Oncotelic Therapeutics, Inc. - Annual Report: 2009 (Form 10-K)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission file number: 0-21990

 

 

 

 

OXiGENE, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Registrant’s telephone number, including area code: (650) 635-7000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  o

 

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

 

 

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

 

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold, as of June 30, 2009 was $59,019,000.

 

As of March 8, 2010, the aggregate number of outstanding shares of common stock of the registrant was 62,948,000.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the registrant’s definitive Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.

 

 

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995

 

Except for historical information contained herein, this Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks and uncertainties that may cause the Company’s actual results or outcomes to be materially different from those anticipated and discussed herein. Important factors that the Company believes may cause such differences are discussed in the “Risk Factors” section of this Annual Report and in the cautionary statements accompanying the forward-looking statements in this Annual Report. In assessing forward-looking statements contained herein, readers are urged to read carefully all Risk Factors and cautionary statements contained in this Annual Report. Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by regulatory and other factors beyond the Company’s control.

 

TABLE OF CONTENTS

 

 

 

OXiGENE is a clinical-stage, biopharmaceutical company developing novel therapeutics to treat cancer and eye diseases. OXiGENE’s primary focus is the development of product candidates referred to as vascular disrupting agents, or VDAs, that selectively disable and destroy abnormal blood vessels that provide solid tumors a means of growth and survival and also are associated with visual impairment in a number of ophthalmological diseases and conditions. To date, more than 400 subjects have been treated with ZYBRESTAT, our lead candidate, in human clinical trials, and the drug candidate has generally been observed to be well-tolerated. The mailing address of OXiGENE’s principal executive offices is 701 Gateway Boulevard, Suite 210, South San Francisco, California 94080 and the telephone number is (650) 635-7000.

 

ZYBRESTAT for Oncology

 

FALCON (fosbretabulin in advanced lung oncology) trial — randomized, controlled Phase II study with ZYBRESTAT in non-small cell lung cancer

 

OXiGENE is currently evaluating ZYBRESTAT in a 60-patient, randomized, controlled Phase II clinical trial, which we refer to as the FALCON trial, as a potential first-line treatment for non-small cell lung cancer, or NSCLC. In the FALCON trial, patients are randomized either to the treatment arm of study, in which they receive ZYBRESTAT in combination with the chemotherapeutic agents, carboplatin and paclitaxel, and the anti-angiogenic drug, bevacizumab, or to the control arm of the study, in which they receive a standard combination regimen of carboplatin, paclitaxel and bevacizumab. The Company believes this study, if successful, will provide support for initiating discussions with the U.S. Food and Drug Administration or FDA for a pivotal registration program with ZYBRESTAT in NSCLC; and more generally, provide clinical validation supporting further evaluation of ZYBRESTAT in combination with commonly used anti-angiogenic therapeutics that act via vascular endothelial growth factor, or VEGF, pathway inhibition.

 

On November 17, 2009, OXiGENE reported interim safety data from the FALCON study for the first 30 patients treated in this study. The data from this planned interim safety analysis indicated that the combination of ZYBRESTAT with carboplatin and paclitaxel plus bevacizumab appeared to be well-tolerated, and that there were no significant overlapping toxicities with bevacizumab. Five of the six patient deaths due to disease progression during the evaluation period occurred in the control arm of the study. The data were presented in a poster by a principal investigator for the Phase 2 trial at the 2009 AACR-NCI-EORTC Molecular Targets and Cancer Therapeutics conference. A further analysis of the efficacy and tolerability of this combination is expected to be presented at the 2010 annual meeting of the American Society of Clinical Oncology, or ASCO, scheduled for June 4-8, 2010 in Chicago, Illinois.

 

FACT (fosbretabulin in anaplastic cancer of the thyroid) trial — Phase 2/3 study with ZYBRESTAT in anaplastic thyroid cancer (ATC)

 

In 2007, OXiGENE initiated a study in which ZYBRESTAT would be evaluated in a 180-patient, Phase 2/3 study, which we refers to as the FACT trial, as a potential treatment for anaplastic thyroid cancer, or ATC, a highly aggressive and lethal malignancy for which there are currently no approved therapeutics and extremely limited treatment options. The primary endpoint for the FACT trial is overall survival. In the FACT trial, patients were randomized either to the treatment arm of the study, in which they receive ZYBRESTAT in combination with the chemotherapeutic agents carboplatin and paclitaxel, or to the control arm of the study, in which they receive only carboplatin and paclitaxel.

 

In February 2010, due to financial considerations, the Company decided to stop further enrollment in the Phase 2/3 FACT clinical trial in ATC, but will continue to treat and follow all patients who are currently enrolled. An event-driven survival analysis is anticipated in late 2010 or in early 2011.

The FDA granted Fast Track designation to ZYBRESTAT for the treatment of regionally advanced and/or metastatic ATC. ZYBRESTAT was awarded orphan drug status by the FDA and the European Commission in the European Union for the treatment of advanced ATC and for the treatment of medullary, Stage IV papillary and Stage IV follicular thyroid cancers. These designations would not be affected by the halted enrollment in the Phase2/3 study.

 

In 2007, OXiGENE completed a Special Protocol Assessment, or SPA, process with the FDA, for this Phase 2/3 study. The FDA has been informed that enrollment in this study was halted and that the company expected that the SPA would no longer be applicable. Any utility of the truncated Phase 2/3 study for regulatory purposes would have to be negotiated with FDA once study outcomes, and in particular overall survival data, are available.

 

Phase II trial with ZYBRESTAT in platinum-resistant ovarian cancer

 

On June 1, 2009, results from a Phase II trial with ZYBRESTAT in combination with the chemotherapeutic agents, carboplatin and paclitaxel, in recurrent, platinum-resistant ovarian cancer, were presented at ASCO. OXiGENE believes the results of this study support further development of ZYBRESTAT in ovarian cancer and is considering options for undertaking further randomized, controlled studies in ovarian cancer, including a study or studies which may potentially be undertaken in collaboration with an oncology cooperative study group and support by the Cancer Therapy Evaluation Program (“CTEP”) of the National Cancer Institute.

 

OXiGENE believes that, if successful, the ongoing ZYBRESTAT study program will establish a compelling rationale for further development of ZYBRESTAT as a treatment for:

 

 

OXiGENE believes these areas for potential further development collectively represent a significant unmet medical need and thus a significant potential commercial market opportunity that includes cancers of the thyroid, ovary, kidney, liver, head and neck, breast, lung, skin, brain, colon and rectum.

 

In addition, based upon preclinical results first published by our collaborators in the November 2007 online issue of the journal BLOOD, as well as preclinical data presented in April 2009 at the annual meeting of the American Association of Cancer Research (AACR), the Company believes that ZYBRESTAT and its other VDA product candidates, particularly OXi4503, may also have utility in the treatment of hematological malignancies or “liquid tumors,” such as acute leukemias and lymphomas.

 

OXi4503, a unique, second generation VDA for oncology indications

 

OXiGENE is currently pursuing development of OXi4503, a second-generation, dual-mechanism VDA, as a treatment for certain solid tumor types. OXiGENE believes that OXi4503 is differentiated from other VDAs by its dual-action activity. The Company’s data indicates that in addition to having potent vascular disrupting effects, OXi4503 is unique in that it can be metabolized by oxidative enzymes to an orthoquinone chemical species that has direct tumor cell killing effects. OXiGENE believes this unique property may result in enhanced anti-tumor activity in certain tumor types as compared with other VDA drug candidates. Based on data from preclinical studies, OXiGENE believes that OXi4503 may have enhanced activity in tumor types with relatively high levels of oxidative enzymes that can facilitate the metabolism of the active OXi4503 VDA to kill tumor cells. These tumor types include hepatocellular carcinoma, melanoma, and myeloid leukemia. In preclinical studies, OXi4503 has shown potent anti-tumor activity against solid tumors and acute myeloid leukemia models, both as a single agent and in combination with other cancer treatment modalities.

 

OXiGENE has completed a Phase I clinical trial in patients with advanced solid tumors sponsored by Clinical Research United Kingdom; and is currently evaluating OXi4503 in an ongoing clinical trial in an

OXiGENE-sponsored Phase Ib trial, initiated in the first quarter of 2009 in patients with solid tumors with hepatic involvement. The Company intends to conduct an interim analysis of the latter trial in mid-2010, and future developments thereafter will depend on the outcome of this interim analysis. To date, OXi4503 has been observed to have a manageable side-effect profile similar to that of other agents in the VDA class, potential single-agent clinical activity, and effects on tumor blood flow and tumor metabolic activity, as determined with several imaging modalities. In December 2009 we filed a U.S. IND for OXi4503. The Company anticipates initiating an additional Phase I study of OXi4503 in a leukemic indication during 2010, subject to available resources.

 

ZYBRESTAT for Ophthalmology

 

In addition to developing ZYBRESTAT as an intravenously administered therapy for oncology indications, OXiGENE is undertaking an ophthalmology research and development program with ZYBRESTAT, the objective of which is to develop a topical formulation of ZYBRESTAT for ophthalmological diseases and conditions that are characterized by abnormal blood vessel growth within the eye that results in loss of vision. OXiGENE believes that a safe, effective and convenient topically-administered anti-vascular therapeutic would have advantages over currently approved anti-vascular, ophthalmological therapeutics, which must be injected directly into patients’ eyes, in some cases on a chronic monthly basis.

 

In June 2009, OXiGENE initiated a randomized, double-masked, placebo-controlled Phase II proof-of-mechanism trial, which the Company refers to as the FAVOR trial, with intravenously-administered ZYBRESTAT in patients with polypoidal choroidal vasculopathy (PCV), a form of choroidal neovascularization against which current therapies, including approved anti-angiogenic drugs, appear to provide limited benefit. The main clinical indication in this disease is a form of polyps formed in the retina of patients which are made up of vessels that have properties very similar to tumor vasculature. The effect of ZYBRESTAT on the polyps is being visualized and documented as part of the study. In parallel with the FAVOR trial, OXiGENE is currently conducting preclinical toxicology and efficacy studies with ZYBRESTAT, administered via topical ophthalmological formulations. The Company expects to conduct an interim analysis of the FAVOR study in the first half of 2010. Further development of this program will depend on the outcome of the interim analysis and review by experts in the field as well as OXiGENE’s management.

 

OXiGENE believes the architecture of the abnormal vasculature in the retina and choroid that contributes to PCV patients’ loss of vision may be particularly susceptible to treatment with a VDA such as ZYBRESTAT. OXiGENE believes that PCV represents an attractive target indication and development pathway for ZYBRESTAT. Unlike wet age-related macular degeneration, an indication for which several anti-angiogenic drugs are approved or prescribed off-label, conducting clinical studies of ZYBRESTAT in patients with ophthalmologic indications not yet approved for treatment with such anti-angiogenic drugs could potentially prove to reduce development time and expense. The objectives of the FAVOR trial and the ongoing preclinical program are to:

 

 

To date, OXiGENE has completed preclinical experiments demonstrating that ZYBRESTAT has activity in six different preclinical ophthalmology models, including a model in which ZYBRESTAT was combined with an approved anti-angiogenic drug. OXiGENE has also completed multiple preclinical studies suggesting that ZYBRESTAT, when applied topically to the surface of the eye at doses that appear to be well-tolerated, penetrates to the retina and choroid in quantities that we believe should be more than sufficient for therapeutic activity. Finally, OXiGENE has completed and reported results at the 2007 annual meeting of the Association

for Research in Vision and Ophthalmology, or ARVO, from a Phase II study in patients with myopic macular degeneration in which all patients in the study met the primary clinical endpoint of vision stabilization at three months after study entry.

 

Based on results of its preclinical trials, OXiGENE believes that a topically-applied formulation of ZYBRESTAT (e.g., an eye-drop or other topical formulation) is feasible and may have clinical utility in the treatment of patients with a variety of ophthalmological diseases and conditions, such as PCV, age-related macular degeneration, diabetic retinopathy and neovascular glaucoma, all of which are characterized by abnormal blood vessel growth and associated loss of vision. In addition to having potential utility for treating ocular diseases and conditions that affect tissues in the back of the eye, OXiGENE believes that a topical ophthalmological formulation of ZYBRESTAT could also have utility for the treatment of other ocular diseases and conditions characterized by abnormal neovascularization that affect tissues in the front of the eye, such as the cornea and iris.

 

Although several anti-angiogenic therapeutics have been approved and are marketed for ophthalmological indications in which patients are experiencing active disease, the requirement that these therapeutics be injected directly into the eye on a repeated basis is a significant limitation for some patients and may result in serious side-effects. OXiGENE believes that a topical formulation of ZYBRESTAT may:

 

 

OXiGENE’s Development Programs and Product Candidates

 

The following table outlines the ongoing, recently completed and planned clinical development programs for OXiGENE’s current product candidates:

 

ZYBRESTAT for Oncology

 

OXi4503 for Oncology

 

 

ZYBRESTAT for Ophthalmology

 

 

Collaborations and Recent Developments

 

Symphony Transaction

 

In October 2008, OXiGENE announced a strategic collaboration with Symphony Capital Partners, L.P. (Symphony), a private-equity firm, under which Symphony agreed to provide up to $40 million in funding to support the advancement of ZYBRESTAT for oncology, ZYBRESTAT for ophthalmology and OXi4503. In connection with the collaboration, OXiGENE granted Symphony ViDA, Inc., a newly-created drug development company, exclusive licenses to ZYBRESTAT for use in ophthalmologic indications and OXi4503. As part of this transaction, OXiGENE maintained the exclusive purchase option, but not the obligation, to purchase all of the equity of Symphony ViDA (Purchase Option) at any time between October 2, 2009 and March 31, 2012 for an amount equal to two times the amount of capital actually invested by Holdings in Symphony ViDA, less certain amounts.

 

Under the collaboration, OXiGENE entered into a series of related agreements with Symphony Capital LLC, Symphony ViDA, Symphony ViDA Holdings LLC (Holdings) and related entities, including a Purchase Option Agreement, a Research and Development Agreement, a Technology License Agreement and an Additional Funding Agreement. In addition, OXiGENE entered into a series of related agreements with Holdings, including a Stock and Warrant Purchase Agreement and a Registration Rights Agreement.

 

Pursuant to these agreements, Holdings formed and capitalized Symphony ViDA in order (a) to hold certain intellectual property related to the programs which were exclusively licensed to Symphony ViDA under the Technology License Agreement and (b) to fund commitments of up to $25 million. The funding was intended to support preclinical and clinical development by OXiGENE, on behalf of Symphony ViDA, of the programs.

 

OXiGENE issued to Holdings, pursuant to the Stock and Warrant Purchase Agreement, an aggregate of 13,513,514 shares of its common stock and warrants at a price of $1.11 per share, which was the closing price of its common stock on the NASDAQ Global Market on September 30, 2008, the day before OXiGENE entered into the Symphony transaction. In addition, pursuant to the Purchase Option Agreement, OXiGENE issued to Holdings an aggregate of 3,603,604 shares of OXiGENE’s common stock with a fair value of $4 million as consideration for the Purchase Option.

 

On July 2, 2009, OXiGENE, Holdings and Symphony ViDA entered into a series of related agreements pursuant to which OXiGENE exercised the Purchase Option under terms set forth in an amended and restated purchase option agreement (the Amended Purchase Option Agreement), and OXiGENE and Holdings also entered into an amended and restated registration rights agreement.

OXiGENE closed on the amended Purchase Option on July 20, 2009 and issued 10 million shares of its common stock to Holdings at the closing in exchange for all of the equity of Symphony ViDA, subject to further adjustment under the rights described in the paragraph above. In addition, upon the closing of the Purchase Option, OXiGENE re-acquired all of the rights to the programs, and the approximately $12,400,000 in cash held by Symphony ViDA at the time of the closing became available for use for OXiGENE’s general corporate purposes.

 

The two members of OXiGENE’s Board of Directors appointed by Symphony Capital LLC, Mr. Mark Kessel and Dr. Alastair Wood, remain on the Board, and OXiGENE maintains its advisory relationships with Symphony and RRD International LLC. The Additional Funding Agreement, dated October 1, 2008, has been terminated.

 

Merger Agreement with VaxGen, Inc.

 

On February 4, 2010, the Company announced that at the special meeting of stockholders of OXiGENE held on February 3, 2010, the issuance of shares of its common stock pursuant to the merger agreement with VaxGen, Inc. previously announced by OXiGENE on October 14, 2009, and all other proposals were adopted. At the special meeting of stockholders of VaxGen, however, also held on February 3, 2010, the necessary majority of the outstanding shares of VaxGen common stock did not vote in favor of adoption of the proposed merger agreement with OXiGENE. The proposed merger between OXiGENE and VaxGen will, therefore, not take place. As previously announced, OXiGENE notified VaxGen of the termination of the merger agreement on February 12, 2010.

 

Company Background

 

OXiGENE is a corporation incorporated in 1988 in the State of New York and reincorporated in 1992 in the State of Delaware, with its principal corporate office in the United States at 701 Gateway Boulevard, Suite 210, South San Francisco, California 94080 (telephone: (650) 635-7000, fax: (650) 635-7001). OXiGENE also has an office in the United Kingdom at Magdalen Centre, Robert Robinson Avenue, The Oxford Science Park, Oxford, OX4 4GA, as well as at 300 Bear Hill Road, Waltham, Massachusetts 02451. OXiGENE’s Internet address is www.OXiGENE.com. OXiGENE’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through the “Investors” section of its website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the Securities and Exchange Commission. Information contained on OXiGENE’s website does not form a part of this Annual Report.

 

VASCULAR DISRUPTING AGENTS: ANTI-VASCULAR THERAPEUTICS THAT ADDRESS A LARGE POTENTIAL MARKET OPPORTUNITY

 

According to Cancer Research UK, a cancer organization in the United Kingdom, nearly 90% of all cancers, more than 200 types, are solid tumors, which are dependent upon a continually developing vascular supply for their growth and survival. Similarly, in the ophthalmology field, abnormal neovascularization characterizes a variety of ophthalmological diseases and conditions, including corneal neovascularization, central retinal vein occlusion, proliferative diabetic retinopathy, retinopathy of prematurity, sickle cell retinopathy, myopic macular degeneration (MMD), age-related macular degeneration (AMD), and neovascular glaucoma.

 

Since 2004, multiple anti-angiogenic drugs (see table below) have been approved for a variety of cancer and ophthalmology indications, and development of approved anti-angiogenic drugs for new indications continues. Physician adoption of these first-generation anti-vascular drugs has been rapid and continues to accelerate.

 

OXiGENE believes that its VDA drug candidates are second-generation anti-vascular drugs that differ from and are complementary and non-competitive with anti-angiogenic agents. Similar to anti-angiogenic agents, OXiGENE’s VDA drug candidates are anti-vascular drugs that exert therapeutic effects by depriving tumors — and in the case of eye disease, ocular lesions — of blood supply. OXiGENE also believes that its

VDA therapeutics may be better tolerated than anti-angiogenic drugs and may potentially have utility in later-stage tumors that have become unresponsive to anti-angiogenic therapies.

 

In September 2006, OXiGENE announced the publication of a research article in the journal Science that provided strong scientific evidence for combining VDAs with anti-angiogenic agents such as bevacizumab, a widely-used anti-angiogenic drug that acts by inhibiting VEGF, a pro-angiogenic growth factor. In this article Professor Kerbel and Dr. Shaked from Sunnybrook Cancer Centre in Canada demonstrated that the combination of ZYBRESTAT and an anti-angiogenic agent (an anti-VEGF-receptor antibody) had synergistic effects on tumors.

 

In December 2007, OXiGENE completed a Phase Ib clinical trial to evaluate ZYBRESTAT in combination bevacizumab (an approved and widely-used anti-VEGF monoclonal antibody) in patients with advanced solid tumors. This was the first human clinical trial to pair a vascular disrupting agent and an anti-angiogenic drug in the treatment of cancer, specifically in patients who had failed previous treatments and were in advanced stages of disease. The trial was an open-label, multi-center trial designed to determine the safety and tolerability of ascending doses of ZYBRESTAT administered intravenously in combination with bevacizumab. Three dose levels of ZYBRESTAT were evaluated in combination with an approved dose of bevacizumab. In May of 2008, OXiGENE reported final data from the trial showing that the two-drug combination appeared to be well-tolerated with early signs of clinical efficacy (9 of 16 patients with stable disease responses with prolonged stable disease observed in several patients) and additive effects on tumor blood-flow inhibition.

 

OXiGENE believes that these pre-clinical and clinical research results suggest combining VDA and anti-angiogenic therapies may be a compelling strategy to maximize the therapeutic potential of VDAs and anti-angiogenic drugs in the treatment of solid tumors. OXiGENE believes the potential ability to synergistically combine VDA drugs with anti-angiogenic therapeutics affords it a wide range of future development and commercialization options with its VDA drug candidates, including tumor types and treatment settings where anti-angiogenic drugs are commonly utilized, as well as those where anti-angiogenic agents are either poorly tolerated, ineffective, no longer effective, or not commonly utilized.

As illustrated in the table below, VDA and anti-angiogenic drugs act via different mechanisms to produce complementary biological and anti-vascular effects with mostly non-overlapping side effects. In pre-clinical studies, VDA plus anti-angiogenic drug combinations demonstrate robust and additive anti-tumor effects. Results from initial human clinical studies conducted by OXiGENE with combinations of ZYBRESTAT and the widely-used anti-angiogenic drug, bevacizumab, provide support and initial clinical validation for combining these agents to significantly increase clinical activity without significantly increasing side-effects.

 

 

OXiGENE believes its VDA drug candidates act on tumor blood vessels via two complementary mechanisms, tubulin depolymerization and disengagement of the junctional protein VE-cadherin, so as to cause shape change of tumor vascular endothelial cells, vessel occlusion and collapse, and the subsequent blockage of blood-flow to the tumor, which deprives it of oxygen and nutrients essential for survival.

 

In vitro studies have demonstrated that its VDA drug candidates act in a reversible fashion on a protein called tubulin inside newly-formed and growing endothelial cells, such as the vascular endothelial cells

comprising tumor vasculature. By binding to the tubulin, ZYBRESTAT is able to collapse the structural framework that maintains the cells’ flat shape. When this occurs, the shape of the cells changes from flat to round, initiating a cascade of events resulting in physical blockage of the blood vessels. The resulting shutdown in blood-flow then deprives tumor cells of the oxygen and nutrients necessary for maintenance and growth and also prevents tumor cells from being able to excrete toxic metabolic waste products. The consequence of the blockage is extensive tumor cell death, as demonstrated in animal studies and suggested in imaging studies of human patients treated with ZYBRESTAT and OXi4503.

 

Pre-clinical research, published in the November 2005 issue of the Journal of Clinical Investigation, showed that ZYBRESTAT also disrupts the molecular engagement of VE-cadherin, a junctional protein important for endothelial cell survival and function. The authors of the research article conclude that this effect only occurs in endothelial cells which lack contact with smooth muscle cells, a known feature of abnormal vasculature associated with tumors and other disease processes. The disengagement of VE-cadherin leads to endothelial cell detachment, which in turn, can cause permanent physical blockage of vessels.

 

Pre-clinical and clinical study results indicate that ZYBRESTAT exerts anti-vascular effects rapidly, within hours of administration, and the half-life of the active form of ZYBRESTAT in humans is approximately four hours. Because the half-life of the active form of ZYBRESTAT is relatively short, the effects of ZYBRESTAT on tubulin are reversible, and ZYBRESTAT is typically administered no more frequently than once per week, the side-effects of ZYBRESTAT are typically transient in nature, limited to the period of time following administration when the active form of ZYBRESTAT is in the body in significant concentrations. This contrasts with anti-angiogenic agents, which are typically administered on a chronic basis so as to constantly maintain levels of drug in the body, exert their tumor blood-vessel growth inhibiting effects over days to weeks, and as a result can cause a variety of chronic side-effects that are not limited to the immediate period following administration.

 

In contrast with anti-angiogenic agents, which can cause a variety of chronic side-effects, side-effects associated with ZYBRESTAT are typically transient and manageable. The most frequent ZYBRESTAT side-effects include infusion-related side effects such as nausea, vomiting, headache and fatigue, and tumor pain, which is consistent with the drug’s mechanism-of-action. Like approved anti-angiogenic drugs, ZYBRESTAT also exhibits cardiovascular effects, which in the majority of patients are mild and transient and transient in nature. Approximately 10-20% of patients treated with ZYBRESTAT experience clinically-significant and transient hypertension that can be readily managed and prevented after initial occurrence with straightforward oral anti-hypertensive therapy. In an analysis undertaken by OXiGENE, the incidence of serious cardiovascular side-effects such as angina and myocardial ischemia observed across all studies to date (including early studies in which hypertension management and prevention was not employed) was less than 3%, a frequency comparable to that reported with approved anti-angiogenic agents such as bevacizumab, sunitinib and sorafenib.

 

  Preclinical Discovery Research

 

Under a sponsored research agreement with Baylor University, OXiGENE is pursuing discovery and development of additional novel, small-molecule therapeutics for the treatment of cancer, including small-molecule cathepsin-L inhibitors and hypoxia-activated VDAs. Cathepsin-L is an enzyme involved in protein degradation and has been shown to be closely involved in the processes of angiogenesis and metastasis. Small molecule inhibitors may have the potential to slow tumor growth and metastasis in a manner OXiGENE believes could be complementary with its VDA therapeutics. OXiGENE also believes that its hypoxia-activated VDAs could serve as line-extension products to ZYBRESTAT and/or OXi4503.

 

OXiGENE’s strategy is to develop innovative therapeutics for oncology and to leverage its drug candidates and technology in the field of ophthalmology. The principal focus of OXiGENE, in the foreseeable future, is to advance the clinical development of its drug candidates ZYBRESTAT and OXi4503 and to identify new pre-clinical candidates that are complementary to our VDAs. To advance its strategy, OXiGENE has established relationships with universities, research organizations and other institutions in these fields.

OXiGENE intends to broaden these relationships, rather than expand its in-house research and development staff. In general, these programs are created, developed and controlled by internal OXiGENE management. Currently, OXiGENE has collaborative agreements and arrangements with a number of institutions in the United States and abroad, which it utilizes to perform the day-to-day activities associated with drug development. In 2009, collaborations were ongoing with a variety of university and research institutions, including the following:

 

 

OXiGENE has secured a technology license from Arizona State University (ASU). The ASU license is an exclusive, world-wide, royalty-bearing license with respect to the commercial rights to particular Combretastatins. Under the ASU license, OXiGENE has the right to grant sublicenses. ASU is entitled to royalty and milestone payments under the license agreement. OXiGENE bears the costs of preparing, filing, prosecuting and maintaining all patent applications under the ASU license. Under the license agreement, OXiGENE has agreed to diligently proceed with the development, manufacture and sale of products using the licensed technology. ASU has the first responsibility of enforcing patents under the license agreement. Either party may terminate the license agreement upon material default or bankruptcy of the other party. Payments made to ASU to date have amounted to $2,500,000. The agreement is to terminate on December 31, 2014 or within two months of receipt of written notice of termination from OXiGENE.

 

OXiGENE also has a license from Baylor University. The Baylor license is an exclusive license to all novel compositions developed for the treatment of vascular disorders, inflammation, parasitic diseases and infections, fungal diseases and infections and/or cancer. OXiGENE has the right to grant sublicenses under the Baylor license. The agreement with Baylor stipulates that royalties will be paid by OXiGENE should sales be generated through use of Baylor’s compounds. OXiGENE is not required to pay Baylor for use of Baylor’s compounds aside from this royalty arrangement. OXiGENE is entitled to file, prosecute and maintain patent applications on products for which it has a license. OXiGENE had made a one-time payment of $50,000 for the licensing fee that was used as a credit against research expenses generated by Baylor.

 

Government Regulation and Product Approval

 

Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing and export and import of products such as those we are developing. Our drugs must be approved by FDA through the new drug application, or NDA, process before they may be legally marketed in the United States.

 

U.S. Drug Development Process

 

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable United States requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusal of government contracts, restitution, disgorgement, or civil or criminal penalties. Any agency or judicial enforcement action could have

a material adverse effect on us. The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

 

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

 

Once a pharmaceutical candidate is identified for development it enters the pre-clinical testing stage. Pre-clinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the pre-clinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. The sponsor will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the first phase lends itself to an efficacy evaluation. Pre-clinical testing continues even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during studies due to safety concerns or non-compliance.

 

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with Good Clinical Practice regulations. These regulations include the requirement that all research subjects provide informed consent. Further, an institutional review board, or IRB, must review and approve the plan for any clinical trial before it commences at any institution. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the information regarding the trial and the consent form that must be provided to each trial subject or his or her legal representative and must monitor the study until completed.

 

Each new clinical protocol must be submitted to the IND for FDA review, and to the IRBs for approval. Protocols detail, among other things, the objectives of the study, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety.

 

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

 

 

During the development of a new drug, sponsors may, under certain circumstances request a special protocol assessment, or SPA, from the FDA. For example, a sponsor may request an SPA of a protocol for a clinical trial that will form the primary basis of an efficacy claim in an NDA. The request, which must be made prior to commencing the trial, must include the proposed protocol and protocol-specific questions that the sponsor would like the FDA to answer regarding the protocol design, study goals and data analysis for the proposed investigation. After receiving the request, the FDA will consider whether the submission is appropriate for an SPA. If an SPA is appropriate, the FDA will base its assessment on the questions posed by the sponsor. Comments from the FDA review team are supposed to be sent to the sponsor within 45 calendar days of receipt of the request. The sponsor may request a meeting to discuss the comments and any remaining issues and uncertainties regarding the protocol. If the sponsor and the FDA reach agreement regarding the protocol, the agreement will be documented and made part of the administrative record. This agreement may not be changed by the sponsor or the FDA after the trial begins, except (1) with the written agreement of the sponsor and the FDA or (2) if the FDA determines that a substantial scientific issue essential to determining the safety or effectiveness of the drug was identified after the testing began.

 

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA. IND Safety Reports must be submitted to the FDA, IRBs and the investigators for any adverse experience associated with the use of the drug that is both serious and unexpected and any finding from tests in animals that suggests a significant risk to human subjects. Phase I, Phase II, and Phase III testing may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

 

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

 

U.S. Review and Approval Processes

 

The results of product development, pre-clinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling, and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of user fees; a waiver of such fees may be obtained under certain limited circumstances.

 

In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration 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. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.

 

The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept an NDA for

filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The approval process is lengthy and difficult and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data and information. Even if such data and information are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The FDA may issue a complete response letter, which may require additional clinical or other data or impose other conditions that must be met in order to secure final approval of the NDA. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant to assure and preserve the product’s identity, strength, quality and purity. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will also inspect selected clinical sites that participated in the clinical studies and may inspect the testing facilities that performed the GLP toxicology studies cited in the NDA.

 

NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. In addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval and may be approved on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. Priority review and accelerated approval do not change the standards for approval, but may expedite the approval process.

 

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. In addition, the FDA may require us to conduct Phase IV testing, which involves clinical trials designed to further assess a drug’s safety and effectiveness after NDA approval, and may require testing and surveillance programs to monitor the safety of approved products which have been commercialized.

 

Patent Term Restoration and Marketing Exclusivity

 

Depending upon the timing, duration and specifics of FDA approval of the use of our drugs, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the extension must be applied for prior to expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the filing of the relevant NDA. Provisions similar to those in the U.S. for patent term restoration are available in the European Union, Japan and other countries and regions. For example, in the European Union, a Supplemental Protection Certificate may be utilized to extend patent life of a drug product for up to a maximum of five years.

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity (NCE) if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDAs, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the pre-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

 

With respect to territories outside the U.S., under Article 39.3 of the World Trade Organization’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), member countries are obliged to protect against unfair commercial use of confidential data on NCEs submitted by companies to obtain approval for marketing new drugs from a regulatory agency.

 

Statutory NCE exclusivity provisions in other territories provide for marketing exclusivity as outlined in the following table:

 

 

Pediatric exclusivity is another type of exclusivity in the United States and the European Union. In the U.S., pediatric exclusivity, if granted, provides an additional six months to an existing exclusivity or statutory delay in approval resulting from a patent certification. This six-month exclusivity, which runs from the end of other exclusivity protection or patent delay, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study. The current pediatric exclusivity provision was reauthorized on September 27, 2007.

 

Orphan Drug Designation

 

Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

 

If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the

FDA may not approve any other applications to market the same drug for the same indication, except in very limited circumstances, for seven years. Orphan drug exclusivity, however, also could block the approval of one of our products for seven years if a competitor obtains approval of the same drug as defined by the FDA or if our product candidate is determined to be contained within the competitor’s product for the same indication or disease.

 

The FDA also administers a clinical research grants program, whereby researchers may compete for funding to conduct clinical trials to support the approval of drugs, biologics, medical devices, and medical foods for rare diseases and conditions. A product does not have to be designated as an orphan drug to be eligible for the grant program. An application for an orphan grant should propose one discrete clinical study to facilitate FDA approval of the product for a rare disease or condition. The study may address an unapproved new product or an unapproved new use for a product already on the market.

 

In the European Union and Japan, orphan drug exclusivity regulations provide for 10 years of marketing exclusivity for orphan drugs that are approved for the treatment of rare diseases or conditions.

 

ZYBRESTAT was awarded orphan drug status by the FDA and the European Commission in the European Union for the treatment of advanced ATC and for the treatment of medullary, Stage IV papillary and Stage IV follicular thyroid cancers.

 

Expedited Review and Approval

 

The FDA has various programs, including Fast Track, priority review, and accelerated approval, that are intended to expedite or simplify the process for reviewing drugs, and/or provide for approval on the basis of surrogate endpoints. Even if a drug qualifies for one or more of these programs, we cannot be sure that the FDA will not later decide that the drug no longer meets the conditions for qualification or that the time period for FDA review or approval will be shortened. Generally, drugs that may be eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that offer meaningful benefits over existing treatments. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated drug and expedite review of the application for a drug designated for priority review. Drugs that receive an accelerated approval may be approved on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect of a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform post-marketing clinical trials.

 

The FDA has granted Fast Track designation to ZYBRESTAT for the treatment of regionally advanced and/or metastatic ATC.

 

Post-Approval Requirements

 

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Later 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 approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct.

Any drug products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the drug, providing the FDA with updated safety and efficacy information, drug sampling and distribution requirements, complying with certain electronic records and signature requirements, and complying with FDA promotion and advertising requirements. FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label.

 

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. For example, on September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-market authority, including the authority to require postmarket studies and clinical trials, labeling changes based on new safety information, and compliance with a risk evaluation and mitigation strategy approved by the FDA. Failure to comply with any requirements under the new law may result in significant penalties. The new law also authorizes significant civil money penalties for the dissemination of false or misleading direct-to-consumer advertisements, and allows the FDA to require companies to submit direct-to-consumer television drug advertisements for FDA review prior to public dissemination. Additionally, the new law expands the clinical trial registry so that sponsors of all clinical trials, except for phase I trials, are required to submit certain clinical trial information for inclusion in the clinical trial registry data bank. In addition, to new legislation, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be.

 

Foreign Regulation

 

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

 

Under European Union regulatory systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure is compulsory for medicines produced by certain biotechnological processes such as genetic engineering, new chemical entities intended for the treatment of HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions, or officially designated “orphan medicines’ and optional for those which are highly innovative. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states (Member States), as well as in the EEA/EFTA states Iceland, Liechtenstein and Norway. For drugs without approval in any Member State and that do not fall within the mandatory scope of the centralized procedure, the decentralized procedure provides for simultaneous approval by one or more other, or concerned, Member States of an assessment of an application performed by one Member State, known as the reference Member State. Under this procedure, an applicant submits an application, or dossier, and related materials (draft summary of product characteristics, draft labeling and package leaflet) to the reference Member State and concerned Member States. The reference Member State prepares a draft assessment report and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference Member State’s assessment report, each concerned Member State must decide whether to approve the assessment report and related materials. If a Member State cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all Member States.

As in the U.S., the European Union may grant orphan drug status for specific indications if the request is made before an application for marketing authorization is made. The European Union considers an orphan medicinal product to be one that affects less than five of every 10,000 people in the European Union. A company whose application for orphan drug designation in the European Union is approved is eligible to receive, among other benefits, regulatory assistance in preparing the marketing application, protocol assistance, access to the Centralized Procedure and reduced application fees. Orphan drugs in the European Union also enjoy economic and marketing benefits, including up to ten years of market exclusivity for the approved indication, unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan designated product. In the European Union and Japan, orphan drug exclusivity regulations provide for 10 years of marketing exclusivity for orphan drugs approved for the treatment of rare diseases or conditions.

 

Reimbursement

 

Sales of pharmaceutical products depend in significant part on the availability of third-party reimbursement. Third-party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. We anticipate third-party payers will provide reimbursement for our products. However, these third-party payers are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. Our product candidates may not be considered cost-effective. It is time consuming and expensive for us to seek reimbursement from third-party payers. Reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.

 

In late 2009, the House of Representatives and the Senate passed health reform bills that, if enacted into law, could, among other things, require most individuals to have health insurance, establish new regulations on health plans, create insurance pooling mechanisms and a government health insurance option to compete with private plans and other expanded public health care measures. Other healthcare reform proposals have also emerged at the state level. We cannot predict what healthcare initiatives, if any, will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. However, an expansion in government’s role in the U.S. healthcare industry may lower reimbursements for our product candidates, reduce medical procedure volumes and adversely affect our business. The ultimate content or timing of any future healthcare reform legislation, and its impact on us, is impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may have an adverse effect on our business, financial condition and results of operations.

 

The passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, imposes new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries, and includes a major expansion of the prescription drug benefit under Medicare Part D. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee.

 

It is not clear what effect the MMA will have on the prices paid for currently approved drugs and the pricing options for new drugs. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payers

often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payers.

 

OXiGENE expects that there will continue to be a number of federal and state proposals to implement governmental pricing controls and limit the growth of healthcare costs, including the cost of prescription drugs. At the present time, Medicare is prohibited from negotiating directly with pharmaceutical companies for drugs. However, Congress is currently considering passing legislation that would lift the ban on federal negotiations. While OXiGENE cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on its business, financial condition and profitability.

 

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A Member State may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products.

 

OXiGENE is able to protect its technology from unauthorized use by third parties only to the extent that it is covered by valid and enforceable patents or is effectively maintained as a trade secret. Accordingly, patents or other proprietary rights are an essential element of our business. As of January 31, 2010, OXiGENE was the exclusive licensee, sole assignee or co-assignee of thirty (30) granted United States patents, twenty-six (26) pending United States patent applications, and granted patents and/or pending applications in several other major markets, including the European Union, Canada and Japan. OXiGENE’s policy is to file United States and foreign patent applications to protect technology, inventions and improvements to inventions that are commercially important to the development of its business. There can be no assurance that any of these patent applications will result in the grant of a patent either in the United States or elsewhere, or that any patents granted will be valid and enforceable, or will provide a competitive advantage or will afford protection against competitors with similar technologies. OXiGENE also intends to rely upon trade secret rights to protect other technologies that may be used to discover and validate targets and that may be used to identify and develop novel drugs. OXiGENE seeks protection, in part, through confidentiality and proprietary information agreements.

 

OXiGENE has exclusively licensed from the Arizona Board of Regents, a corporate body of the State of Arizona, acting for and on behalf of Arizona State University (ASU) certain US and international intellectual property rights to develop and commercialize combretastatins and combretastatin derivatives for a range of indications. Such patents expire between 2013 and 2021. We have exclusively licensed from Bristol Myers- Squibb certain US and international intellectual property rights drawn to certain amine salts of combretastatin A-4 phosphate, including the salt form currently being developed by us. The U.S. patents expire in December 2021. The license from Bristol Myers-Squibb includes extensive international protection of the licensed invention.

 

The industry in which OXiGENE is engaged is characterized by rapidly evolving technology and intense competition. OXiGENE’s competitors include, among others, major pharmaceutical, biopharmaceutical and biotechnology companies, many of which have financial, technical and marketing resources significantly greater than those of OXiGENE. In addition, many of the small companies that compete with OXiGENE have also formed collaborative relationships with large, established companies to support research, development,

clinical trials and commercialization of products that may be competitive with those of OXiGENE. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint ventures or other collaborations.

 

OXiGENE is aware of a limited number of companies involved in the development of VDAs. Such companies include Novartis (in collaboration with Antisoma), Sanofi-Aventis, Myriad Pharmaceutical, Nereus and MediciNova, all of which have VDAs that management believes are at an earlier or similar stage of clinical development than OXiGENE’s lead drug candidate, ZYBRESTAT.

 

OXiGENE expects that, if any of its products gain regulatory approval for sale, they will compete primarily on the basis of product efficacy, safety, patient convenience, reliability, price and patent protection. OXiGENE’s competitive position will also depend on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products and implement joint ventures or other alliances with large pharmaceutical companies in order to jointly market and manufacture its products.

 

OXiGENE expects to continue to maintain a relatively small number of executives and other employees. OXiGENE relies on outsourcing much of its research, development, pre-clinical testing and clinical trial activity, although it maintains managerial and quality control over its clinical trials. As of December 31, 2009, OXiGENE had a total of 46 employees, including 42 full-time employees, of which 33 were engaged in research and development and monitoring of clinical trials. On February 11, 2010, OXiGENE announced that it was reducing it’s work force by 20 employees or approximately 49%. Of the 20 employees, 17 were engaged in research and development activities.

 

OXiGENE’s Clinical Trial Advisory Board assesses and evaluates OXiGENE’s clinical trial program. The Scientific Advisory Board discusses and evaluates OXiGENE’s research and development projects. Members of the Clinical Trial Advisory Board and the Scientific Advisory Board are independent and have no involvement with OXiGENE other than serving on such boards. From time to time, however, the institutions or organizations these individuals are associated with may provide OXiGENE with services.

 

The members of OXiGENE’s Clinical Trial Advisory Board are:

 

HILARY CALVERT, MB, is the Clinical Director of the Northern Institute for Cancer Research and Professor of Medical Oncology at the University of Newcastle upon Tyne, England.

 

JEFFREY S. HEIER, M.D. is a Vitreoretinal Specialist at Ophthalmic Consultants of Boston, Co-Director of the Vitreoretinal Fellowship at OCB/Tufts Medical School, and President of the Center for Eye Research and Education in Boston, Massachusetts.

 

STANLEY KAYE, M.D., BSc, is currently Head of the Drug Development Unit and Head of the Section of Medicine at the Royal Marsden Hospital/Institute of Cancer Research, London.

 

HAKAN MELLSTEDT, M.D., Ph.D. (Chairman) is Professor of Oncologic Biotherapy at the Karolinska Institute and Managing Director of Cancer Center Karolinska, Karolinska Institute, Stockholm, Sweden.

 

LEE S. ROSEN, M.D. is the Director of Developmental Therapeutics for the Cancer Institute Medical Group, affiliated with the John Wayne Cancer Institute in Santa Monica.

 

GORDON RUSTIN, M.D.  is the Director of Medical Oncology at Mount Vernon Hospital, which is the largest cancer center in the South of England.

 

JAN B. VERMORKEN, M.D., Ph.D. is a professor of Oncology and head of the Department of Medical Oncology of the University Hospital of the University of Antwerp, Belgium.

The members of OXiGENE’s Scientific Advisory Board are:

 

ADRIAN L. HARRIS, M.D. is Cancer Research UK Professor of Clinical Oncology at the University of Oxford, and Director of the Cancer Research UK Molecular Oncology Laboratories at the University’s Weatherall Institute of Molecular Medicine.

 

ROBERT S. KERBEL, Ph.D. is a Canada Research Chair in Molecular Medicine and a Professor in the Departments of Medical Biophysics, and Laboratory Medicine & Pathobiology at the University of Toronto.

 

DIETMAR W. SIEMANN, Ph.D. (Chairman) is the John P. Cofrin Professor and Associate Chair for Research in Radiation Oncology at the University of Florida College of Medicine in Gainesville.

 

Some members of the Scientific Advisory Board and the Clinical Trial Advisory Board receive cash compensation. Others have from time to time received, and are expected to continue to receive, options to purchase shares of common stock of OXiGENE. All members are reimbursed for reasonable out-of-pocket expenses incurred in connection with serving on such boards.

 

 

Statements in this Annual Report under the captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company’s behalf, that are not historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any results expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the risk factors set forth below.

 

The Company does not intend to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

We will be required to raise additional funds to finance our operations and remain a going concern; we may not be able to do so when necessary, and/or the terms of any financings may not be advantageous to us.

 

Our operations to date have consumed substantial amounts of cash. Negative cash flows from our operations are expected to continue over at least the next several years. Our cash utilization amount is highly dependent on the progress of our product development programs, particularly, the results of our preclinical and clinical studies, the cost timing and outcomes of regulatory approval for our product candidates, the terms and conditions of our contracts with service providers for these programs, and the rate of recruitment of patients in our human clinical trials.

 

Our cash position has become particularly acute in light of the termination of the VaxGen merger agreement, which occurred following the failure of the VaxGen stockholders to vote in favor of the merger. Following the termination of the VaxGen transaction, on February 11, 2010, we announced a restructuring of our clinical development programs. This restructuring plan is designed to focus our resources on our highest-value clinical assets and reduce our cash utilization. This restructuring includes a termination of further enrollment in our Phase 2/3 anaplastic thyroid cancer clinical trial (FACT) and a reduction in our work force of approximately 49% (20 employees). In addition, the further development of our ongoing clinical trials will depend on upcoming analysis and results of those studies and our cash resources at that time. We cannot assure you that adequate funds will be available to continue the development of our product candidates past the third quarter of 2010.

 

We expect to incur a one-time charge in connection with the reduction of our work force of approximately $600,000 in the first quarter of 2010 for severance pay and benefits to those former employees affected by the reduction. This re-alignment of priorities in clinical programs together with the reduction in

force is expected to reduce the cash required to operate our business from the current level of between $7,000,000 and $8,000,000 per quarter to between $4,000,000 and $5,000,000 per quarter by the second half of 2010.

 

On March 11, 2010, we entered into a definitive agreement with certain institutional investors to sell 6,578,945 shares or our common stock and, separately, a series of warrants to purchase common stock in a private placement. The terms of the definitive agreement, including the anti-dilution and full-ratchet provisions, may make it difficult for us to raise additional capital consistent with prevailing market terms, if at all.

 

We expect cash on hand, including the capital raised in March 2010, to fund our operations through the third quarter of 2010,assuming that we achieve the planned cost reductions from our February 2010 restructuring. In order to remain a going concern beyond the third quarter of 2010, we will require significant funding. Additional funds to finance the operations of the company may not be available on terms that we deem acceptable, or at all.

 

Our ongoing capital requirements will depend on numerous factors, including: the progress and results of preclinical testing and clinical trials of our product candidates under development, including ZYBRESTAT and OXi4503; the progress of our research and development programs; the time and costs expended and required to obtain any necessary or desired regulatory approvals; the resources, if any, that we devote to develop manufacturing methods and advanced technologies; our ability to enter into licensing arrangements, including any unanticipated licensing arrangements that may be necessary to enable us to continue our development and clinical trial programs; the costs and expenses of filing, prosecuting and, if necessary, enforcing our patent claims, or defending against possible claims of infringement by third-party patent or other technology rights; the cost of commercialization activities and arrangements, if any, undertaken by us; and, if and when approved, the demand for our products, which demand depends in turn on circumstances and uncertainties that cannot be fully known, understood or quantified unless and until the time of approval, including the range of indications for which any product is granted approval.

 

If we are unable to raise additional funds when needed, we will not be able to continue development of our product candidates or we will be required to delay, scale back or eliminate some or all of our development programs or cease operations. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing may be dilutive to our current stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize. Our failure to raise capital when needed will materially harm our business, financial condition and results of operations.

 

We have a history of losses, and we anticipate that we will continue to incur losses in the future.

 

We have experienced net losses every year since its inception and, as of December 31, 2009, had an accumulated deficit of approximately $183,930,000. We anticipate continuing to incur substantial additional losses over at least the next several years due to, among other factors, the need to expend substantial amounts on our continuing clinical trials with respect to its VDA drug candidates, technologies, and anticipated research and development activities and the general and administrative expenses associated with those activities. We have not commercially introduced any product and our potential products are in varying early stages of development and testing. Our ability to attain profitability will depend upon our ability to develop products that are effective and commercially viable, to obtain regulatory approval for the manufacture and sale of its products and to license or otherwise market our products successfully. may never achieve profitability, and even if we do, we may not be able to sustain being profitable.

Our committed equity financing facility with Kingsbridge may not be available to us. If we elect to make a draw down, we may be required to make additional “blackout” or other payments to Kingsbridge, which may result in dilution to our stockholders.

 

On February 19, 2008, we entered into a Committed Equity Financings Facility, or CEFF, with Kingsbridge Capital Limited, or Kingsbridge. The terms of the CEFF were amended in February 2010. The CEFF entitles us to sell and obligates Kingsbridge to purchase, from time to time over a period of three years from May 2008, shares of our common stock for cash consideration up to an aggregate of $40 million, subject to certain conditions and restrictions. Kingsbridge will not be obligated to purchase shares under the CEFF unless certain conditions are met, which include a minimum price for our common stock; the accuracy of representations and warranties made to Kingsbridge; compliance with laws; effectiveness of the registration statement registering the shares issuable to Kingsbridge under the CEFF for resale; and the continued listing of our stock on the NASDAQ Global Market. In addition, Kingsbridge is permitted to terminate the CEFF if it determines that a material and adverse event has occurred affecting our business, operations, properties or financial condition and if such condition continues for a period of 10 days from the date Kingsbridge provides us notice of such material and adverse event. If are unable to access funds through the CEFF, or if the CEFF is terminated by Kingsbridge, we may be unable to access capital on favorable terms or at all.

 

We are entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to suspend the use of the registration statement registering the shares issuable to Kingsbridge under the CEFF for resale and prohibit Kingsbridge from selling shares under the prospectus. If we deliver a blackout notice in the 15 trading days following the settlement of a draw down, or if the registration statement is not effective in circumstances not permitted by the agreement, then we must make a payment to Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of the number of shares held by Kingsbridge (exclusive of shares that Kingsbridge may hold pursuant to exercise of the Kingsbridge warrant) and the change in the market price of our common stock during the period in which the use of the registration statement is suspended. If the trading price of our common stock declines during a suspension of the registration statement, the blackout or other payment could be significant.

 

Should we sell shares to Kingsbridge under the CEFF, or issue shares in lieu of a blackout payment, such sale will have a dilutive effect on the holdings of its current stockholders, and may result in downward pressure on the price of OXiGENE common stock. If OXiGENE draws down under the CEFF, it will issue shares to Kingsbridge at a discount of up to 14% from the volume weighted average price of its common stock. If OXiGENE draws down amounts under the CEFF when its share price is decreasing, it will need to issue more shares to raise the same amount than if its stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if OXiGENE’s share price was stable or increasing, and may further decrease OXiGENE’s share price.

 

In April 2009, we initiated an internal review of matters pertaining to our quality, vendor oversight and regulatory compliance systems, practices and procedures relating to the conduct of clinical trials sponsored by us. While we believe that the actions taken by us in connection with this review have substantially improved our systems, practices and procedures, we cannot assure you that these measures will fully prevent any future quality, vendor management or regulatory compliance issues.

 

Because we operate with a relatively small clinical operations team while sponsoring clinical trials in numerous foreign jurisdictions, we are heavily reliant on outside vendors, including clinical research organizations, or CROs, for the training of personnel at the various sites where we are sponsoring clinical trials, periodic monitoring of clinical trial sites, and ongoing management of clinical trial operations at trial sites. Under our oversight, outside vendors are also responsible for hosting and managing our clinical trial databases, including safety databases, and for reporting safety information to the FDA and foreign regulatory authorities. In April 2009, we initiated an internal review of our systems, practices and procedures governing the areas of

vendor oversight, quality, and regulatory compliance as a result of concerns raised by internal personnel that our existing systems, practices and procedures in these areas were not sufficiently robust.

 

Our Board of Directors established a committee of its members to manage the review process. The review primarily focused on matters relating to our ongoing FACT trial in anaplastic thyroid cancer, and included an evaluation of our systems, practices and procedures involving, among other things, the following matters:

 

 

With the assistance of an outside consulting firm, we have prepared and adopted a corrective actions/preventive actions plan, or CAPA, which is designed to remedy and avoid the recurrence of matters noted during the internal review. Pursuant to the CAPA, we are implementing a number of operational changes, particularly as they relate to vendor qualification and oversight, management of clinical trial and safety databases, review and reporting of safety data, and personnel training. In parallel with these operational changes, we recruited a new Chief Development Officer, who later became our Chief Executive Officer, to oversee our drug development programs.

 

While we believe that the actions we have taken in response to the internal review have collectively resulted in substantially improved quality, vendor oversight, and regulatory compliance systems, practices and procedures, we cannot assure you that matters similar or related to those that prompted the review will not recur, or that applicable regulatory authorities, institutional review boards or ethics committees would find the actions taken by it in response to the internal review to have been sufficient. If applicable regulatory authorities were to find our quality controls or other regulatory compliance systems to be insufficient, they could take a range of actions, including but not limited to placing one or more of our clinical trials on clinical hold, requiring us to redo one or more of our clinical trials, or requiring additional clinical trials prior to approval of any of our product candidates. Similarly, if institutional review boards or ethics committees associated with our clinical trial sites were to find our quality systems, practices, and procedures to be insufficient, they could take a range of actions, including suspending participation in our clinical trials at their sites. In addition, we could decide on our own to take any of these actions, if either our management or a data safety monitoring committee concluded that such steps were necessary in order to protect the safety of subjects in trials involving our product candidates, the integrity of the data generated by those trials, or otherwise.

 

We may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable indications or therapeutic areas for our product candidates or those that are in-licensed.

 

We have limited technical, managerial and financial resources to determine the indications on which we should focus the development efforts related to our product candidates. We may make incorrect determinations. The decisions to allocate our research, management and financial resources toward particular indications or therapeutic areas for our product candidates may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate drug development programs may also be incorrect and could cause us to miss valuable opportunities. In addition, from time to time, we may in-license or otherwise acquire product candidates to supplement our internal development activities. Those activities may use resources that otherwise would be devoted to our internal

programs. We cannot assure you that any resources that we devote to acquired or in-licensed programs will result in any products that are superior to our internally developed products.

 

Our product candidates have not completed clinical trials, and may never demonstrate sufficient safety and efficacy in order to do so.

 

Our product candidates are in an early stage of development. In order to achieve profitable operations, we alone or in collaboration with others, must successfully develop, manufacture, introduce and market our products. The time frame necessary to achieve market success for any individual product is long and uncertain. The products currently under development by us will require significant additional research and development and extensive preclinical and clinical testing prior to application for commercial use. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in clinical trials, even after showing promising results in early or later-stage studies or clinical trials. Although we have obtained some favorable results to-date in preclinical studies and clinical trials of certain of our potential products, such results may not be indicative of results that will ultimately be obtained in or throughout such clinical trials, and clinical trials may not show any of our products to be safe or capable of producing a desired result. Additionally, we may encounter problems in its clinical trials that will cause delay, suspend or terminate those clinical trials. Further, our research or product development efforts or those of our collaborative partners may not be successfully completed, any compounds currently under development by us may not be successfully developed into drugs, any potential products may not receive regulatory approval on a timely basis, if at all, and competitors may develop and bring to market products or technologies that render our potential products obsolete. If any of these problems occur, our business would be materially and adversely affected.

 

We depend heavily on our executive officers, directors, and principal consultants and the loss of their services would materially harm its business.

 

We believe that our success depends, and will likely continue to depend, upon its ability to retain the services of our current executive officers, directors, principal consultants and others. The loss of the services of any of these individuals could have a material adverse effect on our business. In addition, we have established relationships with universities, hospitals and research institutions, which have historically provided, and continue to provide, us with access to research laboratories, clinical trials, facilities and patients. Additionally, we believe that it may, at any time and from time to time, materially depend on the services of consultants and other unaffiliated third parties. In February 2010, we affected a restructuring plan designed to focus the Company’s resources on its highest-value clinical assets and reduce its cash utilization. This restructuring included a reduction in its work force of approximately 49% (20 employees). This reduction in work force will further challenge our ability to effectively manage all aspects of our business operations.

 

Our industry is highly competitive, and its products may become technologically obsolete.

 

We are engaged in a rapidly evolving field. Competition from other pharmaceutical companies, biotechnology companies and research and academic institutions is intense and expected to increase. Many of those companies and institutions have substantially greater financial, technical and human resources than we do. Those companies and institutions also have substantially greater experience in developing products, in conducting clinical trials, in obtaining regulatory approval and in manufacturing and marketing pharmaceutical products. Our competitors may succeed in obtaining regulatory approval for their products more rapidly than we do. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. We are aware of at least one other company that currently has a clinical-stage VDA for use in an oncology indication. Some of these competitive products may have an entirely different approach or means of accomplishing the desired therapeutic effect than products being developed by us. Our competitors may succeed in developing technologies and products that are more effective and/or cost competitive than those being developed by us, or that would render our technology and products less competitive or even obsolete. In addition, one or more of our competitors may achieve product commercialization or patent protection earlier than we do, which could materially adversely affect us.

We have licensed in rights to ZYBRESTAT, OXi4503 and other programs from third parties. If our license agreements terminate, we may lose the licensed rights to its product candidates, including ZYBRESTAT and OXi4503, and we may not be able to continue to develop them or, if they are approved, market or commercialize them.

 

We depend on license agreements with third parties for certain intellectual property rights relating to its product candidates, including patent rights. Currently, we have licensed in patent rights from Arizona State University, or ASU, and the Bristol-Myers Squibb Company for ZYBRESTAT and OXi4503 and from Baylor University for other programs. In general, our license agreements require us to make payments and satisfy performance obligations in order to keep these agreements in effect and retain its rights under them. These payment obligations can include upfront fees, maintenance fees, milestones, royalties, patent prosecution expenses, and other fees. These performance obligations typically include diligence obligations. If we fail to pay, be diligent or otherwise perform as required under our license agreements, we could lose the rights under the patents and other intellectual property rights covered by the agreements. While we are not currently aware of any dispute with any licensors under its material agreements with them, if disputes arise under any of our in-licenses, including its in-licenses from ASU and the Bristol-Myers Squibb Company, and Baylor University, we could lose our rights under these agreements. Any such disputes may or may not be resolvable on favorable terms, or at all. Whether or not any disputes of this kind are favorably resolved, our management’s time and attention and its other resources could be consumed by the need to attend to and seek to resolve these disputes and our business could be harmed by the emergence of such a dispute.

 

If we lose our rights under these agreements, we may not be able to conduct any further activities with the product candidate or program that the license covered. If this were to happen, we might not be able to develop our product candidates further, or following regulatory approval, if any, we might be prohibited from marketing or commercializing them. In particular, patents previously licensed to us might after termination be used to stop us from conducting these activities.

 

We depend extensively on our patents and proprietary technology, and we must protect those assets in order to preserve our business.

 

To date, our principal product candidates have been based on certain previously known compounds. We anticipate that the products we develop in the future may include or be based on the same or other compounds owned or produced by unaffiliated parties, as well as synthetic compounds we may discover. Although we expect to seek patent protection for any compounds we discover and/or for any specific use we discovers for new or previously known compounds, any or all of them may not be subject to effective patent protection. Further, the development of regimens for the administration of pharmaceuticals, which generally involve specifications for the frequency, timing and amount of dosages, has been, and we believe, may continue to be, important to our effort, although those processes, as such, may not be patentable. In addition, the issued patents may be declared invalid or our competitors may find ways to avoid the claims in the patents.

 

Our success will depend, in part, on our ability to obtain patents, protect our trade secrets and operate without infringing on the proprietary rights of others. As of January 31, 2010, we were the exclusive licensee, sole assignee or co-assignee of thirty (30) granted United States patents, twenty-six (26) pending United States patent applications, and granted patents and/or pending applications in several other major markets, including the European Union, Canada and Japan. The patent position of pharmaceutical and biotechnology firms like us are generally highly uncertain and involves complex legal and factual questions, resulting in both an apparent inconsistency regarding the breadth of claims allowed in United States patents and general uncertainty as to their legal interpretation and enforceability. Accordingly, patent applications assigned or exclusively licensed to us may not result in patents being issued, any issued patents assigned or exclusively licensed to us may not provide us with competitive protection or may be challenged by others, and the current or future granted patents of others may have an adverse effect on our ability to do business and achieve profitability. Moreover, since some of the basic research relating to one or more of our patent applications and/or patents were performed at various universities and/or funded by grants, one or more universities, employees of such universities and/or grantors could assert that they have certain rights in such research and any resulting products. Further, others may independently develop similar products, may duplicate our products, or may

design around our patent rights. In addition, as a result of the assertion of rights by a third party or otherwise, we may be required to obtain licenses to patents or other proprietary rights of others in or outside of the United States. Any licenses required under any such patents or proprietary rights may not be made available on terms acceptable to us, if at all. If we do not obtain such licenses, we could encounter delays in product market introductions while our attempts to design around such patents or could find that the development, manufacture or sale of products requiring such licenses is foreclosed. In addition, we could incur substantial costs in defending ourselves in suits brought against us or in connection with patents to which it holds licenses or in bringing suit to protect its own patents against infringement.

 

We require employees, Scientific Advisory Board members, Clinical Trial Advisory Board members, and the institutions that perform its preclinical and clinical trials to enter into confidentiality agreements with it. Those agreements provide that all confidential information developed or made known to the individual during the course of the relationship with us to be kept confidential and not to be disclosed to third parties, except in specific circumstances. Any such agreement may not provide meaningful protection for our trade secrets or other confidential information in the event of unauthorized use or disclosure of such information.

 

If third parties on which we rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize its product candidates.

 

We do not have the ability to independently conduct the clinical trials required to obtain regulatory approval for our product candidates. We depend on independent clinical investigators and, in some cases, contract research organizations and other third-party service providers to conduct the clinical trials of our product candidates and expect to continue to do so. We rely heavily on these parties for successful execution of our clinical trials, and we do not control many aspects of their activities. Nonetheless, we are responsible for confirming that each of our clinical trials are conducted in accordance with our general investigational plan and protocol. Moreover, the FDA and corresponding foreign regulatory authorities require us and our clinical investigators to comply with regulations and standards, commonly referred to as good clinical practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the respective trial plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates or result in enforcement action against us.

 

Our products may result in product liability exposure, and it is uncertain whether our insurance coverage will be sufficient to cover all claims.

 

The use of our product candidates in clinical trials and for commercial applications, if any, may expose us to liability claims, in the event such product candidates cause injury or disease, or result in adverse effects. These claims could be made directly by health care institutions, contract laboratories, patients or others using such products. Although we have obtained liability insurance coverage for our ongoing clinical trials, this coverage may not be in amounts sufficient to protect us from any product liability claims or product recalls which could have a material adverse effect on our financial condition and prospects. Further, adverse product and similar liability claims could negatively impact our ability to obtain or maintain regulatory approvals for our technology and product candidates under development.

 

Our products are subject to extensive government regulation, which results in uncertainties and delays in the progress of our products through the clinical trial process.

 

Our research and development activities, preclinical testing and clinical trials, and the manufacturing and marketing of our products are subject to extensive regulation by numerous governmental authorities in the United States and other countries. Preclinical testing and clinical trials and manufacturing and marketing of our products are and will continue to be subject to the rigorous testing and approval requirements and standards of the FDA and other corresponding foreign regulatory authorities. Clinical testing and the regulatory

review process generally take many years and require the expenditure of substantial resources. In addition, delays or rejections may be encountered during the period of product development, clinical testing and FDA regulatory review of each submitted application. Similar delays may also be encountered in foreign countries. Even after such time and expenditures, regulatory approval may not be obtained for any potential products developed by us, and a potential product, if approved in one country, may not be approved in other countries. Moreover, even if regulatory approval of a potential product is granted, such approval may impose significant limitations on the indicated uses for which that product may be marketed. Further, even if such regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections, and later discovery of previously unknown problems, such as undiscovered side effects, or manufacturing problems, may result in restrictions on such product, manufacturer or facility, including a possible withdrawal of the product from the market. Failure to comply with the applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions, injunctions and criminal prosecution. Moreover, continued cost control initiatives by third party health care payers, including government programs such as Medicare may affect the financial ability and willingness of patients and their health care providers to utilize certain therapies which, in turn, could have a material adverse effect on us.

 

We have no manufacturing capacity, and have relied and expect to continue to rely on third-party manufacturers to produce its product candidates.

 

We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of its product candidates or any of the compounds that it is testing in its preclinical programs, and we lack the resources and the capabilities to do so. As a result, we currently rely, and it expects to rely in the future, on third-party manufacturers to supply its product candidates. Reliance on third-party manufacturers entails risks to which we would not be subject if our manufactured product candidates or products itself, including:

 

 

If we do not maintain our developed important manufacturing relationships, we may fail to find replacement manufacturers or develop our own manufacturing capabilities which could delay or impair its ability to obtain regulatory approval for its products and substantially increase its costs or deplete profit margins, if any. If we do find replacement manufacturers, we may not be able to enter into agreements with them on terms and conditions favorable to it, and there could be a substantial delay before new facilities could be qualified and registered with the FDA and foreign regulatory authorities.

 

The FDA and foreign regulatory authorities require manufacturers to register manufacturing facilities. The FDA and corresponding foreign regulators also inspect these facilities to confirm compliance with current good manufacturing practices, or cGMPs. Contract manufacturers may face manufacturing or quality control problems causing drug substance production and shipment delays or a situation where the contractor may not be able to maintain compliance with the applicable cGMP requirements. Any failure to comply with cGMP requirements or other FDA and comparable foreign regulatory requirements could adversely affect our clinical research activities and its ability to develop its product candidates and market its products after approval.

 

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop our product candidates and commercialize any products that receive regulatory approval on a timely basis.

Our restated certificate of incorporation, our amended and restated by-laws, our stockholder rights agreement and Delaware law could deter a change of our management which could discourage or delay offers to acquire it.

 

Certain provisions of Delaware law and of our restated certificate of incorporation, as amended, and amended and restated by-laws could discourage or make it more difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter, transactions that stockholders may otherwise consider to be in their best interests or the best interests of us. Further, the rights issued under the stockholder rights agreement would cause substantial dilution to a person or group that attempts to acquire us on terms not approved in advance by its Board of Directors.

 

The uncertainty associated with pharmaceutical reimbursement and related matters may adversely affect our business.

 

Upon the marketing approval of any one or more of our products, if at all, sales of its products will depend significantly on the extent to which reimbursement for its products and related treatments will be available from government health programs, private health insurers and other third-party payers. Third-party payers and governmental health programs are increasingly attempting to limit and/or regulate the price of medical products and services. The MMA, as well as other changes in governmental or in private third-party payers’ reimbursement policies, may reduce or eliminate any currently expected reimbursement. Decreases in third-party reimbursement for our products could reduce physician usage of the product and have a material adverse effect on our product sales, results of operations and financial condition.

 

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. This law provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate any policies for public or private payers, it is not clear what, if any, effect the research will have on the sales of our products if any such product or the condition that it is intended to treat is the subject of a study. Decreases in third-party reimbursement for our products or a decision by a third-party payer to not cover its products could reduce physician usage of the product and have a material adverse effect on its product sales, results of operations and financial condition.

 

The price of our common stock is volatile, and is likely to continue to fluctuate due to reasons beyond its control.

 

The market price of our common stock has been, and likely will continue to be highly volatile. Factors, including our financial results or our competitors’ financial results, clinical trial and research development announcements and government regulatory action affecting our potential products in both the United States and foreign countries, have had, and may continue to have, a significant effect on its results of operations and on the market price of our common stock. We cannot assure you that your investment in our common stock will not fluctuate significantly. One or more of these factors could significantly harm our business and cause a decline in the price of its common stock in the public market. On March 11, 2010, we entered into a definitive agreement with certain institutional investors to sell 6,578,945 shares or our common stock and, separately, a series of warrants to purchase common stock in a private placement. The terms of the definitive agreement, including the anti-dilution and full-ratchet provisions, may make it difficult for us to raise additional capital consistent with prevailing market terms, if at all. Substantially all of the shares of our common stock issuable upon exercise of outstanding options have been registered for sale and may be sold from time to time hereafter. Such sales, as well as future sales of our common stock by existing stockholders, or the perception that sales could occur, could adversely affect the market price of our common stock. The price and liquidity of our common stock may also be significantly affected by trading activity and market factors related to the NASDAQ and Stockholm Stock Exchange markets, which factors and the resulting effects may differ between

those markets. In order to remain in good standing with both the NASDAQ Global Market and NASDAQ OMX, we must meet the continued listing requirements of these exchanges, which include minimum stockholders’ equity, market value of listed securities or total assets and revenue and minimum bid price of our common stock, among others. There can be no assurance that we will continue to meet the ongoing listing requirements and that our common stock will remain eligible to be traded on these exchanges. Should we determine that continuing to be listed on both exchanges is not the most effective strategy for having our common stock traded and elect to be removed from such listing, there can be no assurance that such action will not have an adverse affect on the market price of our common stock.

 

 

None

 

 

OXiGENE’s corporate headquarters is located in South San Francisco, California. In November 2008, OXiGENE executed a lease for 7,038 square feet (Suite 210) of office space located in South San Francisco, California. OXiGENE agreed to lease an additional 5,275 square feet (Suite 270) of office space in the same building beginning in the first quarter of 2009. The lease agreement is for an estimated 52 months. In April 2009, OXiGENE executed a lease for 3,891 square feet of office space located in Waltham, Massachusetts. The lease is for a period of two years commencing on June 1, 2009. Annual rent payments under the lease will be $73,929 and $77,820 in the first and second years, respectively. OXiGENE continues to pay rent on its former headquarters location in Watertown, Massachusetts which it has sublet through the end of the primary lease term which expires in November 2010. In September 2005, OXiGENE executed a lease for approximately 600 square feet of office space in the Oxford Science Park, Oxford, United Kingdom on a month to month basis. The Oxford facility primarily houses research and development personnel.

 

 

Beginning on October 23, 2009, several putative stockholder class action lawsuits were filed against VaxGen, members of the VaxGen board of directors, OXiGENE and OXiGENE Merger Sub, Inc. in the Superior Court of California, County of San Mateo. The actions, first served on VaxGen on November 4, 2009, styled Jensen v. Panek et al., William Ming v. VaxGen, Inc. et al. and Lisa Hawes v. VaxGen, Inc. et al., allege, among other things, that the members of the VaxGen board of directors violated their fiduciary duties by failing to maximize value for VaxGen’s stockholders when negotiating and entering into the merger agreement between OXiGENE and VaxGen. The lawsuits were consolidated into one class action suit on January 13, 2010. The complaints also allege that OXiGENE and VaxGen aided and abetted those purported breaches. In light of the termination of the merger agreement, OXiGENE expects this lawsuit to be dismissed in due course.

 

 

 

The Company’s common stock is traded on the NASDAQ Global Market under the symbol “OXGN.” The Company’s shares of common stock are also traded on the OMX Stockholm Exchange in Sweden under the symbol “OXGN.” The following table sets forth the high and low sales price per share for the Company’s common stock on the NASDAQ Global Market for each quarterly period during the two most recent fiscal years.

 

 

On March 8, 2010, the closing price of the Company’s common stock on the NASDAQ Global Market was $1.21 per share.

 

As of March 8, 2010, there were approximately 87 stockholders of record of the approximately 62,948,000 outstanding shares of the Company’s common stock. The Company believes, based on the number of proxy statements and related materials distributed in connection with its 2009 Annual Meeting of Stockholders, that there are approximately 11,000 beneficial owners of its common stock.

 

The Company has not declared or paid any cash dividends on its common stock since its inception in 1988, and does not intend to pay cash dividends in the foreseeable future. The Company presently intends to retain future earnings, if any, to finance the growth and development of its business.

 

SUMMARY FINANCIAL INFORMATION

 

The following table sets forth financial data with respect to the Company for each of the five years in the period ended December 31, 2009. The selected financial data for each of the five years in the period ended December 31, 2009 has been derived from the audited financial statements of the Company. The information below should be read in conjunction with the financial statements (and notes thereto) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Item 7 of this Annual Report on Form 10-K.

 

 

 

The amount related to loss attributed to non controlling interest in Symphony ViDA, Inc. represents the loss for the Symphony ViDA, Inc. entity from its inception in October 2008 through the acquisition of the ViDA in July 2009. The investments reported as held by Symphony ViDA, Inc. represented the fair value of amounts held by Symphony ViDA, Inc. and were included in the acquisition.

 

Prior year amounts have been reclassified to conform to current year presentation to reflect an allocation of facilities related costs from General and Administrative expenses to Research and Development expenses. For the years ended December 31, 2008 and 2007, approximately $561,000 and $381,000, respectively, were reclassified to Research and Development expenses.

 

 

Our management’s discussion and analysis of financial condition contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcomes to be materially different from those anticipated and discussed herein. Important factors that we believe may cause such differences are discussed in the “Risk Factors” section of this Annual Report and in the cautionary statements accompanying the forward-looking statements in this Annual Report. In assessing forward-looking statements contained herein, readers are urged to read carefully all Risk Factors and cautionary statements contained in this Annual Report. Further, we operate in an industry sector where securities values are volatile and may be influenced by regulatory and other factors beyond our control.

 

We are a clinical-stage, biopharmaceutical company developing novel therapeutics to treat cancer and eye diseases. Our primary focus is the development and commercialization of product candidates referred to as vascular disrupting agents, or VDAs, that selectively disable and destroy abnormal blood vessels that provide solid tumors a means of growth and survival and also are associated with visual impairment in a number of ophthalmological diseases and conditions. To date, more than 400 subjects have been treated with ZYBRESTAT in human clinical trials, and the drug candidate has generally been observed to be well-tolerated. Our mailing address of our principal executive offices is 701 Gateway Boulevard, Suite 210, South San Francisco, California 94080 and the telephone number is (650) 635-7000.

ZYBRESTAT for Oncology

 

FALCON trial — randomized, controlled Phase II study with ZYBRESTAT in non-small cell lung cancer

 

We are currently evaluating ZYBRESTAT in a 60-patient, randomized, controlled Phase II clinical trial, which we refer to as the FALCON trial, as a potential first-line treatment for non-small cell lung cancer, or NSCLC. In the FALCON trial, patients are randomized either to the treatment arm of study, in which they receive ZYBRESTAT in combination with the chemotherapeutic agents, carboplatin and paclitaxel, and the anti-angiogenic drug, bevacizumab, or to the control arm of the study, in which they receive a standard combination regimen of carboplatin, paclitaxel and bevacizumab. We believe this study, if successful, will provide support for initiating discussions with the U.S. Food and Drug administration or FDA for a pivotal registration study with ZYBRESTAT in NSCLC; and more generally, provide clinical validation supporting further evaluation of ZYBRESTAT in combination with commonly used anti-angiogenic therapeutics that act via vascular endothelial growth factor, or VEGF, pathway inhibition.

 

On November 17, 2009, we reported interim safety data from the FALCON study for the first 30 patients treated in this study. The data from this planned interim safety analysis indicated that the combination of ZYBRESTAT with carboplatin and paclitaxel plus bevacizumab appeared to be well-tolerated, and that there were no significant overlapping toxicities with bevacizumab. Five of the six patient deaths due to disease progression during the evaluation period and occurred in the control arm of the study. The data was presented in a poster by a principal investigator for the Phase 2 trial at the 2009 AACR-NCI-EORTC Molecular Targets and Cancer Therapeutics conference. A further analysis of the efficacy and tolerability of this combination is expected to be presented at the 2010 annual meeting of the American Society of Clinical Oncology, or ASCO, scheduled for June 4-8, 2010 in Chicago, Illinois.

 

FACT (fosbretabulin in anaplastic cancer of the thyroid) trial — Phase 2/3 study with ZYBRESTAT in anaplastic thyroid cancer (ATC)

 

In 2007, we initiated a study in which ZYBRESTAT would be evaluated in a 180-patient, Phase 2/3 study, which we refer to as the FACT trial, as a potential treatment for anaplastic thyroid cancer, or ATC, a highly aggressive and lethal malignancy for which there are currently no approved therapeutics and extremely limited treatment options. The primary endpoint for the FACT trial is overall survival. In the FACT trial, patients are randomized either to the treatment arm of the study, in which they receive ZYBRESTAT in combination with the chemotherapeutic agents carboplatin and paclitaxel, or to the control arm of the study, in which they receive only carboplatin and paclitaxel.

 

In February 2010, due to financial considerations, we decided to stop further enrollment in the Phase 2/3 FACT clinical trial in ATC, but will continue to treat and follow all patients who are currently enrolled. An event-driven survival analysis is anticipated in late 2010 or early 2011.

 

The FDA granted Fast Track designation to ZYBRESTAT for the treatment of regionally advanced and/or metastatic ATC. ZYBRESTAT was awarded orphan drug status by the FDA and the European Commission in the European Union for the treatment of advanced ATC and for the treatment of medullary, Stage IV papillary and Stage IV follicular thyroid cancers. These designations would not be affected by the halted enrollment in the Phase 2/3 study.

 

In 2007, we completed a Special Protocol Assessment, or SPA, process with the U.S. Food and Drug Administration, or FDA, for this Phase 2/3 study. The FDA has been informed that enrollment in this study was halted and that the company expected that the SPA would not longer be applicable. Any utility of the truncated Phase 2/3 study for regulatory purposes would have to be negotiated with the FDA once study outcomes, and in particular overall survival data, are available.

 

Phase II trial with ZYBRESTAT in platinum-resistant ovarian cancer

 

On June 1, 2009, results from a Phase II trial with ZYBRESTAT in combination with the chemotherapeutic agents, carboplatin and paclitaxel, in recurrent, platinum-resistant ovarian cancer, were presented at ASCO. We believe the results of this study support further development of ZYBRESTAT in ovarian cancer and we are

considering options for undertaking further randomized, controlled studies in ovarian cancer, including a study or studies which may potentially be undertaken in collaboration with an oncology cooperative study group and support by the Cancer Therapy Evaluation Program (“CTEP”) of the National Cancer Institute.

 

We believe that, if successful, the ongoing ZYBRESTAT study program will establish a compelling rationale for further development of ZYBRESTAT as a treatment for:

 

 

We believe these areas for potential further development collectively represent a sifnificant unmet medical need and thus a significant potential commercial market opportunity that includes cancers of the thyroid, ovary, kidney, liver, head and neck, breast, lung, skin, brain, colon and rectum.

 

In addition, based upon preclinical results first published by our collaborators in the November 2007 online issue of the journal BLOOD, as well as preclinical data presented in April 2009 at the annual meeting of the American Association of Cancer Research (AACR), we believe that ZYBRESTAT and its other VDA product candidates, particularly OXi4503, may also have utility in the treatment of hematological malignancies or “liquid tumors,” such as acute myeloid leukemia.

 

OXi4503, a unique, second generation VDA for oncology indications

 

We are currently pursuing development of OXi4503, a second-generation, dual-mechanism VDA, as a treatment for certain solid tumor types. We believe that OXi4503 is differentiated from other VDAs by its dual-action activity. Our data indicates that in addition to having potent vascular disrupting effects, OXi4503 is unique in that it can be metabolized by oxidative enzymes to an orthoquinone chemical species that has direct tumor cell killing effects. We believe this unique property may result in enhanced anti-tumor activity in certain tumor types as compared with other VDA drug candidates. Based on data from preclinical studies, we believe that OXi4503 may have enhanced activity in tumor types with relatively high levels of oxidative enzymes that can facilitate the metabolism of the active OXi4503 VDA to kill tumor cells. These tumor types include hepatocellular carcinoma, melanoma, and myeloid leukemia. In preclinical studies, OXi4503 has shown potent anti-tumor activity against solid tumors and acute myeloid leukemia models, both as a single agent and in combination with other cancer treatment modalities.

 

We have completed a Phase I clinical trial in patients with advanced solid tumors sponsored by Clinical Research United Kingdom; and we are currently evaluating OXi4503 in an ongoing clinical trial sponsored by us in a Phase Ib trial, initiated in the first quarter of 2009 in patients with solid tumors with hepatic involvement. We intend to conduct an interim analysis of the latter trial in mid-2010, and future developments thereafter will depend on the outcome of this interim analysis. To date, OXi4503 has been observed to have a manageable side-effect profile similar to that of other agents in the VDA class, potential single-agent clinical activity, and effects on tumor blood flow and tumor metabolic activity, as determined with several imaging modalities. In December 2009 we filed a U.S. IND for OXi4503. We anticipate initiating an additional Phase I study of OXi4503 in a leukemic indication during 2010, subject to available resources.

 

ZYBRESTAT for Ophthalmology

 

In addition to developing ZYBRESTAT as an intravenously administered therapy for oncology indications, we are undertaking an ophthalmology research and development program with ZYBRESTAT, the objective of which is to develop a topical formulation of ZYBRESTAT for ophthalmological diseases and conditions that are characterized by abnormal blood vessel growth within the eye that results in loss of vision. We believe that a safe, effective and convenient topically-administered anti-vascular therapeutic would have advantages over

currently approved anti-vascular, ophthalmological therapeutics, which must be injected directly into patients’ eyes, in some cases on a chronic monthly basis.

 

In June 2009, we initiated a randomized, double-masked, placebo-controlled Phase II proof-of-mechanism trial, which we refer to as the FAVOR trial, with intravenously-administered ZYBRESTAT in patients with polypoidal choroidal vasculopathy (PCV), a form of choroidal neovascularization against which current therapies, including approved anti-angiogenic drugs, appear to provide limited benefit. The main clinical indication in this disease is a form of polyps formed in the retina of patients which are made up of vessels that have properties very similar to tumor vasculature. The effect of ZYBRESTAT on the polyps is being visualized and documented as part of the study. In parallel with the FAVOR trial, we are currently conducting preclinical toxicology and efficacy studies with ZYBRESTAT, administered via topical ophthalmological formulations. The FAVOR study will continue with an expected interim analysis in the first half of 2010. Further development of this program will depend on the outcome of the interim analysis and review experts in the field as well as by our management.

 

We believe the architecture of the abnormal vasculature in the retina and choroid that contributes to PCV patients’ loss of vision may be particularly susceptible to treatment with a VDA such as ZYBRESTAT. We believe that PCV represents an attractive target indication and development pathway for ZYBRESTAT. Unlike wet age-related macular degeneration, an indication for which several anti-angiogenic drugs are approved or prescribed off-label, conducting clinical studies of ZYBRESTAT in patients with ophthalmologic indications not yet approved treatment for such anti-angiogenic drugs could potentially prove to reduce development time and expense. The objectives of the FAVOR trial and the ongoing preclinical program are to:

 

 

To date, we have completed preclinical experiments demonstrating that ZYBRESTAT has activity in six different preclinical ophthalmology models, including a model in which ZYBRESTAT was combined with an approved anti-angiogenic drug. We have also completed multiple preclinical studies suggesting that ZYBRESTAT, when applied topically to the surface of the eye at doses that appear to be well-tolerated, penetrates to the retina and choroid in quantities that we believe should be more than sufficient for therapeutic activity. Finally, we have completed and reported results at the 2007 annual meeting of the Association for Research in Vision and Ophthalmology, or ARVO, from a Phase II study in patients with myopic macular degeneration in which all patients in the study met the primary clinical endpoint of vision stabilization at three months after study entry.

 

Based on results of its preclinical trials, we believe that a topically-applied formulation of ZYBRESTAT (e.g., an eye-drop or other topical formulation) is feasible and may have clinical utility in the treatment of patients with a variety of ophthalmological diseases and conditions, such as PCV, age-related macular degeneration, diabetic retinopathy and neovascular glaucoma, all of which are characterized by abnormal blood vessel growth and associated loss of vision. In addition to having potential utility for treating ocular diseases and conditions that affect tissues in the back of the eye, we believe that a topical ophthalmological formulation of ZYBRESTAT could also have utility for the treatment of other ocular diseases and conditions characterized by abnormal neovascularization that affect tissues in the front of the eye, such as the cornea and iris.

 

Although several anti-angiogenic therapeutics have been approved and are marketed for ophthalmological indications in which patients are experiencing active disease, the requirement that these therapeutics be

injected directly into the eye on a repeated basis is a significant limitation for some patients and may result in serious side-effects. We believe that a topical formulation of ZYBRESTAT may:

 

 

Financial Resources

 

We have generated a cumulative net loss of approximately $183,930,000 for the period from our inception through December 31, 2009. We expect to incur significant additional operating losses over at least the next several years, principally as a result of our continuing clinical trials and anticipated research and development expenditures. The principal source of our working capital to date has been the proceeds of private and public equity financings and to a lesser extent the exercise of warrants and stock options. We currently have no material amount of licensing or other fee income.

 

As of December 31, 2009, we had approximately $14,072,000 in cash, restricted cash and cash equivalents. During our fiscal 2009, we primarily invested in obligations issued by U.S. treasury and federal agencies, obligations of commercial banks and commercial paper. In fiscal 2010, we plan to continue to employ a conservative investment strategy.

 

On March 11, 2010 we entered into a definitive agreement with certain institutional investors to sell 6,578,945 shares of our Common Stock and, separately, a series of warrants to purchase Common Stock in a private placement. Gross proceeds of the financing were approximately $7,500,000, before deducting placement agent fees and estimated offering expenses, and assuming no exercise of the warrants. Existing cash plus the addition of this capital is expected to support our operations through the third quarter of 2010, assuming that we achieve the planned cost reductions from our February 2010 restructuring.

 

We will require significant additional funding to remain a going concern and to fund operations until such time, if ever, we become profitable. However, there can be no assurance that adequate additional financing will be available to us on terms that we deem acceptable, if at all. Our failure to raise capital when needed will materially harm our business, financial condition and results of operations. Royalties or other revenue generated by us from commercial sales of our potential products are not expected for several years, if at all.

 

Including the capital raised in March 2010, our cash position has become particularly acute in light of the termination of the VaxGen merger agreement, which occurred following the failure of the VaxGen stockholders to vote in favor of the merger. Following the termination of the VaxGen transaction, on February 11, 2010, we announced a restructuring of our clinical development programs. This restructuring plan is designed to focus our resources on our highest-value clinical assets and reduce our cash utilization. This restructuring includes a plan to stop further enrollment our Phase 2/3 anaplastic thyroid cancer clinical trial (FACT) and a reduction in our work force of approximately 49% (20 employees). In addition, the further development of our ongoing clinical trials will depend on upcoming analysis and results of our ongoing clinical studies and our cash resources at that time.

 

We expect to incur a one-time charge in connection with the reduction of its work force of approximately $600,000 in the first quarter of 2010 for severance pay and benefits to those former employees affected by the reduction. This re-alignment of priorities in clinical programs together with the reduction in force is expected to reduce the cash required to operate our business from the current level of between $7,000,000 and $8,000,000 per quarter to between $4,000,000 and $5,000,000 per quarter by the second half of 2010.

 

We expect to continue to pursue strategic alliances and consider collaborative development opportunities that may provide us with access to organizations that have capabilities and/or products that are complementary to our own, in order to continue the development of our potential product candidates. However, there can be

no assurances that we will complete any strategic alliances or collaborative development agreements, and the terms of such arrangements may not be advantageous to us.

 

On October 1, 2008, we announced a strategic collaboration with Symphony Capital Partners, L.P. (Symphony), a private-equity firm, under which Symphony agreed to provide up to $40,000,000 in funding to support the advancement of ZYBRESTAT for oncology, ZYBRESTAT for ophthalmology and OXi4503. Under this collaboration, we entered into a series of related agreements with Symphony Capital LLC, Symphony ViDA, Inc., or ViDA, Symphony ViDA Holdings LLC, or Holdings, and related entities. Pursuant to these agreements, Holdings formed and capitalized ViDA, a Delaware corporation, in order (a) to hold certain intellectual property related to two of our product candidates, ZYBRESTAT for opthalmology and OXi4503, which were exclusively licensed to ViDA under a Novated and Restated Technology License Agreement and (b) to fund commitments of up to $25,000,000. The funding was planned to support pre-clinical and clinical development conducted by us, on behalf of ViDA, for ZYBRESTAT for ophthalmology and OXi4503.

 

On July 2, 2009, we entered into a series of related agreements with Holdings and ViDA pursuant to which such parties agreed to amend the terms of the purchase option, as set forth in an amended and restated purchase option agreement (the “Amended Purchase Option Agreement”). In connection with such amendment, we also entered into, with Holdings, an amended and restated registration rights agreement.

 

Under the Amended Purchase Option Agreement, we issued 10,000,000 newly-issued shares of our common stock in exchange for all of the equity of ViDA. We re-acquired all of the rights to the ZYBRESTAT for ophthalmology and OXi4503 programs that had been licensed to ViDA. In addition, the approximately $12,400,000 in cash and marketable securities held by ViDA was transferred to us. After exercising the purchase option, ViDA became our wholly-owned subsidiary and ceased being a variable interest entity.

 

We recorded the acquisition of ViDA as a capital transaction and the $10,383,000 excess of the fair market value of the common stock issued by us ($15,600,000) over the carrying value of the non-controlling interest ($5,217,000) is reflected directly in equity as a reduction to Additional paid-in capital. As a result, the non-controlling interest balance was eliminated. The reduction to Additional paid-in capital was also presented as an increase in the loss applicable to common stock within the calculation of basic and diluted earnings per share.

 

In February 2008, we entered into a Committed Equity Financing Facility (“CEFF”) with Kingsbridge Capital, which was subsequently amended in February 2010. Under the terms of the amended CEFF, Kingsbridge committed to purchase, subject to certain conditions, up to 5,708,035 shares of the Company’s common stock or up to an aggregate of $40,000,000 during the period which ends May 15, 2012. Under the CEFF, we are able to draw down in tranches of up to a maximum of 3.75 percent of our closing market value at the time of the draw down or the alternative draw down amount calculated pursuant to the Common Stock Purchase Agreement whichever is less, subject to certain conditions.

 

The purchase price of these shares is discounted between 5 to 14 percent from the volume weighted average price of our common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares at prices below $0.75 per share or at a price below 85% of the closing share price of our stock in the trading day immediately preceding the commencement of the draw down, whichever is higher. In connection with the CEFF, in 2008, we issued a warrant to Kingsbridge to purchase 250,000 shares of our common stock at a price of $2.74 per share exercisable beginning six months after February 19, 2008 for a period of five years thereafter. As of December 31, 2009, there remain a total of 5,073,435 shares available for sale under the CEFF.

 

The actual and planned uses of proceeds from all of the above financings include the continued development of our two lead product candidates, ZYBRESTAT and OXi4503, in oncology and ophthalmology.

 

We are committed to a disciplined financial strategy and as such maintain a limited employee and facilities base, with development, scientific, finance and administrative functions, which include, among other things, product development, regulatory oversight and clinical testing. Our research and development team members typically work on a number of development projects concurrently. Accordingly, we do not separately track the costs for each of these research and development projects to enable separate disclosure of these costs

on a project-by-project basis. We conduct scientific activities pursuant to collaborative arrangements with universities. Regulatory and clinical testing functions are generally contracted out to third-party, specialty organizations.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to intangible assets. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making the judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

While our significant accounting policies are more fully described in Note 1 to our financial statements included in this report, we believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results.

 

Initial Symphony Transaction

 

On October 1, 2008, we announced a strategic collaboration with Symphony Capital Partners, L.P. a private-equity firm that agreed to provide up to $40,000,000 in funding to support the advancement of ZYBRESTAT for oncology, ZYBRESTAT for ophthalmology and OXi4503. Under this collaboration, we entered into a series of related agreements with Symphony Capital LLC, or Symphony, Symphony ViDA, Inc., or ViDA, Symphony ViDA Holdings LLC, or Holdings, and related entities, including the following:

 

 

In addition, OXiGENE entered into a series of related agreements with Holdings, including the following:

 

 

Pursuant to these agreements, Holdings had formed and capitalized ViDA, a Delaware corporation, in order (a) to hold certain intellectual property related to two of our product candidates, ZYBRESTAT for use in ophthalmologic indications and OXi4503, referred to as the “Programs,” which were exclusively licensed to ViDA under the Novated and Restated Technology License Agreement and (b) to fund commitments of up to $25,000,000. The funding supported pre-clinical and clinical development by us, on behalf of ViDA, for the programs. Under certain circumstances, we could have been required, under the Additioanl Funding Agreement, to commit up to $15,000,000 to ViDA. Our requirement for additional funding was to be

determined by a number of factors, including among others, if at all, the determination of the need for more funding and the written recommendation of the Joint Development Committee (JDC), the approval of the Symphony ViDA Board, the probability and amount of the additional funding provided by Holdings, if any, the probability that we may provide optional funding (“Optional Company Funding”), and the timing of meeting the potential obligations.

 

Pursuant to the agreements, we continued to be primarily responsible for all pre-clinical and clinical development efforts as well as maintenance of the intellectual property portfolio for the programs. OXiGENE and ViDA established a development committee to oversee the Programs. We participated in the development committee and had the right to appoint one of the five directors of ViDA. The Purchase Option Agreement provided for the exclusive right, but not the obligation, for us to repurchase both the Programs by acquiring 100% of the equity of ViDA at any time between October 2, 2009 and March 31, 2012 for an amount equal to two times the amount of capital actually invested by Symphony in ViDA, less certain amounts. If we did not exercise its exclusive right with respect to the purchase of the Programs licensed under the agreement with ViDA, rights to the Programs at the end of the development period would have remained with ViDA. In consideration for the Purchase Option, we issued to Holdings 3,603,604 shares of its common stock and paid approximately $1,750,000 for structuring fees and related expenses to Symphony.

 

Acquisition of ViDA pursuant to an Amended and Restated Purchase Option Agreement

 

On July 2, 2009, Holdings and ViDA entered into a series of related agreements with us pursuant to which such parties agreed to amend the terms of the purchase option, as set forth in an amended and restated purchase option agreement (the “Amended Purchase Option Agreement”). In connection with such amendment, Holdings and us also entered into an amended and restated registration rights agreement (the “Amended Registration Rights Agreement” and together with the Amended and Restated Purchase Option Agreement, the “Transaction Documents”).

 

Under the Amended Purchase Option Agreement, we issued 10,000,000 newly-issued shares of our common stock in exchange for all of the equity of ViDA, which included further consideration for additional securities issued in connection with the Registered Direct Offering. We re-acquired all of the rights to the Programs that had been licensed in 2008 to ViDA. In addition, the approximately $12,400,000 in cash and marketable securities held by ViDA was transferred to us. After exercising the purchase option, ViDA became a wholly-owned subsidiary of ours and ceased being a Variable Interest Entity (VIE), see further discussion below.

 

We recorded the acquisition of ViDA as a capital transaction and the $10,383,000 excess of the fair market value of the common shares issued by us ($15,600,000) over the carrying value of the noncontrolling interest ($5,217,000) was reflected directly in equity as a reduction to Additional paid-in capital. As a result, the noncontrolling interest balance was eliminated. The reduction to Additional paid-in capital was also presented as an increase in the loss applicable to common stock within the calculation of basic and diluted earnings per share.

 

Under the Amended Purchase Option Agreement, in the event that we issued additional securities prior to January 20, 2010, Symphony had the right to receive additional securities from us. Symphony has already received additional consideration under the Amended Purchase Option agreement in connection with the Registered Direct Offering on July 20, 2009. Pursuant to those transactions, OXiGENE issued to Holdings 10,000,000 newly issued shares of our common stock in exchange for all of the equity of ViDA. These 10,000,000 shares included consideration to Holdings for the additional shares issued in the Registered Direct. Holdings’ right to receive further consideration, in the event that we issued additional securities expired on January 20, 2010. No further consideration was earned by Holdings under this right.

 

The two members of the Company’s Board of Directors appointed by Symphony, Mr. Mark Kessel and Dr. Alastair Wood, remain on the Board of Directors, and we maintain the advisory relationships with Symphony and RRD International LLC. The Additional Funding Agreement, dated October 1, 2008, has been terminated in connection with the execution of the Transaction Documents pursuant to the Termination Agreement dated July 2, 2009. The closing of the transaction occurred on July 20, 2009.

Consolidation of Variable Interest Entity (VIE)

 

We consolidated the financial position and results of operations of Symphony ViDA, Inc. (“ViDA”) from October 2008, when it entered into a strategic collaboration with Symphony ViDA Holdings, LLC (“Symphony”), until July 20, 2009 when we acquired 100% of ViDA pursuant to an Amended and Restated Purchase Option Agreement. The funding supported pre-clinical and clinical development by us, on behalf of ViDA, for ZYBRESTAT for ophthalmology and OXi4503.

 

A variable interest entity (VIE) is (1) an entity that has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or (2) an entity that has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or do not receive the expected residual returns of the entity. A VIE should be consolidated by the party that is deemed to be the primary beneficiary, which is the party that has exposure to a majority of the potential variability in the VIE’s outcomes. The application of accounting policy to a given arrangement requires significant management judgment.

 

We consolidated the financial position and results of operations of ViDA in accordance with proper accounting guidance. We believe ViDA was by design a VIE because we had a purchase option to acquire its outstanding voting stock at prices that are fixed based upon the date the option is exercised. The fixed nature of the purchase option price limited Symphony’s returns, as the investor in ViDA. Further, due to the direct investment from Holdings in our common stock, as a related party ViDA was a VIE of which we were the primary beneficiary. After we exercised the purchase option, ViDA became a wholly-owned subsidiary of ours and ceased being a VIE.

 

Accounting and Reporting of Noncontrolling Interests

 

On January 1, 2009, we adopted (retrospectively for all periods presented) the new presentation requirements for noncontrolling interests required by ASC 810 Consolidations. Under ASC 810, earnings or losses attributed to the noncontrolling interests are reported as part of consolidated earnings and not as a separate component of income or expense. Accordingly, we reported the consolidated earnings of ViDA in its consolidated statement of operations from October 2008, when we entered into a strategic collaboration with Symphony, until July 20, 2009, when we acquired 100% of the equity of ViDA pursuant to the Amended and Restated Purchase Option Agreement. Once becoming our wholly-owned subsidiary, the operating results of ViDA continued to be included in our consolidated statement of operations but were no longer subject to the presentation requirements applicable to noncontrolling interests.

 

Losses incurred by ViDA, and attributable to Symphony, were charged to the noncontrolling interest. At December 31, 2008, the noncontrolling interest balance was $9,432,000. Losses charged to the noncontrolling interest in fiscal 2009 of $4,215,000 left the carrying balance of $5,217,000 which was eliminated with the acquisition. See “Acquisition of ViDA pursuant to an Amended and Restated Purchase Option Agreement” above.

 

Committed Equity Financing Facility (“CEFF”) with Kingsbridge Capital Limited

 

In February 2008, we entered into a Committed Equity Financing Facility (“CEFF”) with Kingsbridge Capital, which was subsequently amended in February 2010 to increase the commitment period, increase the draw down discount price and increase the maximum draw period.

 

Under the terms of the amended CEFF, Kingsbridge committed to purchase, subject to certain conditions, up to 5,708,035 shares of our common stock or up to an aggregate of $40,000,000 during the period which ends May 15, 2012. Under the CEFF, we are able to draw down in tranches of up to a maximum of 3.75 percent of our closing market value at the time of the draw down or the alternative draw down amount calculated pursuant to the Common Stock Purchase Agreement whichever is less, subject to certain conditions. The purchase price of these shares is discounted between 5 to 14 percent from the volume weighted average price of our common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares at prices below $0.75 per share or at a price below 85% of the closing

share price our stock in the trading day immediately preceding the commencement of the draw down, whichever is higher. In connection with the CEFF, we issued a warrant to Kingsbridge to purchase 250,000 shares of our common stock at a price of $2.74 per share exercisable beginning six months after February 19, 2008 for a period of five years thereafter. (See Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in the Company’s Common Stock, below.) As of December 31, 2009, there remain a total of 5,073,435 shares available for sale under the CEFF.

 

Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in the Company’s Common Stock

 

In connection with the strategic collaboration with Symphony in October 2008 discussed above, we issued to Holdings, a warrant (the “Direct Investment Warrant”) to purchase 11,281,877 shares of our common stock at $1.11 per share, the closing price of our common stock on the NASDAQ Global Market on September 30, 2008, the day before the consummation of the Symphony transaction. The term of this warrant was ten years from the date of issuance or until October 17, 2018. This warrant was exercised on December 30, 2008 subsequent to the approval of issuance of common stock underlying the warrant by our stockholders at a special meeting of stockholders on December 9, 2008.

 

In addition, we agreed that should the development committee of ViDA determine that ViDA needs additional funding and that funding is provided by Holdings, we would issue to Holdings shares of our common stock having a value of up to $1,000,000 (the “Additional Investment Shares”) on the date of issuance. Because the closing price of our common stock as of the additional closing date was not determinable, the number of potential shares issuable to Holdings to satisfy this $1,000,000 Additional Investment Shares obligation would not be known and there was a possibility that the number of shares necessary to settle the Additional Investment Shares obligation would be greater than the number of shares that we had authorized.

 

In February 2008, we issued five-year warrants exercisable beginning in August 2008 to Kingsbridge Capital Limited in consideration for entering into a Committed Equity Financing Facility (“CEFF”). Through these warrants (the “CEFF Warrants”), Kingsbridge may purchase from us up to 250,000 shares of common stock with an exercise price of $2.74 per share. As of December 31, 2009, none of these warrants had been exercised.

 

Due to the indeterminable number of shares required to meet the Additional Investment Shares obligation, we determined that we may not have sufficient authorized shares to settle our outstanding financial instruments. Our policy with regard to settling outstanding financial instruments is to settle those with the earliest maturity date first which essentially sets the order of preference for settling the awards. Accordingly, we accounted for the Direct Investment Warrant, Additional Investment Shares and CEFF Warrant (collectively the “Derivative Instruments”) as liabilities. We began the treatment of these Derivative Instruments as liabilities (excluding the Direct Registration Warrants which, as discussed below, were not issued until July 2009) as of October 17, 2008, the initial funding and effective date of the Symphony transaction. Establishing the value of these Derivative Instruments is an inherently subjective process. The value of both the Direct Investment Warrant and the CEFF Warrant are determined using the Black-Scholes option model. The value of the Additional Investment Shares is determined by considering a number of factors, including among others, the probability and amount of the additional funding provided by Holdings, if any, the probability that we would provide the additional funding amount, and the timing of meeting the potential obligation. Differences in value from one measurement date to another were recorded as other income/expense in our statement of operations.

 

In October 2008, we recorded a $9,424,000 liability for the fair value of the Derivative Instruments. We remeasured the Derivative Instruments (excluding the Direct Registration Warrants which, as discussed below, were not issued until July 2009) as of December 31, 2008 resulting in a gain of $3,335,000 as a result of the change in fair value of the Direct Investment and the Kingsbridge CEFF warrants.

 

As of June 30, 2009, the Additional Investment Shares had a fair value of zero as a result of the Additional Funding Agreement being terminated by us through the Amended and Restated Purchase Option

Agreement executed on July 2, 2009. As a result of the Additional Investment Share obligation being terminated, the possibility that we may not have sufficient authorized shares to settle our outstanding financial instruments was eliminated. In fiscal year 2009, the change in fair value of the Additional Investment shares resulted in a non-cash gain of $444,000. As of July 20, 2009, we re-measured the fair value of the CEFF Warrants and reclassified the warrants to equity. In fiscal year 2009, the change in fair value of the CEFF Warrants resulted in a non-cash loss of $133,000.

 

Direct Registration Warrants

 

On July 20, 2009, we raised approximately $10,000,000 in gross proceeds, before deducting placement agents’ fees and other offering expenses, in a registered direct offering (the “Offering”) relating to the sale of 6,250,000 units, each unit consisting of (i) one share of common stock, (ii) a five-year warrant (“Direct Registration Series I”) to purchase 0.45 shares of common stock at an exercise price of $2.10 per share of common stock and (iii) a short-term warrant (“Direct Registration Series II”) to purchase 0.45 shares of common stock at an exercise price of $1.60 per share of common stock, for a purchase price of $1.60 per unit (the “Units”). The short-term warrants are exercisable during a period beginning on the date of issuance until the later of (a) nine months from the date of issuance and (b) ten trading days after the earlier of (i) the public announcement of the outcome of the planned interim analysis by the Independent Data Safety Monitoring Committee of data from our Phase II/III pivotal clinical trial regarding ZYBRESTAT as a treatment for anaplastic thyroid cancer or (ii) the public announcement of the suspension, termination or abandonment of such trial for any reason.

 

The Units were offered and sold pursuant to (i) a prospectus dated December 1, 2008 and (ii) a prospectus supplement dated July 15, 2009, pursuant to and forming a part of our effective shelf registration statement on Form S-3 (Registration No. 333-155371). The net proceeds to the Company from the sale of the Units, after deducting the fees of the placement agents and other offering expenses, were approximately $9,029,000. We determined that the Direct Registration Series I and II warrants should be classified as a liability as they require delivery of registered shares of common stock and thus could require net-cash settlement in certain circumstances. Accordingly, these warrants were recorded as a liability at their fair value as of the date of their issuance of $4,055,000 and are revalued at each subsequent reporting date. As of December 31, 2009 the warrants are valued at $2,200,000. The change in fair value between the issuance date and December 31, 2009 of $1,855,000 was recorded as a non-cash gain in the statement of operations.

 

Reclassifications

 

Prior year amounts have been reclassified to conform to current year presentation to reflect an allocation of facilities related costs from General and Administrative expenses to Research and Development expenses. For the years ended December 31, 2008 and 2007, approximately $561,000 and $381,000, respectively, were reclassified to Research and Development expenses.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentration of Credit Risk

 

We have no significant off balance sheet concentrations of credit risk. Financial instruments that potentially subject us to concentrations of credit risk primarily consist of cash and cash equivalents. We hold our cash and cash equivalents at one financial institution.

Cash, Restricted Cash and Cash Equivalents

 

We consider all highly liquid financial instruments with maturities of three months or less when purchased to be cash equivalents. We have $140,000 that is used to secure financing through a Company credit card. This amount is separated from cash and cash equivalents on the Consolidated Balance Sheet.

 

Available-for-Sale Securities

 

We view our marketable securities as available for use in our current operations, and accordingly designate our marketable securities as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, if any, reported as accumulated other comprehensive income (loss) in stockholders’ equity. We review the status of the unrealized gains and losses of our available-for-sale marketable securities on a regular basis. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. Interest and dividends on securities classified as available-for-sale are included in investment income. Securities in an unrealized loss position deemed not to be other-than-temporarily impaired, due to management’s positive intent and ability to hold the securities until anticipated recovery, with maturation greater than twelve months are classified as long-term assets.

 

Accrued Clinical Costs

 

We charge all research and development expenses, both internal and external costs, to operations as incurred. Our research and development costs represent expenses incurred from the engagement of outside professional service organizations, product manufacturers and consultants associated with the development of our potential product candidates. We recognize expense associated with these arrangements based on the completion of activities as specified in the applicable contracts. Costs incurred under fixed fee contracts are accrued ratably over the contract period absent any knowledge that the services will be performed other than ratably. Costs incurred under contracts with clinical trial sites and principal investigators are generally accrued on a patients-treated basis consistent with the terms outlined in the contract. In determining costs incurred on some of these programs, we take into consideration a number of factors, including estimates and input provided by our internal program managers. Upon termination of such contracts, we are normally only liable for costs incurred or committed to date. As a result, accrued research and development expenses represent our estimated contractual liability to outside service providers at any of the relevant times. Any advance payments for goods or services to be used or rendered in future research and development activities pursuant to an executory contractual arrangement are properly classified as prepaid until such goods or services are rendered.

 

Impairment of Long-lived Assets

 

On August 2, 1999, we entered into an exclusive license for the commercial development, use and sale of products or services covered by certain patent rights owned by Arizona State University. The present value of the amount payable under the license agreement has been capitalized based on a discounted cash flow model and is being amortized over the term of the agreement (approximately 15.5 years). Management is required to perform an impairment analysis of its long-lived assets if triggering events occur. We review for such triggering events periodically and, even though triggering events such as a going concern opinion and continuing losses occurred, we have determined that there is no impairment to this asset during the years ended up to and including December 31, 2009. In addition, the agreement provides for additional payments in connection with the license arrangement upon the initiation of certain clinical trials or the completion of certain regulatory approvals, which payments could be accelerated upon the achievement of certain financial milestones as defined in the agreement. To date no clinical trials triggering payments under the agreement have been completed and no regulatory approvals have been obtained. We expense these payments to research and development in the period that payment becomes both probable and estimable.

Stock-Based Compensation

 

We record the expense recognition of the estimated fair value of all share-based payments issued to employees. The valuation of employee stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable employee stock options. Accordingly, an option pricing model is utilized to derive an estimated fair value. In calculating the estimated fair value of our stock options, we used the Black-Scholes option pricing model which requires the consideration of the following six variables for purposes of estimating fair value:

 

 

Stock Option Exercise Price & Grant Date Price of our common stock — The closing market price of our common stock on the date of grant.

 

Expected Term — The expected term of options represents the period of time for which the options are expected to be outstanding and is based on an analysis of historical behavior of participants over time

 

Expected Volatility — The expected volatility is a measure of the amount by which our stock price is expected to fluctuate during the term of the option granted. We determine the expected volatility based on the historical volatility of our common stock over a period commensurate with the option’s expected term.

 

Expected Dividends — Because we have never declared or paid any cash dividends on any of our common stock and do not expect to do so in the foreseeable future, we use an expected dividend yield of zero to calculate the grant date fair value of a stock option.

 

Risk-Free Interest Rate — The risk-free interest rate is the implied yield available on U.S. Treasury issues with a remaining life consistent with the option’s expected term on the date of grant.

 

Of the variables above, the selection of an expected term and expected stock price volatility are the most subjective. In the years ended December 31, 2009 and 2008, respectively, we granted options to purchase 1,454,000 and 366,000 shares of our common stock valued using these assumptions. The majority of the stock option expense recorded in these periods relates to continued vesting of stock options and restricted stock that were granted after January 1, 2006. The grant date estimates of fair value associated with prior awards, which were also calculated using the Black-Scholes option pricing model, have not been changed. The specific valuation assumptions that were utilized for purposes of deriving an estimate of fair value at the time that prior awards were issued are disclosed in Footnote 1.

 

We are required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. This requirement applies to all awards that are not yet vested, including awards granted prior to January 1, 2006. Accordingly, we performed a historical analysis of option awards that were forfeited prior to vesting, and ultimately recorded total stock option expense that reflected this estimated forfeiture rate. In our calculation, we segregated participants into two distinct groups, (1) directors and officers and (2) employees, and our estimated forfeiture rates were calculated at 25% and 50%, respectively using the Straight Line (Uniform) method. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary.

Employee Stock Purchase Plan

 

In May 2009, our stockholders approved the 2009 ESPP. Under the 2009 ESPP, employees have the option to purchase shares of our common stock at 85% of the closing price on the first day of each purchase period or the last day of each purchase period (as defined in the 2009 ESPP), whichever is lower, up to specified limits. Eligible employees are given the option to purchase shares of our common stock, on a tax-favored basis, through regular payroll deductions in compliance with Section 423 of the Code. An aggregate of 2,000,000 shares of common stock may be issued under the 2009 ESPP, subject to adjustment each year pursuant to the terms of the 2009 ESPP. We recorded expense from June 1, 2009 to December 31, 2009 of approximately $50,000 and issued 75,000 shares.

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS 168”), which establishes the FASB Accounting Standards Codification as the source of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements. The provisions of SFAS 168 were adopted by us and the Accounting Standards Codification has been reflected within the disclosures within the consolidated financial statements. The adoption of SFAS 168 had no impact on our consolidated financial statements.

 

On January 1, 2009, we adopted the provisions of SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), as codified in FASB ASC topic 805, Business Combinations (“ASC 805”), and will apply such provisions prospectively to business combinations that have an acquisition date on or after January 1, 2009. ASC 805 establishes principles and requirements for how an acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures goodwill acquired in a business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after purchase accounting is completed will be recognized in earnings rather than as an adjustment to the cost of acquisition. This accounting treatment for deferred tax asset valuation allowances and acquired income tax uncertainties is applicable to acquisitions that occurred both prior and subsequent to the adoption of ASC 805. The adoption of the provisions of ASC 805 did not affect our historical consolidated financial statements.

 

On May 28, 2009, the FASB issued SFAS No. 165 Subsequent Events (“SFAS 165”), as codified in FASB ASC topic 855, Subsequent Events (“ASC 855”). ASC 855 provides guidance related to the accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 requires us to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The adoption of ASC 855 did not have a material impact on our consolidated financial statements.

 

On January 1, 2009, concurrent with the adoption of ASC 805, the Company also adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 ( SFAS 160), as codified in FASB ASC topic 810, Consolidation (ASC 810). ASC 810 changes the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. The adoption of ASC 810 affected our presentation of the minority interest in Symphony Vida.

 

The FASB issued ASC 320, entitled “Recognition and Presentation of Other-Than-Temporary Impairments”. ASC 320 provides new guidance on the recognition and presentation of an other-than-temporary impairments (OTTI) and provides for some new disclosure requirements. We adopted ASC 320 during the quarter ended June 30, 2009. The adoption did not have a material impact on our financial statements.

The FASB issued ASC 815 entitled “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock”. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. The adoption of the provisions of ASC 815 did not have a material impact on our financial position and results of operations.

 

Years ended December 31, 2009 and 2008

 

Revenues

 

We recognized approximately $12,000 in licensing revenue in the year ended December 31, 2008, in connection with the license of our nutritional and diagnostic technology. We did not recognize any license revenue in the year ended December 31, 2009. Future revenues, if any, from this license agreement are expected to continue to be minimal.

 

Our future revenues will depend upon our ability to establish collaborations with respect to, and generate revenues from products currently under development by us. We expect that we will not generate meaningful revenue in fiscal 2010 unless and until we enter into new collaborations providing for funding through the payment of licensing fees and up-front payments.

 

Costs and Expenses

 

The following table summarizes our operating expenses for the periods indicated, in thousands and as a percentage of total expenses:

 

 

Research and development expenses

 

The table below summarizes the most significant components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses and provides the changes in these components and their percentages:

 

 

The most significant component of the increase in research and development expenses in fiscal 2009 over fiscal 2008 of $3,261,000 was for employee compensation and related expenses. In fiscal 2009, in order to support our multiple worldwide clinical studies, one of which was a registrational study, we experienced an increase in our average headcount of approximately 13 R&D employees or approximately 66%. This resulted

in increases in salaries, benefits, recruitment costs and travel costs in fiscal 2009 over fiscal 2008. In addition, we incurred one-time severance expenses of approximately $690,000 primarily associated with two executives who departed the Company in fiscal 2009. The increase in R&D headcount described above also contributed to the increase in Facilities and related costs of $165,000 in fiscal 2009 over fiscal 2008. The decrease in stock based compensation of $152,000 in fiscal 2009 from fiscal 2008 was as a result of forfeitures of grants by executives and non-recurring vesting expense in 2009 of restricted stock grants.

 

With regards to the external services component of our research and development expenses, we experienced a decrease of approximately $1,000,000 on our ZYBRESTAT for oncology program in fiscal 2009 from fiscal 2008 as we concluded our Phase II trial for the treatment of platinum resistant ovarian cancer and a number of other smaller studies in fiscal 2009. We increased expenditures in fiscal 2009 versus fiscal 2008 by approximately $965,000 in our OXi4503 program which includes our Phase I trial of OXi4503 in solid tumors and our Phase I trial of ZYBRESTAT in combination with bevacizumab in solid tumors. We also increased expenditures in fiscal 2009 versus fiscal 2008 in our ZYBRESTAT for Ophthalmology program by approximately $1,369,000, primarily attributable to the initiation of our PCV study. The increases in expenditures on our OXi4503 and ZYBRESTAT for Ophthalmology programs were offset by a decrease in Non-clinical expenditures for those programs of approximately $800,000 in fiscal 2009 versus fiscal 2008.

 

General and administrative expenses

 

The table below summarizes the most significant components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses and provides the changes in these components and their percentages:

 

 

In fiscal 2009 versus fiscal 2008 general and administrative costs increased $1,943,000. The most significant component of this increase was due primarily to an increase of $1,911,000 in consulting and professional services. In fiscal 2009, we incurred one-time costs of approximately $1,341,000 in connection with our proposed merger with VaxGen. These costs included accounting, legal and printing costs incurred in preparation for the acquisition. In addition, we experienced an increase in fiscal 2009 over fiscal 2008 in legal and other advisory consulting and professional services expenses of approximately $540,000 primarily attributable to an initiative we undertook to review and improve our quality, vendor oversight and regulatory compliance, as well as advisory services in connection with the management of the Symphony ViDA.

 

Employee compensation and related expenses in fiscal 2009 versus fiscal 2008 increased by $561,000. This increase is primarily due to severance costs in connection with the departure of our former CEO of approximately $350,000. In addition, our average G&A headcount increased in fiscal 2009 over fiscal 2008 by approximately 1, or approximately 6%, which accounted for increases in salaries, benefits and travel costs in fiscal 2009 over fiscal 2008. The decrease in stock based compensation of $390,000 in fiscal 2009 versus fiscal 2008 is primarily a result of forfeitures of options by directors and executives who departed the company in fiscal 2009.

 

We expect that we will continue to incur general and administrative expenses at an appropriate level to support the ongoing development of our potential product candidates and to meet the requirements of being a public company.

Other Income and Expenses

 

The table below summarizes Other Income and Expense in our Income Statement for the years 2009 and 2008, in thousands.

 

 

The decrease in Investment income of $508,000 for fiscal 2009 from fiscal 2008 is primarily a result of a reduction in our average month end cash balance available for investment and lower average rate of return.

 

We record unrealized (non cash) gain/(loss) as a result of the change in the estimated Fair Market Value (“FMV”) of our Derivative Liabilities and the common stock warrants issued in connection with the Offering discussed in Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in the Company’s Common Stock, Note 1 to the financial statements, Summary of Significant Accounting Policies.

 

In fiscal 2009, we recorded a gain relating to the change in fair value of outstanding warrants which were accounted for as liabilities of $2,166,000. The short-term and long-term direct registration warrants change in fair value from the date of issue of July 20, 2009 to December 31, 2009 was $1,855,000. The change in fair value of the CEFF Warrant and Additional investment warrants from December 31, 2008 to July 20, 2009, the date on which both instruments were no longer treated as liabilities, was $311,000.

 

In fiscal 2008, we recorded a gain of $3,335,000 relating to the change in fair value of outstanding warrants, which were accounted for as liabilities. The majority of this gain, or $3,312,000, is due to the Direct Investment Warrant issued to Symphony Capital in October 2008 and exercised by them in December 2008 following the approval by our stockholders of the issuance of our common stock underlying the warrant at a special meeting of stockholders on December 9, 2008. The gain represents the change in value between the Direct Investment Warrant issue date and December 30, 2008, the date that the Direct Investment Warrant was exercised. The remainder of the gain reflects the change during the fourth quarter in value of the CEFF Warrant issued to Kingsbridge Capital.

 

The Other income (expense) amounts are derived from our gain and loss on foreign currency exchange and reflect both a change in number of foreign clinical trials and the fluctuation in exchange rates.

 

Restructuring Plan

 

We announced on February 11, 2010 a restructuring plan designed to focus resources on our highest-value clinical assets and reduce our cash utilization. Key aspects of the restructuring and its effects on our current clinical trials are as follows:

 

 

 

Tax Matters

 

At December 31, 2009, the Company had a net operating loss carry-forward of approximately $67,923,000 for U.S. income tax purposes, which will be expiring for U.S. purposes through 2028. Due to the degree of uncertainty related to the ultimate use of these loss carry-forwards, we have fully reserved this future benefit. Additionally, the future utilization of the U.S. net operating loss carry-forwards is subject to limitations under the change in stock ownership rules of the Internal Revenue Service. The valuation allowance increased by approximately $8,466,000 and approximately $9,612,000 for the years ended December 31, 2009 and 2008, respectively, due primarily to the increase in net operating loss carry-forwards.

 

Years ended December 31, 2008 and 2007

 

Revenues

 

We recognized approximately $12,000 in licensing revenue in each of the years ended December 31, 2008 and 2007, in connection with the license of our nutritional and diagnostic technology. Future revenues, if any, from this license agreement are expected to continue to be minimal.

 

Costs and Expenses

 

The following table summarizes our operating expenses for the periods indicated, in thousands and as a percentage of total expenses:

 

Research and development expenses

 

The table below summarizes the most significant components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses and provides the changes in these components and their percentages:

 

 

External services expenses are comprised of costs incurred for consultants, contractors and outside service providers that assist in the management and support of our development programs. The increase in these costs in fiscal 2008 over fiscal 2007 is primarily attributable to an increase in expenditures on our ZYBRESTAT oncology programs, namely, our Phase II/III clinical trial for the treatment of anaplastic thyroid cancer, our Phase II trial in combination with bevacizumab^® for the treatment of non small cell lung cancer, and our Phase II trial for the treatment of platinum resistant ovarian cancer, totaling approximately $4,704,000. These increases were offset by decreases in expenditures on both our Phase I trial of OXi4503 in solid tumors and our Phase I trial of ZYBRESTAT in combination with bevacizumab in solid tumors, totaling approximately $1,018,000. In addition, we experienced an increase in our pre-clinical study expenses of approximately $871,000, which was offset by a decrease in drug manufacturing expenses of approximately $753,000.

 

The increase in facilities related expense is due to the expansion of office space in the San Francisco area in fiscal 2008 over 2007 and an increase in the average number of employees to support the continued development of our product candidates. The increase in employee compensation and related expenses is attributable to an increase in the average number of employees, excluding contractors, in fiscal 2008 over fiscal 2007 of approximately 30%.

 

General and administrative expenses

 

The table below summarizes the most significant components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses and provides the changes in these components and their percentages:

 

Although employee compensation and related expenses in fiscal 2008 from fiscal 2007 increased by $30,000 it was due to non-recurring payments and awards made in 2007 in accordance with executive employment agreements and the addition of a senior level executive in 2007 that were not repeated in fiscal 2008 offset by an increase in temps and contractor cost in 2008. The decrease in stock-based compensation in fiscal 2008 from fiscal 2007 is attributable to the departure of our former Chief Executive Officer in 2008 and the full vesting in fiscal 2007 of a number of options granted to our directors and officers that was not repeated in fiscal 2008. As grants of equity awards have not historically been made on a consistent basis year to year, the expense recognized for stock-based compensation is highly variable.

 

The increase in consulting and professional services expenses in fiscal 2008 over fiscal 2007 of $172,000 is attributable to increases in legal and contracted services and advisory costs in connection with the establishment of our committed equity financing facility and the initiation of Symphony ViDA Inc. The decrease in other expenses in fiscal 2008 from fiscal 2007 of $218,000 is consistent with the overall reduction in spending in the combined general and administrative expense categories.

 

Other Income and Expenses

 

In fiscal 2008, we recorded a gain of $3,335,000 relating to the change in fair value of outstanding warrants, which were accounted for as liabilities. The majority of this gain, or $3,312,000, is due to the Direct Investment Warrant issued to Symphony Capital in October 2008 and exercised by them in December 2008 following the approval by our stockholders of the issuance of our common stock underlying the warrant at a special meeting of stockholders on December 9, 2008. The gain represents the change in value between the Direct Investment Warrant issue date and December 30, 2008, the date that the Direct Investment Warrant was exercised. The remainder of the gain reflects the change during the fourth quarter in value of the CEFF Warrant issued to Kingsbridge Capital.

 

Investment income decreased by approximately $1,337,000, or 68%, in fiscal 2008, compared to fiscal 2007, primarily due to a combination of lower average cash, cash equivalents and available-for-sale marketable securities balances during 2008 and by lower average interest rates and returns on investments.

 

We will require significant additional funding to remain a going concern and to fund operations. To date, we have financed our operations principally through net proceeds received from private and public equity financing and in fiscal years 2008 and 2009, from research and development services provided to Symphony ViDA Inc. In July 2009, we completed the purchase of Symphony ViDA, Inc., which resulted in the transfer to us of approximately $12,400,000 in cash and marketable securities held by Symphony ViDA, Inc. and we completed a registered direct offering of our common stock and warrants resulting in net proceeds to us of approximately $9,029,000. We have experienced net losses and negative cash flow from operations each year since our inception, except in fiscal 2000. As of December 31, 2009, we had an accumulated deficit of approximately $183,929,000. We expect to incur increased expenses, resulting in losses, over at least the next several years due to, among other factors, our continuing and planned clinical trials and anticipated research and development activities. We had cash, restricted cash and cash equivalents of approximately $14,072,000 at December 31, 2009.

The following table summarizes our cash flow activities for the periods indicated, in thousands:

 

 

Included in non-cash adjustments to net loss are a gain on change in valuation of warrants of $2,166,000, the loss attributed to noncontrolling interests of approximately $4,215,000 and changes to the rent loss accrual of approximately $60,000 which were offset in part by stock based compensation of approximately $852,000 and depreciation and amortization expense of $220,000. The changes in operating assets reflect an increase in accounts payable, accrued expenses and other payables of approximately $1,852,000 partially offset by an increase in prepaid expenses and other assets of approximately $210,000.

 

On February 11, 2010, we announced a restructuring of our clinical development programs. This restructuring plan is designed to focus our resources on our highest-value clinical assets and reduce our cash utilization. This restructuring includes a plan to stop further enrollment in the our Phase 2/3 anaplastic thyroid cancer clinical trial (FACT) and a reduction in our work force of approximately 49% (20 employees). In addition, the further development of our ongoing clinical trials will depend on upcoming analysis and results of these ongoing clinical studies and our cash resources at that time.

 

We expect to incur a one-time charge in connection with the reduction of our work force of approximately $600,000 in the first quarter of 2010 for severance pay and benefits to those former employees affected by the reduction. This re-alignment of priorities in clinical programs together with the reduction in force is expected to reduce the cash required to operate our business from the current level of between $7,000,000 and $8,000,000 per quarter to between $4,000,000 and $5,000,000 per quarter by the second half of 2010.

 

On July 20, 2009, we raised approximately $10,000,000 in gross proceeds, before deducting placement agents’ fees and other offering expenses, in a registered direct offering relating to the sale of 6,250,000 units,

each unit consisting of (i) one share of common stock, (ii) a five-year warrant to purchase 0.45 shares of common stock at an exercise price of $2.10 per share of common stock and (iii) a short-term warrant to purchase 0.45 shares of common stock at an exercise price of $1.60 per share of common stock, for a purchase price of $1.60 per unit. The short-term warrants are exercisable during a period beginning on the date of issuance until the later of (a) nine months from the date of issuance and (b) ten trading days after the earlier of (i) the public announcement of the outcome of the planned interim analysis by the Independent Data Safety Monitoring Committee of data from our Phase II/III pivotal clinical trial regarding ZYBRESTAT as a treatment for anaplastic thyroid cancer or (ii) the public announcement of the suspension, termination or abandonment of such trial for any reason. The net proceeds to us from the sale of the units, after deducting the fees of the placement agents and other offering expenses, were approximately $9,029,000.

 

Also in July 2009, under an Amended Purchase Option Agreement, we issued 10,000,000 newly-issued shares of our common stock in exchange for all of the equity in the Symphony ViDA. We re-acquired all of the rights to the ZYBRESTAT for ophthalmology and OXi4503 programs that had been licensed to ViDA. In addition, the approximately $12,400,000 in cash and marketable securities held by ViDA was transferred to us.

 

We recorded the acquisition of ViDA as a capital transaction and the $10,383,000 excess of the fair market value of the common shares issued by us ($15,600,000) over the carrying value of the noncontrolling interest ($5,217,000) is reflected directly in equity as a reduction to Additional paid-in capital. As a result, the noncontrolling interest balance was eliminated. The reduction to Additional paid-in capital was also presented as an increase in the loss applicable to common stock within the calculation of basic and diluted earnings per share.

 

On March 11, 2010 we entered into a definitive agreement with certain institutional investors to sell 6,578,945 shares of our Common Stock and, separately, a series of warrants to purchase Common Stock in a private placement. Gross proceeds of the financing were approximately $7,500,000, before deducting placement agent fees and estimated offering expenses, and assuming no exercise of the warrants.

 

We anticipate that our existing cash, restricted cash and cash equivalents of $14,072,000 as of December 31, 2009, along with the capital raised in March 2010 and investment income earned thereon, will enable us to fund currently planned operations through the third quarter of 2010, assuming that we achieve the planned cost reductions from our February 2010 restructuring.

 

Our cash utilization amount is highly dependent on the progress of our potential-product development programs, particularly, the results of our pre-clinical projects, the cost timing and outcomes of regulatory approvals for our product candidates, the terms and conditions of our contracts with service providers for these programs, the rate of recruitment of patients in our human clinical trials, much of which is not within our control as well as the timing of hiring development staff to support our product development plans. The anticipated reduction in our cash utilization, resulting from our restructuring plans, is highly dependent on the timeliness and effectiveness of renegotiating our contracts with the vendors and service providers involved with the restructuring plans. We intend to aggressively pursue other forms of capital infusion including strategic alliances with organizations that have capabilities and/or products that are complementary to our own, in order to continue the development of our potential product candidates.

 

Our cash requirements may vary materially from those now planned for or anticipated by management due to numerous risks and uncertainties. These risks and uncertainties include, but are not limited to: the progress of and results of our pre-clinical testing and clinical trials of our VDA drug candidates under development, including ZYBRESTAT, our lead drug candidate, and OXi4503; the progress of our research and development programs; the time and costs expended and required to obtain any necessary or desired regulatory approvals; the resources, if any, that we devote to developing manufacturing methods and advanced technologies; our ability to enter into licensing arrangements, including any unanticipated licensing arrangements that may be necessary to enable us to continue our development and clinical trial programs; the costs and expenses of filing, prosecuting and, if necessary, enforcing our patent claims, or defending ourselves against possible claims of infringement by us of third party patent or other technology rights; the costs of commercialization activities and arrangements, if any, undertaken by us; and, if and when approved, the demand for our products, which demand is dependent in turn on circumstances and uncertainties that cannot be fully known, understood

or quantified unless and until the time of approval, for example the range of indications for which any product is granted approval.

 

We will need to raise additional funds to support our operations to remain a going concern past the third quarter 2010, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs and other operations. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing may be dilutive to our current stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed will materially harm our business, financial condition and results of operations.

 

Contractual Obligations

 

The following table presents information regarding our contractual obligations and commercial commitments as of December 31, 2009 in thousands:

 

 

Payments under clinical development and related commitments are based on the completion of activities as specified in the contract. The amounts in the table above assume the successful completion, by the third-party contractor, of all of the activities contemplated in the agreements. In addition, not included in operating leases above, is sublease income which totals approximately $233,000 for fiscal 2010.

 

Our primary drug development programs are based on a series of natural products called Combretastatins. In August 1999, we entered into an exclusive license for the commercial development, use and sale of products or services covered by certain patent rights owned by Arizona State University. This agreement was subsequently amended in June 2002. From the inception of the agreement through December 31, 2009, we have paid a total of $2,500,000 in connection with this license. The agreement provides for additional payments in connection with the license arrangement upon the initiation of certain clinical trials or the completion of certain regulatory approvals, which payments could be accelerated upon the achievement of certain financial milestones, as defined in the agreement. The license agreement also provides for additional payments upon our election to develop certain additional compounds, as defined in the agreement. Future milestone payments under this agreement could total $200,000. We are also required to pay royalties on future net sales of products associated with these patent rights.

 

 

At December 31, 2009, we did not hold any derivative financial instruments, commodity-based instruments or other long-term debt obligations. We account for the Direct Registration Warrants as liabilities and as of December 31, 2009 they are valued at $2,200,000.

 

We have adopted an Investment Policy, the primary objectives of which are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields while preserving principal. Although our investments are subject to credit risk, we follow procedures to limit the amount of credit exposure in any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the conservative nature of our investments and relatively short duration, we believe that interest rate risk is mitigated. Our cash and cash equivalents are maintained in U.S. dollar accounts. Although we conduct a number of our trials and studies outside of the

United States, we believe our exposure to foreign currency risk to be limited as the arrangements are in jurisdictions with relatively stable currencies.

 

 

See Item 15 for a list of our Financial Statements and Schedules and Supplementary Information filed as part of this Annual Report.

 

 

Not applicable.

 

 

Evaluation of our Disclosure Controls and Procedures

 

The Securities and Exchange Commission requires that as of the end of the period covered by this Annual Report on Form 10-K, the Chief Executive Officer, CEO, and the Chief Financial Officer, CFO, evaluate the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and report on the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective to ensure that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Exchange Act, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such control that occurred during the fourth quarter of our fiscal year ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

 

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

 

Important Considerations

 

The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that

the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. Because as of June 30, 2009 the Company’s public float value was below $75,000,000, Ernst & Young LLP was not required to issue an opinion on our internal control over financial reporting and, therefore, did not perform for the fiscal year ended December 31, 2009 an audit of our internal control over financial reporting pursuant to Section 404 of the Sarbanes Oxley Act of 2002.

 

 

On February 3, 2010, the Company held a Special Meeting of Stockholders (the “Meeting”). On December 21, 2009, the record date for the Meeting, there were 62,715,109 shares of outstanding common stock of the Company that could be voted at the Meeting. A total of 45,113,594 shares were present, in person or by proxy, and voted at the Meeting. At the Meeting, the proposals to approve the issuance of shares of OXiGENE common stock pursuant to the Agreement and Plan of Merger, dated as of October 14, 2009, by and among OXiGENE, OXiGENE Merger Sub, Inc., VaxGen, Inc. and James P. Panek, as representative of the VaxGen stockholders (Proposal 1); to approve an adjournment of the OXiGENE Meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of OXiGENE Proposal 1 (Proposal 2); and to approve an amendment to the Company’s Restated Certificate of Incorporation to increase the authorized number of shares of the Company’s common stock from 150,000,000 to 175,000,000 (Proposal 3) passed with the following votes:

 

 

There were 7,445,140 broker non-votes for Proposal 1, which had no effect on the vote for Proposal 1.

 

 

The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Proposal 1 — Election of Directors,” “Board and Committee Meetings,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Officers of the Company” and “Code of Conduct and Ethics” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

 

 

The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Executive Compensation,” and “Compensation Discussion and Analysis,” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

 

 

The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

 

The response to this item is incorporated by reference from the discussion responsive thereto under the captions “Certain Relationships and Related Transactions,” “Board and Committee Meetings” and “Executive Compensation” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

 

 

The response to this item is incorporated by reference from the discussion responsive thereto under the caption “Audit Fees” in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.

 

 

(a) The following documents are filed as part of this Annual Report on Form 10-K.

 

(1) Financial Statements

 

See financial statements listed in the accompanying “Index to Financial Statements” covered by the Report of Independent Registered Public Accounting Firm.

 

(2) Financial Statement Schedules

 

None.

 

(3) Exhibits

 

The following is a list of exhibits filed as part of this Annual Report on Form 10-K.

 

EXHIBIT INDEX