Viracta Therapeutics, Inc. - Quarter Report: 2007 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended September 30, 2007
OR
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ________________ to ________________
Commission
file number: 000-51531
SUNESIS
PHARMACEUTICALS, INC.
(Exact
name of Registrant as specified in its Charter)
Delaware
|
|
94-3295878
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S.
Employer Identification Number)
|
341
Oyster Point Boulevard
South
San Francisco, California 94080
(Address
of Principal Executive Offices including Zip Code)
(650)
266-3500
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Large
Accelerated Filer o
Accelerated Filer x
Non-Accelerated Filer o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act). YES o
NO
x
The
registrant had 34,319,314 shares of common stock, $0.0001 par value per share,
outstanding as of October 31, 2007.
SUNESIS
PHARMACEUTICALS, INC.
TABLE
OF CONTENTS
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Page
No.
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PART I.
FINANCIAL INFORMATION
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3
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4
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5
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6
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16
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23
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23
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PART II.
OTHER INFORMATION
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24
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24
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27
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27
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27
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28
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28
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29
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2
SUNESIS
PHARMACEUTICALS, INC.
September
30,
2007
|
December 31,
2006
|
||||||
ASSETS
|
(Unaudited)
|
(1)
|
|||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
12,411,761
|
$
|
6,075,449
|
|||
Marketable
securities
|
42,567,612
|
57,029,199
|
|||||
Prepaids
and other current assets
|
1,189,608
|
1,082,817
|
|||||
Total
current assets
|
56,168,981
|
64,187,465
|
|||||
Property
and equipment, net
|
4,470,776
|
4,728,929
|
|||||
Deposits
and other assets
|
359,974
|
359,974
|
|||||
Total
assets
|
$
|
60,999,731
|
$
|
69,276,368
|
|||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Accounts
payable
|
$
|
556,039
|
$
|
2,477,656
|
|||
Accrued
compensation
|
2,189,961
|
2,323,742
|
|||||
Other
accrued liabilities
|
3,348,309
|
961,766
|
|||||
Current
portion of deferred revenue
|
1,702,031
|
2,260,478
|
|||||
Current
portion of equipment financing
|
939,664
|
885,273
|
|||||
Total
current liabilities
|
8,736,004
|
8,908,915
|
|||||
Non-current
portion of deferred revenue
|
—
|
1,143,159
|
|||||
Non-current
portion of equipment financing
|
1,323,960
|
955,695
|
|||||
Deferred
rent and other non-current liabilities
|
1,581,226
|
1,464,902
|
|||||
Total
liabilities
|
11,641,190
|
12,472,671
|
|||||
Commitments
(Note 6)
|
|||||||
Stockholders’
equity:
|
|||||||
Preferred
stock, $0.0001 par value; 5,000,000 shares authorized, no shares
issued
and
outstanding at September 30, 2007 and December 31,
2006
|
—
|
—
|
|||||
Common
stock, $0.0001 par value; 100,000,000 shares authorized,
34,319,314 shares issued
and outstanding at September 30, 2007; 100,000,000 shares authorized,
29,443,079 shares
issued and outstanding at December 31, 2006
|
3,432
|
2,944
|
|||||
Additional
paid-in capital
|
319,938,390
|
298,073,896
|
|||||
Deferred
stock-based compensation
|
(387,736
|
)
|
(1,006,604
|
)
|
|||
Accumulated
other comprehensive income (loss)
|
32,563
|
(21,376
|
)
|
||||
Accumulated
deficit
|
(270,228,108
|
)
|
(240,245,163
|
)
|
|||
Total
stockholders’ equity
|
49,358,541
|
56,803,697
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
60,999,731
|
$
|
69,276,368
|
(1)
|
The
condensed balance sheet at December 31, 2006 has been derived from
the audited financial statements at that date included in the Company’s
Form 10-K for the fiscal year ended December 31,
2006.
|
See
accompanying notes to condensed consolidated financial statements.
3
SUNESIS
PHARMACEUTICALS, INC.
Three months ended
September
30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
(Unaudited)
|
(Unaudited)
|
||||||||||||
Revenue:
|
|||||||||||||
Collaboration
revenue
|
$
|
80,776
|
$
|
237,046
|
$
|
1,539,110
|
$
|
6,124,418
|
|||||
Collaboration
revenue from related party
|
1,749,498
|
1,712,045
|
5,827,695
|
5,591,890
|
|||||||||
License
revenue
|
—
|
—
|
250,000
|
—
|
|||||||||
Grant
and fellowship revenue
|
—
|
—
|
—
|
37,901
|
|||||||||
Total
revenues
|
1,830,274
|
1,949,091
|
7,616,805
|
11,754,209
|
|||||||||
Operating
expenses:
|
|||||||||||||
Research
and development
|
8,787,118
|
8,583,298
|
27,792,058
|
27,146,773
|
|||||||||
General
and administrative
|
3,408,693
|
3,047,583
|
10,749,034
|
8,882,784
|
|||||||||
Restructuring
charges
|
1,217,848
|
—
|
1,217,848
|
—
|
|||||||||
Total
operating expenses
|
13,413,659
|
11,630,881
|
39,758,940
|
36,029,557
|
|||||||||
Loss
from operations
|
(11,583,385
|
)
|
(9,681,790
|
)
|
(32,142,135
|
)
|
(24,275,348
|
)
|
|||||
Interest
income
|
796,731
|
992,261
|
2,310,285
|
2,495,965
|
|||||||||
Interest
expense
|
(55,903
|
)
|
(45,970
|
)
|
(152,254
|
)
|
(433,625
|
)
|
|||||
Other
income, net
|
232
|
1,856
|
1,159
|
5,749
|
|||||||||
Net
loss
|
$
|
(10,842,325
|
)
|
$
|
(8,733,643
|
)
|
$
|
(29,982,945
|
)
|
$
|
(22,207,259
|
)
|
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Basic
and diluted loss per share
|
$
|
(0.32
|
)
|
$
|
(0.30
|
)
|
$
|
(0.95
|
)
|
$
|
(0.82
|
)
|
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Shares
used in computing basic and diluted
loss per share
|
34,315,961
|
29,333,909
|
31,667,511
|
27,209,536
|
See
accompanying notes to condensed consolidated financial statements.
4
SUNESIS
PHARMACEUTICALS, INC.
Nine months ended September
30,
|
|||||||
2007
|
2006
|
||||||
(Unaudited)
|
|||||||
Cash
flows from operating activities
|
|||||||
Net
loss
|
$
|
(29,982,945
|
)
|
$
|
(22,207,259
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
Depreciation
and amortization
|
1,295,834
|
1,174,805
|
|||||
Stock-based
compensation expense
|
2,488,435
|
2,062,722
|
|||||
Restructuring
charges
|
209,921
|
—
|
|||||
Non-cash
research and development expense
|
—
|
1,999,999
|
|||||
Changes
in operating assets and liabilities:
|
|||||||
Prepaids
and other current assets
|
(106,791
|
)
|
506,681
|
||||
Accounts
payable
|
(1,921,617
|
)
|
156,749
|
||||
Accrued
compensation
|
(133,781
|
)
|
76,807
|
||||
Other
accrued liabilities
|
2,386,543
|
235,982
|
|||||
Deferred
rent and other non-current liabilities
|
116,324
|
79,645
|
|||||
Deferred
revenue
|
(1,701,606
|
)
|
(3,036,915
|
)
|
|||
Net
cash used in operating activities
|
(27,349,683
|
)
|
(18,950,784
|
)
|
|||
Cash
flows from investing activities
|
|||||||
Purchases
of property and equipment
|
(1,160,879
|
)
|
(1,958,730
|
)
|
|||
Purchases
of marketable securities
|
(70,733,619
|
)
|
(38,515,497
|
)
|
|||
Maturities
of marketable securities
|
85,249,145
|
25,647,956
|
|||||
Net
cash provided by (used in) investing activities
|
13,354,647
|
(14,826,271
|
)
|
||||
Cash
flows from financing activities
|
|||||||
Proceeds
from borrowings under equipment financing
|
1,179,337
|
238,568
|
|||||
Payments
on equipment financing
|
(756,681
|
)
|
(864,282
|
)
|
|||
Proceeds
from issuance of common stock and exercise of options, net
of repurchases
|
19,908,692
|
44,376,652
|
|||||
Net
cash provided by financing activities
|
20,331,348
|
43,750,938
|
|||||
Net
increase in cash and cash equivalents
|
6,336,312
|
9,973,883
|
|||||
Cash
and cash equivalents at beginning of period
|
6,075,449
|
17,704,465
|
|||||
Cash
and cash equivalents at end of period
|
$
|
12,411,761
|
$
|
27,678,348
|
|||
Supplemental
disclosure of cash flow information
|
|||||||
Interest
paid
|
$
|
152,254
|
$
|
181,832
|
|||
Non-cash
activities:
|
|||||||
Deferred
stock-based compensation, net of (reversal)
|
$
|
(76,980
|
)
|
$
|
(388,836
|
)
|
|
Issuance
of common stock for in-licensing agreement
|
—
|
$
|
1,999,999
|
See
accompanying notes to condensed consolidated financial statements.
5
SUNESIS
PHARMACEUTICALS, INC.
SEPTEMBER
30, 2007
(Unaudited)
1.
Organization
and Summary of Significant Accounting Policies
Organization
Sunesis
Pharmaceuticals, Inc. (“Sunesis” or the “Company”) was incorporated in the
state of Delaware on February 10, 1998, and its facilities are located in
South San Francisco, California. Sunesis is a clinical-stage biopharmaceutical
company focused on the discovery, development, and commercialization of novel
small molecule therapeutics for oncology and other serious diseases. The
Company’s primary activities since incorporation have been conducting research
and development internally and through corporate collaborators, in-licensing
pharmaceutical compounds, conducting clinical trials, performing business and
financial planning, and raising capital. In January 2007, the Company formed
a
wholly-owned subsidiary, Sunesis Europe Limited, a United Kingdom
corporation.
Sunesis,
Tethering and the Company’s logo are registered trademarks of the Company. All
other trademarks, trade names and service marks appearing in this Quarterly
Report on Form 10-Q are the property of their respective owners.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Actual results could differ materially from these
estimates.
Basis
of Presentation
The
accompanying unaudited, condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by
GAAP for complete financial statements. The financial statements include all
adjustments (consisting only of normal recurring adjustments) that management
believes are necessary for a fair presentation of the periods presented. The
balance sheet at December 31, 2006 was derived from the audited financial
statements at that date. These interim financial results are not necessarily
indicative of results to be expected for the full fiscal year or any other
interim period.
These
unaudited, condensed consolidated financial statements and the notes
accompanying them should be read in conjunction with the Company’s Annual Report
on Form 10-K for the year ended December 31, 2006.
Loss
Per Share
Basic
loss per share is calculated by dividing the net loss by the weighted-average
number of common shares outstanding for the period. Diluted loss per share
is
computed by dividing the net loss by the weighted-average number of common
shares outstanding, and dilutive potential common shares for the period
determined using the treasury-stock method. For purposes of this calculation,
options to purchase common stock and warrants to purchase common stock are
considered to be potential common shares but were excluded from the calculation
of diluted loss per common share for all periods presented since their effect
is
anti-dilutive.
6
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Outstanding
securities not included in
diluted loss per share calculation: |
|
|
|
|
|||||||||
Options
to purchase common stock
|
5,036,647
|
3,149,677
|
5,036,647
|
3,149,677
|
|||||||||
Warrants
to purchase common stock
|
2,693,237
|
2,693,237
|
2,693,237
|
2,693,237
|
|||||||||
Total
|
7,729,884
|
5,842,914
|
7,729,884
|
5,842,914
|
Comprehensive
Loss
Comprehensive
loss is comprised of net loss and unrealized gains and losses on marketable
securities. Comprehensive loss is as follows:
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Net
loss
|
$
|
(10,842,325
|
)
|
$
|
(8,733,643
|
)
|
$
|
(29,982,945
|
)
|
$
|
(22,207,259
|
)
|
|
Change
in unrealized gain/(loss) on marketable
securities
|
34,228
|
12,128
|
53,939
|
55,231
|
|||||||||
Comprehensive
loss
|
$
|
(10,808,097
|
)
|
$
|
(8,721,515
|
)
|
$
|
(29,929,006
|
)
|
$
|
(22,152,028
|
)
|
Accumulated
other comprehensive income (loss) consists of the following:
September
30,
2007
|
December 31,
2006
|
||||||
Unrealized
gain/(loss) on marketable securities
|
$
|
32,563
|
$
|
(21,376
|
)
|
Employee
Stock-Based Compensation
On
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (“SFAS
No. 123(R)”). Under SFAS No. 123(R), stock-based compensation costs for
employees is measured at the grant date, based on the estimated fair value
of
the award at that date, and is recognized as expense over the employee’s
requisite service period, which is generally over the vesting period, on a
straight-line basis.
SFAS
No. 123(R)
Employee
stock-based compensation expense related to all of the Company’s share-based
awards, including stock options granted prior to the Company’s initial public
offering (“IPO”), which continue to be accounted for under Accounting Principles
Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees
(“APB
25”), is as follows for the periods presented:
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Research
and development
|
$
|
320,854
|
$
|
289,588
|
$
|
1,047,218
|
$
|
898,507
|
|||||
General
and administrative
|
421,242
|
396,408
|
1,439,237
|
1,067,036
|
|||||||||
Stock-based
compensation
|
$
|
742,096
|
$
|
685,996
|
$
|
2,486,455
|
$
|
1,965,543
|
The
weighted-average estimated fair value of employee stock options granted during
the three months ended September 30, 2007 and 2006 was $1.56 and $3.31 per
share, respectively, using the Black-Scholes option-pricing model (the
“Black-Scholes Model”). The weighted-average estimated fair value of employee
stock options granted during the nine months ended September 30, 2007 and 2006
was $1.78 and $3.87 per share, respectively, using the Black-Scholes Model.
7
The
Company uses the Black-Scholes Model to value its stock options with the
following assumptions (annualized percentages):
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Volatility
|
68.5%
|
|
80.0%
|
|
68.5%
|
|
80.0%
|
|
|||||
Risk-free
interest rate
|
4.2%
|
|
4.8%
|
|
4.3%
|
|
4.9%
|
|
|||||
Dividend
yield
|
none
|
none
|
none
|
none
|
|||||||||
Expected
term (years)
|
5.1
|
5.0
|
5.1
|
5.0
|
The
weighted-average estimated fair value of purchase rights under our Employee
Stock Purchase Plan (“ESPP”) for the three months ended September 30, 2007 and
2006 was $2.00 and $2.58 per share, respectively. The weighted-average estimated
fair value of purchase rights under the ESPP for the nine months ended September
30, 2007 and 2006 was $1.93 and $2.82 per share, respectively. The
weighted-average estimated fair value of purchase rights under the ESPP was
calculated using the Black-Scholes Model with the following assumptions
(annualized percentages):
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Volatility
|
68.5%
- 80.0%
|
|
80.0%
|
|
68.5%
- 80.0%
|
|
80.0%
|
|
|||||
Risk-free
interest rate
|
4.9%
- 5.1%
|
|
4.4%
- 5.1%
|
|
4.9%
- 5.1%
|
|
3.9%
- 5.1%
|
|
|||||
Dividend
yield
|
none
|
none
|
none
|
none
|
|||||||||
Expected
term (years)
|
0.5
- 1.0
|
0.5
- 1.0
|
0.5
- 1.0
|
0.5
- 1.0
|
The
Company has based its assumptions for volatility and expected term of employee
stock options on the information available with respect to its peer group in
the
same industry. The expected term of the employees’ purchase rights under the
Company’s ESPP is equal to the purchase period. The risk-free interest rate
assumption is based upon observed interest rates appropriate for the expected
life of the Company’s employee stock options and employees’ purchase rights. The
Company does not anticipate paying any cash dividends in the foreseeable future,
and therefore uses an expected dividend yield of zero in both models. SFAS
No.
123(R) also requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The forfeiture rate is estimated based on the Company’s
historical option cancellation and forfeiture information. Forfeitures were
estimated based on historical experience. If factors change and the Company
employs different assumptions in the application of SFAS No. 123(R) in future
periods, the compensation expense that the Company records under SFAS No. 123(R)
may differ significantly from what it has recorded in the current period.
Stock-based
Compensation for Options Granted Prior to the IPO
Prior
to
the Company’s IPO in September 2005, certain stock options were granted with
exercise prices that were below the reassessed fair value of the common stock
at
the date of grant. In accordance with APB 25, deferred stock-based compensation
was recorded for the difference between the estimated fair value of the common
stock underlying the options and the exercise price of the options. The deferred
stock-based compensation is being amortized over the related vesting terms
of
the options.
The
Company records amortization of deferred stock-based compensation in accordance
with the prospective transition method of SFAS No. 123(R) for stock options
granted before December 23, 2004, the date on which the Company filed its
initial registration statement on Form S-1 in connection with its IPO. For
the three months ended September 30, 2007 and 2006, the Company recorded
amortization of deferred stock-based compensation of $0.2 million and $0.2
million, respectively. For the nine months ended September 30, 2007 and 2006,
the Company recorded amortization of deferred stock-based compensation of $0.5
million and $0.5 million, respectively.
8
As
of
September 30, 2007, the expected future amortization expense for deferred
stock-based compensation during each of the following periods is as
follows:
Year ending December 31,
|
||||
2007
remaining period
|
$
|
136,135
|
||
2008
|
251,601
|
|||
Total
amount to be amortized
|
$
|
387,736
|
Accounting
for Uncertainty in Income Taxes
On
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”). There was no impact on the Company’s financial statements upon adoption.
Because of the Company’s historical net operating losses, it has not been
subject to income tax since inception. There were no unrecognized tax benefits
during all the periods presented.
The
Company maintains deferred tax assets that reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
These
deferred tax assets include net operating loss (“NOL”) carryforwards, research
credits and capitalized research and development. The Company’s net deferred tax
assets have been fully offset by a valuation allowance because of the Company’s
history of losses. Under the provisions of Section 382 of the Internal
Revenue Code of 1986, as amended, substantial changes in the Company’s ownership
may limit the amount of NOL carryforwards that can be utilized annually in
the
future to offset taxable income. If a change in ownership of the Company is
deemed to have occurred or occurs in the future, the Company’s ability to use
its NOL carryforwards in any year may be limited.
2.
License
Agreements
Dainippon
Sumitomo Pharma Co., Ltd.
In
October 2003, the Company entered into an agreement with Dainippon Sumitomo
Pharma Co., Ltd. (“Dainippon”) to acquire exclusive worldwide development and
marketing rights for Dainippon’s anti-cancer compound, referred to as
SNS-595.
In
addition to payments already made as of December 31, 2006, the Company may
in the future make a series of milestone payments of up to $8.0 million to
Dainippon based on successful development and regulatory approval of SNS-595
for
cancer indications, as well as royalty payments based on any future product
sales. In return, the Company has received an exclusive, worldwide license
to
develop and market SNS-595. In February 2006, the Company made a $0.5
million milestone payment upon commencement of Phase 2 clinical
trials, which was recorded as research and development expense.
Bristol-Myers
Squibb Company
In
April 2005, the Company entered into an agreement with Bristol-Myers Squibb
Company (“BMS”) to acquire worldwide development and commercialization rights
for BMS’ anti-cancer compound, referred to as SNS-032.
Under
the
terms of this agreement, the Company may in the future be required to make
a
series of milestone payments of up to $29.0 million in cash, equity or any
combination thereof to BMS based on the successful development and approval
for
the first indication and formulation of SNS-032. In addition, the Company may
be
required to make a series of development and commercialization milestone
payments totaling up to $49.0 million in cash, equity or any combination
thereof to BMS, as well as royalty payments, based on any future product net
sales. In return, the Company received worldwide exclusive and non-exclusive
diagnostic and therapeutic licenses to SNS-032 and future CDK inhibitors derived
from related intellectual property. In February 2006, upon commencement of
a Phase 1 clinical trial, the Company made a $2.0 million milestone
payment through the issuance of 404,040 shares of the Company’s common
stock, which was recorded as research and development expense.
9
The
University of California, San Francisco
In
August 2005, and as amended in April 2006, the Company entered into a
research and license agreement with the University of California, San Francisco
(“UCSF”), that provides UCSF a limited license to use Tethering, the Company’s
proprietary fragment-based drug discovery approach, for academic purposes.
UCSF
intends to leverage Tethering to identify novel, small molecule drug candidates.
In return, the Company received an exclusive royalty-free license to any
improvements to Tethering or fragment libraries that emerge from UCSF’s
research. In the event that any small molecules are discovered using Tethering,
the Company will have a right of first negotiation to in-license the compounds.
UCSF is precluded from utilizing the technology for commercial purposes and
from
conducting research in the kinase field or any other drug target on which the
Company is currently interested. The research at UCSF is being conducted by
Dr. James Wells. Dr. Wells was a founder of the Company and is a
member of the Company’s Board of Directors.
SARcode, Inc.
In
March 2006, the Company entered into a license agreement with
SARcode, Inc. (“SARcode”), a privately-held biopharmaceutical company, that
provides SARcode an exclusive, worldwide license to all of the Company’s
lymphocyte
function-associated antigen-1
(“LFA-1”) patents and related know-how. SARcode intends to use the license to
develop small molecule drugs to treat inflammatory diseases. The Company had
previously discontinued its LFA-1 inhibitor program, which is outside of the
Company’s strategic focus.
Pursuant
to the license agreement, in January 2007, the Company received a $0.25
million license fee, which was recorded as revenue, and a $0.25 million note
convertible into preferred stock of SARcode upon certain conditions of the
agreement being met. Both the fee and the note became due upon SARcode’s closing
of its first equity financing. In May 2007, the Company received another
convertible note in the amount of $0.38 million for progress made by SARcode
in
the preclinical development of a novel LFA-1 inhibitor candidate. This second
note is convertible into preferred stock of SARcode under the same conditions
as
the original $0.25 million note. The Company did not record these two notes
receivable from SARcode which are due in 2012 due to uncertainty of
collectibility. In addition to the $0.25 million of cash and the convertible
notes already received, the Company may receive up to $0.38 million in license
fees and convertible notes, $31.25 million in development and marketing
milestone payments, and royalties for the commercialization of a licensed
compound.
3.
Collaboration
Agreements
Johnson &
Johnson Pharmaceutical Research and Development,
L.L.C.
In
May 2002, the Company entered into a research collaboration with
Johnson & Johnson Pharmaceutical Research & Development, L.L.C
(“J&J PRD”) to discover small molecule inhibitors of Cathepsin S, an enzyme
that is important to regulating the inflammatory response. During the research
term of this collaboration, the Company applied its proprietary Tethering
technology to discover novel inhibitors of Cathepsin S.
The
research funding portion of the agreement expired on December 31, 2005.
Costs associated with research and development activities attributable to this
agreement approximated the research funding recognized. The Company may in
the
future receive research and development milestones of up to $24.5 million
as well as royalty payments from J&J PRD based on future product
sales.
Biogen
Idec, Inc.
In
August
2004, the Company entered into a research collaboration with Biogen
Idec, Inc. (“Biogen Idec”) to discover and develop small molecules
targeting RAF kinase and up to five additional oncology kinases, a family of
cell signaling enzymes that play a role in the progression of cancer. The
Company applies its proprietary Tethering technology to generate novel, small
molecule leads that inhibit the oncology kinase targets that are covered by
this
collaboration. This collaboration is still in the research phase and involves
active participation by the Company’s personnel. This collaboration has a
four-year research term, which, if not extended, expires in August
2008.
10
Under
the
terms of the collaboration agreement, the Company received a $7.0 million
upfront non-refundable and non-creditable technology access fee, which is being
recognized as revenue over an initial four-year research term. In the event
that
Biogen Idec decides to exercise its option to extend the initial four-year
research term for one additional year, Biogen Idec is required to pay to the
Company an additional technology access fee as specified in the agreement.
In
addition, the Company receives quarterly research funding of $1.2 million,
subject to inflation adjustments, to be paid by Biogen Idec in advance to
support some of the Company’s research personnel, and the Company may in the
future receive pre-commercialization milestone payments of up to
$60.5 million and royalty payments based on net sales of any compound
resulting from the collaboration. The Company retains an option to participate
in the co-development and co-promotion of product candidates for up to two
targets that may emerge from this collaboration. In April 2006, the Company
received a $0.5 million milestone payment from Biogen Idec for meeting certain
preclinical milestones related to the Raf program, and the Company recorded
it
as revenue.
Merck &
Co., Inc.
In
February 2003, the Company and Merck & Co., Inc. (“Merck”)
entered into a research collaboration to identify and optimize inhibitors of
beta-amyloid converting enzyme (“BACE”), which is believed to play a key role in
Alzheimer’s disease. This collaboration had an initial three-year research term
and a one-year option period. In November 2005, the one-year option was not
exercised by Merck and the research term of the collaboration ended in
February 2006. Accordingly, the upfront, non-refundable and non-creditable
technology access fee was recognized as revenue over the 36-month term of the
agreement ending February 2006. However, the Company retains the right to
earn future milestone payments of up to $45.0 million for BACE and $38.0 million
for all other indications, and royalties on annual net sales of any compound
that results from the collaboration. In June 2006 and again in May 2007,
the Company received milestone payments of $4.25 million and $1.0 million,
respectively, from Merck for meeting certain preclinical milestones related
to
BACE.
In
July
2004, the Company and Merck entered into a multi-year research collaboration
to
discover novel oral drugs for the treatment of viral infections. The Company
provided Merck with a series of small molecule compounds targeting viral
infections. These compounds were derived from Tethering. Merck agreed to be
responsible for advancing these compounds into lead optimization, preclinical
development, and clinical studies. Merck is obligated to pay annual license
fees
ranging from $0.05 million to $0.3 million for the Company’s consulting services
and ongoing access to Tethering as a means of identifying additional compounds
for the treatment of viral infections.
Under
the
terms of the agreement, the Company received an upfront, non-refundable and
non-creditable technology access fee of $2.3 million, which was being
recognized as revenue over an initial three-year research term. The Company
is
also entitled to receive annual license fees aggregating $0.95
million. Through September 30, 2007, the Company has received $0.9 million
in annual license fees. In addition, the Company may receive payments based
on
the achievement of development milestones of up to $22.1 million. In
addition, the Company is entitled to receive royalty payments based on net
sales
for any products resulting from the collaboration. Merck receives an exclusive
worldwide license to any products resulting from the collaboration.
In
connection with the above collaboration agreements, the Company recognized
the
following revenues in the periods presented, which include the amortization
of
upfront fees received, research funding, and milestones earned:
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Merck
|
$
|
80,776
|
$
|
237,046
|
$
|
1,539,110
|
$
|
6,124,418
|
|||||
Biogen
Idec-related party
|
1,749,498
|
1,712,045
|
5,827,695
|
5,591,890
|
|||||||||
Total
collaboration revenue
|
$
|
1,830,274
|
$
|
1,949,091
|
$
|
7,366,805
|
$
|
11,716,308
|
The
Company considers Biogen Idec to be a related party because Biogen Idec owned
approximately 8.5 percent of the Company’s common stock as of September 30, 2007
and approximately 10 percent of the Company’s common stock as of December 31,
2006.
11
4. 2007
Restructuring Plan
On
August
28, 2007, the Company implemented a revised operating plan to focus its efforts
on generating definitive data from its lead programs while streamlining the
Company’s operations and extending its financial resources. The restructuring
plan included an immediate reduction in the Company’s workforce of approximately
twenty-five percent, or 35 employees, to 108 employees. All employees were
given
severance payments, based on length of service at the Company, and career
transition assistance. On October 22, 2007, the Company completed its
consolidation of leased facilities, vacating one property and relocating those
employees to its main location. The Company is currently marketing the vacated
property to prospective sublessees.
The
Company expects to complete all restructuring activities and recognize all
anticipated restructuring charges by the first quarter of 2008. All severance
payments are expected to be made by December 31, 2007.
As
a
result of the restructuring plan, the Company recorded a restructuring charge
in
the third quarter of 2007 of $1.1 million for personnel costs and $0.1 million
for facilities-related and other costs, of which $0.7 million in costs were
settled in cash. The Company estimates that the total amount of the
restructuring charge will be $1.5 million, of which $1.1 million will be
personnel costs and $0.4 million will be facilities related expenses. The cash
portion of the restructuring charge is estimated to be approximately $1.2
million, and the non-cash portion related to stock-based compensation and a
write-off of leasehold improvements on the vacated property is estimated to
be approximately $0.3 million.
The
following table summarizes the accrual balances and utilization by cost type
for
the restructuring plan:
Employee
Severance and Related Benefits
|
Facilities
Related and Other Costs
|
Total
|
||||||||
Balance
at June 30, 2007
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
Restructuring
charges
|
1,094,650
|
123,198
|
1,217,848
|
|||||||
Cash
payments
|
(708,958
|
)
|
—
|
(708,958
|
)
|
|||||
Non-cash
settlement
|
(86,723
|
)
|
(123,198
|
)
|
(209,921
|
)
|
||||
Balance
at September 30, 2007
|
$
|
298,969
|
$
|
—
|
$
|
298,969
|
5. Equipment
Financing and Debt Facility
In
June 2000, the Company entered into an equipment financing agreement with
General Electric Capital Corporation (“GECC”). Various credit lines have been
issued under the financing agreement since 2000. The current $2.6 million credit
line is available through March 28, 2008. As of September 30, 2007, the Company
had drawn a total of $10.4 million under various credit lines under the
financing agreement and the outstanding balance was $2.3 million, which bears
interest at rates ranging from 7.53 percent to 10.61 percent per annum and
is
due in 36 to 48 monthly payments. The equipment loans are secured by the
equipment financed.
In
conjunction with a credit line of $2.5 million under the GECC agreement which
has since expired, the Company issued warrants to GECC to purchase shares of
the
Company’s Series C preferred stock, which converted into warrants to
purchase 1,046 shares of common stock in connection with the Company’s IPO.
The fair value of the warrants issued was insignificant, as determined using
the
Black-Scholes model, and was accounted for as prepaid interest and expensed
on a
straight-line basis over the term of the agreement. This fair value was fully
amortized as of December 31, 2006. As of September 30, 2007, the Company was
in
compliance with all covenants in the GECC agreement.
In
August 2005, the Company entered into a venture loan and security agreement
with Oxford Finance Corporation and Horizon Technology Funding Company LLC,
pursuant to which the Company could borrow up to $15.0 million. The Company
did not borrow any monies under this loan facility and this agreement has
expired. In conjunction with this transaction, the Company issued warrants
to
the lenders to purchase up to 164,830 shares of common stock at a price of
$9.10 per share. These warrants are currently exercisable for 82,415 shares
of common stock and none of the remaining shares covered by the warrants will
vest or become exercisable.
12
The
fair
value of the warrants issued was $0.5 million, as determined using the
Black-Scholes Model, and was accounted for as prepaid interest and expensed
on a
straight-line basis over the term of the agreement. This fair value was fully
amortized as of December 31, 2006.
6.
Contingencies
The
Company is not currently involved in any material legal proceedings. From time
to time, we may become involved in legal proceedings arising in the ordinary
course of the Company’s business.
7.
Stockholders’
Equity
In
March 2006, the Company entered into a common stock and warrant purchase
agreement pursuant to which it sold to certain investors, for an aggregate
purchase price of approximately $45.3 million, 7,246,377 shares of its
common stock and warrants to purchase up to 2,173,914 additional shares of
its
common stock. The purchase price for the common stock and the exercise price
for
the warrants was $6.21 per share. Investors in the financing paid an
additional purchase price equal to $0.125 for each share of common stock
underlying the warrants. The Company received net proceeds of approximately
$43.7 million in this offering.
On
May
30, 2007, the Company completed a public offering of 4,750,000 shares of its
common stock at a public offering price of $4.43 per share. Net cash proceeds
from this offering were approximately $19.5 million after deducting underwriting
discounts and commissions and other offering expenses.
8.
Employee
Benefit Plans
Stock
Option Plans
The
Company generally grants options (i) to new employees which vest and become
exercisable 25 percent on the first anniversary of the vesting commencement
date
and then 1/48th each month thereafter, and (ii) to existing employees which
vest and become exercisable at the rate of 1/48th each month following the
date
of grant over a period of four years.
1998 Stock
Plan and 2001 Stock Plan
The
Company has options outstanding pursuant to its 1998 Stock Plan (“1998 Plan”)
and its 2001 Stock Plan (“2001 Plan”). In conjunction with the
Company's IPO, the Board of Directors elected not to grant any additional
options under either of these stock plans in the future. A description of the
Company's 1998 Plan and 2001 Plan is contained in the Company's Form 10-K/A
for the year ended December 31, 2006.
2005
Equity Incentive Award Plan
In
February 2005, the Board of Directors adopted and, in September 2005,
the stockholders approved the 2005 Equity Incentive Award Plan (the “2005
Plan”). The 2005 Plan is intended to serve as the successor equity incentive
program to the Company’s 1998 Plan and its 2001 Plan. The Company
initially reserved a total of 1,779,396 shares of common stock for issuance
under the 2005 Plan plus any options granted under the Company’s 1998 Plan or
2001 Plan that expire unexercised or are repurchased by the Company pursuant
to
the terms of such options. As of September 30, 2007, options to purchase
3,719,523 shares of the Company’s common stock have been granted under the 2005
Plan and 2,760 shares of common stock have been issued under the 2005
Plan.
Beginning
in 2006, the number of shares of common stock reserved under the 2005 Plan
automatically increases on the first trading day each year by an amount equal
to
the lesser of: (i) 4 percent of the Company’s outstanding shares of common
stock outstanding on such date, (ii) 1,082,352 shares, or (iii) an
amount determined by the Board of Directors. The 2005 Plan was increased by
860,445 shares on January 1, 2006 and by 1,082,352 shares on January 1, 2007
in
accordance with this provision. As of September 30, 2007, the total number
of
shares available for future grants under the 2005 Plan was 520,415. The maximum
aggregate number of shares which may be issued or transferred over the term
of the 2005 Plan is 11,294,112 shares. In addition, no participant in the 2005
Plan may be issued or transferred more than 235,294 shares of common stock
per calendar year pursuant to awards under the 2005 Plan.
13
2006
Employment Commencement Incentive Plan
In
November 2005, the Board of Directors adopted the 2006 Employment
Commencement Incentive Plan (“2006 Plan”), which became effective on
January 1, 2006. The awards granted pursuant to the 2006 Plan are intended
to be inducement awards pursuant to Nasdaq Marketplace
Rule 4350(i)(1)(A)(iv). The 2006 Plan is not subject to the approval of the
Company’s stockholders. Effective January 1, 2007, the Company’s Board of
Directors increased the number of shares of common stock reserved for issuance
under the 2006 Plan by an additional 200,000 shares, such that the total
aggregate number of shares of common stock reserved for issuance under the
2006
Plan is 400,000 shares. Only those employees who have not previously been
employees or directors of the Company or a subsidiary of the Company, or who
become employees following a bona fide period of non-employment by the Company
or a subsidiary of the Company, are eligible to participate in the 2006 Plan.
Additionally, grants awarded to employees under the 2006 Plan must be made
in
connection with the commencement of employment with the Company or a subsidiary
of the Company and must be an inducement material to the employee entering
into
employment with the Company or a subsidiary of the Company. As of September
30,
2007, options to purchase 353,000 shares have been granted under the 2006 Plan
and no shares have been issued under the 2006 Plan.
A
summary
of stock option transactions for all of the Company’s stock option plans since
December 31, 2006 follows:
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding
at December 31, 2006
|
3,942,435
|
$
|
4.30
|
||||||||||
Options
granted
|
1,548,750
|
$
|
2.94
|
||||||||||
Options
exercised
|
(64,107
|
)
|
$
|
2.48
|
|||||||||
Options
canceled/forfeited/expired
|
(390,431
|
)
|
$
|
5.09
|
|||||||||
Balance
at September 30, 2007
|
5,036,647
|
$
|
3.85
|
8.0
|
$
|
34,060
|
|||||||
Exercisable
at September 30, 2007
|
2,271,096
|
$
|
3.80
|
6.5
|
$
|
34,060
|
The
following table summarizes outstanding and exercisable options for all of the
Company’s stock option plans as of September
30, 2007:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
Range
of Exercise Prices
|
Number
Outstanding as of 9/30/07
|
Weighted-
Average Remaining Contractual Term
|
Weighted-
Average Exercise Price
|
Number
Exercisable as of 9/30/07
|
Weighted-
Average
Exercise
Price
|
|||||||||||
$0.43
- $2.31
|
69,417
|
7.5
|
$
|
1.82
|
21,417
|
$
|
0.72
|
|||||||||
$2.55
|
1,298,466
|
5.2
|
$
|
2.55
|
1,260,102
|
$
|
2.55
|
|||||||||
$2.59
|
1,142,650
|
10.0
|
$
|
2.59
|
—
|
—
|
||||||||||
$2.72
- $4.74
|
464,380
|
9.3
|
$
|
4.15
|
79,567
|
$
|
3.95
|
|||||||||
$4.85
|
645,731
|
9.0
|
$
|
4.85
|
173,958
|
$
|
4.85
|
|||||||||
$4.93
- $5.16
|
117,257
|
8.8
|
$
|
5.04
|
40,393
|
$
|
5.06
|
|||||||||
$5.25
|
1,021,431
|
8.2
|
$
|
5.25
|
513,783
|
$
|
5.25
|
|||||||||
$5.50
- $6.40
|
182,716
|
8.8
|
$
|
6.06
|
108,155
|
$
|
6.12
|
|||||||||
$7.15
|
22,400
|
8.5
|
$
|
7.15
|
8,400
|
$
|
7.15
|
|||||||||
$9.56
|
72,199
|
7.7
|
$
|
9.56
|
65,321
|
$
|
9.56
|
|||||||||
$0.43
- $9.56
|
5,036,647
|
8.0
|
$
|
3.85
|
2,271,096
|
$
|
3.80
|
14
The
Company determines the fair value of share-based payment awards on the grant
date using an option-pricing model which is affected by the Company’s stock
price as well as assumptions regarding a number of highly subjective variables.
The total estimated grant date fair value of stock options that were granted
during the three months ended September 30, 2007 and 2006 was approximately
$1.9
million and $0.4 million, respectively. The total estimated grant date fair
value of stock options that were granted during the nine months ended September
30, 2007 and 2006 was approximately $2.8 million and $1.3 million, respectively.
The estimated fair value of shares vested during the three months ended
September 30, 2007 and 2006 was $0.7 million and $0.4 million, respectively.
The
estimated fair value of shares vested during the nine months ended September
30,
2007 and 2006 was $2.1 million and $1.4 million, respectively. At September
30,
2007, total unrecognized estimated compensation cost related to non-vested
stock
options granted prior to that date was $7.3 million and the cost is expected
to
be recognized over a weighted average period of 1.6 years. The total intrinsic
value of stock options exercised during the three months ended September 30,
2007 and 2006 was approximately none and $0.1 million, respectively. The total
intrinsic value of stock options exercised during the nine months ended
September 30, 2007 and 2006 was $0.1 million and $0.3 million, respectively.
For
the three and nine months ended September 30, 2007, the Company recorded cash
received from the exercise of stock options of approximately $28,000 and $0.2
million, respectively. As it is more likely than not that all of the stock
option related tax benefits will not be realized, the Company did not record
net
tax benefits related to the options exercised in the three and nine months
ended
September 30, 2007 and 2006.
Employee
Stock Purchase Plan
In
February 2005, the Board of Directors adopted and in September 2005,
the stockholders approved the 2005 Employee Stock Purchase Plan (“ESPP”). The
Company initially reserved a total of 202,941 shares of common stock for
issuance under the ESPP. The ESPP permits eligible employees to purchase common
stock at a discount through payroll deductions during defined offering periods.
Eligible employees can purchase shares of the Company’s common stock at 85
percent of the lower of the fair market value of the common stock at the
beginning of an offering period or at the purchase date. As of September 30,
2007, there have been 207,660 shares issued under the ESPP.
Beginning
in 2006, the number of shares of common stock reserved under the ESPP
automatically increases on the first trading day each year, by an amount equal
to the lesser of: (i) 0.5 percent of the Company’s outstanding shares of
common stock outstanding on such date, (ii) 135,294 shares, or
(iii) an amount determined by the Board of Directors. The ESPP was
increased by 107,556 shares on January 1, 2006 and by 135,294 shares on January
1, 2007 in accordance with this provision. At September 30, 2007, there were
238,131 shares of common stock reserved for future issuance under the ESPP.
The
maximum aggregate number of shares which may be issued over the term of the
ESPP is 1,352,941 shares. In addition, no participant in the ESPP may be
issued or transferred more than $25,000 of shares of common stock per calendar
year pursuant to awards under the ESPP. No one may purchase more than 1,176
shares during any purchase period. The total estimated fair value of purchase
rights outstanding under the ESPP that vested during the three and nine months
ended September 30, 2007 was approximately none and $0.1 million,
respectively.
9.
Guarantees
and Indemnification
In
November 2002, the FASB issued Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others
(“FIN
45”). FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligations it assumes under
that guarantee.
As
permitted under Delaware law and in accordance with the Company’s Bylaws, the
Company indemnifies its officers and directors for certain events or
occurrences, subject to certain limits, while the officer or director is or
was
serving at the Company’s request in such capacity. The indemnification
agreements with the Company’s officers and directors terminate upon termination
of their employment, but the termination does not affect claims for
indemnification relating to events occurring prior to the effective date of
termination. The maximum amount of potential future indemnification is
unlimited; however, the Company’s officer and director insurance policy reduces
the Company’s exposure and may enable the Company to recover a portion of
any future amounts paid. The Company believes that the fair value of these
indemnification agreements is minimal. In addition, in the ordinary course
of
business the Company enters into agreements, such as licensing agreements,
clinical trial agreements and certain services agreements, containing standard
indemnifications provisions. The Company believes that the likelihood of an
adverse judgment related to such indemnification provisions is remote.
Accordingly, the Company has not recorded any liabilities for any of these
agreements as of September 30, 2007.
15
10.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework
and guidance regarding the methods for measuring fair value, and expands related
disclosures about those measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. We are currently assessing
the impact that SFAS No. 157 will have on our results of operations and
financial position.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
No. 159”). SFAS No. 159 allows entities to choose, at specified election dates,
to measure eligible financial assets and liabilities at fair value in situations
in which they are not otherwise required to be measured at fair value. If a
company elects the fair value option for an eligible item, changes in that
item’s fair value in subsequent reporting periods must be recognized in current
earnings. SFAS No. 159 also establishes presentation and disclosure requirements
designed to draw comparison between entities that elect different measurement
attributes for similar assets and liabilities. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We are currently assessing
the impact that SFAS No. 159 will have on our results of operations and
financial position.
The
following discussion and analysis of our financial condition as of September
30,
2007 and results of operations for the three and nine months ended September
30,
2007 and 2006 should be read together with our financial statements and related
notes included elsewhere in this report. This discussion and analysis contains
“
forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended that involve risks, uncertainties and
assumptions. All statements other than statements of historical facts are
“forward-looking statements” for purposes of these provisions, including any
projections of revenue, expenses or other financial items, any statement of
the
plans and objectives of management for future operations, any statements
concerning proposed new clinical trials or licensing or collaborative
arrangements, any statements regarding future economic conditions or
performance, and any statement of assumptions underlying any of the foregoing.
In some cases, forward-looking statements can be identified by the use of
terminology such as “may,” “will,” “expects,” “plans,” “anticipates,”
“estimates,” “potential,” or “continue” or the negative thereof or other
comparable terminology. Although we believe that the expectations reflected
in
the forward-looking statements contained herein are reasonable, there can be
no
assurance that such expectations or any of the forward-looking statements will
prove to be correct, and actual results could differ materially from those
projected or assumed in the forward-looking statements. . Our actual results
may differ materially from those anticipated in these forward-looking
statements as a result of many factors, including but not limited to those
set
forth under “Risk Factors” and elsewhere in this report. We urge you not to
place undue reliance on these forward-looking statements, which speak only
as of
the date of this report. All forward-looking statements included in this report
are based on information available to us on the date of this report, and we
assume no obligation to update any forward-looking statements contained in
this
report.
In
this
report, “Sunesis,” the “Company,” “we,” “us,” and “our” refer to Sunesis
Pharmaceuticals, Inc.
Business
Overview
We
are a
clinical-stage biopharmaceutical company focused on the discovery, development
and commercialization of novel small molecule therapeutics for oncology and
other serious diseases. We have developed a proprietary fragment-based drug
discovery approach called “Tethering” that we combine with other drug discovery
tools, such as structure-based design and medicinal chemistry, to discover
and
develop novel therapeutics. We have built our product candidate portfolio
through internal discovery and the in-licensing of novel cancer therapeutics.
We
are advancing product candidates through in-house research and development
efforts and strategic collaborations with leading pharmaceutical and
biopharmaceutical companies.
From
our
incorporation in 1998 through 2001, our operations consisted primarily of
developing and refining our drug discovery technologies. Since 2002, we have
focused on the discovery and development of novel small molecule drugs. We
recently underwent a mid-year portfolio review of our ongoing clinical- and
research-stage programs to prioritize and focus our efforts and the allocation
of our financial and human resources. In connection with this review, we
announced in August 2007
a
twenty-five percent reduction in workforce and implementation of a revised
operating plan in order to focus our efforts on generating definitive data
from
our lead programs while streamlining our operations and extending our financial
resources.
16
We
are
currently advancing three proprietary oncology product candidates, SNS-595,
SNS-032 and SNS-314, through in-house research and development efforts. Our
lead
product candidate, SNS-595, is a novel cell cycle inhibitor. With SNS-595,
we
are currently conducting one Phase 2 clinical trial in ovarian cancer, one
Phase 1b combination clinical trial with cytarabine in acute leukemias, and
one
Phase 1b clinical trial in acute leukemias.
Our
second most advanced product candidate, SNS-032, is a potent and selective
inhibitor of cyclin-dependent kinases, or CDKs, 2, 7 and 9. We currently are
conducting a Phase 1 clinical trial with SNS-032 in patients with advanced
B-cell malignancies. We are also developing SNS-314, a targeted small molecule
inhibitor of Aurora kinases, for the treatment of cancer. We began enrolling
patients in a Phase 1 dose escalation trial in patients with advanced solid
tumors in September 2007.
We
have
worldwide development and commercialization rights to SNS-595, SNS-032 (for
diagnostic and therapeutic applications) and SNS-314. We may in the future
enter
into collaborations to maximize the commercial potential of these
programs.
We
have
an ongoing strategic collaboration with Biogen Idec, Inc. to discover and
develop small molecules that inhibit certain oncology kinase targets. This
collaboration is still in the research phase and involves active participation
by our personnel. Under this collaboration, we receive quarterly research
funding of $1.2 million, subject to inflation adjustments, during the four-year
research term which, if not extended, expires in August 2008. We may in the
future receive additional pre-commercialization milestone payments of up to
$60.5 million per target and royalty payments based on product sales by Biogen
Idec as a result of this collaboration.
We
also
have three other ongoing collaborations, one with Johnson & Johnson
Pharmaceutical Research and Development, L.L.C. and two with Merck & Co.,
Inc., under which the research funding portions have expired. However, if our
collaborators advance certain product candidates resulting from these
collaborations, we may be entitled to receive additional milestone payments
as
well as royalty payments based on future product sales, if any. As of September
30, 2007, we had received an aggregate of approximately $80.1 million in cash
from our current and former collaboration and licensing partners in the form
of
stock purchase proceeds and fees from our current and former collaboration
partners.
Since
our
inception, we have generated significant losses. As of September 30, 2007,
we
had an accumulated deficit of $270.2 million, including a deemed dividend of
$88.1 million recorded in conjunction with our initial public offering, or
IPO, in September 2005. We expect our net losses to increase in the future,
primarily due to our anticipated clinical trial activities.
Restructuring
On
August
28, 2007, we implemented a revised operating plan to focus our efforts on
generating definitive data from our lead programs while streamlining the
Company’s operations and extending its financial resources. The restructuring
plan included an immediate reduction in the Company’s workforce of approximately
twenty-five percent, or 35 employees, to 108 employees. All employees were
given
severance payments, based on length of service at the Company and career
transition assistance. On October 22, 2007, we completed our consolidation
of leased facilities, vacating one property and relocating those employees
to
our main location. We are currently marketing the vacated property to
prospective sublessees.
We
expect
to complete all restructuring activities and recognize all anticipated
restructuring charges by the first quarter of 2008. All severance payments
are
expected to be made by December 31, 2007.
As
a
result of the restructuring plan, we recorded a restructuring charge in the
third quarter of 2007 of $1.1 million for personnel costs and $0.1 million
for
facilities-related and other costs, of which $0.7 million in costs were settled
in cash. We estimate that the total amount of the restructuring charge will
be
$1.5 million, of which $1.1 million will be personnel costs and $0.4 million
will be facilities related expenses. The cash portion of the restructuring
charge is estimated to be approximately $1.2 million, and the non-cash portion
related to stock-based compensation and a write-off of leasehold improvements
on
the vacated property is estimated to be approximately $0.3 million.
17
The
following table summarizes the accrual balances and utilization by cost type
for
the restructuring plan:
Employee
Severance and Related Benefits
|
Facilities
Related and Other Costs
|
Total
|
||||||||
Balance
at June 30, 2007
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
Restructuring
charges
|
1,094,650
|
123,198
|
1,217,848
|
|||||||
Cash
payments
|
(708,958
|
)
|
—
|
(708,958
|
)
|
|||||
Non-cash
settlement
|
(86,723
|
)
|
(123,198
|
)
|
(209,921
|
)
|
||||
Balance
at September 30, 2007
|
$
|
298,969
|
$
|
—
|
$
|
298,969
|
Critical
Accounting Policies and Significant Judgments and
Estimates
This
discussion and analysis of our financial condition and results of operations
is
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities and expenses
and the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as revenue and expenses during the reporting
periods. We evaluate our estimates and judgments on an ongoing basis. We base
our estimates on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that
are
not readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or
conditions.
An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at
the
time the estimate is made, and if different estimates that reasonably could
have
been used, or changes in the accounting estimate that are reasonably likely
to
occur periodically, could materially change the financial statements. We believe
there have been no significant changes during the nine months ended September
30, 2007 to the items that we disclosed as our critical accounting policies
and
estimates under Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in our Annual Report on Form 10-K for
the year ended December 31, 2006.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework
and guidance regarding the methods for measuring fair value, and expands related
disclosures about those measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. We are currently assessing
the impact that SFAS No. 157 will have on our results of operations and
financial position.
In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
No. 159”). SFAS No. 159 allows entities to choose, at specified election dates,
to measure eligible financial assets and liabilities at fair value in situations
in which they are not otherwise required to be measured at fair value. If a
company elects the fair value option for an eligible item, changes in that
item’s fair value in subsequent reporting periods must be recognized in current
earnings. SFAS No. 159 also establishes presentation and disclosure requirements
designed to draw comparison between entities that elect different measurement
attributes for similar assets and liabilities. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We are currently assessing
the impact that SFAS No. 159 will have on our results of operations and
financial position.
18
Results
of Operations
Three
and Nine Months Ended September 30, 2007 and 2006
Revenue.
Since
inception, we have not generated any revenue from sales of commercial products
and do not expect to generate any product revenue for the foreseeable future.
To
date, substantially all of our revenue has consisted of collaboration revenue.
In the nine months ended September 30, 2007, we received a $0.25 million license
fee from SARcode, Inc., which was recognized as license revenue. In the nine
months ended September 30, 2006, we recognized $0.04 million in grant and
fellowship revenue. We have not received any grant or fellowship revenue since
the first quarter of 2006 and we do not plan to perform any additional work
under our previously awarded Small Business Research Inititative, or SBIR,
grants in the foreseeable future.
Collaboration
Revenue. We
generate revenue primarily through our collaborations. We currently have three
ongoing collaborations, one of which involves active participation by our
personnel. Revenue from these collaborations has included technology access
fees, research funding and milestone payments and in the future also may include
royalties upon sales of future products that may result from the
collaborations. The table below sets forth our revenue for the three and nine
months ended September 30, 2007 and 2006 from collaboration
partners.
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Merck
|
$
|
80,776
|
$
|
237,046
|
$
|
1,539,110
|
$
|
6,124,418
|
|||||
Biogen
Idec-related party
|
1,749,498
|
1,712,045
|
5,827,695
|
5,591,890
|
|||||||||
Total
collaboration revenue
|
$
|
1,830,274
|
$
|
1,949,091
|
$
|
7,366,805
|
$
|
11,716,308
|
Collaboration
revenue decreased slightly by $0.1 million, or 5.0 percent, to $1.8 million
for
the three months ended September 30, 2007 from $1.9 million for the same
period in 2006, primarily due to lower amortization of license fees related
to
the Merck antiviral collaboration in the 2007 quarter. Collaboration revenue
decreased by $4.3 million, or 37.0 percent, to $7.4 million for the nine
months ended September 30, 2007 from $11.7 million for the same period in 2006,
primarily due to the 2006 receipt of a $4.25 million milestone payment from
Merck for our BACE program, partially offset by a $1.0 million payment from
Merck in 2007 for the achievement of an additional milestone in that program.
In
addition, the research phase of the Merck BACE collaboration was terminated
in
February 2006. Though the research phase of all of our collaborations other
than
our oncology kinase collaboration with Biogen Idec has been completed, we
continue to be eligible to earn milestone payments and royalties on any
compounds that result from the collaborations.
Research
and Development Expense. Most
of
our operating expenses to date have been for research and development
activities. Research and development expense represents costs incurred to
discover and develop novel, small molecule therapeutics, including Phase 1
and Phase 2 clinical trial costs for SNS-595 and Phase 1 clinical
trial costs for SNS-032 and SNS-314, to develop our proprietary fragment-based
Tethering drug discovery approach, to develop in-house research and preclinical
study capabilities, and to discover and advance our product candidates. We
expense all research and development costs as they are incurred.
19
The
table
below sets forth our research and development expense for the three and nine
months ended September 30, 2007 and 2006 for each of our product candidate
programs:
Three months ended
September 30,
|
Nine months ended
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
(in
thousands)
|
(in
thousands)
|
||||||||||||
SNS-595
|
$
|
3,693
|
$
|
2,217
|
$
|
9,999
|
$
|
6,117
|
|||||
SNS-032
|
952
|
961
|
2,858
|
2,420
|
|||||||||
SNS-032
- milestone payment to BMS
|
—
|
—
|
—
|
2,000
|
|||||||||
SNS-314
|
953
|
1,297
|
3,434
|
3,880
|
|||||||||
Other
kinase inhibitors
|
2,261
|
3,253
|
8,498
|
9,260
|
|||||||||
Discovery
and New Technology
|
834
|
847
|
2,806
|
2,945
|
|||||||||
Other
programs
|
94
|
8
|
197
|
525
|
|||||||||
Total
|
$
|
8,787
|
$
|
8,583
|
$
|
27,792
|
$
|
27,147
|
Research
and development expense increased by $0.2 million, or 2.4 percent, to $8.8
million for the three months ended September 30, 2007 from $8.6 million for
the
same period in 2006. This increase is primarily due to a $1.5 million increase
in spending on development of SNS-595, partially offset by (i) reduced spending
of $1.0 million on other kinase inhibitors program due to a shift in research
priorities with a greater emphasis on supporting our clinical programs and
the
restructuring and workforce reduction announced in August 2007, and (ii) reduced
spending of $0.3 million on the development of SNS-314 in the third quarter
of
2007 due to completion of the filing of the IND for SNS-314 in February
2007.
Research
and development expense increased slightly by $0.7 million, or 2.4 percent,
to
$27.8 million for the nine months ended September 30, 2007 from $27.1 million
for the same period in 2006. The 2006 period included a non-cash $2.0 million
milestone payment to Bristol-Myers Squibb Company, or BMS, in connection with
the commencement of a Phase 1 clinical trial for SNS-032. Net of this payment,
research and development expenses increased by $2.7 million, or 10.5 percent,
to
$27.8 million for the nine months ended September 30, 2007 from $25.1 million
for the same period in 2006. This $2.7 million increase is primarily due to
a
$3.9 million increase in spending on development of SNS-595 and a $0.4 million
increase in spending on the development of SNS-032, partially offset by (i)
a
$0.4 million decrease in spending for SNS-314, and (ii) a $1.1 million decrease
in spending on our other kinase inhibitors program and in other programs due
to
changing research priorities with a greater emphasis on supporting our clinical
programs.
We
expect
to continue to incur substantial research and development expenses over the
next
several years, only a portion of which we expect to be funded by collaboration
partners. As SNS-595, SNS-032 and SNS-314 progress through the clinical
development stage, and we potentially bring additional product candidates
through discovery and research and into clinical trials, our spending will
further increase. In addition, under our oncology kinase collaboration with
Biogen Idec, we have an option to co-fund a portion of the development costs
of
product candidates for up to two targets that may result from this
collaboration. Our decision to exercise this option, if made, would materially
increase our research and development expense.
General
and Administrative Expense. Our
general and administrative expense consists primarily of salaries and other
related costs for personnel in finance, human resources, facilities, management,
legal and general administration and non-cash stock compensation. Other
significant costs include facilities costs and fees paid to outside legal
advisors and auditors and patent-related expenses. General and administrative
expense increased by $0.4 million, or 11.8 percent, to $3.4 million for the
three months ended September 30, 2007, from $3.0 million for the same period
in
2006. This increase is primarily due to (i) a $0.1 million increase in salary
and related expenses primarily due to higher average salaries and increased
stock-based compensation expense, and (ii) a $0.2 million increase in
professional services expenses primarily due to increased audit expense and
patent prosecution expense. General and administrative expense increased by
$1.8
million, or 21.0 percent, to $10.7 million for the nine months ended September
30, 2007, from $8.9 million for the same period in 2006. This increase is
primarily a result of (i) a $0.9 million increase in salary and related expenses
due to increases in stock-based compensation expense, salaries and severance,
(ii) a $0.4 million increase in other personnel expense due to an increase
in
temporary services, (iii) a $0.4 million increase in professional service
expense reflecting increased audit and tax preparation fees and patent
prosecution fees, and (iv) a $0.2 million increase in office and related
expenses.
20
Restructuring
Charge. For
the
three and nine months ended September 30, 2007, we recorded a $1.2 million
restructuring charge related to the restructuring plan announced and implemented
in August 2007. This restructuring charge consists of (i) $1.0 million in
severance payments and related personnel termination costs, (ii) $0.1 million
cost related to extending the option exercise period to 16 months for terminated
employees, and (iii) a $0.1 million write-off of leasehold improvements that
will no longer be utilized.
Interest
Income. Interest
income decreased by $0.2 million to $0.8 million for the three months ended
September 30, 2007, from $1.0 million for the same period in
2006, primarily due to lower average balances of cash, cash equivalents and
marketable securities during 2007. Interest income decreased by $0.2 million
to
$2.3 million for the nine months ended September 30, 2007 from $2.5 million
for
the same period in 2006 for the reason stated above.
Interest
Expense. Interest
expense remained relatively consistent at $54,000 for the three months ended
September 30, 2007 compared to $46,000 for the same period in 2006, and
decreased to $0.2 million for the nine months ended September 30, 2007 from
$0.4
million for the same period in 2006, due to lower average outstanding debt
obligations in 2007.
Liquidity
and Capital Resources
Since
our
inception, we have funded our operations primarily through the issuance of
common and preferred stock, research funding and technology access fees from
our
collaboration partners, debt financings and research grants. As of September
30,
2007, we had cash, cash equivalents and marketable securities of
$55.0 million and outstanding borrowing under equipment financings of
$2.3 million.
In
March 2006, we raised net proceeds of $43.7 million through a private
placement of 7,246,377 shares of common stock and warrants to purchase an
additional 2,173,914 shares of common stock. The purchase price for the common
stock and the exercise price for the warrants was $6.21 per share. Investors
in
the financing paid an additional purchase price equal to $0.125 for each share
of common stock underlying the warrants.
In
May
2007, we completed a public offering of 4,750,000 shares of our common stock
at
a public offering price of $4.43 per share. Net cash proceeds from this offering
were approximately $19.5 million after deducting underwriting discounts and
commissions and other offering expenses.
Cash
Flow
Net
cash
used in operating activities was $27.3 million and $19.0 million for the
nine months ended September 30, 2007 and 2006, respectively. Net cash used
in
operating activities for these periods consisted primarily of our net loss,
partially offset by depreciation and amortization, deferred revenue and
stock-based compensation expense, and for the nine months ended September 30,
2006, a $2.0 million non-cash milestone payment to BMS upon commencement of
a
Phase 1 clinical trial for SNS-032.
Net
cash
provided by investing activities was $13.4 million for the nine months ended
September 30, 2007, compared to net cash used in investing activities of $14.8
million for the nine months ended September 30, 2006. The cash provided during
the nine months ended September 30, 2007 was primarily attributable to the
net
maturities of $14.5 million of securities, partially offset by the purchase
of
property and equipment totaling $1.2 million. Net cash used in investing
activities during the nine months ended September 30, 2006 was related to the
net purchases of $12.9 million of securities and the purchase of property and
equipment of $2.0 million. Our investing activities for these periods consisted
primarily of the management of proceeds from our sales of common
stock.
Net
cash
provided by financing activities was $20.3 million and $43.8 million for the
nine months ended September 30, 2007 and 2006, respectively. Our financing
activities for the 2007 period consisted primarily of (i) $19.5 million in
net
proceeds from a public offering in May 2007; (ii) $0.4 million from an Employee
Stock Purchase Plan purchase and stock option exercises; and (iii) $1.2 million
pursuant to an equipment loan, partially offset by the repayment of $0.8 million
in equipment loans related to capital equipment purchases in prior periods.
Our
financing activities for the nine months ended September 30, 2006 consisted
primarily of net proceeds of $43.7 million in a private placement of common
stock and warrants in March 2006.
21
Credit
and Loan Arrangements
In
June 2000, we entered into an equipment financing agreement with General
Electric Capital Corporation, or GECC. Various credit lines have been issued
under the financing agreement since 2000. The current $2.6 million credit line
is available through March 28, 2008. As of September 30, 2007, we have drawn
a
total of $10.4 million under various credit lines under the financing agreement
and the outstanding balance was $2.3 million, which bears interest at rates
ranging from 7.53 percent to 10.61 percent per annum and is due in 36 to 48
monthly payments. The equipment loans are secured by the equipment financed.
As
of September 30, 2007, we were in compliance with all covenants in the GECC
agreement.
Operating
Capital and Capital Expenditure Requirements
We
expect
to continue to incur substantial operating losses in the future. We will not
receive any product revenue unless and until we have a product candidate
approved by the United States Food and Drug Administration, or FDA, or similar
regulatory agencies in other countries and unless and until we successfully
commercialize such an approved product. As of September 30, 2007, our cash,
cash
equivalents and marketable securities totaled $55.0 million. We currently
anticipate that our cash, cash equivalents, marketable securities and available
credit facilities, together with revenue generated from our collaborations,
will
be sufficient to fund our operations beyond 2008. However, we will need to
raise
substantial additional funds to continue our operations and bring future
products to market. We cannot be certain that any of our programs will be
successful or that we will be able to raise sufficient funds to complete the
development and commercialize any of our product candidates currently in
development, should they succeed. Additionally, we plan to continue to evaluate
in-licensing and acquisition opportunities to gain access to new drugs or drug
targets that would fit with our strategy. Any such transaction would likely
increase our funding needs in the future.
Our
future funding requirements will depend on many factors, including but not
limited to:
· |
the
rate of progress and cost of our clinical trials, preclinical studies
and
other discovery and research and development
activities;
|
· |
the
costs associated with establishing manufacturing and commercialization
capabilities;
|
· |
the
costs of acquiring or investing in businesses, product candidates
and
technologies;
|
· |
the
costs of filing, prosecuting, defending and enforcing any patent
claims
and other intellectual property
rights;
|
· |
the
costs and timing of seeking and obtaining FDA and other regulatory
approvals;
|
· |
the
effect of competing technological and market
developments; and
|
· |
the
economic and other terms and timing of any collaboration, licensing
or
other arrangements into which we may
enter.
|
Until
we
can generate a sufficient amount of product revenue to finance our cash
requirements, which we may never do, we expect to finance future cash needs
primarily through public or private equity offerings, debt financings or
strategic collaborations. We do not know whether additional funding will be
available on acceptable terms, or at all. If we are not able to secure
additional funding when needed, we may have to delay, reduce the scope of or
eliminate one or more of our clinical trials or research and development
programs or conduct additional workforce reductions. In addition, we may have
to
partner one or more of our product candidate programs at an earlier stage of
development, which would lower the economic value of those programs to
us.
Off-Balance
Sheet Arrangements
Through
the nine months ended September 30, 2007 and the year ended December 31, 2006,
we did not have any off-balance sheet arrangements or relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or variable interest entities, which are
typically established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
22
We
believe we are not subject to any meaningful market risks related to currency,
commodity prices or similar matters. We are sensitive to short-term interest
rate fluctuations to the extent that such fluctuations impact the interest
income we receive on the investment of our cash.
The
primary objective of our investment activities is to preserve principal while
at
the same time maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example,
if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the fair
value of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including money market funds, commercial
paper and government and non-government debt securities. For all of 2006 and
the
first nine months of 2007, we maintained an investment portfolio primarily
in
money market funds and corporate commercial paper. Due to the short-term nature
of the majority of these investments, we believe we do not have a material
exposure to interest risk arising from our investments.
All
of
our revenue, expense, and capital purchasing activities are transacted in U.S.
dollars.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, as such term is defined in SEC
Rule 13a-15(e), that are designed to ensure that information required to be
disclosed in our Securities Exchange Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s
rules and forms and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment
in
evaluating the cost-benefit relationship of possible controls and
procedures.
As
required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end
of
the period covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures were effective as of the end of the period covered by this
report.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting during
the
quarter ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
23
PART II.
OTHER INFORMATION
We
are
not currently involved in any material legal proceedings. From time to time,
we
may become involved in legal proceedings arising in the ordinary course of
our
business.
For
the nine months ended September 30, 2007, there have been no substantive
changes to the identified risk factors filed in our Annual Report on Form
10-K/A
for the year ended December 31, 2006 filed with the Securities and Exchange
Commission on May 23, 2007, other than in those risk factors, set
forth below. You should carefully consider the following risk factors as
well as
other information in our filings under the Securities Exchange Act of
1934, as amended, before making any investment decisions regarding our
common stock. The risks and uncertainties described herein and in
our Annual Report on Form 10-K/A and in other reports we file with the
Securities and Exchange Commission are not the only ones we face. Additional
risks and uncertainties that we do not presently know or that we currently
deem
immaterial may also impair our business, financial condition, operating results
and prospects. If events corresponding to any of these risks actually occur,
they could harm our business, financial condition, operating results or
prospects. In that case, the trading price of our common stock could
decline.
Risks
Related to Our Business
We
have incurred losses since inception and anticipate that we will continue
to
incur losses for the foreseeable future. We may not ever achieve or sustain
profitability.
We
are a
clinical-stage biopharmaceutical company with a limited operating history.
We
are not profitable and have incurred losses in each year since our inception
in
1998. We do not currently have any products that have been approved for
marketing, and we continue to incur substantial research and development
and
general and administrative expenses related to our operations. Our net loss
for
the nine months ended September 30, 2007, and for the years ended December
31,
2006, 2005 and 2004 was $30.0 million, $31.2 million, $27.5 million
(excluding a preferred stock dividend of $88.1 million) and
$20.5 million, respectively. As of September 30, 2007, we had an
accumulated deficit of $270.2 million, including an $88.1 million deemed
dividend related to our IPO in September 2005. We expect to continue to
incur losses for the foreseeable future, and we expect these losses to increase
significantly, especially upon commencing Phase 3 clinical trials, as we
continue our research activities and conduct development of, and seek regulatory
approvals for, our product candidates, and commercialize any approved drugs.
Our
losses, among other things, have caused and will continue to cause our
stockholders’ equity and working capital to decrease. To date, we have derived
substantially all of our revenue from collaboration agreements. The research
phase for all but one of our collaboration agreements is completed, and the
research phase of that agreement, if not extended, will end in August 2008.
We
can offer no assurance that we will enter into a new or renewed collaboration
agreement in the near future that will result in revenue for us. We also
do not
anticipate that we will generate revenue from the sale of products for the
foreseeable future. If our product candidates or those of our collaborators
fail
in clinical trials or do not gain regulatory approval, or if our future products
do not achieve market acceptance, we may never become profitable. Even if
we
achieve profitability in the future, we may not be able to sustain profitability
in subsequent periods.
We
will require substantial additional funding, which may not be available to
us on
acceptable terms, or at all.
We
are
advancing multiple product candidates through discovery and development.
We will
need to raise substantial additional capital to continue our discovery,
development and commercialization activities. We plan to retain the development
and commercialization rights to some of our novel cancer therapeutics at
least
until we have completed a Phase 2 clinical trial to maximize our economic
upside, which will require substantial expenditures by us.
24
We
will
need to raise substantial additional capital to:
· |
fund
clinical trials and seek regulatory
approvals;
|
· |
pursue
the development of additional product
candidates;
|
· |
continue
our research and expand our development
activities;
|
· |
build
or access manufacturing and commercialization
capabilities;
|
· |
implement
additional internal systems and
infrastructure;
|
· |
maintain,
defend and expand the scope of our intellectual property
portfolio; and
|
· |
hire
additional management and development
personnel.
|
Our
future funding requirements will depend on many factors, including but not
limited to:
· |
the
rate of progress and cost of our clinical trials, preclinical studies
and
other discovery and research and development
activities;
|
· |
the
economic and other terms and timing of any collaboration, licensing
or
other arrangements into which we may
enter;
|
· |
the
costs associated with establishing manufacturing and commercialization
capabilities;
|
· |
the
costs of acquiring or investing in businesses, product candidates
and
technologies;
|
· |
the
costs of filing, prosecuting, defending and enforcing any patent
claims
and other intellectual property rights;
|
· |
the
costs and timing of seeking and obtaining FDA and other regulatory
approvals; and
|
· |
the
effect of competing technological and market
developments.
|
Until
we
can generate a sufficient amount of product revenue to finance our cash
requirements, which we may never do, we expect to finance future cash needs
primarily through public or private equity offerings, debt financings or
strategic collaborations. We do not know whether additional funding will
be
available on acceptable terms, or at all. If we are not able to secure
additional funding when needed, we may have to delay, reduce the scope of
or
eliminate one or more of our clinical trials or research and development
programs, or conduct additional workforce reductions. For example, we recently
announced that we reduced our workforce by approximately twenty-five percent
and
implemented a revised operating plan to focus our efforts on generating
definitive data from our lead programs while streamlining our operations
and
extending our financial resources. In addition to our development activities
in
acute myeloid leukemia (AML), over the next eighteen months we expect to
continue to advance our ongoing studies of SNS-595 in ovarian cancer, SNS-032
in
B-Cell malignancies and SNS-314 in solid tumors.
In
addition, we may partner one or more of our product candidate programs at
an
earlier stage of development, which would lower the economic value of such
program or programs to us.
25
Our
workforce reduction announced in August 2007 and any future workforce and
expense reductions may have an adverse impact on our internal programs, our
ability to hire and retain key personnel and may be distracting to
management.
In
August
2007, we announced a workforce reduction of 35 employees in order to reduce
expenses. In light of our continued need for funding and expense control,
we may
be required to implement further workforce and expense reductions in the
future.
Workforce and expense reductions have resulted, and further reductions could
result, in reduced progress on our internal programs. In addition, employees,
whether or not directly affected by a reduction, may seek future employment
with
our business partners or competitors. Although our employees are required
to
sign a confidentiality agreement at the time of hire, the confidential nature
of
certain proprietary information may not be maintained in the course of any
such
future employment. Further, we believe that our future success will depend
in
large part upon our ability to attract and retain highly skilled personnel.
We
may have difficulty retaining and attracting such personnel as a result of
a
perceived risk of future workforce and expense reductions. In addition, the
implementation of expense reduction programs may result in the diversion
of
efforts of our executive management team and other key employees, which could
adversely affect our business.
Risks
Related to Our Common Stock
The
price of our common stock may continue to be volatile, and the value of an
investment in our common stock may decline.
We
sold
shares of common stock in our IPO in September 2005 at a price of
$7.00 per share, and through October 16, 2007, our stock has subsequently
traded as low as $1.92 share. An active and liquid trading market for our
common
stock may not develop or be sustained. Factors that could cause volatility
in
the market price of our common stock include, but are not limited
to:
· |
results
from, and any delays in or discontinuance of, our clinical trial
programs,
including our ongoing and planned clinical trials for SNS-595, SNS-032
and
SNS-314;
|
· |
failure
to raise additional capital to carry through with our clinical development
plan;
|
· |
announcements
of FDA non-approval of our product candidates, including SNS-595,
SNS-032
or SNS-314, delays in filing regulatory documents with the FDA or
other
regulatory agencies, or delays in the review process by the FDA or
other
foreign regulatory agencies;
|
· |
failure
or discontinuation of any of our research
programs;
|
· |
announcements
relating to future collaborations or our existing collaborations
with
Biogen Idec, Johnson & Johnson PRD and
Merck;
|
· |
delays
in the commercialization of our future
products;
|
· |
market
conditions in the pharmaceutical, biopharmaceutical and biotechnology
sectors and issuance of new or changed securities analysts’ reports or
recommendations;
|
· |
actual
and anticipated fluctuations in our quarterly operating
results;
|
· |
developments
or disputes concerning our intellectual property or other proprietary
rights;
|
· |
introduction
of technological innovations or new products by us or our
competitors;
|
· |
issues
in manufacturing or supplying the active ingredients for our product
candidates or future products;
|
· |
market
acceptance of our future products;
|
· |
deviations
in our operating results from the estimates of
analysts;
|
26
· |
third-party
healthcare reimbursement policies;
|
· |
FDA
or other U.S. or foreign regulatory actions affecting us or our
industry;
|
· |
litigation
or public concern about the safety of our product candidates or future
drugs;
|
· |
sales
of our common stock by our officers, directors or significant
stockholders; and
|
· |
additions
or departures of key personnel.
|
In
addition, the stock markets in general, and the markets for pharmaceutical,
biopharmaceutical and biotechnology stocks in particular, have experienced
extreme volatility that have been often unrelated to the operating performance
of the issuer. These broad market fluctuations may adversely affect the trading
price or liquidity of our common stock. In the past, when the market price
of a
stock has been volatile, holders of that stock have sometimes instituted
securities class action litigation against the issuer. If any of our
stockholders were to bring such a lawsuit against us, we could incur substantial
costs defending the lawsuit and the attention of our management would be
diverted from the operation of our business.
Recent
Sales of Unregistered Equity Securities
There
were no repurchases of securities or any sales of unregistered equity securities
during the quarter ended September 30, 2007.
Use
of Proceeds
We
completed our initial public offering of 6,051,126 shares of our common stock
on
Form S-1 (Reg. No. 333-121646), which was declared effective by the SEC on
September 27, 2005. We issued 6,000,000 shares on September 30, 2005 for
gross
proceeds of $42.0 million. We issued an additional 51,126 shares on November
1,
2005 for gross proceeds of $0.36 million in connection with the underwriters’
partial exercise of their over-allotment option. We paid the underwriters
a
commission of $3.0 million and incurred additional offering expenses of
approximately $2.2 million. After deducting the underwriters’ commission and the
offering expenses, we received net proceeds of approximately $37.2
million.
The
net
proceeds from our IPO have been invested into short-term investment grade
securities and money market accounts. We have begun, and intend to continue
to
use, our net proceeds to fund clinical and preclinical development of our
product candidates, to discover additional product candidates, to repay
outstanding indebtedness and for general corporate purposes, including capital
expenditures and working capital. We may use a portion of our net proceeds
to
in-license product candidates or to invest in businesses or technologies
that we
believe are complementary to our own.
No
payments for such expenses related to our IPO were made directly or indirectly
to (i) any of our directors, officers or their associates, (ii) any person(s)
owning 10 percent or more of any class of our equity securities, or (iii)
any of
our affiliates.
None.
None.
27
None.
Exhibit
Number
|
Description
|
|||
3.1
|
||||
|
||||
3.2
|
||||
|
||||
4.1
|
Reference
is made to Exhibit 3.1 and 3.2.
|
|||
|
||||
10.52
|
||||
|
||||
31.1
|
||||
31.2
|
||||
32.1*
|
||||
32.2*
|
*
|
The
certifications attached as Exhibits 32.1 and 32.2 accompany this
Quarterly
Report on Form 10-Q, are not deemed filed with the Securities and
Exchange
Commission and are not to be incorporated by reference into any filing
of
Sunesis Pharmaceuticals, Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether
made
before or after the date of this Form 10-Q, irrespective of any general
incorporation language contained in such
filing.
|
28
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
SUNESIS
PHARMACEUTICALS, INC.
|
|
|
(Registrant)
|
Date:
November 8, 2007
|
/S/
ERIC H. BJERKHOLT
|
|
|
Eric
H. Bjerkholt
Senior
Vice President, Corporate Development and Finance,
Chief Financial Officer |
Exhibit
Index
Exhibit
Number
|
Description
|
|||
3.1
|
||||
|
||||
3.2
|
||||
|
||||
4.1
|
Reference
is made to Exhibit 3.1 and 3.2.
|
|||
|
||||
10.52
|
||||
|
||||
31.1
|
||||
31.2
|
||||
32.1*
|
||||
32.2*
|
*
|
The
certifications attached as Exhibits 32.1 and 32.2 accompany this
Quarterly
Report on Form 10-Q, are not deemed filed with the Securities and
Exchange
Commission and are not to be incorporated by reference into any filing
of
Sunesis Pharmaceuticals, Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether
made
before or after the date of this Form 10-Q, irrespective of any general
incorporation language contained in such
filing.
|
29