HALOZYME THERAPEUTICS, INC. - Quarter Report: 2010 September (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)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to .
Commission File Number 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)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes [_] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See 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 x | 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 [ ] No [X]
The
number of outstanding shares of the registrants common stock,
par value $0.001 per share, was 100,434,905 as of
November 2, 2010.
HALOZYME THERAPEUTICS, INC.
INDEX
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
Item 1. | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
Item 2. | 14 | |||||||
Item 3. | 39 | |||||||
Item 4. | 39 | |||||||
PART II OTHER INFORMATION |
||||||||
Item 1. | 39 | |||||||
Item 1A. | 40 | |||||||
Item 2. | 40 | |||||||
Item 3. | 40 | |||||||
Item 4. | 40 | |||||||
Item 5. | 40 | |||||||
Item 6. | 40 | |||||||
41 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Note) | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 89,840,588 | $ | 67,464,506 | ||||
Accounts receivable |
2,622,076 | 4,243,909 | ||||||
Inventory |
1,076,580 | 1,159,551 | ||||||
Prepaid expenses and other assets |
4,891,556 | 1,573,777 | ||||||
Total current assets |
98,430,800 | 74,441,743 | ||||||
Property and equipment, net |
1,960,935 | 2,708,016 | ||||||
Total Assets |
$ | 100,391,735 | $ | 77,149,759 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,828,069 | $ | 2,820,491 | ||||
Accrued expenses |
5,052,723 | 6,083,854 | ||||||
Deferred revenue |
4,900,502 | 5,492,604 | ||||||
Total current liabilities |
11,781,294 | 14,396,949 | ||||||
Deferred revenue, net of current portion |
53,024,341 | 54,989,588 | ||||||
Deferred rent, net of current portion |
582,385 | 859,833 | ||||||
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;
100,383,410 and 91,681,756 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively |
100,384 | 91,682 | ||||||
Additional paid-in capital |
243,261,452 | 178,821,852 | ||||||
Accumulated deficit |
(208,358,121 | ) | (172,010,145 | ) | ||||
Total stockholders equity |
35,003,715 | 6,903,389 | ||||||
Total Liabilities and Stockholders Equity |
$ | 100,391,735 | $ | 77,149,759 | ||||
Note: | The balance sheet at December 31, 2009 has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. |
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Product sales |
$ | 98,100 | $ | 411,109 | $ | 695,440 | $ | 669,267 | ||||||||
Revenues under collaborative agreements |
3,298,407 | 2,617,776 | 9,356,151 | 6,558,145 | ||||||||||||
Total revenues |
3,396,507 | 3,028,885 | 10,051,591 | 7,227,412 | ||||||||||||
Operating expenses: |
||||||||||||||||
Cost of product sales |
7,214 | 102,638 | 96,413 | 151,939 | ||||||||||||
Research and development |
12,448,865 | 13,162,748 | 35,840,475 | 41,763,972 | ||||||||||||
Selling, general and administrative |
3,374,069 | 3,703,099 | 10,488,568 | 11,093,563 | ||||||||||||
Total operating expenses |
15,830,148 | 16,968,485 | 46,425,456 | 53,009,474 | ||||||||||||
Operating loss |
(12,433,641 | ) | (13,939,600 | ) | (36,373,865 | ) | (45,782,062 | ) | ||||||||
Interest and other income, net |
24,065 | 29,318 | 25,889 | 86,391 | ||||||||||||
Net loss |
$ | (12,409,576 | ) | $ | (13,910,282 | ) | $ | (36,347,976 | ) | $ | (45,695,671 | ) | ||||
Basic and diluted net loss per share |
$ | (0.13 | ) | $ | (0.16 | ) | $ | (0.39 | ) | $ | (0.54 | ) | ||||
Shares used in computing basic and diluted
net loss per share |
93,626,893 | 89,570,540 | 92,342,665 | 85,086,456 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (36,347,976 | ) | $ | (45,695,671 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Share-based compensation |
3,745,976 | 2,918,075 | ||||||
Depreciation and amortization |
1,164,162 | 1,048,562 | ||||||
Loss on disposal of equipment |
8,431 | 2,685 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
1,621,833 | 5,674,660 | ||||||
Inventory |
82,971 | (796,931 | ) | |||||
Prepaid expenses and other assets |
(3,317,779 | ) | (350,866 | ) | ||||
Accounts payable and accrued expenses |
(2,184,007 | ) | (182,914 | ) | ||||
Deferred rent |
(226,699 | ) | (39,202 | ) | ||||
Deferred revenue |
(2,557,349 | ) | 8,241,057 | |||||
Net cash used in operating activities |
(38,010,437 | ) | (29,180,545 | ) | ||||
Investing activities: |
||||||||
Purchases of property and equipment |
(315,807 | ) | (897,654 | ) | ||||
Net cash used in investing activities |
(315,807 | ) | (897,654 | ) | ||||
Financing activities: |
||||||||
Proceeds from issuance of common stock, net |
59,965,059 | 38,174,371 | ||||||
Proceeds from exercise of stock options |
737,267 | 767,485 | ||||||
Proceeds from exercise of warrants, net |
- | 5,056,229 | ||||||
Net cash provided by financing activities |
60,702,326 | 43,998,085 | ||||||
Net increase in cash and cash equivalents |
22,376,082 | 13,919,886 | ||||||
Cash and cash equivalents at beginning of period |
67,464,506 | 63,715,906 | ||||||
Cash and cash equivalents at end of period |
$ | 89,840,588 | $ | 77,635,792 | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Accounts payable for purchases of property and equipment |
$ | 109,705 | $ | 307,260 |
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
HALOZYME THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 based primarily 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 multiple proprietary
programs in various stages of research and development. In addition, the Company has entered into a
key partnership 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. The Company has also entered into two key partnerships 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® (hyaluronidase human injection). Baxter is responsible for the
execution of HYLENEX clinical development, sales and marketing strategy. There are two marketed
products that utilize the Companys technology: HYLENEX, a product used as an adjuvant to enhance
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 API to the third party that produces Cumulase, in
addition to other 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, 2009. The unaudited 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.
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.
3. Pending Adoption of Recent Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2010-17, Revenue Recognition (Topic 605): Milestone Method of Revenue
Recognition. ASU No. 2010-17 states that the milestone method is a valid application of the
proportional performance model
6
Table of Contents
when applied to research or development arrangements. Accordingly, an entity can make an accounting
policy election to recognize a payment that is contingent upon the achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The milestone method is
not required and is not the only acceptable method of revenue recognition for milestone payments.
The guidance in ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010
and may be applied prospectively to milestones achieved after the adoption date or retrospectively
for all periods presented. Early adoption is permitted provided that the revised guidance is
retrospectively applied to the beginning of the year of adoption. The Company will adopt this
guidance on January 1, 2011. The Company does not expect the adoption of ASU No. 2010-17 to have a
material impact on its consolidated financial position or results of operations.
In September 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 requires an entity to allocate
arrangement consideration at the inception of an arrangement to all of its deliverables based on
their relative selling prices. ASU No. 2009-13 eliminates the use of the residual method of
allocation and requires the relative-selling-price method in all circumstances in which an entity
recognizes revenue for an arrangement with multiple deliverables subject to Accounting Standards
Code 605-25. The guidance in ASU No. 2009-13 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The Company will adopt this guidance on January 1, 2011. The Company does
not expect the adoption of ASU No. 2009-13 to have a material impact on its consolidated financial
position or results of operations.
4. Summary of Significant Accounting Policies
Fair Value Measurements
The Company follows the authoritative guidance for fair value measurements and disclosures,
which among other things, defines fair value, establishes a consistent framework for measuring fair
value and expands disclosure for each major asset and liability category measured at fair value on
either a recurring or nonrecurring basis. Fair value is defined as an exit price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability.
The framework for measuring fair value provides a hierarchy that prioritizes the inputs to
valuation techniques used in measuring fair value as follows:
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 equivalents of approximately $88.3 million at September 30, 2010 are carried at fair
value and are classified within Level 1 of the fair value hierarchy because they are valued based
on quoted market prices for identical securities.
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 the authoritative guidance for revenue
recognition. The Company recognizes revenue when all of the following criteria are met: (1)
persuasive evidence of an
7
Table of Contents
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 and API for 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 returns of API 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. HYLENEX was voluntarily recalled in May 2010. The Company
has been in communication with the U.S. Food and Drug Administration (FDA) and has provided them
materials relating to the root cause and remediation plans. The Company has requested a meeting
with the FDA, and the Company will be able to better predict the timing of a HYLENEX reintroduction
after its meeting with the FDA. In connection with the recall, the Company did not recognize any
royalty revenue from product sales made after March 31, 2010 based on managements assessment that
any product sales made after that date are expected to be returned.
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, API for Cumulase and
the API for HYLENEX. Cost of product sales associated with the sales of API for HYLENEX is
recognized as the product is released which may result in irregular quarterly fluctuations that may
not correspond to the amount of revenue recognized from product sales for such quarters.
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.
8
Table of Contents
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 FDA or other regulatory
authorities or when other significant risk factors are abated. Management has viewed future
economic benefits for all of our licensed technology or product candidates to be uncertain and has
expensed these amounts for accounting purposes.
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.
Share-Based Compensation
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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Research and development |
$ | 691,266 | $ | 573,732 | $ | 2,049,134 | $ | 1,541,740 | ||||||||
Selling, general and administrative |
634,424 | 473,577 | 1,696,842 | 1,376,335 | ||||||||||||
Share-based compensation expense
before tax |
1,325,690 | 1,047,309 | 3,745,976 | 2,918,075 | ||||||||||||
Related income tax benefit |
- | - | - | - | ||||||||||||
Share-based compensation expense,
net of tax |
$ | 1,325,690 | $ | 1,047,309 | $ | 3,745,976 | $ | 2,918,075 | ||||||||
Net share-based compensation expense
per basic and diluted share |
$ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.03 | ||||||||
Share-based compensation expense from: |
||||||||||||||||
Stock options |
$ | 1,035,496 | $ | 795,552 | $ | 3,131,890 | $ | 2,214,017 | ||||||||
Restricted stock awards |
290,194 | 251,757 | 614,086 | 704,058 | ||||||||||||
$ | 1,325,690 | $ | 1,047,309 | $ | 3,745,976 | $ | 2,918,075 | |||||||||
9
Table of Contents
Since the Company has a net operating loss carryforward as of September 30, 2010, 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 September 30,
2010 and 2009, employees exercised stock options to purchase 73,112 and 175,281 shares of common
stock, respectively, for aggregate proceeds of approximately $240,000 and $186,000, respectively.
For the nine months ended September 30, 2010 and 2009, employees exercised stock options to
purchase 281,654 and 623,711 shares of common stock, respectively, for aggregate proceeds of
approximately $737,000 and $767,000, respectively.
As of September 30, 2010, total unrecognized estimated compensation cost related to non-vested
stock options and non-vested restricted stock awards granted prior to that date was approximately
$8.3 million and $554,000, respectively, which is expected to be recognized over a weighted-average
period of approximately 2.5 years and seven months, respectively.
5. Inventory
Inventory at September 30, 2010 and December 31, 2009 consists of raw materials used in
production of HYLENEX and Cumulase products.
6. Property and Equipment
Property and equipment, net consists of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Research equipment |
$ | 4,195,677 | $ | 3,838,307 | ||||
Computer and office equipment |
1,277,537 | 1,333,924 | ||||||
Leasehold improvements |
993,031 | 981,140 | ||||||
6,466,245 | 6,153,371 | |||||||
Accumulated depreciation and amortization |
(4,505,310 | ) | (3,445,355 | ) | ||||
$ | 1,960,935 | $ | 2,708,016 | |||||
Depreciation and amortization expense totaled approximately $365,000 and $368,000 for the
three months ended September 30, 2010 and 2009, respectively, and $1.2 million and $1.0 million for
the nine months ended September 30, 2010 and 2009, respectively.
7. Accrued Expenses
Accrued expenses consist of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accrued compensation and payroll taxes |
$ | 2,621,432 | $ | 2,945,498 | ||||
Accrued outsourced research and development expenses |
1,884,155 | 2,609,819 | ||||||
Accrued expenses |
547,136 | 528,537 | ||||||
$ | 5,052,723 | $ | 6,083,854 | |||||
10
Table of Contents
8. Deferred Revenue
Deferred revenue consists of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Collaborative agreements |
$ | 47,601,249 | $ | 50,390,400 | ||||
Product sales |
10,323,594 | 10,091,792 | ||||||
Total deferred revenue |
57,924,843 | 60,482,192 | ||||||
Less current portion |
4,900,502 | 5,492,604 | ||||||
Deferred revenue, net of current portion |
$ | 53,024,341 | $ | 54,989,588 | ||||
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, and 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 September
30, 2010 Roche paid an aggregate of approximately $17.0 million in connection with Roches election
of two additional exclusive targets and annual license fees for the right to designate the
remaining targets as exclusive targets.
Due to the Companys continuing involvement obligations (for example, support activities
associated with rHuPH20 enzyme), revenues from the upfront payment, exclusive designation fees and
annual license 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 license maintenance fees under the Roche Partnership in the amounts of approximately
$458,000 and $514,000 for the three months ended September 30, 2010 and 2009, respectively, and
$1.5 million and $1.4 million for the nine months ended September 30, 2010 and 2009, respectively.
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 (for example, support activities
associated with rHuPH20 enzyme), 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 amounts of approximately $121,000 and
$152,000 for the three months ended September 30, 2010 and 2009, respectively, and $400,000 and
$455,000 for the nine months ended September 30, 2010 and 2009, respectively.
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 (for example, support
activities associated with rHuPH20 enzyme), 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 amounts of approximately $117,000 and $147,000
for the three months ended September 30, 2010 and 2009, respectively, and $387,000 and $440,000 for
the nine months ended September 30, 2010 and 2009, respectively.
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. The Company recognized revenue
from product-based payments in the amounts of approximately $0 and $64,000 for the three months
ended September 30, 2010 and 2009, respectively, and $332,000 and $121,000 for the nine months
ended September 30, 2010 and 2009, respectively.
11
Table of Contents
9. Net Loss Per Share
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 September 30, | ||||||||
2010 | 2009 | |||||||
Stock options and awards |
8,628,068 | 8,039,524 | ||||||
Warrants |
- | 492,857 | ||||||
8,628,068 | 8,532,381 | |||||||
10. Stockholders Equity
In September 2010, the Company issued 8.3 million shares of common stock in a public offering
at a price of $7.25 per share, generating approximately $60.0 million in net proceeds. In
connection with this financing, the Company granted to an underwriter an option to purchase
1,245,000 shares of common stock at a price of $7.25 per share. The option was exercisable in the
event that the underwriter sold more than 8.3 million shares of common stock. The option expired
unexercised on October 8, 2010.
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 nine months ended September 30, 2010 and 2009, holders of the Companys outstanding
options exercised rights to purchase approximately 282,000 and 624,000 common shares, respectively,
at weighted exercise prices of $2.62 and $1.23 per share, respectively, for net proceeds of
approximately $737,000 and $767,000, respectively. Options to purchase approximately 8.5 million
and 7.8 million shares of the Companys common stock were outstanding as of September 30, 2010 and
December 31, 2009, respectively.
During the nine months ended September 30, 2009, holders of the Companys outstanding warrants
exercised warrants to purchase approximately 2.7 million shares of common stock at an exercise
price of $2.02 per share for net proceeds of approximately $5.1 million. There were no warrants
outstanding as of September 30, 2010 and December 31, 2009.
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.
In
May 2010, the Company delivered a notice of breach to Baxter due to Baxters failure to
manufacture HYLENEX in accordance with the terms of existing development and supply contracts.
In August 2010, the Company announced the withdrawal, without
prejudice, of the notice of breach to Baxter.
The Company has been in communication with the FDA and has provided them materials relating to the
root cause and remediation plans. The Company has requested a meeting with the FDA, and the Company
will be able to better predict the timing of a HYLENEX reintroduction after its meeting with the
FDA.
12
Table of Contents
12. Subsequent Events
In October 2010, the Company completed a corporate reorganization to focus its resources on
advancing its core proprietary programs and supporting strategic alliances with Roche and Baxter.
This reorganization resulted in a reduction in the workforce of approximately 25 percent primarily
in the discovery research and preclinical areas. The Company will incur a one-time charge in the
fourth quarter of 2010 resulting from this workforce reduction that will be mostly offset by
reduced compensation expenses during the quarter.
On
October 29, 2010, the Company was awarded a total cash grant of
approximately $978,000 under the Qualifying Therapeutic Discovery
Project program administered under section 48D of the Internal
Revenue Code. The total amount awarded is expected to be received
during the fourth quarter of 2010.
13
Table of Contents
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 based primarily 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 both normal tissues throughout the
body, such as skin and cartilage, and abnormal tissues such as tumors. Our primary technology is
based on our proprietary recombinant human PH20 enzyme, or rHuPH20, a human synthetic version of
hyaluronidase. The PH20 enzyme is a naturally occurring enzyme that temporarily degrades HA,
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 through the
development of our own proprietary products. The rHuPH20 technology may also be applied to existing
and developmental products of third parties through partnerships or other collaborations.
Our operations to date have involved: (i) organizing and staffing our operating subsidiary,
Halozyme, Inc.; (ii) acquiring, developing and securing our technology; (iii) undertaking product
development for our existing products and a limited number of product candidates; and (iv)
supporting the development of partnered 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 multiple proprietary programs in various stages of research and
development. In addition, we have entered into a key partnership 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. We have also entered into two key
partnerships 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®. There are two marketed products
that utilize our technology: HYLENEX, a product used as an adjuvant to enhance the dispersion and
absorption of other injected drugs and fluids, and Cumulase®, a product used for in
vitro fertilization, or IVF. Historically, we have received only limited revenue from the sales of
API for HYLENEX and the sales of API to the third party that produces Cumulase, in addition to
other revenues from our partnerships with Baxter and Roche.
14
Table of Contents
Because a portion of the HYLENEX manufactured by Baxter was not in compliance with the
requirements of the underlying HYLENEX agreements, HYLENEX was
voluntarily recalled in May 2010. In May 2010, we delivered a notice of breach to Baxter due to Baxters failure to manufacture
HYLENEX in accordance with the terms of existing development and
supply contracts. In August 2010, we announced
the withdrawal, without prejudice, of the notice of breach to Baxter. We have been in communication with the U.S. Food
and Drug Administration, or FDA, and have provided them materials relating to the root cause and
remediation plans. We have requested a meeting with the FDA, and we will be able to better predict
the timing of a HYLENEX reintroduction after our meeting with the FDA.
On August 12, 2010, we announced the issuance of United States Patent No. 7,767,429 (the 429
Patent) claiming rHuPH20. Claims to the human PH20 glycoprotein, PEGylated variants, the
glycoprotein produced by recombinant methods, and pharmaceutical compositions with other agents,
including antibodies, insulins, cytokines, anti-infectives and additional therapeutic classes were
awarded in this patent and additional claims are in prosecution. This patent will not expire until
September 23, 2027. A European counterpart patent, EP1603541, was also granted to us on November
11, 2009. On August 13, 2010, however, we learned that an opposition to this patent was filed with
the European Patent Office. We plan on contesting the opposition with written submissions to the
European Patent Office and we expect to obtain European patent protection that is equal or superior
to the claims issued in the 429 patent. The European patent provides protection until March 5,
2024.
In October 2010, we completed a corporate reorganization to focus our resources on advancing
our core proprietary programs and supporting strategic alliances with Roche and Baxter. This
reorganization resulted in a reduction in the workforce of approximately 25 percent primarily in
the discovery research and preclinical areas. We will incur a one-time charge in the fourth quarter
of 2010 resulting from this workforce reduction that will be mostly offset by reduced compensation
expenses during the quarter.
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 $208.4 million as of September 30, 2010.
In January 2010, we filed a shelf registration statement on Form S-3 (Registration No.
333-164215) which allows us, from time to time, to offer and sell up to $100.0 million of equity or
debt securities. In September 2010, we sold approximately $60.2 million of our common stock in an
underwritten public offering at a price of $7.25 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.
15
Table of Contents
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 products and product
candidates as well as our partnered products and product candidates:
![(BAR GRAPH)](https://www.sec.gov/Archives/edgar/data/0001159036/000095012310101221/a57702a5770201.gif)
Ultrafast Insulin Program
Our lead proprietary program focuses on the formulation of rHuPH20 with prandial (mealtime)
insulins 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 regular insulin (such combinations are referred to as
Insulin-PH20) or a rapid acting analog insulin, i.e., insulin lispro (Humalog®),
insulin aspart (Novolog®) and insulin glulisine (Apidra®) (such combinations
are referred to as Analog-PH20),
16
Table of Contents
facilitates faster insulin dispersion in, and absorption from, the subcutaneous space into the
vascular compartment leading to faster insulin response. By making mealtime insulin onset faster,
i.e., providing earlier insulin to the blood and thus earlier glucose 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.
The primary goal of our ultrafast insulin program is to develop a best-in-class insulin
product, with demonstrated clinical benefits for type 1 and 2 diabetes mellitus patients, in
comparison to the current standard of care analog products that participate in the growing
$3.8 billion prandial insulin market. We are developing Insulin-PH20 and Analog-PH20 in parallel to
explore a maximum range of value creating opportunities. With a more rapidly absorbed, faster
acting insulin product, we seek to demonstrate one or more significant improvements relative to
existing treatment, such as improved glycemic control, less hypoglycemia, and less weight gain. A
number of Phase 1 and Phase 2 clinical pharmacology trials, and registration trial-enabling
treatment studies in connection with our ultrafast insulin program are ongoing or planned, that
will investigate the various attributes of our insulin product candidates. The status of some of
these trials is summarized below:
| In August 2010, we initiated two randomized double-blind Phase 2 clinical trials
that utilize our rHuPH20 in combination with the two leading commercially available
mealtime analogs: insulin aspart and insulin lispro. Diabetes patients enrolled in
these cross-over design studies will receive an insulin analog alone and the
Analog-PH20 treatment for 12 weeks each. Previous studies have demonstrated that the
coinjection of rHuPH20 with an insulin analog results in a more physiologic fast-in,
fast-out profile that enhances the mealtime glycemic control for each analog. These
Phase 2 clinical trials, one in type 1 diabetes patients and the other in type 2
patients, will compare two ultrafast insulin analog products formulated with rHuPH20 to
an active comparator, Humalog. Each study will enroll approximately 110 patients and
begins with a 4 to 6 week titration period where patients optimize their basal insulin
dosing. Patients will then be randomized to receive either the Lispro-PH20 or
Aspart-PH20 investigational study drugs and the active comparator three times daily for
12 weeks each in a random sequence. The primary endpoint of each study will be a
comparison of improved glycemic control, as assessed by the change in glycemic control
from baseline. Data regarding postprandial glucose levels, the proportion of patients
that safely achieve glycemic control targets, rates of hypoglycemia, weight change and
additional endpoints will be collected. |
||
| In August 2010, we completed a Phase 2 clinical trial to compare regular insulin
with rHuPH20 to lispro alone. After a one-month observation period that included dose
optimization, patients were randomized to regular insulin with rHuPH20 or lispro and
treated for three months. At the end of three months, patients were crossed over to the
other study treatment for another three months. This study was designed to evaluate the
safety and efficacy of Insulin-PH20 relative to a standard of care therapy, Humalog.
The result of this study will be presented at the Tenth Annual Diabetes Technology
Meeting, November 2010, in Bethesda, Maryland. |
||
| In March 2010, we completed a Phase 2 clinical study in patients with type 2
diabetes mellitus. This randomized cross-over design study was designed to compare the
postprandial glycemic excursions following a standardized test meal for three treatment
regimens: insulin lispro with rHuPH20, regular insulin with rHuPH20 and lispro alone,
each delivered at an individually optimized dose. The clinical trial results showed
that injection of insulin lispro with rHuPH20 reduces both hyperglycemic excursions and
incidence of hypoglycemia relative to insulin lispro alone, and that the optimum dose
of insulin lispro was reduced when coinjected with rHuPH20. The results from this study
were presented at the American Diabetes Association, or ADA, 70th Scientific
Sessions in Orlando in June 2010 and at the 46th Annual Meeting of the
European Association for the Study of Diabetes, or EASD, in Stockholm, Sweden in
September 2010. |
||
| In February 2010, we completed a Phase 1 clinical study designed to assess the
effects of three approved prandial insulin analogs administered with rHuPH20 compared
to each of the analogs alone, each delivered at a standardized dose. This randomized,
six-way cross-over design, euglycemic clamp study compared the postprandial
pharmacokinetics and glucodynamics of the insulin analogs with and without rHuPH20. The
clinical trial results showed that the addition of rHuPH20 to three different mealtime
insulin analogs accelerated their absorption. The acceleration produced by the |
17
Table of Contents
coadministration of rHuPH20 produced significantly more pronounced insulin action during
the first two hours after injection followed by a more rapid diminution of insulin
effects compared to the analogs alone. The coinjection of PH20 with lispro, aspart and
glulisine results in a more physiologic fast-in, fast-out profile and accelerates the
glucodynamic profile for each analog. The results from this study were also presented at
the ADA 70th Scientific Sessions in Orlando in June 2010 and the
46th Annual Meeting of the EASD in Stockholm, Sweden in September 2010. |
PEGPH20
We are investigating a PEGylated version of 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
one minute to approximately 48-72 hours. An estimated 20% to 30% of solid tumors, including
prostate, breast, pancreas and colon, accumulate significant amounts of HA that forms a halo-like
coating over the surface of the tumor. The quantity of HA produced by the tumor 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 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, liposomal doxorubicin and gemcitabine 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-escalation, multicenter, pharmacokinetic and
pharmacodynamic, safety study, in which patients with advanced solid tumors are receiving
intravenous administration of PEGPH20 as a single agent. Based on initial data from this trial, and
after consultation with the FDA, lower doses of PEGPH20 are now employed at a lower dosing
frequency. The study is actively enrolling and in a dose escalation phase. In July 2010, we
initiated a second Phase 1 clinical trial with PEGPH20 in the treatment of solid tumors.
This trial incorporates the use of oral dexamethasone as a pretreatment for all patients prior to
receiving intravenous administration of PEGPH20. The second Phase 1 study is ongoing and actively
enrolling.
Enhanze Technology
Enhanze Technology, a proprietary drug delivery enhancement platform 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. 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, some of which currently require
intravenous administration. Potential benefits of subcutaneous administration of these biologics
include life cycle management, patient convenience, reductions in infusion reactions and benefits
to payors.
We currently have Enhanze Technology partnerships with Roche and Baxter and we are currently
pursuing additional partnerships with biopharmaceutical companies that market or develop drugs that
could benefit from injection via the subcutaneous route of administration.
18
Table of Contents
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. Roche elected to add a fourth exclusive
target to the three original exclusive targets in December 2008 and a fifth exclusive target in
June 2009. 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.
Compounds directed at three of the Roche exclusive targets have previously commenced clinical
trials. One compound has completed a Phase 1 clinical trial, one compound (subcutaneous MabThera®)
is in a Phase 1 clinical trial and is preparing to begin a Phase 3 clinical trial, and the third
compound (subcutaneous Herceptin) is in a Phase 3 clinical trial. In October 2009, Roche commenced
its first Phase 3 clinical trial for a compound directed at an exclusive target. This Phase 3
clinical trial is for a subcutaneously delivered version of Roches anticancer biologic, Herceptin
(trastuzumab). The study will investigate the pharmacokinetics, efficacy and safety of subcutaneous
Herceptin in patients with HER2-positive breast cancer as part of adjuvant treatment. Herceptin is
approved to treat HER2-positive breast cancer and currently is given intravenously. Breast cancer
is the most common cancer among women worldwide. Each year, more than one million new cases of
breast cancer are diagnosed worldwide, and nearly 400,000 people will die of the disease annually.
In HER2-positive breast cancer, increased quantities of the HER2 protein are present on the surface
of the tumor cells. This is known as HER2 positivity and affects approximately 20-25% of women
with breast cancer. Roche has stated that they expect to file for regulatory approval of subcutaneous Herceptin in 2012.
In September 2009, Roche began a Phase 1 clinical trial for a subcutaneous formulation of
MabThera® (rituximab). The study will investigate the pharmacokinetics and tolerability of
subcutaneous MabThera in patients with follicular lymphoma as part of maintenance treatment.
Intravenously administered MabThera is approved for the treatment of non-Hodgkins lymphoma (NHL),
a type of cancer that affects lymphocytes, or white blood cells. An estimated 66,000 new cases of
NHL were diagnosed in the U.S. in 2009 with approximately 125,000 new cases reported worldwide.
Roche anticipates starting a Phase 3 clinical trial to investigate the pharmacokinetics, efficacy
and safety of subcutaneous MabThera in December 2010.
Additional information about the Phase 3 subcutaneous Herceptin and Phase 1 and Phase 3
subcutaneous MabThera clinical trials can be found at www.clinicaltrials.gov and
www.roche-trials.com.
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, or HyQ. 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, 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, Baxter
commenced a Phase 3 clinical trial for HyQ, and in July 2009, the enrollment for this study was
completed. Baxter has stated that they expect to file for regulatory approval of HyQ in 2011.
HYLENEX Partnership
HYLENEX is a formulation of rHuPH20 that, when injected under the skin, enhances the
dispersion and absorption of other injected drugs or fluids. In February 2007, Halozyme and Baxter
amended certain existing
19
Table of Contents
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.
In October 2009, Baxter commenced the commercial launch of HYLENEX recombinant (hyaluronidase
human injection) for use in pediatric rehydration at the 2009 American College of Emergency
Physicians (ACEP) scientific assembly. 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, (ii) cytostatic and cytotoxic chemotherapeutic agents and (iii) proprietary
small molecule drugs, the rights to which have been retained by Halozyme.
Because a portion of the HYLENEX manufactured by Baxter was not in compliance with the
requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May 2010. In
May 2010, we delivered a notice of breach to Baxter due to Baxters failure to manufacture
HYLENEX in accordance with the terms of existing development and supply contracts. The notice was
sent after Baxter informed us that a portion of the HYLENEX manufactured by Baxter was not in
compliance with the requirements of the underlying agreements with Baxter. In August 2010, we announced the
withdrawal, without prejudice, of the notice of breach to Baxter. We have been in communication with the FDA and have
provided them materials relating to the root cause and remediation plans. We have requested a
meeting with the FDA, and we will be able to better predict the timing of a HYLENEX reintroduction
after our meeting with the FDA.
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 payments 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.
Elements of our collaborative partnerships include nonrefundable license fees, reimbursements
of research and development services, various clinical, 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 license 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 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 API for Cumulase
and HYLENEX. Cost of product sales associated with the sales of API for HYLENEX is recognized as
the product is released which may result in
irregular quarterly fluctuations that may not correspond to the amount of revenue recognized
from product sales for such quarters.
20
Table of Contents
Research and Development. Our research and development expenses include salaries and
benefits, research-related manufacturing services, clinical trials, contract research services,
supplies and materials, facilities and other overhead costs and other outside expenses. 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 September 30, 2010, we have incurred research and
development expenses of $185.5 million. From January 1, 2007 through September 30, 2010,
approximately 22% and 15% of our research and development expenses were associated with the
development of our ultrafast insulin and PEGPH20 product candidates, respectively. Due to the
uncertainty in obtaining FDA and other regulatory approvals, 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 as our product candidates
advance 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
existing resource levels, 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based on
our condensed 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.
21
Table of Contents
We recognize revenues in accordance with the authoritative guidance on revenue recognition.
Revenue is recognized 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 API for 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 returns of API 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
we earn such revenue from the sales of HYLENEX by Baxter. HYLENEX was voluntarily recalled in May
2010. We have been in communication with the FDA and have provided them materials relating to the
root cause and remediation plans. We have requested a meeting with the FDA, and we will be able to
better predict the timing of a HYLENEX reintroduction after our meeting with the FDA. In connection
with the recall, we did not recognize any royalty revenue from product sales made after March 31,
2010 based on managements assessment that any product sales made after that date are expected to
be returned.
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 use the fair value method to account for share-based payments in accordance with the
authoritative guidance for stock compensation. 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. The expected term of options granted is
based on analyses of historical employee termination rates and option exercises. The risk-free
interest
22
Table of Contents
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 stock in the foreseeable future, we estimated the dividend
yield to be 0%. Forfeitures are 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.
If factors change and we employ different assumptions for determination of fair value in
future periods, the share-based compensation expense that we record 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. 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
authoritative guidance on stock compensation 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, 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 our 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 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 regulatory bodies such as the FDA or when other
significant risk factors are abated. Management has viewed future economic benefits for all of our
licensed technology or product candidates to be uncertain and has expensed these amounts for
accounting purposes.
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.
23
Table of Contents
Inventory
Inventory consists of raw materials used in production, work in process and finished goods
inventory on hand related to our HYLENEX and Cumulase products. Inventory is valued at lower of
cost or market (net realizable value) using the first-in, first-out method. Inventory is reviewed
periodically for slow-moving or obsolete status. To the extent that its net realizable value is
lower than cost, an impairment would be recorded.
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, 2009, which contain accounting policies and other disclosures required
by U.S. GAAP.
Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Product Sales Product sales were $98,000 for the three months ended September 30, 2010
compared to $411,000 for the three months ended September 30, 2009. The decrease of $313,000 was
due to the decreases in sales of API for HYLENEX and API for Cumulase. Based on the voluntary
recall of HYLENEX announced in May 2010, we expect total product sales to remain low in future
periods at least until HYLENEX is reintroduced to the market.
Revenues Under Collaborative Agreements Revenues under collaborative agreements were
approximately $3.3 million for the three months ended September 30, 2010 compared to $2.6 million
for the three months ended September 30, 2009. Revenues under collaborative agreements consisted of
the amortization of license fees and milestone payments received from Baxter and Roche of
approximately $695,000 and $1.8 million for the three months ended September 30, 2010 and 2009,
respectively, and reimbursements for research and development services from Baxter of $851,000 and
$260,000 and Roche of $1.7 million and $546,000 for the three months ended September 30, 2010 and
2009, respectively. Such reimbursements are for research and development services
rendered by us at the request of Roche and Baxter 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.
Cost of Product Sales Cost of product sales were $7,000 for the three months ended September
30, 2010 compared to $103,000 for the three months ended September 30, 2009. The decrease of
$96,000 was primarily due to the decrease in the sales of HYLENEX API. Based on the voluntary
recall of HYLENEX announced in May 2010, we expect total cost of product sales to remain low in
future periods at least until HYLENEX is reintroduced to the market.
Research and Development Research and development expenses were $12.4 million for the three
months ended September 30, 2010 compared to $13.2 million for the three months ended September 30,
2009. The decrease of $714,000, or 5%, was primarily due to a decrease in clinical trial expenses
mainly related to the ultrafast insulin program. We expect research and development costs to
increase in future periods as we expand our clinical trial programs, primarily with the ultrafast
insulin program, and continue to develop and manufacture our product candidates.
Selling, General and Administrative SG&A expenses were $3.4 million for the three months
ended September 30, 2010 compared to $3.7 million for the three months ended September 30, 2009.
The decrease of $329,000 or 9% is mainly due to the decrease in market research expenses.
Interest and Other Income, Net Interest and other income consisted of interest income of
$23,000 for the three months ended September 30, 2010 compared to $27,000 for the three months
ended September 30, 2009.
24
Table of Contents
Net Loss Net loss was $12.4 million, or $0.13 per common share, for the three months ended
September 30, 2010 compared to $13.9 million, or $0.16 per common share, for the three months ended
September 30, 2009. The decrease in net loss was primarily due to the decrease in operating
expenses and the increase in revenues.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Product Sales Product sales were $695,000 for the nine months ended September 30, 2010
compared to $669,000 for the nine months ended September 30, 2009. Based on the voluntary recall of
HYLENEX announced in May 2010, we expect total product sales to remain low in future periods at
least until HYLENEX is reintroduced to the market.
Revenues Under Collaborative Agreements Revenues under collaborative agreements were
approximately $9.4 million for the nine months ended September 30, 2010 compared to $6.6 million
for the nine months ended September 30, 2009. Revenues under collaborative agreements consisted of
the amortization of license fees and milestone payments received from Baxter and Roche of
approximately $2.3 million and $4.3 million for the nine months ended September 30, 2010 and 2009,
respectively, and reimbursements for research and development services from Baxter of $3.3 million
and $959,000 and Roche of $3.5 million and $1.3 million for the nine months ended September 30,
2010 and 2009, respectively. Such reimbursements are for research and development
services rendered by us at the request of Roche and Baxter 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.
Cost of Sales Cost of sales were $96,000 for the nine months ended September 30, 2010
compared to $152,000 for the nine months ended September 30, 2009. The decrease of $56,000 was
primarily due to the decrease in the sales of HYLENEX API. Based on the voluntary recall of HYLENEX
announced in May 2010, we expect total cost of product sales to remain low in future periods at
least until HYLENEX is reintroduced to the market.
Research and Development Research and development expenses were $35.8 million for the nine
months ended September 30, 2010 compared to $41.8 million for the nine months ended September 30,
2009. The decrease of $6.0 million, or 14%, was primarily due to $3.8 million decrease in
research-related manufacturing activities and a $3.1 million decrease in clinical trial expenses
mainly related to the ultrafast insulin program. The decrease was partially offset by the increased
compensation costs of $1.5 million primarily due to the increase in our research and development
headcount. At September 30, 2010, the average of our headcount for research and development
functions increased to 108 employees, compared with 98 employees at September 30, 2009. As the
result of the reduction in workforce in October 2010, our headcount for research and development
functions was reduced to 75. Notwithstanding this reduction in headcount, we expect research and
development costs to increase in future periods as we expand our clinical trial programs and
continue to develop and manufacture our product candidates.
Selling, General and Administrative SG&A expenses were $10.5 million for the nine months
ended September 30, 2010 compared to $11.1 million for the nine months ended September 30, 2009.
The decrease of approximately $605,000, or 5%, was primarily due to the decrease in compensation
costs and market research expenses.
Interest and Other Income Interest and other income consisted of interest income of $32,000
and $88,000 for the nine months ended September 30, 2010 and 2009, respectively. The decrease in
interest income was primarily due to lower interest rates and lower average cash and cash
equivalent balances in 2010 as compared to the same period in 2009.
Net Loss Net loss was $36.3 million, or $0.39 per common share, for the nine months ended
September 30, 2010 compared to $45.7 million, or $0.54 per common share for the nine months ended
September 30, 2009. The decrease in net loss was primarily due to the decrease in operating
expenses and the increase in revenues.
25
Table of Contents
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are our existing cash and cash equivalents. As of September
30, 2010, we had cash and cash equivalents of approximately $89.8 million. We will continue to have
significant cash requirements to support product development activities. The amount and timing of
cash requirements will depend on the success of our clinical development programs, regulatory and
market acceptance, and the resources we devote to research and other commercialization activities.
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, excluding the proceeds from the financing
completed in September 2010, of approximately $40.0 to $45.0 million for the year ending December
31, 2010, 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 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 or private issuance of securities; (ii) new collaborative agreements; and/or (iii)
expansions or revisions to existing collaborative relationships.
In January 2010, we filed a shelf registration statement on Form S-3 (Registration No.
333-164215) which allows us, from time to time, to offer and sell up to $100.0 million of equity or
debt securities. In September 2010, we sold approximately $60.2 million of our common stock in an
underwritten public offering at a price of $7.25 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 existing cash and cash equivalents will not be adequate to fund our operations until we
become cash flow positive, if ever. We cannot be certain that additional financing will be
available when needed or, if available, on favorable terms. If we are unable to raise sufficient
funds, we will need to delay, scale back or eliminate some or all of our research and development
programs, delay the launch of our product candidates, if approved, and/or restructure our
operations. 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, the issuance of warrants that
may ultimately dilute existing stockholders when exercised, as well as covenants that may restrict
our ability to operate our business.
Cash Flows
Net cash used in operations was $38.0 million for the nine months ended September 30, 2010
compared to $29.2 million of net cash used in operations for the nine months ended September 30,
2009. The change was primarily due to a $12.0 million decrease in receipts from partnership
payments as compared to the same period in 2009 and $3.0 million increase in prepaid expenses and
other assets. The decrease was partially offset by decreased operating expenses of $6.6 million in
the nine months ended September 30, 2010 as compared to the same period in 2009.
Net cash used in investing activities was $316,000 for the nine months ended September 30,
2010 compared to $898,000 for the nine months ended September 30, 2009. The decrease was primarily
due to a decrease in purchases of property and equipment in the nine months ended September 30,
2010.
Net cash provided by financing activities was $60.7 million for the nine months ended
September 30, 2010 compared to $44.0 million for the nine months ended September 30, 2009. Net cash
provided by financing activities in 2010 primarily consisted of $60.0 million in net proceeds from
the sale of our common stock in September 2010 and $737,000 in net proceeds from stock option
exercises. Net cash provided by financing activities for the nine months ended September 30, 2009
consisted of $38.2 million in net proceeds from the sale of our common stock in June 2009 and $5.8
million in net proceeds from warrant and stock option exercises.
26
Table of Contents
Off-Balance Sheet Arrangements
As of September 30, 2010, 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, Pending Adoption of Recent 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.
Relative to expenses incurred in our operations, we have generated only minimal revenue from
product sales, licensing fees and milestone payments to date and we may never generate sufficient
revenues from future product sales, licensing fees and milestone payments to offset expenses. Even
if we ultimately 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 September 30, 2010, we have
incurred aggregate net losses of approximately $208.4 million.
If our proprietary and partnered product candidates do not receive and maintain regulatory
approvals, or if approvals are not obtained in a timely manner, such failure or delay would
substantially impair our ability to generate revenues.
Approval from the FDA is necessary to manufacture and market pharmaceutical products in the
United States and the other countries in which we anticipate doing business have similar
requirements. The process for obtaining FDA and other regulatory approvals is extensive,
time-consuming and costly, and there is no guarantee that the FDA or other regulatory bodies will
approve any applications 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 the desired
product launch schedule for a product candidate. We, and our partners, attempt to provide guidance
as to the timing for the filing and acceptance of such regulatory approvals, but such filings and
approvals may not occur on the originally anticipated timeline, or at all. There are no proprietary
or partnered product candidates currently in the regulatory approval process, and we and our
partners may not be successful in obtaining such approvals for any potential products in a timely
manner, or at all (please also refer to the risk factor titled Our proprietary and partnered
product candidates may not receive regulatory approvals for a variety of reasons, including
unsuccessful clinical trials. for additional information relating to the approval of product
candidates).
27
Table of Contents
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 and other 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 a cGMP-approved
manufacturing facility, or if either Avid or Cook: (i) are unable to retain status as cGMP-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 have not 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. We have attempted to mitigate the impact of
supply interruption through the establishment of excess API inventory, but there can be no
assurances that this safety stock will be maintained or that it will be sufficient to address any
delays, interruptions or other problems experienced by Avid and/or Cook. 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; (ii) delay or prevent the effective commercialization
of proprietary or partnered products and/or (iii) cause us to breach contractual obligations to
deliver API to our partners. 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, or any other collaboration agreement, is
terminated for any reason, our business could significantly suffer.
We have entered into multiple 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.
For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance
with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May
2010. We have been in communication with the FDA, and have provided them materials relating to the
root cause and remediation plans. We have requested a meeting with the FDA, and we will be able to
better predict the timing for a HYLENEX reintroduction after our meeting with the FDA.
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 ultrafast
insulin program, HYLENEX and other proprietary and partnered products and product candidates. An
adverse development for rHuPH20 (e.g., an adverse regulatory determination relating to rHuPH20, 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.
28
Table of Contents
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 or delay 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 applicable regulatory 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. In the United States
and other jurisdictions, regulatory approval can be delayed, limited or not granted for many
reasons, including, among others:
| regulatory review may not find a product candidate safe or effective
enough to merit either continued testing or final approval; |
||
| regulatory review may not find that the data from preclinical testing
and clinical trials justifies approval, or they may require additional
studies that would significantly delay or make continued pursuit of
approval commercially unattractive; |
||
| a regulatory agency 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 regulatory approval for
such a trial; |
||
| a regulatory agency may not approve our manufacturing processes or
facilities, or the processes or facilities of our partners, our
contract manufacturers or our raw material suppliers; |
||
| a regulatory agency may identify problems or other deficiencies in our
existing manufacturing processes or facilities, or the existing
processes or facilities of our partners, our contract manufacturers or
our raw material suppliers; |
||
| a regulatory agency may change its formal or informal approval
requirements and policies, act contrary to previous guidance, adopt
new regulations or raise new issues or concerns late in the approval
process; or |
||
| a product candidate may be approved only for indications that are
narrow or under conditions that place the product at a competitive
disadvantage, which may limit the sales and marketing activities for
such product candidate or otherwise adversely impact the commercial
potential of a product. |
If a proprietary or partnered product candidate is not approved 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 the 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.
29
Table of Contents
Our key partners are responsible for providing certain proprietary materials that are essential
components of our partnered product candidates, and any failure to supply these materials could
delay the development and commercialization efforts for these partnered product candidates and/or
damage our collaborative partnerships.
Our partners are responsible for providing certain proprietary materials that are essential
components of our partnered product candidates. For example, Roche is responsible for producing the
Herceptin and MabThera required for its subcutaneous product candidates and Baxter is responsible
for producing the GAMMAGARD LIQUID for its product candidate. If a partner, or any applicable third
party service provider of a partner, encounters difficulties in the manufacture, storage, delivery,
fill, finish or packaging of either components of the partnered product candidate or the partnered
product candidate itself, such difficulties could: (i) cause the delay of clinical trials or
otherwise delay or prevent the regulatory approval of partnered product candidates; and/or (ii)
delay or prevent the effective commercialization of partnered products. Such delays could have a
material adverse effect on our business and financial condition. For example, Baxter received a
Warning Letter from the FDA in January 2010 regarding Baxters GAMMAGARD LIQUID manufacturing
facility in Lessines, Belgium. The FDA indicated in March 2010 that the issues raised in the
Warning Letter had been addressed by Baxter and we do not expect these issues to impact the
development of the GAMMAGARD LIQUID product candidate.
If we have problems with third parties that either distribute API on our behalf or prepare, fill,
finish and package our products and product candidates for distribution, our commercialization and
development efforts for our products and product candidates could be delayed or stopped.
We rely on third parties to store and ship API on our behalf and to also 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 acceptable to us, or if the third
parties we identify fail to perform their obligations, 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. 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 the commercialization of HYLENEX.
For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance
with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May
2010. We have been in communication with the FDA, and have provided them materials relating to the
root cause and remediation plans. We have requested a meeting with the FDA, and we will be able to
better predict the timing for a HYLENEX reintroduction after our meeting with the FDA.
We may wish to raise additional capital in the next twelve months and there can be no assurance
that we will be able to obtain such funds.
During the next twelve months, we may wish to raise additional capital to continue the
development of our product candidates or for other current corporate purposes. Our current cash
position and expected revenues during the next few years may 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 will need to
raise additional capital in the future through one or more financing vehicles that may be available
to us. Potential financing vehicles include: (i) the public or private issuance of securities; (ii)
new collaborative agreements; and/or (iii) expansions or revisions to existing collaborative
relationships.
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 additional capital is not available on
favorable terms when needed, we will be required to significantly reduce operating expenses through
the restructuring of our operations. 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.
30
Table of Contents
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. Our sales, marketing and distribution
capabilities 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 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, and our partners, will be subject to ongoing regulatory 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; |
31
Table of Contents
| voluntary or mandatory recall; |
||
| fines; |
||
| 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. |
For example, because a portion of the HYLENEX manufactured by Baxter was not in compliance
with the requirements of the underlying HYLENEX agreements, HYLENEX was voluntarily recalled in May
2010. We have been in communication with the FDA, and have provided them materials relating to the
root cause and remediation plans. We have requested a meeting with the FDA, and we will be able to
better predict the timing for HYLENEX reintroduction after our meeting with the FDA.
If proprietary or partnered product candidates are approved by regulatory bodies such as 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 approved product label; |
||
| the effectiveness of our sales and marketing efforts and the effectiveness of the sales
and marketing efforts of our partners; |
||
| the introduction of generic competitors; and |
||
| the extent to which reimbursement for our products and related treatments will be
available from third party payors. |
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 applicable regulatory bodies such as 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.
32
Table of Contents
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.
Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic
event.
Our operations, including laboratories, offices and other research facilities, are located in
a three building campus in San Diego, California. We depend on our facilities and on our partners,
contractors and vendors for the continued operation of our business. Natural disasters or other
catastrophic events, interruptions in the supply of natural resources, political and governmental
changes, wildfires and other fires, floods, explosions, actions of animal rights activists,
earthquakes and civil unrest could disrupt our operations or those of our partners, contractors and
vendors. Even though we believe we carry commercially reasonable business interruption and
liability insurance, and our contractors may carry liability insurance that protect us in certain
events, we might suffer losses as a result of business interruptions that exceed the coverage
available under our and our contractors insurance policies or for which we or our contractors do
not have coverage. Any natural disaster or catastrophic event could have a significant negative
impact on our operations and financial results. Moreover, any such event could delay our research
and development programs.
33
Table of Contents
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
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 September 30, 2010 were $9.11 and
$5.22, respectively. We expect our stock price to continue to be subject to significant volatility
and, in addition to the other risks and uncertainties described
34
Table of Contents
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; |
||
| 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 regulatory 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 applicable regulatory bodies such as 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; |
||
| the sale of additional debt and/or equity securities by us; |
||
| our failure to obtain financing on acceptable terms; or |
||
| a restructuring of our operations. |
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 $39.8 million of additional equity or
debt securities under an 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.
35
Table of Contents
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.
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. |
36
Table of Contents
We currently own or license several 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. For example, a European patent, EP1603541, claiming rHuPH20 was granted to us on
November 11, 2009. Claims to the human PH20 glycoprotein, PEGylated variants, the glycoprotein
produced by recombinant methods, and pharmaceutical compositions with other agents, including
antibodies, insulins, cytokines, anti-infectives and additional therapeutic classes were awarded in
this patent and additional claims are in prosecution. On August 13, 2010, however, we learned that
an opposition to this patent was filed with the European Patent Office. We plan on contesting the
opposition with written submissions to the European Patent Office and we expect to obtain European
patent protection that is equal or superior to claims previously issued in a counterpart United
States patent (U.S. Patent No. 7,767,429). Any 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, or
other proceedings in other jurisdictions, to determine the priority, validity or enforceability 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
37
Table of Contents
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.
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. Pending the
reintroduction of HYLENEX, the competitors for HYLENEX will include, but are not limited to,
Sigma-Aldrich Corporation, ISTA Pharmaceuticals, Inc. and Amphastar Pharmaceuticals, Inc. For our
Insulin-PH20 and Analog-PH20 product candidates, 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
38
Table of Contents
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 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 typically invest all, or substantially all, of our cash
in money market funds that invest primarily in government securities. Our investment policy also
permits investments in a variety of securities including commercial paper 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
September 30, 2010, 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 decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can only provide reasonable assurance of achieving the desired control objectives, and in reaching
a reasonable level of assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
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 September 30, 2010, 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 disputes, including litigation, relating to claims
arising out of operations in the normal course of our business. Any of these claims could subject
us to costly legal expenses 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,
39
Table of Contents
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 section provides updated information in certain areas, particularly with respect to
uncertainties regarding the regulatory approval of proprietary and partnered product candidates. We
do not believe the 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
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit | Title | |
10.1
|
Underwriting Agreement, between Halozyme Therapeutics, Inc. and Barclays Capital Inc., dated September 8, 2010 (1) | |
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 |
(1) | Incorporated by reference to the Registrants Current Report on Form 8-K, filed September 9,
2010. |
40
Table of Contents
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: November 5, 2010 | /s/ Jonathan E. Lim | |||
Jonathan E. Lim, MD | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Dated: November 5, 2010 | /s/ Kurt A. Gustafson | |||
Kurt A. Gustafson | ||||
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
||||
41