MEI Pharma, Inc. - Annual Report: 2005 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the period ended June 30, 2005
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___to ___.
Commission File Number: 000-50484
Marshall Edwards, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
51-0407811 (I.R.S. Employer Identification No.) |
140 Wicks Road, North Ryde, NSW, 2113 Australia
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code:
(011) 61 2 8877- 6196
(011) 61 2 8877- 6196
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on which | ||
Title of Each Class | Registered | |
None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.00000002 par value
Warrants to Purchase Common Stock
(Title of Class)
Common Stock, $0.00000002 par value
Warrants to Purchase Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein. and will not be contained, to the best
of the registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).Yes o No þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the registrant was
approximately $66.6 million based on the closing price of the registrants Common Stock as
reported on the NASDAQ National Market on December 31, 2004.
As of July 31, 2005, the number of shares outstanding of the issuers common stock, $0.00000002 par
value, was 56,938,000.
Documents Incorporated by Reference
Portions of this registrants definitive proxy statement for its 2005 annual meeting to be filed
with the SEC no later than 120 days after the end of the fiscal year are incorporated by reference
in Part III of this Annual Report on Form 10-K.
MARSHALL EDWARDS, INC.
TABLE OF CONTENTS
Page | ||||
PART I |
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Item 1: Business |
4 | |||
Item 2: Properties |
32 | |||
Item 3: Legal Proceedings |
32 | |||
Item 4: Submissions of Matters to a Vote of Security Holders |
32 | |||
PART II |
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Item 5: Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Securities |
33 | |||
Item 6: Selected Financial Data |
36 | |||
Item 7: Managements Discussion and Analysis of Financial Condition and results of
Operations. |
36 | |||
Item 7a: Quantitative and Qualitative Disclosures about Market Risk |
46 | |||
Item 8: Financial Statements and Supplementary Data |
47 | |||
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure |
65 | |||
Item 9a: Controls and Procedures |
65 | |||
Item 9b: Other Information |
66 | |||
PART III |
||||
Item 10: Directors and Officers of the Registrant |
67 | |||
Item 11: Executive Compensation |
67 | |||
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
67 | |||
Item 13: Certain Relationships and Related Transactions |
67 | |||
Item 14: Principle Accountant Fees and Services |
73 | |||
PART IV |
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Item 15: Exhibits and Financial Statement Schedules |
74 |
2
Cautionary Statement about Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Security Exchange Act of 1934,
as amended. All statements other than statements of historical facts contained in this Annual
Report, including statements regarding the future financial position, business strategy and plans
and objectives of management for future operations, are forward-looking statements. The words
believe, may, will, estimate, continue, anticipate, intend, should, plan,
expect, and similar expressions, as they relate to the Company, are intended to identify
forward-looking statements. The Company has based these forward-looking statements largely on
current expectations and projections about future events and financial trends that it believes may
affect financial condition, results of operations, business strategy and financial needs. These
forward-looking statements are subject to a number of risks, uncertainties and assumptions,
including, without limitation, those described in Risk Factors and elsewhere in this Form 10-K,
including, among other things:
| our inability to obtain any additional required financing or financing available to us on acceptable terms; | ||
| our failure to successfully commercialize our product candidates; | ||
| costs and delays in the development and/or receipt of FDA or other required governmental approvals, or the failure to obtain such approvals, for our product candidates; | ||
| uncertainties in clinical trial results; | ||
| our inability to maintain or enter into, and the risks resulting from our dependence upon, collaboration or contractual arrangements necessary for the development, manufacture, commercialization, marketing, sales and distribution of any products; | ||
| continued cooperation and support of Novogen, our parent company; | ||
| competition and competitive factors; | ||
| our inability to protect our patents or proprietary rights and obtain necessary rights to third party patents and intellectual property to operate our business; | ||
| our inability to operate our business without infringing the patents and proprietary rights of others; | ||
| general economic conditions; | ||
| the failure of any products to gain market acceptance; | ||
| technological changes; | ||
| government regulation generally and the receipt of the regulatory approvals; | ||
| changes in industry practice; and | ||
| one-time events. |
These risks are not exhaustive. Other sections of this Annual Report on Form 10-K may include
additional factors which could adversely impact our business and financial performance. Moreover,
we operate in a very competitive and rapidly changing environment. New risk factors emerge from
time to time and it is not possible for us to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking
statements.
You should not rely upon forward looking statements as predictions of future events. We cannot
assure you that the events and circumstances reflected in the forward looking statements will be
achieved or occur. Although we believe that the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of activity, performance or
achievements.
3
PART I
Item 1. Business
Overview of Our Business
We are a developmental stage pharmaceutical company, incorporated on December 1, 2000 as a
wholly-owned subsidiary of Novogen Limited, an Australian Company. We commenced operation in May
2002 and our business purpose is the development and commercialization of drugs for the treatment
of cancer. We are presently engaged in the clinical development and commercialization of a drug
candidate called phenoxodiol, which we believe may have broad application against a wide range of
cancers. Phenoxodiol appears to target a number of key components involved in cancer cell survival
and proliferation based on the emerging field of signal transduction regulation, with little or no
effect on normal cells detected in pre-clinical testing.
Novogen Limited, an Australian company publicly traded on the Australian Stock Exchange and the
Nasdaq National Market, owns approximately 86.9% of our outstanding common stock. We were
incorporated as a separate subsidiary of Novogen to focus on the development and commercialization
of drugs for the treatment of cancer. In contrast, Novogen has a broader business focus which, in
addition to the business conducted by us, includes a consumer health division that focuses on the
development of a range of non-prescription products for the health needs of both men and women and
a pharmaceutical division which focuses on the development of prescription drugs. We believe that
Novogens corporate structure, with us functioning as a corporate entity separate from Novogens
other lines of business, has provided us with:
| greater strategic focus on the development of phenoxodiol and other cancer drugs with dedicated financial resources; | ||
| direct access to the capital markets and investors who focus on the development of cancer drugs and the ability to raise debt or equity should additional funding be required in the future; and | ||
| the ability to offer equity interests, co-development rights and other arrangements to strategic partners who focus on the market for the treatment and prevention of cancer. |
During fiscal year 2005, we made significant progress in the clinical development of phenoxodiol
including:
| In May 2005, we announced preliminary results from the combination therapy trial for patients with late stage refractory ovarian cancer being conducted at Yale New Haven Hospital in the United States and the Royal Womens Hospital in Australia. These preliminary results revealed that 33% (12/36) of patients who were on combination therapy that included phenoxodiol experienced a complete or partial response. | ||
| In January 2005, we announced that we had appointed a global research organization to manage our planned pivotal Phase IIb multinational ovarian cancer study. The trial will be known as the Ovature trial. We are discussing trial design with the U.S. Food and Drug Administration (FDA) to develop a trial protocol that is intended to support marketing approval of phenoxodiol, including the number of treatment arms to be included and the number of patients required to be tested in each arm of the trial. |
4
| In November 2004, we announced that the FDA granted phenoxodiol Fast Track status for its intended use as a chemo-sensitizing agent in patients with recurrent late stage ovarian cancer. In January 2005, we announced that the FDA granted phenoxodiol Fast Track status for its intended use in patients with hormone-refractory prostate cancer. Under the FDA Modernization Act of 1997, designation as a Fast Track product means that phenoxodiol is eligible for certain programs for accelerated marketing approval. |
Scientific Overview
Phenoxodiol belongs to a class of drugs that we refer to as Multiple Signal Transduction Regulators
(MSTRs).
Signal transduction refers to the means by which cells respond to chemical signals that come from
within the cell itself, from neighboring cells, and from elsewhere in the body. These signals
regulate such vital functions as the growth and survival of the cell. We believe that malfunctions
in key components of the signal transduction process (whereby a series of chemical signals within a
cell leads to the expression of a particular function) are fundamental to neoplastic diseases such
as cancer, where cells respond abnormally to normal levels of signals, typically by over-responding
to them with increased cell growth and survival.
We believe that identifying malfunctions in the signal transduction process and then designing
drugs to block or correct them has become a basis for the development of the next generation of
anti-cancer drugs. These drugs have become known as signal transduction inhibitors. These drugs are
being designed to target a specific signaling pathway which typically is over-active in a tumor
cell, and by blocking its progression, so to prevent or reduce the ability of the tumor cell to
divide or to survive. We believe that signal transduction inhibitors, while displaying anti-tumor
activity against a small number of different types of cancer, generally have failed to provide more
than modest prolongation of survival of cancer patients. We believe this is because most human
cancers involve errors of multiple signaling pathways, and inhibition of a single pathway by any
one drug alone cannot reasonably be expected to provide more than a temporary halt to cancer
progression.
We believe that phenoxodiol increases the potency of signal transduction inhibitors by targeting
multiple signaling pathways, and in particular, those pathways vital to the survival of most, if
not all, human cancer cells. In the term MSTR, multiple refers to the fact that more than one
signaling pathway is targeted by the drug, and regulator refers to the fact that while the drug
predominantly inhibits errant pro-survival signaling pathways, it conversely can also activate
pro-death signaling pathways.
We believe that phenoxodiol is able to exert a multiplicity of effects, including on both
pro-survival and pro-death signaling systems, as a result of its primary target on the tumor
cell being a protein whose function in the tumor cell is so fundamental to cell biochemistry that
to shut it down produces a broad range of biochemical consequences.
The potential explanation for this effect on the fundamental biochemistry of tumor cells was
provided by a discovery of a research team at Purdue University in Indiana. This team has a
long-standing research interest in a family of proteins at the cell surface that are involved in
the transport of waste electrons, particularly hydrogen ions, across the cell membrane. This
function is so fundamental to normal cell function and viability, that any loss of function of this
electron pump will disrupt a wide range of biochemical processes as a consequence of elevated waste
hydrogen levels. One of the key components of this electron pump mechanism is a protein known as
NADH oxidase (abbreviated as NOX). This protein is situated on the outside of the cell membrane of
all living matter, and regulates the flow of waste hydrogen across the cell membrane. The Purdue
University studies have now shown that all forms of human cancer express a variant form of the
constitutive (or normal) NOX, known as tumor-specific NADH oxidase (abbreviated as tNOX). Based on
Purdue University studies, we believe
5
that tNOX is a primary molecular target for phenoxodiol.
Phenoxodiol appears to specifically block the action of tNOX, with the resulting inhibition of H+
efflux from the cell leading to extensive disruption to signaling pathways and to eventual
inhibition of cell proliferation and activation of apoptosis, the process of programmed cell death
by which a cell dies naturally. The Purdue studies also show that phenoxodiol has no effect on the
normal form of NOX, providing an explanation for how phenoxodiol can be so selective in its action,
with its cytotoxic effects being limited to cancer cells.
Purdue University studies recently have also shown that one of the important consequences of a rise
in intra-cell levels of waste hydrogen ions is inhibition of an enzyme known as sphingosine kinase.
This enzyme is responsible for the production of a compound within cells known as
sphingosine-1-phosphate (abbreviated as S-1-P). S-1-P plays an important role in all cells in
activating a wide range of pro survival signal transduction mechanisms, including the production
of proteins known as anti-apoptosis proteins whose task it is to block the apoptosis process.
S-1-P levels have been reported to be elevated in tumor cells, and in particular in tumor cells
that have become resistant to standard chemotherapy drugs.
This finding is relevant because of results from laboratory studies at Yale University that have
revealed that the killing effect of phenoxodiol of cancer cells occurs through the loss of the
ability of the tumor cell to manufacture anti-apoptosis proteins such as XIAP and c-FLIP.
Collectively, the Yale University and Purdue University results provide a rational mechanism of
action of phenoxodiol starting with the inhibition of tNOX, leading in turn to the loss of S-1-P
activity, leading eventually to the loss of anti-apoptosis proteins.
Recent laboratory studies conducted by Novogen and Yale University have confirmed that this chain
of biochemical events following exposure of tumor cells to phenoxodiol also provides an explanation
for why phenoxodiol is able to reverse resistance that builds up in tumor cells to standard
anti-cancer drugs such as cisplatin, gemcitabine and taxanes.
In one aspect of this effect, phenoxodiol appears to restore sensitivity to these drugs in cells
such as ovarian cancer cells that have acquired resistance to such drugs. In another aspect,
pretreatment of tumor cells with phenoxodiol considerably increases the sensitivity of virgin tumor
cells to the cytotoxic effects of standard chemotoxic drugs. Both of these effects are achieved
without increasing the toxicity of the standard chemotoxic drugs to non tumor-cells.
Overall Clinical Development Strategy
Based on the early clinical and pre-clinical work conducted on phenoxodiol, we believe that based
on its mode of action, phenoxodiol has the potential to become a treatment option for a wide range
of human cancers, and to be employed at various stages of cancer development
ranging from early-stage cancer through to late-stage cancer.
The immediate priority, is to focus on those therapeutic indications that will expedite drug
marketing approval of phenoxodiol by regulatory bodies. To this end, we will continue our work in
late-stage chemo-resistant, ovarian and prostate cancers. In chemo-resistant cancers we hope to
show that phenoxodiol will provide in humans what it has demonstrated in the laboratory and in
animal models, which is the restoration of chemo-sensitivity to standard chemotoxic agents. In this
way, phenoxodiol will be used to condition the tumor cells to the more destructive effects of drugs
such as cisplatin, gemcitabine and taxanes with the combined effects of all drugs providing a
potent force able to attack well established and extensive cancer disease. In January 2005, we
announced that researchers from Yale University School of Medicine found that phenoxodiol
considerably enhances the ability of the drug docetaxel to kill human ovarian cancer cells in the
laboratory. In addition, in May 2005, we announced preliminary results from the combination
therapy trial for patients with late stage refractory ovarian cancer being conducted at Yale New
Haven Hospital in the United States and the Royal Womens Hospital in Australia. These preliminary
results revealed that 33% (12/36) of patients who were on combination therapy that included
phenoxodiol experienced a complete or partial response.
6
In due course, it is possible that other forms of cancer, generally regarded as unresponsive to
standard drugs, will be added to this program in order to maximize the opportunity for treating
chemo-resistant cancers.
Phenoxodiol is also being developed for use in earlier-stage cancers. This is the basis of the
clinical program involving the use of phenoxodiol as a monotherapy in squamous cell carcinoma (SCC)
of the cervix, vagina and vulva. This area also is being targeted as a matter of priority. The
commercial attraction of this area is that cervical cancer is a form of cancer for which early
diagnosis is commonly available, and for which a non-invasive, non-surgical drug option might be an
attractive therapeutic option.
History of Phenoxodiol Development
In 1995, the phenoxodiol structure was suggested as a potential metabolite of daidzein, a naturally
occurring isoflavone. Isoflavones are a family of structurally-related compounds found in foods
such as legumes, red clover, lentils and chickpeas. When eaten, isoflavones are converted in the
body into a wide range of compounds known as isoflavone metabolites.
Commencing in 1995, Novogen scientists synthesized a number of the naturally-occurring isoflavone
metabolites and screened them for anti-cancer action. The rationale for this was the purported
beneficial role of dietary isoflavones in cancer prevention. Phenoxodiol was found to be the most
potent anti-cancer compound among the compounds tested. It was cytostatic and cytotoxic against a
wide range of human cancer cells, but without toxicity against non-tumor cells. In vivo (in
animals) studies in laboratory animals subsequently showed that phenoxodiol administered either
orally or systemically was adequately bio-available (absorbed into the body in useful form) and
significantly retarded tumor development, in particular in athymic mice bearing xenografts of human
prostate cancer. Such anticancer effects in animals were achieved without evidence of toxicity, and
thus phenoxodiol was selected for development as a human anti-cancer drug.
Subsequent pre-clinical studies identified a range of molecular targets of phenoxodiol within human
cancer cells, prompting us to classify the drug as a Multiple Signal Transduction
Regulator.
The broad anti-cancer action of phenoxodiol against an extensive library of different human cancer
cell lines such as prostate, breast, ovarian, lung and cervical cancer, mesothelioma, melanoma,
glioma and rhabdomyosarcoma, suggested potential clinical application against a wide range of types
of human cancer. Further pre-clinical studies showed that phenoxodiol has a number of indirect
anti-cancer effects including a potent ability as an anti-androgen, which is a process that reduces
the biological impact of male sex hormones like testosterone, and an ability to induce apoptosis of
hyperplastic prostate smooth muscle cells, the main type of stromal cells found in the prostate
gland, that suggested prostate cancer as a particularly suitable clinical target, leading to this
form of cancer being identified early as a prime potential clinical target for the drug. However,
with a view to allowing further time to identify those cancer types that are the most sensitive
types of cancer to phenoxodiol, the strategy adopted was to conduct Phase I studies in patients
with a wide selection of solid tumors in order to gain preliminary evidence of efficacy across a
range of different tumor types.
Early animal studies had been conducted with both oral and intravenous dosage forms of phenoxodiol.
For human use, both dosage forms of phenoxodiol are being trialed.
A Phase lb safety study was commenced in Australia in November 2000 and finished in March 2002.
Twenty-one patients with late-stage solid cancers of any type were given phenoxodiol by weekly
bolus injections, which are intravenous injections delivered quickly, usually over several minutes,
for 12 weeks. This was a dose-escalating study with different patients receiving doses ranging from
1 to 30
7
mg/kg/dose. An important end-point for Phase 1b safety studies is to determine the maximum
tolerated dose, abbreviated as MTD, which is the highest dose of drug that can be delivered without
causing life-threatening toxicity. The only safety issue reported in this study was
hypersensitivity represented by rashes, headaches or fever in 3 patients which was considered
likely to be associated with the material used to suspend the phenoxodiol in the intravenous dosage
form. The MTD was not reached by the 30 mg/kg dose, and the study was terminated at that point,
with that dosage being the highest that could practically be administered.
A second Phase lb safety study commenced in Australia in April 2001 and concluded in 2002.
Twenty-one patients with late-stage solid cancers of any type were given phenoxodiol by continuous
intravenous infusion. The rationale here was to test the concept of delivering phenoxodiol on a
continuous basis in order to maintain drug levels in the blood at a steady, moderate, continuous
level, rather than the short, infrequent peak levels achieved with the bolus injection method.
Laboratory studies had suggested that when used as a monotherapy, phenoxodiol was more effective
when given to animals on a repeated and frequent basis. This again was a dose-escalating study,
with different patients receiving doses from 1 to 40 mg/kg/day. As in the previous study, the MTD
was not reached and no significant toxicities were encountered.
An Investigational New Drug Application (IND) for the intravenous dosage form of phenoxodiol
became effective in the US in January 2001, allowing a third Phase lb toxicity study to commence at
The Cleveland Clinic, Ohio, in August 2001. This study concluded in 2002. Nineteen patients with
late-stage solid cancers of any type were given phenoxodiol by continuous intravenous infusion in a
repeat of the Australian study. The rationale here was to conduct a clinical study in the US as
part of a program with the ultimate aim of seeking to conduct a study to support marketing approval
in the US. This was a dose-escalating study, with inter-patient escalation from 0.5 to 64
mg/kg/day. As with the Australian study, no MTD was reached and no significant toxicities were
encountered.
The main conclusions from this Phase I safety program of the intravenous dosage form were:
| that the intravenous dosage form was generally well-tolerated and without significant safety issues, but that it was associated with some intolerance (hypersensitivity); | ||
| that continuous intravenous infusion was unlikely to deliver blood levels of drug that were thought to be potentially clinically relevant for the treatment of cancer, and that the bolus injection method was potentially better; and | ||
| that preliminary evidence of an anti-tumor effect was obtained in some patients with solid tumors. |
Concurrent with the Phase I clinical trial program outlined above, pre-clinical studies were being
conducted at Yale University Medical School that focused on the use of phenoxodiol in the treatment
of ovarian cancer, in particular, late-stage cancers that had become resistant to standard
anti-cancer drugs. Those studies found that phenoxodiol was particularly effective in cell culture
and in animals in killing highly chemo-resistant ovarian cancer cells. It also was found that
phenoxodiol displayed a potent ability to restore the sensitivity of these chemo-resistant cancer
cells to standard anti-cancer drugs including platinums and taxanes, the standard drugs used in the
treatment of ovarian cancer.
These Yale studies led to the development of a strategy to use phenoxodiol to restore sensitivity
to drugs such as cisplatin or carboplatin and paclitaxel or docetaxel in late-stage ovarian cancer
that had become resistant to such drugs. It was decided to give phenoxodiol by bolus injection, and
to give it on two consecutive days each week as a way of increasing the exposure of the cancer to
drug. A Phase Ib safety study was conducted in the first instance using this new regimen. This was
conducted at Yale-New Haven Hospital, CT, commencing 2002 and ending 2003 in patients with
late-stage, platinum- and taxane-resistant ovarian cancers. It was a dose-escalating study in 40
women, with 10 women each receiving 1, 3, 10 or 20 mg/kg/day. No particular safety issues were
encountered with the three lower dosages, although the 20 mg/kg dose produced two incidences of
thrombocytopenia, or reduced platelet levels. This was an effect observed earlier in safety studies
in dogs, and was thought to be due to the carrier compound in which the phenoxodiol was dissolved.
Evidence of an anti-tumor effect (stabilization of disease) was observed in the three lower
dosages, but not the highest dose.
8
At the conclusion of this study, a Phase IIa study was commenced in both Australia and the US in 60
women with chemo-resistant, late-stage ovarian cancer, where phenoxodiol was used in combination
with cisplatin or paclitaxel to see if the chemo-resistance could be reversed. This study commenced
in early 2004 and is ongoing. The investigators have reported that phenoxodiol has produced a 33%
tumor response (tumor shrinkage) rate in these patients (12/36) and have concluded that this
provides preliminary proof-of-concept.
The tumor responses observed in these patients led to the drug receiving Fast Track status from the
FDA in 2004 for recurrent late stage ovarian cancer that is resistant or refractory to platins and
taxanes.
Starting in 2002 it was decided to pursue the development of the oral dosage form of phenoxodiol.
This was driven by the realization that continuous delivery of drug was preferable for an
anti-cancer effect, and that the oral dosage form was a more practical way of achieving this
compared to the intravenous dosage form which could only be given no more than two days per week
because of the logistics of bringing patients into hospital for treatment. The oral dosage form, on
the other hand, could be administered on an out-patient basis.
The first clinical study was a Phase lb/IIa study which began in early 2002 on the use of
phenoxodiol in patients with hematological tumors. This was predominantly a bio-availability and
safety study, but also was intended to look for any evidence of anti-tumor activity in non-solid
tumors. It was a dose-escalation study, where each patient was given a rising dose up to a maximum
of 55 mg/kg/day over two 12-hourly doses. The study confirmed that the drug was readily absorbed
from the gut to the extent of about 30%, and that there were no safety or intolerance issues, even
at the highest dose. No evidence of anti-tumor effect was observed, leading to the conclusion that
phenoxodiol is not appropriate for hematological cancers due to the presence of phenoxodiol in the
blood in conjugated form (glucuronides and sulfates). While such conjugation is not thought to
impede the drugs ability to attack most solid tumors, it is an impediment with blood-based cancers
because of the inability of blood to deconjugate drug. Solid tissues generally possess the
necessary ability to deconjugate these complexes to release the bio-active, unconjugated drug.
The next clinical study undertaken with the oral dosage form was in Australia in men with
hormone-refractory prostate cancer. This study commenced in 2003 and is ongoing. Twenty-four
patients are being treated with different dosages of phenoxodiol (20, 80, 200 and 400 mg) every
8-hours until they show disease progression. The investigators in this study have reported that the
drug has produced a delay in disease progression in a number of men in the 200 and 400 mg dose
groups, and that there have been no safety or intolerance issues.
The Prostate Specific Antigen, PSA, responses observed in some patients in this study led to the
oral dosage form receiving Fast Track status from the FDA for this indication in 2004.
An IND for the oral dosage form of phenoxodiol became effective in the US in June 2003 which
allowed a study in collaboration with Yale University School of Medicine to be conducted in
patients with cancer of the cervix vulva and vagina. This dose-response Phase IIa study is ongoing.
Phenoxodiol is being used on a neo-adjuvant, monotherapy basis in patients following a primary
diagnosis of cancer. Phenoxodiol is being given at dosages of 50, 200 or 400 mg (8-hourly) for four
weeks prior to surgery. The study is intended to measure the effect of treatment on tumor size and
tumor biology.
A Phase IIa study commenced in Australia in early 2004 in order to assess the safety of
administering high dose oral phenoxodiol therapy on a continuous basis in combination with
carboplatin or cisplatin.
9
This study is being conducted in patients with solid cancers, and renal
cancer in particular.
In early 2005, we announced that we were proposing to take phenoxodiol into a pivotal study for
marketing approval with the indication to be sought of using phenoxodiol to restore sensitivity to
carboplatin in platinum-refractory ovarian cancer.
Competition
The development of phenoxodiol and other drug candidates is highly competitive. A number of other
companies have products or drug candidates in various stages of pre-clinical or clinical
development that are intended for the same therapeutic indications for which phenoxodiol is being
developed. Some of these potential competing drugs are further advanced in development than
phenoxodiol and may be commercialized sooner. Even if we are successful in developing
effective drugs, phenoxodiol may not compete successfully with products produced by our
competitors.
With respect to the use of phenoxodiol for late-stage prostate cancer, docetaxel, a drug
distributed by Aventis, was approved in 2004 by the FDA for the treatment of hormone refractory
prostate cancer, establishing a new bench-mark for standard chemotherapy in late-stage prostate
cancer. We do not believe this is a direct competitor because our strategy is to develop
phenoxodiol as a chemosensitizer for docetaxel in patients with prostate cancer who become
refractory to docetaxel. A number of pharmaceutical and biotechnology companies are known to be
seeking to develop drugs for the same indication.
With respect to the use of phenoxodiol as a chemo-sensitizing agent to restore sensitivity to
platinum-based drugs in late-stage ovarian cancer, the experimental drug, Telcyta (Telik Inc.) is a
directly competitive drug. Telcyta currently is in a Phase III registration trial suggesting that
it has shown sufficient promise in a Phase II study to warrant progression to a Phase III study.
The different trialing regimes being used by us with phenoxodiol and by Telik Inc with Telcyta make
it difficult to compare the two drugs for efficacy in this area and, as a result, we cannot
evaluate the level of competition. However, we expect that at any level of efficacy, Telcyta,
should it be approved for marketing, would represent a significant competitor for phenoxodiol.
Our competitors include pharmaceutical companies and biotechnology companies, as well as
universities and public and private research institutions. In addition, companies active in
different but related fields represent substantial competition for us. Many of our competitors
developing oncologic drugs have significantly greater capital resources, larger research and
development staffs and facilities and greater experience in drug development, regulation,
manufacturing and marketing than we do. These organizations also compete with Novogen, our services
provider, to recruit qualified personnel, and with us to attract partners for joint ventures and to
license technologies that are competitive with our technologies. As a result, our competitors may
be able to more easily develop technologies and products that would render our technologies or our
drug candidates obsolete or non-competitive.
Intellectual Property
Novogen has been granted patents and has additional patents pending in a number of countries which
cover a family of chemically related compounds with potentially broad ranging and complementary
anti-cancer effects. Novogen has granted to us an exclusive license, with respect to its patent
rights and intellectual property know-how to develop, market and distribute one of these compounds,
phenoxodiol, as an anti-cancer agent, except in topical form. See Part III, Item 13 Certain
Relationships and Related Transactions for more information regarding our agreements with Novogen.
We have licensed from Novogen the rights to the Novogen patents and applications as they relate to
phenoxodiol as an anti-cancer agent. Excluded from these rights is phenoxodiol in a topical
formulation. The patent rights we have licensed from Novogen can be largely classified into two
broad
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groups: patent rights relating to phenoxodiol used as an anti-cancer agent, which we refer to
as therapeutic patent rights, and patent rights relating to the manufacture of phenoxodiol for
anti-cancer purposes, which we refer to as manufacturing patent rights. The pending and issued
Novogen patent rights can be further broken down into four families, three families belonging to
the therapeutic patent rights and one family belonging to the manufacturing patent rights. The
three families in the therapeutic patent rights relate to:
| phenoxodiol in the treatment of cancer (thirteen pending and nine issued); | ||
| compositions and methods for protecting skin from ultraviolet induced immunosuppression and skin damage, including phenoxodiol (nine pending and four issued); and | ||
| therapeutic methods and compositions involving isoflav-3-ene and isoflavan structure, including phenoxodiol (PCT pending). | ||
| The family relating to the manufacturing patent rights relate to: |
o | the production of isoflavone derivatives, including phenoxodiol (sixteen pending and one issued). |
Novogen has been granted a U.S. Patent (No. 6,649,648) by the United States Patent and Trademark
Office (USPTO) relating to the treatment of cancerous disease with isoflavone derivatives including
phenoxodiol. U.S. Patent 6,649,648 also includes claims specifically directed to the treatment of
ovarian cancer, breast cancer, prostate cancer, uterine cancer, bowel cancer, testicular cancer,
endometrial cancer, leukemia and metastatic cancer with isoflavone derivatives including
phenoxodiol.
As patent applications in the United States are maintained in secrecy until published by the USPTO
at 18 months from filing, for all cases filed after November 29, 2000, or at issue, for cases filed
prior to November 29, 2000, and as publication of discoveries in the scientific or patent
literature often lag behind the actual discoveries, we cannot be certain that Novogen was the first
to make the inventions covered by the Novogen patents and applications as they relate to
phenoxodiol as an anti-cancer agent referred to above. Moreover, pursuant to the terms of the
Uruguay Round Agreements Act, patents filed on or after June 8, 1995 have a term of twenty years
from the date of such filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to therapeutic use of
phenoxodiol as patent applications in the biopharmaceutical sector often take considerable time to
issue. However, in some countries patent term may be extended.
In order to protect the confidentiality of our technology, including trade secrets and know-how and
other proprietary technical and business information, we require all of our consultants, advisors
and collaborators to enter into confidentiality agreements that prohibit the use or disclosure of
information that is deemed confidential. The agreements also oblige our consultants, advisors and
collaborators to assign to us developments, discoveries and inventions made by such persons in
connection with their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or intellectual
property will be protected thereby or that others will not independently develop substantially
equivalent proprietary information or intellectual property.
The pharmaceutical industry is highly competitive and patents may have been applied for by, and
issued to, other parties relating to products competitive with phenoxodiol. Use of phenoxodiol and
any other drug candidates may give rise to claims that they infringe the patents or proprietary
rights of other parties, existing now and in the future. An adverse claim could subject us to
significant liabilities to such other parties and/or require disputed rights to be licensed from
such other parties. We cannot be sure that any license required under any such patents or
proprietary rights would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions, or may find that the
development, manufacture or sale of products requiring such licenses may be precluded. We have not
conducted any searches or made any independent investigations of the existence of any patents or
proprietary rights of other parties.
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Relationship with Novogen
Novogen has been granted patents and has additional patent applications pending in a number of
countries pertaining to phenoxodiols family of compounds and to phenoxodiol itself and their use
in anticancer therapeutics. Novogen has granted to us an exclusive license under its patent rights
and the intellectual property rights in its relevant know-how to develop, market and distribute all
forms of administering phenoxodiol for anti-cancer applications, except topical applications.
Novogen is active in the discovery and development of new drugs based on the emerging field of
signal transduction regulation. Signal transduction regulators offer the potential for effective,
well-tolerated treatment of common diseases, including cancer and heart disease. Novogen has
developed a family of chemically related compounds with potentially broad ranging and complementary
anti-cancer effects.
We have entered into certain key agreements with Novogen. These agreements, discussed briefly
below, are more fully detailed in Part III, Item 13 Certain Relationships and Related
Transactions.
Under the license agreement, Novogen granted us an exclusive world-wide, non-transferable license,
under the Novogen patent rights, to conduct clinical trials and commercialize and distribute all
forms of administering phenoxodiol except topical applications. The agreement covers uses of
phenoxodiol in the field of prevention, treatment or cure of cancer in humans. Our business is
currently focused on advancing the clinical program underway for the development of phenoxodiol.
Under a manufacturing license and supply agreement, we have granted Novogen a sublicense to
manufacture and supply phenoxodiol to us in its primary manufactured form for both the research and
development program and phenoxodiols ultimate commercial use. Novogen has a pilot phenoxodiol
manufacturing plant which we believe has sufficient capacity and which can be augmented by third
party manufacturing facilities to meet the projected amount of phenoxodiol required to complete the
proposed clinical program.
Under a license option deed, Novogen granted us an exclusive first right to accept and an exclusive
last right to match any proposed dealing by Novogen with its intellectual property rights in other
synthetic compounds developed by Novogen that have known or potential anti-cancer applications in
all forms other than topical applications.
Pursuant to a services agreement, Novogen provides services reasonably required by us relating to
the development and commercialization of phenoxodiol. We do not currently intend to directly employ
any staff and are reliant on Novogen for the provision of resources to conduct our business.
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Research and Development
The objective of our research and development program is the generation of data sufficient to
achieve regulatory approval of phenoxodiol in one or more dosage forms in major markets such as the
United States, and/or to allow us to enter into a commercial relationship with another party. The
data is generated by our clinical trial programs.
The key aspects of this program are to provide more complete characterization of the following:
| the relevant molecular targets of action of phenoxodiol; | ||
| the relative therapeutic indications of different dosage forms of phenoxodiol; | ||
| the relative therapeutic benefits and indications of phenoxodiol as a monotherapy or as part of combinational therapy with other chemotoxics; and | ||
| the most appropriate cancer targets for phenoxodiol. |
Research expenses were $2.279 million for the year ended June 30, 2005, $2.381 million for the year
ended June 30, 2004 and $2.024 million for the year ended June 30, 2003.
Regulation
U.S. Regulatory Requirements
U.S. Regulatory Requirements
The U.S. Food and Drug Administration, or FDA, and comparable regulatory agencies in foreign
countries, regulate and impose substantial requirements upon the research, development,
pre-clinical and clinical testing, labeling, manufacture, quality control, storage, approval,
advertising, promotion, marketing, distribution and export of pharmaceutical products including
biologics, as well as significant reporting and record-keeping obligations. State governments may
also impose obligations in these areas.
In the United States, pharmaceutical products are regulated by the FDA under the Federal Food Drug
and Cosmetic Act or FDCA and other laws including in the case of biologics, the Public Health
Service Act. We believe, but cannot be certain, that our products will be regulated as drugs by the
FDA. The process required by the FDA before drugs may be marketed in the United States generally
involves the following:
| pre-clinical laboratory evaluations, including formulation and stability testing, and animal tests performed under the FDAs Good Laboratory Practices regulations to assess potential safety and effectiveness; | ||
| submission and approval of an IND, including results of pre-clinical tests and protocols for clinical tests, which must become effective before clinical trials may begin in the United States; | ||
| obtaining approval of Institutional Review Boards to administer the products to human subjects in clinical trials; | ||
| adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for the products intended use; | ||
| development of manufacturing processes which conform to FDA current Good Manufacturing Practices, or cGMPs, as confirmed by FDA inspection; |
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| submission of pre-clinical and clinical test results, and chemistry, manufacture and control information on the product to the FDA in a New Drug Approval Application, or NDA; and | ||
| FDA review and approval of an NDA, prior to any commercial sale or shipment of a product. |
The testing and approval process requires substantial time, effort, and financial resources, and we
cannot be certain that any approval will be granted on a timely basis, if at all.
The results of the pre-clinical tests, together with initial specified manufacturing information,
the proposed clinical trial protocol, and information about the participating investigators are
submitted to the FDA as part of an IND, which must become effective before we may begin human
clinical trials. Additionally, an independent Institutional Review Board at each clinical trial
site proposing to conduct the clinical trials must review and approve each study protocol and
oversee conduct of the trial. An IND becomes effective 30 days after receipt by the FDA, unless the
FDA, within the 30-day period, raises concerns or questions about the conduct of the trials as
outlined in the IND and imposes a clinical hold. If the FDA imposes a clinical hold, the IND
sponsor must resolve the FDAs concerns before clinical trials can begin. Pre-clinical tests and
studies can take several years to complete, and there is no guarantee that an IND we submit based
on such tests and studies will become effective within any specific time period, if at all.
Human clinical trials are typically conducted in three sequential phases that may overlap.
Phase I: The drug is initially introduced into healthy human subjects or patients and tested for
safety and dosage tolerance. Absorption, metabolism, distribution, and excretion testing is
generally performed at this stage.
Phase II: The drug is studied in controlled, exploratory therapeutic trials in a
limited number of subjects with the disease or medical condition for which the new drug is intended
to be used in order to identify possible adverse effects and safety risks, to determine the
preliminary or potential efficacy of the product for specific targeted diseases or medical
conditions, and to determine dosage tolerance and the optimal effective dose.
Phase III: When Phase II studies demonstrate that a specific dosage range of the drug is likely
to be effective and the drug has an acceptable safety profile controlled, large-scale therapeutic
Phase III trials are undertaken at multiple study sites to demonstrate clinical efficacy and to
further test for safety in an expanded patient population.
We cannot be certain that we will successfully complete Phase I, Phase II, or Phase III testing of
our products within any specific time period if at all. Furthermore the FDA, the Institutional
Review Board or we may suspend or terminate clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an unacceptable health risk.
Results of pre-clinical studies and clinical trials, as well as detailed information about the
manufacturing process, quality control methods, and product composition, among other things, are
submitted to the FDA as part of an NDA seeking approval to market and commercially distribute the
product on the basis of a determination that the product is safe and effective for its intended
use. Before approving an NDA, the FDA will inspect the facilities at which the product is
manufactured and will not approve the product unless cGMP compliance is satisfactory. If applicable
regulatory criteria are not satisfied, the FDA may deny the NDA or require additional testing or
information. As a condition of approval, the FDA also may require post-marketing testing or
surveillance to monitor the products safety or efficacy. Even after an NDA is approved, the FDA
may impose additional obligations or restrictions (such as labeling changes), or even suspend or
withdraw a product approval on the basis of data that arise after the product reaches the market,
or if compliance with regulatory standards is not maintained. We cannot be certain that any NDA we
submit will be approved by the
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FDA on a timely basis, if at all. Also, any such approval may limit
the indicated uses for which the product may be marketed. Any refusal to approve, delay in
approval, suspension or withdrawal of approval, or restrictions on indicated uses could have a
material adverse impact on our business prospects.
Each NDA must be accompanied by a user fee, pursuant to the requirements of the Prescription Drug
User Fee Act, or PDUFA, and its amendments. According to the FDAs fee schedule, effective on
October 1, 2004 for the fiscal year 2005, the user fee for an application requiring clinical data,
such as an NDA, is $672,000. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also
imposes an annual product fee for prescription drugs and biologics ($41,710), and an annual
establishment fee ($262,200) on facilities used to manufacture prescription drugs and biologics. A
written request can be submitted for a waiver for the application fee for the first human drug
application that is filed by a small business, but there are no waivers for product or
establishment fees. We are not at the stage of development with our products where we are subject
to these fees, but they are significant expenditures that will be incurred in the future and must
be paid at the time of application submissions to FDA.
Satisfaction of FDA requirements typically takes several years. The actual time required varies
substantially, based upon the type, complexity, and novelty of the pharmaceutical product, among
other things. Government regulation imposes costly and time-consuming requirements and restrictions
throughout the product life cycle and may delay product marketing for a considerable period of
time, limit product marketing, or prevent marketing altogether. Success in pre-clinical or early
stage clinical trials does not assure success in later stage clinical trials. Data obtained from
pre-clinical and clinical activities is not always conclusive and may be susceptible to varying
interpretations that could delay, limit, or prevent marketing approval. Even if a product receives
marketing approval, the approval is limited to specific clinical indications. Further, even after
marketing approval is obtained, the discovery of previously unknown problems with a product may
result in restrictions on the product or even complete withdrawal of the product from the market.
After product approval, there are continuing significant regulatory requirements imposed by the
FDA, including record-keeping requirements, obligations to report adverse side effects in patients
using the products, and restrictions on advertising and promotional activities. Quality control and
manufacturing procedures must continue to conform to cGMPs, and the FDA periodically inspects
facilities to assess cGMP compliance. Additionally, post-approval changes in ingredient
composition, manufacturing processes or facilities, product labeling, or other areas may require
submission of an NDA Supplement to the FDA for review and approval. New indications will require
additional clinical tests and submission of an NDA Supplement. Failure to comply with FDA
regulatory requirements may result in an enforcement action by the FDA, including Warning Letters,
product recalls, suspension or revocation of product approval, seizure of product
to prevent distribution, impositions of injunctions prohibiting product manufacture or
distribution, and civil and criminal penalties. Maintaining compliance is costly and
time-consuming. We cannot be certain that we, or our present or future suppliers or third-party
manufacturers, will be able to comply with all FDA regulatory requirements, and potential
consequences of noncompliance could have a material adverse impact on our business prospects.
The FDAs policies may change, and additional governmental regulations may be enacted that could
delay, limit, or prevent regulatory approval of our products or affect our ability to manufacture,
market, or distribute our products after approval. Moreover, increased attention to the containment
of healthcare costs in the United States and in foreign markets could result in new government
regulations that could have a material adverse effect on our business. Our failure to obtain
coverage, an adequate level of reimbursement, or acceptable prices for our future products could
diminish any revenues we may be able to generate. Our ability to commercialize future products will
depend in part on the extent to which coverage and reimbursement for the products will be available
from government and health administration authorities, private health insurers, and other
third-party payers. European Union and U.S. government and other third-party payers increasingly
are attempting to
15
contain healthcare costs by consideration of new laws and regulations limiting
both coverage and the level of reimbursement for new drugs. We cannot predict the likelihood,
nature or extent of adverse governmental regulation that might arise from future legislative or
administrative action, either in the United States or abroad.
Our activities also may be subject to state laws and regulations that affect our ability to develop
and sell our products. We are also subject to numerous federal, state, and local laws relating to
such matters as safe working conditions, clinical, laboratory, and manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous
substances. We may incur significant costs to comply with such laws and regulations now or in the
future, and the failure to comply may have a material adverse impact on our business prospects.
The FDCA includes provisions designed to facilitate and expedite the development and review of
drugs and biological products intended for treatment of serious or life-threatening conditions that
demonstrate the potential to address unmet medical needs for such conditions. These provisions set
forth a procedure for designation of a drug as a fast track product. The fast track designation
applies to the combination of the product and specific indication for which it is being studied. A
product designated as fast track is ordinarily eligible for additional programs for expediting
development and review, but products that are not in fast track drug development programs may also
be able to take advantage of these programs. These programs include priority review of NDAs and
accelerated approval. Drug approval under the accelerated regulations may be based on evidence of
clinical effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. A
postmarketing clinical study will be required to verify clinical benefit, and other restrictions to
assure safe use may be imposed.
Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the Patent Act), a
sponsor may obtain marketing exclusivity for a period of time following FDA approval of certain
drug applications, regardless of patent status, if the drug is a new chemical entity or if new
clinical studies were required to support the marketing application for the drug. This marketing
exclusivity prevents a third party from obtaining FDA approval for an identical or nearly identical
drug under an Abbreviated New Drug Application (ANDA) or a 505(b)(2) New Drug Application. The
statute also allows a patent owner to obtain an extension of applicable patent terms for a period
equal to one-half the period of time elapsed between the filing of an IND and the filing of the
corresponding NDA plus the period of time between the filing of the NDA and
FDA approval, with a five year maximum patent extension. We cannot be certain that Novogen will be
able to take advantage of either the patent term extension or marketing exclusivity provisions of
these laws.
The Best Pharmaceuticals for Children Act, signed into law on January 4, 2002, provides an
additional six months of marketing exclusivity for new or marketed drugs, for which specific
pediatric studies were conducted at the written request of the FDA. On December 3, 2003, the
Pediatric Research Equity Act was signed into law, authorizing the FDA to require pediatric studies
for drugs and biological products to ensure the drugs or products safety and effectiveness in
children. This Act required that New Drug Applications (NDAs) or supplements to NDAs contain data
assessing the safety and effectiveness for the claimed indication in all relevant pediatric
subpopulations. Dosing and admistration must be supported for each pediatric subpopulation for
which the drug is safe and effective. The FDA may grant deferrals for submission of data, or full
or partial waivers. We cannot be certain that we will be able to take advantage of these statutory
pediatric marketing exclusivity provisions.
Australian Regulatory Requirements
The Therapeutic Goods Act 1989, or 1989 Act, sets out the legal requirements for the import,
export, manufacture and supply of pharmaceutical products in Australia. The 1989 Act requires that
all pharmaceutical products to be imported into, supplied in, manufactured in or exported from
Australia be included in the Australian Register of Therapeutic Goods, or ARTG, unless specifically
exempted under the Act.
16
In order to ensure that a product can be included in the ARTG, a sponsoring company must make an
application to the Therapeutic Goods Administration, or TGA. The application usually consists of a
form accompanied by data (usually based on the European Union requirements) to support the quality,
safety and efficacy of the drug and payment of a fee. Application details are available on the
TGA website http://www.tga.gov.au.
The first phase of evaluation, known as the Application Entry Process, is usually a short period
during which an application is assessed on an administrative level to ensure that it complies with
the basic guidelines. The TGA must decide within 40 working days whether it will accept the
application for evaluation.
Once an application is accepted for evaluation, aspects of the data provided are allocated to
evaluators, who prepare evaluation reports. The evaluation reports are then sent to the sponsoring
company who then has the opportunity to comment on the views expressed within the evaluation report
and to submit supplementary data to address any issues raised in the evaluation reports. Following
this evaluation, the chemistry and quality control aspects of a product may be referred to a
sub-committee of the Australian Drug and Evaluation Committee, or ADEC, to review the evaluation
reports.
Once the evaluations are complete, the TGA prepares a summary document on the key issues on which
advice will be sought from the ADEC. This summary is sent to the sponsoring company which is able
to submit a response to the ADEC dealing with issues raised in the summary and those not previously
addressed in the evaluation report. The ADEC provides independent advice on the quality,
risk-benefit, effectiveness and access of the drug and conduct medical and scientific evaluations
of the application. The ADECs resolutions are provided to the sponsoring company after 5 working
days after the ADEC meeting.
The TGA takes into account the advice of the ADEC in reaching a decision to approve or reject a
product. Any approval for registration on the ARTG may have conditions associated with it.
From the time that the TGA accepts the initial application for evaluation, the TGA must complete
the evaluation and make a decision on the registration of the product within 255 working days. The
TGA also has a system of priority evaluation for products that meet certain criteria, including
where the product is a new chemical entity that it is not otherwise available on the market as an
approved product, and is for the treatment of a serious, life-threatening illness for which other
therapies are either ineffective or not available.
European Union Regulatory Requirements
Outside the United States, our ability to market our products will also be contingent upon
receiving marketing authorizations from the appropriate regulatory authorities and compliance with
applicable post-approval regulatory requirements. Although the specific requirements and
restrictions vary from country to country, as a general matter, foreign regulatory systems include
risks similar to those associated with FDA regulation, described above. Under EU regulatory
systems, marketing authorizations may be submitted either under a centralized or decentralized
procedure. Under the centralized procedure, a single application to the European Medicines
Evaluation Agency (EMEA) leads to an approval granted by the European Commission which permits the
marketing of the product throughout the EU. The centralized procedure is mandatory for certain
classes of medicinal products, but optional for others. For example, all medicinal products
developed by certain biotechnological means must be authorized via the centralized procedure. We
assume that the centralized procedure will apply to our products that are developed by means of a
biotechnology process. The decentralized procedure provides for mutual recognition of nationally
approved decisions and is used for products that are not required to be authorized by the
centralized procedure. Under the decentralized procedure, the holders of a national marketing
authorization may submit further applications to the competent
17
authorities of the remaining member
states, which will then be requested to recognize the original authorization based upon an
assessment report prepared by the original authorizing competent authority. The recognition process
should take no longer than 90 days, but if one member state makes an objection, which under the
legislation can only be based on a possible risk to human health, we have the option to withdraw
the application from that country or take the application to arbitration by the Committee for
Proprietary Medicinal Products (CPMP) of the EMEA. If a referral for arbitration is made, the
procedure is suspended, and in the intervening time, the only EU country in which the product can
be marketed will be the country where the original authorization has been granted, even if all the
other designated countries are ready to recognize the product. The opinion of the CPMP, which is
binding, could support or reject the objection or alternatively could reach a compromise position
acceptable to all EU countries concerned. Arbitration can be avoided if the application is
withdrawn in the objecting country, but once the application has been referred to arbitration, it
cannot be withdrawn. The arbitration procedure may take an additional year before a final decision
is reached and may require the delivery of additional data.
As with FDA approval we may not be able to secure regulatory approvals in Europe in a timely
manner, if at all. Additionally, as in the United States, post-approval regulatory requirements,
such as those regarding product manufacture, marketing, or distribution, would apply to any product
that is approved in Europe, and failure to comply with such obligations could have a material
adverse effect on our ability to successfully commercialize any product.
New European Legislation was introduced in 2001 designed to harmonize the regulation of
clinical trials across the EU. This legislation has now been implemented in all EU countries. In
addition, the entire EU regulatory regime has recently undergone a significant revision and new
laws have been introduced that amend the current EU Medicines Directive. These amendments are due
to come into effect by October 30, 2005 and are currently being implemented on a country by country
basis. For example, the centralized procedure for the authorization of new medicines will be
compulsory for biotechnology products and those developed for cancer and other specified diseases
and disorders. Accordingly, there is a marked degree of change and uncertainty both in the
regulation of clinical trials and in respect of marketing authorizations which face us for our
products in Europe.
Government Funding
Novogen received financial support for the phenoxodiol drug program from the Australian government
under what is known as the START Program. The START Program is a merit-based program designed to
encourage and assist Australian companies to undertake research and development and
commercialization through a range of grants and loans. The START Program is administered by the
Industry Research and Development, or IR&D Board. The IR&D Board is made up of private sector and
academic members with expertise and experience in research and development and commercialization.
In 1998, the Australian government agreed to provide A$2.7 million (approximately U.S. $1.8
million) to Novogen, enabling it to expedite phenoxodiol into clinical trials, provided that the
grant money was matched by an equal expenditure by Novogen. The START grant was awarded after the
governments review of the pertinent research results, the intellectual property driving the
program, and the likelihood and potential for commercial success of the drug.
The terms of the grant require Novogen to obtain the consent of the Australian government to deal
with the intellectual property rights which have arisen through the program conducted to date.
Novogen has obtained the consent of the Australian government to the grant of the license to us and
to the other arrangements between us and Novogen concerning the development and commercialization
of phenoxodiol.
Under the START Program, Novogen must meet certain project development and commercialization
obligations. Novogen has met the project development obligations and has received final payment
thereon. Novogen believes that it is currently in compliance with its commercialization schedule
and that it has fulfilled all of its obligations under the terms of the START Program and expects
to continue to do so in the future. For additional information on the consequences to us in the
event Novogen fails to comply with its obligations under the START Program, see the Intellectual
Property and Risk Factors sections of this annual report.
Employees
We do not have any employees. Novogen provides us with staff and other financial and administrative
services under our services agreement with Novogen.
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Risk Factors
In addition to the other information in this Annual Report the following risk factors should be
considered carefully in evaluating us and our business.
Risks Related to Our Business
We have a limited operating history, and we are likely to incur operating losses for the
foreseeable future.
You should consider our prospects in light of the risks and difficulties frequently encountered by
early stage and developmental companies. Although we were incorporated in December 2000, we have
only been in operation since May 2002. We have incurred net losses of $18,115,000 since our
inception, including net losses of $6,421,000, $8,538,000 and $3,033,000 for the years ended June
30, 2005, 2004 and 2003, respectively. We anticipate that we will incur operating losses and
negative cash flow for the foreseeable future. We have not yet commercialized any products and
cannot be sure that we will ever be able to do so, or that we may ever become profitable. We expect
to expand our clinical trials significantly, which will result in increasing losses, and may
continue to incur substantial losses even if we begin to generate revenues from the distribution
and sale of phenoxodiol.
If we are unable to successfully develop and commercialize phenoxodiol or license other viable drug
candidates, our ability to sustain future operations will be significantly diminished.
We are currently developing only one drug, phenoxodiol. We cannot guarantee that phenoxodiol will
be successful. Although we have rights to potentially develop other related compounds discovered
and developed by Novogen under the terms of our license option deed with Novogen, our rights under
our license agreement with Novogen are limited to the commercialization of phenoxodiol as an
anti-cancer agent and these rights specifically exclude phenoxodiol in a topical application. If we
are unable to successfully develop and commercialize phenoxodiol or other viable drug candidates,
we may be required to cease or reduce our operations.
If we do not receive regulatory approval for marketing phenoxodiol or such approval is withdrawn,
we will not be able to commercialize phenoxodiol.
We need regulatory approval in order to commercialize phenoxodiol. We may never receive marketing
approval or if we do receive marketing approval, it will be limited to those disease states and
conditions for which phenoxodiol has been proven to be safe and effective. Phenoxodiol currently is
in various Phase 1b/11a clinical trials with the intention of being developed as both a monotherapy
and a chemo-sensitizing agent for use with first-line chemotherapies in the areas of
hormone-refractory prostate carcinoma, early stage cancer of the cervix, vagina and vulva, late
stage ovarian carcinoma and renal cancer. Phenoxodiol has been granted fast track status by the
FDA for use in hormone refractory prostate cancer for patients with recurrent late stage ovarian
cancer. Product approval, if granted, can be withdrawn for failure to comply with regulatory
requirements or upon the occurrence of adverse events following commercial introduction. In
addition, our ability to market phenoxodiol in overseas countries is contingent upon receiving the
required regulatory approvals in those countries. If we cannot commercialize phenoxodiol, we may be
required to cease or reduce our operations. We cannot assure you that material delays, difficulties
or adverse developments in the regulatory process will not be encountered in the future.
If the data from our clinical trials does not demonstrate the safety and effectiveness of
phenoxodiol to the FDAs satisfaction, we will not receive FDA approval to market phenoxodiol in
the United States.
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To obtain FDA approval for marketing, our pivotal trials must generate data demonstrating that
phenoxodiol is safe and effective for each indication for which approval is sought. The FDAs
grant of permission to proceed with clinical trials does not constitute a binding commitment that
the FDA will consider the trial design adequate to support approval, or that the data generated
during pivotal trials will meet the safety and effectiveness endpoints, or otherwise produce
results that will lead the FDA to grant marketing approval. If the FDA concludes that the data
from our clinical trials has failed to demonstrate the safety and effectiveness of phenoxodiol for
any indication, we will not receive FDA approval to market phenoxodiol for those indications in the
United States.
We may not complete our pivotal trials on schedule, or at all, or they may be conducted improperly,
which may delay or preclude FDA marketing approval.
The completion of our pivotal trials may be delayed or terminated for many reasons, including, but
not limited to, if:
| the FDA does not grant permission to proceed and places the trial on clinical hold; | ||
| subjects do not enroll in our pivotal trials at the rate we currently expect; | ||
| subjects experience an unacceptable rate or severity of adverse side effects; | ||
| third party clinical investigators do not perform our pivotal trial on our anticipated schedule or consistent with the clinical trial protocol, Good Clinical Practice and regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner; | ||
| inspections of our clinical trial sites by the FDA or Institutional Review Boards, (IRBs), find regulatory violations that require us to undertake corrective action, suspend or terminate one or more sites, or prohibit us from using some or all of the data in support of our marketing applications; | ||
| one or more IRB suspends or terminates the trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial; or | ||
| one or more of our clinical investigators withdraws from our trials or deviates from our approved protocol. |
Our development costs will increase if we have material delays in our pivotal trials, or if we are
required to modify, suspend, terminate or repeat a pivotal trial.
We may not be able to secure and maintain suitable research institutions to conduct our clinical
trials.
We rely on suitable research institutions, of which there are many, to conduct our clinical trials.
While we have not previously experienced problems with third parties upon whom we rely for research
or clinical trials, our reliance upon research institutions, including hospitals and cancer
clinics, provides us with less control over the timing and cost of clinical trials and the ability
to recruit patients than if we had conducted the trials on our own. Further, there is a greater
likelihood that disputes may arise with these research institutions over the ownership of
intellectual property discovered during the clinical trials. If we are unable to reach agreement
with suitable research institutions on acceptable terms, or if any resulting agreement is
terminated and we are unable to quickly replace the applicable research institution with another
qualified institution on acceptable terms, the research could be delayed and we may be unable to
complete development, or commercialize phenoxodiol, which will adversely affect our ability to
generate operating revenues.
20
Any failure in our clinical trials could impair the commercial prospects for phenoxodiol.
Clinical trials have a high risk of failure. A number of companies in the pharmaceutical industry,
including biotechnology companies, have suffered significant setbacks in advanced clinical trials,
even after achieving promising results in earlier trials. While we have not had any material delays
in our clinical testing program if we experience delays in the testing or approval process or need
to perform more or larger clinical trials than originally planned our commercial prospects for
phenoxodiol or any other drug candidates may be impaired and we may be required to cease or reduce
our operations.
Our ability to achieve profitability is dependent on a number of factors, many of which have
uncertain outcomes.
Our ability to achieve profitability is dependent on a number of factors including:
| completing our clinical trial program and receiving marketing approval. Clinical testing is a prerequisite to the receipt of the regulatory approval necessary to commercialize phenoxodiol. We cannot control the outcome of our testing program or whether we receive regulatory approval. We will not be able to generate sales revenues until we receive marketing approval; | ||
| establishing strategic partnerships to market and sell phenoxodiol. Our negotiating position with potential strategic partners will be affected by the success of our clinical program. If we are unable to attract partners and negotiate favorable terms, we may have difficulty generating revenues from our commercialization of phenoxodiol; | ||
| maintaining a low cost operation and scalable supply of phenoxodiol capable of meeting the demands of the commercial market. We have contracted with Novogen for the supply of phenoxodiol and Novogen has fully complied with the terms of our manufacturing license and supply agreement. Under the terms of the manufacturing license and supply agreement, the supply of phenoxodiol is charged to us on a cost-plus basis. We do not have direct control over the manufacturing costs of phenoxodiol. We cannot control Novogens ability to expand its production capabilities to produce the large quantities that may be required by the commercial market. If our costs for the supply of phenoxodiol rise or if Novogen fails to supply sufficient quantities of phenoxodiol, our profitability could be adversely affected; and | ||
| our ability to license from Novogen rights to commercialize new cancer compounds. We may license from Novogen the rights to other cancer compounds under the terms of the license option deed. If development of phenoxodiol is unsuccessful or if we choose to expand to the development of additional compounds, our success may depend on controlling the costs of developing such new compounds and negotiating a favorable license agreement with Novogen. The availability of new compounds to commercialize and the cost to develop these compounds is outside of our direct control. |
We have no direct control over the costs of manufacturing phenoxodiol and increases in these costs
would increase the costs of conducting clinical trials and could adversely affect future
profitability if these costs increase significantly.
We do not intend to manufacture phenoxodiol ourselves and we will be relying on third parties for
our supplies of phenoxodiol both for clinical trials and for commercial quantities in the future.
We have contracted with Novogen to manufacture and supply us with our requirements of phenoxodiol.
The cost of manufacturing phenoxodiol is charged to us on a cost plus markup basis. We have no
direct control over the costs of manufacturing phenoxodiol. If the costs of manufacturing
phenoxodiol increase or if the cost of the materials used to make phenoxodiol increases these costs
will be passed on to us by Novogen making the cost of conducting clinical trials more expensive.
If, in the future, a third party other than Novogen manufactures and supplies us with phenoxodiol,
we will not have
21
direct control over those manufacturing costs. Once we are able to commercialize phenoxodiol,
increases in manufacturing costs could adversely affect our future profitability if we are unable
to pass all of the increased costs along to our customers.
Final approval by regulatory authorities of phenoxodiol for commercial use may be delayed, limited
or prevented, any of which would adversely affect our ability to generate operating revenues.
Any of the following factors may serve to delay, limit or prevent the final approval by regulatory
authorities of phenoxodiol for commercial use:
| phenoxodiol is in the early stages of clinical development and we will need to conduct significant clinical testing to prove safety and efficacy before applications for marketing can be filed with the FDA, or with the regulatory authorities of other countries, to approve phenoxodiol for final use; | ||
| data obtained from pre-clinical and clinical tests can be interpreted in different ways, which could delay, limit or prevent regulatory approval; | ||
| development and testing of product formulation, including identification of suitable excipients; | ||
| it may take us many years to complete the testing of phenoxodiol or any other drug candidates, and failure can occur at any stage of this process; | ||
| negative or inconclusive results or adverse medical events during a clinical trial could cause us to delay or terminate our development efforts; | ||
| there is relatively limited scientific understanding of the means by which cells respond to chemical signals that reach them through the bloodstream, which we refer to as multiple signal transduction regulation or MSTR, the class of drug compounds to which phenoxodiol belongs; and | ||
| the commercialization of phenoxodiol may be delayed if the FDA or another regulatory authority requires us to expand the size and/or scope of the clinical trials. |
While we have not encountered any material delays or adverse events from the factors described
above to date, we cannot assure you that such delays or adverse events will not be encountered in
the future.
We may not be able to establish the strategic partnerships necessary to market and distribute
phenoxodiol.
A key part of our business plan is to establish relationships with strategic partners. We must
successfully contract with third parties to package, market and distribute phenoxodiol. We have not
yet established any strategic partnerships. Potential partners may not wish to enter into
agreements with us due to Novogens current equity position as our majority stockholder or our
contractual relationships with Novogen. Similarly, potential partners may be discouraged by our
limited operating history. Additionally, our relative attractiveness to potential partners and
consequently, our ability to negotiate acceptable terms in any partnership agreement will be
affected by the results of our clinical program. For example, if phenoxodiol is shown to have high
efficacy against a broad range of cancers we may generate greater interest from potential partners
than if phenoxodiol was demonstrated to be less effective or applicable to a narrower range of
cancers. There is no assurance that we will be able to negotiate commercially acceptable licensing
or other agreements for the future exploitation of phenoxodiol, including the continued clinical
development, manufacture or marketing of phenoxodiol. If we are unable to successfully contract for
these services, or if arrangements for these services are terminated, we may have to delay our commercialization program for phenoxodiol which will adversely
affect our ability to generate operating revenues.
22
We face a risk of product liability claims and may not be able to obtain adequate insurance.
Our business exposes us to the risk of product liability claims. This risk is inherent in the
manufacturing, testing and marketing of human therapeutic products. We have product liability
insurance coverage of up to approximately $14 million. Although we believe that this amount of
insurance coverage is appropriate for our business at this time, it is subject to deductibles and
coverage limitations, and the market for such insurance is becoming more restrictive. We may not be
able to obtain or maintain adequate protection against potential liabilities. If we are unable to
sufficiently
insure against potential product liability claims, we will be exposed to significant liabilities,
which may materially and adversely affect our business development and commercialization efforts.
We will need to raise additional funds to complete Phase III clinical trials and commercialize
phenoxodiol, and the actual amount of funds we will need will be determined by a number of factors,
some of which are beyond our control.
While we believe that we have sufficient funds to complete our current clinical trial program, we
will require additional funds to further the evaluation of phenoxodiol beyond the current
objectives including the completion of any Phase III clinical trials for phenoxodiol, and to pursue
the commercialization of phenoxodiol. The actual amount of funds that we will need will be
determined by many factors, some of which are beyond our control. As a result, we may need
additional funds sooner than we currently anticipate. These factors include:
| the progress of research activities, the number and scope of research programs; | ||
| the progress of pre-clinical and clinical development activities; | ||
| the progress of the development efforts of Novogen or any other parties with whom we enter into research and development agreements; | ||
| our ability to establish and maintain current and new research and development and licensing arrangements; | ||
| our ability to achieve milestones under licensing arrangements; and | ||
| the costs involved in enforcing or defending patent claims and other intellectual property rights; and the costs and timing of regulatory approvals. |
If our capital resources are insufficient to meet future capital requirements, we will have to
raise additional funds. If we are unable to obtain additional funds on favourable terms we may be
required to cease or reduce our operations. Also, if we raise more funds by selling additional
shares of our common stock or securities convertible into or exercisable for shares of our common
stock, your ownership interests may be diluted.
Our commercial opportunity will be reduced or eliminated if competitors develop and market products
that are more effective, have fewer side effects or are less expensive than phenoxodiol.
The development of phenoxodiol and other drug candidates is highly competitive. A number of other
companies have products or drug candidates in various stages of pre-clinical or clinical
development that are intended for the same therapeutic indications for which phenoxodiol is being
developed. Some of these potential competing drugs are further advanced in development than
phenoxodiol and may be commercialized sooner. Even if we are successful in developing effective
drugs, phenoxodiol may not compete successfully with products produced by our competitors.
23
With respect to the use of phenoxodiol for late-stage prostate cancer, docetaxel, a drug
distributed by Aventis, was approved in 2004 by the FDA for the treatment of hormone refractory
prostate cancer, establishing a new bench-mark for standard chemotherapy in late-stage prostate
cancer. We do not believe this is a direct competitor because our strategy is to develop
phenoxodiol as a chemosensitizer for docetaxel in patients with prostate cancer who become
refractory to docetaxel. A number of pharmaceutical and biotechnology companies are known to be
seeking to develop drugs for the same indication.
With respect to the use of phenoxodiol as a chemo-sensitizing agent to restore sensitivity to
platinum-based drugs in late-stage ovarian cancer, the experimental drug, Telcyta (Telik Inc.) is a
directly competitive drug. Telcyta currently is in a Phase III registration trial suggesting that
it has shown sufficient promise in a Phase II study to warrant progression to a Phase III study.
The different trialing regimes being used by us with phenoxodiol and by Telik Inc with Telcyta make
it difficult to compare the two drugs for efficacy in this area and, as a result, we cannot
evaluate the level of competition. However, we expect that at any level of efficacy, Telcyta,
should it be approved for marketing, would represent a serious competitor for phenoxodiol.
Our competitors include pharmaceutical companies and biotechnology companies, as well as
universities and public and private research institutions. In addition, companies active in
different but related fields represent substantial competition for us. Many of our competitors
developing oncologic drugs have significantly greater capital resources, larger research and
development staffs and facilities and greater experience in drug development, regulation,
manufacturing and marketing than us. These organizations also compete with Novogen, our services
provider, to recruit qualified personnel, and with us to attract partners for joint ventures and to
license technologies that are competitive with ours. As a result, our competitors may be able to
more easily develop technologies and products that would render our technologies or our drug
candidates obsolete or non-competitive.
Our right to develop and exploit phenoxodiol is subject to the terms and conditions of agreements
we have entered into with Novogen, and under these agreements our rights may be terminated under
certain circumstances, some of which may be beyond our control.
We have licensed the intellectual property in the phenoxodiol technology from Novogen. All forms of
administering phenoxodiol for the treatment of cancer are licensed to us, excluding topical
applications. If we fail to meet our obligations under our license agreement, the manufacturing
license and supply agreement or the services agreement with Novogen, any or all of these agreements
may be terminated by Novogen and we could lose our rights to develop phenoxodiol. As of the date of
this annual report, we have no reason to believe that we will be unable to satisfy our obligations
under these agreements. In addition, each of these agreements may be terminated immediately by
Novogen in the event that we undergo a change of control without the consent of Novogen. A change
of control means a change in control of more than half the voting rights attaching to the shares
of our subsidiary, a change in control of more than half of the issued shares of our subsidiary
(not counting any share which carries no right to participate beyond a specified amount in the
distribution of either profit or capital) or a change in control of the composition of the board of
directors of our subsidiary. Each of these agreements may also be terminated if we become the
subject of certain bankruptcy proceedings or cease for any reason to be able to lawfully carry out
all the transactions required by each respective agreement.
Our license rights are fundamental to our business and therefore a loss of these rights will likely
cause us to cease operations.
The rights granted to us under the license agreement, the manufacturing license and supply
agreement and the license option deed with Novogen are fundamental to our business.
24
The license agreement grants us the right to make, have made, market, distribute, sell, hire or
otherwise dispose of phenoxodiol products in the field of prevention, treatment or cure of cancer
in humans by pharmaceuticals delivered in all forms except topical applications. Our business
purpose is to develop and commercialize cancer drugs including phenoxodiol, which we would be
unable to pursue without the rights granted to us under the license agreement.
Under the manufacturing license and supply agreement, we have granted to Novogen an exclusive
sub-license to manufacture and supply phenoxodiol to us in its primary manufactured form and
Novogen has agreed to manufacture for us our required quantities of phenoxodiol. This agreement
enables us to protect the licensed intellectual property rights used in the manufacturing process
while securing the services of a manufacturing partner in Novogen, which through its equity
position in us, shares a common interest in the production of phenoxodiol. The license option deed
grants us an exclusive first right to accept and exclusive last right to match any proposed dealing
by Novogen with its intellectual property rights with a third party relating to certain compounds
(other than phenoxodiol) developed by Novogen and its affiliates which have applications in the
field of prevention, treatment or cure of cancer in humans. The license option deed is important to
our business because it allows us to maintain control over the sale by Novogen of complementary as
well as potentially competitive intellectual property rights to third party competitors.
Any loss of the rights under any of these agreements will likely cause us to cease operations.
The success of phenoxodiol is largely dependent on Novogens ability to obtain and maintain patent
protection and preserve trade secrets, which cannot be guaranteed.
Patent protection and trade secret protection are important to our business and our future will
depend, in part on our ability and the ability of Novogen to maintain trade secret protection,
obtain patents and operate without infringing the proprietary rights of others both in the United
States and abroad. Litigation or other legal proceedings may be necessary to defend against claims
of infringement, to enforce our patents, or to protect our trade secrets or the trade secrets of
Novogen. Such litigation could result in substantial costs and diversion of our managements
attention. Novogen has not been involved in any opposition re-examination trade secret dispute,
infringement litigation or any other litigation or legal proceedings pertaining to the licensed
patent rights.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions. Novogen has applied for patents in a number of
countries with respect to the use of phenoxodiol for the treatment, prevention or cure of cancer.
We have licensed both issued patents and pending patent applications from Novogen. Novogen has
issued patents in the United States, Australia and Singapore covering the use of phenoxodiol to
prevent, or treat skin cancer from ultraviolet damage. Novogen also has patents issued in
Australia, Hong Kong, New Zealand and the United Kingdom related to phenoxodiol for the treatment
of a variety of cancers and has recently received a notice of allowance in the United States that
is also related to phenoxodiol for the treatment of a variety of cancers.
Novogens applications may not proceed to grant or may be amended to reduce the scope of protection
of any patent granted. The applications and patents may also be opposed or challenged by third
parties. Our commercial success will depend, in part, on the ability of Novogen and our ability to
obtain and maintain effective patent protection for the technologies underlying phenoxodiol and
other compounds, and to successfully defend patent rights in those technologies against third-party
challenges. As patent applications in the United States are maintained in secrecy until published
or issued and as publication of discoveries in the scientific or patent literature often lag behind
the actual discoveries, we cannot be certain that Novogen was the first to make the inventions
covered by its pending patent applications or issued patents or that it was the first to file
patent applications for such inventions. Additionally, the breadth of claims allowed in
biotechnology and pharmaceutical patents or their enforceability cannot be predicted. We cannot be
sure that any additional patents will issue from any of Novogens patent applications or, should
any patents issue, that we will be provided with
25
adequate protection against potentially competitive products. Furthermore, we cannot be sure that
should patents issue, they will be of commercial value to us, or that private parties, including
competitors, will not successfully challenge our patents or circumvent our patent position in the
United States or abroad.
Claims by other companies that we infringe their proprietary technology may result in liability for
damages or stop our development and commercialization efforts.
The pharmaceutical industry is highly competitive and patents have been applied for by, and issued
to, other parties relating to products competitive with phenoxodiol. Therefore, phenoxodiol and any
other drug candidates may give rise to claims that they infringe the patents or proprietary rights
of other parties existing now and in the future. Furthermore, to the extent that we or Novogen or
our respective consultants or research collaborators use intellectual property owned by others in
work performed for us or Novogen, disputes may also arise as to the rights in such intellectual
property or in resulting know-how and inventions. An adverse claim could subject us to significant
liabilities to such other parties and/or require disputed rights to be licensed from such other
parties.
Under the terms of the Manufacturing License and Supply Agreement, Novogen is responsible for
producing the required amount of phenoxodiol for our clinical program and subsequent commercial
quantities. Novogen is currently undertaking formulation development and manufacturing process
development work for both the intravenous and oral dose formulations. This work is being conducted
to ensure that there is a robust production process which meets the expected commercial quantities
of phenoxodiol and that both the intravenous and oral dose formulations are manufactured on a cost
effective basis.
During this process Novogen has identified a number of excipients that may be used in the
formulations of phenoxodiol. Excipients, among other things, perform the function of a carrier of
the active drug ingredient in the intravenous formulation. Some of these identified excipients or
carriers may be included in third party patents in some countries. We intend to seek a license if
we decide to use a patented excipient in the marketed intravenous product or we may choose one of
those excipients that do not have a license requirement.
We cannot be sure that any license required under any such patents or proprietary rights would be
made available on terms acceptable to us, if at all. If we do not obtain such licenses, we may
encounter delays in product market introductions, or may find that the development, manufacture or
sale of products requiring such licenses may be precluded. We have not conducted any searches or
made any independent investigations of the existence of any patents or proprietary rights of other
parties.
We may be subject to substantial costs stemming from our defense against third-party intellectual
property infringement claims.
Third parties may assert that we or Novogen are using their proprietary information without
authorization. Third parties may also have or obtain patents and may claim that technologies
licensed to or used by us infringe their patents. If we are required to defend patent infringement
actions brought by third parties, or if we sue to protect our own patent rights, we may be required
to pay substantial litigation costs and managerial attention may be diverted from business
operations even if the outcome is not adverse to us. In addition, any legal action that seeks
damages or an injunction to stop us from carrying on our commercial activities relating to the
affected technologies could subject us to monetary liability and require us or Novogen or any third
party licensors to obtain a license to continue to use the affected technologies. We cannot predict
whether we or Novogen would prevail in any of these types of actions or that any required license
would be made available on commercially acceptable terms or at all.
In the event that Novogen does not comply with its obligations under a grant from the Australian
government under which phenoxodiol was, in part, developed, our rights to use the intellectual
property relating to phenoxodiol and developed by Novogen may revert back to the Australian
government.
26
Novogen developed phenoxodiol in part using funds from the Australian government under what is
known as the START Program. Under the START Program, Novogen must meet certain project development
and commercialization obligations. Novogen has met the project development obligations and has
received final payment thereon. Novogen believes it is currently in compliance with its
commercialization schedule. Although Novogen believes that it has complied with its obligations
under the START Program, if the Australian government disagrees or if Novogen undergoes a change of
control without the prior consent of the Australian Government, the Australian government has a
right to demand that intellectual property created during the course of the project funded by the
grant be vested back in the Australian government or demand repayment of the funds paid to Novogen
under the program. The Australian government may then license the intellectual property rights
related to phenoxodiol to other parties and may demand other intellectual property rights from
Novogen. Any such reclamation by the Australian government could preclude our use of Novogens
intellectual property in the development and commercialization of phenoxodiol and we may have to
compete with other companies to whom the Australian government may license the intellectual
property.
The enforcement of civil liabilities against our officers and directors may be difficult.
All of our officers and directors are residents of jurisdictions outside the United States. As a
result it may be difficult for you to effect service of process within the United States upon our
officers and directors or to enforce judgments obtained against our officers and directors or us in
United States courts.
Our revenue is affected by fluctuations in currency exchange rates.
Much of our expenditures and potential revenue will be spent or derived outside of the United
States. As a result, fluctuations between the United States dollar and the currencies of the
countries in which we operate may increase our costs or reduce our potential revenue. At present,
we do not engage in hedging transactions to protect against uncertainly in future exchange rates
between particular foreign currencies and the U.S. dollar.
We are authorized to issue a class of blank check preferred stock, which could adversely affect the
holders of our common stock.
Our restated certificate of incorporation allows us to issue a class of blank check preferred stock
with rights potentially senior to those of our common stock without any further vote or action by
the holders of our common stock. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to the holders of our common stock or could
adversely affect the rights and powers including voting rights, of such holders. In certain
circumstances such issuance could have the effect of decreasing the market price of our shares, or
making a change in control of us more difficult.
We are in the process of strengthening our internal control over financial reporting.
We have determined that the personnel and management of Novogen, who perform our accounting and
financial reporting functions pursuant to our services agreement with Novogen, are not sufficiently
expert in U.S. GAAP and the requirements of the Securities and Exchange Commission and the Public
Company Accounting Oversight Board and that this lack of expertise represents a material weakness
in the operation of the our internal control over financial reporting. In addition, we have also
determined that our system of financial reporting was not designed to prepare financial statements
in accordance with U.S. GAAP and that our system of internal control, in particular our processes
to review and analyze elements of the financial statement close process and prepare consolidated
financial statements in accordance with U.S. GAAP, has not reduced to a relatively low
27
level the risk that errors in amounts that would be material in relation to those financial
statements may occur and may not be detected within a timely period by management in the normal
course of business.
We and Novogen have undertaken a re- evaluation of our internal controls and procedures and have
implemented such enhancements as appropriate. While we have taken measures designed to address the
above matters, we and Novogen may need to implement additional measures to further enhance our
internal controls and procedures.
We are exposed to certain potential risks from recent legislation requiring companies to evaluate
their internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of
2002.
We are evaluating our internal controls systems in order to allow management to report on the
effectiveness of our internal control over financial reporting and our registered independent
public accounting firm to attest to this report, as required by Section 404 of the Sarbanes-Oxley
Act. We are performing the system and process evaluation and testing, and implementing any
necessary remediation required, in an effort to comply with the management reporting and public
accounting firm attestation requirements and continue to incur additional expenses and devote
significant management time towards completing actions required for managements evaluation. The
evaluation and attestation processes required by Section 404 are new and, consequently, public
companies and public accounting firms are still developing their experience in complying with
these requirements. While we have developed and are implementing plans to fully implement the
requirements relating to internal controls and all other aspects of Section 404 in a timely
fashion, we cannot be certain as to the timing of completion of our evaluation, testing and
remediation actions or the impact of the same on our operations since, like other public companies,
we are undergoing the process for the first time in a regulatory environment where the standards to
assess adequacy of compliance are under development. We cannot assure you that there may not be
significant deficiencies or material weaknesses that would be required to be reported as a result
of the process.
Risks Related to Our Relationship with Novogen
As our majority stockholder, Novogen has the ability to determine the outcome of all matters
submitted to our stockholders for approval and Novogens interests may conflict with ours or our
other stockholders interests.
Novogen beneficially owns approximately 86.9% of our outstanding shares of common stock. As a
result, Novogen will have the ability to effectively determine the outcome of all matters submitted
to our stockholders for approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets.
Novogen will have the ability to effectively control our management and affairs. Novogens
interests may not always be the same as that of our other stockholders. In addition this
concentration of ownership may harm the market price of our shares by:
| delaying, deferring or preventing a change in control; | ||
| impeding a merger, consolidation, takeover or other business combination involving us; | ||
| discouraging a potential acquirer from making a tender, offer or otherwise attempting to obtain control of us; or | ||
| selling us to a third party. |
A number of our directors are officers and/or directors of Novogen which may create a conflict of
interest.
28
Three of our six existing board members currently serve as board members of
Novogen. Our President and Chief Executive Officer, Christopher Naughton, is the Managing Director
of Novogen. Our Chairman and Phenoxodiol Program Director, Professor Graham Kelly, is an executive of Novogen. Our Chief Financial Officer and Secretary, David Ross Seaton, is the Chief Financial
Officer of Novogen. Simultaneous service as a Novogen director or officer can create, or appear to
create, a conflict of interest, when such directors or officers are presented with decisions that
could have different implications for us and for Novogen.
We depend on a number of key personnel whose services are provided by Novogen under our services
agreement. If we are not able to procure these services in the future, the strategic direction of
the clinical development program would be disrupted, causing a delay in phenoxodiols
commercialization.
We currently rely on Professor Graham Kelly, our Chairman and Phenoxodiol Program Director,
Professor Alan Husband, Novogen Research Director, and Mr. Christopher Naughton, our President and
CEO, to provide the strategic direction for the clinical development of phenoxodiol. If we are
unable to secure the ongoing services of these key personnel, the commercialization program for
phenoxodiol will be disrupted and will cause delays in obtaining marketing approval. Novogen has
entered into employment agreements and maintains key man life insurance policies for each of these
persons.
The ongoing criminal investigations involving Professor Kelly, our Chairman and Phenoxodiol Program
Director, could have a material adverse effect on our business or cause our stock price to decline.
Professor Kelly is one of a number of individuals who, and whose associated entities and advisors,
have been the subject of investigations by certain Australian authorities relative to their alleged
involvement in the evasion of Australian tax, fraud and money laundering. Professor Kelly has
informed us that he does not believe that he has committed any wrongdoing and denies that he has
been involved in any wrongdoing. Nevertheless, Professor Kelly may need to allocate time and
resources to deal with the investigation. Additionally, if the Australian authorities were to
decide to prosecute Professor Kelly upon concluding their investigation and if such prosecution
were to result in a conviction, Professor Kelly may be barred from acting as an officer or director
and may become unavailable to us. Any publicity related to this investigation or potential
prosecution or conviction of Professor Kelly could have a material adverse effect on our business
or cause our stock price to decline.
Novogen can compete with us.
We have no contract, arrangement or understanding with Novogen to preclude it from developing a
product which may be competitive with phenoxodiol or to use phenoxodiol for any uses other than
anticancer applications. Novogen has reserved the intellectual property rights and know-how rights
relating to topical applications of phenoxodiol even in the field of cancer. There can be no
assurance that Novogen or its subsidiaries will not pursue alternative technologies or product
candidates as a means of developing treatments for the conditions targeted by phenoxodiol or any
other product candidate which we seek to exploit.
We are dependent on Novogen for our personnel.
We have no employees. We rely on Novogen to provide or procure the provision of staff and other
financial and administrative services under our services agreement with Novogen. We believe Novogen
has fully complied with the terms of our services agreement. As discussed above, though, we have
determined that the personnel and management of Novogen, who perform our accounting and financial
reporting functions pursuant to our services agreement with Novogen, are not sufficiently expert in
U.S. GAAP and the requirements of the Securities and Exchange Commission and the Public
29
Company Accounting Oversight Board. While we and Novogen have taken measures designed to address
this matter, we cannot assure you that Novogen will be able to provide personnel and management
that are sufficiently expert in these areas. To successfully develop phenoxodiol, we will require
ongoing access to the personnel who have, to date, been responsible for the development of
phenoxodiol. The services agreement does not specify a minimum amount of time that Novogen
employees must devote to our operations. If we are unable to secure or if we lose the services of
these personnel, the ability to develop phenoxodiol could be materially impaired. Moreover, if our
business experiences substantial and rapid growth, we may not be able to secure the services and
resources we require from Novogen or from other persons to support that growth.
We are largely dependent on Novogen for our supply of phenoxodiol and should Novogen be unable to
supply commercial quantities of phenoxodiol, it may be difficult to secure an alternative source.
We currently intend that phenoxodiol will be supplied to us in its primary manufactured form by
Novogen under the manufacturing license and supply agreement. As the manufacturing process for
phenoxodiol has not been tested in the quantities needed for commercial sales, we may he unable to
receive the necessary quantities in a timely manner. In addition, in order for Novogen to supply
commercial quantities of phenoxodiol in due course, it will need to contract third party
manufacture.
If Novogen materially and persistently fails to supply us with the quantities of phenoxodiol that
we require, the manufacturing license and supply agreement permits us, and we could consider
contracting with third party manufacturers for the production of phenoxodiol. Any third party
manufacturer would have to satisfy cGMPs and would have to meet our quality assurance standards. In
addition, it may be difficult to negotiate acceptable terms with any third party manufacturer.
Risks Related to Our Common Stock
The trading price of the shares of our common stock could be highly volatile and could decline in
value and we may incur significant costs from class action litigation.
The trading price of our common stock could be highly volatile in response to various factors, many
of which are beyond our control, including:
| developments concerning phenoxodiol; | ||
| announcements of technological innovations by us or our competitors; | ||
| new products introduced or announced by us or our competitors; | ||
| changes in financial estimates by securities analysts; | ||
| actual or anticipated variations in operating results; | ||
| expiration or termination of licenses, research contracts or other collaboration agreements; | ||
| conditions or trends in the regulatory climate and the biotechnology, pharmaceutical and genomics industries; | ||
| changes in the market valuations of similar companies; | ||
| the liquidity of any market for our securities; | ||
| trading prices of our common stock on the Alternative Investment Market of the London Stock Exchange; and | ||
| additional sales by us or Novogen of shares of our common stock. |
30
In addition equity markets in general and the market for biotechnology and life sciences
companies in particular have experienced substantial price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of companies traded in those
markets. In addition, changes in economic conditions in the United States, Europe or globally,
could impact upon our ability to grow profitably. Adverse economic changes are outside our control
and may result in material adverse impacts on our business or our results of operations. These
broad market and industry factors may materially affect the market price of our shares of common
stock, regardless of our development and operating performance. In the past, following periods of
volatility in the market price of a companys securities, securities class-action litigation has
often been instituted against that company. Such litigation, if instituted against us, could cause
us to incur substantial costs and divert managements attention and resources.
You will not be able to exercise the warrants if we do not maintain the effectiveness of the
registration statement and a current prospectus.
If we do not maintain an effective registration statement and a current prospectus or comply with
applicable state securities laws, you may not be able to exercise the warrants. In order for you to
be able to exercise the warrants, the shares underlying the warrants must be covered by an
effective registration statement and a current prospectus and be qualified for sale or exempt from
qualification under the applicable securities laws of the state in which you reside. Although we
cannot assure you that we will actually be able to do so, we will use our best efforts to:
| maintain an effective registration statement and a current prospectus covering the shares of our common stock underlying the warrants at all times when the market price of the common stock exceeds the exercise price of the warrants until the expiration of the warrants; and | ||
| maintain the registration of such shares under the securities laws of the states, if any, in which we initially qualify the common stock units for sale in this offering. |
Future sales of our common stock may depress our stock price.
The market price of our common stock could decline as a result of sales of substantial amounts of
our common stock in the public market, including the shares covered by this annual report, or the
perception that these sales could occur. In addition, these factors could make it more difficult
for us to raise funds through future equity offerings. As of July 31, 2005, we had 56,938,000
shares of our common stock outstanding not including the 2,392,000 shares of common stock
underlying the warrants.
We may also acquire other companies or technologies or finance strategic alliances by issuing
equity, which may result in additional dilution to our stockholders.
We will have broad discretion over the use of the net proceeds to us from any exercise of
outstanding warrants.
We will have broad discretion to use the net proceeds to us upon any exercise of outstanding
warrants, and you will be relying on the judgment of our board of directors and management
regarding the application of these proceeds. Although we expect to use a substantial portion of the
net proceeds from any exercise of the warrants for general corporate purposes, including potential
payments to Novogen under the terms of the license agreement, potential licensing of other cancer
compounds developed by Novogen under the license option deed and potential expansion of the
clinical trial program for phenoxodiol to include other forms of cancer, we have not allocated these net proceeds for specific
purposes.
31
Item 2. Properties
The Company does not own or lease any property.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this Annual Report on Form 10-K.
32
PART II
Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Securities
The following tables set forth for the period indicated the high and low sale prices of our common
stock and warrants as reported by the Nasdaq National Market and for our common stock as reported
by the AIM. The trading price for our shares of common stock on the AIM are quoted as sterling (£),
the lawful currency of the United Kingdom.
Common Stock | Nasdaq National Market | AIM Market | ||||||||||||||
High | Low | High | Low | |||||||||||||
$ | $ | £ | £ | |||||||||||||
Year Ended June 30, 2004 |
||||||||||||||||
First Quarter |
| | 3.93 | 3.25 | ||||||||||||
Second Quarter |
12.99 | 6.25 | 5.60 | 3.80 | ||||||||||||
Third Quarter |
13.10 | 7.63 | 6.12 | 5.09 | ||||||||||||
Fourth Quarter |
12.00 | 7.31 | 6.10 | 5.20 | ||||||||||||
Year Ended June 30, 2005 |
||||||||||||||||
First Quarter |
9.27 | 5.74 | 4.85 | 4.25 | ||||||||||||
Second Quarter |
10.49 | 6.71 | 5.10 | 4.60 | ||||||||||||
Third Quarter |
9.54 | 6.79 | 4.52 | 3.60 | ||||||||||||
Fourth Quarter |
9.32 | 6.72 | 4.05 | 3.60 | ||||||||||||
Warrants |
||||||||||||||||
Year Ended June 30, 2004 |
||||||||||||||||
First Quarter |
| | ||||||||||||||
Second Quarter |
8.64 | 2.30 | ||||||||||||||
Third Quarter |
7.40 | 3.35 | ||||||||||||||
Fourth Quarter |
6.95 | 4.65 | ||||||||||||||
Year Ended June 30, 2005 |
||||||||||||||||
First Quarter |
5.75 | 2.95 | ||||||||||||||
Second Quarter |
6.00 | 4.06 | ||||||||||||||
Third Quarter |
5.55 | 3.60 | ||||||||||||||
Fourth Quarter |
5.10 | 3.70 |
The following table sets forth, for the period indicated, the high, low, average and
period-end noon buying rate for sterling, expressed in dollars per sterling in New York City as
certified for customs purposes by the Federal Reserve Bank of New York.
33
Period Ended | High | Low | Average | Period-End | ||||||||||||
Year Ended June 30, 2004 |
||||||||||||||||
First Quarter |
$ | 1.6718 | $ | 1.5728 | $ | 1.6071 | $ | 1.6620 | ||||||||
Second Quarter |
$ | 1.7842 | $ | 1.6598 | $ | 1.7079 | $ | 1.7842 | ||||||||
Third Quarter |
$ | 1.9045 | $ | 1.7902 | $ | 1.8385 | $ | 1.8400 | ||||||||
Fourth Quarter |
$ | 1.8564 | $ | 1.7544 | $ | 1.8071 | $ | 1.8126 | ||||||||
Year Ended June 30, 2005 |
||||||||||||||||
First Quarter |
$ | 1.8734 | $ | 1.7733 | $ | 1.8193 | $ | 1.1809 | ||||||||
Second Quarter |
$ | 1.9482 | $ | 1.7790 | $ | 1.8687 | $ | 1.9160 | ||||||||
Third Quarter |
$ | 1.9292 | $ | 1.8570 | $ | 1.8911 | $ | 1.8880 | ||||||||
Fourth Quarter |
$ | 1.9197 | $ | 1.7930 | $ | 1.8560 | $ | 1.7930 |
As of July 29, 2005, the last reported closing price of our common stock and warrants on the
Nasdaq National Market was $7.00 and $3.75 respectively. The price of our common stock on the AIM
market was £3.97 as of July 31, 2005. There were approximately 1420 stockholders on record of our
common stock
Dividends
We have never declared or paid any cash dividends on our common stock and do not anticipate paying
any cash dividends in the foreseeable future. We currently intend to retain future earnings, if
any, to fund the expansion and growth of our business. Payments of any future cash dividends will
be at the discretion of our board of directors after taking into account various factors, including
our financial condition, operating results, current and anticipated cash needs, plans for expansion
and other factors that our board of directors deem relevant.
Use of Proceeds of Initial Public Offering
The effective date of the registration statement (Registration No. 333-109129) filed on Form S-1
and registration statement (Registration No. 333-111291) filed on Form S-1 pursuant to Rule 462(b),
both relating to the initial public offering in the United States of common stock units (each unit
consisting of one share of the Companys common stock and one warrant to purchase a share of the
Companys common stock at an exercise price of $9.00 per share), was December 17, 2003. Proceeds to
the Company from the offering, after deduction of underwriting discounts and commissions of
approximately $806,000 and offering costs of approximately $1,612,000, totalled approximately
$15,522,000. As of June 30, 2005, the Company had used $13,066,000 of the proceeds of the offering
of which: $5,000,000 was used to make the first license fee payment due to Novogen under the terms
of the license agreement; $2,000,000 was used to make the milestone license fee payment due to
Novogen under the terms of the license agreement; and $6,066,000 was used to pay the ongoing
expenses of clinical trials, amounts due to Novogen under the services agreement and the
manufacturing license and supply agreement and general corporate expenses. All remaining proceeds
of the offering have been invested in short-term money market accounts.
The Company intends to use the balance of the proceeds invested in short-term money market accounts
of approximately $2.5 million to complete Phase II clinical trials of phenoxodiol and other
research projects currently underway.
34
Stock Repurchases
The Company has not repurchased any shares of common stock during the fourth quarter of the fiscal
year ended June 30, 2005.
Equity Compensation
The following table sets forth, as of June 30, 2005 outstanding awards and shares remaining
available for future issuance under the Companys compensation plans under which equity securities
are authorized for issuance.
(a) | (b) | (c) | ||||||||||
Number of securities | Weighted-average | Number of securities | ||||||||||
Plan Category | to be issued upon exercise of | exercise price of | remaining available for | |||||||||
outstanding options, | outstanding options, | future issuance under | ||||||||||
warrants and rights | warrants and rights | equity compensation | ||||||||||
plans | ||||||||||||
Equity compensation
plans approved by
security holders |
Not Applicable | $ Not Applicable | Not Applicable | |||||||||
Equity compensation
plans not approved
by security holders |
None | $ Not Applicable | Indeterminable | |||||||||
Total |
None | $ Not Applicable | Indeterminable |
Our employee share option plan provides our directors, employees, employees of our affiliates
and certain of our contractors and consultants with the opportunity to participate in our
ownership. Our remuneration committee addresses participation, the number of options offered and
any conditions of exercise. In making these determinations the committee will generally consider
the participants position and record of service to us and our affiliates and potential
contribution to the growth of us and our affiliates. Any other matters tending to indicate the
participants merit may also be considered. Options will be exercisable between two years and five
years after grant, unless otherwise determined by the committee appointed by the board. Options
granted will be exercisable at a price determined by the committee at the time of issue (and will
be subject to adjustment in accordance with the terms of the plan). Other key terms of the plan
include:
| Options will lapse if the participants cease to be engaged by us or our affiliates. The committee will have the discretion to waive this provision. | ||
| The terms of the plan also provide for adjustments to the rights of an option holder as a result of a reorganisation of our capital or other corporate event. The holder of an option is not permitted to participate in any distribution by us or in any rights or other entitlements issued by us to stockholders in respect of our shares unless the options are exercised prior to the relevant record; and | ||
| All options vest on the occurrence of certain events such as a change of control, as defined in the share option plan. |
The plan also contains standard provisions dealing with matters such as administration of the plan,
amendment of the plan and termination or suspension of the plan.
35
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Statement of Operations
Years Ended June 30, | ||||||||||||||||
2005 | 2004 | 2003 | 2002 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Interest and other income |
$ | 308 | $ | 193 | $ | 145 | $ | 7 | ||||||||
Total revenues |
308 | 193 | 145 | 7 | ||||||||||||
Loss from operations |
(6,421 | ) | (8,538 | ) | (3,033 | ) | (122 | ) | ||||||||
Income tax expense |
| | | (1 | ) | |||||||||||
Net loss arising during development stage |
$ | (6,421 | ) | $ | (8,538 | ) | $ | (3,033 | ) | $ | (123 | ) | ||||
Net loss per common share: |
||||||||||||||||
Basic and diluted |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.06 | ) | $ | (0.00 | ) | ||||
Weighted average common shares outstanding |
56,938,000 | 54,954,578 | 52,023,247 | 49,769,581 | ||||||||||||
Balance Sheet Data
As of June 30, | ||||||||||||||||
2005 | 2004 | 2003 | 2002 | |||||||||||||
(in thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 9,238 | $ | 24,819 | $ | 7,244 | $ | 9,164 | ||||||||
Total assets |
$ | 19,364 | $ | 24,849 | $ | 7,286 | $ | 9,185 | ||||||||
Total stockholders equity |
$ | 16,521 | $ | 22,942 | $ | 5,933 | $ | 8,899 |
Item 7. Managements Discussion and Analysis of Financial Condition and results of Operations.
The following discussion and analysis should be read in conjunction with Item 8. Financial
Statements and Supplementary Data included below. Operating results are not necessarily indicative
of results that may occur in future periods. This discussion and analysis contains forward-looking
statements that involve risks uncertainties and assumptions. The actual results may differ
materially from those anticipated in the forward-looking statements as a result of many factors
including, but not limited to, those set forth under Cautionary Statements About Forward-Looking
Statements and Risk Factors in Item 1. Business included above in this Annual Report. All
forward-looking statements included in this document are based on the information available to us
on the date of this document and we assume no obligation to update any forward-looking statements
contained in this Annual Report.
36
Overview
We are a development stage company incorporated on December 1, 2000 as a wholly-owned subsidiary of
Novogen Limited. The Company commenced operations in May 2002 and its business purpose is the
development and commercialization of drugs for the treatment of cancer. The Company is presently
engaged in the clinical development of the anti-cancer drug phenoxodiol. A Novogen subsidiary,
Novogen Research Pty Limited, has granted to the Companys subsidiary, Marshall Edwards Pty
Limited, or MEPL, a worldwide non-transferable license under its patent right and patent
applications and its relevant know-how to conduct clinical trials and commercialize and distribute
all forms of phenoxodiol for uses in the field of prevention, treatment, and cure of cancer in
humans, except topical applications. Novogen currently owns approximately 86.9% of the outstanding
shares of the Companys common stock.
The Companys main focus since commencing operations is to undertake human clinical testing of
phenoxodiol. The Company does not employ any staff directly but obtains services from Novogen under
a services agreement. The Company has incurred losses since inception and expects to incur
operating losses and generate negative cash flows from operations for the foreseeable future as it
expands research and development activities and moves phenoxodiol into later stages of development.
As of June 30, 2005, the Company had accumulated losses of $18,115,000.
During fiscal year 2005, we made significant progress in the clinical development of phenoxodiol
including:
| In May 2005, we announced preliminary results from the combination therapy trial for patients with late stage refractory ovarian cancer being conducted at Yale New Haven Hospital in the United States and the Royal Womens Hospital in Australia. These preliminary results revealed that 33% (12/36) of patients who were on combination therapy that included phenoxodiol experienced a complete or partial response. | ||
| In January 2005, we announced that we had appointed a global research organization to manage our planned pivotal Phase IIb multinational ovarian cancer study. The trial will be known as the Ovature trial. We are discussing trial design with the U.S. Food and Drug Administration (FDA) to develop a trial protocol that is intended to support marketing approval of phenoxodiol, including the number of treatment arms to be included and the number of patients required to be tested in each arm of the trial. | ||
| In November 2004, we announced that the FDA granted phenoxodiol Fast Track status for its intended use as a chemo-sensitizing agent in patients with recurrent late stage ovarian cancer. In January 2005, we announced that the FDA granted phenoxodiol Fast Track status for its intended use in patients with hormone-refractory prostate cancer. Under the FDA Modernization Act of 1997, designation as a Fast Track product means that phenoxodiol is eligible for certain programs for accelerated marketing approval. |
The Company has not generated any revenues from operations since inception other than interest
on cash assets.
Expenses have consisted primarily of costs associated with conducting the clinical trials of
phenoxodiol and costs incurred under the license agreement, the services agreement and the
manufacturing license and supply agreements with Novogen and its subsidiaries, including the costs
of the clinical trial drug supplies. See Part III, Item 13 Certain Relationships on Related
Transactions for a description of these agreements.
To date, operations have been funded primarily through the sale of equity securities.
37
The Company expects that quarterly and annual results of operations will fluctuate for the
foreseeable future due to several factors including the timing and extent of research and
development efforts and the outcome and extent of clinical trial activities. The Companys limited
operating history makes accurate prediction of future operating results difficult or impossible.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying notes. Actual results
could differ from those estimates.
Clinical Trials Expenses
Estimates have been used in determining the expense liability under certain clinical trial
contracts where services have been performed but not yet invoiced. The actual costs of those
services could differ in amount and timing from the estimates used in completing the financial
results.
Clinical trial expenses of $1,156,000 have been included in the financial statements for the year
ended June 30, 2005, of which $304,000 has been accrued at June 30, 2005. These estimates are based
on the number of patients in each trial and the drug administration cycle.
Clinical research contracts may vary depending on the clinical trial design and protocol. Generally
the costs, and therefore estimates, associated with clinical trial contracts are based on the
number of patients, drug administration cycles, the type of treatment and the outcome being
measured. The length of time before actual amounts can be determined will vary depending on length
of the patient cycles and the timing of the invoices by the clinical trial partners.
Development Expenses
Research and development costs incurred since inception through June 30, 2005 amount to $6,753,000.
Research and development costs are expensed as they are incurred and are expected to increase in
the future as the phenoxodiol clinical program progresses.
Historical research and development costs and clinical trial costs have not been documented on a
project by project basis. In addition, research and development resources are supplied by Novogen
across several projects. As a result, the costs incurred for each clinical project cannot be stated
precisely on a project by project basis.
The Company expects that a large percentage of research and development expenses in the future will
be incurred in support of current and future clinical development programs. These expenditures are
subject to a number of uncertainties in timing and cost to completion.
The duration and cost of clinical trials may vary significantly over the life of a project as a result of:
| the number of sites included in the trials; | ||
| the length of time required to enroll suitable patients; |
38
| the number of patients that participate in the trials; | ||
| the indication being studied; and | ||
| the efficacy and safety profile of the product. |
The Companys strategy also includes the option of entering into collaborative arrangements with
third parties to participate in the development and commercialization of phenoxodiol. In the event
third parties have control over the clinical development process, the completion date would largely
be under the control of that third party.
As a result of these uncertainties, the Company is unable to determine the duration of or
completion costs for research and development projects or when and to what extent it will receive
cash inflows from the commercialization and sale of phenoxodiol.
The Company intends to continue the clinical development of phenoxodiol and to assess the
opportunity to license other cancer drugs developed by Novogen as the opportunities arise.
39
Results of Operations
Summary of Revenue and Expenses
The following table provides a summary of revenues and expenses to supplement the more detailed
discussions below:
Revenues
Years Ended June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands) | ||||||||||||
Interest and other income |
$ | 308 | $ | 193 | $ | 145 | ||||||
Total revenues |
308 | 193 | 145 | |||||||||
Research and development expenses
Years Ended June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands) | ||||||||||||
Clinical trial study costs |
$ | (1,156 | ) | $ | (774 | ) | $ | (1,060 | ) | |||
Clinical trial drug costs |
(612 | ) | (761 | ) | (164 | ) | ||||||
Research and development service charge |
(385 | ) | (811 | ) | (790 | ) | ||||||
Other |
(126 | ) | (35 | ) | (10 | ) | ||||||
Total Research and Development Costs |
(2,279 | ) | (2,381 | ) | (2,024 | ) | ||||||
License Fees
Years Ended June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands) | ||||||||||||
License Fees |
(3,000 | ) | (5,500 | ) | (500 | ) | ||||||
Selling, general and administrative expenses
Years Ended June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands) | ||||||||||||
Legal and professional fees |
$ | (371 | ) | $ | (250 | ) | $ | (119 | ) | |||
Administrative service charge |
(688 | ) | (302 | ) | (285 | ) | ||||||
Other |
(391 | ) | (298 | ) | (250 | ) | ||||||
Total operating expenses |
(1,450 | ) | (850 | ) | (654 | ) | ||||||
Year Ended June 30, 2005 Compared to the Year Ended June 30, 2004
The Company recorded a consolidated loss of $6,421,000 and $8,538,000 for the years ended June 30,
2005 and 2004, respectively.
Revenues: The Company received interest on cash assets and cash equivalents of $308,000 for the
year ended June 30, 2005 versus $193,000 for the year ended June 30, 2004. This increase was due to
the Companys investing activities in higher yielding interest bearing deposits and higher average
cash
balances following the Companys December 2003 public offering.
Research and Development: Research and Development expenses decreased $102,000 to $2,279,000 for
the year ended June 30, 2005 compared to $2,381,000 for the year ended June 30, 2004. This decrease
was due primarily to a reduction in the research and development service charge from
40
Novogen under
the terms of the services agreement reflecting lower costs incurred by Novogen and reduced time
spent by Novogen personnel on the development of phenoxodiol. Clinical trial drug costs have also
reduced as many patients have now completed the treatment cycles. These costs have partially been
offset by an increase in clinical trial costs. This increase in clinical trial costs result from an
increase patient data management and analysis costs associated with reporting and summarizing the
outcomes of the clinical trials.
License Fees: Milestone license fees of $2,000,000 have been accrued in the twelve months ended
June 30, 2005 in connection with the annual milestone license fee of $4,000,000 that is payable to
Novogen within 30 days after December 31, 2005 under the terms of the license agreement with
Novogen. Milestone license fees of $1,000,000 were accrued during the twelve months ended June 30,
2004 in connection with the annual milestone license fee of $2,000,000 due to Novogen within 30
days after December 31, 2004. The December 31, 2004 license fee was paid to Novogen in January
2005.
Selling, General and Administrative: Selling, general and administrative expenses increased by
$600,000 to $1,450,000 for the year ended June 30, 2005 compared to $850,000 for the year ended
June 30, 2004. The increase was due primarily to the increase in costs associated with professional
fees and increased costs incurred for administration and accounting services provided by Novogen
under the terms of the services agreement and other fees relating to compliance with United States
securities reporting requirements and FDA regulations. Included in selling, general and
administrative expenses are foreign exchange gains and losses which occur when revaluing cash
denominated in foreign currencies and translation gains and losses upon consolidation of MEPL. MEPL
uses US dollars as its functional currency and also engages in transactions in foreign currencies.
However, MEPLs accounts and financial statements are denominated in Australian dollars.
Translation of MEPLs financial statements into U.S. dollars did not have a material impact on the
Companys financial position. At June 30, 2004, the Company had not established a foreign currency
hedging program. Net foreign exchange losses during the twelve months ended June 30, 2005 were
$24,000 compared with net exchange gains of $58,000 during the twelve months ended June 30, 2004.
MEPLs accounts are maintained in Australian dollars, however, its functional currency is US
dollars. Foreign exchange gains and losses occur upon consolidation of MEPL and also as a result of
translations in foreign currency.
Year Ended June 30, 2004 Compared to the Year Ended June 30, 2003
The Company recorded a consolidated loss of $8,538,000 and $3,033,000 for the years ended June 30,
2004 and 2003, respectively.
Revenues: The Company received interest on cash assets and cash equivalents of $193,000 for the
year ended June 30, 2004 versus $145,000 for the year ended June 30, 2003. This increase was due to
the Companys higher cash balances following the Companys December 2003 public offering.
Research and Development: Research and Development expenses increased $357,000 to $2,381,000
for the year ended June 30, 2004 compared to $2,024,000 for the year ended June 30, 2003. This
increase was due primarily to the increase in cost of phenoxodiol supplied for use in the clinical
trial program.
41
License Fees: A license fee of $5,000,000 was paid to Novogen in February 2004 under the terms
of the license agreement following the exercise of warrants and the receipt of proceeds from the
public offering completed in December 2003. Milestone license fees of $1,000,000 were accrued at
June 30, 2004 in connection with the annual milestone license fee of $2,000,000 that was payable to
Novogen on December 31, 2004 under the terms of the license agreement with Novogen.
Selling, General and Administrative: Selling, general and administrative increased by $196,000 to
$850,000 for the year ended June 30, 2004 compared to $654,000 for the year ended June 30, 2003.
The increase was due primarily to the increase in costs associated with professional and other fees
relating to compliance with United States reporting requirements. Other expenses including those
related to compliance costs and related on-going investor relations also increased. The Company
conducts a portion of its business in Australian dollars. At June 30, 2004, the Company had not
established a foreign currency hedging program. Net foreign exchange gains during the twelve months
ended June 30, 2004 were $58,000 compared with net exchange gains of $3,000 during the twelve
months ended June 30, 2003. MEPLs accounts are maintained in Australian dollars, however, its
functional currency is US dollars. Foreign exchange gains and losses occur upon consolidation of
MEPL and also as a result of translations in foreign currency.
Liquidity and Capital Resources
At June 30, 2005, the Company had cash resources of $19,238,000 compared to $24,819,000 at June 30,
2004. The decrease was due to expenditures in the clinical trial program and other corporate
expenses incurred during the year. Funds are invested in short term bank accounts, pending use. The
implementation of the Companys business plan is dependent on the Companys ability to maintain
adequate cash resources to complete the clinical development program.
Source and Uses of Cash
Cash Used in Operating Activities
Cash used in operating activities for the year ended June 30, 2005 was $5,581,000 compared to
$7,972,000 for the same period in 2004. The decrease in cash outflow of $2,391,000 for the year
ended June 30, 2005 was due primarily to reduced losses of $2,117,000 incurred during the year
which included the milestone license fee of $2,000,000 paid in January 2005, a reduction of
$3,000,000 from the previous years lump sum license fee, paid under the terms of the license
agreement with Novogen. This reduction was partially offset by increased operating expenses for
clinical trials and administrative costs.
Cash Used in Financing Activities
During the year ended June 30, 2005, $10,000,000 was placed in a high interest yielding cash
deposit account for a term of seven months. The interest earned on these funds has been accrued in
the accounts.
Cash Requirements
The Company believes that it will have sufficient cash resources to fund existing operations at
least through the end of June 2006 and to complete the current Phase I and lb/IIa clinical trial
program.
The Company is currently planning to conduct a pivotal clinical study to support marketing approval
of phenoxodiol for ovarian cancer. The trial will use phenoxodiol in combination with carboplatin
and
42
will assess phenoxodiols efficacy for late stage ovarian cancer patients who are refractory to
standard chemotherapies. The Company is discussing trial design with the FDA to develop a trial
protocol, including the number of treatment arms needed to be completed and the number of patients required
to be tested in each arm. The Company is still in the planning stage of the trial design and has
not determined the cash resources needed to complete the trial.
Also, additional cash resources may be required if a new cancer compound is developed by Novogen
and the Company secures a license under the terms of the Companys license option deed from
Novogen. Novogen has notified the Company that its new anti-cancer compound NV-196 (previously
referred to as NV-18) is now an option compound under the terms of the license option deed and
that Novogen has commenced Phase I clinical trials. The Company has commissioned an independent
report on NV-196 and will review initial clinical results before making a decision to commence
license negotiations with Novogen.
Ongoing operations through the conduct of the clinical trial program will continue to consume cash
resources without generating revenues.
The Company is required to make payments under the terms of the License Agreement with Novogen as
follows:
1. A lump sum license fee of $5,000,000 is payable to Novogen on November 1, 2003 or such later
date when the cumulative total of all funds received from debt or equity issuances and revenue
received from commercialization (income other than sales) and sales of phenoxodiol products exceeds
$50,000,000. We have not yet met these preconditions for payment.
2. In addition to the amount above, until the expiration of the exclusivity period of the license,
MEPL must pay Novogen 2.5% of all net sales and 25% of commercialization income. After the
exclusivity period of the license, 1.5% of net sales must be paid to Novogen. The preconditions to
such payments have not yet occurred.
3. In addition to the amounts above, amounts payable for annual milestone license fees under
the license agreement for the calendar years ended December 31 are as follows:
Calendar Year | ||||
2005 |
$ | 4,000,000 | ||
Each calendar year thereafter during the exclusivity period |
$ | 8,000,000 |
The Exclusivity Period ends on the later of:
(a) the date of expiration or lapsing of the last Patent Right in the patents and patent
applications set out in the licence agreement with Novogen; or
(b) the date of expiration or lapsing of the last Licensed Patent Right which MEPL would,
but for the licence granted in licence agreement, infringe in any country in the Territory
by doing in that country any of the things set out in the licence agreement.
At June 30, 2004 an amount of $1,000,000 was accrued and reflected in amounts due to the parent
company, being 50% of the $2,000,000 milestone payment payable to Novogen on December 31, 2004
under the terms of the license agreement with Novogen. The Company paid the $2,000,000 due
43
to Novogen at the end of January 2005. Milestone license fees of $2,000,000 have been accrued at June
30, 2005 in connection with the $4,000,000 payment due within 30 days following December 31, 2005.
The Company will also be required to make payments to Novogen under the services agreement and
manufacturing license and supply agreement.
The Company does not intend to incur any significant capital expenditures in the foreseeable
future.
The Company is currently assessing its future cash requirements needed to fund new clinical trial
initiatives and licensing options available to it under the license option deed.
Contractual Obligations
The following table summarizes our future payment obligations and commitments as of June 30, 2005:
(In thousands) | Payment due by period | |||||||||||||||||||
less than 1 | 1 - 3 | 3 - 5 | More than | |||||||||||||||||
Contractual Obligations | Total | Year | Years | Years | 5 Years | |||||||||||||||
Purchase Obligations |
$ | 2,285 | $ | 1,821 | $ | 464 | $ | | $ | | ||||||||||
Total |
$ | 2,285 | $ | 1,821 | $ | 464 | $ | | $ | | ||||||||||
No amounts have been included in the above table for future payments to Novogen which may
arise in connection with the license agreement, the services agreement or the manufacturing and
supply agreement.
Off-Balance Sheet Arrangements
The Company does not currently have any off-balance sheet arrangements.
44
Recent Accounting Announcements
Share-Based Payments
In December 2004, the FASB Issued Statement of Financial Accounting Standards No. 123R (Statement
123R), Share-Based Payments, the provisions of which become effective for the Company in fiscal
2006. This Statement eliminates the alternative to use APB No. 25s intrinsic value method of
accounting that was provided in Statement 123 as originally issued. Statement 123R requires
companies to recognize the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards. While the fair-value-based method
prescribed by Statement 123R is similar to the fair-value-based method disclosed under the
provisions of Statement 123 in most respects, there are some differences. The Companys stock
option plan provides for the grant of options to the Companys directors, employees, employees of
the Companys affiliates and certain of the Companys contractors and consultants. To date no
options have been issued under the plan.
Accounting Changes and Error Corrections
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154),
Accounting Changes and Error Corrections which provides guidance on the accounting for and
reporting of accounting changes and correction of errors. This statement changes the requirements
for the accounting for and reporting of a change in accounting principle and applies to all
voluntary changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition
provisions. This statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We do not anticipate a material effect upon the
adoption of this statement.
45
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company places cash in on call and short-term deposit accounts with high quality financial
institutions.
In the normal course of business operations may be exposed to fluctuations in interest rates. These
fluctuations can vary the costs of financing and investing. Because we have no debt there was no
material impact on earnings due to fluctuations in interest rates.
The Company does not use derivative financial instruments to hedge its risks associated with the
fluctuations of interest rates.
Foreign Currency Risk
The Company conducts a portion of its business in various currencies, primarily in U.S. and
Australian dollars. At June 30, 2005, the Company had not established a foreign currency hedging
program. Net foreign exchange losses during the twelve months ended June 30, 2005 were $24,000
compared with net exchange gains of $58,000 during the twelve months ended June 30, 2004. Foreign
exchange gains and losses occur upon consolidation of MEPL, which uses U.S. dollars as its
functional currency and also engages in transactions in foreign currencies. MEPLs accounts are
denominated in Australian dollars. Translation of MEPLs financial statements into U.S. dollars did
not have a material impact on the Companys financial position.
The Company does not consider the effects of foreign currency movements to be a material risk to
its financial condition.
46
Item 8. Financial Statements and Supplementary Data
Marshall Edwards, Inc
Index to Financial Statements
Index to Financial Statements
Report of BDO Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
47
Chartered Accounts & Advisers |
Level 19, 2 Market Street Sydney NSW 2000
GPO Box 2551 Sydney NSW 2001 Tel. +61 2 9286 5555 Fax +61 2 9286 5599 Email: bdosyd@bdosyd.com.au www. bdo.com.au |
Report of Independent Registered Public Accounting Firm
The Board of Directors
Marshall Edwards, Inc.
Marshall Edwards, Inc.
We have audited the accompanying consolidated balance sheet of Marshall Edwards, Inc. (a
development stage company) as of June 30, 2005, and the related statements of operations,
stockholders equity, and cash flows for the year then ended, and for the period from December 1,
2000 (inception) through June 30, 2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audit. The financial statements as of June 30, 2004 and for the period from December
1, 2000 (inception) through June 30, 2004, were audited by other auditors whose report dated August
13, 2004 expressed an unqualified opinion on those statements. The financial statements for the
period from December 1, 2000 (inception) through June 30, 2004 include total revenues and net loss
of $345,000 and $11,694,000, respectively. Our opinion on the statements of operations,
stockholders equity, and cash flows for the period from December 1, 2000 (inception) through June
30, 2005, insofar as it relates to amounts for prior periods through June 30, 2004, is based solely
on the report of other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit and
the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of
Marshall Edwards, Inc. at June 30, 2005, and the consolidated results of its operations and its
cash flows for the year then ended and the period from December 1, 2000 (inception) through June
30, 2005, in conformity with accounting principles generally accepted in the United States of
America.
BDO
Sydney, NSW, Australia
September 13, 2005
Sydney, NSW, Australia
September 13, 2005
Liability limited by the Accountants
Scheme, approved under the
Professional Standards Act 1994 (NSW)
BDO is a national association of seperate
partnership and entities
Scheme, approved under the
Professional Standards Act 1994 (NSW)
BDO is a national association of seperate
partnership and entities
48
n | Ernst & Young Centre 680 George Street Sydney NSW 2000 Australia |
n | Tel Fax DX |
61 2 9248 5555 61 2 9248 5959 Sydney Stock Exchange 10172 |
||||||
GPO Box 2646 Sydney NSW 2001 |
Report of Independent Registered Public Accounting Firm
The Board of Directors
Marshall Edwards, Inc.
Marshall Edwards, Inc.
We have audited the accompanying consolidated balance sheet of Marshall Edwards, Inc.
(a development stage enterprise) (the Company) as of June 30, 2004, and the related
consolidated statements of operations, shareholders equity, and cash flows for the
year then ended, and for the period from December 1, 2000 (inception) through June
30, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audit. The financial statements as of June 30, 2003, and for the period
from December 1, 2000 (inception) through June 30, 2003, were audited by other
auditors whose report dated July 31, 2003 expressed an unqualified opinion on those
statements. The financial statements for the period from December 1, 2000 (inception)
through June 30, 2003 include total revenues and net loss of US$l52,000 and
US$3,156,000, respectively. Our opinion on the statements of operations,
shareholders equity, and cash flows for the period from December 1, 2000 (inception)
through June 30, 2004, insofar as it relates to amounts for prior periods through
June 30, 2003, is based solely on the report of other auditors.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Marshall Edwards, Inc. at June 30, 2004, and the
consolidated results of its operations and its cash flows for the year then ended and
the period from December 1, 2000 (inception) through June 30, 2004, in conformity
with U.S. generally accepted accounting principles.
Sydney, Australia |
13 August 2004 |
Liability limited by the
Accountants Scheme, approved under the Professional Standards Act 1994 (NSW) |
49
n | Ernst & Young LLP 1111 Summer Street Stamford, Connecticut 06905 |
n | Phone: (203) 674-3000 Fax: (203) 674-3001 www.ey.com |
Report of Independent Registered Public Accounting Firm
The Board of Directors Marshall Edwards, Inc.
We have audited the accompanying consolidated statement of operations, shareholders equity and
cash flows of Marshall Edwards, Inc. (a development stage company) for the year ended June 30, 2003
and for the period from December 1, 2000 (inception) through June 30, 2003. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of Marshall Edwards, Inc.,
for the year ended June 30, 2003 and the period from December 1, 2000 (inception) through June 30,
2003, in conformity with U.S. generally accepted accounting principles.
July 31, 2003
A Member Practice of Ernst & Young Global
50
MARSHALL EDWARDS, INC.
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(In thousands, except share and per share data)
June 30, | June 30, | |||||||
2005 | 2004 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 9,238 | $ | 24,819 | ||||
Short-term investments |
10,000 | | ||||||
Prepaid expenses and other current assets |
126 | 30 | ||||||
Total current assets |
19,364 | 24,849 | ||||||
Total assets |
$ | 19,364 | $ | 24,849 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 254 | $ | 192 | ||||
Accrued expenses |
403 | 437 | ||||||
Amount due to parent company |
2,186 | 1,278 | ||||||
Total current liabilities |
2,843 | 1,907 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value, authorized 100,000 shares,
none outstanding |
| | ||||||
Common stock, $0.00000002 par value, 113,000,000 authorized
shares; shares issued and outstanding: 56,938,000 at
June 30, 2005 and 56,938,000 at June 30, 2004 |
| | ||||||
Additional paid-in capital |
34,636 | 34,636 | ||||||
Deficit accumulated during development stage |
(18,115 | ) | (11,694 | ) | ||||
Accumulated other comprehensive income |
| | ||||||
Total stockholders equity |
16,521 | 22,942 | ||||||
Total liabilities and stockholders equity |
$ | 19,364 | $ | 24,849 | ||||
See accompanying notes.
51
MARSHALL EDWARDS, INC.
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(In thousands, except share and per share data)
Period from | ||||||||||||||||
December 1, | ||||||||||||||||
2000 (Inception) | ||||||||||||||||
through | ||||||||||||||||
Years Ended June 30, | June 30, | |||||||||||||||
2005 | 2004 | 2003 | 2005 | |||||||||||||
Revenues: |
||||||||||||||||
Interest and other income |
$ | 308 | $ | 193 | $ | 145 | $ | 653 | ||||||||
Total revenues |
308 | 193 | 145 | 653 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
(2,279 | ) | (2,381 | ) | (2,024 | ) | (6,753 | ) | ||||||||
License fees |
(3,000 | ) | (5,500 | ) | (500 | ) | (9,000 | ) | ||||||||
Selling, general and administrative |
(1,450 | ) | (850 | ) | (654 | ) | (3,014 | ) | ||||||||
Total operating expenses |
(6,729 | ) | (8,731 | ) | (3,178 | ) | (18,767 | ) | ||||||||
Loss from operations |
(6,421 | ) | (8,538 | ) | (3,033 | ) | (18,114 | ) | ||||||||
Income tax expense |
| | | (1 | ) | |||||||||||
Net loss arising during development stage |
$ | (6,421 | ) | $ | (8,538 | ) | $ | (3,033 | ) | $ | (18,115 | ) | ||||
Net loss per common share: |
||||||||||||||||
Basic and diluted |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.06 | ) | |||||||
Weighted average common shares outstanding |
56,938,000 | 54,954,578 | 52,023,247 | |||||||||||||
See accompanying notes.
52
MARSHALL EDWARDS, INC.
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(In thousands)
Period from | ||||||||||||||||
December 1, 2000 | ||||||||||||||||
(Inception) | ||||||||||||||||
Years Ended June 30, | through June 30, | |||||||||||||||
2005 | 2004 | 2003 | 2005 | |||||||||||||
Operating activities |
||||||||||||||||
Net loss arising during development stage |
(6,421 | ) | (8,538 | ) | (3,033 | ) | (18,115 | ) | ||||||||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Prepaid expenses and other current assets |
(96 | ) | 12 | (21 | ) | (126 | ) | |||||||||
Accounts payable |
62 | (241 | ) | 381 | 254 | |||||||||||
Accrued expenses |
(34 | ) | 159 | 278 | 403 | |||||||||||
Amounts due to parent company |
908 | 636 | 554 | 2,186 | ||||||||||||
Net cash used in operating activities |
(5,581 | ) | (7,972 | ) | (1,841 | ) | (15,398 | ) | ||||||||
Financing activities |
||||||||||||||||
Net proceeds from issuance of Common Stock |
| 25,578 | 36 | 34,636 | ||||||||||||
Amounts payable in connection with issuance of
Common Stock |
| | (146 | ) | | |||||||||||
Investment in short-term deposits |
(10,000 | ) | | | (10,000 | ) | ||||||||||
Net cash (used in) provided by financing activities |
(10,000 | ) | 25,578 | (110 | ) | 24,636 | ||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| (31 | ) | 31 | | |||||||||||
Net (decrease) increase in cash and cash
equivalents |
(15,581 | ) | 17,575 | (1,920 | ) | 9,238 | ||||||||||
Cash and cash equivalents at beginning of period |
24,819 | 7,244 | 9,164 | | ||||||||||||
Cash and cash equivalents at end of period |
9,238 | 24,819 | 7,244 | 9,238 | ||||||||||||
Income taxes paid |
| | | | ||||||||||||
See accompanying notes.
53
MARSHALL EDWARDS, INC.
(A Development Stage Company)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(In thousands, except share data)
Deficit | ||||||||||||||||||||
accumulated | Accumulated | |||||||||||||||||||
during | other | |||||||||||||||||||
Additional paid | development | comprehensive | ||||||||||||||||||
Common Stock | in capital | stage | income/(loss) | Total | ||||||||||||||||
(shares) | ||||||||||||||||||||
Balance June 30, 2001 |
49,500,000 | $ | | $ | | $ | | $ | | |||||||||||
Net loss arising during development stage |
(123 | ) | (123 | ) | ||||||||||||||||
Common Stock issued May 22, 2002
(including 2,523,000 warrants) |
2,523,000 | 9,022 | 9,022 | |||||||||||||||||
Balance at June 30, 2002 |
52,023,000 | 9,022 | (123 | ) | | 8,899 | ||||||||||||||
Net loss arising during development stage |
(3,033 | ) | (3,033 | ) | ||||||||||||||||
Foreign currency translation adjustments |
31 | 31 | ||||||||||||||||||
Comprehensive Loss |
(3,002 | ) | ||||||||||||||||||
Common Stock issued June 26, 2003 |
9,000 | 36 | 36 | |||||||||||||||||
Balance at June 30, 2003 |
52,032,000 | 9,058 | (3,156 | ) | 31 | 5,933 | ||||||||||||||
Net loss arising during development stage |
(8,538 | ) | (8,538 | ) | ||||||||||||||||
Foreign currency translation adjustments |
(31 | ) | (31 | ) | ||||||||||||||||
Comprehensive Loss |
(8,569 | ) | ||||||||||||||||||
Common Stock issued November 30, 2003 |
2,514,000 | 10,056 | 10,056 | |||||||||||||||||
Common Stock issued December 18, 2003
(including 2,392,000 warrants) |
2,392,000 | 15,522 | 15,522 | |||||||||||||||||
Balance at June 30, 2004 |
56,938,000 | $ | 34,636 | $ | (11,694 | ) | $ | | $ | 22,942 | ||||||||||
Net loss arising during development stage |
(6,421 | ) | (6,421 | ) | ||||||||||||||||
Comprehensive Loss |
(6,421 | ) | ||||||||||||||||||
Balance at June 30, 2005 |
56,938,000 | 34,636 | (18,115 | ) | | $ | 16,521 | |||||||||||||
See accompanying notes.
54
MARSHALL EDWARDS, INC.
(A Development Stage Company)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
June 30, 2005
1. | The Company and Summary of Significant Accounting Policies |
Marshall Edwards, Inc. (MEI) is a development stage company incorporated in December 2000 as
a wholly-owned subsidiary of Novogen Limited, an Australian pharmaceutical company. MEI commenced
operations in May 2002. MEI, including its wholly-owned Australian subsidiary, Marshall Edwards
Pty. Limited (MEPL) (together the Company) is a pharmaceutical company with a primary focus on
the development and commercialization of drugs for the treatment of cancer. The Company is
presently engaged in the clinical development and commercialization of a drug candidate called
phenoxodiol. The Company intends to develop phenoxodiol for use in a wide range of human cancers.
The Company operates primarily in Australia and the United States.
Novogen Limited and certain of its subsidiary companies (collectively Novogen), have granted to
the Company a worldwide, non transferable license under their patent and patent applications and in
their know-how to conduct clinical trials and commercialize and distribute all forms of delivering
phenoxodiol in the field of prevention, treatment and cure of cancer in humans except topical
applications. In addition, the Company has an exclusive first right and an exclusive last right to
match any proposed dealing by Novogen of its intellectual property rights with a third party
relating to synthetic pharmaceutical compounds (other than phenoxodiol), that have known or
potential applications in the field of prevention, treatment or cure of cancer in humans all forms
other than topical applications.
The Companys business focus is to conduct the clinical program for the development and
commercialization of phenoxodiol.
Principles of Consolidation
The consolidated financial statements include the accounts of Marshall Edwards, Inc. and its
wholly-owned subsidiary, Marshall Edwards Pty. Limited. Significant intercompany accounts and
transactions have been eliminated on consolidation.
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition
Interest
The only revenue earned to date is interest on cash balances.
55
Cash and Cash Equivalents and Short Term Investments
Cash on hand and in banks and short-term deposits are stated at the nominal value. The Company
considers all highly liquid investments with a maturity of three months or less when purchased to
be cash equivalents. Highly liquid investments with stated maturities of greater than three months
are classified as short-term investments. The Companys cash, held in the US, is deposited in
financial institutions that are FDIC insured. These deposits are in excess of the FDIC insurance
limits. The company also holds cash with Australian financial institutions.
Income Taxes
Income taxes have been provided for using the liability method in accordance with FASB Statement
No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are
recognized and measured using enacted tax rates in effect for the year in which the differences are
expected to be recognized. Valuation allowances are established against the recorded deferred
income tax assets to the extent that management believes that it is more likely than not that a
portion of the deferred income tax assets are not realizable.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, including cash and cash equivalents,
short-term investments and accounts payable approximate fair value.
Foreign Currency Translation
The financial statements of MEPL have been translated into U.S. dollars in accordance with FASB
Statement No. 52, Foreign Currency Translation. Assets and liabilities are translated into U.S.
dollars using the exchange rates in effect at the balance sheet date. Income statement amounts have
been translated using the average exchange rate for the periods. Realized gains and losses from
foreign currency transactions are reflected in the consolidated statements of operations.
Translation of Marshall Edwards Pty Limiteds Financial Statements into U.S dollars does not have a
material impact on the Companys financial position.
Research and Development Expenses
Research and development expenses relate primarily to the cost of conducting human clinical trials
of phenoxodiol. Research and development costs are charged to expense as incurred.
License Fees
Costs incurred related to the acquisition or licensing of products that have not yet received
regulatory approval to be marketed, or that are not commercially viable and ready for use or have
no alternative future use, are charged to earnings in the period incurred.
Stock-Based Compensation
The Companys stock option plan provides for the grant of options to the Companys directors,
employees, employees of the Companys affiliates and certain of the Companys contractors and
consultants. To date no options have been issued under the plan.
56
Basic and Diluted Loss Per Share
Basic and diluted earnings or loss per share is calculated in accordance with FASB Statement No.
128, Earnings Per Share. In computing basic earnings or loss per share, the dilutive effect of
stock options are excluded, whereas for diluted earnings per share they are included unless the
effect is anti-dilutive. Since the Company has a loss for all periods presented, diluted and basic
earnings per share are the same.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss
includes certain changes in Stockholders Equity that are excluded from net loss. Comprehensive
loss for all periods presented has been reflected in the Consolidated Statement of Stockholders
Equity.
Recent Accounting Announcements
Share-Based Payments
In December 2004, the FASB Issued Statement of Financial Accounting Standards No. 123R (Statement
123R), Share-Based Payments, the provisions of which become effective for the Company in fiscal
2006. This Statement eliminates the alternative to use APB No. 25s intrinsic value method of
accounting that was provided in Statement 123 as originally issued. Statement 123R requires
companies to recognize the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards. While the fair-value-based method
prescribed by Statement 123R is similar to the fair-value-based method disclosed under the
provisions of Statement 123 in most respects, there are some differences. The Companys stock
option plan provides for the grant of options to the Companys directors, employees, employees of
the Companys affiliates and certain of the Companys contractors and consultants. To date no
options have been issued under the plan. Statement 123R is effective for the Company in Fiscal
2006.
Accounting Changes and Error Corrections
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154),
Accounting Changes and Error Corrections which provides guidance on the accounting for and
reporting of accounting changes and correction of errors. This statement changes the requirements
for the accounting for and reporting of a change in accounting principle and applies to all
voluntary changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition
provisions. This statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We do not anticipate a material effect upon the
adoption of this statement.
57
2. Income Taxes
Loss from operations consists of the following jurisdictions:
Year ended June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands $) | ||||||||||||
Domestic |
(326 | ) | (321 | ) | (186 | ) | ||||||
Foreign |
(6,095 | ) | (8,217 | ) | (2,847 | ) | ||||||
(6,421 | ) | (8,538 | ) | (3,033 | ) | |||||||
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax
expense attributable to loss arising during development stage is:
Year ended June 30, | ||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
(in thousands $) | % | (in thousands $) | % | (in thousands $) | % | |||||||||||||||||||
Tax at US statutory rates |
2,247 | 35 | 2,988 | 35 | 1,062 | 35 | ||||||||||||||||||
Australian tax |
(305 | ) | (5 | ) | (411 | ) | (5 | ) | (142 | ) | (5 | ) | ||||||||||||
R&D Tax concession |
43 | 1 | ||||||||||||||||||||||
Under Provision |
156 | 2 | ||||||||||||||||||||||
Change in valuation allowance |
(2,141 | ) | (33 | ) | (2,577 | ) | (30 | ) | (920 | ) | (30 | ) | ||||||||||||
| | | | | | |||||||||||||||||||
Deferred tax liabilities and assets are comprised of the following:
Year ended June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(in thousands $) | ||||||||||||
Deferred tax liabilities |
||||||||||||
Unrealised Foreign Exchange Gain |
(4 | ) | (25 | ) | | |||||||
Accrued Interest Income |
| (2 | ) | | ||||||||
Prepayments |
| | | |||||||||
Total deferred tax liabilities |
(4 | ) | (27 | ) | | |||||||
Deferred tax assets |
||||||||||||
Tax carried forward losses |
4,972 | 3,365 | 933 | |||||||||
Unrealised Foreign Exchange Loss |
8 | (121 | ) | (129 | ) | |||||||
Consultant and other accruals |
700 | 318 | 154 | |||||||||
Total deferred tax assets |
5,680 | 3,562 | 958 | |||||||||
Valuation allowance for deferred tax assets |
(5,676 | ) | (3,535 | ) | (958 | ) | ||||||
Net deferred tax assets and liabilities |
| | | |||||||||
Management evaluates the recoverability of the deferred tax asset and the amount of the required
valuation allowance. Due to the uncertainty surrounding the realization of the tax deductions in
future tax returns, the Company has recorded a valuation allowance against its net deferred tax
asset at June 30, 2005 and 2004. At such time as it is determined that it is more likely than not
that the deferred tax assets will be realized, the valuation allowance will be reduced.
58
There was no benefit from income taxes recorded for the period from December 1, 2000 (inception) to
June 30, 2005 due to the Companys inability to recognize the benefit of net operating losses. The
Company had federal net operating loss carry forwards of approximately $938,000 at June 30, 2005.
The federal net operating losses will begin to expire in 2022.
Foreign tax losses of approximately $16,462,000 at June 30, 2005, may be carried forward
indefinitely.
3. Loss Per Share
The following table sets forth the computation of basic and diluted net loss per common share:
Years ended June 30, | ||||||||||||
2004 | 2004 | 2003 | ||||||||||
(In Thousands, except share data) | ||||||||||||
Numerator |
||||||||||||
Net loss arising during development stage |
(6,421 | ) | (8,538 | ) | (3,033 | ) | ||||||
Effect of dilutive securities |
| | | |||||||||
Numerator for diluted earnings per share |
$ | (6,421 | ) | $ | (8,538 | ) | $ | (3,033 | ) | |||
Denominator |
||||||||||||
Denominator for basic earnings per share - |
||||||||||||
Weighted average shares used in computing net
loss per share, basic and diluted |
56,938,000 | 54,954,578 | 52,023,247 | |||||||||
Effect of dilutive securities |
| | | |||||||||
Dilutive potential common shares |
56,938,000 | 54,954,578 | 52,023,247 | |||||||||
Basic and Diluted net loss per share |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.06 | ) |
During the period presented the Company had warrants outstanding that could potentially dilute
basic earnings per share in the future, but were excluded from the computation of diluted net loss
per share as the effect would have been anti-dilutive. Since the Company has a loss for all periods
presented, diluted and basic earnings per share are the same. The outstanding warrants consist of
the following potential common shares:
As at June 30, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Outstanding Warrants |
2,392,000 | 2,392,000 | 2,514,000 |
The warrants outstanding at June 30, 2005 have an exercise price of $9.00 per share and are
exercisable prior to December 18, 2006.
4. Expenditure Commitments and Contingencies
At June, 30, 2005, the Company had contracted to conduct research and development expenditures of
approximately $2,285,000. Of the expenditure commitments, clinical trial amounts are based on the
assumption that all patients enrolled in clinical trials will complete the maximum number of
allowed treatment cycles. The amounts, assuming all treatment cycles are completed, are expected to
be incurred as follows:
59
(In thousands) | Payment due by period | |||||||||||||||||||
less than 1 | 1 - 3 | 3 - 5 | More than | |||||||||||||||||
Contractual Obligations | Total | Year | Years | Years | 5 Years | |||||||||||||||
Purchase Obligations |
$ | 2,285 | $ | 1,821 | $ | 464 | $ | | $ | | ||||||||||
Total |
$ | 2,285 | $ | 1,821 | $ | 464 | $ | | $ | | ||||||||||
No amounts have been included for future payments to Novogen which may arise in connection with the
license agreement, the services agreement or the manufacturing license and supply agreement as
future payments under the terms of the agreements are subject to termination provisions. Payments
in connection with these agreements are detailed in Note 6 Related Party Transactions
The company is not currently a party to any material legal proceedings.
The Companys certificate of incorporation provided that it will indemnify Novogen in connection
with certain actions brought against Novogen by any of the Companys stockholders or any other
person.
The Company has guaranteed the payment and performance of the obligations of its subsidiary,
Marshall Edwards Pty Limited, to Novogen and its subsidiaries, Novogen Laboratories Pty Limited and
Novogen Research Pty Limited, under the license agreement, the manufacturing license and supply
agreement and the services agreement. Novogen has guaranteed the performance of the obligations of
Novogen Research Pty Limited under the license agreement and the obligations of Novogen
Laboratories Pty Limited under the manufacturing license and supply agreement to Marshall Edwards
Pty Limited. Each of the Company and Novogens obligations in the guarantee and indemnity agreement
are absolute, unconditional and irrevocable.
5. Segment Information
The Companys focus is to continue the clinical program currently underway for the development and
commercialization of phenoxodiol. The business contains two major segments based on geographic
location.
60
Year Ended June 30, | ||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||
USA | Australia | Total | USA | Australia | Total | USA | Australia | Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Statement of Operations |
||||||||||||||||||||||||||||||||||||
Interest Revenue |
238 | 70 | 308 | 167 | 26 | 193 | 110 | 35 | 145 | |||||||||||||||||||||||||||
Loss from operations |
(326 | ) | (6,095 | ) | (6,421 | ) | (321 | ) | (8,217 | ) | (8,538 | ) | (186 | ) | (2,847 | ) | (3,033 | ) | ||||||||||||||||||
Income Tax Expense |
| | | | | | | | | |||||||||||||||||||||||||||
Net loss arising during development stage |
(326 | ) | (6,095 | ) | (6,421 | ) | (321 | ) | (8,217 | ) | (8,538 | ) | (186 | ) | (2,847 | ) | (3,033 | ) | ||||||||||||||||||
Balance Sheet |
||||||||||||||||||||||||||||||||||||
Segment assets |
33,877 | 4,266 | 38,143 | 34,220 | 802 | 35,022 | 8,896 | 374 | 9,270 | |||||||||||||||||||||||||||
Elimination of investment in subsidiary |
(18,779 | ) | | (18,779 | ) | (10,173 | ) | | (10,173 | ) | (1,984 | ) | | (1,984 | ) | |||||||||||||||||||||
Consolidated Assets |
$ | 15,098 | $ | 4,266 | $ | 19,364 | $ | 24,047 | $ | 802 | $ | 24,849 | $ | 6,912 | $ | 374 | $ | 7,286 | ||||||||||||||||||
Segment liabilities |
$ | 93 | $ | 2,750 | $ | 2,843 | $ | 110 | $ | 1,797 | $ | 1,907 | $ | 43 | $ | 1,310 | $ | 1,353 | ||||||||||||||||||
6. Related Party Transactions
License Agreement
The license agreement is an agreement under which Novogens subsidiary, Novogen Research Pty
Limited, grants to MEPL a worldwide non-transferable license under its patents and patent
applications and in its know-how to conduct clinical trials and commercialize and distribute
phenoxodiol products. The agreement covers uses of phenoxodiol in the field of prevention,
treatment or cure of cancer in humans delivered in all forms except topical applications. The
license is exclusive until the expiration or lapsing of the last relevant Novogen patents or patent
applications in the world and thereafter is non-exclusive. MEPL may terminate the agreement by
giving three months notice to Novogen. MEPL paid $5,000,000 to Novogen in February 2004 which was
the first lump sum license fee payment due under the terms of the license agreement. Also, MEPL
paid $2,000,000 to Novogen in January 2005 which was the annual milestone license fee payment due
under the license agreement. Future amounts payable to Novogen under terms of the license agreement
are as follows:
1. A second lump sum license fee of $5,000,000 is payable to Novogen on November 1, 2003 or such
later date when the cumulative total of all funds received from debt or equity issuances and
revenue received from commercialization (income other than sales) and sales of phenoxodiol products
exceeds $50,000,000. The Company has not yet reached these preconditions for payment.
2. In addition to the amounts above, until the expiration of the exclusivity period of the license,
MEPL must pay Novogen 2.5% of all net sales and 25% of commercialization income. After the
exclusivity period of the license, 1.5% of net sales must be paid to Novogen.
3. In addition to the amounts above, amounts payable for annual milestone license fees under the
license agreement for the calendar years ended December 31 are as follows:
61
Calendar Year | ||||
2005 |
$ | 4,000,000 | ||
Each calendar year thereafter during the exclusivity period |
$ | 8,000,000 |
Milestone license fees of $2,000,000 have been accrued in the twelve months ended June 30, 2005 in
connection with the annual milestone payment of $4,000,000 due within 30 days following the end of
the calendar year, December 31, 2005. The Company has paid the December 31, 2004 annual milestone
license fee of $2,000,000 due to Novogen at the end of January 2005.
License Option Deed
The license option deed grants MEPL an exclusive right to accept and an exclusive right to match
any proposed dealing by Novogen of its intellectual property rights with a third party relating to
synthetic compounds (other than phenoxodiol) that have known or potential applications in the field
of prevention, treatment or cure of cancer in humans in all forms other than topical applications.
Services Agreement
The Company does not currently intend to directly employ any staff. Under the terms of the services
agreement, Novogen Limited or its subsidiaries have agreed to provide services reasonably required
by the Company relating to the development and commercialization of phenoxodiol. Novogen has agreed
to provide these services at cost plus a 10% mark-up. The Company may terminate the agreement on
three months written notice to Novogen.
Transactions giving rise to expenditure amounting to $1,073,000, $1,113,000 and $1,075,000 were
made under the services agreement with Novogen during the twelve months ended June 30, 2005, 2004
and 2003 respectively. Of these amounts, $385,000, $811,000 and $790,000 related to service fees
paid to Novogen for research and development services provided in the twelve months ended June 30,
2005, 2004 and 2003 respectively, reflecting the time spent by Novogen research staff on the
development of phenoxodiol. Additionally, $688,000, $302,000 and $285,000 of the total expenditure
during the twelve months ended June 30, 2005, 2004 and 2003 respectively related to costs incurred
for administration and accounting services provided by Novogen. The increase in 2005 related to
compliance with United States securities reporting requirements.
At June 30, 2005 and 2004, $100,000 and $229,000, respectively, was due and owing to Novogen under
the services agreement and is included in amounts due to parent company.
Manufacturing License and Supply Agreement
Under the terms of the manufacturing license and supply agreement, MEPL has granted to one of
Novogens subsidiaries an exclusive, non-transferable sub license to manufacture and supply
phenoxodiol in its primary manufactured form. Novogens subsidiary has agreed to supply phenoxodiol
to MEPL for the clinical trial development program and phenoxodiols ultimate commercial use.
Novogen will supply phenoxodiol at cost plus a 50% markup.
Transactions giving rise to expenditure amounting to $612,000, $761,000 and $164,000 were made
under the manufacturing license and supply agreement with Novogen during the twelve months ended
June 30, 2005, 2004 and 2003, respectively.
62
At June 30, 2005 and 2004, $79,000 and $44,000, respectively, was due and owing to Novogen under
the manufacturing license and supply agreement and is included in amounts due to parent company.
7. Equity
Marshall Edwards, Inc. (the Company) is a development stage company incorporated in December 2000
that commenced operations in May 2002 coinciding with its listing on the London Stock Exchanges
Alternative Investment Market (AIM).
In May 2002, the Company sold 2,523,000 shares of its common stock and 2,523,000 warrants,
raising proceeds of $9,022,000, net of $1,070,000 of transaction costs. The warrants were
exercisable prior to November 30, 2003 at an exercise price of $4.00 per share. The common stock
was listed for trading on the London Stock Exchanges Alternative Investment Market (AIM).
Following the listing, Novogen Limited retained 95.1% of the Companys common stock.
In June 2003, 9,000 warrants were exercised, resulting in proceeds to the Company of $36,000. In
November 2003 the remaining 2,514,000 warrants were exercised at an exercise price of $4.00 per
share with proceeds to the Company of $10,056,000.
In December 2003, the Company sold 2,392,000 common stock units at a public offering price of $7.50
per unit. Each common stock unit consisted of:
| one share of common stock; and | ||
| one warrant to purchase a share of common stock, exercisable prior to December 18, 2006 at an exercise price equal to $9.00. |
In connection with the December 2003 offering, the Companys common stock and warrants commenced
trading separately on the Nasdaq National Market. The Company received proceeds of $15,522,000, net
of $2,431,000 transaction costs in the December 2003 offering. Following the offering, Novogen
Limited retained 86.9% of the Companys common stock.
63
8. Quarterly Financial Data (Unaudited)
2005 for the quarter ended | Jun-30 | Mar-31 | Dec-31 | Sep-30 | Year | |||||||||||||||
(in thousands except per share data) | ||||||||||||||||||||
Revenue |
106 | 71 | 64 | 67 | 308 | |||||||||||||||
Net Loss |
(2,076 | ) | (1,740 | ) | (1,375 | ) | (1,230 | ) | (6,421 | ) | ||||||||||
Net Loss arising during development stage |
(2,076 | ) | (1,740 | ) | (1,375 | ) | (1,230 | ) | (6,421 | ) | ||||||||||
Basic and diluted loss per share |
(0.04 | ) | (0.03 | ) | (0.02 | ) | (0.02 | ) | (0.11 | ) |
2004 for the quarter ended | Jun-30 | Mar-31 | Dec-31 | Sep-30 | Year | |||||||||||||||
(in thousands except per share data) | ||||||||||||||||||||
Revenue |
72 | 75 | 25 | 21 | 193 | |||||||||||||||
Net Loss |
(1,201 | ) | (1,541 | ) | (4,682 | ) | (1,114 | ) | (8,538 | ) | ||||||||||
Net Loss arising during development stage |
(1,201 | ) | (1,541 | ) | (4,682 | ) | (1,114 | ) | (8,538 | ) | ||||||||||
Basic and diluted loss per share |
(0.02 | ) | (0.03 | ) | (0.09 | ) | (0.02 | ) | (0.16 | ) |
64
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this report, the Companys management, with the participation
of the Companys principal executive officer and principal financial officer, evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the
Companys principal executive officer and principal financial officer have concluded that the
Companys disclosure controls and procedures were not designed nor were functioning effectively to
provide reasonable assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934 was recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms. The identified weakness in internal control over financial reporting and in disclosure
controls is described below under the heading Changes in Internal Controls.
Changes in Internal Controls
In 2004, the Company determined that the personnel and management of Novogen who perform our
accounting and financial reporting functions pursuant to the Services Agreement are not
sufficiently expert in U.S. GAAP and the requirements of the SEC and the Public Company Accounting
Oversight Board and that this lack of expertise represents a material weakness in the operation of
our internal control over financial reporting.
In addition, our system of financial reporting was not designed to prepare financial statements in
accordance with U.S. GAAP and that our system of internal control, in particular our processes to
review and analyze elements of the financial statement close process and prepare consolidated
financial statements in accordance with U.S. GAAP, has not reduced to a relatively low level the
risk that errors in amounts that would be material in relation to those financial statements may
occur and may not be detected within a timely period by management in the normal course of
business.
In this regard, we recommended that Novogen engage personnel with expertise or train existing
personnel in the following areas:
| U.S. GAAP; | ||
| financial reporting in accordance with the SEC regulations; | ||
| requirements of the Public Company Accounting Oversight Board; and | ||
| application of technical accounting pronouncements. |
We have sought assurances from Novogen that it will promptly remedy the concerns raised and Novogen
has presented to us a plan for addressing these concerns. We believe that Novogens plan is
designed to ensure that the preparation of our consolidated financial statements, including the
processes to review and analyze elements of our financial statement close process, is in accordance
with U.S. GAAP and that relevant information about U.S. GAAP, SEC financial reporting
65
requirements,
and the requirements of the Public Company Accounting Oversight Board is available to those persons
involved in the process by which our financial statements are prepared. Specifically
Novogens plan provides for additional resources and further training of the Novogen accounting
team including:
1) | the employment of additional accounting staff on the Novogen accounting team which will enable senior finance staff responsible for the preparation of U.S. GAAP financial reports to spend more time dealing with U.S. GAAP reporting issues; | ||
2) | increasing the level of attendance at targeted U.S. GAAP and SEC reporting courses by senior Novogen finance staff responsible for the preparation of U.S. GAAP financial reports and SEC disclosure; and | ||
3) | subscribing to additional information networks that provide publications and updates of SEC and U.S. GAAP releases and rule changes and of information about the requirements of the Public Company Accounting Oversight Board. |
Progress on the implementation of Novogens plan to address the material weakness.
During the period covered by the report, Novogen has made significant progress in implementing its
plan to address the identified material weakness.
Novogen has already recruited an additional degree qualified accountant, enabling senior finance
staff responsible for the preparation of U.S. GAAP financial reports to spend more time dealing
with U.S GAAP reporting issues. Additionally, Novogens senior finance staff have completed
training courses including the SEC Institutes SEC Reporting Conference, the SEC Institutes
Workshop on Implementing SOX404 Internal Control Reporting and will continue to evaluate the merits
of additional courses as they become available. Novogen has already begun to receive additional
publications and updates of SEC, U.S. GAAP and Public Company Accounting Oversight Board
requirements and will continue to review the adequacy of this additional information to determine
whether additional resources are required.
Until we are satisfied that we have addressed our needs for sufficient expertise in preparing
financial statements required in our filings under the securities law we will seek to mitigate this
weakness by conferring with our outside accounting advisors with respect to the technical
requirements applicable to our financial statements.
The implementation of the initiatives described above are among our highest priorities. Our Board
of Directors, in coordination with our Audit Committee, will continually assess the progress and
sufficiency of these initiatives and make adjustments as and when necessary. As of the date of
this report, we believe that the plans outlined above, when completed, will eliminate the weakness
in internal accounting control as described above. Nonetheless, a control system, no matter how
well designed and operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance that all control
issues have been detected.
Item 9b.
Not applicable
66
PART III
Item 10. Directors and Executive Officers of the Registrant
Code of Ethics
We have adopted a Code of Business and Ethics policy that applies to our Directors
and employees (including our principal executive officer and our principal financial
officer), and have posted the text of our policy on our website
(www.marshalledwardsinc.com). In addition, we intend to promptly disclose (i) the
nature of any amendment to the policy that applies to our principal executive officer
and principal financial officer and (ii) the nature of any waiver, including an
implicit waiver, from a provision of the policy that is granted to one of these
specified individuals, the name of such person who is granted the waiver and the date
of the waiver on our website in the future.
The other information required by this item is incorporated by reference from the
information under the caption Election of Directors and the caption Compensation and
Other Information Concerning Officers, Directors and Certain Stockholders and the
caption 16(a) Beneficial Ownership reporting Compliance contained in our proxy
statement for the fiscal year ended June 30, 2004 (the Proxy Statement).
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference from the
information under the caption Compensation and Other Information Concerning Officers,
Directors and Certain stockholders under the caption Compensation Committee
Interlocks and Insider Participation contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain of the information required by this item is included in Part II Item 5 of this
Annual Report and certain information is incorporated by reference from the Information
under the caption Security Ownership of Certain Beneficial Owners and Management
contained in the proxy statement.
Item 13. Certain Relationships and Related Transactions
Our agreements with Novogen are each summarized below. Each of these agreements was
approved by a majority of our independent directors who did not have an interest in the
transaction. We believe that each of our agreements with Novogen is on terms as
favorable to us as we could have obtained from unaffiliated third parties. The
following description is only a summary of what we believe are the material provisions
of the agreements.
The License Agreement
Novogens subsidiary, Novogen Research Pty Limited, has granted our subsidiary,
Marshall Edwards Pty Limited, a world-wide, non-transferable license under its patents
and patent applications and in its licensed know-how to conduct clinical trials and
commercialize and distribute phenoxodiol products. We and Novogen have each guaranteed
the obligations of our respective subsidiaries under this license agreement. See
Guarantee and Indemnity Agreement. The license is exclusive until the expiration or
lapsing of the last relevant Novogen patents or patent applications in the world, which
we expect will be no earlier than August 29, 2017, and thereafter is non-exclusive for
the remainder of the term of the agreement. The license grants us the right to make,
have made, market, distribute, sell, hire or otherwise dispose of phenoxodiol products
in the field (the Field) of prevention treatment or cure of cancer in humans by
pharmaceuticals delivered in all forms except topical applications.
67
We are obliged to continue current and undertake further clinical trials of
phenoxodiol, and are responsible for paying for all materials necessary to conduct
clinical trials. We must conduct all such trials diligently and professionally, must
use reasonable endeavors to design and conduct clinical trials to generate outcomes
which are calculated to result in regulatory approval of phenoxodiol products. We must
also keep proper records of all clinical trials and allow Novogen to inspect those
records.
All intellectual property rights in the medication, trial protocols, results of the
clinical trials, case report forms and any other materials used in the conduct of the
clinical trials are assigned by us to Novogen and we must not publish the results of
clinical trials without the prior written consent of Novogen. Each party must disclose
to the other party developments, improvements, enhancements or new know-how in relation
to the phenoxodiol product which are made or acquired by either party.
We may not sub-license, sub-contract, or engage agents without the prior written
consent of Novogen. Any proposed sub-contractors and agents must first agree in writing
to comply with certain confidentiality obligations and to assign to Novogen all
intellectual property rights in the Field created or acquired by them in the course of
their engagement.
Marketing and Commercialization
We may market and commercialize phenoxodiol products under the license in any manner we
think fit, so long as we conduct any marketing and commercialization activities on a
commercially reasonable basis in compliance with applicable laws and regulations,
comply with reasonable directions given by Novogen, act in a manner which we consider
to be most beneficial to the interests of us and Novogen, and otherwise act in good
faith to Novogen. All advertising and promotional material must he submitted to Novogen
for prior approval.
Fees, Charges and Costs
The following table summarizes our responsibility for fees, charges and costs under the
license agreement.
MEPL paid $5,000,000 to Novogen in February 2004 which was the first lump sum license
fee payment due under the terms of the license agreement. Also, MEPL paid $2,000,000 to
Novogen in January 2005 which was the annual milestone license fee payment due under
the license agreement. Future amounts payable to Novogen under terms of the license
agreement are as follows:
1. A second lump sum license fee of $5,000,000 is payable to Novogen on November 1,
2003 or such later date when the cumulative total of all funds received from debt or
equity issuances and revenue received from commercialization (income other than sales)
and sales of phenoxodiol products exceeds $50,000,000.
2. In addition to the amounts above, until the expiration of the exclusivity period of
the license, MEPL must pay Novogen 2.5 % of all net sales and 25% of commercialization
income. After the exclusivity period of the license, 1.5% of net sales must be paid to
Novogen.
68
3. Amounts payable for annual milestone license fees under the license agreement for
the calendar years ended December 31 are as follows:
Calendar Year | ||||
2005 |
$ | 4,000,000 | ||
Each calendar year thereafter |
$ | 8,000,000 |
For the fiscal year ended June 30, 2005 we have included $3,000,000 as a license fee
expense in our consolidated statements of operations.
Termination
We may terminate the license agreement at any time, by giving three months notice to
Novogen. We may also terminate the agreement if Novogen commits a breach of any of its
material obligations under the agreement, becomes the subject of certain bankruptcy
proceedings or is unable to lawfully perform its obligations. Novogen may terminate the
agreement if we commit a breach of any of our material obligations under the agreement,
become the subject of certain bankruptcy proceedings or are unable to lawfully perform
our obligations. Novogen may also terminate the agreement immediately if a change of
control, as defined in the license agreement, occurs without the consent of Novogen.
The Manufacturing License and Supply Agreement
Our subsidiary, Marshall Edwards Pty Limited has granted to Novogens subsidiary,
Novogen Laboratories Pty Limited, an exclusive, non-transferable sub-license to
manufacture and supply phenoxodiol to us in its primary manufactured form. We and
Novogen have each guaranteed the obligations of our respective subsidiaries under this
manufacturing license and supply agreement. See Guarantee and Indemnity Agreement.
Novogen must not sublicense its rights or engage agents or subcontractors to exercise
its rights or perform its obligations under the agreement without our prior written
consent.
Supply of Phenoxodiol
We provide to Novogen rolling forecasts quarterly of our estimated supply requirements
for phenoxodiol, and issue purchase orders for phenoxodiol to Novogen specifying the
volume of phenoxodiol required. Novogen must confirm the quantity it is able to supply
to fulfill the purchase order within 5 business days of receiving the purchase order.
Novogen must then supply the volume of phenoxodiol it agreed to supply, and must
otherwise use all reasonable endeavors to fulfill the purchase order. Novogen must
manufacture and deliver phenoxodiol to us at a port nominated by us. Title to the
phenoxodiol does not pass to us until we have paid the purchase price (as described
below) and retention of title arrangements apply. We are not obligated to purchase any
minimum amount of phenoxodiol from Novogen.
We must also provide to Novogen at least one years advance written notice of the date
on which the phenoxodiol product will be first offered for sale commercially.
If Novogen materially and persistently fails to supply the amount of phenoxodiol
ordered by us by the required date, we may manufacture (or engage a third party,
without Novogens consent, to manufacture) the amount of the shortfall of phenoxodiol
until Novogen demonstrates that it is able to consistently supply phenoxodiol in
accordance with our requirements. In this case, Novogen must take all reasonable steps
to make available to us or the third party, on commercial terms, the know-how necessary
to enable that manufacture to occur.
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Fees and Charges
The purchase price for phenoxodiol supplied is the total costs to Novogen plus a
mark-up of 50%. The purchase price may be adjusted quarterly by Novogen by reference to
the actual costs referred to above for the preceding quarter. If at any time we do not
pay any amount due to Novogen, Novogen may suspend the supply of phenoxodiol to us
until payment is received. Interest accrues daily on the outstanding balance of all
overdue amounts payable to Novogen under the manufacturing license and supply
agreement.
For the fiscal year ended June 2005, we expensed $612,000 in fees under the
manufacturing and supply agreement.
Manufacturing Developments and Improvements
Each party must disclose to the other any new developments, improvements and new
know-how relating to the manufacture of phenoxodiol which are made or acquired by it
during the term of the agreement. All intellectual property rights in developments,
improvements and new know-how made or acquired by Novogen are to be assigned to us. We
must provide to Novogen such technical information and assistance as Novogen reasonably
requests in order to exercise its rights and perform its obligations.
Each party acknowledges that nothing in the agreement shall have the effect of
transferring or assigning to Novogen any right, title or interest in any intellectual
property rights in the phenoxodiol products licensed under the agreement.
Novogen agrees to notify us immediately on becoming aware of any infringement of the
intellectual property rights in the licensed products or any claim by a third party
that the activities of the parties under the agreement infringe such third partys
intellectual property rights. If required, Novogen agrees to be a party to any
proceedings brought by us in relation to any infringement of intellectual property
rights in the licensed products and also agrees, at our cost, to provide all reasonable
assistance in relation to such proceedings and to execute such documents as we
reasonably require.
Termination
Either party may terminate the agreement immediately at any time if the other party
becomes the subject of certain bankruptcy proceedings, becomes unable to carry out the
transactions contemplated by the agreement or breaches its obligations and does not
cure such breach within 21 days notice. We may also terminate the agreement
immediately if the license agreement expires or is terminated. Novogen may also
terminate the agreement immediately if a change of control, as defined in the
manufacturing license and supply agreement, occurs without the consent of Novogen.
Limitation of Liability
The liability of Novogen for breach of conditions or warranties imposed by statute is
limited to the replacement of goods, supply of equivalent goods, repair or replacement
value of goods or the re-supply or payment for re-supply of services.
The License Option Deed
Novogens subsidiary, Novogen Research Pty Limited has granted our subsidiary, Marshall
Edwards Pty Limited, an exclusive first right to accept and an exclusive last right to
match any proposed dealing by Novogen with its intellectual property rights with a
third party relating to certain synthetic pharmaceutical compounds (other than
phenoxodiol) developed by Novogen or its affiliates.
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Option Compounds
The rights relate to all synthetic pharmaceutical compounds, known as Option Compounds,
delivered or taken in all forms except topical applications (other than phenoxodiol,
which is the subject of the license agreement), developed before or during the term of
the deed, by or on behalf of Novogen or its affiliates, which have known applications
in the Field of prevention, treatment or cure of cancer in humans.
Dealings in Option Compounds and Exercise of Rights
Novogen must not, and must ensure that its affiliates other than us do not, deal,
solicit entertain or discuss dealings with any intellectual property rights in the
Field or in relation to any Option Compounds without giving us an exclusive first right
to accept and an exclusive last right to match any such dealing. If we exercise our
first right to accept or last right to match, Novogen must deal with the intellectual
property rights in favor of us on the terms and conditions proposed. We have 15
business days to exercise those rights and, if we fail to do so, Novogen may deal with
those intellectual property rights in favor of a third party provided that the terms
are no more favorable to that third party than those first offered to us or which we
declined to match.
Protection of Intellectual Property
Novogen must act in good faith toward us in relation to its obligations under the deed
and must ensure that all persons involved in any research or development work in the
Field in relation to Option Compounds assign all intellectual property rights relating
to the Option Compounds to Novogen. Novogen must also ensure that its affiliates, other
than us, do the same. Novogen continues to be solely responsible for the maintenance of
any patent rights in the Option Compounds, which it may maintain and enforce at its
sole discretion and expense.
Development Reports
Novogen must provide to us from time to time, and in no event less frequently than
every six months, development reports relating to the clinical trials and development
of Option Compounds, and must notify us immediately of any regulatory approvals granted
and assessments made by any government agency.
Term and Termination
The term of the deed is sixteen years from the commencement date of the agreement,
unless terminated earlier. We may terminate the deed at any time on three months
notice to Novogen. Either party may terminate the deed immediately at any time if the
other party becomes the subject of certain bankruptcy proceedings, becomes unable to
carry out the transactions contemplated by the agreement or breaches its obligations
and does not cure such breach within 21 days notice.
Novogen may also terminate the deed immediately if a change of control, as defined in
the license option deed, occurs without the consent of Novogen.
The Services Agreement
Novogen has agreed to provide a range of services to us, or procure that its
subsidiaries provide those services.
These services include providing general assistance and advice on research and
development and commercializing phenoxodiol products and other compounds in which we
may acquire intellectual property rights in the future, such as Option Compounds in
relation to which we have exercised our rights under the license option deed.
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Novogens obligations also include providing, within the agreed budgets described
below, our needs with respect to secretarial, marketing, finance, logistics,
administrative and managerial support. Novogen also plans, conducts and supervises
pre-clinical and clinical trials with phenoxodiol and with other compounds in which we
have intellectual property rights. Novogen also provides scientific and technical
advice on management of pre-clinical and clinical research programs undertaken by us
and manages such research provisions. We have guaranteed the obligations of our
subsidiary under the services agreement. See Guarantee and Indemnity Agreement.
Novogen may not sub-contract the provision of any part of the services without our
prior written consent.
Fees for Services
We pay services fees to Novogen on a monthly basis in accordance with an agreed annual
budget. At the beginning of each financial year Novogen prepares a budget estimate for
us with respect to the percentage of time spent by Novogens employees and consultants
in the provision of services to us in the previous financial year and any relevant
considerations which are likely to influence the time spent for the
following financial year. Each estimate must include the remuneration paid by Novogen
to each person expected to provide the services and the percentage of time Novogen
expects those persons will spend on our business, the allocated on-costs attributable
to each person, a premises rental charge and a charge for asset usage and general
overheads. The total estimate is to be the sum of these charges plus a mark-up of 10%.
We also pay Novogens reasonable out of pocket expenses incurred in providing the
services to us. At the end of the fiscal year an adjustment is made to reflect actual
costs incurred where they differ from budget.
For the fiscal year ended June 2005, we expensed $1,073,000 in fees under the services
agreement.
Intellectual Property and Confidentiality
All intellectual property rights created by Novogen in the performance of the services
for or at the request of us are licensed to us. Each party also has obligations to the
other party to honor the others confidential information.
Termination
We may terminate our rights and obligations under the services agreement on three
months written notice to Novogen. Either we or Novogen may terminate the agreement
immediately at any time if the other party becomes the subject of certain bankruptcy
proceedings, becomes unable to carry out the transactions contemplated by the
agreement, breaches its obligations and does not cure such breach within 21 days notice
or if a change of control in the other party occurs. Novogen may also terminate the
agreement immediately if a change of control, as defined in the services agreement,
occurs without the consent of Novogen.
Guarantee and Indemnity Agreement
We have guaranteed the payment and performance of the obligations of our subsidiary,
Marshall Edwards Pty Limited, to Novogen and its subsidiaries, Novogen Laboratories Pty
Limited and Novogen Research Pty Limited, under the license agreement, the
manufacturing license and supply agreement and the services agreement. Novogen has
guaranteed the performance of the obligations of Novogen Research Pty Limited under the
license agreement and the obligations of Novogen Laboratories Pty Limited under the
manufacturing license and supply agreement to Marshall Edwards Pty Limited. Each of our
and Novogens obligations in the guarantee and indemnity agreement are absolute,
unconditional and irrevocable.
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Indemnification
We and Novogen have each agreed to indemnity the other if either of our respective
subsidiaries default in the performance of any obligation under the license agreement,
the manufacturing license and supply agreement or the services agreement. The defaulting
party must indemnify the other against all losses, liabilities and expenses, including
legal expenses on a full indemnity basis, incurred, directly or indirectly, as a result
of that default. The party in default must pay the amount of those losses, liabilities
and expenses on demand to the non-defaulting party. Furthermore, if Marshall Edwards Pty
Limited defaults on its payment obligations, we must pay that money as directed by
Novogen.
Termination
This agreement is a continuing obligation, and remains in full force until all the
guaranteed obligations have been irrevocably paid and performed in full.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference from the information
under the caption Principal Accountant Fees and Services contained in the Proxy
Statement.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements under Item 8, Part II hereof.
2. Financial Statement Schedules
The Financial Statement Schedules have been omitted either because they are not required
or because the information has been included in the financial statements or the notes
thereto included in this Annual Report on Form 10-K.
3. Exhibits
Exhibit Index
Exhibits | ||
3.1
|
Amended and Restated Certificates of Incorporation. (1) | |
3.2
|
Amended and Restated Bylaws. (1) | |
4.1
|
Specimen Stock Certificate. (1) | |
4.2
|
Warrant Agreement. (1) | |
4.3
|
Specimen Warrant Certificate. (1) | |
10.1
|
Amended and Restated License Agreement between Novogen Research Pty Limited and Marshall Edwards Pty Limited. (1) | |
10.2
|
Amended and Restated Manufacturing License and Supply Agreement between Novogen Laboratories Pty Limited and Marshall Edwards Pty Limited. (1) | |
10.3
|
Amended and Restated License Option Deed between Novogen Research Pty Limited and Marshall Edwards Pty Limited. (1) | |
10.4
|
Amended and Restated Services Agreement among Novogen Limited, Marshall Edwards, Inc. and Marshall Edwards Pty Limited. (1) | |
10.5
|
Guarantee and Indemnity among Marshall Edwards, Inc., Novogen Laboratories Pty Limited, Novogen Research Pty Limited and Novogen Limited. (1) | |
10.6
|
Marshall Edwards, Inc. Share Option Plan. (1) | |
21
|
Subsidiaries of Marshall Edwards, Inc. (1) | |
23.1
|
Consent of Ernst & Young | |
23.2
|
Consent of Ernst & Young LLP | |
31.1
|
Certification required by Rule 13a-14(a) or Rule 15d-14(a) | |
31.2
|
Certification required by Rule 13a-14(a) or Rule 15d-14(a) | |
32
|
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C 1350). |
(1) | Incorporated by reference to exhibits to the Registration Statement on Form S-1 filed on December 18, 2003, as amended (Reg. No. 333-109129). |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on September 13, 2005.
MARSHALL EDWARDS, INC. | ||||
A Delaware Corporation | ||||
By: | /s/ Christopher Naughton | |||
Christopher Naughton | ||||
Chief Executive Offer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on
September 13, 2005.
Signatures
|
Title | |||
By:
|
/s/ Christopher Naughton | President, Chief Executive Officer and Director | ||
Christopher Naughton | ||||
By:
|
/s/ David Seaton | Secretary, Chief Financial Officer | ||
David Seaton | ||||
By:
|
/s/ Graham Kelly | Director | ||
Graham Kelly | ||||
By:
|
/s/ Stephen Breckenridge | Director | ||
Stephen Breckenridge | ||||
By:
|
/s/ David de Kretser | Director | ||
David de Kretser | ||||
By:
|
/s/ Paul Nestel | Director | ||
Paul Nestel | ||||
By:
|
/s/ Philip Johnston | Director | ||
Philip Johnston |
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