Halozyme Therapeutics, Inc.
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number: 001-32335
Halozyme Therapeutics,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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88-0488686
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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11388 Sorrento Valley Road,
San Diego, California
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92121
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(Address of principal executive
offices)
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(Zip Code)
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(858) 794-8889
(Registrants
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Act:
None
Securities
registered under Section 12(g) of the Act:
Common
Stock, Par Value $.001
(Title
of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the
definitions of large accelerated filer
accelerated filer and smaller reporting
company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of
June 29, 2007 was approximately $563,072,000 based on the
closing price on the NASDAQ Stock Market reported for such date.
Shares of common stock held by each officer and director and by
each person who is known to own 10% or more of the outstanding
common stock have been excluded in that such persons may be
deemed to be affiliates of the registrant. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 1, 2008, there were 78,432,949 shares of
the registrants $.001 par value common stock issued
and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the issuers Definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A in connection with the registrants
2008 Annual Meeting of Stockholders, to be filed subsequent to
the date hereof, are incorporated by reference into
Parts II and III of this Annual Report. Such
Definitive Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the
conclusion of the issuers fiscal year ended
December 31, 2007.
PART I
This Annual Report on
Form 10-K
contains forward-looking statements regarding our business,
financial condition, results of operations and prospects. Words
such as expects, anticipates,
intends, plans, believes,
seeks, estimates and similar expressions
or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Annual Report.
Additionally, statements concerning future matters such as the
development or regulatory approval of new products, enhancements
of existing products or technologies, third party performance
under key collaboration agreements, revenue and expense levels
and other statements regarding matters that are not historical
are forward-looking statements.
Although forward-looking statements in this Annual Report
reflect the good faith judgment of our management, such
statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes
discussed in or anticipated by the forward-looking statements.
Factors that could cause or contribute to such differences in
results and outcomes include without limitation those discussed
under the heading Risk Factors below, as well as
those discussed elsewhere in this Annual Report. Readers are
urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual
Report. We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Annual
Report. Readers are urged to carefully review and consider the
various disclosures made in this Annual Report, which attempt to
advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations
and prospects.
Overview
We are a biopharmaceutical company developing and
commercializing products targeting the extracellular matrix
(Matrix) for the drug delivery, oncology, and
dermatology markets. Our portfolio of products is based on
intellectual property covering the family of human enzymes known
as hyaluronidases. Our key partnerships are with Roche to apply
Enhanzetm
Technology to Roches biological therapeutic compounds for
up to 13 targets and with Baxter to apply Enhanze Technology to
Baxters biological therapeutic compound, GAMMAGARD LIQUID
10%.
Our operations to date have been focused on organizing and
staffing Halozyme Therapeutics, Inc. (Halozyme or
the Company), acquiring, developing and securing its
technology and undertaking product development for our existing
products and for our product candidates. We have received FDA
approval for two products:
Cumulase®,
for use in in-vitro fertilization, and HYLENEX, for use as an
adjuvant to increase the absorption and dispersion of other
injected drugs and fluids.
In November 2007, we reincorporated from the State of Nevada to
the State of Delaware. Our principal offices and research
facilities are located at 11388 Sorrento Valley Road,
San Diego, California 92121. Our telephone number is
(858) 794-8889
and our
e-mail
address is info@halozyme.com. Additional information
about the Company can be found on our website at
www.halozyme.com, and in our periodic and current reports
filed with the Securities and Exchange Commission
(SEC). Copies of our current and periodic reports
filed with the SEC are available at the SEC Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and online at www.sec.gov and our website at
www.halozyme.com.
Technology
Our technology is based on recombinant human PH20 (rHuPH20), a
human synthetic version of hyaluronidase that degrades
hyaluronic acid, a space-filling, gel-like substance that is a
major component of tissues throughout the body, such as skin and
bone. The PH20 enzyme is a naturally occurring enzyme that
digests hyaluronic acid to temporarily break down the gel,
thereby facilitating the penetration and dispersion of other
drugs and fluids that are injected under the skin or in the
muscle. It also degrades the cumulus matrix surrounding oocytes
(eggs) facilitating in vitro fertilization (IVF).
1
Our proprietary technology, as evidenced by our exclusive
license with the University of Connecticut of the patent
covering the DNA sequence that encodes human hyaluronidase, may
both expand existing markets and create new ones. Gaps in
existing hyaluronidase offerings may create demand for our
solution, and provide new market opportunities. Our objective is
to apply our products and products under development to key
markets in multiple therapeutic areas.
Strategy
We are a biopharmaceutical company developing and
commercializing products targeting the Matrix for the drug
delivery, oncology, and dermatology markets. The Matrix is a key
structural component found in both normal tissues such as skin
and bone, and abnormal tissues such as tumors. By expanding upon
our scientific expertise in the Matrix, we hope to develop
therapeutic and aesthetic drugs. Our lead enzyme, rHuPH20
hyaluronidase, is an example of a Matrix modifying enzyme. By
degrading hyaluronan, a key Matrix component in the skin,
rHuPH20 facilitates the delivery of drugs and fluids through the
Matrix and into circulation. While rHuPH20 is the underlying
drug delivery technology of both Hylenex for generic small
molecules and fluids, and Enhanze Technology for proprietary
small and large molecules, we are seeking ways to combine or
co-formulate rHuPH20 with previously approved small molecule
drugs to develop new proprietary products.
We are also expanding our scientific work in the Matrix by
developing other enzymes and agents that target unique aspects
of the Matrix, giving rise to potential new molecular entities
targeting indications in oncology, dermatology and metabolism.
For instance, we are developing a pegylated version of rHuPH20
that lasts longer in the bloodstream, and may therefore better
target solid tumors by clearing away the surrounding hyaluronan
and reducing the interstitial fluid pressure within malignant
tumors to allow better penetration by chemotherapeutic agents.
In addition, we are developing a Matrix modifying enzyme that
targets components of the skin and subcutaneous tissues that may
have both therapeutic and aesthetic applications within
dermatology. Key aspects of our corporate strategy include the
following:
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Develop our own proprietary products based on our PH20 enzyme
and other new molecular entities;
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Continue to expand the commercialization of Hylenex through our
partner, Baxter Healthcare;
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Continue product development under our Roche Enhanze Technology
collaboration;
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Continue product development under our Baxter Bioscience Enhanze
Technology collaboration;
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Continue clinical development of our lead oncology product
candidate,
Chemophase®;
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Continue to seek partnerships for our Enhanze Technology drug
delivery platform; and
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Continue to commercialize Cumulase through our distributors.
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Current
Products and Product Candidates
We have two marketed products and multiple product candidates
targeting several indications in various stages of development.
The following table summarizes our lead clinical products and
product candidates:
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Product
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Indication (Brief Description)
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Development Status
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Cumulase
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In vitro fertilization
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Marketed
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Hylenex
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Agent for drug and fluid infusion
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Marketed
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Chemophase
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Chemoadjuvant for superficial bladder cancer
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Phase I/IIa
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Enhanze Technology
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Agent for enhanced drug delivery
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Phase I
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Proprietary PH20
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Oncology, metabolism
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Pre-Clinical
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Proprietary Non-PH20
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Oncology, dermatology
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Pre-Clinical
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Cumulase
Cumulase is an ex vivo (used outside of the body)
formulation of rHuPH20 to replace the bovine (bull) enzyme
currently used for the preparation of oocytes (eggs) prior to
IVF during the process of intracytoplasmic sperm
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injection (ICSI), in which the enzyme is an essential component.
The enzyme strips away the hyaluronic acid that surrounds the
oocyte. This allows the clinician to then perform the ICSI
procedure, injecting the sperm into the oocyte. The FDA
considers hyaluronidase IVF products to be medical devices
subject to 510(k) approval and we filed our 510(k) application
during September 2004. We received a CE (European Conformity)
Mark for Cumulase in December 2004, which allows us to market
Cumulase in the European Union. We received FDA clearance in
April 2005. We launched Cumulase in the European Union and in
the United States in June 2005. We believe the total ICSI market
consisted of an estimated 500,000 intracytoplasmic sperm
injection cycles worldwide in 2005 (Source: CDC, 2001; ESHRE,
2002).
Hylenex
Hylenex is a human recombinant formulation of rHuPH20 to
facilitate the absorption and dispersion of other injected drugs
or fluids. When injected under the skin or in the muscle,
hyaluronidase can digest the hyaluronic acid gel, allowing for
temporarily enhanced penetration and dispersion of other
injected drugs or fluids. We filed a New Drug Application (NDA)
in March 2005 and we received approval of our Hylenex NDA in
December 2005.
Enzymatically-Augmented Subcutaneous Infusion
(EASI): Hylenex facilitates subcutaneous delivery
of fluids up to one liter without the need for intravenous
access, a procedure known as EASI. Children and the elderly, in
particular, often have difficult venous access (referred to as
DVA), making it challenging even for skilled nurses to start and
maintain intravenous access. Importantly, EASI for fluid
replacement in children and the elderly may be achieved with
limited or no need for nursing assistance.
INFUSE-LR Study: During January 2006, we
completed the Increased Flow Utilizing Subcutaneously-Enabled
Lactated Ringers clinical trial, or INFUSE-LR study, which
was designed to determine the subcutaneous (Sub-Q) infusion flow
rate of Lactated Ringers solution with and without
Hylenex, determine the Sub-Q infusion flow rate dose response to
Hylenex over one order of magnitude of dose, and assess safety
and tolerability. This prospective, double-blind, randomized,
placebo-controlled, within-subject, dose-comparison study
enrolled 54 volunteer subjects who received Sub-Q infusions
simultaneously in both upper arms through 24 gauge catheters.
Key results from the study included:
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The use of Hylenex compared to placebo preceding Sub-Q infusion,
under gravity flow, to accelerate the flow rate was assessed.
Hylenex accelerated flow versus placebo in every subject
studied, and by an overall mean ratio of approximately
four-fold. The overall mean flow rate for Sub-Q infusion with
Hylenex was 464 mL/hr versus 118 mL/hr with placebo (p <
0.0001).
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The faster flow rates did not result in an increase in edema. A
total of 94% of subjects had moderate or severe arm edema with
placebo compared to 17% with Hylenex (p < 0.0001).
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In the study, there were no serious or severe adverse events
(AE). Based on the AE profile, Hylenex was at least as well
tolerated as placebo.
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INFUSE-Morphine Study: During October 2006, we
completed the Increased Flow Utilizing Subcutaneously-Enabled
Morphine clinical trial, or INFUSE-Morphine study, which was
designed to determine the time to maximal blood levels of
morphine after subcutaneous administration with and without
Hylenex, to determine the time to maximal blood levels after
intravenous administration of morphine, and to assess safety and
tolerability. This prospective, double-blind, randomized,
placebo-controlled, within-subject, dose-comparison study
enrolled 12 evaluable patients who received Sub-Q infusions. Key
results from the study included:
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The primary endpoint hypothesis was achieved by demonstrating a
statistically significant acceleration in the average time to
maximal plasma concentration (Tmax) of morphine. Tmax was
reduced from 13.8 minutes when injected subcutaneously with the
saline placebo to a Tmax of 9.2 minutes when injected with
Hylenex, a 33% reduction in the time to maximal plasma
concentration (p<0.05).
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Sub-Q administration of morphine plus Hylenex provided total
drug exposure
(4-hour AUC)
of morphine and its active metabolite that was at least
comparable to IV morphine administration, as calculated
based on the sampling time points for measuring absorption.
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Morphine plus Hylenex appeared to be safe and well tolerated.
The most commonly reported adverse events were mild injection
site redness, rash, swelling, and itching. However, no
Hylenex-related toxicity was apparent based on a comparison of
adverse events for Sub-Q injections with rHuPH20 versus saline
placebo.
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Chemophase
Chemophase, our lead oncology product candidate, is an
investigative chemoadjuvant designed to enhance the transport of
chemotherapeutic agents to tumor tissue, increasing diffusion in
tissues without affecting vascular permeability. Many solid
tumor types (e.g., colon, breast, prostate) accumulate
hyaluronic acid, creating a barrier to the effective penetration
of current or future chemotherapeutics. Previous clinical trials
of bovine PH20 in patients showed some promise in enhancing
chemotherapy regimens using adjunctive systemic hyaluronidase in
previously chemo-refractory patients.
Furthermore, we have observed significant reduction of tumor
interstitial fluid pressure following the administration of
rHuPH20 in solid tumors grown in mice. Tumor interstitial
pressure is widely believed to be an important factor limiting
the access of cytostatic regimens to solid tumors. By digesting
the hyaluronic acid gel, rHuPH20 may reduce interstitial
pressure in the tumor and promote more effective delivery of
chemotherapy throughout the tumor, as it does under the skin in
the case of Hylenex. This could potentially lead to increased
patient survival and extended product lifecycles of many
commonly used chemotherapeutic agents.
As we continue development of an intravenous formulation of
rHuPH20, we hope to realize time and cost savings by leveraging
our current manufacturing process and toxicology package to
support a clinical program for a local oncology application. As
such, during June 2005 we submitted an investigational new drug
application (IND) in order to begin clinical testing
of our Chemophase product candidate in combination with
Mitomycin in superficial bladder cancer. We received
authorization to initiate clinical testing of Chemophase in
August 2005, and we commenced patient enrollment in our initial
clinical protocol under this IND in October 2005. In March 2006,
we completed enrollment in our Chemophase Phase I clinical
trial. In April 2006, we commenced patient enrollment in our
Chemophase Phase I/IIa clinical trial. In September 2007, we
completed enrollment in our Phase I/IIa clinical trial.
Each year there are approximately 63,000 new cases of urinary
bladder cancer in the United States (Source: American Cancer
Society, 2005). Approximately 70% of these new cases are
superficial bladder cancer (Source: AUA Bladder
Cancer Guidelines Panel, 1999). There are approximately 500,000
prevalent cases of urinary bladder cancer (Source: NCI SEER
Cancer Statistics Review, 2002) in the United States.
Approximately 30% of treated patients have a recurrence within
12 months (Source: Southwest Oncology Group Study, 1995).
Enhanze
Technology
Enhanze Technology, a proprietary drug delivery platform using
Halozymes first approved enzyme, rHuPH20, is our broader
technology opportunity that can potentially lead to partnerships
with other pharmaceutical companies. When co-formulated with
other injectable drugs, Enhanze Technology may facilitate the
penetration and dispersion of these drugs by temporarily opening
flow channels under the skin. Molecules as large as 200
nanometers may pass freely through the extracellular matrix,
which recovers its normal density within approximately
24 hours, leading to a drug delivery platform which does
not permanently alter the architecture of the skin. The
principal focus of our Enhanze Technology platform is the use of
rHuPH20 to facilitate subcutaneous or intramuscular routes of
administration for large molecule biological therapeutics. We
are seeking partnerships with pharmaceutical companies that
market drugs requiring or benefiting from injection via the
subcutaneous or intramuscular routes that could benefit from
this technology. In December 2006, we signed our first Enhanze
Technology partnership with F. Hoffmann-La Roche Ltd and
Hoffmann-La Roche, Inc. (collectively, Roche).
In September 2007, we signed our second Enhanze Technology
partnership with Baxter Healthcare Corporation (BHC)
and Baxter Healthcare S.A. (BHSA and along with BHC,
collectively, Baxter).
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Roche
Agreement
In December 2006, we signed our first Enhanze Technology
partnership with Roche. Under the terms of the agreement, Roche
obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20, our proprietary
recombinant human hyaluronidase, and up to thirteen Roche target
compounds resulting from the collaboration. Also under the terms
of the agreement, we are obligated to significantly scale up the
production of rHuPH20 and to identify a second source
manufacturer to assist us in meeting these production
obligations. Roche paid us $20 million as an initial
upfront payment for the application of rHuPH20 to three
pre-defined Roche biologic targets. Pending the successful
completion of a series of clinical, regulatory, and sales
events, Roche may pay us further milestones which could
potentially reach a value of up to $111 million. In
addition, Roche may pay us royalties on potential product sales
for these first three targets. Over the next ten years, Roche
will also have the option to exclusively develop and
commercialize rHuPH20 with an additional ten targets to be
identified by Roche, provided that Roche will be obligated to
pay continuing exclusivity maintenance fees to us in order to
maintain its exclusive development rights for these targets. For
each of the additional ten targets, Roche may pay us further
upfront and milestone payments of up to $47 million per
target as well as royalties on potential product sales for each
of these additional ten targets. Additionally, Roche will obtain
access to our expertise in developing and applying rHuPH20 to
Roche targets. In addition, in December 2006, an affiliate of
Roche purchased 3,385,000 shares of common stock for an
aggregate of approximately $11.1 million.
Baxter
Gammagard Agreement
In September 2007, we signed our second Enhanze Technology
partnership with Baxter. Under the terms of the agreement,
Baxter obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20, Halozymes
proprietary recombinant human hyaluronidase, with a current
Baxter product, Gammagard
Liquidtm.
Gammagard Liquid is indicated for the treatment of primary
immunodeficiency disorders associated with defects in humoral
immunity. Under the terms of the agreement, Baxter made an
initial upfront payment of $10 million to us. Pending
successful completion of a series of regulatory and sales
milestones, Baxter may make further milestone payments totaling
$37 million to us. In addition, Baxter will pay royalties
on the sales, if any, of the products that result from the
collaboration. The agreement is applicable to both kit and
co-formulation combinations. Baxter will assume all development,
manufacturing, clinical, regulatory, sales and marketing costs
under the agreement, while we will be responsible for the supply
of the rHuPH20 enzyme. In addition, Baxter has certain product
development and commercialization obligations in major markets
identified in the agreement.
Sales and
Marketing
Cumulase
Our sales and marketing strategy in the IVF market consists of a
multi-channel approach that targets patients, clinicians,
suppliers, and regulators. We are currently seeking to raise
public awareness of the current risk of using animal-derived
products in IVF applications among industry professionals and
the general public through advertising in trade journals,
presentations and booths at conferences and trade shows, Web
initiatives, and brand-building efforts such as press releases
and other public relations efforts. Two of the highest impact
target audiences are, the Society for Assisted Reproductive
Technology (SART) in the United States and, the European Society
of Human Reproduction and Embryology (ESHRE) in Europe. We have
signed non-exclusive distribution agreements with distributors
of IVF reagents and media who sell directly to IVF clinics in
both the United States and European markets. During 2007, sales
to MediCult for the EU were approximately $337,000 and sales to
MidAtlantic were approximately $179,000, of which approximately
$70,000 was to the EU.
Hylenex
The sales and marketing strategy for Hylenex primarily consists
of building a strong clinical foundation with post-marketing
trials as well as educating the market on the concept of
difficult venous access. Post-marketing clinical trials are
ongoing to explore the potential of Hylenex in a variety of
situations, since limited or no data with Hylenex exist in most
situations in which our partner, Baxter, will market it.
Examples of the trials include the completed INFUSE-LR study and
the completed INFUSE-Morphine study. In addition, Baxter is
currently
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enrolling patients in the INFUSE-Pediatric Rehydration Study,
which is designed to determine the rehydration success rate
(efficacy) and safety in children treated with Hylenex-augmented
subcutaneous fluid infusion. Baxter currently has a team of
Medical Science Liaisons as well as Nurse Educators that are
engaging in market education and development prior to commercial
launches in various market segments following publication of
related clinical data.
Baxter
Agreements
In February 2007, we amended certain agreements with Baxter for
Hylenex and entered into a new agreement, collectively the
Baxter Agreements, for kits and co-formulations with rHuPH20.
Under the terms of the Baxter Agreements, Baxter paid us a
nonrefundable upfront payment of $10 million and, pending
the successful completion of a series of regulatory and sales
events, Baxter will make milestone payments to us which could
potentially reach a value of up to $25 million. In
addition, Baxter will make payments to us based on the sales of
products covered under the Baxter Agreements. In February 2007,
Baxter prepaid $1.0 million of such product-based payments
in connection with the execution of the Baxter Agreements. In
January 2008, Baxter prepaid another $3.5 million of such
product-based payments and is obligated to prepay
$5.5 million of additional product-based payments on or
prior to January 1, 2009. Baxter will also now assume all
development, manufacturing, clinical, regulatory, sales and
marketing costs of the products covered by the Baxter
Agreements. We will continue to supply Baxter with the active
pharmaceutical ingredient (API) for Hylenex, and
Baxter will fill and finish Hylenex and hold it for subsequent
distribution. In addition, Baxter will obtain a worldwide,
exclusive license to develop and commercialize product
combinations of rHuPH20 with Baxter hydration fluids and generic
small molecule drugs, with the exception of combinations with
(i) bisphosphonates, (ii) cytostatic and
(iii) cytotoxic chemotherapeutic agents, the rights to
which have been retained by us. In addition, in February 2007,
an affiliate of Baxter purchased 2,070,394 shares of our
common stock for an aggregate of approximately $20 million.
Additionally, Baxter will make product-based payments on the
sales, if any, of the products that result from the
collaboration.
Competition
Cumulase
A key clinical selling point for Cumulase is that it may
eliminate the risk of animal pathogen transmission and toxicity
inherent in slaughterhouse preparations. The competing enzymes
are of animal origin, creating an opportunity for us to enter
the market with a recombinant human enzyme alternative. The
leading IVF suppliers are CooperSurgical, Irvine Scientific, and
Cook Ob/Gyn (all three of these companies produce bovine
products) in the US, and MediCult (ovine product) and Vitrolife
(bovine product) outside the US. Cumulase is priced at a premium
compared to the animal-derived products sold by these leading
IVF suppliers, which may make market penetration difficult.
Hylenex
Other manufacturers have FDA approved products for use as
spreading agents, including ISTA Pharmaceuticals, Inc.
(ISTA), with an ovine (ram) hyaluronidase,
Vitrase®,
Amphastar Pharmaceuticals, Inc., with a bovine hyaluronidase,
Amphadasetm,
and Primapharm, Inc. also with a bovine hyaluronidase,
Hydasetm.
The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are distinct new chemical entities and hence afforded
five years of market exclusivity. The five year market
exclusivity precludes identical new chemical entity products
from being marketed for a period of five years. As each of these
products is established as distinctly different new chemical
entities, the marketing exclusivity granted does not prohibit
the marketing of the products. In addition, some commercial
pharmacies now compound hyaluronidase preparations for
institutions and physicians. However, there are some concerns
with using a compounded sterile product. Compounded preparations
are not FDA-approved products. Some compounding pharmacies do
not test every batch of product for drug concentration,
sterility, and lack of pyrogens. In addition, Hylenex is priced
at a significant premium compared to the animal-derived
hyaluronidases currently in the marketplace. This price premium
may slow market adoption of Hylenex and make market penetration
difficult.
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Patents
and Proprietary Rights
Patents and other proprietary rights are essential to our
business. Our success will depend in part on our ability to
obtain patent protection for our inventions, to preserve our
trade secrets and to operate without infringing the proprietary
rights of third parties. Our strategy is to actively pursue
patent protection in the United States and certain foreign
jurisdictions for technology that we believe to be proprietary
and that offers us a potential competitive advantage. Our patent
portfolio includes six issued patents and a number of pending
patent applications. We are the exclusive licensee of the
University of Connecticut under a patent covering the DNA
sequence that encodes human hyaluronidase. This patent expires
in 2015. We have patents and patent applications pertaining to
recombinant human hyaluronidases and their methods of
manufacture. We believe our patent filings represent a barrier
to entry for potential competitors looking to utilize these
hyaluronidases.
In addition to patents, we rely on trade secrets and proprietary
know-how. We seek protection of these trade secrets and
proprietary know-how, in part, through confidentiality and
proprietary information agreements. Our policy is to require our
employees, directors, consultants, advisors, outside scientific
collaborators and sponsored researchers, other advisors and
other individuals and entities to execute confidentiality
agreements upon the start of employment, consulting or other
contractual relationships with us. These agreements provide that
all confidential information developed or made known to the
individual or entity during the course of the relationship is to
be kept confidential and not disclosed to third parties except
in specific circumstances. In the case of employees and some
other parties, the agreements provide that all inventions
conceived by the individual will be our exclusive property.
Despite the use of these agreements and our efforts to protect
our intellectual property, there will always be a risk of
unauthorized use or disclosure of information. Furthermore, our
trade secrets may otherwise become known to, or be independently
developed by, our competitors.
We also file trademark applications to protect the names of our
products. These applications may not mature to registration and
may be challenged by third parties. We are pursuing trademark
protection in a number of different countries around the world.
Development
and Manufacturing
We have signed a commercial supply agreement with Avid
Bioservices, Inc. (Avid), a contract manufacturing
organization, to produce bulk recombinant enzyme product for
clinical and commercial use. Avid will manufacture the API under
commercial good manufacturing practices for commercial scale
production and will provide support for chemistry, manufacturing
and controls sections for any FDA regulatory filings. We have
entered into discussions to establish arrangements with an
additional manufacturer for these ingredients. Difficulties in
our relationship with Avid or delays or interruptions in
Avids supply of its requirements could limit or stop its
ability to provide sufficient quantities of our products, on a
timely basis, for clinical trials and commercial sales, which
would have a material adverse effect on our business and
consolidated financial condition.
In the event that any of our product candidates are used in
clinical trials or receive the necessary regulatory approval for
commercialization, we rely on third parties to prepare, fill,
finish and package the products prior to their distribution. If
we are unable to locate third parties to perform these functions
on terms that are economically acceptable to us, the progress of
clinical trials could be delayed or even suspended and the
commercialization of approved product candidates could be
delayed or prevented. We currently utilize a third party to
prepare, fill, finish and package Cumulase. We have entered into
an agreement with another third party to prepare, fill, finish
and package Cumulase. We are currently in the technology
transfer stage with this third party and expect to initiate
commercial manufacturing later this year. We also utilize Baxter
Pharmaceutical Solutions (BPS), a subsidiary of Baxter, to
prepare, fill, finish and package Hylenex. Baxter has only
limited experience manufacturing Hylenex batches, and we rely on
its ability to successfully manufacture Hylenex batches
according to product specifications. Any delays or interruptions
in Baxters ability to manufacture Hylenex batches could
limit its ability to provide sufficient quantities of our
Hylenex product, on a timely basis, for commercial sales, which
would have a material adverse effect on our business and
consolidated financial condition.
7
Research
and Development Activities
Our research and development expenses consist primarily of costs
associated with the development and manufacturing of our product
candidates, compensation and other expenses for research and
development personnel, supplies and materials, costs for
consultants and related contract research, facility costs,
amortization and depreciation. We charge all research and
development expenses to operations as they are incurred.
Historically, our research and development activities were
primarily focused on the development of our Cumulase and Hylenex
products, but we are also developing our Chemophase product
candidate, and we completed enrollment in our Phase I/IIa
clinical trial for Chemophase in September 2007. Our industry is
subject to rapid technological advancements, developing industry
standards and new product introductions and enhancements. As a
result, our success depends, in large part, on our ability to
develop and commercialize products.
Our research and development expenditures in fiscal 2007, 2006
and 2005 totaled approximately $20.6 million,
$9.2 million and $10.2 million, respectively. Research
and development expenditures in fiscal 2007 were primarily
related to the manufacturing and production of our rHuPH20
enzyme, and the development of Enhanze Technology, our Hylenex
product, and our Chemophase product candidate. Research and
development expenditures in fiscal 2006 and 2005 were primarily
related to the development of our Cumulase and Hylenex products,
and our Chemophase product candidate. We anticipate that we will
incur significant research and development expenses in the
future in connection with the development of product candidates.
Government
Regulations
The FDA and comparable regulatory agencies in foreign countries
regulate extensively the manufacture and sale of the
pharmaceutical products that we have developed or currently are
developing. The FDA has established guidelines and safety
standards that are applicable to the non-clinical evaluation and
clinical investigation of therapeutic products and stringent
regulations that govern the manufacture and sale of these
products. The process of obtaining regulatory approval for a new
therapeutic product usually requires a significant amount of
time and substantial resources. The steps typically required
before a product can be produced and marketed for human use
include:
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Animal pharmacology studies to obtain preliminary information on
the safety and efficacy of a drug;
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Non-clinical evaluation in vitro and in vivo
including extensive toxicology studies.
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The results of these non-clinical studies may be submitted to
the FDA as part of an IND application. The sponsor of an IND
application may commence human testing of the compound
30 days after submission of the IND, unless notified to the
contrary by the FDA.
The clinical testing program for a new drug typically involves
three phases:
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Phase I investigations are generally conducted in healthy
subjects. In certain instances, subjects with a life-threatening
disease, such as cancer, may participate in Phase I studies that
determine the maximum tolerated dose and initial safety of the
product;
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Phase II studies are conducted in limited numbers of
subjects with the disease or condition to be treated and are
aimed at determining the most effective dose and schedule of
administration, evaluating both safety and whether the product
demonstrates therapeutic effectiveness against the
disease; and
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Phase III studies involve large, well-controlled
investigations in diseased subjects and are aimed at verifying
the safety and effectiveness of the drug.
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Data from all clinical studies, as well as all non-clinical
studies and evidence of product quality, typically are submitted
to the FDA in an NDA. Although the FDAs requirements for
clinical trials are well established and we believe that we have
planned and conducted our clinical trials in accordance with the
FDAs applicable regulations and guidelines, these
requirements, including requirements relating to testing the
safety of drug candidates, may be subject to change as a result
of recent announcements regarding safety problems with approved
drugs. Additionally, we could be required to conduct additional
trials beyond what we had planned due to the FDAs safety
and/or
8
efficacy concerns or due to differing interpretations of the
meaning of our clinical data. (See Part I
Item 1A, Risk Factors.)
The FDAs Center for Drug Evaluation and Research
(CDER) must approve a new drug application for a
drug before it may be marketed in the U.S. If we begin to
market our proposed products for commercial sale in the U.S.,
any manufacturing operations that may be established in or
outside the U.S. will also be subject to rigorous
regulation, including compliance with current Good Manufacturing
Practices (cGMP). We also may be subject to
regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substance Control Act,
the Export Control Act and other present and future laws of
general application. In addition, the handling, care and use of
laboratory mice, including the hu-PBL-SCID mice and rats, are
subject to the Guidelines for the Humane Use and Care of
Laboratory Animals published by the National Institutes of
Health.
Regulatory obligations continue post-approval, and include the
reporting of adverse events when a drug is utilized in the
broader commercial population. Promotion and marketing of drugs
is also strictly regulated, with penalties imposed for
violations of FDA regulations, the Lanham Act (trademark
statute), and other federal and state laws, including the
federal anti-kickback statute.
We currently intend to continue to seek, directly or through our
partners, approval to market our products and product candidates
in foreign countries, which may have regulatory processes that
differ materially from those of the FDA. We anticipate that we
will rely upon pharmaceutical or biotechnology companies to
license our proposed products or independent consultants to seek
approvals to market our proposed products in foreign countries.
We cannot assure you that approvals to market any of our
proposed products can be obtained in any country. Approval to
market a product in any one foreign country does not necessarily
indicate that approval can be obtained in other countries.
Product
Liability Insurance
We currently maintain product liability insurance on our
products and clinical trials that provides coverage in the
amount of $5,000,000 per incident and $5,000,000 in the
aggregate.
Executive
Officers of the Registrant
Information concerning our executive officers, including their
names, ages and certain biographical information can be found in
Part III-Item 10.
Directors, Executive Officers and Corporate
Governance. This information is incorporated by reference
into Part I of this report.
Employees
As of February 29, 2008, we had 92 full-time
employees, including 64 engaged in research and clinical
development activities. Included in our total headcount are
32 employees who hold Ph.D. or M.D. degrees. We currently
anticipate hiring approximately 25 to 50 additional employees by
the end of 2008. None of our employees are unionized and we
believe our relationship with our employees is good.
Risks
Related To Our Business
We
have generated only minimal revenue from product sales to date;
we have a history of net losses and negative cash flow, and we
may never achieve or maintain profitability.
We have generated only minimal revenue from product sales to
date and may never generate significant revenues from future
product sales. Even if we do achieve significant revenues from
product sales, licensing revenues and milestone payments, we
expect to incur significant operating losses over the next
several years. We have never been profitable, and we may never
become profitable. Through December 31, 2007, we have
incurred aggregate net losses of approximately
$65.0 million.
9
If we
do not receive and maintain regulatory approvals for our product
candidates, we will not be able to commercialize our products,
which would substantially impair our ability to generate
revenues.
With the exception of the December 2004 receipt of a CE
(European Conformity) Mark, the April 2005 FDA clearance for
Cumulase and the December 2005 FDA approval for our spreading
agent, Hylenex, none of our product candidates has received
regulatory approval from the FDA or from any similar national
regulatory agency or authority in any other country in which we
intend to do business. Approval from the FDA is necessary to
manufacture and market pharmaceutical products in the United
States. Most other countries in which we may do business have
similar requirements.
Other manufacturers have FDA approved products for use as
spreading agents, including ISTA Pharmaceuticals, Inc., with an
ovine-derived hyaluronidase,
Vitrase®,
Amphastar Pharmaceuticals, Inc., with a bovine-derived
hyaluronidase,
Amphadasetm,
and Primapharm, Inc., also with a bovine-derived hyaluronidase,
Hydasetm.
The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are each distinct new chemical entities and hence
afforded five years of market exclusivity. The five year market
exclusivity precludes identical new chemical entity products
from being marketed for a period of five years. For so long as
each of these products is established as a distinctly different
new chemical entity, the marketing exclusivity granted does not
prohibit the marketing of any of these products, including
Hylenex. If the FDA changes its earlier determination that
Hylenex is a distinct new chemical entity, our ability to market
Hylenex will be materially impaired.
The process for obtaining FDA approval is extensive,
time-consuming and costly, and there is no guarantee that the
FDA will approve any NDAs that we intend to file with respect to
any of our product candidates, or that the timing of any such
approval will be appropriate for our product launch schedule and
other business priorities, which are subject to change. We have
not currently begun the NDA approval process for any of our
other potential products, and we may not be successful in
obtaining such approvals for any of our potential products.
We may
not receive regulatory approvals for our product candidates for
a variety of reasons, including unsuccessful clinical
trials.
Clinical testing of pharmaceutical products is a long, expensive
and uncertain process and the failure of a clinical trial can
occur at any stage. Even if initial results of pre-clinical
studies or clinical trial results are promising, we may obtain
different results that fail to show the desired levels of safety
and efficacy, or we may not obtain FDA approval for a variety of
other reasons. The clinical trials of any of our product
candidates could be unsuccessful, which would prevent us from
obtaining regulatory approval and commercializing the product.
FDA approval can be delayed, limited or not granted for many
reasons, including, among others:
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FDA officials may not find a product candidate safe or effective
enough to merit either continued testing or final approval;
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FDA officials may not find that the data from pre-clinical
testing and clinical trials justifies approval, or they may
require additional studies that would make it commercially
unattractive to continue pursuit of approval;
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the FDA may reject our trial data or disagree with our
interpretations of either clinical trial data or applicable
regulations;
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the cost of a clinical trial may be greater than what we
originally anticipate, and we may decide to not pursue FDA
approval for such a trial;
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the FDA may not approve our manufacturing processes or
facilities, or the processes or facilities of our contract
manufacturers or raw material suppliers;
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the FDA may change its formal or informal approval requirements
and policies, act contrary to previous guidance, or adopt new
regulations; or
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the FDA may approve a product candidate for indications that are
narrow or under conditions that place the product at a
competitive disadvantage, which may limit our sales and
marketing activities or otherwise adversely impact the
commercial potential of a product.
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If the FDA does not approve our product candidates in a timely
fashion on commercially viable terms, or if we terminate
development of any of our product candidates due to difficulties
or delays encountered in the regulatory approval process, it
will have a material adverse impact on our business and we will
be dependent on the development of our other product candidates
and/or our
ability to successfully acquire other products and technologies.
We may not receive regulatory approval of our Chemophase product
candidate or any other product candidates, in a timely manner,
or at all.
We intend to market certain of our products, and perhaps have
certain of our products manufactured, in foreign countries. The
process of obtaining regulatory approvals in foreign countries
is subject to delay and failure for many of the same reasons set
forth above as well as for reasons that vary from jurisdiction
to jurisdiction. The approval process varies among countries and
jurisdictions and can involve additional testing. The time
required to obtain approval may differ from that required to
obtain FDA approval. We may not obtain foreign regulatory
approvals on a timely basis, if at all. Approval by the FDA does
not ensure approval by regulatory authorities in other countries
or jurisdictions, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in
other foreign countries or jurisdictions or by the FDA.
If we
fail to comply with regulatory requirements, regulatory agencies
may take action against us, which could significantly harm our
business.
Any approved products, along with the manufacturing processes,
post-approval clinical data, labeling, advertising and
promotional activities for these products, are subject to
continual requirements and review by the FDA and other
regulatory bodies. Regulatory authorities subject a marketed
product, its manufacturer and the manufacturing facilities to
continual review and periodic inspections. We will be subject to
ongoing FDA requirements, including required submissions of
safety and other post-market information and reports,
registration requirements, current Good Manufacturing Processes,
or cGMP, regulations, requirements regarding the distribution of
samples to physicians and recordkeeping requirements. The cGMP
regulations include requirements relating to quality control and
quality assurance, as well as the corresponding maintenance of
records and documentation. We rely on the compliance by our
contract manufacturers with cGMP regulations and other
regulatory requirements relating to the manufacture of our
products. We are also subject to state laws and registration
requirements covering the distribution of our products.
Regulatory agencies may change existing requirements or adopt
new requirements or policies. We may be slow to adapt or may not
be able to adapt to these changes or new requirements.
Later discovery of previously unknown problems with our
products, manufacturing processes or failure to comply with
regulatory requirements, may result in any of the following:
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restrictions on our products or manufacturing processes;
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warning letters;
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withdrawal of the products from the market;
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voluntary or mandatory recall;
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fines;
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suspension or withdrawal of regulatory approvals;
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suspension or termination of any of our ongoing clinical trials;
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refusal to permit the import or export of our products;
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refusal to approve pending applications or supplements to
approved applications that we submit;
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product seizure; or
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injunctions or the imposition of civil or criminal penalties.
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11
If any
party to a key collaboration agreement, including us, fails to
perform material obligations under such agreement, or if a key
collaboration agreement is terminated for any reason, our
business would significantly suffer.
We have entered into key collaboration agreements under which we
may receive significant future payments in the form of
maintenance fees, milestone payments and royalties. In the event
that a party fails to perform under a key collaboration
agreement, or if a key collaboration agreement is terminated,
the reduction in anticipated revenues could delay or suspend our
product development activities for some of our product
candidates as well as our commercialization efforts for some or
all of our products. In addition, the termination of a key
collaboration agreement by one of our partners could materially
impact our ability to enter into additional collaboration
agreements with new partners on favorable terms, if at all. In
certain circumstances, the termination of a key collaboration
agreement would require us to revise our corporate strategy
going forward and reevaluate the applications and value of our
technology.
If we
are unable to sufficiently develop our sales, marketing and
distribution capabilities or enter into successful agreements
with third parties to perform these functions, we will not be
able to fully commercialize our products.
We may not be successful in marketing and promoting our existing
product candidates or any other products we develop or acquire
in the future. We are currently in the process of developing our
sales, marketing and distribution capabilities. However, our
current capabilities in these areas are very limited. In order
to commercialize any products successfully, we must internally
develop substantial sales, marketing and distribution
capabilities or establish collaborations or other arrangements
with third parties to perform these services. We do not have
extensive experience in these areas, and we may not be able to
establish adequate in-house sales, marketing and distribution
capabilities or engage and effectively manage relationships with
third parties to perform any or all of such services. To the
extent that we enter into co-promotion or other licensing
arrangements, our product revenues are likely to be lower than
if we directly marketed and sold our products, and any revenues
we receive will depend upon the efforts of third parties, whose
efforts may not meet our expectations or be successful.
We have entered into non-exclusive distribution agreements with
MediCult AS, a Denmark-based distributor, and MidAtlantic
Diagnostics, Inc., a New Jersey-based distributor, to market and
sell our Cumulase product. We have entered into an exclusive
sales and marketing agreement with Baxter to market and sell our
Hylenex product in the United States and Puerto Rico. Baxter
also has the right to market and sell Hylenex on an exclusive
basis in all territories outside of the United States, if and
when we seek and receive the applicable regulatory approvals in
those territories.
We depend upon the efforts of these third parties, such as
Baxter, to promote and sell our current products, but there can
be no assurance that the efforts of these third parties will
meet our expectations or result in any significant product
sales. While these third parties are largely responsible for the
speed and scope of sales and marketing efforts, they may not
dedicate the resources necessary to maximize product
opportunities and our ability to cause these third parties to
increase the speed and scope of their efforts may be limited. In
addition, sales and marketing efforts could be negatively
impacted by the delay or failure to obtain additional supportive
clinical trial data for our products. Our third party partners
are responsible for conducting these additional clinical trials
and our ability to increase the efforts and resources allocated
to these trials may be limited.
If our
sole contract manufacturer is unable to manufacture significant
amounts of the active pharmaceutical ingredient used in our
products, our product development and commercialization efforts
could be delayed or stopped.
We have signed a commercial supply agreement with Avid
Bioservices, Inc. (Avid), a contract manufacturing
organization, to produce bulk recombinant human hyaluronidase
for clinical trials and commercial use. Avid will produce the
active pharmaceutical ingredient used in each of Cumulase,
Hylenex, Chemophase, and Enhanze Technology under cGMP for
clinical or commercial scale production and will provide support
for the chemistry, manufacturing and controls sections for FDA
regulatory filings. Avid has only limited experience
manufacturing our active pharmaceutical ingredient batches, and
we rely on its ability to successfully manufacture these batches
12
according to product specifications. In addition, as a result of
our contractual obligations to Roche, we will be required to
significantly scale up our active pharmaceutical ingredient
production during the next few years. We do not currently have a
significant inventory of the active pharmaceutical ingredient
used in our products and product candidates, so if Avid does not
maintain its status as an FDA-approved manufacturing facility,
is unable to successfully scale up our active pharmaceutical
ingredient production, or is unable to manufacture the active
pharmaceutical ingredient used in our products and product
candidates according to product specifications for any other
reason, the commercialization of our products and the
development of our product candidates will be delayed and our
business will be adversely affected. We have entered into
discussions to establish arrangements with an additional
manufacturer for these ingredients. We have not yet established,
and may not be able to establish, favorable arrangements with
additional manufacturers for these ingredients or products
should the existing supplies become unavailable or in the event
that our sole contract manufacturer is unable to adequately
perform its responsibilities. Any delays or interruptions in the
supply of materials by Avid could cause the delay of clinical
trials and could delay or prevent the commercialization of
product candidates that may receive regulatory approval. Such
delays or interruptions would have a material adverse effect on
our business and financial condition.
If we
have problems with the third parties that prepare, fill, finish,
and package our product candidates for distribution, our product
development and commercialization efforts for these candidates
could be delayed or stopped.
In the event that any of our product candidates are used in
clinical trials or receive the necessary regulatory approval for
commercialization, we rely on third parties to prepare, fill,
finish, and package the products prior to their distribution. If
we are unable to locate third parties to perform these functions
on terms that are economically acceptable to us, the progress of
clinical trials could be delayed or even suspended and the
commercialization of approved product candidates could be
delayed or prevented. We currently utilize a third-party to
prepare, fill, finish, and package Cumulase. This third party
has only limited experience manufacturing Cumulase batches and,
to date, has not demonstrated a consistent ability to
manufacture Cumulase according to product specifications. We
have entered into an agreement with another third party to
prepare, fill, finish and package Cumulase. We are currently in
the technology transfer stage with this third party and expect
to initiate commercial manufacturing in 2008. If our third party
manufacturers are unable to successfully manufacture Cumulase,
we may be unable to supply enough Cumulase product to meet
demand. In addition, we currently utilize a subsidiary of Baxter
to prepare, fill, finish, and package Hylenex under a
development and supply agreement. Baxter has only limited
experience manufacturing Hylenex batches, and we rely on its
ability to successfully manufacture Hylenex batches according to
product specifications. Any delays or interruptions in
Baxters ability to manufacture Hylenex batches in amounts
necessary to meet product demand could have a material adverse
impact on our business and financial condition.
We may
wish to raise funds in the next twelve months, and there can be
no assurance that such funds will be available.
During the next twelve months, we may wish to raise additional
capital to complete or accelerate the steps required to continue
development of our product candidates and to fund general
operations. If we engage in acquisitions of companies, products,
or technology in order to execute our business strategy, we may
need to raise additional capital. We may be required to raise
additional capital in the future through the public offering of
securities, collaborative agreements, private financings and
various other equity or debt financings, including calling
outstanding warrants to purchase our common stock.
Currently, warrants to purchase approximately 4.9 million
shares of our common stock are outstanding and this amount of
outstanding warrants may make us a less desirable candidate for
investment for some potential investors. Approximately
1.6 million of our outstanding warrants contain a call
feature that, potentially, may allow us to raise funds from the
holders of these warrants. We have the ability, at our sole
discretion, to call warrants exercisable for up to approximately
1.6 million shares of common stock and, upon such a call,
the holders of these warrants have thirty days to decide whether
to exercise their warrants at a price of $1.75 per share or
receive $0.01 from us for each share of common stock that is not
exercised.
Considering our stage of development and the nature of our
capital structure, if we are required to raise additional
capital in the future, the additional financing may not be
available on favorable terms, or at all. If we are
13
successful in raising additional capital, a substantial number
of additional shares may be issued and these shares will dilute
the ownership interest of our current investors.
If our
product candidates are approved by the FDA but do not gain
market acceptance, our business will suffer because we may not
be able to fund future operations.
Assuming that we obtain the necessary regulatory approvals, a
number of factors may affect the market acceptance of any of our
existing product candidates or any other products we develop or
acquire in the future, including, among others:
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the price of our products relative to other therapies for the
same or similar treatments;
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the perception by patients, physicians and other members of the
health care community of the effectiveness and safety of our
products for their prescribed treatments;
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our ability to fund our sales and marketing efforts;
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the degree to which the use of our products is restricted by the
product label approved by the FDA;
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the effectiveness of our sales and marketing efforts; and
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the introduction of generic competitors.
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If our products do not gain market acceptance, we may not be
able to fund future operations, including the development or
acquisition of new product candidates
and/or our
sales and marketing efforts for our approved products, which
would cause our business to suffer.
In addition, our ability to market and promote our product
candidates will be restricted to the labels approved by the FDA.
If the approved labels are restrictive, our sales and marketing
efforts may be negatively affected.
Developing
and marketing pharmaceutical products for human use involves
product liability risks, for which we currently have limited
insurance coverage.
The testing, marketing and sale of pharmaceutical products
involves the risk of product liability claims by consumers and
other third parties. Although we maintain product liability
insurance coverage, product liability claims can be high in the
pharmaceutical industry and our insurance may not sufficiently
cover our actual liabilities. If product liability claims were
made against us, it is possible that our insurance carriers may
deny, or attempt to deny, coverage in certain instances. If a
lawsuit against us is successful, then the lack or insufficiency
of insurance coverage could materially and adversely affect our
business and financial condition. Furthermore, various
distributors of pharmaceutical products require minimum product
liability insurance coverage before purchase or acceptance of
products for distribution. Failure to satisfy these insurance
requirements could impede our ability to achieve broad
distribution of our proposed products and the imposition of
higher insurance requirements could impose additional costs on
us.
Our
inability to attract, hire and retain key management and
scientific personnel, and to recruit qualified independent
directors, could negatively affect our business.
Our success depends on the performance of key management and
scientific employees with biotechnology experience. Given our
small staff size and programs currently under development, we
depend substantially on our ability to hire, train, retain and
motivate high quality personnel, especially our scientists and
management team in this field. If we are unable to retain
existing personnel or identify or hire additional personnel, we
may not be able to research, develop, commercialize or market
our product candidates as expected or on a timely basis and, as
a result, our business may be harmed. In addition, we rely on
the expertise and guidance of independent directors to develop
business strategies and to guide our execution of these
strategies. Due to changes in the regulatory environment for
public companies over the past few years, the demand for
independent directors has increased and it may be difficult for
us, due to competition from both like-size and larger companies,
to recruit qualified independent directors.
Furthermore, if we were to lose key management personnel,
particularly Jonathan Lim, M.D., our chief executive
officer, or Gregory Frost, Ph.D., our chief scientific
officer, then we would likely lose some portion of our
14
institutional knowledge and technical know-how, potentially
causing a substantial delay in one or more of our development
programs until adequate replacement personnel could be hired and
trained. For example, Dr. Frost has been with us from soon
after our inception, and he possesses a substantial amount of
knowledge about our development efforts. If we were to lose his
services, we would experience delays in meeting our product
development schedules. We have not entered into any retention or
other agreements specifically designed to motivate officers or
other employees to remain with us, other than standard
agreements relating to the vesting of stock options that every
optionee of the Company must enter into as a condition of
receiving an option grant.
We do not have key man life insurance policies on the lives of
any of our employees, including Dr. Lim and Dr. Frost.
Risks
Related To Ownership of Our Common Stock
Future
sales of shares of our common stock upon the exercise of
currently outstanding securities or pursuant to our universal
shelf registration statement may negatively affect our stock
price.
As a result of our January 2004 private financing transaction,
we issued warrants to private investors for the purchase of
approximately 10.5 million shares of common stock at
purchase prices ranging from $0.77 to $1.75 per share.
Currently, approximately 2.8 million shares of common stock
remain issuable upon the exercise of these warrants. As a result
of our October 2004 financing transaction, we issued warrants
for the purchase of approximately 2.7 million shares of
common stock at a purchase price of $2.25 per share. Currently,
approximately 2.0 million shares of common stock remain
issuable upon the exercise of these warrants. The exercise of
these warrants could result in significant dilution to
stockholders at the time of exercise which could negatively
affect our stock price.
We currently have the ability, from time to time, to offer and
sell up to $32.5 million of additional equity or debt
securities under a currently effective universal shelf
registration statement. Sales of substantial amounts of shares
of our common stock or other securities under our universal
shelf registration statement could lower the market price of our
common stock and impair our ability to raise capital through the
sale of equity securities. In the future, we may issue
additional options, warrants or other derivative securities
convertible into our common stock.
Our
stock price is subject to significant volatility.
We participate in a highly dynamic industry which often results
in significant volatility in the market price of common stock
irrespective of company performance. As a result, our high and
low sales prices of our common stock during the year ended
December 31, 2007 were $11.00 and $6.00, respectively. We
expect our stock price to continue to be subject to significant
volatility and, in addition to the other risks and uncertainties
described elsewhere in this Annual Report on
Form 10-K
and all other risks and uncertainties that are either not known
to us at this time or which we deem to be immaterial, any of the
following factors may lead to a significant drop in our stock
price:
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our failure, or the failure of one of our third party partners,
to comply with the terms of our collaboration agreements;
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the termination, for any reason, of any of our collaboration
agreements;
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the sale of common stock by any significant shareholder,
including, but not limited to, direct or indirect sales by
members of our Board of Directors;
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general negative conditions in the healthcare industry;
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general negative conditions in the financial markets;
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the failure, for any reason, to obtain FDA approval for any of
our products;
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the failure, for any reason, to secure or defend our
intellectual property position;
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for those products that are approved by the FDA, the failure of
the FDA to approve such products in a timely manner consistent
with the FDAs historical approval process;
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15
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the suspension of our Chemophase clinical trial due to safety or
patient tolerability issues;
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the suspension of our Chemophase clinical trial due to market
and/or
competitive conditions;
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our failure, or the failure of our third party partners, to
successfully commercialize products approved by the FDA;
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our failure, or the failure of our third party partners, to
generate product revenues anticipated by investors;
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problems with our sole API contract manufacturer or our sole
fill and finish manufacturer for Hylenex;
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the exercise of our right to redeem certain outstanding warrants
to purchase our common stock;
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the sale of additional debt
and/or
equity securities by us; and
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the departure of key personnel.
|
Trading
in our stock has historically been limited, so investors may not
be able to sell as much stock as they want to at prevailing
market prices.
Our stock has historically traded at a low daily trading volume.
If recent trading volumes decrease, it may be difficult for
stockholders to sell their shares in the public market at any
given time at prevailing prices.
Our
decision to redeem outstanding warrants may drive down the
market price of our stock.
We may have the ability to redeem certain outstanding warrants,
under certain conditions, that may be exercised for
approximately 1.6 million shares of common stock. The
redemption price for these warrants is $0.01 per share, but the
warrant holders have the opportunity to exercise their warrants
prior to redemption at the price of $1.75 per share. If we
decide to redeem any portion of our outstanding warrants in the
future, some selling security holders may choose to sell
outstanding shares of common stock in order to finance the
exercise of the warrants prior to their redemption. This pattern
of selling may result in a reduction of our common stocks
market price.
Risks
Related To Our Industry
Compliance
with the extensive government regulations to which we are
subject is expensive and time consuming and may result in the
delay or cancellation of product sales, introductions or
modifications.
Extensive industry regulation has had, and will continue to
have, a significant impact on our business. All pharmaceutical
companies, including ours, are subject to extensive, complex,
costly and evolving regulation by the federal government,
principally the FDA and, to a lesser extent, the U.S. Drug
Enforcement Administration (DEA) and foreign and
state government agencies. The Federal Food, Drug and Cosmetic
Act, the Controlled Substances Act and other domestic and
foreign statutes and regulations govern or influence the
testing, manufacturing, packaging, labeling, storing,
recordkeeping, safety, approval, advertising, promotion, sale
and distribution of our products. Under certain of these
regulations, Halozyme and its contract suppliers and
manufacturers are subject to periodic inspection of its or their
respective facilities, procedures and operations
and/or the
testing of products by the FDA, the DEA and other authorities,
which conduct periodic inspections to confirm that Halozyme and
its contract suppliers and manufacturers are in compliance with
all applicable regulations. The FDA also conducts pre-approval
and post-approval reviews and plant inspections to determine
whether our systems, or our contract suppliers and
manufacturers processes, are in compliance with cGMP and
other FDA regulations. If we, or our contract supplier, fail
these inspections, we may not be able to commercialize our
product in a timely manner without incurring significant
additional costs, or at all.
In addition, the FDA imposes a number of complex regulatory
requirements on entities that advertise and promote
pharmaceuticals including, but not limited to, standards and
regulations for direct-to-consumer advertising, off-label
promotion, industry-sponsored scientific and educational
activities, and promotional activities involving the internet.
We are dependent on receiving FDA and other governmental
approvals prior to manufacturing, marketing and shipping our
products. Consequently, there is always a risk that the FDA or
other applicable governmental
16
authorities will not approve our products, or will take
post-approval action limiting or revoking our ability to sell
our products, or that the rate, timing and cost of such
approvals will adversely affect our product introduction plans
or results of operations.
Our
suppliers and sole manufacturer are subject to regulation by the
FDA and other agencies, and if they do not meet their
commitments, we would have to find substitute suppliers or
manufacturers, which could delay the supply of our products to
market.
Regulatory requirements applicable to pharmaceutical products
make the substitution of suppliers and manufacturers costly and
time consuming. We have no internal manufacturing capabilities
and are, and expect to be in the future, entirely dependent on
contract manufacturers and suppliers for the manufacture of our
products and for their active and other ingredients. The
disqualification of these manufacturers and suppliers through
their failure to comply with regulatory requirements could
negatively impact our business because the delays and costs in
obtaining and qualifying alternate suppliers (if such
alternative suppliers are available, which we cannot assure)
could delay clinical trials or otherwise inhibit our ability to
bring approved products to market, which would have a material
adverse effect on our business and financial condition.
We may
be required to initiate or defend against legal proceedings
related to intellectual property rights, which may result in
substantial expense, delay and/or cessation of the development
and commercialization of our products.
We rely on patents to protect our intellectual property rights.
The strength of this protection, however, is uncertain. For
example, it is not certain that:
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|
|
our patents and pending patent applications cover products
and/or
technology that we invented first;
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|
we were the first to file patent applications for these
inventions;
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|
others will not independently develop similar or alternative
technologies or duplicate our technologies;
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|
any of our pending patent applications will result in issued
patents; and
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|
any of our issued patents, or patent pending applications that
result in issued patents, will be held valid and infringed in
the event the patents are asserted against others.
|
We currently own or license several U.S. patents and also
have pending patent applications. There can be no assurance that
our existing patents, or any patents issued to us as a result of
our pending patent applications, will provide a basis for
commercially viable products, will provide us with any
competitive advantages, or will not face third party challenges
or be the subject of further proceedings limiting their scope or
enforceability. Such limitations in our patent portfolio could
have a material adverse effect on our business and financial
condition. In addition, if any of our pending patent
applications do not result in issued patents, this could have a
material adverse effect on our business and financial condition.
We may become involved in interference proceedings in the
U.S. Patent and Trademark Office to determine the priority
of our inventions. In addition, costly litigation could be
necessary to protect our patent position. We also rely on
trademarks to protect the names of our products. These
trademarks may be challenged by others. If we enforce our
trademarks against third parties, such enforcement proceedings
may be expensive. We also rely on trade secrets, unpatented
proprietary know-how and continuing technological innovation
that we seek to protect with confidentiality agreements with
employees, consultants and others with whom we discuss our
business. Disputes may arise concerning the ownership of
intellectual property or the applicability or enforceability of
these agreements, and we might not be able to resolve these
disputes in our favor.
In addition to protecting our own intellectual property rights,
third parties may assert patent, trademark or copyright
infringement or other intellectual property claims against us
based on what they believe are their own intellectual property
rights. If we become involved in any intellectual property
litigation, we may be required to pay substantial damages,
including but not limited to treble damages, for past
infringement if it is ultimately determined that our products
infringe a third partys intellectual property rights. Even
if infringement claims against us are without merit, defending a
lawsuit takes significant time, may be expensive and may divert
managements attention
17
from other business concerns. Further, we may be stopped from
developing, manufacturing or selling our products until we
obtain a license from the owner of the relevant technology or
other intellectual property rights. If such a license is
available at all, it may require us to pay substantial royalties
or other fees.
Future
acquisitions could disrupt our business and harm our financial
condition.
In order to augment our product pipeline or otherwise strengthen
our business, we may decide to acquire additional businesses,
products and technologies. As we have limited experience in
evaluating and completing acquisitions, our ability as an
organization to make such acquisitions is unproven. Acquisitions
could require significant capital infusions and could involve
many risks, including, but not limited to, the following:
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we may have to issue convertible debt or equity securities to
complete an acquisition, which would dilute our stockholders and
could adversely affect the market price of our common stock;
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|
an acquisition may negatively impact our results of operations
because it may require us to incur large one-time charges to
earnings, amortize or write down amounts related to goodwill and
other intangible assets, or incur or assume substantial debt or
liabilities, or it may cause adverse tax consequences,
substantial depreciation or deferred compensation charges;
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|
we may encounter difficulties in assimilating and integrating
the business, products, technologies, personnel or operations of
companies that we acquire;
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|
certain acquisitions may disrupt our relationship with existing
customers who are competitive with the acquired business,
products or technologies;
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|
acquisitions may require significant capital infusions and the
acquired businesses, products or technologies may not generate
sufficient revenue to offset acquisition costs;
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an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management;
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|
acquisitions may involve the entry into a geographic or business
market in which we have little or no prior experience; and
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|
key personnel of an acquired company may decide not to work for
us.
|
If any of these risks occurred, it could adversely affect our
business, financial condition and operating results. We cannot
assure you that we will be able to identify or consummate any
future acquisitions on acceptable terms, or at all. If we do
pursue any acquisitions, it is possible that we may not realize
the anticipated benefits from such acquisitions or that the
market will not view such acquisitions positively.
If
third party reimbursement and customer contracts are not
available, our products may not be accepted in the
market.
Our ability to earn sufficient returns on our products will
depend in part on the extent to which reimbursement for our
products and related treatments will be available from
government health administration authorities, private health
insurers, managed care organizations and other healthcare
providers.
Third-party payors are increasingly attempting to limit both the
coverage and the level of reimbursement of new drug products to
contain costs. Consequently, significant uncertainty exists as
to the reimbursement status of newly approved healthcare
products. Third party payors may not establish adequate levels
of reimbursement for the products that we commercialize, which
could limit their market acceptance and result in a material
adverse effect on our financial condition.
Customer contracts, such as with group paying organizations and
hospital formularies, will often not offer contract or formulary
status without either the lowest price or substantial proven
clinical differentiation. If our products are compared to
animal-extracted hyaluronidases by these entities, it is
possible that neither of these conditions will be met, which
could limit market acceptance and result in a material adverse
effect on our financial condition.
18
The
rising cost of healthcare and related pharmaceutical product
pricing has led to cost containment pressures that could cause
us to sell our products at lower prices, resulting in less
revenue to us.
Any of our products that have been or in the future are approved
by the FDA may be purchased or reimbursed by state and federal
government authorities, private health insurers and other
organizations, such as health maintenance organizations and
managed care organizations. Such third party payors increasingly
challenge pharmaceutical product pricing. The trend toward
managed healthcare in the United States, the growth of such
organizations, and various legislative proposals and enactments
to reform healthcare and government insurance programs,
including the Medicare Prescription Drug Modernization Act of
2003, could significantly influence the manner in which
pharmaceutical products are prescribed and purchased, resulting
in lower prices
and/or a
reduction in demand. Such cost containment measures and
healthcare reforms could adversely affect our ability to sell
our products. Furthermore, individual states have become
increasingly aggressive in passing legislation and implementing
regulations designed to control pharmaceutical product pricing,
including price or patient reimbursement constraints, discounts,
restrictions on certain product access, importation from other
countries and bulk purchasing. Legally mandated price controls
on payment amounts by third party payors or other restrictions
could negatively and materially impact our revenues and
financial condition. We anticipate that we will encounter
similar regulatory and legislative issues in most other
countries outside the United States.
We
face intense competition and rapid technological change that
could result in the development of products by others that are
superior to the products we are developing.
We have numerous competitors in the United States and abroad
including, among others, major pharmaceutical and specialized
biotechnology firms, universities and other research
institutions that may be developing competing products. Such
competitors include, but are not limited to, Sigma-Aldrich
Corporation, ISTA Pharmaceuticals, Inc., or ISTA, Amphastar
Pharmaceuticals, Inc., or Amphastar, and Primapharm, Inc. or
Primapharm, among others. These competitors may develop
technologies and products that are more effective, safer, or
less costly than our current or future product candidates or
that could render our technologies and product candidates
obsolete or noncompetitive. Many of these competitors have
substantially more resources and product development,
manufacturing and marketing experience and capabilities than we
do. In addition, many of our competitors have significantly
greater experience than we do in undertaking pre-clinical
testing and clinical trials of pharmaceutical product candidates
and obtaining FDA and other regulatory approvals of products and
therapies for use in healthcare. Other manufacturers have FDA
approved products for use as spreading agents, including ISTA,
with an ovine-derived hyaluronidase,
Vitrase®,
Amphastar, with a bovine-derived hyaluronidase,
Amphadasetm,
and Primapharm, also with a bovine-derived hyaluronidase,
Hydasetm.
The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are distinct new chemical entities and hence afforded
five years of market exclusivity. The five year market
exclusivity precludes identical new chemical entity products
from being marketed for a period of five years. As each of these
products is established as distinctly different new chemical
entities, the marketing exclusivity granted does not prohibit
the marketing of the products.
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Item 1B.
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Unresolved
Staff Comments
|
None.
Our administrative offices and research facilities are currently
located in San Diego, California. We sublease an aggregate
of approximately 48,800 square feet of office and research
space for an initial monthly rent expense of approximately
$108,000, net of costs and property taxes associated with the
operation and maintenance of the subleased facilities. We had
two separate leases for approximately 18,400 combined square
feet of facilities, which expired in December 2007. We believe
the current space is adequate for our immediate needs.
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Item 3.
|
Legal
Proceedings
|
From time to time, we may be involved in litigation relating to
claims arising out of operations in the normal course of our
business. Any of these claims could subject us to costly
litigation and, while we generally believe that
19
we have adequate insurance to cover many different types of
liabilities, our insurance carriers may deny coverage or our
policy limits may be inadequate to fully satisfy any damage
awards or settlements. If this were to happen, the payment of
any such awards could have a material adverse effect on our
results of operations and financial position. Additionally, any
such claims, whether or not successful, could damage our
reputation and business. We currently are not a party to any
legal proceedings, the adverse outcome of which, in
managements opinion, individually or in the aggregate,
would have a material adverse effect on our results of
operations or financial position.
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Item 4.
|
Submission
of Matters to a Vote of Security Holders
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A special meeting of stockholders was held on November 14,
2007. One proposal was considered. The proposal was to approve
an Agreement and Plan of Merger pursuant to which we would
reincorporate from the State of Nevada to the State of Delaware.
This proposal received the following votes:
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Shares
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For approval
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40,216,282
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Against approval
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1,638,578
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Abstained
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71,428
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The foregoing proposal was approved.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Since May 10, 2007, our common stock has traded on the
NASDAQ Stock Market under the symbol HALO. During
the period from January 1, 2006 to May 9, 2007, our
common stock traded under the symbol HTI on The
American Stock Exchange (the AMEX). The following
table sets forth the high and low sales prices per share of our
common stock during each quarter of the two most recent fiscal
years:
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Fiscal Year 2007
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High
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Low
|
|
|
First Quarter
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$
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9.70
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$
|
6.75
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Second Quarter
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|
$
|
11.00
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$
|
8.00
|
|
Third Quarter
|
|
$
|
10.50
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|
$
|
7.49
|
|
Fourth Quarter
|
|
$
|
9.46
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|
$
|
6.00
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Fiscal Year 2006
|
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High
|
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Low
|
|
|
First Quarter
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|
$
|
3.71
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|
|
$
|
1.79
|
|
Second Quarter
|
|
$
|
3.59
|
|
|
$
|
2.20
|
|
Third Quarter
|
|
$
|
2.74
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|
|
$
|
2.15
|
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Fourth Quarter
|
|
$
|
8.70
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|
$
|
2.46
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On February 29, 2008, the closing sales price of our common
stock on the NASDAQ Stock Market was $5.50 per share. As of
February 29, 2008, we had approximately 3,500 stockholders
of record. We have not paid any dividends on our common stock
since our inception and do not expect to pay dividends on our
common stock in the foreseeable future.
20
The graph below compares Halozyme Therapeutics, Inc.s
cumulative
45-month
total shareholder return on common stock with the cumulative
total returns of the AMEX Composite index, the NASDAQ Composite
index, the AMEX Biotechnology index and the NASDAQ Biotechnology
index. The graph tracks the performance of a $100 investment in
our common stock and in each of the indexes (with the
reinvestment of all dividends) from
3/12/2004 to
12/31/2007.
The historical stock price performance included in this graph is
not necessarily indicative of future stock price performance.
COMPARISON
OF 45 MONTH CUMULATIVE TOTAL RETURN*
Halozyme Therapeutics Inc.
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* |
$100 invested on 3/12/04 in stock or on 2/29/04 in
index-including reinvestment of dividends.
Fiscal year ending December 31.
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|
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|
3/04
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|
|
3/04
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|
|
6/04
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|
|
9/04
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|
12/04
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|
|
3/05
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|
|
6/05
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|
|
9/05
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|
|
12/05
|
|
|
3/06
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|
|
6/06
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|
|
9/06
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|
|
12/06
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|
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3/07
|
|
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6/07
|
|
|
9/07
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12/07
|
Halozyme Therapeutics Inc
|
|
|
|
100
|
|
|
|
|
105
|
|
|
|
|
77
|
|
|
|
|
54
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|
|
|
|
53
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|
|
|
|
40
|
|
|
|
|
44
|
|
|
|
|
51
|
|
|
|
|
44
|
|
|
|
|
83
|
|
|
|
|
65
|
|
|
|
|
64
|
|
|
|
|
194
|
|
|
|
|
194
|
|
|
|
|
222
|
|
|
|
|
209
|
|
|
|
|
171
|
|
AMEX Composite
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
98
|
|
|
|
|
100
|
|
|
|
|
115
|
|
|
|
|
118
|
|
|
|
|
125
|
|
|
|
|
141
|
|
|
|
|
141
|
|
|
|
|
157
|
|
|
|
|
154
|
|
|
|
|
155
|
|
|
|
|
168
|
|
|
|
|
177
|
|
|
|
|
191
|
|
|
|
|
195
|
|
|
|
|
196
|
|
NASDAQ Composite
|
|
|
|
100
|
|
|
|
|
98
|
|
|
|
|
101
|
|
|
|
|
94
|
|
|
|
|
108
|
|
|
|
|
99
|
|
|
|
|
102
|
|
|
|
|
108
|
|
|
|
|
110
|
|
|
|
|
118
|
|
|
|
|
110
|
|
|
|
|
114
|
|
|
|
|
123
|
|
|
|
|
123
|
|
|
|
|
132
|
|
|
|
|
138
|
|
|
|
|
134
|
|
AMEX Biotechnology
|
|
|
|
100
|
|
|
|
|
96
|
|
|
|
|
100
|
|
|
|
|
98
|
|
|
|
|
104
|
|
|
|
|
95
|
|
|
|
|
112
|
|
|
|
|
130
|
|
|
|
|
137
|
|
|
|
|
134
|
|
|
|
|
127
|
|
|
|
|
132
|
|
|
|
|
131
|
|
|
|
|
126
|
|
|
|
|
126
|
|
|
|
|
133
|
|
|
|
|
120
|
|
NASDAQ Biotechnology
|
|
|
|
100
|
|
|
|
|
98
|
|
|
|
|
98
|
|
|
|
|
94
|
|
|
|
|
103
|
|
|
|
|
90
|
|
|
|
|
96
|
|
|
|
|
113
|
|
|
|
|
116
|
|
|
|
|
121
|
|
|
|
|
109
|
|
|
|
|
113
|
|
|
|
|
115
|
|
|
|
|
112
|
|
|
|
|
115
|
|
|
|
|
122
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Sales of Unregistered Securities
During the three months ended December 31, 2007, holders of
various outstanding warrants exercised their rights to purchase
520,161 common shares for gross proceeds of approximately
$635,000. The shares and underlying warrants were purchased for
investment in a private placement exempt from the registration
requirements of the Securities Act pursuant to Section 4(2)
thereof.
21
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial data set forth below as of
December 31, 2007 and 2006, and for the fiscal years ended
December 31, 2007, 2006 and 2005, are derived from our
audited consolidated financial statements included elsewhere in
this report. This information should be read in conjunction with
those consolidated financial statements, the notes thereto, and
with Managements Discussion and Analysis of
Financial Condition and Results of Operations. The
selected consolidated financial data set forth below as of
December 31, 2005, 2004 and 2003, and for the years ended
December 31, 2004 and 2003, are derived from our audited
consolidated financial statements that are contained in reports
previously filed with the SEC, not included herein.
Summary
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Statement of operations data:
|
|
2007
|
|
|
2006
|
|
|
2005 _
|
|
|
2004
|
|
|
2003
|
|
|
Total revenues
|
|
$
|
3,799,521
|
|
|
$
|
981,746
|
|
|
$
|
127,209
|
|
|
$
|
|
|
|
$
|
|
|
Net loss
|
|
$
|
(23,896,183
|
)
|
|
$
|
(14,751,986
|
)
|
|
$
|
(13,275,373
|
)
|
|
$
|
(9,091,376
|
)
|
|
$
|
(2,115,025
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.31
|
)
|
Shares used in computing net loss per share, basic and diluted
|
|
|
74,317,930
|
|
|
|
62,610,265
|
|
|
|
50,317,021
|
|
|
|
35,411,127
|
|
|
|
6,826,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Balance sheet data:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash and cash equivalents
|
|
$
|
97,679,085
|
|
|
$
|
44,189,403
|
|
|
$
|
19,132,194
|
|
|
$
|
16,007,714
|
|
|
$
|
503,580
|
|
Working capital
|
|
$
|
92,312,937
|
|
|
$
|
41,343,010
|
|
|
$
|
17,802,804
|
|
|
$
|
14,566,209
|
|
|
$
|
230,140
|
|
Total assets
|
|
$
|
103,460,374
|
|
|
$
|
46,091,320
|
|
|
$
|
20,510,255
|
|
|
$
|
16,403,671
|
|
|
$
|
647,247
|
|
Deferred revenues
|
|
$
|
39,269,491
|
|
|
$
|
19,981,537
|
|
|
$
|
254,138
|
|
|
$
|
|
|
|
$
|
|
|
Total liabilities
|
|
$
|
45,692,450
|
|
|
$
|
23,010,085
|
|
|
$
|
2,303,368
|
|
|
$
|
1,579,413
|
|
|
$
|
273,440
|
|
Stockholders equity
|
|
$
|
57,767,924
|
|
|
$
|
23,081,235
|
|
|
$
|
18,206,887
|
|
|
$
|
14,824,258
|
|
|
$
|
373,807
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
In addition to historical information, the following
discussion contains forward-looking statements that are subject
to risks and uncertainties. Actual results may differ
substantially from those referred to herein due to a number of
factors, including but not limited to risks described in the
section entitled Risks Related to Our Business and elsewhere in
this Annual Report.
Overview
We are a biopharmaceutical company dedicated to the development
and commercialization of products targeting the extracellular
matrix for the drug delivery, oncology and dermatology markets.
Our existing products and our products under development are
based on intellectual property covering the family of human
enzymes known as hyaluronidases. Hyaluronidases are enzymes
(proteins) that break down hyaluronic acid which is a naturally
occurring substance in the human body. Our technology is based
on our proprietary recombinant human PH20 enzyme, or
rHuPH20, a human synthetic version of hyaluronidase that
degrades hyaluronic acid, a space-filling, gel-like substance
that is a major component of tissues throughout the body, such
as skin and bone. The PH20 enzyme is a naturally occurring
enzyme that digests hyaluronic acid to temporarily break down
the gel, thereby facilitating the penetration and diffusion of
other drugs and fluids that are injected under the skin or in
the muscle. It also degrades the cumulus matrix surrounding
oocytes (eggs) facilitating in vitro fertilization, or IVF.
Our operations to date have been limited to organizing and
staffing the Company, acquiring, developing and securing our
technology and undertaking product development for our existing
products and a limited number of product candidates. We have two
marketed products:
Cumulase®,
a product used for IVF, and Hylenex, a product
22
used as an adjuvant to increase the absorption and dispersion of
other injected drugs and fluids. Currently, we have only limited
revenue from the sales of Cumulase and Hylenex, in addition to
revenues from collaborative agreements with Baxter Healthcare
Corporation, or Baxter, and F. Hoffmann-La Roche, Ltd and
Hoffmann-La Roche,
Inc., (collectively Roche). Revenues from product
sales depend on our ability to develop, manufacture, obtain
regulatory approvals for and successfully commercialize our
product candidates. All of our product candidates are in the
research, pre-clinical, or clinical stage. It may be years, if
ever, before we are able to obtain the regulatory approvals
necessary to generate meaningful revenue from the sale of these
product candidates. We have incurred net operating losses each
year since inception, with an accumulated deficit of
approximately $65.0 million as of December 31, 2007.
We currently have an effective universal shelf registration
statement which will permit us, from time to time, to offer and
sell up to $32.5 million of additional equity or debt
securities. Sales of a substantial number of shares of our
common stock pursuant to this registration statement or in
connection with other transactions, or even the potential for
such sales through the exercise of currently outstanding
warrants, could lower the market price of our common stock and
impair our ability to raise capital through the sale of equity
securities. In the future, we may issue additional options,
warrants or other derivative securities convertible into our
common stock to fund the continued development of our product
candidates and for other general corporate purposes.
Current
Products and Product Candidates
We have two marketed products and multiple product candidates
targeting several indications in various stages of development.
The following table summarizes our lead clinical products and
product candidates:
|
|
|
|
|
Product
|
|
Indication (Brief Description)
|
|
Development Status
|
|
Cumulase
|
|
In vitro fertilization
|
|
Marketed
|
Hylenex
|
|
Agent for drug and fluid infusion
|
|
Marketed
|
Chemophase
|
|
Chemoadjuvant for superficial bladder cancer
|
|
Phase I/IIa
|
Enhanze Technology
|
|
Agent for enhanced drug delivery
|
|
Phase I
|
Proprietary PH20
|
|
Oncology, metabolism
|
|
Pre-Clinical
|
Proprietary Non-PH20
|
|
Oncology, dermatology
|
|
Pre-Clinical
|
Cumulase is an ex vivo (used outside the body)
formulation of rHuPH20 to replace the bovine enzyme currently
used for the preparation of oocytes prior to IVF during the
process of intracytoplasmic sperm injection, in which the enzyme
is an essential component. We launched Cumulase in the European
Union and the United States in June 2005.
Hylenex is a human recombinant formulation for rHuPH20 to
facilitate the absorption and dispersion of other injected drugs
or fluids. When injected under the skin or in the muscle,
hyaluronidase can digest the hyaluronic acid gel, allowing for
temporarily enhanced penetration and dispersion of other
injected drugs or fluids. We received approval from the Food and
Drug Administration, or FDA, for Hylenex in December 2005. In
February 2007, we entered into an expanded collaboration
agreement with Baxter under which Baxter fills and finishes
Hylenex and holds it for subsequent distribution.
Chemophase, our lead oncology product candidate, is an
investigative chemoadjuvant designed to enhance the transport of
chemotherapeutic agents to tumor tissue, potentially increasing
diffusion in tissues without affecting vascular permeability.
Chemophase is being developed for potential use in the treatment
of patients with superficial bladder cancer. In April 2006, we
commenced patient enrollment in our Chemophase Phase I/IIa
clinical trial. In September 2007, we completed enrollment in
our Phase I/IIa clinical trial.
Enhanzetm
Technology, a proprietary drug enhancement system using rHuPH20,
is our broader technology opportunity that can potentially lead
to proprietary partnerships with other pharmaceutical companies.
We are currently seeking partnerships with pharmaceutical
companies that market or develop drugs requiring or benefiting
from injection via the subcutaneous or intramuscular routes that
could benefit from this technology. In December 2006, we
signed our first Enhanze Technology partnership with Roche. In
September 2007, we signed our second Enhanze Technology
partnership with Baxter.
23
Collaborative
Agreements
Roche
Agreement
In December 2006, we entered into a License and Collaboration
Agreement (the Roche Agreement) with Roche for
Enhanze Technology. Under the terms of the Roche Agreement,
Roche obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20 and up to thirteen
Roche target compounds resulting from the collaboration. Roche
paid us $20 million as an initial upfront license fee for
the application of rHuPH20 to three pre-defined Roche biologic
targets. Pending the successful completion of a series of
clinical, regulatory, and sales events, Roche will pay us
further milestones which could potentially reach a value of up
to $111 million. In addition, Roche will pay us royalties
on product sales for these first three targets. Over the next
ten years, Roche will also have the option to exclusively
develop and commercialize rHuPH20 with an additional ten targets
to be identified by Roche, provided that Roche will be obligated
to pay continuing exclusivity maintenance fees to us in order to
maintain its exclusive development rights for these targets. For
each of the additional ten targets, Roche may pay us further
upfront and milestone payments of up to $47 million per
target, as well as royalties on product sales for each of these
additional ten targets. Additionally, Roche will obtain access
to our expertise in developing and applying rHuPH20 to Roche
targets. In addition, in December 2006, an affiliate of Roche
purchased 3,385,000 shares of common stock for an aggregate
of approximately $11.1 million.
Baxter
Agreements
In September 2007, we entered into an Enhanze Technology License
and Collaboration Agreement (the Gammagard License)
with Baxter. Under the terms of the Gammagard License, Baxter
obtained a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20 with a current
Baxter product, Gammagard
Liquidtm.
Under the terms of the agreement, Baxter made an initial upfront
payment of $10 million to us. Pending successful completion
of a series of regulatory and sales milestones, Baxter may make
further milestone payments totaling $37 million to us. In
addition, Baxter will pay royalties on the sales, if any, of the
products that result from the collaboration. The Gammagard
License is applicable to both kit and co-formulation
combinations. Baxter will assume all development, manufacturing,
clinical, regulatory, sales and marketing costs under the
Gammagard License, while we will be responsible for the supply
of the rHuPH20 enzyme. In addition, Baxter has certain product
development and commercialization obligations in major markets
identified in the Gammagard License.
In February 2007, we amended certain agreements with Baxter for
Hylenex and entered into a new agreement, collectively the
Baxter Agreements, for kits and co-formulations with rHuPH20.
Under the terms of the Baxter Agreements, Baxter paid us a
nonrefundable upfront payment of $10 million and, pending
the successful completion of a series of regulatory and sales
events, Baxter will make milestone payments to us which could
potentially reach a value of up to $25 million. In
addition, Baxter will make payments to us based on the sales of
products covered under the Baxter Agreements. In February 2007,
Baxter prepaid $1.0 million of such product-based payments
in connection with the execution of the Baxter Agreements. In
January 2008, Baxter prepaid another $3.5 million of such
product-based payments and is obligated to prepay
$5.5 million of additional product-based payments on or
prior to January 1, 2009. Baxter will also now assume all
development, manufacturing, clinical, regulatory, sales and
marketing costs of the products covered by the Baxter
Agreements. We will continue to supply Baxter with the API for
Hylenex, and Baxter will prepare, fill, finish and package
Hylenex and hold it for subsequent distribution. In addition,
Baxter will obtain a worldwide, exclusive license to develop and
commercialize product combinations of rHuPH20 with Baxter
hydration fluids and generic small molecule drugs, with the
exception of combinations with (i) bisphosphonates, as well
as (ii) cytostatic and cytotoxic chemotherapeutic agents,
the rights to which have been retained by us. In addition, in
February 2007, an affiliate of Baxter purchased
2,070,394 shares of our common stock for an aggregate of
approximately $20 million. Additionally, Baxter will make
product-based payments on the sales, if any, of the products
that result from the collaboration.
Revenues
Revenues from product sales depend on our ability to develop,
manufacture, obtain regulatory approvals for and successfully
commercialize our products and product candidates.
24
Revenues from license and collaboration agreements are
recognized based on the performance requirements of the
underlying agreements. Revenue is deferred for fees received
before earned. Non-refundable upfront fees, where we have an
ongoing involvement or performance obligation, are recorded as
deferred revenue and recognized as revenue over the contract or
development period. Milestone payments are generally recognized
as revenue upon the achievement of the milestones as specified
in the underlying agreement, assuming we meet certain criteria.
Royalty revenues from the sale of licensed products are
recognized upon the sale of such products.
During 2006 and 2007, we entered into the Roche Agreement, the
Baxter Agreements and the Gammagard License, which consist of
non-refundable upfront license fees, reimbursements of research
and development services, various clinical, regulatory or sales
milestones and future product-based or royalty payments, as
applicable. Due to our ongoing involvement obligations under the
agreements, we recorded the non-refundable upfront license fees
as deferred revenues. Such revenues are being recognized over
the terms of the underlying agreements.
Costs
and Expenses
Cost of Sales. Cost of sales consists
primarily of raw materials, third-party manufacturing costs,
fill and finish costs, and freight costs associated with the
sales of Cumulase, and the API for Hylenex.
Research and Development. Our research and
development expenses consist primarily of costs associated with
the development and manufacturing of our product candidates,
compensation and other expenses for research and development
personnel, supplies and materials, costs for consultants and
related contract research, clinical trials, facility costs, and
depreciation. We charge all research and development expenses to
operations as they are incurred. Our research and development
activities are primarily focused on the development of our
various product candidates.
Since our inception in 1998 through 2007, we have incurred
research and development expenses of $48.9 million. From
2005 through 2007, approximately 27% of our research and
development expenses were associated with the research and
development of our recombinant human PH20 enzyme used in our
Cumulase and Hylenex products, and approximately 17% of our
research and development expenses were associated with the
development of our Chemophase product candidate. Due to the
uncertainty in obtaining FDA approval, our reliance on third
parties, and competitive pressures, we are unable to estimate
with any certainty the additional costs we will incur in the
continued development of our Chemophase product candidate for
commercialization. However, we expect our research and
development expenses to increase substantially if we are able to
advance our Chemophase product candidate and our other product
candidates into later stages of clinical development.
Clinical development timelines, likelihood of success, and total
costs vary widely. Although we are currently focused primarily
on advancing Chemophase, we anticipate that we will make
determinations as to which research and development projects to
pursue and how much funding to direct to each project on an
ongoing basis in response to the scientific and clinical
progress of each product candidate and other market and
regulatory developments.
Product candidate completion dates and costs vary significantly
for each product candidate and are difficult to estimate. The
lengthy process of seeking regulatory approvals and the
subsequent compliance with applicable regulations require the
expenditure of substantial resources. Any failure by us to
obtain, or any delay in obtaining, regulatory approvals could
cause our research and development expenditures to increase and,
in turn, have a material adverse effect on our results of
operations. We cannot be certain when, or if, our Chemophase
product candidate, or any of our other product candidates, will
receive regulatory approval or whether any net cash inflow from
our Chemophase product candidate, or any of our other product
candidates, or development projects, will commence.
Selling, General and Administrative. Selling,
general and administrative expenses consist primarily of
compensation and other expenses related to our corporate
operations and administrative employees, accounting and legal
fees, other professional services expenses, marketing expenses,
as well as other expenses associated with operating as a
publicly traded company. We anticipate continued increases in
selling, general and administrative expenses as our operations
continue to expand.
25
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial position and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles, or
U.S. GAAP. The preparation of our consolidated financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and
liabilities. We review our estimates on an ongoing basis. We
base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different
assumptions or conditions. We believe the following accounting
policies to be critical to the judgments and estimates used in
the preparation of our consolidated financial statements.
Revenue
Recognition
The Company generates revenues from product sales and
collaborative agreements. Payments received under collaborative
agreements may include nonrefundable fees at the inception of
the agreements, milestone payments for specific achievements
designated in the collaborative agreements, reimbursements of
research and development services
and/or
royalties on sales of products resulting from collaborative
arrangements.
We recognize revenue in accordance with SEC Staff Accounting
Bulletin No. 104, Revenue Recognition, and
Emerging Issues Task Force, or EITF, Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. Revenue
is recognized when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the sellers price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured.
Product
Sales
Revenues from the sale of Cumulase are recognized when the
transfer of ownership occurs which is upon shipment to the
distributors. We are obligated to accept returns for product
that does not meet product specifications. Historically, we have
not had any product returns; therefore, no allowance for product
returns has been established.
Under the terms of the Baxter Agreements, we supply Baxter the
API for Hylenex at our fully burdened cost plus a margin. Baxter
fills and finishes Hylenex and holds it for subsequent
distribution, at which time we ensure it meets product
specifications and release it as available for sale. Because of
our continued involvement in the development and production
process of Hylenex, the earnings process is not considered to be
complete. Accordingly, we defer the revenue and related product
costs on the API for Hylenex until the product is filled,
finished, packaged and released. In addition, we receive
product-based payments upon the sale of Hylenex by Baxter, in
accordance with the terms of the Baxter Agreements. Product
sales revenues are recognized as we earn such revenues based on
Baxters shipments of Hylenex to its distributors when such
amounts can be reasonably estimated. In February 2007, Baxter
prepaid $1.0 million of such product-based payments which
was deferred and is being recognized as earned. In January 2008,
Baxter prepaid another $3.5 million of such product-based
payments and is obligated to prepay $5.5 million of
additional product-based payments on or prior to January 1,
2009.
Revenues
under Collaborative Agreements
Revenues from collaborative and licensing agreements are
recognized based on the performance requirements of the
underlying agreements. Revenue is deferred for fees received
before earned. Nonrefundable upfront payments, in which we have
an ongoing involvement or performance obligation, are recorded
as deferred revenue and recognized as revenue over the contract
or development period. In February 2007, we entered into the
Baxter Agreements which consist of nonrefundable upfront license
fees, reimbursements of research and development services,
various clinical, regulatory or sales milestones and
product-based payments. Due to our ongoing involvement
obligations, the nonrefundable upfront license fee received in
February 2007 under the Baxter Agreements was deferred and is
being recognized over the term of the agreement. In September
2007, we entered
26
into the Gammagard License with Baxter. Under the terms of that
agreement, Baxter made an initial upfront payment of
$10 million, which is being deferred and recognized over
the term of the agreement.
We recognize milestone payments upon the achievement of
specified milestones if (1) the milestone is substantive in
nature, and the achievement of the milestone was not reasonably
assured at the inception of the agreement, (2) the fees are
nonrefundable and (3) our performance obligations after the
milestone achievement will continue to be funded by our
collaborator at a level comparable to the level before the
milestone achievement. Any milestone payments received prior to
satisfying these revenue recognition criteria are recorded as
deferred revenue. Reimbursements of research and development
services are recognized as revenue during the period in which
the services are performed. Royalties to be received based on
sales of licensed products by our collaborators incorporating
our products are recognized as earned in accordance with the
terms of the underlying agreements.
Share-Based
Compensation
We account for share-based awards exchanged for employee
services in accordance with Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, or
SFAS 123R, which we adopted effective January 1, 2006,
including the provisions of the SECs Staff Accounting
Bulletin No. 107, or SAB 107. We use the fair
value method to account for share-based payments with a modified
prospective application which provides for certain changes to
the method for valuing share-based compensation. The valuation
provisions of SFAS 123R apply to new awards and awards that
are outstanding on the effective date and subsequently modified
or cancelled. Under the modified prospective application, prior
periods were not revised for comparative purposes.
The fair value of each option award is estimated on the date of
grant using a Black-Scholes-Merton option pricing model, or
Black-Scholes model, that uses assumptions regarding a number of
complex and subjective variables. These variables include, but
are not limited to, our expected stock price volatility, actual
and projected employee stock option exercise behaviors,
risk-free interest rate and expected dividends. Expected
volatilities are based on historical volatility of our common
stock and our peer group. The expected term of options granted
is based on analyses of historical employee termination rates
and option exercises. The risk-free interest rates are based on
the U.S. Treasury yield in effect at the time of the grant.
Since we do not expect to pay dividends on our common stock in
the foreseeable future, we estimated the dividend yield to be
0%. SFAS 123R requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. We estimate
pre-vesting forfeitures based on our historical experience and
those of our peer group.
If factors change and we employ different assumptions in the
application of SFAS 123R in future periods, the share-based
compensation expense that we record under SFAS 123R may
differ significantly from what we have recorded in the current
period. There is a high degree of subjectivity involved when
using option pricing models to estimate share-based compensation
under SFAS 123R. Certain share-based payments, such as
employee stock options, may expire worthless or otherwise result
in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our
consolidated financial statements. Alternatively, values may be
realized from these instruments that are significantly in excess
of the fair values originally estimated on the grant date and
reported in our consolidated financial statements. There is
currently no market-based mechanism or other practical
application to verify the reliability and accuracy of the
estimates stemming from these valuation models, nor is there a
means to compare and adjust the estimates to actual values.
Although the fair value of employee share-based awards is
determined in accordance with SFAS 123R and SAB 107
using an option-pricing model, that value may not be indicative
of the fair value observed in a willing buyer/willing seller
market transaction.
Clinical
Trial and Contract Research Expenses
Research and development expenses are charged to operations as
incurred. Our expenses related to clinical trials are based on
estimates of the services received and efforts expended pursuant
to contracts with multiple research institutions, clinical
research organizations, and other vendors that conduct and
manage clinical trials on our behalf. The financial terms of
these agreements are subject to negotiation and vary from
contract to contract and may result in uneven payment flows.
Generally, these agreements set forth the scope of work to be
performed at a fixed fee or unit price. Payments under the
contracts depend on factors such as the successful enrollment of
patients or the completion of clinical trial milestones.
Expenses related to clinical trials generally are accrued based
on
27
contracted amounts applied to the level of patient enrollment
and activity according to the protocol. If timelines or
contracts are modified based upon changes in the clinical trial
protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.
In addition, we have several contracts that extend across
multiple reporting periods, including our largest contract
representing a $1.3 million research contract for the
management of a toxicology study. We recognize expenses as the
services are provided pursuant to managements assessment
of the progress that has been made to date. Such contracts
require an assessment of the work that has been completed during
the period, including measurement of progress, analysis of data
that justifies the progress and managements judgment.
Based on our experience and managements intimate
involvement with these outsourced contracts, it is reasonably
likely that we may experience a 3% variance in our estimate of
the work completed. A 3% variance in our estimate of the work
completed in our largest contract could increase or decrease our
operating expenses by approximately $40,000 which would not
represent a material change to historically reported results of
operations.
Inventory
Inventory consists of our Cumulase product and our API for
Hylenex. Inventory primarily represents raw materials used in
production, work in process, and finished goods inventory on
hand, valued at actual cost. Inventory is reviewed periodically
for slow-moving or obsolete items. If a launch of a new product
is delayed, inventory may not be fully utilized and could be
subject to impairment, at which point we would record a reserve
to adjust inventory to its net realizable value.
The above listing is not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by U.S. GAAP. There are also areas in which our
managements judgment in selecting any available
alternative would not produce a materially different result.
Please see our audited consolidated financial statements and
notes thereto included in Part II Item 8
of this report, which contain accounting policies and other
disclosures required by U.S. GAAP.
Results
of Operations Comparison of Years Ended
December 31, 2007 and 2006
Product Sales Product sales were
$640,000 for the year ended December 31, 2007 compared to
$671,000 for the year ended December 31, 2006, a decrease
of $31,000, or 5%. Cumulase product sales were $516,000 and
$342,000 for the years ended December 31, 2007 and 2006,
respectively. Sales of the API for Hylenex decreased by $205,000
resulting from the disposition by Baxter of short-dated Hylenex
vials in 2006.
Revenues Under Collaborative
Agreements Revenues under collaborative
agreements were approximately $3.2 million for the year
ended December 31, 2007 compared to $311,000 for the year
ended December 31, 2006. Revenues under collaborative
agreements primarily consisted of the amortization of upfront
fees received from Baxter and Roche of approximately
$1.9 million and $81,000 in 2007 and 2006, respectively.
Revenues under collaborative agreements also included
reimbursements for research and development services from Baxter
and Roche of $1.3 million and $230,000 in 2007 and 2006,
respectively.
Cost of Sales Cost of sales were
$240,000 for the year ended December 31, 2007 compared to
$437,000 for the year ended December 31, 2006, a decrease
of $197,000, or 45%. The decrease was primarily due to the
decrease in sales of the API for Hylenex resulting from the
disposition by Baxter of short-dated Hylenex vials in 2006.
Research and Development Research
and development expenses were $20.6 million for the year
ended December 31, 2007 compared to $9.2 million for
the year ended December 31, 2006. Our research and
development expenses, which include costs incurred in connection
with the collaborative agreements, consisted primarily of costs
associated with the development and manufacturing of our product
candidates, compensation and other expenses for research and
development personnel, supplies and materials, costs for
consultants and related contract research, facility costs,
amortization and depreciation. The increase of approximately
$11.4 million was primarily due to the increase in
outsourced research and development expenses of
$6.2 million due to our various pre-clinical programs and
the manufacturing
scale-up of
our rHuPH20 enzyme. In addition, compensation costs increased by
$2.8 million, of which $238,000 related to share-based
compensation. At December 31, 2007, our headcount for
research and development functions totaled 56 employees,
compared with 25 employees at December 31, 2006.
28
Additionally, our facilities expenses increased by
$1.3 million, research supplies and services expenses
increased by $740,000 and depreciation expense increased by
$281,000. We expect research and development costs to continue
to increase in future periods as we increase our research
efforts, expand our clinical trials, and continue to develop and
manufacture our product candidates.
Selling, General and
Administrative Selling, general and
administrative expenses (SG&A) were
$11.2 million for the year ended December 31, 2007
compared to $6.9 million for the year ended
December 31, 2006. The increase of approximately
$4.3 million was primarily due to the increase in
compensation costs of $2.5 million, of which
$1.1 million related to share-based compensation. At
December 31, 2007, our headcount for SG&A functions
totaled 27 employees, compared with 11 employees at
December 31, 2006. In addition, other increases included an
increase in legal expenses, primarily related to intellectual
property matters and collaborative agreements, of $554,000 and
an increase in facilities expenses of $367,000. We expect
SG&A expenses to increase in future periods as we continue
to increase headcount.
Share-Based Compensation Total
compensation cost for our share-based payments for the years
ended December 31, 2007 and 2006 was $2.6 million and
$1.3 million, respectively. Research and development
expense included share-based compensation of approximately
$663,000 and $425,000, respectively, for the years ended
December 31, 2007 and 2006. Selling, general and
administrative expense included share-based compensation of
approximately $1.9 million and $850,000, respectively, for
the years ended December 31, 2007 and 2006. As of
December 31, 2007, $5.0 million of total unrecognized
compensation costs related to non-vested stock options and
restricted stock awards is expected to be recognized over a
weighted average period of 2.2 years.
Interest Income Interest income
was $4.3 million for the year ended December 31, 2007
compared to $831,000 for the year ended December 31, 2006.
The increase in interest income was due to higher average cash
and cash equivalents balances during 2007.
Net Loss Net loss for the year
ended December 31, 2007 was $23.9 million, or $0.32
per common share, compared to $14.8 million, or $0.24 per
common share for the year ended December 31, 2006. The
increase in net loss was primarily due to an increase in
operating expenses, partially offset by increases in revenues
and interest income.
Comparison
of Years Ended December 31, 2006 and 2005
Product Sales Product sales were
$671,000 for the year ended December 31, 2006 compared to
$127,000 for the year ended December 31, 2005, an increase
of $544,000, or 428%. Cumulase product sales were $342,000 and
$127,000 and sales of the API for Hylenex were $329,000 and $0
for the years ended December 31, 2006 and 2005,
respectively.
Revenues Under Collaborative
Agreements Revenues under collaborative
agreements increased by $311,000 for the year ended
December 31, 2006 from $0 for the year ended
December 31, 2005. Revenues under collaborative agreements
primarily consist of the amortization of the upfront fee from
Roche and reimbursements for research and development services
from Baxter.
Cost of Sales Cost of sales were
$437,000 for the year ended December 31, 2006 compared to
$52,000 for the year ended December 31, 2005, an increase
of $385,000, or 740%. This increase was due to the increase in
product sales for Cumulase and the API for Hylenex.
Research and Development Research
and development expenses were $9.2 million for the year
ended December 31, 2006 compared to $10.2 million for
the year ended December 31, 2005. Our research and
development expenses consisted primarily of costs associated
with the development and manufacturing of our product
candidates, compensation and other expenses for research and
development personnel, supplies and materials, costs for
consultants and related contract research, facility costs,
amortization and depreciation. Research and development expenses
decreased by $1.0 million, primarily due to decreased
contract manufacturing, analytical, and stability costs related
to the development and production of our rHuPH20 enzyme of
$1.5 million and decreased contract research studies of
$1.6 million, primarily due to a Chemophase toxicology
study of $1.0 million performed in 2005, and decreased
consulting fees of $200,000, partially offset by higher clinical
trial costs of $1.0 million, increased compensation costs
of $650,000 and share-based compensation costs of $425,000.
29
Selling, General and
Administrative SG&A expenses were
$6.9 million for the year ended December 31, 2006
compared to $3.4 million for the year ended
December 31, 2005. SG&A expenses increased by
$3.5 million primarily related to increased compensation
costs of $558,000, share-based compensation expenses of
$850,000, increased recruiting costs of $251,000, increased
professional fees of $900,000 mainly associated with increased
legal services related to collaborative agreements and increased
audit and consulting fees related to internal controls
documentation and testing under the Sarbanes-Oxley Act of 2002.
In addition, marketing costs increased $800,000 due primarily to
our share of Hylenex pre-launch marketing expenses.
Share-Based Compensation Through
2005, we accounted for our stock plans using the intrinsic value
method and recorded no stock based compensation for options
granted to employees. Effective at the beginning of 2006, we
adopted Statement of Financial Accounting Standards
No. 123(R) (SFAS 123R),
Share-Based Payment, and elected to adopt the
modified prospective application method. SFAS 123R requires
us to use a fair-valued based method to account for share-based
compensation. Accordingly, share-based compensation cost is
measured at the grant date, based on the fair value of the
award, and is recognized as expense over the employees
requisite service period. Total compensation cost for our
share-based payments for the year ended December 31, 2006
was $1.3 million. SG&A expense and research and
development expense for the year ended December 31, 2006
included share-based compensation of $850,000 and $425,000,
respectively. As of December 31, 2006, $2.2 million of
total unrecognized compensation costs related to nonvested
awards is expected to be recognized over a weighted average
period of 1.9 years.
Interest Income Interest income
was $831,000 for the year ended December 31, 2006 compared
to $286,000 for the year ended December 31, 2005. The
increase in interest income was due to higher interest income as
a result of maintaining higher average cash balances during 2006.
Net Loss Net loss for the year
ended December 31, 2006 was $14.8 million, or $0.24
per common share, compared to $13.3 million, or $0.26 per
common share for the year ended December 31, 2005. The
increase in net loss was due to an increase in operating
expenses.
Liquidity
and Capital Resources
Our principal sources of liquidity are our existing cash and
cash equivalents. As of December 31, 2007, cash and cash
equivalents were $97.7 million versus $44.2 million as
of December 31, 2006, an increase of $53.5 million.
This increase resulted primarily from the net proceeds from the
sale of common stock to New River Management V, LP
(New River) for approximately $32.1 million in
the second quarter of 2007, approximately $20.0 million in
net proceeds from the sale of common stock to an affiliate of
Baxter in February 2007, and $21.0 million of initial
upfront payments from Baxter during 2007 of which
$20.3 million was recorded as deferred revenue as of
December 31, 2007, offset by our net cash used in
operations and for the purchase of property and equipment for
the year ended December 31, 2007. A member of our Board of
Directors, Randal J. Kirk, is an affiliate of New River.
Additionally, we received cash of approximately
$4.0 million related to the exercise of stock options and
warrants during the year ended December 31, 2007.
Operating
Activities
Net cash used by operations was $148,000 during the year ended
December 31, 2007 compared to $7.1 million of cash
provided by operations during the year ended December 31,
2006. This change was primarily due to the $9.1 million
increase in the total net loss for the year ended
December 31, 2007 as compared to 2006.
Net cash provided by operations was $7.1 million during the
year ended December 31, 2006 compared to $13.0 million
of cash used in operations during the year ended
December 31, 2005. This change was due to the
$20.0 million initial up front payment received from Roche
in 2006 of which $19.9 million was recorded as deferred
revenue as of December 31, 2006.
30
Investing
Activities
Net cash used in investing activities was $2.4 million
during the year ended December 31, 2007 compared to
$365,000 during the year ended December 31, 2006. This was
due to the increased purchase of property and equipment during
2007.
Net cash used in investing activities was $365,000 during the
year ended December 31, 2006 compared to $351,000 during
the year ended December 31, 2005. This was due to the
increased purchase of property and equipment during 2006.
Financing
Activities
Net cash provided by financing activities was $56.0 million
during the year ended December 31, 2007 versus
$18.3 million during the year ended December 31, 2006.
In the second quarter of 2007, we sold 3.5 million shares
of our common stock to New River for an aggregate price of
approximately $32.1 million. In February 2007, an affiliate
of Baxter purchased approximately 2.1 million shares of our
common stock for an aggregate price of approximately
$20 million. Additionally, we received approximately
$4.0 million and $7.3 million in net proceeds from
warrant and stock option exercises during the years ended
December 31, 2007 and 2006, respectively.
Net cash provided by financing activities was $18.3 million
during the year ended December 31, 2006 versus
$16.5 million during the year ended December 31, 2005.
In December 2006, we sold common stock for approximately
$11.0 million, net of issuance costs. Additionally, we
received approximately $7.3 million in net proceeds from
warrant and stock option exercises during the year ended
December 31, 2006.
We expect our cash requirements to increase significantly as we
continue to increase our research and development for, seek
regulatory approvals of, and develop and manufacture our current
product candidates. As we expand our research and development
efforts and pursue additional product opportunities, we
anticipate significant cash requirements for hiring of
personnel, capital expenditures and investment in additional
internal systems and infrastructure. The amount and timing of
cash requirements will depend on the research, development,
manufacture, regulatory and market acceptance of our product
candidates, if any, and the resources we devote to researching,
developing, manufacturing, commercializing and supporting our
product candidates.
We believe that our current cash and cash equivalents will be
sufficient to fund our operations for at least the next twelve
months. Currently, we anticipate 2008 cash expenses of
approximately $40 million to $50 million, depending on the
progress of various pre-clinical and clinical programs and the
timing of our manufacturing scale up. Until we can generate
significant cash from our operations, we expect to continue to
fund our operations with existing cash resources that were
primarily generated from the proceeds of the Roche and Baxter
collaborations and the sale of our common stock to New River. We
may finance future cash needs through the sale of other equity
securities, the exercise of our callable warrants, strategic
collaboration agreements, debt financing, or any combination of
the foregoing.
In June 2005, we filed a shelf registration statement on
Form S-3
(Registration
No. 333-125731)
which initially allowed us, from time to time, to offer and sell
up to $50 million of equity or debt securities. We have
previously sold common stock under this registration statement
for an aggregate of approximately $17.5 million, so we
currently have the ability to issue debt and equity securities
for an aggregate of $32.5 million. We cannot be certain
that our existing cash and cash equivalents will be adequate for
our anticipated needs or that additional financing will be
available when needed or that, if available, financing will be
obtained on terms favorable to us or our stockholders. Having
insufficient funds may require us to delay, scale back or
eliminate some or all of our research and development programs
or delay the launch of our product candidates. If we raise
additional funds by issuing equity securities, substantial
dilution to existing stockholders could result. If we raise
additional funds by incurring debt financing, the terms of the
debt may involve significant cash payment obligations as well as
covenants and specific financial ratios that may restrict our
ability to operate our business.
Off-Balance Sheet Arrangements As of
December 31, 2007, we did not have any relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we did
not engage in trading activities involving non-
31
exchange traded contracts. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships.
Contractual Obligations As of
December 31, 2007, future minimum payments due under our
contractual obligations are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
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Less than
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|
|
|
|
|
|
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More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Operating leases
|
|
$
|
7,488,000
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|
|
$
|
943,000
|
|
|
$
|
3,086,000
|
|
|
$
|
3,392,000
|
|
|
$
|
67,000
|
|
License payments
|
|
|
2,565,000
|
|
|
|
305,000
|
|
|
|
610,000
|
|
|
|
610,000
|
|
|
|
1,040,000
|
|
Purchase obligations(1)
|
|
|
6,644,000
|
|
|
|
6,644,000
|
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|
|
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|
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|
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|
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Total
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$
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16,697,000
|
|
|
$
|
7,892,000
|
|
|
$
|
3,696,000
|
|
|
$
|
4,002,000
|
|
|
$
|
1,107,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
(1) |
|
Purchase obligations include outstanding purchase orders for
outsourced research and development services for our various
pre-clinical and clinical programs, for the manufacturing of our
products for clinical and commercial use, and other recurring
purchases and services made in the normal course of business. |
As of December 31, 2007, we had no long-term debt or
capital lease obligations.
Our future capital uses and requirements depend on numerous
forward-looking factors. These factors may include, but are not
limited to, the following:
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the rate of progress and cost of research and development
activities;
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the number and scope of our research activities;
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|
the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
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our ability to establish and maintain product discovery and
development collaborations;
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|
the effect of competing technological and market developments;
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|
the terms and timing of any collaborative, licensing and other
arrangements that we may establish; and
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the extent to which we acquire or in-license new products,
technologies or businesses.
|
Recent
Accounting Pronouncements
See Note 2, Summary of Significant Accounting
Policies Recent Accounting Pronouncements, in
the Notes to Consolidated Financial Statements for a discussion
of recent accounting pronouncements and their effect, if any, on
the Company.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our primary exposure to market risk is interest income
sensitivity, which is affected by changes in the general level
of U.S. interest rates, particularly because the majority
of our investments are in short-term marketable securities. The
primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we
receive from our investments without significantly increasing
risk. Some of the securities that we invest in may be subject to
market risk. This means that a change in prevailing interest
rates may cause the value of the investment to fluctuate. For
example, if we purchase a security that was issued with a fixed
interest rate and the prevailing interest rate later rises, the
value of our investment will probably decline. To minimize this
risk, we intend to continue to maintain our portfolio of cash
equivalents and short-term investments in a variety of
securities including commercial paper, money market funds and
government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate.
As of December 31, 2007, we did not have any holdings of
derivative financial or commodity instruments, or any foreign
currency denominated transactions, and all of our cash and cash
equivalents were in money market mutual funds and other highly
liquid investments.
32
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our financial statements are annexed to this report beginning on
page F-1.
|
|
Item 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined
under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this Annual
Report.
Changes
in Internal Control Over Financial Reporting
There have been no significant changes in our internal control
over financial reporting that occurred during the quarter ended
December 31, 2007, that have materially affected, or are
reasonably likely to materially affect our internal control over
financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rule 13a-15(f)
and
Rule 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, our principal
executive and principal financial officers and effected by our
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
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|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
|
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|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and
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|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial
statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on our assessment, management concluded that, as of
December 31, 2007, our internal control over financial
reporting is effective based on those criteria.
The independent registered public accounting firm that audited
the consolidated financial statements that are included in this
Annual Report on
Form 10-K
has issued an audit report on the effectiveness of our internal
control over financial reporting as of December 31, 2007.
The report appears below.
33
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Halozyme Therapeutics, Inc.
We have audited Halozyme Therapeutics, Inc.s internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Halozyme Therapeutics, Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Halozyme Therapeutics, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Halozyme Therapeutics, Inc. as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, cash flows and stockholders
equity for each of the two years in the period ended
December 31, 2007 and our report dated March 12, 2008
expressed an unqualified opinion thereon.
San Diego, California
March 12, 2008
34
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Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item regarding directors is
incorporated by reference to our Definitive Proxy Statement (the
Proxy Statement) to be filed with the Securities and
Exchange Commission in connection with our 2008 Annual Meeting
of Stockholders under the heading Election of
Directors. The information required by this item regarding
compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, is incorporated by reference to the
information under the caption Compliance with
Section 16(a) of the Exchange Act to be contained in
the Proxy Statement. The information required by this item
regarding our code of ethics is incorporated by reference to the
information under the caption Code of Conduct and
Ethics to be contained in our Proxy Statement. The
information required by this item regarding our audit committee
is incorporated by reference to the information under the
caption Board Meetings and Committees Audit
Committee to be contained in our Proxy Statement.
Executive
Officers
Jonathan E. Lim, M.D. (36), President, Chief
Executive Officer and Director. Dr. Lim joined Halozyme in
2003. From 2001 to 2003, Dr. Lim was a management
consultant at McKinsey & Company, where he specialized
in the health care industry, serving a wide range of
start-ups to
Fortune 500 companies in the biopharmaceutical, medical
products, and payor/provider segments. From 1999 to 2001,
Dr. Lim was a recipient of a National Institutes of Health
Postdoctoral Fellowship, during which time he conducted clinical
outcomes research at Harvard Medical School. He has published
articles in peer-reviewed medical journals such as the Annals of
Surgery and the Journal of Refractive Surgery.
Dr. Lims prior experience also includes two years of
clinical training in general surgery at the New York
Hospital-Cornell Medical Center and Memorial Sloan-Kettering
Cancer Center; Founder and President of a health care technology
start-up;
Founding
Editor-in-Chief
of the McGill Journal of Medicine; and basic science and
clinical research at the Salk Institute for Biological Studies
and Massachusetts Eye and Ear Infirmary. Dr. Lim is
currently a California licensed physician and
volunteer surgeon in his spare time. He was a member of the
strategic planning committee of the American Medical Association
from 2002 to 2005. Dr. Lim earned his BS, with honors, and
MS degrees in molecular biology from Stanford University, his MD
degree from McGill University, and his MPH degree in health care
management from Harvard University.
Gregory I. Frost, Ph.D. (36), Vice
President & Chief Scientific Officer and Director.
Dr. Frost co-founded Halozyme in 1999 and has spent more
than twelve years researching the hyaluronidase family of
enzymes. From 1998 to 1999, he was a Senior Research Scientist
at the Sidney Kimmel Cancer Center (SKCC), where he focused much
of his work developing the hyaluronidase technology. Prior to
SKCC, his research in the Department of Pathology at the
University of California, San Francisco, led directly to
the purification, cloning, and characterization of the human
hyaluronidase gene family, and the discovery of several
metabolic disorders. He has authored multiple scientific
peer-reviewed and invited articles in the Hyaluronidase field
and is an inventor on several key patents. Dr. Frosts
prior experience includes serving as a scientific consultant to
a number of biopharmaceutical companies, including Q-Med (SE),
Biophausia AB (SE), and Active Biotech (SE). Dr. Frost is
registered to practice before the US Patent Trademark Office,
and earned his BA in biochemistry and molecular biology from the
University of California, Santa Cruz, and his Ph.D. in the
department of Pathology at the University of California,
San Francisco, where he was an ARCS-Scholar.
David A. Ramsay, MBA (43), Vice
President & Chief Financial Officer. Mr. Ramsay
joined Halozyme in 2003 and has over 20 years of corporate
financial experience spanning several industries. From 2000 to
2003, he was Vice President, Chief Financial Officer of Lathian
Systems, a provider of technology-based sales solutions for the
life sciences industry. Prior to Lathian, Mr. Ramsay was
the Vice President, Treasurer of ICN Pharmaceuticals, now called
Valeant Pharmaceuticals International, a multinational,
specialty pharmaceutical company. Mr. Ramsay joined ICN in
1998 from ARCO, where he spent four years in various financial
roles, most recently serving as
35
Manager of Financial Planning & Analysis for the
companys 1,700-station West Coast Retail Marketing
Network. Prior to ARCO, he served as Vice President, Controller
for Security Pacific Asian Bank, a subsidiary of Security
Pacific Corporation. He began his career as an Auditor at
Deloitte & Touche, where he obtained his CPA license.
Mr. Ramsay served on the Board of Directors for Axxora Life
Sciences, Inc., a privately held, worldwide research reagent
company which was recently sold to Enzo Biochem (NYSE:ENZ) of
New York. He was also Chairman of the Audit Committee of Axxora.
Mr. Ramsay graduated from the University of California,
Berkeley, with a BS degree in Business Administration and earned
his MBA degree with a dual major in Finance and Strategic
Management from The Wharton School at the University of
Pennsylvania.
Richard C. Yocum, M.D. (52), Vice President of
Clinical Development and Medical Affairs. Dr. Yocum joined
Halozyme in 2005 and has over 23 years of professional
experience in clinical drug development, project team
management, clinical research trial design and implementation,
and the practice of general internal medicine. His experience
spans all phases of clinical development, including IND
submissions; Phase I, II, III, and IV
trials; multinational clinical trials; NDA, NDS and MAA
preparation and submissions, including proven successes with
multiple NDA and MAA approvals and new product launches; FDA
advisory panel meetings and CHMP Oral Hearing; and lifecycle
management. Dr. Yocums broad-based training and
experience in internal medicine has enabled him to successfully
lead drug development efforts in multiple therapeutic areas,
including oncology, dermatology, cardiovascular, immunology,
endocrinology, and gastroenterology. Prior to Halozyme, from May
2002 to March 2005, Dr. Yocum was Vice President of
Clinical Development and Medical Affairs at Chugai Pharma USA,
LLC (CPUSA), a member of the Chugai-Roche group. From 1995 to
2002, Dr. Yocum was responsible for the clinical
development of several retinoid-based drugs for the treatment of
various cancers and benign dermatological diseases at Ligand
Pharmaceuticals, where he was involved in the approval of seven
new drug registration dossiers, and served most recently as
Executive Medical Director of Clinical Development. From 1993 to
1995, Dr. Yocum was employed in the Clinical Research
department at Gensia. Dr. Yocum is board-certified in
general internal medicine, and maintained a clinical practice
for nine years before transitioning to the pharmaceutical
industry. He received his AB in Chemistry from Dartmouth
College, his M.D. from Johns Hopkins University, and completed
his medical residency at the University of California,
San Diego.
Don A. Kennard (61), Vice President of Regulatory
Affairs & Quality Assurance. Mr. Kennard joined
Halozyme in 2004 and brings to Halozyme nearly 30 years of
professional senior management experience in the fields of
regulatory affairs (RA), clinical programs, and quality
assurance (QA). He has worked directly with the U.S. Food
and Drug Administration (FDA), as well as regulatory authorities
of various foreign ministries of health, to secure registration,
authorize commercialization, and successfully implement quality
programs, for a broad range and extensive number of product
approvals across pharmaceuticals, biologics, medical devices,
and diagnostics. Prior to Halozyme, Mr. Kennard was Vice
President of Worldwide RA/QA at Quidel, Inc., a manufacturer of
diagnostic products, where he led the RA/QA and Clinical
functions, while also establishing a Quality System CE marking
program that enabled Quidel to expand and sustain sales in the
European Union. From 1991 to 2001, he was Vice President of
RA/QA/R&D for Nobel Biocare, Inc. and Steri-Oss (acquired
by Nobel Biocare), where he directed all regulatory affairs,
quality assurance, clinical trials, and R&D activities.
From 1981 to 1991, Mr. Kennard was Director of RA/QA at
Allergan, Inc., where he directed regulatory affairs, quality
assurance and quality control in the development and manufacture
of prescription and OTC ophthalmic and dermatological drugs,
injectable drugs, biotechnology products, and ophthalmic
products. Prior to Allergan, he was Director of Quality Control
at B. Braun. Mr. Kennard holds a BS degree in
Microbiology.
Robert L. Little (58), Vice President &
Chief Commercial Officer. Mr. Little joined Halozyme in
2006 and brings to Halozyme over 30 years of general
management, commercial operations, and finance experience in the
pharmaceutical industry. From 2003 to 2006, Mr. Little was
Senior Vice President of Commercial Operations at Neurocrine
Biosciences, where he was responsible for building and managing
the Companys sales and marketing functions. During his
tenure, Mr. Little put in place a fully integrated
commercial organization, including a marketing team, a
200 person CNS sales force, and full logistical and
infrastructure support, in order to initially co-detail Zoloft
with Pfizer, and to later launch Indiplon. From 1985 to 2003,
Mr. Little was at Pharmacia, Inc. where his most recent
position was Group Vice President, Diversified Products. His
responsibilities included managing Pharmacias Diversified
Products business, as well as forming a new global business unit
merging pricing, reimbursement, and health outcomes groups to
focus on current industry issues, pricing, and drug values. From
36
1999 to 2001, Mr. Little was Group Vice President,
Specialty Products and worldwide head of a $2.5 billion,
global specialty products business (Ophthalmology,
Endocrinology, Neurology, and others). Mr. Little
previously held a number of positions within Pharmacia,
including President and Managing Director of Pharmacia in Milan,
Italy, President of Pharmacia & UpJohn in Canada, and
President of Pharmacia, Inc. in Canada. Prior to joining
Pharmacia, he held positions at Adria Laboratories and Miles
Laboratories/Bayer A.G. in the U.K., Italy, and the United
States. Mr. Little earned his degree in economics and
finance from the West London Business School, Ealing Technical
College.
William J. Fallon (51), Vice President,
Manufacturing & Operations. Mr. Fallon joined
Halozyme in 2006. He was previously President and Chief
Executive Officer and a member of the board of directors of
Cytovance Biologics, a contract manufacturing organization that
provides manufacturing and development services to the
biotechnology industry. At Cytovance, Mr. Fallon oversaw
the design, construction, and validation of a
state-of-the-art,
greenfield cGMP manufacturing facility. From 2001 to 2003, he
was Vice President of Technical Operations at Genzyme
Corporation, having held the same position at Novazyme
Pharmaceuticals, Inc. prior to its $138 million acquisition
by Genzyme in 2001. He joined Novazyme and Genzyme from
Transkaryotic Therapies, where he was Vice President of
Manufacturing from 1998 to 2001. From 1993 through 1998, he was
employed in several management positions for the Ares-Serono
Group, culminating in the position of Vice President, US
Manufacturing Operations. In this role, he served as general
manager, overseeing the production and distribution of all of
Seronos approved biotechnology products. From 1990 to
1992, he was Director of Manufacturing for Centocor, Inc. His
prior experience also includes various management and
operational roles at Invitron Corporation and Travenol-Genentech
Diagnostics. Mr. Fallon earned a B.S. degree in Marine
Science and a B.A. degree in Biology from Long Island University
and an M.S. degree in Biology from Northeastern University.
Matthew R. Hooper (50), Vice President &
General Counsel. Mr. Hooper joined Halozyme in 2007 and
brings to Halozyme nearly 25 years of legal experience.
Most recently, he was Assistant General Counsel at
Johnson & Johnson (J&J), where he served in a
dual role as member of J&Js Law Department, and Vice
President of Law for Scios, Inc., a wholly-owned J&J
subsidiary focused on cardiovascular therapeutics, from 2005 to
2006. He also assumed responsibility for commercial legal
affairs for Nitinol Devices & Components (J&J
subsidiary specializing in cardiovascular medical device
components). From 2003 to 2005, Mr. Hooper served as Senior
Counsel at J&J, where he handled all commercial legal
affairs related to Scios integration into J&J
following completion of the $2.5 billion merger in April
2003. From 2001 to 2003, he served as Vice President, General
Counsel of Scios, where he oversaw all legal aspects of the
Companys operations. Mr. Hooper joined Scios in 2000
as Senior Patent Counsel, with responsibility for all
intellectual property matters for the Company. From 1999 to
2000, Mr. Hooper was senior counsel in the litigation group
of Jones Day Reavis and Pogue in Chicago. From 1994 to 1999, he
held the position of Patent Counsel at Abbott Laboratories in
its patent and trademark department, where he was responsible
for U.S. and foreign patent preparation and prosecution,
litigation support, legal opinions and contract preparation
supporting Abbotts diagnostics businesses. In this role,
he also delivered comprehensive analysis and legal opinions on
competitor patent portfolios to evaluate business risk and guide
Abbotts product and business development strategies.
Before joining Abbott, Mr. Hooper served as a patent
attorney at Amoco Corporation from 1985 to 1994, and was an
associate attorney in private practice in Chicago from 1982 to
1985. He received his JD degree from Northwestern
University Law School and his BS degree in Chemistry from
LaSalle University.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to the information under the caption Executive
Compensation contained in the Proxy Statement.
37
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference to the information under the caption Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters contained in the Proxy
Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to the information under the caption Certain
Relationships and Related Transactions, and Director
Independence contained in the Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference to the information under the caption Principal
Accounting Fees and Services contained in the Proxy
Statement.
38
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The following documents are filed as part of this Annual Report:
(a) Financial Statements and Schedules:
|
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|
|
|
|
|
Page
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
Consolidated Financial Statements:
|
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|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
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|
|
|
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F-5
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|
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F-6
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|
|
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F-7
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(b) Exhibits:
|
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|
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated November 14, 2007, by
and between the Registrant and the Registrants predecessor
Nevada corporation(1)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on October 7, 2007(2)
|
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3
|
.2
|
|
Certificate of Designation, Preferences and Rights of the terms
of the Series A Preferred Stock(1)
|
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3
|
.3
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Bylaws(2)
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4
|
.1
|
|
Amended Rights Agreement between Corporate Stock Transfer, as
rights agent, and Registrant, dated November 12, 2007
|
|
10
|
.1
|
|
License Agreement between University of Connecticut and
Registrant, dated November 15, 2002(3)
|
|
10
|
.2*
|
|
Agreement for Services between Avid Bioservices, Inc. and
Registrant, dated November 19, 2003(3)
|
|
10
|
.3*
|
|
Distribution Agreement between MidAtlantic Diagnostics, Inc. and
Registrant, dated January 30, 2004(3)
|
|
10
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.4*
|
|
Distribution Agreement between MediCult AS and Registrant, dated
February 9, 2004(3)
|
|
10
|
.5
|
|
2004 Stock Plan and Form of Option Agreement thereunder(4)
|
|
10
|
.6
|
|
Form of Indemnity Agreement for Directors and Executive
Officers(22)
|
|
10
|
.7*
|
|
Exclusive Distribution Agreement between Baxter Healthcare and
Registrant, dated August 13, 2004(5)
|
|
10
|
.8
|
|
Form of Callable Stock Purchase Warrant(4)
|
|
10
|
.9
|
|
Form of Common Stock Purchase Warrant(6)
|
|
10
|
.10
|
|
DeliaTroph Pharmaceuticals, Inc. 2001 Amended and Restated Stock
Plan and form of Stock Option Agreements for options assumed
thereunder(7)
|
|
10
|
.11
|
|
Nonstatutory Stock Option Agreement With Andrew Kim(7)
|
|
10
|
.12*
|
|
Commercial Supply Agreement with Avid Bioservices, Inc. and
Registrant, dated February 16, 2005(8)
|
|
10
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.13*
|
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Development and Supply Agreement with Baxter Healthcare
Corporation and Registrant, dated March 24, 2005(9)
|
|
10
|
.14*
|
|
First Amendment to the Exclusive Distribution Agreement between
Baxter Healthcare Corporation and Registrant, dated
March 24, 2005(9)
|
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10
|
.15
|
|
Halozyme Therapeutics, Inc. 2005 Outside Directors Stock
Plan(10)
|
|
10
|
.16*
|
|
Second Amendment to the Exclusive Distribution Agreement between
Baxter Healthcare Corporation and Registrant, dated
December 8, 2005(11)
|
|
10
|
.17
|
|
First Amendment to the License Agreement between University of
Connecticut and Registrant, dated January 9, 2006(12)
|
|
10
|
.18
|
|
Halozyme Therapeutics, Inc. 2006 Stock Plan(14)
|
39
|
|
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|
10
|
.19
|
|
Form of Stock Option Agreement (2005 Outside Directors
Stock Plan)(15)
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10
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.20
|
|
Form of Restricted Stock Agreement (2005 Outside Directors
Stock Plan)(15)
|
|
10
|
.21
|
|
Form of Stock Option Agreement (2006 Stock Plan)(15)
|
|
10
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.22
|
|
Form of Restricted Stock Agreement (2006 Stock Plan)(15)
|
|
10
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.23*
|
|
License and Collaboration Agreement between F.
Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. and
Registrant dated December 5, 2006(16)
|
|
10
|
.24
|
|
Stock Purchase Agreement between Roche Finance Ltd and
Registrant, dated December 5, 2006(16)
|
|
10
|
.25*
|
|
First Amendment to the Commercial Supply Agreement between Avid
Bioservices, Inc. and Registrant, dated December 15,
2006(17)
|
|
10
|
.26*
|
|
Amended and Restated Exclusive Distribution Agreement between
Baxter Healthcare Corporation, Baxter Healthcare S.A. and
Registrant, dated February 14, 2007(18)
|
|
10
|
.27*
|
|
Amended and Restated Development and Supply Agreement between
Baxter Healthcare Corporation, Baxter Healthcare S.A. and
Registrant, dated February 14, 2007(18)
|
|
10
|
.28*
|
|
License and Collaboration Agreement between Baxter Healthcare
Corporation, Baxter Healthcare S.A. and Registrant, dated
February 14, 2007(18)
|
|
10
|
.29
|
|
Stock Purchase Agreement between Baxter International, Inc. and
Registrant, dated February 14, 2007(18)
|
|
10
|
.30
|
|
Stock Purchase Agreement between New River Management V, LP
and Registrant, dated April 23, 2007(19)
|
|
10
|
.31
|
|
Sublease Agreement (11404 Sorrento Valley Road), effective as of
July 2, 2007(20)
|
|
10
|
.32
|
|
Sublease Agreement (11388 Sorrento Valley Road), effective as of
July 2, 2007(20)
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|
10
|
.33
|
|
Standard Industrial Net Lease (11388 Sorrento Valley Road),
effective as of July 26, 2007(20)
|
|
10
|
.34*
|
|
Enhanze Technology License and Collaboration Agreement, by
Baxter Healthcare Corporation, Baxter Healthcare S.A. and
Registrant, dated September 7, 2007(21)
|
|
21
|
.1
|
|
Subsidiaries of Registrant(13)
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting
Firm Ernst & Young LLP
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23
|
.2
|
|
Consent of Independent Registered Public Accounting
Firm Cacciamatta Accountancy Corporation
|
|
31
|
.1
|
|
Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certification of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
(1) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed November 20, 2007. |
|
(2) |
|
Incorporated by reference to the Registrants definitive
proxy statement filed with the SEC on Form DEF14A on
October 11, 2007. |
|
(3) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form SB-2
filed with the Commission on April 23, 2004. |
|
(4) |
|
Incorporated by reference to the Registrants amendment
number two to the Registration Statement on
Form SB-2
filed with the Commission on July 23, 2004. |
|
(5) |
|
Incorporated by reference to the Registrants Quarterly
Report on Form
10-QSB,
filed November 12, 2004. |
|
(6) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed October 15, 2004. |
|
(7) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-8
filed with the Commission on October 26, 2004. |
|
(8) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed February 22, 2005. |
|
(9) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed March 30, 2005. |
|
(10) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed July 6, 2005. |
|
(11) |
|
Incorporated by reference to the Registrants Annual Report
on
Form 10-KSB,
filed March 24, 2006. |
40
|
|
|
(12) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed January 12, 2006. |
|
(13) |
|
Incorporated by reference to the Registrants Annual Report
on Form
10-KSB/A,
filed March 29, 2005. |
|
(14) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed March 24, 2006. |
|
(15) |
|
Incorporated by reference to the Registrants Quarterly
Report on Form
10-Q, filed
August 8, 2006. |
|
(16) |
|
Incorporated by reference to the Registrants Current
Report on Form
8-K/A, filed
December 15, 2006. |
|
(17) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed December 21, 2006. |
|
(18) |
|
Incorporated by reference to the Registrants Current
Report on Form
8-K/A, filed
February 20, 2007. |
|
(19) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed April 24, 2007. |
|
(20) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed July 31, 2007. |
|
(21) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed September 12, 2007. |
|
(22) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K,
filed December 20, 2007. |
|
* |
|
Confidential treatment has been requested for certain portions
of this exhibit. These portions have been omitted from this
agreement and have been filed separately with the Securities and
Exchange Commission. |
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned in the City of San Diego, on
March 13, 2008.
Halozyme Therapeutics, Inc.,
a Delaware corporation
Jonathan E. Lim, M.D.
President and Chief Executive Officer
Date: March 13, 2008
POWER OF
ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Jonathan E. Lim
and David A. Ramsay, and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place, and stead,
in any and all capacities, to sign any and all amendments to
this Annual Report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his
substitute or substituted, may lawfully do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Annual Report has been signed by the following
persons in the capacities and on the dates indicated.
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|
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|
|
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|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jonathan
E. Lim, M.D.
Jonathan
E. Lim, M.D.
|
|
President and Chief Executive Officer (Principal Executive
Officer), Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ David
A. Ramsay
David
A. Ramsay
|
|
Secretary and Chief Financial Officer (Principal Financial and
Accounting Officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Gregory
I. Frost, Ph.D.
Gregory
I. Frost, Ph.D.
|
|
Vice President and Chief Scientific Officer, Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Kenneth
J. Kelley
Kenneth
J. Kelley
|
|
Chairman of the Board of Directors
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Robert
L. Engler, M.D.
Robert
L. Engler, M.D.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Kathryn
E. Falberg
Kathryn
E. Falberg
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Randal
J. Kirk
Randal
J. Kirk
|
|
Director
|
|
March 13, 2008
|
42
|
|
|
|
|
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|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Connie
Matsui
Connie
Matsui
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ John
S. Patton, Ph.D.
John
S. Patton, Ph.D.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Steven
T. Thornton
Steven
T. Thornton
|
|
Director
|
|
March 13, 2008
|
43
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Halozyme Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of
Halozyme Therapeutics, Inc. as of December 31, 2007 and
2006, and the related consolidated statements of operations,
cash flows and stockholders equity for each of the two
years in the period ended December 31, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Halozyme Therapeutics, Inc. at
December 31, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the two years in
the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2006 the Company changed
its method of accounting for share-based payments in accordance
with Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Halozyme Therapeutics, Inc.s internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 12, 2008
expressed an unqualified opinion thereon.
San Diego, California
March 12, 2008
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Halozyme Therapeutics, Inc.
We have audited the accompanying consolidated balance sheet of
Halozyme Therapeutics, Inc. and subsidiary (the
Company) as of December 31, 2005, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the years
in the two year period ended December 31, 2005. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company has determined that
it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes, examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2005, and the results of its
operations and its cash flows for each of the years in the two
year period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Cacciamatta Accountancy Corporation
Irvine, California
March 12, 2006
F-2
HALOZYME
THERAPEUTICS, INC.
AS OF
DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
97,679,085
|
|
|
$
|
44,189,403
|
|
Accounts receivable
|
|
|
779,825
|
|
|
|
363,565
|
|
Inventory
|
|
|
703,468
|
|
|
|
442,492
|
|
Prepaid expenses and other assets
|
|
|
2,014,680
|
|
|
|
598,090
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
101,177,058
|
|
|
|
45,593,550
|
|
Property and equipment, net
|
|
|
2,283,316
|
|
|
|
497,770
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
103,460,374
|
|
|
$
|
46,091,320
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
3,055,637
|
|
|
$
|
2,017,395
|
|
Accrued expenses
|
|
|
2,502,259
|
|
|
|
1,011,153
|
|
Deferred revenue
|
|
|
3,306,225
|
|
|
|
1,221,992
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,864,121
|
|
|
|
4,250,540
|
|
Deferred revenue, net of current portion
|
|
|
35,963,266
|
|
|
|
18,759,545
|
|
Deferred rent, net of current portion
|
|
|
865,063
|
|
|
|
|
|
Commitments and contingencies (note 9)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock $0.001 par value;
20,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock $0.001 par value;
150,000,000 shares authorized; 77,903,944 and
68,736,993 shares issued and outstanding as of
December 31, 2007 and 2006, respectively
|
|
|
77,904
|
|
|
|
68,737
|
|
Additional paid-in capital
|
|
|
122,685,443
|
|
|
|
64,111,738
|
|
Accumulated deficit
|
|
|
(64,995,423
|
)
|
|
|
(41,099,240
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
57,767,924
|
|
|
|
23,081,235
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
103,460,374
|
|
|
$
|
46,091,320
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
HALOZYME
THERAPEUTICS, INC.
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
639,590
|
|
|
$
|
670,625
|
|
|
$
|
127,209
|
|
Revenue under collaborative agreements
|
|
|
3,159,931
|
|
|
|
311,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,799,521
|
|
|
|
981,746
|
|
|
|
127,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
240,429
|
|
|
|
436,990
|
|
|
|
51,968
|
|
Research and development
|
|
|
20,554,105
|
|
|
|
9,214,759
|
|
|
|
10,220,079
|
|
Selling, general and administrative
|
|
|
11,155,194
|
|
|
|
6,912,853
|
|
|
|
3,416,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31,949,728
|
|
|
|
16,564,602
|
|
|
|
13,688,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(28,150,207
|
)
|
|
|
(15,582,856
|
)
|
|
|
(13,561,417
|
)
|
Interest income
|
|
|
4,254,024
|
|
|
|
830,870
|
|
|
|
286,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(23,896,183
|
)
|
|
$
|
(14,751,986
|
)
|
|
$
|
(13,275,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
74,317,930
|
|
|
|
62,610,265
|
|
|
|
50,317,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
HALOZYME
THERAPEUTICS, INC.
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,896,183
|
)
|
|
$
|
(14,751,986
|
)
|
|
$
|
(13,275,373
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
2,580,204
|
|
|
|
1,274,567
|
|
|
|
|
|
Depreciation and amortization
|
|
|
576,491
|
|
|
|
243,999
|
|
|
|
206,348
|
|
Loss (gain) on disposal of equipment
|
|
|
3,289
|
|
|
|
4,278
|
|
|
|
(1,200
|
)
|
Issuance of stock options for services
|
|
|
|
|
|
|
9,322
|
|
|
|
186,402
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(416,260
|
)
|
|
|
13,802
|
|
|
|
(377,367
|
)
|
Inventory
|
|
|
(260,976
|
)
|
|
|
(163,534
|
)
|
|
|
(227,136
|
)
|
Prepaid expenses and other assets
|
|
|
(1,416,590
|
)
|
|
|
(257,602
|
)
|
|
|
(231,857
|
)
|
Accounts payable and accrued expenses
|
|
|
2,529,348
|
|
|
|
979,318
|
|
|
|
469,816
|
|
Deferred rent
|
|
|
865,063
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
19,287,954
|
|
|
|
19,727,399
|
|
|
|
254,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(147,660
|
)
|
|
|
7,079,563
|
|
|
|
(12,996,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,365,326
|
)
|
|
|
(364,799
|
)
|
|
|
(350,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,365,326
|
)
|
|
|
(364,799
|
)
|
|
|
(350,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
51,989,488
|
|
|
|
11,043,862
|
|
|
|
16,020,809
|
|
Proceeds from exercise of stock options, net
|
|
|
1,707,337
|
|
|
|
156,114
|
|
|
|
218,422
|
|
Proceeds from exercise of warrants, net
|
|
|
2,305,843
|
|
|
|
7,142,469
|
|
|
|
232,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
56,002,668
|
|
|
|
18,342,445
|
|
|
|
16,471,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
53,489,682
|
|
|
|
25,057,209
|
|
|
|
3,124,480
|
|
CASH AND CASH EQUIVALENTS at beginning of year
|
|
|
44,189,403
|
|
|
|
19,132,194
|
|
|
|
16,007,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS at end of year
|
|
$
|
97,679,085
|
|
|
$
|
44,189,403
|
|
|
$
|
19,132,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
HALOZYME
THERAPEUTICS, INC.
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
BALANCE AT DECEMBER 31, 2004
|
|
|
49,202,083
|
|
|
$
|
49,202
|
|
|
$
|
27,846,937
|
|
|
$
|
(13,071,881
|
)
|
|
$
|
14,824,258
|
|
Issuance of common stock pursuant to exercise of stock options
|
|
|
620,146
|
|
|
|
620
|
|
|
|
217,802
|
|
|
|
|
|
|
|
218,422
|
|
Issuance of common stock pursuant to exercise of warrants, net
|
|
|
424,768
|
|
|
|
425
|
|
|
|
231,944
|
|
|
|
|
|
|
|
232,369
|
|
Issuance of stock options to consultants for services
|
|
|
|
|
|
|
|
|
|
|
186,402
|
|
|
|
|
|
|
|
186,402
|
|
Issuance of common stock for cash, net
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
16,010,809
|
|
|
|
|
|
|
|
16,020,809
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,275,373
|
)
|
|
|
(13,275,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2005
|
|
|
60,246,997
|
|
|
|
60,247
|
|
|
|
44,493,894
|
|
|
|
(26,347,254
|
)
|
|
|
18,206,887
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,274,567
|
|
|
|
|
|
|
|
1,274,567
|
|
Issuance of restricted stock awards
|
|
|
90,000
|
|
|
|
90
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock pursuant to exercise of warrants, net
|
|
|
4,818,846
|
|
|
|
4,819
|
|
|
|
7,137,650
|
|
|
|
|
|
|
|
7,142,469
|
|
Issuance of common stock pursuant to exercise of stock options
|
|
|
196,150
|
|
|
|
196
|
|
|
|
155,918
|
|
|
|
|
|
|
|
156,114
|
|
Issuance of stock options to consultants for services
|
|
|
|
|
|
|
|
|
|
|
9,322
|
|
|
|
|
|
|
|
9,322
|
|
Issuance of common stock for cash, net
|
|
|
3,385,000
|
|
|
|
3,385
|
|
|
|
11,040,477
|
|
|
|
|
|
|
|
11,043,862
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,751,986
|
)
|
|
|
(14,751,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2006
|
|
|
68,736,993
|
|
|
|
68,737
|
|
|
|
64,111,738
|
|
|
|
(41,099,240
|
)
|
|
|
23,081,235
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,580,204
|
|
|
|
|
|
|
|
2,580,204
|
|
Issuance of restricted stock awards
|
|
|
105,000
|
|
|
|
105
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock pursuant to exercise of warrants, net
|
|
|
1,783,852
|
|
|
|
1,784
|
|
|
|
2,304,059
|
|
|
|
|
|
|
|
2,305,843
|
|
Issuance of common stock pursuant to exercise of stock options
|
|
|
1,707,705
|
|
|
|
1,708
|
|
|
|
1,705,629
|
|
|
|
|
|
|
|
1,707,337
|
|
Issuance of common stock for cash, net
|
|
|
5,570,394
|
|
|
|
5,570
|
|
|
|
51,983,918
|
|
|
|
|
|
|
|
51,989,488
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,896,183
|
)
|
|
|
(23,896,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2007
|
|
|
77,903,944
|
|
|
$
|
77,904
|
|
|
$
|
122,685,443
|
|
|
$
|
(64,995,423
|
)
|
|
$
|
57,767,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
Halozyme
Therapeutics, Inc.
|
|
1.
|
Organization
and Business
|
Halozyme Therapeutics, Inc. (Halozyme or the
Company) is a biopharmaceutical company developing
and commercializing products targeting the extracellular matrix
for the drug delivery, oncology and dermatology markets.
The Companys operations to date have been limited to
organizing and staffing the Company, acquiring, developing and
securing its technology and undertaking product development for
its existing products and a limited number of product
candidates. The Company has two products:
Cumulase®,
a product used for in vitro fertilization, and Hylenex, a
product used as an adjuvant to increase the absorption and
dispersion of other injected drugs and fluids. The Company has
only limited revenues from the sales of these products.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the accounts of
Halozyme Therapeutics, Inc. and its wholly owned subsidiary,
Halozyme, Inc. All intercompany accounts and transactions have
been eliminated.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles (U.S. GAAP) requires management to
make estimates and assumptions that affect the amounts reported
in the Companys consolidated financial statements and
accompanying notes. On an ongoing basis, the Company evaluates
its estimates and judgments, which are based on historical and
anticipated results and trends and on various other assumptions
that management believes to be reasonable under the
circumstances. By their nature, estimates are subject to an
inherent degree of uncertainty and, as such, actual results may
differ from managements estimates.
Cash
and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments
with maturities of three months or less from the original
purchase date.
Concentrations
Financial instruments that potentially subject us to a
significant concentration of credit risk consist of cash and
cash equivalents and accounts receivable. Halozyme maintains its
cash balances with one major commercial bank. Deposits held with
the bank exceed the amount of insurance provided on such
deposits.
The Company sells its products to established distributors in
the pharmaceutical industry. Credit is extended based on an
evaluation of the customers financial condition.
Approximately 91% and 95% of the accounts receivable balance as
of December 31, 2007 and 2006, respectively, represents
amounts due from two customers. Management evaluates the
collectibility of the accounts receivable based on a variety of
factors including the length of time the receivables are past
due, the financial health of the customer and historical
experience. Based upon the review of these factors, the Company
did not record an allowance for doubtful accounts at
December 31, 2007 and 2006. For the years ended
December 31, 2007, 2006 and 2005, 36%, 55% and 0% of total
revenues were from Baxter Healthcare Corporation
(Baxter) and 50%, 10% and 0% were from F.
Hoffmann-La Roche Ltd (LTD) and
Hoffmann-La Roche Inc. (INC) (LTD and INC,
collectively, Roche), respectively.
The Company relies on a single third-party manufacturer for the
supply of the active pharmaceutical ingredient in each of its
current products. Payments due to this supplier represent 20%
and 16% of the accounts payable balance at December 31,
2007 and 2006, respectively.
F-7
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Accounts
Receivable
Accounts receivable is recorded at the invoiced amount and is
non-interest bearing. Accounts receivable is recorded net of an
allowance for doubtful accounts. Currently, the allowance for
doubtful accounts is zero as the collectibility of accounts
receivable is reasonably assured. The Company is obligated to
accept returns for product that does not meet product
specifications. Historically, the Company has not had any
product returns; therefore, no allowance for product returns has
been established.
Inventory
Inventory is stated at lower of cost or market. Cost, which
includes amounts related to materials and costs incurred by the
Companys contract manufacturer, is determined on a
first-in,
first-out basis. Inventories are reviewed periodically for
slow-moving or obsolete status. Management evaluates the
carrying value of inventories on a regular basis, taking into
account such factors as historical and anticipated future sales
compared to quantities on hand, the price it expects to obtain
for products in their respective markets compared with
historical cost and the remaining shelf life of goods on hand.
Property
and Equipment
Property and equipment are recorded at cost. Equipment and
furniture are depreciated using the straight-line method over
their estimated useful lives of three years and leasehold
improvements are amortized using the straight-line method over
the estimated useful life of the asset or the lease term,
whichever is shorter.
Impairment
of Long-Lived Assets
The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In accordance with SFAS No. 144,
long-lived assets are reviewed for events of changes in
circumstances, which indicate that their carrying value may not
be recoverable. At December 31, 2007, there has been no
impairment of the value of such assets.
Fair
Value of Financial Instruments
Financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses, are
carried at cost, which management believes approximates fair
value because of the short-term maturity of these instruments.
Revenue
Recognition
The Company generates revenues from product sales and
collaborative agreements. Payments received under collaborative
agreements may include nonrefundable fees at the inception of
the agreements, milestone payments for specific achievements
designated in the collaborative agreements, reimbursements of
research and development services
and/or
royalties on sales of products resulting from collaborative
arrangements.
The Company recognizes revenues in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition,
and Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. The
Company recognizes revenue when all of the following criteria
are met: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services have been rendered;
(3) the sellers price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured.
Product Sales Revenues from the sale of
Cumulase are recognized when the transfer of ownership occurs
which is upon shipment to the distributors. The Company is
obligated to accept returns for product that does not
F-8
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
meet product specifications. Historically, the Company has not
had any product returns; therefore, no allowance for product
returns has been established.
In accordance with the Amended and Restated Development and
Supply Agreement (the Development and Supply
Agreement) with Baxter, the Company supplies Baxter with
the active pharmaceutical ingredient (API) for
Hylenex at its fully burdened cost plus a margin. Baxter fills
and finishes Hylenex and holds it for subsequent distribution,
at which time the Company ensures it meets product
specifications and releases it as available for sale. Because of
the Companys continued involvement in the development and
production process of Hylenex, the earnings process is not
considered to be complete. Accordingly, the Company defers the
revenue and related product costs on the API for Hylenex until
the product is filled, finished, packaged and released. Baxter
may only return the API for Hylenex to the Company if it does
not conform to the specified criteria set forth in the
Development and Supply Agreement or upon termination of such
agreement. The Company has historically demonstrated that the
API shipped to Baxter has consistently met the specified
criteria. Therefore, no allowance for product returns has been
established. In addition, the Company receives product-based
payments upon the sale of Hylenex by Baxter, in accordance with
the terms of the agreement with Baxter. Product sales revenues
are recognized as the Company earns such revenues based on
Baxters shipments of Hylenex to its distributors when such
amounts can be reasonably estimated. In February 2007, Baxter
prepaid $1.0 million of such product-based payments which
was deferred and is being recognized as earned. In January 2008,
Baxter prepaid another $3.5 million of such product-based
payments and is obligated to prepay $5.5 million of
additional product-based payments on or prior to January 1,
2009.
Collaborative Agreements The Company analyzes
each element of its collaborative agreements to determine the
appropriate revenue recognition. The Company recognizes revenue
on nonrefundable upfront payments in which it has an ongoing
involvement or performance obligation over the period of
significant involvement under the related agreements. The
Company recognizes milestone payments upon the achievement of
specified milestones if (1) the milestone is substantive in
nature, and the achievement of the milestone was not reasonably
assured at the inception of the agreement, (2) the fees are
nonrefundable and (3) our performance obligations after the
milestone achievement will continue to be funded by our
collaborator at a level comparable to the level before the
milestone achievement. Any milestone payments received prior to
satisfying these revenue recognition criteria are recorded as
deferred revenue. Reimbursements of research and development
services are recognized as revenue during the period in which
the services are performed. Royalties to be received based on
sales of licensed products by the Companys collaborators
incorporating the Companys products are recognized as
earned.
Cost
of Sales
Cost of sales consists primarily of raw materials, third-party
manufacturing costs, fill and finish costs, freight associated
with the sales of Cumulase, and the API for Hylenex.
Research
and Development Expenses
Research and development expenses consist primarily of costs
associated with the development and manufacturing of the
Companys product candidates, compensation and other
expenses for research and development personnel, supplies and
materials, costs for consultants and related contract research,
clinical trials, facility costs, and depreciation. The Company
charges all research and development expenses to operations as
they are incurred, in accordance with SFAS No. 2,
Accounting for Research and Development Costs. The
Companys research and development activities are primarily
focused on the development of its Chemophase and
Enhanzetm
Technology product candidates, both of which are based on the
Companys proprietary recombinant human PH20 enzyme
(rHuPH20).
F-9
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Clinical
Trial and Contract Research Expenses
The Companys expenses related to clinical trials are based
on estimates of the services received and efforts expended
pursuant to contracts with multiple research institutions,
clinical research organizations, and other vendors that conduct
and manage clinical trials on its behalf.
Share-Based
Compensation
On January 1, 2006, the Company adopted the provisions of
revised SFAS No. 123 (SFAS 123R),
Share-Based
Payment, including the provisions of Staff Accounting
Bulletin No. 107 (SAB 107), using the
modified prospective transition method to account for its
employee share-based awards. Under SFAS 123R, share-based
compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense
over the employees requisite service period. Halozyme has
no awards with market or performance conditions. The valuation
provisions of SFAS 123R apply to new awards and to awards
that are outstanding at the effective date and subsequently
modified or cancelled. Estimated compensation expense for awards
outstanding at the effective date will be recognized over the
remaining service period using the compensation cost calculated
for pro forma disclosure purposes under SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123). The Companys consolidated
financial statements as of and for the year ended
December 31, 2006 reflect the impact of SFAS 123R. In
accordance with the modified prospective transition method, the
consolidated financial statements for prior periods were not
restated to reflect, and do not include, the impact of
SFAS 123R.
On November 10, 2005, the FASB issued FASB Staff Position
No. FAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards
(FAS 123R-3).
Management elected to adopt the alternative transition method
provided in
FAS 123R-3.
The alternative transition method includes a simplified method
to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects
of employee share-based compensation, which is available to
absorb tax deficiencies recognized subsequent to the adoption of
SFAS 123R.
Share-based compensation expense recognized during the period is
based on the value of the portion of share-based payment awards
that is ultimately expected to vest during the period.
Share-based compensation expense recognized in the
Companys consolidated statements of operations for the
years ended December 31, 2007 and 2006 included
compensation expense for share-based payment awards granted
prior to, but not yet vested as of, December 31, 2005 based
on the grant date fair value estimated in accordance with the
pro forma provisions of SFAS 123 and share-based payment
awards granted subsequent to December 31, 2005 based on the
grant date fair value estimated in accordance with
SFAS 123R. Share awards are amortized under the
straight-line method. As share-based compensation expense
recognized in the consolidated statement of operations for the
years ended December 31, 2007 and 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Pre-vesting forfeitures were estimated to be approximately 10%
for employees in the years ended December 31, 2007 and 2006
based on the Companys historical experience and those of
its peer group. In the pro forma information required under
SFAS 123 for the year ended December 31, 2005, the
Company accounted for forfeitures as they occurred.
F-10
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Total share-based compensation expense related to share-based
awards, recognized under SFAS 123R, for the years ended
December 31, 2007 and 2006 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Research and development
|
|
$
|
662,690
|
|
|
$
|
424,305
|
|
Selling, general and administrative
|
|
|
1,917,514
|
|
|
|
850,262
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense before taxes
|
|
|
2,580,204
|
|
|
|
1,274,567
|
|
Related income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
$
|
2,580,204
|
|
|
$
|
1,274,567
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense per basic and diluted share
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense from:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
1,857,249
|
|
|
$
|
1,136,530
|
|
Restricted stock awards
|
|
|
722,955
|
|
|
|
138,037
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,580,204
|
|
|
$
|
1,274,567
|
|
|
|
|
|
|
|
|
|
|
Prior to January 1, 2006, the Company accounted for
share-based awards to employees using the intrinsic value method
in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations and provided the required pro forma
disclosures of SFAS 123. Under the intrinsic value method,
no share-based compensation expense had been recognized in the
consolidated statement of operations for share-based awards to
employees, because the exercise price of the stock options
granted to employees equaled the fair market value of the
underlying stock at the date of grant.
The following table summarizes the pro forma effect on the
Companys net loss and per share data as if it had applied
the fair value recognition provisions of SFAS 123 in
determining share-based compensation for the year ended
December 31, 2005:
|
|
|
|
|
|
|
2005
|
|
|
Net loss, as reported
|
|
$
|
(13,275,373
|
)
|
Add: Share-based employee compensation expense
|
|
|
|
|
Deduct: Total share-based employee compensation expense
determined under fair value based method for all awards
|
|
|
(1,224,943
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(14,500,316
|
)
|
|
|
|
|
|
Net loss per share, basic and diluted, as reported
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
Pro forma net loss per share, basic and diluted
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
The Company accounts for stock options granted to non-employees
in accordance with Emerging Issues Task Force Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services,
(EITF 96-18).
Under
EITF 96-18,
the Company determines the fair value of the stock options
granted as either the fair value of the consideration received
or the fair value of the equity instruments issued, whichever is
more reliably measurable.
Income
Taxes
Income taxes are recorded in accordance with
SFAS No. 109, Accounting for Income Taxes,
which requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events
that have been recognized in the Companys consolidated
financial statements or tax returns. Measurement of the deferred
items is
F-11
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
based on enacted tax laws. In the event the future consequences
of differences between financial reporting bases and tax bases
of the Companys assets and liabilities result in a
deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the
future benefits indicated by such assets. The Company records a
valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized. Management
has considered future taxable income and ongoing tax planning
strategies in assessing the need for the valuation allowance. In
the event the Company were to determine that it would be able to
realize the deferred tax assets in the future in excess of their
net recorded amounts, an adjustment to the deferred tax assets
would increase the income in the period such determination was
made. Likewise, should the Company determine that it would not
be able to realize all or part of the net deferred tax assets in
the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made.
Effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions (tax contingencies) accounted
for in accordance with SFAS No. 109. FIN 48 also
provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. The adoption of FIN 48 had no
impact on the Companys consolidated financial position or
results of operations. At the date of adoption and at
December 31, 2007, the Companys unrecognized income
tax benefits and uncertain tax provisions were not material.
Net
Loss Per Share
In accordance with SFAS No. 128, Earnings Per
Share, and SEC Staff Accounting Bulletin (SAB)
No. 98, basic net loss per common share is computed by
dividing net loss for the period by the weighted average number
of common shares outstanding during the period. Under
SFAS No. 128, diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares,
such as stock options and warrants, outstanding during the
period. Such common equivalent shares have not been included in
the computation of net loss per share as their effect would have
been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator Net loss
|
|
$
|
(23,896,183
|
)
|
|
$
|
(14,751,986
|
)
|
|
$
|
(13,275,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Weighted average shares outstanding
|
|
|
74,317,930
|
|
|
|
62,610,265
|
|
|
|
50,317,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares (not included because of their
anti-dilutive nature)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and awards
|
|
|
7,914,979
|
|
|
|
8,727,322
|
|
|
|
8,535,751
|
|
Stock warrants
|
|
|
4,859,030
|
|
|
|
6,714,403
|
|
|
|
11,561,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common equivalents
|
|
|
12,774,009
|
|
|
|
15,441,725
|
|
|
|
20,097,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
Comprehensive income (loss) is defined as all changes in a
companys net assets, except changes resulting from
transactions with shareholders. At December 31, 2007, 2006,
and 2005, the Company had no reportable differences between net
loss and comprehensive loss.
F-12
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Segment
Information
The Company operates in one segment, which is the research,
development and commercialization of products based on the
extracellular matrix for the drug delivery, oncology and
dermatology markets. The chief operating decision-makers review
the operating results on an aggregate basis and manage the
operations as a single operating segment.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value
Measurements (SFAS 157), which defines fair
value, establishes a framework for measuring fair value in
accordance with GAAP and expands disclosure about fair value
measurements. The Company will be required to adopt
SFAS 157 in the first quarter of 2008. The Company does not
expect the adoption of SFAS 157 to significantly affect its
consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which allows certain financial
assets and liabilities to be recognized, at the Companys
election, at fair value. The provisions of SFAS 159 will be
effective for the Company beginning January 1, 2008. The
Company is in the process of determining the effect, if any, the
adoption of SFAS 159 will have on its consolidated
financial position or results of operations.
In June 2007, the FASB ratified EITF Issue
No. 07-03,
Accounting for Non-Refundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities, which requires that non-refundable advance
payments for goods or services that will be used or performed in
future research and development activities pursuant to executory
contractual arrangements be deferred and recognized as an
expense in the period that the related goods are delivered or
services are performed. The Company will adopt EITF Issue
No. 07-03
in the first quarter of 2008, and it is not expected to have a
material impact on its consolidated financial position or
results of operations.
In December 2007, the FASB ratified EITF Issue
No. 07-01,
Accounting for Collaboration Arrangements Related to the
Development and Commercialization of Intellectual Property,
which is focused on how the parties to a collaborative agreement
should account for costs incurred and revenue generated on sales
to third parties, how sharing payments pursuant to a
collaboration agreement should be presented in the statement of
operations and certain related disclosure questions. The Company
will be required to adopt EITF Issue
No. 07-01
in the first quarter of 2009 and it is not expected to have a
material impact on its consolidated financial position or
results of operations.
Inventory consists of the following as of December 31, 2007
and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
578,397
|
|
|
$
|
337,344
|
|
Work in process
|
|
|
46,394
|
|
|
|
76,257
|
|
Finished goods
|
|
|
78,677
|
|
|
|
28,891
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
703,468
|
|
|
$
|
442,492
|
|
|
|
|
|
|
|
|
|
|
Inventory is used in the manufacture of the Companys
Cumulase and Hylenex products and is stated at the lower of cost
or market.
F-13
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
4.
|
Property
and Equipment
|
Property and equipment consists of the following as of
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Research equipment
|
|
$
|
1,892,658
|
|
|
$
|
805,077
|
|
Computer and office equipment
|
|
|
789,851
|
|
|
|
217,418
|
|
Leasehold improvements
|
|
|
633,996
|
|
|
|
179,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,316,505
|
|
|
|
1,202,317
|
|
Less accumulated depreciation
|
|
|
(1,033,189
|
)
|
|
|
(704,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,283,316
|
|
|
$
|
497,770
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled $576,491, $243,999
and $206,348, for the years ended December 31, 2007, 2006
and 2005, respectively.
Accrued expenses consist of the following as of
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued expenses
|
|
$
|
1,083,946
|
|
|
$
|
602,140
|
|
Accrued compensation and payroll taxes
|
|
|
1,418,313
|
|
|
|
409,013
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,502,259
|
|
|
$
|
1,011,153
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue consists of the following as of
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Collaborative agreements
|
|
$
|
39,079,524
|
|
|
$
|
19,918,965
|
|
Product sales
|
|
|
189,967
|
|
|
|
62,572
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,269,491
|
|
|
$
|
19,981,537
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
3,306,225
|
|
|
$
|
1,221,992
|
|
Long-term portion
|
|
|
35,963,266
|
|
|
|
18,759,545
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Revenue
|
|
$
|
39,269,491
|
|
|
$
|
19,981,537
|
|
|
|
|
|
|
|
|
|
|
Roche Agreement In December 2006, the Company
entered into a license and collaborative agreement with Roche.
Under the terms of the Roche Agreement, Roche will obtain a
worldwide, exclusive license to develop and commercialize
product combinations of rHuPH20, the Companys proprietary
recombinant human hyaluronidase, and up to thirteen Roche target
compounds resulting from the collaboration. Roche paid
$20 million to Halozyme in December 2006 as an initial
upfront payment for the application of rHuPH20 to three
pre-defined Roche biologic targets.
Due to Halozymes continuing involvement obligations,
revenue from the $20 million upfront payment was deferred
and is being recognized over the term of the agreement. The
Company recognized $1.2 million and $81,000 in revenue from
the Roche upfront payment in the years ended December 31,
2007 and 2006, respectively.
Baxter Agreements In September 2007, the
Company and Baxter entered into an Enhanze Technology License
and Collaboration Agreement (the Gammagard License).
Under the terms of the Gammagard License,
F-14
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Baxter paid the Company a nonrefundable upfront payment of
$10 million. Due to the Companys continuing
involvement obligations, the $10 million upfront payment
was deferred and is being recognized over the term of the
Gammagard License. The Company recognized revenues of $192,000
under the Gammagard License for the year ended December 31,
2007.
In February 2007, the Company amended certain agreements with
Baxter for Hylenex and entered into a new agreement for kits and
co-formulations with rHuPH20 (the Baxter
Agreements). Under the terms of the Baxter Agreements,
Baxter paid the Company a nonrefundable upfront payment of
$10 million. Due to the Companys continuing
involvement obligations, the $10 million upfront payment
was deferred and is being recognized over the term of the
agreements. The Company recognized $516,000 in revenues under
the Baxter Agreements for the year ended December 31, 2007.
In addition, Baxter will make payments to the Company based on
sales of the products covered under the Baxter Agreements.
Baxter prepaid $1.0 million of such product-based payments
in connection with the execution of the Baxter Agreements. In
January 2008, Baxter prepaid another $3.5 million of such
product-based payments and is obligated to prepay
$5.5 million of additional product-based payments on or
prior to January 1, 2009. The prepaid product-based
payments are deferred and are being recognized as product sales
revenues as the Company earns such revenues from the sales of
Hylenex by Baxter.
Issuance of Common Stock In April 2007, the
Company entered into a definitive stock purchase agreement (the
Purchase Agreement) with New River
Management V, LP (New River). Under the terms
of the Purchase Agreement, New River purchased 3,500,000
newly-issued shares of the Companys common stock for an
aggregate price of approximately $32.1 million. The sale of
the shares was completed in May 2007. The Company has agreed to
file a registration statement upon demand with the SEC covering
the resale of these shares.
In February 2007, an affiliate of Baxter purchased
2,070,394 shares of the Companys common stock for an
aggregate price of approximately $20.0 million.
In December 2006, the Company issued and sold to an accredited
investor, an affiliate of Roche (the Purchaser),
3,385,000 shares (the Shares) of the
Companys common stock at a price of $3.27 per share, for
gross proceeds of approximately $11.1 million. The Shares
were sold pursuant to exemptions from registration under
Regulation D of the Securities Act. In December 2006, the
Company also entered into a registration rights agreement (the
Rights Agreement) with the Purchaser, under which
the Company may be required to register the Shares upon the
occurrence of certain events set forth in the Rights Agreement.
Such triggering events include, but are not limited to, the
registration of shares pursuant to a registration statement not
currently in effect. The Rights Agreement will terminate at such
time as the Purchaser may sell the Shares in any three month
period pursuant to the provisions of Rule 144 under the
Securities Act of 1933, as amended. As of December 31,
2007, the Company had not filed a registration statement with
the SEC covering the resale of the Shares.
During 2007, the Company issued an aggregate of
3,596,557 shares of common stock in connection with the
exercises of stock purchase warrants (1,783,852 shares at a
weighted average price of $1.29 per share), stock options
(1,707,705 shares at a weighted average price of $1.00 per
share) and restricted stock awards (105,000 shares at a
price of $0) for cash in the aggregate amount of approximately
$4.0 million.
During 2006, the Company issued an aggregate of
5,104,996 shares of common stock in connection with the
exercises of stock purchase warrants (4,818,846 shares at a
weighted average price of $1.48 per share), stock options
(196,150 shares at a weighted average price of $0.80 per
share) and restricted stock awards (90,000 shares at a
price of $0) for cash in the aggregate amount of approximately
$7.3 million.
In December 2005, the Company issued 10,000,000 shares of
common stock in a registered direct offering at a price per
share of $1.75, generating approximately $16.0 million in
net proceeds.
F-15
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
During 2005, the Company issued an aggregate of
1,044,914 shares of common stock in connection with the
exercises of stock purchase warrants (424,768 shares at a
weighted average price of $0.55 per share) and stock options
(620,146 shares at a weighted average price of $0.35 per
share) for cash in the aggregate amount of approximately
$451,000.
Issuance of Common Stock Options for Services
In 2006, an option to purchase 13,332 shares of the
Companys common stock was issued to a consultant for
services received and the stock option was valued at $9,322. In
2005, options to purchase 50,000 shares of the
Companys common stock were issued to members of our
Scientific Advisory Board for services valued at $77,000 and
options to purchase 74,000 shares of the Companys
common stock were issued to consultants for services valued at
$109,000. These options were fully exercisable and fully vested
on the date of grant and shall expire in ten years based on the
terms of the options. The fair value of these options was
recorded as a noncash stock expense.
Warrants In connection with the October 2004
private placement, the Company issued warrants to purchase
2,709,542 shares of common stock at an exercise price of
$2.25 per share. These warrants are exercisable until
October 12, 2009. As of December 31, 2007 and 2006,
2,030,572 and 2,623,828, respectively, of these warrants were
outstanding.
In connection with the January 2004 private placement, the
Company issued warrants (the Callable Warrants) to
purchase 8,094,829 shares of common stock at an exercise
price of $1.75 per share, as amended. These warrants are
exercisable until January 28, 2009 and are callable by the
Company under certain conditions. In December 2004, the Company
called the first tranche of the Callable Warrants and holders of
the Callable Warrants exercised warrants to purchase
1,571,682 shares of common stock at $1.75 per share, or
approximately $2.7 million in net proceeds. In August 2006,
the Company called the second tranche of the Callable Warrants
and holders of the Callable Warrants exercised warrants to
purchase 2,204,188 shares of common stock at $1.75 per
share, or approximately $3.9 million in net proceeds. As of
December 31, 2007 and 2006, 1,634,143 and 2,340,412,
respectively, of the Callable Warrants were outstanding.
In October 2003, in conjunction with the issuance of the
Companys Series C Convertible Preferred Stock (the
Series C), the Company granted warrants to
purchase 2,367,114 shares of common stock to purchasers of
the Series C at an exercise price of $0.7667 per share.
These warrants are exercisable until October 15, 2008. As
of December 31, 2007 and 2006, 1,194,315 and 1,398,749,
respectively, of these warrants were outstanding.
In connection with the promissory notes issued in 2003 and 2002,
the Company granted warrants to purchase 867,419 shares of
common stock at an exercise price of $0.4496 per share. These
warrants expired in October 2007. As of December 31, 2007
and 2006, zero and 351,414, respectively, of these warrants were
outstanding.
|
|
8.
|
Equity
Incentive Plans
|
The Company currently has four equity incentive plans (the
Plans): the 2001 Stock Plan, the 2004 Stock Plan,
the 2005 Outside Directors Stock Plan, and the 2006 Stock
Plan. All of the Plans were approved by the stockholders.
Options are subject to terms and conditions established by the
Compensation Committee of the Companys Board of Directors.
Options have a term of ten years and generally vest at the rate
of 25% one year from the grant date and monthly thereafter until
the options are fully vested over four years. Certain option
awards provide for accelerated vesting if there is a change in
control (as defined in the Plans). At the present time,
management intends to issue new common shares upon the exercise
of stock options.
During the year ended December 31, 2007, the Company
granted share-based awards under the 2006 Stock Plan and the
2005 Outside Directors Stock Plan. The Company had an
aggregate of 12,625,000 shares of common stock reserved for
issuance as of December 31, 2007. Of those shares,
7,809,979 shares were subject to outstanding options and
1,308,338 shares were available for future grants of
share-based awards.
F-16
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
A summary of the Companys stock option award activity as
of and for the years ended December 31, 2007 and 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Underlying
|
|
|
Average Exercise
|
|
|
Average Remaining
|
|
|
Intrinsic
|
|
|
|
Stock Options
|
|
|
Price per Share
|
|
|
Contractual Term (yrs)
|
|
|
Value
|
|
|
Outstanding at January 1, 2006
|
|
|
8,535,751
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
577,682
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(196,150
|
)
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(279,961
|
)
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
8,637,322
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,029,881
|
|
|
$
|
8.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,732,567
|
)
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(124,657
|
)
|
|
$
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
7,809,979
|
|
|
$
|
2.03
|
|
|
|
6.5
|
|
|
$
|
40.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest in the future at December 31,
2007
|
|
|
7,590,826
|
|
|
$
|
1.91
|
|
|
|
6.4
|
|
|
$
|
40.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
5,867,469
|
|
|
$
|
0.95
|
|
|
|
5.8
|
|
|
$
|
36.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair values of options granted
during the years ended December 31, 2007, 2006 and 2005
were $4.94 per share, $1.57 per share and $1.16 per share,
respectively. As of December 31, 2007, $4.6 million of
total unrecognized compensation costs related to non-vested
stock option awards is expected to be recognized over a weighted
average period of 2.3 years. The intrinsic value of options
exercised during the years ended December 31, 2007, 2006
and 2005 was $13.5 million, $342,355 and $935,188,
respectively. No tax benefit was realized for the tax deductions
from option exercise of the share-based payment arrangements in
the year ended December 31, 2007.
The fair value of each option award is estimated on the date of
grant using a Black-Scholes-Merton option pricing model
(Black-Scholes model) that uses the assumptions
noted in the following table. Expected volatility is based on
historical volatility of the Companys common stock and its
peer group. The expected term of options granted is based on
analyses of historical employee termination rates and option
exercises. The risk-free interest rate is based on the
U.S. Treasury yield for a period consistent with the
expected term of the option in effect at the time of the grant.
The dividend yield assumption is based on the expectation of no
future dividend payments by the Company. Assumptions used in the
Black-Scholes model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
70.0
|
%
|
|
|
75.0
|
%
|
|
|
76.0
|
%
|
Average expected term (in years)
|
|
|
5.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
Risk-free interest rate
|
|
|
3.5-4.7
|
%
|
|
|
4.6-5.1
|
%
|
|
|
3.9
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
F-17
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes information for outstanding and
exercisable options as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Vested and
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.06 - $ 0.43
|
|
|
4,192,932
|
|
|
|
5.4
|
|
|
$
|
0.40
|
|
|
|
4,182,635
|
|
|
$
|
0.40
|
|
$0.44 - $ 2.05
|
|
|
1,772,754
|
|
|
|
6.9
|
|
|
$
|
1.95
|
|
|
|
1,192,202
|
|
|
$
|
1.92
|
|
$2.06 - $ 4.10
|
|
|
827,546
|
|
|
|
7.8
|
|
|
$
|
3.02
|
|
|
|
492,445
|
|
|
$
|
3.29
|
|
$4.11 - $10.37
|
|
|
1,016,747
|
|
|
|
9.5
|
|
|
$
|
8.09
|
|
|
|
187
|
|
|
$
|
6.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,809,979
|
|
|
|
6.5
|
|
|
$
|
2.03
|
|
|
|
5,867,469
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards. Restricted stock
awards are grants that entitle the holder to acquire shares of
restricted common stock at a fixed price, which is typically
nominal. The shares of restricted stock cannot be sold, pledged,
or otherwise disposed of until the award vests and any unvested
shares may be reacquired by the Company for the original
purchase price following the awardees termination of
service. Annual grants of restricted stock under the Outside
Directors Stock Plan typically vest in full the first day
the awardee may trade the Companys stock in compliance
with the Companys insider trading policy following the
date immediately preceding the first annual meeting of
stockholders following the grant date.
During the year ended December 31, 2007, the Company issued
105,000 restricted stock awards under the 2005 Outside
Directors Stock Plan. As of December 31, 2007, these
105,000 outstanding restricted stock awards were nonvested. The
grant-date fair value of restricted stock awards granted during
the year ended December 31, 2007 was $1.1 million, or
$10.37 per share.
During the year ended December 31, 2006, the Company issued
90,000 restricted stock awards under the 2005 Outside
Directors Stock Plan. As of December 31, 2007, these
90,000 restricted stock awards were fully vested. The grant-date
fair value of restricted stock awards granted during the year
ended December 31, 2006 was $244,950, or $2.72 per share.
No restricted stock awards were granted in the year ended
December 31, 2005. As of December 31, 2007, total
unrecognized compensation cost related to unvested shares was
$364,140, which is expected to be recognized over a
weighted-average period of 4.5 months.
|
|
9.
|
Commitments
and Contingencies
|
Operating Leases The Companys
administrative offices and research facilities are located in
San Diego, California. The Company leases an aggregate of
approximately 48,800 square feet of office and research
space.
In July 2007, the Company entered into two sublease agreements
with Avanir Pharmaceuticals, Inc. (Avanir) for
Avanirs excess leased facilities in San Diego,
California (the Subleases). The Company subleases
approximately 48,800 square feet of office and research
space for an initial monthly rent expense of approximately
$108,000, net of costs and property taxes associated with the
operation and maintenance of the subleased facilities. The
annual base rent is subject to approximately 4% annual increases
each year throughout the terms of the subleases. In addition,
the Company received free rent totaling approximately
$1.0 million, of which $674,000 was included in deferred
rent as of December 31, 2007. The difference between the
actual amount paid and the amount recorded as rent expense in
each fiscal year has been recorded as an adjustment to deferred
rent. The Company will pay a pro rata share of operating costs,
insurance costs, costs of utilities and real property taxes
incurred by Avanir for the subleased facilities.
One of the Subleases runs through August 2008. As a result, in
July 2007, the Company entered into a lease agreement (the
Lease) with BC Sorrento, LLC (BC
Sorrento) for these facilities through January 2013.
Payment obligations under the Lease will not commence until
September 2008 after the obligations in the short-term Sublease
have concluded. The annual base rent is subject to approximately
4% annual increases each year
F-18
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
throughout the term of the Lease. Under the Lease, the Company
received an allowance for the cost of tenant improvements
totaling $276,000 and will receive free rent totaling
approximately $219,000 beginning in September 2008. The
difference between the actual amount paid and the amount
recorded as rent expense in each fiscal year has been recorded
as an adjustment to deferred rent.
Additionally, the Company leases certain office equipment under
operating leases. Total rent expense was approximately
$1,050,000, $297,000 and $238,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Approximate annual future minimum operating lease payments as of
December 31, 2007 are as follows:
|
|
|
|
|
|
|
Operating
|
|
Year
|
|
Leases
|
|
|
2008
|
|
$
|
943,000
|
|
2009
|
|
|
1,480,000
|
|
2010
|
|
|
1,606,000
|
|
2011
|
|
|
1,663,000
|
|
2012
|
|
|
1,729,000
|
|
Thereafter
|
|
|
67,000
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
7,488,000
|
|
|
|
|
|
|
Material Agreements In September 2007,
Halozyme entered into the Gammagard License with Baxter. Under
the terms of the Gammagard License, Baxter obtained a worldwide,
exclusive license to develop and commercialize product
combinations of rHuPH20, with a current Baxter product,
Gammagard
Liquidtm.
Under the terms of the Gammagard License, Baxter paid the
Company a nonrefundable upfront payment of $10 million. Due
to the Companys continuing involvement obligations, the
$10 million upfront payment was deferred and is being
recognized over the term of the Gammagard License.
Pending successful completion of a series of regulatory and
sales milestones, Baxter may make further milestone payments
totaling $37 million to us. In addition, Baxter will pay
royalties on the sales, if any, of the products that result from
the collaboration. The Gammagard License is applicable to both
kit and co-formulation combinations. Baxter will assume all
development, manufacturing, clinical, regulatory, sales and
marketing costs under the Gammagard License, while Halozyme will
be responsible for the supply of the rHuPH20 enzyme. In
addition, Baxter has certain product development and
commercialization obligations in major markets identified in the
Gammagard License.
In February 2007, the Company amended certain agreements with
Baxter for Hylenex and entered into a new agreement,
collectively the Baxter Agreements, for kits and co-formulations
with rHuPH20. Under the terms of the Baxter Agreements, Baxter
paid a nonrefundable upfront payment of $10 million and,
pending the successful completion of a series of regulatory and
sales events, Baxter will make milestone payments to us which
could potentially reach a value of up to $25 million. In
addition, Baxter will make payments to Halozyme based on the
sales of products covered under the Baxter Agreements. In
February 2007, Baxter prepaid $1.0 million of such
product-based payments in connection with the execution of the
Baxter Agreements. In January 2008, Baxter prepaid another
$3.5 million of such product-based payments and is
obligated to prepay $5.5 million of additional
product-based payments on or prior to January 1, 2009.
Baxter will also now assume all development, manufacturing,
clinical, regulatory, sales and marketing costs of the products
covered by the Baxter Agreements. The Company will continue to
supply Baxter with the API for Hylenex, and Baxter will fill and
finish Hylenex and hold it for subsequent distribution. In
addition, Baxter will obtain a worldwide, exclusive license to
develop and commercialize product combinations of rHuPH20 with
Baxter hydration fluids and generic small molecule drugs, with
the exception of combinations with (i) bisphosphonates,
(ii) cytostatic and (iii) cytotoxic chemotherapeutic
agents, the rights to which have been retained by us.
Additionally, Baxter will make product-based payments on the
F-19
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
sales, if any, of the products that result from the
collaboration. Due to the Companys continuing involvement
obligations, the $10 million upfront payment was deferred
and is being recognized over the term of the agreements.
In December 2006, Halozyme entered into the Roche Agreement with
Roche for Enhanze Technology. Under the terms of the Roche
Agreement, Roche obtained a worldwide, exclusive license to
develop and commercialize product combinations of rHuPH20 and up
to thirteen Roche target compounds resulting from the
collaboration. Roche paid $20 million as an initial upfront
license fee for the application of rHuPH20 to three pre-defined
Roche biologic targets. Pending the successful completion of a
series of clinical, regulatory, and sales events, Roche will pay
the Company further milestones which could potentially reach a
value of up to $111 million. In addition, Roche will pay
the Company royalties on product sales for these first three
targets. Over the next ten years, Roche will also have the
option to exclusively develop and commercialize rHuPH20 with an
additional ten targets to be identified by Roche, provided that
Roche will be obligated to pay continuing exclusivity
maintenance fees to Halozyme in order to maintain its exclusive
development rights for these targets. For each of the additional
ten targets, Roche may pay Halozyme further upfront and
milestone payments of up to $47 million per target, as well
as royalties on product sales for each of these additional ten
targets. Additionally, Roche will obtain access to the
Companys expertise in developing and applying rHuPH20 to
Roche targets.
In December 2006, the Company amended its Commercial Supply
Agreement (the Amendment) with Avid Bioservices,
Inc. (Avid) which was originally entered into in
February 2005. Under the terms of the Amendment, the Company is
committed to certain minimum annual purchases of API equal to
two quarters of forecasted supply. In addition, Avid has the
right to manufacture and supply a certain percentage of the API
that will be used in the Companys Cumulase and Hylenex
products.
Legal Contingencies From time to time the
Company is involved in legal actions arising in the normal
course of its business. The Company is not presently subject to
any material litigation nor, to managements knowledge, is
any litigation threatened against the Company that collectively
is expected to have a material adverse effect on the
Companys cash flows, financial condition or results of
operations.
Significant components of the Companys net deferred tax
assets at December 31, 2007 and 2006 are shown below. A
valuation allowance of $28.6 million and $17.8 million
has been established to offset the net deferred tax assets as of
December 31, 2007 and 2006, respectively, as realization of
such assets is uncertain.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
15,303,000
|
|
|
$
|
15,134,000
|
|
Deferred revenue
|
|
|
7,639,000
|
|
|
|
|
|
Research and development credits
|
|
|
4,321,000
|
|
|
|
2,081,000
|
|
Share-based compensation
|
|
|
696,000
|
|
|
|
386,000
|
|
Depreciation
|
|
|
95,000
|
|
|
|
92,000
|
|
Other, net
|
|
|
505,000
|
|
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
28,559,000
|
|
|
|
17,764,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(28,559,000
|
)
|
|
|
(17,764,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The provision for income taxes on earnings subject to income
taxes differs from the statutory federal income tax rate at
December 31, 2007, 2006 and 2005, due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal income tax rate of 34%
|
|
$
|
(8,125,000
|
)
|
|
$
|
(5,016,000
|
)
|
|
$
|
(4,514,000
|
)
|
State income tax, net of federal benefit
|
|
|
(1,394,000
|
)
|
|
|
(861,000
|
)
|
|
|
(775,000
|
)
|
Research and development credits
|
|
|
(2,133,000
|
)
|
|
|
(615,000
|
)
|
|
|
(573,000
|
)
|
Tax effect on non-deductible expenses and other
|
|
|
857,000
|
|
|
|
286,000
|
|
|
|
(196,000
|
)
|
Increase in valuation allowance
|
|
|
10,795,000
|
|
|
|
6,206,000
|
|
|
|
6,058,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company had federal and
California tax net operating loss carryforwards of approximately
$47.7 million and $48.8 million, which will begin to
expire in 2018 and 2010, respectively, unless previously
utilized. At December 31, 2007, the Company also had
federal and California research and development tax credit
carryforwards of approximately $3.0 million and
$1.9 million, respectively, which will begin to expire in
2024 unless previously utilized. The tax benefit of
approximately $9.5 million of net operating losses,
attributable to stock option deductions, will be credited to
equity if realized.
Pursuant to Internal Revenue Code Section 382, the annual
use of the net operating loss carryforwards and research and
development tax credits could be limited by any greater than 50%
ownership change during any three-year testing period. As a
result of any such ownership change, portions of the
Companys net operating loss carryforwards and research and
development tax credits are subject to annual limitations. The
Company recently completed a Section 382 analysis regarding
the limitation of the net operating losses and research and
development credits. Based upon the analysis, the Company
determined that ownership changes occurred in prior years.
However, the annual limitations on net operating loss and
research and development tax credit carryforwards will not have
a material impact on the future utilization of such
carryforwards.
The Company adopted the provisions of FIN 48 on
January 1, 2007. The adoption of FIN 48 did not impact
the Companys consolidated financial position or results of
operations. At the date of adoption and at December 31,
2007, the Companys unrecognized income tax benefits and
uncertain tax provisions were not material and would not, if
recognized, affect the effective tax rate. The Company does not
anticipate that there will be a significant change in the
unrecognized tax benefits within the next 12 months.
Interest
and/or
penalties related to uncertain income tax positions are
recognized by the Company as a component of income tax expense.
For the year ended December 31, 2007, the Company did not
recognize any interest or penalties.
The Company is subject to taxation in the U.S. and in
various state jurisdictions. The Companys tax years for
1998 and forward are subject to examination by the U.S. and
California tax authorities due to the carryforward of unutilized
net operating losses and research and development credits.
|
|
11.
|
Related
Party Transactions
|
In July 2007, the Company entered into two sublease agreements
with Avanir for Avanirs excess leased facilities in
San Diego, California (the Subleases). One of
the Subleases runs through August 2008. As a result, in July
2007, the Company entered into a lease agreement (the
Lease) with BC Sorrento for these facilities through
January 2013. Connie Matsui, a director of the Company, and her
husband have a controlling ownership interest in an entity that
holds a minority ownership position in BC Sorrento. In addition,
this entity currently serves as the managing member of BC
Sorrento. The transaction with BC Sorrento was reviewed and
approved by the Companys Board of Directors in accordance
with the Companys related party transaction policy.
F-21
Halozyme
Therapeutics, Inc.
Notes to
Consolidated Financial
Statements (Continued)
In December 2006, Halozyme entered into a license agreement with
a related party, Nektar Therapeutics AL, Corporation
(Nektar) under which the Company obtained a license
to certain intellectual property rights and proprietary
technology of Nektar. Nektars co-founder, Chief Scientific
Officer and Director, Dr. John Patton, is currently a
member of the Companys Board of Directors. Dr. Patton
recused himself from the segments of the various Board of
Directors meetings at which this transaction was discussed,
evaluated or approved. The Company paid Nektar $75,000 in
January 2007 under the terms of this agreement and is obligated
to make certain payments in the future upon achieving certain
specified milestones and royalties on product sales.
|
|
12.
|
Summary
of Unaudited Quarterly Financial Information
|
The following is a summary of the Companys unaudited
quarterly statement of operations data derived from unaudited
consolidated financial statements included in the Quarterly
Reports on
Form 10-Q:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
2007 (Unaudited):
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Total revenues
|
|
$
|
810,215
|
|
|
$
|
708,516
|
|
|
$
|
942,881
|
|
|
$
|
1,337,909
|
|
Total operating expenses
|
|
$
|
4,890,626
|
|
|
$
|
6,542,830
|
|
|
$
|
9,252,533
|
|
|
$
|
11,263,739
|
|
Net loss
|
|
$
|
(3,357,304
|
)
|
|
$
|
(4,801,707
|
)
|
|
$
|
(7,028,781
|
)
|
|
$
|
(8,708,391
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.11
|
)
|
Shares used in computing net loss per share, basic and diluted
|
|
|
69,984,931
|
|
|
|
73,217,967
|
|
|
|
76,502,867
|
|
|
|
77,459,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
2006 (Unaudited):
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Total revenues
|
|
$
|
73,281
|
|
|
$
|
119,662
|
|
|
$
|
362,476
|
|
|
$
|
426,327
|
|
Total operating expenses
|
|
$
|
3,746,321
|
|
|
$
|
3,534,635
|
|
|
$
|
4,188,514
|
|
|
$
|
5,095,132
|
|
Net loss
|
|
$
|
(3,490,194
|
)
|
|
$
|
(3,232,791
|
)
|
|
$
|
(3,651,038
|
)
|
|
$
|
(4,377,963
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
Shares used in computing net loss per share, basic and diluted
|
|
|
60,456,462
|
|
|
|
61,841,867
|
|
|
|
62,731,254
|
|
|
|
65,402,770
|
|
F-22