UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
fiscal year ended December 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
Number)
|
|
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2600
Kelly Road, Suite 100
|
||
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Warrington,
Pennsylvania 18976-3622
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||
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(Address
of principal executive offices)
|
(215)
488-9300
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value
Preferred
Stock Purchase Rights
(Title
of
class)
__________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES o NO
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. YES o NO
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES x
NO
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K o.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o
NO
x
The
aggregate market value of shares of voting and non-voting common equity held
by
non-affiliates of the registrant computed using the closing price of common
equity as reported on NASDAQ National Market under the symbol DSCO on June
30,
2005, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $325 million. For the purposes of determining
this amount only, the registrant has defined affiliates to include: (a) the
executive officers named in Part III of this Annual Report on Form 10-K; (b)
all
directors of the registrant; and (c) each shareholder that has informed the
registrant by February 28, 2006 that it is the beneficial owner of 10% or more
of the outstanding shares of common stock of the registrant.
As
of
March 14, 2006, 61,140,942 shares of the registrant’s common stock were
outstanding.
Portions
of the information required by Items 10 through 14 of Part III of this Annual
Report on Form 10-K are incorporated by reference to the extent described herein
from our 2006 definitive proxy statement, which is expected to be filed by
us
with the Commission within 120 days after the close of our 2005 fiscal
year.
ii
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc., and its wholly-owned, presently
inactive subsidiary, Acute Therapeutics, Inc.
FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 10-K contains “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. The forward-looking statements are only
predictions and provide our current expectations or forecasts of future events
and financial performance and may be identified by the use of forward-looking
terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “intends,” “may,” “will” or “should” or, in each case, their
negative, or other variations or comparable terminology, though the absence
of
these words does not necessarily mean that a statement is not forward-looking.
The forward-looking statements include all matters that are not historical
facts
and include, 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.
We
intend
that all forward-looking statements be subject to the safe-harbor provisions
of
the Private Securities Litigation Reform Act of 1995. 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;
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| · |
risks
relating to the progress of our research and development;
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| · |
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);
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| · |
risk
that our internal sales and marketing organization will not succeed
in
developing market awareness of our products;
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| · |
risk
that our internal sales and marketing organization will not be able
to
attract or maintain qualified personnel;
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| · |
risk
of delay in the FDA’s or other health regulatory authorities’ approval of
any applications we file;
|
| · |
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 materials suppliers and
development partners to provide us with adequate supplies of drug
substance and drug products for completion of any of our clinical
studies;
|
| · |
risks
relating to our drug manufacturing
operations;
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| · |
risks
relating to the integration of our recently-acquired manufacturing
operations into our existing
operations;
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| · |
risks
relating to the lack of adequate supplies of drug substance and drug
product for completion of any of our clinical studies,
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| · |
risks
relating to our ability and the ability of our collaborators to develop
and successfully commercialize products that will combine our drug
products with innovative aerosolization
technologies;
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| · |
risks
relating to the significant, time-consuming and costly research,
development, pre-clinical studies, clinical testing and regulatory
approval for any products that we may develop independently or in
connection with our collaboration arrangements;
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| · |
risks
relating to the development of competing therapies and/or technologies
by
other companies; and
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| · |
the
other risks and certainties detailed in Item 1A: “Risk Factors” and in the
documents incorporated by reference in this report.
|
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.
iii
DISCOVERY
LABORATORIES, INC.
Table
of Contents to Annual Report on Form 10-K
For
the Fiscal Year Ended December 31, 2005
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PART
I
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ITEM
1.
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BUSINESS
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1
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ITEM
1A.
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RISK
FACTORS
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14
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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25
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ITEM
2.
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PROPERTIES
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25
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ITEM
3.
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LEGAL
PROCEEDINGS
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26
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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26
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PART
II
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ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER
PURCHASES OF EQUITY SECURITIES
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27
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ITEM
6.
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SELECTED
FINANCIAL DATA
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28
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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29
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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47
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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48
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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48
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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48
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ITEM
9B.
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OTHER
INFORMATION
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49
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PART
III
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ITEM
10.
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
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50
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ITEM
11.
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EXECUTIVE
COMPENSATION
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50
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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50
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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50
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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50
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PART
IV
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ITEM
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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51
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SIGNATURES
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52
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iv
PART
I
ITEM
1. BUSINESS.
COMPANY
OVERVIEW AND BUSINESS STRATEGY
Discovery
Laboratories, Inc., which we refer to as “we,” “us,” or the “Company,” has its
principal offices located at 2600 Kelly Road, Warrington, Pennsylvania. Our
telephone number is 215-488-9300 and our website address is
www.discoverylabs.com. Our common shares are listed on the Nasdaq National
Market, where our symbol is DSCO.
We
are a
biotechnology company developing our 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 precision-engineered surfactant that is designed to closely mimic
the
essential properties of natural human lung surfactant. We believe that through
this SRT 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.
Our
lead
product, SurfaxinÒ
(lucinactant), for the prevention of Respiratory Distress Syndrome (RDS) in
premature infants, has received an Approvable Letter from the U.S. Food and
Drug
Administration (FDA) and is under review for approval in Europe by the European
Medicines Evaluation Agency (EMEA). The FDA has established April 2006 as its
target to complete its review of the Surfaxin new drug application (NDA) and
we
anticipate that the commercial launch of Surfaxin will occur late in the second
quarter of 2006.
Our
SRT
pipeline is initially focused on the most significant respiratory conditions
prevalent in the NICU. In addition to Surfaxin for RDS, we are presently
conducting a Phase 2 clinical trial of Surfaxin for the prevention and treatment
of Bronchopulmonary Dysplasia (BPD, also known as Chronic Lung Disease) in
premature infants. We are also preparing to conduct multiple Phase 2 pilot
studies with Aerosurf™, our proprietary aerosolized SRT administered through
nasal continuous positive airway pressure (nCPAP), for the treatment of neonatal
respiratory failures.
To
address the various 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 to treat Acute Respiratory Distress Syndrome
(ARDS) in adults, and are also researching and developing aerosol SRT to address
Acute Lung Injury (ALI) prophylaxis, chronic obstructive pulmonary disease
(COPD), cystic fibrosis, asthma and other debilitating respiratory
conditions.
Our
goal
is to become a fully integrated biotechnology company. We are implementing
a
long-term business strategy which includes the following:
| · |
In
December 2005, we purchased the manufacturing operation of our contract
manufacturer, Laureate Pharma, Inc., which is critical to the production
of Surfaxin and our SRT clinical programs. We will use this pharmaceutical
manufacturing and development facility for the production of Surfaxin,
other SRT formulations and aerosol development capabilities. We view
our
recent acquisition of manufacturing operations as an initial step
in our
manufacturing strategy for the continued development of our SRT portfolio,
including life cycle management of Surfaxin, potential formulation
enhancements, and expansion of our aerosol SRT products, beginning
with
Aerosurf. Our long-term strategy includes building or acquiring additional
manufacturing capabilities for the production of our precision-engineered
surfactant drug products;
|
| · |
Anticipating
the potential approval and commercial launch of Surfaxin for RDS
in the
United States, we are building a U.S. commercial organization to
focus
initially on opportunities in the NICU and, as products are developed,
to
potentially expand to pediatric, critical care and hospital
settings;
|
1
| · |
We
are investing in the development of our aerosol SRT pipeline programs,
including Aerosurf, primarily utilizing the aerosol generating
technology we licensed in December 2005 through a strategic
alliance with Chrysalis Technologies, a division of Philip Morris
USA
Inc.; and
|
| · |
We
plan on securing corporate partnerships for international markets
for the
development and potential commercialization of our SRT pipeline for
the
NICU, including Surfaxin. We plan on securing corporate partnerships
for
the development and potential commercialization of our SRT pipeline
addressing respiratory conditions affecting young adult and adult
patients
in the critical care and other hospital settings. We have entered
into a
corporate partnership with Laboratorios del Dr. Esteve, S.A., primarily
for the marketing and sales of Surfaxin and certain of our other
SRT
products in Southern Europe.
|
SURFACTANT
TECHNOLOGY
Our
precision-engineered surfactant replacement technology was invented at The
Scripps Research Institute and was exclusively licensed to Johnson & Johnson
which, together with its wholly-owned subsidiary, Ortho Pharmaceutical
Corporation, developed it further. We acquired the exclusive worldwide
sublicense to the technology in October 1996.
Surfactants
are protein and lipid (fat) compositions that are produced naturally in the
lungs and are critical to all air-breathing mammals. They cover the entire
alveolar surface, or air sacs, of the lungs and the terminal conducting airways
which lead to the air sacs. Surfactants facilitate respiration by continually
modifying the surface tension of the fluid normally present within the alveoli,
or air sacs, that line the inside of the lungs. In the absence of sufficient
surfactant or should the surfactant degrade, these air sacs tend to collapse,
and, as a result, the lungs do not absorb sufficient oxygen. In addition to
lowering aveolar surface tension, surfactants play other important roles in
human respiration including, but not limited to, lowering the surface tension
of
the conducting airways and maintaining airflow and airway patency (keeping
the
airways open and expanded). Human surfactants include four known surfactant
proteins, A, B, C and D. It has been established, through numerous studies,
that
surfactant protein B (SP-B) is essential for respiratory function.
Presently,
the FDA has approved surfactants as replacement therapy only for RDS in
premature infants, a condition in which infants, due to premature birth, have
an
insufficient amount of their own natural surfactant. The most commonly used
of
these approved replacement surfactants are derived from pig and cow lungs.
Although they are clinically effective, they have drawbacks and cannot readily
be scaled or developed to treat broader populations for RDS in premature infants
and other respiratory diseases. There is presently only one approved synthetic
surfactant available, however, this product does not contain surfactant
proteins, is not widely used and is not actively marketed by its
manufacturer.
Animal-derived
surfactant products are prepared using a chemical extraction process from minced
cow or pig lung. Because of the animal-sourced materials and the chemical
extraction processes, there can potentially be significant variation in
production lots and, consequently, product quality specifications must be broad.
In addition, the protein levels of these animal-derived surfactants are
inherently lower than the protein levels of native human surfactant. The
production costs of these animal-derived surfactants are high, relative to
other
analogous pharmaceutical products, generation of large quantities is limited,
and these products cannot readily be reformulated for aerosol delivery to the
lungs.
Our
precision-engineered surfactant product candidates, including Surfaxin, are
engineered versions of natural human lung surfactant and contain a
precision-engineered peptide, sinapultide. Sinapultide is a 21 amino acid
protein-like substance that is designed to closely mimic the essential
attributes of human surfactant protein B (SP-B), the surfactant protein most
important for the proper functioning of the respiratory system. Our products
have the ability to be precisely formulated, either as a liquid instillate,
aerosolized liquid or dry powder, to address various medical
indications.
We
believe that our precision-engineered surfactant can be manufactured in
sufficient quantities, in more exact and consistent pharmaceutical grade
quality, less expensively than the animal-derived surfactants and has no
potential to cause adverse immunological responses in young and older adults,
all important attributes for our products to potentially fulfill significant
unmet medical needs. In addition, we believe that our precision-engineered
surfactants might possess other pharmaceutical benefits not currently exhibited
by the animal surfactants such as longer shelf-life, and elimination of the
risk
of animal-borne diseases including the brain-wasting bovine spongiform
encephalopathy (commonly called “mad-cow disease”).
2
We
have
demonstrated that our SRT can be aerosolized at the proper particle size and
with the fluid dynamics capable of penetrating the deep lung. We have
successfully completed a Phase 2a pilot clinical study of our aerosol SRT in
neonates and a Phase 1b pilot clinical study in adults with mild to moderate
asthma. To date, we have achieved the following important development objectives
with our aerosol SRT:
| · |
full
retention of the surface-tension lowering properties of a functioning
surfactant necessary to restore lung function and maintain patency
of the
conducting airways;
|
| · |
full
retention of the surfactant composition upon
aerosolization;
|
| · |
drug
particle size believed suitable for deposition in the
deep-lungs;
|
| · |
delivery
rates to achieve therapeutic dosages in a reasonable time period;
and
|
| · |
reproducible
aerosol output.
|
Many
respiratory diseases are associated with an inflammatory event that causes
surfactant dysfunction and a loss of patency of the conducting airways.
Scientific data support the premise that the therapeutic use of surfactants
in
aerosol form has the ability to reestablish airway patency, improve pulmonary
mechanics and act as an anti-inflammatory. Surfactant normally prevents moisture
from accumulating in the airways’ most narrow sections and thereby maintains the
patency of the conducting airways.
SURFACTANT
THERAPY FOR RESPIRATORY MEDICINE
Products
for the Neonatal Intensive Care Unit
Surfaxin®
(Lucinactant) for Respiratory Distress Syndrome in Premature
Infants
RDS
is a
condition in which premature infants are born with an insufficient amount of
their own natural surfactant. Premature infants born prior to 32 weeks gestation
have not fully developed their own natural lung surfactant and therefore need
treatment to sustain life. This condition often results in the need for the
infant to undergo surfactant replacement therapy or mechanical ventilation.
RDS
is experienced in approximately half of the babies born between 26 and 32 weeks
gestational age. The incidence of RDS approaches 100% in babies born less than
26 weeks gestational age. Surfaxin is the first precision-engineered, protein
B-based agent that mimics the surface-active properties of human surfactant.
To
treat premature infants suffering from RDS, surfactants, including Surfaxin,
are
delivered in a liquid form and injected through an endotracheal tube (a tube
inserted into the infant’s mouth and down the trachea).
There
are
over 3,000,000 premature infants born annually worldwide. More than 750,000
of
these premature infants are considered “very low birth weight” infants (less
than 1,250 grams), of which, approximately 550,000 are considered at significant
risk for RDS. Due to limitations associated with the animal-derived surfactant
products that are currently approved to treat RDS in premature infants, access
to such therapy is mainly limited to the approximately 150,000 very low birth
weight infants born in the United States and Western Europe. This results in
hundreds of thousands of premature infants born in the world each year who
need,
but do not receive, effective surfactant replacement therapy.
For
RDS,
we conducted a Phase 3 pivotal trial, which formed the basis of our NDA to
the
FDA that was filed in April 2004, and a supportive Phase 3 trial.
The
pivotal Phase 3 trial enrolled 1,294 patients and was designed as a
multinational, multicenter, randomized, masked, controlled, prophylaxis,
event-driven, superiority trial to demonstrate the safety and efficacy of
Surfaxin over Exosurf®,
an
approved, non-protein containing synthetic surfactant. Survanta®,
a
cow-derived surfactant and the leading surfactant used in the United States,
served as a reference arm in the trial. Key trial results were assessed by
an
independent, blinded adjudication committee comprised of leading neonatologists
and pediatric radiologists. This committee provided a consistent and
standardized method for assessing critical efficacy data in the trial. An
independent Data Safety Monitoring Board (DSMB) was responsible for monitoring
the overall safety of the trial and no major safety issues were
identified.
3
The
supportive, multinational, multicenter, prophylaxis, randomized, controlled
masked, Phase 3 clinical trial enrolled 252 patients and was designed as a
non-inferiority trial comparing Surfaxin to Curosurf®,
a
porcine (pig) derived surfactant and the leading surfactant used in Europe.
This
trial demonstrated the overall safety and non-inferiority of Surfaxin to
Curosurf.
In
February 2005, we received an Approvable Letter from the FDA for Surfaxin for
the prevention of RDS in premature infants. As part of the review of the
Surfaxin NDA, the FDA, in January 2005, issued a Form 483 to our then contract
manufacturer, Laureate Pharma, Inc. citing inspectional observations related
to
basic quality controls, process assurances and documentation requirements that
support the commercial production process necessary to comply with current
good
manufacturing practices (cGMPs). To address the inspectional observations,
we
and Laureate implemented improved quality systems and documentation controls
believed to support the FDA’s regulatory requirements for the approval of
Surfaxin. In December 2005, we purchased the manufacturing operations of
Laureate in Totowa, NJ.
Our
previously submitted responses to the Approvable Letter were accepted by the
FDA
as a complete response as of October 5, 2005. Assuming that the corrective
actions made to the Surfaxin manufacturing operation in Totowa, NJ are adequate,
we anticipate that our NDA will be approved in April 2006 and that the U.S.
commercial launch of Surfaxin will occur late in the second quarter of
2006.
In
October 2004, the EMEA validated our Marketing Authorization Application (MAA),
that we had filed previously, for clearance to market Surfaxin for the
prevention and rescue treatment of RDS in premature infants in Europe.
We
have
recently received the Day 180 List of Outstanding Issues from the Committee
for
Medicinal Products for Human Use (CHMP) in relation to our MAA for Surfaxin.
We
plan to submit a written response to all of the CHMP’s outstanding issues in
early April 2006 with a possible Oral Explanation before the CHMP in late June
2006. According to standard CHMP procedures, the CHMP is expected to make a
recommendation on whether to grant a Marketing Authorization for Surfaxin and
issue a formal Opinion in late July 2006.
The
FDA
has granted us Orphan Drug Designation for Surfaxin for the prevention of RDS.
“Orphan drugs” are pharmaceutical products that are intended to treat diseases
affecting fewer than 200,000 patients in the United States. The Office of Orphan
Product Development of the FDA grants certain advantages to the sponsors of
orphan drugs including, but not limited to, seven years of market exclusivity
upon approval of the drug, certain tax incentives for clinical research and
grants to fund testing of the drug. The Commission of the European Communities
has designated Surfaxin as an Orphan Medicinal Product for the prevention and
treatment of RDS in premature infants. This designation allows us exclusive
marketing rights for Surfaxin for indications of RDS in Europe for 10 years
(subject to revision after six years) following marketing approval by the EMEA.
In addition, the designation enables us to receive regulatory assistance in
the
further development process of Surfaxin, and to access reduced regulatory fees
throughout its marketing life.
Surfaxin®
for
the Prevention of Bronchopulmonary Dysplasia
Bronchopulmonary
Dysplasia (BPD), also known as Chronic Lung Disease, is a costly syndrome
affecting premature infants. It is associated with surfactant deficiency and
the
prolonged use of mechanical ventilation and oxygen supplementation. Some
premature babies are born with a lack of natural surfactant in their lungs.
Without surfactant, the air sacs in the lungs collapse and are unable to absorb
sufficient oxygen resulting in RDS. To treat RDS, babies require a surfactant
usually within one hour of birth as well as mechanical ventilation to support
the babies’ respiration. The lack of surfactant and use of mechanical
ventilation may cause chronic injury and scarring of the lungs - resulting
in
BPD. Presently there are no approved drugs for the treatment of BPD. These
babies suffer from abnormal lung development and typically have a need for
respiratory assistance - oftentimes, for many months, as well as comprehensive
care spanning years. It is estimated that the cost of treating an infant with
BPD in the United States can approach $250,000 with approximately 50,000 infants
developing BPD in the United States and Europe each year.
4
We
are
currently conducting a double-blind, controlled Phase 2 clinical trial that
will
enroll up to 210 very low birth weight premature infants born at risk for
developing BPD. The study’s objective is to determine the safety and
tolerability of administering Surfaxin as a therapeutic approach for the
prevention and treatment of BPD. The BPD study design provides that premature
infants receive a treatment regime of up to 5 Surfaxin doses beginning within
the first 3-10 days of life that are in addition to the surfactant they received
on day 1 of life for RDS. 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 and its severity. The trial is being
conducted at sites throughout the United States, as well as sites in Latin
America and Europe. We anticipate the results of this trial to be available
in
the third quarter of 2006.
In
January 2006, the FDA granted us Fast-Track designation for Surfaxin for the
treatment and prevention of BPD in premature infants. Designation as a Fast
Track product means that the FDA has determined that the drug is intended for
the treatment of a serious or life-threatening condition and demonstrates the
potential to address unmet medical needs for such a condition, and that the
FDA
will facilitate and expedite the development and review of the application
for
the approval of the product. The FDA generally will review an NDA for a drug
granted Fast Track designation within six months instead of the typical one
to
three years.
In
October 2005, the FDA designated Surfaxin as an Orphan Drug for the treatment
of
BPD in premature infants
Aerosurf™,
Aerosolized Surfactant Replacement Therapy in the NICU
Serious
respiratory problems are some of the most prevalent medical issues facing
premature infants in the NICU. There are approximately 1.5 million premature
infants born annually worldwide at risk for respiratory problems associated
with
surfactant dysfunction. Neonatologists generally try to avoid mechanically
ventilating these patients because doing so requires intubation (the invasive
process of inserting a breathing tube down the trachea). The potential utility
of a non-invasive method of delivering SRT to treat premature infants suffering
from an array of respiratory disorders has been recognized by the neonatal
medical community.
Aerosurf
is our precision-engineered aerosolized SRT administered via nasal continuous
positive airway pressure (nCPAP) to treat premature infants at risk for
respiratory failure. In September 2005, we completed and announced the results
of a Phase 2 pilot clinical trial of Aerosurf which was designed to evaluate
its
feasibility, safety and tolerability for the prevention of RDS in premature
infants. The study demonstrated that it is feasible to deliver Aerosurf via
nCPAP and the treatment was generally safe and well tolerated.
In
December 2005, we entered into a strategic alliance with Chrysalis for us to
develop and commercialize aerosolized SRT to address a broad range of serious
respiratory conditions. The alliance united two potentially complementary
respiratory technologies - our precision-engineered surfactant technology with
Chrysalis’ novel aerosolization device technology that is being developed to
enable the delivery of therapeutics to the deep lung. Through this alliance,
we
gained exclusive rights to Chrysalis’ aerosolization technology for use with
pulmonary surfactants for all respiratory diseases. Our lead neonatal program
utilizing the Chrysalis technology is Aerosurf administered via nCPAP to treat
premature infants in the NICU at risk for respiratory failure. We anticipate
conducting Phase 2a pilot clinical studies of Aerosurf utilizing the Chrysalis
aerosolization technology in the second half of 2006.
Products
for the Critical Care Unit and other Hospital Settings
Surfaxin®
for
Acute Respiratory Distress Syndrome in Adults
Acute
Respiratory Distress Syndrome (ARDS) is a life-threatening disorder for which
no
approved therapies exist anywhere in the world. It is characterized by an excess
of fluid in the lungs and decreased oxygen levels in the patient. One prominent
characteristic of this severe respiratory disorder is the destruction of
surfactants naturally present in lung tissue. The conditions are caused by
illnesses including pneumonia and septic shock (a toxic condition caused by
infection) and events such as gastric aspiration, smoke inhalation, near
drowning, industrial accidents and other traumas.
5
We
are
presently conducting a Phase 2 open-label, controlled, multi-center clinical
trial of our SRT for the treatment of ARDS in adults. Patients are randomized
to
either receive our SRT or the current standard of care, which is mechanical
ventilation and support therapies. Our SRT is administered to patients in high
concentration and large volume via a proprietary sequential lavage technique,
or
lung wash, delivered through a bronchoscope to each of the 19 segments of the
lung. The procedure is intended to cleanse and remove inflammatory substances
and debris from the lungs, while leaving sufficient amounts of our
SRT behind
to
help re-establish the lungs’ capacity to absorb oxygen.
The
objective is to restore functional surfactant levels and to allow critically
ill
patients to be removed from mechanical ventilation sooner. The primary endpoint
of this trial is the incidence rate of patients alive and off mechanical
ventilation at Day 28. Some of the key secondary endpoints include mortality
at
the end of Day 28 and safety and tolerability of our SRT and the bronchoscopic
lavage procedure. Results of the Phase 2 trial are anticipated to be available
at the end of March 2006.
The
current standard of care for ARDS includes placing patients on mechanical
ventilators in intensive care units at a cost per patient of approximately
$8,500 per day, typically for an average of 21 to 28 days. There are estimated
to be between 150,000 and 200,000 adults per year in the United States suffering
from ARDS with similar numbers afflicted in Europe. Presently, the mortality
rate is estimated to be between 30% to 40%.
The
FDA
has granted us Fast-Track designation and Orphan Drug designation for our SRT
for the treatment of ARDS in adults. The EMEA has granted us Orphan Product
designation for our SRT for the treatment of ALI in adults (which in this
circumstance is a larger patient population that encompasses ARDS).
Aerosolized
Surfactant for Acute Lung Injury and Other Respiratory
Indications
We
believe that our proprietary precision-engineered aerosolized SRT may be
effective as a preventive measure for patients at risk for respiratory disorders
such as ALI, chronic obstructive respiratory disorder (COPD), cystic fibrosis
(CF), asthma, and other debilitating respiratory conditions. We anticipate
that
our aerosol SRT pipeline programs will primarily utilize the aerosol generating
technology rights which we acquired in December 2005 through our strategic
alliance with Chrysalis. Our lead adult program utilizing the Chrysalis
technology is the development of aerosolized SRT administered as a prophylactic
for patients at risk for Acute Lung Injury (ALI).
ALI
is
associated with conditions that either directly or indirectly injure the air
sacs of the lung. ALI is a syndrome of inflammation and increased permeability
of the lungs with an associated breakdown of the lungs’ surfactant layer. The
most serious manifestation of ALI is ARDS. Among the causes of ALI are
complications typically associated with certain major surgeries, mechanical
ventilator induced lung injury (often referred to as VILI), smoke inhalation,
pneumonia and sepsis. There are an estimated 1 million patients at risk in
the
United States for ALI annually and there are no currently-approved
therapies.
We
believe that the successful application of our precision-engineered surfactant
technology with Chrysalis’ novel aerosolization device technology has the
potential of producing surfactant-based therapies that may significantly advance
the treatment of serious respiratory conditions such as COPD. Given the focus
on
developing the SRT pipeline for the NICU, we will be assessing the development
priority of these programs throughout 2006.
STRATEGIC
ALLIANCES
Chrysalis
Technologies, a Division of Philip Morris USA Inc.
In
December 2005, we entered into a strategic alliance with Chrysalis Technologies
(Chrysalis), a division of Philip Morris USA Inc., to develop and commercialize
aerosolized surfactant replacement therapies to address a broad range of serious
respiratory conditions, such as ALI, neonatal respiratory failure, COPD, asthma,
cystic fibrosis and others. This alliance unites two potentially highly
complementary respiratory technologies -- our precision-engineered surfactant
technology with Chrysalis’ novel aerosolization device technology that is being
developed to enable the delivery of therapeutics to the deep lung.
6
Chrysalis
has developed a proprietary aerosol generation technology that is being designed
with the potential to enable targeted upper respiratory or deep lung delivery
of
therapies for local or systematic applications. The Chrysalis technology is
designed to produce high-quality, low velocity aerosols for possible deep lung
aerosol delivery. Aerosols are created by pumping the drug formulation through
a
small, heated capillary wherein the excipient system is substantially converted
to the vapor state. Upon exiting the capillary, the vapor stream quickly cools
and slows in velocity yielding a dense aerosol with a defined particle size.
The
defined particle size can be readily controlled and adjusted through device
modifications and drug formulation changes.
The
alliance focuses on therapies for hospitalized patients, including those
in the
NICU, pediatric intensive care unit (PICU) and the adult intensive care unit
(ICU), and can be expanded into other hospital applications and ambulatory
settings. The parties are utilizing their respective capabilities and resources
to support and fund the design and development of integrated drug-device
systems
that can be uniquely customized to address specific respiratory diseases
and
patient populations. Chrysalis is responsible for developing the design for
the
aerosol device platform, patient interface and disposable dose packets. We
are
responsible for aerosolized SRT drug formulations, clinical and regulatory
activities, and the manufacturing and commercialization of the drug-device
products. We have exclusive rights to Chrysalis’ aerosolization technology for
use with pulmonary surfactants for all respiratory diseases and conditions
in
hospital and ambulatory settings. Generally, Chrysalis will receive a tiered
royalty on product sales: the base royalty generally applies to aggregate
net
sales of less than $500 million per contract year; the royalty generally
increases on aggregate net sales in excess of $500 million per contract year,
and generally increases further on aggregate net sales of alliance products
in
excess of $1 billion per contract year.
Our
lead
neonatal program utilizing the Chrysalis technology is Aerosurf administered
via
nCPAP to treat premature infants in the NICU at risk for respiratory failure.
Our lead adult program utilizing the Chrysalis technology is the development
of
aerosolized SRT administered as a prophylactic for patients in the hospital
at
risk for ALI.
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 Meconium Aspiration Syndrome (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
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 that 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 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.
7
In
October 2005, Esteve sublicensed the distribution rights to Surfaxin in Italy
to
Dompe Farmaceutici s.p.a. (Dompe), a privately owned Italian company. Under
the
sublicense agreement, Dompe will be responsible for sales, marketing and
distribution in Italy of Surfaxin.
LICENSING
ARRANGEMENTS; PATENTS AND PROPRIETARY RIGHTS
Patents
and Proprietary Rights
Johnson
& Johnson and The Scripps Research Institute
Our
precision-engineered surfactant platform technology, including Surfaxin, is
based on the proprietary peptide, sinapultide, (a 21 amino acid protein-like
substance that closely mimics the essential human lung protein SP-B). This
technology was invented at The Scripps Research Institute and was exclusively
licensed to, and further developed by, Johnson & Johnson and its wholly
owned subsidiary, Ortho Pharmaceutical. We have received an exclusive, worldwide
sublicense from Johnson & Johnson and Scripps for, and have rights to, a
series of over 30 patents and patent filings (worldwide) which are important,
either individually or collectively, to our strategy for commercializing our
precision-engineered surfactant technology for the diagnosis, prevention and
treatment of disease. The sublicense gives us the exclusive rights to such
patents for the life of the patents.
Patents
covering our proprietary precision-engineered surfactant technology that have
been issued or are pending worldwide include composition of matter, formulation,
manufacturing and uses, including the pulmonary lavage, or “lung wash”
techniques. Our most significant patent rights principally consist of five
issued United States patents: U.S. Patent No. 5,407,914; U.S. Patent No.
5,260,273; U.S. Patent No. 5,164,369; U.S. Patent No. 5,789,381; and U.S. Patent
No. 6,013,619 (along with corresponding issued and pending foreign
counterparts). These patents relate to precision-engineered pulmonary
surfactants (including Surfaxin), certain related peptides (amino acid
protein-like substances) and compositions, methods of treating respiratory
distress syndromes with these surfactants and compositions, and
our
proprietary pulmonary lavage method of treating RDS with these surfactants.
We
also have certain pending United States and foreign patent applications that
relate to methods of manufacturing certain peptides which may be used in the
manufacture of Surfaxin and
other
aspects of our precision-engineered surfactant technology.
In
September 2003, United States Patent No. 6,613,734 issued, covering a
wide
variety of combinations of peptides, proteins and other molecules related to
our
proprietary precision-engineered pulmonary surfactant technology. The patent
also includes methods of making and using these molecules.
In
September 2002, European Patent No. 0590006 was granted covering claims directed
to compositions that contain sinapultide for use as a therapeutic surfactant
for
treating RDS and related conditions. European Patent Nos. 0350506 and 0593094
have also issued covering certain other surfactant peptides, including
sinapultide and related peptides.
U.S.
Patent No. 6,013,619 was issued to Scripps and licensed to us, and covers
methods of using any engineered surfactants (including Surfaxin) or animal-
or
human-derived surfactants in pulmonary lavage for respiratory disorders. Our
proprietary pulmonary lavage techniques (using surfactant) include lavage via
a
bronchoscope in adults. Scientific rationale supports the premise that our
proprietary lavage technique may provide a clinical benefit to the treatment
of
ALI and ARDS in adults by decreasing the amount of infectious and inflammatory
debris in the lungs, restoring the air sacs to a more normal state and possibly
resulting in patients getting off mechanical ventilation sooner.
8
All
such
patents, including our relevant European patents, expire on various dates
beginning in 2008 and ending in 2017 or, in some cases, possibly
later.
Our
Patents and Patent Rights
We
have
been active in seeking patent protection for our innovations relating to new
formulations and methods of manufacturing and delivering sinapultide pulmonary
surfactants. Our patent activities have focused particularly on formulation
and
delivery of aerosolized pulmonary surfactant.
In
May of
2005, we filed United States and International patent applications (US
11/130,783 and PCT US/2005/0178184) directed to systems, devices and methods
for
non-invasive pulmonary delivery of aerosolized surfactant. In August of 2005,
we
filed additional U.S. and International patent applications (US 11/209,588
and
PCT US/2005/0029811) to seek expanded protection of our aerosol delivery system
and methods to include non-invasive pulmonary delivery in conjunction with
invasive techniques as needed.
In
November of 2005, we filed U.S. and International patent applications
(US11/274,201 and PCT US/2005/041281), directed to lyophilized formulations
of
sinapultide pulmonary surfactants and methods of manufacture. In December of
2005, we filed U.S. and International patent applications (US 11/316,308 and
PCT
US/2005/046862), directed to sinapultide pulmonary surfactant formulations
having improved viscosity characteristics, aerosolization capacity and storage
stability.
See
Item
1A: “Risk Factors - 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”; “ - Even if we obtain patents to protect
our products, those patents may not be sufficiently broad and others could
compete with us”; “ - Intellectual property rights of third parties could limit
our ability to market our products”; and “ - If we cannot meet requirements
under our license agreements, we could lose the rights to our
products.”
MANUFACTURING
AND DISTRIBUTION
Manufacturing
-- Precision-Engineered Surfactant
Our
precision-engineered surfactant product candidates, including Surfaxin, must
be
manufactured in a sterile environment and in compliance with current good
manufacturing practices (cGMPs) set by the FDA and other relevant worldwide
regulatory authorities. We have our manufacturing operation in Totowa, NJ in
approximately 21,000 square feet of leased pharmaceutical manufacturing and
development space that is specifically designed for the production of sterile
pharmaceuticals in compliance with cGMPs. Our product candidates are
manufactured through the combination of raw materials such as sinapultide,
which
is provided by BACHEM California, Inc., and PolyPeptides Laboratories, Inc.,
and
certain other active ingredients, including certain lipids, that are provided
by
other suppliers such as Genzyme Pharmaceuticals, a division of the Genzyme
Corporation, and Avanti Polar Lipids. Packaging and labeling of commercial
product will be performed by a third party vendor.
In
December 2005, we purchased, for $16.0 million, the manufacturing operation
of
Laureate that are critical to the production of Surfaxin and our SRT clinical
programs. We will use this pharmaceutical manufacturing and development facility
for the production of Surfaxin, other SRT formulations and aerosol development
capabilities. Laureate previously was our contract manufacturer and the Totowa
facility was essentially a dedicated Surfaxin operation. Together with Laureate,
we have invested in resources, facilities and quality systems to prepare a
cGMP-compliant operation for the anticipated FDA approval of Surfaxin. We feel
the acquisition provides us with operational control and potentially improved
economics for the potential commercial and clinical production of our lead
product, Surfaxin, and our pipeline of precision-engineered SRT products. We
have entered into a transitional services arrangement with Laureate whereby
it
is anticipated that Laureate will provide us with certain limited
manufacturing-related support services through December 2006.
In
January 2005, the FDA issued an inspection report (Form FDA-483) to Laureate,
at
that time our contract manufacturer of Surfaxin, citing certain observations
concerning Laureate’s compliance with cGMPs in connection with its 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. To address the inspectional observations, we and Laureate implemented
improved quality systems and documentation controls believed to support the
FDA’s regulatory requirements. Assuming that the corrective actions made to the
Surfaxin manufacturing operations in Totowa, NJ are adequate, we anticipate
that
our NDA will be approved in April 2006 and that the commercial launch of
Surfaxin will occur late in the second quarter of 2006.
9
We
anticipate that our manufacturing capabilities, primarily through our
manufacturing operation in Totowa, NJ, should allow sufficient commercial
production of Surfaxin, if approved, to supply the present worldwide demand
for
the prevention of RDS in premature infants, the prevention and treatment of
BPD
and all of our anticipated clinical-scale production requirements for SRT for
the treatment of ARDS in adults, and Aerosurf for neonatal respiratory failures.
The
lease
for our Totowa, NJ, manufacturing operation is through December 2014. In
addition to the customary terms and conditions, the lease contains an early
termination option, first beginning in December 2009. The early termination
option can only be exercised by the landlord upon a minimum of two years prior
notice and, in the earlier years, payment to us of significant early termination
amounts. Taking into account this early termination option for our Totowa,
NJ,
facility, our long-term commercial strategy includes building or acquiring
additional manufacturing capabilities for the production of our
precision-engineered surfactant drug products. We view our recent acquisition
of
manufacturing operations as an initial step of our manufacturing strategy for
the continued development of our SRT portfolio, including life cycle management
of Surfaxin, potential formulation enhancements, and expansion of our aerosol
SRT products, beginning with Aerosurf.
Manufacturing
-- SRT Aerosolization Systems
In
December 2005, we entered into a strategic alliance with Chrysalis Technologies,
a division of Philip Morris USA Inc., to develop and commercialize aerosolized
surfactant replacement therapies to address a broad range of serious respiratory
conditions. The alliance focuses on therapies for hospitalized patients,
including those in the NICU, pediatric intensive care unit and the adult
intensive care unit, and can be expanded into other hospital applications and
ambulatory settings. The product candidates resulting from the alliance will
combine our proprietary precision-engineered SRT with Chysalis’ aerosolization
device technology.
Chrysalis
has developed a proprietary aerosol generation technology that is being designed
with the potential to enable targeted upper respiratory or deep lung delivery
of
therapies for local or systematic applications. The Chrysalis technology is
designed to produce high-quality, low velocity aerosols for possible deep lung
aerosol delivery.
The
parties are utilizing their respective capabilities and resources to support
and
fund the design and development of integrated drug-device systems that can
be
uniquely customized to address specific respiratory diseases and patient
populations. Chrysalis is responsible for developing the design for the aerosol
device platform, patient interface and disposable dose packets. We are
responsible for aerosolized SRT drug formulations, clinical and regulatory
activities, and the manufacturing and commercialization of the drug-device
products.
To
manufacture the aerosolization systems we plan on utilizing third-party contract
manufacturers, suppliers and assemblers for our planned clinical trials. This
includes the assembly of key sub-components that comprise the important parts
of
the drug-device products such as the aerosol generator, dose packet, disposable
delivery parts and patient interface system necessary to administer our SRT
in
patients in the NICU and ICU. These sub-components will be manufactured by
third-party vendors and shipped to one central location for assembly and
integration of the aerosolization system. Once assembled, the aerosolization
systems will be quality control tested prior to release for clinical trial
or
commercial use. The SRT drug product will be manufactured at our Totowa, NJ
facility and filled in the disposable dose packets at the same
location.
10
Distribution
Surfaxin
requires cold-chain storage and distribution. We have secured an arrangement
with ASD Healthcare Inc., a subsidiary of AmerisourceBergen Corporation for
the
exclusive distribution of Surfaxin in the United States.
Our
collaboration with Esteve provides that Esteve has the responsibility for
distribution in Andorra, Greece, Italy, Portugal and Spain. We will need to
evaluate third party distribution capabilities in other parts of the world
prior
to commercializing those regions.
COMPETITION
We
are
engaged in highly competitive fields of pharmaceutical research. Competition
from numerous existing companies and others entering the fields in which we
operate is intense and expected to increase. We expect to compete with, among
others, conventional pharmaceutical companies. Most of these companies have
substantially greater research and development, manufacturing, marketing,
financial, technological personnel and managerial resources than we do.
Acquisitions of competing companies by large pharmaceutical or health care
companies could further enhance such competitors’ financial, marketing and other
resources. Moreover, competitors that are able to complete clinical trials,
obtain required regulatory approvals and commence commercial sales of their
products before we do may enjoy a significant competitive advantage over us.
There are also existing therapies that may compete with the products we are
developing. See Item 1A: “Risk Factors- 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.”
Currently,
the FDA has approved surfactants as replacement therapy only for the prevention
and treatment of RDS in premature infants, a condition in which infants are
born
with an insufficient amount of their own natural surfactant. The most commonly
used of these approved replacement surfactants are derived from a chemical
extraction process of pig and cow lungs. 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 derived from
minced cow lung that contains the cow version of surfactant protein B. Forest
Laboratories, Inc., markets its calf lung surfactant extract,
Infasurf®,
in the
United States. There is presently only one approved synthetic surfactant
available, Exosurf®,
marketed by GlaxoSmithKline, plc. However, this product does not contain any
surfactant proteins, is not widely used and its active marketing recently has
been discontinued by its manufacturer.
With
respect to the development of lung surfactants for the treatment of other
respiratory diseases and upper airway disorders, with the exception of
recombinant SP-C technology under development by Altana Pharma AG and one
porcine-derived surfactant drug candidate under development by Leo Pharma A/S
in
Denmark, we are not aware of any other lung surfactant currently under
development.
Presently,
there are no approved therapies for the treatment of BPD. Further, there are
no
currently approved aerosolized technology therapies to address neonatal
respiratory failures in the NICU, where mechanical ventilation represents the
current standard of care.
Similarly,
there are no drugs currently approved that are specifically indicated for the
treatment of ARDS in adults. Current therapy consists of general supportive
care
and mechanical ventilation. There are a significant number of other potential
therapies in development for the treatment of ARDS in adults that are not
surfactant related. Any of these various drugs or devices could significantly
impact the commercial opportunity for Surfaxin.
GOVERNMENT
REGULATION
The
testing, manufacture, distribution, advertising and marketing of drug products
are subject to extensive regulation by federal, state and local governmental
authorities in the United States, including the FDA, and by similar agencies
in
other countries. Any product that we develop must receive all relevant
regulatory approvals or clearances before it may be marketed in a particular
country.
11
The
regulatory process, which includes preclinical studies and clinical trials
of
each pharmaceutical compound to establish its safety and efficacy and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over us. Delays or
terminations of clinical trials we undertake would likely impair our development
of product candidates. Delays or terminations could result from a number of
factors, including stringent enrollment criteria, slow rate of enrollment,
size
of patient population, having to compete with other clinical trials for eligible
patients, geographical considerations and others.
The
FDA
review process can be lengthy and unpredictable, and we may encounter delays
or
rejections of our applications when submitted. Generally, in order to gain
FDA
approval, we first must conduct preclinical studies in a laboratory and in
animal models to obtain preliminary information on a compound’s efficacy and to
identify any safety problems. The results of these studies are submitted as
part
of an Investigational New Drug (IND) application that the FDA must review before
human clinical trials of an investigational drug can commence.
Clinical
trials are normally done in three sequential phases and generally take two
to
five years or longer to complete. Phase 1 consists of testing the drug product
in a small number of humans, normally healthy volunteers, to determine
preliminary safety and tolerable dose range. Phase 2 usually involves studies
in
a limited patient population to evaluate the effectiveness of the drug product
in humans having the disease or medical condition for which the product is
indicated, determine dosage tolerance and optimal dosage and identify possible
common adverse effects and safety risks. Phase 3 consists of additional
controlled testing at multiple clinical sites to establish clinical safety
and
effectiveness in an expanded patient population of geographically dispersed
test
sites to evaluate the overall benefit-risk relationship for administering the
product and to provide an adequate basis for product labeling. Phase 4 clinical
trials may be conducted after approval to gain additional experience from the
treatment of patients in the intended therapeutic indication.
After
completion of clinical trials of a new drug product, FDA and foreign regulatory
authority marketing approval must be obtained. An NDA submitted to the FDA
generally takes one to three years to obtain approval. If questions arise during
the FDA review process, approval may take a significantly longer period of
time.
The testing and approval processes require substantial time and effort and
we
may not receive approval on a timely basis, if at all. Even if regulatory
clearances are obtained, a marketed product is subject to continual review,
and
later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market as well as possible
civil or criminal sanctions. For marketing outside the United States, we also
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country. None of our products under
development have been approved for marketing in the United States or elsewhere.
We may not be able to obtain regulatory approval for any such products under
development. Failure to obtain requisite governmental approvals or failure
to
obtain approvals of the scope requested will delay or preclude us, or our
licensees or marketing partners, from marketing our products, or limit the
commercial use of our products, and thereby would have a material adverse effect
on our business, financial condition and results of operations. See Item 1A:
“Risk Factors - Our technology platform is based solely on our proprietary
precision-engineered surfactant technology” and “Our ongoing clinical trials may
be delayed, or fail, which will harm our business”; and “ - The regulatory
approval process for our products is expensive and time consuming, and the
outcome is uncertain. We may not obtain required regulatory approvals for the
commercialization of our products.”
The
FDA
has granted us Fast-Track designation for the indications of ARDS in adults
and
for the prevention and treatment of BPD in premature infants. Designation as
a
Fast Track product means that the FDA has determined that the drug is intended
for the
treatment of
a
serious or
life-threatening condition
and demonstrates the potential to address
unmet
medical needs
for
such a condition, and that the FDA will facilitate and expedite the development
and review of the application for the approval of the product. The FDA generally
will review an NDA for a drug granted Fast Track designation within six months
instead of the typical one to three years.
The
Office
of Orphan Products Development of
the
FDA has granted Orphan Drug designation for
Surfaxin as a treatment for RDS in premature infants, ARDS
in
adults, MAS in full-term infants,
and BPD
in premature infants. “Orphan drugs” are pharmaceutical products that are
intended to treat diseases affecting fewer than 200,000 patients in the United
States. The Office of Orphan Product Development of the FDA grants certain
advantages to the sponsors of “orphan drugs” including, but not limited to,
seven years of market exclusivity upon approval of the drug, certain tax
incentives for clinical research and grants to fund testing of the drug.
Additionally, our SRT has
received designation as an Orphan Product for ALI (which, in this circumstance,
encompasses ARDS) from the EMEA.
12
EMPLOYEES
We
have
approximately 160 full-time employees, primarily employed in the United States,
Europe and Latin America. In connection with our manufacturing operation in
Totowa, NJ, we have entered into collective bargaining arrangements, expiring
December 2009, with respect to certain employee classifications. See Item 1A:
“Risk Factors - 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.”
AVAILABLE
INFORMATION
We
file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any
materials
that
we file
with the
SEC at
the SEC’s Public Reference Room at 100 F
Street,
N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Many of our
SEC filings
are also available to the public from the SEC’s
Website at “http://www.sec.gov.” We make available free of charge our annual,
quarterly and current reports, proxy statements and other information upon
request. To request such materials, please send an e-mail to
ir@DiscoveryLabs.com or contact the
Investor Relations Department
at our
address as set forth above.
We
maintain a Website at “http://www.DiscoveryLabs.com” (this is not a hyperlink,
you must visit this website through an Internet browser). Our Website and the
information contained therein or connected thereto are not incorporated into
this Annual Report on Form 10-K.
13
ITEM
1A. RISK
FACTORS.
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.
We
may not successfully develop and market our products, and even if we do, we
may
not become profitable.
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 December 31, 2005, we have an
accumulated deficit of approximately $202.0 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
precision-engineered surfactant technology platform is based on the scientific
rationale of using 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 technology platform. Any material problems
with
our technology platform could have a material adverse effect on our
business.
The
regulatory approval process for our products is expensive and time-consuming,
and the outcome is uncertain. We may not obtain required regulatory approvals
for the commercialization of our products.
In
order
to sell Surfaxin or any of our other products under development, we must receive
regulatory approvals for each product. The FDA and foreign regulators
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 foreign regulators that the
manufacturer of the product maintains good laboratory and manufacturing
practices during testing and manufacturing. 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. 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.
We
have
filed an NDA with the FDA for Surfaxin for the prevention of RDS in premature
infants. As part of the review of the Surfaxin NDA, the FDA, in January 2005,
issued a Form 483 to our then contract manufacturer, Laureate Pharma, Inc.
citing inspectional observations related to basic quality controls, process
assurances and documentation requirements that support the commercial production
process necessary to comply with current good manufacturing practices (cGMPs).
The FDA issued an Approvable Letter to us in February 2005 regarding our NDA.
To
address the Form 483 inspectional observations, we and Laureate implemented
improved quality systems and documentation controls believed to support the
FDA’s regulatory requirements for the approval of Surfaxin. In October 2005, the
FDA accepted our responses to the Approvable Letter as a complete response
thereby establishing April 2006 as its target to complete its review of our
NDA.
Assuming that the corrective actions made to the Surfaxin manufacturing
operation in Totowa, NJ are adequate, we anticipate that our NDA will be
approved in April 2006 and that the U.S. commercial launch of Surfaxin will
occur late in the second quarter of 2006. The FDA, however, might still delay
its approval of our NDA or reject our NDA, which would have a material adverse
effect on our business.
14
We
have
filed an MAA with the EMEA for clearance to market Surfaxin for the prevention
of RDS in premature infants in Europe. In February 2006, we received the Day
180
List of Outstanding Issues from the Committee for Medicinal Products for Human
Use (CHMP) in relation to our MAA. We plan to submit a written response to
all
of the CHMP’s outstanding issues in early April 2006 with a possible Oral
Explanation before the CHMP in late June 2006. According to standard CHMP
procedures, the Committee is expected to make a recommendation on whether to
grant a Marketing Authorization for Surfaxin and issue a formal Opinion in
late
July 2006. The EMEA, however, may not complete the review or may reject the
MAA.
See
also
Item 1: “Business - Company Overview and Business Strategy” and Item 7:
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation - Plan of Operations.”
If
the FDA and foreign regulators do not approve our products, we will not be
able
to market our products.
The
FDA
and foreign regulators have not yet approved any of our products under
development for marketing in the United States or elsewhere. The FDA or a
foreign regulator 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 or a foreign regulator 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.
Our
pending NDA for Surfaxin for the prevention of RDS in premature infants may
not
be approved by the FDA in a timely manner or at all, which would adversely
impact our ability to commercialize this product.
We
submitted an NDA to the FDA for Surfaxin for the prevention of RDS in premature
infants. Under the Prescription Drug User Fee Act of 1992, or PDUFA, guidelines,
we expect that the FDA will complete its review or otherwise respond to this
NDA
on or about April 6, 2006. In connection with its review, the FDA may request
additional information from us, including data from additional clinical trials.
Ultimately, the FDA may not approve Surfaxin for RDS in premature infants.
Any
failure to obtain FDA approval or further delay associated with the FDA’s review
process would adversely impact our ability to commercialize our lead
product.
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
has notified us that two of our intended indications for our
precision-engineered SRT, BPD in premature 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. Designation as a Fast Track product
means that the FDA has determined that the drug is intended for the treatment
of
a serious or life-threatening condition and demonstrates the potential to
address unmet medical needs for such a condition, and that the FDA will
facilitate and expedite the development and review of the application for the
approval of the product. The FDA generally will review an NDA for a drug granted
Fast Track designation within six months instead of the typical one to three
years. Fast Track designation does not accelerate clinical trials nor does
it
mean that the regulatory requirements are less stringent. Our products may
cease
to qualify for expedited review and our other drug candidates may fail to
qualify for Fast Track designation or expedited review.
Our
ongoing clinical trials may be delayed, or fail, which will harm our
business.
Clinical
trials generally take two to five years or more to complete. Our first product
is not expected to be commercially available in the United States until the
second quarter of 2006 at the earliest, and our other product candidates will
take longer to commercialize. Like many biotechnology companies, we may suffer
significant setbacks in advanced clinical trials, even after obtaining promising
results in earlier trials or in preliminary findings for such clinical trials.
Data obtained from clinical trials 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:
15
| · |
the
number of clinical sites;
|
| · |
the
size of the patient population;
|
| · |
the
proximity of patients to the clinical
sites;
|
| · |
the
eligibility and enrollment criteria for the
study;
|
| · |
the
existence of competing clinical trials;
|
| · |
the
existence of alternative available products;
and
|
| · |
geographical
and geopolitical considerations.
|
Delays
in
patient enrollment in clinical trials may occur, which would likely result
in
increased costs, program delays or both. Patients may also suffer adverse
medical events or side effects that are common to those administered with the
surfactant class of drugs such as a decrease in the oxygen level of the blood
upon administration.
It
is
also possible that the FDA or foreign regulators could interrupt, delay or
halt
any one or more of our clinical trials for any of our product candidates. If
we
or any regulator 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 or a foreign regulator on the design of any one
or
more of the clinical studies necessary for approval. Conditions imposed by
the
FDA and foreign regulators on our clinical trials could significantly increase
the time required for completion of such clinical trials and the costs of
conducting the clinical trials.
In
addition to our efforts to commercialize Surfaxin for the prevention of RDS
in
premature infants, we are currently conducting two clinical trials: a Phase
2
clinical trial to determine the safety and tolerability of administering
Surfaxin as a therapeutic approach for the prevention and treatment of BPD
in
premature infants and a Phase 2 clinical trial to address ARDS in adults. We
are
preparing to conduct multiple Phase 2 pilot studies with Aerosurf for the
potential treatment of premature infants in the NICU suffering from neonatal
respiratory failure.
See
also
Item 1: “Business - Company Overview and Business Strategy” and Item 7:
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation - Plan of Operations.”
The
manufacture of our products is a highly exacting and complex process, and if
we
or one of our materials suppliers encounter problems manufacturing our products,
our business could suffer.
The
FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also inspect these facilities to
confirm compliance with cGMP or similar requirements that the FDA or foreign
regulators establish. We or our materials suppliers may face manufacturing
or
quality control problems causing product production and shipment delays or
a
situation where we or the supplier may not be able to maintain compliance with
the FDA’s cGMP requirements, or those of foreign regulators, necessary to
continue manufacturing our drug substance. Manufacturing or quality control
problems have already and may again occur at our Totowa facility or our
materials suppliers. Any failure to comply with cGMP requirements or other
FDA
or foreign regulatory requirements could adversely affect our clinical research
activities and our ability to market and develop our products.
In
December 2005, we acquired Laureate’s clinical manufacturing facility in Totowa,
New Jersey. The facility has been qualified to produce appropriate clinical
grade material of our drug product for use in our ongoing clinical studies.
With
this acquisition, we now maintain a complete manufacturing facility and we
will
be manufacturing our products. We currently own certain specialized
manufacturing equipment, employ certain manufacturing managerial personnel,
and
we expect to invest in additional manufacturing equipment. We may be unable
to
produce Surfaxin and our other SRT drug candidates to appropriate standards
for
use in clinical studies. If we do not successfully develop our manufacturing
capabilities, it will adversely affect the sales of our products.
16
If
the parties we depend on for supplying our drug substance raw materials and
certain manufacturing-related services do not timely supply these products
and
services, it may delay or impair our ability to develop, manufacture and market
our products.
We
rely
on suppliers for our drug substance raw materials and third parties for certain
manufacturing-related services in order to produce material that meets
appropriate standards for commercial distribution and use in clinical trials
of
our products. To succeed, clinical trials require adequate supplies of drug
substance and drug product, which may be difficult or uneconomical to procure
or
manufacture. We and our suppliers and vendors may not be able to (i) produce
our
drug substance or drug product to appropriate standards for use in clinical
studies, (ii) perform under any definitive manufacturing, supply or service
agreements with us or (iii) remain in business for a sufficient time to
successfully produce and market our product candidates. If we do not maintain
important manufacturing and service relationships, we may fail to find a
replacement supplier or required vendor 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 and vendors, 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
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 working capital will be adequate to satisfy
our capital needs into the second half of 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. 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 also Item
1A: “Risk Factors - Our
Committed Equity Financing Facility may have a dilutive impact on our
stockholders.”
Furthermore,
if the market price of our common stock declines as a result of the dilutive
aspects of such potential financings, we could cease to meet the financial
requirements to maintain the listing of our securities on The NASDAQ National
Market. See Item
1A: “Risk Factors 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
10,962,651 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. In 2005, $20.2 million was successfully raised
under the CEFF in two separate financings over 15 day periods in September
and
November, respectively. We anticipate using additional portions of the available
CEFF during 2006 to support manufacturing, development and commercialization
activities associated with our potential U.S. commercial launch of Surfaxin
late
in the second quarter of 2006.
17
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 other 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 $47.6 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.
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 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.
Our collaboration arrangement with Esteve for Surfaxin and certain other of
our
product candidates is 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 of
RDS
in premature 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. 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 collaborators’
expertise and dedication of sufficient resources to develop and commercialize
our proposed products.
In
December, 2005, we entered into a Strategic Alliance Agreement with Chrysalis
to
develop and commercialize aerosolized SRT to address a broad range of serious
respiratory conditions. Under the agreement, we have exclusive rights to
Chrysalis’ proprietary aerosolization technology for use with pulmonary
surfactants for all respiratory diseases and conditions in hospital and
ambulatory settings. Chrysalis will assist with the development of certain
combination drug-device surfactant products, and provide certain additional
consultative services to us in connection with combination drug-device
surfactant products, provided that certain terms and conditions are satisfied.
Additionally, Chrysalis is responsible for developing the design for the aerosol
device platform, patient interface and disposable dose packets. We are
responsible for aerosolized SRT drug formulations, clinical and regulatory
activities, and the manufacturing and commercialization of the drug-device
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 Item 1A: “Risk Factors - Our limited sales and
marketing experience may restrict our success in commercializing our product
candidates.”
18
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 Item 1A: “Risk
Factors - 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 develop and 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.
19
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, Ortho Pharmaceutical and Chrysalis. 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:
| · |
these
agreements may be breached;
|
| · |
these
agreements may not provide adequate remedies for the applicable type
of
breach;
|
| · |
our
trade secrets or proprietary know-how will otherwise become known;
|
| · |
our
competitors will independently develop similar technology;
or
|
| · |
our
competitors will independently discover our proprietary information
and
trade secrets.
|
Our
limited sales and marketing experience may restrict our success in
commercializing our product candidates.
We
have
limited experience in marketing or selling pharmaceutical products and have
a
limited marketing and sales team. 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
expect
to rely primarily on our marketing and sales team to market Surfaxin in the
United States, if Surfaxin is approved by the FDA. Accordingly, we are further
developing our marketing and sales team. Developing a marketing and sales team
to market and sell products is a difficult, significantly expensive and
time-consuming process. Recruiting, training and retaining qualified sales
personnel is 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. If we are unable
to
successfully motivate and expand our marketing and sales force and further
develop our sales and marketing capabilities, we will have difficulty selling,
maintaining and increasing the sales of our products.
20
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. 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 enter into distribution arrangements and marketing alliances, which could
require us to give up rights to our product candidates.
We
may
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. Our 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 adversely affect a collaborator’s willingness or ability to complete
its obligations under any
arrangement.
|
We
may
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.
If
we
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.
We
have
announced our intention to market and sell Surfaxin outside of the United States
through one or more marketing partners upon receipt of regulatory 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.
21
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. As of March 14, 2006, we
have
employment agreements with eight officers expiring in December 2006. Each
employment agreement provides that its term shall automatically be extended
for
one additional year, unless at least 90 days prior to January 1 either party
gives notice that it does not wish to extend the agreement. Although these
employment agreements generally include non-competition covenants and provide
for severance payments that are contingent upon the applicable employee’s
refraining from competition with us, the applicable noncompete provisions can
be
difficult and costly to monitor and enforce. The loss of any of these persons’
services would adversely affect our ability to develop and market our products
and obtain necessary regulatory approvals. 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,
four products are specifically approved for the prevention of RDS in premature
infants. There are no approved drugs that are specifically indicated for
the
prevention and treatment of ALI/ARDS in adults and current therapy consists
of
general supportive care and mechanical ventilation. See Item 1: “Business
–
Competition.”
22
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
we acquire companies, products or technologies, we may face risks associated
with those acquisitions.
If
we are
presented with appropriate opportunities, we intend to acquire or make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefit of any acquisition or investment. If we acquire
companies or technologies, we will likely face risks, uncertainties and
disruptions associated with the integration process, including difficulties
in
the integration of these operations and services of an acquired company,
integration of acquired technology with our products, diversion of our
management’s attention from other business concerns, the potential loss of key
employees or customers of the acquired businesses and impairment charges if
future acquisitions are not as successful as we originally anticipate. If we
fail to successfully integrate other companies, products or technologies that
we
may acquire, our business could be harmed. Furthermore, we may have to incur
debt or issue equity securities to pay for any additional future acquisitions
or
investments, the issuance of which could be dilutive to our existing
shareholders. In addition, our operating results may suffer because of
acquisition-related costs or amortization expenses or charges relating to
acquired intangible assets.
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 million per occurrence and $10 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
December 31, 2005, our directors, executive officers, principal stockholders
and
affiliated entities beneficially owned, in the aggregate, approximately 16%
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.
23
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 this Item
1A.
|
Our
common stock is listed for quotation on The NASDAQ National Market. During
the
twelve month period ended December 31, 2005, the price of our common stock
has
ranged from $5.05 to $9.15. We expect the price of our common stock to remain
volatile. The average daily trading volume in our common stock varies
significantly. For the twelve month period ended December 31, 2005, the average
daily trading volume in our common stock was approximately 560,000 shares and
the average number of transactions per day was approximately 1,795. 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 Capital
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
December
31, 2005,
we had
61,021,694 shares of common stock issued and outstanding.
24
We
have a
universal shelf registration statement on Form S-3 (File No. 333-128929), filed
with the SEC on October 11, 2005, for the proposed offering from time to time
of
up to $100 million of our debt or equity securities, of which $80 million is
remaining. We have no immediate plans to sell any securities under this
registration statement. 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 10,587,651 shares of our common stock that are currently reserved
for
issuance under the CEFF. See Item 1A: “Risk Factors - Our Committed Equity
Financing Facility may have a dilutive impact on our stockholders.”
As
of
December 31, 2005, up to 10,903,542 shares of our common stock were issuable
upon exercise of outstanding options and warrants. 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
1B. UNRESOLVED
STAFF COMMENTS.
There
are
no material unresolved written comments that were received from the SEC staff
180 days or more before the end of our fiscal year relating to our periodic
or
current reports under the Securities Exchange Act of 1934.
ITEM
2. PROPERTIES.
Our
principal offices are leased and located at 2600 Kelly Road, Suite 100,
Warrington, Pennsylvania 18976-3622. The telephone number of our executive
office is (215) 488-9300 and the facsimile number is (215) 488-9301. We also
lease space in Doylestown, Pennsylvania, for our analytical laboratory. We
lease
our research facility in Mountain View, California, where we principally develop
aerosolized formulations of our proprietary precision-engineered surfactant.
We
lease the space for our manufacturing facility in Totowa, New
Jersey.
25
ITEM
3. LEGAL
PROCEEDINGS.
Other
than disputes arising in the ordinary course of our business, we are not aware
of any pending or threatened legal actions that would, if determined adversely
to us, have a material adverse effect on our business and
operations.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No
matters were submitted to a vote of security holders during the fourth quarter
of 2005.
26
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
Our
common stock is traded on the Nasdaq National Market under the symbol “DSCO.” As
of March 2, 2006, the number of stockholders of record of shares of our common
stock was 162 and the number of beneficial owners of shares of our common stock
was approximately 15,000. As of March 14, 2006, there were 61,140,942 shares
of
our common stock issued and outstanding.
The
following table sets forth the quarterly price ranges of our common stock for
the periods indicated, as reported by Nasdaq.
|
Low
|
High
|
||||||
|
First
Quarter 2004
|
$
|
9.94
|
$
|
13.90
|
|||
|
Second
Quarter 2004
|
$
|
8.25
|
$
|
13.22
|
|||
|
Third
Quarter 2004
|
$
|
5.75
|
$
|
9.90
|
|||
|
Fourth
Quarter 2004
|
$
|
6.42
|
$
|
9.52
|
|||
|
First
Quarter 2005
|
$
|
5.05
|
$
|
8.60
|
|||
|
Second
Quarter 2005
|
$
|
5.34
|
$
|
7.60
|
|||
|
Third
Quarter 2005
|
$
|
5.55
|
$
|
9.15
|
|||
|
Fourth
Quarter 2005
|
$
|
5.67
|
$
|
7.43
|
|||
|
First
Quarter 2006 (through March 14, 2006)
|
$
|
6.66
|
$
|
8.60
|
|||
We
have
not paid dividends on our common stock. It is anticipated that we will not
pay
dividends on our common stock in the foreseeable future.
Sales
of Unregistered Securities
In
the
quarter ended December 31, 2005, pursuant to the exercise of outstanding
warrants and options, we issued an aggregate of 10,834 shares of our common
stock at various exercise prices ranging from $1.50 to $6.47 per share. We
also
awarded and issued 30,263 shares of our common stock as restricted stock awards
under our Amended and Restated 1998 Stock Incentive Plan that will be held
in
escrow as vesting terms (100% vesting upon the date that Surfaxin for RDS first
becomes widely available, as such date is determined by the Company) are
achieved. 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 by us.
Information relating to compensation plans under which our common stock is
authorized for issuance is referred to in Part III, Item 12 of this Annual
Report on Form 10-K.
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 to be made by us with the amount of any such match determined
as a
percentage of each individual participant’s cash contribution. For the quarter
ended December 31, 2005, shares issued by us as a discretionary match totaled
10,498 shares of common stock.
27
ITEM
6. SELECTED
FINANCIAL DATA
The
selected consolidated financial data set forth below with respect to our
consolidated statement of operations for the years ended December 31, 2005,
2004
and 2003 and with respect to the consolidated balance sheets as of December
31,
2005 and 2004 have been derived from audited consolidated financial statements
included as part of this Annual Report on Form 10-K. The statement of operations
data for the years ended December 31, 2002 and 2001 and the balance sheet data
as of December 31, 2003 and 2002 and 2001 are derived from audited financial
statements not included in this Annual Report. The following selected
consolidated financial data should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual
Report.
|
Consolidated
Statement of Operations Data:
(in
thousands, except per share data)
|
||||||||||||||||
|
For
the year ended December 31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
Revenues
from collaborative agreements
|
$
|
134
|
$
|
1,209
|
$
|
1,037
|
$
|
1,782
|
$
|
1,112
|
||||||
|
Operating
Expenses:
|
||||||||||||||||
|
Research
and development
|
24,137
|
25,793
|
19,750
|
14,347
|
8,007
|
|||||||||||
|
General
and administrative
|
18,505
|
13,322
|
5,722
|
5,458
|
5,067
|
|||||||||||
|
In-process
research and development
|
16,787
|
-
|
-
|
-
|
-
|
|||||||||||
|
Corporate
partnership restructuring charges
|
-
|
8,126
|
-
|
-
|
-
|
|||||||||||
|
Total
expenses
|
59,429
|
47,241
|
25,472
|
19,805
|
13,074
|
|||||||||||
|
Operating
loss
|
(59,295
|
)
|
(46,032
|
)
|
(24,435
|
)
|
(18,023
|
)
|
(11,962
|
)
|
||||||
|
Other
income and expense
|
391
|
(171
|
)
|
155
|
580
|
816
|
||||||||||
|
Net
loss
|
$
|
(58,904
|
)
|
$
|
(46,
203
|
)
|
$
|
(24,280
|
)
|
$
|
(17,443
|
)
|
$
|
(11,146
|
)
|
|
|
Net
loss per common share - basic and diluted
|
$
|
(1.09
|
)
|
$
|
(1.00
|
)
|
$
|
(0.65
|
)
|
$
|
(0.64
|
)
|
$
|
(0.51
|
)
|
|
|
Weighted
average number of common shares
outstanding
|
54,094
|
46,179
|
37,426
|
27,351
|
22,038
|
|||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||
|
(in
thousands)
|
For
the year ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
Cash
and investments
|
$
|
50,908
|
$
|
32,654
|
$
|
29,422
|
$
|
19,152
|
$
|
16,696
|
||||||
|
Working
capital
|
33,860
|
24,519
|
23,061
|
16,277
|
16,484
|
|||||||||||
|
Total
assets
|
56,008
|
37,637
|
32,715
|
21,062
|
20,065
|
|||||||||||
|
Long-term
obligations, less current potion
|
3,323
|
7,583
|
711
|
1,706
|
33
|
|||||||||||
|
Total
stockholder’s equity
|
$
|
34,838
|
$
|
21,097
|
$
|
24,303
|
$
|
14,761
|
$
|
17,623
|
||||||
28
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
This
item
should be read in connection with our Consolidated Financial Statements.
See
Item 15: “Exhibits and Financial Statement Schedules.”
OVERVIEW
We
are a
biotechnology company developing its proprietary surfactant technology as
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 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 NICU, critical care unit
and
other hospital settings, where there are few or no approved therapies available.
Our
SRT
pipeline is initially focused on the most significant respiratory conditions
prevalent in the NICU. Our lead product, SurfaxinÒ
(lucinactant), for the prevention of RDS in premature infants, has received
an
Approvable Letter from the FDA and is under review for approval in Europe
by the
EMEA. The FDA has established April 2006 as its target to complete its review
of
the Surfaxin NDA. Surfaxin is also being developed for the prevention and
treatment of Bronchopulmonary Dysplasia (BPD), also known as Chronic Lung
Disease, in premature infants. We are preparing to conduct multiple Phase
2
pilot studies with Aerosurf™, aerosolized SRT administered through nasal
continuous positive airway pressure (nCPAP), for the treatment of neonatal
respiratory failure.
To
address the various 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 to address Acute Respiratory Distress
Syndrome (ARDS) in adults, and are also developing aerosol formulations of
SRT
to address Acute Lung Injury (ALI), asthma, COPD, and other respiratory
conditions.
With
the
goal of becoming a fully integrated biotechnology company, we are implementing
a
long-term business strategy which includes:
| · |
continued
investment in manufacturing capabilities (including at the manufacturing
operations in New Jersey acquired in December 2005) for the production
of
precision-engineered surfactant drug products to meet anticipated
clinical
and, if approved, commercial needs in the United States, Europe
and other
markets. We view our recent acquisition of manufacturing operations
as an
initial step of our manufacturing strategy for the continued development
of our SRT portfolio. Our long-term strategy includes building
or
acquiring additional manufacturing capabilities for the production
of our
precision-engineered surfactant drug products;
|
| · |
building
a specialty pulmonary United States sales and marketing organization
to
focus initially on opportunities in the NICU;
|
| · |
investing
in development of aerosol SRT pipeline programs, including Aerosurf,
primarily utilizing the aerosol generating technology we licensed
in
December 2005 through a strategic alliance with Chrysalis Technologies,
a
division of Philip Morris USA Inc.; and
|
| · |
securing
additional corporate partnerships for international markets outside
of the
United States for the development and potential commercialization
of SRT,
including Surfaxin.
|
29
Since
our
inception, we have incurred significant losses and, as of December 31, 2005,
we
had an accumulated deficit of $202.0 million (including historical results
of
predecessor companies). The majority of our expenditures to date have been
for
research and development activities and in 2005 also include significant
general
and administrative, primarily pre-commercialization, activities. Research
and
development expenses represent costs incurred for scientific and clinical
personnel, clinical trials, regulatory filings and developing manufacturing
capabilities (including costs for contract manufacturing and the purchase
of our
own manufacturing operations in 2005). We expense research and development
costs
as they are incurred. General and administrative expenses consist primarily
of
pre-launch commercialization sales and marketing, executive management,
financial, business development, legal and general corporate activities and
related expenses. See Item 7: “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations.”
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings, debt arrangements and strategic
collaborations. As of December 31, 2005, we had: (i) cash and investments
of
$50.9 million; (ii) $47.6 million available under our Committed Equity Financing
Facility (CEFF) with Kingsbridge Capital Ltd. (Kingsbridge), subject to the
terms and conditions of the CEFF; (iii) a $9.0 million capital equipment
lease
financing arrangement with General Electric Capital Corporation (GECC), of
which
$6.4 million has been drawn and, after giving effect to principal payments,
$4.9
million was outstanding; and (iv) a secured revolving credit facility of
$8.5
million with PharmaBio Development Inc. (PharmaBio), of which the entire
amount
was outstanding. See Item 7: “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources.”
RESEARCH
AND DEVELOPMENT
Research
and development expenses for the years ended December 31, 2005, 2004 and
2003
were $24.1 million, $25.8 million, and $19.8 million, respectively. These
costs
are charged to operations as incurred and are tracked 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. In
2005,
we incurred a non-recurring charge of $16.8 million associated with the purchase
of the manufacturing operations at the Totowa, NJ facility and which we
classified as in-process research and development. The one-time charge is
not
reflected in the following discussion.
These
cost categories typically include the following expenses:
Research
and Pre-Clinical Operations
Research
and pre-clinical operations reflects 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 (including a research funding and option agreement with The
Scripps Research Institute which expired in February 2005).
Manufacturing
Development
Manufacturing
development primarily reflects costs incurred to develop current good
manufacturing practices (cGMP) manufacturing capabilities in order to provide
clinical and commercial scale drug supply. Manufacturing development activities
include external contract manufacturing resources (including expenses associated
with technology transfer and significant development costs associated with
the
implementation of enhancements to quality controls, process assurances and
documentation requirements that support the production process at the Totowa,
NJ
manufacturing facility that we acquired in December 2005), securing our own
manufacturing capabilities and expanding the operations to meet production
needs
for our SRT pipeline, employee costs, depreciation, and expenses for the
purchase of raw materials, quality control and assurance activities, and
analytical services.
30
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 include 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 each of the
foregoing categories for the years ended December 31, 2005, 2004 and
2003:
|
(Dollars
in thousands)
|
Year
Ended December 31,
|
|||||||||
|
Research
and Development Expenses:
|
2005
|
|
|
2004
|
|
|
2003
|
|||
|
Research
and pre-clinical operations
|
$
|
2,211
|
$
|
2,916
|
$
|
1,958
|
||||
|
Manufacturing
development
|
11,416
|
7,010
|
4,268
|
|||||||
|
Unallocated
development - clinical and regulatory operations
|
7,274
|
8,588
|
5,966
|
|||||||
|
Direct
clinical trial expenses
|
3,236
|
7,279
|
7,558
|
|||||||
|
Total
Research and Development Expenses
|
$
|
24,137
|
$
|
25,793
|
$
|
19,750
|
||||
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 and 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 in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations,” below. Successful
completion of development of our SRT is contingent on numerous risks,
uncertainties and other factors, which are described in detail in the section
entitled “Risk Factors”.
These
factors include:
| · |
Completion
of pre-clinical and clinical trials of our product candidates 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
supply of raw materials necessary to manufacture
Surfaxin;
|
| · |
Timely
resolution of the cGMP-related matters at our manufacturing operation
in
Totowa, NJ and certain other SRTs presently under development,
including
matters that were noted by the FDA in its inspectional report on
Form
FDA-483;
|
| · |
Successful
manufacture of Surfaxin at our operation in Totowa, NJ;
and
|
| · |
Obtaining
sales and marketing capabilities and additional manufacturing operations,
for which we presently have limited
resources.
|
31
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 compatibility with complimentary
technologies;
|
| · |
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 the value, financial condition and results of operations
will
be substantially harmed.
CORPORATE
PARTNERSHIP AGREEMENTS
Chrysalis
Technologies, a Division of Philip Morris USA Inc.
In
December 2005, we entered into a strategic alliance with Chrysalis Technologies
(Chrysalis), a division of Philip Morris USA Inc., to develop and commercialize
aerosol SRT to address a broad range of serious respiratory conditions, such
as
ALI, neonatal respiratory failure, COPD, asthma, cystic fibrosis and others.
The
alliance united two highly complementary respiratory technologies - our
precision-engineered surfactant technology with Chrysalis’ novel aerosolization
device technology that is being developed to enable the delivery of therapeutics
to the deep lung.
Chrysalis
has developed a proprietary aerosol generation technology that is being designed
with the potential to enable targeted upper respiratory or deep lung delivery
of
therapies for local or systematic applications. The Chrysalis technology
is
designed to produce high-quality, low velocity aerosols for possible deep
lung
aerosol delivery. Aerosols are created by pumping the drug formulation through
a
small, heated capillary wherein the excipient system is substantially converted
to the vapor state. Upon exiting the capillary, the vapor stream quickly
cools
and slows in velocity yielding a dense aerosol with a defined particle size.
The
defined particle size can be readily controlled and adjusted through device
modifications and drug formulation changes.
The
alliance focuses on therapies for hospitalized patients, including those
in the
neonatal intensive care unit (NICU), pediatric intensive care unit (PICU)
and
the adult intensive care unit (ICU), and can be expanded into other hospital
applications and ambulatory settings. We and Chrysalis are utilizing their
respective capabilities and resources to support and fund the design and
development of integrated drug-device systems that can be uniquely customized
to
address specific respiratory diseases and patient populations. Chrysalis
is
responsible for developing the design for the aerosol device platform, patient
interface and disposable dose packets. We are responsible for aerosolized
SRT
drug formulations, clinical and regulatory activities, and the manufacturing
and
commercialization of the drug-device products. We have exclusive rights to
Chrysalis’ aerosolization technology for use with pulmonary surfactants for all
respiratory diseases and conditions in hospital and ambulatory settings.
Generally, Chrysalis will receive a tiered royalty on product sales: the
base
royalty generally applies to aggregate net sales of less than $500 million
per
contract year; the royalty generally increases on aggregate net sales in
excess
of $500 million per contract year, and generally increases further on aggregate
net sales of alliance products in excess of $1 billion per contract
year.
Our
lead
neonatal program utilizing the Chrysalis technology is Aerosurf administered
via
nasal continuous positive airway pressure (nCPAP) to treat premature infants
in
the NICU at risk for respiratory failure. Our lead adult program utilizing
the
Chrysalis technology is the development of aerosolized SRT administered as
a
prophylactic for patients in the hospital at risk for Acute Lung Injury (ALI).
32
Laboratorios
del Dr. Esteve, S.A.
In
1999,
we entered into a strategic alliance 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
December 2004, we reached an agreement with Esteve to restructure our strategic
alliance for the development, marketing and sales of our products in Europe
and
Latin America. This restructured alliance supersedes the existing sublicense
and
supply agreements we had entered into with Esteve in March 2002. Under the
revised alliance, 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 that 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 alliance,
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
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.
In
October 2005, Esteve sublicensed the distribution rights to Surfaxin in Italy
to
Dompe Farmaceitici Spa (Dompe), a privately owned Italian company. Under
the
sublicense agreement, Dompe will be responsible for sales, marketing and
distribution in Italy of Surfaxin.
The
Scripps Research Institute
Our
research funding and option agreement with Scripps expired in February 2005.
Pursuant to this agreement, we had been obligated to fund a portion of Scripps’
research efforts and thereby had the option to acquire an exclusive worldwide
license to the technology developed from the research program during the
term of
the agreement. Scripps owned all of the technology that it developed pursuant
to
work performed under the agreement. We had the right to receive 50% of the
net
royalty income received by Scripps for inventions that were jointly developed
under the agreement and for which we did not exercise our option to acquire
an
exclusive license. Payments to Scripps under this agreement were $400,000,
$600,000 and $649,000 in 2005, 2004, and 2003, respectively.
PLAN
OF OPERATIONS
The
Company has incurred substantial losses since inception and expects to continue
to expend substantial amounts for continued product research, development,
manufacturing and commercialization activities.
33
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 Item 1A: “Risk Factors - Our technology
platform is based solely on our proprietary, precision-engineered
surfactant technology;” “Our ongoing clinical trials may be delayed, or
fail, which will harm our business;” and “The regulatory approval process
for our products is expensive and time-consuming, and the outcome
is
uncertain. We may not obtain required regulatory approvals for
the
commercialization of our products.”
|
Our
major
research and development projects include:
SRT
for Neonatal Intensive Care Unit
|
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.
|
|
We
have received an Approvable Letter from the FDA for Surfaxin for
the
prevention of RDS in premature infants. We anticipate potential
FDA
approval in April 2006 and U.S. commercial launch to occur late
in the
second quarter of 2006.
|
We
have
filed an MAA with the EMEA for clearance to market Surfaxin for the prevention
and rescue treatment of RDS in premature infants in Europe. Activities
associated with this regulatory filing are ongoing. We have received the
Day 180
List of Outstanding Issues from the Committee for Medicinal Products for
Human
Use (CHMP) in relation to our MAA for Surfaxin®
for the
prevention and rescue treatment of Respiratory Distress Syndrome in premature
infants. We plan to submit a written response to all of the CHMP’s outstanding
issues in early April 2006 with a possible Oral Explanation before the CHMP
in
late June 2006. According to standard CHMP procedures, the Committee is expected
to make a recommendation on whether to grant a Marketing Authorization for
Surfaxin and issue a formal Opinion in late July 2006.
|
We
are currently conducting a double-blind, controlled Phase 2 clinical
trial
that will enroll up to 210 very low birth weight premature infants
born at
risk for developing BPD. The study’s objective is to determine the safety
and tolerability of administering Surfaxin as a therapeutic approach
for
the prevention and treatment of BPD. The BPD study design provides
that
such premature infants receive a treatment regime of up to 5 Surfaxin
doses beginning within the first 3-10 days of life that are in
addition to
the surfactant they received on day 1 of life for RDS. 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 or its severity. We anticipate the results of this trial
to be
available in the third quarter of 2006. In October 2005, the Office
of
Orphan Products Development of the FDA granted Orphan Drug designation
to
Surfaxin for the treatment of BPD in premature infants. We anticipate
the
results of this trial to be available in the third quarter of 2006.
|
|
Aerosurf™
is our precision-engineered aerosolized SRT administered via nCPAP
intended to treat premature infants at risk for respiratory failures.
In
September 2005, we completed and announced the results of our first
pilot
Phase 2 clinical study of Aerosurf, which was designed as an open
label,
multicenter study to evaluate the feasibility, safety and tolerability
of
Aerosurf delivered via nCPAP for the prevention of RDS in premature
infants administered within 30 minutes of birth over a three hour
duration. The study showed that it is feasible to deliver Aerosurf
via
nCPAP and that the treatment was generally safe and well tolerated.
|
34
|
In
December 2005, we entered into a strategic alliance with Chrysalis.
The
alliance united two highly complementary respiratory technologies
- our
precision-engineered surfactant technology with Chrysalis’ novel
aerosolization device technology that is being developed to enable
the
delivery of therapeutics to the deep lung. Through this alliance,
we
gained exclusive rights to their aerosolization technology for
use with
pulmonary surfactants for all respiratory diseases. Our lead neonatal
program utilizing the Chrysalis technology is Aerosurf administered
via
nasal continuous positive airway pressure (nCPAP) to treat premature
infants in the NICU at risk for respiratory failure. We anticipate
conducting pilot Phase 2 clinical studies of Aerosurf utilizing
the
Chrysalis aerosolization technology in the second half of 2006.
|
SRT
for Critical Care and Hospital Indications
|
We
are presently conducting a Phase 2 open-label, controlled, multi-center
clinical trial of our SRT for the treatment of adults with ARDS.
In
December 2004, we announced preliminary data from this trial and
that we
were modifying the trial protocol to allow for increased enrollment
of up
to 160 patients. Patients are randomized to either receive our
SRT or the
current standard of care, which is mechanical ventilation and support
therapies. The primary endpoint of this trial is the incidence
rate of
patients being alive and off mechanical ventilation at Day 28.
Secondary
endpoints include, but are not limited to, safety and tolerability
of our
SRT and the bronchoscopic lavage procedure, increased oxygenation,
decreased ventilatory requirements, mortality at the end of Day
28, number
of days in the intensive care unit, and number of days in the hospital.
Results of the Phase 2 trial are anticipated to be available in
March
2006.
|
We
are
also evaluating the development of aerosol formulations of SRT to potentially
address ALI, asthma, COPD, and other respiratory conditions. In 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 to treat patients with mild-persistent asthma (development
name DSC-104). In December 2005, we entered into a strategic alliance with
Chrysalis to develop and commercialize aerosolized SRT to address a broad
range
of serious respiratory conditions. Our lead adult program utilizing the
Chrysalis technology is the development of aerosolized SRT administered as
a
prophylactic for patients in the hospital at risk for Acute Lung Injury (ALI).
Given the current focus on developing the SRT pipeline for the NICU, we will
be
assessing the timing and further prioritization of these programs in 2006.
| (ii) |
invest
in and support our long-term manufacturing strategy for the production
of
our precision-engineered surfactant drug product including:
|
(a)
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 expansion of our manufacturing operations in New Jersey
(acquired in December 2005).
In
October 2003, we entered into a contract manufacturing arrangement with Laureate
Pharma, Inc. (Laureate), whereby our Surfaxin manufacturing know-how and
dedicated equipment was transferred to their Totowa, NJ operations. Transfer
of
the Surfaxin manufacturing process was completed in 2004 and, since that
time,
the Totowa, NJ operations have been predominantly dedicated to Surfaxin and
the
support of regulatory compliance requirements for our manufacturing operation.
In
February 2005, we received an Approvable Letter from the FDA for clearance
to
market Surfaxin, our lead product, for the prevention and treatment of RDS
in
premature infants. As part of the review of the Surfaxin NDA, the FDA, in
January 2005, issued an inspection report (Form FDA-483) to Laureate, at
that
time our contract manufacturer of Surfaxin, citing certain observations
concerning Laureate’s compliance with cGMPs in connection with its 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. To address the inspectional observations, we and Laureate implemented
improve quality systems and documentation controls believed to support the
FDA’s
regulatory requirements.
35
In
December 2005, we purchased, for $16.0 million, the manufacturing operation
of
Laureate that are critical to the production of Surfaxin and our SRT clinical
programs. We will use this pharmaceutical manufacturing and development facility
for the production of Surfaxin and for the development and enhanced formulations
of Surfaxin and the development of aerosol formulations including Aerosurf.
Laureate previously was our contract manufacturer and the Totowa facility
was
essentially a dedicated Surfaxin operation. Together with Laureate, we have
invested in resources, facilities and quality systems to prepare a
cGMP-compliant operation for the anticipated FDA approval of Surfaxin. We
have
entered into a transitional services arrangement with Laureate whereby it
is
anticipated that Laureate will provide us with certain limited
manufacturing-related support services through December 2006. See In-Process
Research and Development.
Our
previously submitted responses to the Approvable Letter were accepted by
the FDA
as a complete response as of October 5, 2005. This date marks the start of
the
six month review period during which the FDA expects to complete its review
of
our NDA for Surfaxin for the prevention of RDS in premature infants. Assuming
that the corrective actions made to the Surfaxin manufacturing operations
in
Totowa, NJ are adequate, we anticipate that our NDA will be approved in April
2006 and that the U.S. commercial launch of Surfaxin will occur late in the
second quarter of 2006.
We
view
the recent acquisition of manufacturing operation as an initial step of our
manufacturing strategy for the continued development of our SRT portfolio,
including life cycle management of Surfaxin, potential formulation enhancements,
and expansion of our aerosol SRT products. We anticipate that our manufacturing
capabilities, primarily through our manufacturing operation in Totowa, NJ,
should allow sufficient commercial production of Surfaxin, if approved, to
supply the present worldwide demand for the prevention of RDS in premature
infants, the prevention and treatment of BPD and all of our anticipated
clinical-scale production requirements for SRT for the treatment of ARDS
in
adults, and Aerosurf for neonatal respiratory diseases;
(b)
securing
additional manufacturing capabilities.
|
The
lease for our Totowa, NJ, manufacturing operations is through December
2014. In addition to the customary terms and conditions, the lease
contains an early termination option, first beginning in December
2009.
The early termination option can only be exercised by the landlord
upon a
minimum of two years prior notice and, in the earlier years, payment
to us
of significant early termination amounts. Taking into account this
early
termination option for our Totowa, NJ, facility, our long-term
strategy
includes building or acquiring additional manufacturing capabilities
for
the production of our precision-engineered surfactant drug products;
and
|
(c) manufacture
of the aerosolization devices and related componentry for our aerosol SRT
products. We plan on utilizing third party contract manufacturers, suppliers
and
assemblers for our planned clinical trials.
See
Item
1A: “Risk Factors - The manufacture of our products is a highly exacting and
complex process, and if we or one of our materials suppliers encounter problems
manufacturing our products, our business could suffer;” and “If the parties we
depend on for supplying our drug substance raw materials and certain
manufacturing-related services do not timely supply these products and services,
it may delay or impair our ability to develop, manufacture and market our
products.”
| (iii) |
build
our own specialty pulmonary United States sales, marketing and
medical
affairs organization to execute the commercial launch of Surfaxin,
if
approved, in the United States. We anticipate that our Surfaxin
NDA will
be approved in April 2006 and that the U.S. commercial launch of
Surfaxin
will occur late in the second quarter of 2006. Our sales and marketing
force will initially focus on opportunities in the NICU and, as
products
are developed, to expand to critical care and hospital settings.
This
strategic initiative, which is necessary for the anticipated commercial
launch of Surfaxin, is intended to allow us to manage and administer
our
own commercial operations, establish a strong presence in the NICU
and
optimize company economics;
|
| (iv) |
implement
an international partnering strategy for the development and
commercialization of our SRT NICU pipeline, including Surfaxin,
in
international markets outside of the United States;
and
|
36
| (v) |
invest
in additional general and administrative resources primarily to
support
our intellectual property portfolios, including building and enforcing
our
patent and trademark positions, our business development initiatives,
financial systems and controls and management information technologies.
|
We
will
need to generate significant revenues from product sales, related royalties
and
transfer prices to achieve and maintain profitability. Through December 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 suppliers. Moreover, we may never achieve significant revenues
or
profitable operations from the sale of any of our products or technologies.
Through
December 31, 2005, we had not generated taxable income. On December 31, 2005,
net operating losses available to offset future taxable income for Federal
tax
purposes were approximately $187.0 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 $3.8 million at December 31, 2005.
The
Federal net operating loss and research and development tax credit carryforwards
expire beginning in 2009 through 2024.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
We
have
identified below some of our more critical accounting policies and changes
to
accounting policies. For further discussion of our accounting policies see
Note
2 - “Summary of Significant Accounting Policies” in the Notes to Consolidated
Financial Statements. See Item 15: “Exhibits and Financial Statement
Schedules.”
Revenue
Recognition- research and development collaborative
agreements
For
up-front payments and licensing fees related to our contract research or
technology, we defer and recognize revenue as earned over the life of the
related agreement. Milestone payments are recognized as revenue upon achievement
of contract-specified events and when there are no remaining performance
obligations.
Revenue
earned under our research and development collaborative agreement contracts
is
recognized over a number of years as we perform research and development
activities. For up-front payments and licensing fees related to our contract
research or technology, we defer and recognize revenue as earned over the
estimated period in which the services are expected to be
performed.
Research
and Development Costs
Research
and development costs are expensed as incurred. We will continue to incur
research and development costs as we continue to expand our product development
activities. Our research and development costs have included, and will continue
to include, expenses for internal development personnel, supplies and
facilities, clinical trials, regulatory compliance and reviews, validation
of
processes and start up costs to establish commercial manufacturing capabilities.
Once a product candidate is approved by the FDA, if at all, and we begin
commercial manufacturing, we will no longer expense certain manufacturing
costs
as research and development costs for any such product.
RESULTS
OF OPERATIONS
The
net
loss for the years ended December 31, 2005, 2004 and 2003 were $58.9 million
(or
$1.09 per share), $46.2 million (or $1.00 per share) and $24.3 million (or
$0.65
per share), respectively.
37
In
2005,
we purchased the manufacturing operations of Laureate Pharma, Inc. (Laureate)
in
Totowa, NJ for $16.0 million and incurred additional related expenses of
$0.8
million. Included in the 2005 net loss is a charge, classified as in-process
research & development, of $16.8 million or $0.31 per share related to the
manufacturing purchase. Included in the 2004 net loss is a charge, classified
as
corporate partnership restructuring, of $8.1 million, or $0.18 per share,
associated with the restructuring of strategic collaborations with Quintiles
and
Esteve.
Excluding
these charges, the net loss for the year ended December 31, 2005 and 2004
was
$42.1 million, or $0.78 per share, and $38.1 million, or $0.82 per share,
respectively.
Revenue
Revenue
for the years ended December 31, 2005, 2004 and 2003 were $0.1 million, $1.2
million and $1.0 million, respectively. These revenues are primarily associated
with our corporate partnership agreement with Esteve to develop, market and
sell
Surfaxin in Southern Europe. Additionally, 2003 revenues include approximately
$0.3 million related to our Small Business Innovative Research (SBIR) grant
to
develop Surfaxin for ARDS and the conclusion of this project.
The
primary change in revenues from 2003, 2004 and 2005 reflects; (i) the agreements
with Esteve as of 2002 whereby Esteve was responsible for providing development
funding; (ii) the restructuring of our corporate partnership with Esteve
in
December 2004 (primarily as it relates to funding of ARDS development costs);
and (iii) the extension of the amortization period (based on the anticipated
approval timeline for certain world health regulatory authorities) for revenue
recognition of the funding previously provided in connection with RDS clinical
trial costs.
Research
and Development Expenses
Research
and development expenses for the years ended December 31, 2005, 2004 and
2003
were $24.1 million, $25.8 million and $19.8 million, respectively. For a
description of expenses and research and development activities see
“Management’s Discussion and Analysis - Research and Development”. For a
description of the clinical programs included in research and development
see
“Management’s Discussion and Analysis - Plan of Operations”.
The
change in research and development expenses for the years ended December
31,
2005, 2004 and 2003 primarily reflects:
| (i) |
manufacturing
development activities to support the production of clinical and
commercial drug supply for our SRT programs, including Surfaxin,
in
conformance with current Good Manufacturing Practices (cGMPs).
Expenses
related to manufacturing development activities were $11.4 million,
$7.0
million and $4.3 million for the years ended December 31, 2005,
2004 and
2003, respectively.
|
The
increase in 2005 versus 2004 primarily reflects expenses incurred for the
implementation of enhancements to quality controls, process assurances and
documentation requirements that support the production process predominantly
at
Laureate’s Totowa, NJ operation (our contract manufacturer at that time) in
response to the FDA 483 inspectional observations. Additionally, we made
enhancements and improvements to Laureate’s Totowa, NJ operations and facility
for the production of Surfaxin, SRT formulations and aerosol development
capabilities. In December 2005, we purchased the manufacturing operation
of
Laureate in Totowa, NJ.
|
The
increase in 2004 versus 2003 primarily reflects expenses associated
with
the transfer and validation of our manufacturing equipment process
and
know-how to Laureate (completed in 2004) to support the production
of
clinical and commercial drug supply of Surfaxin in conformance
with cGMPs;
|
38
| (ii) |
direct
clinical trial and regulatory activities, related to the advancement
of
our SRT pipeline. Expenses related to these activities were $3.2
million,
$7.3 million and $7.6 million for the years ended December 31,
2005, 2004
and 2003, respectively. The decrease in 2005 from 2004 is primarily
due to
costs in 2004 associated with clinical and regulatory activities
for
Surfaxin for RDS, principally the NDA filing, a related milestone
payment
for the license of Surfaxin, and follow-up clinical activity pertaining
to
the two Phase 3 clinical trials. Expenditures in 2005 primarily
reflect
regulatory activities associated with Surfaxin for RDS (specifically
the
U.S. FDA Approvable Letter and the EMEA Marketing Authorization
Application) and clinical activities related to the Phase 2 clinical
trials for ARDS in adults, BPD in premature infants and Aerosurf
for
Neonatal Respiratory Failures. Expenses incurred in 2004 and 2003
are
primarily related to the clinical and development, regulatory and
long-term clinical follow-up activity for the two Phase 3 trials
of
Surfaxin for RDS in premature
infants;
|
| (iii) |
clinical
and regulatory operations to manage multiple clinical studies related
to
the advancement of our SRT pipeline. Expenses related to these
activities
were $7.3 million, $8.6 million and $6.0 million for the years
ended
December 31, 2005, 2004 and 2003, respectively. The decrease in
2005
versus 2004 is primarily related to the use of external consultants
and
temporary help associated with the filing of the Surfaxin NDA in
2004. The
increase in 2004 versus 2003 is primarily related to the expansion
of
clinical, regulatory, biostatistics and scientific capabilities
to support
multiple programs in advancing our SRT pipeline;
and
|
| (iv) |
research
and pre-clinical operations associated with the development of
aerosolized
and other related formulations of our precision-engineered lung
surfactant
and application and engineering of aerosol delivery systems for
our SRT
pipeline. Expenses related to these activities were $2.2 million,
$2.9
million and $2.0 million for the years ended December 31, 2005,
2004 and
2003, respectively. The decrease in 2005 versus 2004 is primarily
related
to the conclusion of research efforts and funding associated with
The
Scripps Research Institute agreement, which expired in February
2005. The
increase in 2004 versus 2003 is primarily related to building our
aerosol
technology management and related capabilities in our California
operations.
|
General
and Administrative Expenses
General
and administrative expenses for the years ended December 31, 2005, 2004 and
2003
were $18.5 million, $13.3 million and $5.7 million, respectively. General
and
administrative expenses consist primarily of the costs of pre-launch commercial
sales and marketing, executive management, finance and accounting, business
and
commercial development, legal, facility and other administrative costs.
The
increase in general and administrative expenses for the years ended December
31,
2005, 2004 and 2003 primarily reflects:
| (i) |
pre-launch
commercialization activities (in anticipation of the potential
approval
and launch of Surfaxin for RDS in the second quarter of 2006) related
to
building our own specialty pulmonary United States commercial organization
to focus initially on the commercial and medical promise of its
SRT to
address respiratory therapies for the Neonatal Intensive Care Unit
(NICU).
Expenditures are for sales, marketing and medical affairs activities.
Expenses for the years ended December 31, 2005, 2004 and 2003 were
$10.1
million, $5.9 million and $1.0 million, respectively. A portion
of these
commercialization expenses were financed by use of the secured,
revolving
credit facility with PharmaBio in the amounts of $3.5 million in
2004 and
$1.0 million in 2003; and
|
| (ii) |
business
administrative expenses were $8.4 million, $7.4 million and $4.7
million
for the years ended December 31, 2005, 2004 and 2003, respectively.
The
increases from 2003 through 2005 primarily include building management
and
systems for financial and information technology capabilities,
business
development activities related to potential strategic collaborations,
legal activities related to the preparation and filing of patents
in
connection with the expansion of our SRT pipeline, facilities expansion
activities to accommodate existing and future growth, and corporate
governance initiatives to comply with the Sarbanes-Oxley
Act.
|
39
In-Process
Research & Development
In
December 2005, we purchased the manufacturing operations of Laureate Pharma,
Inc. (Laureate) in Totowa, NJ (our previous contract manufacturer) for $16.0
million and incurred additional related expenses of $0.8 million. The
pharmaceutical manufacturing and development facility will be used for the
production of Surfaxin, SRT formulations and aerosol development capabilities.
We believe this acquisition was a logical way to implement the initial step
of a
long-term manufacturing strategy for the continued development of our SRT
portfolio, specifically life cycle management of Surfaxin for new indications,
potential formulation enhancements, and expansion of our aerosolized SRT
products beginning with Aerosurf™.
The
manufacturing facility in Totowa, NJ is located in approximately 21,000 square
feet of leased pharmaceutical manufacturing and development space that is
specifically designed for the production of sterile pharmaceuticals in
compliance with current Good Manufacturing Practices (cGMP) requirements.
There
are approximately 25 personnel that are qualified in sterile pharmaceutical
manufacturing and currently employed at the operations. In October 2003,
we and
Laureate entered into a contract manufacturing arrangement, whereby our Surfaxin
manufacturing know-how and dedicated equipment was transferred to this facility.
Transfer of the Surfaxin manufacturing process was completed in 2004 and,
since
that time, the facility has been predominantly dedicated to Surfaxin and
the
support of regulatory compliance requirements for our manufacturing operations.
In January 2005, as part of the review of the Surfaxin NDA, the FDA issued
a
Form 483 to Laureate, citing inspectional observations related to basic quality
controls, process assurances and documentation requirements that support
the
commercial production process necessary to comply with cGMPs. To address
the
inspectional observations, we and Laureate implemented improved quality systems
and documentation controls believed to support the FDA’s regulatory requirements
for the approval of Surfaxin.
In
consideration for the $16.0 million paid to Laureate, we received the
following:
| · |
An
assignment of the existing lease of the Totowa facility, with a
lease term
expiring in December 2014. The lease is subject to customary terms
and
conditions and contains an early termination option, first beginning
in
December 2009. The early termination option can only be exercised
by the
landlord upon a minimum of two years prior notice and payment of
significant early termination amounts to
us.
|
| · |
Equipment
and leasehold improvements related to the Totowa
facility.
|
| · |
The
right to employ the majority of the approximately 25 personnel
that are
qualified in sterile pharmaceutical manufacturing and that were
employed
by Laureate at the operations.
|
In
connection with this transaction, we incurred a non-recurring charge, classified
as in-process research & development in accordance with Financial Accounting
Standard No. 2 (FAS 2) “Accounting for Research & Development Costs,” of
$16.8 million associated with the purchase of the manufacturing operations
at
the Totowa, NJ facility.
Also,
in
connection with the acquisition, we borrowed $2.4 million pursuant to our
capital lease financing arrangement with General Electric Capital Corporation
(GECC) to support financially the purchase of the manufacturing operations.
Corporate
Partnership Restructuring Charges
In
2004,
we incurred non-cash charges totaling $8.1 million related to the restructuring
of our corporate partnerships with Quintiles and Esteve. See “Management’s
Discussion and Analysis - Corporate Partnership Agreements.”
In
2001,
we entered into a commercialization agreement with Quintiles Transnational
Corp.
(Quintiles), and its strategic investment group affiliate, PharmaBio, to
provide
certain commercialization services in the United States for Surfaxin for
the
prevention of RDS in premature infants and the treatment of Meconium Aspiration
Syndrome (MAS) in full-term infants. In November 2004, we reached an agreement
with Quintiles to restructure our business arrangements and terminate our
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
a
warrant to PharmaBio to purchase 850,000 shares of our common stock at an
exercise price equal to $7.19 per share. The warrant has 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 warrant was valued at
its
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 remains available with the
original maturity date of December 10, 2004 being extended until December
31,
2006.
40
In
December 2004, we restructured our strategic alliance with Esteve for the
development, marketing and sales of our products in Europe and Latin America.
Under the revised collaboration, we have regained full commercialization
rights
in key European markets, Central America and South America for our SRT,
including Surfaxin for RDS in premature infants and ARDS in adults. In
consideration for regaining commercial rights in the restructuring, we issued
to
Esteve 500,000 shares of common stock for no cash consideration. We incurred
a
non-cash charge of $3.5 million related to the shares of common stock issued
to
Esteve and $0.6 million for other expenses associated with the restructuring,
primarily the reversal of Esteve’s funding of research and development costs for
ARDS under our prior agreement.
Other
Income and (Expense)
Other
income and (expense) for the years ended December 31, 2005, 2004 and 2003
were
$391,000, ($171,000) and $155,000, respectively.
Interest
income for the years ended December 31, 2005, 2004 and 2003 was $1,345,000,
$392,000 and $452,000, respectively. The
increase is primarily due to higher average cash balances and a general increase
in earned market interest rates.
Interest
and amortization expense for the years ended December 31, 2005, 2004 and
2003
was $954,000, $563,000 and $297,000, respectively. The increases are primarily
due to higher outstanding balances with our credit facility and capital lease
financing arrangements and an increase in 2005 in the prime borrowing rate.
See
“Liquidity and Capital Resources.”
LIQUIDITY
AND CAPITAL RESOURCES
Working
Capital
Currently,
we require cash to fund our working capital needs, to purchase capital assets,
and to pay our debt service, including principal, interest and capital lease
obligations. We have funded our cash requirements primarily through the issuance
of equity securities and the use of credit and capital lease facilities.
We plan
to fund our future cash requirements through:
| · |
the
issuance of equity and debt
financings
|
| · |
payments
from potential strategic collaborators, including license fees
and
sponsored research funding
|
| · |
sales
of Surfaxin, if approved
|
| · |
capital
lease financings, and
|
| · |
interest
earned on invested capital.
|
We
believe our current working capital is sufficient to meet planned activities
into the second half of 2006, before taking into account any amounts that
may be
available through the use of the CEFF. We anticipate using additional portions
of the available CEFF to support manufacturing, development and
commercialization activities in 2006.
We
will
need additional financing from investors or collaborators to complete research
and development, manufacturing, and commercialization of our current product
candidates under development, and satisfy debt obligations. Working capital
requirements will depend upon numerous factors, including, without limitation,
the approval of Surfaxin for RDS in premature infants by the FDA and EMEA,
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.
41
Cash,
Cash Equivalents and Marketable Securities
As
of
December 31, 2005, we had cash, cash equivalents, restricted cash and marketable
securities of $50.9 million, as compared to $32.7 million as of December
31,
2004. The change from December 31, 2004, is primarily due to aggregate cash
outflows in 2005 of $58.7 million, which consisted of $42.7 million used
in
operating and investing activities and $16.0 million for the purchase of
the
manufacturing operations of Laureate. These cash outflows were offset by
aggregate cash inflows of $76.9 million, which consisted of: (i) a registered
direct public offering of 5,060,000 shares resulting in net proceeds of $27.4
million; (ii) a registered direct public offering of 3,030,304 shares resulting
in net proceeds of $18.9 million; (iii) a registered direct public offering
to
our corporate partner, Esteve, resulting in net proceeds of $4.5 million;
(iv)
two financings pursuant to the CEFF of 3,510,607 shares resulting in net
proceeds of $20.2 million; (v) $2.4 million, net of principal payments, which
was primarily associated with financing the manufacturing purchase, from
the use
of the capital lease financing arrangement with GECC; (vi) $2.6 million accessed
under our credit facility from PharmaBio; and (vii) $0.9 million received
from
the exercise of stock options and warrants.
Committed
Equity Financing Facility
In
July
2004, we entered into a Committed Equity Financing Facility (CEFF) with
Kingsbridge Capital Ltd. (Kingsbridge), pursuant to which Kingsbridge has
committed to finance up to $75.0 million of capital for newly-issued shares
of
Common Stock. The exact timing, amount and price of any CEFF financings is
subject to our ultimate determination, and certain conditions of the facility
agreement. In connection with the CEFF, we issued a Class B Investor warrant
to
Kingsbridge to purchase up to 375,000 shares of Common Stock at an exercise
price equal to $12.0744 per share. The warrant, which expires in January
2010,
must be exercised for cash, except in limited circumstances, for total proceeds
equal to approximately $4.5 million, if exercised. As of December 31, 2005,
the
Class B Investor Warrant had not been exercised in whole or in part.
In
November 2005, we entered into a financing pursuant to the CEFF resulting
in
aggregate cash proceeds to us of $3.2 million from the issuance of 498,552
shares of common stock at an average price of $6.42, after taking into account
the applicable discount rate provided for by the CEFF.
In
September 2005, we entered into a financing pursuant to the CEFF resulting
in
aggregate cash proceeds to us of $17.0 million from the issuance of 3,012,055
shares of common stock at an average price of $5.64, after taking into account
the applicable discount rate provided for by the CEFF.
In
December 2004, we entered into a financing pursuant to the CEFF resulting
in
aggregate cash proceeds to us of $7.2 million from the issuance of 901,742
shares of common stock at an average price of $7.98, after taking into account
the applicable discount rate provided for by the CEFF.
Subject
to the conditions of the CEFF, there is currently $47.6 million that remains
available under the CEFF.
Potential
Financings under the October 2005 Universal Shelf Registration
Statement
In
October 2005, we filed a universal shelf registration statement on Form S-3
with
the SEC for the proposed offering, from time to time, of up to $100.0 million
of
our debt or equity securities. In December 2005, we completed a registered
direct offering of 3,030,304 shares of our common stock to select institutional
investors resulting in gross proceeds to us of $20.0 million.
The
universal shelf registration statement may permit us, from time to time,
to
offer and sell up to an additional approximately $80.0 million of equity
or debt
securities. There can be no assurance, however, that we will be able to complete
any such offerings of securities. Factors influencing the availability of
additional financing include the progress of our commercial activities, investor
perception of our prospects and the general condition of the financial markets,
among others.
42
Debt
Facilities
Payments
due under contractual debt obligations at December 31, 2005, including principal
and interest, are as follows:
|
(in
thousands)
|
2006
|
2007
|
2008
|
2009
|
Total
|
|||||||||||
|
Credit
facility with Quintiles
|
$
|
9,300
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
9,300
|
||||||
|
Capital
lease obligations - GECC & others
|
1,214
|
1,080
|
487
|
49
|
2,830
|
|||||||||||
|
Note
Payable - GECC
|
763
|
833
|
833
|
438
|
2,867
|
|||||||||||
|
Total
|
$
|
11,277
|
$
|
1,913
|
$
|
1,320
|
$
|
487
|
$
|
14,997
|
||||||
Credit
Facility with Quintiles Transnational Corp.
We
entered into a collaboration arrangement with Quintiles Transnational Corp.
(Quintiles), in 2001, to provide certain commercialization services in the
United States for Surfaxin for the treatment of RDS in premature infants
and MAS
in full-term infants. In connection with the commercialization agreement,
Quintiles extended to us a secured, revolving credit facility of $8.5 to
$10.0
million to fund pre-marketing activities associated with the launch of Surfaxin
in the United States.
In
November 2004, we restructured our business arrangements with Quintiles and
terminated our commercialization agreement for Surfaxin in the United States.
The existing secured, revolving credit facility remained available to borrow
up
to $8.5 million. By virtue of the termination of the commercialization
agreements, we are no longer obligated to use funds advanced under the credit
facility for services provided by Quintiles, and Quintiles is no longer
obligated to make milestone payments. The original maturity date of December
10,
2004, is now extended until December 31, 2006. The interest rate is the greater
of 8% or prime rate plus 2% annually and payments are due quarterly in arrears.
As of December 31, 2005, $8.5 million was outstanding under the credit facility
and is classified as a current liability. Outstanding principal and interest
due
under the credit facility are due and payable as a balloon payment on December
31, 2006.
We
have
utilized the credit facility for $2.6 million in 2005, $3.5 million in 2004
and
$1.0 million in 2003 as a source of working capital. As of December 31, 2005,
$8.5 million was outstanding, due in December 2006, and classified as a current
liability.
Capital
Lease and Note Payable Financing Arrangements with General Electric Capital
Corporation
Capital
lease liabilities and note payable as of December 31, 2005 and 2004 are as
follows:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Current
|
|||||||
|
Capital
leases, GECC
|
$
|
982
|
$
|
828
|
|||
|
Note
payable, GECC
|
560
|
—
|
|||||
|
All
other
|
26
|
26
|
|||||
|
Capital
leases and note payable, current
|
1,568
|
854
|
|||||
|
Long
Term
|
|||||||
|
Capital
leases, GECC
|
1,480
|
1,626
|
|||||
|
Note
payable, GECC
|
1,840
|
—
|
|||||
|
All
other
|
3
|
28
|
|||||
|
Capital
leases and note payable, long term
|
3,323
|
1,654
|
|||||
|
Total
capital leases and note payable
|
$
|
4,891
|
$
|
2,508
|
|||
43
Our
primary capital lease financing arrangement is with the Life Science and
Technology Finance Division of General Electric Capital Corporation (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. The capital lease is secured by the related assets.
Subject to certain conditions, this arrangement provides for financing of
up to
$9.0 million, of which $0.5 million is contingent upon FDA approval of Surfaxin
for the prevention of RDS in premature infants. The funds are available through
April 2006, subject to certain conditions. Laboratory and manufacturing
equipment is financed over 48 months and all other equipment is financed
over 36
months. Interest rates vary in accordance with changes in the three and four
year treasury rates. For portions of the capital lease financing arrangement
accessed in 2005, the interest rates ranged from 9.9% to 10.5%.
As
of
December 31, 2005, we had used $6.4 million of the available financing under
the
arrangement and had $2.6 million remaining available for future use, subject
to
certain conditions.
Amounts
available, used and remaining available for future use as of December 31,
2005
and 2004 are as follows:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Financing
available
|
|||||||
|
Currently
available
|
$
|
8,500
|
$
|
7,500
|
|||
|
Availability
subject to FDA approval
|
500
|
1,500
|
|||||
|
Total
|
9,000
|
9,000
|
|||||
|
Amount
used (cumulative)
|
(6,358
|
)
|
(3,042
|
)
|
|||
|
Amount
available for future use
|
$
|
2,642
|
$
|
5,958
|
|||
Included
in the amounts above, in December 2005, we borrowed $2.4 million pursuant
to our
capital lease financing arrangement to support the purchase of our manufacturing
operations in Totowa, NJ. In accordance with the accounting treatment for
the
manufacturing purchase, the $2.4 million was classified as a note payable
on the
balance sheet (of which $0.6 million is current and $1.8 million is long-term
as
of December 31, 2005). The note has an interest rate of 10.3% and is repayable
over a 48-month period. The note payable is secured by equipment at the
manufacturing facility in Totowa, NJ.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania, New Jersey 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
lease
a 21,000 square foot pharmaceutical manufacturing and development facility
in
Totowa, NJ that is specifically designed for the production of sterile
pharmaceuticals in compliance with cGMP requirements. The lease expires in
December 2014 with total aggregate payments of $1.4 million ($150,000 per
year).
The lease contains an early termination option, first beginning in December
2009. The early termination option can only be exercised by the landlord
upon a
minimum of two years prior notice and payment of significant early termination
amounts to us.
44
We
also
lease approximately 11,000 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
February 2006, subject to a monthly extensions.
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 the Mountain
View
facility, we leased office and laboratory space in Redwood City, California.
The
facility was approximately 5,000 square feet and housed our 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.
If
we are
successful in commercializing our SRT portfolio, we expect that our needs
for
additional leased space will increase.
Registered
Public Offerings
In
December 2005, we completed a registered direct offering of 3,030,304 shares
of
our common stock to select institutional investors. The shares were priced
at
$6.60 per share resulting in gross and net proceeds to us of $20.0 million
and
$18.9 million, respectively. This offering was made pursuant to our October
2005
universal shelf registration statement.
In
November 2005, we sold 650,000 shares of our common stock to Esteve, at a
price
per share of $6.88, for aggregate proceeds of approximately $4.5 million.
This
offering was made pursuant to our December 2003 shelf registration
statement.
In
February 2005, we completed a registered direct public offering of 5,060,000
shares of common stock. The shares were priced at $5.75 per share resulting
in
gross and net proceeds to us equal to $29.1 million and $27.4 million,
respectively. This offering was made pursuant to our December 2003 shelf
registration statement.
In
April
2004, we completed an underwritten public offering of 2,200,000 shares of
common
stock. The shares were priced at $11.00 per share resulting in our receipt
of
gross and net proceeds equal to $24.2 million and $22.8 million, respectively.
This offering was made pursuant to our December 2003 shelf registration
statement.
Private
Placements
In
June
2003, we completed the sale of securities in a private placement to selected
institutional and accredited investors for net proceeds of approximately
$25.9
million. We issued 4,997,882 shares of Common Stock and 999,577 Class A Investor
Warrants to purchase shares of Common Stock at an exercise price equal to
$6.875
per share. The Class A Investor Warrants have a seven-year term. As of December
31, 2005, 909,381 of the Class A Investor Warrants remain
unexercised.
In
June
and July 2003, our common stock attained certain price performance thresholds
on
the Nasdaq SmallCap Market that permitted us to redeem (and thereby effectively
compel the exercise thereof) three of our outstanding classes of warrants
which
represented, in aggregate, the right to purchase approximately 3.6 million
shares of common stock. Such warrants (i.e., the Class I, Class F and Class
C
warrants) were previously issued by us in connection with certain private
placement financings that occurred in November 2002, October 2001, and April
1999, respectively. These warrants were exercised, in accordance with their
respective terms, either cashlessly or for cash, resulting in the issuance
to
the holders of approximately 3.3 million shares of common stock and our receipt
of aggregate cash proceeds of $6.1 million.
Other
Financing Transactions - Warrants
In
November 2004, we reached and agreement with Quintiles to restructure our
business arrangements and terminate the commercialization agreement for Surfaxin
in the United States. In connection with regaining the full United States
commercialization rights for Surfaxin, we issued a warrant to PharmaBio to
purchase 850,000 shares of our common stock at an exercise price equal to
$7.19
per share. The warrant has 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. As of December 31, 2005, the warrant has not been exercised in whole
or
in part.
45
In
July
2004, in connection with the CEFF, we issued a Class B Investor warrant to
Kingsbridge to purchase up to 375,000 shares of Common Stock at an exercise
price equal to $12.0744 per share. The warrant, which expires in January
2010,
must be exercised for cash, except in limited circumstances, for total proceeds
equal to approximately $4.5 million, if exercised. As of December 31, 2005,
the
Class B Investor Warrant had not been exercised in whole or in part.
Future
Capital Requirements
Unless
and until we can generate significant cash from our operations, we expect
to
continue to require substantial additional funding to conduct our business,
including our expanded commercial, manufacturing and research and product
development activities and repay our indebtedness. 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 2007. Our future capital requirements
will depend on the potential approval of Surfaxin for RDS in premature infants
and any resulting revenue generation, the results of our 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 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 when needed or on terms acceptable to us, if at all. If we fail
to
receive additional funding or enter into collaborative ventures, 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 our 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 Item
1A:
“Risk Factors - 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.”
CONTRACTUAL
OBLIGATIONS
Our
contractual debt obligations include commitments and estimated purchase
obligations entered into in the normal course of business.
Payments
due under contractual debt obligations at December 31, 2005, including principal
and interest, are as follows:
|
(in
thousands)
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
|||||||||||||||
|
Credit
facility (1)
|
$
|
9,300
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
9,300
|
||||||||
|
Capital
lease obligations (1)
|
1,214
|
1,080
|
487
|
49
|
—
|
—
|
2,830
|
|||||||||||||||
|
Note
Payable (1)
|
763
|
833
|
833
|
438
|
—
|
—
|
2,867
|
|||||||||||||||
|
Operating
lease obligations (2)
|
1,422
|
1,452
|
1,310
|
1,146
|
277
|
600
|
6,207
|
|||||||||||||||
|
Purchase
obligations (3)
|
2,613
|
233
|
—
|
—
|
—
|
—
|
2,846
|
|||||||||||||||
|
Employment
agreements (3)
|
2,117
|
—
|
—
|
—
|
—
|
—
|
2,117
|
|||||||||||||||
|
Total
|
$
|
17,429
|
$
|
3,598
|
$
|
2,630
|
$
|
1,633
|
$
|
277
|
$
|
600
|
$
|
26,167
|
||||||||
| (1) |
See
Item 7: “Management’s
Discussion and Analysis of Financial Condition and Operations
- Liquidity
and Capital Resources - Debt Facilities”.
|
| (2) |
See
Item 7: “Management’s
Discussion and Analysis of Financial Condition and Operations
- Liquidity
and Capital Resources - Lease Agreements”.
|
| (3) |
See
discussion below.
|
46
Our
purchase obligations include commitments entered in the ordinary course of
business, primarily commitments to purchase manufacturing equipment and services
for the enhancement of our manufacturing capabilities for Surfaxin and sales
and
marketing services related to the potential launch of Surfaxin in the United
States.
On
December 31, 2005, we had employment agreements with seven officers providing
for an aggregate annual salary of $2,117,000. The agreements expire in December
2006. However, on each January 1st thereafter, the term of each agreement
automatically extends for one additional year, unless at least 90 days prior
to
such January 1st date, either we or the respective officer that is a party
thereto shall have given notice that any such extension is not desired. All
of
the foregoing agreements provide for the issuance of annual bonuses and the
granting of options subject to approval by the Board of Directors. In addition,
the employment agreements contain severance arrangements providing for, in
certain circumstances, cash payments, equity benefits and the continuation
of
certain other employee benefits.
In
addition to the contractual obligations above, we have certain milestone
payment
obligations, aggregating $2,500,000, and royalty payment obligations to Ortho
Pharmaceutical, Inc. related to our product licenses. To date, we have paid
$450,000 with respect to such milestones.
ITEM
7A. 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.
47
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
See
the
Index to Consolidated Financial Statements on Page F-1 attached
hereto.
ITEM
9. CHANGES
IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not
applicable.
ITEM
9A. CONTROLS
AND PROCEDURES.
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our 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 our management necessarily was required to apply its judgment
in
evaluating the cost-benefit relationship of possible controls and procedures.
Our
Chief
Executive Officer and our 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
Annual
Report
on Form
10-K.
Based
on this
evaluation,
our
Chief Executive Officer and our Chief Financial Officer
concluded that as
of the
end of the period covered by this report our
disclosure controls and procedures were
effective in their
design to ensure that
information
required
to be disclosed by
us
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.
48
(b)
Management’s Report on the Company’s Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
promulgated under the Exchange Act. Our internal control system is designed
to
provide reasonable assurance to our management and board of directors regarding
the preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, our management
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2005. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment, our management believes that our internal
control over financial reporting is effective based on those criteria, as of
December 31, 2005.
Our
independent registered public accounting firm has audited management’s
assessment of our internal control over financial reporting, and issued an
unqualified opinion dated January 27, 2006 on such assessment and on our
internal control over financial reporting, which opinion is included
herein.
(c) Changes
in internal controls
There
were no changes in our internal controls 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.
ITEM
9B. OTHER
INFORMATION.
Not
applicable.
49
PART
III
The
information required by Items 10 through 14 of Part III is incorporated by
reference to our definitive proxy statement to be filed with the Securities
and
Exchange Commission within 120 days after the end of our fiscal
year.
We
have
adopted a Code of Ethics that applies to our officers, including our principal
executive, financial and accounting officers, and our directors and employees.
We have posted the Code of Ethics on our Internet Website at
“http://www.DiscoveryLabs.com” (this is not a hyperlink, you must visit this
website through an Internet browser) under the Investor Information, Corporate
Policies section. We intend to make all required disclosures on a Current Report
on Form 8-K concerning any amendments to, or waivers from, our Code of Ethics
with respect to our executive officers and directors. Our Website and the
information contained therein or connected thereto are not incorporated into
this Annual Report on Form 10-K.
50
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
The
consolidated financial statements required to be filed in this Annual Report
on
Form 10-K are listed on the Index to Consolidated Financial Statements on page
F-1 hereof.
Exhibits
are listed on the Index to Exhibits at the end of this Annual Report on Form
10-K. The exhibits required to be filed pursuant to Item 601 of Regulation
S-K,
which are listed on the Index in response to this Item, are incorporated herein
by reference.
51
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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. | ||
| |
|
|
| Date: March 16, 2006 | By: | /s/ Robert J. Capetola |
|
Robert
J. Capetola, Ph.D.
President
and Chief Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Name
& Title
|
Date
|
||
|
/s/
Robert J. Capetola
|
Robert
J. Capetola, Ph.D.
President,
Chief Executive Officer and Director
|
March
16,
2006
|
||
|
/s/
John G. Cooper
|
John
G. Cooper
Executive
Vice President and Chief Financial Officer
|
March
16,
2006
|
||
|
/s/
Kathleen A. McGowan
|
Kathleen
A. McGowan
Controller
(Principal Accounting Officer)
|
March
16,
2006
|
||
|
/s/
Herbert H. McDade, Jr.
|
Herbert
H. McDade, Jr.
Chairman
of the Board of Directors
|
March
16,
2006
|
||
|
/s/
W. Thomas Amick
|
W.
Thomas Amick
Director
|
March
16,
2006
|
||
|
/s/
Antonio Esteve
|
Antonio
Esteve, Ph.D.
Director
|
March
16,
2006
|
||
|
/s/
Max E. Link
|
Max
E. Link, Ph.D.
Director
|
March
16,
2006
|
||
|
/s/
Marvin E. Rosenthale
|
Marvin
E. Rosenthale, Ph.D.
Director
|
March
16,
2006
|
52
INDEX
TO EXHIBITS
The
following exhibits are included with this Annual Report on Form 10-K. All
management contracts or compensatory plans or arrangements are marked with
an
asterisk.
|
Exhibit
No.
|
Description
|
Method
of Filing
|
|
3.1
|
Restated
Certificate of Incorporation of Discovery, dated September 18,
2002.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on
March
31, 2003.
|
|
3.2
|
Amended
and Restated By-Laws of Discovery.
|
Incorporated
by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, as filed with the SEC on
March
15, 2004.
|
|
3.3
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004.
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004.
|
|
3.4
|
Certificate
of Amendment to the Certificate of Incorporation of Discovery, dated
as of
May 28, 2004.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
9,
2004.
|
|
3.5
|
Certificate
of Amendment to the Restated Certificate of Incorporation of Discovery,
dated as of July 8, 2005.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
8,
2005.
|
|
4.1
|
Form
of Class E Warrant.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on March 29, 2000.
|
|
4.2
|
Form
of Unit Purchase Option issued to Paramount Capital, Inc.
|
Incorporated
by reference to Exhibit 4.4 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the SEC
on
March 30, 2000.
|
|
4.3
|
Form
of Class A Investor Warrant.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003.
|
|
4.4
|
Class
B Investor Warrant issued to Kingsbridge Capital Limited.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004.
|
|
4.5
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery
and
QFinance, Inc.
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9,
2004.
|
E-1
| Exhibit No. | Description | Method of Filing |
|
4.6
|
$8,500,000
Amended and Restated Promissory Note, amended and restated as of
November
3, 2004, by and between Discovery and PharmaBio Development
Inc.
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004.
|
|
10.1
|
Form
of Registration Rights Agreement between Discovery, Johnson & Johnson
Development Corporation and The Scripps Research
Institute.
|
Incorporated
by reference to Exhibit F to Exhibit 2.1 to Discovery’s Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, as filed
with the
SEC on March 31, 1998.
|
|
10.2+
|
Sublicense
Agreement, dated as of October 28, 1996, between Johnson & Johnson,
Ortho Pharmaceutical Corporation and Acute Therapeutics,
Inc.
|
Incorporated
by reference to Exhibit 10.6 to Discovery’s Registration Statement on Form
SB-2, as filed with the SEC on January 7, 1997 (File No.
333-19375).
|
|
10.3
|
*
Restated 1993 Stock Option Plan of Discovery.
|
Incorporated
by reference to Discovery’s Registration Statement on Form SB-2 (File No.
33-92-886).
|
|
10.4
|
*
1995 Stock Option Plan of Discovery.
|
Incorporated
by reference to Discovery’s Registration Statement on Form SB-2 (File No.
33-92-886).
|
|
10.5
|
*
Amended and Restated 1998 Stock Incentive Plan of Discovery (amended
as of
May 13, 2005).
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Registration Statement on Form
S-8, as filed with the SEC on August 23, 2005 (File No.
333-116268).
|
|
10.6
|
Registration
Rights Agreement, dated June 16, 1998, among Discovery, Johnson &
Johnson Development Corporation and The Scripps Research
Institute.
|
Incorporated
by reference to Exhibit 10.28 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC
on
April 9, 1999.
|
|
10.7
|
Form
of Proprietary Information and Inventions, Non-Solicitation and Non
Competition Agreement.
|
Incorporated
by reference to Exhibit 10.50 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC
on
April 9, 1999.
|
|
10.8
|
*
Form of Notice of Grant of Stock Option under the 1998 Stock Incentive
Plan.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999, as filed with the
SEC on
November 17, 1999.
|
|
10.9
|
Master
Security Agreement, dated as of December 23, 2002, between General
Electric Capital Corporation and Discovery.
|
Incorporated
by reference to Exhibit 10.32 to Discovery’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed with the SEC
on
March 31, 2003.
|
|
10.10
|
Amendment,
dated as of December 23, 2002, to the Master Security Agreement between
General Electric Capital Corporation and Discovery.
|
Incorporated
by reference to Exhibit 10.33 to Discovery’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed with the SEC
on
March 31, 2003.
|
E-2
| Exhibit No. | Description | Method of Filing |
|
10.11
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between Discovery
and Continental Stock Transfer & Trust Company.
|
Incorporated
by reference to Exhibit 2.4 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004.
|
|
10.12
|
Common
Stock Purchase Agreement, dated as of July 7, 2004, by and between
Kingsbridge Capital Limited and Discovery.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004.
|
|
10.13
|
Registration
Rights Agreement, dated as of July 7, 2004, by and between Kingsbridge
Capital Limited and Discovery.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004.
|
|
10.14
|
Agreement,
dated as of November 3, 2004, by and between Discovery, Quintiles
Transnational Corp. and PharmaBio Development Inc.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004.
|
|
10.15
|
Amended
and Restated Loan Agreement, dated as of December 10, 2001, amended
and
restated as of November 3, 2004, by and between Discovery and PharmaBio
Development Inc.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004.
|
|
10.16
|
Amended
and Restated Security Agreement, dated as of December 10, 2001, amended
and restated as of November 3, 2004, by and between Discovery and
PharmaBio Development Inc.
|
Incorporated
by reference to Exhibit 10.3 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004.
|
|
10.17+
|
Amended
and Restated Sublicense and Collaboration Agreement made as of December
3,
2004, between Discovery and Laboratorios del Dr. Esteve,
S.A.
|
Incorporated
by reference to Exhibit 10.28 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.18+
|
Amended
and Restated Supply Agreement, dated as of December 3, 2004, by and
between Discovery and Laboratorios del Dr. Esteve, S.A.
|
Incorporated
by reference to Exhibit 10.29 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.19+
|
Strategic
Alliance Agreement, dated as of December 9, 2005, between Discovery
and
Philip Morris USA Inc. d/b/a Chrysalis Technologies
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 12, 2005.
|
|
10.20
|
Asset
Purchase Agreement, dated as of December 27, 2005, between Discovery
and
Laureate Pharma, Inc.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on January 3, 2006.
|
E-3
| Exhibit No. | Description | Method of Filing |
|
10.21
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Robert
J.
Capetola, Ph.D.
|
Incorporated
by reference to Exhibit 10.21 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.22
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and John
G.
Cooper
|
Incorporated
by reference to Exhibit 10.22 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.23
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and David
L.
Lopez, Esq., CPA
|
Incorporated
by reference to Exhibit 10.23 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.24
|
Employment
Agreement, dated as of May 24, 2004, between Discovery and Mark
Osterman
|
Incorporated
by reference to Exhibit 10.24 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.25
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Christopher
J. Schaber, Ph.D.
|
Incorporated
by reference to Exhibit 10.25 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.26
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Robert
Segal, M.D.
|
Incorporated
by reference to Exhibit 10.26 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.27
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Deni
M.
Zodda, Ph.D.
|
Incorporated
by reference to Exhibit 10.27 to Discovery’s Annual Report on Form 10-K
for the year ended December 31, 2004, as filed with the SEC on March
16,
2005.
|
|
10.28
|
Employment
Agreement, dated as of January 24, 2006, between Discovery and Kathryn
Cole.
|
Filed
herewith.
|
|
10.29
|
Assignment
of Lease and Termination and Option Agreement, dated as of December
30,
2005, between Laureate Pharma, Inc. and Discovery.
|
Filed
herewith.
|
|
21.1
|
Subsidiaries
of Discovery.
|
Incorporated
by reference to Exhibit 21.1 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997, as filed with the SEC
on
March 31, 1998.
|
|
23.1
|
Consent
of Ernst & Young LLP.
|
Filed
herewith.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
Act.
|
Filed
herewith.
|
E-4
| Exhibit No. | Description | Method of Filing |
|
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.
|
+ Confidential
treatment requested as to certain portions of these exhibits. Such portions
have
been redacted and filed separately with the Commission.
E-5
|
Contents
|
||
|
Page
|
||
|
Consolidated
Financial Statements
|
||
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
||
|
Report
of Independent Registered Public Accounting Firm on Internal Control
over
Financial Reporting
|
F-3
|
|
|
|
|
|
|
Balance
Sheets as of December 31, 2005 and December 31, 2004
|
F-4
|
|
|
|
||
|
Statements
of Operations for the years ended
|
|
|
|
December
31, 2005, 2004 and 2003
|
F-5
|
|
|
|
||
|
Statements
of Changes in Stockholders' Equity for the years ended
|
|
|
|
December
31, 2005,
2004 and 2003
|
F-6
|
|
|
|
||
|
Statements
of Cash Flows for the years ended
|
|
|
|
December
31, 2005, 2004 and 2003
|
F-7
|
|
|
|
||
|
Notes
to consolidated financial statements
|
F-8
|
|
F-1
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders
Discovery
Laboratories, Inc.
Warrington,
Pennsylvania
We
have
audited the accompanying consolidated balance sheets of Discovery Laboratories,
Inc. and subsidiary (the “Company”) as of December 31, 2005 and 2004, and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2005 and 2004, and the consolidated results of its operations
and
its cash flows for each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
January 27, 2006, expressed an unqualified opinion thereon.
/s/Ernst
& Young LLP
Philadelphia,
Pennsylvania
January
27, 2006
F-2
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders
Discovery
Laboratories, Inc.
Warrington,
Pennsylvania
We
have
audited management’s assessment, included in the accompanying Management’s
Report on the Company’s Internal Control over Financial Reporting, that
Discovery Laboratories, Inc. and subsidiary (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated,
in
all material respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balances sheets of the Company
as of December 31, 2005 and 2004, and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2005 of the Company and our report dated
January 27, 2006 expressed an unqualified opinion thereon.
/s/
Ernst
& Young LLP
Philadelphia,
Pennsylvania
January
27, 2006
F-3
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(In
thousands, except per share data)
|
December
31,
|
December
31,
|
||||||
|
2005
|
2004
|
||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
47,010
|
$
|
29,264
|
|||
|
Restricted
cash
|
647
|
646
|
|||||
|
Investments
|
3,251
|
2,744
|
|||||
|
Note
receivable, current portion
|
3
|
3
|
|||||
|
Prepaid
expenses and other current assets
|
557
|
685
|
|||||
|
Total
Current Assets
|
51,468
|
33,342
|
|||||
|
Property
and equipment, net
|
4,322
|
4,063
|
|||||
|
Note
receivable, non-current portion
|
187
|
190
|
|||||
|
Other
assets
|
31
|
42
|
|||||
|
Total
Assets
|
$
|
56,008
|
$
|
37,637
|
|||
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
7,540
|
$
|
7,969
|
|||
|
Credit
facility, current portion
|
8,500
|
—
|
|||||
|
Capitalized
leases and note payable, current portion
|
1,568
|
854
|
|||||
|
Total
Current Liabilities
|
17,608
|
8,823
|
|||||
|
Credit
facility, non-current portion
|
—
|
5,929
|
|||||
|
Capitalized
leases and note payable, non-current portion
|
3,323
|
1,654
|
|||||
|
Other
liabilities
|
239
|
134
|
|||||
|
Total
Liabilities
|
21,170
|
16,540
|
|||||
|
Shareholders'
Equity:
|
|||||||
|
Common
stock, $.001 par value; 180,000 and 80,000 authorized; 61,335
and 48,747 issued, 61,022 and 48,434 outstanding at December
31, 2005 and December 31, 2004, respectively
|
61
|
49
|
|||||
|
Additional
paid-in capital
|
240,028
|
167,627
|
|||||
|
Unearned
portion of compensatory stock options
|
(230
|
)
|
(461
|
)
|
|||
|
Accumulated
deficit
|
(201,965
|
)
|
(143,061
|
)
|
|||
|
Treasury
stock (at cost; 313 shares of common stock)
|
(3,054
|
)
|
(3,054
|
)
|
|||
|
Accumulated
other comprehensive income
|
(2
|
)
|
(3
|
)
|
|||
|
Total
Shareholders' Equity
|
34,838
|
21,097
|
|||||
|
Total
Liabilities & Shareholders’ Equity
|
$
|
56,008
|
$
|
37,637
|
|||
See notes to consolidated financial
statements
F-4
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(In
thousands, except per share data)
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Revenues:
|
||||||||||
|
Contracts,
licensing, milestones and grants
|
$
|
134
|
$
|
1,209
|
$
|
1,037
|
||||
|
Expenses:
|
||||||||||
|
Research
& development
|
24,137
|
25,793
|
19,750
|
|||||||
|
General
& administrative
|
18,505
|
13,322
|
5,722
|
|||||||
|
In-process
research & development
|
16,787
|
—
|
—
|
|||||||
|
Corporate
partnership restructuring charges
|
—
|
8,126
|
—
|
|||||||
|
Total
expenses
|
59,429
|
47,241
|
25,472
|
|||||||
|
Operating
Loss
|
(59,295
|
)
|
(46,032
|
)
|
(24,435
|
)
|
||||
|
Other
income and expenses:
|
||||||||||
|
Interest
income, dividends, realized
gains,
and other income
|
1,345
|
404
|
452
|
|||||||
|
Interest
expense
|
(954
|
)
|
(575
|
)
|
(297
|
)
|
||||
|
Other
income / (expense), net
|
391
|
(171
|
)
|
155
|
||||||
|
Net
Loss
|
$
|
(58,904
|
)
|
$
|
(46,203
|
)
|
$
|
(24,280
|
)
|
|
|
Net
loss per common share - basic and diluted
|
$
|
(1.09
|
)
|
$
|
(1.00
|
)
|
$
|
(0.65
|
)
|
|
|
Weighted
average number of common shares
outstanding - basic and diluted
|
54,094
|
46,179
|
37,426
|
|||||||
See
notes to consolidated financial
statements
F-5
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Changes in Stockholders' Equity
For
Years Ended December 31, 2005,
2004, and 2003
(In
thousands)
|
Common
Stock
|
Treasury
Stock
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Unearned
Portion
of
Compensatory
Stock
Options
|
Accumulated
Deficit
|
Shares
|
Amount
|
Accumulated
Other
Comprehensive
(Loss)
|
Total
|
||||||||||||||||||||
|
Balance
- January 1, 2003
|
32,857
|
$
|
33
|
$
|
87,463
|
$
|
(95
|
)
|
$
|
(72,578
|
)
|
(38
|
)
|
$
|
(239
|
)
|
$
|
177
|
$
|
14,761
|
||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(24,280
|
)
|
-
|
-
|
-
|
(
24,280
|
)
|
|||||||||||||||||
|
Other
comprehensive loss - unrealized losses on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(177
|
)
|
(177
|
)
|
|||||||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(24,457
|
)
|
||||||||||||||||||
|
Issuance
of common stock, stock option exercises
|
993
|
1
|
1,940
|
-
|
-
|
-
|
-
|
-
|
1,941
|
|||||||||||||||||||
|
Issuance
of common stock, warrant exercises
|
3,790
|
4
|
6,846
|
-
|
-
|
-
|
-
|
-
|
6,850
|
|||||||||||||||||||
|
Issuance
of common stock, 401k employer match
|
21
|
-
|
86
|
-
|
-
|
-
|
-
|
-
|
86
|
|||||||||||||||||||
|
Expense
related to stock options
|
-
|
-
|
99
|
93
|
-
|
-
|
-
|
-
|
192
|
|||||||||||||||||||
|
Issuance
of common stock, June private financing
|
4,998
|
5
|
25,925
|
-
|
-
|
-
|
-
|
-
|
25,930
|
|||||||||||||||||||
|
Change
in value of Class H warrants
|
-
|
-
|
50
|
-
|
-
|
-
|
-
|
-
|
50
|
|||||||||||||||||||
|
Shares
tendered for exercise of stock options
|
-
|
-
|
-
|
-
|
-
|
(129
|
)
|
(1,050
|
)
|
-
|
(1,050
|
)
|
||||||||||||||||
|
Balance
- December 31, 2003
|
42,659
|
$
|
43
|
$
|
122,409
|
$
|
(2
|
)
|
$
|
(96,858
|
)
|
(167
|
)
|
$
|
(1,289
|
)
|
-
|
$
|
24,303
|
|||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(46,203
|
)
|
-
|
-
|
-
|
(46,203
|
)
|
|||||||||||||||||
|
Other
comprehensive loss - unrealized losses on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3
|
)
|
(3
|
)
|
|||||||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(46,206
|
)
|
||||||||||||||||||
|
Issuance
of common stock, stock option exercises
|
1,271
|
1
|
2,500
|
-
|
-
|
-
|
-
|
-
|
2,501
|
|||||||||||||||||||
|
Issuance
of common stock, warrant exercises
|
1,193
|
1
|
1,819
|
-
|
-
|
-
|
-
|
-
|
1,820
|
|||||||||||||||||||
|
Issuance
of common stock, 401(k) employer match
|
23
|
-
|
196
|
-
|
-
|
-
|
-
|
-
|
196
|
|||||||||||||||||||
|
Expense
related to stock options
|
-
|
-
|
1,723
|
(459
|
)
|
-
|
-
|
-
|
-
|
1,264
|
||||||||||||||||||
|
Issuance
of common stock, April financing
|
2,200
|
2
|
22,730
|
-
|
-
|
-
|
-
|
-
|
22,732
|
|||||||||||||||||||
|
Issuance
of warrants, October Quintiles restructuring
|
-
|
-
|
3,978
|
-
|
-
|
-
|
-
|
-
|
3,978
|
|||||||||||||||||||
|
Issuance
of common stock, December Esteve restructuring
|
500
|
1
|
3,465
|
-
|
-
|
-
|
-
|
-
|
3,466
|
|||||||||||||||||||
|
Issuance
of common stock, December draw on CEFF
|
902
|
1
|
7,090
|
-
|
-
|
-
|
-
|
-
|
7,091
|
|||||||||||||||||||
|
Change
in value of Class H warrants
|
-
|
-
|
(48
|
)
|
-
|
-
|
-
|
-
|
-
|
(48
|
)
|
|||||||||||||||||
|
Shares
tendered for exercise of stock options
|
-
|
-
|
1,765
|
-
|
-
|
(146
|
)
|
(1,765
|
)
|
-
|
-
|
|||||||||||||||||
|
Balance
- December 31, 2004
|
48,748
|
$
|
49
|
$
|
167,627
|
$
|
(461
|
)
|
$
|
(143,061
|
)
|
(313
|
)
|
$
|
(3,054
|
)
|
$
|
(3
|
)
|
$
|
21,097
|
|||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(58,904
|
)
|
-
|
-
|
-
|
(58,904
|
)
|
|||||||||||||||||
|
Other
comprehensive loss - unrealized losses on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
1
|
|||||||||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(58,903
|
)
|
||||||||||||||||||
|
Issuance
of common stock, stock option exercises
|
226
|
-
|
649
|
-
|
-
|
-
|
-
|
-
|
649
|
|||||||||||||||||||
|
Issuance
of common stock, warrant exercises
|
43
|
-
|
250
|
-
|
-
|
-
|
-
|
-
|
250
|
|||||||||||||||||||
|
Issuance
of common stock, restricted stock awards
|
30
|
-
|
15
|
-
|
-
|
-
|
-
|
-
|
15
|
|||||||||||||||||||
|
Issuance
of common stock, 401(k) employer match
|
37
|
-
|
235
|
-
|
-
|
-
|
-
|
-
|
235
|
|||||||||||||||||||
|
Expense
related to stock options
|
-
|
-
|
151
|
231
|
-
|
-
|
-
|
-
|
382
|
|||||||||||||||||||
|
Issuance
of common stock, February 2005 financing
|
5,060
|
5
|
27,559
|
-
|
-
|
-
|
-
|
-
|
27,564
|
|||||||||||||||||||
|
Issuance
of common stock, December 2005 financing
|
3,030
|
3
|
18,912
|
-
|
-
|
-
|
-
|
-
|
18,915
|
|||||||||||||||||||
|
Issuance
of common stock, October 2005 Esteve financing
|
650
|
1
|
4,433
|
-
|
-
|
-
|
-
|
-
|
4,434
|
|||||||||||||||||||
|
Issuance
of common stock, 2005 CEFF financings
|
3,511
|
3
|
20,197
|
-
|
-
|
-
|
-
|
-
|
20,200
|
|||||||||||||||||||
|
Balance
- December 31, 2005
|
61,335
|
$
|
61
|
$
|
240,028
|
$
|
(230
|
)
|
$
|
(201,965
|
)
|
(313
|
)
|
$
|
(3,054
|
)
|
$
|
(2
|
)
|
$
|
34,838
|
|||||||
See notes to consolidated financial
statements
F-6
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(In
thousands)
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flow from operating activities:
|
||||||||||
|
Net
loss
|
$
|
(58,904
|
)
|
$
|
(46,203
|
)
|
$
|
(24,280
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used
In
operating activities:
|
||||||||||
|
Depreciation
and amortization
|
788
|
816
|
416
|
|||||||
|
Realized
(gains) losses on marketable securities
|
—
|
—
|
(114
|
)
|
||||||
|
Non-cash
charge for issuance of common stock and
warrants
related to corporate partnership restructurings
|
—
|
7,443
|
—
|
|||||||
|
Non-cash
stock compensation expense
|
382
|
1,264
|
192
|
|||||||
|
Stock
issued for 401(k) match
|
235
|
196
|
86
|
|||||||
|
Loss
on disposal of fixed assets
|
16
|
12
|
—
|
|||||||
|
Changes
in:
|
||||||||||
|
Prepaid
expenses and other current assets
|
128
|
(68
|
)
|
(340
|
)
|
|||||
|
Accounts
payable and accrued expenses
|
(429
|
)
|
3,759
|
1,197
|
||||||
|
Other
assets
|
11
|
(23
|
)
|
103
|
||||||
|
Other
liabilities
|
105
|
(538
|
)
|
(721
|
)
|
|||||
|
Net
cash used in operating activities
|
(57,668
|
)
|
(33,342
|
)
|
(23,461
|
)
|
||||
|
Cash
flow from investing activities:
|
||||||||||
|
Purchase
of property and equipment
|
(1,063
|
)
|
(2,207
|
)
|
(1,514
|
)
|
||||
|
Restricted
cash
|
(1
|
)
|
(646
|
)
|
—
|
|||||
|
Related
party loan payments received
|
3
|
2
|
2
|
|||||||
|
Purchase
of marketable securities
|
(33,340
|
)
|
(18,483
|
)
|
(284
|
)
|
||||
|
Proceeds
from sale or maturity of marketable securities
|
32,834
|
15,465
|
10,873
|
|||||||
|
Net
cash (used in) / provided by investing activities
|
(1,567
|
)
|
(5,869
|
)
|
9,077
|
|||||
|
Cash
flow from financing activities:
|
||||||||||
|
Proceeds
from issuance of securities, net of expenses
|
72,027
|
35,911
|
34,721
|
|||||||
|
Proceeds
from use of credit facility
|
2,571
|
3,493
|
986
|
|||||||
|
Proceeds
from note payable for manufacturing purchase
|
2,400
|
—
|
—
|
|||||||
|
Equipment
financed through capital lease
|
916
|
1,928
|
908
|
|||||||
|
Principal
payments under capital lease obligation
|
(933
|
)
|
(514
|
)
|
(259
|
)
|
||||
|
Purchase
of treasury stock
|
—
|
(1,765
|
)
|
(1,050
|
)
|
|||||
|
Net
cash provided by financing activities
|
76,981
|
39,053
|
35,306
|
|||||||
|
Net
increase / (decrease) in cash and cash equivalents
|
17,746
|
(158
|
)
|
20,922
|
||||||
|
Cash
and cash equivalents - beginning of year
|
29,264
|
29,422
|
8,500
|
|||||||
|
Cash
and cash equivalents - end of year
|
$
|
47,010
|
$
|
29,264
|
$
|
29,422
|
||||
|
Supplementary
disclosure of cash flows information:
|
||||||||||
|
Interest
Paid
|
$
|
860
|
$
|
186
|
$
|
167
|
||||
|
Noncash
transactions:
|
||||||||||
|
Class
H warrants issued/revalued
|
—
|
$
|
(48
|
)
|
$
|
50
|
||||
|
Unrealized
gain / (loss) on marketable securities
|
(1
|
)
|
(3
|
)
|
(177
|
)
|
||||
See
notes to consolidated financial
statements
F-7
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
1 - The Company
Discovery
Laboratories, Inc. (the “Company”) is a biotechnology company developing its
proprietary surfactant technology as SRT for respiratory diseases. Surfactants
are produced naturally in the lungs and are essential for breathing. The
Company’s technology produces a precision-engineered surfactant that is designed
to closely mimic the essential properties of natural human lung surfactant.
The
Company believes 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 NICU, critical care unit and other hospital
settings, where there are few or no approved therapies available.
The
Company’s SRT pipeline is initially focused on the most significant respiratory
conditions prevalent in the NICU. The Company’s lead product,
SurfaxinÒ
(lucinactant), for the prevention of RDS in premature infants, has received
an
Approvable Letter from the FDA and is under review for approval in Europe by
the
EMEA. The FDA has established April 2006 as its target to complete its review
of
the Surfaxin NDA. Surfaxin is also being developed for the prevention and
treatment of Bronchopulmonary Dysplasia (BPD), also known as Chronic Lung
Disease, in premature infants. The Company is preparing to conduct multiple
Phase 2 pilot studies with Aerosurf™, aerosolized SRT administered through nasal
continuous positive airway pressure (nCPAP), for the treatment of neonatal
respiratory failure.
To
address the various respiratory conditions affecting pediatric, young adult
and
adult patients in the critical care and other hospital settings, the Company
is
conducting a Phase 2 clinical trial to address Acute Respiratory Distress
Syndrome (ARDS) in adults, and is also developing aerosol formulations of SRT
to
address Acute Lung Injury (ALI), asthma, COPD, and other respiratory
conditions.
With
the
goal of becoming a fully integrated biotechnology company, the Company’s are
implementing a long-term business strategy which includes: (i) continued
investment in manufacturing capabilities (including at the manufacturing
operations in New Jersey acquired by the Company in December 2005) for the
production of precision-engineered surfactant drug products to meet anticipated
clinical and commercial needs, if approved, in the United States, Europe and
other markets; (ii) building a specialty pulmonary United States sales and
marketing organization to focus initially on opportunities in the NICU; (iii)
investing in development of aerosol SRT pipeline programs, including Aerosurf,
primarily utilizing the aerosol generating technology, rights to which we
acquired in December 2005 and are currently developing through a strategic
alliance with Chrysalis Technologies, a division of Philip Morris USA Inc.
(Chrysalis); and (iv) securing additional corporate partnerships for the
development and potential commercialization of SRT, including Surfaxin, in
Europe and the rest of the world.
Management’s
Plans and Financings
The
Company has incurred substantial losses since inception and expects to continue
to expend substantial amounts for continued product research, development,
manufacturing and commercialization activities. The Company funds its operations
primarily through the issuance of equity securities and the use of credit and
capital lease facilities. Management plans to fund its research, development,
manufacturing and commercialization activities with the issuance of additional
equity, debt and entering into strategic alliances, if possible, that will
provide funding for operations, including the U.S. commercial launch anticipated
late in the second quarter of 2006 of our lead product, Surfaxin. The future
of
the Company is dependent on its ability to obtain additional financing and,
ultimately, on its ability to achieve profitable operations. There is no
assurance, however, that such financing will be available or that the Company's
efforts ultimately will be successful.
Business
Segments
The
Company currently operates in one business
segment,
which
is the research and development of products focused on Surfactant Replacement
Therapies (SRTs) for respiratory diseases. The Company is managed and operated
as one business. A single management team that reports to the Chief Executive
Officer comprehensively manages the entire business. The Company does not
operate separate lines of business with respect to its product candidates.
Accordingly, the Company does not have separately reportable segments as defined
by SFAS No. 131, “Disclosure about Segments of an Enterprise and Related
Information”.
F-8
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
2 - Summary of Significant Accounting Policies
Accounting
Principles
The
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States.
Consolidation
The
financial statements include all of the accounts of Discovery Laboratories,
Inc.
and its inactive subsidiary, Acute Therapeutics, Inc.
Cash,
cash equivalents and investments
The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
The
investments are classified as available-for-sale and are comprised of shares
of
high-quality, corporate bonds. Investments are carried at fair market value.
Realized gains and losses are computed using the average cost of securities
sold. Any appreciation/depreciation on these investments is recorded as other
comprehensive income (loss) in the statements of changes in stockholders' equity
until realized.
Investments
are made pursuant to the Investment Policy approved by the Board of Directors.
The policy provides for the purchase of high-quality investments, while ensuring
preservation of capital and fulfillment of liquidity needs.
Property
and equipment
Property
and equipment is recorded at cost. Depreciation of furniture and equipment
is
computed using the straight-line method over the estimated useful lives of
the
assets (five to seven years). Leasehold improvements are amortized over the
lower of the (a) term of the lease or (b) useful life of the improvements.
Expenditures for repairs and maintenance are charged to expense as
incurred.
Use
of estimates
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Long-lived
assets
Under
Statement of Financial Accounting Standards (SFAS) No. 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets”, the Company is required to
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and measure any impairment
loss as the difference between the carrying amount and the fair value of the
asset. No impairment was recorded during the years ended December 31, 2005,
2004
and 2003, as management of the Company believes the sum of its future
undiscounted cash flows will exceed the carrying amount of the
assets.
F-9
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Research
and
development
Research
and development costs are charged to operations as incurred.
Revenue
recognition - research and development collaborative
agreements
The
Company has received nonrefundable fees from companies under license,
sublicense, collaboration and research funding agreements. The Company initially
records such funds as deferred revenue and recognizes research and development
collaborative contract revenue when the amounts are earned, which occurs over
a
number of years as the Company performs research and development activities.
See
Note 9 - Corporate Partnership Agreements for a detailed description of the
Company’s revenue recognition methodology under these agreements.
Additionally,
the Company had previously been awarded grants from certain third party
organizations to help fund research for the drugs that the Company is currently
developing. As research and development expenditures qualifying under the grant
were incurred, grant reports were periodically completed and submitted to the
granting agency for review. If approved, the granting agency remitted payment
to
the Company, which was recorded as revenue upon receipt.
Stock-based
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.
The Company continues to account for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, “Accounting for Stock Options Issued
to Employees” and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying Common Stock and the
exercise price of the option 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 cost for the Company's 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 years ended December 31, 2005, 2004, and 2003 would have been
as
follows:
|
(in
thousands, except per share data)
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
Loss as reported
|
$
|
(58,904
|
)
|
$
|
(46,203
|
)
|
$
|
(24,280
|
)
|
|
|
Additional
stock-based employee
compensation
|
$
|
(14,340
|
)
|
$
|
(3,996
|
)
|
$
|
(3,738
|
)
|
|
|
Pro
forma net loss
|
$
|
(73,244
|
)
|
$
|
(50,199
|
)
|
$
|
(28,018
|
)
|
|
|
Pro
forma net loss per share
|
$
|
(1.35
|
)
|
$
|
(1.09
|
)
|
$
|
(0.75
|
)
|
|
The
net
loss as reported on the statement of operations for the year ended December
31,
2005 includes compensation
costs for stock-based compensation awards of
$397,000. These costs include non-cash charges of $36,000 for the modification
of options held by former members of management.
These
compensation costs also include a non-cash charge related to the vested portion
of employee stock options granted and approved by the Company’s Board of
Directors in December 2003, but were subject to subsequent shareholder approval.
These employee options were granted at fair market value on the date of approval
by the Board of Directors. These options were subject to the requisite approval
of the Company’s shareholders for an increase in the number of shares of Common
Stock issuable under the 1998 Plan in an amount equal to or greater than the
aggregate amount of such options. Approval was obtained at the Company’s Annual
Meeting of Shareholders for 2004, at which time the fair market value of our
Common Stock was greater than the fair market value on the date the options
were
granted. The difference in fair market value on the date of grant versus the
date of subsequent shareholder approval was recorded as unearned portion of
compensatory stock options and will be recognized into expense as the options
vest. The Company incurred a non-cash charge of $231,000 in 2005 and $461,000
in
2004 related to the vesting of such options.
F-10
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
The
weighted average fair value of the options granted were estimated on the date
of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
|
Years
Ended December 31,
|
|||||
|
2005
|
2004
|
2003
|
|||
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
||
|
Expected
stock price volatility
|
77%
|
81%
|
86%
|
||
|
Risk-free
interest rate
|
4.1%
|
3.5%
|
2.4%
|
||
|
Expected
option term
|
3.5
years
|
3.5
years
|
3.5
years
|
||
In
December 2004, the FASB issued Financial
Accounting Standards Board Statement No. 123 (revised 2004), “Share-Based
Payment” (SFAS
123(R)), which 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 123(R) eliminates the alternative use of APB No. 25’s intrinsic
value method of accounting for stock options granted to employees.
The
Company adopted the provisions of SFAS No. 123R on January 1, 2006 using
the “modified prospective” transition method and the Black-Scholes valuation
model to value the stock options. As a result of the provisions of SFAS 123R,
the Company expects to incur compensation charges in the range of $4.0 million
to $6.0 million for the year ending December 31, 2006. However, the
estimated compensation charges can be affected by a number of variables,
including the Company’s stock price and the timing of 2006 employee stock option
grants. The Company will recognize compensation cost for stock-based awards
issued after December 31, 2005, on a straight-line basis over the requisite
service period of the award.
Board
of Directors approved acceleration of the vesting of certain stock
options
On
December 27, 2005, pursuant to and in accordance with the recommendation of
the
Compensation Committee of the Board of Directors of the Company, the Board
of
Directors approved acceleration of vesting of certain unvested and
“out-of-the-money” stock options granted under the 1998 Plan that are held by
employees and officers of the Company and that have an exercise price of $9.02
or greater. Options to purchase approximately 1,050,706 shares of the Company’s
common stock were accelerated, including options to purchase approximately
948,749 shares of common stock held by employees at or above the level of Vice
President.
The
Board
of Directors decided to accelerate the vesting of these “out-of-the-money”
options primarily to minimize certain future compensation expense that the
Company would otherwise be required to recognize in its consolidated statements
of operations with respect to these options pursuant to SFAS 123(R) which became
effective for the Company January 1, 2006. The Company estimates that the
aggregate future compensation expense that will be eliminated as a result of
the
acceleration of the vesting of these options is approximately $7.2 million,
calculated in accordance with SFAS 123(R) (of which approximately $6.6 million
is attributable to options held by employees at or above the level of Vice
President).
F-11
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
In
connection with the accelerated vesting, holders of accelerated options to
purchase an aggregate of 1,018,831 shares of common stock or 97% of the total
options subject to vesting acceleration, including each affected employee at
or
above the level of Director, entered into “lock-up” agreements with the Company
to refrain from selling shares acquired upon the exercise of such accelerated
options (other than shares needed to cover the exercise price and satisfy
withholding taxes) until the date on which the exercise would have been
permitted under the option’s pre-acceleration vesting terms or, in certain
circumstances, the employee’s last day of employment or upon a “change in
control” (as such term may be defined in any applicable agreement between the
individual and the Company), if such last date of employment or “change in
control” is earlier.
Net
loss per common share
Net
loss
per common share is computed pursuant to the provisions of SFAS No. 128,
"Earnings per Share", and is based on the weighted average number of common
shares outstanding for the periods. For the years ended December 31, 2005,
2004
and 2003, 10,904,000, 9,684,000 and 8,753,000 shares of common stock,
respectively, were potentially issuable upon the exercise of certain of the
Company’s stock options and warrants and were not included in the calculation of
net loss per share as the effect would be anti-dilutive.
Reclassification
Certain
prior year balances have been reclassified to conform with the current
presentation.
Note
3 - Investments
The
available-for-sale marketable securities held by the Company at December 31,
2005 and December 31, 2004 consisted of high-quality, corporate bonds with
a
maturity of greater than three months. All available-for-sale marketable
securities have a maturity period of less than one year.
As
of
December 31, 2005 and 2004, the available-for-sale marketable securities
consisted of the following:
|
Years
Ended December 31,
|
|||||||
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Cost
of investment
|
$
|
3,190
|
$
|
2,738
|
|||
|
Interest
earned
|
66
|
87
|
|||||
|
Amortized
premium
|
(3
|
)
|
(78
|
)
|
|||
|
Unrealized
loss
|
(2
|
)
|
(3
|
)
|
|||
|
Fair
market value
|
$
|
3,251
|
$
|
2,744
|
|||
Note
4 - Restricted Cash
The
Company has cash balances that are restricted as to use and discloses such
amounts separately on the 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 the Company’s
office space in Bucks County, Pennsylvania. The letter of credit is secured
by
cash and is included in the 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
5 - Note Receivable
from Related Party
The
note
receivable pertains to a $200,000, 7% per annum mortgagor’s note due from an
executive of the Company. 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 December 31,
2005
and 2004 was approximately $190,000 and $193,000, respectively.
F-12
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
6 - Property and Equipment
Property
and equipment as of December 31, 2005 and 2004 was comprised of the
following:
|
December
31,
|
|||||||
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Equipment
(1)
|
$
|
4,269
|
$
|
3,589
|
|||
|
Furniture
|
1,052
|
869
|
|||||
|
Leasehold
improvements
|
330
|
330
|
|||||
|
Construction-in-progress
|
1,050
|
891
|
|||||
|
Subtotal
|
6,701
|
5,679
|
|||||
|
Accumulated
depreciation
|
(2,379
|
)
|
(1,616
|
)
|
|||
|
Net
property and equipment
|
$
|
4,322
|
$
|
4,063
|
|||
| (1) |
The
equipment balance consists of: (i) manufacturing equipment to produce
Surfaxin for use in the Company’s clinical trials and for anticipated
commercial needs; (ii) laboratory equipment for research and development
activities, including aerosol development; and (iii) computers and
office
equipment to support the research, development, administrative and
commercialization activities of the Company.
|
The
property and equipment balance as of December 31, 2005 and 2004 includes
$3,755,000 and $3,396,000, respectively, of property and equipment subject
to a
capital lease. The capitalized leases are secured by the respective assets.
The
associated accumulated depreciation was $862,000 and $546,000 as of December
31,
2005 and 2004, respectively.
The
balance of Construction-in-Progress at both December 31, 2005 and December
31,
2004 primarily consists of manufacturing equipment projects for the Company’s
current manufacturing operations.
In
addition to the balance in Construction in Progress, the Company had additional
construction purchase commitments, yet to be fulfilled, totaling $65,000 as
of
December 31, 2005. As of December 31, 2004, the Company had $203,000 of
construction purchase commitments, yet to be fulfilled, which were subsequently
fulfilled in 2005.
Depreciation
expense for the years ended December 31, 2005, 2004, and 2003 was $788,000,
$546,000, and $331,000, respectively.
Note
7 - Purchase of Manufacturing Operations - Classified as In-process Research
and
Development
In
December 2005, the Company purchased the manufacturing operations of Laureate
Pharma, Inc. (Laureate) in Totowa, NJ (the Company’s then contract manufacturer)
for $16.0 million and incurred additional related expenses of $0.8 million.
The
pharmaceutical manufacturing and development facility will be used for the
production of Surfaxin, SRT formulations and aerosol development capabilities.
The Company believes this acquisition was a logical way to implement a long-term
manufacturing strategy for the continued development of the Company’s SRT
portfolio, specifically life cycle management of Surfaxin for new indications,
potential formulation enhancements, and expansion of the Company’s aerosol SRT
products beginning with Aerosurf™.
The
manufacturing facility in Totowa, NJ is located in approximately 21,000 square
feet of leased pharmaceutical manufacturing and development space that is
specifically designed for the production of sterile pharmaceuticals in
compliance with current Good Manufacturing Practice (cGMP) requirements. There
are approximately 25 personnel that are qualified in sterile pharmaceutical
manufacturing and currently employed at the operations. Discovery and Laureate
had previously entered into a contract manufacturing arrangement in October
2003, whereby Discovery’s Surfaxin manufacturing know-how and dedicated
equipment was transferred to this facility. Transfer of the Surfaxin
manufacturing process was completed in 2004 and, since that time, the facility
has been predominantly dedicated to Surfaxin and the support of regulatory
compliance requirements for Discovery’s manufacturing operations. In January
2005, as part of the review of the Surfaxin NDA, the FDA issued a Form 483
to
Laureate, citing inspectional observations related to basic quality controls,
process assurances and documentation requirements that support the commercial
production process necessary to comply with cGMPs. To address the inspectional
observations, Discovery and Laureate implemented improved quality systems and
documentation controls believed to support the FDA’s regulatory requirements for
the approval of Surfaxin.
F-13
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
In
consideration for the $16.0 million paid to Laureate, the Company received
the
following:
| · |
An
assignment of the existing lease of the Totowa facility, with a lease
term
expiring in December 2014. The lease is subject to customary terms
and
conditions and contains an early termination option, first beginning
in
December 2009. The early termination option can only be exercised
by the
landlord upon a minimum of two years prior notice and payment of
significant early termination amounts to
Discovery.
|
| · |
Equipment
and leasehold improvements related to the Totowa
facility.
|
| · |
The
right to employ the majority of the approximately 25 personnel that
are
qualified in sterile pharmaceutical manufacturing and that were employed
by Laureate at the operations.
|
In
connection with this transaction, we incurred a non-recurring charge, classified
as in-process research & development in accordance with FAS 2 “Accounting
for Research & Development Costs”, of $16.8 million associated with the
purchase of the manufacturing operations at the Totowa, NJ facility.
Also,
in
connection with the acquisition, the Company borrowed $2.4
million pursuant to its capital lease financing arrangement with
General Electric Capital Corporation (GECC) to partially finance the purchase
of
the manufacturing operations. See Note 8 - Debt Facilities.
Note
8 - Debt Facilities
Credit
Facility with Quintiles Transnational Corp. (“Quintiles”)
The
Company entered into a collaboration arrangement with Quintiles, in 2001, to
provide certain commercialization services in the United States for Surfaxin
for
the treatment of RDS in premature infants and Meconium Aspiration Syndrome
(MAS) in full-term infants. In connection with the commercialization
agreement, Quintiles extended to the Company a secured, revolving credit
facility of $8.5 to $10.0 million to fund pre-marketing activities associated
with the launch of Surfaxin in the United States. The Company was obligated
to
use a significant portion of the funds borrowed under the credit facility for
pre-launch marketing services provided by Quintiles. Principal amounts owed
under the credit facility may have been repaid out of the proceeds of milestone
payments to be paid to the Company by Quintiles upon the achievement of certain
corporate milestones. Interest was payable quarterly in arrears at a rate of
the
greater of 8% or prime rate plus 2% annually. Outstanding principal was due
on
December 10, 2004.
In
November 2004, the Company restructured its business arrangements with Quintiles
and terminated the commercialization agreement for Surfaxin in the United
States. The existing secured, revolving credit facility remained available
to
borrow up to $8.5 million. By virtue of the termination of the commercialization
agreements, the Company was no longer obligated to use funds advanced under
the
credit facility for services provided by Quintiles, and Quintiles was no longer
obligated to make milestone payments. The original maturity date of December
10,
2004, is now extended until December 31, 2006. The interest rate is the prime
rate plus 2% annually and payments are due quarterly in arrears. As of December
31, 2005, $8.5 million was outstanding under the credit facility and is
classified as a current liability. Outstanding principal and interest due under
the credit facility are due and payable as a balloon payment on December 31,
2006.
F-14
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Capital
Lease and Note Payable Financing Arrangements
Capital
lease liabilities and note payable as of December 31, 2005 and 2004 are as
follows:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Current
|
|||||||
|
Capital
leases, GECC
|
$
|
982
|
$
|
828
|
|||
|
Note
payable, GECC
|
560
|
—
|
|||||
|
All
other
|
26
|
26
|
|||||
|
Capital
leases and note payable, current
|
1,568
|
854
|
|||||
|
Long
Term
|
|||||||
|
Capital
leases, GECC
|
1,480
|
1,626
|
|||||
|
Note
payable, GECC
|
1,840
|
—
|
|||||
|
All
other
|
3
|
28
|
|||||
|
Capital
leases and note payable, long term
|
3,323
|
1,654
|
|||||
|
Total
capital leases and note payable
|
$
|
4,891
|
$
|
2,508
|
|||
The
Company’s primary capital lease financing arrangement is with the Life Science
and Technology Finance Division of General Electric Capital Corporation
(“GECC”). Under this arrangement, the Company purchases capital equipment,
including manufacturing, information technology systems, laboratory, office
and
other related capital assets and subsequently finances those purchases through
this capital lease financing arrangement. The capital lease is secured by the
related assets. This arrangement provides for financing of up to $9.0 million,
of which $0.5 million is contingent upon FDA approval of Surfaxin for the
prevention of RDS in premature infants. Subject to certain conditions, the
funds
are available through April 2006. Laboratory and manufacturing equipment is
financed over 48 months and all other equipment is financed over 36 months.
Interest rates vary in accordance with changes in the three and four year
treasury rates. For portions of the capital lease financing arrangement accessed
in 2005, the interest rates ranged from 9.9% to 10.5%.
As
of
December 31, 2005, the Company had used $6.4 million of the available financing
under the arrangement and had $2.6 million remaining available for future use,
subject to certain conditions.
Amounts
available, used and remaining available for future use as of December 31, 2005
and 2004 are as follows:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Financing
available
|
|||||||
|
Currently
available
|
$
|
8,500
|
$
|
7,500
|
|||
|
Availability
subject to FDA approval
|
500
|
1,500
|
|||||
|
Total
|
9,000
|
9,000
|
|||||
|
Amount
used (cumulative)
|
(6,358
|
)
|
(3,042
|
)
|
|||
|
Amount
available for future use
|
$
|
2,642
|
$
|
5,958
|
|||
Included
in the amounts above, in December 2005, the Company borrowed $2.4 million
pursuant to its capital lease financing arrangement associated with the purchase
of the manufacturing operations of Laureate in Totowa, NJ. In accordance with
the accounting treatment for the manufacturing purchase, the $2.4 million was
classified as a note payable on the balance sheet (of which $0.6 million is
current and $1.8 million is long-term). The note has an interest rate of 10.3%
and is repayable over a 48-month period. The note payable is secured by
equipment at the manufacturing facility in Totowa, NJ.
F-15
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Payments
due under contractual debt obligations at December 31, 2005, including principal
and interest, are as follows:
|
(in
thousands)
|
2006
|
2007
|
2008
|
2009
|
Total
|
|||||||||||
|
Credit
facility with Quintiles
|
$
|
9,300
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
9,300
|
||||||
|
Capital
lease obligations - GECC & others
|
1,214
|
1,080
|
487
|
49
|
2,830
|
|||||||||||
|
Note
Payable - GECC
|
763
|
833
|
833
|
438
|
2,867
|
|||||||||||
|
Total
|
$
|
11,277
|
$
|
1,913
|
$
|
1,320
|
$
|
487
|
$
|
14,997
|
||||||
Note
9 - Corporate Partnership Agreements
Chrysalis
Technologies, Division of Philip Morris USA Inc.
(Chrysalis)
In
December 2005, the Company entered into a strategic alliance with Chrysalis
Technologies, a division of Philip Morris USA Inc., to develop and commercialize
aerosolized SRT to potentially address a broad range of serious respiratory
conditions, such as acute lung injury, neonatal respiratory failure, chronic
obstructive pulmonary disorder, asthma, cystic fibrosis and others. The intent
of the alliance is to unite two potentially highly complementary respiratory
technologies - the Company’s precision-engineered surfactant technology with
Chrysalis’ novel aerosolization device technology that is being developed to
enable the delivery of therapeutics to the deep lung.
The
alliance focuses on therapies for hospitalized patients, including those in
the
neonatal intensive care unit (NICU), pediatric intensive care unit (PICU) and
the adult intensive care unit (ICU), and can be expanded into other hospital
applications and ambulatory settings. Discovery Labs and Chrysalis are utilizing
their respective capabilities and resources to support and fund the design
and
development of integrated drug-device systems that can be uniquely customized
to
address specific respiratory diseases and patient populations. Chrysalis is
responsible for developing the design for the aerosol device platform, patient
interface and disposable dose packets. The Company is responsible for
aerosolized SRT drug formulations, clinical and regulatory activities, and
the
manufacturing and commercialization of the drug-device products. Discovery
has
exclusive rights to Chrysalis’ aerosolization technology for use with pulmonary
surfactants for all respiratory diseases and conditions in hospital and
ambulatory settings. Generally, Chrysalis will receive a tiered royalty on
product sales: the base royalty generally applies to aggregate net sales of
less
than $500 million per contract year; the royalty generally increases on
aggregate net sales in excess of $500 million per contract year, and generally
increases further on aggregate net sales of alliance products in excess of
$1
billion per contract year.
The
Company’s lead program for aerosolized SRT is Aerosurf administered via nCPAP to
treat premature infants in the NICU at risk for respiratory failure. The Company
also plans to develop aerosolized SRT to treat ALI in the hospital.
Laboratorios
del Dr. Esteve, S.A. (Esteve)
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.
F-16
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
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 that 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
October 2005, Esteve sublicensed the distribution rights to Surfaxin in Italy
to
Dompe Farmaceutici Spa (Dompe), a privately owned Italian company. Under the
sublicense agreement, Dompe will be responsible for sales, marketing and
distribution in Italy of Surfaxin.
License
fees and reimbursement of research and development expenditures associated
with
the Esteve collaboration were recorded as deferred revenue and recognized as
revenue when the amounts were earned, which occurs over a number of years as
the
Company performs research and development activities. For the years ended
December 31, 2005, 2004 and 2003, the company recorded revenue related to the
Esteve collaboration of $0.1 million, $1.2 million and $0.7 million,
respectively.
Restructuring
of Corporate Partnerships
2004
Restructuring of Esteve Partnership
In
consideration for regaining commercial rights in the 2004 restructured
partnership, the Company issued to Esteve 500,000 shares of common stock for
no
cash consideration, valued at $3.5 million. The Company incurred a non-cash
charge, including the value of the shares issued and other costs related to
the
restructuring, of $4.1 million. This charge is a component of Corporate
Partnership Restructuring Charges on the statement of operations. The Company
also agreed to pay to Esteve 10% of cash up-front and milestone fees that the
Company may receive in connection with any future strategic collaborations
for
the development and commercialization of Surfaxin for RDS, ARDS or certain
other
Surfactant Replacement Therapies in the territory for which the Company had
previously granted a license to Esteve. Any such up-front and milestone fees
that the Company may pay to Esteve are not to exceed $20 million in the
aggregate.
2004
Restructuring / Termination of Quintiles Collaboration
In
2001,
we entered into a commercialization agreement with Quintiles Transnational
Corp.
(Quintiles), and its strategic investment group affiliate, PharmaBio, to provide
certain commercialization services in the United States for Surfaxin for the
prevention of RDS in premature infants and the treatment of Meconium Aspiration
Syndrome (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.
F-17
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
In
connection with our arrangement to regain full commercialization rights for
Surfaxin, we issued a warrant to PharmaBio to purchase 850,000 shares of our
common stock at an exercise price equal to $7.19 per share. The warrant has
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 warrant was valued
at its 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 remains available
with
the original maturity date of December 10, 2004 being extended until December
31, 2006.
Note
10 - Licensing and Research Funding Agreements
Ortho
Pharmaceutical, Inc.
The
Company and Ortho Pharmaceutical, Inc. (Ortho Pharmaceutical), a wholly-owned
subsidiary of Johnson & Johnson, Inc., are parties to an agreement granting
an exclusive worldwide license of the proprietary SRT technology, including
Surfaxin, to the Company in exchange for certain license fees, future milestone
payments (aggregating $2,500,000) and royalties. To date, the Company has paid
$450,000 for milestones achieved.
The
Scripps Research Institute
The
Company and The Scripps Research Institute (Scripps) were parties to a research
funding and option agreement which expired in February 2005. Pursuant to this
agreement, the Company had been obligated to fund a portion of Scripps' research
efforts and thereby had the option to acquire an exclusive worldwide license
to
the technology developed from the research program during the term of the
agreement. The Company has exercised its license option with respect to certain
inventions developed under the agreement. We had the right to receive 50% of
the
net royalty income received by Scripps for inventions that were jointly
developed under the agreement and for which we did not exercise our option
to
acquire an exclusive license. Payments to Scripps under this agreement were
$400,000, $600,000 and $649,000 in 2005, 2004, and 2003,
respectively.
Note
11 - Stockholders’ Equity
Registered
Public Offerings and Private Placements
In
December 2005, the Company completed a registered direct offering of 3,030,304
shares of our common stock to select institutional investors. The shares were
priced at $6.60 per share resulting in gross and net proceeds to the Company
equal to $20.0 million and $18.9 million, respectively. This offering was made
pursuant to the Company’s October 2005 universal shelf registration
statement.
In
November 2005, the Company sold 650,000 shares of our common stock to Esteve,
at
a price per share of $6.88, for aggregate proceeds of approximately $4.5
million. This offering was made pursuant to the Company’s December 2003 shelf
registration statement.
In
February 2005, the Company completed a registered direct public offering of
5,060,000 shares of common stock. The shares were priced at $5.75 per share
resulting in gross and net proceeds to the Company equal to $29.1 million and
$27.4 million, respectively. This offering was made pursuant to the Company’s
December 2003 shelf registration statement.
In
April
2004, the Company completed an underwritten public offering of 2,200,000 shares
of common stock. The shares were priced at $11.00 per share resulting in the
Company’s receipt of gross and net proceeds equal to $24.2 million and $22.8
million, respectively. This offering was made pursuant to the Company’s December
2003 shelf registration statement.
F-18
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
In
June
2003, the Company completed the sale of securities in a private placement to
selected institutional and accredited investors for net proceeds of
approximately $25.9 million. The Company issued 4,997,882 shares of Common
Stock
and 999,577 Class A Investor Warrants to purchase shares of Common Stock at
an
exercise price equal to $6.875 per share. The Class A Investor Warrants have
a
seven-year term. As of December 31, 2005, 909,381 of the Class A Investor
Warrants remain unexercised.
Committed
Equity Financing Facility (CEFF)
In
July
2004, the Company entered into a Committed Equity Financing Facility (“CEFF”)
with Kingsbridge Capital Ltd. (“Kingsbridge”), pursuant to which Kingsbridge has
committed to finance up to $75.0 million of capital for newly-issued shares
of
Common Stock. The exact timing, amount and price of any CEFF financings is
subject to the Company’s ultimate determination, and certain conditions of the
facility agreement. In connection with the CEFF, the Company issued a Class
B
Investor warrant to Kingsbridge to purchase up to 375,000 shares of Common
Stock
at an exercise price equal to $12.0744 per share. The warrant, which expires
in
January 2010, must be exercised for cash, except in limited circumstances,
for
total proceeds of approximately $4.5 million, if exercised. As of December
31,
2005, the Class B Investor Warrant had not been exercised in whole or in
part.
In
November 2005, the Company entered into a financing pursuant to the CEFF
resulting in aggregate cash proceeds to the Company of $3.2 million from the
issuance of 498,552 shares of common stock at an average price of $6.42, after
taking into account the applicable discount rate provided for by the CEFF.
In
September 2005, the Company entered into a financing pursuant to the CEFF
resulting in aggregate cash proceeds to the Company of $17.0 million from the
issuance of 3,012,055 shares of common stock at an average price of $5.64,
after
taking into account the applicable discount rate provided for by the
CEFF.
In
December 2004, the Company entered into a financing pursuant to the CEFF
resulting in aggregate cash proceeds to the Company of $7.2 million from the
issuance of 901,742 shares of common stock at an average price of $7.98, after
taking into account the applicable discount rate provided for by the
CEFF.
Subject
to the conditions of the CEFF, there is currently $47.6 million that remains
available under the CEFF.
Shares
Issued Pursuant to the Restructuring of Corporate
Partnerships
2004
Restructuring of Esteve Partnership
In
December 2004, the Company restructured its strategic alliance with Esteve
for
the development, marketing and sales of our products in Europe and Latin
America. See Note 9 - Corporate Partnership Agreements. In consideration for
regaining commercial rights in the restructuring, the Company issued to Esteve
500,000 shares of common stock for no cash consideration, and for accounting
purposes, incurred a non-cash charge of $3.5 million in 2004, representing
the
fair market value of the shares on the date of issuance.
2004
Restructuring / Termination of Quintiles Collaboration
In
November 2004, the Company agreed with Quintiles to restructure its business
arrangements and terminate the commercialization agreements for Surfaxin in
the
United States. See Note 9 - Corporate Partnership Agreements. In connection
with
obtaining full commercialization rights for Surfaxin, the Company issued to
Quintiles a warrant to purchase 850,000 shares of Common Stock at an exercise
price equal to $7.19 per share. The warrant has a 10-year term and is
exercisable for total proceeds equal to approximately $6.0 million in cash
or as
an offset to cancel indebtedness of the Company in connection with the existing
secured revolving credit facility of $8.5 million.
Redemption
of Warrants
Pursuant
to an equity investment from Quintiles and PharmaBio in December 2001, the
Company issued Class G Warrants to purchase 357,143 shares of Common Stock
at an
exercise price equal to $3.485 per share (subject to adjustment). The Class
G
Warrants had a 10-year term and the Company was entitled to redeem the Class
G
Warrants upon the attainment of certain price performance thresholds of the
common stock. In February 2004, the price performance criteria was met and
the
warrants were redeemed. The warrants were cashlessly exercised resulting in
the
issuance of 249,726 shares of Common Stock.
F-19
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Pursuant
to a credit facility from Quintiles and PharmaBio in December 2001, the Company
issued Class H Warrants to purchase 320,000 shares of Common Stock. The Class
H
Warrants were exercisable at $3.03 per share and were exercisable
proportionately only upon availability of the credit facility. The Class H
Warrants had a 10-year term and the Company was entitled to redeem the Class
H
warrants upon the attainment of certain price performance thresholds of the
Common Stock. In 2004, the price performance criteria was met and the warrants
were redeemed. The Class H Warrants were cashlessly exercised resulting in
the
issuance of 228,402 shares of Common Stock.
In
June
and July 2003, the Company common stock attained certain price performance
thresholds on the Nasdaq SmallCap Market that permitted the Company to redeem
(and thereby effectively compel the exercise thereof) three of the Company’s
outstanding classes of warrants which represented, in aggregate, the right
to
purchase approximately 3.6 million shares of common stock. Such warrants (i.e.,
the Class I, Class F and Class C warrants) were previously issued by the Company
in connection with certain private placement financings that occurred in
November 2002, October 2001, and April 1999, respectively. These warrants were
exercised in June and July 2003, in accordance with their respective terms,
either cashlessly or for cash, resulting in the issuance to the holders of
approximately 3.3 million shares of common stock and the Company’s receipt of
aggregate cash proceeds of $6.1 million.
Common
shares reserved for future issuance
Common
shares reserved for potential future issuance upon exercise of
warrants
The
chart
below details shares of common stock reserved for future issuance upon the
exercise of warrants.
The
chart
below details shares of common stock reserved for future issuance upon the
exercise of warrants.
|
Shares
Reserved for Issuance upon Exercise of Warrants
|
|||||||||||||
|
December
31,
|
|||||||||||||
|
2005
|
2004
|
Exercise
Price
|
Expiration
Date
|
||||||||||
|
Quintiles
Warrant
(2004
business restructuring)
|
850,000
|
850,000
|
$
|
7.19
|
11/3/2014
|
||||||||
|
Class
B Investor Warrants
(2004
Kingsbridge CEFF)
|
375,000
|
375,000
|
$
|
12.07
|
1/6/2010
|
||||||||
|
Class
A Investor Warrants (2003)
|
909,381
|
945,745
|
$
|
6.88
|
2/19/2010
|
||||||||
|
Class
E Investor Warrants (2000)
|
—
|
310,567
|
$
|
7.38
|
3/21/2005
|
||||||||
|
Placement
Agent (2000)
|
185,822
|
214,794
|
$
|
7.47(1
|
)
|
9/21/2007
|
|||||||
|
Placement
Agent Warrants (1996)
|
4,615
|
4,615
|
$
|
0.54(1
|
)
|
11/15/2006
|
|||||||
|
Placement
Agent Warrants (1996)
|
138,953
|
138,953
|
$
|
2.27(1
|
)
|
11/15/2006
|
|||||||
|
Total
|
2,463,771
|
2,839,674
|
|||||||||||
|
(1)
Original warrant price adjusted for dilution provision
|
|||||||||||||
Common
shares reserved for potential future issuance upon exercise of stock
options
The
Company’s has a Stock Incentive Plan, which includes three equity programs. See
Note 12 - Stock Options. The Company had shares reserved for potential future
issuance under the Stock Incentive Plan of 10,074,746 and 7,330,888 as of
December 31, 2005 and 2004, respectively, for stock options available and
outstanding for future grants. As of December 31, 2005 and 2004, 8,439,771
and
6,844,654 stock options were granted and outstanding, respectively. As of
December 31, 2005 and 2004, there were 1,634,975 and 486,234 stock options
available for future grants, respectively.
F-20
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Potential
issuance of common shares under the October 2005 Universal Shelf Registration
Statement
In
October 2005, the Company filed a universal shelf registration statement on
Form
S-3 with the SEC for the proposed offering, from time to time, of up to $100.0
million of our debt or equity securities. In December 2005, the Company
completed a registered direct offering of 3,030,304 shares of our common stock
to select institutional investors resulting in gross proceeds to the Company
of
$20.0 million.
There
is
currently $80.0 million remaining on the October 2005 universal shelf
registration statement.
Common
shares reserved for potential future issuance under the
CEFF
The
Company entered into a CEFF with Kingsbridge pursuant to which Kingsbridge
has
committed to finance up to $75.0 million of capital for newly-issued shares
of
common stock. See Note 11 - “Stockholders’ Equity”. In October 2004, the Company
filed a registration statement pursuant to the CEFF, which reserved 15,000,000
shares of common stock for future issuance under the CEFF calculated as the
full
amount available, $75.0 million, divided by the lowest price per share as
determined by the CEFF agreement, $5.00 per share. The Company has entered
into
three financings pursuant to the CEFF as follows: (i) December 2004 - proceeds
of $7.2 million from the issuance of 901,742 shares; (ii) September 2005 -
proceeds of $17.0 million from the issuance of 3,012,055 shares; and (iii)
November 2005 - proceeds of $3.2 million from the issuance of 498,552 shares.
After giving effect to the shares issued in each CEFF financing, the Company
had
10,587,651 shares of common stock reserved for issuance under of the CEFF as
of
December 31, 2005.
Common
shares reserved for future issuance under the December 2003 Shelf Registration
Statement
In
2003,
the Company filed a shelf registration statement with the SEC for the proposed
offering from time to time of up to an aggregate 6,500,000 million shares of
common stock.
In
April
2004, the Company completed an underwritten public offering of 2,200,000 million
shares of common stock pursuant to the shelf registration statement, resulting
in gross proceeds of $24.2 million. As of December 31, 2004, the Company had
4,300,000 shares reserved for issuance under the shelf registration statement.
In
February 2005, the Company amended the original shelf registration statement,
increasing the shares of common stock available by 1,468,592 shares. Also in
February 2005, the Company completed a registered direct offering of 5,060,000
shares of common stock pursuant to the shelf registration statement, resulting
in gross proceeds of $29.1 million.
In
November 2005, Esteve agreed to purchase 650,000 shares of the Company’s common
stock resulting in gross proceeds of $4.5 million. Subsequent to this
transaction, the remaining 58,592 shares reserved under the shelf registration
statement, as amended, were de-registered.
As
of
December 31, 2005, the Company had no shares reserved for potential future
issuance under this shelf registration statement.
F-21
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Common
shares reserved for potential future issuance under the Company’s 401(k)
Plan
The
Company has a voluntary 401(k) savings plan covering eligible employees.
Effective January 1, 2003, the Company allows for periodic discretionary matches
as a percentage of each participant’s contributions in newly issued shares of
common stock. The Company match resulted in the issuance of 36,750 and 22,564
shares of common stock for the years ended December 31, 2005 and 2004,
respectively. The Company had shares reserved for potential future issuance
under the Company’s 401(k) Plan of 69,353 and 106,103 for the years ended
December 31, 2005 and 2004, respectively.
Treasury
Stock/Common Stock issued for services
The
Company has a stock repurchase program wherein the Company may buy its own
shares on the open market and use such shares to settle indebtedness. Such
shares are accounted for as treasury stock. During the years ended December
31,
2005, 2004 and 2003, the Company did not repurchase its own shares on the open
market.
During
the twelve months ended December 31, 2004, certain members of the Company’s
management and certain consultants, pursuant to terms set forth in the Company’s
Amended and Restated 1998 Stock Incentive Plan, tendered shares of Common Stock
then held by such members in lieu of cash for payment for the exercise of
certain stock options previously granted to such parties. For the twelve months
ended December 31, 2004, 146,204 shares of our Common Stock were tendered to
us
by such parties in lieu of cash at a weighted average price of $12.07 per share.
These shares are accounted for as treasury stock. For the year ended December
31, 2005, there were no such shares tendered to the Company.
The
following chart details shares tendered to the Company in lieu of cash for
the
exercise of stock options in 2004:
|
Number
of shares
|
|
||||||
|
|
received
in lieu of
|
|
|||||
|
|
cash
for the exercise
|
Average
price
|
|||||
|
|
of
stock options
|
Per
share
|
|||||
|
January
2004
|
97,226
|
$
|
12.44
|
||||
|
March
2004
|
18,497
|
12.08
|
|||||
|
May
2004
|
24,702
|
11.27
|
|||||
|
July
2004
|
5,779
|
9.30
|
|||||
|
Total
|
146,204
|
$
|
12.07
|
||||
Note
12 - Stock Options
In
March
1998, the Company adopted its 1998 Stock Incentive Plan, which includes three
equity programs (the "1998 Plan"):
Discretionary
Option Grant Program
Under
the
Discretionary Option Grant Program, options to acquire shares of the common
stock may be granted to eligible persons who are employees, non-employee
directors, consultants and other independent advisors. Options granted under
the
Discretionary Option Grant Program are granted at no less than one hundred
percent (100%) of the fair market value of the common stock on the date of
the
grant; generally vest over a period of three years; and expire no later than
10
years from the date of the grant, subject to certain conditions. Options granted
and outstanding through November 2003 are exercisable immediately upon grant,
however, the shares issuable upon the exercise of such options are subject
to
repurchase by the Company. Any such repurchase rights lapse as the options
vest
according to their stated terms. All shares of common stock issuable upon such
non-vested options are subject to restrictions on transferability. Options
granted under the 1998 Plan after November 2003 are only exercisable upon
vesting.
F-22
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Stock
Issuance Program
Under
the
Stock Issuance Program, such eligible persons may be issued shares of the common
stock. In 2005, the Company issued 30,263 restricted stock awards to certain
employees for no cash consideration. The Company did not issue any such shares
for the years ended December 31, 2004 and 2003.
Automatic
Option Grant Program
Under
the
Automatic Option Grant Program, eligible non-employee directors will
automatically receive option grants at periodic intervals at an exercise price
equal to the fair market value per share on the date of the grant. Such options
usually vest upon the first anniversary of the date of the grant and expire
no
later than 10 years from the date of the grant.
The
Company currently has 12,570,000 shares of common stock under the 1998 Stock
Incentive Plan, of which 10,075,000 remain reserved for issuance over the term
of the plan. The 1998 Plan was amended at each of the Annual Meetings of
Shareholders for the years 2005, 2004 and 2003 to increase the maximum number
of
shares of common stock reserved for issuance over the term of the plan by
3,000,000 shares, 3,000,000 shares, and 1,420,000 shares, respectively.
A
summary
of the Company’s stock option activity and related information is as
follows:
|
Price
Per Share
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average
Remaining
Contractual
Life
|
||||||
|
Balance
at January 1, 2003
|
$0.0026
- $5.375
|
5,605,184
|
$2.85
|
7.81
years
|
|||||
|
Options
granted
|
1.70
- 9.17
|
1,111,750
|
6.75
|
||||||
|
Options
exercised
|
0.0026
- 4.22
|
(993,001)
|
1.95
|
||||||
|
Options
forfeited
|
0.1923
- 5.06
|
(168,611)
|
2.76
|
||||||
|
Balance
at December 31, 2003
|
0.0026
- 9.17
|
5,555,322
|
3.80
|
7.44
years
|
|||||
|
Options
granted
|
5.92
- 10.60
|
2,681,250
|
8.60
|
||||||
|
Options
exercised
|
.3205
- 9.17
|
(1,271,493)
|
3.41
|
||||||
|
Options
forfeited
|
1.42
- 10.60
|
(120,425)
|
5.64
|
||||||
|
Balance
at December 31, 2004
|
0.0026
- 10.60
|
6,844,654
|
5.69
|
7.76
years
|
|||||
|
Options
granted
|
5.15
- 9.02
|
2,079,000
|
7.97
|
||||||
|
Options
exercised
|
1.46
- 7.22
|
(225,879)
|
2.87
|
||||||
|
Options
forfeited
|
1.50
- 10.60
|
(258,004)
|
7.19
|
||||||
|
Balance
at December 31, 2005
|
$.0026
- $10.60
|
8,439,771
|
$6.28
|
7.31
years
|
|||||
Options
granted and outstanding through November 2003 are exercisable immediately upon
grant, however, the shares issuable upon the exercise of such options are
subject to repurchase by the Company. Any such repurchase rights lapse as the
options vest according to their stated terms.
F-23
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
The
following table provides detail with regard to options outstanding and
exercisable at December 31, 2005:
|
Price
per share
|
Shares
Outstanding
|
Weighted
Average
Price
per
Share
|
Weighted
Average
Remaining
Contractual
Life
|
Shares
Exercisable
|
Weighted
Average
Price
per
Share
|
|
$0.0026
- $2.00
|
663,956
|
$1.56
|
5.88
years
|
663,956
|
$1.56
|
|
$2.01
- $4.00
|
1,536,846
|
$2.63
|
5.99
years
|
1,536,846
|
$2.63
|
|
$4.01
- $6.00
|
1,088,021
|
$4.75
|
4.44
years
|
1,029,771
|
$4.70
|
|
$6.01
- $8.00
|
1,642,906
|
$6.74
|
8.95
years
|
624,147
|
$6.76
|
|
$8.01
- $10.00
|
3,258,042
|
$8.94
|
8.28
years
|
3,217,292
|
$8.94
|
|
$10.01
- $10.60
|
250,000
|
$10.12
|
8.38
years
|
250,000
|
$10.12
|
|
8,439,771
|
7,322,012
|
The
following table provides further detail with regard to options that are
exercisable and vested (therefore, not subject to repurchase rights and related
restrictions on transferability by the Company) at December 31,
2005:
|
Price
per share
|
Shares
Exercisable
|
Weighted
Average
Price
per
Share
|
Vested
Shares
not
subject to
Repurchase
Rights
|
Weighted
Average
Price
per
Share
|
|
$0.0026
- $2.00
|
663,956
|
$1.56
|
663,956
|
$1.56
|
|
$2.01
- $4.00
|
1,536,846
|
$2.63
|
751,432
|
$2.50
|
|
$4.01
- $6.00
|
1,029,771
|
$4.70
|
1,029,438
|
$4.70
|
|
$6.01
- $8.00
|
624,147
|
$6.76
|
620,482
|
$6.76
|
|
$8.01
- $10.00
|
3,217,292
|
$8.94
|
3,217,292
|
$8.94
|
|
$10.01
- $10.60
|
250,000
|
$10.12
|
250,000
|
$10.12
|
|
7,322,012
|
6,532,600
|
In
December 2004, the Board of Directors approved the issuance of options
to
management to purchase up to 1,148,500 shares of common stock at an exercise
price of $9.02 per share. Such options are expressly subject to the requisite
approval of the Company’s shareholders, to be obtained no later than the
Company’s Annual Meeting of Shareholders for 2005, for an amendment to the 1998
Plan authorizing an increase in the number of shares issuable under the
plan in
an amount equal to or greater than the aggregate amount of such options
and an
increase in the total shares authorized for use by the Company. Approval
was
obtained at the Company’s Annual Meeting of Shareholders for 2005, at which time
the fair market value of our common stock was $6.28, which was less than
the
fair market value on the date the options were granted and no additional
compensation expense was required to be recognized as a result.
In
December 2003, the Board of Directors approved the issuance of options to
management to purchase up to 1,464,500 shares of common stock at an exercise
price of $9.17 per share, the fair market value on the date the Board of
Directors approved the grant. Such options were expressly subject to the
requisite approval of the Company’s shareholders, to be obtained no later than
the Company’s Annual Meeting of Shareholders for 2004, for an amendment to the
1998 Plan authorizing an increase in the number of shares issuable under the
plan in an amount equal to or greater than the aggregate amount of such options.
Approval was obtained at the Company’s Annual Meeting of Shareholders for 2004,
at which time the fair market value of our common stock was $9.80, which was
greater than the fair market value on the date the options were granted. The
difference in fair market value on the date of grant versus the date of
subsequent shareholder approval was recorded as unearned portion of compensatory
stock options and will be recognized into expense as the options vest. The
Company incurred a non-cash charge of $231,000 and $461,000 related to the
vesting of such options in 2005 and 2004, respectively.
F-24
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Board
of Directors approved acceleration of the vesting of certain stock
options
On
December 27, 2005, pursuant to and in accordance with the recommendation of
the
Compensation Committee of the Board of Directors of the Company, the Board
of
Directors approved full acceleration of vesting of certain unvested stock
options granted under the Company’s Amended and Restated 1998 Stock Incentive
Plan that are held by employees and officers of the Company and that have an
exercise price of $9.02 or greater. Options to purchase approximately 1,050,706
shares of the Company’s common stock were accelerated, including options to
purchase approximately 948,749 shares of common stock held by employees at
or
above the level of Vice President.
The
Board
of Directors decided to accelerate the vesting of these “out-of-the-money”
options primarily to minimize certain future compensation expense that the
Company would otherwise be required to recognize in its consolidated statements
of operations with respect to these options pursuant to Financial Accounting
Standards Board Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”) which became effective for the Company January 1, 2006. The Company
estimates that the aggregate future compensation expense that will be eliminated
as a result of the acceleration of the vesting of these options is approximately
$7.2 million, calculated in accordance with SFAS 123(R) (of which approximately
$6.6 million is attributable to options held by employees at or above the level
of Vice President).
In
connection with the accelerated vesting, holders of accelerated options to
purchase an aggregate of 1,018,831 shares of common stock or 97% of the total
options subject to vesting acceleration, including each affected employee at
or
above the level of Director, entered into written “lock-up” agreements with the
Company to refrain from selling shares acquired upon the exercise of such
accelerated options (other than shares needed to cover the exercise price and
satisfy withholding taxes) until the date on which the exercise would have
been
permitted under the option’s pre-acceleration vesting terms or, in certain
circumstances, the employee’s last day of employment or upon a “change in
control” (as such term may be defined in any applicable agreement between the
individual and the Company), if such last date of employment or “change in
control” is earlier.
Options
granted at less than fair market value
Prior
to
2002, under the Automatic Option Grant Program, eligible directors automatically
received option grants at periodic intervals at an exercise price equal to
60%
of fair market value per share on the date of the grant. Since 2002, all stock
option grants to non-employee directors pursuant to the Automatic Option Grant
Program are required to be at 100% of the fair market value per share on the
date of the grant.
The
following table pertains to options granted to non-employee directors at less
than fair market value prior to 2002 that remain outstanding:
|
December
31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Shares
outstanding
|
200,000
|
200,000
|
240,000
|
|||||||
|
Weighted
average exercise price
|
$
|
2.11
|
$
|
2.11
|
$
|
2.09
|
||||
|
Weighted
average fair value
|
$
|
3.52
|
$
|
3.52
|
$
|
3.49
|
||||
Note
13 - 401(k) Match
The
Company has a voluntary 401(k) savings plan covering eligible employees.
Effective January 1, 2003, the Company allows for periodic discretionary matches
as a percentage of each participant’s contributions in newly issued shares of
Common Stock. The total match for the year ended December 31, 2005 was $255,000,
resulting in the issuance of 40,426 shares. The total match for the year ending
December 31, 2004 was $215,000, resulting in the issuance of 25,683 shares.
F-25
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
14 - Commitments
The
Company’s contractual obligations include commitments and estimated purchase
obligations entered into in the normal course of business.
Payments
due under contractual obligations at December 31, 2005 are as follows:
|
(in
thousands)
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
|||||||||||||||
|
Operating
lease obligations
|
$
|
1,422
|
$
|
1,452
|
$
|
1,310
|
$
|
1,146
|
$
|
277
|
$
|
600
|
$
|
6,207
|
||||||||
|
Purchase
obligations
|
2,613
|
233
|
—
|
—
|
—
|
—
|
2,846
|
|||||||||||||||
|
Employment
agreements
|
2,117
|
—
|
—
|
—
|
—
|
—
|
2,117
|
|||||||||||||||
|
Total
|
$
|
6,152
|
$
|
1,685
|
$
|
1,310
|
$
|
1,146
|
$
|
277
|
$
|
600
|
$
|
11,170
|
||||||||
The
Company’s operating leases consist primarily of facility leases for the
Company’s operations in Pennsylvania, New Jersey and California.
The
Company maintains its 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 business administration.
The
lease expires in February 2010 with total aggregate payments of $4.6 million.
The
Company leases a 21,000 square foot pharmaceutical manufacturing and development
facility in Totowa, NJ that is specifically designed for the production of
sterile pharmaceuticals in compliance with cGMP requirements. The lease expires
in December 2014 with total aggregate payments of $1.4 million ($150,000 per
year). The lease contains an early termination option, first beginning in
December 2009. The early termination option can only be exercised by the
landlord upon a minimum of two years prior notice and payment of significant
early termination amounts to the Company.
The
Company also leases approximately 11,000 square feet of office and laboratory
space in Doylestown, PA. The Company maintains the Doylestown facility for
the
continuation of analytical laboratory activities under a lease that expires
in
August 2006, subject to monthly extensions.
The
Company leases office and laboratory space in Mountain View, California. The
facility is 16,800 square feet and houses the Company’s aerosol development
operations. The lease expires in June 2008 with total aggregate payments of
$804,000. Prior to the Mountain View facility, the Company leased office and
laboratory space in Redwood City, California. The facility was approximately
5,000 square feet and housed the Company’s aerosol development operations. In
December 2004, the Company 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.
Rent
expense under all of these leases for the years ended December 31, 2005, 2004,
and 2003 were $1,367,000, $752,000 and $572,000, respectively.
The
Company’s purchase obligations include commitments entered in the ordinary
course of business, primarily commitments to purchase manufacturing equipment
and services for the enhancement of the Company’s manufacturing capabilities for
Surfaxin and sales and marketing services related to the potential U.S.
commercial launch of Surfaxin late in the second quarter of 2006.
At
December 31, 2005, the Company had employment agreements with seven officers
providing for an aggregate annual salary equal to $2,117,000. The agreements
expire in December 2006, 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, the Company or the executive shall have given notice that it does
not
wish to extend the agreement. All of the foregoing agreements provide for the
issuance of annual bonuses and the granting of options at the discretion of
and
subject to approval by the Board of Directors. All of the foregoing agreements
provide that in the event that the employment of any such officers is terminated
without Cause or should any such officers terminate employment for Good Reason,
as defined in the respective agreements, including in circumstances of a change
of control, such officer shall be entitled to certain cash compensation,
benefits continuation and
beneficial modifications to the terms of previously granted equity
securities.
F-26
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
In
addition to the contractual obligations above, the Company has future milestone
commitments, aggregating $2,500,000, and royalty obligations to Johnson &
Johnson, Inc., and Ortho Pharmaceutical, a wholly-owned subsidiary of Johnson
& Johnson, Inc., related to the Company’s product licenses. To date, the
Company has paid $450,000 for milestones achieved.
Note
15 - Related Party Transactions
Laboratorios
del Dr. Esteve, S.A. (Esteve)
Dr.
Antonio Esteve serves as a member of the Company’s Board of Directors and is an
executive officer of Esteve. The Company has a strategic corporate partnership
with Esteve. See Note 9 - Corporate Partnership Agreements.
In
November 2005, the Company sold 650,000 shares of our common stock to Esteve,
at
a price per share of $6.88, for aggregate proceeds of approximately $4.5
million. The shares were issued pursuant to a registration statement on Form
S-3MEF filed with the SEC on February 17, 2005.
Note
16 - Income Taxes
Since
its
inception, the Company has never recorded a provision or benefit for federal
and
state income taxes.
The
reconciliation of the income tax benefit computed at the Federal statutory
rates
to the Company’s recorded tax benefit for the years ended December 31, 2005,
2004 and 2003 are as follows:
|
(in
thousands)
|
December
31,
|
|||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Income
tax benefit, statutory rates
|
$
|
20,027
|
$
|
15,739
|
$
|
8,255
|
||||
|
State
taxes on income, net of federal benefit
|
3,721
|
2,776
|
2,015
|
|||||||
|
Research
and development tax credit
|
840
|
623
|
441
|
|||||||
|
Other
|
(47
|
)
|
(87
|
)
|
92
|
|||||
|
Income
tax benefit
|
24,541
|
19,051
|
10,803
|
|||||||
|
Valuation
allowance
|
(24,541
|
)
|
(19,051
|
)
|
(10,803
|
)
|
||||
|
Income
tax benefit
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
F-27
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
The
tax
effects of temporary differences that give rise to deferred tax assets and
deferred tax liabilities, at December 31, 2005 and 2004, are as
follows:
|
(in
thousands)
|
December
31,
|
||||||
|
2005
|
2004
|
||||||
|
Long-term
deferred tax assets:
|
|||||||
|
Net
operating loss carryforwards
(federal
and state)
|
$
|
72,725
|
$
|
55,825
|
|||
|
Research
and development tax credits
|
3,818
|
2,832
|
|||||
|
Compensation
Expense on Stock
|
680
|
524
|
|||||
|
Charitable
Contribution Carryforward
|
16
|
5
|
|||||
|
Other
Accrued
|
452
|
161
|
|||||
|
Deferred
Revenue
|
—
|
55
|
|||||
|
Depreciation
|
3,025
|
||||||
|
Capitalized
research and development
|
3,025
|
38
|
|||||
|
Total
long-term deferred tax assets
|
83,741
|
59,440
|
|||||
|
Long-term
deferred tax liabilities:
|
|||||||
|
Property
and equipment
|
—
|
(651
|
)
|
||||
|
Net
deferred tax assets
|
83,741
|
58,789
|
|||||
|
Less:
valuation allowance
|
(83,741
|
)
|
(58,789
|
)
|
|||
|
|
$
|
— |
$
|
—
|
|||
The
Company is in a net deferred tax asset position at December 31, 2005 and 2004
before the consideration of a valuation allowance. Due to the fact that the
Company has never realized a profit, management has fully reserved the net
deferred tax asset since realization is not assured.
At
December 31, 2005 and 2004, the Company had available carryforward net operating
losses for Federal tax purposes of $187.0 million and $140.7 million,
respectively, and a research and development tax credit carryforward of $3.8
million and $2.8 million, respectively. The Federal net operating loss and
research and development tax credit carryforwards expire beginning in 2009
and
continuing through 2024. At December 31, 2005, the Company had available
carryforward federal and state net operating losses of $1.8 million and $22,000,
respectively, related to stock based compensation. Additionally, at December
31,
2005 and 2004, the Company had available carryforward losses of approximately
$167.5 million and $121.9 million, respectively, for state tax purposes. The
utilization of the Federal net operating loss carryforwards is subject to annual
limitations in accordance with Section 382 of the Internal Revenue Code. Certain
state carryforward net operating losses are also subject to annual
limitations.
Federal
and state net operating losses, $5.2 million and $0.4 million, respectively,
relate to stock based compensation, the tax effect of which will result in
a
credit to equity as opposed to income tax expense to the extent these losses
are
utilized in the future.
F-28
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
17 - Selected Quarterly Financial Data (unaudited)
The
following table contains unaudited statement of operations information for
each
quarter of 2005 and 2004. The operating results for any quarter are not
necessarily indicative of results for any future period.
|
2005
Quarters Ended:
|
(in
thousands, except per share data)
|
|||||||||||||||
|
Mar.
31
|
June
30
|
Sept.
30
|
Dec.
31
|
Total
Year
|
||||||||||||
|
Revenues
|
$
|
61
|
$
|
24
|
$
|
20
|
$
|
29
|
$
|
134
|
||||||
|
Expenses:
|
||||||||||||||||
|
Research
and development
|
5,120
|
5,864
|
5,676
|
7,477
|
24,137
|
|||||||||||
|
General
and administrative
|
4,270
|
4,095
|
4,817
|
5,323
|
18,505
|
|||||||||||
|
In-process
research & development
|
—
|
—
|
—
|
16,787
|
16,787
|
|||||||||||
|
Corporate
partnership restructuring charge
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Total
expenses
|
9,390
|
9,959
|
10,493
|
29,587
|
59,429
|
|||||||||||
|
Operating
loss
|
(9,329
|
)
|
(9,935
|
)
|
(10,473
|
)
|
(29,558
|
)
|
(59,295
|
)
|
||||||
|
Other
expense, net
|
13
|
109
|
67
|
202
|
391
|
|||||||||||
|
Net
loss
|
$
|
(9,316
|
)
|
$
|
(9,826
|
)
|
$
|
(10,406
|
)
|
$
|
(29,356
|
)
|
$
|
(58,904
|
)
|
|
|
Net
loss per common share - basic and diluted
|
$
|
(0.18
|
)
|
$
|
(0.18
|
)
|
$
|
(0.19
|
)
|
$
|
(0.51
|
)
|
$
|
(1.09
|
)
|
|
|
Weighted
average number of common shares
outstanding
|
50,784
|
53,587
|
54,476
|
57,843
|
54,094
|
|||||||||||
|
2004
Quarters Ended:
|
(in
thousands, except per share data)
|
|||||||||||||||
|
Mar.
31
|
June
30 (1)
|
Sept.
30
|
Dec.
31
|
Total
Year
|
||||||||||||
|
Revenues
|
$
|
142
|
$
|
697
|
$
|
236
|
$
|
134
|
$
|
1,209
|
||||||
|
Expenses:
|
||||||||||||||||
|
Research
and development
|
6,710
|
6,373
|
5,673
|
7,037
|
25,793
|
|||||||||||
|
General
and administrative
|
2,281
|
3,175
|
2,908
|
4,958
|
13,322
|
|||||||||||
|
In-process
research & development
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Corporate
partnership restructuring charge
|
—
|
—
|
—
|
8,126
|
8,126
|
|||||||||||
|
Total
expenses
|
8,991
|
9,548
|
8,581
|
20,121
|
47,241
|
|||||||||||
|
Operating
loss
|
(8,849
|
)
|
(8,851
|
)
|
(8,345
|
)
|
(19,987
|
)
|
(46,032
|
)
|
||||||
|
Other
expense, net
|
(23
|
)
|
(46
|
)
|
(37
|
)
|
(65
|
)
|
(171
|
)
|
||||||
|
Net
loss
|
$
|
(8,872
|
)
|
$
|
(8,897
|
)
|
$
|
(8,382
|
)
|
$
|
(20,052
|
)
|
$
|
(46,203
|
)
|
|
|
Net
loss per common share - basic and diluted
|
$
|
(0.20
|
)
|
$
|
(0.19
|
)
|
$
|
(0.18
|
)
|
$
|
(0.42
|
)
|
$
|
(1.00
|
)
|
|
|
Weighted
average number of common shares
outstanding
|
43,320
|
46,683
|
46,988
|
47,236
|
46,179
|
|||||||||||
| (1) |
A
reclassification has been made to the presentation of operating expenses
in the second quarter of 2004. The expense associated with a milestone
payment related to the license of Surfaxin has been reclassifed from
general and administrative expenses and is currently reflected in
research
and development expenses.
|
F-29
Exhibit
10.28
Execution
Copy
EMPLOYMENT
AGREEMENT
This
Employment Agreement (the “Agreement")
is
made as of this 24th
day of
January 2006, by and between DISCOVERY LABORATORIES, INC., a Delaware
corporation (the "Company"),
and
KATHRYN COLE (the "Executive").
WHEREAS,
the Company and the Executive desire that Executive be employed by the Company
and that the terms and conditions of such employment be defined.
NOW,
THEREFORE, in consideration of the employment of Executive by the Company,
the
Company and the Executive hereby agree as follows:
1. Certain
Definitions.
Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement.
The
term (“Term”)
of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2006; provided, however, that commencing on January 1,
2007, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days
prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive's
Duties and Obligations.
(a) Duties.
The
Executive shall serve as the Company's Senior Vice President, Human Resources.
The Executive shall be responsible for all duties customarily associated with
this title. The Executive shall at all times report directly to the Company’s
Chief Executive Officer.
(b) Location
of Employment.
The
Executive's principal place of business shall be at the Company's headquarters
to be located within thirty (30) miles of Warrington, Pennsylvania; provided,
that the Executive acknowledges and agrees that the performance by the Executive
of her duties shall, from time-to-time, require travel including, without
limitation, overseas travel.
4.
Proprietary
Information and Inventions Agreement.
Upon
execution of this Agreement, Executive shall execute the Company’s standard form
of Intellectual Property and Confidential Information Agreement (the
“Confidentiality
Agreement”)
a copy
of which is attached to this Agreement as Exhibit
B.
Executive shall comply at all times with the terms and conditions of the
Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information
5. Devotion
of Time to Company's Business.
(a) Full-Time
Efforts.
During
her employment with the Company, the Executive shall devote substantially all
of
her time, attention and efforts to the proper performance of her implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of
the
Company.
(b) No
Other Employment.
During
her employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial
or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment.
During
the Term and for 12 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company's material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided,
that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person
to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 12 month period described in the preceding
sentence shall be extended to 24 months in the event of any termination of
the
Executive’s employment described in Sections 8(a) and (c).
(d) Injunctive
Relief.
In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall
be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 5(c) or
the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking
any
other remedies which may be available.
(e) Reformation.
To the
extent that the restrictions imposed by Section 5(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not
to
be unreasonable.
2
6.
Compensation
and Benefits.
(a) Base
Compensation.
During
the Term, the Company shall pay to the Executive (i) base annual compensation
("Base
Salary")
of at
least $180,000, payable in accordance with the Company's regular payroll
practices and less all required withholdings, and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 6. The Base Salary
shall be reviewed at least annually at the start of each calendar year for
the
purposes of determining increases, if any, based on the Executive's performance,
the performance of the Company, inflation, the then prevailing salary scales
for
comparable positions and other relevant factors.
(b) Bonuses.
The
Company shall pay to Executive a one-time sign-on bonus of $25,000, payable
in
accordance with and on the date of the Company’s regular payroll practices on
such date first following the date of commencement of this Agreement.
Thereafter, during the Term, the Executive shall be eligible for such year-end
bonus, which may be paid in either cash or equity, or both, as is awarded solely
at the discretion of the Compensation Committee of the Board after consultation
with the Company’s Chief Executive Officer, provided,
that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights
and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.
(c) Benefits.
During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company's
senior executives or to its employees on substantially the same basis that
such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death
and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from
time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however,
that
(i) with respect to that period of time beginning with the date of commencement
of this Agreement through the date of initiation of Executive’s eligibility for
participation in Company-sponsored health-related programs, the Company shall
bear the costs of Executive’s COBRA benefits offered by her predecessor
employer; and (ii) nothing in this Agreement shall be construed to require
the
Company to establish or maintain any such plans, programs or arrangements.
Anything contained herein to the contrary notwithstanding, throughout the Term,
Executive shall be entitled to receive life insurance on behalf of Executive’s
named beneficiaries in the amount of Executive’s then current annual salary for
the Term of this Agreement at no cost to the Executive, except the Company
shall
have no liability whatsoever for any taxes (whether based on income or
otherwise) imposed upon or incurred by Executive in connection with any such
insurance.
(d) Vacations.
During
the Term, the Executive shall be entitled to 20 days paid vacation per year,
to
be earned ratably throughout the year, 5 days of which may be carried over
from
year to year (provided,
that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
3
(e) Reimbursement
of Business Expenses.
The
Executive is authorized to incur reasonable expenses in carrying out her duties
and responsibilities under this Agreement and the Company shall reimburse her
for all such expenses, in accordance with reasonable policies of the
Company.
(f) Stock
Options. The Company, subject to the approval of the Company’s Board of
Directors and its shareholders, as appropriate, shall grant to Executive non
qualified stock options under the Company’s Amended and Restated 1998 Stock
Incentive Plan (the “Plan”) to purchase 50,000 shares of Common Stock at
an exercise
price equal to the fair market value as of the commencement date of this
Agreement. Twenty-five percent (25%) of such stock options shall vest upon
date
of grant and the remainder shall vest in a series of three successive equal
annual installments, provided, however that all such vesting shall be subject
to
the terms and conditions as set forth in the Plan, except as may be otherwise
provided for herein.
7. Change
of Control Benefits.
(a) Bonus.
The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for,
or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise her options at a time and in a fashion that will entitle her to
receive, in exchange for any shares acquired pursuant to any such exercise,
the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
8.
Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In
the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of
the
Executive's employment, a lump sum payment in respect of all accrued but unused
vacation days (provided,
that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at her Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
4
(ii)
In
the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).
(b) Termination
by the Company without Cause or by the Executive for Good Reason.
If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive
the
following from the Company:
(i)
The
amounts set forth in Section 8(a)(i);
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For
one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and her dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and her dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however,
that
the Company’s obligation under this Section 8(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control.
If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 8(a)(i) above;
5
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For
two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and her dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and her dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however,
that
the Company’s obligation under this Section 8(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and
all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
9.
Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination
to
the other party hereto given in accordance with Section 13. For purposes of
this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date.
The
failure to set forth in the Notice of Termination any fact or circumstance
which
contributes to a showing of Good Reason or Cause will not waive any right of
the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
6
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
10. Mitigation
of Damages.
The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv),
the
amount of any payment or benefit provided for under this Agreement will not
be
reduced by any compensation or benefits earned by the Executive as the result
of
self-employment or employment by another employer or otherwise.
11. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of
the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”)
would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties,
are
hereinafter collectively referred to as the “Excise
Tax”),
then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”)
in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 11, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to
be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 11, including whether
and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and
the assumptions to be utilized in arriving at such determination, shall be
made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”)
which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely
by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later
of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish
the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company
and
the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
(“Underpayment”)
or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event
the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for her Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent her expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
7
12. Legal
Fees.
All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute
or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 12,
each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
13.
Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if
to the
Board or the Company:
Discovery
Laboratories, Inc.
350
South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if
to the
Executive:
Kathryn
Cole
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
14. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
15. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes all other prior
agreements, written or oral, with respect thereto.
8
16.
Arbitration.
(a) If
the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”),
then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked "Arbitration Demand". Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 16. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction
for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision
of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered
by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association ("AAA")
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time
of
the arbitration hearing, such arbitration to be completed in a 60-day period.
In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues
to
be arbitrated has satisfied the conditions precedent to such party's right
to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered
by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority
to
award punitive damages. No party shall seek punitive damages in relation to
any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
9
(iv)
Except
as
provided in Section 12, the parties shall bear their own costs in preparing
for
and participating in the resolution of any Dispute pursuant to this Section
15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except
as
provided in the last sentence of Section 16(a), the provisions of this Section
16 shall be a complete defense to any suit, action or proceeding instituted
in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 16 shall pay the costs of
the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
17. Miscellaneous.
(a) Governing
Law.
This
Agreement shall be interpreted, construed, governed and enforced according
to
the laws of the State of New York without regard to the application of choice
of
law rules.
(b) Amendments.
No
amendment or modification of the terms or conditions of this Agreement shall
be
valid unless in writing and signed by the parties hereto.
(c) Severability.
If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as
to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if
such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and
the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in
the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of
the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns.
Except
as provided in Section17(d) in the case of the Company, or to the Beneficiary
in
the case of the death of the Executive, this Agreement is not assignable by
any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
10
(f) Remedies
Cumulative; No Waiver.
No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall
be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Omitted.
(i) Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
18. No
Contract of Employment.
Nothing
contained in this Agreement will be construed as a right of the Executive to
be
continued in the employment of the Company, or as a limitation of the right
of
the Company to discharge the Executive with or without Cause.
19.
Executive
Acknowledgement.
The
Executive hereby acknowledges that he has read and understands the provisions
of
this Agreement, that he has been given the opportunity for her legal counsel
to
review this Agreement, that the provisions of this Agreement are reasonable
and
that he has received a copy of this Agreement.
11
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to
be
executed as of the date first above written.
| DISCOVERY LABORATORIES, INC. | ||
| |
|
|
| By: | /s/ Robert J. Capetola | |
|
Name: Robert J. Capetola, Ph.D. |
||
| Title: President and Chief Executive Officer | ||
| By: | /s/ Kathryn Cole | |
|
KATHRYN COLE |
||
12
EXHIBIT
A
(a) “Beneficiary”
means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it
to
the General Counsel of the Company. The Executive may change her designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form.
If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided
under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause”
means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies
the
manner in which the Company believes that the Executive has neglected her
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii)
the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”),
or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control”
means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of
the
Company’s then outstanding securities;
13
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”)
cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided,
that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3)
of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further,
that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of
the
Board or other actual or threatened solicitation of proxies or consents by
or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid
or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”)
other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date”
means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect
the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change
of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code”
means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination”
means
the date specified in a Notice of Termination pursuant to Section 8 hereof,
or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the
case
may be.
14
(g) “Disability”
means a
mental or physical condition that renders the Executive substantially incapable
of performing her duties and obligations under this Agreement, after taking
into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties)
for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided,
that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period”
means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason”
means,
unless the Executive has consented in writing thereto, the occurrence of any
of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii)
a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions
of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure
by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change
of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce her benefits under
any of such plans or deprive her of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination
or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus”
means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
15
Exhibit
10.29
ASSIGNMENT
OF
LEASE
AND
TEMINATION
AND OPTION AGREEMENT
THIS
ASIGNMENT OF LEASE AND TERMINATION AND OPTION AGREEMENT (this “Agreement”) is
made this 30th day of December, 2005, by and between
LAUREATE
PHARMA, INC., a Delaware corporation (“Assignor”), and DISCOVERY LABORATORIES,
INC., a Delaware corporation (“Assignee”).
BACKGROUND
Assignor,
as tenant, entered into a certain Agreement of Lease with Landlord, dated as
of
December 3, 2004, as amended by Amendment No. 1 to Lease between Landlord and
Assignor (collectively, the “Lease”). Pursuant to the Lease, Tenant is occupying
approximately 21,000 rentable square feet in the building located at 700 Union
Boulevard, Totowa, New Jersey (the “Premises”), as more particularly described
in the Lease, for a term currently expiring on December 3, 2014, unless sooner
terminated pursuant to the terms of the Lease and the Termination And Option
Agreement (as defined below). The Lease is hereby incorporated herein by this
reference, and a copy of the Lease is attached hereto as Exhibit “A”.
In
connection with the Lease, Assignor and Landlord have entered into a certain
Termination and Option Agreement, dated December 3, 2004, as amended by
Amendment No.1 to Termination And Option Agreement between Assignor and
Landlord, dated the date hereof (collectively, the “Termination and Option
Agreement”) pursuant to which Landlord is granted certain early termination
option upon the payment to Assignor of certain early termination payments and
Assignor is granted certain purchase options, as set forth more fully set forth
in the Termination and Option Agreement.
Assignor,
as seller, and Assignee, as buyer, entered into a certain Asset Purchase
Agreement (the “APA Agreement”), pursuant to which Assignor agreed to sell and
Buyer agreed to purchase certain assets more particularly described in the
Agreement.
Pursuant
to the APA Agreement, Assignor agreed to assign to Assignee all of Assignor’s
right, title and interest in and to the Lease and the Termination and Option
Agreement, and Assignee agreed to accept such assignment, on the terms and
conditions more fully set forth herein.
Landlord
has consented to the assignment of all of Assignor’s right, title and interest
in and to the Lease and the Termination and Option Agreement, pursuant to that
certain Consent to Assignment and Assumption, dated the date hereof between
Landlord, Assignor and Assignee.
NOW,
THEREFORE, Assignor and Assignee, in consideration of the mutual promises
contained herein and in the Agreement and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and intending
to
be legally bound hereby, covenant and agree as follows:
1. Assignment.
Effective as of the Effective Date, Assignor hereby conveys, transfers, assigns
and sets over unto Assignee all of Assignor’s right, title, interest and
privilege as tenant in and to (i) the Lease and (ii) the Termination and Option
Agreement, including, without limitation, the right to receive all Termination
Payments (as defined therein) and the rights to exercise the Purchase Option
(as
defined therein) in accordance with the terms of the Termination and Option
Agreement.
1
2. Assumption.
Effective as of the Effective Date, Assignee hereby accepts the foregoing
assignment of the Termination and Option Agreement from Assignor, and Assignee
assumes all of the liabilities and obligations of the tenant under (i) the
Lease
and (ii) the Termination and Option Agreement accruing on and after the
Effective Date.
3. Further
Assurances. Assignor and Assignee agree to cooperate in good faith in completing
the transactions described herein, including executing further instruments
of
assignment as reasonably necessary.
4. Effective
Date. Assignor and Assignee acknowledge that this Agreement shall only be
effective on the earliest date (the “Effective Date”) when each of the following
shall have been accomplished:
(a) Assignor
and Assignee shall have executed and delivered this Agreement;
(b) Settlement
shall have been completed under the Agreement;
(c) Assignor
and Assignee and Landlord shall have executed and delivered the Consent to
Assignment and Assumption, in form and substance acceptable to Landlord,
Assignor and Assignee in their reasonable discretion.
5. Miscellaneous.
(a) This
Agreement and the APA Agreement contains the entire agreement between the
parties hereto with respect to the subject matter hereof and may only be amended
by an instrument in writing signed by the parties hereto. Neither the making
nor
the acceptance of this instrument shall enlarge, restrict or otherwise modify
the terms of the APA Agreement or constitute a waiver or release by Seller
or
Buyer of any Liabilities, duties or obligations imposed upon either of them
by
the terms of the APA Agreement, including, without limitation, the
representations and warranties and other provisions that the APA Agreement
provides shall survive the Closing Date and the limitations on survival and
remedies set forth in the APA Agreement.
(b) This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, executors, administrators, successors and
assigns;
(c) This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New Jersey, without giving effect to any choice of laws provisions
which may direct the application of the laws of another jurisdiction;
and
(d) This
Agreement may be executed in multiple counterparts, each of which shall be
an
original and all of which together shall constitute but one and the same
instrument.
REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK
2
IN
WITNESS WHEREOF, the parties hereto have duly executed this Agreement, under
seal, the day and year first above written.
|
ASSIGNOR:
LAUREATE
PHARMA, INC.
|
||
| |
|
|
| By: | /s/ Christopher J. Davis | |
|
Name: Christopher J. Davis |
||
| Title: Vice President and Treasurer | ||
|
|
||
|
ASSIGNEE:
DISCOVERY
LABORATORIES, INC.
|
||
| |
|
|
| By: | /s/ David L. Lopez | |
|
Name: David L. Lopez, Esq., CPA |
||
| Title: Executive Vice President, General Counsel | ||
3
EXHIBIT
A
Lease
AMENDMENT
NO. 1 TO AGREEMENT OF LEASE
This
AMENDMENT NO. 1 TO AGREEMENT OF LEASE ("Amendment")
is
made and entered into as of December 30, 2005 by NORWELL LAND COMPANY, a
New
York general partnership (“Landlord”)
and
LAUREATE PHARMA, INC. (formerly known as Biopharma Acquisition Company, Inc.),
a
Delaware corporation (“Tenant”).
WITNESSETH:
WHEREAS,
Landlord and Tenant entered into that certain Agreement of Lease, dated as
of
December 3, 2004 (the “Agreement”);
WHEREAS,
Tenant and Discovery Laboratories, Inc. (“Assignee”)
are
parties to that certain Asset Purchase Agreement, dated as of December 27,
2005
(the “Asset
Purchase Agreement”),
pursuant to which, among other things, Tenant will assign the Agreement to
Assignee and Assignee will assume Tenant’s obligations under the Agreement, and
it is a condition to the consummation of the transaction contemplated by
the
Asset Purchase Agreement that Landlord consent to the assignment of the
Agreement (the “Landlord
Consent”);
and
WHEREAS,
Landlord and Tenant desire to enter into this Amendment to amend certain
portions of the Agreement.
NOW,
THEREFORE, in consideration of the mutual premises and promises set forth
herein, the parties hereto intending to be legally bound, hereby agree and
provide as follows:
1. Capitalized
Terms.
Capitalized terms used herein and not defined shall have the meaning ascribed
to
them in the Agreement.
2. Amendment
to Section 17.2.
If
Landlord delivers the Landlord Consent, then, from and after the Effective
Date
of the Landlord Consent, Section 17.2 of the Agreement shall, without further
act or deed, be amended and restated in its entirety as follows:
“17.2 If
Tenant
desires to sublet all or part of the Leased Premises or assign this Lease,
Tenant shall give Landlord notice of Tenant’s desire, accompanied by (i) a
reasonably detailed description of the proposed assignee or subtenant and
its
principals, the nature of its business and its proposed use of the Leased
Premises, and (ii) current financial information with respect to the proposed
assignee or subtenant, including most recent financial statements (and Tenant
shall promptly deliver to Landlord such additional information as Landlord
reasonably requests). Landlord’s consent to the proposed assignment or sublease
shall not be unreasonably withheld, conditioned or delayed if:
| (a) |
there
is then no uncured Event of Default by Tenant under the
Lease;
|
| (b) |
the
proposed assignee or subtenant shall use the Leased Premises for
the
permitted uses under the Lease, and for no other
purpose;
|
| (c) |
the
proposed assignee or subtenant is not engaged in the research,
development, manufacturing or sale of products for the treatment
of pain,
provided that such products compete with products being researched,
developed, manufactured or sold by Master Tenant or an Affiliate
of Master
Tenant; and
|
| (d) |
Tenant
reimburses Landlord for any reasonable costs that Landlord incurs
in
connection with the assignment or sublease, including reasonable
attorneys’ fees and disbursements.
|
If
approved by Landlord, Tenant shall provide a copy of the assignment or sublease,
as applicable, to Landlord, promptly after the same is executed.”
3. Amendment
to Section 22.1.
If
Landlord delivers the Landlord Consent, then, from and after the Effective
Date
of the Landlord Consent, Section 22.1 of the Agreement shall, without further
act or deed, be amended by deleting the notice addresses of Tenant in their
entirety and substituting therefor the following:
| To Tenant: |
Discovery
Laboratories, Inc.
700
Union Boulevard
Totowa,
New Jersey 07512
Attn:
Jerry Orehostky, Vice
President
|
| Withcopy to: |
Discovery
Laboratories, Inc.
2600
Kelly Road
Warrington,
Pennsylvania 18976-3646
Attn:
David L. Lopez, SVP and General
Counsel
|
4. Effect
of Amendment.
This
Amendment shall be effective as of the date hereof. Except as amended herein,
the Agreement shall remain in full force and effect. To the extent of any
conflict between the terms of this Amendment and the Agreement, the terms
of
this Amendment shall control. From the date hereof, any reference to the
Agreement shall be a reference to the Agreement as amended by this
Amendment.
5. Counterparts.
This
Amendment may be executed in one or more counterparts (including by facsimile),
each of which shall be deemed an original, and all such counterparts shall
constitute a single instrument.
[SIGNATURE PAGE FOLLOWS]
[Signature
Page to Amendment No. 1 to Agreement of Lease]
IN
WITNESS WHEREOF, Landlord and Tenant have executed this Amendment the day
and
year first above written.
|
TENANT:
LAUREATE
PHARMA, INC.
|
||
| |
|
|
| By: | /s/ Christopher J. Davis | |
|
Name:
Christopher J. Davis
Title:
Vice President and Treasurer
|
||
|
LANDLORD:
NORWELL
LAND COMPANY
|
||
|
By:
|
Connecticut
Avenue Realty Co., Inc., its managing general partner
|
|
| By: | /s/ Howard R. Udell | |
|
Name:
Howard R. Udell
Title:
VP and Assistant Secretary
|
||
EXHIBIT
B
Termination
and Option Agreement
AMENDMENT
NO. 1 TO TERMINATION AND OPTION AGREEMENT
This
AMENDMENT NO. 1 TO TERMINATION AND OPTION AGREEMENT ("Amendment")
is
made and entered into as of December 30, 2005 by NORWELL LAND COMPANY, a New
York general partnership (“Landlord”)
and
LAUREATE PHARMA, INC. (formerly known as Biopharma Acquisition Company, Inc.),
a
Delaware corporation (“Tenant”).
WITNESSETH:
WHEREAS,
Landlord and Tenant entered into that certain Termination and Option Agreement,
dated as of December 3, 2004 (the “Agreement”);
and
WHEREAS,
Landlord and Tenant desire to enter into this Amendment to amend certain
portions of the Agreement.
NOW,
THEREFORE, in consideration of the mutual premises and promises set forth
herein, the parties hereto intending to be legally bound, hereby agree and
provide as follows:
1. Capitalized
Terms.
Capitalized terms used herein and not defined shall have the meaning ascribed
to
them in the Agreement.
2. Amendment
to Section 1.3.
Section
1.3 of the Agreement is hereby amended and restated in its entirety as
follows:
“1.3 "Historical
Cost of Goods Sold (HCOGS)"
shall
mean 150% of the cost of goods sold incurred at the Leased Premises, excluding
material costs and idle plant costs, by Tenant under United States generally
accepted accounting principals (“GAAP”) for products approved by the FDA plus
product produced for clinical trial supplies from its operations at the Leased
Premises during the twelve calendar month period immediately preceding the
Termination Notice Date.”
3. Amendment
to Section 1.7.
Section
1.7 of the Agreement is hereby amended and restated in its entirety as
follows:
“1.7 "Projected
Cost of Goods Sold (PCOGS)"
shall
mean 150% of the cost of goods sold projected to be incurred at the Leased
Premises, excluding material costs and idle plant costs, by Tenant under GAAP
for products approved by the FDA plus product produced for clinical trial
supplies from its operations at the Leased Premises during the twelve calendar
month period immediately succeeding the Termination Notice Date.”
4. Amendment
to Section 2.1(b).
Section
2.1(b) of the Agreement is hereby amended and restated in its entirety as
follows:
“2.1(b) If
Tenant's activities at the Leased Premises are not Viable as of the Termination
Notice Date, the amount of the Termination Payment shall be an amount equal
to
all actual, reasonable and customary costs to relocate and reestablish Tenant's
operations at the Leased Premises for which Tenant has presented Landlord
reasonable supporting documentation including evidence that any relocated
equipment will be actively used by Tenant to produce product approved by the
FDA
plus product produced for clinical trial supplies. Notwithstanding the
foregoing, the Termination Payment under this Section 2.1(b) shall in no event
exceed the maximum Termination Payment that would be due and payable under
Section 2.1(a) if Tenant’s activities were deemed Viable under Section
2.1(c).”
5. Amendment
to Section 2.1(c).
Section
2.1(c) of the Agreement is hereby amended and restated in its entirety as
follows:
“2.1(c) Tenant's
activities at the Leased Premises will be deemed to be "Viable"
if
either HCOGS or PCOGS is greater than or equal to $3,000,000. Tenant shall
deliver Tenant's calculation of whether its activities at the Leased Premises
are Viable (the "Final
Viability Data")
within
thirty (30) days after the Termination Notice Date.”
6. Effect
of Amendment.
This
Amendment shall be effective as of the date hereof. Except as amended herein,
the Agreement shall remain in full force and effect. To the extent of any
conflict between the terms of this Amendment and the Agreement, the terms of
this Amendment shall control. From the date hereof, any reference to the
Agreement shall be a reference to the Agreement as amended by this
Amendment.
7. Counterparts.
This
Amendment may be executed in one or more counterparts (including by facsimile),
each of which shall be deemed an original, and all such counterparts shall
constitute a single instrument.
[SIGNATURE
PAGE FOLLOWS]
2
[Signature
Page to Amendment No. 1 to Termination and Option Agreement]
IN
WITNESS WHEREOF, Landlord and Tenant have executed this Amendment the day and
year first above written.
|
TENANT:
LAUREATE
PHARMA, INC.
|
||
| |
|
|
| By: | /s/ Christopher J. Davis | |
|
Name:
Christopher J. Davis
Title:
Vice President and Treasurer
|
||
|
LANDLORD:
NORWELL
LAND COMPANY
|
||
| By: |
Connecticut
Avenue Realty Co., Inc., its managing general partner
|
|
| By: | /s/ Howard R. Udell | |
|
Name:
Howard R. Udell
Title:
VP and Assistant Secretary
|
||
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in this Annual Report (Form 10-K)
of
Discovery Laboratories, Inc. of our report dated January 27, 2006, with respect
to the consolidated financial statements of Discovery Laboratories, Inc.,
included in the 2005 Annual Report to Shareholders of Discovery Laboratories,
Inc.
We
consent to the incorporation by reference in the following Registration
Statements:
(1)
Registration
Statements (Form S-3 No. 333-86105, Form S-3 No. 333-35206, Form S-3 No.
333-72614, Form S-3 No. 333-82596, Form S-3 No. 333-101666, Form S-3 No.
333-107836, Form S-3 No. 333-118595, Form S-3 No. 333-121297 and Form S-3 No.
333-128929) of Discovery Laboratories, Inc. and in the related
Prospectuses,
(2)
Registration
Statements (Form S-8 No. 333-100824, Form S-8 No. 333-109274, Form S-8 No.
333-110412, Form S-8 No. 333-116268 and Form S-8 No. 333-127790) pertaining
to
the Amended and Restated 1988 Stock Incentive Plan of Discovery Laboratories,
Inc.;
of
our
report dated January 27, 2006, with respect to the consolidated financial
statements of Discovery Laboratories, Inc. incorporated herein by reference,
and
our report dated January 27, 2006, with respect to Discovery Laboratories,
Inc.
management's assessment of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over financial reporting
of
Discovery Laboratories, Inc., included in this Annual Report (Form 10-K) of
Discovery Laboratories, Inc.
/s/
Ernst
& Young LLP
March
13,
2006
Philadelphia,
Pennsylvania
Exhibit
31.1
CERTIFICATIONS
I,
Robert
J. Capetola, certify that:
1.
I
have
reviewed this Annual Report on Form 10-K of Discovery Laboratories,
Inc.;
2. Based
on
my knowledge, this 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 report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this 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 report;
4. The
registrant’s other certifying officer(s) 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, or caused such disclosure controls
and
procedures to be designed under our supervision, 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 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 report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) 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(s) 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 the 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: March 16, 2006 | By: | /s/ Robert J. Capetola |
|
Robert J. Capetola, Ph.D.
President and Chief Executive Officer
|
||
Exhibit
31.2
CERTIFICATIONS
I,
John
G. Cooper, certify that:
1.
I
have
reviewed this Annual Report on Form 10-K of Discovery Laboratories,
Inc.;
2. Based
on
my knowledge, this 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 report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this 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 report;
4. The
registrant’s other certifying officer(s) 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, or caused such disclosure controls
and
procedures to be designed under our supervision, 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 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 report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) 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(s) 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 the 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: March 16, 2006 | By: | /s/ John G. Cooper |
|
John G. Cooper
Executive
Vice President, Chief Financial Officer
|
||
Exhibit
32.1
CERTIFICATIONS
Pursuant
to 18 U.S.C. § 1350, each of the undersigned officers of Discovery Laboratories,
Inc. (the “Company”) hereby certifies that the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2005 (the “Report”) fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act
of 1934, and that the information contained in the Report fairly presents,
in
all material respects, the financial condition and results of operations of
the
Company.
Date:
March 16, 2006
| /s/ Robert J. Capetola | |||
|
Robert
J. Capetola, Ph.D.
President
and Chief Executive Officer
|
|||
| /s/ John G. Cooper | |||
|
John
G. Cooper
Executive
Vice President,
Chief
Financial Officer
|
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 SEC or its staff upon request.
This
certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange
Act
of 1934.