Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
quarterly period ended March 31, 2005
OR
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
transition period from _____________ to ___________
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
94-3171943 |
(State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
2600
Kelly Road, Suite 100
Warrington,
PA 18976 |
18976 |
(Address
of principal executive offices) |
(Zip
Code) |
(215)
488-9300
(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. x Yes o
No
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). x Yes o
No
As of May
3, 2005, 53,522,562 shares of common stock, par value $0.001 per share,
were
outstanding.
Table
of Contents
PART
I - FINANCIAL INFORMATION |
Page |
|
|
Item
1. Financial Statements |
|
|
|
CONSOLIDATED
BALANCE SHEETS -- |
|
As
of March 31, 2005 (unaudited) and December 31, 2004 |
Page
1 |
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited) -- |
|
For
the Three Months Ended March 31, 2005 and 2004 |
Page
2 |
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)-- |
|
For
the Three Months Ended March 31, 2005 and 2004 |
Page
3 |
|
|
Notes
to Consolidated Financial Statements |
|
-
March 31, 2005 (unaudited) |
Page
4 |
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations |
Page
7 |
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk |
Page
38 |
|
|
Item
4. Controls and Procedures |
Page
39 |
|
|
PART
II - OTHER INFORMATION |
|
|
|
Item
1. Legal Proceedings |
Page
40 |
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds |
Page
40 |
|
|
Item
3. Defaults Upon Senior Securities |
Page
40 |
|
|
Item
4. Submission of Matters to a Vote of Security Holders |
Page
40 |
|
|
Item
5. Other Information |
Page
40 |
|
|
Item
6. Exhibits |
Page
40 |
|
|
Signatures |
Page
41 |
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc. (“Discovery”), and its
wholly-owned, presently inactive subsidiary, Acute Therapeutics,
Inc.
FORWARD
LOOKING STATEMENTS
The
statements set forth under Part I, Item 2: “Management’s Discussion and Analysis
of Financial Condition and Results of Operation” and elsewhere in this report,
including those incorporated by reference herein, which are not historical,
including, without limitation, statements concerning our research and
development programs and clinical trials, the possibility of submitting
regulatory filings for our products under development, the seeking of
collaboration arrangements with pharmaceutical companies or others to develop,
manufacture and market products, the research and development of particular
compounds and technologies and the period of time for which our existing
resources will enable us to fund our operations, constitute “Forward Looking
Statements” within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend that all
forward-looking statements be subject to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are only predictions and reflect our views as of the date they are
made with respect to future events and financial performance. Forward-looking
statements are subject to many risks and uncertainties which could cause our
actual results to differ materially from any future results expressed or implied
by the forward-looking statements.
Examples
of the risks and uncertainties include, but are not limited to: risk that
financial conditions may change; risks relating to the progress of our research
and development (including
the results of clinical trials being conducted by us and the risk that our lead
product candidate, Surfaxin®, or
other drug candidates will not prove to be safe or useful for the treatment of
certain indications); the
risk that we will not be able to raise additional capital or enter into
additional collaboration agreements (including strategic alliances for our
aerosol and Surfactant Replacement Therapies); risk that we will not be able to
develop a successful sales and marketing organization in a timely manner, if at
all; risk that our internal sales and marketing organization will not succeed in
developing market awareness of our products; risk that our internal sales and
marketing organization will not be able to attract or maintain qualified
personnel; delays in
the FDA’s or other health regulatory authorities’ approval or potential
rejection of any applications we file, including the New Drug Application (NDA)
we filed in April 2004 and the Marketing Approval Application (MAA) we submitted
in October 2004; risks that any such regulatory authority will not approve the
marketing and sale of a drug product even after acceptance of an application we
file for any such drug product; risks
relating to the ability of our third party contract manufacturers to provide us
with adequate supplies of drug substance and drug products for completion of any
of our clinical studies; risks relating to the lack of adequate supplies of drug
substance and drug product for completion of any of our clinical studies, and
risks relating to the development of competing therapies and/or technologies by
other companies; and the
other risks and certainties detailed in Part I, Item 2: “Management’s Discussion
and Analysis of Financial Condition and Results of Operation - Risks Related to
Our Business,” and in the documents incorporated by reference in this report.
Companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after obtaining promising earlier
trial results. Data obtained from tests are susceptible to varying
interpretations, which may delay, limit or prevent regulatory
approval.
Except to
the extent required by applicable laws or rules, we do not undertake to update
any forward-looking statements or to publicly announce revisions to any of the
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART
I - FINANCIAL INFORMATION
ITEM
1. Financial Statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(in
thousands, except per share data)
|
|
March
31, |
|
December
31, |
|
|
|
2005 |
|
2004 |
|
|
|
(Unaudited) |
|
|
|
ASSETS |
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
28,957 |
|
$ |
29,264 |
|
Restricted
cash |
|
|
637 |
|
|
646 |
|
Available-for-sale
marketable securities |
|
|
22,233 |
|
|
2,744 |
|
Note
receivable, current portion |
|
|
3 |
|
|
3
|
|
Prepaid
expenses and other current assets |
|
|
736 |
|
|
685
|
|
Total
Current Assets |
|
|
52,566 |
|
|
33,342
|
|
Property
and equipment, net of accumulated depreciation |
|
|
3,990 |
|
|
4,063
|
|
Note
receivable, non-current portion |
|
|
189 |
|
|
190
|
|
Other
assets |
|
|
31 |
|
|
42
|
|
Total
Assets |
|
$ |
56,776 |
|
$ |
37,637 |
|
LIABILITIES
& STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
|
|
Accounts
payable and accrued expenses |
|
$ |
6,191 |
|
$ |
7,969 |
|
Capitalized
leases, current portion |
|
|
899 |
|
|
854
|
|
Total
Current Liabilities |
|
|
7,090 |
|
|
8,823
|
|
Deferred
revenue |
|
|
73 |
|
|
134 |
|
Credit
facility, non-current portion |
|
|
8,500 |
|
|
5,929 |
|
Capitalized
leases, non-current portion |
|
|
1,629 |
|
|
1,654
|
|
Total
Liabilities |
|
|
17,292 |
|
|
16,540 |
|
Stockholders’
Equity: |
|
|
|
|
|
|
|
Common
Stock, $0.001 par value; 80,000 authorized;
53,825
and 48,747 issued, 53,512 and 48,434 outstanding at
March
31, 2005 and December 31, 2004, respectively |
|
|
54 |
|
|
49
|
|
Additional
paid-in capital |
|
|
195,272 |
|
|
167,627 |
|
Unearned
portion of compensatory stock options |
|
|
(404 |
) |
|
(461 |
) |
Accumulated
deficit |
|
|
(152,377 |
) |
|
(143,061 |
) |
Treasury
stock (at cost; 313 shares at
March
31, 2005 and December 31, 2004) |
|
|
(3,054 |
) |
|
(3,054 |
) |
Accumulated
other comprehensive loss |
|
|
(7 |
) |
|
(3 |
) |
Total
Stockholders’ Equity |
|
|
39,484 |
|
|
21,097
|
|
Total
Liabilities & Stockholders’ Equity |
|
$ |
56,776 |
|
$ |
37,637 |
|
PART
I - FINANCIAL INFORMATION
ITEM
1. Financial Statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
|
Three
Months Ended |
|
|
|
March
31, |
|
|
|
2005 |
|
2004 |
|
Revenues: |
|
|
|
|
|
Contracts
and grants |
|
$ |
61 |
|
$ |
142 |
|
Expenses: |
|
|
|
|
|
|
|
Research
& Development |
|
|
5,120 |
|
|
6,710
|
|
General
& Administrative |
|
|
4,270 |
|
|
2,281
|
|
Total
Expenses |
|
|
9,390 |
|
|
8,991
|
|
Operating
Loss |
|
|
(9,329 |
) |
|
(8,849 |
) |
Other
income / (expense): |
|
|
|
|
|
|
|
Interest
and other income |
|
|
214 |
|
|
63
|
|
Interest
expense |
|
|
(201 |
) |
|
(86 |
) |
Other
income / (expense), net |
|
|
13 |
|
|
(23 |
) |
Net
Loss |
|
$ |
(9,316 |
) |
$ |
(8,872 |
) |
Net
loss per common share -
basic
and diluted |
|
$ |
(0.18 |
) |
$ |
(0.20 |
) |
Weighted
average number of common
shares
outstanding - basic and diluted |
|
|
50,784
|
|
|
43,320
|
|
PART
I - FINANCIAL INFORMATION
ITEM
1. Financial Statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
|
Three
Months Ended |
|
|
|
March
31, |
|
|
|
2005 |
|
2004 |
|
Cash
flows from operating activities: |
|
|
|
|
|
Net
loss |
|
$ |
(9,316 |
) |
$ |
(8,872 |
) |
Adjustments
to reconcile net loss to net cash used
in
operating activities: |
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
214 |
|
|
116 |
|
Compensatory
stock options expense |
|
|
123 |
|
|
87 |
|
Changes
in: |
|
|
|
|
|
|
|
Prepaid
expenses and other current assets |
|
|
(51 |
) |
|
81 |
|
Accounts
payable and accrued expenses |
|
|
(1,778 |
) |
|
152 |
|
Other
assets |
|
|
11 |
|
|
-- |
|
Deferred
revenue |
|
|
(61 |
) |
|
(134 |
) |
Net
cash used in operating activities |
|
|
(10,858 |
) |
|
(8,570 |
) |
Cash
flows from investing activities: |
|
|
|
|
|
|
|
Purchase
of property and equipment |
|
|
(118 |
) |
|
(580 |
) |
Restricted
cash |
|
|
9 |
|
|
-- |
|
Related
party loan payments received |
|
|
1 |
|
|
1 |
|
Purchases
of marketable securities |
|
|
(22,208 |
) |
|
-- |
|
Proceeds
from sales or maturity of marketable securities |
|
|
2,692 |
|
|
-- |
|
Net
cash used in investing activities |
|
|
(19,624 |
) |
|
(579 |
) |
Cash
flows from financing activities: |
|
|
|
|
|
|
|
Proceeds
from issuance of securities, net of expenses |
|
|
27,584 |
|
|
3,709 |
|
Purchase
of treasury stock |
|
|
-- |
|
|
(1,433 |
) |
Proceeds
from credit facility |
|
|
2,571 |
|
|
829 |
|
Equipment
financed through capital lease obligation |
|
|
225 |
|
|
279 |
|
Principal
payments under capital lease obligation |
|
|
(205 |
) |
|
(93 |
) |
Net
cash provided by financing activities |
|
|
30,175 |
|
|
3,291 |
|
Net
decrease in cash and cash equivalents |
|
|
(307 |
) |
|
(5,858 |
) |
Cash
and cash equivalents - beginning of period |
|
|
29,264 |
|
|
29,422 |
|
Cash
and cash equivalents - end of period |
|
$ |
28,957 |
|
$ |
23,564 |
|
Supplementary
disclosure of cash flows information: |
|
|
|
|
|
|
|
Interest
paid |
|
$ |
176 |
|
$ |
70 |
|
Non-cash
transactions: |
|
|
|
|
|
|
|
Class
H warrants issued/revalued |
|
|
-- |
|
|
(26 |
) |
Unrealized
loss on marketable securities |
|
|
(4 |
) |
|
-- |
|
Notes
to Consolidated Financial Statements (unaudited)
Note
1 - The Company and Basis of Presentation
The
Company
Discovery
Laboratories, Inc. is a biopharmaceutical company developing its proprietary
surfactant technology as Surfactant Replacement Therapies (SRT) for respiratory
diseases. Surfactants are produced naturally in the lungs and are essential for
breathing. Our technology produces a precisely engineered surfactant that is
designed to closely mimic the essential properties of natural human lung
surfactant. We believe that through this technology, pulmonary surfactants have
the potential, for the first time, to be developed into a series of respiratory
therapies for patients in the neonatal intensive care unit, critical care unit
and other hospital settings, where there are few or no approved therapies
available.
We have
received an Approvable Letter from the FDA for SurfaxinÒ
(lucinactant), our lead product, for the prevention of Respiratory Distress
Syndrome (RDS) in premature infants, and we have filed a Marketing Authorization
Application (MAA) with the European Medicines Evaluation Agency (EMEA) for
clearance to market Surfaxin in Europe. We are also conducting various clinical
programs to address Acute Respiratory Distress Syndrome (ARDS) in adults,
Bronchopulmonary Dysplasia (BPD) in premature infants, Neonatal Respiratory
Disorders in premature infants, asthma in adults and Meconium Aspiration
Syndrome (MAS) in full-term infants.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information in accordance with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normally recurring accruals) considered for fair presentation
have been included. Operating results for the three month period ended March 31,
2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2004.
All of
our current products under development are subject to license agreements that
will require the payment of future royalties.
Certain
prior period balances have been reclassified to conform to the current period
presentation.
Note
2 - Net Loss Per Share
Net loss
per share is computed based on the weighted average number of common shares
outstanding for the periods. Common shares issuable upon the exercise of options
and warrants are not included in the calculation of the net loss per share as
their effect would be anti-dilutive.
Note
3 - Stock Based Employee Compensation
The
Financial Accounting Standards Board (FASB) has issued Statement of Financial
Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation -
Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for
Stock-Based Compensation” to provide alternative methods of transition to a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on the reported results.
We continue to account for our stock option plans in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Options Issued to
Employees” and, accordingly, recognize compensation expense for the difference
between the fair value of the underlying common stock and the exercise price of
the options at the date of grant. The effect of applying SFAS No. 148 on pro
forma net loss is not necessarily representative of the effects on reported net
income or loss for future years due to, among other things, (i) the vesting
period of the stock options and (ii) the fair value of additional stock options
in future years. Had compensation costs for our stock option plans been
determined based upon the fair value of the options at the grant date of awards
under the plans consistent with the methodology prescribed under SFAS No. 148,
the pro forma net loss for the three months ended March 31, 2005 and 2004 would
have been as follows:
(in
thousands) |
|
Three
Months Ended
March
31, |
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Net
Loss as reported |
|
$ |
(9,316 |
) |
$ |
(8,872 |
) |
Additional
stock-based
employee
compensation |
|
|
(619 |
) |
|
-- |
|
Pro
forma Net Loss |
|
$ |
(9,935 |
) |
$ |
(8,872 |
) |
|
|
|
|
|
|
|
|
Pro
forma Net Loss per share |
|
$ |
(0.20 |
) |
$ |
(0.20 |
) |
In
December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based
Payment”. SFAS 123R requires stock-based employee compensation to be measured
based on the grant-date fair value of the award and the cost to be recognized
over the period during which an employee is required to provide service in
exchange for the award. SFAS 123R eliminates the alternative use of APB No. 25’s
intrinsic value method of accounting for awards that was provided in SFAS 123
as originally issued. Excess tax benefits, as defined by SFAS 123R, will be
recognized as an addition to paid-in-capital. We are in the process of
evaluating the impact of this standard on our financial statements and currently
expect to adopt SFAS 123R in the first quarter of 2006.
Note
4 - Comprehensive Loss
Total
comprehensive loss was $9.3 million and $8.9 million for the three months ended
March 31, 2005 and 2004, respectively.
Note
5 - Restricted Cash
We have
cash balances that are restricted as to use and disclose such amounts separately
on our balance sheets. The primary component of Restricted Cash is a security
deposit in the amount of $600,000 in the form of a letter of credit related to
the lease agreement dated May 26, 2004 for our office space in Bucks County,
Pennsylvania. The letter of credit is secured by cash and is recorded in our
balance sheets as “Restricted Cash”. Beginning in March 2008, the security
deposit and the letter of credit will be reduced to $400,000. That balance will
remain in effect through the remainder of the lease term. Subject to certain
conditions, upon expiration of the lease in November 2009, the letter of credit
will expire.
Note
6 - Note Receivable
Note
receivable pertains to a $200,000, 7% per annum mortgagor’s note due from one of
our executive officers. This note is secured by a mortgage agreement dated July
24, 2001. The note calls for monthly payments of principal and interest over a
360-month period. The principal balance outstanding at March 31, 2005 and
December 31, 2004 was approximately $192,000 and $193,000,
respectively.
Note
7 - Treasury Stock
Occasionally,
certain members of our management and certain consultants, pursuant to terms set
forth in our Amended and Restated 1998 Stock Incentive Plan, tender shares
of common stock held by such persons in lieu of cash for payment for the
exercise of certain stock options previously granted to such parties. These
shares are accounted for as treasury stock. There were no such shares tendered
to us during the three months ended March 31, 2005.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
“Management’s
Discussion and Analysis of Financial Condition and Results of Operation” should
be read in connection with our Consolidated Financial Statements.
Overview
Discovery
Laboratories, Inc. is a biopharmaceutical company developing its proprietary
surfactant technology as precision-engineered Surfactant Replacement Therapies
(SRT) for respiratory diseases. Surfactants are produced naturally in the lungs
and are essential for breathing. Our technology produces a precision-engineered
surfactant that is designed to mimic the essential properties of natural human
lung surfactant. We believe that through this technology, pulmonary surfactants
have the potential, for the first time, to be developed into a series of
respiratory therapies for patients in the neonatal intensive care unit (NICU),
critical care unit and other hospital settings, where there are few or no
approved therapies available.
We have
received an Approvable Letter from the U.S. FDA for SurfaxinÒ
(lucinactant), our lead product, for the prevention of RDS in premature infants,
and have filed a Marketing Authorization Application (MAA) with the European
Medical Evaluation Agency (EMEA) for clearance to market Surfaxin in Europe. We
anticipate potential approval and commercial launch of Surfaxin in the United
States and potential EMEA approval to occur in the first quarter of 2006.
In
addition to Surfaxin for the prevention of RDS in premature infants, we are
conducting several NICU therapeutic programs targeting respiratory conditions
cited as some of the most significant unmet medical needs for the neonatal
community. We are conducting three Phase 2 clinical trials - Surfaxin for the
treatment of Bronchopulmonary Dysplasia (BPD) in premature infants, aerosolized
SRT administered through nasal continuous positive airway pressure (nCPAP) for
Neonatal Respiratory Failures, and Surfaxin for the prophylactic/early treatment
of Meconium Aspiration Syndrome (MAS) in full term infants.
We are
also developing SRT to address unmet respiratory conditions affecting pediatric,
young adult and adult patients in the critical care and other hospital settings.
In this respect, we are conducting a Phase 2 clinical trial of Surfaxin for the
treatment of ARDS in adults in the intensive care unit (ICU), for which we
announced preliminary data in December 2004. We have completed a Phase 1b trial
of our precision-engineered lung surfactant delivered as an inhaled aerosol
(development name DSC-104) for patients who suffer from asthma. In addition, we
are evaluating the development of aerosolized formulations of our
precision-engineered SRT to potentially prevent or treat Acute Lung Injury, COPD
and rhinitis/sinusitis.
In
anticipation of the potential approval of Surfaxin for the prevention of RDS in
premature infants in the United States and other global markets, we are
presently implementing a long-term business strategy which
includes:
(i) |
manufacturing
for the production of our precision-engineered surfactant drug products to
meet anticipated clinical and commercial needs, if approved, in the United
States, Europe and other markets. We are investing in the further
development and scale-up of the current contract manufacturer of our SRT,
Laureate Pharma, Inc. (Laureate), and securing additional manufacturing
capabilities to meet production needs as they expand, including
alternative contract manufacturers and building our own manufacturing
facility. In January 2005, the FDA issued an inspection report (FDA
Form-483) to Laureate citing certain observations concerning Laureate’s
compliance with current Good Manufacturing Practices (cGMPs) in connection
with the FDA’s review of our NDA for Surfaxin for the prevention of RDS in
premature infants. The general focus of the inspection observations
relates to basic quality controls, process assurances and documentation
requirements to support the commercial production process. In response, we
and Laureate submitted a cGMP Action Plan to the FDA on January 31, 2005,
outlining corrective measures anticipated to be completed by July 2005.
Assuming the adequacy of such corrective actions and the approval of the
NDA, we anticipate that the commercial launch of Surfaxin will occur in
the first quarter of 2006. Our other clinical programs currently in
progress are not affected by this inspection report and remain on track.
However, if the inspection observations noted in the FDA Form-483 are not
resolved in the time period stated above, a delay may occur in these
programs. We do not expect that the foregoing will have an effect on our
European regulatory filings; |
(ii) |
building
sales and marketing capabilities to execute the launch of Surfaxin in the
United States, if approved. We are building our own specialty pulmonary
United States sales and marketing organization to focus initially on
opportunities in the NICU and, as products are developed, to expand to
critical care and hospital settings. This strategic initiative, led by the
anticipated launch of Surfaxin, is intended to allow us to manage and
administer our own sales and marketing operation, establish a strong
presence in the NICU and optimize company economics;
and |
(iii) |
securing
corporate partnerships for the development and potential commercialization
of SRT, including Surfaxin, in Europe and the rest of the
world. |
Since our
inception, we have incurred significant losses and, as of March 31, 2005, had an
accumulated deficit of $152.4 million (including historical results of
predecessor companies). The majority of our expenditures to date have been for
research and development activities. Research and development expenses represent
costs incurred for scientific and clinical personnel, clinical trials,
regulatory filings and manufacturing efforts (including raw material costs). We
expense research and development costs as they are incurred. Selling, general
and administrative expenses consist primarily of executive management,
financial, business development, pre-launch commercialization sales and
marketing, legal and general corporate activities and related expenses. See
“Plan of Operations.”
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings and strategic collaborations. As of March
31, 2005, we had (i) cash and investments of $51.8 million, (ii) a secured
revolving credit facility of $8.5 million with PharmaBio, of which the entire
amount was outstanding and (iii) a $9.0 million capital equipment lease
financing arrangement with General Electric Capital Corporation (GECC), of which
$7.5 million was available for borrowing, $3.3 million has been drawn, and $2.5
million was outstanding. We also had up to $67.8 million available under the
Committed Equity Financing Facility (CEFF) from Kingsbridge Capital Ltd.
(Kingsbridge). In connection with a registered direct public offering we
conducted in February 2005, we entered into a Placement Agent Agreement with SG
Cowen & Co. LLC (SG Cowen) on February 18, 2005. Pursuant to such agreement,
we agreed not to access funds under the CEFF until May 26, 2005, or in an amount
greater than $5.0 million for an additional 90-day period
thereafter.
Research
and Development
Research
and development expenses for the three months ended March 31, 2005 and 2004 were
$5.1 million and $6.7 million, respectively. Research and development expenses
are charged to operations as incurred and we track such costs by category rather
than by project. Research and development costs consist primarily of expenses
associated with research and pre-clinical operations, manufacturing development,
clinical and regulatory operations and other direct clinical trials activities.
These
cost categories typically include the following expenses:
Research
and Pre-Clinical Operations
Research
and pre-clinical operations reflect activities associated with research prior to
the initiation of any potential human clinical trials. These activities
predominantly represent projects associated with the development of aerosolized
and other related formulations of our precision-engineered lung surfactant and
engineering of aerosol delivery systems to potentially treat a range of
respiratory disorders prevalent in the NICU and the hospital. Research and
pre-clinical operations costs primarily reflect expenses incurred for personnel,
consultants, facilities and research and development arrangements with
collaborators.
Manufacturing
Development
Manufacturing
development primarily reflects costs incurred to prepare current good
manufacturing procedures (cGMP) manufacturing capabilities in order to provide
clinical and commercial scale drug supply. Manufacturing development activities
include external contract manufacturing resources (as well as further
development and scale-up of our current contract manufacturer of SRT, Laureate
and securing additional manufacturing capabilities to meet production needs as
they expand, including alternative contract manufacturers and building our own
manufacturing facility), personnel costs, depreciation and expenses associated
with technology transfer, process development and validation, quality control
and assurance activities and analytical services.
Unallocated
Development -- Clinical and Regulatory Operations
Clinical
and regulatory operations reflect the preparation, implementation and management
of our clinical trial activities in accordance with current good clinical
practices (cGCPs). Included in unallocated clinical development and regulatory
operations are costs associated with personnel, supplies, facilities, fees to
consultants and other related costs for clinical trial implementation and
management, clinical quality control and regulatory compliance activities, data
management and biostatistics.
Direct
Expenses -- Clinical Trials
Direct
expenses of clinical trials includes patient enrollment costs, external site
costs, expense of clinical drug supply and external costs such as contract
research consultant fees and expenses.
The
following summarizes our research and development expenses by the foregoing
categories for the three months ended March 31, 2005 and 2004:
(
in thousands) |
|
Three
Months Ended
March
31, |
|
Research
and Development Expenses: |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Research
and pre-clinical operations |
|
$ |
929 |
|
$ |
651 |
|
Manufacturing
development |
|
|
1,390 |
|
|
1,734 |
|
Unallocated
development - clinical and regulatory operations |
|
|
1,639 |
|
|
2,233 |
|
Direct
clinical trial expenses |
|
|
1,162 |
|
|
2,092 |
|
Total
Research and Development Expenses |
|
$ |
5,120 |
|
$ |
6,710 |
|
Due to
the significant risks and uncertainties inherent in the clinical development and
regulatory approval processes, the nature, timing and costs of the efforts
necessary to complete projects in development are not reasonably estimable.
Results from clinical trials may not be favorable. Data from clinical trials are
subject to varying interpretation and may be deemed insufficient by the
regulatory bodies reviewing applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.
Currently,
none of our drug product candidates are available for commercial sale. All of
our potential products are in regulatory review, clinical or pre-clinical
development and the status and anticipated completion date of each of our lead
SRT programs is discussed above. Successful completion of development of our
Surfactant Replacement Therapies is contingent on numerous risks, uncertainties
and other factors, which are described in detail in the section entitled “Risks
Related to Our Business.”
These
factors include:
· |
Completion
of pre-clinical and clinical trials of the product candidate with the
scientific results that support further development and/or regulatory
approval; |
· |
Receipt
of necessary regulatory approvals; |
· |
Obtaining
adequate supplies of surfactant raw materials on commercially reasonable
terms; |
· |
Obtaining
capital necessary to fund our operations, including our research and
development efforts, manufacturing requirements and clinical
trials; |
· |
Performance
of third-party collaborators on whom we rely for the commercialization and
manufacture of Surfaxin; |
· |
Timely
resolution of the cGMP-related matters at Laureate, the contract
manufacturer for Surfaxin and certain other Surfactant Replacement
Therapies presently under development, that were noted by the FDA in its
inspectional report on FDA Form-483; and |
· |
Obtaining
manufacturing and sales and marketing capabilities for which we presently
have limited resources. |
As a
result of the amount and nature of these factors, many of which are outside our
control, the success, timing of completion, and ultimate cost, of development of
any of our product candidates is highly uncertain and cannot be estimated with
any degree of certainty. The timing and cost to complete drug trials alone may
be impacted by, among other things:
· Slow
patient enrollment;
· Long
treatment time required to demonstrate effectiveness;
· Lack of
sufficient clinical supplies and material;
· Adverse
medical events or side effects in treated patients;
· Lack of
effectiveness of the product candidate being tested; and
· Lack of
sufficient funds.
If we do
not successfully complete clinical trials, we will not receive regulatory
approval to market our SRT products. If we do not obtain and maintain regulatory
approval for our products, we will not generate any revenues from the sale of
our products and our value, financial condition and results of operations will
be substantially harmed.
Corporate
Partnership Agreements
Quintiles
Transnational Corp. and PharmaBio Development Inc.
In 2001,
we entered into a commercialization agreement with Quintiles Transnational Corp.
(Quintiles), and its strategic investment group affiliate, PharmaBio Development
Inc. (PharmaBio), to provide certain commercialization services in the United
States for Surfaxin for the prevention of RDS in premature infants and the
treatment of MAS in full-term infants.
In
November 2004, we reached an agreement with Quintiles to restructure our
business arrangements and terminate the commercialization agreement for Surfaxin
in the United States. We now have full commercialization rights for Surfaxin in
the United States. Pursuant to the restructuring, Quintiles is no longer
obligated to provide any commercialization services and our obligation to pay a
commission on net sales in the United States of Surfaxin for the prevention of
RDS in premature infants and the treatment of MAS to Quintiles has been
terminated.
In
connection with our arrangement to regain full commercialization rights for
Surfaxin, we issued warrants to PharmaBio to purchase 850,000 shares of common
stock at an exercise price equal to $7.19 per share. The warrants have a 10-year
term and shall be exercisable for cash only with expected total proceeds to us,
if exercised, equal to approximately $6.0 million. The warrants were valued at
their fair value on the date of issuance and we incurred a non-cash charge equal
to $4.0 million in connection with the issuance. The existing secured revolving
credit facility of $8.5 million with PharmaBio, will remain available and the
original maturity date of December 10, 2004 is now extended until December 31,
2006. See “Liquidity and Capital Resources.”
Laboratorios
del Dr. Esteve, S.A.
In 1999,
we entered into a corporate partnership with Laboratorios del Dr. Esteve, S.A.
(Esteve), to develop, market and sell Surfaxin, primarily in southern Europe. In
2002, we significantly expanded our relationship with Esteve by entering into a
new collaboration arrangement, which superseded the 1999 agreement, and expanded
the territory covered by those original agreements to all of Europe, Central and
South America, and Mexico. Esteve was obligated to provide certain
commercialization services for Surfaxin for the prevention of RDS in premature
infants, the treatment of MAS in full-term infants and the treatment of ARDS in
adult patients. Our exclusive supply agreement with Esteve provided that Esteve
would purchase all of its Surfaxin drug product requirements at an established
transfer price based on sales of Surfaxin by Esteve and/or its sublicensee(s).
Esteve also agreed to sponsor certain clinical trial costs related to obtaining
regulatory approval in Europe for ARDS and make certain milestone payments to us
upon the attainment of European marketing regulatory approval for Surfaxin. In
connection with the 2002 expanded agreement, Esteve purchased 821,862 shares of
common stock at $4.867 per share for $4.0 million in gross proceeds and paid a
non-refundable licensing fee of $500,000. We have accounted for the license fees
and reimbursement of research and development expenditures associated with the
Esteve collaboration as deferred revenue.
In
December 2004, we reached an agreement with Esteve to restructure our corporate
partnership for the development, marketing and sales of our products in Europe
and Latin America. This restructured partnership supersedes the existing
sublicense and supply agreements we had entered into with Esteve in March 2002.
Under the revised partnership, we regained full commercialization rights in key
European markets, Central America and South America for SRT, including Surfaxin
for the prevention of RDS in premature infants and the treatment of ARDS in
adults. Esteve will focus on Andorra, Greece, Italy, Portugal, and Spain, and
now has development and marketing rights to a broader portfolio of potential SRT
products. Under the restructured collaboration, Esteve will pay us a transfer
price on sales of Surfaxin and other SRT that is increased from those provided
for in the previous collaborative arrangement. We will be responsible for the
manufacture and supply of all of the covered products and Esteve will be
responsible for all sales and marketing in the revised territory. Esteve has
agreed to make stipulated cash payments to us upon its achievement of certain
milestones, primarily upon receipt of marketing regulatory approvals for the
covered products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the revised territory.
In
consideration for regaining commercial rights in the 2004 restructured
partnership, we issued to Esteve 500,000 shares of common stock for no cash
consideration, valued at $3.5 million. We incurred a non-cash charge, including
the value of the shares issued and other costs related to the restructuring, of
$4.1 million. We also granted to Esteve rights to additional potential SRT
products in our pipeline, and also agreed to pay to Esteve 10% of cash up-front
and milestone fees that we may receive in connection with any future strategic
collaborations for the development and commercialization of Surfaxin for RDS,
ARDS or certain of other SRTs in the territory for which we had previously
granted a license to Esteve. Payments to Esteve in respect of any such up-front
and milestone fees are not to exceed $20 million in the aggregate.
Plan
of Operations
We expect
to continue to incur increasing operating losses for the foreseeable future,
primarily due to our continued research and development activities attributable
to new and existing products, manufacturing, commercialization, and selling,
general and administrative activities.
We
anticipate that during the next 12 to 24 months we will:
(i) |
increase
research, development and regulatory activities in an effort to develop a
broad pipeline of potential SRT for respiratory diseases. The drug
development, clinical trial and regulatory process is lengthy, expensive
and uncertain and subject to numerous risks including, without limitation,
the following risks discussed in “Risks Related to Our Business” - “Our
technology platform is based solely on our proprietary,
precision-engineered surfactant technology. Ongoing clinical trials for
our lead surfactant replacement therapies may be delayed, or fail, which
will harm our business;” - “The clinical trial and regulatory approval
process for our products is expensive and time consuming, and the outcome
is uncertain.” |
Our major
research and development projects include:
SRT
for Neonatal Intensive Care Unit
We have
received an Approvable Letter from the FDA for Surfaxin for the prevention of
RDS in premature infants, and have filed an MAA with the EMEA for clearance to
market Surfaxin in Europe. We anticipate potential approval and commercial
launch of Surfaxin in the United States and potential EMEA approval to occur in
the first quarter of 2006. Activities associated with our regulatory filings
with the FDA and EMEA are ongoing.
In order
to address the most prevalent respiratory disorders affecting infants in the
NICU, we are
conducting several NICU therapeutic programs targeting respiratory conditions
cited as some of the most significant unmet medical needs for the neonatal
community. These programs include three Phase 2 clinical trials -
Surfaxin for
the treatment of BPD in premature infants, aerosolized SRT administered through
nasal continuous positive airway pressure (nCPAP) for Neonatal Respiratory
Failures and Surfaxin for the prophylactic/early treatment of MAS in full term
infants.
The Phase
2 BPD clinical trial is a double-blind, controlled trial (that will enroll up to
210 very low birth weight premature infants born at risk for developing BPD) to
determine the safety and tolerability of Surfaxin administration in the first
weeks of life as a therapeutic approach for the prevention of BPD. This study is
designed to determine whether such treatment can decrease the proportion of
infants on mechanical ventilation or oxygen or the incidence of death or BPD.
The results of this trial are expected to be available in the first quarter of
2006.
We are
currently conducting an open label, Phase 2, multicenter pilot study to evaluate
aerosolized SRT delivered via nCPAP in premature infants. This trial will be
conducted at up to four centers in the United States and will enroll
approximately 20 infants with a gestational age of 28-32 weeks who are suffering
from RDS. Patients will receive, in two treatment regimens, aerosolized SRT
delivered via nCPAP within thirty minutes of birth. The overall program is to
begin with a pilot study to evaluate the safety and tolerability of aerosolized
SRT delivered via our proprietary nCPAP technology, initially within patients
who suffer from RDS followed by additional studies to include other neonatal
respiratory failures within the NICU. Results of this Phase 2 pilot study are
anticipated to be available in the third quarter of 2005.
We are
conducting a Phase 2 clinical trial of our proprietary Surfaxin lavage in
up to 60 full-term infants for use as a prophylactic or early treatment for
patients who are at risk of developing MAS but have not shown symptoms of
compromised respiratory function. Surfaxin is
administered as a liquid bolus through an endotracheal tube as well as by our
proprietary lavage (lung-wash) technique.
SRT
for Critical Care and Hospital Indications
In an
effort to address unmet respiratory conditions affecting pediatric, young adult
and adult patients in the critical care and other hospital settings, we are
conducting a Phase 2 clinical trial for the treatment of ARDS in adults in the
intensive care unit (ICU). The Phase 2 protocol was modified to better establish
the endpoint signal in key clinical outcomes in order to properly power and
design a potential Phase 3 clinical trial. The modified protocol allows for
increased enrollment of up to 160 patients. The remainder of the trial will be
comprised of Surfaxin Dose Group B (lavage and bolus) and Standard of Care.
Results of the Phase 2 trial are anticipated to be available in the first
quarter of 2006.
During
2004, we completed a successful Phase 1b clinical trial intended to evaluate the
tolerability and lung deposition of our precision-engineered SRT, delivered as
an inhaled aerosol (development name DSC-104), to treat patients with
mild-persistent asthma. We are preparing to initiate a Phase 2 clinical trial of
DSC-104 to treat patients with moderate to severe asthma in the fourth quarter
of 2005.
We are
also evaluating the development of aerosolized formulations of our
precision-engineered surfactant to potentially prevent or treat ALI, COPD,
rhinitis, sinusitis, sleep apnea and otitis media (inner ear
infection);
(ii) |
invest
in and support a long-term manufacturing strategy for the production of
our precision-engineered surfactant drug product including: (i) corrective
measures related to the observations cited by the FDA concerning our
current contract manufacturer, Laureate, and its compliance with cGMPs in
connection with the FDA’s review of our NDA for Surfaxin for the
prevention of RDS in premature infants; (ii) further development and
scale-up of the Laureate facility; (iii) securing additional manufacturing
capabilities to meet production needs as they expand, including
alternative contract manufacturers and building our own manufacturing
facility. We anticipate that our manufacturing capabilities through
Laureate, upon successful completion and implementation of its cGMP Action
Plan dated January 31, 2005, should allow sufficient commercial production
of Surfaxin, if approved, to supply the present worldwide demand for the
prevention of RDS in premature infants and all of our anticipated
clinical-scale production requirements including Surfaxin for the
treatment of ARDS in adults. See “Risks Related to Our Business” - “In
order to conduct our clinical trials we need adequate supplies of our drug
substance and drug product which may not be readily available” and “If the
parties we depend on for manufacturing our pharmaceutical products do not
timely supply these products, it may delay or impair our ability to
develop and market our products;” |
(iii) |
build
our sales and marketing capabilities to execute the launch of Surfaxin in
the United States, if approved. We are building our own specialty
pulmonary United States sales and marketing organization to focus
initially on opportunities in the NICU and, as products are developed, to
expand to critical care and hospital settings. This strategic initiative,
led by the anticipated launch of Surfaxin, is intended to allow us to
fully control our own sales and marketing operation, establish a strong
presence in the NICU and optimize company economics;
|
(iv) |
implement
our commercialization strategy for Surfaxin in Europe and the rest of the
world through corporate partnerships; and |
(v)
|
invest
in additional general and administrative resources primarily to support
our business development initiatives, financial systems and controls and
management information technologies. |
We will
need to generate significant revenues from product sales and or related
royalties and transfer prices to achieve and maintain profitability. Through
March 31, 2005, we had no revenues from any product sales, and had not achieved
profitability on a quarterly or annual basis. Our ability to achieve
profitability depends upon, among other things, our ability to develop products,
obtain regulatory approval for products under development and enter into
agreements for product development, manufacturing and commercialization. In
addition, our results are dependent upon the performance of our strategic
partners and third party contract manufacturers and suppliers. Moreover, we may
never achieve significant revenues or profitable operations from the sale of any
of our products or technologies.
Through
December 31, 2004, we had not generated taxable income. On December 31, 2004,
net operating losses available to offset future taxable income for Federal tax
purposes were approximately $140.7 million. The future utilization of such loss
carryforwards may be limited pursuant to regulations promulgated under Section
382 of the Internal Revenue Code. In addition, we have a research and
development tax credit carryforward of $2.6 million at December 31, 2004. The
Federal net operating loss and research and development tax credit carryforwards
expire beginning in 2008 and continuing through 2023.
Results
of Operations
The net
loss for the periods ended March 31, 2005 and 2004 were $9.3 million (or $0.18
per share) and $8.9 million (or $0.20 per share), respectively.
Revenue
Revenue
for the three months ended March 31, 2005 and 2004 was $61,000 and $142,000,
respectively. This revenue is primarily associated with our corporate
partnership agreement with Esteve to develop, market and sell Surfaxin in
Southern Europe, as was in effect during such periods. The decrease in revenue
is due to the extension of the amortization period as a result of the adjusted
timelines for the anticipated FDA approval for Surfaxin, and related revenue
recognition of the funding previously provided to us in connection with our
corporate partnership with Esteve.
Research
and Development Expenses
Research
and development expenses for the three months ended March 31, 2005 and 2004 were
$5.1 million and $6.7 million, respectively.
The
research and development expenses for the three months ended March 31, 2005 and
2004 primarily reflect:
(i) |
manufacturing
activities, including manufacturing personnel costs to support further
development and scale-up of our current contract manufacturer, Laureate
and securing additional manufacturing capabilities to meet production
needs as they expand, including alternative contract manufacturers and
building our own manufacturing facility. Expenses related to manufacturing
activities were $1.4 million and $1.7 million for the three months ended
March 31, 2005 and 2004, respectively. Included in manufacturing
activities for the three months ended March 31, 2005 were primarily costs
associated with our participation in corrective measures taken as a
response to an inspection report from the FDA to Laureate. Included in
manufacturing activities for the three months ended March 31, 2004 were
expenses associated with the transfer (completed in 2004) and validation
of our manufacturing equipment to Laureate to support the production of
clinical and commercial drug supply of Surfaxin in conformance with cGMPs;
and |
(ii)
|
research
and development expenses, excluding manufacturing activities, of $3.7
million and $5.0 million for the three months ended March 31, 2005 and
2004, respectively. For the three months ended March 31, 2005, research
and development activities primarily reflect regulatory activities for
Surfaxin for the prevention of RDS in premature infants (associated with
our FDA Approvable Letter and regulatory activities for the MAA filed with
the EMEA in Europe), clinical activities related to our Phase 2 clinical
trials for ARDS, BPD and nCPAP. Additionally, such costs include product
development of our aerosol SRT programs. For the three months ended March
31, 2004, research and development activities were primarily associated
with clinical and regulatory activities for Surfaxin for the prevention of
RDS in premature infants (principally the NDA filing) and investment in
our SRT pipeline. |
General
and Administrative Expenses
General
and administrative expenses for the three months ended March 31, 2005 and
2004 were $4.3
million and $2.3 million, respectively. General and administrative expenses
consist primarily of the costs of executive management, finance and accounting,
business and commercial development, pre-launch commercial sales and marketing,
legal, facility and other administrative costs.
The
general and administrative expenses for the three months ended March 31, 2005
and 2004 primarily
reflect:
(i) |
commercialization
activities, including building a sales and marketing senior management
team and activities to support medical affairs as well as medical science
liaisons, in anticipation of the launch of Surfaxin for the prevention of
RDS in premature infants in the United States and Europe, if approved.
Expenses for commercialization activities for the three months ended March
31, 2005 and 2004 were $2.4 million and $936,000, respectively;
and |
(ii) |
general
and administrative expenses, excluding commercialization activities, of
$1.9 million and $1.3 million for the three months ended March 31, 2005
and 2004, respectively. These expenses include financial and information
technology capabilities in preparation for the potential approval and
launch of Surfaxin for the prevention of RDS in premature infants,
executive management and support infrastructure, legal activities related
to the preparation and filing of patents in connection with the expansion
of our SRT pipeline, facilities related costs to accommodate current and
prepare for future growth, and corporate governance initiatives to comply
with the Sarbanes-Oxley Act. |
Other
Income/(Expense)
Other
income/(expense) for the three months ended March 31, 2005 and 2004 was $13,000
and $(23,000), respectively.
Interest
income for the three months ended March 31, 2005 and 2004 was $214,000 and
$63,000, respectively. The
increase is primarily due to a higher average cash, cash equivalent and
marketable securities balance and a general increase in earned market interest
rates.
Interest
expense for the three months ended March 31, 2005 and 2004 was $201,000 and
$86,000, respectively. The increase is primarily due to interest expense
associated with our credit facility and capital lease financing arrangements.
See “Liquidity and Capital Resources.”
Liquidity
and Capital Resources
Cash,
Cash Equivalents and Marketable Securities
As of
March 31, 2005, we had cash, cash equivalents, restricted cash and marketable
securities of $51.8 million as compared to $32.7 million as of December 31,
2004. In February 2005, we completed a registered direct public offering of
5,060,000 shares of its common stock. The shares were priced at $5.75 per share
resulting in the receipt of gross and net proceeds equal to $29.1 million and
$27.5 million, respectively. Excluding proceeds from this public offering, net
cash used in the first quarter of 2005 was $8.4 million. Cash used in operating
and investing activities during the quarter was $11.0 million, offset by $2.6
million accessed under our secured credit facility from PharmaBio.
Committed
Equity Financing Facility (CEFF)
We have a
CEFF with Kingsbridge, pursuant to which Kingsbridge is committed to finance up
to $75.0 million of capital to support our future growth, which expires in
October 2007. Subject to certain conditions and limitations, from time to time
under the CEFF, we may require Kingsbridge to purchase newly-issued shares of
its common stock at a discount between 6% and 10% of the volume weighted average
price of its common stock and thus raise capital as required, at the time, price
and in amounts deemed suitable to us. During the first quarter of 2005, we did
not raise capital under the CEFF. As of March 31, 2005, $67.8 million remains
available under the CEFF.
In
connection with a registered direct public offering we conducted in February
2005, we entered into a Placement Agent Agreement with SG Cowen pursuant to
which we agreed not to access funds under the CEFF until May 26, 2005, or in an
amount greater than $5.0 million for an additional 90-day period
thereafter.
Secured,
Revolving Credit Facility and Capital Lease Arrangement
Secured
Credit Facility with Quintiles
We have
an $8.5 million secured credit facility with PharmaBio, Quintiles’ strategic
investment group affiliate. Interest is paid quarterly in arrears at a rate
equal to 8% annually. During the first quarter of 2005, we accessed the
remaining $2.6 million available under the credit facility and currently the
entire $8.5 million is outstanding and is due in December 2006.
Capital
Lease Financing Arrangement with GECC
We have a
capital lease financing arrangement with the Life Science and Technology Finance
Division of GECC. Under this arrangement, we purchase capital equipment,
including manufacturing, information technology systems, laboratory, office and
other related capital assets and subsequently finance those purchases through
this capital lease financing arrangement. This arrangement provides us with
financing for up to $9.0 million, of which $1.5 million is contingent upon FDA
approval of Surfaxin for the prevention of RDS in premature infants. The funds
may be drawn down through September 2005. Laboratory
and manufacturing equipment is leased over 48 months with an interest rate equal
to 9.39% per annum and all other equipment is leased over 36 months with an
interest rate equal to 9.63% per annum. During
the first quarter of 2005, we used $225,000 under the capital lease financing
arrangement. As of March 31, 2005, we had used $3.3 million of the financing
available under the line of credit and, after giving effect to principal
payments, $2.5 million was outstanding. As of March 31, 2005, $4.2 million was
available under the capital lease financing arrangement.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania and California.
We
maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594
square feet and serves as the main operating facility for clinical development,
regulatory, sales and marketing and administration. The lease expires in
February 2010 with total aggregate payments of $4.6 million.
We also
lease approximately 14,000 square feet of office and laboratory space in
Doylestown, Pennsylvania. We maintain the Doylestown facility for the
continuation of analytical laboratory activities under a lease that expires in
August 2005.
We lease
office and laboratory space in Mountain View, California. The facility is 16,800
square feet and houses our aerosol development operations. The lease expires in
June 2008 with total aggregate payments of $804,000.
Prior to
leasing the Mountain View facility, we subleased office and laboratory space in
Redwood City, California. The facility was approximately 5,000 square feet and
housed the aerosol development operations. In December 2004, we vacated the
Redwood City facility and moved to the Mountain View facility. In February 2005,
the sublease agreement for the Redwood City facility was terminated.
Working
Capital
We
believe our current working capital is sufficient to meet planned activities
into 2006, before taking into account any amounts that may be available through
the use of the CEFF. In connection with the registered direct public offering we
conducted in February 2005, we entered into a Placement Agent Agreement with SG
Cowen pursuant to which we agreed not to offer to sell any additional shares of
common stock until May 29, 2005 without the consent of SG Cowen, subject to
certain exceptions contained therein. Pursuant to the Placement Agent Agreement,
we also agreed to not access funds under the CEFF until May 26, 2005, or in an
amount greater than $5.0 million for an additional 90-day period
thereafter.
We will
need additional financing from investors or collaborators to complete research
and development and commercialization of our current product candidates under
development. Working capital requirements will depend upon numerous factors,
including, without limitation, the progress of research and development
programs, clinical trials, timing and cost of obtaining regulatory approvals,
timing and cost of sales and marketing activities, levels of resources that we
devote to the development of manufacturing and marketing capabilities,
technological advances, status of competitors, ability to establish
collaborative arrangements with other organizations, the ability to defend and
enforce intellectual property rights and the establishment of additional
strategic or licensing arrangements with other companies or
acquisitions.
Historically,
our working capital has been provided from the proceeds of private financings
and strategic alliances:
We have a
shelf registration statement filed with the SEC for the proposed offering from
time to time of shares of common stock. In February 2005, we completed a
registered direct public offering of 5,060,000 shares of common stock at $5.75
per share, resulting in gross proceeds of $29.1 million. There are currently
708,592 shares reserved for potential future issuance under the shelf
registration statement.
In
December 2004, we entered into a financing pursuant to the CEFF resulting in
proceeds of $7.2 million from the issuance of 901,742 shares at an average price
of $7.98, after taking into account the applicable discount rate provided for by
the CEFF.
In April
2004, we completed an underwritten registered direct public offering of 2.2
million shares of common stock priced at $11.00 per share pursuant to the shelf
registration statement, resulting in gross and net proceeds of $24.2 million and
$22.8 million, respectively.
We will
require substantial additional funding to conduct our business, including our
expanded research and product development activities and establishment of
commercialization resources. Based on our current operating plan, we believe
that our currently available resources, including amounts that may be available
under our CEFF with Kingsbridge and our capital lease financing arrangement with
General Electric Capital Corporation, will be adequate to satisfy our capital
needs into 2006. Our future capital requirements will depend on the results of
our manufacturing activities, research and development activities, clinical
studies and trials, competitive and technological advances and the regulatory
process. Our operations will not become profitable before we exhaust our current
resources; therefore, we will need to raise substantial additional funds through
additional debt or equity financings or through collaborative ventures with
potential corporate partners.
We may,
in some cases, elect to develop products on our own instead of entering into
collaboration arrangements and this would increase our cash requirements. Other
than our credit facility with PharmaBio, our CEFF with Kingsbridge and our
capital lease financing arrangement with General Electric Capital Corporation,
we have not entered into any additional arrangements to obtain additional
financing. The sale of additional equity and debt securities may result in
additional dilution to our shareholders, and we cannot be certain that
additional financing will be available in amounts or on terms acceptable to
them, if at all. If we fail to enter into collaborative ventures or to receive
additional funding, we may have to reduce significantly the scope of or
discontinue our planned research, development and commercialization activities,
which could significantly harm our financial condition and operating results.
Furthermore, we could cease to qualify for listing of common stock on the NASDAQ
National Market if the market price of our common stock declines as a result of
the dilutive aspects of such potential financings. See “Risks
Related to Our Business” - “We will need additional capital, and our ability to
continue all of our existing planned research and development activities is
uncertain. Any additional financing could result in equity dilution;” “ - The
market price of our stock may be adversely affected by market volatility;” and “
- - A substantial number of our securities are eligible for future sale and this
could affect the market price for our stock and our ability to raise
capital.”
Risks
Related to Our Business
The
following risks, among others, could cause our actual results, performance,
achievements or industry results to differ materially from those expressed in
our forward-looking statements contained herein and presented elsewhere by
management from time to time.
Because
we are a biopharmaceutical company, we may not successfully develop and market
our products, and even if we do, we may not generate enough revenue or become
profitable.
We are a
biopharmaceutical company, therefore, you must evaluate us in light of the
uncertainties and complexities present in such companies. We currently have no
products approved for marketing and sale and are conducting research and
development on our product candidates. As a result, we have not begun to market
or generate revenues from the commercialization of any of our products. Our
long-term viability will be impaired if we are unable to obtain regulatory
approval for, or successfully market, our product candidates.
To date,
we have only generated revenues from investments, research grants and
collaborative research and development agreements. We will need to engage in
significant, time-consuming and costly research, development, pre-clinical
studies, clinical testing and regulatory approval for our products under
development prior to their commercialization. In addition, pre-clinical or
clinical studies may show that our products are not effective or safe for one or
more of their intended uses. We may fail in the development and
commercialization of our products. As of March 31, 2005, we have an accumulated
deficit of approximately $152.4 million and we expect to continue to incur
significant increasing operating losses over the next several years. If we
succeed in the development of our products, we still may not generate sufficient
or sustainable revenues or we may not be profitable.
Our
technology platform is based solely on our proprietary precision-engineered,
surfactant technology. Our ongoing clinical trials for our lead surfactant
replacement technologies may be delayed, or fail, which will harm our
business.
Our
precision-engineered surfactant platform technology is based on the scientific
rationale of SRT to treat life threatening respiratory disorders and as the
foundation for the development of novel respiratory therapies and products. Our
business is dependent upon the successful development and approval of our
product candidates based on this platform technology. We have received an
Approvable Letter from the FDA for Surfaxin, our lead product, for the
prevention of RDS in premature infants, and have filed an MAA with the EMEA for
clearance to market Surfaxin in Europe. The Approvable Letter from the FDA
contains conditions that Discovery must meet in order to obtain approval and
they primarily involve finalizing labeling and correcting previously reported
manufacturing issues.
Currently,
we are conducting a Phase 2 clinical trial for the treatment of ARDS in adults
and a Phase 2 trial for the prevention of MAS in full-term infants. We have
initiated a Phase 2 clinical trial using aerosolized SRT via nCPAP to
potentially treat premature infants in the NICU suffering from Neonatal
Respiratory Failures, a Phase 2 clinical trial using Surfaxin for the prevention
of BPD, and are preparing to initiate a Phase 2 trial using DSC-104 to treat
patients with asthma.
Companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after obtaining promising results in
earlier trials. Data obtained from tests are susceptible to varying
interpretations which may delay, limit or prevent regulatory approval. In
addition, we may be unable to enroll patients quickly enough to meet our
expectations for completing any or all of these trials. The timing and
completion of current and planned clinical trials of our product candidates
depend on, among other factors, the rate at which patients are enrolled, which
is a function of many factors, including:
—the
number of clinical sites;
—the size
of the patient population;
—the
proximity of patients to the clinical sites;
—the
eligibility criteria for the study;
—the
existence of competing clinical trials; and
—the
existence of alternative available products.
Delays in
patient enrollment in clinical trials may occur, which would likely result in
increased costs, program delays or both.
If
the parties we depend on for manufacturing our pharmaceutical products do not
timely supply these products, it may delay or impair our ability to develop and
market our products.
We rely
on outside manufacturers for our drug substance and other active ingredients for
Surfaxin and to produce material that meets appropriate standards for use in
clinical studies of our products. Presently, Laureate is our sole clinical
manufacturing facility that has been qualified to produce appropriate clinical
grade material of our drug product for use in our ongoing clinical studies.
In
January 2005, the FDA issued an inspection report (FDA Form-483) to Laureate,
citing certain observations concerning Laureate’s compliance with current cGMPs
in connection with the FDA’s review of our NDA for Surfaxin for the prevention
of RDS in premature infants. The general focus of the inspection observations
relates to basic quality controls, process assurances and documentation
requirements to support the commercial production process. In response, a cGMP
Action Plan was submitted to the FDA on January 31, 2005, outlining corrective
measures anticipated to be completed by July 2005. Assuming the adequacy of such
corrective actions and the approval of our NDA for Surfaxin, we anticipate that
the commercial launch of Surfaxin will occur in the first quarter of 2006. We
anticipate that our manufacturing capabilities through Laureate, upon successful
completion and implementation of our Action Plan should allow sufficient
commercial production of Surfaxin, if approved, to supply the present worldwide
demand for the prevention of RDS in premature infants and our other Surfactant
Replacement Therapies for our planned clinical trials. If the FDA does not
accept the cGMP Action Plan, or we or Laureate do not adequately address the
initiatives set forth therein, the FDA may delay its approval of our NDA for
Surfaxin or reject our NDA. Any delay in the approval of the NDA, or the
rejection thereof, will have a material adverse effect on our
business.
Laureate
or other outside manufacturers may not be able to (i) produce our drug substance
or drug product to appropriate standards for use in clinical studies, (ii)
comply with remediation activities set forth in the cGMP Action Plan (iii)
perform under any definitive manufacturing agreements with us or (iv) remain in
the contract manufacturing business for a sufficient time to successfully
produce and market our product candidates. If we do not maintain important
manufacturing relationships, we may fail to find a replacement manufacturer or
develop our own manufacturing capabilities which could delay or impair our
ability to obtain regulatory approval for our products and substantially
increase our costs or deplete profit margins, if any. If we do find replacement
manufacturers, we may not be able to enter into agreements with them on terms
and conditions favorable to us and, there could be a substantial delay before a
new facility could be qualified and registered with the FDA and foreign
regulatory authorities.
We may in
the future elect to manufacture some of our products on our own. Although we own
certain specialized manufacturing equipment, are considering an investment in
additional manufacturing equipment and employ certain manufacturing managerial
personnel, we do not presently maintain a complete manufacturing facility and we
do not anticipate manufacturing on our own any of our products during the next
12 months. If we decide to manufacture products on our own and do not
successfully develop manufacturing capabilities, it will adversely affect sales
of our products.
The FDA
and foreign regulatory authorities require manufacturers to register
manufacturing facilities. The FDA and corresponding foreign regulators also
inspect these facilities to confirm compliance with cGMPs or similar
requirements that the FDA or corresponding foreign regulators establish.
Contract manufacturers may face manufacturing or quality control problems
causing product production and shipment delays or a situation where the
contractor may not be able to maintain compliance with the FDA’s cGMP
requirements, or those of comparable foreign regulatory authorities, necessary
to continue manufacturing our drug substance. Any failure to comply with cGMP
requirements or other FDA and comparable foreign regulatory requirements could
adversely affect our clinical research activities and our ability to market and
develop our products. See also “Risks Related to Our Business - In order to
conduct our clinical trials we need adequate supplies of our drug substance and
drug product, which may not be readily available”.
In
order to conduct our clinical trials we need adequate supplies of our drug
substance and drug product, which may not be readily
available.
To
succeed, clinical trials require adequate supplies of drug substance and drug
product, which may be difficult or uneconomical to procure or manufacture. We
rely on third party contract manufacturers for our drug substance and other
active ingredients for Surfaxin and to produce material that meets appropriate
standards for use in clinical trials of our products. Laureate, our contract
manufacturer, may not be able to produce Surfaxin to appropriate standards for
use in clinical studies. Manufacturing or quality control problems have already
and may again occur at Laureate or our other contract manufacturers, causing
production and shipment delays or a situation where the contractor may not be
able to maintain compliance with the FDA’s cGMP requirements necessary to
continue manufacturing our ingredients or drug product. If any such suppliers or
manufacturers of our products fail to comply with cGMP requirements or other FDA
and comparable foreign regulatory requirements, it could adversely affect our
clinical research activities and our ability to market and develop our products.
See also “Risks Related to Our Business - If the parties we depend on for
manufacturing our pharmaceutical products do not timely supply these products,
it may delay or impair our ability to develop and market our
products”.
We
will need additional capital and our ability to continue all of our existing
planned research and development activities is uncertain. Any additional
financing could result in equity dilution.
We will
need substantial additional funding to conduct our presently planned research
and product development activities. Based on our current operating plan, we
believe that our currently available financial resources will be adequate to
satisfy our capital needs into 2006. Our future capital requirements will depend
on a number of factors that are uncertain, including the results of our research
and development activities, clinical studies and trials, competitive and
technological advances and the regulatory process, among others. We will likely
need to raise substantial additional funds through collaborative ventures with
potential corporate partners and through additional debt or equity financings.
We may also continue to seek additional funding through capital lease
transactions. We may in some cases elect to develop products on our own instead
of entering into collaboration arrangements. This would increase our cash
requirements for research and development.
We have
not entered into arrangements to obtain any additional financing, except for the
CEFF with Kingsbridge, our revolving credit facility with PharmaBio and our
capital equipment lease financing arrangement with GECC. In
connection with a registered direct public offering that we conducted in
February 2005, we entered into a Placement Agent Agreement with SG Cowen
pursuant to which we agreed not to offer to sell any additional shares of our
common stock until May 29, 2005 without the consent of SG Cowen, subject to
certain exceptions contained therein. Pursuant to the Placement Agent Agreement,
we also agreed to not access funds under the CEFF until May 26, 2005, or in an
amount greater than $5 million for an additional 90-day period thereafter. Any
additional financing could include unattractive terms or result in significant
dilution of stockholders’ interests and share prices may decline. If we fail to
enter into collaborative ventures or to receive additional funding, we may have
to delay, scale back or discontinue certain of our research and development
operations, and consider licensing the development and commercialization of
products that we consider valuable and which we otherwise would have developed
ourselves. If we are unable to raise required capital, we may be forced to limit
many, if not all, of our research and development programs and related
operations, curtail commercialization of our product candidates and, ultimately,
cease operations. See “Risks
Related to Our Business - Our Committed Equity Financing Facility may have a
dilutive impact on our stockholders”.
Furthermore,
we could cease to qualify for listing of our securities on the NASDAQ National
Market if the market price of our common stock declines as a result of the
dilutive aspects of such potential financings. See “Risks
Related to Our Business - The market price of our stock may be adversely
affected by market volatility”.
Our
Committed Equity Financing Facility may have a dilutive impact on our
stockholders.
There are
14,473,000 shares of our common stock that are reserved for issuance under the
CEFF arrangement with Kingsbridge, 375,000 of which are issuable under the
warrant we granted to Kingsbridge. The issuance of shares of our common stock
under the CEFF and upon exercise of the warrant will have a dilutive impact on
our other stockholders and the issuance or even potential issuance of such
shares could have a negative effect on the market price of our common stock. In
addition, if we access the CEFF, we will issue shares of our common stock to
Kingsbridge at a discount of between 6% and 10% of the daily volume weighted
average price of our common stock during a specified period of trading days
after we access the CEFF. Issuing shares at a discount will further dilute the
interests of other stockholders.
To the
extent that Kingsbridge sells shares of our common stock issued under the CEFF
to third parties, our stock price may decrease due to the additional selling
pressure in the market. The perceived risk of dilution from sales of stock to or
by Kingsbridge may cause holders of our common stock to sell their shares, or it
may encourage short sales of our common stock or either similar transactions.
This could contribute to a decline in the stock price of our common
stock.
We may
not be able to meet the conditions we are required to meet under CEFF and we may
not be able to access any portion of the remaining $67.8 million available under
the CEFF. In addition, we are dependent upon the financial ability of
Kingsbridge to fund the CEFF. Any failure by Kingsbridge to perform its
obligations under the CEFF could have a material adverse effect upon us.
The
clinical trial and regulatory approval process for our products is expensive and
time consuming, and the outcome is uncertain.
In order
to sell Surfaxin and our other products that are under development, we must
receive regulatory approvals for each product. The FDA and comparable agencies
in foreign countries extensively and rigorously regulate the testing,
manufacture, distribution, advertising, pricing and marketing of drug products
like our products. This approval process includes preclinical studies and
clinical trials of each pharmaceutical compound to establish the safety and
effectiveness of each product and the confirmation by the FDA and comparable
agencies in foreign countries that the manufacturer of the product maintains
good laboratory and manufacturing practices during testing and manufacturing.
Although we are involved in certain late-stage clinical trials, pharmaceutical
and biotechnology companies have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier clinical trials or in
preliminary findings for such clinical trials. Further, even if favorable
testing data is generated by clinical trials of drug products, the FDA or EMEA
may not accept or approve an NDA or MAA filed by a pharmaceutical or
biotechnology company for such drug product. On April 13, 2004, we filed an NDA
for Surfaxin for the prevention of RDS in premature infants. The FDA accepted
the NDA filing and in February 2005 we received an Approvable Letter from the
FDA with respect to our NDA. The Approvable Letter contains conditions that we
must meet prior to obtaining final U.S. marketing approval for Surfaxin. The
conditions that we must meet primarily involve finalizing labeling and
correcting previously reported manufacturing issues, however, the FDA might
still reject the NDA. We have also submitted an MAA with the EMEA for clearance
to market Surfaxin for the prevention and treatment of RDS in premature infants.
The EMEA has validated the MAA indicating that the application is complete and
that the review process has begun. However, the EMEA may not complete the review
or may reject the MAA.
The
approval process is lengthy, expensive and uncertain. It is also possible that
the FDA or comparable foreign regulatory authorities could interrupt, delay or
halt any one or more of our clinical trials for any of our product candidates.
If we, or any regulatory authorities, believe that trial participants face
unacceptable health risks, any one or more of our trials could be suspended or
terminated. We also may not reach agreement with the FDA and/or comparable
foreign agencies on the design of any one or more of the clinical studies
necessary for approval. Conditions imposed by the FDA and comparable agencies in
foreign countries on our clinical trials could significantly increase the time
required for completion of such clinical trials and the costs of conducting the
clinical trials. Data obtained from clinical trials are susceptible to varying
interpretations which may delay, limit or prevent regulatory
approval.
Delays
and terminations of the clinical trials we conduct could result from
insufficient patient enrollment. Patient enrollment is a function of several
factors, including the size of the patient population, stringent enrollment
criteria, the proximity of the patients to the trial sites, having to compete
with other clinical trials for eligible patients, geographical and geopolitical
considerations and others. Delays in patient enrollment can result in greater
costs and longer trial timeframes. Patients may also suffer adverse medical
events or side effects that are common to this class of drug such as a decrease
in the oxygen level of the blood upon administration.
Clinical
trials generally take two to five years or more to complete, and, accordingly,
our first product is not expected to be commercially available in the United
States until at least the first quarter of 2006, and our other product
candidates will take longer. The FDA has notified us that two of our intended
indications for our precision-engineered surfactant-based therapy, MAS in
full-term infants and ARDS in adults, have been granted designation as
“fast-track” products under provisions of the Food and Drug Administration
Modernization Act of 1997. The FDA has also granted us Orphan Drug Designation
for three of our intended indications for Surfaxin: ARDS in adults; RDS in
infants; and MAS in full-term infants. To support our development of Surfaxin
for the treatment of MAS, the FDA has awarded us an Orphan Products Development
Grant. Fast-Track Status does not accelerate the clinical trials nor does it
mean that the regulatory requirements are less stringent. The Fast-Track Status
provisions are designed to expedite the FDA’s review of new drugs intended to
treat serious or life-threatening conditions. The FDA generally will review the
New Drug Application for a drug granted Fast-Track Status within six months
instead of the typical one to three years.
The EMEA
has granted Orphan Medicinal Product designation for three of our intended
indications for Surfaxin; RDS in premature infants, MAS in full-term infants and
ALI in adults.
Our
products may not, however, continue to qualify for expedited review and our
other drug candidates may fail to qualify for fast track development or
expedited review. Even though some of our drug candidates have qualified for
expedited review, the FDA may not approve them at all or any sooner than other
drug candidates that do not qualify for expedited review.
The FDA
and comparable foreign agencies could withdraw any approvals we obtain, if any.
Further, if there is a later discovery of unknown problems or if we fail to
comply with other applicable regulatory requirements at any stage in the
regulatory process, the FDA may restrict or delay our marketing of a product or
force us to make product recalls. In addition, the FDA could impose other
sanctions such as fines, injunctions, civil penalties or criminal prosecutions.
To market our products outside the United States, we also need to comply with
foreign regulatory requirements governing human clinical trials and marketing
approval for pharmaceutical products. The FDA and foreign regulators have not
yet approved any of our products under development for marketing in the United
States or elsewhere. If the FDA and other regulators do not approve our
products, we will not be able to market our products.
Our
strategy, in many cases, is to enter into collaboration agreements with third
parties with respect to our products and we may require additional collaboration
agreements. If we fail to enter into these agreements or if we or the third
parties do not perform under such agreements, it could impair our ability to
commercialize our products.
Our
strategy for the completion of the required development and clinical testing of
our products and for the manufacturing, marketing and commercialization of our
products, in many cases, depends upon entering into collaboration arrangements
with pharmaceutical companies to market, commercialize and distribute our
products. We have a revised collaboration arrangement with Esteve for Surfaxin
and certain other of our product candidates that is now focused on key Southern
European markets. Within these countries, Esteve will be responsible for the
development and marketing of Surfaxin for a broader portfolio of indications,
including the prevention/treatment of RDS in premature infants, MAS in full-term
infants and ALI/ARDS in adults. Esteve will also be responsible for the
sponsorship of certain clinical trial costs related to obtaining EMEA approval
for commercialization of Surfaxin in Europe for several indications. We will be
responsible for the remainder of the regulatory activities relating to Surfaxin,
including with respect to EMEA filings.
If we or
Esteve breach or terminate the agreements that make up such collaboration
arrangements or Esteve otherwise fails to conduct their Surfaxin-related
activities in a timely manner or if there is a dispute about their obligations,
we may need to seek other partners or we may have to develop our own internal
sales and marketing capability for the indications of Surfaxin which Esteve.
Accordingly, we may need to enter into additional collaboration agreements and
our success, particularly outside of the United States, may depend upon
obtaining additional collaboration partners. In addition, we may depend on our
partners’ expertise and dedication of sufficient resources to develop and
commercialize our proposed products. We may, in the future, grant to
collaboration partners rights to license and commercialize pharmaceutical
products developed under collaboration agreements. Under these arrangements, our
collaboration partners may control key decisions relating to the development of
the products. The rights of our collaboration partners would limit our
flexibility in considering alternatives for the commercialization of our
products. If we fail to successfully develop these relationships or if our
collaboration partners fail to successfully develop or commercialize any of our
products, it may delay or prevent us from developing or commercializing our
products in a competitive and timely manner and would have a material adverse
effect on the commercialization of Surfaxin. See “Risks Related to Our Business
- - We currently have a limited sales and marketing team and, therefore, must
develop a sales and marketing team or enter into distribution arrangements and
marketing alliances, which could require us to give up rights to our product
candidates. Our limited sales and marketing experience may restrict our success
in commercializing our product candidates”.
If
we cannot protect our intellectual property, other companies could use our
technology in competitive products. If we infringe the intellectual property
rights of others, other companies could prevent us from developing or marketing
our products.
We seek
patent protection for our drug candidates so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend in part on our ability and that
of parties from whom we license technology to:
—defend
our patents and otherwise prevent others from infringing on our proprietary
rights;
—protect
trade secrets; and
—operate
without infringing upon the proprietary rights of others, both in the United
States and in other countries.
The
patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved. To date, the United States Patent and Trademark
Office has not adopted a consistent policy regarding the breadth of claims that
the United States Patent and Trademark Office allows in biotechnology patents or
the degree of protection that these types of patents afford. As a result, there
are risks that we may not develop or obtain rights to products or processes that
are or may seem to be patentable.
Even
if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us.
We, and
the parties licensing technologies to us, have filed various United States and
foreign patent applications with respect to the products and technologies under
our development, and the United States Patent and Trademark Office and foreign
patent offices have issued patents with respect to our products and
technologies. These patent applications include international applications filed
under the Patent Cooperation Treaty. Our pending patent applications, those we
may file in the future or those we may license from third parties may not result
in the United States Patent and Trademark Office or foreign patent office
issuing patents. Also, if patent rights covering our products are not
sufficiently broad, they may not provide us with sufficient proprietary
protection or competitive advantages against competitors with similar products
and technologies. Furthermore, if the United States Patent and Trademark Office
or foreign patent offices issue patents to us or our licensors, others may
challenge the patents or circumvent the patents, or the patent office or the
courts may invalidate the patents. Thus, any patents we own or license from or
to third parties may not provide any protection against
competitors.
Furthermore,
the life of our patents is limited. We have licensed a series of patents from
Johnson & Johnson and its wholly owned subsidiary, Ortho Pharmaceutical
Corporation, which are important, either individually or collectively, to our
strategy of commercializing our surfactant technology. Such patents, which
include relevant European patents, expire on various dates beginning in 2009 and
ending in 2017 or, in some cases, possibly later. We have filed, and when
possible and appropriate, will file, other patent applications with respect to
our products and processes in the United States and in foreign countries. We may
not be able to develop additional products or processes that will be patentable
or additional patents may not be issued to us. See also “Risks Related to Our
Business - If we cannot meet requirements under our license agreements, we could
lose the rights to our products”.
Intellectual
property rights of third parties could limit our ability to market our
products.
Our
commercial success also significantly depends on our ability to operate without
infringing the patents or violating the proprietary rights of others. The United
States Patent and Trademark Office keeps United States patent applications
confidential while the applications are pending. As a result, we cannot
determine which inventions third parties claim in pending patent applications
that they have filed. We may need to engage in litigation to defend or enforce
our patent and license rights or to determine the scope and validity of the
proprietary rights of others. It will be expensive and time consuming to defend
and enforce patent claims. Thus, even in those instances in which the outcome is
favorable to us, the proceedings can result in the diversion of substantial
resources from our other activities. An adverse determination may subject us to
significant liabilities or require us to seek licenses that third parties may
not grant to us or may only grant at rates that diminish or deplete the
profitability of the products to us. An adverse determination could also require
us to alter our products or processes or cease altogether any related research
and development activities or product sales.
If
we cannot meet requirements under our license agreements, we could lose the
rights to our products.
We depend
on licensing agreements with third parties to maintain the intellectual property
rights to our products under development. Presently, we have licensed rights
from Johnson & Johnson and Ortho Pharmaceutical. These agreements require us
to make payments and satisfy performance obligations in order to maintain our
rights under these licensing agreements. All of these agreements last either
throughout the life of the patents, or with respect to other licensed
technology, for a number of years after the first commercial sale of the
relevant product.
In
addition, we are responsible for the cost of filing and prosecuting certain
patent applications and maintaining certain issued patents licensed to us. If we
do not meet our obligations under our license agreements in a timely manner, we
could lose the rights to our proprietary technology.
Finally,
we may be required to obtain licenses to patents or other proprietary rights of
third parties in connection with the development and use of our products and
technologies. Licenses required under any such patents or proprietary rights
might not be made available on terms acceptable to us, if at all.
We
rely on confidentiality agreements that could be breached and may be difficult
to enforce.
Although
we believe that we take reasonable steps to protect our intellectual property,
including the use of agreements relating to the non-disclosure of confidential
information to third parties, as well as agreements that purport to require the
disclosure and assignment to us of the rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, the agreements can be difficult and costly to enforce. Although we seek to
obtain these types of agreements from our consultants, advisors and research
collaborators, to the extent that they apply or independently develop
intellectual property in connection with any of our projects, disputes may arise
as to the proprietary rights to this type of information. If a dispute arises, a
court may determine that the right belongs to a third party, and enforcement of
our rights can be costly and unpredictable. In addition, we will rely on trade
secrets and proprietary know-how that we will seek to protect in part by
confidentiality agreements with our employees, consultants, advisors or others.
Despite the protective measures we employ, we still face the risk
that:
—they
will breach these agreements;
—any
agreements we obtain will not provide adequate remedies for the applicable type
of breach or that our trade secrets or proprietary know-how will otherwise
become known or competitors will independently develop similar
technology; and
—our
competitors will independently discover our proprietary information and trade
secrets.
We
currently have a limited sales and marketing team and, therefore, must develop a
sales and marketing team or enter into distribution arrangements and marketing
alliances, which could require us to give up rights to our product candidates.
Our limited sales and marketing experience may restrict our success in
commercializing our product candidates.
If we
successfully develop and obtain regulatory approval for Surfaxin and the other
product candidates that we are currently developing, we may: (1) market and sell
them through our sales force, (2) license some of them to large pharmaceutical
companies and/or (3) market and sell them through other arrangements, including
co-promotion arrangements.
We
currently have a limited sales and marketing team and we plan to further develop
our marketing and sales team as we expect to rely primarily on such team to
market Surfaxin in the United States, if Surfaxin is approved by the FDA.
Recruiting, training and retaining qualified sales personnel is therefore
critical to our success. Competition for skilled personnel is intense, and we
may be unable to attract and retain a sufficient number of qualified individuals
to successfully launch Surfaxin. Additionally, we may not be able to provide
adequate incentive to our sales force. Accordingly, we may be unable to
establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for Surfaxin or our other product
candidates.
Developing
a marketing and sales team to market and sell products is a difficult,
significantly expensive and time-consuming process. We have no prior experience
developing a marketing and sales team and may be unsuccessful in our attempt to
do so. If we are unable to develop an internal sales and marketing operation, we
may not be able to increase market awareness and sell our products.
Establishing
the expertise necessary to successfully market and sell Surfaxin, or any other
product, will require a substantial capital investment. We expect to incur
significant expenses in developing our marketing and sales team. Our ability to
make that investment and also execute our current operating plan is dependent on
numerous factors, including, the performance of third party collaborators with
whom we may contract. Accordingly, we may not have sufficient funds to
successfully commercialize Surfaxin or any other potential product in the United
States or elsewhere.
We may
also need to enter into additional co-promotion arrangements with third parties
where our own sales force is neither well situated nor large enough to achieve
maximum penetration in the market. We may not be successful in entering into any
co-promotion arrangements, and the terms of any co-promotion arrangements may
not be favorable to us. In addition, if we enter into co-promotion arrangements
or market and sell additional products directly, we may need to further expand
our sales force and incur additional costs.
We may
also rely on third-party distributors to distribute our products or enter into
marketing alliances to sell our products. We may not be successful in entering
into distribution arrangements and marketing alliances with third parties. Our
failure to successfully develop a marketing and sales team or to enter into
these arrangements on favorable terms could delay or impair our ability to
commercialize our product candidates and could increase our costs of
commercialization. Dependence on distribution arrangements and marketing
alliances to commercialize our product candidates will subject us to a number of
risks, including:
—we may be
required to relinquish important rights to our products or product candidates;
—we may
not be able to control the amount and timing of resources that our distributors
or collaborators may devote to the commercialization of our product candidates;
—our
distributors or collaborators may experience financial difficulties;
—our
distributors or collaborators may not devote sufficient time to the marketing
and sales of our products thereby exposing us to potential expenses in
terminating such distribution agreements; and
—business
combinations or significant changes in a collaborator’s business strategy may
also adversely affect a collaborator’s willingness or ability to complete its
obligations under any arrangement.
If we
fail to establish marketing and sales capabilities or fail to enter into
arrangements with third parties in a timely manner or if they fail to perform,
it could adversely affect sales of our products. We and any of our third-party
collaborators must also market our products in compliance with federal, state
and local laws relating to the providing of incentives and inducements.
Violation of these laws can result in substantial penalties. If we are unable to
successfully motivate and expand our marketing and sales force and further
develop our sales and marketing capabilities, or if our distributors fail to
promote our products, we will have difficulty maintaining and increasing the
sales of our products.
We
may be unable to either establish marketing and sales capabilities or enter into
corporate collaborations necessary to successfully commercialize Surfaxin or our
other potential products.
We have
limited experience in marketing or selling pharmaceutical products and have
limited marketing and sales resources. To achieve commercial success for
Surfaxin, or any other approved product, we must either rely upon our limited
marketing and sales force and related infrastructure, or enter into arrangements
with others to market and sell our products. We intend to promote Surfaxin in
the United States through our own dedicated marketing and sales team.
Recruiting, training and retaining qualified sales personnel is therefore
critical to our success. Competition for skilled personnel is intense, and we
may not be able to attract and retain a sufficient number of qualified
individuals to successfully launch Surfaxin. Accordingly, we may be unable to
establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for Surfaxin.
In
addition, establishing the expertise necessary to successfully market and sell
Surfaxin, or any other product, will require a substantial capital investment.
Our ability to make that investment and also execute our current operating plan
is dependent on numerous factors, including, as described above, partnering of
clinical programs at opportune times and continued prudent fiscal management.
Accordingly, we may not have the funds to successfully commercialize Surfaxin or
any other potential product in the United States or elsewhere.
Moreover,
Surfaxin competes, and our product candidates in development are likely to
compete, with products of other companies that currently have extensive and
well-funded marketing and sales operations. Because these companies are capable
of devoting significantly greater resources to their marketing and sales
efforts, our marketing and sales efforts may not compete successfully against
the efforts of these other companies.
We have
also announced our intention to market and sell Surfaxin outside of the United
States through one or more marketing partners upon receipt of approval abroad.
Although our agreement with Esteve provides for collaborative efforts in
directing a global commercialization effort, we have somewhat limited influence
over the decisions made by Esteve or their sublicensees or the resources they
devote to the marketing and distribution of Surfaxin products in their licensed
territory, and Esteve or their sublicensees may not meet their obligations in
this regard. Our marketing and distribution arrangement with Esteve may not be
successful, and we may not receive any revenues from it. Also, we may not be
able to enter into marketing and sales agreements on acceptable terms, if at
all, for Surfaxin in territories not covered by the Esteve agreement, or for any
of our other product candidates.
We
depend upon key employees and consultants in a competitive market for skilled
personnel. If we are unable to attract and retain key personnel, it could
adversely affect our ability to develop and market our
products.
We
are highly dependent upon the principal members of our management team,
especially our Chief Executive Officer, Dr. Capetola, and our directors, as well
as our scientific advisory board members, consultants and collaborating
scientists. Many of these people have been involved in our formation or have
otherwise been involved with us for many years, have played integral roles in
our progress and we believe that they will continue to provide value to us. A
loss of any of these personnel may have a material adverse effect on aspects of
our business and clinical development and regulatory programs. At March 31,
2005, we had employment agreements with seven officers expiring in December
2005. However, commencing on January 1, 2006, and on each January 1st
thereafter, the term of these agreements shall automatically be extended for one
additional year, unless at least 90 days prior to such January 1st date, either
we or the officer shall have given notice that such party does not wish to
extend the agreement. Although these employment agreements generally provide for
severance payments that are contingent upon the applicable employee’s refraining
from competition with us, the loss of any of these persons’ services would
adversely affect our ability to develop and market our products and obtain
necessary regulatory approvals, and the applicable noncompete provisions can be
difficult and costly to monitor and enforce. Further, we do not maintain key-man
life insurance.
Our
future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel, including marketing and sales staff. We experience intense
competition for qualified personnel, and the existence of non-competition
agreements between prospective employees and their former employers may prevent
us from hiring those individuals or subject us to suit from their former
employers.
While we
attempt to provide competitive compensation packages to attract and retain key
personnel, some of our competitors are likely to have greater resources and more
experience than we have, making it difficult for us to compete successfully for
key personnel.
Our
industry is highly competitive and we have less capital and resources than many
of our competitors, which may give them an advantage in developing and marketing
products similar to ours or make our products obsolete.
Our
industry is highly competitive and subject to rapid technological innovation and
evolving industry standards. We compete with numerous existing companies
intensely in many ways. We intend to market our products under development for
the treatment of diseases for which other technologies and treatments are
rapidly developing and, consequently, we expect new companies to enter our
industry and that competition in the industry will increase. Many of these
companies have substantially greater research and development, manufacturing,
marketing, financial, technological, personnel and managerial resources than we
have. In addition, many of these competitors, either alone or with their
collaborative partners, have significantly greater experience than we do
in:
—developing
products;
—undertaking
preclinical testing and human clinical trials;
—obtaining
FDA and other regulatory approvals or products; and
—manufacturing
and marketing products.
Accordingly,
our competitors may succeed in obtaining patent protection, receiving FDA or
comparable foreign approval or commercializing products before us. If we
commence commercial product sales, we will compete against companies with
greater marketing and manufacturing capabilities who may successfully develop
and commercialize products that are more effective or less expensive than ours.
These are areas in which, as yet, we have limited or no experience. In addition,
developments by our competitors may render our product candidates obsolete or
noncompetitive.
Presently,
there are no approved drugs that are specifically indicated for the prevention
and treatment of MAS in full-term infants or ALI/ARDS in adults. Current therapy
consists of general supportive care and mechanical ventilation.
Four
products, three that are animal-derived and one that is a synthetic, are
specifically approved for the prevention of RDS in premature infants.
Exosurf® is
synthetic and is marketed by GlaxoSmithKline, plc, outside the United States and
contains only phospholipids (the fats normally present in the lungs) and
synthetic organic detergents and no stabilizing protein or peptides. This
product, however, does not contain any surfactant proteins, is not widely used
and its active marketing recently has been discontinued by its manufacturer.
Curosurf® is a
porcine lung extract that is marketed in Europe by Chiesi Farmaceutici S.p.A.,
and in the United States by Dey Laboratories, Inc. Survanta®,
marketed by the Ross division of Abbott Laboratories, Inc., is an extract of
bovine lung that contains the cow version of surfactant protein C. Forest
Laboratories, Inc., markets its calf lung surfactant, Infasurf® in the
United States for the prevention of RDS in premature infants. Although none of
the four approved surfactants for RDS in premature infants is approved for ALI
or ARDS in adults, which are significantly larger markets, there are a
significant number of other potential therapies in development for these
indications that are not surfactant-related. Any of these various drugs or
devices could significantly impact the commercial opportunity for Surfaxin. We
believe that engineered precision-engineered surfactants such as Surfaxin will
be far less expensive to produce than the animal-derived products approved for
the prevention of RDS in premature infants and will have no capability of
transmitting the brain-wasting bovine spongiform encephalopathy (commonly called
“mad-cow disease”) or causing adverse immunological responses in young and older
adults.
We also
face, and will continue to face, competition from colleges, universities,
governmental agencies and other public and private research organizations. These
competitors are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. Some of these technologies may compete directly with the technologies
that we are developing. These institutions will also compete with us in
recruiting highly qualified scientific personnel. We expect that therapeutic
developments in the areas in which we are active may occur at a rapid rate and
that competition will intensify as advances in this field are made. As a result,
we need to continue to devote substantial resources and efforts to research and
development activities.
If
product liability claims are brought against us, it may result in reduced demand
for our products or damages that exceed our insurance
coverage.
The
clinical testing of, marketing and use of our products exposes us to product
liability claims in the event that the use or misuse of those products causes
injury, disease or results in adverse effects. Use of our products in clinical
trials, as well as commercial sale, could result in product liability claims. In
addition, sales of our products through third party arrangements could also
subject us to product liability claims. We presently carry product liability
insurance with coverages of up to $10.0 million per occurrence and $10.0 million
in the aggregate, an amount we consider reasonable and customary relating to our
clinical trials of Surfaxin. However, this insurance coverage includes various
deductibles, limitations and exclusions from coverage, and in any event might
not fully cover any potential claims. We may need to obtain additional product
liability insurance coverage prior to initiating other clinical trials. We
expect to obtain product liability insurance coverage before commercialization
of our proposed products; however, the insurance is expensive and insurance
companies may not issue this type of insurance when we need it. We may not be
able to obtain adequate insurance in the future at an acceptable cost. Any
product liability claim, even one that was not in excess of our insurance
coverage or one that is meritless and/or unsuccessful, could adversely affect
our cash available for other purposes, such as research and development. In
addition, the existence of a product liability claim could affect the market
price of our common stock.
We
expect to face uncertainty over reimbursement and healthcare
reform.
In both
the United States and other countries, sales of our products will depend in part
upon the availability of reimbursement from third party payors, which include
government health administration authorities, managed care providers and private
health insurers. Third party payors are increasingly challenging the price and
examining the cost effectiveness of medical products and services.
Directors,
executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that
you do not consider to be in your best interest.
As of
March 31, 2005, our directors, executive officers, principal stockholders and
affiliated entities beneficially owned, in the aggregate, approximately 13% of
our outstanding voting securities. As a result, if some or all of them acted
together, they would have the ability to exert substantial influence over the
election of our Board of Directors and the outcome of issues requiring approval
by our stockholders. This concentration of ownership may have the effect of
delaying or preventing a change in control of our company that may be favored by
other stockholders. This could prevent transactions in which stockholders might
otherwise recover a premium for their shares over current market
prices.
The
market price of our stock may be adversely affected by market
volatility.
The
market price of our common stock, like that of many other development stage
pharmaceutical or biotechnology companies, has been and is likely to be
volatile. In addition to general economic, political and market conditions, the
price and trading volume of our stock could fluctuate widely in response to many
factors, including:
—announcements
of the results of clinical trials by us or our competitors;
—adverse
reactions to products;
—governmental
approvals, delays in expected governmental approvals or withdrawals of any prior
governmental approvals or public or regulatory agency concerns regarding the
safety or effectiveness of our products;
—changes
in the United States or foreign regulatory policy during the period of product
development;
—developments
in patent or other proprietary rights, including any third party challenges of
our intellectual property rights;
—announcements
of technological innovations by us or our competitors;
—announcements
of new products or new contracts by us or our competitors;
—actual
or anticipated variations in our operating results due to the level of
development expenses and other factors;
—changes
in financial estimates by securities analysts and whether our earnings meet or
exceed the estimates;
—conditions
and trends in the pharmaceutical and other industries;
—new
accounting standards; and
—the
occurrence of any of the risks described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Risks Related to Our
Business”.
Our
common stock is listed for quotation on the NASDAQ National Market. During the
three month period ended March 31, 2005, the price of our common stock has
ranged from $5.05 to $8.60. We expect the price of our common stock to remain
volatile. The average daily trading volume in our common stock varies
significantly. For the 12-month period ended March 31, 2005, the average daily
trading volume in our common stock was approximately 578,000 shares and the
average number of transactions per day was approximately 1,800. Our relatively
low average volume and low average number of transactions per day may affect the
ability of our stockholders to sell their shares in the public market at
prevailing prices and a more active market may never develop.
In
addition, we may not be able to continue to adhere to the strict listing
criteria of the National Market. If the common stock were no longer listed on
the National Market, investors might only be able to trade on the Nasdaq
SmallCap Market, in the over-the-counter market in the Pink Sheets® (a
quotation medium operated by the National Quotation Bureau, LLC) or on the OTC
Bulletin Board® of the
National Association of Securities Dealers, Inc. This would impair the liquidity
of our securities not only in the number of shares that could be bought and sold
at a given price, which might be depressed by the relative illiquidity, but also
through delays in the timing of transactions and reduction in media
coverage.
In the
past, following periods of volatility in the market price of the securities of
companies in our industry, securities class action litigation has often been
instituted against companies in our industry. If we face securities litigation
in the future, even if meritless or unsuccessful, it would result in substantial
costs and a diversion of management attention and resources, which would
negatively impact our business.
A
substantial number of our securities are eligible for future sale and this could
affect the market price for our stock and our ability to raise
capital.
The
market price of our common stock could drop due to sales of a large number of
shares of our common stock or the perception that these sales could occur. As of
March 31,
2005, we had
53,511,946 shares of common stock issued and outstanding. In addition, as of
March 31, 2005, up to 9,327,408 shares of our common stock were issuable upon
exercise of outstanding options and warrants. In December 2003, we filed a Form
S-3 shelf registration statement with the Commission for the proposed offering
from time to time of up to 6,500,000 shares of common stock, of which 708,592
shares of our common stock currently remain available for us to sell in
registered transactions. We have no immediate plans to sell any securities under
the shelf registration. However, we may issue securities from time to time in
response to market conditions or other circumstances on terms and conditions
that will be determined at such time. Additionally, there are 14,098,000 shares
of our common stock that are reserved for issuance under the CEFF arrangement
with Kingsbridge. See “Risks Related to Our Business - Our Committed Equity
Financing Facility may have a dilutive impact on our stockholders.
Holders
of our stock options and warrants are likely to exercise them, if ever, at a
time when we otherwise could obtain a price for the sale of our securities that
is higher than the exercise price per security of the options or warrants. This
exercise, or the possibility of this exercise, may impede our efforts to obtain
additional financing through the sale of additional securities or make this
financing more costly, and may reduce the price of our common
stock.
Provisions
of our Certificate of Incorporation, Shareholders Rights Agreement and Delaware
law could defer a change of our management which could discourage or delay
offers to acquire us.
Provisions
of our Restated Certificate of Incorporation, as amended, our Shareholders
Rights Agreement and Delaware law may make it more difficult for someone to
acquire control of us or for our stockholders to remove existing management, and
might discourage a third party from offering to acquire us, even if a change in
control or in management would be beneficial to our stockholders. For example,
our Restated Certificate of Incorporation, as amended, allows us to issue shares
of preferred stock without any vote or further action by our stockholders. Our
Board of Directors has the authority to fix and determine the relative rights
and preferences of preferred stock. Our Board of Directors also has the
authority to issue preferred stock without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In addition, our Board of Directors, without further stockholder
approval, could issue large blocks of preferred stock. We have adopted a
shareholders rights agreement which under certain circumstances would
significantly impair the ability of third parties to acquire control of us
without prior approval of our Board of Directors thereby discouraging
unsolicited takeover proposals. The rights issued under the shareholders rights
agreement would cause substantial dilution to a person or group that attempts to
acquire us on terms not approved in advance by our Board of
Directors.
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers and, by
policy, limit the amount of credit exposure to any one issuer. We currently do
not hedge interest rate or currency exchange exposure. We classify highly liquid
investments purchased with a maturity of three months or less as “cash
equivalents” and commercial paper and fixed income mutual funds as “available
for sale securities.” Fixed income securities may have their fair market value
adversely affected due to a rise in interest rates and we may suffer losses in
principal if forced to sell securities that have declined in market value due to
a change in interest rates.
Item
4. Controls
and Procedures
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls or internal control over financial
reporting will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this
Quarterly Report on Form
10-Q. Based
on this
evaluation, the
Chief Executive Officer and Chief Financial Officer
concluded that as of the
end of the period covered by this report, the
disclosure controls and procedures were
effective in their
design to ensure that
information required
to be disclosed in the
reports that
we file
or submit
under the
Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
(b) Changes
in internal controls
There
were no changes in internal controls over financial reporting or other factors
that could materially affect those controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
In the
quarter ended March 31, 2005, pursuant to the exercise of outstanding warrants
and options, we issued an aggregate of 10,252 shares of common stock at various
exercise prices ranging from $1.50 to $7.22 per share for a aggregate
consideration equal to $25,851. We claimed the exemption from registration
provided by Section 4(2) of the Securities Act for these transactions. No
broker-dealers were involved in the sale and no commissions were
paid.
We have a
voluntary 401(k) savings plan covering eligible employees. Effective January 1,
2003, we allowed for periodic discretionary matches of newly issued shares of
common stock with the amount of any such match determined as a percentage of
each participant’s cash contribution. The total fair market value of our match
of common stock to the 401(k) for the quarter ended March 31, 2005 was $53,237.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibits
are listed on the Index to Exhibits at the end of this Quarterly Report. The
exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
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 thereunto
duly authorized.
|
|
|
|
Discovery Laboratories,
Inc. |
|
|
(Registrant) |
Date: May 3, 2005 |
By: |
/s/ Robert J.
Capetola |
|
Robert J. Capetola, Ph.D. |
|
President and Chief Executive
Officer |
|
|
|
Date: May 3, 2005 |
By: |
/s/ John G.
Cooper |
|
John G. Cooper |
|
Executive Vice President and Chief
Financial Officer |
|
(Principal Financial
Officer) |
INDEX
TO EXHIBITS
The
following exhibits are included with this Quarterly Report. All management
contracts or compensatory plans or arrangements, if any, are marked with an
asterisk.
Exhibit
No. |
|
Description |
|
Method
of Filing |
10.1 |
|
Placement
Agent Agreement, dated February 17, 2005, between the Company and SG Cowen
& Co., LLC. |
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
report date February 17, 2005. |
10.2 |
|
Placement
Agent Agreement, dated February 18, 2005, between the Company and SG Cowen
& Co., LLC. |
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
report date February 18, 2005. |
31.1 |
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange
Act. |
|
Filed
herewith. |
31.2 |
|
Certification
of Chief Financial Officer and Principal Accounting Officer Pursuant to
Rule 13a-14(a) of the Exchange Act. |
|
Filed
herewith. |
32.1 |
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
Filed
herewith. |
Unassociated Document
Exhibit
31.1
CERTIFICATIONS
PURSUANT TO
SECTION
302 OF
THE
SARBANES-OXLEY ACT OF 2002
I, Robert
J. Capetola, certify that:
1. I have
reviewed this quarterly report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based on
my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on
my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects, the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d)
disclosed
in this quarterly report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b)
any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
May
3, 2005
|
/s/
Robert J. Capetola
Robert
J. Capetola, Ph.D.
President
and Chief Executive Officer |
Unassociated Document
Exhibit
31.2
CERTIFICATIONS
PURSUANT TO
SECTION
302 OF
THE
SARBANES-OXLEY ACT OF 2002
I, John
G. Cooper, certify that:
1. I have
reviewed this quarterly report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based on
my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on
my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;
4.
The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c)
evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d)
disclosed
in this quarterly report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
a)
all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b)
any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
May
3, 2005
|
/s/
John G. Cooper
John
G. Cooper
Executive
Vice President and
Chief
Financial Officer |
Unassociated Document
Exhibit
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY
ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Discovery Laboratories,
Inc. (the “Company”), for the period ended March 31, 2005, as filed with the
Securities and Exchange Commission (the “Commission”) on the date hereof (the
“Report”), each of the undersigned, in his capacity as an officer of the
Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
the
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended;
and |
2. |
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company. |
A signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002 has been provided to the Company and will be retained by the Company
and furnished to the Commission or its staff upon request.
Date:
May 3,
2005
Name:
/s/
Robert J. Capetola
Name:
Robert J. Capetola, Ph.D.
Title:
President and Chief
Executive Officer
Name:
/s/
John G. Cooper
Name:
John G. Cooper
Title:
Executive Vice President
and Chief
Financial Officer