e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-32335
HALOZYME THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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88-0488686 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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11388 Sorrento Valley Road |
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San Diego, CA
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92121 |
(Address of principal executive offices)
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(Zip Code) |
(858) 794-8889
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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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 number of outstanding shares of the registrants common stock, par value $0.001 per share, as of May 1, 2008 was
79,517,144.
HALOZYME THERAPEUTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2008
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
92,558,408 |
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$ |
97,679,085 |
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Accounts receivable |
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1,130,384 |
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779,825 |
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Inventory |
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679,083 |
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703,468 |
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Prepaid expenses and other assets |
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2,252,861 |
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2,014,680 |
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Total current assets |
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96,620,736 |
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101,177,058 |
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Property and equipment, net |
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2,251,099 |
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2,283,316 |
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Total assets |
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$ |
98,871,835 |
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$ |
103,460,374 |
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Liabilities and Stockholders Equity |
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Accounts payable |
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$ |
3,398,587 |
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$ |
3,055,637 |
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Accrued expenses |
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2,942,071 |
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2,502,259 |
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Deferred revenue |
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3,261,983 |
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3,306,225 |
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Total current liabilities |
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9,602,641 |
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8,864,121 |
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Deferred revenue, net of current portion |
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38,992,374 |
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35,963,266 |
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Deferred rent, net of current portion |
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1,005,768 |
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865,063 |
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Commitments and contingencies (Note 9) |
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Stockholders equity: |
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Preferred stock $0.001 par value;
20,000,000 shares authorized; no shares
issued and outstanding |
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Common stock $0.001 par value;
150,000,000 shares authorized; 79,507,955
and 77,903,944 shares issued and
outstanding at March 31, 2008 and
December 31, 2007, respectively |
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79,508 |
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77,904 |
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Additional paid-in capital |
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124,140,964 |
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122,685,443 |
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Accumulated deficit |
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(74,949,420 |
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(64,995,423 |
) |
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Total stockholders equity |
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49,271,052 |
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57,767,924 |
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Total liabilities and stockholders equity |
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$ |
98,871,835 |
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$ |
103,460,374 |
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See accompanying notes to condensed consolidated financial statements.
3
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Revenues: |
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Product sales |
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$ |
141,438 |
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$ |
187,086 |
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Revenues under collaborative agreements |
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1,664,080 |
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623,129 |
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Total revenues |
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1,805,518 |
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810,215 |
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Operating expenses: |
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Cost of product sales |
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37,190 |
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76,228 |
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Research and development |
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8,444,191 |
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2,829,364 |
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Selling, general and administrative |
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4,157,603 |
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1,985,034 |
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Total operating expenses |
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12,638,984 |
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4,890,626 |
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Operating loss |
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(10,833,466 |
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(4,080,411 |
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Interest income |
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879,469 |
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723,107 |
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Net loss |
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$ |
(9,953,997 |
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$ |
(3,357,304 |
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Basic and diluted net loss per share |
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$ |
(0.13 |
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$ |
(0.05 |
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Shares used in computing basic and diluted net loss per share |
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78,300,319 |
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69,984,931 |
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See accompanying notes to condensed consolidated financial statements.
4
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Operating activities: |
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Net loss |
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$ |
(9,953,997 |
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$ |
(3,357,304 |
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Adjustments to reconcile net loss to net cash (used
in) provided by operating activities: |
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Share-based compensation |
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863,516 |
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415,480 |
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Depreciation and amortization |
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228,206 |
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86,635 |
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Loss on disposal of equipment |
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9,029 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(350,559 |
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(182,721 |
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Inventory |
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24,385 |
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(32,693 |
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Prepaid expenses and other assets |
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(238,181 |
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(704,088 |
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Accounts payable and accrued expenses |
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782,762 |
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(769,224 |
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Deferred rent |
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140,705 |
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Deferred revenue |
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2,984,866 |
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10,722,040 |
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Net cash (used in) provided by operating activities |
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(5,509,268 |
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6,178,125 |
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Investing activities: |
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Purchases of property and equipment |
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(205,018 |
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(160,891 |
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Net cash used in investing activities |
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(205,018 |
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(160,891 |
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Financing activities: |
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Proceeds from exercise of stock options, net |
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593,609 |
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459,918 |
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Proceeds from issuance of common stock, net |
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19,946,411 |
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Proceeds from exercise of warrants, net |
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357,909 |
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Net cash provided by financing activities |
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593,609 |
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20,764,238 |
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Net (decrease) increase in cash and cash equivalents |
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(5,120,677 |
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26,781,472 |
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Cash and cash equivalents at beginning of period |
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97,679,085 |
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44,189,403 |
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Cash and cash equivalents at end of period |
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$ |
92,558,408 |
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$ |
70,970,875 |
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See accompanying notes to condensed consolidated financial statements.
5
HALOZYME THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Business
Halozyme Therapeutics, Inc. (Halozyme or the Company) is a biopharmaceutical company
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. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles (U.S. GAAP) and with the
rules and regulations of the U.S. Securities and Exchange Commission (SEC) related to a quarterly
report on Form 10-Q. Accordingly, they do not include all of the information and disclosures
required by U.S. GAAP for a complete set of financial statements. These condensed consolidated
financial statements and notes thereto should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2007. The unaudited financial information for the interim periods
presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair
presentation of the financial condition and results of operations for the periods presented, with
such adjustments consisting only of normal recurring adjustments. Operating results for interim
periods are not necessarily indicative of the operating results for an entire fiscal year.
The condensed consolidated financial statements include the accounts of Halozyme and its
wholly owned subsidiary, Halozyme, Inc. All intercompany accounts and transactions have been
eliminated in the condensed consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts, as well as disclosures of
commitments and contingencies in the financial statements and accompanying notes. Actual results
could differ from those estimates.
3. Summary of Significant Accounting Policies
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 agreements.
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.
6
Product Sales Revenues from the sales 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 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 Healthcare Corporation (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.
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.
Costs and Expenses
The Companys costs and expenses include the following:
Cost of Product Sales. Cost of product sales consists primarily of raw materials, third-party
manufacturing costs, fill and finish costs and freight costs associated with the sales of Cumulase,
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 Statement of Financial Accounting Standards (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 Enhanze Technology product candidates,
both of which are based on the Companys proprietary recombinant human PH20 enzyme (rHuPH20).
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.
7
Selling, General and Administrative. Selling, general and administrative expenses consist
primarily of compensation and other expenses related to the Companys 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.
Share-Based Compensation
The Company accounts for share-based awards exchanged for employee services in accordance with
SFAS No. 123(R), Share-Based Payment (SFAS 123R). Under SFAS 123R, share-based compensation
expense is measured at the grant date, based on the estimated fair value of the award, and is
recognized as expense, net of estimated forfeitures, over the employees requisite service period.
Total share-based compensation expense related to all of the Companys share-based awards for
the three months ended March 31, 2008 and 2007 was allocated as follows:
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Research and development |
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$ |
263,647 |
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$ |
145,322 |
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Selling, general and administrative |
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|
599,869 |
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|
270,158 |
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Share-based compensation expense before tax |
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863,516 |
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|
415,480 |
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Related income tax benefit |
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Share-based compensation expense, net of tax |
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$ |
863,516 |
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$ |
415,480 |
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Net share-based compensation expense per basic and diluted share |
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$ |
0.01 |
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$ |
0.01 |
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Share-based compensation expense from: |
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Stock options |
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$ |
619,863 |
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$ |
360,480 |
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Restricted stock awards |
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|
243,653 |
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55,000 |
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$ |
863,516 |
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$ |
415,480 |
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4. Inventory
Inventory consisted of the following:
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March 31, |
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December 31, |
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2008 |
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2007 |
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Raw materials |
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$ |
578,397 |
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$ |
578,397 |
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Work in process |
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|
50,765 |
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|
46,394 |
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Finished goods |
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|
49,921 |
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|
78,677 |
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|
$ |
679,083 |
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$ |
703,468 |
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Inventory is stated at the lower of cost or market.
5. Property and Equipment
Property and equipment, net consisted of the following:
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March 31, |
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December 31, |
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2008 |
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2007 |
|
Research equipment |
|
$ |
2,038,020 |
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|
$ |
1,892,658 |
|
Computer and office equipment |
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|
819,904 |
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|
789,851 |
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Leasehold improvements |
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|
638,598 |
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|
633,996 |
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|
3,496,522 |
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|
3,316,505 |
|
Accumulated depreciation and amortization |
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|
(1,245,423 |
) |
|
|
(1,033,189 |
) |
|
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|
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|
$ |
2,251,099 |
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$ |
2,283,316 |
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8
Depreciation and amortization expense totaled $228,206 and $86,635, for the three months ended
March 31, 2008 and 2007, respectively.
6. Deferred Revenue
Deferred revenue consisted of the following:
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March 31, |
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December 31, |
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|
2008 |
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|
2007 |
|
Collaborative agreements |
|
$ |
41,933,123 |
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|
$ |
39,079,524 |
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Product sales |
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|
321,234 |
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|
189,967 |
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42,254,357 |
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|
39,269,491 |
|
Less current portion |
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(3,261,983 |
) |
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|
(3,306,225 |
) |
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|
$ |
38,992,374 |
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|
$ |
35,963,266 |
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|
Roche Agreement In December 2006, the Company entered into a license and collaboration
agreement with F. Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (collectively, Roche) for
Enhanze Technology (the Roche Agreement). Under the terms of the Roche Agreement, Roche obtained
a worldwide, exclusive license to develop and commercialize product combinations of rHuPH20, the
Companys proprietary recombinant human hyaluronidase, and up to thirteen Roche target compounds
resulting from the collaboration. Roche paid $20 million to the Company in December 2006 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
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 the Company in order to
maintain its exclusive development rights for these targets. For each of the additional ten
targets, Roche may pay the Company 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.
Due to the Companys 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 $290,000 in revenue from the Roche upfront payment for the three months ended March 31,
2008 and 2007.
Baxter Agreements In September 2007, the Company and Baxter Healthcare Corporation (BHC)
and Baxter Healthcare S.A. (BHSA and along with BHC, collectively, Baxter) entered into an
Enhanze Technology License and Collaboration Agreement (the Gammagard License). 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 the Company. 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 the Company 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.
The Company recognized $152,000 in revenues under the Gammagard License for the three months ended
March 31, 2008.
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 and, pending the successful completion of a series of regulatory and sales events, Baxter
will make milestone payments to the Company which could potentially reach a value of up to $25
million. In addition, Baxter will make payments to the Company 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
9
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. Baxter will also now assume 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. 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 approximately $147,000 and $77,000 in revenues under the Baxter Agreements for the three
months ended March 31, 2008 and 2007, respectively.
7. 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, awards 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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Numerator Net loss |
|
$ |
(9,953,997 |
) |
|
$ |
(3,357,304 |
) |
|
|
|
|
|
|
|
Denominator Weighted average shares outstanding |
|
|
78,300,319 |
|
|
|
69,984,931 |
|
|
|
|
|
|
|
|
Net loss per share |
|
$ |
(0.13 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share equivalents not included because of their anti-dilutive effect: |
|
|
|
|
|
|
|
|
Stock options and awards |
|
|
6,854,948 |
|
|
|
8,740,443 |
|
Warrants |
|
|
4,859,030 |
|
|
|
6,204,006 |
|
|
|
|
|
|
|
|
|
|
|
11,713,978 |
|
|
|
14,944,449 |
|
|
|
|
|
|
|
|
8. Stockholders Equity
During the three months ended March 31, 2008, holders of the Companys outstanding options
exercised rights to purchase approximately 1.6 million common shares for net proceeds of
approximately $594,000. Options to purchase approximately 6.7 million and 7.8 million shares of
the Companys common stock were outstanding as of March 31, 2008 and December 31, 2007,
respectively. Warrants to purchase approximately 4.9 million shares of the Companys common stock
were outstanding as of March 31, 2008 and December 31, 2007.
9. Commitments and Contingencies
Operating Leases The Companys administrative offices and research facilities are located in
San Diego, California. 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 throughout the terms of the
Subleases. In addition, the Company received free rent totaling approximately $1.0 million, of
which $842,000 was included in deferred rent as of March 31, 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
10
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 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. 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.
Additionally, the Company leases certain office equipment under operating leases. Total rent
expense was approximately $342,000 and $95,000 for the three months ended March 31, 2008 and 2007,
respectively.
Material Agreement 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 consolidated cash flows, financial
condition or results of operations.
10. Segment Information
The Company operates in one segment which is the research, development and commercialization
of products for the drug delivery, oncology, and dermatology markets. The chief operating
decision-makers review the Companys operating results on an aggregate basis and manage its
operations as a single operating segment.
11. Recent Accounting Pronouncements
In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative
Arrangements, which establishes how the participants in a collaborative arrangement shall report
costs incurred and revenue generated from transactions with third parties in each entitys
respective statement of operations. The Company will be required to adopt EITF Issue No. 07-1 in
the first quarter of 2009 and it is not expected to have a material impact on the Companys
consolidated financial position or results of operations.
In
September 2006, the Financial 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
adopted SFAS 157 in the first quarter of 2008. Cash and cash equivalents are carried at fair value
based on quoted market prices for identical securities (Level 1 inputs). The adoption of SFAS 157
had no effect on the Companys consolidated financial position or results of operations.
11
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
As used in this report, unless the context suggests otherwise, the terms we, our, ours,
and us refer to Halozyme Therapeutics, Inc., and its wholly owned subsidiary, Halozyme, Inc.,
which are sometimes collectively referred to herein as the Company.
The following information should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and the audited consolidated financial statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended December 31, 2007 filed with the U.S. Securities and
Exchange Commission, or SEC, on March 14, 2008.
Except for the historical information contained herein, this report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements reflect managements current forecast of certain aspects of our future. You can identify
most forward-looking statements by forward-looking words such as believe, think, may,
could, will, estimate, continue, anticipate, intend, seek, plan, expect,
should, would and similar expressions in this report. Such statements are based on currently
available operating, financial and competitive information and are subject to various risks,
uncertainties and assumptions that could cause actual results to differ materially from those
anticipated or implied in our forward-looking statements due to a number of factors including, but
not limited to, those set forth below under the caption Risks Related to Our Business and
elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a biopharmaceutical company dedicated to the development and commercialization of
products targeting the extracellular matrix for the 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 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 $74.9
million as of March 31, 2008.
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.
12
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
|
|
Phase I |
|
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.
Enhanze 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.
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
13
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
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 Liquid. 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 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 obtained 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 approximately $20 million.
Revenues
Revenues from product sales depend on our ability to develop, manufacture, obtain regulatory
approvals for and successfully commercialize our products and product candidates.
Revenues from license and collaboration agreements are recognized based on the performance
requirements of the underlying agreements. Revenue is deferred for fees received before 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.
14
Costs and Expenses
Cost of Product Sales. Cost of product sales consists primarily of raw materials, third-party
manufacturing costs, fill and finish costs, and freight costs associated with the 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 March 31, 2008, we have incurred research and development
expenses of $57.3 million. From 2005 through March 31, 2008, approximately 23% 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 14% 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 both our proprietary PH20 and proprietary non-PH20
programs, 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.
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
15
differ from these estimates under different assumptions or conditions. We believe the
following accounting policies to be critical to the judgments and estimates used in the preparation
of our consolidated financial statements.
Revenue Recognition
We generate revenues from product sales and collaborative agreements. Payments received under
collaborative agreements may include nonrefundable fees at the inception of the agreements,
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 agreements. In September 2007, we entered
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
16
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 stock price volatility is 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 rate is 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 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
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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. Refer to our audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2007, which contain accounting policies and other disclosures required by U.S.
GAAP.
Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
Product Sales - Product sales were $141,000 for the three months ended March 31, 2008 compared to
$187,000 for the three months ended March 31, 2007. The decrease of $46,000 was primarily due to
the decrease in sales of Cumulase of $44,000.
Revenues Under Collaborative Agreements Revenues under collaborative agreements were $1.7 million
for the three months ended March 31, 2008 compared to $623,000 for the three months ended March 31,
2007. Revenues under collaborative agreements consisted of the amortization of upfront fees
received from Baxter and Roche of $588,000 and $367,000 for the three months ended March 31, 2008
and 2007, respectively. Revenues under collaborative agreements also consisted of reimbursements
for research and development services from Baxter of $452,000 and $68,000 and Roche of $624,000 and
$188,000 for the three months ended March 31, 2008 and 2007, respectively. Such reimbursements are
for research and development services rendered by us at the request of Baxter and Roche. Therefore,
the amount of future revenues related to reimbursable research and development services is
uncertain.
Cost of Product Sales - Cost of product sales were $37,000 for the three months ended March 31,
2008 compared to $76,000 for the three months ended March 31, 2007. The decrease of $39,000 was
primarily due to the decrease in the sales of Cumulase.
Research and Development - Research and development expenses were $8.4 million for the three months
ended March 31, 2008 compared to $2.8 million for the three months ended March 31, 2007. The
increase of $5.6 million was primarily due to the increase in outsourced research and development
costs of $2.5 million due to our various pre-clinical programs and the manufacturing scale-up of
our rHuPH20 enzyme. In addition, compensation costs increased by $1.4 million primarily due to the
increase in our research and development headcount. At March 31, 2008, our headcount for research
and development functions totaled 69 employees, compared with 32 employees at March 31, 2007.
Additionally, our facilities expenses increased by $499,000, clinical trial expenses increased by
$602,000 and research supplies expenses increased by $429,000 for the three months ended March 31,
2008 as compared to the three months ended March 31, 2007. We expect research and development
costs to continue to increase in future periods as we increase our research efforts and headcount,
expand our clinical trials, and continue to develop and manufacture our product candidates.
Selling, General and Administrative - Selling, general and administrative (SG&A) expenses were
$4.2 million for the three months ended March 31, 2008 compared to $2.0 million for the three
months ended March 31, 2007. The increase of approximately $2.2 million was primarily due to the
increase in compensation costs of $1.1 million, of
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which $330,000 related to share-based compensation. At March 31, 2008, our headcount for SG&A
functions totaled 29 employees, compared with 14 employees at
March 31, 2007. In addition legal expenses increased by $863,000
of which $576,000 related to the settlement of
an arbitration matter. We expect SG&A expenses
to increase in future periods as we continue to expand our operations.
Interest Income - Interest income was $879,000 for the three months ended March 31, 2008 compared
to $723,000 for the three months ended March 31, 2007. The increase in interest income was due to
higher average cash and cash equivalents balances during the three months ended March 31, 2008 as
compared to the same period in 2007.
Net
Loss - Net loss for the three months ended March 31, 2008
was $10.0 million, or $0.13 per common
share, compared to $3.4 million, or $0.05 per common share, for the three months ended March 31,
2007. The increase in net loss was primarily due to an increase in operating expenses, partially
offset by increases in revenues.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are our existing cash and cash equivalents. As of March 31,
2008, we had cash and cash equivalents of approximately $92.6 million. 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 cash expenses of
approximately $45.0 million to $55.0 million for the year ending December 31, 2008, 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 Management V, LP
(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 $50.0 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.
Cash Flows
Net cash used by operations was $5.5 million for the three months ended March 31, 2008
compared to $6.2 million provided by operations for the three months ended March 31, 2007. This
change was primarily due to the increase in operating expenses as well as the $11.0 million initial
up front payments received from Baxter in the three months ended March 31, 2007, as compared to the
$3.5 million product-based payment received from Baxter in the three months ended March 31, 2008.
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Net cash used in investing activities was $205,000 for the three months ended March 31, 2008
compared to $161,000 for the three months ended March 31, 2007. This increase was due to the
increase in purchases of property and equipment during the three months ended March 31, 2008 as
compared to the same period in 2007.
Net cash provided by financing activities was $594,000 for the three months ended March 31,
2008 compared to $20.8 million for the three months ended March 31, 2007. In February 2007, we
sold common stock for approximately $20 million, net of issuance costs.
Off-Balance Sheet Arrangements
As of March 31, 2008, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. In addition, we did not engage in
trading activities involving non-exchange traded contracts. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had engaged in these
relationships.
Recent Accounting Pronouncements
In
December 2007, the FASB ratified EITF Issue No. 07-1,
Accounting for Collaborative
Arrangements, which establishes
how the participants in a collaborative arrangement shall report costs incurred and
revenue generated from transactions with third parties in each
entitys respective statement of operations. We will be required to adopt EITF Issue No. 07-1 in the first quarter of 2009 and it is
not expected to have a material impact on our consolidated financial position or results of
operations.
In
September 2006, the Financial 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
adopted SFAS 157 in the first quarter of 2008. Cash and cash equivalents are carried at fair value
based on quoted market prices for identical securities (Level 1 inputs). The adoption of SFAS 157
had no effect on the Companys consolidated financial position or results of operations.
Risk Factors
The following information sets forth factors that could cause our actual results to differ
materially from those contained in forward-looking statements we have made in this Quarterly Report
on Form 10-Q and those we may make from time to time. For a more detailed discussion of the factors
that could cause actual results to differ, see the Risk Factors section in our Annual Report on
Form 10-K filed with the SEC on March 14, 2008. In addition to the risk factors discussed below, we
are also subject to additional risks and uncertainties not presently known to us or that we
currently deem immaterial. If any of these known or unknown risks or uncertainties actually occur,
our business could be harmed substantially.
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 March 31, 2008, we have incurred aggregate
net losses of approximately $74.9
million.
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
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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, Amphadase, and Primapharm, Inc., also with a
bovine-derived hyaluronidase, Hydase. 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. |
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
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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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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
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these batches 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
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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. |
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
25
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 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 twelve months ended March 31, 2008 were $11.00 and
$4.19, 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; |
26
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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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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
27
FDA also conducts pre-approval and post-approval reviews and plant inspections to determine
whether our systems, or our contract suppliers and manufacturers processes, are in compliance
with cGMP and other FDA regulations. If we, or our contract supplier, fail these inspections, we
may not be able to commercialize our product in a timely manner without incurring significant
additional costs, or at all.
In addition, the FDA imposes a number of complex regulatory requirements on entities that
advertise and promote pharmaceuticals including, but not limited to, standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities, and promotional activities involving the internet.
We are dependent on receiving FDA and other governmental approvals prior to manufacturing,
marketing and shipping our products. Consequently, there is always a risk that the FDA or other
applicable governmental authorities will not approve our products, or will take post-approval
action limiting or revoking our ability to sell our products, or that the rate, timing and cost of
such approvals will adversely affect our product introduction plans or results of operations.
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.
28
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 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.
29
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-derived hyaluronidases by these
entities, it is possible that neither of these conditions will be met, which could limit market
acceptance and result in a material adverse effect on our financial condition.
The rising cost of healthcare and related pharmaceutical product pricing has led to cost
containment pressures that could cause us to sell our products at lower prices, resulting in less
revenue to us.
Any of 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, Amphadase, and Primapharm,
also with a bovine-derived hyaluronidase, Hydase. 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
30
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is interest income sensitivity, which is affected by
changes in the general level of U.S. interest rates, particularly because the majority of our
investments are in short-term marketable securities. The primary objective of our investment
activities is to preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities that we invest in
may be subject to market risk. This means that a change in prevailing interest rates may cause the
value of the investment to fluctuate. For example, if we purchase a security that was issued with
a fixed interest rate and the prevailing interest rate later rises, the value of our investment
will probably decline. To minimize this risk, we 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 March 31, 2008, 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.
Item 4. 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. Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2008, that have materially affected, or are reasonably
likely to materially affect our internal control over financial reporting.
31
PART II OTHER INFORMATION
Item 1. 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 we have adequate insurance to cover many different
types of liabilities, our insurance carriers may deny coverage or our policy limits may be
inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment
of any such awards could have a material adverse effect on our consolidated results of operations
and financial position. Additionally, any such claims, whether or not successful, could damage our
reputation and business. We currently are not a party to any legal proceedings, the adverse
outcome of which, in managements opinion, individually or in the aggregate, would have a material
adverse effect on our consolidated results of operations or financial position.
Item 1A. Risk Factors
A description of the risk factors associated with our business is included under Risk
Factors in Managements Discussion and Analysis of Financial Condition and Results of
Operations, contained in Item 2 of Part I of this report. This description includes any changes
to and supersedes the description of the risk factors associated with our business previously
disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007. There
have been no material changes to the risk factors described in our Annual Report on Form 10-K for
the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
32
Item 6. Exhibits
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Exhibit |
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Title |
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2.1
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Agreement and Plan of Merger, dated November 14, 2007, by and between the Registrant and the
Registrants predecessor Nevada corporation (1) |
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3.1
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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
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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
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Amended Rights Agreement between Corporate Stock Transfer, as rights agent, and Registrant,
dated November 12, 2007 (20) |
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10.1
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License Agreement between University of Connecticut and Registrant, dated November 15, 2002
(3) |
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10.2
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First Amendment to the License Agreement between University of Connecticut and Registrant,
dated January 9, 2006 (9) |
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10.3*
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Commercial Supply Agreement with Avid Bioservices, Inc. and Registrant, dated February 16,
2005 (7) |
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10.4*
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First Amendment to the Commercial Supply Agreement between Avid Bioservices, Inc. and
Registrant, dated December 15, 2006 (14) |
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10.5
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Form of Callable Stock Purchase Warrant (4) |
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10.6
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Form of Common Stock Purchase Warrant (5) |
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10.7#
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DeliaTroph Pharmaceuticals, Inc. 2001 Amended and Restated Stock Plan and form of Stock
Option Agreements for options assumed thereunder (6) |
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10.8
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Nonstatutory Stock Option Agreement With Andrew Kim (6) |
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10.9#
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2004 Stock Plan and Form of Option Agreement thereunder (4) |
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10.10#
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Halozyme Therapeutics, Inc. 2005 Outside Directors Stock Plan (8) |
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10.11#
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Form of Stock Option Agreement (2005 Outside Directors Stock Plan) (12) |
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10.12#
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Form of Restricted Stock Agreement (2005 Outside Directors Stock Plan) (12) |
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10.13#
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Halozyme Therapeutics, Inc. 2006 Stock Plan (11) |
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10.14#
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Form of Stock Option Agreement (2006 Stock Plan) (12) |
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10.15#
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Form of Restricted Stock Agreement (2006 Stock Plan) (12) |
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10.16#
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Halozyme Therapeutics, Inc. 2008 Stock Plan (21) |
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10.17#
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Halozyme Therapeutics, Inc. 2008 Outside Directors Stock Plan (21) |
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10.18#
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Form of Indemnity Agreement for Directors and Executive Officers (19) |
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10.19#
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Outside Director Compensation Plan |
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10.20#
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2007 Senior Executive Incentive Plan |
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10.21#
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Severance Policy |
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10.22*
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Amended and Restated Exclusive Distribution Agreement between Baxter Healthcare Corporation,
Baxter Healthcare S.A. and Registrant, dated February 14, 2007 (15) |
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10.23*
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Amended and Restated Development and Supply Agreement between Baxter Healthcare Corporation,
Baxter Healthcare S.A. and Registrant, dated February 14, 2007 (15) |
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10.24*
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License and Collaboration Agreement between Baxter Healthcare Corporation, Baxter Healthcare
S.A. and Registrant, dated February 14, 2007 (15) |
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10.25*
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Enhanze Technology License and
Collaboration Agreement between Baxter Healthcare Corporation,
Baxter Healthcare S.A. and Registrant, dated September 7, 2007 (18) |
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10.26*
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License and Collaboration Agreement between F. Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc.
and Registrant dated December 5, 2006 (13) |
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10.27
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Stock Purchase Agreement between Roche Finance Ltd and Registrant, dated December 5, 2006
(13) |
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10.28
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Stock Purchase Agreement between Baxter International, Inc. and Registrant, dated February
14, 2007 (15) |
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10.29
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Stock Purchase Agreement between New River Management V, LP and Registrant, dated April 23,
2007(16) |
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10.30
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Sublease Agreement (11404 Sorrento Valley Road), effective as of July 2, 2007 (17) |
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10.31
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Sublease Agreement (11388 Sorrento Valley Road), effective as of July 2, 2007 (17) |
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10.32
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Standard Industrial Net Lease (11388 Sorrento Valley Road), effective as of July 26, 2007 (17) |
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Exhibit |
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Title |
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21.1
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Subsidiaries of Registrant (10) |
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31.1
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Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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(1)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed November 20,
2007. |
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(2)
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Incorporated by reference to the Registrants definitive proxy statement filed with the SEC
on Form DEF14A on October 11, 2007. |
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(3)
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Incorporated by reference to the Registrants Registration Statement on Form SB-2 filed with
the Commission on April 23, 2004. |
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(4)
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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. |
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(5)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed October 15,
2004. |
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(6)
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Incorporated by reference to the Registrants Registration Statement on Form S-8 filed with
the Commission on October 26, 2004. |
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(7)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed February 22,
2005. |
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(8)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed July 6, 2005. |
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(9)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed January 12,
2006. |
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(10)
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Incorporated by reference to the Registrants Annual Report on Form 10-KSB/A, filed March 29,
2005. |
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(11)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed March 24,
2006. |
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(12)
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Incorporated by reference to the Registrants Quarterly Report on Form 10-Q, filed August 8,
2006. |
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(13)
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Incorporated by reference to the Registrants Current Report on Form 8-K/A, filed December
15, 2006. |
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(14)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed December 21,
2006. |
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(15)
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Incorporated by reference to the Registrants Current Report on Form 8-K/A, filed February
20, 2007. |
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(16)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed April 24,
2007. |
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(17)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed July 31,
2007. |
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(18)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed September 12,
2007. |
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(19)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed December 20,
2007. |
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(20)
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Incorporated by reference to the Registrants Annual Report on Form 10-K, filed March 14,
2008. |
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(21)
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed March 19,
2008. |
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*
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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. |
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#
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Indicates management contract or compensatory plan or arrangement. |
34
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 May 9, 2008.
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Halozyme Therapeutics, Inc.,
a Delaware corporation |
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Date: May 9, 2008
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By:
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/s/ Jonathan E. Lim |
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Jonathan E. Lim, MD |
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Its:
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President, Chief Executive Officer, |
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(Principal Executive Officer) |
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Date: May 9, 2008
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By:
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/s/ David A. Ramsay |
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David A. Ramsay |
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Its:
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Secretary, Chief Financial Officer
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(Principal Financial and Accounting Officer) |
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35