supplements to approved applications that we submit; | ||
| product seizure; or | ||
| injunctions or the imposition of civil or criminal penalties. |
We may wish to raise funds in the next twelve months, and there can be no assurance that such funds
will be available.
During the next twelve months, we may wish to raise additional capital to continue the
development of our product candidates or for other corporate purposes. Our current cash position
and expected revenues during the next few years will not constitute the amount of capital necessary
for us to continue the development of our proprietary product candidates and to fund general
operations. In addition, if we engage in acquisitions of companies, products or technology in order
to execute our business strategy, we may need to raise additional capital. We expect to raise
additional capital in the future through one or more financing vehicles that may be available to
us. These financing vehicles currently include: (i) the public offering of securities; (ii) new
collaborative agreements; (iii) expansions or revisions to existing collaborative relationships;
(iv) private financings and/or (v) other equity or debt financings.
Currently, warrants to purchase approximately 1.8 million shares of our common stock at an
exercise price of $2.25 per share are outstanding and this amount of outstanding warrants may make
us a less desirable candidate for investment for some potential investors. Considering our stage of development, the nature
of our capital structure and general market conditions, if we are required to raise additional
capital in the future, the additional financing may not be available on favorable terms, or at all.
If we are successful in raising additional capital, a substantial number of additional shares may
be issued and these shares will dilute the ownership interest of our current investors.
If proprietary or partnered product candidates are approved by the FDA but do not gain market
acceptance, our business may suffer and we may not be able to fund future operations.
Assuming that our proprietary or partnered product candidates obtain the necessary regulatory
approvals, a number of factors may affect the market acceptance of these existing product
candidates or any other products which are developed or acquired in the future, including, among
others:
| the price of products relative to other therapies for the same or similar treatments; | ||
| the perception by patients, physicians and other members of the health care community of the effectiveness and safety of these products for their prescribed treatments; | ||
| our ability to fund our sales and marketing efforts and the ability and willingness of our partners to fund sales and marketing efforts; | ||
| the degree to which the use of these products is restricted by the product label approved by the FDA; | ||
| the effectiveness of our sales and marketing efforts and the effectiveness of the sales and marketing efforts of our partners; and | ||
| the introduction of generic competitors. |
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If these products do not gain market acceptance, we may not be able to fund future operations,
including the development or acquisition of new product candidates and/or our sales and marketing
efforts for our approved products, which would cause our business to suffer.
In addition, our proprietary and partnered product candidates will be restricted to the labels
approved by the FDA and these restrictions may limit the marketing and promotion of the ultimate
products. If the approved labels are restrictive, the sales and marketing efforts for these
products may be negatively affected.
Developing and marketing pharmaceutical products for human use involves product liability risks,
for which we currently have limited insurance coverage.
The testing, marketing and sale of pharmaceutical products involves the risk of product
liability claims by consumers and other third parties. Although we maintain product liability
insurance coverage, product liability claims can be high in the pharmaceutical industry and our
insurance may not sufficiently cover our actual liabilities. If product liability claims were to be
made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage
in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of
insurance coverage could materially and adversely affect our business and financial condition.
Furthermore, various distributors of pharmaceutical products require minimum product liability
insurance coverage before purchase or acceptance of products for distribution. Failure to satisfy
these insurance requirements could impede our ability to achieve broad distribution of our proposed
products and the imposition of higher insurance requirements could impose additional costs on us.
In addition, since many of our partnered product candidates include the pharmaceutical products of
a third party, we run the risk that problems with the third party pharmaceutical product will give
rise to liability claims against us.
Our inability to attract, hire and retain key management and scientific personnel could negatively
affect our business.
Our success depends on the performance of key management and scientific employees with
biotechnology experience. Given our relatively small staff size relative to the number of programs
currently under development, we depend substantially on our ability to hire, train, motivate and
retain high quality personnel, especially our scientists and management team. If we are unable to
retain existing personnel or identify or hire additional personnel, we may not be able to research,
develop, commercialize or market our product candidates as expected or on a timely basis and we may
not be able to adequately support current and future alliances with strategic partners.
Furthermore, if we were to lose key management personnel, particularly Jonathan Lim, M.D., our
President and Chief Executive Officer, or Gregory Frost, Ph.D., our Chief Scientific Officer, then
we would likely lose some portion of our institutional knowledge and technical know-how,
potentially causing a substantial delay in one or more of our development programs until adequate
replacement personnel could be hired and trained. For example, Dr. Frost has been with us from soon
after our inception, and he possesses a substantial amount of knowledge about our development
efforts. If we were to lose his services, we would experience delays in meeting our product
development schedules. In 2008, we adopted a severance policy applicable to all employees and a
change in control policy applicable to senior executives. We have not adopted any other policies or
entered into any other agreements specifically designed to motivate officers or other employees to
remain with us.
We do not have key man life insurance policies on the lives of any of our employees, including
Dr. Lim and Dr. Frost.
If we or our partners do not achieve projected development goals in the timeframes we publicly
announce or otherwise expect, the commercialization of our products and the development of our
product candidates may be delayed and, as a result, our stock price may decline.
We publicly articulate the estimated timing for the accomplishment of certain scientific,
clinical, regulatory and other product development goals. The accomplishment of any goal is
typically based on numerous assumptions and the achievement of a particular goal may be delayed for
any number of reasons both within and outside of our control. If scientific, regulatory, strategic
or other factors cause us to not meet a goal, regardless of whether that goal has been publicly
articulated or not, the commercialization of our products and the development of our proprietary
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and partnered product candidates may be delayed. In addition, the consistent failure to meet
publicly announced milestones may erode the credibility of our management team with respect to
future milestone estimates.
Future acquisitions could disrupt our business and harm our financial condition.
In order to augment our product pipeline or otherwise strengthen our business, we may decide
to acquire additional businesses, products and technologies. As we have limited experience in
evaluating and completing acquisitions, our ability as an organization to make such acquisitions is
unproven. Acquisitions could require significant capital infusions and could involve many risks,
including, but not limited to, the following:
| we may have to issue convertible debt or equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock; | ||
| an acquisition may negatively impact our results of operations because it may require us to amortize or write down amounts related to goodwill and other intangible assets, or incur or assume substantial debt or liabilities, or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges; | ||
| we may encounter difficulties in assimilating and integrating the business, products, technologies, personnel or operations of companies that we acquire; | ||
| certain acquisitions may impact our relationship with existing or potential partners who are competitive with the acquired business, products or technologies; | ||
| acquisitions may require significant capital infusions and the acquired businesses, products or technologies may not generate sufficient value to justify acquisition costs; | ||
| an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; | ||
| acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience; and | ||
| key personnel of an acquired company may decide not to work for us. |
If any of these risks occurred, it could adversely affect our business, financial condition
and operating results. We cannot assure you that we will be able to identify or consummate any
future acquisitions on acceptable terms, or at all. If we do pursue any acquisitions, it is
possible that we may not realize the anticipated benefits from such acquisitions or that the market
will not view such acquisitions positively.
Risks Related To Ownership of Our Common Stock
Our stock price is subject to significant volatility.
We participate in a highly dynamic industry which often results in significant volatility in
the market price of common stock irrespective of company performance. As a result, our high and low
sales prices of our common stock during the twelve months ended June 30, 2009 were $8.26 and $2.60,
respectively. We expect our stock price to continue to be subject to significant volatility and, in
addition to the other risks and uncertainties described elsewhere in this Quarterly Report on Form
10-Q and all other risks and uncertainties that are either not known to us at this time or which we
deem to be immaterial, any of the following factors may lead to a significant drop in our stock
price:
| a dispute regarding our failure, or the failure of one of our third party partners, to comply with the terms of a collaboration agreement; | ||
| the termination, for any reason, of any of our collaboration agreements; |
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| the sale of common stock by any significant stockholder, including, but not limited to, direct or indirect sales by members of management or our Board of Directors; | ||
| the resignation, or other departure, of members of management or our Board of Directors; | ||
| general negative conditions in the healthcare industry; | ||
| general negative conditions in the financial markets; | ||
| the failure, for any reason, to obtain FDA approval for any of our proprietary or partnered product candidates; | ||
| the failure, for any reason, to secure or defend our intellectual property position; | ||
| for those products that are approved by the FDA, the failure of the FDA to approve such products in a timely manner consistent with the FDAs historical approval process; | ||
| the suspension of any clinical trial due to safety or patient tolerability issues; | ||
| the suspension of any clinical trial due to market and/or competitive conditions; | ||
| our failure, or the failure of our third party partners, to successfully commercialize products approved by the FDA; | ||
| our failure, or the failure of our third party partners, to generate product revenues anticipated by investors; | ||
| problems with an API contract manufacturer or a fill and finish manufacturer for any product or product candidate; and | ||
| the sale of additional debt and/or equity securities by us. |
Trading in our stock has historically been limited, so investors may not be able to sell as much
stock as they want to at prevailing market prices.
Our stock has historically traded at a low daily trading volume. If low trading volume
continues, it may be difficult for stockholders to sell their shares in the public market at any
given time at prevailing prices.
The exercise of outstanding warrants may drive down the market price of our stock.
Outstanding warrants that may be exercised for approximately 1.8 million shares of common
stock at an exercise price of $2.25 per share will expire per their terms on October 12, 2009. Some
exercising warrant holders may choose to sell outstanding shares of common stock in order to
finance the exercise of their warrants, or they may choose to sell the shares that they receive
upon exercise of the warrants. This pattern of selling may result in a reduction of our common
stocks market price.
Future sales of shares of our common stock pursuant to our universal shelf registration statement
may negatively affect our stock price.
We currently have the ability to offer and sell up to $10.0 million of additional equity or
debt securities under a currently effective universal shelf registration statement. Sales of
substantial amounts of shares of our common stock or other securities under our universal shelf
registration statement could lower the market price of our common stock and impair our ability to
raise capital through the sale of equity securities. In the future, we may issue additional
options, warrants or other derivative securities convertible into our common stock.
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Risks Related To Our Industry
Compliance with the extensive government regulations to which we are subject is expensive and time
consuming and may result in the delay or cancellation of product sales, introductions or
modifications.
Extensive industry regulation has had, and will continue to have, a significant impact on our
business. All pharmaceutical companies, including ours, are subject to extensive, complex, costly
and evolving regulation by the federal government, principally the FDA and, to a lesser extent, the
U.S. Drug Enforcement Administration, or DEA, and foreign and state government agencies. The
Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other domestic and foreign
statutes and regulations govern or influence the testing, manufacturing, packaging, labeling,
storing, recordkeeping, safety, approval, advertising, promotion, sale and distribution of our
products. Under certain of these regulations, we and our contract suppliers and manufacturers are
subject to periodic inspection of our or their respective facilities, procedures and operations
and/or the testing of products by the FDA, the DEA and other authorities, which conduct periodic
inspections to confirm that we and our contract suppliers and manufacturers are in compliance with
all applicable regulations. The FDA also conducts pre-approval and post-approval reviews and plant
inspections to determine whether our systems, or our contract suppliers and manufacturers
processes, are in compliance with cGMP and other FDA regulations. If we, or our contract supplier,
fail these inspections, we may not be able to commercialize our product in a timely manner without
incurring significant additional costs, or at all.
In addition, the FDA imposes a number of complex regulatory requirements on entities that
advertise and promote pharmaceuticals including, but not limited to, standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities, and promotional activities involving the internet.
We are dependent on receiving FDA and other governmental approvals prior to manufacturing,
marketing and shipping our products. Consequently, there is always a risk that the FDA or other
applicable governmental authorities will not approve our products, or will take post-approval
action limiting or revoking our ability to sell our products, or that the rate, timing and cost of
such approvals will adversely affect our product introduction plans or results of operations.
We may be required to initiate or defend against legal proceedings related to intellectual property
rights, which may result in substantial expense, delay and/or cessation of the development and
commercialization of our products.
We primarily rely on patents to protect our intellectual property rights. The strength of this
protection, however, is uncertain. For example, it is not certain that:
| our patents and pending patent applications cover products and/or technology that we invented first; | ||
| we were the first to file patent applications for these inventions; | ||
| others will not independently develop similar or alternative technologies or duplicate our technologies; | ||
| any of our pending patent applications will result in issued patents; and | ||
| any of our issued patents, or patent pending applications that result in issued patents, will be held valid and infringed in the event the patents are asserted against others. |
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We currently own or license several U.S. patents and also have pending patent applications
applicable to rHuPh20 and other proprietary materials. There can be no assurance that our existing
patents, or any patents issued to us as a result of our pending patent applications, will provide a
basis for commercially viable products, will provide us with any competitive advantages, or will
not face third party challenges or be the subject of further proceedings limiting their scope or
enforceability. Such limitations in our patent portfolio could have a material adverse effect on
our business and financial condition. In addition, if any of our pending patent applications do not
result in issued patents, or result in issued patents with narrow or limited claims, this could
have a material adverse effect on our business and financial condition.
We may become involved in interference proceedings in the U.S. Patent and Trademark Office to
determine the priority of our inventions. In addition, costly litigation could be necessary to
protect our patent position. We also rely on trademarks to protect the names of our products. These
trademarks may not be acceptable to regulatory agencies. In addition, these trademarks may be
challenged by others. If we enforce our trademarks against third parties, such enforcement
proceedings may be expensive. We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect with confidentiality agreements with
employees, consultants and others with whom we discuss our business. Disputes may arise concerning
the ownership of intellectual property or the applicability or enforceability of these agreements,
and we might not be able to resolve these disputes in our favor.
In addition to protecting our own intellectual property rights, third parties may assert
patent, trademark or copyright infringement or other intellectual property claims against us based
on what they believe are their own intellectual property rights. If we become involved in any
intellectual property litigation, we may be required to pay substantial damages, including but not
limited to treble damages, for past infringement if it is ultimately determined that our products
infringe a third partys intellectual property rights. Even if infringement claims against us are
without merit, defending a lawsuit takes significant time, may be expensive and may divert
managements attention from other business concerns. Further, we may be stopped from developing,
manufacturing or selling our products until we obtain a license from the owner of the relevant
technology or other intellectual property rights. If such a license is available at all, it may
require us to pay substantial royalties or other fees.
Patent protection for protein-based therapeutic products and other biotechnology inventions is
subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws
change, our competitors may be able to develop and commercialize products based on our discoveries.
Patent protection for protein-based therapeutic products is highly uncertain and involves
complex legal and factual questions. In recent years, there have been significant changes in patent
law, including the legal standards that govern the scope of protein and biotechnology patents.
Standards for patentability of full-length and partial genes, and their corresponding proteins, are
changing. Recent court decisions have made it more difficult to obtain patents, by making it more
difficult to satisfy the requirement of non-obviousness, have decreased the availability of
injunctions against infringers, and have increased the likelihood of challenging the validity of a
patent through a declaratory judgment action. Taken together, these decisions could make it more
difficult and costly for us to obtain, license and enforce our patents. In addition, in recent
years, several members of the United States Congress have made numerous proposals to change the
patent statute. These proposals include measures that, among other things, would expand the ability
of third parties to oppose United States patents, introduce the first to file standard to the
United States patent system, and limit damages an infringer is required to pay. If the patent
statute is changed, the scope, validity and enforceability of our patents may be significantly
decreased.
There also have been, and continue to be, policy discussions concerning the scope of patent
protection awarded to biotechnology inventions. Social and political opposition to biotechnology
patents may lead to narrower patent protection within the biotechnology industry. Social and
political opposition to patents on genes and proteins may lead to narrower patent protection, or
narrower claim interpretation, for genes, their corresponding proteins and inventions related to their use, formulation and manufacture. Patent protection relating to
biotechnology products is also subject to a great deal of uncertainty outside the United States,
and patent laws are evolving and undergoing revision in many countries. Changes in, or different
interpretations of, patent laws worldwide may result in our inability to obtain or enforce patents,
and may allow others to use our discoveries to develop and commercialize competitive products,
which would impair our business.
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If third party reimbursement and customer contracts are not available, our products may not be
accepted in the market.
Our ability to earn sufficient returns on our products will depend in part on the extent to
which reimbursement for our products and related treatments will be available from government
health administration authorities, private health insurers, managed care organizations and other
healthcare providers.
Third-party payors are increasingly attempting to limit both the coverage and the level of
reimbursement of new drug products to contain costs. Consequently, significant uncertainty exists
as to the reimbursement status of newly approved healthcare products. Third party payors may not
establish adequate levels of reimbursement for the products that we commercialize, which could
limit their market acceptance and result in a material adverse effect on our financial condition.
Customer contracts, such as with group purchasing organizations and hospital formularies, will
often not offer contract or formulary status without either the lowest price or substantial proven
clinical differentiation. If our products are compared to animal-derived hyaluronidases by these
entities, it is possible that neither of these conditions will be met, which could limit market
acceptance and result in a material adverse effect on our financial condition.
The rising cost of healthcare and related pharmaceutical product pricing has led to cost
containment pressures that could cause us to sell our products at lower prices, resulting in less
revenue to us.
Any of the proprietary or partnered products that have been, or in the future are, approved by
the FDA may be purchased or reimbursed by state and federal government authorities, private health
insurers and other organizations, such as health maintenance organizations and managed care
organizations. Such third party payors increasingly challenge pharmaceutical product pricing. The
trend toward managed healthcare in the United States, the growth of such organizations, and various
legislative proposals and enactments to reform healthcare and government insurance programs,
including the Medicare Prescription Drug Modernization Act of 2003, could significantly influence
the manner in which pharmaceutical products are prescribed and purchased, resulting in lower prices
and/or a reduction in demand. Such cost containment measures and healthcare reforms could adversely
affect our ability to sell our products. Furthermore, individual states have become increasingly
aggressive in passing legislation and implementing regulations designed to control pharmaceutical
product pricing, including price or patient reimbursement constraints, discounts, restrictions on
certain product access, importation from other countries and bulk purchasing. Legally mandated
price controls on payment amounts by third party payors or other restrictions could negatively and
materially impact our revenues and financial condition. We anticipate that we will encounter
similar regulatory and legislative issues in most other countries outside the United States.
We face intense competition and rapid technological change that could result in the development of
products by others that are superior to our proprietary and partnered products under development.
Our proprietary and partnered products have numerous competitors in the United States and
abroad including, among others, major pharmaceutical and specialized biotechnology firms,
universities and other research institutions that have developed competing products. For example,
for HYLENEX, such competitors include, but are not limited to, Sigma-Aldrich Corporation, ISTA
Pharmaceuticals, Inc., Amphastar Pharmaceuticals, Inc. and Primapharm, Inc. among others. For our
Insulin-PH20 product candidate, such competitors may include Biodel Inc. and Mannkind Corporation.
These competitors may develop technologies and products that are more effective, safer, or less
costly than our current or future proprietary and partnered product candidates or that could render
our technologies and product candidates obsolete or noncompetitive. Many of these competitors have
substantially more resources and product development, manufacturing and marketing experience and capabilities
than we do. In addition, many of our competitors have significantly greater experience than we do
in undertaking preclinical testing and clinical trials of pharmaceutical product candidates and
obtaining FDA and other regulatory approvals of products and therapies for use in healthcare.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is interest income sensitivity, which is affected by
changes in the general level of U.S. interest rates, particularly because the majority of our
investments are in short-term marketable
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securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities that we invest in may
be subject to market risk. This means that a change in prevailing interest rates may cause the
value of the investment to fluctuate. For example, if we purchase a security that was issued with a
fixed interest rate and the prevailing interest rate later rises, the value of our investment will
probably decline. To minimize this risk, we intend to continue to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities including commercial paper, money
market funds and government and non-government debt securities. In general, money market funds are
not subject to market risk because the interest paid on such funds fluctuates with the prevailing
interest rate. As of June 30, 2009, we did not have any holdings of derivative financial or
commodity instruments, or any foreign currency denominated transactions, and all of our cash and
cash equivalents were in money market mutual funds and other investments that we believe to be
highly liquid.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the timelines specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decision
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can only provide reasonable assurance of achieving the desired control objectives, and in reaching
a reasonable level of assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2009, that have materially affected, or are reasonably
likely to materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of
operations in the normal course of our business. Any of these claims could subject us to costly
litigation and, while we generally believe that we have adequate insurance to cover many different
types of liabilities, our insurance carriers may deny coverage or our policy limits may be
inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment
of any such awards could have a material adverse effect on our consolidated results of operations
and financial position. Additionally, any such claims, whether or not successful, could damage our
reputation and business. We currently are not a party to any legal proceedings, the adverse outcome
of which, in managements opinion, individually or in the aggregate, would have a material adverse
effect on our consolidated results of operations or financial position.
Item 1A. Risk Factors
We have provided updated Risk Factors in the section labeled Risk Factors in Part I, Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations. The Risk
Factors
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section provides updated information in certain areas and we added a risk factor that
specifically addresses the importance of rHuPH20 for many products and product candidates, but we
do not believe those updates have materially changed the type or magnitude of the risks we face in
comparison to the disclosure provided in our most recent Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2009, we issued 119,628 shares of common stock in
connection with the cashless exercise of an outstanding warrant. We did not receive any cash
proceeds from this cashless exercise. The shares and underlying warrants were purchased for
investment in a private placement exempt from the registration requirements of the Securities Act
pursuant to Section 3(a) (9) thereof.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders was held on May 7, 2009. At the Annual Meeting, our
stockholders voted on the following two proposals:
Proposal No. 1:
To elect two Class II directors to hold office for a three-year term and until their
respective successors are elected and qualified. The voting results were as follows:
Nominees | Votes For | Votes Against | ||||||
Randal J. Kirk |
58,727,632 | 241,691 | ||||||
John S. Patton |
51,363,127 | 7,606,196 |
We also have: (i) three Class III directors, Robert L. Engler, M.D., Gregory I. Frost, Ph.D.
and Connie L. Matsui, whose terms do not expire until our Annual Meeting of Stockholders in 2010,
and (ii) three Class I directors, Kathryn E. Falberg, Kenneth J. Kelley and Jonathan E. Lim, M.D.,
whose terms do not expire until our Annual Meeting of Stockholders in 2011. Both nominees were
elected to the board of directors.
Proposal No. 2:
To ratify the selection of Ernst & Young LLP as our independent registered public accounting
firm for the fiscal year ending December 31, 2009. The voting results were as follows:
For: 58,911,563 | Against: 32,703 | Abstained: 25,057 |
The foregoing proposal was approved.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit | Title | |
2.1
|
Agreement and Plan of Merger, dated November 14, 2007, by and between the Registrant and the Registrants predecessor Nevada corporation (1) | |
3.1
|
Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on October 7, 2007 (2) | |
3.2
|
Certificate of Designation, Preferences and Rights of the terms of the Series A Preferred Stock (1) | |
3.3
|
Bylaws (2) |
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Exhibit | Title | |
4.1
|
Amended Rights Agreement between Corporate Stock Transfer, as rights agent, and Registrant, dated November 12, 2007 (19) | |
10.1
|
License Agreement between University of Connecticut and Registrant, dated November 15, 2002 (3) | |
10.2
|
First Amendment to the License Agreement between University of Connecticut and Registrant, dated January 9, 2006 (9) | |
10.3*
|
Commercial Supply Agreement with Avid Bioservices, Inc. and Registrant, dated February 16, 2005 (7) | |
10.4*
|
First Amendment to the Commercial Supply Agreement between Avid Bioservices, Inc. and Registrant, dated December 15, 2006 (14) | |
10.5*
|
Clinical Supply Agreement between Cook Pharmica, LLC and Registrant, dated August 15, 2008 (23) | |
10.6
|
Form of Common Stock Purchase Warrant (5) | |
10.7#
|
DeliaTroph Pharmaceuticals, Inc. 2001 Amended and Restated Stock Plan and form of Stock Option Agreements for options assumed thereunder (6) | |
10.8
|
Nonstatutory Stock Option Agreement with Andrew Kim (6) | |
10.9#
|
2004 Stock Plan and Form of Option Agreement thereunder (4) | |
10.10#
|
Halozyme Therapeutics, Inc. 2005 Outside Directors Stock Plan (8) | |
10.11#
|
Form of Stock Option Agreement (2005 Outside Directors Stock Plan) (12) | |
10.12#
|
Form of Restricted Stock Agreement (2005 Outside Directors Stock Plan) (12) | |
10.13#
|
Halozyme Therapeutics, Inc. 2006 Stock Plan (11) | |
10.14#
|
Form of Stock Option Agreement (2006 Stock Plan) (12) | |
10.15#
|
Form of Restricted Stock Agreement (2006 Stock Plan) (12) | |
10.16#
|
Halozyme Therapeutics, Inc. 2008 Stock Plan (20) | |
10.17#
|
Form of Stock Option Agreement (2008 Stock Plan) | |
10.18#
|
Form of Restricted Stock Agreement (2008 Stock Plan) | |
10.19#
|
Halozyme Therapeutics, Inc. 2008 Outside Directors Stock Plan (20) | |
10.20#
|
Form of Restricted Stock Agreement (2008 Outside Directors Stock Plan) | |
10.21#
|
Form of Indemnity Agreement for Directors and Executive Officers (18) | |
10.22#
|
Outside Director Compensation Plan (22) | |
10.23#
|
2007 Senior Executive Incentive Plan (22) | |
10.24#
|
2008 Senior Executive Incentive Structure (21) | |
10.25#
|
2009 Senior Executive Incentive Plan (24) | |
10.26#
|
Change in Control Policy (21) | |
10.27#
|
Severance Policy (22) | |
10.28*
|
Amended and Restated Exclusive Distribution Agreement between Baxter Healthcare Corporation, Baxter Healthcare S.A. and Registrant, dated February 14, 2007 (15) | |
10.29*
|
Amended and Restated Development and Supply Agreement between Baxter Healthcare Corporation, Baxter Healthcare S.A. and Registrant, dated February 14, 2007 (15) | |
10.30*
|
License and Collaboration Agreement between Baxter Healthcare Corporation, Baxter Healthcare S.A. and Registrant, dated February 14, 2007 (15) | |
10.31*
|
Enhanze Technology License and Collaboration Agreement between Baxter Healthcare Corporation, Baxter Healthcare S.A. and Registrant, dated September 7, 2007 (17) | |
10.32*
|
License and Collaboration Agreement between F. Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. and Registrant dated December 5, 2006 (13) | |
10.33
|
Sublease Agreement (11404 Sorrento Valley Road), effective as of July 2, 2007 (16) | |
10.34
|
Sublease Agreement (11388 Sorrento Valley Road), effective as of July 2, 2007 (16) | |
10.35
|
Standard Industrial Net Lease (11388 Sorrento Valley Road), effective as of July 26, 2007 (16) | |
10.36
|
Underwriting Agreement, dated June 23, 2009, between Halozyme Therapeutics, Inc. and Jefferies & Company, Inc., dated June 23, 2009 (25) | |
21.1
|
Subsidiaries of Registrant (10) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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(1) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed November 20, 2007. | |
(2) | Incorporated by reference to the Registrants definitive proxy statement filed with the SEC on Form DEF14A on October 11, 2007. | |
(3) | Incorporated by reference to the Registrants Registration Statement on Form SB-2 filed with the Commission on April 23, 2004. | |
(4) | Incorporated by reference to the Registrants amendment number two to the Registration Statement on Form SB-2 filed with the Commission on July 23, 2004. | |
(5) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed October 15, 2004. | |
(6) | Incorporated by reference to the Registrants Registration Statement on Form S-8 filed with the Commission on October 26, 2004. | |
(7) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed February 22, 2005. | |
(8) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed July 6, 2005. | |
(9) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed January 12, 2006. | |
(10) | Incorporated by reference to the Registrants Annual Report on Form 10-KSB/A, filed March 29, 2005. | |
(11) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed March 24, 2006. | |
(12) | Incorporated by reference to the Registrants Quarterly Report on Form 10-Q, filed August 8, 2006. | |
(13) | Incorporated by reference to the Registrants Current Report on Form 8-K/A, filed December 15, 2006. | |
(14) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed December 21, 2006. | |
(15) | Incorporated by reference to the Registrants Current Report on Form 8-K/A, filed February 20, 2007. | |
(16) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed July 31, 2007. | |
(17) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed September 12, 2007. | |
(18) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed December 20, 2007. | |
(19) | Incorporated by reference to the Registrants Annual Report on Form 10-K, filed March 14, 2008. | |
(20) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed March 19, 2008. | |
(21) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed April 21, 2008. | |
(22) | Incorporated by reference to the Registrants Quarterly Report on Form 10-Q, filed May 9, 2008. | |
(23) | Incorporated by reference to the Registrants Quarterly Report on Form 10-Q, filed November 7, 2008. | |
(24) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed February 9, 2009. | |
(25) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed June 23, 2009. | |
* | Confidential treatment has been requested for certain portions of this exhibit. These portions have been omitted from this agreement and have been filed separately with the Securities and Exchange Commission. | |
# | Indicates management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Halozyme Therapeutics, Inc., a Delaware corporation |
||||
Dated: August 7, 2009 | /s/ Jonathan E. Lim | |||
Jonathan E. Lim, MD | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Dated: August 7, 2009 | /s/ Kurt A. Gustafson | |||
Kurt A. Gustafson | ||||
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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