sv1za
As filed with the Securities and Exchange Commission on
October 10, 2006
Registration
No. 333-135821
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
CADENCE PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
|
|
|
|
|
Delaware |
|
2834 |
|
41-2142317 |
(State or other jurisdiction of
incorporation or organization) |
|
(Primary Standard Industrial
Classification Code Number) |
|
(I.R.S. Employer
Identification Number) |
12481 High Bluff Drive, Suite 200
San Diego, CA 92130
(858) 436-1400
(Address, including zip code, and telephone number, including
area code, of Registrants principal executive offices)
Theodore R. Schroeder
President and Chief Executive Officer
Cadence Pharmaceuticals, Inc.
12481 High Bluff Drive, Suite 200
San Diego, CA 92130
(858) 436-1400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
|
|
|
Faye H. Russell, Esq.
Cheston J. Larson, Esq.
Ali D. Fawaz, Esq.
Latham & Watkins LLP
12636 High Bluff Drive, Suite 400
San Diego, CA 92130
(858) 523-5400 |
|
Mark B. Weeks, Esq.
Ross L. Burningham, Esq.
Ryan A. Murr, Esq.
Heller Ehrman LLP
4350 La Jolla Village Drive, 7th Floor
San Diego, CA 92122
(858) 450-8400 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
Title of Each Class of |
|
Number of Shares |
|
Proposed Maximum |
|
Proposed Maximum |
|
Amount of |
Securities to be Registered |
|
Registered(1) |
|
Offering Price per Share |
|
Aggregate Offering Price(2) |
|
Registration Fee(3) |
|
Common Stock, $0.0001 par value
|
|
6,900,000 |
|
$13.00 |
|
$89,700,000 |
|
$9,598 |
|
|
|
|
|
(1) |
Includes 900,000 shares subject to the underwriters
over-allotment option. |
|
|
(2) |
Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the
Securities Act of 1933, as amended. |
|
|
(3) |
The registrant previously paid $9,229 as a registration fee in
connection with this Registration Statement on Form S-1,
Registration No. 333-135821, filed on July 17, 2006,
as amended. |
|
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information
contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting offers to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
|
Subject to Completion
Preliminary Prospectus dated
October 10, 2006
P R O S P E C T U S
6,000,000 Shares
Common Stock
This is our initial public offering. We are offering
6,000,000 shares of common stock.
We expect the initial public offering price to be between $11.00
and $13.00 per share. Currently, no public market exists
for our common stock. After pricing of the offering, we expect
that our common stock will be quoted on the Nasdaq Global Market
under the symbol CADX.
Investing in our common stock involves risks that are
described in the Risk Factors section beginning on
page 8 of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
Total | |
|
|
| |
|
| |
Public offering price
|
|
$ |
|
|
|
$ |
|
|
Underwriting discount
|
|
$ |
|
|
|
$ |
|
|
Proceeds, before expenses, to us
|
|
$ |
|
|
|
$ |
|
|
The underwriters may also purchase up to an additional
900,000 shares of common stock from us at the public
offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares of common stock will be ready for delivery on or
about ,
2006.
Merrill Lynch & Co.
|
|
|
Pacific Growth Equities, LLC |
The date of this prospectus
is ,
2006.
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with information different from
or in addition to that contained in this prospectus. If anyone
provides you with different or inconsistent information, you
should not rely on it. We are offering to sell, and seeking
offers to buy, shares of our common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. Our business,
financial condition, results of operations and prospects may
have changed since that date.
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
PROSPECTUS SUMMARY
This summary does not contain all of the information you
should consider before buying shares of our common stock. You
should read the entire prospectus carefully, especially the
Risk Factors section and our financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in shares of our common stock. Unless
the context requires otherwise, references in this prospectus to
Cadence, we, us and
our refer to Cadence Pharmaceuticals, Inc.
Cadence Pharmaceuticals, Inc.
Our Company
We are a biopharmaceutical company focused on in-licensing,
developing and commercializing proprietary product candidates
principally for use in the hospital setting. Since our inception
in 2004, we have in-licensed rights to two Phase III
product candidates, both of which have been studied in prior
Phase III clinical trials conducted by our licensors. We
have in-licensed the exclusive U.S. and Canadian rights
to IV APAP, an intravenous formulation of acetaminophen
that is currently marketed in Europe for the treatment of acute
pain and fever by Bristol-Myers Squibb Company, or BMS. We
believe that IV APAP is the only stable,
pharmaceutically-acceptable intravenous formulation of
acetaminophen. We have also in-licensed the exclusive North
American and European rights to omiganan pentahydrochloride 1%
aqueous gel, or
OmigardTM,
for the prevention and treatment of device-related, surgical
wound-related and burn-related infections. We believe that the
hospital setting is a concentrated, underserved market for
pharmaceuticals and anticipate building our own,
hospital-focused sales force as our product candidates approach
potential U.S. Food and Drug Administration, or FDA,
approval. We intend to build a leading franchise in the hospital
setting, continuing to focus on products that are in late-stages
of development, currently commercialized outside the United
States, or approved in the United States but with significant
commercial potential for proprietary new uses or formulations.
The Hospital Market
Large, multinational pharmaceutical companies have generally
decreased marketing efforts focused on hospital-use drugs,
instead focusing on drugs that can be marketed in the larger
outpatient setting. We believe this reduced emphasis on the
hospital marketplace presents us with an excellent opportunity
to in-license, acquire, develop and commercialize products that
address unmet medical needs in the hospital setting. We believe
the concentrated nature of the hospital marketplace will allow
for our expansion into other therapeutic areas without
substantial investment in additional commercial infrastructure.
According to data from IMS Health Inc., or IMS, an independent
marketing research firm, approximately $28 billion was
spent on promotional activities by the pharmaceutical industry
in 2004. Of this amount, IMS estimates that only $1 billion
was directed towards hospital-based physicians and directors of
pharmacies. In contrast, U.S. hospitals and clinics
accounted for approximately $54 billion or 21% of
U.S. pharmaceutical sales in 2005, according to IMS.
Furthermore, we believe pharmaceutical sales to acute care
hospitals are highly concentrated among a relatively small
number of large institutions. For example, according to Wolters
Kluwer Health, an independent marketing research firm, only
2,000 of the approximately 5,000 acute care hospitals in the
United States represent more than 80% of injectable analgesic
sales. We believe the relative lack of promotional efforts
directed toward the highly concentrated hospital marketplace
makes it an underserved and compelling opportunity, especially
for a biopharmaceutical company commercializing its products
directly through its own dedicated sales force.
Our Product Candidates
|
|
|
IV APAP for the Treatment of Acute Pain and Fever |
We are developing IV APAP in the U.S. market for the
treatment of acute pain and fever. According to IMS, over
251 million units of injectable analgesics, typically used
to treat acute pain, were sold in the United States in 2005.
Opioids represent the majority of unit volume in the market but
1
are associated with a variety of unwanted side effects including
sedation, nausea, vomiting, constipation, cognitive impairment
and respiratory depression. Ketorolac, a non-steroidal
anti-inflammatory drug, or NSAID, is the only
non-opioid injectable
analgesic available in the United States for the treatment of
acute pain. However, ketorolac carries strong warnings from the
FDA for various side effects, including an increased risk of
bleeding a particularly troubling side-effect in the
surgical setting.
Acetaminophen was first available for sale in the United States
in 1955 when it was introduced under the brand name Tylenol.
Acetaminophen is the most widely used drug for pain relief and
the reduction of fever in the United States and is currently
available in over 600 pharmaceutical products. Historically,
poor stability in aqueous solutions and inadequate solubility of
acetaminophen prevented the development of an intravenous dosage
form. The patent protection for IV APAP extends through
various dates in 2017 to 2021. Our patent protection for IV APAP
is limited to a specific intravenous formulation of
acetaminophen and extends through various dates in 2017 to 2021.
There are currently no patents covering the acetaminophen
molecule itself in the territories licensed to us, which include
the United States and Canada.
IV APAP has previously been studied in six completed
Phase III trials by BMS principally to support a Marketing
Authorization Application in Europe for multiple indications,
including pain and fever in both adults and children. Since its
introduction in Europe in mid-2002, over 100 million doses
of IV APAP have been administered to patients, and it has
become the market share leader among injectable analgesics, with
2005 sales of more than $140 million according to IMS. In
the fourth quarter of 2006, we expect to initiate the remaining
Phase III clinical trial requirements for potential
approval in the United States. We expect these Phase III
clinical trial results to be available in the first half of 2008
and, if positive, to subsequently submit a new drug application,
or NDA, for IV APAP in the second half of 2008. However, we
cannot be certain that the FDA will not require additional
trials or that IV APAP will ever receive regulatory approval in
the United States.
|
|
|
Omigard for the Prevention of Intravascular
Catheter-Related Infections |
We are currently developing Omigard for the prevention of
intravascular catheter-related infections. According to the
February 2004 Catheter: Global Markets &
Technologies report from Theta Reports, eight million
central venous catheters, or CVCs, were sold in the United
States in 2003, and unit sales are projected to grow to
11 million by 2007. Although CVCs have become an important
part of medical care, they can give rise to dangerous and costly
complications, including: local catheter site infections, or
LCSIs, which are infections at the catheter insertion site;
catheter colonization, which is the growth of microorganisms on
the portion of the catheter below the skin surface; and
catheter-related bloodstream infections, or CRBSIs, which are
infections in the bloodstream caused by microorganisms
associated with the catheter. The Centers for Disease Control
and Prevention estimates that there are 250,000 CRBSIs among
hospitalized patients each year in the United States. The
attributable mortality rate of CRBSIs is approximately 12% to
25% with an average marginal cost to the healthcare system of
$25,000 per infection. Currently, topical antiseptics are
the primary agent used to cleanse the skin surface around the
catheter insertion site prior to insertion. However, the utility
of these antiseptics is limited, principally due to their short
duration of antimicrobial activity.
Omigard is a topical antimicrobial that has been demonstrated to
be rapidly bactericidal and fungicidal with prolonged duration
of activity against microorganisms commonly found on the skin
surface, including multi-drug resistant microorganisms such as
methicillin-resistant staphylococcus aureus, or MRSA.
Importantly, resistance to Omigard has not been induced in the
laboratory after extensive study, nor has Omigard demonstrated
potential to induce cross-resistance to other antimicrobial
therapeutics. We have in-licensed the patents and the exclusive
development and commercialization rights to Omigard in North
America and Europe for the prevention of device-related,
surgical wound-related and burn-related infections from Migenix
Inc. The patent protection for Omigard extends through various
dates in 2017 to 2022.
2
Omigard has previously been studied in a large, completed
Phase III trial that demonstrated statistically significant
outcomes for the prevention of LCSI and catheter colonization.
The presence of an LCSI may result in replacement of the
catheter and/or administration of antibiotics, both of which
create additional costs to hospitals and have the potential for
adverse safety outcomes. In addition, catheter colonization is
well correlated with CRBSIs, according to a published review of
clinical trials. However, despite the favorable, statistically
significant results for prevention of LCSI and catheter
colonization, the study did not show statistical significance
for the primary endpoint, the prevention of CRBSIs. After
in-licensing Omigard, we reached agreement with the FDA through
the special protocol assessment, or SPA, process on the trial
design, endpoints and statistical analysis plan for a single
confirmatory Phase III clinical trial with a primary
endpoint of prevention of LCSIs. The SPA process provides for
official FDA evaluation of a proposed Phase III clinical
trial protocol and generally provides a product sponsor with a
binding agreement from the FDA that the design and analysis of
the trial are adequate to support a license application
submission if the trial is performed according to the SPA. We
initiated this Phase III clinical trial in August 2005
and expect the results to be available in the second half of
2007 and, if positive, to subsequently submit an NDA for Omigard
in the first half of 2008.
Our Strategy
Our goal is to be a leading biopharmaceutical company focused on
the development and commercialization of proprietary
pharmaceuticals principally for use in the hospital setting.
Specifically, we intend to:
|
|
|
|
|
Obtain regulatory approval for our Phase III hospital
product candidates. We have designed our Phase III
clinical programs in an effort to reduce clinical development
risk, facilitate regulatory approval and optimize marketing
claims. To that end, we plan to resume a
U.S. Phase III program later this year for IV
APAP previously initiated by BMS, and we expect to submit an NDA
in the second half of 2008 based on the previously completed
trials and any further trials that may be required by the FDA.
In addition, we have reached a written agreement with the FDA
through the SPA process for a single confirmatory Phase III
study of Omigard for the prevention of LCSIs. |
|
|
|
Build a highly leverageable sales organization targeting
hospitals. We intend to build a commercial organization
focused on promoting our products principally to hospitals in
the United States. We believe that both IV APAP and Omigard
can be effectively promoted by our own sales force targeting key
hospitals in the United States. Importantly, we believe the
number of institutions in the hospital marketplace is relatively
limited and a small number of these institutions account for a
substantial portion of the prescribing activity. The
concentrated nature of this market creates the opportunity for
significant marketing synergies as we intend to leverage our
sales force across multiple therapeutic categories in the
hospital. Outside the United States, we intend to establish
strategic partnerships for the commercialization of our products
where we have commercialization rights. |
|
|
|
Expand our product portfolio through acquiring or
in-licensing additional late-stage, hospital-focused products
with well-understood risk profiles. We will seek additional
opportunities to acquire or in-license products to more fully
exploit our clinical, regulatory, manufacturing, sales and
marketing capabilities. We believe that our focus on the
hospital market enables us to evaluate a broader range of
products across multiple therapeutic areas for possible
acquisition. We focus on products that are in late-stages of
development, currently commercialized outside the United States,
or approved in the United States but with significant commercial
potential for proprietary new uses, including new indications,
dosage forms or delivery systems. |
|
|
|
Pursue additional indications and commercial opportunities
for our product candidates. We will seek to maximize the
value of IV APAP, Omigard and any other product candidates
we may in-license, acquire or develop by pursuing other
indications and commercial |
3
|
|
|
|
|
opportunities for such candidates. For example, we have rights
to develop and commercialize Omigard for additional indications
related to the prevention and treatment of device-related,
surgical wound-related and burn-related infections. |
Risk Factors
We are a development stage company with no revenues, and our
operations to date have generated substantial and increasing
needs for cash. Our net loss was $7.7 million in 2005, and
as of June 30, 2006, we had an accumulated deficit of
$46.0 million. Our business and our ability to execute on
our business strategy are subject to a number of risks that you
should be aware of before you decide to buy our common stock. In
particular, you should consider the following risks, which are
discussed more fully in Risk Factors beginning on
page 8:
|
|
|
|
|
we are largely dependent on the success of our only two product
candidates, IV APAP and Omigard, and we cannot be certain that
our planned clinical development programs will be sufficient to
support NDA submissions or that either product candidate will
receive regulatory approval or be successfully commercialized; |
|
|
|
delays in the commencement, enrollment or completion of clinical
testing for either of our product candidates could result in
increased costs to us and delay or limit our ability to obtain
regulatory approval; |
|
|
|
even if our product candidates are approved by regulatory
authorities, we expect intense competition in the hospital
marketplace for our targeted indications; |
|
|
|
the patent rights that we have in-licensed covering IV APAP are
limited to a specific intravenous formulation of acetaminophen,
and our market opportunity for this product candidate may be
limited by the lack of patent protection for the active
ingredient itself and other formulations that may be developed
by competitors; and |
|
|
|
we will require substantial additional funding and may be unable
to raise capital when needed, which would force us to delay,
reduce or eliminate our development programs and
commercialization efforts. |
Corporate Information
We were incorporated in Delaware on May 26, 2004. Our
principal executive offices are located at 12481 High Bluff
Drive, Suite 200, San Diego, California 92130, and our
telephone number is
(858) 436-1400.
Prior to November 2004, we were named Strata Pharmaceuticals,
Inc. Our website address is http://www.cadencepharm.com. The
information on, or accessible through, our website is not part
of this prospectus.
The U.S. Patent and Trademark Office has issued a Notice of
Allowance in connection with our
intent-to-use trademark
application for the mark
CADENCEtm,
covering pharmaceutical preparations for the treatment or
prevention of diseases or infections of the bodys major
organs, including the heart, lungs, liver and kidneys;
pharmaceutical preparations for the treatment or prevention of
diseases of the bodys systems, including the immune system
and the cardiovascular system; and pharmaceutical preparations
to treat or manage pain, anesthesia, surgical and medical
procedures. A Notice of Allowance is a notice issued by the U.S.
Patent and Trademark Office to an
intent-to-use
application once all steps of the application process have been
completed. Once the Notice of Allowance has been issued, the
applicant has six months to file a statement of use or an
extension, showing that it is using the mark in commerce, in
order for the U.S. Patent and Trademark Office to issue a
certificate of registration. We are developing commercial names
for our product candidates, and have applied for
U.S. trademark registration for
Omigardtm.
This prospectus also contains trademarks of others, including
Bactroban®,
Betadine®,
BioPatch®,
DepoDur®,
Dermagraft®,
Habitrol®,
Lotensin®,
Neosporin®,
Perfalgan®,
Pro-Dafalgan®,
Toradol®
and
Tylenol®.
4
THE OFFERING
|
|
|
|
Common stock offered |
|
6,000,000 shares |
|
|
|
Common stock to be outstanding after this offering |
|
28,045,540 shares |
|
|
Use of proceeds |
|
We expect to use the net proceeds from this offering to fund
clinical trials and other research and development activities,
and to fund working capital, capital expenditures and other
general corporate purposes. We may also use a portion of the net
proceeds to in-license, acquire or invest in complementary
businesses or products. |
|
Risk factors |
|
See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock. |
|
Proposed Nasdaq Global Market symbol |
|
CADX |
The number of shares of common stock to be outstanding after
this offering is based on 22,045,540 shares outstanding as
of June 30, 2006, and excludes:
|
|
|
|
|
|
1,442,372 shares of common stock issuable upon the exercise
of options outstanding as of June 30, 2006 at a weighted
average exercise price of $1.52 per share; |
|
|
|
|
|
96,250 shares of common stock issuable upon the exercise of
warrants outstanding as of June 30, 2006 at a weighted
average exercise price of $4.00 per share; and |
|
|
|
|
|
2,519,693 shares of common stock reserved for future
issuance under our 2006 equity incentive award plan, which will
become effective on the day prior to the day on which we become
subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended, or the Exchange Act (including
419,693 shares of common stock reserved for future grant or
issuance under our 2004 equity incentive award plan, which
shares will be added to the shares to be reserved under our 2006
equity incentive award plan upon the effectiveness of the 2006
equity incentive award plan). |
|
Except as otherwise indicated, all information in this
prospectus assumes:
|
|
|
|
|
|
no exercise by the underwriters of their option to purchase up
to an additional 900,000 shares of common stock to cover
over-allotments; |
|
|
|
|
the filing of our amended and restated certificate of
incorporation and amended and restated bylaws upon completion of
this offering; |
|
|
|
|
the conversion of all outstanding shares of our preferred stock
into 19,907,605 shares of common stock upon completion of
this offering; and |
|
|
|
|
|
a one-for-four reverse stock split of our common stock to be
effected before the completion of this offering. |
|
5
SUMMARY FINANCIAL DATA
The following table summarizes certain of our financial data.
The summary financial data are derived from our audited
financial statements for the period from May 26, 2004
(inception) through December 31, 2004, and the year
ended December 31, 2005. Data are also derived from our
unaudited financial statements for the six-month periods ended
June 30, 2005 and 2006, and for the period from
May 26, 2004 (inception) through June 30, 2006.
The data should be read together with our financial statements
and related notes, Selected Financial Data, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus. The pro forma as adjusted balance sheet data
gives effect to the conversion of all outstanding shares of our
preferred stock into 19,907,605 shares of our common stock
and our sale of 6,000,000 shares of our common stock in
this offering at the assumed initial offering price of
$12.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering
costs payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
|
|
|
|
Period from | |
|
|
May 26, 2004 | |
|
|
|
|
|
May 26, 2004 | |
|
|
(Inception) | |
|
|
|
Six Months Ended | |
|
(Inception) | |
|
|
Through | |
|
Year Ended | |
|
June 30, | |
|
Through | |
|
|
December 31, | |
|
December 31, | |
|
| |
|
June 30, | |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ |
1,883 |
|
|
$ |
6,126 |
|
|
$ |
2,402 |
|
|
$ |
33,664 |
|
|
$ |
41,674 |
|
|
Marketing
|
|
|
41 |
|
|
|
240 |
|
|
|
142 |
|
|
|
317 |
|
|
|
598 |
|
|
General and administrative
|
|
|
877 |
|
|
|
1,412 |
|
|
|
540 |
|
|
|
1,968 |
|
|
|
4,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,801 |
|
|
|
7,778 |
|
|
|
3,084 |
|
|
|
35,949 |
|
|
|
46,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,801 |
) |
|
|
(7,778 |
) |
|
|
(3,084 |
) |
|
|
(35,949 |
) |
|
|
(46,529 |
) |
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9 |
|
|
|
255 |
|
|
|
14 |
|
|
|
553 |
|
|
|
818 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
(44 |
) |
|
Impairment of investment securities
|
|
|
(45 |
) |
|
|
(183 |
) |
|
|
(183 |
) |
|
|
|
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
(36 |
) |
|
|
72 |
|
|
|
(169 |
) |
|
|
509 |
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,837 |
) |
|
$ |
(7,706 |
) |
|
$ |
(3,253 |
) |
|
$ |
(35,440 |
) |
|
$ |
(45,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share(1)
|
|
$ |
(3.10 |
) |
|
$ |
(6.67 |
) |
|
$ |
(2.87 |
) |
|
$ |
(28.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss per share(1)
|
|
|
915 |
|
|
|
1,156 |
|
|
|
1,132 |
|
|
|
1,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share(1)
|
|
|
|
|
|
$ |
(1.49 |
) |
|
|
|
|
|
$ |
(2.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute pro forma basic and diluted net loss per
share(1)
|
|
|
|
|
|
|
5,162 |
|
|
|
|
|
|
|
14,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
See Note 1 of Notes to Financial Statements for an
explanation of the method used to compute the historical and pro
forma net loss per share and the number of shares used in the
computation of the per share amounts. |
6
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
As Adjusted(1) | |
|
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
42,881 |
|
|
$ |
108,081 |
|
Working capital
|
|
|
37,476 |
|
|
|
102,676 |
|
Total assets
|
|
|
46,477 |
|
|
|
111,677 |
|
Long-term debt, less current portion
|
|
|
5,968 |
|
|
|
5,968 |
|
Deficit accumulated during the development stage
|
|
|
(45,983 |
) |
|
|
(45,983 |
) |
Total stockholders equity
|
|
|
34,550 |
|
|
|
99,750 |
|
|
|
(1) |
Each $1.00 increase or decrease in the assumed initial public
offering price of $12.00 would increase or decrease,
respectively, the amount of cash and cash equivalents, working
capital, total assets and total stockholders equity by
$5.6 million, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same and after deducting the estimated underwriting discounts
and commissions and estimated offering costs payable by us. |
7
RISK FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus, before
deciding whether to invest in shares of our common stock. The
occurrence of any of the following risks could harm our
business, financial condition, results of operations or growth
prospects. In that case, the trading price of our common stock
could decline, and you may lose all or part of your
investment.
Risks Related to Our Business and Industry
We are largely dependent on the success of our two product
candidates, IV APAP and Omigard, and we cannot be certain that
either of these product candidates will receive regulatory
approval or be successfully commercialized.
We currently have no drug products for sale and we cannot
guarantee that we will ever have marketable drug products. The
research, testing, manufacturing, labeling, approval, selling,
marketing and distribution of drug products are subject to
extensive regulation by the U.S. Food and Drug
Administration, or FDA, and other regulatory authorities in the
United States and other countries, which regulations differ from
country to country. We are not permitted to market our product
candidates in the United States until we receive approval of a
new drug application, or NDA, from the FDA. We have not
submitted an NDA or received marketing approval for either of
our product candidates. Obtaining approval of an NDA is a
lengthy, expensive and uncertain process. We currently have only
two product candidates, and our business success currently
depends entirely on their successful development and
commercialization.
We have not developed either of our product candidates
independently. We recently in-licensed exclusive rights
to IV APAP, an intravenous formulation of acetaminophen
that is currently marketed in Europe for the treatment of acute
pain and fever by Bristol-Myers Squibb Company, or BMS. We
intend to conduct six clinical trials to provide the FDA with
data to support multiple dose efficacy for soft tissue surgery,
efficacy for fever and safety in adults and children, based on
the preliminary feedback we received from the FDA in our meeting
in August 2006. In July 2004, we in-licensed the rights to our
only other product candidate, omiganan pentahydrochloride 1%
aqueous gel, or Omigard, which is currently being evaluated in a
single Phase III clinical trial for the prevention of local
catheter site infections, or LCSIs, and will require the
successful completion of this Phase III clinical trial
before we are able to submit an NDA to the FDA for approval. Our
clinical development programs for IV APAP and Omigard may
not lead to commercial products if we fail to demonstrate that
the product candidates are safe and effective in clinical trials
and we may therefore fail to obtain necessary approvals from the
FDA and similar foreign regulatory agencies, or because we may
have inadequate financial or other resources to advance these
product candidates through the clinical trial process. Any
failure to obtain approval of IV APAP or Omigard would have
a material and adverse impact on our business.
If clinical trials of our current or future product
candidates do not produce results necessary to support
regulatory approval in the United States or elsewhere, we will
be unable to commercialize these products.
To receive regulatory approval for the commercial sale
of IV APAP, Omigard or any other product candidates that we
may in-license or acquire, we must conduct, at our own expense,
adequate and well controlled clinical trials to demonstrate
efficacy and safety in humans. Clinical testing is expensive,
takes many years and has an uncertain outcome. Clinical failure
can occur at any stage of the testing. Our clinical trials may
produce negative or inconclusive results, and we may decide, or
regulators may require us, to conduct additional clinical and/or
non-clinical testing. For example, Migenix Inc., or Migenix, the
licensor for our Omigard product candidate, together with its
former collaborator, Fujisawa Healthcare, Inc., or Fujisawa,
completed enrollment in a Phase III trial in February 2003
that demonstrated statistically significant results for the
secondary endpoints of the trial: the prevention of LCSIs and
catheter colonization, which is the growth of microorganisms on
the portion of the catheter below the skin
8
surface. However, the trial did not show statistical
significance for the primary endpoint, the prevention of
catheter-related bloodstream infections, or CRBSIs.
After the termination of the collaboration between Migenix and
Fujisawa in January 2004, we in-licensed the rights to Omigard
from Migenix in July 2004 and subsequently reached an agreement
under the special protocol assessment, or SPA, process with the
FDA concerning the protocol for our own Phase III clinical
trial for Omigard. In connection with the SPA for Omigard, the
FDA agreed that a single confirmatory Phase III trial will
be required for approval of Omigard and that the prevention of
LCSIs will be the sole primary efficacy endpoint. However, we
cannot be certain that our ongoing Phase III trial for
Omigard will demonstrate statistical significance or otherwise
demonstrate sufficient efficacy and safety to support the filing
of an NDA or ultimately lead to regulatory approval.
Furthermore, despite having completed the SPA process, the
FDAs agreement with us on the trial protocol remains
subject to future public health concerns unrecognized at the
time of the FDAs protocol assessment.
Our failure to adequately demonstrate the efficacy and safety
of IV APAP, Omigard or any other product candidates that we
may in-license or acquire would prevent receipt of regulatory
approval and, ultimately, the commercialization of that product
candidate.
Because the results of earlier clinical trials are not
necessarily predictive of future results, IV APAP, Omigard or
any other product candidate we advance into clinical trials may
not have favorable results in later clinical trials or receive
regulatory approval.
Success in clinical testing and early clinical trials does not
ensure that later clinical trials will generate adequate data to
demonstrate the efficacy and safety of the investigational drug.
A number of companies in the pharmaceutical industry, including
those with greater resources and experience, have suffered
significant setbacks in Phase III clinical trials, even
after promising results in earlier clinical trials.
In March 2006, we in-licensed the rights to IV APAP from
BMS, which is currently marketing IV APAP in Europe and
other parts of the world under the brand name Perfalgan. BMS has
completed nine clinical trials, mostly in Europe, primarily in
support of European regulatory approvals for this product
candidate. However, we do not know at this time what regulatory
weight, if any, the U.S. and Canadian regulatory agencies will
give to these clinical data in supplementing clinical data
generated by us for potential regulatory approval of IV
APAP in the United States and Canada. The FDA and foreign
regulatory agencies may reject these clinical trial results if
they determine that the clinical trials were not conducted in
accordance with requisite regulatory standards and procedures.
Furthermore, we have not audited or verified the accuracy of the
primary clinical data provided by BMS and cannot determine their
applicability to our regulatory filings. Even though BMS has
obtained marketing approval in Europe and other territories
for IV APAP, we must conduct additional adequate and well
controlled clinical trials in the United States to
demonstrate IV APAPs safety and efficacy in specific
indications to gain regulatory approval in the United States. We
may not be able to demonstrate the same safety and efficacy
for IV APAP in our planned Phase III clinical trial as
was demonstrated previously by BMS.
Our other product candidate, Omigard, is a novel antimicrobial
peptide and is not yet approved in any jurisdiction. No
antimicrobial peptide has been approved by the FDA, including
two antimicrobial peptides with mechanisms of action similar to
Omigard that were studied in Phase III clinical trials.
Although Omigard has been studied in more than
750 patients, all of the patients studied were enrolled in
trials conducted or sponsored by Migenix or Fujisawa. Since
in-licensing rights to Omigard from Migenix in July 2004, we
have initiated a Phase III clinical trial in which we are
still seeking to enroll the target patient population. We do not
expect to complete enrollment in this Phase III clinical
trial until the second half of 2007. Similar to IV APAP, we
have obtained electronic databases from the completed
Phase III trials sponsored by Migenix and Fujisawa, and are
currently analyzing these data. We have not audited or verified
the accuracy of the primary clinical data provided by our
licensor and its former collaborator and cannot determine their
applicability to our regulatory filings. Although the
Phase III clinical trial for Omigard conducted by Migenix
and Fujisawa demonstrated favorable, statistically significant
results for the prevention of LCSIs and catheter colonization,
secondary endpoints in their trial,
9
we may not observe similar results in our ongoing Phase III
clinical trial. Furthermore, the earlier Phase III clinical
trial failed to show statistical significance for the primary
endpoint of that trial, the prevention of CRBSIs. While we will
measure the prevention of CRBSIs as a secondary endpoint in our
ongoing Phase III clinical trial for Omigard, our trial is
not designed to demonstrate statistical significance for this
secondary endpoint. Although we are targeting a different
primary endpoint in our trial, the prevention of LCSIs, it is
possible that we will experience similar, unexpected results.
Failure to satisfy a primary endpoint in a Phase III
clinical trial would generally mean that a product candidate
would not receive regulatory approval without a further
successful Phase III clinical trial.
The data collected from our clinical trials may not be adequate
to support regulatory approval of IV APAP, Omigard or any
other product candidates that we may in-license or acquire.
Moreover, all clinical data reported is taken from databases
that may not have been fully reconciled against medical records
kept at the clinical sites. Despite the results reported by
others in earlier clinical trials for our product candidates, we
do not know whether any Phase III or other clinical trials
we may conduct will demonstrate adequate efficacy and safety to
result in regulatory approval to market our product candidates.
Delays in the commencement or completion of clinical testing
could result in increased costs to us and delay or limit our
ability to obtain regulatory approval for our product
candidates.
Delays in the commencement or completion of clinical testing
could significantly affect our product development costs. We do
not know whether planned clinical trials for IV APAP will
begin on time or be completed on schedule, if at all. Similarly,
we may not complete enrollment for our ongoing Phase III
clinical trial for Omigard on schedule, or at all. The
commencement and completion of clinical trials requires us to
identify and maintain a sufficient number of trial sites, many
of which may already be engaged in other clinical trial programs
for the same indication as our product candidates or may not be
eligible to participate in or may be required to withdraw from a
clinical trial as a result of changing standards of care. The
commencement and completion of clinical trials can be delayed
for a variety of other reasons, including delays related to:
|
|
|
|
|
reaching agreements on acceptable terms with prospective
clinical research organizations, or CROs, and trial sites, the
terms of which can be subject to extensive negotiation and may
vary significantly among different CROs and trial sites; |
|
|
|
obtaining regulatory approval to commence a clinical trial; |
|
|
|
obtaining institutional review board approval to conduct a
clinical trial at a prospective site; |
|
|
|
recruiting and enrolling patients to participate in clinical
trials for a variety of reasons, including competition from
other clinical trial programs for the same indication as our
product candidates; and |
|
|
|
retaining patients who have initiated a clinical trial but may
be prone to withdraw due to the treatment protocol, lack of
efficacy, personal issues, side effects from the therapy or who
are lost to further follow-up. |
In addition, a clinical trial may be suspended or terminated by
us, the FDA or other regulatory authorities due to a number of
factors, including:
|
|
|
|
|
failure to conduct the clinical trial in accordance with
regulatory requirements or our clinical protocols; |
|
|
|
inspection of the clinical trial operations or trial sites by
the FDA or other regulatory authorities resulting in the
imposition of a clinical hold; |
|
|
|
unforeseen safety issues or any determination that a trial
presents unacceptable health risks; or |
10
|
|
|
|
|
lack of adequate funding to continue the clinical trial,
including the incurrence of unforeseen costs due to enrollment
delays, requirements to conduct additional trials and studies
and increased expenses associated with the services of our CROs
and other third parties. |
Additionally, changes in regulatory requirements and guidance
may occur and we may need to amend clinical trial protocols to
reflect these changes. Amendments may require us to resubmit our
clinical trial protocols to institutional review boards for
reexamination, which may impact the costs, timing or successful
completion of a clinical trial. If we experience delays in the
completion of, or if we terminate, our clinical trials, the
commercial prospects for our product candidates will be harmed,
and our ability to generate product revenues will be delayed. In
addition, many of the factors that cause, or lead to, a delay in
the commencement or completion of clinical trials may also
ultimately lead to the denial of regulatory approval of a
product candidate. Even if we are able to ultimately
commercialize our product candidates, other therapies for the
same indications may have been introduced to the market and
established a competitive advantage.
We expect intense competition in the territories in which we
have rights to our product candidates, and new products may
emerge that provide different or better therapeutic alternatives
for our targeted indications.
The biotechnology and pharmaceutical industries are subject to
rapid and intense technological change. We face, and will
continue to face, competition in the development and marketing
of our product candidates from academic institutions, government
agencies, research institutions and biotechnology and
pharmaceutical companies. There can be no assurance that
developments by others will not render our product candidates
obsolete or noncompetitive. Furthermore, new developments,
including the development of other drug technologies and methods
of preventing the incidence of disease, occur in the
pharmaceutical industry at a rapid pace. These developments may
render our product candidates obsolete or noncompetitive.
We intend to develop IV APAP for the treatment of acute
pain in the hospital setting, which will compete with well
established injectable drugs for this and similar indications,
including opioids such as morphine, fentanyl, meperidine and
hydromorphone, each of which is available generically from
several manufacturers, as well as an extended release injectable
formulation of morphine, DepoDur, currently marketed by an
affiliate of Endo Pharmaceuticals Holdings Inc. Ketorolac, an
injectable non-steroidal anti-inflammatory drug, or NSAID, is
also available generically from several manufacturers and used
to treat acute pain. During the time that it will take us to
obtain regulatory approval for IV APAP, if at all, we
anticipate that several additional products may be developed for
the treatment of acute pain, including other injectable NSAIDs,
novel opioids, new formulations of currently available opioids,
long-acting local anesthetics and new chemical entities as well
as alternative delivery forms of various opioids and NSAIDs.
We are also developing our Omigard product candidate for the
prevention of intravascular catheter-related infections in the
hospital setting. If approved, Omigard will compete with well
established topical products that are currently used in practice
to prevent these infections as well as BioPatch, a device
marketed by Johnson & Johnson, which has been approved
for wound dressing and prevention of catheter-related
infections. Other competitive products may be under development.
In addition, competitors may seek to develop alternative
formulations of our product candidates that address our targeted
indications that do not directly infringe on our in-licensed
patent rights. For example, we are aware of several U.S. and
Canadian patents and patent applications covering various
potential injectable formulations of acetaminophen, including
intravenous formulations, as well as methods of making and using
these potential formulations. Furthermore, there are third-party
patents covering analogs of omiganan and Migenix has patented
analogs of omiganan that are not licensed to us. The commercial
opportunity for our product candidates could be significantly
harmed if competitors are able to develop alternative
formulations outside the scope of our in-licensed patents.
Compared to us, many of our potential competitors have
substantially greater:
|
|
|
|
|
capital resources; |
|
|
|
development resources, including personnel and technology; |
11
|
|
|
|
|
clinical trial experience; |
|
|
|
regulatory experience; |
|
|
|
expertise in prosecution of intellectual property rights; and |
|
|
|
manufacturing, distribution and sales and marketing experience. |
As a result of these factors, our competitors may obtain
regulatory approval of their products more rapidly than we are
able to or may obtain patent protection or other intellectual
property rights that limit our ability to develop or
commercialize our product candidates. Our competitors may also
develop drugs that are more effective, useful and less costly
than ours and may also be more successful than us in
manufacturing and marketing their products. We also expect to
face similar competition in our efforts to identify appropriate
collaborators or partners to help develop or commercialize our
product candidates in markets outside the United States.
If any of our product candidates for which we receive
regulatory approval do not achieve broad market acceptance, the
revenues that we generate from their sales will be limited.
The commercial success of our product candidates for which we
obtain marketing approval from the FDA or other regulatory
authorities will depend upon the acceptance of these products by
the medical community and coverage and reimbursement of them by
third-party payors, including government payors. The degree of
market acceptance of any of our approved products will depend on
a number of factors, including:
|
|
|
|
|
limitations or warnings contained in a products
FDA-approved labeling, including potential limitations or
warnings for IV APAP that may be more restrictive than oral
formulations of acetaminophen; |
|
|
|
changes in the standard of care for the targeted indications for
either of our product candidates could reduce the marketing
impact of any superiority claims that we could make following
FDA approval; |
|
|
|
limitations inherent in the approved indication for either of
our product candidates compared to more commonly-understood or
addressed conditions, including, in the case of Omigard, the
ability to promote Omigard to hospitals and physicians who may
be more focused on an indication specifically for the prevention
of CRBSIs compared to the prevention of LCSIs, the primary
endpoint in our ongoing Phase III clinical trial; and |
|
|
|
potential advantages over, and availability of, alternative
treatments, including, in the case of IV APAP, a number of
products already used to treat acute pain in the hospital
setting, and in the case of Omigard, a number of competitive
topical products as well as a device that has been approved for
wound dressing and prevention of catheter-related infections. |
Our ability to effectively promote and sell our product
candidates in the hospital marketplace will also depend on
pricing and cost effectiveness, including our ability to produce
a product at a competitive price and our ability to obtain
sufficient third-party coverage or reimbursement. Since many
hospitals are members of group purchasing organizations, which
leverage the purchasing power of a group of entities to obtain
discounts based on the collective buying power of the group, our
ability to attract customers in the hospital marketplace will
also depend on our ability to effectively promote our product
candidates to group purchasing organizations. We will also need
to demonstrate acceptable evidence of safety and efficacy as
well as relative convenience and ease of administration. Market
acceptance could be further limited depending on the prevalence
and severity of any expected or unexpected adverse side effects
associated with our product candidates. If our product
candidates are approved but do not achieve an adequate level of
acceptance by physicians, health care payors and patients, we
may not generate sufficient revenue from these products, and we
may not become or remain profitable. In addition, our efforts to
educate the medical community and third-party payors on the
benefits of our product candidates may require significant
resources and may never be successful.
12
The decreasing use of the comparator product in our clinical
trial for Omigard may limit our ability to complete the trial in
a timely manner and hinder the competitive profile of this
product candidate.
The SPA that we agreed to with the FDA for our ongoing
Phase III clinical trial for Omigard requires that Omigard
be compared to 10% povidone-iodine, a topical antiseptic used to
sterilize catheter insertion sites. Although the SPA generally
provides us with a binding agreement from the FDA that, assuming
positive results, the design and analysis of our ongoing Omigard
trial are adequate to support an NDA filing, all SPAs are
subject to future public health concerns unrecognized at the
time of protocol assessment.
After we established the SPA and commenced our clinical trial,
many hospitals, particularly in the United States, began
increasing use of another topical antiseptic, chlorhexidine, as
the standard of care to sterilize catheter insertion sites.
Although we believe 10% povidone-iodine continues to be used by
a sufficient number of hospitals to support continued enrollment
of patients in our Phase III clinical trial for Omigard,
this changing standard of care limits the number of potential
clinical trial sites available to us. Accordingly, it may be
difficult for us to maintain the clinical trial sites that we
have already retained for the Omigard trial if any of these
institutions elects to replace our comparator product with
chlorhexidine, and it may take us longer than anticipated to
identify and reach terms with additional hospitals to serve as
clinical trial sites for the trial. Delays in the completion of
enrollment or clinical testing for our ongoing Phase III
clinical trial for Omigard and any other studies we may conduct
to compare Omigard to chlorhexidine or another topical
antiseptic could significantly affect our product development
costs, our prospects for regulatory approval and our ability to
compete. Furthermore, the decreasing use of 10% povidone-iodine
in favor of chlorhexidine could reduce the marketing impact of
any superiority claims that we could make following FDA
approval. For example, hospitals and physicians may be reluctant
to adopt the use of Omigard as a single agent for the prevention
of local catheter site infections. Even if Omigard is approved
by the FDA, if this product candidate does not achieve an
adequate level of acceptance by physicians, health care payors
and patients, we may be unable to generate sufficient revenues
to recover our development costs or otherwise sustain and grow
our business.
Even if our product candidates receive regulatory approval,
they may still face future development and regulatory
difficulties.
Even if U.S. regulatory approval is obtained, the FDA may
still impose significant restrictions on a products
indicated uses or marketing or impose ongoing requirements for
potentially costly post-approval studies. Any of these
restrictions or requirements could adversely affect our
potential product revenues. For example, the label ultimately
approved for IV APAP, Omigard or any other product
candidates that we may in-license or acquire, if any, may
include a restriction on the term of its use, or it may not
include one or more of our intended indications.
Our product candidates will also be subject to ongoing FDA
requirements for the labeling, packaging, storage, advertising,
promotion, record-keeping and submission of safety and other
post-market information on the drug. In addition, approved
products, manufacturers and manufacturers facilities are
subject to continual review and periodic inspections. If a
regulatory agency discovers previously unknown problems with a
product, such as adverse events of unanticipated severity or
frequency, or problems with the facility where the product is
manufactured, a regulatory agency may impose restrictions on
that product or us, including requiring withdrawal of the
product from the market. If our product candidates fail to
comply with applicable regulatory requirements, such as current
Good Manufacturing Practices, or cGMPs, a regulatory agency may:
|
|
|
|
|
issue warning letters or untitled letters; |
|
|
|
require us to enter into a consent decree, which can include
imposition of various fines, reimbursements for inspection
costs, required due dates for specific actions and penalties for
noncompliance; |
|
|
|
impose other civil or criminal penalties; |
13
|
|
|
|
|
suspend regulatory approval; |
|
|
|
suspend any ongoing clinical trials; |
|
|
|
refuse to approve pending applications or supplements to
approved applications filed by us; |
|
|
|
impose restrictions on operations, including costly new
manufacturing requirements; or |
|
|
|
seize or detain products or require a product recall. |
Even if our product candidates receive regulatory approval in
the United States, we may never receive approval or
commercialize our products outside of the United States.
Our rights to IV APAP are limited to the United States and
Canada, and our rights to Omigard are limited to North America
and Europe. In order to market any products outside of the
United States, we must establish and comply with numerous and
varying regulatory requirements of other countries regarding
safety and efficacy. Approval procedures vary among countries
and can involve additional product testing and additional
administrative review periods. The time required to obtain
approval in other countries might differ from that required to
obtain FDA approval. The regulatory approval process in other
countries may include all of the risks detailed above regarding
FDA approval in the United States as well as other risks.
Regulatory approval in one country does not ensure regulatory
approval in another, but a failure or delay in obtaining
regulatory approval in one country may have a negative effect on
the regulatory process in others. Failure to obtain regulatory
approval in other countries or any delay or setback in obtaining
such approval could have the same adverse effects detailed above
regarding FDA approval in the United States. As described above,
such effects include the risks that our product candidates may
not be approved for all indications requested, which could limit
the uses of our product candidates and have an adverse effect on
product sales and potential royalties, and that such approval
may be subject to limitations on the indicated uses for which
the product may be marketed or require costly, post-marketing
follow-up studies.
We have never marketed a drug before, and if we are unable to
establish an effective sales and marketing infrastructure, we
will not be able to successfully commercialize our product
candidates.
In the United States, we plan to build our own sales force to
market our products directly to physicians, nurses, hospitals,
group purchasing organizations and third-party payors. We
currently do not have significant internal sales, distribution
and marketing capabilities. In order to commercialize any of our
product candidates, we must either acquire or internally develop
sales and marketing capabilities, or enter into collaborations
with partners to perform these services for us. The acquisition
or development of a hospital-focused sales and marketing
infrastructure for our domestic operations will require
substantial resources, will be expensive and time consuming and
could negatively impact our commercialization efforts, including
delay any product launch. Moreover, we may not be able to hire a
sales force that is sufficient in size or has adequate
expertise. If we are unable to establish our sales and marketing
capability or any other capabilities necessary to commercialize
any products we may develop, we will need to contract with third
parties to market and sell our products. If we are unable to
establish adequate sales and marketing capabilities, whether
independently or with third parties, we may not be able to
generate any product revenue, may generate increased expenses
and may never become profitable.
14
Our product candidates may have undesirable side effects that
could delay or prevent their regulatory approval or
commercialization.
Undesirable side effects caused by our product candidates could
interrupt, delay or halt clinical trials and could result in the
denial of regulatory approval by the FDA or other regulatory
authorities for any or all targeted indications, and in turn
prevent us from commercializing our product candidates and
generating revenues from their sale. For example, the adverse
events related to IV APAP observed in clinical trials completed
to date include transient liver enzyme evaluations, nausea or
vomiting and pain or local skin reactions at the injection site.
When used outside the current guidelines for administration,
acetaminophen has the potential to cause liver toxicity. While
administration of acetaminophen in intravenous form is not
expected to result in an increased risk of toxicity to the liver
compared with an equivalent dose of acetaminophen administered
orally, we cannot be certain that increased liver toxicity or
other drug-related side effects will not be observed in future
clinical trials or that the FDA will not require additional
trials or impose more severe labeling restrictions due to liver
toxicity or other concerns. Drug-related adverse events observed
in clinical trials completed to date for Omigard have been
limited to local skin reactions, including redness, swelling,
bleeding, itching, bruising and pain. In addition, while these
drug-related adverse events have all been related to the skin,
including the catheter insertion site, we cannot be certain that
other drug-related side effects will not be reported in clinical
trials or thereafter.
If either of our product candidates receives marketing approval
and we or others later identify undesirable side effects caused
by the product:
|
|
|
|
|
regulatory authorities may require the addition of labeling
statements, specific warnings or a contraindication; |
|
|
|
regulatory authorities may withdraw their approval of the
product; |
|
|
|
we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product; and |
|
|
|
our reputation may suffer. |
Any of these events could prevent us from achieving or
maintaining market acceptance of the affected product or could
substantially increase our commercialization costs and expenses,
which in turn could delay or prevent us from generating
significant revenues from its sale.
If the government or third-party payors fail to provide
coverage and adequate coverage and payment rates for our future
products, if any, or if hospitals choose to use therapies that
are less expensive, our revenue and prospects for profitability
will be limited.
In both domestic and foreign markets, our sales of any future
products will depend in part upon the availability of coverage
and reimbursement from third-party payors. Such third-party
payors include government health programs such as Medicare,
managed care providers, private health insurers and other
organizations. In particular, many U.S. hospitals receive a
fixed reimbursement amount per procedure for certain surgeries
and other treatment therapies they perform. Because this amount
may not be based on the actual expenses the hospital incurs,
hospitals may choose to use therapies which are less expensive
when compared to our product candidates. Accordingly, IV APAP,
Omigard or any other product candidates that we may in-license
or acquire, if approved, will face competition from other
therapies and drugs for these limited hospital financial
resources. We may need to conduct post-marketing studies in
order to demonstrate the cost-effectiveness of any future
products to the satisfaction of hospitals, other target
customers and their third-party payors. Such studies might
require us to commit a significant amount of management time and
financial and other resources. Our future products might not
ultimately be considered cost-effective. Adequate third-party
coverage and reimbursement might not be available to enable us
to maintain price levels sufficient to realize an appropriate
return on investment in product development.
15
Governments continue to propose and pass legislation designed to
reduce the cost of healthcare. In the United States, we expect
that there will continue to be federal and state proposals to
implement similar governmental controls. For example, in
December 2003, Congress enacted a limited prescription drug
benefit for Medicare beneficiaries in the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003. Under this
program, drug prices for certain prescription drugs are
negotiated by drug plans, with the goal to lower costs for
Medicare beneficiaries. In some foreign markets, the government
controls the pricing of prescription pharmaceuticals. In these
countries, pricing negotiated with governmental authorities can
take six to 12 months or longer after the receipt of
regulatory marketing approval for a product. Cost control
initiatives could decrease the price that we would receive for
any products in the future, which would limit our revenue and
profitability. Accordingly, legislation and regulations
affecting the pricing of pharmaceuticals might change before our
product candidates are approved for marketing. Adoption of such
legislation could further limit reimbursement for
pharmaceuticals.
If we breach any of the agreements under which we license
rights to our product candidates from others, we could lose the
ability to continue the development and commercialization of our
product candidates.
In March 2006, we entered into an exclusive license agreement
with BMS relating to our IV APAP product candidate for the
United States and Canada, and in July 2004, we entered into an
exclusive license agreement with Migenix relating to our Omigard
product candidate for North America and Europe. Because we have
in-licensed the rights to our two product candidates from third
parties, if there is any dispute between us and our licensors
regarding our rights under these license agreements, our ability
to develop and commercialize these product candidates may be
adversely affected. Any uncured, material breach under these
license agreements could result in our loss of exclusive rights
to the related product candidate and may lead to a complete
termination of our product development efforts for the related
product candidate.
If BMS breaches the underlying agreement under which we
sublicense the rights to our IV APAP product candidate, we could
lose the ability to develop and commercialize IV APAP.
Our license for IV APAP is subject to the terms and conditions
of a license from SCR Pharmatop to BMS, under which BMS
originally licensed the intellectual property rights covering
IV APAP. If BMS materially breaches the terms or conditions
of this underlying license from SCR Pharmatop, and neither BMS
nor we adequately cure that breach, or BMS and SCR Pharmatop
otherwise become involved in a dispute, the breach by BMS or
disputes with SCR Pharmatop could result in a loss of, or other
material adverse impact on, our rights under our license
agreement with BMS. While we would expect to exercise all rights
and remedies available to us, including seeking to cure any
breach by BMS, and otherwise seek to preserve our rights under
the patents licensed by SCR Pharmatop, we may not be able to do
so in a timely manner, at an acceptable cost or at all. Any
uncured, material breach under the license from SCR Pharmatop to
BMS could result indirectly in our loss of exclusive rights to
our IV APAP product candidate and may lead to a complete
termination of our product development and any commercialization
efforts for IV APAP.
We rely on third parties to conduct our clinical trials,
including our planned Phase III clinical program
for IV APAP and our ongoing Phase III clinical trial
for Omigard. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may
not be able to obtain regulatory approval for or commercialize
our product candidates on our anticipated timeline or at all.
We intend to rely primarily on third-party CROs to oversee our
clinical trials for our IV APAP and Omigard product
candidates, and we depend on independent clinical investigators,
medical institutions and contract laboratories to conduct our
clinical trials. Although we rely on CROs to conduct our
clinical trials, we are responsible for ensuring that each of
our clinical trials is conducted in accordance with its
investigational plan and protocol. Moreover, the FDA requires us
to comply with regulations and standards, commonly referred to
as good clinical practices, or GCPs, for conducting, monitoring,
recording
16
and reporting the results of clinical trials to ensure that the
data and results are scientifically credible and accurate and
that the trial subjects are adequately informed of the potential
risks of participating in clinical trials. Our reliance on CROs
does not relieve us of these responsibilities and requirements.
CROs and investigators are not our employees, and we cannot
control the amount or timing of resources that they devote to
our programs. If our CROs or independent investigators fail to
devote sufficient time and resources to our drug development
programs, or if their performance is substandard, it will delay
the approval of our FDA applications and our introductions of
new products. The CROs with which we contract for execution of
our clinical trials play a significant role in the conduct of
the trials and the subsequent collection and analysis of data.
Failure of the CROs to meet their obligations could adversely
affect clinical development of our product candidates. Moreover,
these independent investigators and CROs may also have
relationships with other commercial entities, some of which may
have competitive products under development or currently
marketed. If independent investigators and CROs assist our
competitors, it could harm our competitive position. If any of
these third parties do not successfully carry out their
contractual duties or obligations or meet expected deadlines, or
if the quality or accuracy of the clinical data is compromised
for any reason, our clinical trials may be extended, delayed or
terminated, and we may not be able to obtain regulatory approval
for IV APAP, Omigard or future product candidates.
If the manufacturers upon whom we rely fail to produce our
product candidates in the volumes that we require on a timely
basis, or to comply with stringent regulations applicable to
pharmaceutical drug manufacturers, we may face delays in the
development and commercialization of, or be unable to meet
demand for, our products and may lose potential revenues.
We do not manufacture any of our product candidates, and we do
not currently plan to develop any capacity to do so. We do not
yet have agreements established regarding commercial supply of
either of our product candidates and may not be able to
establish or maintain commercial manufacturing arrangements on
commercially reasonable terms for IV APAP, Omigard or any
other product candidates that we may in-license or acquire. Any
problems or delays we experience in preparing for
commercial-scale manufacturing of a product candidate may result
in a delay in FDA approval of the product candidate or may
impair our ability to manufacture commercial quantities, which
would adversely affect our business. For example, our
manufacturers will need to produce specific batches of our
product candidates to demonstrate acceptable stability under
various conditions and for commercially viable lengths of time.
We and our contract manufacturers will need to demonstrate to
the FDA and other regulatory authorities this acceptable
stability data for our product candidates, as well as validate
methods and manufacturing processes, in order to receive
regulatory approval to commercialize IV APAP, Omigard or
any other product candidate. Furthermore, if our commercial
manufacturers fail to deliver the required commercial quantities
of bulk drug substance or finished product on a timely basis and
at commercially reasonable prices, we would likely be unable to
meet demand for our products and we would lose potential
revenues.
We currently have what we believe are adequate clinical supplies
of our Omigard product candidate. We entered into a clinical
supply agreement with Lawrence Laboratories, an affiliate of
BMS, under which Lawrence Laboratories has manufactured a single
batch of clinical supplies of IV APAP and a single batch of
placebo. With these batches, we believe we will have adequate
clinical supplies of our IV APAP product candidate and placebo.
The term of the clinical supply agreement generally extends
until the earlier of the receipt by us of regulatory approval
for IV APAP or December 31, 2008. In addition, the clinical
supply agreement could terminate upon mutual written consent of
the parties, the termination of the IV APAP agreement or our
dissolution. The clinical supply agreement may also be
terminated by either party upon written notice to the other
party of an uncured, material breach. We are currently
negotiating with suppliers for the potential commercial supply
of the finished drug product for IV APAP. We do not have
any long-term commitments from our suppliers of clinical trial
material or guaranteed prices for our product candidates or
placebos. The manufacture of pharmaceutical products requires
significant expertise and capital investment, including the
development of advanced manufacturing techniques and process
controls. Manufacturers of pharmaceutical products often
encounter difficulties in production, particularly in scaling up
initial production. These problems include difficulties with
production
17
costs and yields, quality control, including stability of the
product candidate and quality assurance testing, shortages of
qualified personnel, as well as compliance with strictly
enforced federal, state and foreign regulations. Our
manufacturers may not perform as agreed. If our manufacturers
were to encounter any of these difficulties, our ability to
provide product candidates to patients in our clinical trials
would be jeopardized.
In addition, all manufacturers of our product candidates must
comply with cGMP requirements enforced by the FDA through its
facilities inspection program. These requirements include
quality control, quality assurance and the maintenance of
records and documentation. Manufacturers of our product
candidates may be unable to comply with these cGMP requirements
and with other FDA, state and foreign regulatory requirements.
We have little control over our manufacturers compliance
with these regulations and standards. A failure to comply with
these requirements may result in fines and civil penalties,
suspension of production, suspension or delay in product
approval, product seizure or recall, or withdrawal of product
approval. If the safety of any quantities supplied is
compromised due to our manufacturers failure to adhere to
applicable laws or for other reasons, we may not be able to
obtain regulatory approval for or successfully commercialize our
product candidates.
Our future growth depends on our ability to identify and
acquire or in-license products and if we do not successfully
identify and acquire or in-license related product candidates or
integrate them into our operations, we may have limited growth
opportunities.
We in-licensed the rights to each of our two current product
candidates, IV APAP and Omigard, from third parties who
conducted the initial development of each product candidate. An
important part of our business strategy is to continue to
develop a pipeline of product candidates by acquiring or
in-licensing products, businesses or technologies that we
believe are a strategic fit with our focus on the hospital
marketplace. Future in-licenses or acquisitions, however, may
entail numerous operational and financial risks, including:
|
|
|
|
|
exposure to unknown liabilities; |
|
|
|
disruption of our business and diversion of our
managements time and attention to develop acquired
products or technologies; |
|
|
|
incurrence of substantial debt or dilutive issuances of
securities to pay for acquisitions; |
|
|
|
higher than expected acquisition and integration costs; |
|
|
|
increased amortization expenses; |
|
|
|
difficulty and cost in combining the operations and personnel of
any acquired businesses with our operations and personnel; |
|
|
|
impairment of relationships with key suppliers or customers of
any acquired businesses due to changes in management and
ownership; and |
|
|
|
inability to retain key employees of any acquired businesses. |
We have limited resources to identify and execute the
acquisition or in-licensing of third-party products, businesses
and technologies and integrate them into our current
infrastructure. In particular, we may compete with larger
pharmaceutical companies and other competitors in our efforts to
establish new collaborations and in-licensing opportunities.
These competitors likely will have access to greater financial
resources than us and may have greater expertise in identifying
and evaluating new opportunities. Moreover, we may devote
resources to potential acquisitions or in-licensing
opportunities that are never completed, or we may fail to
realize the anticipated benefits of such efforts.
18
We will need to increase the size of our organization, and we
may experience difficulties in managing growth.
As of June 30, 2006, we had 24 full-time employees. We
will need to continue to expand our managerial, operational,
financial and other resources in order to manage and fund our
operations and clinical trials, continue our development
activities and commercialize our product candidates. To support
this growth, we expect to hire approximately 20 additional
employees within the next 12 months at an estimated cost of
$2.5 million. We are not in a position to provide a
meaningful estimate of our staffing needs beyond the next
12 months. Our management, personnel, systems and
facilities currently in place may not be adequate to support
this future growth. Furthermore, our staffing estimates are
based on assumptions that may prove to be wrong. Our need to
effectively manage our operations, growth and various projects
requires that we:
|
|
|
|
|
manage our clinical trials effectively, including our planned
Phase III clinical program for IV APAP, which will be
conducted at numerous clinical trial sites, and our ongoing
Phase III clinical trial for Omigard, which is being
conducted at numerous clinical sites; |
|
|
|
manage our internal development efforts effectively while
carrying out our contractual obligations to licensors and other
third parties; and |
|
|
|
continue to improve our operational, financial and management
controls, reporting systems and procedures. |
We may be unable to successfully implement these tasks on a
larger scale and, accordingly, may not achieve our development
and commercialization goals.
We may not be able to manage our business effectively if we
are unable to attract and retain key personnel.
We may not be able to attract or retain qualified management and
scientific and clinical personnel in the future due to the
intense competition for qualified personnel among biotechnology,
pharmaceutical and other businesses, particularly in the
San Diego, California area. If we are not able to attract
and retain necessary personnel to accomplish our business
objectives, we may experience constraints that will
significantly impede the achievement of our development
objectives, our ability to raise additional capital and our
ability to implement our business strategy.
Our industry has experienced a high rate of turnover of
management personnel in recent years. We are highly dependent on
the product acquisition, development, regulatory and
commercialization expertise of our senior management,
particularly Theodore R. Schroeder, our President and Chief
Executive Officer, James B. Breitmeyer, M.D., Ph.D., our
Executive Vice President, Development and Chief Medical Officer,
and William R. LaRue, our Senior Vice President, Chief Financial
Officer, Treasurer and Secretary. If we lose one or more of
these key employees, our ability to implement our business
strategy successfully could be seriously harmed. Replacing key
employees may be difficult and may take an extended period of
time because of the limited number of individuals in our
industry with the breadth of skills and experience required to
develop, gain regulatory approval of and commercialize products
successfully. Competition to hire from this limited pool is
intense, and we may be unable to hire, train, retain or motivate
these additional key personnel. Although we have employment
agreements with Mr. Schroeder, Dr. Breitmeyer and
Mr. LaRue, these agreements are terminable at will at any
time with or without notice and, therefore, we may not be able
to retain their services as expected.
In addition, we have scientific and clinical advisors who assist
us in our product development and clinical strategies. These
advisors are not our employees and may have commitments to, or
consulting or advisory contracts with, other entities that may
limit their availability to us, or may have arrangements with
other companies to assist in the development of products that
may compete with ours.
19
We face potential product liability exposure, and if
successful claims are brought against us, we may incur
substantial liability for a product candidate and may have to
limit its commercialization.
The use of our product candidates in clinical trials and the
sale of any products for which we obtain marketing approval
expose us to the risk of product liability claims. Product
liability claims might be brought against us by consumers,
health care providers or others using, administering or selling
our products. If we cannot successfully defend ourselves against
these claims, we will incur substantial liabilities. Regardless
of merit or eventual outcome, liability claims may result in:
|
|
|
|
|
withdrawal of clinical trial participants; |
|
|
|
termination of clinical trial sites or entire trial programs; |
|
|
|
decreased demand for our product candidates; |
|
|
|
impairment of our business reputation; |
|
|
|
costs of related litigation; |
|
|
|
substantial monetary awards to patients or other claimants; |
|
|
|
loss of revenues; and |
|
|
|
the inability to commercialize our product candidates. |
We have obtained limited product liability insurance coverage
for our clinical trials with a $10 million annual aggregate
coverage limit and additional amounts in selected foreign
countries where we are conducting clinical trials. However, our
insurance coverage may not reimburse us or may not be sufficient
to reimburse us for any expenses or losses we may suffer.
Moreover, insurance coverage is becoming increasingly expensive,
and, in the future, we may not be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to
protect us against losses due to liability. We intend to expand
our insurance coverage to include the sale of commercial
products if we obtain marketing approval for our product
candidates in development, but we may be unable to obtain
commercially reasonable product liability insurance for any
products approved for marketing. On occasion, large judgments
have been awarded in class action lawsuits based on drugs that
had unanticipated side effects. A successful product liability
claim or series of claims brought against us could cause our
stock price to fall and, if judgments exceed our insurance
coverage, could decrease our cash and adversely affect our
business.
Recent proposed legislation may permit re-importation of
drugs from foreign countries into the United States, including
foreign countries where the drugs are sold at lower prices than
in the United States, which could materially adversely affect
our operating results and our overall financial condition.
Legislation has been introduced in Congress that, if enacted,
would permit more widespread re-importation of drugs from
foreign countries into the United States, which may include
re-importation from foreign countries where the drugs are sold
at lower prices than in the United States. Such legislation, or
similar regulatory changes, could decrease the price we receive
for any approved products which, in turn, could materially
adversely affect our operating results and our overall financial
condition. For example, BMS markets IV APAP in Europe and other
countries principally under the brand name Perfalgan. Although
Perfalgan is not labeled for sale in the United States and we
have an exclusive license from BMS and its licensor to develop
and sell our product candidate in the United States, it is
possible that hospitals and other users may in the future seek
to import Perfalgan rather than purchase IV APAP in the
United States for
cost-savings or other
reasons. We would not receive any revenues from the importation
and sale of Perfalgan into the United States.
Our business involves the use of hazardous materials and we
and our third-party manufacturers must comply with environmental
laws and regulations, which can be expensive and restrict how we
do business.
Our third-party manufacturers activities and, to a lesser
extent, our own activities involve the controlled storage, use
and disposal of hazardous materials, including the components of
our product
20
candidates and other hazardous compounds. We and our
manufacturers are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling
and disposal of these hazardous materials. Although we believe
that the safety procedures for handling and disposing of these
materials comply with the standards prescribed by these laws and
regulations, we cannot eliminate the risk of accidental
contamination or injury from these materials. In the event of an
accident, state or federal authorities may curtail our use of
these materials and interrupt our business operations.
Our business and operations would suffer in the event of
system failures.
Despite the implementation of security measures, our internal
computer systems are vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, war and
telecommunication and electrical failures. Any system failure,
accident or security breach that causes interruptions in our
operations could result in a material disruption of our drug
development programs. For example, the loss of clinical trial
data from completed or ongoing clinical trials for IV APAP
or Omigard could result in delays in our regulatory approval
efforts and significantly increase our costs to recover or
reproduce the data. To the extent that any disruption or
security breach results in a loss or damage to our data or
applications, or inappropriate disclosure of confidential or
proprietary information, we may incur liability and the further
development of our product candidates may be delayed.
Risks Related to Intellectual Property
The patent rights that we have in-licensed covering IV
APAP are limited to a specific intravenous formulation of
acetaminophen, and our market opportunity for this product
candidate may be limited by the lack of patent protection for
the active ingredient itself and other formulations that may be
developed by competitors.
The active ingredient in IV APAP is acetaminophen. There
are currently no patents covering the acetaminophen molecule
itself in the territories licensed to us, which include the
United States and Canada. As a result, competitors who obtain
the requisite regulatory approval can offer products with the
same active ingredient as IV APAP so long as the
competitors do not infringe any process or formulation patents
that we have in-licensed from BMS and its licensor, SCR
Pharmatop. We are aware of a number of third-party patents in
the United States that claim methods of making acetaminophen. If
a supplier of the active pharmaceutical ingredient, or API, for
our IV APAP product candidate is found to infringe any of
these method patents covering acetaminophen, our supply of the
API could be delayed and we may be required to locate an
alternative supplier. We are also aware of several U.S. and
Canadian patents and patent applications covering various
potential injectable formulations of acetaminophen as well as
methods of making and using these potential formulations. In
addition, Injectapap, a formulation of acetaminophen for
intramuscular injection was approved by the FDA for the
reduction of fever in adults in March 1986 but was withdrawn
from the market by McNeil Pharmaceutical in July 1986. Although
we are not aware of any announcement regarding the reasons for
Injectapaps withdrawal, we believe it was likely withdrawn
from the market due to product-related concerns either related
to the intramuscular injection mode of administration or the
sodium bisulfite in the formulation.
The number of patents and patent applications covering products
in the same field as IV APAP indicates that competitors
have sought to develop and may seek to market competing
formulations that may not be covered by our licensed patents and
patent applications. In addition, the Canadian patent
applications that we have in-licensed have yet to be examined by
the Canadian Patent Office. Thus, they may issue with claims
that cover less than the corresponding in-licensed
U.S. patents, or simply not issue at all. The commercial
opportunity for our IV APAP product candidate could be
significantly harmed if competitors are able to develop an
alternative formulation of acetaminophen outside the scope of
our in-licensed patents.
21
The patent rights that we have in-licensed covering Omigard
are limited in scope and limited to specific territories.
We have an exclusive license from Migenix for Omigard in North
America and Europe for the licensed field, although currently
there are issued patents only in the United States and certain
European countries. Canadian applications are pending; however,
the claims that ultimately issue in Canada may be narrower than
the protection obtained in the United States and Europe or may
simply not issue at all. In addition, no patent protection has
been sought in Mexico. Accordingly, the manufacture, sale and
use of Omigard in Mexico by a competitor cannot be prevented.
Furthermore, there are third-party patents covering analogs of
omiganan and Migenix has patented analogs of omiganan that are
not licensed to us. It is possible that competitors having
rights to these patents may develop competing products having
the same, similar or better efficacy compared to Omigard.
Furthermore, our license agreement with Migenix may be construed
to cover only the use of Omigard and other formulations of
omiganan for the licensed field, which is the treatment of
burn-related, surgical wound-related, or device-related
infections. Thus, Migenix or third-party licensees of Migenix
may be able to market Omigard for other uses, including
treatment of non-surgery related wound infections. We may be
unable to prevent physicians from using any such competitive
Omigard product off-label for the field licensed to us.
We depend on our licensors for the maintenance and
enforcement of our intellectual property and have limited
control, if any, over the amount or timing of resources that our
licensors devote on our behalf.
We depend on our licensors, BMS and Migenix, to protect the
proprietary rights covering IV APAP and Omigard.
Regarding IV APAP, either BMS or its licensor, SCR
Pharmatop, depending on the patent or application, is
responsible for maintaining issued patents and prosecuting
patent applications. Regarding Omigard, Migenix is responsible
for maintaining issued patents and prosecuting patent
applications. We have limited, if any, control over the amount
or timing of resources that our licensors devote on our behalf
or the priority they place on maintaining these patent rights
and prosecuting these patent applications to our advantage. SCR
Pharmatop is under a contractual obligation to BMS to diligently
prosecute their patent applications and allow BMS the
opportunity to consult, review and comment on patent office
communications. However, we cannot be sure that SCR Pharmatop
will perform as required. Should BMS decide it no longer wants
to maintain any of the patents licensed to us, BMS is required
to afford us the opportunity to do so at our expense. However,
we cannot be sure that BMS will perform as required. If BMS does
not perform, and if we do not assume the maintenance of the
licensed patents in sufficient time to make required payments or
filings with the appropriate governmental agencies, we risk
losing the benefit of all or some of those patent rights. For
patents and applications licensed from Migenix, Migenix is
obligated to use commercially reasonable efforts to obtain and
maintain patent rights covering Omigard in North America and
Europe. If Migenix intends to abandon prosecution or maintenance
of any patents or applications, they are obligated to notify us,
and at that time, we will be granted an opportunity to maintain
and prosecute the patents and applications. In such a case,
Migenix is required to transfer all necessary rights and
responsibilities to facilitate our maintenance and prosecution
of the patents and applications. Similar to BMS, however, we
cannot be certain that Migenix will perform its contractual
obligations as required or that we will be able to adequately
assume the prosecution or maintenance of the Omigard-related
patents and applications.
As part of a financing transaction, Migenix has pledged as
collateral to its lenders the patents and patent applications
covering Omigard. While we believe our license agreement with
Migenix would survive any foreclosure on these patents and
patent applications, we cannot be sure that the lenders will
have adequate expertise or resources to properly perform
Migenixs obligations to us under the license agreement,
including maintaining and prosecuting the patents and patent
applications.
While we intend to take actions reasonably necessary to enforce
our patent rights, we depend, in part, on our licensors to
protect a substantial portion of our proprietary rights. In the
case of the IV APAP patents, BMS has the first right to
prosecute a third-party infringement of the SCR Pharmatop
patents,
22
and has the sole right to prosecute third-party infringement of
the BMS patents. We will have the ability to cooperate with BMS
in third-party infringement suits involving the SCR Pharmatop
patents. In certain instances, we may be allowed to pursue the
infringement claim ourselves. With respect to Omigard, we have
the first right to prosecute a third-party for infringement of
the in-licensed Migenix patents provided the infringing
activities are in North America or Europe and relate primarily
to the licensed field of use. Migenix is obligated to reasonably
cooperate with any such suit.
Our licensors may also be notified of alleged infringement and
be sued for infringement of third-party patents or other
proprietary rights. We may have limited, if any, control or
involvement over the defense of these claims, and our licensors
could be subject to injunctions and temporary or permanent
exclusionary orders in the United States or other countries. Our
licensors are not obligated to defend or assist in our defense
against third-party claims of infringement. We have limited, if
any, control over the amount or timing of resources, if any,
that our licensors devote on our behalf or the priority they
place on defense of such third-party claims of infringement.
Finally, Migenix is not obligated to defend or assist in our
defense of a third-party infringement suit relating to our
Omigard product candidate; however, Migenix has the right to
control the defense and settlement that relates to the validity
and enforceability of claims in the in-licensed Migenix patents.
For a third-party challenge to the SCR Pharmatop in-licensed
patents relating to IV APAP, we will have some ability to
participate in either SCR Pharmatops or BMSs defense
thereof. In the case that neither party elects to defend the
third-party challenge, then we may have the opportunity to
defend it. For a third-party challenge to the in-licensed BMS
patents relating to IV APAP, BMS has the sole right to
defend such challenge. If it chooses not to, we may have the
right to renegotiate or terminate the license regarding the
in-licensed BMS patents.
Because of the uncertainty inherent in any patent or other
litigation involving proprietary rights, we or our licensors may
not be successful in defending claims of intellectual property
infringement by third parties, which could have a material
adverse affect on our results of operations. Regardless of the
outcome of any litigation, defending the litigation may be
expensive, time-consuming and distracting to management.
Because it is difficult and costly to protect our proprietary
rights, we may not be able to ensure their protection.
Our commercial success will depend in part on obtaining and
maintaining patent protection and trade secret protection
for IV APAP, Omigard or any other product candidates that
we may in-license or acquire and the methods we use to
manufacture them, as well as successfully defending these
patents against third-party challenges. We will only be able to
protect our technologies from unauthorized use by third parties
to the extent that valid and enforceable patents or trade
secrets cover them.
The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and
factual questions for which important legal principles remain
unresolved. No consistent policy regarding the breadth of claims
allowed in pharmaceutical or biotechnology patents has emerged
to date in the United States. The patent situation outside the
United States is even more uncertain. Changes in either the
patent laws or in interpretations of patent laws in the United
States and other countries may diminish the value of our
intellectual property. Accordingly, we cannot predict the
breadth of claims that may be allowed or enforced in our patents
or in third-party patents.
The degree of future protection for our proprietary rights is
uncertain, because legal means afford only limited protection
and may not adequately protect our rights or permit us to gain
or keep our competitive advantage. For example:
|
|
|
|
|
our licensors might not have been the first to make the
inventions covered by each of our pending patent applications
and issued patents; |
|
|
|
our licensors might not have been the first to file patent
applications for these inventions; |
23
|
|
|
|
|
others may independently develop similar or alternative
technologies or duplicate any of our product candidates or
technologies; |
|
|
|
it is possible that none of the pending patent applications
licensed to us will result in issued patents; |
|
|
|
the issued patents covering our product candidates may not
provide a basis for commercially viable active products, may not
provide us with any competitive advantages, or may be challenged
by third parties; |
|
|
|
we may not develop additional proprietary technologies that are
patentable; or |
|
|
|
patents of others may have an adverse effect on our business. |
Patent applications in the United States are maintained in
confidence for at least 18 months after their earliest
effective filing date. Consequently, we cannot be certain that
our licensors were the first to invent or the first to file
patent applications on some of our product candidates. In the
event that a third party has also filed a U.S. patent
application relating to our product candidates or a similar
invention, we may have to participate in interference
proceedings declared by the U.S. Patent and Trademark
Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial and it is
possible that our efforts would be unsuccessful, resulting in a
material adverse effect on our U.S. patent position.
Furthermore, we may not have identified all U.S. and foreign
patents or published applications that affect our business
either by blocking our ability to commercialize our drugs or by
covering similar technologies that affect our drug market.
In addition, some countries, including many in Europe, do not
grant patent claims directed to methods of treating humans, and
in these countries patent protection may not be available at all
to protect our drug candidates. Even if patents issue, we cannot
guarantee that the claims of those patents will be valid and
enforceable or provide us with any significant protection
against competitive products, or otherwise be commercially
valuable to us.
We also rely on trade secrets to protect our technology,
particularly where we do not believe patent protection is
appropriate or obtainable. However, trade secrets are difficult
to protect. While we use reasonable efforts to protect our trade
secrets, our licensors, employees, consultants, contractors,
outside scientific collaborators and other advisors may
unintentionally or willfully disclose our information to
competitors. Enforcing a claim that a third party illegally
obtained and is using our trade secrets is expensive and time
consuming, and the outcome is unpredictable. In addition, courts
outside the United States are sometimes less willing to protect
trade secrets. Moreover, our competitors may independently
develop equivalent knowledge, methods and know-how.
If our licensors or we fail to obtain or maintain patent
protection or trade secret protection for IV APAP, Omigard
or any other product candidate we may in-license or acquire,
third parties could use our proprietary information, which could
impair our ability to compete in the market and adversely affect
our ability to generate revenues and achieve profitability.
If we are sued for infringing intellectual property rights of
third parties, it will be costly and time consuming, and an
unfavorable outcome in any litigation would harm our
business.
Our ability to develop, manufacture, market and sell IV
APAP, Omigard or any other product candidates that we may
in-license or acquire depends upon our ability to avoid
infringing the proprietary rights of third parties. Numerous
U.S. and foreign issued patents and pending patent
applications, which are owned by third parties, exist in the
general fields of pain treatment and prevention of infections
and cover the use of numerous compounds and formulations in our
targeted markets. For instance, there is a patent in force in
various European countries, with claims that, if valid, may be
broad enough in scope to cover the formulation of our Omigard
product candidate. It is possible that we may determine it
prudent to seek a license to this European patent in order to
avoid potential litigation and other disputes. We cannot be sure
that a license would be available to us on commercially
reasonable terms, or at all.
24
Similarly, there is a patent application pending in the United
States that corresponds to the European patent. Because this
patent application has neither published nor issued, it is too
early to tell if the claims of this application will present
similar issues for Omigard in the United States. There is also a
patent application pending in Canada that corresponds to the
European patent. Because this patent application has not issued,
it is too early to tell if the claims of this application will
present similar issues for Omigard in Canada. However, similar
to the European patent, if the U.S. or Canadian patent
applications issue with a scope that is broad enough to cover
our Omigard product candidate and we are unable to assert
successful defenses to any patent claims, we may be unable to
commercialize Omigard, or may be required to expend substantial
sums to obtain a license to the other partys patent. While
we believe there may be multiple grounds to challenge the
validity of the European patent, and these grounds may be
applicable to the U.S. and Canadian applications should they
issue as patents, the outcome of any litigation relating to this
European patent and the U.S. and Canadian patent applications,
or any other patents or patent applications, is uncertain and
participating in such litigation would be expensive,
time-consuming and distracting to management. Because of the
uncertainty inherent in any patent or other litigation involving
proprietary rights, we and Migenix may not be successful in
defending intellectual property claims by third parties, which
could have a material adverse affect on our results of
operations. Regardless of the outcome of any litigation,
defending the litigation may be expensive, time-consuming and
distracting to management. In addition, because patent
applications can take many years to issue, there may be
currently pending applications, unknown to us, which may later
result in issued patents that IV APAP or Omigard may
infringe. There could also be existing patents of which we are
not aware that IV APAP or Omigard may inadvertently
infringe.
There is a substantial amount of litigation involving patent and
other intellectual property rights in the biotechnology and
biopharmaceutical industries generally. If a third party claims
that we infringe on their products or technology, we could face
a number of issues, including:
|
|
|
|
|
infringement and other intellectual property claims which, with
or without merit, can be expensive and time consuming to
litigate and can divert managements attention from our
core business; |
|
|
|
substantial damages for past infringement which we may have to
pay if a court decides that our product infringes on a
competitors patent; |
|
|
|
a court prohibiting us from selling or licensing our product
unless the patent holder licenses the patent to us, which it is
not required to do; |
|
|
|
if a license is available from a patent holder, we may have to
pay substantial royalties or grant cross licenses to our
patents; and |
|
|
|
redesigning our processes so they do not infringe, which may not
be possible or could require substantial funds and time. |
We may be subject to claims that our employees have
wrongfully used or disclosed alleged trade secrets of their
former employers.
As is common in the biotechnology and pharmaceutical industry,
we employ individuals who were previously employed at other
biotechnology or pharmaceutical companies, including our
competitors or potential competitors. Although no claims against
us are currently pending, we may be subject to claims that these
employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. Even if we are successful in defending
against these claims, litigation could result in substantial
costs and be a distraction to management.
25
Risks Related to Our Finances and Capital Requirements
We have incurred significant operating losses since our
inception and anticipate that we will incur continued losses for
the foreseeable future.
We are a development stage company with a limited operating
history. We have focused primarily on in-licensing and
developing our two product candidates, IV APAP and Omigard, with
the goal of supporting regulatory approval for these product
candidates. We have financed our operations almost exclusively
through private placements of preferred stock and have incurred
losses in each year since our inception in May 2004. Net losses
were $2.8 million in 2004, $7.7 million in 2005 and
$35.4 million for the first six months of 2006. The net
loss for the first six months of 2006 was principally attributed
to our expense related to the $25.0 million licensing fee
for IV APAP paid to BMS and clinical trial and regulatory
expenses. As of June 30, 2006, we had an accumulated
deficit of $46.0 million. These losses, among other things,
have had and will continue to have an adverse effect on our
stockholders equity and working capital. We expect our
development expenses as well as clinical product manufacturing
expenses to increase in connection with our ongoing and planned
Phase III clinical trials for our product candidates. In
addition, if we obtain regulatory approval for IV APAP or
Omigard, we expect to incur significant sales, marketing and
outsourced manufacturing expenses as well as continued
development expenses. As a result, we expect to continue to
incur significant and increasing operating losses for the
foreseeable future. Because of the numerous risks and
uncertainties associated with developing pharmaceutical
products, we are unable to predict the extent of any future
losses or when we will become profitable, if at all.
We currently have no source of revenue and may never be
profitable.
Our ability to become profitable depends upon our ability to
generate revenue. To date, we have not generated any revenue
from our development-stage product candidates, and we do not
know when, or if, we will generate any revenue. Our ability to
generate revenue depends on a number of factors, including, but
not limited to, our ability to:
|
|
|
|
|
successfully complete our ongoing and planned clinical trials
for IV APAP and Omigard; |
|
|
|
obtain regulatory approval for either of our two product
candidates; |
|
|
|
assuming these regulatory approvals are received, manufacture
commercial quantities of our product candidates at acceptable
cost levels; and |
|
|
|
successfully market and sell any approved products. |
Even if one or more of our product candidates is approved for
commercial sale, we anticipate incurring significant costs
associated with commercializing any approved product. We also do
not anticipate that we will achieve profitability for at least
several years after generating material revenues, if ever. If we
are unable to generate revenues, we will not become profitable
and may be unable to continue operations without continued
funding.
Our short operating history makes it difficult to evaluate
our business and prospects.
We were incorporated in May 2004 and have only been conducting
operations with respect to our IV APAP product candidate
since March 2006 and our Omigard product candidate since July
2004. Our operations to date have been limited to organizing and
staffing our company, in-licensing our two product candidates
and initiating product development activities for our two
product candidates. We have not yet demonstrated an ability to
obtain regulatory approval for or successfully commercialize a
product candidate. Consequently, any predictions about our
future performance may not be as accurate as they could be if we
had a history of successfully developing and commercializing
pharmaceutical products.
26
We will need additional funding and may be unable to raise
capital when needed, which would force us to delay, reduce or
eliminate our product development programs or commercialization
efforts.
Developing products for use in the hospital setting, conducting
clinical trials, establishing outsourced manufacturing
relationships and successfully manufacturing and marketing drugs
that we may develop is expensive. We will need to raise
additional capital to:
|
|
|
|
|
fund our operations and continue to conduct adequate and
well-controlled clinical trials to provide clinical data to
support regulatory approval of marketing applications; |
|
|
|
continue our development activities; |
|
|
|
qualify and outsource the commercial-scale manufacturing of our
products under cGMP; and |
|
|
|
commercialize IV APAP, Omigard or any other product
candidates that we may in-license or acquire, if any of these
product candidates receive regulatory approval. |
We believe that our existing cash and cash equivalents will be
sufficient to meet our projected operating requirements through
at least June 30, 2007. We have based this estimate on
assumptions that may prove to be wrong, and we could spend our
available financial resources much faster than we currently
expect. Our future funding requirements will depend on many
factors, including, but not limited to:
|
|
|
|
|
the rate of progress and cost of our clinical trials and other
product development programs for IV APAP, Omigard and any
other product candidates that we may in-license or acquire; |
|
|
|
the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights associated
with our product candidates; |
|
|
|
the cost and timing of completion of an outsourced commercial
manufacturing supply for each product candidate; |
|
|
|
the costs and timing of regulatory approval; |
|
|
|
the costs of establishing sales, marketing and distribution
capabilities; |
|
|
|
the effect of competing technological and market developments;
and |
|
|
|
the terms and timing of any collaborative, licensing,
co-promotion or other arrangements that we may establish. |
Future capital requirements will also depend on the extent to
which we acquire or invest in additional complementary
businesses, products and technologies, but we currently have no
commitments or agreements relating to any of these types of
transactions.
Until we can generate a sufficient amount of product revenue, if
ever, we expect to finance future cash needs through public or
private equity offerings, debt financings or corporate
collaboration and licensing arrangements, as well as through
interest income earned on cash balances. We cannot be certain
that additional funding will be available on acceptable terms,
or at all. If adequate funds are not available, we may be
required to delay, reduce the scope of or eliminate one or more
of our development programs or our commercialization efforts.
Our quarterly operating results may fluctuate
significantly.
We expect our operating results to be subject to quarterly
fluctuations. Our net loss and other operating results will be
affected by numerous factors, including:
|
|
|
|
|
the timing of milestone payments required under our license
agreements for IV APAP and Omigard; |
|
|
|
our execution of other collaborative, licensing or similar
arrangements, and the timing of payments we may make or receive
under these arrangements; |
27
|
|
|
|
|
our addition or termination of clinical trials or funding
support; |
|
|
|
variations in the level of expenses related to our two existing
product candidates or future development programs; |
|
|
|
any intellectual property infringement lawsuit in which we may
become involved; |
|
|
|
regulatory developments affecting our product candidates or
those of our competitors; and |
|
|
|
if either of our product candidates receives regulatory
approval, the level of underlying hospital demand for our
product candidates and wholesalers buying patterns. |
If our quarterly operating results fall below the expectations
of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the
price of our stock to fluctuate substantially. We believe that
quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an
indication of our future performance.
Raising additional funds by issuing securities may cause
dilution to existing stockholders and raising funds through
lending and licensing arrangements may restrict our operations
or require us to relinquish proprietary rights.
To the extent that we raise additional capital by issuing equity
securities, our existing stockholders ownership will be
diluted. If we raise additional funds through licensing
arrangements, it may be necessary to relinquish potentially
valuable rights to our potential products or proprietary
technologies, or grant licenses on terms that are not favorable
to us. Any debt financing we enter into may involve covenants
that restrict our operations. These restrictive covenants may
include limitations on additional borrowing and specific
restrictions on the use of our assets as well as prohibitions on
our ability to create liens, pay dividends, redeem our stock or
make investments. For example, in February 2006, we entered into
a $7.0 million loan and security agreement with Silicon
Valley Bank and Oxford Finance Corporation which contains a
variety of affirmative and negative covenants, including
required financial reporting, limitations on the disposition of
assets other than in the ordinary course of business,
limitations on the incurrence of additional debt and other
requirements. To secure our performance of our obligations under
the loan and security agreement, we pledged substantially all of
our assets other than intellectual property assets, to the
lenders. Our failure to comply with the covenants in the loan
and security agreement could result in an event of default that,
if not cured or waived, could result in the acceleration of all
or a substantial portion of our debt.
We will incur significant increased costs as a result of
operating as a public company, and our management will be
required to devote substantial time to new compliance
initiatives.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the SEC and the Nasdaq Global
Market, have imposed various new requirements on public
companies, including requiring establishment and maintenance of
effective disclosure and financial controls and changes in
corporate governance practices. Our management and other
personnel will need to devote a substantial amount of time to
these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance
costs and will make some activities more
time-consuming and
costly. For example, we expect these rules and regulations to
make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required
to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to
attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers.
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, commencing in
fiscal 2008, we must perform system and process evaluation and
testing of our internal controls over financial reporting to
allow management and our independent registered public
accounting firm to report on the effectiveness of
28
our internal controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend
significant management efforts. We currently do not have an
internal audit group, and we will need to hire additional
accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we
are not able to comply with the requirements of Section 404
in a timely manner, or if we or our independent registered
public accounting firm identifies deficiencies in our internal
controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline and we
could be subject to sanctions or investigations by Nasdaq, the
SEC or other regulatory authorities, which would require
additional financial and management resources.
Risks Relating to Securities Markets and Investment in Our
Stock
There may not be a viable public market for our common
stock.
Prior to this offering, there has been no public market for our
common stock, and there can be no assurance that a regular
trading market will develop and continue after this offering or
that the market price of our common stock will not decline below
the initial public offering price. The initial public offering
price will be determined through negotiations between us and the
representatives of the underwriters and may not be indicative of
the market price of our common stock following this offering.
Among the factors considered in such negotiations are prevailing
market conditions, certain of our financial information, market
valuations of other companies that we and the representatives of
the underwriters believe to be comparable to us, estimates of
our business potential, the present state of our development and
other factors deemed relevant. See Underwriting for
additional information.
As a new investor, you will experience immediate and
substantial dilution in the net tangible book value of your
shares.
The initial public offering price of our common stock in this
offering is considerably more than the net tangible book value
per share of our outstanding common stock. Investors purchasing
shares of common stock in this offering will pay a price that
substantially exceeds the value of our tangible assets after
subtracting liabilities. As a result, investors will:
|
|
|
|
|
|
incur immediate dilution of $8.44 per share, based on an
assumed initial public offering price of $12.00 per share,
the mid-point of our expected public offering price range; and |
|
|
|
|
|
contribute 47% of the total amount invested to date to fund our
company based on an assumed initial offering price to the public
of $12.00 per share, the mid-point of our expected public
offering price range, but will own only 21% of the shares of
common stock outstanding after the offering. |
|
To the extent outstanding stock options or warrants are
exercised, there will be further dilution to new investors.
We believe that our existing cash, cash equivalents and
short-term investments will be sufficient to meet our projected
operating requirements through at least June 30, 2007.
However, because we will need to raise additional capital to
fund our clinical development programs, among other things, we
may conduct substantial additional equity offerings. These
future equity issuances, together with the exercise of
outstanding options or warrants and any additional shares issued
in connection with acquisitions, will result in further dilution
to investors.
We expect that the price of our common stock will fluctuate
substantially.
The initial public offering price for the shares of our common
stock sold in this offering has been determined by negotiation
between the representatives of the underwriters and us. This
price may not
29
reflect the market price of our common stock following this
offering. The price of our common stock may decline. In
addition, the market price of our common stock is likely to be
highly volatile and may fluctuate substantially due to many
factors, including:
|
|
|
|
|
the results from our clinical trial programs, including our
planned Phase III clinical program for IV APAP and our
ongoing Phase III clinical trial for Omigard; |
|
|
|
the results of clinical trial programs for IV APAP and
Omigard being performed by others; |
|
|
|
FDA or international regulatory actions, including failure to
receive regulatory approval for any of our product candidates; |
|
|
|
failure of any of our product candidates, if approved, to
achieve commercial success; |
|
|
|
announcements of the introduction of new products by us or our
competitors; |
|
|
|
market conditions in the pharmaceutical and biotechnology
sectors; |
|
|
|
developments concerning product development results or
intellectual property rights of others; |
|
|
|
litigation or public concern about the safety of our potential
products; |
|
|
|
actual and anticipated fluctuations in our quarterly operating
results; |
|
|
|
deviations in our operating results from the estimates of
securities analysts or other analyst comments; |
|
|
|
additions or departures of key personnel; |
|
|
|
third-party coverage and reimbursement policies; |
|
|
|
developments concerning current or future strategic
collaborations; and |
|
|
|
discussion of us or our stock price by the financial and
scientific press and in online investor communities. |
The realization of any of the risks described in these
Risk Factors could have a dramatic and material
adverse impact on the market price of our common stock. In
addition, class action litigation has often been instituted
against companies whose securities have experienced periods of
volatility in market price. Any such litigation brought against
us could result in substantial costs and a diversion of
managements attention and resources, which could hurt our
business, operating results and financial condition.
Our management team may invest or spend the proceeds of this
offering in ways in which you may not agree or in ways which may
not yield a return.
Our management will have broad discretion over the use of
proceeds from this offering. The net proceeds from this offering
will be used to fund clinical trials and other research and
development activities, and to fund working capital, capital
expenditures and other general corporate purposes. We may also
use a portion of the net proceeds to in-license, acquire or
invest in complementary businesses or products. We have no
present understandings, commitments or agreements with respect
to any such in-licenses, acquisitions or investments and no
portion of the net proceeds has been allocated for any specific
transaction. Our management will have considerable discretion in
the application of the net proceeds, and you will not have the
opportunity, as part of your investment decision, to assess
whether the proceeds are being used appropriately. The net
proceeds may be used for corporate purposes that do not increase
our operating results or market value. Until the net proceeds
are used, they may be placed in investments that do not produce
significant income or that lose value.
Future sales of our common stock may depress our stock
price.
Sales of a substantial number of shares of our common stock in
the public market could occur at any time. These sales, or the
perception in the market that the holders of a large number of
shares intend to sell shares, could reduce the market price of
our common stock. After this offering, we will have 28,045,540
outstanding shares of common stock based on the number of
shares outstanding as of June 30,
30
2006. This includes the shares that we are selling in this
offering, which may be resold in the public market immediately.
Of the remaining shares, 22,045,540 shares are currently
restricted as a result of securities laws or
lock-up agreements but
will be available for resale in the public market as described
in the Shares Eligible for Future Sale section of
this prospectus. As a result of the lock-up agreements between
our underwriters and our security holders and the provisions of
Rule 144, Rule 144(k) and Rule 701 under the
Securities Act, the shares of our common stock (excluding the
shares sold in this offering) that will be available for sale in
the public market are as follows:
|
|
|
|
|
|
4,159,206 shares will be eligible for sale under
Rule 144(k) or Rule 701 upon the expiration of the
lock-up agreements, beginning 180 days after the date of
this prospectus; |
|
|
|
|
|
17,886,334 shares will be eligible for sale under
Rule 144 upon the expiration of the lock-up agreements,
subject to volume limitations, manner of sale requirements and
other restrictions, beginning 180 days after the date of
this prospectus; |
|
|
|
|
|
441,480 shares will be eligible for sale, upon exercise of
vested options, upon the expiration of the lock-up agreements,
beginning 180 days after the date of this prospectus; and |
|
|
|
|
|
96,250 shares will be eligible for sale, upon exercise of
outstanding warrants, upon the expiration of the lock-up
agreements, beginning 180 days after the date of this
prospectus. |
|
Moreover, after this offering, holders of approximately
21,330,113 shares of common stock and the holders of
warrants to purchase 96,250 shares of our common stock will have
rights, subject to some conditions, to require us to file
registration statements covering their shares or to include
their shares in registration statements that we may file for
ourselves or other stockholders. These rights will continue
following this offering and will terminate seven years following
the completion of this offering, or for any particular holder
with registration rights, at such time following this offering
when all securities held by that stockholder subject to
registration rights may be sold pursuant to Rule 144 under
the Securities Act. We also intend to register all shares of
common stock that we may issue under our equity compensation
plans. Once we register these shares, they can be freely sold in
the public market upon issuance, subject to the
lock-up agreements
described in the Underwriting section of this
prospectus.
Our executive officers and directors and their affiliates
will exercise control over stockholder voting matters in a
manner that may not be in the best interests of all of our
stockholders.
Immediately following this offering, our executive officers and
directors and their affiliates will together control
approximately 56.8% of our outstanding common stock. As a
result, these stockholders will collectively be able to
significantly influence all matters requiring approval of our
stockholders, including the election of directors and approval
of significant corporate transactions. The concentration of
ownership may delay, prevent or deter a change in control of our
company even when such a change may be in the best interests of
all stockholders, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part
of a sale of our company or our assets and might affect the
prevailing market price of our common stock.
Anti-takeover provisions under our charter documents and
Delaware law could delay or prevent a change of control which
could limit the market price of our common stock and may prevent
or frustrate attempts by our stockholders to replace or remove
our current management.
Our amended and restated certificate of incorporation and
amended and restated bylaws, which are to become effective at
the closing of this offering, contain provisions that could
delay or prevent a change of control of our company or changes
in our board of directors that our stockholders might consider
favorable. Some of these provisions include:
|
|
|
|
|
a board of directors divided into three classes serving
staggered three-year terms, such that not all members of the
board will be elected at one time; |
|
|
|
a prohibition on stockholder action through written consent; |
31
|
|
|
|
|
a requirement that special meetings of stockholders be called
only by the chairman of the board of directors, the chief
executive officer, the president or by a majority of the total
number of authorized directors; |
|
|
|
advance notice requirements for stockholder proposals and
nominations; |
|
|
|
a requirement of approval of not less than
662/3%
of all outstanding shares of our capital stock entitled to vote
to amend any bylaws by stockholder action, or to amend specific
provisions of our certificate of incorporation; and |
|
|
|
the authority of the board of directors to issue preferred stock
on terms determined by the board of directors without
stockholder approval. |
In addition, we are governed by the provisions of
Section 203 of the Delaware General Corporate Law, which
may prohibit certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. These and
other provisions in our amended and restated certificate of
incorporation, amended and restated bylaws and Delaware law
could make it more difficult for stockholders or potential
acquirers to obtain control of our board of directors or
initiate actions that are opposed by the then-current board of
directors, including to delay or impede a merger, tender offer
or proxy contest involving our company. Any delay or prevention
of a change of control transaction or changes in our board of
directors could cause the market price of our common stock to
decline.
We have never paid dividends on our capital stock, and we do
not anticipate paying any cash dividends in the foreseeable
future.
We have paid no cash dividends on any of our classes of capital
stock to date and we currently intend to retain our future
earnings, if any, to fund the development and growth of our
business. We do not anticipate paying any cash dividends on our
common stock in the foreseeable future. Furthermore, our loan
and security agreement with Silicon Valley Bank and Oxford
Finance Corporation restricts our ability to pay dividends. As a
result, capital appreciation, if any, of our common stock will
be your sole source of gain for the foreseeable future.
We may become involved in securities class action litigation
that could divert managements attention and harm our
business.
The stock markets have from time to time experienced significant
price and volume fluctuations that have affected the market
prices for the common stock of pharmaceutical companies. These
broad market fluctuations may cause the market price of our
common stock to decline. In the past, securities class action
litigation has often been brought against a company following a
decline in the market price of its securities. This risk is
especially relevant for us because biotechnology and
biopharmaceutical companies have experienced significant stock
price volatility in recent years. We may become involved in this
type of litigation in the future. Litigation often is expensive
and diverts managements attention and resources, which
could adversely affect our business.
32
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including
statements regarding the progress and timing of clinical trials,
the safety and efficacy of our product candidates, the goals of
our development activities, estimates of the potential markets
for our product candidates, estimates of the capacity of
manufacturing and other facilities to support our products,
projected cash needs and our expected future revenues,
operations and expenditures. The forward-looking statements are
contained principally in the sections entitled Prospectus
Summary, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Business. These statements
relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors
that could cause our actual results, levels of activity,
performance or achievement to differ materially from those
expressed or implied by these forward-looking statements. These
risks and uncertainties include, among others:
|
|
|
|
|
our ability to successfully complete clinical development of our
only two product candidates, IV APAP and Omigard, on expected
timetables, or at all, which includes enrolling sufficient
patients in our clinical trials and demonstrating the safety and
efficacy of these product candidates in such trials; |
|
|
|
the content and timing of submissions to and decisions made by
the FDA and other regulatory agencies, including foreign
regulatory agencies, demonstrating to the satisfaction of the
FDA and such other agencies the safety and efficacy of our
product candidates; |
|
|
|
intense competition in our markets and the ability of our
competitors, many of whom have greater resources than we do, to
offer different or better therapeutic alternatives than our
product candidates; |
|
|
|
market acceptance of and future development and regulatory
difficulties relating to any product candidates for which we do
receive regulatory approval; |
|
|
|
our ability to develop sales, distribution and marketing
capabilities or enter into agreements with third parties to
sell, distribute and market any of our product candidates that
may be approved for sale; |
|
|
|
our ability to obtain coverage and reimbursement for any of our
product candidates that may be approved for sale from the
government or third-party payors, and the extent of such
coverage and reimbursement, and the willingness of hospitals to
pay for our product candidates versus less expensive therapies; |
|
|
|
our compliance with the agreements under which we license the
rights to our product candidates; |
|
|
|
our reliance on third parties to conduct our clinical trials and
manufacture our product candidates; |
|
|
|
our ability to grow our business by identifying and acquiring or
in-licensing new product candidates, increasing the size of our
organization and attracting and retaining key personnel; |
|
|
|
our and our licensors ability to obtain, maintain and
successfully enforce adequate patent and other intellectual
property protection of our product candidates and the rights
relating thereto; and |
|
|
|
our short operating history, our lack of revenue and
profitability, our significant historical operating losses and
our ability to obtain additional funding to continue to operate
our business, which funding may not be available on commercially
reasonable terms, or at all. |
33
Forward-looking statements include all statements that are not
historical facts. In some cases, you can identify
forward-looking statements by terms such as may,
will, should, could,
would, expect, plan,
anticipate, believe,
estimate, project, predict,
potential, or the negative of those terms, and
similar expressions and comparable terminology intended to
identify forward-looking statements. These statements reflect
our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. These
forward-looking statements represent our estimates and
assumptions only as of the date of this prospectus and, except
as required by law, we undertake no obligation to update or
revise publicly any forward-looking statements, whether as a
result of new information, future events or otherwise after the
date of this prospectus. The forward-looking statements
contained in this prospectus are excluded from the safe harbor
protection provided by the Private Securities Litigation Reform
Act of 1995 and Section 27A of the Securities Act of 1933,
as amended.
34
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately
$65.2 million from the sale of the shares of common stock
offered in this offering, based on an assumed initial public
offering price of $12.00 per share (the mid-point of the
price range set forth on the cover page of this prospectus) and
after deducting the estimated underwriting discounts and
commissions and estimated offering costs payable by us. Each
$1.00 increase or decrease in the assumed initial public
offering price of $12.00 per share would increase or
decrease, the net proceeds to us from this offering by
approximately $5.6 million, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
costs payable by us.
The principal purposes for this offering are to fund clinical
trials and other research and development activities, including
with respect to our two product candidates, to fund our working
capital, to make capital expenditures, for other general
corporate purposes, to create a public market for our common
stock, to increase our ability to access the capital markets in
the future and to provide liquidity for our existing
stockholders.
We currently expect to use our net proceeds from this offering
as follows:
|
|
|
|
|
approximately $58.0 million to fund clinical trials for
IV APAP and Omigard and other research and development
activities; |
|
|
|
approximately $4.0 million to fund capital expenditures,
primarily including equipment associated with the manufacturing
of IV APAP; and |
|
|
|
the remainder to fund working capital and other general
corporate purposes. |
We anticipate that the net proceeds from this offering, together
with our existing cash and cash equivalents, will allow us to
complete the clinical trials necessary to support NDA filings
for IV APAP and Omigard.
We may also use a portion of the net proceeds to in-license,
acquire or invest in complementary businesses or products.
However, we have no current understandings, commitments or
agreements to do so.
The amounts and timing of our actual expenditures will depend on
numerous factors, including the progress in, and costs of, our
clinical trials and other product development programs. We
therefore cannot estimate the amount of net proceeds to be used
for all of the purposes described above. We may find it
necessary or advisable to use the net proceeds for other
purposes, and we will have broad discretion in the application
of the net proceeds. Pending the uses described above, we intend
to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital
stock and we do not currently intend to pay any cash dividends
on our common stock. We expect to retain future earnings, if
any, to fund the development and growth of our business. The
payment of dividends by us on our common stock is limited by our
loan and security agreement with Silicon Valley Bank and Oxford
Finance Corporation. Any future determination to pay dividends
on our common stock will be at the discretion of our board of
directors and will depend upon, among other factors, our results
of operations, financial condition, capital requirements and
contractual restrictions.
35
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2006:
|
|
|
|
|
on an actual basis; and |
|
|
|
|
on a pro forma as adjusted basis to reflect the conversion of
all outstanding shares of our preferred stock into
19,907,605 shares of common stock and our receipt of the
estimated net proceeds from this offering, based on an assumed
initial public offering price of $12.00 per share (the
mid-point of the price range set forth on the cover page of this
prospectus) and after deducting the estimated underwriting
discounts and commissions and estimated offering costs payable
by us. |
|
The pro forma information below is illustrative only and our
capitalization following the completion of this offering will be
adjusted based on the actual initial public offering price and
other terms of this offering determined at pricing. You should
read this table together with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our financial statements and the related
notes appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
as Adjusted(1) | |
|
|
| |
|
| |
|
|
(In thousands, except share | |
|
|
and par value amounts) | |
Cash and cash equivalents
|
|
$ |
42,881 |
|
|
$ |
108,081 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$ |
5,968 |
|
|
$ |
5,968 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value actual and pro forma as
adjusted; actual 80,015,455 shares authorized;
79,630,455 issued and outstanding; pro forma as
adjusted 10,000,000 shares authorized; no
shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Series A-1 convertible preferred stock, actual
8,085,108 shares authorized, issued and outstanding; pro
forma as adjusted no shares authorized; no shares
issued and outstanding
|
|
|
1 |
|
|
|
|
|
|
Series A-2 convertible preferred stock, actual
18,060,347 shares authorized; 17,675,347 issued and
outstanding; pro forma as adjusted no shares
authorized; no shares issued and outstanding
|
|
|
2 |
|
|
|
|
|
|
Series A-3 convertible preferred stock, actual
53,870,000 shares authorized, issued and outstanding; pro
forma as adjusted no shares authorized; no shares
issued and outstanding
|
|
|
5 |
|
|
|
|
|
Common stock, $0.0001 par value; actual
100,000,000 shares authorized; 2,137,935 shares issued
and outstanding; pro forma as adjusted
100,000,000 shares authorized; 28,045,540 shares
issued and outstanding
|
|
|
|
|
|
|
3 |
|
Additional paid-in capital
|
|
|
80,525 |
|
|
|
145,730 |
|
Deficit accumulated during the development stage
|
|
|
(45,983 |
) |
|
|
(45,983 |
) |
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
34,550 |
|
|
|
99,750 |
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
40,518 |
|
|
$ |
105,718 |
|
|
|
|
|
|
|
|
|
|
(1) |
Each $1.00 increase or decrease in the assumed initial public
offering price of $12.00 per share would increase or
decrease, respectively, the amount of cash and cash equivalents,
additional paid-in capital and total capitalization by
approximately $5.6 million, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
costs payable by us. |
36
The number of pro forma as adjusted common shares shown as
issued and outstanding in the table is based on the number of
shares of our common stock outstanding as of June 30, 2006,
and excludes:
|
|
|
|
|
|
1,442,372 shares of common stock issuable upon the exercise
of options outstanding as of June 30, 2006 at a weighted
average exercise price of $1.52 per share; |
|
|
|
|
|
96,250 shares of common stock issuable upon the exercise of
warrants outstanding as of June 30, 2006 at a weighted
average exercise price of $4.00 per share; and |
|
|
|
|
|
2,519,693 shares of our common stock reserved for future
issuance under our 2006 equity incentive award plan, which will
become effective on the day prior to the day on which we become
subject to the reporting requirements of the Exchange Act
(including 419,693 shares of common stock reserved for
future grant or issuance under our 2004 equity incentive award
plan, which shares will be added to the shares to be reserved
under our 2006 equity incentive award plan upon the
effectiveness of the 2006 equity incentive award plan). |
|
37
DILUTION
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the public offering price per share of our common stock and the
pro forma as adjusted net tangible book value per share of our
common stock after this offering. As of June 30, 2006, our
historical net tangible book value was $34.5 million, or
$1.57 per share of common stock. Our historical net
tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities,
divided by the total number of shares of our common stock
outstanding as of June 30, 2006, after giving effect to the
conversion of all outstanding shares of our preferred stock into
19,907,605 shares of our common stock. After giving effect
to our sale in this offering of 6,000,000 shares of our
common stock at an assumed initial public offering price of
$12.00 per share (the mid-point of the price range set
forth on the cover page of this prospectus) and after deducting
estimated underwriting discounts and commissions and estimated
offering costs payable by us, our pro forma as adjusted net
tangible book value as of June 30, 2006 would have been
$99.7 million, or $3.56 per share of our common stock.
This represents an immediate increase of net tangible book value
of $1.99 per share to our existing stockholders and an
immediate dilution of $8.44 per share to investors
purchasing shares in this offering. The following table
illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$ |
12.00 |
|
|
Historical net tangible book value per share as of June 30,
2006
|
|
$ |
1.57 |
|
|
|
|
|
|
Increase per share attributable to investors purchasing shares
in this offering
|
|
|
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share, as adjusted to give
effect to this offering
|
|
|
|
|
|
|
3.56 |
|
|
|
|
|
|
|
|
Dilution to investors purchasing shares in this offering
|
|
|
|
|
|
$ |
8.44 |
|
|
|
|
|
|
|
|
Each $1.00 increase or decrease in the assumed initial public
offering price of $12.00 per share would increase or
decrease our pro forma as adjusted net tangible book value by
approximately $5.6 million, the pro forma as adjusted net
tangible book value per share after this offering by
approximately $0.20 per share and the dilution as adjusted
to investors purchasing shares in this offering by approximately
$0.80 per share, assuming the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same and after deducting the estimated underwriting
discounts and commissions and estimated offering costs payable
by us.
If the underwriters exercise their over-allotment option in
full, the pro forma net tangible book value per share after
giving effect to this offering would be $3.79 per share,
and the dilution in pro forma net tangible book value per share
to investors in this offering would be $8.21 per share.
The following table summarizes, as of June 30, 2006, the
differences between the number of shares of common stock
purchased from us, after giving effect to the conversion of our
preferred stock into common stock, the total effective cash
consideration paid, and the average price per share paid by our
existing stockholders and by our new investors purchasing stock
in this offering at an assumed initial public offering price of
$12.00 per share (the mid-point of the price range set
forth on the cover page of this prospectus) before deducting the
estimated underwriting discounts and commissions and estimated
offering costs payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased | |
|
Total Consideration | |
|
|
|
|
| |
|
| |
|
Average Price | |
|
|
Number | |
|
Percent | |
|
Amount | |
|
Percent | |
|
Per Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Existing stockholders before this offering
|
|
|
22,045,540 |
|
|
|
79 |
% |
|
$ |
79,742,641 |
|
|
|
53 |
% |
|
$ |
3.62 |
|
Investors purchasing shares in this offering
|
|
|
6,000,000 |
|
|
|
21 |
|
|
|
72,000,000 |
|
|
|
47 |
|
|
|
12.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,045,540 |
|
|
|
100.0 |
% |
|
$ |
151,742,641 |
|
|
|
100.0 |
% |
|
$ |
5.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Each $1.00 increase or decrease in the assumed initial public
offering price of $12.00 per share would increase or
decrease total consideration paid by new investors, total
consideration paid by all stockholders and the average price per
share paid by all stockholders by $6.0 million,
$6.0 million and $0.21 per share, respectively, assuming
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting
the estimated underwriting discounts and commissions and
estimated offering costs payable by us.
If the underwriters exercise their over-allotment option in
full, our existing stockholders would own 76% and our new
investors would own 24% of the total number of shares of our
common stock outstanding after this offering.
The above information assumes no exercise of stock options or
warrants outstanding as of June 30, 2006. As of
June 30, 2006, there were:
|
|
|
|
|
|
1,442,372 shares of common stock issuable upon the exercise
of options outstanding as of June 30, 2006 at a weighted
average exercise price of $1.52 per share; |
|
|
|
|
|
96,250 shares of common stock issuable upon the exercise of
warrants outstanding as of June 30, 2006 at a weighted
average exercise price of $4.00 per share; and |
|
|
|
|
|
2,519,693 shares of our common stock reserved for future
issuance under our 2006 equity incentive award plan, which will
become effective on the day prior to the day on which we become
subject to the reporting requirements of the Exchange Act
(including 419,693 shares of common stock reserved for
future grant or issuance under our 2004 equity incentive award
plan, which shares will be added to the shares to be reserved
under our 2006 equity incentive award plan upon the
effectiveness of the 2006 equity incentive award plan). |
|
39
SELECTED FINANCIAL DATA
The following selected statement of operations data for the
period from May 26, 2004 (inception) through
December 31, 2004, the year ended December 31, 2005
and the balance sheet data as of December 31, 2004 and 2005
have been derived from our audited financial statements included
elsewhere in this prospectus. The statement of operations data
for the six-month periods ended June 30, 2005 and 2006, the
period from May 26, 2004 (inception) through
June 30, 2006 and the balance sheet data as of
June 30, 2006 have been derived from our unaudited
financial statements included elsewhere in this prospectus. The
unaudited financial statements have been prepared on a basis
consistent with our audited financial statements and, in the
opinion of management, contain all adjustments, consisting only
of normal recurring adjustments, we consider necessary for the
fair presentation of the financial data. The selected financial
data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and related notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
|
|
|
|
Period from | |
|
|
May 26, 2004 | |
|
|
|
|
|
May 26, 2004 | |
|
|
(Inception) | |
|
|
|
Six Months Ended | |
|
(Inception) | |
|
|
Through | |
|
Year Ended | |
|
June 30, | |
|
Through | |
|
|
December 31, | |
|
December 31, | |
|
| |
|
June 30, | |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ |
1,883 |
|
|
$ |
6,126 |
|
|
$ |
2,402 |
|
|
$ |
33,664 |
|
|
$ |
41,674 |
|
|
Marketing
|
|
|
41 |
|
|
|
240 |
|
|
|
142 |
|
|
|
317 |
|
|
|
598 |
|
|
General and administrative
|
|
|
877 |
|
|
|
1,412 |
|
|
|
540 |
|
|
|
1,968 |
|
|
|
4,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,801 |
|
|
|
7,778 |
|
|
|
3,084 |
|
|
|
35,949 |
|
|
|
46,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,801 |
) |
|
|
(7,778 |
) |
|
|
(3,084 |
) |
|
|
(35,949 |
) |
|
|
(46,529 |
) |
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9 |
|
|
|
255 |
|
|
|
14 |
|
|
|
553 |
|
|
|
818 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
(44 |
) |
|
Impairment of investment securities
|
|
|
(45 |
) |
|
|
(183 |
) |
|
|
(183 |
) |
|
|
|
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
(36 |
) |
|
|
72 |
|
|
|
(169 |
) |
|
|
509 |
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,837 |
) |
|
$ |
(7,706 |
) |
|
$ |
(3,253 |
) |
|
$ |
(35,440 |
) |
|
$ |
(45,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share(1)
|
|
$ |
(3.10 |
) |
|
$ |
(6.67 |
) |
|
$ |
(2.87 |
) |
|
$ |
(28.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss per share(1)
|
|
|
915 |
|
|
|
1,156 |
|
|
|
1,132 |
|
|
|
1,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share(1)
|
|
|
|
|
|
$ |
(1.49 |
) |
|
|
|
|
|
$ |
(2.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute pro forma basic and diluted net loss per
share(1)
|
|
|
|
|
|
|
5,162 |
|
|
|
|
|
|
|
14,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
See Note 1 of Notes to Financial Statements for an
explanation of the method used to compute the historical and pro
forma net loss per share and the number of shares used in the
computation of the per share amounts. |
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of | |
|
|
| |
|
June 30, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and securities available-for-sale
|
|
$ |
4,271 |
|
|
$ |
15,025 |
|
|
$ |
42,881 |
|
Working capital
|
|
|
4,161 |
|
|
|
14,405 |
|
|
|
37,476 |
|
Total assets
|
|
|
4,841 |
|
|
|
15,891 |
|
|
|
46,477 |
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
5,968 |
|
Deficit accumulated during the development stage
|
|
|
(2,837 |
) |
|
|
(10,543 |
) |
|
|
(45,983 |
) |
Total stockholders equity
|
|
|
4,727 |
|
|
|
14,745 |
|
|
|
34,550 |
|
41
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Selected Financial Data and our
financial statements and related notes appearing elsewhere in
this prospectus. In addition to historical information, this
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including but not limited to those set forth under Risk
Factors and elsewhere in this prospectus.
Overview
We are a biopharmaceutical company focused on in-licensing,
developing and commercializing proprietary product candidates
principally for use in the hospital setting. Since our inception
in 2004, we have in-licensed rights to two Phase III
product candidates, both of which have been studied in prior
Phase III clinical trials conducted by our licensors. We
have in-licensed the exclusive U.S. and Canadian rights
to IV APAP, an intravenous formulation of acetaminophen
that is currently marketed in Europe for the treatment of acute
pain and fever by Bristol-Myers Squibb Company, or BMS. We
believe that IV APAP is the only stable,
pharmaceutically-acceptable intravenous formulation of
acetaminophen. We have also in-licensed the exclusive North
American and European rights to omiganan pentahydrochloride 1%
aqueous gel, or Omigard, for the prevention and treatment of
device-related, surgical wound-related and burn-related
infections.
We believe that the hospital setting is a concentrated,
underserved market for pharmaceuticals and anticipate building
our own, hospital-focused sales force as our product candidates
approach potential U.S. Food and Drug Administration, or
FDA, approval. We intend to build a leading franchise in the
hospital setting, continuing to focus on products that are in
late-stages of development, currently commercialized outside the
United States, or approved in the United States but with
significant commercial potential for proprietary new uses or
formulations.
We were incorporated in May 2004. During 2004, we focused on
hiring our management team and initial operating employees and
on in-licensing our first product candidate, Omigard.
Substantial operations did not commence until September 2004.
During 2005, we completed the special protocol assessment, or
SPA, for Omigard, and initiated Phase III clinical trials
for this product candidate. In March 2006, we
in-licensed rights
to IV APAP from BMS. Pending further discussions with the
FDA concerning our Phase III development program
for IV APAP, we plan to initiate the remaining
Phase III clinical trial requirements for this product
candidate in the fourth quarter of 2006.
We are a development stage company. We have incurred significant
net losses since our inception. As of June 30, 2006, we had
an accumulated deficit of $46.0 million. These losses have
resulted principally from costs incurred in connection with
research and development activities, including license fees,
costs of clinical trial activities associated with our current
product candidates and general and administrative expenses. We
expect to continue to incur operating losses for the next
several years as we pursue the clinical development and market
launch of our product candidates and acquire or in-license
additional products, technologies or businesses that are
complementary to our own.
We have not generated any revenues to date, and we do not expect
to generate any revenues from licensing, achievement of
milestones or product sales until we are able to commercialize
our product candidates ourselves or execute a collaboration
arrangement.
42
|
|
|
Research and Development Expenses |
Our research and development expenses consist primarily of
license fees, salaries and related employee benefits, costs
associated with clinical trials managed by our contract research
organizations, or CROs, and costs associated with non-clinical
activities, such as regulatory expenses. Our most significant
costs are for license fees and clinical trials. The clinical
trial expenses include payments to vendors such as CROs,
investigators, clinical suppliers and related consultants. Our
historical research and development expenses relate
predominantly to the in-licensing of IV APAP and Omigard
and clinical trials for Omigard. We charge all research and
development expenses to operations as incurred because the
underlying technology associated with these expenditures relates
to our research and development efforts and has no alternative
future uses.
We use external service providers and vendors to conduct our
clinical trials, to manufacture our product candidates to be
used in clinical trials and to provide various other research
and development related products and services. A substantial
portion of these external costs are tracked on a project basis.
We use our internal research and development resources across
several projects and many resources are not attributable to
specific projects. A substantial portion of our internal costs,
including personnel and facility related costs, are not tracked
on a project basis and are included in the
unallocated category in the table below.
The following summarizes our research and development expenses
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
|
|
|
|
Period from | |
|
|
May 26, 2004 | |
|
|
|
|
|
May 26, 2004 | |
|
|
(Inception) | |
|
|
|
Six Months Ended | |
|
(Inception) | |
|
|
Through | |
|
Year Ended | |
|
June 30, | |
|
Through | |
|
|
December 31, | |
|
December 31, | |
|
| |
|
June 30, | |
Product Candidate |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
IV APAP
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
25,698 |
|
|
$ |
25,698 |
|
Omigard
|
|
|
1,651 |
|
|
|
4,802 |
|
|
|
1,850 |
|
|
|
6,238 |
|
|
|
12,691 |
|
Unallocated
|
|
|
232 |
|
|
|
1,324 |
|
|
|
552 |
|
|
|
1,728 |
|
|
|
3,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,883 |
|
|
$ |
6,126 |
|
|
$ |
2,402 |
|
|
$ |
33,664 |
|
|
$ |
41,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At this time, due to the risks inherent in the clinical trial
process and given the early stage of our product development
programs, we are unable to estimate with any certainty the costs
we will incur in the continued development of our product
candidates for potential commercialization. Clinical development
timelines, the probability of success and development costs vary
widely. While we are currently focused on advancing each of our
product development programs, our future research and
development expenses will depend on the determinations we make
as to the scientific and clinical success of each product
candidate, as well as ongoing assessments as to each product
candidates commercial potential. In addition, we cannot
forecast with any degree of certainty which product candidates
will be subject to future collaborations, when such arrangements
will be secured, if at all, and to what degree such arrangements
would affect our development plans and capital requirements.
We expect our development expenses to be substantial over the
next few years as we continue the advancement of our product
development programs. We initiated our Phase III clinical
trial program for Omigard in August 2005, and we have not yet
commenced our own Phase III clinical trials
for IV APAP. We expect to receive results from the
ongoing Omigard clinical trial in the second half of 2007. In
the fourth quarter of 2006, we expect to initiate the remaining
Phase III clinical trial requirements for IV APAP for
submission to the FDA and expect these Phase III clinical
trial results to be available in the first half of 2008. The
lengthy process of completing clinical trials and seeking
regulatory approval for our product candidates requires the
expenditure of substantial resources. Any failure by us or delay
in completing clinical trials, or in obtaining regulatory
approvals, could cause our research and development expense to
increase and, in turn, have a material adverse effect on our
results of operations.
43
Our marketing expenses consist primarily of market research
studies, salaries, benefits and professional fees related to
building our marketing capabilities. We anticipate increases in
marketing expenses as we add personnel and continue to develop
and prepare for the potential commercialization of our product
candidates.
|
|
|
General and Administrative |
Our general and administrative expenses consist primarily of
salaries, benefits and professional fees related to our
administrative, finance, human resources, legal, business
development and internal systems support functions, as well as
insurance and facility costs. We anticipate increases in general
and administrative expenses as we add personnel, comply with the
reporting obligations applicable to publicly-held companies, and
continue to build our corporate infrastructure in support of our
continued development and preparation for the potential
commercialization of our product candidates.
|
|
|
Interest and Other Income |
Interest and other income consist primarily of interest earned
on our cash, cash equivalents and short-term investments and
other-than-temporary
declines in the market value of
available-for-sale
securities.
As of December 31, 2005, we had both federal and state net
operating loss carryforwards of approximately $8.7 million.
If not utilized, the net operating loss carryforwards will begin
expiring in 2024 for federal purposes and 2014 for state
purposes. As of December 31, 2005, we had both federal and
state research and development tax credit carryforwards of
approximately $0.3 million and $0.1 million,
respectively. The federal tax credits will begin expiring in
2024 unless previously utilized and the state tax credits
carryforward indefinitely. Under Section 382 of the
Internal Revenue Code of 1986, as amended, or the Internal
Revenue Code, substantial changes in our ownership may limit the
amount of net operating loss carryforwards that could be
utilized annually in the future to offset taxable income. Any
such annual limitation may significantly reduce the utilization
of the net operating losses before they expire. In each period
since our inception, we have recorded a valuation allowance for
the full amount of our deferred tax asset, as the realization of
the deferred tax asset is uncertain. As a result, we have not
recorded any federal or state income tax benefit in our
statement of operations.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of our financial
condition and results of operations is based on our financial
statements, which have been prepared in conformity with
generally accepted accounting principles in the United States.
The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, expenses and related disclosures. Actual
results could differ from those estimates.
We believe the following accounting policies to be critical to
the judgments and estimates used in the preparation of our
financial statements.
|
|
|
Research and Development Expenses |
A substantial portion of our on-going research and development
activities are performed under agreements we enter into with
external service providers, including CROs, who conduct many of
our research and development activities. We accrue for costs
incurred under these contracts based on factors such as
estimates of work performed, milestones achieved, patient
enrollment and experience with similar contracts. As actual
costs become known, we adjust our accruals. To date, our
accruals have been within managements estimates, and no
material adjustments to research and development expenses have
been
44
recognized. We expect to expand the level of research and
development activity performed by external service providers in
the future. As a result, we anticipate that our estimated
accruals will be more material to our operations in future
periods. Subsequent changes in estimates may result in a
material change in our accruals, which could also materially
affect our results of operations.
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards, or SFAS, No. 123(R),
Share-Based Payment, which revises
SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles Board, or
APB, Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123(R) requires that
share-based payment transactions with employees be recognized in
the financial statements based on their fair value and
recognized as compensation expense over the vesting period.
Prior to SFAS No. 123(R), we disclosed the pro forma
effects of applying SFAS No. 123 under the minimum
value method. We adopted SFAS No. 123(R) effective
January 1, 2006, prospectively for new equity awards issued
subsequent to December 31, 2005. The adoption of
SFAS No. 123(R) in the first quarter of 2006 did not
result in the recognition of additional stock-based compensation
expense.
Under SFAS No. 123(R), we calculate the fair value of
stock option grants using the Black-Scholes option-pricing
model. The assumptions used in the Black-Scholes model were
6.06-6.08 years for the expected term, 70% for the expected
volatility, 4.36-5.08% for the risk free rate and 0% for
dividend yield for the six months ended June 30, 2006.
Future expense amounts for any particular quarterly or annual
period could be affected by changes in our assumptions.
The weighted average expected option term for 2006 reflects the
application of the simplified method set out in SEC Staff
Accounting Bulletin, or SAB, No. 107 which was issued in
March 2005. The simplified method defines the life as the
average of the contractual term of the options and the weighted
average vesting period for all option tranches.
Estimated volatility for fiscal 2006 also reflects the
application of SAB No. 107 interpretive guidance and,
accordingly, incorporates historical volatility of similar
public entities.
As of June 30, 2006, we had approximately $7.5 million
of unrecognized share-based compensation costs related to
nonvested equity awards. As of June 30, 2006, we had
outstanding vested options to purchase 85,445 shares of our
common stock and unvested options to purchase
1,356,927 shares of our common stock with an intrinsic
value of $1.0 million and $14.1 million, respectively,
based on an estimated initial public offering price of
$12.00 per share.
Prior to January 1, 2006, we applied the
intrinsic-value-based method of accounting prescribed by APB
Opinion No. 25 and related interpretations. Under this
method, if the exercise price of the award equaled or exceeded
the fair value of the underlying stock on the measurement date,
no compensation expense was recognized. The measurement date was
the date on which the final number of shares and exercise price
were known and was generally the grant date for awards to
employees and directors. If the exercise price of the award was
below the fair value of the underlying stock on the measurement
date, then compensation cost was recorded, using the
intrinsic-value method, and was generally recognized in the
statements of operations over the vesting period of the award.
The fair value of our common stock has been established by our
board of directors. We have applied the guidance in the American
Institute of Certified Public Accountants, or AICPA, Audit and
Accounting Practice Aid Series, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation, to determine the fair value of our common
stock for purposes of setting the exercise prices of stock
options granted to employees and others. This guidance
emphasizes the importance of the operational development in
determining the value of the enterprise. As a development stage
enterprise, we are at an early stage of existence, primarily
focused on development with an unproven business model. To date,
we have been funded primarily by venture capitalists with a
history of funding
start-up, high-risk
entities with the potential for high returns in the event the
investments are successful.
45
Prior to the licensing of IV APAP on March 26, 2006,
we valued our common stock at the nominal amount of $0.40 per
share when we were considered to be in a very early stage of
development (stages 1 and 2) as defined in the AICPA
guidance, where the preferences of the preferred stockholders,
in particular the liquidation preferences, are very meaningful.
We utilized an asset-based approach for enterprise value and
allocated such value to preferred and common stock based on the
current value method. The significant estimates used in the
asset-based approach consisted of the valuation of our assets
and liabilities, which we determined were substantially the same
as their fair market values. Since the fair market value of our
net assets, including Omigard development costs incurred, of
$25.2 million was less than the $25.8 million
liquidation value of our preferred stock, no significant value
was assigned to our common stock under the current value method,
which allocates value based on liquidation preferences. We did
not obtain a contemporaneous independent valuation as we were
focused on product development and fund raising and believed our
board of directors, all of whom are related parties, had the
requisite experience at valuing early stage companies.
On June 14, 2006, we commenced the initial public offering
process, and based on the preliminary valuation information
presented by the underwriters for this offering, we reassessed
the value of the common stock used to grant equity awards back
to June 30, 2005. The reassessment of fair value was
completed by management, all of whom are related parties,
without the use of an unrelated valuation specialist. Management
concluded that the stock options granted to employees and
directors in May and June of 2006 were at prices that were below
the reassessed values. The values of the common stock for May
and June of 2006 were initially determined by our board of
directors. In the reassessment process, our management concluded
that the original valuations did not give enough consideration
to the impact of an initial public offering on the value of the
common stock and we revised the estimate of fair value as
discussed below. The reassessed fair values may not be
reflective of fair market value that would result from the
application of other valuation methods, including accepted
valuation methods for tax purposes.
On March 26, 2006, we completed the licensing of IV APAP
and simultaneously completed the sale of our
Series A-3
preferred stock of $53.9 million, which was used to acquire
the rights to IV APAP and we expect to be used to fund the
clinical trials for IV APAP. We believe that the
in-license of rights to
IV APAP was a significant milestone which resulted in an
increase in value since it provided us with a second drug
candidate and demonstrated that we could execute on our
strategic initiative to have multiple products in clinical
trials with the potential for significant future revenues. No
other corporate milestones have occurred in 2006 that would
result in material changes to our enterprise value. Prior to
licensing IV APAP, we did not believe we could enter the public
equity markets.
As of March 31, 2006, our board of directors, all of whom
are related parties, performed a contemporaneous valuation,
which initially resulted in an increase of our common stock
valuation to $1.36 per share from $0.40 per share. The valuation
utilized a market-based approach for enterprise value and
allocated such value to preferred and common stock based on an
option pricing model. This approach is consistent with the AICPA
guidance based on our stage of development following our
in-licensing of rights to IV APAP. The determination of
enterprise value was based on our
Series A-3
preferred stock financing, in which greater than 50% of the
investors consisted of new investors to our company. On
May 9, 2006, we granted 1,124,057 stock options at $1.36
per share; however, in connection with our reassessment process,
we concluded that with the proximity to the initiation of this
offering on June 14, 2006, the value of the options should
give more consideration to the expected valuation in this
offering. Accordingly, we concluded that the revised fair value
of the common stock should be the estimated low end of the price
range for this offering of $11.00 per share, less a discount for
marketability of 40%, which reflects an estimate of the risk of
not completing this offering, or $6.60 per share.
On June 12, 2006, we granted 259,500 stock options at $3.20
per share based on a contemporaneous valuation performed by our
board of directors. The valuation utilized a market-based
approach for enterprise value and allocated such value to
preferred and common stock based on an option pricing model. The
determination of the enterprise value was based on equal
weighting of
Series A-3
preferred stock financing values and valuation ranges provided
by the underwriters for this offering, less a marketability
discount of 40% determined based on a put option analysis and
published data regarding
46
marketability discounts in initial public offerings. However, in
connection with our reassessment process and the proximity to
the initiation of this offering, management concluded that the
value of the options should give more consideration to the
expected valuation in this offering. The valuation ranges
initially provided by our underwriters are consistent with the
current estimates of value contemplated in this offering.
Accordingly, the revised fair value of the common stock was
estimated to be the low end of the price range for this offering
of $11.00 per share, less a discount for marketability of
30%, which reflects an estimate of the risk of not completing
this offering, or $7.70 per share.
Since we utilized an asset-based approach in our very early
stage of development and moved to a market-based approach upon
the in-licensing of IV APAP, the probability of successful
development of our product candidates was not a specific
variable used in our valuation approaches. However, this
probability was considered in the price paid for our Series A-3
preferred stock and the valuation ranges provided by the
underwriters, which are specific factors included in our
valuation approaches.
Equity instruments issued to non-employees are recorded at their
fair value as determined in accordance with
SFAS No. 123(R) and Emerging Issues Task Force 96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods and Services, and are periodically revalued as the
equity instruments vest and are recognized as expense over the
related service period.
Results of Operations
|
|
|
Comparison of six months ended June 30, 2006 and
2005 |
Research and Development Expenses. Research and
development expenses increased to $33.7 million for the six
months ended June 30, 2006 from $2.4 million for the
comparable period during 2005. This increase of
$31.3 million primarily was due to:
|
|
|
|
|
an increase of $25.7 million in our IV APAP program
primarily as a result of a $25.0 million license fee which
was immediately expensed as in-process research and development; |
|
|
|
an increase of $4.4 million in our Omigard program as a
result of clinical trial and related costs for a Phase III
clinical trial initiated in August 2005; and |
|
|
|
|
an increase of $1.2 million in unallocated expenses as a
result of increased salaries and related personnel costs from
increased research and development staff to support our clinical
and regulatory efforts related to both Omigard and IV APAP. |
|
Marketing Expenses. Marketing expenses increased to
$0.3 million for the six months ended June 30, 2006
from $0.1 million for the comparable period during 2005.
This increase of $0.2 million primarily was due to higher
market research and branding and personnel costs in 2006.
General and Administrative Expenses. General and
administrative expenses increased to $2.0 million for the
six months ended June 30, 2006 from $0.5 million for
the comparable period during 2005. This increase of
$1.5 million primarily was due to
stock-based
compensation charges, legal fees related to the IV APAP license
agreement and our new facility lease, other professional fees
and consulting fees.
Interest Income. Interest income increased to $553,000
for the six months ended June 30, 2006 from $14,000 for the
comparable period during 2005. This increase of $539,000
primarily was due to the increase in average cash and investment
balances as a result of preferred stock sales and higher
interest rates in 2006.
Interest Expense. Interest expense increased to $44,000
for the six months ended June 30, 2006 from zero for the
comparable period during 2005. This increase of $44,000 was
primarily due to non-cash interest expense related to the
warrants issued to Silicon Valley Bank and Oxford Finance
Corporation in connection with their February 2006 commitment to
lend us $7.0 million.
47
Impairment of Investment Securities. Impairment of
investment securities was zero for the six months ended
June 30, 2006 compared to $183,000 for the comparable
period in 2005. The 2005 impairment charges were due to declines
in the market value of our Migenix holdings that were determined
to be other-than-temporary.
|
|
|
Comparison of year ended December 31, 2005 to the
period from May 26, 2004 (inception) through
December 31, 2004 |
Research and Development Expenses. Research and
development expenses increased to $6.1 million for the year
ended December 31, 2005 from $1.9 million for the
period from May 26, 2004 (inception) through
December 31, 2004. This increase of $4.2 million
primarily was due to:
|
|
|
|
|
|
an increase of $3.1 million in our Omigard program as a
result of clinical trial and related costs offset by a decrease
in license fees; and |
|
|
|
|
an increase of $1.1 million in unallocated expenses as a
result of increased salaries and related personnel costs from
increased research and development staff to support our initial
clinical and regulatory efforts. |
Marketing Expenses. Marketing expenses increased to
$240,000 for the year ended December 31, 2005 from $41,000
for the period from May 26, 2004 (inception) through
December 31, 2004. This increase of $199,000 primarily was
due to market research, branding and personnel costs in 2005.
General and Administrative Expenses. General and
administrative expenses increased to $1.4 million for the
year ended December 31, 2005 from $0.9 million for the
period from May 26, 2004 (inception) through
December 31, 2004. This increase of $0.5 million
primarily was due to salaries and related costs as we expanded
our general and administrative functions to support our
operations, as well as legal fees, other professional fees and
consulting fees.
Interest Income. Interest income increased to $256,000
for the year ended December 31, 2005 from $9,000 for the
period from May 26, 2004 (inception) through
December 31, 2004. This increase of $247,000 primarily was
due to the increase in average cash and investment balances and
interest rates in 2005.
Impairment of Investment Securities. Impairment of
investment securities increased to $183,000 for the year ended
December 31, 2005 from $45,000 for the period from
May 26, 2004 (inception) through December 31, 2004.
This increase of $138,000 was due to declines in the market
value of our Migenix holdings that were determined to be
other-than-temporary.
Liquidity and Capital Resources
Since inception, our operations have been financed primarily
through the private placement of equity securities. Through
June 30, 2006, we received net proceeds of approximately
$79.5 million from the sale of shares of our preferred and
common stock as follows:
|
|
|
|
|
|
from July 2004 to June 2006, we issued and sold a total of
2,137,935 shares of common stock for aggregate net proceeds
of $0.6 million; |
|
|
|
|
from July 2004 to August 2004, we issued and sold a total of
8,085,108 shares of Series A-1 preferred stock for
aggregate net proceeds of $7.5 million; |
|
|
|
from June 2005 to September 2005, we issued and sold
17,675,347 shares of Series A-2 preferred stock for
aggregate net proceeds of $17.6 million; and |
|
|
|
in March 2006, we issued and sold a total of
53,870,000 shares of Series A-3 preferred stock for
aggregate net proceeds of $53.8 million. |
In February 2006, we entered into a $7.0 million loan and
security agreement with Silicon Valley Bank and Oxford Finance
Corporation to provide us with growth capital. We drew down
$7.0 million in
48
June 2006 and have no further credit available under this
agreement. We are required to make interest only payments on the
loan balance for the first six months of the loan, and beginning
February 2007, we are required to make the first of 30 equal
monthly principal and interest payments. Interest accrues on all
outstanding amounts at the fixed rate of 11.47%. The loan is
collateralized by substantially all of our assets other than
intellectual property. We are subject to prepayment penalties.
Under the terms of the agreement, we are precluded from entering
into certain financing and other transactions, including
disposing of certain assets and paying dividends, and are
subject to various non-financial covenants.
In conjunction with the loan and security agreement, we issued
warrants to the lenders to purchase 385,000 shares of
Series A-2 preferred stock at an exercise price of
$1.00 per share.
As of June 30, 2006, we had $42.9 million in cash and
cash equivalents. We have invested a substantial portion of our
available cash funds in money market funds placed with reputable
financial institutions for which credit loss is not anticipated.
We have established guidelines relating to diversification and
maturities of our investments to preserve principal and maintain
liquidity.
Our operating activities used net cash in the amount of
$31.1 million in the six months ended June 30, 2006,
$6.9 million for the year ended December 31, 2005 and
$2.7 million for the period from May 26, 2004
(inception) through December 31, 2004. The increase in
net cash used in operating activities from 2004 to 2005
primarily was due to an increase in our net loss as a result of
increased expenses related to the clinical development of
Omigard and increased salaries and overhead of company
personnel. The increase in net cash used in operating activities
from 2005 to 2006 primarily was due to an increase in our net
loss as a result of increased expenses related to the license
fee paid for IV APAP. We cannot be certain if, when or to
what extent we will receive cash inflows from the
commercialization of our product candidates. We expect our
development expenses to be substantial and to increase over the
next few years as we continue the advancement of our product
development programs.
As a biopharmaceutical company focused on in-licensing,
developing and commercializing proprietary pharmaceutical
product candidates, we have entered into license agreements to
acquire the rights to develop and commercialize our two product
candidates, IV APAP and Omigard. Pursuant to these agreements,
we obtained exclusive licenses to the patent rights and know-how
for selected indications and territories. Under the IV APAP
agreement, we paid to BMS a $25.0 million up-front fee and
may be required to make future milestone payments totaling up to
$50.0 million upon the achievement of various milestones
related to regulatory or commercial events. Under the Omigard
agreement, we paid to Migenix Inc. an aggregate of
$2.0 million in the form of an up-front fee, including the
purchase of 617,284 shares of Migenix common stock, and may
be required to make future milestone payments totaling up to
$27.0 million upon the achievement of various milestones
related to regulatory or commercial events. Under both
agreements, we are also obligated to pay royalties on any net
sales of the licensed products.
Our future capital uses and requirements depend on numerous
forward-looking factors. These factors include but are not
limited to the following:
|
|
|
|
|
the progress of our clinical trials, including expenses to
support the trials and milestone payments that may become
payable to BMS or Migenix; |
|
|
|
our ability to establish and maintain strategic collaborations,
including licensing and other arrangements; |
|
|
|
the costs involved in enforcing or defending patent claims or
other intellectual property rights; |
|
|
|
the costs and timing of regulatory approvals; |
|
|
|
the costs of establishing sales or distribution capabilities; |
|
|
|
the success of the commercialization of our products; and |
|
|
|
the extent to which we in-license, acquire or invest in other
indications, products, technologies and businesses. |
49
We believe that our existing cash and cash equivalents will be
sufficient to meet our projected operating requirements through
at least June 30, 2007.
Until we can generate significant cash from our operations, we
expect to continue to fund our operations with existing cash
resources generated from the proceeds of offerings of our equity
securities and our existing borrowings under our loan and
security agreement. In addition, we may finance future cash
needs through the sale of additional equity securities,
strategic collaboration agreements and debt financing. However,
we have drawn down all available amounts under our existing loan
and security agreement, and we may not be successful in
obtaining strategic collaboration agreements or in receiving
milestone or royalty payments under those strategic
collaboration agreements. In addition, we cannot be sure that
our existing cash and investment resources will be adequate,
that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to
us or our stockholders. Having insufficient funds may require us
to delay, scale-back or eliminate some or all of our development
programs, relinquish some or even all rights to product
candidates at an earlier stage of development or renegotiate
less favorable terms than we would otherwise choose. Failure to
obtain adequate financing also may adversely affect our ability
to operate as a going concern. If we raise additional funds by
issuing equity securities, substantial dilution to existing
stockholders would likely result. If we raise additional funds
by incurring additional debt financing, the terms of the debt
may involve significant cash payment obligations as well as
covenants and specific financial ratios that may restrict our
ability to operate our business.
Contractual Obligations and Commitments
The following table describes our long-term contractual
obligations and commitments as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than | |
|
|
|
|
Total | |
|
1 Year | |
|
1 - 3 Years |
|
4-5 Years |
|
After 5 Years |
|
|
| |
|
| |
|
|
|
|
|
|
|
|
(In thousands) |
Long-term debt obligations(1)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating lease obligations(2)
|
|
|
147 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
License obligations(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
147 |
|
|
$ |
147 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Long-term debt obligations do not include $7.0 million of
indebtedness incurred in June 2006 under our loan and security
agreement with Silicon Valley Bank and Oxford Finance
Corporation. |
|
(2) |
In May 2006, we entered into a six-year operating lease for
23,494 square feet of office space. Operating lease
obligations do not include $6.7 million of non-cancelable
operating lease payments related to this lease. Future minimum
payments under the operating lease total $0.2 million,
$1.0 million, $1.1 million, $1.1 million,
$1.2 million, $1.2 million and $0.9 million for
the years ending December 31, 2006, 2007, 2008, 2009, 2010,
2011 and 2012, respectively. |
|
(3) |
License obligations do not include additional payments of up to
$77.0 million due upon the occurrence of certain milestones
related to regulatory or commercial events. We may also be
required to pay royalties on any net sales of the licensed
products. License payments may be increased based on the timing
of various milestones and the extent to which the licensed
technologies are pursued for other indications. These milestone
payments and royalty payments under our license agreements are
not included in the table above because we cannot, at this time,
determine when or if the related milestones will be achieved or
the events triggering the commencement of payment obligations
will occur. |
We also enter into agreements with third parties to manufacture
our product candidates, conduct our clinical trials and perform
data collection and analysis. Our payment obligations under these
50
agreements depend upon the progress of our development programs.
Therefore, we are unable at this time to estimate with certainty
the future costs we will incur under these agreements.
Related Party Transactions
For a description of our related party transactions, see the
Certain Relationships and Related Party Transactions
section of this prospectus.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities.
Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents as of June 30, 2006 consisted
primarily of cash and money market funds. Our primary exposure
to market risk is interest income sensitivity, which is affected
by changes in the general level of U.S. interest rates,
particularly because the majority of our investments are in
short-term marketable securities. The primary objective of our
investment activities is to preserve principal while at the same
time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities
that we invest in may be subject to market risk. This means that
a change in prevailing interest rates may cause the value of the
investment to fluctuate. For example, if we purchase a security
that was issued with a fixed interest rate and the prevailing
interest rate later rises, the value of our investment will
probably decline. To minimize this risk, we intend to continue
to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities including commercial
paper, money market funds and government and non-government debt
securities, all with various maturities. In general, money
market funds are not subject to market risk because the interest
paid on such funds fluctuates with the prevailing interest rate.
51
BUSINESS
Overview
We are a biopharmaceutical company focused on in-licensing,
developing and commercializing proprietary product candidates
principally for use in the hospital setting. Since our inception
in 2004, we have in-licensed rights to two Phase III
product candidates. We have in-licensed the exclusive U.S. and
Canadian rights to IV APAP, an intravenous formulation of
acetaminophen that has previously been studied in six completed
Phase III trials and is currently marketed in Europe for
the treatment of acute pain and fever by Bristol-Myers Squibb
Company, or BMS. We believe that IV APAP is the only
stable, pharmaceutically-acceptable intravenous formulation of
acetaminophen. We intend to initiate Phase III development
for the treatment of acute pain in the fourth quarter of 2006
and Phase III development for the treatment of fever in the
first half of 2007. We also in-licensed the exclusive North
American and European rights to omiganan pentahydrochloride 1%
aqueous gel, or Omigard, for the prevention and treatment of
device-related, surgical wound-related and burn-related
infections. We are currently conducting a Phase III trial
of Omigard for the prevention of local catheter site infections,
or LCSI, to confirm the results observed for the prevention of
LCSI, a secondary endpoint, in a large, completed Phase III
trial. We believe that the hospital setting is a concentrated,
underserved market for pharmaceuticals and anticipate building
our own, hospital-focused sales force as our products approach
potential U.S. Food and Drug Administration, or FDA,
approval. We intend to build a leading franchise in the hospital
setting, continuing to focus on products that are in late-stages
of development, currently commercialized outside the United
States or approved in the United States but with significant
commercial potential for proprietary new uses or formulations.
Our current portfolio consists of the following product
candidates:
|
|
|
|
|
IV APAP for the treatment of acute pain and fever. We are
developing IV APAP in the U.S. market for the
treatment of acute pain and fever. According to IMS Health,
Inc., or IMS, an independent marketing research firm, over
251 million units of injectable analgesics, typically used
to treat pain, were sold in the United States in 2005. Opioids
such as morphine, meperdine, hydromorphone and fentanyl
represent the majority of unit volume in the market but are
associated with a variety of unwanted side effects including
sedation, nausea, vomiting, constipation, cognitive impairment
and respiratory depression. Ketorolac, a non-steroidal
anti-inflammatory drug, or NSAID, is the only
non-opioid injectable
analgesic available for the treatment of acute pain in the
United States. However, ketorolac carries strong warnings from
the FDA for various side effects, including an increased risk of
bleeding a particularly troubling side-effect in the
surgical setting. |
|
|
|
In March 2006, we in-licensed the patents and the exclusive
development and commercialization rights to IV APAP in the
United States and Canada from BMS. IV APAP has been marketed
outside the United States for approximately four years. Since
its introduction in Europe in mid-2002, over 100 million
doses of IV APAP have been administered to patients, and it
has become the market share leader among injectable analgesics
with 2005 sales of more than $140 million according to IMS.
With approval in over 40 countries, the addition of IV APAP
to our product pipeline is consistent with our strategy to
in-license and develop pharmaceutical candidates with
well-understood risk profiles. In the fourth quarter of 2006, we
expect to initiate the remaining Phase III clinical trial
requirements. We expect these Phase III clinical trial
results to be available in the first half of 2008 and, if
positive, to subsequently submit a new drug application, or NDA,
in the second half of 2008. |
|
|
|
|
|
Omigard for the prevention of intravascular catheter-related
infections. We are developing Omigard for the prevention of
intravascular catheter-related infections in the United States
and Europe. According to the February 2004 Catheter: Global
Markets & Technologies report from Theta Reports,
eight million central venous catheters, or CVCs, were sold in
the United States in 2003, and unit sales are projected to grow
to 11 million by 2007. Although |
52
|
|
|
|
|
CVCs have become an important part of medical care, they can
give rise to dangerous and costly complications, including:
LCSIs, which are infections at the catheter insertion site;
catheter colonization, which is the growth of microorganisms on
the portion of the catheter below the skin surface; and
catheter-related bloodstream infections, or CRBSIs, which are
infections in the bloodstream caused by microorganisms
associated with the catheter. The Centers for Disease Control
and Prevention, or the CDC, estimates that there are 250,000
CRBSIs each year in the United States. The attributable
mortality rate of CRBSIs is approximately 12% to 25% with an
average marginal cost to the healthcare system of
$25,000 per infection. Currently, topical antiseptics are
the primary agent used to cleanse the skin surface around the
catheter insertion site prior to insertion. However, the utility
of these antiseptics is limited, principally due to the
relatively short duration of antimicrobial activity. |
|
|
|
Omigard is a topical antimicrobial that has been demonstrated to
be rapidly bactericidal and fungicidal with prolonged duration
of activity against all microorganisms commonly found on the
skin surface including multi-drug resistant microorganisms such
as methicillin-resistant staphylococcus aureus, or MRSA.
Importantly, resistance to Omigard has not been induced in the
laboratory after extensive study nor has Omigard demonstrated
potential to induce cross-resistance to other antimicrobial
therapeutics. In July 2004, we in-licensed the patents and the
exclusive development and commercialization rights to Omigard in
North America and Europe for the prevention of device-related,
surgical wound-related and burn-related infections. |
|
|
Omigard has previously been studied in a large, completed
Phase III trial that demonstrated statistically significant
outcomes for the prevention of LCSIs and catheter colonization.
The presence of an LCSI may result in replacement of the
catheter and/or administration of antibiotics, both of which
create additional costs to hospitals and have the potential for
adverse safety outcomes. In addition, catheter colonization is
well correlated with CRBSIs, according to a published review of
clinical trials. In August 2005, we initiated a confirmatory
Phase III clinical trial with a primary endpoint, the
prevention of LCSIs. We reached agreement with the FDA on the
trial design, endpoints and statistical analysis plan received
through the special protocol assessment, or SPA, process. We
expect these Phase III results to be available in the
second half of 2007 and to subsequently submit an NDA for
Omigard in the first half of 2008. |
|
|
|
|
|
Other product candidates. We are also exploring the
opportunity to develop new formulations of omiganan
pentahydrochloride for the prevention and treatment of other
device-related, surgical wound-related and burn-related
infections. We are currently preparing preclinical experiments
in animal models prior to initiating human clinical trials. |
Our Strategy
Our goal is to be a leading biopharmaceutical company focused on
the development and commercialization of proprietary
pharmaceuticals principally for use in the hospital setting. Our
near-term strategy is to focus on completing the development of
and commercializing our existing product candidates. Our
long-term strategy is to in-license, acquire, develop and
commercialize additional product candidates that are in
late-stages of development, currently commercialized outside the
United States or approved in the United States but with
significant commercial potential for proprietary new uses or
formulations. Specifically, we intend to:
|
|
|
|
|
Obtain regulatory approval for our Phase III hospital
product candidates, IV APAP and Omigard. We are applying the
expertise of our development teams to conduct and successfully
complete the Phase III clinical trials associated with each
product candidate. We have designed our Phase III clinical
programs in an effort to reduce clinical development risk,
facilitate regulatory approval and optimize marketing claims. To
that end, |
53
|
|
|
|
|
we plan to resume a U.S. Phase III program later this
year for IV APAP previously initiated by BMS, and we expect
to submit an NDA in the second half of 2008 based on the
previously completed trials and any further trials that may be
required by the FDA. In addition, we have reached a written
agreement with the FDA through the SPA process for a single
confirmatory Phase III study of Omigard for the prevention
of LCSIs. |
|
|
|
Build a highly leverageable sales organization targeting
hospitals. We intend to build a commercial organization
focused on promoting our products principally to hospitals in
the United States. We believe that both IV APAP and Omigard
can be effectively promoted by our own sales force targeting key
hospitals in the United States. Importantly, the number of
institutions comprising the hospital marketplace is relatively
limited and we believe a small number of these institutions
account for a substantial portion of the prescribing activity.
The concentrated nature of this market creates the opportunity
for significant marketing synergies as we intend to leverage our
sales force across multiple therapeutic categories in the
hospital. Outside the United States, we intend to establish
strategic partnerships for the commercialization of our products
where we have commercialization rights. |
|
|
|
Expand our product portfolio through acquiring or
in-licensing additional late-stage, hospital-focused products
with well-understood risk profiles. We will seek additional
opportunities to acquire or in-license products to more fully
exploit our clinical, regulatory, manufacturing, sales and
marketing capabilities. We believe that our focus on the
hospital market enables us to evaluate a broader range of
products across multiple therapeutic areas for possible
acquisition. In addition, competition from large pharmaceutical
companies has generally diminished in the hospital marketplace
as greater emphasis has shifted toward larger opportunities in
the primary care setting. To reduce the
time-to- market and the
risks and costs of clinical development, we focus on products
that are in late-stages of development, currently commercialized
outside the United States or approved in the United States but
with significant commercial potential for proprietary new uses
or formulations. |
|
|
|
Pursue additional indications and commercial opportunities
for our product candidates. We will seek to maximize the
value of IV APAP, Omigard and any other product candidates
we may in-license, acquire or develop by pursuing other
indications and commercial opportunities for such candidates.
For example, we have rights to develop and commercialize
omiganan pentahydrochloride for additional indications related
to the prevention and treatment of device-related, surgical
wound-related and burn-related infections. |
The Hospital Market
Large, multinational pharmaceutical companies have generally
decreased marketing efforts focused on hospital-use drugs,
instead focusing on drugs that can be marketed in the larger
outpatient setting. We believe this reduced emphasis on the
hospital marketplace presents us with an excellent opportunity
to in-license, acquire, develop and commercialize products that
address unmet medical needs in the hospital setting. We believe
the concentrated nature of the hospital marketplace will allow
for our expansion into other therapeutic areas without
substantial investment in additional commercial infrastructure.
According to IMS, approximately $28 billion was spent on
promotional activities by the pharmaceutical industry in 2004.
Of this amount, IMS estimates that only $1 billion was
directed towards hospital-based physicians and directors of
pharmacies. This hospital-focused spending represents
approximately 3% of total promotional expenditures and has
declined from approximately 6% of total spending in 1996. The
significant imbalance towards the outpatient market is
highlighted by spending on
direct-to-consumer
campaigns and drug sampling which now make up close to 80% of
promotional spending for pharmaceuticals.
Despite these declining promotional expenditures,
U.S. hospitals and clinics accounted for approximately
$54 billion or 21% of U.S. pharmaceutical sales in
2005, according to IMS. Furthermore, we believe pharmaceutical
sales to acute care hospitals are highly concentrated among a
relatively small
54
number of large institutions. For example, according to Wolters
Kluwer Health, an independent marketing research firm, only
2,000 of the approximately 5,000 acute care hospitals in the
United States represent more than 80% of injectable analgesic
sales. The concentration of high-prescribing institutions
enables effective promotion of pharmaceuticals utilizing a
relatively small, dedicated sales and marketing organization. We
believe the relative lack of promotional efforts directed toward
the highly concentrated hospital marketplace makes it an
underserved and compelling opportunity, especially for a
biopharmaceutical company commercializing its products directly
through its own dedicated sales force.
We believe a typical sales representative focused on
office-based physicians can generally promote only two to three
products effectively; whereas, a typical hospital-focused sales
representative can effectively promote five to six products.
Furthermore, we believe a typical sales representative focused
on office-based physicians can effectively reach five to seven
physicians per day; whereas, a typical hospital-focused sales
representative can reach many more physicians, nurses and
pharmacy directors within a given institution. Notably, a
hospital-focused sales representative also faces significantly
less travel time between sales calls and less wait time in
physician offices as a large number of prescribers can be found
in a single location. Furthermore, drug sampling generally does
not occur in hospitals, which represents a significant cost
advantage versus marketing to office-based physicians. A single
sales representative can promote products from multiple
therapeutic categories to multiple prescribers within the
institution.
In addition to hospitals, we intend to promote our products to
certain ambulatory care centers, including ambulatory surgery
centers and dialysis clinics, which tend to be located in close
proximity to a hospital and can be targeted with our hospital
sales force. According to Verispan, there are approximately
5,000 outpatient surgery centers in the United States. We
estimate that fewer than 500 of these surgery centers represent
the high opportunity segment for our products. According to the
U.S. General Accounting Office, there are approximately
4,000 dialysis clinics in the United States, of which we believe
most are either co-located with a hospital or located in close
proximity to a hospital.
In recent years there has also been significant activity by both
government agencies and accrediting organizations to hold
hospitals accountable for improving patient outcomes across a
wide variety of areas, including infection control, pain
management, cardiovascular care and others. For example,
according to the Association for Professionals in Infection
Control and Epidemiology, there are now 13 U.S. states that
require hospitals to publicly report their infections rates and
there are more than 20 other states that have had legislative
activity related to public reporting of infection rates in 2006.
These types of initiatives support our view that significant
unmet medical needs remain in hospitals today.
55
Our Product Development Programs
Our current product development programs are focused on
late-stage development products principally for use in the
hospital setting. Our portfolio consists of the following
product candidates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development | |
|
|
|
|
|
|
|
|
Stage in the | |
|
Development | |
|
Cadence | |
Product Candidate |
|
Indication | |
|
United States | |
|
Stage in Europe | |
|
Commercial Rights | |
|
|
| |
|
| |
|
| |
|
| |
IV APAP(1)
|
|
Treatment of acute pain adults |
|
|
Phase III |
|
|
|
Marketed (by BMS) |
|
|
|
United States, Canada |
|
|
|
Treatment of acute pain pediatrics |
|
|
Phase III |
|
|
|
Marketed (by BMS) |
|
|
|
United States, Canada |
|
|
|
Treatment of fever adults |
|
|
Phase III |
|
|
|
Marketed (by BMS) |
|
|
|
United States, Canada |
|
|
|
Treatment of fever pediatrics |
|
|
Phase III |
|
|
|
Marketed (by BMS) |
|
|
|
United States, Canada |
|
|
Omigard
|
|
Prevention of local catheter site infections |
|
|
Phase III |
|
|
|
Phase III |
|
|
|
North America, Europe |
|
|
|
|
|
(1) |
In March 2006, we in-licensed the patents and the exclusive
development and commercialization rights to IV APAP in the
United States and Canada from BMS. BMS has completed
Phase III trials with respect to the above indications,
excluding the treatment of fever in adults, for IV APAP in
Europe and the United States, which we intend to use in our NDA
filing following agreement with the FDA on additional clinical
trials needed in the United States for approval. Because the
Phase III clinical trial requirements differ in the United
States compared to Europe, we are required to complete
additional Phase III trials, particularly to demonstrate
safety and efficacy from multiple day dosing in additional
patient populations, including patients undergoing soft tissue
surgery, such as abdominal hysterectomy, and patients with
fever. In the fourth quarter of 2006, we expect to initiate the
remaining Phase III clinical trial requirements for
submission in the United States. We expect these Phase III
clinical trial results to be available in the first half of 2008
and, if positive, to submit an NDA in the second half of 2008. |
|
|
|
IV APAP for the Treatment of Acute Pain and Fever |
Acute pain is generally defined as pain with relatively short
duration and recent onset with an easily identifiable cause. It
serves to warn the patient of tissue damage and is often sharp
initially and followed by aching pain. In the hospital setting,
acute pain is generally classified as post-operative or
non-operative.
Post-operative pain is a response to tissue damage during
surgery that stimulates peripheral nerves, which signal the
brain to produce a sensory and emotional response.
Post-operative pain may occur not only at the surgical site but
also in areas not directly affected by the surgical procedure.
The pain may be experienced by an inpatient or outpatient and
can be felt after surgical procedures.
Numerous studies reveal that the incidence and severity of
post-operative pain is primarily determined by the type of
surgery, duration of surgery and the treatment choice following
surgery. Post-operative pain is usually greatest with abdominal,
head-neck, orthopedic and thoracic surgery and may last up to
eight days after the surgical procedure. In comparison, surgical
procedures such as arthroscopy, breast biopsy, hernia repair and
plastic surgery tend to be less invasive and generally produce
minor surgical trauma.
56
Despite major improvements in surgical techniques and the
introduction of novel drugs, the overall treatment of
post-operative pain has not substantially improved over the last
20 years. According to the industry research group
Datamonitor, up to 75% of patients report inadequate pain
relief. Such inadequate pain relief often leads to nausea,
vomiting, decreased mobilization and reduced nutritional
intake all of which impede patient
recovery and can lead to infections and blood clots
in the legs and lungs all of which jeopardize
patient safety. All of these factors have a major impact on
patient care and hospital economic outcomes, including prolonged
hospital stays.
Non-operative pain in the hospital is typically associated with
diseases, disorders, trauma and other conditions. The most
common non-operative pain types among hospitalized patients
include pain associated with cancer, trauma, burns, gallstones
and cardiovascular events. Other incidences of non-operative
pain among hospitalized patients are often related to HIV,
pancreatitis, sickle cell disease and other diseases. Inadequate
pain management in these patients also leads to poor health and
economic outcomes.
|
|
|
Market for Injectable Analgesics |
Drugs used to treat pain are collectively known as analgesics.
Injectable formulations of analgesics are typically used when
patients are unable to take medications by mouth, faster onset
of analgesia is required, or it is otherwise more convenient to
administer drugs in injectable form. Hospitalized patients may
be unable to take medications by mouth for a variety of reasons
including post-anesthesia sedation, other forms of sedation,
nausea, vomiting, gastrointestinal limitations or other
conditions.
According to IMS, the U.S. market for injectable analgesics
exceeded 251 million vials in 2005. Morphine is the current
market leader and accounted for more than 135 million vials
in 2005. Other injectable opioids such as meperidine,
hydromorphone and fentanyl, which are all available in generic
forms, accounted for more than 80 million vials in 2005.
Ketorolac (Toradol), a genericized NSAID, is the only
non-opioid injectable
analgesic for acute pain available in the United States.
According to IMS, injectable ketorolac sold more than
33 million vials in 2005.
According to Datamonitor, up to 53 million patients undergo
surgical procedures each year in the United States. Datamonitor
projects the number of surgical procedures to increase as the
elderly population increases and as technological advances allow
new surgical procedures to be performed. As such, we expect that
the need for safe and effective drugs to treat pain in the
post-operative setting will continue to increase.
|
|
|
Limitations of Current Therapies |
Only two classes of injectable analgesics, opioids and NSAIDs,
are currently available in the United States for the treatment
of acute pain.
Opioids have been used as analgesics for over 2,000 years
and continue to be the mainstay of post-operative pain
management. Opioids activate certain receptors in the central
nervous system, which produce analgesia, euphoria and other
positive effects. A range of opioids are available in injectable
form including morphine, fentanyl, meperidine and hydromorphone.
Opioids, however, are associated with a variety of unwanted side
effects including sedation, nausea, vomiting, constipation,
headache, cognitive impairment and respiratory depression.
Respiratory depression can lead to death if not monitored
closely. Side effects from opioids have been demonstrated to
reduce quality of life and side-effect-related dosing
limitations can result in suboptimal pain relief due to
under-dosing. All of these side effects may require additional
medications or treatments and can prolong patient stay in the
post-anesthesia care unit as well as a patients overall
stay in the hospital or in an ambulatory surgical center.
Opioid-related side effects also impose significant economic
burdens on hospitals and ambulatory surgical centers. For
example, nausea and vomiting, common opioid-related side
effects, can cause the need for administration of anti-nausea
medication, increased monitoring by nurses, increased length of
stay
57
in the post-anesthesia care unit and overall length of stay in
the hospital, diverting resources that could otherwise be
utilized in revenue-generating activities. Studies have
demonstrated increased costs related to post-operative opioid
administration from not only increased personnel time and length
of stay but also increased supply and drug costs, including
drugs to manage the nausea and vomiting.
The only non-opioid
injectable analgesic for acute pain available in the United
States is the NSAID ketorolac. NSAIDs act as non-selective
inhibitors of the enzyme cyclooxygenase, inhibiting both the
cyclooxygenase-1, or
COX-1, and cyclooxygenase-2, or COX-2, enzymes. The inhibition
of COX-2 produces an anti-inflammatory effect resulting in
analgesia. Since NSAIDs do not produce respiratory depression or
impair gastrointestinal motility, they are considered to be
useful alternatives to opioids for the relief of acute pain.
Studies have also demonstrated the opioid-sparing potential of
ketorolac when used in combination with opioids, as well as
resulting decreases in hospital costs. Published studies have
shown lower overall per-patient costs ranging from $326 to
$2,031 for the patients treated with ketorolac and opioids
compared to those treated with opioids alone.
Despite these economic advantages, the use of ketorolac is
severely limited in the post-operative period. Non-specific
NSAIDs such as ketorolac block COX-1, which plays a major role
in the release of prostaglandins to regulate platelet
aggregation and protect the lining of the stomach. As a result,
bleeding, gastrointestinal and renal complications are
significant impediments to the post-operative use of ketorolac.
The product carries a black box warning for these side effects.
A black box warning is the strongest type of warning that the
FDA can require for a drug and is generally reserved for warning
prescribers about adverse drug reactions that can cause serious
injury or death. The FDA specifically warns that ketorolac
should not be used in various patient populations that are
at-risk for bleeding, as a prophylactic analgesic prior to major
surgery or for intraoperative administration when stoppage of
bleeding is critical.
The World Health Organization, or WHO, has established a
three-step analgesic ladder for the treatment of pain, which
recommends initial treatment with a non-opioid such as
acetaminophen, aspirin, or NSAIDs followed by the addition of
opioids as pain increases. The WHO analgesic ladder is
consistent with the practice of multimodal analgesia, which
involves the use of more than one class of drug for pain control
to obtain additional analgesia, reduce side effects or both. In
the United States, this recommended practice of multimodal
analgesia is not fully available to physicians given the current
lack of an intravenous formulation of acetaminophen. With the
availability of IV APAP in Europe, physicians are able to
treat post-operative pain with IV APAP as baseline therapy
and use opioids in combination as needed for increasing levels
of pain.
Fever is an increase in internal body temperature above its
normal range of 98.6 degrees Fahrenheit. A significant
fever is usually defined as an oral or ear temperature of
greater than 102 degrees Fahrenheit or a rectal temperature
of greater than 103 degrees Fahrenheit. Very high fevers
may cause hallucinations, confusion, irritability, convulsions
or death. Fever is most often an important immune system
response to a viral or bacterial infection since most viruses
and bacteria cannot thrive in hot environments. White blood
cells release substances called pyrogens that act on the
hypothalamus in the brain to raise body temperature.
Hospitalized patients are at especially high risk for developing
fever given the potential exposure to various infectious
microorganisms, invasive procedures and medications. Surgery is
the most common source of fever in the hospital setting, and
published incidence rates range from 14% to 91% of
post-operative patients. Infections such as wound infections,
urinary tract infections and pneumonia are the next most
frequent causes. However, deep venous thrombosis, pulmonary
emboli, myocardial infarction and medications are also important
potential sources of fever. Many patients also present with
fever upon arrival at the hospital due to community-acquired
infections, underlying diseases, including cancer and HIV,
severe sunburn, and often the origin of a fever is unknown.
Fever is also the most common reason parents bring their
children to the emergency rooms of hospitals. Pediatric fever is
particularly worrisome as approximately 4% of children under age
five
58
experience fever-induced seizures, or febrile seizures. The
signs of febrile seizures, which occur when a childs
temperature rises or falls rapidly, include loss of
consciousness and convulsions.
Acetaminophen, ibuprofen and aspirin are the most commonly used
medications to treat fever. The use of ibuprofen, an NSAID, and
aspirin are limited due to gastrointestinal side-effects and the
risk of bleeding. Ibuprofen is not approved for children under
six months of age and is not recommended for patients that are
dehydrated or vomiting continuously. Aspirin is contraindicated
in children and teenagers with viral infections due to the risk
of acquiring Reyes syndrome, a potentially fatal disease.
In the United States, acetaminophen, ibuprofen and aspirin are
not available in intravenous dosage form. However, oral delivery
of medications is often not possible for hospitalized patients
that are unconscious, sedated, fasting, experiencing nausea and
vomiting or are otherwise unable to take medications by mouth.
Rectal delivery of medications is sometimes possible; however,
drug absorption is often erratic, resulting in unpredictable
levels of efficacy. Rectal delivery in infants is further
complicated by frequent bowel movements which may lead to
difficulty determining the amount of medication delivered. It is
often more convenient to administer medications in intravenous
dosage form, particularly for patients that currently have an
intravenous line in place. We believe that the availability
of IV APAP in the United States would offer a significant
new treatment option for hospitalized patients with fever.
IV APAP has been marketed by BMS in Europe since its launch in
France in mid-2002 and subsequent approvals in other countries
throughout Europe and other parts of the world. After obtaining
these approvals, BMS elected to seek a partner to develop and
commercialize IV APAP in the United States and Canada based
on a new corporate strategy to focus the companys research
and development on 10 specific disease areas, which do not
include the treatment of pain. In March 2006, we completed our
agreement with BMS to
in-license these rights.
Acetaminophen is the most widely used drug for pain relief and
the reduction of fever in the United States. The mechanism of
action of acetaminophen remains not well understood; however, it
is believed that acetaminophen acts in part on central COX
enzymes without the peripheral anti-inflammatory effects,
platelet inhibition or other side effects associated with
NSAIDs. Acetaminophen was discovered in the late
19th century but was not available for sale until 1955 when
it was introduced under the brand name Tylenol in the United
States. Acetaminophen is currently available in over 600
combination and single ingredient prescription and
over-the-counter
medicines, including tablet, caplet, orally-dosed liquid
suspension, powder and suppository forms for both adults and
children.
Historically, poor stability in aqueous solutions and inadequate
solubility of acetaminophen prevented the development of an
intravenous dosage form. Acetaminophen will decompose in the
presence of oxygen and water. The rate of decomposition is
accelerated as the temperature is increased and upon exposure to
light. The stability is also a function of the solutions
pH, which creates a further challenge to formulate acetaminophen
in an aqueous solution suitable for intravenous administration.
We believe that IV APAP is the only stable,
pharmaceutically-acceptable intravenous formulation of
acetaminophen. Inactive ingredients, or excipients, in the
formulation protect acetaminophen from destabilization by oxygen
in the solution.
Prior to the introduction of IV APAP in Europe, BMS had
developed an intravenous formulation of propacetamol, a prodrug
that is rapidly converted in the bloodstream to acetaminophen.
This formulation was developed as an alternative approach given
the challenges associated with formulating acetaminophen itself
in solution. Available in Europe for more than 20 years,
intravenous propacetamol was marketed under the brand name
Pro-Dafalgan and was generally indicated for the treatment of
acute moderate pain and the reduction of fever. Pro-Dafalgan was
provided for use as a dried powder to be reconstituted in
solution prior to intravenous administration. In healthcare
workers reconstituting the drug, there were reported incidences
of allergic reactions, including mild allergic reactions on the
skin and severe allergic shock from inhalation. Intravenous
propacetamol was also associated with pain at the injection site
and other local reactions in approximately 50% of patients
receiving the drug.
59
IV APAP was approved in Europe based on clinical data
demonstrating that the formulation provides superior analgesic
efficacy over placebo and similar analgesic efficacy and
bioequivalence to intravenous propacetamol. Well-controlled
clinical trials have demonstrated that IV APAP has a safety
profile similar to placebo with significantly better
tolerability than intravenous propacetamol upon infusion. Pain
at the injection site has been demonstrated to be no different
than placebo.
IV APAP is the only intravenous formulation of acetaminophen
available anywhere in the world and has now been approved in
over 40 countries. BMS markets IV APAP in Europe and other
countries principally under the brand name Perfalgan. When BMS
launched IV APAP, it withdrew intravenous propacetamol from
the market. Two strengths of IV APAP are commercially
available in these countries in a
ready-to-use solution:
a 50mL bottle containing 0.5g acetaminophen and a 100mL bottle
containing 1g acetaminophen. Both are labeled for
administration via a 15-minute intravenous infusion.
In Europe, IV APAP was initially launched in France in mid-2002,
followed by Germany and Spain in 2003 and Italy and the United
Kingdom in 2004. Despite this country-by-country launch,
IV APAP achieved a 43% dollar share (20% vial share) as of
the first quarter of 2006. In 2005, IV APAP sold more than
55 million vials, which represents a 21% increase over 2004
according to IMS. Total sales of IV APAP exceeded
$140 million (U.S. dollars) in 2005 according to IMS.
We believe the United States represents a substantially larger
market opportunity for IV APAP than Europe with respect to
the number of surgical procedures and potential pricing. For
example, the United States accounts for nearly 50% of worldwide
hip and knee replacement surgeries; whereas, Europe only
accounts for approximately 30% of such surgeries, according to
Datamonitor. More significantly, pharmaceutical pricing
continues to be higher in the United States on average. Each
country in the European Union currently employs direct and other
forms of price controls, including reference systems where
prices for new drugs are based upon the prices of existing drugs
that provide similar therapeutic benefit or prices of drugs in
other European countries. According to IMS, the average selling
price in Europe was approximately $2.50 (U.S. dollars) per
vial of IV APAP. In contrast, the price of Toradol (ketorolac)
in the United States in 1997, prior to the entry of generic
competitors, was approximately $7.00 (U.S. dollars) per
vial according to the American Journal of Health-System Pharmacy.
We believe that the key product attributes that will drive
adoption include the proven efficacy and established safety
profile of acetaminophen, the potential ability to reduce
concomitant use of morphine and other opioids, a more convenient
dosage form for some patients and a more rapid onset of action.
|
|
|
Clinical Development History |
Clinical Overview. There have been 2,241 subjects,
including 1,780 subjects that received IV APAP, studied in
nine clinical trials completed by BMS, largely submitted to
support the Marketing Authorization Application, or MAA, that
resulted in European approval. These trials included two
Phase I trials, six Phase III trials and one large
Phase IV trial. Overall, we believe that the results of
these nine studies demonstrate that IV APAP is safe and
effective in the treatment of post-operative pain in adults and
children. These trials have also demonstrated that IV APAP
reduces the consumption of opioids when used in combination.
Clinical Studies for Post-Operative Pain in Adults. One
Phase III study evaluated 150 adult subjects with
moderate-to-severe pain
following total hip and total knee replacements. Subjects were
randomized to receive IV APAP, intravenous propacetamol or
placebo. We believe this study best demonstrates the efficacy
of IV APAP since the patients in the trial were undergoing
surgical procedures with more severe levels of pain. On the
primary efficacy endpoint, pain relief scores in the patients
treated with IV APAP were statistically higher
(p-value<0.05) than those treated with placebo and
not statistically different than those treated with intravenous
propacetamol from 15 minutes to six hours, at which point
patients received a second dose. P-values indicate the
likelihood that clinical trial results were due to random
statistical fluctuations rather than a true cause and effect.
The lower the p-value, the more likely there is a true
cause-and-effect
relationship. Therefore, p-values provide a sense of the
reliability of
60
the results of the study in question. Typically, the FDA
requires a p-value of less than 0.05 to establish the
statistical significance of a clinical trial.
The following graph presents the results for pain relief
reported by patients in this Phase III study for
post-operative pain in
adults following major orthopedic surgery, based on a five point
verbal scale, with four representing complete pain relief and
zero representing no pain relief:
In addition, this Phase III study demonstrated the
following results:
|
|
|
|
|
|
|
Outcome Measure |
|
Result |
|
p-value | |
|
|
|
|
| |
Median time to morphine rescue
|
|
3.0 hours for IV APAP vs. 0.8 hours for placebo |
|
|
<0.001 |
|
Reduction in morphine consumption over the 24-hour period
|
|
33% reduction (19.1mg) for IV APAP compared to placebo |
|
|
<0.01 |
|
This Phase III study also demonstrated a statistically
significant reduction in pain intensity and a statistically
significant improvement in patient satisfaction with pain
treatment for IV APAP compared to placebo. Drug-related adverse
events in this trial were similar to placebo.
Two Phase III studies evaluated a total of 349 adult
subjects with
moderate-to-severe pain
following third molar surgery. Subjects were randomized to
receive IV APAP, intravenous propacetamol or placebo.
Statistically significant effects versus placebo
(p-value<0.01) were obtained with IV APAP for
all efficacy criteria, including pain relief, pain intensity
difference, duration of analgesia and patients global
evaluation. There were no statistically significant differences
in treatment-related adverse events between IV APAP and
placebo. IV APAP demonstrated similar results on all efficacy
parameters compared to intravenous propacetamol with
significantly lower incidence of pain at the injection site.
One Phase III study evaluated 163 adult subjects with
moderate-to-severe pain
following minor gynecologic surgery. Subjects were randomized to
receive IV APAP or intravenous propacetamol. IV APAP
demonstrated similar results on all efficacy parameters compared
to intravenous propacetamol with statistically significantly
lower incidence of pain at the injection site.
One Phase IV study evaluated 1,061 subjects with
mild-to-moderate pain
following surgery. All subjects received up to four doses
of IV APAP over a
24-hour period. This
trial provided additional data regarding the administration of
multiple-doses of IV APAP.
Clinical Studies for Post-Operative Pain in Children. One
Phase III study evaluated 183 pediatric subjects with
moderate-to-severe pain
following surgery for hernia repair. Subjects were
61
randomized to receive IV APAP or intravenous propacetamol.
IV APAP demonstrated similar results on all efficacy parameters
compared to intravenous propacetamol with significantly lower
incidence of pain at the injection site.
Clinical Studies for Fever in Children. One
Phase III study evaluated 67 pediatric subjects (age one
month to 12 years) with fever of infectious origin.
Subjects were randomized to receive IV APAP or intravenous
propacetamol. IV APAP demonstrated similar results on all
efficacy parameters compared to intravenous propacetamol with
statistically significantly lower incidence of pain at the
injection site.
Safety Summary. The safety of acetaminophen has been
well-established through decades of use in oral, suppository and
intravenous formulations. The primary safety concern with
acetaminophen is hepatotoxicity, which is well-understood and
occurs rarely when acetaminophen is dosed in accordance with the
recommended guidelines. In addition, an effective antidote,
N-acetylcysteine, is available to treat acetaminophen overdose.
We believe there is no evidence that IV APAP poses an
increased risk for hepatoxicity or any other adverse event. In
fact, in the 1,780 subjects receiving IV APAP in nine
clinical trials previously completed by BMS, the product has
exhibited a safety profile consistent with published data for
oral acetaminophen. This is also consistent with observations
from the European post-marketing safety database of IV APAP
which covers a time period in which over 100 million doses
were administered to patients.
In pharmacokinetic trials, the peak plasma concentration of
acetaminophen ranged from 50% to 74% higher for IV APAP
compared to oral acetaminophen; however, total plasma
concentrations over time were not meaningfully different.
Further, these results demonstrated that urinary elimination of
acetaminophen metabolites, including metabolites with potential
to interact with the liver, was not meaningfully different
for IV APAP compared to oral acetaminophen at 12 and
24 hour measurements. Therefore, the study concluded
that IV APAP would not be expected to be associated with an
increased risk of toxicity to the liver compared with an
equivalent dose of acetaminophen administered orally.
Opioid Sparing Summary. The use of IV APAP in
clinical trials has consistently been associated with at least a
33% reduction in opioid consumption compared to placebo. In
these cases, opioids were available at the discretion of
patients utilizing patient controlled analgesia, or PCA, devices.
|
|
|
Clinical Development Plan |
We are developing IV APAP based on a targeted indication
for the treatment of acute pain, usually in the post-operative
setting, and the treatment of fever. We are seeking approval for
use in both adults and children for these indications. Our
proposed development plan to support this indication integrates
the existing body of intravenous propacetamol data, IV APAP data
and the data generated by clinical studies of IV APAP to be
conducted by us. Under our agreement with BMS, we have rights to
reference these BMS data. We intend to submit a 505(b)(2) NDA
for IV APAP based on these data sets as well as references
to the extensive literature which supports the safety and
efficacy of acetaminophen in oral formulations.
Section 505(b)(2) of the Federal Food, Drug and Cosmetic
Act permits the submission of an NDA where at least some of the
information required for approval comes from studies not
conducted by or for the applicant and for which the applicant
has not obtained a right of reference.
In August 2006, we met with the FDA to discuss the clinical
trial requirements for submission of a 505(b)(2) NDA for
IV APAP. Based on the feedback from the FDA, we intend to
conduct six clinical trials to provide the FDA with additional
data to support multiple dose efficacy for soft tissue surgery,
efficacy for fever and safety in adults and children. These
trials include:
|
|
|
|
|
|
Phase III trial in female patients with moderate-to-severe pain
following gynecologic surgery: this trial will be a randomized,
placebo-controlled, double-blind, multi-center study to assess
the efficacy and safety of single and multiple doses of IV APAP. |
|
|
|
|
Phase III trial in adults with fever: this trial will be a
randomized, controlled, double-blind study to assess the
efficacy and safety of single and multiple doses of IV APAP. |
62
|
|
|
|
|
|
Pharmacokinetic study in adult subjects: this trial will be a
randomized, single-center study to assess the pharmacokinetics
of single and multiple doses of IV APAP compared to oral
acetaminophen in adults. |
|
|
|
|
|
Pharmacokinetic study in pediatric subjects: this trial will be
a randomized, single-center study to assess the pharmacokinetics
of single and multiple doses of IV APAP compared to oral
acetaminophen in children. |
|
|
|
|
Safety study in adult subjects: this trial will be an
open-label, multi-center study to assess the safety of single
and multiple doses of IV APAP in adults. |
|
|
|
Safety study in pediatric subjects: this trial will be an
open-label, multi-center study to assess the safety of single
and multiple doses of IV APAP in children. |
Total enrollment of the six clinical trials is expected to be
approximately 750 subjects. We intend to initiate the
gynecologic surgery Phase III trial and the adult
pharmacokinetic study in the fourth quarter of 2006. We intend
to initiate the other clinical trials in the first half of 2007.
In addition, BMS is conducting a randomized trial in patients
undergoing hip replacement surgery. We expect the data from this
trial to be available to us in 2007.
|
|
|
Omigard for the Prevention of Intravascular
Catheter-Related Infections |
|
|
|
Intravascular Catheter-Related Infections
Background |
The use of catheters for vascular access has become essential to
medical practice. Intravascular catheters are inserted through
the skin and advanced so that the tip rests in a vein or artery.
Intravascular catheters are typically classified as either
peripheral lines which access smaller veins or central lines
(such as CVCs, peripherally inserted central catheters and
arterial lines) to access larger veins (such as the jugular,
femoral and subclavian veins) and arteries. Although such
catheters provide necessary access to veins and arteries, their
use puts patients at risk for dangerous and costly
complications, including LCSIs, catheter colonization and
CRBSIs, and, to a lesser degree, infections in other organs
including the heart, lungs, brain and bones.
Based on published clinical studies, we estimate that, of
patients with a CVC, approximately 10% will develop an LCSI and
20% will develop catheter colonization. This translates into
approximately one million LCSIs and two million incidences of
catheter colonization in the United States each year. The
presence of an LSCI may result in replacement of the catheter
and/or administration of antibiotics, both of which create
additional costs to hospitals and have the potential for adverse
safety outcomes. In addition, catheter colonization is well
correlated with CRBSIs, according to a published review of
clinical trials.
The CDC estimates that there are more than 250,000 CRBSIs among
hospitalized patients and more than 75,000 CRBSIs among
hemodialysis patients in the United States each year.
Attributable mortality is estimated by the CDC to be 12% to 25%
for each CRBSI, which translates into 39,000 to 81,250 deaths
annually due to CRBSIs. Further, the CDC estimates that the
average cost per infection is estimated to be $25,000 and, for
patients in the intensive care unit, is estimated to be up to
$56,000.
The additional costs related to infectious complications from
CVCs result in an estimated annual burden to the healthcare
system exceeding $6 billion. The majority of these costs
are shouldered by hospitals due to the reimbursement system.
Adopted by Medicare in 1983, the Prospective Payment System for
acute hospital inpatient services generally establishes
pre-determined reimbursement amounts, or diagnosis-related
groups, which are classifications based on the patients
discharge diagnoses, procedures performed and other patient
factors. Similar prospective payment systems were later adopted
for certain other Medicare inpatient hospital services, such as
rehabilitation and psychiatric hospitals. When the costs of
treating a patient fall below or are above these prospective
payment amounts, the hospital reaps the respective benefit or
bears the respective cost. Therefore, there is a compelling
economic incentive for these hospitals to use all available
means to reduce infections.
63
The CDC estimates that hospital-acquired bloodstream infections
are the eighth leading cause of death in the United States and
that intravascular catheters are the leading cause of
hospital-acquired bloodstream infections. Furthermore, a recent
study in the New England Journal of Medicine reported that 70%
of these infections are antibiotic-resistant, making them more
difficult and costly to treat. Consumer groups, the CDC and the
Joint Commission on Accreditation of Healthcare Organizations,
or JCAHO, are calling for greater scrutiny and wider reporting
of data on hospital-acquired infections. JCAHO or other
recognized accreditation is necessary for reimbursement
eligibility with Medicare and most insurers. Laws have been
passed mandating public reporting of hospital-acquired infection
data in Colorado, Connecticut, Florida, Illinois, Maryland,
Missouri, New Hampshire, New York, Pennsylvania, South Carolina,
Tennessee, Vermont and Virginia. In 2006, more than 20 other
states have had some legislative activity related to public
reporting of hospital-acquired infections. We believe that the
increased scrutiny on catheter-related infections in addition to
compelling economic incentives will drive adoption of new
products which show an ability to reduce infection rates.
|
|
|
Market for Antimicrobials to Prevent Intravascular
Catheter Infections |
Theta Reports estimates that nearly 500 million
intravascular catheters will be used in the United States in
2006, including approximately 10 million CVCs. Unit sales
of CVCs are projected to grow at 9% per year. Outside the
United States, Theta Reports estimates that approximately
11 million CVCs will be used in 2006. The number of CVC
placements is increasing as the population continues to age and
hospitalized patients become increasingly compromised. We
estimate that patients with a CVC receive, on average, three to
four topical antimicrobial applications during a hospital stay.
This translates into more than an estimated 30 million
applications in the United States in 2006 for CVCs alone.
The Centers for Medicare and Medicaid Services indicate that
there were more than 321,500 patients with end-stage renal
disease receiving dialysis at the end of 2004, of which
approximately 25% had a CVC. This patient population has been
growing at an annual rate of approximately 8% due to the aging
population, rise in diabetes, shortage of organ donors and
improved technologies enabling longer survival of patients with
end-stage renal disease. Patients on hemodialysis receive, on
average, three topical antimicrobial applications per week. This
translates into more than an estimated 12 million
applications in the United States in 2006.
The use of topical antimicrobials to prevent infections
associated with other central lines, including arterial lines
and peripherally inserted central catheters, also represents a
significant market opportunity. According to Theta Reports,
there are more than 2 million peripherally inserted central
catheters inserted in the United States each year. We estimate
there are also approximately 7 million arterials lines
inserted in the United States each year.
|
|
|
Limitations of Current Therapies |
Microorganisms on the skin surface have been demonstrated to be
the leading cause of intravascular device-related infections,
including LCSIs and CRBSIs. The same microorganisms on the skin
that cause LCSIs can lead to CRBSIs. Given the evidence for the
importance of killing microorganisms on the skin surface to
prevent the development of intravascular device-related
infections, the use of topical antimicrobials is critical.
However, currently available products have significant
limitations.
The standard of care for skin antisepsis prior to catheter
insertion and at dressing changes has been dominated by either
povidone-iodine, also known as Betadine, or chlorhexidine,
although usage patterns are increasingly favoring chlorhexidine.
In 2002, the CDC published guidelines that stated that although
chlorhexidine is preferred, povidone-iodine can be used. In
2002, a meta-analysis of eight heterogeneous studies comparing
various formulations of chlorhexidine to povidone-iodine for the
prevention of catheter-related infections was published. While
the meta-analysis indicated a benefit to chlorhexidine, only one
of the eight studies on its own demonstrated a statistically
significant prevention of
64
CRBSIs. We believe that this change in medical practice despite
the lack of robust clinical evidence underscores the desire and
willingness of healthcare providers to address this significant
unmet need.
Although topical antiseptics tend to have a broad spectrum of
antimicrobial activity, duration of activity ranges from minutes
to hours after application. These products do not provide
sustained antimicrobial coverage throughout the periods between
dressing changes (typically every 72-96 hours), and this
lack of sustained antimicrobial activity can put patients at
increased risk for acquiring an infection at the catheter
insertion site.
In order to address the limited duration of activity associated
with topical antiseptics, topical antibiotics have been used,
either alone or in combination with topical antiseptics, to
confer protection against microbial invasion. Clinical trials
have shown benefits attributable to topical antibiotics, but
these products have either been associated with increased
frequency of fungal infections or emergence of bacterial
resistance, including MRSA. These drawbacks have significantly
diminished the use of topical antibiotics for the prevention of
catheter-related infections. As a result, the market has almost
exclusively switched back to the use of topical antiseptics.
There is some limited use of BioPatch, a
chlorhexidine-impregnated foam dressing that is placed around
the catheter at the insertion site. While this product delivers
chlorhexidine to the catheter insertion site over a period of
days, it has not been widely adopted reportedly due to
difficulty in applying the dressing and the inability to visibly
inspect the insertion site through the dressing. Physicians and
nurses must lift up the BioPatch to monitor the insertion site
for redness, swelling and other leading signs of infection. Such
disruption of the dressing has the potential to interfere with
the sterility of the site and promote the spread of pathogens.
Other products either in use or in development to reduce
catheter-related infections are focused on downstream aspects of
the infectious process. Some catheters coated with antiseptics
and antibiotics have demonstrated reductions in catheter-related
infections. Other new technologies being developed include
contamination-resistant hubs, attachable cuffs, new
catheter-coatings and antiseptic catheter lock solutions. We
believe any use of these products would be in addition to the
use of antimicrobial agents on the skin surface to prevent
catheter-related infections.
Omigard was discovered by researchers at Migenix. Migenix
subsequently entered into a collaboration and license agreement
with Fujisawa Healthcare, Inc., or Fujisawa. In that agreement,
Fujisawa was granted the rights to commercialize Omigard in
North America in return for licensing payments, funding of all
remaining development costs and establishment of a joint
development committee. In January 2004, Migenix reacquired all
rights to Omigard from Fujisawa after completion of the first
Phase III trial and then, in July 2004, licensed both the
North American and European rights to us with the objective of
completing the development program and commercializing the
product.
Unlike other topical antimicrobials, Omigard exhibits a
combination of features that we believe make it an ideal product
for the prevention of catheter-related infections. Such features
include:
|
|
|
|
|
broad spectrum bactericidal and fungicidal activity; |
|
|
|
activity against resistant strains, including MRSA; |
|
|
|
rapid and prolonged duration of effect; |
|
|
|
resistance to Omigard has not been induced in the laboratory; |
|
|
|
no demonstrated ability to generate cross-resistance to other
antimicrobials; |
|
|
|
excellent safety profile; and |
|
|
|
convenient application. |
65
Omigard is effective against a wide variety of bacteria and
fungi. The compound has been tested against more than 285
strains of Gram-positive and Gram-negative bacteria as well as
more than 75 fungal strains. These studies demonstrate that
Omigard has broad bactericidal and fungicidal activity against
bacteria and fungi commonly found on the surface of human skin.
Further, Omigard has also demonstrated the ability to kill
multi-drug resistant microorganisms, including MRSA, and
vancomycin-resistant enterococcus, or VRE. The incidence
of resistant infections is increasing, and these microorganisms
represent a potentially significant threat to the public health.
Omigard has demonstrated not only the ability to kill rapidly
but also, unlike the topical antiseptics, a prolonged duration
of effect. In preclinical studies with Omigard, most
microorganisms were killed after only six minutes of exposure.
In skin surface studies, Omigard demonstrated the ability to
kill more than 99.9% of microorganisms for at least three days.
In laboratory testing conducted by Migenix, resistance to
Omigard, unlike the topical antiseptics, has not been
demonstrated, nor has
cross-resistance to
other antimicrobials been demonstrated. A primary mechanism of
action of Omigard is believed to be depolarization of the outer
cell membrane of infectious microorganisms, resulting in cell
death. Specific receptors within the cell have not been shown to
be involved in the disruption of the cell membrane and,
therefore, this non-specific mechanism of action decreases the
likelihood of the development of resistance.
Omigard presents a benign toxicological profile when
administered topically at doses as much as 30 times the planned
human dose. The product has been demonstrated to be
non-irritating to the skin, non-sensitizing to the skin, and not
absorbed through the skin into the bloodstream (based on the
inability to detect Omigard in the bloodstream at very low
levels) and, therefore, has no meaningful systemic exposure.
Omigard is packaged in a convenient, single
unit-of-use plastic
squeeze vial. Omigard, which is formulated as a 1% clear
viscous, aqueous gel, is applied around the catheter insertion
site by squeezing the plastic vial. Unlike the topical
antiseptics, Omigard does not have to be scrubbed onto the skin
surface. Unlike povidone-iodine, Omigard does not have the
potential to stain the skin and clothes of patients and
healthcare providers.
|
|
|
Clinical Development History |
Migenix completed one Phase I and two Phase II studies
of Omigard in a total of 273 subjects. These trials demonstrated
no evidence of sensitization, clinically significant irritation
or systemic absorption. In addition, the Phase I trial
exhibited killing of greater than 99.9% of bacteria and fungi on
skin and maintained this level of antimicrobial activity for at
least three days.
Migenix and Fujisawa subsequently completed a multi-center,
randomized, evaluation committee-blinded Phase III trial
that compared Omigard to 10% povidone-iodine in patients
receiving CVCs, peripherally inserted central catheters, and/or
arterial lines. The study was conducted in 1,407 patients
in 27 centers in the United States. The primary efficacy
endpoint was to demonstrate the superiority of Omigard over 10%
povidone-iodine for the prevention of CRBSIs, as determined by a
treatment-blinded evaluation committee. Secondary efficacy
endpoints included demonstrating the superiority of Omigard for
the prevention of LCSI and catheter colonization.
Treatment with Omigard resulted in a statistically significant
prevention in catheter colonization compared to 10%
povidone-iodine (p-value=0.002). The Omigard group had
21.9% fewer incidences of catheter colonization than the 10%
povidone-iodine group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment Arm | |
|
|
|
|
| |
|
|
Variable |
|
10% povidone-iodine | |
|
Omigard | |
|
p-value | |
|
|
| |
|
| |
|
| |
Catheter colonization present
|
|
|
232/583 (39.8)% |
|
|
|
180/578 (31.1)% |
|
|
|
0.002 |
|
66
Treatment with Omigard also resulted in a statistically
significant prevention in LCSI
(p-value=0.004).
The table below summarizes data for LCSI in the modified
intent-to-treat
analysis set, which includes only those patients who did not
have a bloodstream infection present at baseline. As shown in
the table, the Omigard group had 49.2% fewer LCSIs than the 10%
povidone-iodine group. Moreover, there was a greater than 50%
reduction in the number of patients that had an LCSI and a
catheter removed (p-value=0.002).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment Arm | |
|
|
|
|
| |
|
|
Variable |
|
10% povidone-iodine | |
|
Omigard | |
|
p-value | |
|
|
| |
|
| |
|
| |
LCSI present
|
|
|
48/699 (6.9)% |
|
|
|
24/693 (3.5)% |
|
|
|
0.004 |
|
Despite these favorable, statistically significant results for
the prevention of LCSI and catheter colonization, the study did
not show statistical significance for the primary endpoint: the
prevention of CRBSI. The table below compares the incidence of
CRBSI in the modified
intent-to-treat
analysis set after treatment with Omigard or 10%
povidone-iodine. The
rates of failure (development of CRBSI) and indeterminate
response were similar for the two treatments arms. There was a
15.4% reduction in the incidence of microbiologically-proven
CRBSI in the Omigard group compared to 10% povidone iodine;
however, this outcome was not statistically significant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment Arm | |
|
|
|
|
| |
|
|
Outcome |
|
10% povidone-iodine | |
|
Omigard | |
|
p-value | |
|
|
| |
|
| |
|
| |
Failure
|
|
|
18/699 (2.6)% |
|
|
|
15/693 (2.2)% |
|
|
|
0.622 |
|
Success
|
|
|
635/699 (90.8)% |
|
|
|
630/693 (90.9)% |
|
|
|
|
|
Indeterminate
|
|
|
46/699 (6.6)% |
|
|
|
48/693 (6.9)% |
|
|
|
|
|
The definition of CRBSI required an organism isolated from a
peripheral blood draw to be genotypically matched to an organism
isolated from the catheter tip. In this study, many catheters
were lost and the organisms could be not isolated from the
catheter tip. Similarly, many patients were administered
systemic antibiotics for suspected bloodstream infections but
were given such antibiotics prior to taking a blood draw. As a
result, the high rate of indeterminate events was observed,
which we believe was a significant factor contributing to the
lower than expected rate of CRBSI. In addition, the study
enrolled a large number of patients that were at relatively low
risk for developing a CRBSI, which we believe further decreased
the event rate to a point where, as observed, a statistically
significant difference for CRBSI between the two treatment arms
could not be detected. We believe that the CRBSI endpoint, as
defined in the previous study, is not achievable without a very
significant increase the number of patients enrolled.
Only 14 patients (2.0%) in each treatment group had adverse
events that were considered drug-related. All of these Omigard
adverse events were related to the catheter insertion site, and
none were serious. Overall, there were no statistically
significant differences between the treatment groups for any
safety variable.
|
|
|
Clinical Development Plan |
In June 2005, we reached agreement on the clinical development
plan for Omigard with the FDA under the FDAs SPA process.
The SPA process provides for a formal review and written
agreement of clinical protocols that are binding on both the FDA
and the company sponsor. Through the SPA process, the FDA agreed
that a single confirmatory Phase III trial would be
required for approval and that LCSI would be the sole primary
efficacy endpoint. Secondary endpoints include catheter
colonization and other measures of infection.
The presence of an LCSI will typically result in one of several
actions being taken by a physician, including administration of
systemic or topical antimicrobials and/or removal and
replacement of the catheter. The most serious risks from
catheter replacement include bleeding from a damaged artery or
puncturing of a lung. Further, the same microorganisms on the
skin surface that cause LCSIs can cause
67
CRBSIs. A published review of clinical trials found that
catheter colonization is well correlated to CRBSIs.
We have completed a market research study that indicates
physicians only modestly favor (73% vs. 65%) a profile of
Omigard that demonstrates a statistically significant prevention
in LCSIs, catheter colonization and CRBSIs compared to a profile
of Omigard that demonstrates a statistically significant
prevention in LCSIs and catheter colonization alone. The FDA has
communicated to us that LCSI is a clinically relevant indication
and, based on these market research findings, we believe that a
product indicated for the prevention of LCSIs is also a highly
relevant indication to physicians.
The confirmatory Phase III trial that we are conducting
according to the SPA, known as the Central Line Infection
Reduction Study, or CLIRS trial, is a multi-center, randomized,
evaluation committee-blinded study in patients receiving a CVC.
The primary efficacy endpoint of the study is to evaluate
whether Omigard is superior to 10% povidone-iodine in the
prevention of LCSI in patients requiring central venous
catheterization. Secondary objectives of the study are to
evaluate whether Omigard is superior to 10% povidone-iodine
treatment in preventing significant catheter colonization, CRBSI
and all-cause bloodstream infections in patients requiring
central venous catheterization.
The CLIRS trial is designed to recruit 1,250 patients
randomized to receive either Omigard or 10% povidone-iodine. The
study began enrollment in August 2005 and is currently being
conducted at centers in the United States and Europe. We expect
to complete enrollment and have results available in the second
half of 2007. Omigard for the prevention of LCSIs was awarded
fast track status by the FDA, and we intend to submit an NDA to
the FDA in the first half of 2008.
We also intend to submit an MAA to European regulatory
authorities in the first half of 2008. We have met with
regulatory authorities in several European countries and believe
that no additional clinical trials will be required for
submission if the ongoing CLIRS trial is successful.
We intend to pursue a pediatric indication for Omigard for the
prevention of catheter-related infections. As in the adult
population, CVCs are frequently used in neonates, infants and
children with wide variety of conditions. Pediatric CVCs are a
significant source of infectious complications in hospitalized
children.
We have rights to develop and commercialize omiganan
pentahydrochloride for additional indications related to the
prevention and treatment of device-related, surgical
wound-related and burn-related infections. We believe that
omiganan pentahydrochloride may have significant opportunity in
these areas. For example, the CDC estimates there are
approximately 500,000 post-operative surgical site infections in
the United States annually. The CDC also estimates that there
are 50,000 hospitalizations from burn injuries and that 10,000
people will die from burn-related infections in the United
States every year.
Commercialization Strategy
We intend to build a commercial organization in the United
States focused on promoting our products to physicians, nurses
and pharmacy directors principally in the hospital setting. We
believe that we can achieve our strategic goals by deploying an
experienced sales organization supported by an internal
marketing infrastructure that targets institutions with the
greatest use of pharmaceutical products. We will consider
opportunities to partner our products to reach markets outside
the United States or to expand our reach to other physician
groups outside the hospital where applicable. In particular, we
believe that Omigard is an excellent candidate for partnering in
countries outside the United States, and we anticipate launching
the product in those countries with a partner who has the
resources to be competitive in the hospital market.
For the launch of Omigard in the United States, we intend to
build our own commercial organization and estimate that a sales
force of approximately 75-100 people will reach the top 1,200
68
institutions, which we believe represents more than 60% of the
market opportunity for the product. Sales calls will primarily
target anesthesiologists and surgeons. Other targets will
include intensive care physicians, infectious disease physicians
and infection control physicians and nurses in outpatient
dialysis centers, obstetricians and other physicians throughout
the hospital. Key elements in the adoption of Omigard will
include formulary acceptance followed by trial and usage and,
ultimately, adoption to standing orders and protocols within the
hospitals and specific units therein. We expect that Omigard
will initially be used in combination with topical antiseptics
but ultimately may be used as a stand-alone treatment after more
widespread use. We intend to initially target Omigard to high
risk patients we believe, based on market research, to comprise
approximately 47% of patients with CVCs.
For the launch of IV APAP, we intend to expand the sales
force to 150-200 people to reach the top 1,800 to 2,000
institutions, which we believe represents more than 80% of the
opportunity for both products. The primary target audience will
include anesthesiologists and surgeons. Other targets will
include certified registered nurse anesthetists, emergency
medicine physicians, obstetricians and other physicians
throughout the hospital.
Licensing Agreements
In March 2006, we in-licensed the patents and the exclusive
development and commercialization rights to IV APAP in the
United States and Canada from BMS. BMS has sublicensed these
rights to us under a license agreement with SCR Pharmatop S.A.,
or Pharmatop.
As consideration for the license, we paid a $25.0 million
up-front fee and may be required to make future milestone
payments totaling up to $50.0 million upon the achievement
of various milestones related to regulatory or commercial
events. We are also obligated to pay a royalty on net sales of
the licensed products. We have the right to grant sublicenses to
our affiliates.
The term of the IV APAP agreement generally extends on a
country-by-country basis until the last licensed patent expires,
which is expected to occur in 2022. Either party may terminate
the IV APAP agreement upon delivery of written notice if
the other party commits a material breach of its obligations and
fails to remedy the breach within a specified period or upon the
occurrence of specified bankruptcy, reorganization, liquidation
or receivership proceedings. In addition, BMS may terminate
the IV APAP agreement if we breach, in our capacity as a
sublicensee, any provision of the agreement between BMS and
Pharmatop. The IV APAP agreement will automatically
terminate in the event of a termination of the license agreement
between BMS and Pharmatop. We may terminate the IV APAP
agreement at any time upon specified written notice to BMS after
the occurrence of events of default that relate to our territory
and would entitle BMS to terminate the Pharmatop license
agreement. The events of default include Pharmatops
inability to maintain specified claims under listed patents, the
marketing by a third party of a parenterally-administered
product containing acetaminophen, subject to certain conditions,
or a successful third party action that deprives Pharmatop of
its rights to specified patents. We may also terminate the
IV APAP agreement upon specified written notice after an
uncured failure by Pharmatop to perform any of its material
obligations under the Pharmatop license agreement with respect
to our territory that would permit BMS to terminate the
Pharmatop license agreement.
Either BMS or Pharmatop may terminate the license agreement
between them upon delivery of written notice after an uncured
failure by the other party to perform any of its material
obligations under the license agreement. BMS may generally
terminate the agreement upon written notice to Pharmatop within
a specified period so long as all payments due under the
agreement to Pharmatop are current. Pharmatop may terminate the
agreement upon specified written notice if BMS opposes any of
the listed patent applications or challenges the validity or
enforceability of any of the listed licensed patents. BMS is
also entitled to terminate the Pharmatop agreement upon the
occurrence of events of default that relate to the territory
described above.
69
In July 2004, we in-licensed from Migenix the patents and the
exclusive development and commercialization rights to omiganan
pentahydrochloride for the prevention and treatment of
device-related, surgical wound-related and burn-related
infections in North America and Europe.
As consideration for the license, we paid a $2.0 million
up-front fee, of which $1.45 million was allocated to the
value of the acquired technology and $450,000 was attributed to
the acquisition of 617,284 shares of Migenix common stock.
We may be required to make future milestone payments totaling up
to $27.0 million upon the achievement of various milestones
related to regulatory or commercial events. We are also
obligated to pay a royalty on net sales of the licensed
products. We have the right to grant sublicenses to third
parties.
The term of the Omigard agreement generally extends until the
last licensed patent expires, which is expected to occur in
November 2022. Either party may terminate the Omigard agreement
upon specified written notice after the other party commits a
material breach of its obligations and fails to remedy the
breach or upon the cessation of operations of the other party or
occurrence of specified bankruptcy, reorganization, liquidation
or receivership proceedings involving the other party. We may
terminate the Omigard agreement upon written notice if we
determine, prior to regulatory approval in the United States,
that the product is not reasonably expected to demonstrate
safety or efficacy. We may also terminate the Omigard agreement
upon specified written notice after receipt of any interim
results or the executive summary following database lock of the
on-going Phase III trial for Omigard.
Intellectual Property
We are the exclusive licensee of two U.S. patents and two
pending Canadian patent applications from Pharmatop, under
BMSs license to these patents from Pharmatop.
U.S. Patent No. 6,028,222 (Canadian patent application
2,233,924) covers the formulation of IV APAP and expires in
August 2017. U.S. Patent No. 6,992,218 (Canadian
patent application 2,415,403) covers the process used to
manufacture IV APAP and expires in June 2021.
We have also in-licensed the non-exclusive rights to two
U.S. patents from BMS. U.S. Patent No. 6,593,331
covers a method of treating pain with acetaminophen and
concurrent administration of a hydroxyazapirone and expires in
April 2022. US Patent No. 6,511,982 covers a method of
treating pain with acetaminophen and concurrent administration
of buspirone and expires in June 2020.
We are the exclusive licensee of four U.S. patents, four
pending U.S. applications, and their international
equivalents in North America and Europe for the prevention and
treatment of device-related, surgical wound-related, and
burn-related infections. U.S. Patent No. 6,180,604 and
U.S. Patent No. 6,538,106 cover composition of matter
for certain analogues of indolicidin, including Omigard, and
expire in August 2017. U.S. Patent No. 6,503,881
covers composition of matter for additional analogues of
indolicidin (not including Omigard), pharmaceutical preparations
of certain analogues of indolicidin, including Omigard, and
methods of using the pharmaceutical preparations for treating
microbial infections (including covering routes of
administration). U.S. Patent No. 6,503,881 also
expires in August 2017. U.S. Patent No. 6,835,536
covers specific pharmaceutical preparations of certain analogues
of indolicidin, including Omigard, and methods of treatment by
applying pharmaceutical preparations to a target site, including
a target site were a medical device is inserted.
U.S. Patent No. 6,835,536 expires in November 2022.
Manufacturing
In February 2006, we entered into a clinical supply agreement
with Lawrence Laboratories, an affiliate of BMS, under which
Lawrence Laboratories has manufactured clinical supplies of IV
APAP and
70
placebo. Under the terms of the agreement, Lawrence Laboratories
is obligated to supply us with this single batch of IV APAP and
a single batch of placebo at specified prices. With these
batches, we believe we will have adequate clinical supplies of
our IV APAP product candidate and placebo. The term of the
clinical supply agreement generally extends until the earlier of
the receipt by us of regulatory approval for IV APAP or
December 31, 2008. In addition, the clinical supply
agreement terminates upon mutual written consent of the parties,
the termination of the IV APAP agreement or our dissolution.
Either party may also terminate the clinical supply agreement
upon written notice of an uncured, material breach by the other
party. For commercial supply, the active pharmaceutical
ingredient, or API, acetaminophen is readily available from
multiple suppliers. We are currently negotiating with suppliers
for commercial supply of the finished drug product for IV
APAP.
We have purchased clinical supplies of the API omiganan
pentahydrochloride from UCB Bioproducts, which was recently
acquired by Lonza Group, Ltd. We have purchased clinical
supplies of the Omigard finished drug product from Cardinal
Health, Inc. Lonza and Cardinal have produced the clinical
supplies which we are using in our Phase III Omigard
program. We are currently negotiating with suppliers for
commercial supply of the API and finished drug product for
Omigard.
Competition
The pharmaceutical industry is subject to intense competition
and characterized by extensive research efforts and rapid
technological progress. Competition in our industry occurs on a
variety of fronts, including developing and bringing new
products to market before others, developing new technologies to
improve existing products, developing new products to provide
the same benefits as existing products at lower cost and
developing new products to provide benefits superior to those of
existing products. There are many companies, including generic
manufacturers as well as large pharmaceutical companies, that
have significantly greater financial and other resources than we
do, as well as academic and other research institutions that are
engaged in research and development efforts for the indications
targeted by our product candidates.
Our IV APAP product candidate is being developed for the
treatment of acute pain, usually in the hospital setting. A wide
variety of competitive products already address this target
market, including:
|
|
|
|
|
Morphine is the leading product for the treatment of acute
post-operative pain, and is available generically from several
manufacturers; |
|
|
|
DepoDur, currently marketed by Endo Pharmaceuticals, is an
extended release injectable formulation of morphine; and |
|
|
|
other injectable opioids, including fentanyl, meperidine and
hydromorphone, each of which is available generically from
several manufacturers. |
|
|
|
|
|
Ketorolac, an injectable NSAID, is available generically from
several manufacturers. |
We are also aware of a number of product candidates in
development to treat acute pain, including injectable NSAIDs,
novel opioids, new formulations of currently available opioids,
long-acting local anesthetics and new chemical entities as well
as alternative delivery forms of various opioids and NSAIDs. A
variety of pharmaceutical and biotechnology companies are
developing these new product candidates, including but not
limited to Anesiva, Inc (formerly Corgentech Inc.), CeNeS
Pharmaceuticals plc, Cumberland Pharmaceuticals
71
Inc., Durect Corporation, Javelin Pharmaceuticals, Inc., Pfizer
Inc., SkyePharma Inc., St. Charles Pharmaceuticals, TheraQuest
Biosciences, LLC and Xsira Pharmaceuticals, Inc.
We are developing our Omigard product candidate for the
prevention of intravascular catheter-related infections.
Although there are no approved drugs for this specific
indication, a number of topical products are currently used in
practice and one device has been approved for wound dressing and
prevention of catheter-related infections. These competitive
products include:
|
|
|
|
|
topical antiseptics such as povidone-iodine and chlorhexidine,
each of which is available generically from several
manufacturers; |
|
|
|
Neosporin, a topical antibacterial ointment containing
polymyxin, neomycin and bacitracin, available generically from
several manufacturers; |
|
|
|
Bactroban, a topical antibacterial containing mupirocin,
available generically from several manufacturers; and |
|
|
|
BioPatch, a chlorhexidine-impregnated foam dressing, from
Johnson & Johnson that is approved both for wound
dressing and the prevention of catheter-related infections. |
Other products may be in development; however, we are not aware
of any other topical drugs being developed for the prevention of
intravascular catheter-related infections.
Government Regulation
Governmental authorities in the United States and other
countries extensively regulate the testing, manufacturing,
labeling, storage, record-keeping, advertising, promotion,
export, marketing and distribution, among other things, of
pharmaceutical products. In the United States, the FDA, under
the Federal Food, Drug and Cosmetic Act and other federal
statutes and regulations, subjects pharmaceutical products to
rigorous review. If we do not comply with applicable
requirements, we may be fined, the government may refuse to
approve our marketing applications or allow us to manufacture or
market our products, and we may be criminally prosecuted.
We and our manufacturers and clinical research organizations may
also be subject to regulations under other federal, state and
local laws, including the Occupational Safety and Health Act,
the Environmental Protection Act, the Clean Air Act and import,
export and customs regulations as well as the laws and
regulations of other countries.
To obtain approval of a new product from the FDA, we must, among
other requirements, submit data supporting safety and efficacy
as well as detailed information on the manufacture and
composition of the product and proposed labeling. The testing
and collection of data and the preparation of necessary
applications are expensive and time-consuming. The FDA may not
act quickly or favorably in reviewing these applications, and we
may encounter significant difficulties or costs in our efforts
to obtain FDA approvals that could delay or preclude us from
marketing our products.
The process required by the FDA before a new drug may be
marketed in the United States generally involves the following:
completion of preclinical laboratory and animal testing in
compliance with FDA regulations, submission of an
investigational new drug application, or IND, which must become
effective before human clinical trials may begin, performance of
adequate and well-controlled human clinical trials to establish
the safety and efficacy of the proposed drug for its intended
use, and submission and approval of an NDA by the FDA. The
sponsor typically conducts human clinical trials in three
sequential phases, but the phases may overlap. In Phase I
clinical trials, the product is tested in a small number of
patients or healthy volunteers, primarily for safety at one or
more dosages. In Phase II clinical trials, in addition to
safety, the sponsor evaluates the efficacy of the product on
targeted indications, and
72
identifies possible adverse effects and safety risks in a
patient population. Phase III clinical trials typically
involve testing for safety and clinical efficacy in an expanded
population at geographically-dispersed test sites.
Clinical trials must be conducted in accordance with the
FDAs good clinical practices requirements. The FDA may
order the partial, temporary or permanent discontinuation of a
clinical trial at any time or impose other sanctions if it
believes that the clinical trial is not being conducted in
accordance with FDA requirements or presents an unacceptable
risk to the clinical trial patients. The institutional review
board, or IRB, generally must approve the clinical trial design
and patient informed consent at each clinical site and may also
require the clinical trial at that site to be halted, either
temporarily or permanently, for failure to comply with the
IRBs requirements, or may impose other conditions.
The applicant must submit to the FDA the results of the
preclinical and clinical trials, together with, among other
things, detailed information on the manufacture and composition
of the product and proposed labeling, in the form of an NDA,
including payment of a user fee. The FDA reviews all NDAs
submitted before it accepts them for filing and may request
additional information rather than accepting an NDA for filing.
Once the submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under the policies agreed to by the
FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA
has 10 months in which to complete its initial review of a
standard NDA and respond to the applicant. The review process
and the PDUFA goal date may be extended by three months if the
FDA requests or the NDA sponsor otherwise provides additional
information or clarification regarding information already
provided in the submission within the last three months of the
PDUFA goal date. If the FDAs evaluations of the NDA and
the clinical and manufacturing procedures and facilities are
favorable, the FDA may issue either an approval letter or an
approvable letter, which contains the conditions that must be
met in order to secure final approval of the NDA. If and when
those conditions have been met to the FDAs satisfaction,
the FDA will issue an approval letter, authorizing commercial
marketing of the drug for certain indications. According to the
FDA, the median total approval time for NDAs approved during
calendar year 2004 was approximately 13 months for standard
applications. If the FDAs evaluation of the NDA submission
and the clinical and manufacturing procedures and facilities is
not favorable, the FDA may refuse to approve the NDA and issue a
not approvable letter.
|
|
|
Special Protocol Assessment Process |
The special protocol assessment, or SPA, process provides for
official FDA evaluation of a proposed Phase III clinical
trial protocol and generally provides a product sponsor with a
binding agreement from the FDA that the design and analysis of
the trial are adequate to support a license application
submission if the trial is performed according to the SPA. The
FDAs guidance on the SPA process indicates that SPAs are
designed to evaluate individual clinical trial protocols
primarily in response to specific questions posed by the
sponsors. In practice, the sponsor of a product candidate may
request an SPA for proposed Phase III trial objectives,
designs, clinical endpoints and analyses. A request for an SPA
is submitted in the form of a separate amendment to an IND, and
the FDAs evaluation generally will be completed within a
45-day review period
under applicable PDUFA goals, provided that the trials have been
the subject of discussion at an
end-of-Phase II
and pre-Phase III meeting with the FDA, or in other limited
cases. All agreements and disagreements between the FDA and the
sponsor regarding an SPA, including the FDAs responses to
questions about protocol design, primary efficacy endpoints,
study conduct, data analysis and prospective labeling statements
must be documented in writing. In limited circumstances, the FDA
may agree that a specific finding, such as a particular p-value
on the primary efficacy endpoint of a study, will satisfy a
specific objective, such as demonstration of efficacy, or
support an approval decision. However, final determinations by
the FDA are made after a complete review of the applicable NDA
and are based on the entire data in the application, and any SPA
is subject to future public health concerns unrecognized at the
time of protocol assessment.
73
|
|
|
Section 505(b)(2) New Drug Applications |
As an alternate path to FDA approval for new indications or
improved formulations of previously-approved products, a company
may file a Section 505(b)(2) NDA, instead of a
stand-alone or full NDA.
Section 505(b)(2) of the Federal Food, Drug and Cosmetic
Act was enacted as part of the Drug Price Competition and Patent
Term Restoration Act of 1984, otherwise known as the
Hatch-Waxman Amendments. Section 505(b)(2) permits the
submission of an NDA where at least some of the information
required for approval comes from studies not conducted by or for
the applicant and for which the applicant has not obtained a
right of reference. For example, the Hatch-Waxman Amendments
permit the applicant to rely upon the FDAs findings of
safety and effectiveness for an approved product. The FDA may
also require companies to perform additional studies or
measurements to support the change from the approved product.
The FDA may then approve the new formulation for all or some of
the label indications for which the referenced product has been
approved, or the new indication sought by the
Section 505(b)(2) applicant.
To the extent that the Section 505(b)(2) applicant is
relying on the FDAs findings for an already-approved
product, the applicant is required to certify to the FDA
concerning any patents listed for the approved product in the
FDAs Orange Book publication. Specifically, the applicant
must certify that: (1) the required patent information has
not been filed; (2) the listed patent has expired;
(3) the listed patent has not expired, but will expire on a
particular date and approval is sought after patent expiration;
or (4) the listed patent is invalid or will not be
infringed by the manufacture, use or sale of the new product. A
certification that the new product will not infringe the already
approved products Orange Book-listed patents or that such
patents are invalid is called a paragraph IV certification.
If the applicant does not challenge the listed patents, the
Section 505(b)(2) application will not be approved until
all the listed patents claiming the referenced product have
expired. The Section 505(b)(2) application may also not be
approved until any non-patent exclusivity, such as exclusivity
for obtaining approval of a new chemical entity, listed in the
Orange Book for the referenced product has expired.
If the applicant has provided a paragraph IV certification
to the FDA, the applicant must also send notice of the
paragraph IV certification to the NDA and patent holders
once the NDA has been accepted for filing by the FDA. The NDA
and patent holders may then initiate a legal challenge to the
paragraph IV certification. The filing of a patent
infringement lawsuit within 45 days of their receipt of a
paragraph IV certification automatically prevents the FDA
from approving the Section 505(b)(2) NDA until the earliest
of 30 months, expiration of the patent, settlement of the
lawsuit or a decision in the infringement case that is favorable
to the Section 505(b)(2) applicant. For drugs with
five-year exclusivity, if an action for patent infringement is
initiated after year four of that exclusivity period, then the
30-month stay period is
extended by such amount of time so that 7.5 years has
elapsed since the approval of the NDA with five-year
exclusivity. This period could be extended by six months if the
NDA sponsor obtains pediatric exclusivity. Thus, the
Section 505(b)(2) applicant may invest a significant amount
of time and expense in the development of its products only to
be subject to significant delay and patent litigation before its
products may be commercialized. Alternatively, if the listed
patent holder does not file a patent infringement lawsuit within
the required 45-day
period, the applicants NDA will not be subject to the
30-month stay.
Notwithstanding the approval of many products by the FDA
pursuant to Section 505(b)(2), over the last few years,
certain brand-name pharmaceutical companies and others have
objected to the FDAs interpretation of
Section 505(b)(2) and one pharmaceutical company has sued
the FDA on the matter. Although the issues in that litigation
are specific to the products involved, if the FDA does not
prevail, it may be required to change its interpretation of
Section 505(b)(2), which could delay or even prevent the
FDA from approving any Section 505(b)(2) NDA that we submit.
A drug designated as a fast track product by the FDA must be
intended for the treatment of a serious or life-threatening
condition and demonstrate the potential to address unmet medical
needs for the
74
condition. Fast track designation does not apply to a product
alone, but applies to a combination of the product and specific
indication for which it is being studied. A sponsor may submit a
request for fast track designation at the time of original
submission of its IND, or at any time thereafter prior to
receiving marketing approval of its NDA. Fast track status
enables the sponsor to have more frequent and timely
communication and meetings with the FDA regarding the product
development plans. Fast track status may also result in
eligibility for NDA priority review, under which the PDUFA
review goal for the NDA is six months rather than ten months.
Under the Hatch-Waxman Act, newly-approved drugs and indications
benefit from a statutory period of non-patent marketing
exclusivity. The Hatch-Waxman Act provides five-year marketing
exclusivity to the first applicant to gain approval of an NDA
for a new chemical entity, meaning that the FDA has not
previously approved any other new drug containing the same
active moiety. Hatch-Waxman prohibits the submission of an
abbreviated new drug application, or ANDA, or a
Section 505(b)(2) NDA for another version of such drug
during the five-year exclusive period; however, as explained
above, submission of an ANDA or Section 505(b)(2) NDA
containing a paragraph IV certification is permitted after
four years, which may trigger a
30-month stay of
approval of the ANDA or Section 505(b)(2) NDA. Protection
under Hatch-Waxman will not prevent the submission or approval
of another full NDA; however, the applicant would be required to
conduct its own preclinical and adequate and well-controlled
clinical trials to demonstrate safety and effectiveness. The
Hatch-Waxman Act also provides three years of marketing
exclusivity for the approval of new and supplemental NDAs,
including Section 505(b)(2) NDAs, for, among other things,
new indications, dosages or strengths of an existing drug, if
new clinical investigations that were conducted or sponsored by
the applicant are essential to the approval of the application.
|
|
|
Other Regulatory Requirements |
We may also be subject to a number of post-approval regulatory
requirements. If we seek to make certain changes to an approved
product, such as promoting or labeling a product for a new
indication, making certain manufacturing changes or product
enhancements or adding labeling claims, we will need FDA review
and approval before the change can be implemented. While
physicians may use products for indications that have not been
approved by the FDA, we may not label or promote the product for
an indication that has not been approved. Securing FDA approval
for new indications or product enhancements and, in some cases,
for manufacturing and labeling claims, is generally a
time-consuming and expensive process that may require us to
conduct clinical trials under the FDAs IND regulations.
Even if such studies are conducted, the FDA may not approve any
change in a timely fashion, or at all. In addition, adverse
experiences associated with use of the products must be reported
to the FDA, and FDA rules govern how we can label, advertise or
otherwise commercialize our products.
There are current post-marketing safety surveillance
requirements that we will need to meet to continue to market an
approved product. The FDA also may, in its discretion, require
post-marketing testing and surveillance to monitor the effects
of approved products or place conditions on any approvals that
could restrict the commercial applications of these products.
In addition to FDA restrictions on marketing of pharmaceutical
products, several other types of state and federal laws have
been applied to restrict certain marketing practices in the
pharmaceutical industry in recent years. These laws include
anti-kickback statutes and false claims statutes. The federal
health care program anti-kickback statute prohibits, among other
things, knowingly and willfully offering, paying, soliciting or
receiving remuneration to induce or in return for purchasing,
leasing, ordering or arranging for the purchase, lease or order
of any health care item or service reimbursable under Medicare,
Medicaid or other federally financed health care programs. This
statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers,
purchasers and formulary managers on the other. Violations of
the anti-kickback statute are punishable by imprisonment,
criminal fines, civil monetary penalties and exclusion from
participation in federal health care programs.
75
Although there are a number of statutory exemptions and
regulatory safe harbors protecting certain common activities
from prosecution or other regulatory sanctions, the exemptions
and safe harbors are drawn narrowly, and practices that involve
remuneration intended to induce prescribing, purchases or
recommendations may be subject to scrutiny if they do not
qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to have a false claim
paid. Recently, several pharmaceutical and other health care
companies have been prosecuted under these laws for allegedly
inflating drug prices they report to pricing services, which in
turn were used by the government to set Medicare and Medicaid
reimbursement rates, and for allegedly providing free product to
customers with the expectation that the customers would bill
federal programs for the product. In addition, certain marketing
practices, including off-label promotion, may also violate false
claims laws. The majority of states also have statutes or
regulations similar to the federal anti-kickback law and false
claims laws, which apply to items and services reimbursed under
Medicaid and other state programs, or, in several states, apply
regardless of the payor.
In addition, we and the manufacturers on which we rely for the
manufacture of our products are subject to requirements that
drugs be manufactured, packaged and labeled in conformity with
current good manufacturing practice, or cGMP. To comply with
cGMP requirements, manufacturers must continue to spend time,
money and effort to meet requirements relating to personnel,
facilities, equipment, production and process, labeling and
packaging, quality control, record-keeping and other
requirements. The FDA periodically inspects drug manufacturing
facilities to evaluate compliance with cGMP requirements.
Also, as part of the sales and marketing process, pharmaceutical
companies frequently provide samples of approved drugs to
physicians. This practice is regulated by the FDA and other
governmental authorities, including, in particular, requirements
concerning record-keeping and control procedures.
Outside of the United States, our ability to market our products
will also depend on receiving marketing authorizations from the
appropriate regulatory authorities. The foreign regulatory
approval process includes all of the risks associated with the
FDA approval process described above. The requirements governing
the conduct of clinical trials and marketing authorization vary
widely from country to country.
|
|
|
Third-Party Reimbursement and Pricing Controls |
In the United States and elsewhere, sales of pharmaceutical
products depend in significant part on the availability of
coverage and reimbursement to providers and the consumer from
third-party payors, such as government and private insurance
plans. Third-party payors are increasingly challenging the
prices charged for medical products and services. Our products
may not be considered cost effective, and coverage and
reimbursement may not be available or sufficient to allow us to
sell our products on a competitive and profitable basis.
In many foreign markets, including the countries in the European
Union, pricing of pharmaceutical products is subject to
governmental control. In the United States, there have been, and
we expect that there will continue to be, a number of federal
and state proposals to implement similar governmental pricing
control. While we cannot predict whether such legislative or
regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on our business,
financial condition and profitability.
Employees
As of June 30, 2006, we had 24 employees, consisting of
clinical development, regulatory affairs, manufacturing and
program management, administration, business development and
marketing. We consider our relations with our employees to be
good.
76
Facilities
We lease approximately 23,494 square feet of space in our
headquarters in San Diego, California under a sublease that
expires in 2012. We intend to sublease approximately
5,800 square feet of our headquarters for a period of two
years. We have no laboratory, research or manufacturing
facilities. We believe that our current facilities are adequate
for our needs for the immediate future and that, should it be
needed, suitable additional space will be available to
accommodate expansion of our operations on commercially
reasonable terms.
Legal Proceedings
We are not engaged in any legal proceedings.
77
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information about our
executive officers and directors as of September 30, 2006:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Theodore R. Schroeder
|
|
|
51 |
|
|
President, Chief Executive Officer and Director |
James B. Breitmeyer, M.D., Ph.D.
|
|
|
52 |
|
|
Executive Vice President, Development and Chief Medical Officer |
William S. Craig, Ph.D.
|
|
|
56 |
|
|
Senior Vice President, Pharmaceutical Development and
Manufacturing |
William R. LaRue
|
|
|
55 |
|
|
Senior Vice President, Chief Financial Officer, Treasurer and
Secretary |
Richard E. Lowenthal
|
|
|
40 |
|
|
Vice President, Regulatory Affairs and Quality Assurance |
Mike A. Royal, M.D., J.D.
|
|
|
53 |
|
|
Vice President, Clinical Development, Analgesics |
David A. Socks
|
|
|
32 |
|
|
Vice President, Business Development |
Cam L. Garner(1)
|
|
|
58 |
|
|
Chairman of the Board of Directors |
Brian G. Atwood(2)
|
|
|
53 |
|
|
Director |
Samuel L. Barker, Ph.D.
|
|
|
64 |
|
|
Director |
Michael A. Berman, M.D.(2)(3)
|
|
|
64 |
|
|
Director |
James C. Blair, Ph.D.(1)
|
|
|
67 |
|
|
Director |
Alan D. Frazier(1)(3)
|
|
|
55 |
|
|
Director |
Alain B. Schreiber, M.D.(2)
|
|
|
51 |
|
|
Director |
Christopher J. Twomey(3)
|
|
|
47 |
|
|
Director |
|
|
|
|
(1) |
Member of the Compensation Committee. |
|
(2) |
Member of the Nominating/ Corporate Governance Committee. |
|
(3) |
Member of the Audit Committee. |
Executive Officers
Theodore R. Schroeder is one of our co-founders and has
served as our President and Chief Executive Officer and as a
member of our board of directors since our inception in May
2004. From August 2002 to February 2004, he served as Senior
Vice President of North America Sales and Marketing of Elan
Pharmaceuticals, Inc., a neuroscience-based pharmaceutical
company. From February 2001 to August 2002, Mr. Schroeder
served as General Manager of the Hospital Products Business Unit
at Elan, a position he also held at Dura Pharmaceuticals, Inc.,
a specialty respiratory pharmaceutical and pulmonary drug
delivery company, from May 1999 to November 2000 until its
acquisition by Elan. Prior to joining Dura, Mr. Schroeder
held a number of hospital-related sales and marketing positions
with Bristol-Myers Squibb Company, a global pharmaceutical
company. Mr. Schroeder holds a B.S. in management from
Rutgers University.
James B. Breitmeyer, M.D., Ph.D. has served as our
Executive Vice President, Development and Chief Medical Officer
since August 2006. From December 2001 to August 2006,
Dr. Breitmeyer served as Chief Medical Officer and Vice
President, Pharmaceutical Operations of Applied Molecular
Evolution, a wholly-owned subsidiary of Eli Lilly and Company, a
global pharmaceutical company. From February 2000 to July 2001,
Dr. Breitmeyer was the President and Chief Executive
Officer of the Harvard Clinical Research Institute. Prior to
February 2000, Dr. Breitmeyer held various positions of
increasing
78
responsibility including Senior Vice President and Chief Medical
Officer of Serono International S.A., a global biopharmaceutical
company. Dr. Breitmeyer holds a B.A. in chemistry from the
University of California, Santa Cruz, and an M.D. and Ph.D. from
Washington University School of Medicine.
William S. Craig, Ph.D. has served as our Senior
Vice President, Pharmaceutical Development and Manufacturing
since November 2004. From January 2000 to November 2004,
Dr. Craig served as Vice President, Research and Product
Development of ISTA Pharmaceuticals, Inc., an
ophthalmology-focused specialty pharmaceutical company. From
1996 to December 1999, Dr. Craig served as Vice President,
Research and Development for Alpha Therapeutics Corporation, a
biotechnology company. From 1988 to 1996, he served as Senior
Director, Research and Development for Telios Pharmaceuticals,
Inc., a biotechnology company. Dr. Craig holds a B.S. in
biochemistry from the University of Michigan and a Ph.D. in
chemistry from the University of California, San Diego.
William R. LaRue has served as our Senior Vice President,
Chief Financial Officer, Treasurer and Secretary since June
2006. From April 2001 to May 2006, Mr. LaRue served as
Senior Vice President and Chief Financial Officer of Micromet,
Inc., formerly CancerVax Corporation, a biotechnology company
focused on the treatment and control of cancer. From March 2000
to February 2001, Mr. LaRue served as Executive Vice
President and Chief Financial Officer of eHelp Corporation, a
provider of user assistance software. From January 1997 to
February 2000, Mr. LaRue served as Vice President and
Treasurer of Safeskin Corporation, a medical device company, and
from January 1993 to January 1997 he served as Treasurer of GDE
Systems, Inc., a high technology electronic systems company.
Mr. LaRue received a B.S. in business administration and an
M.B.A. from the University of Southern California.
Richard E. Lowenthal has served as our Vice President,
Regulatory Affairs and Quality Assurance since November 2004.
From November 2002 to November 2004, Mr. Lowenthal served
as Head, Worldwide Regulatory Affairs and Drug Safety of Maxim
Pharmaceuticals, Inc., a biopharmaceutical company. From
December 2001 to November 2002, he served as Vice President of
Regulatory Affairs and Quality Assurance of AnGes, MG, Inc., a
biotechnology company. From June 1996 to December 2001,
Mr. Lowenthal served in various roles in regulatory affairs
and research and development at Janssen Research Foundation, a
division of Johnson & Johnson, including Global Project
Leader for Risperdal New Products and most recently as the
Global Director of Chemistry, Manufacturing and Control
Regulatory Affairs. From March 1995 to June 1996, he served as
the Director of Regulatory Affairs and Quality Assurance of
Somerset Pharmaceuticals, Inc., a proprietary research and
development pharmaceutical company. Prior to joining Somerset,
Mr. Lowenthal worked at the FDA as a new drug reviewer in
the Division of Neuropharmacologic Drug Products and in the
Division of Oncology and Pulmonary Drug Products.
Mr. Lowenthal holds a B.Sc. in biochemistry from Florida
State University, an M.Sc. in organic chemistry from Florida
State University and a Masters of Business Science in Executive
Leadership from the University of San Diego.
Mike A. Royal, M.D., J.D. has served as our
Vice President, Clinical Development, Analgesics since April
2006. From December 2004 to March 2006, Dr. Royal served as
Chief Medical Officer of Solstice Neurosciences, Inc., a
specialty biopharmaceutical company. From May 2003 to December
2004, Dr. Royal served as Vice President, Strategic Brand
Development and Global Medical Affairs of Alpharma Inc., a
global specialty pharmaceutical company. From January 2002 to
May 2003, he served as Senior Medical Director of Elan
Pharmaceuticals, Inc., a neuroscience-based biotechnology
company. From 1994 to January 2002, he owned and managed the
largest private practice pain management clinic and research
center in Oklahoma. Dr. Royal has also served as Director
of the Acute Pain Service, Staff Anesthesiologist, and Assistant
Professor of Anesthesiology and Critical Care Medicine at the
University of Pittsburgh Medical Center. Dr. Royal is board
certified in internal medicine, anesthesiology, pain management,
and addiction medicine and has published extensively in the area
of pain management. He holds a B.S. in chemistry from the
Massachusetts Institute of Technology, an M.D. from the
University of Massachusetts, a J.D. from the University of
Maryland and an M.B.A. from New York University (TRIUM).
79
David A. Socks is one of our co-founders and has served
as our Vice President, Business Development since our inception
in May 2004. From May 2004 to June 2006, Mr. Socks also
served as our Chief Financial Officer, Treasurer, and Secretary.
From July 2000 to May 2004, Mr. Socks was a Venture Partner
at Windamere Venture Partners, a venture capital firm investing
in early stage life science companies. In this capacity,
Mr. Socks held management positions at two portfolio
companies of Windamere Venture Partners. These positions
included Vice President of Business Development of Kanisa
Pharmaceuticals, Inc., an oncology-focused specialty
pharmaceutical company and Vice President of Finance of CelTor
Biosystems, Inc., a drug discovery company. Mr. Socks
co-founded several pharmaceutical companies including Avera
Pharmaceuticals, Inc., Kanisa Pharmaceuticals, Inc., Somaxon
Pharmaceuticals, Inc. and Verus Pharmaceuticals, Inc. and two
medical technology companies including MiraMedica, Inc. and
SpineWave, Inc. In 1999, Mr. Socks worked in business
development at Neurocrine Biosciences, a biopharmaceutical
company. In 1998, he worked in the venture capital arm of EFO
Holdings, L.P., an investment firm. From 1995 to 1998, he worked
at Kaiser Associates, Inc., a strategic management consulting
firm, where he was most recently a Senior Manager.
Mr. Socks holds a B.S. in business administration from
Georgetown University and an M.B.A. from Stanford University.
Board of Directors
Cam L. Garner is one of our co-founders and has served as
a member of our board of directors since our inception in May
2004, and as the chairman of our board of directors since July
2004. Mr. Garner co-founded Verus Pharmaceuticals, Inc.,
Somaxon Pharmaceuticals, Inc. and Xcel Pharmaceuticals, Inc.,
which are specialty pharmaceutical companies. Since July 2004,
he has served as Chairman and Chief Executive Officer of Verus.
He served as Chairman of Xcel Pharmaceuticals, Inc. from January
2001 until it was acquired in March 2005 by Valeant
Pharmaceuticals International. From August 2001 to February
2002, he served as acting Chief Executive Officer of Favrille,
Inc., a biotechnology company, and is currently the Chairman of
its board of directors. From 1989 to 1995, he served as Chief
Executive Officer of Dura Pharmaceuticals, Inc., a specialty
respiratory pharmaceutical and pulmonary drug delivery company,
and Chairman and Chief Executive Officer from 1995 to 2000 until
it was sold to Elan in November 2000. Previously, he served as
Chairman of DJ Pharma, a specialty pharmaceutical sales and
marketing company, which was sold to Biovail Corporation in
2000. Mr. Garner serves as chairman of the board of
Favrille, Inc., a biopharmaceutical company, and also serves on
the board of directors of two other publicly-held
companies Somaxon Pharmaceuticals, Inc., a specialty
pharmaceutical company, and Pharmion Corporation, a
biotechnology company and other privately-held
pharmaceutical companies. In addition, Mr. Garner
participates on the boards of several charitable organizations.
Mr. Garner holds a B.A. in biology and an M.B.A. from
Baldwin-Wallace College and an honorary Doctor of Science from
Virginia Wesleyan College.
Brian G. Atwood has served as a member of our board of
directors since March 2006. Since 1999, Mr. Atwood has served as
a Managing Director of Versant Ventures I, LLC, Versant Ventures
II, LLC and Versant Ventures III, LLC (Versant Ventures), a
venture capital firm focusing on healthcare that he co-founded.
Prior to founding Versant Ventures, Mr. Atwood served as a
general partner of Brentwood Associates, a venture capital firm.
Mr. Atwood also serves on the board of directors of Pharmion
Corporation, ForteBio, FivePrime Therapeutics, Inc., Saegis
Pharmaceuticals, Helicos Biosciences Corp. and Spaltudaq
Corporation. Mr. Atwood holds a B.S. in biological sciences from
the University of California, Irvine, an M.S. in ecology from
the University of California, Davis and an M.B.A. from Harvard
University.
Samuel L. Barker, Ph.D. has served as a member of our
board of directors since August 2006. In March 2001, Dr. Barker
co-founded Clearview Projects, Inc., a provider of partnering
and transaction services to biopharmaceutical companies, and has
served as a principal since that time. Dr. Barker also
served as President and Chief Executive Officer of Clearview
Projects from July 2003 to November 2004. Dr. Barker served in a
series of leadership positions at Bristol-Myers Squibb Company
until his retirement in 1999. His positions at Bristol-Myers
Squibb included service as Executive Vice President, Worldwide
Franchise Management and Strategy during 1998, President, United
States Pharmaceuticals from 1992 to
80
1997, and President, Bristol-Myers Squibb Intercontinental
Commercial Operations from 1990 to 1992. Prior to 1990, Dr.
Barker held executive positions in research and development,
manufacturing, finance, business development and sales and
marketing at Squibb Pharmaceuticals. Dr. Barker also serves on
the board of directors of AtheroGenics, Inc., a pharmaceutical
company, and Lexicon Genetics Incorporated, a biopharmaceutical
company, where he serves as chairman. Dr. Barker holds a B.S.
from Henderson State College, an M.S. from the University of
Arkansas and a Ph.D. from Purdue University.
Michael A. Berman, M.D. has served as a member of
our board of directors since April 2006. Since January 2005,
Dr. Berman has served as President and Chief Executive
Officer of the Michael A. Berman Group, Inc., a consulting firm
specializing in the healthcare industry. Since January 2005,
Dr. Berman has also served as a consultant for Stockamp and
Associates, Inc., a business process consulting firm
specializing in the healthcare industry. From October 1999 to
January 2005, Dr. Berman served as Executive Vice President
and Director of New York Presbyterian Hospital, and from
September 1997 to October 1999 as its Senior Vice President and
Chief Medical Officer. From April 1984 to September 1997, he
served as Professor and Chairman of the Department of Pediatrics
at the University of Maryland School of Medicine.
Dr. Berman holds a M.D. from the State University of New
York, Syracuse.
James C. Blair, Ph.D. has served as a member of our
board of directors since September 2005. Since 1985,
Mr. Blair has been a partner of Domain Associates, L.L.C.,
a venture capital management company focused on life sciences.
Mr. Blair also serves on the board of directors of Cell
Biosciences, Inc., Five Prime Therapeutics, Inc., GenVault
Corporation, NeuroPace, Inc., Novacea, Inc., NuVasive, Inc.,
Pharmion Corporation, Verus Pharmaceuticals, Inc. and Volcano
Corporation. Mr. Blair has over 35 years experience
with venture and emerging growth companies. In the course of
this experience, he has been involved in the creation and
successful development at the board level of over forty life
science ventures, including Amgen Inc., Aurora Biosciences
Corporation, Amylin Pharmaceuticals, Inc., Applied Biosystems
Inc., Dura Pharmaceuticals, GeneOhm Sciences, Inc. and Molecular
Dynamics Inc. A former managing director of Rothschild Inc.,
Mr. Blair was directly involved at a senior level with
Rothschild/ New Court venture capital activities from 1978 to
1985. From 1969 to 1978, he was associated with F.S. Smithers
and Co. and White, Weld and Co., two investment banking firms
actively involved with new ventures and emerging growth
companies. From 1961 to 1969, Mr. Blair was an engineering
manager with RCA Corporation, during which time he received a
David Sarnoff Fellowship. He currently serves on the board of
directors of the Prostate Cancer Foundation, a philanthropic
organization, and he is on the advisory boards of the Department
of Molecular Biology at Princeton University and the Department
of Biomedical Engineering at the University of Pennsylvania.
Mr. Blair holds a B.S.E. from Princeton University and an
M.S.E. and Ph.D. from the University of Pennsylvania.
Alan D. Frazier has served as a member of our board of
directors since March 2006. In 1991, Mr. Frazier founded
Frazier Healthcare Ventures, a venture capital firm, and has
served as the managing partner since its inception. From 1983 to
1991, Mr. Frazier served as Executive Vice President, Chief
Financial Officer and Treasurer of Immunex Corporation, a
biopharmaceutical company. From 1980 to 1983, Mr. Frazier
was a principal in the Audit Department of Arthur
Young & Company, which is now Ernst & Young
LLP. Mr. Frazier is a member of the board of directors of
Alexza Pharmaceuticals, Inc. and Rigel Pharmaceuticals, Inc.,
both of which are pharmaceutical companies. Mr. Frazier
received a B.A. in economics from the University of Washington.
Alain B. Schreiber, M.D. has served as a member of
our board of directors since July 2004. Since 2000,
Dr. Schreiber has been a General Partner of ProQuest
Investments, a venture capital firm. From May 1992 to June 2000,
Dr. Schreiber served as President, Chief Executive Officer
and a director of Vical Incorporated, a biopharmaceutical
company. From July 1985 to April 1992, he held various positions
with Rhone-Poulenc Rorer Inc., which is now Sanofi-Aventis, most
recently as Senior Vice President of Discovery Research. From
October 1982 to June 1985, Dr. Schreiber served as
Biochemistry Department Head at Syntex Research, which is now
Roche Bioscience. Dr. Schreiber currently serves on the
board of several privately held companies including BioRexis
Pharmaceutical Corporation, Concentric Medical, Inc.
81
and Optimer Pharmaceuticals, Inc. Dr. Schreiber holds a
B.S. in chemistry and an M.D. from the Free University in
Brussels, Belgium.
Christopher J. Twomey has served as a member of our board
of directors since July 2006. Mr. Twomey joined Biosite
Incorporated, a medical diagnostic company, in March 1990 and is
currently its Senior Vice President, Finance and Chief Financial
Officer. From 1981 to 1990, Mr. Twomey worked for
Ernst & Young LLP, where he served as an Audit Manager.
Mr. Twomey also serves on the board of directors of
Senomyx, Inc., a biotechnology company, where he serves as Chair
of the Audit Committee. Mr. Twomey holds a B.A. in business
economics from the University of California at
Santa Barbara.
Board Composition
Our board of directors is currently authorized to have eight
members, and is currently composed of seven non-employee members
and our current President and Chief Executive Officer, Theodore
R. Schroeder. Upon completion of this offering, our amended and
restated certificate of incorporation will provide for a
classified board of directors consisting of three classes of
directors, each serving staggered three-year terms. As a result,
a portion of our board of directors will be elected each year.
To implement the classified structure, prior to the consummation
of this offering, two of the nominees to the board will be
appointed to one-year terms, three will be appointed to two-year
terms and three will be appointed to three-year terms.
Thereafter, directors will be elected for three-year terms. Our
Class I directors, whose terms will expire at the 2007
annual meeting of stockholders, will be Drs. Berman and
Schreiber and Mr. Schroeder. Our Class II directors,
whose terms will expire at the 2008 annual meeting of
stockholders, will be Dr. Blair and Messrs. Frazier and Twomey.
Our Class III directors, whose terms will expire at the
2009 annual meeting of stockholders, will be Dr. Barker and
Messrs. Atwood and Garner.
Pursuant to a voting agreement originally entered into in July
2004 and most recently amended in August 2006 by and among us
and certain of our stockholders, Drs. Barker, Berman, Blair
and Schreiber and Messrs. Atwood, Frazier, Garner,
Schroeder and Twomey were each elected to serve as members on
our board of directors and, as of the date of this prospectus,
continue to so serve. The voting agreement will terminate upon
completion of this offering, and members previously elected to
our board of directors pursuant to this agreement will continue
to serve as directors until their successors are duly elected by
holders of our common stock. For a more complete description of
the voting agreement, see Certain Relationships and
Related Party Transactions Voting Agreement.
Board Committees
Our board of directors has established three committees: the
audit committee, the compensation committee and the
nominating/corporate governance committee. Our board of
directors may establish other committees to facilitate the
management of our business.
Audit Committee. Our audit committee consists of
Messrs. Twomey (chair and audit committee financial expert)
and Frazier and Dr. Berman, each of whom our board of
directors has determined is independent within the meaning of
the independent director standards of the SEC and the Nasdaq
Stock Market, Inc.
This committees main function is to oversee our accounting
and financial reporting processes, internal systems of control,
independent registered public accounting firm relationships and
the audits of our financial statements. This committees
responsibilities include:
|
|
|
|
|
selecting and hiring our independent registered public
accounting firm; |
|
|
|
evaluating the qualifications, independence and performance of
our independent registered public accounting firm; |
|
|
|
approving the audit and non-audit services to be performed by
our independent registered public accounting firm; |
82
|
|
|
|
|
reviewing the design, implementation, adequacy and effectiveness
of our internal controls and our critical accounting policies; |
|
|
|
overseeing and monitoring the integrity of our financial
statements and our compliance with legal and regulatory
requirements as they relate to financial statements or
accounting matters; |
|
|
|
reviewing with management and our auditors any earnings
announcements and other public announcements regarding our
results of operations; |
|
|
|
preparing the report that the SEC requires in our annual proxy
statement; and |
|
|
|
reviewing and approving any related party transactions and
reviewing and monitoring compliance with our code of conduct and
ethics. |
Compensation Committee. Our compensation committee
consists of Messrs. Garner (chair) and Frazier and
Dr. Blair, each of whom our board of directors has
determined is independent within the meaning of the independent
director standards of the Nasdaq Stock Market, Inc. This
committees purpose is to assist our board of directors in
determining the development plans and compensation for our
senior management and directors and recommend these plans to our
board. This committees responsibilities include:
|
|
|
|
|
reviewing and recommending compensation and benefit plans for
our executive officers and compensation policies for members of
our board of directors and board committees; |
|
|
|
reviewing the terms of offer letters and employment agreements
and arrangements with our officers; |
|
|
|
setting performance goals for our officers and reviewing their
performance against these goals; |
|
|
|
evaluating the competitiveness of our executive compensation
plans and periodically reviewing executive succession plans; and |
|
|
|
preparing the report that the SEC requires in our annual proxy
statement. |
Nominating/ Corporate Governance Committee. Our
nominating/corporate governance committee consists of
Mr. Atwood (chair) and Drs. Berman and Schreiber,
each of whom our board of directors has determined is
independent within the meaning of the independent director
standards of the Nasdaq Stock Market, Inc. This committees
purpose is to assist our board by identifying individuals
qualified to become members of our board of directors,
consistent with criteria set by our board, and to develop our
corporate governance principles. This committees
responsibilities include:
|
|
|
|
|
evaluating the composition, size and governance of our board of
directors and its committees and making recommendations
regarding future planning and the appointment of directors to
our committees; |
|
|
|
administering a policy for considering stockholder nominees for
election to our board of directors; |
|
|
|
evaluating and recommending candidates for election to our board
of directors; |
|
|
|
overseeing our board of directors performance and
self-evaluation process; and |
|
|
|
reviewing our corporate governance principles and providing
recommendations to the board regarding possible changes. |
Compensation Committee Interlocks and Insider
Participation
Prior to establishing the compensation committee, our board of
directors as a whole performed the functions delegated to the
compensation committee. None of the members of our compensation
committee
83
has ever been one of our officers or employees. None of our
executive officers currently serves, or has served, as a member
of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a
member of our board of directors or compensation committee.
Director Compensation
From September 2004 through August 2005, we paid Mr. Garner
$5,000 per month plus qualified business expenses for his
services as chairman of our board of directors under the terms
of a consulting agreement between us and a limited liability
company affiliated with Mr. Garner. The agreement expired
on August 31, 2005. From September 2005 to February 2006,
we continued to pay Mr. Garner $5,000 per month for
his services as chairman of our board of directors. In February
2006, Mr. Garners monthly compensation for his
services as chairman of our board of directors was increased to
$8,333 per month.
Other than to Mr. Garner, we have historically not provided
cash compensation to directors for their services as directors
or members of committees of the board of directors. Following
the completion of this offering, we intend to provide cash
compensation in the form of an annual retainer of $25,000 for
each non-employee director. We will also pay an additional
annual retainer to the non-employee director serving as
(i) the chairman of our Audit Committee equal to $10,000,
and (ii) the chairman of our Compensation Committee or our
Nominating/ Corporate Governance Committee equal to $4,000. We
will pay an additional annual retainer to non-employee directors
(other than the chairman) serving on the Audit Committee equal
to $5,000 and to non-employee directors (other than the
chairman) serving on the Compensation Committee or the
Nominating/Corporate Governance Committee equal to $2,000. We
will pay additional cash compensation to the non-employee
director serving as the chairman of our board of directors equal
to $100,000 per year. We have reimbursed and will continue
to reimburse our non-employee directors for their reasonable
expenses incurred in attending meetings of our board of
directors and committees of the board of directors.
Following the completion of this offering, any non-employee
director who is first elected to the board of directors will be
granted a non-qualified option to purchase 25,000 shares of
our common stock (subject to adjustment as provided in the 2006
plan described below) on the date of his or her initial election
to the board of directors. Such options will have an exercise
price per share equal to the fair market value of our common
stock on the date of grant. In addition, on the date of each
annual meeting of our stockholders following this offering, each
non-employee director will be eligible to receive a
non-qualified option to purchase 12,500 shares of common
stock (subject to adjustment as provided in the 2006 plan
described below).
The initial options granted to non-employee directors described
above will vest in thirty-six (36) equal monthly installments on
the first day of each calendar month subsequent to the date of
grant, subject to the directors continuing service on our
board of directors on those dates. The annual options granted to
non-employee directors described above will vest in twelve equal
monthly installments on the first day of each calendar month
following the date of grant, subject to the directors
continuing service on our board of directors on those dates. The
term of each option granted to a non-employee director shall be
ten years. The terms of these options are described in more
detail under Employee Benefit and Stock
Plans.
84
Executive Compensation
The following table summarizes the compensation that we paid to
our Chief Executive Officer and each of our four other most
highly compensated executive officers during the year ended
December 31, 2005. We refer to these officers in this
prospectus as our named executive officers.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term | |
|
|
|
|
|
|
|
|
Compensation | |
|
|
|
|
Annual Compensation | |
|
|
|
| |
|
|
|
|
| |
|
Other Annual | |
|
Securities | |
|
All Other | |
Name and Principal Position |
|
Salary | |
|
Bonus | |
|
Compensation | |
|
Underlying Options | |
|
Compensation | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theodore R. Schroeder
|
|
$ |
250,000 |
|
|
$ |
30,000 |
|
|
|
|
|
|
|
62,500 |
|
|
|
|
|
|
President and Chief
Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard E. Lowenthal
|
|
|
220,000 |
|
|
|
25,430 |
|
|
|
|
|
|
|
141,000 |
|
|
|
|
|
|
Vice President, Regulatory Affairs and Quality Assurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William S. Craig, Ph.D.
|
|
|
220,000 |
|
|
|
23,161 |
|
|
|
|
|
|
|
87,500 |
|
|
|
|
|
|
Senior Vice President, Pharmaceutical Development
and Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth R. Heilbrunn, M.D.(1)
|
|
|
206,250 |
|
|
|
6,000 |
|
|
|
|
|
|
|
87,500 |
|
|
|
|
|
|
Senior Vice President,
Clinical Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David A. Socks
|
|
|
175,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President,
Business Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Dr. Heilbrunn joined us as our Senior Vice President,
Clinical Development in April 2005 and, therefore, the amounts
set forth above reflect less than a full year. Effective
September 30, 2006, Dr. Heilbrunn resigned. |
In May 2006, Dr. Mike A. Royal, M.D., J.D. joined
us as our Vice President, Clinical Development, Analgesics at an
annual salary of $275,000. In June 2006, Mr. William R.
LaRue joined us as our Senior Vice President, Chief Financial
Officer, Treasurer and Secretary at an annual salary of
$265,000. In August 2006, Dr. James B. Breitmeyer joined us
as our Executive Vice President, Development and Chief Medical
Officer at an annual salary of $330,000.
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect
to stock options granted to the individuals named in the Summary
Compensation Table during the fiscal year ended
December 31, 2005, including the potential realizable value
over the ten-year term of the options, based on assumed rates of
stock appreciation of 5% and 10%, compounded annually, minus the
applicable per share exercise price.
These assumed rates of appreciation are mandated by the rules of
the SEC and do not represent our estimate or projection of our
future common stock price. We cannot assure you that any of the
values in the table will be achieved. Actual gains, if any, on
stock option exercises will be dependent on the future
performance of our common stock and overall stock market
conditions. The assumed 5% and 10% rates of stock appreciation
are based on the assumed initial public offering price of
$12.00 per share (the mid-point of the price range set
forth on the cover page of this prospectus). The percentage of
total
85
options granted is based upon our granting of options to
employees, directors and consultants in 2005 to purchase an
aggregate of 769,250 shares of our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Realizable Value at | |
|
|
|
|
|
|
|
|
|
|
Assumed Annual Rates of | |
|
|
|
|
Stock Price Appreciation | |
|
|
Individual Grants | |
|
for Option Term | |
|
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
|
|
|
Number of | |
|
Total Options | |
|
|
|
|
|
|
Shares | |
|
Granted to | |
|
|
|
|
|
|
Underlying | |
|
Employees | |
|
Exercise | |
|
|
|
|
|
|
Options | |
|
In Last | |
|
Price Per | |
|
Expiration | |
|
|
Name |
|
Granted | |
|
Fiscal Year | |
|
Share | |
|
Date | |
|
5% | |
|
10% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Theodore R. Schroeder
|
|
|
62,500 |
|
|
|
8.12% |
|
|
$ |
0.40 |
|
|
|
12-29-2015 |
|
|
$ |
1,196,671 |
|
|
$ |
1,920,307 |
|
Richard E. Lowenthal
|
|
|
75,000 |
|
|
|
9.75% |
|
|
|
0.40 |
|
|
|
2-15-2015 |
|
|
|
1,436,005 |
|
|
|
2,304,368 |
|
|
|
|
66,000 |
|
|
|
8.58% |
|
|
|
0.40 |
|
|
|
12-29-2015 |
|
|
|
1,263,685 |
|
|
|
2,027,844 |
|
William S. Craig, Ph.D.
|
|
|
87,500 |
|
|
|
11.37% |
|
|
|
0.40 |
|
|
|
2-15-2015 |
|
|
|
1,675,339 |
|
|
|
2,688,430 |
|
Kenneth R. Heilbrunn, M.D.(1)
|
|
|
87,500 |
|
|
|
11.37% |
|
|
|
0.40 |
|
|
|
5-19-2015 |
|
|
|
1,675,339 |
|
|
|
2,688,430 |
|
David A. Socks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Effective September 30, 2006, Dr. Heilbrunn resigned
as our Senior Vice President, Clinical Development. |
Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table describes for the named executive officers
the number and value of securities underlying exercisable and
unexercisable options held by them as of December 31, 2005.
The value realized and the value of unexercised
in-the-money options at
December 31, 2005 are based on the assumed initial public
offering price of $12.00 per share (the mid-point of the
price range set forth on the cover page of this prospectus) less
the per share exercise price, multiplied by the number of shares
issued or issuable, as the case may be, upon exercise of the
option. All options were granted under our 2004 equity incentive
award plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
|
|
|
|
|
|
|
Underlying | |
|
Value of Unexercised |
|
|
|
|
|
|
Unexercised Options at | |
|
In-the-Money Options at |
|
|
Number of | |
|
|
|
December 31, 2005 | |
|
December 31, 2005 |
|
|
Shares Acquired | |
|
Value | |
|
| |
|
|
Name |
|
on Exercise | |
|
Realized | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Theodore R. Schroeder
|
|
|
250,000 |
(1) |
|
$ |
2,900,000 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Richard E. Lowenthal
|
|
|
141,000 |
(2) |
|
|
1,635,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William S. Craig, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
87,500 |
(3) |
|
|
|
|
|
|
1,015,000 |
|
|
|
|
|
Kenneth R. Heilbrunn, M.D.
|
|
|
|
|
|
|
|
|
|
|
87,500 |
(4) |
|
|
|
|
|
|
1,015,000 |
|
|
|
|
|
David A. Socks
|
|
|
|
|
|
|
|
|
|
|
25,000 |
(5) |
|
|
|
|
|
|
290,000 |
|
|
|
|
|
|
|
|
(1) |
Of these 250,000 shares, 191,406 were unvested as of
December 31, 2005. |
|
|
|
(2) |
Of these 141,000 shares, 122,250 were unvested as of
December 31, 2005. |
|
|
|
(3) |
Of these 87,500 shares, 63,802 were unvested as of
December 31, 2005. |
|
|
|
(4) |
Of these 87,500 shares, 87,500 were unvested as of
December 31, 2005. Effective September 30, 2006,
Dr. Heilbrunn resigned as our Senior Vice President,
Clinical Development, at which time the vesting of options to
purchase 48,437 shares of our common stock was accelerated. |
|
|
|
(5) |
Of these 25,000 shares, 17,188 were unvested as of
December 31, 2005. |
|
86
Employment Agreements
We have entered into employment agreements with Theodore R.
Schroeder, our President and Chief Executive Officer, James B.
Breitmeyer, M.D., Ph.D., our Executive Vice President,
Development and Chief Medical Officer, William S.
Craig, Ph.D., our Senior Vice President, Pharmaceutical
Development and Manufacturing, William R. LaRue, our Senior Vice
President, Chief Financial Officer, Treasurer and Secretary,
Richard E. Lowenthal, our Vice President, Regulatory Affairs and
Quality Assurance, Mike A. Royal, M.D., J.D., our Vice
President, Clinical Development, Analgesics, and David A. Socks,
our Vice President, Business Development.
Pursuant to the employment agreements, each executive is
required to faithfully, industriously and to the best of his or
her ability, experience and talent perform all of the duties
that may be assigned to such executive pursuant to his or her
employment agreement, and shall devote substantially all of his
or her productive time and efforts to the performance of such
duties.
The base salaries of the executives are set forth in the
employment agreements. The employment agreements do not provide
for automatic annual increases in salary, but each employment
agreement provides for annual salary reviews. The employment
agreements provide that each executive shall participate in any
bonus plan that our board of directors or its designee may
approve for our senior executives (see
Employee Benefit and Stock Plans
Annual Bonus Plan below). Each executives employment
is at-will and may be terminated by us at any time, with or
without notice. Similarly, each executive may terminate his or
her employment with us at any time, with or without notice.
The employment agreements provide each executive with certain
severance benefits in the event his or her employment is
terminated as a result of his or her death or permanent
disability. Specifically, in the event of such a termination,
each executive will receive any accrued but unpaid base salary
as of the date of termination, a lump sum cash payment equal to
the executives annual base salary, and a lump sum cash
payment equal to the executives prorated annual bonus.
Additionally, in the event of an executives death, his or
her eligible dependents would receive 12 months healthcare
benefits continuation coverage at our expense. In the event of
an executives permanent disability, he or she will receive
12 months healthcare and life insurance benefits
continuation at our expense.
The employment agreements also provide each executive with
certain severance benefits in the event his or her employment is
terminated by us other than for cause, as defined in
the agreements and described below, or if the executive resigns
with good reason, as defined in the agreements and
described below. Specifically, if such termination occurs within
three months prior to or within 12 months following a
change of control, each executive will receive any accrued but
unpaid base salary as of the date of termination, a lump sum
cash payment equal to the executives annual base salary, a
lump sum cash payment equal to the executives prorated
annual bonus, and 12 months healthcare and life insurance
benefits continuation coverage at our expense, plus a maximum of
$15,000 towards outplacement services. If such termination
occurs more than three months prior to a change of control or
more than 12 months following a change of control, each
executive will receive the benefits described in the previous
sentence, less the prorated annual bonus.
The employment agreements provide that, in the event an
executives employment is terminated by us other than for
cause or as a result of the executives death or permanent
disability, or if the executive resigns for good reason, that
portion of the executives stock awards, and any unvested
shares issued upon the exercise of such stock awards, which
would have vested if the executive had remained employed for an
additional 12 months following the date of termination will
immediately vest on the date of termination. In addition, if an
executives employment is terminated by us other than for
cause or if an executive resigns for good reason within three
months prior to or twelve months following a change of control,
all of the executives remaining unvested stock awards, and
any unvested shares issued upon the exercise of such stock
awards, will immediately vest on the later of (1) the date
of termination or (2) the date of the change of control.
This accelerated vesting is in addition to any accelerated
vesting provided under our stock option plans.
87
Provided that the relevant stock award agreements do not specify
a longer exercise period, an executive may generally exercise
his or her stock awards until three months after the date of the
executives termination of employment, except that the
executive may also exercise his or her stock awards three months
after the date of a change of control, if the executives
employment is terminated by us other than for cause or if the
executive resigns for good reason within three months prior to a
change of control, and if such stock awards were granted on or
after the effective date of the executives employment
agreement. In no event, however, may an executive exercise any
stock award later than its original outside expiration date.
In addition, the employment agreements provide that, in
connection with a change of control, 50% of the executives
unvested stock awards, and any unvested shares issued upon the
exercise of stock awards, will immediately become vested. This
accelerated vesting is in addition to any accelerated vesting
provided under our stock option plans.
The employment agreements also include standard noncompetition,
nonsolicitation and nondisclosure covenants on the part of the
executives. During the term of each executives employment
with us, the employment agreements provide that he or she may
not compete with our business in any manner, except that an
executive may own insignificant equity positions in publicly
traded companies so long as the executive does not control such
company. During the term of each executives employment
with us and for any period during which he or she is receiving
severance, the employment agreements provide that he or she may
not solicit our employees or consultants. The employment
agreements also reaffirm the executives obligations under
our standard employee proprietary information and inventions
agreement to which each executive is a party.
For purposes of the employment agreements, cause
means, generally, the executives commission of an act of
fraud, embezzlement or dishonesty that has a material adverse
impact on us, the executives conviction of, or plea of
guilty or no contest to a felony, the executives
unauthorized use or disclosure of our confidential information
or trade secrets that has a material adverse impact on us, the
executives gross negligence, insubordination, material
violation of any duty of loyalty to us or any other material
misconduct on the part of the executive, the executives
ongoing and repeated failure or refusal to perform or neglect of
his or her duties (where such failure, refusal or neglect
continues for 15 days following the executives
receipt of written notice from our board), or a breach by the
executive of any material provision of his or her employment
agreement. Prior to any determination by us that
cause has occurred, we will provide the executive
with written notice of the reasons for such determination,
afford the executive a reasonable opportunity to remedy any such
breach, and provide the executive an opportunity to be heard
prior to the final decision to terminate the executives
employment.
For purposes of the employment agreements, good
reason means, generally, a change by us in the
executives position or responsibilities, other than a
change in the executives reporting relationship, that, in
the executives reasonable judgment, represents a
substantial and material reduction in the position or
responsibilities as in effect immediately prior thereto, our
assignment to the executive of any duties or responsibilities
that, in the executives reasonable judgment, are
materially inconsistent with such position or responsibilities,
any removal of the executive from or failure to reappoint or
reelect the executive to any of such positions, except in
connection with the termination of the executives
employment for cause, as a result of his or her permanent
disability or death, or by the executive other than for good
reason, a material reduction in the executives annual base
salary (other than in connection with a general reduction in
wages for personnel with similar status and responsibilities),
our requiring the executive (without the executives
consent) to be based at any place outside a
50-mile radius of his
or her initial place of employment with us, except for
reasonably required travel on behalf of our business, our
failure to provide the executive with compensation and benefits
substantially equivalent (in terms of benefit levels and/or
reward opportunities) to those provided for under each of our
material employee benefit plans, programs and practices as in
effect immediately prior to the date of the employment
agreement, or any material breach by us of our obligations to
the executive under the employment agreement.
88
Proprietary Information and Inventions Agreement
Each of our named executive officers has also entered into a
standard form agreement with respect to proprietary information
and inventions. Among other things, this agreement obligates
each named executive officer to refrain from disclosing any of
our proprietary information received during the course of
employment and, with some exceptions, to assign to us any
inventions conceived or developed during the course of
employment.
Employee Benefit and Stock Plans
In August 2006, our board of directors approved our 2006
corporate bonus plan. Pursuant to the 2006 corporate bonus plan,
our board of directors designated for each executive officer a
target bonus amount, expressed as a percentage of his or her
base salary (40% for our chief executive officer, 30% for our
executive vice presidents and senior vice presidents and 25% for
our other executive officers). Our executive officers are
eligible to receive bonuses if certain individual and corporate
performance criteria are achieved during the 2006 fiscal year,
and such bonuses are payable as cash, stock, options, or a
combination of the foregoing. Bonus payments will be based on
the compensation committees evaluation of our achievement
of corporate performance goals for 2006, which were determined
by the compensation committee prior to the inception of the 2006
incentive plan. The use of corporate performance goals is
intended to establish a link between the executives pay
and our business performance. The individual performance of each
of the executive officers during 2006 will be evaluated
according to the achievement of individual performance goals,
which were approved by the president and chief executive officer
and the relevant vice presidents prior to the inception of the
2006 incentive plan. Our president and chief executive officer
will receive a bonus determined solely by reference to the
achievement of corporate performance goals. The compensation
committee is responsible for approving any bonuses to our
executive officers pursuant to the 2006 incentive plan.
|
|
|
2006 Equity Incentive Award Plan |
In August 2006, our board of directors approved our 2006
Equity Incentive Award Plan, or the 2006 plan, which was
approved by our stockholders in August 2006. The 2006 plan
will become effective on the day prior to the day of this
offering.
We have initially reserved 2,100,000 shares of our common
stock for issuance under the 2006 plan. In addition, the number
of shares initially reserved under the 2006 plan will be
increased by (i) the number of shares of common stock
available for issuance and not subject to options granted under
our 2004 equity incentive award plan as of the effective date of
the 2006 plan, and (ii) the number of shares of common
stock related to options granted under our 2004 equity incentive
award plan that are repurchased, forfeited, expired or are
cancelled on or after the effective date of the 2006 plan. The
total number of shares described in clauses (i) and (ii) of the
preceding sentence shall not exceed 2,875,000 shares of our
common stock. The 2006 plan contains an evergreen
provision that allows for an annual increase in the number
of shares available for issuance under the 2006 plan on January
1 of each year during the ten-year term of the 2006 plan,
beginning on January 1, 2008. The annual increase in the
number of shares shall be equal to the lesser of:
|
|
|
|
|
4% of our outstanding common stock on the applicable January 1;
and |
|
|
|
a lesser amount determined by our board of directors. |
Notwithstanding the evergreen provision, the 2006
plan also provides for an aggregate limit of 20,000,000 shares
of common stock which may be issued under the 2006 plan over the
course of its ten-year term. The material terms of the 2006 plan
are summarized below. The 2006 plan is filed as an exhibit to
the registration statement of which this prospectus is a part.
89
Administration. The compensation committee of our board
of directors will administer the 2006 plan (except with respect
to any award granted to independent directors (as
defined in the 2006 plan), which must be administered by our
full board of directors). To administer the 2006 plan, our
compensation committee must consist of at least two members of
our board of directors, each of whom is a non-employee
director for purposes of
Rule 16b-3 under
the Securities Exchange Act of 1934, as amended, and, with
respect to awards that are intended to constitute
performance-based compensation under Section 162(m) of the
Internal Revenue Code of 1986, as amended, an outside
director for purposes of Section 162(m). Subject to
the terms and conditions of the 2006 plan, our compensation
committee has the authority to select the persons to whom awards
are to be made, to determine the type or types of awards to be
granted to each person, the number of awards to grant, the
number of shares to be subject to such awards, and the terms and
conditions of such awards, and to make all other determinations
and decisions and to take all other actions necessary or
advisable for the administration of the 2006 plan. Our
compensation committee is also authorized to adopt, amend or
rescind rules relating to administration of the 2006 plan. Our
board of directors may at any time abolish the compensation
committee and revest in itself the authority to administer the
2006 plan. The full board of directors will administer the 2006
plan with respect to awards to non-employee directors.
Eligibility. Options, stock appreciation rights, or SARs,
restricted stock and other awards under the 2006 plan may be
granted to individuals who are then our officers or employees or
are the officers or employees of any of our subsidiaries. Such
awards may also be granted to our non-employee directors and
consultants but only employees may be granted incentive stock
options, or ISOs. The maximum number of shares that may be
subject to awards granted under the 2006 plan to any individual
in any calendar year cannot exceed 1,000,000.
Awards. The 2006 plan provides that our compensation
committee (or the board of directors, in the case of awards to
non-employee directors) may grant or issue stock options, SARs,
restricted stock, restricted stock units, dividend equivalents,
performance share awards, performance stock units, stock
payments, deferred stock, performance bonus awards,
performance-based awards, and other stock-based awards, or any
combination thereof. The compensation committee (or the board of
directors, in the case of awards to non-employee directors) will
consider each award grant subjectively, considering factors such
as the individual performance of the recipient and the
anticipated contribution of the recipient to the attainment of
the companys long-term goals. Each award will be set forth
in a separate agreement with the person receiving the award and
will indicate the type, terms and conditions of the award.
|
|
|
|
|
Nonqualified stock options, or NQSOs, will provide for the right
to purchase shares of our common stock at a specified price
which may not be less than par value of a share of common stock
on the date of grant, and usually will become exercisable (at
the discretion of our compensation committee or the board of
directors, in the case of awards to non-employee directors) in
one or more installments after the grant date, subject to the
participants continued employment or service with us
and/or subject to the satisfaction of performance targets
established by our compensation committee (or the board of
directors, in the case of awards to non-employee directors).
NQSOs may be granted for any term specified by our compensation
committee (or the board of directors, in the case of awards to
non-employee directors), but the term may not exceed ten years. |
|
|
|
ISOs will be designed to comply with the provisions of the
Internal Revenue Code and will be subject to specified
restrictions contained in the Internal Revenue Code. Among such
restrictions, ISOs must have an exercise price of not less than
the fair market value of a share of common stock on the date of
grant, may only be granted to employees, must expire within a
specified period of time following the optionees
termination of employment, and must be exercised within the ten
years after the date of grant. In the case of an ISO granted to
an individual who owns (or is deemed to own) more than 10% of
the total combined voting power of all classes of our capital
stock, the 2006 plan provides that the exercise price must be
more than 110% of the fair market value of a share of common
stock on the date of grant and the ISO must expire upon the
fifth anniversary of the date of its grant. |
90
|
|
|
|
|
Restricted stock may be granted to participants and made subject
to such restrictions as may be determined by our compensation
committee (or the board of directors, in the case of awards to
non-employee directors). Typically, restricted stock may be
forfeited for no consideration if the conditions or restrictions
are not met, and they may not be sold or otherwise transferred
to third parties until restrictions are removed or expire.
Recipients of restricted stock, unlike recipients of options,
may have voting rights and may receive dividends, if any, prior
to the time when the restrictions lapse. |
|
|
|
Restricted stock units may be awarded to participants, typically
without payment of consideration or for a nominal purchase
price, but subject to vesting conditions including continued
employment or on performance criteria established by our
compensation committee (or the board of directors, in the case
of awards to non-employee directors). Like restricted stock,
restricted stock units may not be sold or otherwise transferred
or hypothecated until vesting conditions are removed or expire.
Unlike restricted stock, stock underlying restricted stock units
will not be issued until the restricted stock units have vested,
and recipients of restricted stock units generally will have no
voting or dividend rights prior to the time when vesting
conditions are satisfied. |
|
|
|
SARs may be granted in connection with stock options or other
awards, or separately. SARs granted under the 2006 plan in
connection with stock options or other awards typically will
provide for payments to the holder based upon increases in the
price of our common stock over the exercise price of the related
option or other awards. Except as required by
Section 162(m) of the Internal Revenue Code with respect to
an SAR intended to qualify as performance-based compensation as
described in Section 162(m) of the Internal Revenue Code,
there are no restrictions specified in the 2006 plan on the
exercise of SARs or the amount of gain realizable therefrom. Our
compensation committee (or the board of directors, in the case
of awards to non-employee directors) may elect to pay SARs in
cash or in common stock or in a combination of both. |
|
|
|
Dividend equivalents represent the value of the dividends, if
any, per share paid by us, calculated with reference to the
number of shares covered by the stock options, SARs or other
awards held by the participant. |
|
|
|
Performance awards (i.e., performance share awards,
performance stock units, performance bonus awards,
performance-based awards and deferred stock) may be granted by
our compensation committee (or the board of directors, in the
case of awards to non-employee directors) on an individual or
group basis. Generally, these awards will be based upon specific
performance targets and may be paid in cash or in common stock
or in a combination of both. Performance awards may include
phantom stock awards that provide for payments based
upon increases in the price of our common stock over a
predetermined period. Performance awards may also include
bonuses that may be granted by our compensation committee (or
the board of directors, in the case of awards to non- employee
directors) on an individual or group basis, which may be paid on
a current or deferred basis and may be payable in cash or in
common stock or in a combination of both. The maximum amount of
any such bonuses to a covered employee within the
meaning of Section 162(m) of the Code shall not exceed
$1,000,000 for any fiscal year during the term of the 2006 plan. |
|
|
|
Stock payments may be authorized by our compensation committee
(or the board of directors, in the case of awards to
non-employee directors) in the form of common stock or an option
or other right to purchase common stock as part of a deferred
compensation arrangement, made in lieu of all or any part of
compensation, including bonuses, that would otherwise be payable
to employees or consultants or members of our board of directors. |
Corporate Transactions. In the event of a change of
control where the acquiror does not assume awards granted under
the plan, awards issued under the 2006 plan will be subject to
accelerated vesting
91
such that 100% of the awards will become vested and exercisable
or payable, as applicable. Under the 2006 plan, a change of
control is generally defined as:
|
|
|
|
|
the direct or indirect sale or exchange in a single or series of
related transactions (other than an offering of our stock to the
general public through a registration statement filed with the
SEC) whereby any person or entity or related group of persons or
entities (other than us, our subsidiaries, an employee benefit
plan maintained by us or any of our subsidiaries or a person or
entity that, prior to such transaction, directly or indirectly
controls, is controlled by, or is under common control with, us)
directly or indirectly acquires beneficial ownership (within the
meaning of
Rule 13d-3 under
the Exchange Act) of more than 50% of the total combined voting
power of our securities outstanding immediately after such
acquisition; |
|
|
|
during any two-year period, individuals who, at the beginning of
such period, constitute our board of directors together with any
new director(s) whose election by our board of directors or
nomination for election by our stockholders was approved by a
vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the
two-year period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a
majority of our board of directors; |
|
|
|
the merger, consolidation, reorganization, or business
combination in which the company is a party (whether directly
involving the company or indirectly involving the company
through one or more intermediaries, other than a merger,
consolidation, reorganization, or business combination that
results in our outstanding voting securities immediately before
the transaction continuing to represent a majority of the voting
power of the acquiring companys outstanding voting
securities or a merger, consolidation, reorganization, or
business combination after which no person or entity owns 50% of
the successor companys voting power); and |
|
|
|
the sale, exchange or transfer of all or substantially all of
our assets. |
Amendment and Termination of the 2006 Plan. Our board of
directors may terminate, amend or modify the 2006 plan. However,
stockholder approval of any amendment to the 2006 plan will be
obtained to the extent necessary and desirable to comply with
any applicable law, regulation or stock exchange rule, or for
any amendment to the 2006 plan that increases the number of
shares available under the 2006 plan. If not terminated earlier
by the compensation committee or the board of directors, the
2006 plan will terminate on the tenth anniversary of the date of
its initial approval by our board of directors.
Securities Laws and Federal Income Taxes. The 2006 plan
is designed to comply with various securities and federal tax
laws as follows:
|
|
|
|
|
Securities Laws. The 2006 plan is intended to conform to
all provisions of the Securities Act and the Exchange Act and
any and all regulations and rules promulgated by the SEC
thereunder, including without limitation,
Rule 16b-3. The
2006 plan will be administered, and awards will be granted and
may be exercised, only in such a manner as to conform to such
laws, rules and regulations. |
|
|
|
General Federal Tax Consequences. Under current federal
laws, in general, recipients of awards and grants of NQSOs,
SARs, restricted stock, restricted stock units, dividend
equivalents, performance awards and stock payments under the
plan are taxable under Section 83 of the Internal Revenue
Code upon their receipt of common stock or cash with respect to
such awards or grants and, subject to Section 162(m) of the
Internal Revenue Code, we will be entitled to an income tax
deduction with respect to the amounts taxable to such
recipients. However, Section 409A of the Internal Revenue
Code provides certain new requirements on non-qualified deferred
compensation arrangements. Certain awards under the 2006 plan
are subject to the requirements of Section 409A, in form
and in operation, such as restricted stock unit awards. We
intend that all plan awards that are subject to
Section 409A will satisfy the requirements of
Section 409A. However, if a plan award is |
92
|
|
|
|
|
subject to and fails to satisfy the requirements of
Section 409A, the recipient of that award may recognize
ordinary income on the amounts deferred under the award, to the
extent vested, which may be prior to when the compensation is
actually or constructively received. Also, if an award that is
subject to Section 409A fails to comply, Section 409A
imposes an additional 20% federal income tax on compensation
recognized as ordinary income, as well as interest on such
deferred compensation. |
|
|
|
Under Sections 421 and 422 of the Internal Revenue Code,
recipients of ISOs are generally not taxed on their receipt of
common stock upon their exercises of ISOs if the ISOs and option
stock are held for specified minimum holding periods and, in
such event, we are not entitled to income tax deductions with
respect to such exercises. Participants in the 2006 plan will be
provided with detailed information regarding the tax
consequences relating to the various types of awards and grants
under the 2006 plan. |
|
|
|
|
|
Section 162(m) Limitation. In general, under
Section 162(m) of the Internal Revenue Code, income tax
deductions of publicly-held corporations may be limited to the
extent total compensation (including base salary, annual bonus,
stock option exercises and non-qualified benefits paid) for
certain executive officers exceeds $1 million (less the
amount of any excess parachute payments as defined
in Section 280G of the Internal Revenue Code) in any one
year. However, under Section 162(m), the deduction limit
does not apply to certain performance-based
compensation if an independent compensation committee
determines performance goals, and if the material terms of the
performance-based compensation are disclosed to and approved by
our stockholders. In particular, stock options and SARs will
satisfy the performance-based compensation exception
if the awards are made by a qualifying compensation committee,
the 2006 plan sets the maximum number of shares that can be
granted to any person within a specified period and the
compensation is based solely on an increase in the stock price
after the grant date. Specifically, the option exercise price
must be equal to or greater than the fair market value of the
stock subject to the award on the grant date. Under a
Section 162(m) transition rule for compensation plans of
corporations which are privately held and which become publicly
held in an initial public offering, the 2006 plan will not be
subject to Section 162(m) until a specified transition
date, which is the earlier of (i) the material modification
of the 2006 plan, (ii) the issuance of all employer stock
and other compensation that has been allocated under the 2006
plan, or (iii) the first annual meeting of stockholders at
which directors are to be elected that occurs after the close of
the third calendar year following the calendar year in which the
initial public offering occurs. After the transition date,
rights or awards granted under the 2006 plan, other than options
and SARs, will not qualify as performance-based
compensation for purposes of Section 162(m) unless
such rights or awards are granted or vest upon pre-established
objective performance goals, the material terms of which are
disclosed to and approved by our stockholders. |
We have attempted to structure the 2006 plan in such a manner
that, after the transition date, the compensation attributable
to stock options and SARs which meet the other requirements of
Section 162(m) will not be subject to the $1 million
limitation. We have not, however, requested a ruling from the
Internal Revenue Service, or IRS, or an opinion of counsel
regarding this issue.
|
|
|
2004 Equity Incentive Award Plan |
Our 2004 equity incentive award plan, or 2004 plan, was
initially adopted by our board of directors and approved by our
stockholders in November 2004. As amended to date, we have
reserved a total of 2,875,000 shares of common stock for
issuance under the 2004 plan. As of June 30, 2006, options
to purchase 1,020,435 shares of common stock had been
exercised (7,500 shares of which were repurchased by us),
options to purchase 1,442,372 shares of common stock
were outstanding and 419,693 shares of common stock
remained available for grant. As of June 30, 2006, the
outstanding options were exercisable at a weighted average
exercise price of approximately $1.52 per share. The
material terms of the 2004 plan
93
are summarized below. The 2004 plan is filed as an exhibit to
the registration statement of which this prospectus is a part.
No Further Grants. After the effective date of the 2006
Plan, no additional awards will be granted under the 2004 plan.
Administration. The compensation committee of our board
of directors administers the 2004 plan. Following the completion
of this offering, to administer the 2004 plan, our compensation
committee must be constituted as described above in our
description of the 2006 Plan. Subject to the terms and
conditions of the 2004 plan, our compensation committee has the
authority to select the persons to whom awards are to be made,
to determine the number of shares to be subject thereto and the
terms and conditions thereof, and to make all other
determinations and to take all other actions necessary or
advisable for the administration of the 2004 plan. Our
compensation committee is also authorized to establish, adopt,
amend or rescind rules relating to administration of the 2004
plan. Our board of directors may at any time abolish the
compensation committee and revest in itself the authority to
administer the 2004 plan. The full board of directors
administers the 2004 plan with respect to awards to non-employee
directors.
Eligibility. Options and restricted stock under the 2004
plan may be granted to individuals who are then our officers or
employees or are the officers or employees of any of our
subsidiaries. Such awards may also be granted to our
non-employee directors or consultants, but only employees may be
granted ISOs.
Awards. The 2004 plan provides that our compensation
committee may grant or issue stock options and restricted stock,
stock appreciation rights, performance share awards, restricted
stock units, dividend equivalents, stock payments or
performance-based awards or any combination thereof. Each award
will be set forth in a separate agreement with the person
receiving the award and will indicate the type, terms and
conditions of the award.
|
|
|
|
|
NQSOs provide for the right to purchase shares of our common
stock at a specified price, which for purposes of the 2004 plan
prior to the date of this offering, may be no less than 85% of
the fair market value on the date of grant, and usually will
become exercisable (at the discretion of our compensation
committee (or the board of directors, in the case of awards to
non-employee directors), in one or more installments after the
grant date, subject to the participants continued
employment or service with us and/or subject to the satisfaction
of performance targets established by our compensation committee
(or the board of directors, in the case of awards to
non-employee directors). NQSOs may be granted for a maximum
10-year term. |
|
|
|
ISOs are designed to comply with the provisions of the Internal
Revenue Code and will be subject to specified restrictions
contained in the Internal Revenue Code and as further described
above in connection with the 2006 Equity Incentive Award Plan. |
To date, we have only granted stock options under the 2004 plan.
Corporate Transactions. In the event of a change of
control where the acquiror does not assume awards granted under
the plan and does not substitute substantially similar awards
for those outstanding under the plan, awards issued under the
plan will be subject to accelerated vesting such that 100% of
the awards will become vested and exercisable or payable, as
applicable. Under the 2004 plan, a change of control is
generally defined as:
|
|
|
|
|
a merger or consolidation of us with or into any other
corporation or other entity or person; or |
|
|
|
a sale, lease, exchange or other transfer in one transaction or
a series of related transactions of all or substantially all of
our outstanding securities or all or substantially all of our
assets. |
Amendment and Termination of the 2004 plan. The
compensation committee, with the approval of the board of
directors, may terminate, amend or modify the 2004 plan.
However, stockholder approval of any amendment to the 2004 plan
will be obtained to the extent necessary and desirable to comply
with
94
any applicable law, regulation, or stock exchange rule. If not
terminated earlier by the compensation committee, with the
approval of the board of directors, the 2004 plan will terminate
on the tenth anniversary of the date of its initial adoption by
our board of directors.
We provide a basic savings plan, or 401(k) plan, which is
intended to qualify under Section 401(k) of the Internal
Revenue Code so that contributions to our 401(k) plan by
employees or by us, and the investment earnings thereon, are not
taxable to employees until withdrawn from our 401(k) plan. If
our 401(k) plan qualifies under Section 401(k) of the
Internal Revenue Code, contributions by us, if any, will be
deductible by us when made.
All of our employees are eligible to participate in our 401(k)
plan. Pursuant to our 401(k) plan, employees may elect to reduce
their current compensation by up to the statutorily-prescribed
annual limit of $15,000 in 2006 and to have the amount of this
reduction contributed to our 401(k) plan. Our 401(k) plan
permits, but does not require, additional matching or
non-elective contributions to our 401(k) plan by us on behalf of
all participants in our 401(k) plan. To date, we have not made
any matching or non-elective contributions to our 401(k) plan.
Limitations of Liability and Indemnification Matters
We will adopt provisions in our amended and restated certificate
of incorporation that limit the liability of our directors for
monetary damages for breach of their fiduciary duties, except
for liability that cannot be eliminated under the Delaware
General Corporation Law. Delaware law provides that directors of
a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except
liability for any of the following:
|
|
|
|
|
any breach of their duty of loyalty to the corporation or its
stockholders; |
|
|
|
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; |
|
|
|
unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law; or |
|
|
|
any transaction from which the director derived an improper
personal benefit. |
This limitation of liability does not apply to liabilities
arising under the federal securities laws and does not affect
the availability of equitable remedies such as injunctive relief
or rescission.
Our amended and restated certificate of incorporation and our
amended and restated bylaws also will provide that we shall
indemnify our directors and executive officers and may indemnify
our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under
our amended and restated bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our amended
and restated bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any
liability arising out of his or her actions in this capacity,
regardless of whether our amended and restated bylaws would
permit indemnification.
We have entered into separate indemnification agreements with
our directors and executive officers, in addition to
indemnification provided for in our charter documents. These
agreements, among other things, provide for indemnification of
our directors and executive officers for expenses, judgments,
fines and settlement amounts incurred by this person in any
action or proceeding arising out of this persons services
as a director or executive officer or at our request. We believe
that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers.
95
PRINCIPAL STOCKHOLDERS
The following table sets forth information about the beneficial
ownership of our common stock at September 30, 2006, and as
adjusted to reflect the sale of the shares of common stock in
this offering, for:
|
|
|
|
|
each person known to us to be the beneficial owner of more than
5% of our common stock; |
|
|
|
each named executive officer and two additional executive
officers; |
|
|
|
each of our directors; and |
|
|
|
all of our executive officers and directors as a group. |
Unless otherwise noted below, the address of each beneficial
owner listed on the table is c/o Cadence Pharmaceuticals,
Inc., 12481 High Bluff Drive, Suite 200, San Diego, CA
92130. We have determined beneficial ownership in accordance
with the rules of the SEC. Except as indicated by the footnotes
below, we believe, based on the information furnished to us by
the stockholders, that the persons and entities named in the
tables below have sole voting and investment power with respect
to all shares of common stock that they beneficially own,
subject to applicable community property laws. We have based our
calculation of the percentage of beneficial ownership on
22,085,540 shares of common stock outstanding on
September 30, 2006, which assumes the conversion of all
outstanding shares of preferred stock into common stock and
28,085,540 shares of common stock outstanding upon
completion of this offering.
In computing the number of shares of common stock beneficially
owned by a person and the percentage ownership of that person,
we deemed outstanding shares of common stock subject to options
or warrants held by that person that are currently exercisable
or exercisable within 60 days of September 30, 2006.
We did not deem these shares outstanding, however, for the
purpose of computing the percentage ownership of any other
person.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
|
Common Stock | |
|
|
Number of | |
|
Beneficially Owned | |
|
|
Shares | |
|
| |
|
|
Beneficially | |
|
Prior to | |
|
After | |
Beneficial Owner |
|
Owned | |
|
Offering | |
|
Offering | |
|
|
| |
|
| |
|
| |
5% or Greater Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds affiliated with Domain Associates, L.L.C.(1)
|
|
|
5,741,122 |
|
|
|
26.0 |
% |
|
|
20.4 |
% |
|
|
One Palmer Square, Suite 515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Princeton, NJ 08542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ProQuest Investments III, L.P.(2)
|
|
|
3,080,674 |
|
|
|
13.9 |
|
|
|
11.0 |
|
|
|
90 Nassau Street, 5th Floor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Princeton, NJ 08542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frazier Healthcare V, LP(3)
|
|
|
2,525,000 |
|
|
|
11.4 |
|
|
|
9.0 |
|
|
|
601 Union Street, Suite 3200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seattle, WA 98101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds affiliated with Versant Ventures II, L.L.C.(4)
|
|
|
2,024,998 |
|
|
|
9.2 |
|
|
|
7.2 |
|
|
|
3000 Sand Hill Road
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building 4, Suite 210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Menlo Park, CA 94025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds affiliated with Technology Partners(5)
|
|
|
2,000,000 |
|
|
|
9.1 |
|
|
|
7.1 |
|
|
|
100 Shoreline Highway
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suite 282, Building B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill Valley, CA 94941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB Biotech Ventures II, L.P.(6)
|
|
|
1,750,000 |
|
|
|
7.9 |
|
|
|
6.2 |
|
|
|
Trafalgar Court, Les Banques
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St Peter Port, Guernsey, Channel Islands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GY1 3QL
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
|
Common Stock | |
|
|
Number of | |
|
Beneficially Owned | |
|
|
Shares | |
|
| |
|
|
Beneficially | |
|
Prior to | |
|
After | |
Beneficial Owner |
|
Owned | |
|
Offering | |
|
Offering | |
|
|
| |
|
| |
|
| |
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theodore R. Schroeder(7)
|
|
|
1,010,936 |
|
|
|
4.5 |
|
|
|
3.5 |
|
|
James B. Breitmeyer, M.D., Ph.D.(8)
|
|
|
176,250 |
|
|
|
* |
|
|
|
* |
|
|
William S. Craig, Ph.D.(9)
|
|
|
176,327 |
|
|
|
* |
|
|
|
* |
|
|
Kenneth R. Heilbrunn, M.D.(10)
|
|
|
79,428 |
|
|
|
* |
|
|
|
* |
|
|
William R. LaRue(11)
|
|
|
224,750 |
|
|
|
1.0 |
|
|
|
* |
|
|
Richard E. Lowenthal(12)
|
|
|
141,000 |
|
|
|
* |
|
|
|
* |
|
|
Mike A. Royal, M.D., J.D.(13)
|
|
|
93,750 |
|
|
|
* |
|
|
|
* |
|
|
David A. Socks(14)
|
|
|
423,183 |
|
|
|
1.9 |
|
|
|
1.5 |
|
|
Cam L. Garner(15)
|
|
|
1,062,530 |
|
|
|
4.8 |
|
|
|
3.8 |
|
|
Brian G. Atwood(4)
|
|
|
2,024,998 |
|
|
|
9.2 |
|
|
|
7.2 |
|
|
Samuel L. Barker, Ph.D.(16)
|
|
|
25,000 |
|
|
|
* |
|
|
|
* |
|
|
Michael A. Berman, M.D.(17)
|
|
|
25,000 |
|
|
|
* |
|
|
|
* |
|
|
James C. Blair, Ph.D.(1)
|
|
|
5,741,122 |
|
|
|
26.0 |
|
|
|
20.4 |
|
|
Alan D. Frazier(3)
|
|
|
2,525,000 |
|
|
|
11.4 |
|
|
|
9.0 |
|
|
Alain B. Schreiber, M.D.(2)
|
|
|
3,080,674 |
|
|
|
13.9 |
|
|
|
11.0 |
|
|
Christopher J. Twomey(18)
|
|
|
25,000 |
|
|
|
* |
|
|
|
* |
|
|
Executive officers and directors as a group (16 persons)(19)
|
|
|
16,834,948 |
|
|
|
71.1 |
|
|
|
56.8 |
|
|
|
|
|
* |
Represents beneficial ownership of less than one percent of our
outstanding common stock. |
|
|
|
|
|
(1) |
Includes 5,653,038 shares of common stock owned by Domain
Partners VI, L.P., 60,584 shares of common stock owned by
DP VI Associates, L.P. and 27,500 shares of common stock
owned by Domain Associates, L.L.C. Of the 27,500 shares
owned by Domain Associates, 20,625 will be subject to our right
of repurchase within 60 days of September 30, 2006.
Dr. Blair is a member of our board of directors and a
managing member of Domain Associates, L.L.C. and a managing
member of One Palmer Square Associates VI, L.L.C., which is the
general partner of Domain Partners VI, L.P. and DP VI
Associates, L.P. Dr. Blair disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest
therein. |
|
|
|
|
(2) |
Includes 3,053,174 shares of common stock owned by ProQuest
Investments III, L.P. and 12,500 shares of common stock
owned by ProQuest Management LLC. Of the 12,500 shares
owned by ProQuest Management, 4,375 will be subject to our right
of repurchase within 60 days of September 30, 2006.
Also includes 15,000 shares Dr. Schreiber has the
right to acquire pursuant to outstanding options which are
immediately exercisable, 13,750 of which would be subject to our
right of repurchase within 60 days of September 30,
2006. Dr. Schreiber is a member of our board of directors
and a managing member of ProQuest Management LLC and a managing
member of ProQuest Associates III LLC, the ultimate general
partner of ProQuest Investments III, L.P. |
|
|
|
|
(3) |
Includes 25,000 shares Mr. Frazier has the right to
acquire pursuant to outstanding options which are immediately
exercisable, 21,875 of which would be subject to our right of
repurchase within 60 days of September 30, 2006. The
voting and disposition of the shares held by Frazier
Healthcare V, LP is determined by FHM V, LLC, which is
the general partner of FHM V, LP, which is the general
partner of Frazier Healthcare V, LP. Mr. Frazier is a
member of our board of directors and a managing member of
FHM V, LLC. Mr. Frazier disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest
therein. |
|
footnotes continued on the following page
97
|
|
|
|
|
(4) |
Includes 1,945,686 shares of common stock owned by Versant
Venture Capital II, L.P., 36,923 shares of common
stock owned by Versant Affiliates Fund II-A, L.P. and
17,389 shares of common stock owned by Versant Side
Fund II, L.P. Also includes 25,000 shares
Mr. Atwood has the right to acquire pursuant to outstanding
options which are immediately exercisable, 21,875 of which would
be subject to our right of repurchase within 60 days of
September 30, 2006. Mr. Atwood is a member of our
board of directors and a managing member of Versant
Ventures II, L.L.C., which is the general partner of each
of these Versant funds. Mr. Atwood disclaims beneficial
ownership of shares owned by these Versant funds except to the
extent of his pecuniary interest therein. |
|
|
|
|
(5) |
Includes 1,880,000 shares of common stock owned by
Technology Partners Fund VII, L.P. and 120,000 shares
of common stock owned by Technology Partners Affiliates VII,
L.P. The voting and disposition of the shares held by Technology
Partners Fund VII, L.P. and Technology Partners Affiliates
VII is determined by TP Management VII, L.L.C., which is the
general partner of each of these Technology Partners funds. John
E. Ardell III, Ira Ehrenpreis, James Glasheen, Sheila Mutter and
Roger J. Quy share voting and dispositive authority over the
shares held by Technology Partners. |
|
|
|
(6) |
The voting and disposition of the shares held by BB Biotech
Ventures II, L.P. is determined by its general partner, BB
Biotech Ventures GP (Guernsey) Limited. Christopher Wilfred
Cochrane, Benedict Peter Goronwy Morgan and Hans Jorg Graf, in
their capacities as directors of the general partner, share
voting and dispositive authority over the shares held by BB
Biotech Ventures. |
|
|
|
(7) |
Includes 510,936 shares Mr. Schroeder has the right to
acquire pursuant to outstanding options which are immediately
exercisable, all of which would be subject to our right of
repurchase within 60 days of September 30, 2006. Also
includes 250,000 unvested shares acquired by Mr. Schroeder
upon the early exercise of stock options, 148,438 of which will
be subject to our right of repurchase within 60 days of
September 30, 2006. Also includes 250,000 shares
acquired by Mr. Schroeder as one of our co-founders. |
|
|
|
|
(8) |
Includes 176,250 shares Dr. Breitmeyer has the right
to acquire pursuant to outstanding options that are immediately
exercisable, all of which would be subject to our right of
repurchase within 60 days of September 30, 2006. |
|
|
|
|
(9) |
Includes 176,327 shares Dr. Craig has the right to
acquire pursuant to outstanding options which are immediately
exercisable, 132,577 of which would be subject to our right of
repurchase within 60 days of September 30, 2006. |
|
|
|
|
|
|
(10) |
Includes 79,428 shares Dr. Heilbrunn has the right to
acquire pursuant to outstanding options that are immediately
exercisable, none of which would be subject to our right of
repurchase within 60 days of September 30, 2006.
Effective September 30, 2006, Dr. Heilbrunn resigned
as our Senior Vice President, Clinical Development. |
|
|
|
|
(11) |
Includes 11,000 shares acquired by Mr. LaRue upon
exercise of stock options, 7,563 of which will be subject to our
right of repurchase within 60 days of September 30,
2006. These 11,000 shares are held by a trust for the
benefit of Mr. LaRues family. Also includes
213,750 shares of common stock Mr. LaRue has the right
to acquire pursuant to outstanding options that are immediately
exercisable, all of which would be subject to our right of
repurchase within 60 days of September 30, 2006. |
|
|
|
|
(12) |
Includes 141,000 shares acquired by Mr. Lowenthal upon
the exercise of stock options, 105,063 of which will be subject
to our right of repurchase within 60 days of
September 30, 2006. These 141,000 shares are held of
record by a trust for the benefit of Mr. Lowenthals
family. |
|
|
|
(13) |
Includes 93,750 shares Dr. Royal has the right to
acquire pursuant to outstanding options which are immediately
exercisable, all of which would be subject to our right of
repurchase within 60 days of September 30, 2006. |
|
footnotes continued on the following page
98
|
|
|
(14) |
Includes 210,683 shares Mr. Socks has the right to
acquire pursuant to outstanding options which are immediately
exercisable, 197,142 of which would be subject to our right of
repurchase within 60 days of September 30, 2006. Also
includes 212,500 shares acquired by Mr. Socks as one
of our co-founders. |
|
|
|
(15) |
Includes 573,435 shares acquired by Mr. Garner upon
the exercise of stock options, 514,604 of which will be subject
to our right of repurchase within 60 days of
September 30, 2006. Of these 573,435 shares,
538,435 shares are held of record by a trust for which
Mr. Garner serves as trustee and 35,000 shares are
held by a limited liability company for which Mr. Garner is
the sole member. Also includes 437,500 shares acquired by
Mr. Garner as one of our co-founders. Of these
437,500 shares, 400,000 shares are held by a limited
liability company for which Mr. Garner is the sole member
and 37,500 shares are held by siblings of Mr. Garner.
Also includes 51,595 shares acquired by a limited liability
company for which Mr. Garner is the sole member. |
|
|
|
(16) |
Includes 25,000 shares Dr. Barker has the right to
acquire pursuant to outstanding options which are immediately
exercisable, 22,917 of which would be subject to our right of
repurchase within 60 days of September 30, 2006. |
|
|
|
(17) |
Includes 25,000 shares Dr. Berman has the right to
acquire pursuant to outstanding options which are immediately
exercisable, 22,500 of which would be subject to our right of
repurchase within 60 days of September 30, 2006. |
|
|
|
(18) |
Includes 25,000 shares acquired by Mr. Twomey upon
exercise of stock options, 22,917 of which would be subject to
our right of repurchase within 60 days of
September 30, 2006. These 25,000 shares are held of
record by a trust for the benefit of Mr. Twomeys
family. |
|
|
|
(19) |
Includes 1,576,124 shares of common stock subject to
outstanding options which are immediately exercisable, 1,427,322
of which would be subject to our right of repurchase within
60 days of September 30, 2006. Includes
1,040,435 shares of common stock acquired upon the exercise
of options, 823,585 of which will be subject to our right of
repurchase within 60 days of September 30, 2006. |
|
99
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We describe below transactions and series of similar
transactions, since our inception, to which we were a party or
will be a party, in which:
|
|
|
|
|
the amounts involved exceeded or will exceed $60,000; and |
|
|
|
a director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will
have a direct or indirect material interest. |
We also describe below certain other transactions with our
directors, executive officers and stockholders.
Preferred Stock Issuances
In July and August 2004, we issued in a private placement an
aggregate of 8,085,108 shares of Series A-1 preferred
stock at a per share price of $0.94, for aggregate consideration
of $7,600,002. In June and September 2005, we issued in a
private placement an aggregate of 17,675,347 shares of
Series A-2 preferred stock at a per share price of $1.00,
for aggregate consideration of $17,675,347. In March 2006, we
issued in a private placement 53,870,000 shares of
Series A-3 preferred stock at a per share price of $1.00,
for aggregate consideration of $53,870,000.
The following table sets forth the aggregate number of these
securities acquired by the listed directors, executive officers
or holders of more than 5% of our common stock, or their
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Preferred Stock | |
|
|
| |
Investor |
|
Series A-1 | |
|
Series A-2 | |
|
Series A-3 | |
|
|
| |
|
| |
|
| |
Funds affiliated with Domain Associates, L.L.C.(1)
|
|
|
3,989,362 |
|
|
|
6,365,130 |
|
|
|
12,500,000 |
|
ProQuest Investments III, L.P.(2)
|
|
|
2,393,618 |
|
|
|
3,819,080 |
|
|
|
6,000,000 |
|
Frazier Healthcare V, LP(3)
|
|
|
|
|
|
|
|
|
|
|
10,000,000 |
|
Funds affiliated with Versant Ventures II, L.L.C.(4)
|
|
|
|
|
|
|
|
|
|
|
8,000,000 |
|
Funds affiliated with Technology Partners(5)
|
|
|
|
|
|
|
|
|
|
|
8,000,000 |
|
BB Biotech Ventures II, L.P.(6)
|
|
|
|
|
|
|
3,000,000 |
|
|
|
4,000,000 |
|
Cam L. Garner(7)
|
|
|
106,383 |
|
|
|
|
|
|
|
100,000 |
|
|
|
(1) |
Includes 3,947,061 shares of Series A-1 preferred
stock, 6,297,638 shares of Series A-2 preferred stock
and 12,367,456 shares of Series A-3 preferred stock
owned by Domain Partners VI, L.P., and 42,301 shares of
Series A-1 preferred stock, 67,492 shares of
Series A-2 preferred stock, and 132,544 shares of
Series A-3 preferred stock owned by DP VI Associates, L.P.
Dr. Blair, a member of our board of directors, is a
managing member of Domain Associates, L.L.C. and a managing
member of One Palmer Square Associates VI, L.L.C., which is the
general partner of Domain Partners VI, L.P. and DP VI
Associates, L.P. |
|
(2) |
The voting and disposition of the shares held by ProQuest
Investments III, L.P. is determined by ProQuest
Associates III LLC, the ultimate general partner of
ProQuest Investments III, L.P. Dr. Schreiber, a member
of our board of directors, is a managing member of ProQuest
Associates III LLC. |
|
(3) |
The voting and disposition of the shares held by Frazier
Healthcare V, LP is determined by FHM V, LLC, which is
the general partner of FHM V, LP, which is the general
partner of Frazier Healthcare V, LP. Mr. Frazier, a
member of our board of directors, is a managing member of
FHM V, LLC. |
footnotes continued on the following page
100
|
|
(4) |
Includes 7,782,747 shares of Series A-3 preferred
stock owned by Versant Venture Capital II, L.P.,
147,695 shares of Series A-3 preferred stock owned by
Versant Affiliates Fund II-A, L.P., and 69,558 shares
of Series A-3 preferred stock owned by Versant Side
Fund II, L.P. Mr. Atwood, a member of our board of
directors, is a managing member of Versant Ventures II, L.L.C.,
which is the general partner of each of these Versant funds. |
|
(5) |
Includes 7,520,000 shares of Series A-3 preferred
stock owned by Technology Partners Fund VII, L.P. and
480,000 shares of Series A-3 preferred stock owned by
Technology Partners Affiliates VII, L.P. The voting
and disposition of the shares held by Technology Partners
Fund VII, L.P. and Technology Partners Affiliates VII is
determined by TP Management VII, L.L.C., which is the general
partner of each of these Technology Partners funds. John E.
Ardell III, Ira Ehrenpreis, James Glasheen, Sheila Mutter and
Roger J. Quy share voting and dispositive authority over the
shares held by Technology Partners. |
|
(6) |
The voting and disposition of the shares held by BB Biotech
Ventures II, L.P. is determined by its general partner, BB
Biotech Ventures GP (Guernsey) Limited. Christopher Wilfred
Cochrane, Benedict Peter Goronwy Morgan and Hans Jorg Graf, in
their capacities as directors of the general partner, share
voting and dispositive authority over the shares held by BB
Biotech Ventures. |
|
(7) |
Shares held by a limited liability company for which
Mr. Garner is the sole member. |
Common Stock Issuances
In July 2004, in connection with the inception of our company,
we issued and sold a total of 1,125,000 shares of common
stock for an aggregate consideration of $4,500. The price for
the common stock was determined through negotiations between our
board of directors and the purchasers based primarily on the
early stage of our development at the time of the transaction.
The following table sets forth the aggregate number of these
securities acquired by the listed directors and executive
officers or their affiliates:
|
|
|
|
|
Investor |
|
Common Stock | |
|
|
| |
Cam L. Garner(1)
|
|
|
437,500 |
|
Theodore R. Schroeder(2)
|
|
|
250,000 |
|
David A. Socks
|
|
|
212,500 |
|
|
|
|
(1) |
Of these 437,500 shares, 400,000 shares are held by a
limited liability company for which Mr. Garner is the sole
member and 37,500 shares are held by siblings of
Mr. Garner. |
|
|
(2) |
Shares held by a trust for the benefit of
Mr. Schroeders family. |
Investor Rights Agreement
We have entered into an agreement with purchasers of our
preferred stock that provides for certain rights relating to the
registration of their shares of common stock issuable upon
conversion of their preferred stock. The agreement also provides
these rights to shares of common stock held by
Messrs. Schroeder and Socks. These rights will continue
following this offering and will terminate seven years following
the completion of this offering, or for any particular holder
with registration rights, at such time following this offering
when all securities held by that stockholder subject to
registration rights may be sold pursuant to Rule 144 under
the Securities Act. All holders of our preferred stock are
parties to this agreement. See Description of Capital
Stock Registration Rights for additional
information.
101
Voting Agreement
Pursuant to a voting agreement originally entered into in July
2004 and most recently amended in March 2006 by and among us and
certain of our stockholders, the following directors were each
elected to serve as members on our board of directors and, as of
the date of this prospectus, continue to so serve: Drs.
Barker, Berman, Blair and Schreiber and
Messrs. Atwood, Frazier, Garner and Schroeder. Pursuant to
the voting agreement, Mr. Schroeder, as our president and
chief executive officer, and Mr. Garner were initially
selected to serve on our board of directors as representatives
of our common stock, as designated by a majority of our common
stockholders. Dr. Schreiber and Messrs. Atwood, Blair
and Frazier were initially selected to serve on our board of
directors as representatives of our preferred stock, as
designated by ProQuest Investments III, L.P., Versant
Venture Capital II, L.P., Domain Partners VI, L.P. and
Frazier Healthcare V, LP, respectively. Drs. Barker and
Berman and Mr. Twomey were selected to serve on our board of
directors as representatives of our common stock and preferred
stock, as designated by a majority of our common and preferred
stockholders.
The voting agreement will terminate upon completion of this
offering, and members previously elected to our board of
directors pursuant to this agreement will continue to serve as
directors until their successors are duly elected by holders of
our common stock.
Stock Option Grants
Certain stock option grants to our directors and executive
officers and related option grant policies are described in this
prospectus under the captions Management
Director Compensation and Management
Option Grants in Last Fiscal Year. Prior to this offering,
we granted the following options to certain non-employee
directors:
|
|
|
|
|
|
In November 2004, we granted to Dr. Schreiber an option to
purchase 10,000 shares of our common stock at an
exercise price of $0.40 per share, vesting over 16 calendar
quarters from September 2004. |
|
|
|
|
|
In November 2005, we granted to Dr. Blair an option to
purchase 10,000 shares of our common stock at an
exercise price of $0.40 per share, vesting over 16 calendar
quarters from September 2005. |
|
|
|
|
|
In November 2005, we granted to each of Dr. Schreiber and
Mr. Garner an option to purchase 2,500 shares of
our common stock at an exercise price of $0.40 per share,
vesting over four calendar quarters from September 2005. |
|
|
|
|
|
In December 2005, we granted to Mr. Garner an option to
purchase 340,500 shares of our common stock at an
exercise price of $0.40 per share, vesting over four years
from December 2005. |
|
|
|
|
|
In May 2006, we granted to Mr. Garner an option to
purchase 195,435 shares of our common stock at an
exercise price of $1.36 per share, vesting over four years
from February 2006. |
|
|
|
|
|
In May 2006, we granted to Dr. Berman an option to
purchase 10,000 shares of our common stock at an
exercise price of $1.36 per share, vesting over 16 calendar
quarters from April 2006. |
|
|
|
|
|
In May 2006, we granted to each of Messrs. Atwood and
Frazier an option to purchase 10,000 shares of our
common stock at an exercise price of $1.36 per share,
vesting over 16 calendar quarters from March 2006. |
|
|
|
|
|
In July 2006, we granted to Mr. Twomey an option to
purchase 25,000 shares of our common stock at an
exercise price of $3.20 per share, vesting over 12 calendar
quarters from July 2006. |
|
102
|
|
|
|
|
|
In July 2006, we granted to each of Mr. Atwood,
Drs. Berman and Blair, Mr. Frazier and
Dr. Schreiber an option to purchase 15,000 shares
of our common stock at an exercise price of $3.20 per
share, vesting over 12 calendar quarters from July 2006. |
|
|
|
|
|
In August 2006, we granted to Dr. Barker an option to
purchase 25,000 shares of our common stock at an exercise price
of $3.20 per share, vesting over 12 calendar quarters from
August 2006. |
|
In addition, we granted to each of Messrs. Craig and Socks
an option in May 2006 to purchase 88,827 and 185,683,
respectively, shares of our common stock at an exercise price of
$1.36 per share. In June 2006, we granted to each of
Mr. LaRue and Dr. Royal an option to
purchase 176,250 and 75,000, respectively, shares of our
common stock at an exercise price of $3.20 per share. In
August 2006, we granted to Dr. Breitmeyer an option to purchase
176,250 shares of our common stock at an exercise price of
$3.20 per share. Also in August 2006, we granted to each of
Mr. LaRue and Dr. Royal an option to purchase 37,500
and 18,750 shares of our common stock at an exercise price
of $3.20 per share. Each of these options vests with respect to
25% of the shares subject to the option one year after the
applicable vesting commencement date and monthly thereafter over
the following three years.
Employment Agreements
We have entered into employment agreements with Theodore R.
Schroeder, our President and Chief Executive Officer, James B.
Breitmeyer, M.D., Ph.D., our Executive Vice President,
Development and Chief Medical Officer, William S.
Craig, Ph.D., our Senior Vice President, Pharmaceutical
Development and Manufacturing, William R. LaRue, our Senior Vice
President, Chief Financial Officer, Treasurer and Secretary,
Richard E. Lowenthal, our Vice President, Regulatory Affairs and
Quality Assurance, Mike A. Royal, M.D., J.D. our Vice
President, Clinical Development, Analgesics, and David A. Socks,
our Vice President, Business Development. For further
information, see Management Employment
Agreements.
Indemnification of Officers and Directors
Our restated certificate of incorporation and our amended and
restated bylaws provide that we will indemnify each of our
directors and officers to the fullest extent permitted by the
Delaware General Corporation Law. Further, we have entered into
indemnification agreements with each of our directors and
officers, and we have purchased a policy of directors and
officers liability insurance that insures our directors
and officers against the cost of defense, settlement or payment
of a judgment under certain circumstances. For further
information, see Management Limitations of
Liability and Indemnification Matters.
Consulting Agreement with Mr. Cam L. Garner
From September 2004 through August 2005, we paid Mr. Garner
$5,000 per month plus qualified business expenses for his
services as chairman of our board of directors under the terms
of a consulting agreement between us and a limited liability
company affiliated with Mr. Garner. The agreement expired
on August 31, 2005.
Other Transactions
During 2004, Windamere III, LLC, a limited liability company
affiliated with our former director, Scott L. Glenn, advanced
$500,000 for pre-operating expenses and an exclusivity fee due
in connection with the Collaboration and License Agreement
between us and Migenix. The advance was settled with 531,915
shares of our Series A-1 preferred stock.
In September 2006, Kenneth R. Heilbrunn, M.D., our former
Senior Vice President, Clinical Development, resigned. In
accordance with the terms of his employment agreement, we are
obligated to pay Dr. Heilbrunn a lump-sum cash payment
equal to his annual base salary and other benefits for
12 months following his date of termination. The employment
agreement also allows for the acceleration of vesting for those
options that would vest one year from the date of termination.
103
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering and filing of our amended and
restated certificate of incorporation, our authorized capital
stock will consist of 100,000,000 shares of common stock,
$0.0001 par value per share, and 10,000,000 shares of
preferred stock, $0.0001 par value per share. The following
description summarizes some of the terms of our capital stock.
Because it is only a summary, it does not contain all the
information that may be important to you. For a complete
description you should refer to our amended and restated
certificate of incorporation and amended and restated bylaws,
copies of which have been filed as exhibits to the registration
statement of which the prospectus is a part.
Common Stock
On June 30, 2006, there were 2,137,935 shares of
common stock outstanding, held of record by
15 stockholders. This amount excludes our outstanding
shares of preferred stock as of June 30, 2006 which will
convert into 19,907,605 shares of common stock upon
completion of the offering. After this offering, there will be
28,045,540 shares of our common stock outstanding, or
28,945,540 shares if the underwriters exercise their
over-allotment option in full.
The holders of our common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of
the stockholders, including the election of directors, and do
not have cumulative voting rights. Accordingly, the holders of a
majority of the shares of common stock entitled to vote in any
election of directors can elect all of the directors standing
for election, if they so choose. Subject to preferences that may
be applicable to any then outstanding preferred stock, holders
of common stock are entitled to receive ratably those dividends,
if any, as may be declared by the board of directors out of
legally available funds. Upon our liquidation, dissolution or
winding up, the holders of common stock will be entitled to
share ratably in the net assets legally available for
distribution to stockholders after the payment of all of our
debts and other liabilities of our company, subject to the prior
rights of any preferred stock then outstanding. Holders of
common stock have no preemptive or conversion rights or other
subscription rights and there are no redemption or sinking funds
provisions applicable to the common stock. All outstanding
shares of common stock are, and the common stock to be
outstanding upon completion of this offering will be, fully paid
and nonassessable.
Preferred Stock
On June 30, 2006, there were 79,630,455 shares of
preferred stock outstanding, held of record by
32 stockholders. Our stockholders have agreed to convert
their shares of preferred stock to common stock in connection
with the completion of this offering. Accordingly, upon the
completion of this offering, all outstanding shares of preferred
stock as of June 30, 2006 will automatically convert into
19,907,605 shares of our common stock.
Following the offering, our board of directors will have the
authority, without any action by the stockholders, to issue from
time to time preferred stock in one or more series and to fix
the number of shares, designations, preferences, powers, and
relative, participating, optional or other special rights and
the qualifications or restrictions thereof. The preferences,
powers, rights and restrictions of different series of preferred
stock may differ with respect to dividend rates, amounts payable
on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and
other matters. The issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to
holders of common stock or adversely affect the rights and
powers, including voting rights, of the holders of common stock,
and may have the effect of delaying, deferring or preventing a
change in control of our company. The existence of authorized
but unissued preferred stock may enable the board of directors
to render more difficult or to discourage an attempt to obtain
control of us by means of a merger, tender offer, proxy contest
or otherwise. For example, if in the due exercise of its
fiduciary obligations, the board of directors were to determine
that a takeover proposal is not in our best interests, the board
of directors could cause shares of preferred stock to be issued
without stockholder approval in one or more
104
private offerings or other transactions that might dilute the
voting or other rights of the proposed acquirer or insurgent
stockholder or stockholder group.
Warrants
In February 2006, in connection with our loan and security
agreement, we issued a warrant to purchase up to an aggregate of
192,500 shares of our Series A-2 preferred stock to
each of Silicon Valley Bank and Oxford Finance Corporation.
These warrants are immediately exercisable at an exercise price
of $1.00 per share and, excluding certain mergers or
acquisitions, expire upon the later of ten years from the date
of grant, which is February 17, 2016, or five years after
the closing of this offering. These warrants will become
exercisable for an aggregate of 96,250 shares of our common
stock, at an exercise price of $4.00 per share, upon
completion of this offering.
Each of these warrants has a net exercise provision under which
its holder may, in lieu of payment of the exercise price in
cash, surrender the warrant and receive, after this offering, a
net amount of shares of our common stock based on the fair
market value of our common stock at the time of exercise of the
warrant after deduction of the aggregate exercise price. Each of
these warrants for common stock also contains provisions for the
adjustment of the exercise price and the aggregate number of
shares issuable upon the exercise of the warrant in the event of
stock dividends, stock splits, reorganizations and
reclassifications and consolidations.
Registration Rights
After this offering, the holders of approximately
21,330,113 shares of common stock and the holders of
warrants to purchase 96,250 shares of common stock
will be entitled to rights with respect to the registration of
these shares under the Securities Act. These shares are referred
to as registrable securities. Under the terms of the agreement
between us and the holders of the registrable securities, if we
propose to register any of our securities under the Securities
Act, these holders are entitled to notice of such registration
and are entitled to include their shares of registrable
securities in our registration. Certain of these holders are
also entitled to demand registration, pursuant to which they may
require us to use our best efforts to register their registrable
securities under the Securities Act at our expense, up to a
maximum of two such registrations. Holders of registrable
securities may also require us to file an unlimited number of
additional registration statements on
Form S-3 at our
expense so long as the holders propose to sell registrable
securities of at least $1.0 million and we have not already
filed two such registration statements on
Form S-3 in the
previous twelve months.
All of these registration rights are subject to certain
conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares
included in such registration and our right not to effect a
requested registration 60 days prior to or 180 days
after an offering of our securities, including this offering.
These registration rights have been waived by all of the holders
thereof with respect to this offering.
Anti-Takeover Effects of Provisions of Our Amended and
Restated Certificate of Incorporation, Our Amended and Restated
Bylaws and Delaware Law
Some provisions of Delaware law, our amended and restated
certificate of incorporation and our amended and restated bylaws
contain provisions that could make the following transactions
more difficult: acquisition of us by means of a tender offer;
acquisition of us by means of a proxy contest or otherwise; or
removal of our incumbent officers and directors. It is possible
that these provisions could make it more difficult to accomplish
or could deter transactions that stockholders may otherwise
consider to be in their best interest or in our best interests,
including transactions that might result in a premium over the
market price for our shares.
These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to
acquire control of us to first negotiate with our board of
directors. We believe that the benefits of increased
105
protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging these
proposals because negotiation of these proposals could result in
an improvement of their terms.
|
|
|
Undesignated Preferred Stock |
The ability to authorize undesignated preferred stock makes it
possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other
provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of our company.
Our charter documents provide that a special meeting of
stockholders may be called only by our chairman of the board,
chief executive officer or president, or by a resolution adopted
by a majority of our board of directors.
|
|
|
Requirements for Advance Notification of Stockholder
Nominations and Proposals |
Our amended and restated bylaws establish advance notice
procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of
directors or a committee of the board of directors.
|
|
|
Elimination of Stockholder Action by Written
Consent |
Our amended and restated certificate of incorporation eliminates
the right of stockholders to act by written consent without a
meeting.
|
|
|
Election and Removal of Directors |
Our board of directors is divided into three classes. The
directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. For more
information on the classified board, see
Management Board of Directors. This
system of electing and removing directors may tend to discourage
a third party from making a tender offer or otherwise attempting
to obtain control of us, because it generally makes it more
difficult for stockholders to replace a majority of the
directors.
|
|
|
Delaware Anti-Takeover Statute |
We are subject to Section 203 of the Delaware General
Corporation Law, which prohibits persons deemed interested
stockholders from engaging in a business
combination with a publicly held Delaware corporation for
three years following the date these persons become interested
stockholders unless the business combination is, or the
transaction in which the person became an interested stockholder
was, approved in a prescribed manner or another prescribed
exception applies. Generally, an interested
stockholder is a person who, together with affiliates and
associates, owns, or within three years prior to the
determination of interested stockholder status did own, 15% or
more of a corporations voting stock. Generally, a
business combination includes a merger, asset or
stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. The existence of this
provision may have an anti-takeover effect with respect to
transactions not approved in advance by the board of directors.
|
|
|
Amendment of Charter Provisions |
The amendment of any of the above provisions, except for the
provision making it possible for our board of directors to issue
preferred stock, would require approval by holders of at least
662/3%
of our then outstanding common stock.
The provisions of Delaware law, our amended and restated
certificate of incorporation and our amended and restated bylaws
could have the effect of discouraging others from attempting
hostile
106
takeovers and, as a consequence, they may also inhibit temporary
fluctuations in the market price of our common stock that often
result from actual or rumored hostile takeover attempts. These
provisions may also have the effect of preventing changes in our
management. It is possible that these provisions could make it
more difficult to accomplish transactions that stockholders may
otherwise deem to be in their best interests.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company, located at
59 Maiden Lane, Plaza Level, New York, NY 10038.
Nasdaq Global Market Listing
We have applied to have our common stock approved for quotation
on the Nasdaq Global Market under the symbol CADX.
107
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of our common stock in the public
market, or the availability of such shares for sale in the
public market, could adversely affect market prices prevailing
from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering
due to contractual and legal restrictions on resale.
Nevertheless, sales of our common stock in the public market
after such restrictions lapse, or the perception that those
sales may occur, could adversely affect the prevailing market
price at such time and our ability to raise equity capital in
the future.
Sales of Restricted Shares
Upon the closing of this offering, we will have outstanding an
aggregate of approximately 28,045,540 shares of common
stock, based on 22,045,540 shares outstanding as of
June 30, 2006. Of these shares, the 6,000,000 shares
of common stock to be sold in this offering will be freely
tradable without restriction or further registration under the
Securities Act, unless the shares are held by any of our
affiliates as such term is defined in Rule 144
of the Securities Act. All remaining shares of common stock held
by existing stockholders were issued and sold by us in private
transactions and are eligible for public sale only if registered
under the Securities Act or if they qualify for an exemption
from registration under Rule 144, Rule 144(k) or
Rule 701 under the Securities Act, which rules are
summarized below.
As a result of the
lock-up agreements
described below and the provisions of Rule 144,
Rule 144(k) and Rule 701 under the Securities Act, the
shares of our common stock (excluding the shares sold in this
offering) that will be available for sale in the public market
are as follows:
|
|
|
|
|
|
4,159,206 shares will be eligible for sale under
Rule 144(k) or Rule 701 upon the expiration of the
lock-up agreements, as
more particularly and except as described below, beginning
180 days after the date of this prospectus; |
|
|
|
|
|
17,886,334 shares will be eligible for sale under
Rule 144 upon the expiration of the
lock-up agreements, as
more particularly and except as described below, beginning
180 days after the date of this prospectus; |
|
|
|
|
|
441,480 shares will be eligible for sale, upon exercise of
vested options, upon the expiration of the
lock-up agreements, as
more particularly and except as described below, beginning
180 days after the date of this prospectus; and |
|
|
|
|
|
96,250 shares will be eligible for sale, upon exercise of
outstanding warrants, upon the expiration of the lock-up
agreements, as more particularly and except as described below,
beginning 180 days after the date of this prospectus. |
|
Lock-up
Agreements
We, each of our directors and executive officers, and all of the
holders of our common stock and holders of securities
exercisable for or convertible into shares of our common stock
have each agreed not to sell or otherwise dispose of, directly
or indirectly any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of
our common stock for a period of not less than 180 days
from the date of this prospectus without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
Merrill Lynch, in its sole discretion, at any time or from time
to time and without notice, may release for sale in the public
market all or any portion of the shares restricted by the terms
of the lock-up
agreements. The lock-up
restrictions will not apply to transactions relating to common
shares acquired in open market transactions after the closing of
this offering provided that no filing by the transferor under
Rule 144 of the Securities Act or Section 16 of the
Exchange Act is required or will be voluntarily made in
connection with such transactions. The
lock-up restrictions
also will not apply to certain transfers not involving a
disposition for value, provided that the recipient agrees to be
bound by these lock-up
108
restrictions and provided that no filing by the transferor under
Rule 144 of the Securities Act or Section 16 of the
Exchange Act is required or will be voluntarily made in
connection with such transfers.
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the effective date of this
offering, a person (or persons whose shares are required to be
aggregated) who has beneficially owned restricted securities for
at least one year, is entitled to sell a number of restricted
shares within any three-month period that does not exceed the
greater of:
|
|
|
|
|
|
one percent of the number of common shares then outstanding,
which will equal approximately 280,455 shares immediately
after this offering (assuming no exercise of the
underwriters over-allotment option and no exercise of
outstanding options or warrants); or |
|
|
|
|
the average weekly trading volume of our common shares on the
Nasdaq Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such
sale. |
Sales of restricted shares under Rule 144 are also subject
to requirements regarding the manner of sale, notice and the
availability of current public information about us.
Rule 144 also provides that affiliates that sell our common
shares that are not restricted shares must nonetheless comply
with the same restrictions applicable to restricted shares,
other than the holding period requirement.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
our affiliate at any time during the 90 days preceding a
sale and who has beneficially owned the shares proposed to be
sold for at least two years, including the holding period of any
prior owner other than an affiliate, may sell those shares
without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701 as currently in effect, any of
our employees, directors, officers, consultants or advisors who
acquires common stock from us in connection with a compensatory
stock or option plan or other written agreement before the
effective date of this offering (to the extent such common stock
is not subject to a
lock-up agreement) is
entitled to resell such shares 90 days after the effective
date of this offering in reliance on Rule 144. The SEC has
indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired
upon exercise of such options, including exercises after the
date of this prospectus. Securities issued in reliance on
Rule 701 are restricted securities and, subject to the
lock-up agreements
described above, beginning 90 days after the date of this
prospectus, may be sold by persons other than affiliates, as
defined in Rule 144, subject only to the manner of sale
provisions of Rule 144 and by affiliates under
Rule 144 without compliance with its one-year minimum
holding period requirement.
Stock Plans
We intend to file one or more registration statements on
Form S-8 under the
Securities Act to register shares of our common stock issued or
reserved for issuance under our 2006 Equity Incentive Award
Plan. The first such registration statement is expected to be
filed soon after the date of this prospectus and will
automatically become effective upon filing with the SEC.
Accordingly, shares registered under such registration statement
will be available for sale in the open market, unless such
shares are subject to vesting restrictions with us or the
lock-up restrictions
described above.
109
Warrants
As of June 30, 2006, warrants to purchase a total of
385,000 shares of our Series A-2 preferred stock at a
price of $1.00 per share were outstanding. Upon completion
of this offering, these warrants will become exercisable for a
total of 96,250 shares of our common stock at a price of
$4.00 per share. See Description of Capital
Stock Warrants. All of these common shares are
subject to the terms of the
lock-up agreements with
the underwriters.
Stock Options
As of June 30, 2006, options to purchase a total of
1,442,372 shares of our common stock were outstanding, of
which 1,354,797 were exercisable. All of the shares subject to
options are subject to the terms of the
lock-up agreements with
the underwriters. An additional 419,693 shares of common
stock were available for future option grants under our stock
plan.
110
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS TO
NON-U.S. HOLDERS
This section summarizes material U.S. federal income tax
considerations relating to the ownership and disposition of
common stock to
non-U.S. holders.
This summary does not provide a complete analysis of all
potential tax considerations. The information provided below is
based on existing authorities. These authorities may change, or
the IRS might interpret the existing authorities differently. In
either case, the tax considerations of owning or disposing of
common stock could differ from those described below. For
purposes of this summary, a
non-U.S. holder
is any beneficial owner of our common stock other than a citizen
or resident of the United States, a corporation or a partnership
organized under the laws of the United States or any state, a
trust that is (i) subject to the primary supervision of a
U.S. court and the control of one of more U.S. persons
or (ii) has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a
U.S. person, or an estate whose income is subject to
U.S. income tax regardless of source. If a partnership or
other flow-through entity is a beneficial owner of common stock,
the tax treatment of a partner in the partnership or an owner of
the entity will depend upon the status of the partner or other
owner and the activities of the partnership or other entity.
Accordingly, partnerships and flow-through entities that hold
our common stock and partners or owners of such partnerships or
entities, as applicable, should consult their own tax advisors.
The summary generally does not address tax considerations that
may be relevant to particular investors because of their
specific circumstances, or because they are subject to special
rules, including, without limitation, banks, insurance
companies, or other financial institutions; persons subject to
the alternative minimum tax; tax exempt organizations; dealers
in securities or currencies; traders in securities that elect to
use a mark to market method of accounting for their securities
holdings; persons that own, or are deemed to own, more than five
percent of our company (except to the extent specifically set
forth below); certain former citizens or long term residents of
the United States; persons who hold our common stock as a
position in a hedging transaction, straddle,
conversion transaction or other risk reduction
transaction; or persons deemed to sell our common stock under
the constructive sale provisions of the Internal Revenue Code.
Finally, the summary does not describe the effects of any
applicable foreign, state or local laws.
INVESTORS CONSIDERING THE PURCHASE OF COMMON STOCK ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE
U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR
SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE, OR LOCAL
LAWS, AND TAX TREATIES.
Dividends
We have not made any distributions on our common stock, and we
do not plan to make any distributions for the foreseeable
future. However, if we do make distributions on our common
stock, those payments will constitute dividends for
U.S. tax purposes to the extent paid from our current and
accumulated earnings and profits, as determined under
U.S. federal income tax principles. To the extent those
distributions exceed our current and accumulated earnings and
profits, they will constitute a return of capital and will first
reduce a
non-U.S. holders
basis in our common stock, but not below zero, and then will be
treated as gain from the sale of stock. Any dividend paid to a
non-U.S. holder on
our common stock will generally be subject to
U.S. withholding tax at a 30 percent rate. The
withholding tax might not apply, however, or might apply at a
reduced rate, under the terms of an applicable income tax treaty
between the United States and the
non-U.S. holders
country of residence. A
non-U.S. holder
must demonstrate its entitlement to treaty benefits by
certifying its nonresident status. A
non-U.S. holder
can meet this certification requirement by providing a
Form W-8BEN or appropriate substitute form to us or our
paying agent. If the holder holds the stock through a financial
institution or other agent acting on the holders behalf,
the holder will be required to provide appropriate documentation
to such financial institution or the agent. The financial
institution or the agent will then be required to provide
certification to us or our paying agent, either directly or
through other intermediaries. For payments made to a foreign
partnership or other flow-through entity, the certification
requirements generally apply to the partners or other owners
rather than to the partnership or other entity, and the
partnership or other entity must provide the partners or
other owners documentation to us or our paying agent.
Special rules, described
111
below, apply if a dividend is effectively connected with a
U.S. trade or business conducted by the
non-U.S. holder.
Sale of Common Stock
Non-U.S. holders
will generally not be subject to U.S. federal income tax on
any gains realized on the sale, exchange, or other disposition
of common stock. This general rule, however, is subject to
several exceptions. For example, the gain would be subject to
U.S. federal income tax if:
|
|
|
|
|
the gain is effectively connected with the conduct by the
non-U.S. holder of
a U.S. trade or business (in which case the special rules
described below apply); |
|
|
|
the
non-U.S. holder is
an individual who holds our common stock as a capital asset
(generally, an asset held for investment purposes) and who is
present in the U.S. for a period or periods aggregating
183 days or more during the calendar year in which the sale
or disposition occurs and certain other conditions are met; |
|
|
|
the
non-U.S. holder
was a citizen or resident of the United States and thus is
subject to special rules that apply to expatriates; or |
|
|
|
the rules of the Foreign Investment in Real Property Tax Act, or
FIRPTA (described below) treat the gain as effectively connected
with a U.S. trade or business. |
An individual
non-U.S. holder
described in the second bullet point immediately above will be
subject to a flat 30% tax on the gain derived from the sale,
which may be offset by U.S. source capital losses, even
though the individual is not considered a resident of the
U.S. If a
non-U.S. holder is
described in the third bullet point above, the
non-U.S. holder
should consult its own tax advisor to determine the
U.S. federal, state, local and other tax consequences that
may be relevant to such holder.
The FIRPTA rules may apply to a sale, exchange or other
disposition of common stock if we are, or were within five years
before the transaction, a U.S. real property holding
corporation, or a USRPHC. In general, we would be a USRPHC
if interests in U.S. real estate comprised most of our
assets. We do not believe that we are a USRPHC or that we will
become one in the future. If we are or become a USRPHC, so long
as our common stock is regularly traded on an established
securities market, only a
non-U.S. holder
who, actually or constructively, holds or held (at any time
during the shorter of the five year period preceding the date of
disposition or the holders holding period) more than 5% of
our common stock will be subject to U.S. federal income tax
on the disposition of our common stock.
Dividends or Gain Effectively Connected With a
U.S. Trade or Business
If any dividend on common stock, or gain from the sale, exchange
or other disposition of common stock, is effectively connected
with a U.S. trade or business conducted by the
non-U.S. holder,
then the dividend or gain will be subject to U.S. federal
income tax at the regular graduated rates. If the
non-U.S. holder is
eligible for the benefits of a tax treaty between the United
States and the holders country of residence, any
effectively connected dividend or gain would
generally be subject to U.S. federal income tax only if it
is also attributable to a permanent establishment or fixed base
maintained by the holder in the United States. Payments of
dividends that are effectively connected with a U.S. trade
or business, and therefore included in the gross income of a
non-U.S. holder,
will not be subject to the 30 percent withholding tax. To
claim exemption from withholding, the holder must certify its
qualification, which can be done by filing a Form W-8ECI.
If the
non-U.S. holder is
a corporation, that portion of its earnings and profits that is
effectively connected with its U.S. trade or business would
generally be subject to a branch profits tax. The
branch profits tax rate is generally 30 percent, although
an applicable income tax treaty might provide for a lower rate.
112
Backup Withholding and Information Reporting
The Internal Revenue Code and the Treasury regulations require
those who make specified payments to report the payments to the
IRS. Among the specified payments are dividends and proceeds
paid by brokers to their customers. The required information
returns enable the IRS to determine whether the recipient
properly included the payments in income. This reporting regime
is reinforced by backup withholding rules. These
rules require the payors to withhold tax from payments subject
to information reporting if the recipient fails to cooperate
with the reporting regime by failing to provide his taxpayer
identification number to the payor, furnishing an incorrect
identification number, or repeatedly failing to report interest
or dividends on his returns. The withholding tax rate is
currently 28 percent. The backup withholding rules do not
apply to payments to certain exempt holders, including
corporations, whether domestic or foreign, who establish their
exempt status.
Payments to
non-U.S. holders
of dividends on common stock will generally not be subject to
backup withholding, and payments of proceeds made to
non-U.S. holders
by a broker upon a sale of common stock will not be subject to
information reporting or backup withholding, in each case so
long as the
non-U.S. holder
certifies its nonresident status. Some of the common means of
certifying nonresident status are described under
Dividends. We must report annually to
the IRS any dividends paid to each
non-U.S. holder
and the tax withheld, if any, with respect to such dividends.
Copies of these reports may be made available to tax authorities
in the country where the
non-U.S. holder
resides.
Any amounts withheld from a payment to a holder of common stock
under the backup withholding rules can be credited against any
U.S. federal income tax liability of the holder.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX
ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE,
LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING, AND
DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY
PROPOSED CHANGE IN APPLICABLE LAWS.
113
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Deutsche Bank Securities Inc., Pacific Growth Equities, LLC and
JMP Securities LLC are acting as representatives of each of the
underwriters named below. Subject to the terms and conditions
set forth in a purchase agreement among us and the underwriters,
we have agreed to sell to the underwriters, and each of the
underwriters has agreed, severally and not jointly, to purchase
from us, the number of shares of common stock set forth opposite
its name below.
|
|
|
|
|
|
|
Number | |
|
|
of Shares | |
Underwriter |
|
| |
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
Deutsche Bank Securities Inc.
|
|
|
|
|
Pacific Growth Equities, LLC
|
|
|
|
|
JMP Securities LLC
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,000,000 |
|
|
|
|
|
Subject to the terms and conditions set forth in the purchase
agreement, the underwriters have agreed, severally and not
jointly, to purchase all of the shares sold under the purchase
agreement if any of these shares are purchased. If an
underwriter defaults, the purchase agreement provides that the
purchase commitments of the nondefaulting underwriters may be
increased or the purchase agreement may be terminated.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
purchase agreement, such as the receipt by the underwriters of
officers certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us that the underwriters
propose initially to offer the shares to the public at the
initial public offering price set forth on the cover page of
this prospectus and to dealers at that price less a concession
not in excess of
$ per
share. The underwriters may allow, and the dealers may reallow,
a discount not in excess of
$ per
share to other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us. The
information assumes either no exercise or full exercise by the
underwriters of their over-allotment option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
Without Option | |
|
With Option | |
|
|
| |
|
| |
|
| |
Public offering price
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
Underwriting discount
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
Proceeds, before expenses, to us
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
The expenses of the offering, not including the underwriting
discount, are estimated at $1.8 million and are payable by
us.
114
Over-allotment Option
We have granted an option to the underwriters to purchase up to
900,000 additional shares at the public offering price, less the
underwriting discount. The underwriters may exercise this option
for 30 days from the date of this prospectus solely to
cover any over-allotments. If the underwriters exercise this
option, each will be obligated, subject to conditions contained
in the purchase agreement, to purchase a number of additional
shares proportionate to that underwriters initial amount
reflected in the above table.
No Sales of Similar Securities
We and our officers, directors, stockholders, warrant holders
and option holders, who hold all of our shares of common stock,
on a fully diluted basis, have agreed, subject to certain
exceptions, not to sell or transfer any common stock or
securities convertible into, exchangeable for, exercisable for,
or repayable with common stock, for 180 days after the date
of this prospectus without first obtaining the written consent
of Merrill Lynch. Specifically, we and these other individuals
have agreed not to directly or indirectly
|
|
|
|
|
offer, pledge, sell or contract to sell any common stock, |
|
|
|
sell any option or contract to purchase any common stock, |
|
|
|
purchase any option or contract to sell any common stock, |
|
|
|
grant any option, right or warrant for the sale of any common
stock, |
|
|
|
lend or otherwise dispose of or transfer any common stock, |
|
|
|
request or demand that we file a registration statement related
to the common stock, or |
|
|
|
enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock, whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise. |
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable
with common stock. It also applies to common stock owned now or
acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition.
Quotation on the Nasdaq Global Market
We expect the shares to be approved for quotation on the Nasdaq
Global Market, subject to notice of issuance, under the symbol
CADX.
Before this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations among us and the
representatives. In addition to prevailing market conditions,
the factors to be considered in determining the initial public
offering price are
|
|
|
|
|
the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us, |
|
|
|
our financial information, |
|
|
|
the history of, and the prospects for, our company and the
industry in which we compete, |
|
|
|
an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenues, |
|
|
|
the present state of our development, and |
|
|
|
the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours. |
115
An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representatives
may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain
that price.
In connection with the offering, the underwriters may purchase
and sell our common stock in the open market. These transactions
may include short sales, purchases on the open market to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. Covered short sales are sales made in an
amount not greater than the underwriters option to
purchase additional shares in the offering. The underwriters may
close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered
short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option. Naked
short sales are sales in excess of the over-allotment option.
The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of our common stock
in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions
consist of various bids for or purchases of shares of common
stock made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters make any representation that the representatives
will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Electronic Offer, Sale and Distribution of Shares
A prospectus in electronic format will be made available on the
websites maintained by one or more of the underwriters of this
offering. Other than the electronic prospectus, the information
on the websites of the underwriters is not part of this
prospectus. The underwriters may agree to allocate a number of
shares to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated to
underwriters that may make Internet distributions on the same
basis as other allocations.
116
Other Relationships
Some of the underwriters and their affiliates have provided from
time to time, and may provide in the future, investment and
commercial banking and financial advisory services to us in the
ordinary course of business, for which they have received and
may continue to receive customary fees and commissions.
LEGAL MATTERS
The validity of our common stock offered by this prospectus will
be passed upon for us by Latham & Watkins LLP,
San Diego, California. Latham & Watkins LLP and
certain attorneys and investment funds affiliated with the firm
collectively own an aggregate of 90,000 shares of our
preferred stock, which will convert into an aggregate of
22,500 shares of our common stock upon the completion of
this offering. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Heller
Ehrman LLP, San Diego, California.
EXPERTS
Ernst & Young LLP, independent registered public accounting
firm, has audited our financial statements as of
December 31, 2004 and 2005 and for the period from
May 26, 2004 (inception) through December 31,
2004 and for the year ended December 31, 2005 as set forth
in their report. We have included our financial statements in
this prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLPs report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the
Securities Act of 1933, as amended, with respect to the shares
of our common stock offered hereby. This prospectus does not
contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. Some items are
omitted in accordance with the rules and regulations of the SEC.
For further information with respect to us and the common stock
offered hereby, we refer you to the registration statement and
the exhibits and schedules filed therewith. Statements contained
in this prospectus as to the contents of any contract, agreement
or any other document are summaries of the material terms of
this contract, agreement or other document. With respect to each
of these contracts, agreements or other documents filed as an
exhibit to the registration statement, reference is made to the
exhibits for a more complete description of the matter involved.
A copy of the registration statement, and the exhibits and
schedules thereto, may be inspected without charge at the public
reference facilities maintained by the SEC at 100 F Street NE,
Washington, D.C. 20549. Copies of these materials may be
obtained from the Public Reference Section of the SEC at
100 F Street NE, Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330 for
further information on the operation of the public reference
facility. The SEC maintains a web site that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address
of the SECs website is http://www.sec.gov.
117
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Cadence Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Cadence
Pharmaceuticals, Inc. (a development stage company) as of
December 31, 2004 and 2005 and the related statements of
operations, stockholders equity and cash flows for the
period from May 26, 2004 (inception) through
December 31, 2004 and for the year ended December 31,
2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and 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 financial position
of Cadence Pharmaceuticals, Inc. (a development stage company)
at December 31, 2004 and 2005 and the results of its
operations and its cash flows for the period from May 26,
2004 (inception) through December 31, 2004 and for the
year ended December 31, 2005 in conformity with generally
accepted accounting principles in the United States.
San Diego, California
April 21, 2006,
except for Note 10, as to which the date is
October 4, 2006.
F-2
Cadence Pharmaceuticals, Inc.
(a development stage company)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
|
|
|
|
Stockholders | |
|
|
December 31, | |
|
|
|
Equity at | |
|
|
| |
|
June 30, | |
|
June 30, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
4,271,229 |
|
|
$ |
8,025,285 |
|
|
$ |
42,881,305 |
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
7,000,000 |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
3,854 |
|
|
|
526,173 |
|
|
|
438,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,275,083 |
|
|
|
15,551,458 |
|
|
|
43,319,579 |
|
|
|
|
|
Property and equipment, net
|
|
|
108,735 |
|
|
|
117,740 |
|
|
|
770,693 |
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
1,581,130 |
|
|
|
|
|
Other assets
|
|
|
457,159 |
|
|
|
222,000 |
|
|
|
805,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
4,840,977 |
|
|
$ |
15,891,198 |
|
|
$ |
46,476,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
68,509 |
|
|
$ |
715,781 |
|
|
$ |
1,860,993 |
|
|
|
|
|
|
Accrued liabilities
|
|
|
45,965 |
|
|
|
430,220 |
|
|
|
2,949,955 |
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
1,032,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
114,474 |
|
|
|
1,146,001 |
|
|
|
5,843,405 |
|
|
|
|
|
Deferred rent
|
|
|
|
|
|
|
|
|
|
|
116,309 |
|
|
|
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
5,967,543 |
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 convertible preferred stock,
8,085,108 shares authorized, issued and outstanding at
December 31, 2004 and 2005 and June 30, 2006
(unaudited); aggregate liquidation preference of $7,600,002; no
shares issued and outstanding pro forma (unaudited)
|
|
|
809 |
|
|
|
809 |
|
|
|
809 |
|
|
$ |
|
|
|
|
Series A-2 convertible preferred stock,
12,900,001 shares, 17,675,347 shares and
18,060,347 shares authorized at December 31, 2004 and
2005 and June 30, 2006 (unaudited), respectively; no
shares, 17,675,347 shares and 17,675,347 shares issued
and outstanding at December 31, 2004 and 2005 and
June 30, 2006 (unaudited), respectively; aggregate
liquidation preference of $17,675,347; no shares issued and
outstanding pro forma (unaudited)
|
|
|
|
|
|
|
1,767 |
|
|
|
1,767 |
|
|
|
|
|
|
|
Series A-3 convertible preferred stock,
53,870,000 shares authorized at June 30, 2006
(unaudited); 53,870,000 shares issued and outstanding at
June 30, 2006 (unaudited); aggregate liquidation preference
of $53,870,000; no shares issued and outstanding pro forma
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
5,387 |
|
|
|
|
|
|
Common stock, $0.0001 par value; 33,000,000 shares,
40,000,000 shares and 100,000,000 shares authorized at
December 31, 2004 and 2005 and June 30, 2006
(unaudited), respectively; 1,170,000 shares,
1,904,000 shares and 2,137,935 shares issued and
outstanding at December 31, 2004 and 2005 and June 30,
2006 (unaudited), respectively; 22,045,540 shares issued
and outstanding pro forma (unaudited)
|
|
|
117 |
|
|
|
190 |
|
|
|
214 |
|
|
|
2,205 |
|
|
Additional paid-in capital
|
|
|
7,562,814 |
|
|
|
25,472,880 |
|
|
|
80,524,107 |
|
|
|
80,530,079 |
|
|
Stock subscription receivable
|
|
|
|
|
|
|
(187,600 |
) |
|
|
|
|
|
|
|
|
|
Deficit accumulated during the development stage
|
|
|
(2,837,237 |
) |
|
|
(10,542,849 |
) |
|
|
(45,982,734 |
) |
|
|
(45,982,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,726,503 |
|
|
|
14,745,197 |
|
|
|
34,549,550 |
|
|
$ |
34,549,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
4,840,977 |
|
|
$ |
15,891,198 |
|
|
$ |
46,476,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
Cadence Pharmaceuticals, Inc.
(a development stage company)
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
|
|
|
|
Period from | |
|
|
May 26, 2004 | |
|
|
|
|
|
|
|
May 26, 2004 | |
|
|
(Inception) | |
|
|
|
|
|
(Inception) | |
|
|
Through | |
|
Year Ended | |
|
Six Months Ended June 30, | |
|
Through | |
|
|
December 31, | |
|
December 31, | |
|
| |
|
June 30, | |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
|
(Unaudited) | |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ |
1,883,357 |
|
|
$ |
6,126,226 |
|
|
$ |
2,401,589 |
|
|
$ |
33,663,970 |
|
|
$ |
41,673,553 |
|
|
Marketing
|
|
|
41,114 |
|
|
|
240,361 |
|
|
|
142,501 |
|
|
|
316,541 |
|
|
|
598,016 |
|
|
General and administrative
|
|
|
877,146 |
|
|
|
1,411,810 |
|
|
|
539,914 |
|
|
|
1,967,980 |
|
|
|
4,256,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,801,617 |
|
|
|
7,778,397 |
|
|
|
3,084,004 |
|
|
|
35,948,491 |
|
|
|
46,528,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,801,617 |
) |
|
|
(7,778,397 |
) |
|
|
(3,084,004 |
) |
|
|
(35,948,491 |
) |
|
|
(46,528,505 |
) |
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,380 |
|
|
|
255,785 |
|
|
|
13,996 |
|
|
|
552,501 |
|
|
|
817,666 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,895 |
) |
|
|
(43,895 |
) |
|
Impairment of investment securities
|
|
|
(45,000 |
) |
|
|
(183,000 |
) |
|
|
(183,000 |
) |
|
|
|
|
|
|
(228,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
(35,620 |
) |
|
|
72,785 |
|
|
|
(169,004 |
) |
|
|
508,606 |
|
|
|
545,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,837,237 |
) |
|
$ |
(7,705,612 |
) |
|
$ |
(3,253,008 |
) |
|
$ |
(35,439,885 |
) |
|
$ |
(45,982,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(3.10 |
) |
|
$ |
(6.67 |
) |
|
$ |
(2.87 |
) |
|
$ |
(28.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss per share
|
|
|
914,589 |
|
|
|
1,155,879 |
|
|
|
1,131,716 |
|
|
|
1,243,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
|
|
|
|
$ |
(1.49 |
) |
|
|
|
|
|
$ |
(2.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute pro forma basic and diluted net loss per
share
|
|
|
|
|
|
|
5,162,132 |
|
|
|
|
|
|
|
14,677,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
Cadence Pharmaceuticals, Inc.
(a development stage company)
STATEMENTS OF STOCKHOLDERS EQUITY
For the Period from May 26, 2004
(inception) through June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 | |
|
Series A-2 | |
|
Series A-3 | |
|
|
|
|
|
|
|
|
|
Deficit | |
|
|
|
|
Convertible | |
|
Convertible | |
|
Convertible | |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Preferred Stock | |
|
Preferred Stock | |
|
Preferred Stock | |
|
Common Stock | |
|
Additional | |
|
Stock | |
|
During the | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
Paid-In | |
|
Subscription | |
|
Development | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Capital | |
|
Receivable | |
|
Stage | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Issuance of common stock to founders for cash at $0.004 per
share in July
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
1,125,000 |
|
|
$ |
112 |
|
|
$ |
4,388 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,500 |
|
Exercise of common stock options for cash at $0.40 per
share in December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000 |
|
|
|
5 |
|
|
|
17,995 |
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
Issuance of Series A-1 preferred stock for cash at
$0.94 per share, net of $59,573 of offering costs, in July
and August
|
|
|
8,085,108 |
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,539,620 |
|
|
|
|
|
|
|
|
|
|
|
7,540,429 |
|
Issuance of common stock options for consulting services in
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
811 |
|
|
|
|
|
|
|
|
|
|
|
811 |
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,837,237 |
) |
|
|
(2,837,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
8,085,108 |
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,170,000 |
|
|
|
117 |
|
|
|
7,562,814 |
|
|
|
|
|
|
|
(2,837,237 |
) |
|
|
4,726,503 |
|
Exercise of common stock options at $0.40 per share in
February, June and December, net of the repurchase of
7,500 shares at $0.40 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734,000 |
|
|
|
73 |
|
|
|
293,527 |
|
|
|
(187,600 |
) |
|
|
|
|
|
|
106,000 |
|
Issuance of Series A-2 preferred stock for cash at
$1.00 per share, net of $57,041 of offering costs, in June
and September
|
|
|
|
|
|
|
|
|
|
|
17,675,347 |
|
|
|
1,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,616,539 |
|
|
|
|
|
|
|
|
|
|
|
17,618,306 |
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,705,612 |
) |
|
|
(7,705,612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
8,085,108 |
|
|
|
809 |
|
|
|
17,675,347 |
|
|
|
1,767 |
|
|
|
|
|
|
|
|
|
|
|
1,904,000 |
|
|
|
190 |
|
|
|
25,472,880 |
|
|
|
(187,600 |
) |
|
|
(10,542,849 |
) |
|
|
14,745,197 |
|
Exercise of common stock options for cash between $0.40 and
$1.36 per share in January through June (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,935 |
|
|
|
24 |
|
|
|
281,168 |
|
|
|
|
|
|
|
|
|
|
|
281,192 |
|
Collection of stock subscription receivable (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,600 |
|
|
|
|
|
|
|
187,600 |
|
Issuance of Series A-3 preferred stock for cash at
$1.00 per share, net of $94,987 of offering costs, in March
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,870,000 |
|
|
|
5,387 |
|
|
|
|
|
|
|
|
|
|
|
53,769,626 |
|
|
|
|
|
|
|
|
|
|
|
53,775,013 |
|
Issuance of warrants in connection with loan and security
agreement in February (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,572 |
|
|
|
|
|
|
|
|
|
|
|
313,572 |
|
Employee stock- based compensation recognized under SFAS
No. 123(R) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
686,861 |
|
|
|
|
|
|
|
|
|
|
|
686,861 |
|
Net loss and comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,439,885 |
) |
|
|
(35,439,885 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 (unaudited)
|
|
|
8,085,108 |
|
|
$ |
809 |
|
|
|
17,675,347 |
|
|
$ |
1,767 |
|
|
|
53,870,000 |
|
|
$ |
5,387 |
|
|
|
2,137,935 |
|
|
$ |
214 |
|
|
$ |
80,524,107 |
|
|
$ |
|
|
|
$ |
(45,982,734 |
) |
|
$ |
34,549,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
Cadence Pharmaceuticals, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
|
|
|
|
Period from | |
|
|
May 26, 2004 | |
|
|
|
|
|
|
|
May 26, 2004 | |
|
|
(Inception) | |
|
|
|
|
|
(Inception) | |
|
|
Through | |
|
Year Ended | |
|
Six Months Ended June 30, | |
|
Through | |
|
|
December 31, | |
|
December 31, | |
|
| |
|
June 30, | |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
|
(Unaudited) | |
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,837,237 |
) |
|
$ |
(7,705,612 |
) |
|
$ |
(3,253,008 |
) |
|
$ |
(35,439,885 |
) |
|
$ |
(45,982,734 |
) |
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
8,389 |
|
|
|
36,876 |
|
|
|
15,771 |
|
|
|
28,862 |
|
|
|
74,127 |
|
|
|
Stock-based compensation
|
|
|
811 |
|
|
|
|
|
|
|
|
|
|
|
686,861 |
|
|
|
687,672 |
|
|
|
Non-cash interest expense and impairment charges
|
|
|
45,000 |
|
|
|
183,000 |
|
|
|
183,000 |
|
|
|
41,665 |
|
|
|
269,665 |
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(56,013 |
) |
|
|
(470,160 |
) |
|
|
(260,033 |
) |
|
|
59,799 |
|
|
|
(466,374 |
) |
|
|
|
Accounts payable, accrued liabilities and deferred rent
|
|
|
114,474 |
|
|
|
1,031,527 |
|
|
|
1,157,612 |
|
|
|
3,510,041 |
|
|
|
4,656,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,724,576 |
) |
|
|
(6,924,369 |
) |
|
|
(2,156,658 |
) |
|
|
(31,112,657 |
) |
|
|
(40,761,602 |
) |
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(450,000 |
) |
|
|
(7,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
(7,450,000 |
) |
Maturities of marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000,000 |
|
|
|
7,000,000 |
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,581,130 |
) |
|
|
(1,581,130 |
) |
Purchases of property and equipment
|
|
|
(117,124 |
) |
|
|
(45,881 |
) |
|
|
(10,719 |
) |
|
|
(681,815 |
) |
|
|
(844,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(567,124 |
) |
|
|
(7,045,881 |
) |
|
|
(10,719 |
) |
|
|
4,737,055 |
|
|
|
(2,875,950 |
) |
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
22,500 |
|
|
|
106,000 |
|
|
|
109,000 |
|
|
|
456,609 |
|
|
|
585,109 |
|
Proceeds from sale of preferred stock, net of issuance costs
|
|
|
7,540,429 |
|
|
|
17,618,306 |
|
|
|
13,661,958 |
|
|
|
53,775,013 |
|
|
|
78,933,748 |
|
Borrowings under debt agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000,000 |
|
|
|
7,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,562,929 |
|
|
|
17,724,306 |
|
|
|
13,770,958 |
|
|
|
61,231,622 |
|
|
|
86,518,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
4,271,229 |
|
|
|
3,754,056 |
|
|
|
11,603,581 |
|
|
|
34,856,020 |
|
|
|
42,881,305 |
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
4,271,229 |
|
|
|
4,271,229 |
|
|
|
8,025,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
4,271,229 |
|
|
$ |
8,025,285 |
|
|
$ |
15,874,810 |
|
|
$ |
42,881,305 |
|
|
$ |
42,881,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in connection with loan and security
agreement
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
313,572 |
|
|
$ |
313,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
|
|
1. |
The Company and Summary of Significant Accounting Policies |
|
|
|
The Company and Basis of Presentation |
Cadence Pharmaceuticals, Inc. (the Company) was
incorporated in the state of Delaware in May 2004. The Company
is a biopharmaceutical company focused on in-licensing,
developing and commercializing proprietary product candidates
principally for use in the hospital setting.
The Companys primary activities since incorporation have
been organizational activities, including recruiting personnel,
establishing office facilities, conducting research and
development, including clinical trials, and raising capital. To
date, the Company has in-licensed rights to two Phase III
product candidates. Since the Company has not begun principal
operations of commercializing a product candidate, the Company
is considered to be in the development stage.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
|
|
|
Unaudited Interim Financial Statements |
The accompanying unaudited interim balance sheet as of
June 30, 2006, the statements of operations and cash flows
for the six months ended June 30, 2005 and 2006 and the
period from May 26, 2004 (inception) through
June 30, 2006 and the statement of stockholders
equity for the six months ended June 30, 2006 are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements
and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments necessary to
present fairly the Companys financial position as of
June 30, 2006 and results of operations and cash flows for
the six months ended June 30, 2005 and 2006. The results of
operations for the six months ended June 30, 2006 are not
necessarily indicative of the results to be expected for the
year ending December 31, 2006 or for any other interim
period or for any other future year.
|
|
|
Unaudited Pro Forma Stockholders Equity |
The unaudited pro forma stockholders equity information in
the accompanying balance sheet assumes the conversion of the
outstanding shares of convertible preferred stock at
June 30, 2006 into 19,907,605 shares of common stock
as though the completion of the initial public offering
contemplated by the filing of this prospectus had occurred on
June 30, 2006. Common shares issued in such initial public
offering and any related estimated net proceeds are excluded
from such pro forma information.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents consists of cash and other highly
liquid investments with original maturities of three months or
less from the date of purchase.
F-7
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
|
|
|
Investment Securities Available-for-Sale |
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, the Company
classifies all securities as available-for-sale, as the sale of
such securities may be required prior to maturity to implement
management strategies. These securities are carried at fair
value, with the unrealized gains and losses reported as a
component of accumulated other comprehensive loss until
realized. Realized gains and losses from the sale of
available-for-sale securities, if any, are determined on a
specific identification basis. As of December 31, 2004 and
2005 and June 30, 2006, the carrying value of the
investments approximated their fair market value.
|
|
|
Fair Value of Financial Instruments |
The carrying amount of cash and cash equivalents, accounts
payable and accrued liabilities are considered to be
representative of their respective fair values because of the
short-term nature of those instruments. The fair value of
available-for-sale
securities is based upon market prices quoted on the last day of
the fiscal period.
|
|
|
Concentration of Credit Risk |
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist primarily of
cash and cash equivalents and securities available-for-sale. The
Company maintains deposits in federally insured financial
institutions in excess of federally insured limits. However,
management believes the Company is not exposed to significant
credit risk due to the financial position of the depository
institutions in which those deposits are held. Additionally, the
Company has established guidelines regarding diversification of
its investments and their maturities, which are designed to
maintain safety and liquidity.
Property and equipment, including leasehold improvements, are
stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the
assets, generally two to five years. Leasehold improvements are
amortized over the shorter of their useful lives or the terms of
the related leases.
|
|
|
Impairment of Long-Lived Assets |
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, long-lived
assets, such as property and equipment are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or the fair value less costs to
sell, and are no longer depreciated. The assets and liabilities
of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability
sections of the balance sheet. Although the Company has
accumulated losses since inception, the
F-8
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
Company believes the future cash flows to be received from the
long-lived assets will exceed the assets carrying value
and, accordingly, the Company has not recognized any impairment
losses through June 30, 2006.
The Company accounts for research and development costs in
accordance with SFAS No. 2, Accounting for Research
and Development Costs. SFAS No. 2 specifies that
research and development costs should be charged to expense
until technological feasibility has been established for the
product. Once technological feasibility is established, all
product costs should be capitalized until the product is
available for general release to customers. The Company has
determined that technological feasibility for its product
candidates is reached when the requisite regulatory approvals
are obtained to make the product available for sale. The
Companys research and development expenses consist
primarily of license fees, salaries and related employee
benefits, costs associated with clinical trials managed by the
Companys contract research organizations, or CROs, and
costs associated with non-clinical activities, such as
regulatory expenses. The Company uses external service providers
and vendors to conduct clinical trials, to manufacture product
candidates to be used in clinical trials and to provide various
other research and development related products and services.
Through June 30, 2006, research and development expenses
relate predominantly to the in-licensing of IV APAP and
Omigard and clinical trials for Omigard.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. The Company provides a valuation allowance
against net deferred tax assets unless, based upon the available
evidence, it is more likely than not that the deferred tax
assets will be realized.
Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123(R), Share-Based
Payment, using the prospective transition method and
therefore, prior period results will not be restated.
SFAS No. 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
issued to Employees, and related interpretations, and
revises guidance in SFAS No. 123, Accounting for
Stock-Based Compensation. Under this transition method, the
compensation cost related to all equity instruments granted
prior to, but not yet vested as of, the adoption date is
recognized based on the grant-date fair value which is estimated
in accordance with the original provisions of
SFAS No. 123; however, those options issued prior to
but unvested on January 1, 2006 and valued using the
minimum value method are excluded from the options subject to
SFAS No. 123(R). Compensation costs related to all equity
instruments granted after January 1, 2006 is recognized at
grant-date fair value of the awards in accordance with the
provisions of SFAS No. 123(R). Additionally, under the
provisions of SFAS No. 123(R), the Company is required
to include an estimate of the number of the
F-9
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
awards that will be forfeited in calculating compensation costs,
which is recognized over the requisite service period of the
awards on a straight-line basis.
During the six months ended June 30, 2006, the Company
recorded $686,861, or $0.55 per share, of stock-based
compensation expense as a result of the adoption of SFAS
No. 123(R). Of this amount, the Company allocated $110,339,
$84 and $576,438 to research and development, sales and
marketing and general and administrative expenses, respectively,
based on the department to which the associated employee
reports. No related tax benefits of the stock-based compensation
costs have been recognized since the inception of the Company.
The following table shows the assumptions used to compute the
stock-based compensation costs for the stock options granted
during the six months ended June 30, 2006 using the
Black-Scholes option pricing model:
|
|
|
|
|
Employee Stock Options
|
|
|
|
|
Risk-free interest rate
|
|
|
4.36 5.08 |
% |
Dividend yield
|
|
|
0.00 |
% |
Expected life of options (years)
|
|
|
6.06 6.08 |
|
Volatility
|
|
|
70.00 |
% |
The risk-free interest rate assumption was based on the United
States Treasurys rates for U.S. Treasury zero-coupon
bonds with maturities similar to those of the expected term of
the award being valued. The assumed dividend yield was based on
the Companys expectation of not paying dividends in the
foreseeable future. The weighted average expected life of
options was calculated using the simplified method as prescribed
by Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 107. This
decision was based on the lack of relevant historical data due
to the Companys limited historical experience. In
addition, due to the Companys limited historical data, the
estimated volatility also reflects the application of
SAB No. 107, incorporating the historical volatility
of comparable companies whose share prices are publicly
available.
The weighted average grant-date fair values of stock options
granted during the six months ended June 30, 2006 was
$5.90 per share.
As of June 30, 2006, the Company has approximately
$7,500,000 of unrecognized stock-based compensation costs
related to the non-vested balance of the 1,387,303 stock options
granted during the six months ended June 30, 2006 and
expects to recognize such compensation over a weighted average
period of 3.66 years.
Prior to January 1, 2006, the Company applied the
intrinsic-value-based method of accounting prescribed by APB
Opinion No. 25, and related interpretations including
Financial Accounting Standards Board (FASB)
Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25, to account for
its equity-based awards to employees and directors. Under this
method, if the exercise price of the award equaled or exceeded
the fair value of the underlying stock on the measurement date,
no compensation expense was recognized. The measurement date was
the date on which the final number of shares and exercise price
were known and was generally the grant date for awards to
employees and directors. If the exercise price of the award was
below the fair value of the underlying stock on the measurement
date, then compensation cost was recorded, using the
F-10
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
intrinsic-value method, and was generally recognized in the
statements of operations over the vesting period of the award.
The effect on net loss as if the fair-value-based method had
been applied to all outstanding and unvested awards in each
period would have been less than a $10,000 increase in the net
loss for each period in the period from May 26, 2004
(inception) through December 31, 2005. For purposes of
disclosures required by SFAS No. 123, the estimated
fair value of the options was amortized on a straight-line basis
over the vesting period. The fair value of these awards was
estimated using the Minimum Value pricing model, with the
following weighted-average assumptions for 2004 and 2005:
risk-free interest rate of 3.53% and 4.17%, respectively;
dividend yield of 0%; expected volatility of 0%; and a life of
four years.
Equity instruments issued to non-employees are recorded at their
fair value as determined in accordance with
SFAS No. 123(R) and Emerging Issues Task Force
(EITF)
96-18, Accounting
for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods and
Services, and are periodically revalued as the equity
instruments vest and are recognized as expense over the related
service period. Compensation expense related to the 2,500 stock
options issued to a non-employee was $811 for both the period
from May 26, 2004 (inception) through
December 31, 2004 and the period from May 26, 2004
(inception) through June 30, 2006. The fair value of
these stock options was estimated using the Black-Scholes
pricing model, with the following weighted-average assumptions:
risk-free interest rate of 4.19%; dividend yield of 0%; expected
volatility of 70%; and a life of 10 years.
The Company has applied SFAS No. 130, Reporting
Comprehensive Income, which requires that all components of
comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income,
including foreign currency translation adjustments and
unrealized gains and losses on investments, shall be reported,
net of their related tax effect, to arrive at comprehensive
income. The net loss and comprehensive loss were the same for
all periods presented.
Basic net loss per share is calculated by dividing the net loss
by the weighted average number of common shares outstanding for
the period, without consideration for common stock equivalents.
Diluted net loss per share is computed by dividing the net loss
by the weighted average number of common share equivalents
outstanding for the period determined using the treasury-stock
method. For purposes of this calculation, convertible preferred
stock, stock options and warrants are considered to be common
stock equivalents and are only included in the calculation of
diluted net loss per share when their effect is dilutive.
The unaudited pro forma basic and diluted net loss per share is
calculated by dividing the net loss by the weighted average
number of common shares outstanding for the period plus the
weighted average number of common shares resulting from the
assumed conversion of the outstanding shares of convertible
preferred stock. The assumed conversion is calculated using the
as-if-converted method, as if such conversion had occurred as of
the beginning of each period presented or as of the original
issuance date, if later.
F-11
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from | |
|
|
|
|
|
|
|
|
May 26, 2004 | |
|
|
|
|
|
|
|
|
(Inception) | |
|
|
|
|
|
|
Through | |
|
Year Ended | |
|
Six Months Ended June 30, | |
|
|
December 31, | |
|
December 31, | |
|
| |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,837,237 |
) |
|
$ |
(7,705,612 |
) |
|
$ |
(3,253,008 |
) |
|
$ |
(35,439,885 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
920,137 |
|
|
|
1,319,367 |
|
|
|
1,192,514 |
|
|
|
1,956,706 |
|
|
Weighted average unvested common shares subject to repurchase
|
|
|
(5,548 |
) |
|
|
(163,488 |
) |
|
|
(60,798 |
) |
|
|
(713,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
914,589 |
|
|
|
1,155,879 |
|
|
|
1,131,716 |
|
|
|
1,243,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(3.10 |
) |
|
$ |
(6.67 |
) |
|
$ |
(2.87 |
) |
|
$ |
(28.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used above
|
|
|
|
|
|
$ |
(7,705,612 |
) |
|
|
|
|
|
$ |
(35,439,885 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
|
|
|
|
$ |
(1.49 |
) |
|
|
|
|
|
$ |
(2.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used above
|
|
|
|
|
|
|
1,155,879 |
|
|
|
|
|
|
|
1,243,500 |
|
Pro forma adjustments to reflect assumed weighted average effect
of conversion of preferred stock
|
|
|
|
|
|
|
4,006,253 |
|
|
|
|
|
|
|
13,434,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares used to compute basic and diluted net loss per
share
|
|
|
|
|
|
|
5,162,132 |
|
|
|
|
|
|
|
14,677,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding anti-dilutive securities not included
in diluted net loss per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock (as converted)
|
|
|
2,021,271 |
|
|
|
6,440,107 |
|
|
|
5,477,607 |
|
|
|
19,907,605 |
|
Preferred stock warrants (as converted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,250 |
|
Common stock options
|
|
|
261,250 |
|
|
|
289,000 |
|
|
|
241,250 |
|
|
|
1,442,372 |
|
Common stock subject to repurchase
|
|
|
42,188 |
|
|
|
691,969 |
|
|
|
307,188 |
|
|
|
860,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,324,709 |
|
|
|
7,421,076 |
|
|
|
6,026,045 |
|
|
|
22,306,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. |
Securities Available-for-Sale |
As of December 31, 2005, the Company held $7,000,000 of
commercial paper issued by U.S. corporations and rated by
debt rating agencies.
F-12
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
In addition, as of December 31, 2004 and 2005 and
June 30, 2006, the Company held 617,284 shares of
Migenix common stock acquired in July 2004 at an initial cost of
$450,000. See Note 6 for further discussion of the
acquisition of these shares. In 2004 and 2005, the Company
recorded non-cash impairment charges on investments of $45,000
and $183,000, respectively, related to decreases in the market
value of the Migenix stock.
In determining if and when decreases in market value of the
Companys equity positions below their cost are
other-than-temporary, the Company examines historical trends in
stock prices and the financial condition of the Issuers. When
the Company determines that a decline in value is
other-than-temporary, the Company recognizes an impairment loss
in the current period operating results to the extent of the
decline.
|
|
3. |
Property and Equipment |
Property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
|
|
| |
|
June 30, | |
|
|
Useful Lives | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Leasehold improvements
|
|
|
2 years |
|
|
$ |
1,146 |
|
|
$ |
1,146 |
|
|
$ |
1,146 |
|
Computer equipment and software
|
|
|
3 years |
|
|
|
55,245 |
|
|
|
63,972 |
|
|
|
186,006 |
|
Furniture and equipment
|
|
|
5 years |
|
|
|
60,733 |
|
|
|
94,982 |
|
|
|
94,982 |
|
Manufacturing equipment
|
|
|
7 years |
|
|
|
|
|
|
|
|
|
|
|
122,500 |
|
Construction in-process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,124 |
|
|
|
160,100 |
|
|
|
841,915 |
|
Less accumulated depreciation
|
|
|
|
|
|
|
(8,389 |
) |
|
|
(42,360 |
) |
|
|
(71,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
108,735 |
|
|
$ |
117,740 |
|
|
$ |
770,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. |
Related Party Transactions |
From September 2004 through August 2005, the Company paid
Mr. Cam L. Garner $5,000 per month plus qualified
business expenses for his services as chairman of the
Companys board of directors under the terms of a
consulting agreement between the Company and a limited liability
company affiliated with Mr. Garner. The agreement expired
on August 31, 2005. From September 2005 to February 2006,
the Company continued to pay Mr. Garner $5,000 per
month for his services as chairman of the Companys board
of directors. In March 2006, Mr. Garners monthly
compensation for his services as chairman of the Companys
board of directors was increased to $8,333 per month. For
the period from May 26, 2004 (inception) through
December 31, 2004, the year ended December 31, 2005,
the six months ended June 30, 2005 and 2006 and the period
from May 26, 2004 (inception) through June 30,
2006, the Company expensed $20,000, $60,000, $30,000, $43,333,
and $123,333, respectively for payments to Mr. Garner for
services as chairman of the Companys board of directors.
The unpaid balance as of December 31, 2004 and 2005 and
June 30, 2006 was $20,000, $10,000 and $8,333, respectively.
During 2004, a stockholder advanced $500,000 for pre-operating
expenses and an exclusivity fee due for the collaboration and
license agreement with Migenix (see Note 6). The advance
was accounted for in accordance with the SEC SAB Topic 5T
(SAB No. 79), Accounting for Expenses or Liabilities
F-13
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
Paid by Principal Stockholder(s), which requires the
Company to record expenses for services paid by stockholders for
the benefit of the Company as if such expenses had been paid
directly by the Company. The 531,915 shares of Series A-1
preferred stock issued in settlement of the $500,000 advance
were valued at $0.94 per share, the price paid by new
Series A-1 investors. The transaction was recorded as a $500,000
cash investment in Series A-1 preferred stock by the stockholder
and a corresponding cash payment of $500,000 for operating
expenses.
|
|
|
Loan and Security Agreement |
In February 2006, the Company entered into a $7,000,000 loan and
security agreement with Silicon Valley Bank and Oxford Finance
Corporation to provide growth capital to the Company. In
June 2006, the Company drew down $7,000,000 under the loan
and security agreement with Silicon Valley Bank and Oxford
Finance Corporation and has no further credit available under
this agreement. The Company will make interest only payments on
growth capital advances until the first day of the month
following the six month anniversary of each growth capital
advance, at which date the Company will make the first of 30
equal principal and interest payments. Interest accrues on all
outstanding amounts at the fixed rate equal to the greater of
(a) 10.83% or (b) the Treasury Rate plus 6.25% as of
the date the first principal and interest payment is due. The
loans are collateralized by substantially all the assets of the
Company (excluding intellectual property) and are subject to
prepayment penalties. Under the terms of the agreement, the
Company may be precluded from entering into certain financing
and other transactions, including disposing of certain assets
and paying dividends, and is subject to certain non-financial
covenants. Upon the occurrence of an event of default, including
a Material Adverse Change (as defined in the agreement), the
lenders may declare all outstanding amounts due and payable.
In conjunction with the loan and security agreement, the Company
issued fully exercisable warrants to the lenders to purchase an
aggregate of 385,000 shares of the Companys
Series A-2 preferred stock at an exercise price of
$1.00 per share. Excluding certain mergers or acquisitions,
the warrants expire upon the later of: (a) 10 years
from issuance or (b) five years after the closing of an
initial public offering of the Companys common stock. The
$313,572 fair value of the warrants was determined using the
Black-Scholes valuation model, recorded as debt issuance costs
which are included as other long-term assets in the accompanying
balance sheets, and amortized to interest expense over the
expected term of the loan agreement. The warrants were valued
using the following assumptions: risk-free interest rate of
4.57%; dividend yield of 0%; expected volatility of 70%; and
contractual term of 10 years.
In 2004, the Company subleased its corporate headquarters under
a non-cancelable operating lease that expires in September 2006.
As of December 31, 2005 and June 30, 2006, the
sublessor held a security deposit of $50,685. In May 2006,
the Company entered into a six-year operating lease for
23,494 square feet of office space. The Company will
receive certain tenant improvement allowances and rent abatement
and has an option to extend the lease for five years. Monthly
rental payments are adjusted on an annual basis and the lease
expires in September 2012. As security for the lease, the
landlord required a letter of credit in the amount of
$1,581,130. The letter of credit is collateralized by a
certificate of deposit in the same amount that is classified as
restricted cash in the accompanying balance sheet. The required
amount subject to the letter of credit and corresponding
certificate of deposit will be reduced by 22% on each of
F-14
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
the first four anniversaries of the commencement of the lease.
Rent expense was $67,579, $190,911, $89,542, $274,231 and
$309,174 for the period from May 26, 2004
(inception) through December 31, 2004, the year ended
December 31, 2005, the six months ended June 30, 2005
and 2006 and the period from May 26, 2004
(inception) through June 30, 2006, respectively. As of
June 30, 2006, future minimum payments under the operating
leases total $186,999, $1,009,000, $1,074,851, $1,112,206,
$1,151,676, $1,191,851 and $917,676 for the years ending
December 31, 2006, 2007, 2008, 2009, 2010, 2011 and 2012,
respectively.
|
|
6. |
License Agreements and Acquired Development and
Commercialization Rights |
In July 2004, the Company in-licensed from Migenix the
technology and the exclusive development and commercialization
rights to its omiganan pentahydrochloride product candidate for
the prevention and treatment of device-related, wound-related,
and burn-related infections in North America and Europe. As
consideration for the license, the Company paid a $2,000,000
up-front fee, of which $1,550,000 was allocated to the value of
the acquired technology and $450,000 was recorded as other
long-term assets in the accompanying balance sheet for the
617,284 shares of Migenix common stock acquired. The
Company may also be required to make future milestone payments
totaling up to $27,000,000 upon the achievement of various
milestones related to regulatory or commercial events. The
Company is also obligated to pay a royalty on future net sales
(as defined) of the licensed products and has the right to grant
sublicenses to affiliates. The Company expects results from
Phase III clinical trials for the licensed product in the
second half of 2007 but does not expect FDA approval prior to
2008. Accordingly, all payments related to the Migenix agreement
(other than for the acquisition of common stock) have been
recorded as research and development expense.
In March 2006, the Company in-licensed the technology and the
exclusive development and commercialization rights to
its IV APAP product candidate in the United States and
Canada from Bristol-Myers Squibb Company (BMS). BMS
sublicensed these rights to the Company under a license
agreement with SCR Pharmatop S.A. As consideration for the
license, the Company paid a $25,000,000 up-front fee, and may be
required to make future milestone payments totaling up to
$50,000,000 upon the achievement of various milestones related
to regulatory or commercial events. The Company is also
obligated to pay a royalty on net sales of the licensed products
and has the right to grant sublicenses to third parties. The
Company expects to initiate Phase III clinical trials for
the licensed product in 2006 but does not expect FDA approval
prior to 2008. Accordingly, all payments related to the BMS
agreement have been recorded as research and development expense.
|
|
|
Convertible Preferred Stock |
In July and August 2004, the Company issued
8,085,108 shares of
Series A-1
preferred stock at $0.94 per share for cash of $7,600,002.
The Company incurred offering costs of $59,573 resulting in net
cash proceeds of $7,540,429.
In June and September 2005, the Company issued an aggregate of
17,675,347 shares of
Series A-2
preferred stock at $1.00 per share for cash of $17,675,347.
The Company incurred offering costs of $57,041 resulting in net
cash proceeds of $17,618,306.
F-15
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
In March 2006, the Company issued 53,870,000 shares of
Series A-3
preferred stock at $1.00 per share for cash of $53,870,000.
The Company incurred offering costs of $94,987 resulting in net
cash proceeds of $53,775,013.
Each holder of
Series A-1,
A-2 and
A-3 preferred stock has
the right, at the option of the holder at any time, to convert
shares of preferred stock into shares of common stock at a
conversion ratio of
one-to-four, subject to
further adjustment for stock splits, certain capital
reorganizations and dilutive stock issuances. Each share of
preferred stock will automatically convert into shares of common
stock, at the then effective applicable conversion rate upon the
earlier of: (i) the day preceding the closing of the sale
of the Companys common stock in connection with a firmly
underwritten public offering in which the Company receives gross
proceeds of at least $30,000,000 at a price of at least
$12.00 per share (as adjusted from time to time) or
(ii) the consent of at least 60% of the then outstanding
shares of preferred stock, as a single class.
Unless 60% of the
Series A-3
preferred stockholders vote otherwise, certain
Series A-3
preferred stockholders that fail to participate in future equity
financings up to specified amounts will lose their right of
first offer related to any subsequent equity financings and any
Series A-1
preferred stock held by them will automatically convert into
newly created Series A-4 preferred stock and any
Series A-2 and
A-3 preferred stock
held by them will automatically convert into newly created
Series A-5 preferred stock. Series A-4 and A-5
preferred stock shall have identical rights and preferences as
Series A-1,
A-2 and
A-3 preferred stock
with the exception of certain anti-dilution protections.
The holders of
Series A-1,
A-2 and
A-3 preferred stock are
entitled to receive, when, as and if declared by the
Companys Board of Directors out of legally available
funds, non-cumulative dividends payable to holders of the
preferred stock in an amount equal to $0.0752, $0.08 and
$0.08 per share, respectively, in preference and priority
to the payment of any dividends on common stock. As of
December 31, 2005 and June 30, 2006, no dividends have
been declared by the Board of Directors.
In the event of any liquidation, dissolution or winding up of
the Company, the holders of
Series A-1,
A-2 and
A-3 preferred stock
will be entitled to receive in preference to the holders of
common stock, the amount of their original purchase price per
share, plus declared and unpaid dividends, if any. If the assets
and funds available to be distributed among the holders of the
preferred stock shall be insufficient to permit the payment to
such holders of the full preferences, then the entire assets and
funds legally available for distribution to such holders shall
be distributed ratably based on the total due each such holder.
Any remaining assets of the Company will be distributed ratably
among the holders of the common stock and preferred stock, with
the preferred stock limited to the aggregate of three times the
original purchase price per share, based upon the number of
shares of common stock held by each stockholder, treating each
share of preferred stock as if it were converted into shares of
common stock at the then-applicable conversion rate.
Preferred stockholders are entitled to the number of votes they
would have upon conversion of their preferred shares into common
stock at the then-applicable conversion rate. The preferred
stockholders have been granted certain rights with regard to the
election of board members and various other corporate actions.
F-16
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
In 2004, the Company adopted the Cadence Pharmaceuticals, Inc.
2004 Equity Incentive Plan (the 2004 Plan). The 2004
Plan allows for the grant of options, restricted stock awards,
performance share awards, dividend equivalents, restricted stock
units, stock payments and stock appreciation rights to
employees, directors and consultants of the Company. As of
December 31, 2005 and June 30, 2006, respectively, the
2004 Plan had 1,125,000 and 2,875,000 shares of common
stock reserved for issuance. Options granted under the 2004 Plan
expire no later than 10 years from the date of grant.
Options generally vest over a four-year period and may be
immediately exercisable. After one year, the options generally
vest 25%. Thereafter, options generally vest monthly in 36 equal
installments. The exercise price of incentive stock options
shall not be less than 100% of the fair value of the
Companys common stock on the date of grant. The exercise
price of any option granted to a 10% stockholder may be no less
than 110% of the fair value of the Companys common stock
on the date of grant. The fair value of the Companys
common stock is established contemporaneously by the
Companys board of directors all of whom are related
parties. From May 26, 2004 (inception) through February
2006 the valuations were performed by the Companys board
of directors who have experience in valuing early stage
companies.
The Company has applied the guidance in the American Institute
of Certified Public Accountants (AICPA) Audit and
Accounting Practice Aid Series, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation, to determine the fair value of its common
stock for purposes of setting the exercise prices of stock
options granted to employees and others. This guidance
emphasizes the importance of the operational development in
determining the value of the enterprise. As a development stage
enterprise, the Company is at an early stage of existence,
primarily focused on product development with an unproven
business model. To date, the Company has been funded primarily
by venture capitalists with a history of funding
start-up, high-risk
entities with the potential for high returns in the event the
investments are successful. Prior to the licensing of IV
APAP in March 2006, the Company was considered to be in a very
early stage of development as defined in the AICPA guidance
where the preferences of the preferred stockholders, in
particular the liquidation preferences, are very meaningful and
the common stock was valued at $0.40 per share. Subsequent to
the Companys licensing of IV APAP but prior to the
initiation of the Companys initial public offering process
on June 14, 2006, the Company allocated additional
enterprise value to its common stock with an increase in the
common stock valuation to $1.36 per share. Subsequent to
the initiation of the initial public offering process, the
Company increased its common stock valuation to $3.20 per
share.
F-17
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
On June 14, 2006, the Company commenced the initial public
offering process, and based on the preliminary valuation
information presented by the underwriters, management reassessed
the value of the common stock used to grant equity awards back
to June 30, 2005. The reassessment of fair value was
completed by management, all of whom are related parties,
without the use of an unrelated valuation specialist. Management
concluded that the stock options granted to employees and
directors in May and June of 2006 were at prices below the
reassessed values. The values of the common stock for May and
June of 2006 were initially determined by the Companys
board of directors. In the reassessment process, management
concluded that the original valuations did not give enough
consideration to the impact of an initial public offering on the
value of the common stock. Accordingly, for the
1,124,057 options granted at $1.36 per share in May 2006,
and for the 259,500 options granted in June 2006 at $3.20
per share, the reassessed fair values were determined to be
$6.60 per share and $7.70 per share, respectively. The
reassessed values were determined by using the low end of the
estimated offering range of $11.00 per share, less a
marketability discount of 40% and 30%, respectively, which
reflects the estimated risk of not completing the initial public
offering.
At December 31, 2005 and June 30, 2006, respectively,
a total of 57,000 and 419,693 shares of common stock
remained available for issuance under the 2004 Plan. A summary
of the Companys stock option activity under the 2004 Plan
and related information are as follows:
|
|
|
|
|
|
|
|
|
|
|
Options | |
|
Weighted Average | |
|
|
Outstanding | |
|
Exercise Price | |
|
|
| |
|
| |
Granted
|
|
|
306,250 |
|
|
$ |
0.40 |
|
Exercised
|
|
|
(45,000 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
261,250 |
|
|
$ |
0.40 |
|
Granted
|
|
|
769,250 |
|
|
$ |
0.40 |
|
Exercised
|
|
|
(741,500 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
289,000 |
|
|
$ |
0.40 |
|
Granted
|
|
|
1,387,307 |
|
|
$ |
1.72 |
|
Exercised
|
|
|
(233,935 |
) |
|
$ |
1.20 |
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
1,442,372 |
|
|
$ |
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
Exercise |
|
Number | |
|
Contractual | |
|
Exercise | |
|
Number | |
|
Exercise | |
Price |
|
Outstanding | |
|
Life (in years) | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.40
|
|
|
289,000 |
|
|
|
9.24 |
|
|
$ |
0.40 |
|
|
|
247,380 |
|
|
$ |
0.40 |
|
F-18
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 | |
|
|
| |
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Average | |
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Remaining | |
|
Average | |
Exercise |
|
Number | |
|
Contractual | |
|
Exercise | |
|
Number | |
|
Contractual | |
|
Exercise | |
Price |
|
Outstanding | |
|
Life (in years) | |
|
Price | |
|
Exercisable | |
|
Life (in years) | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$0.40
|
|
|
254,250 |
|
|
|
8.72 |
|
|
$ |
0.40 |
|
|
|
213,100 |
|
|
|
8.69 |
|
|
$ |
0.40 |
|
$1.36
|
|
|
928,622 |
|
|
|
9.86 |
|
|
$ |
1.36 |
|
|
|
890,447 |
|
|
|
9.86 |
|
|
$ |
1.36 |
|
$3.20
|
|
|
259,500 |
|
|
|
9.96 |
|
|
$ |
3.20 |
|
|
|
251,250 |
|
|
|
9.96 |
|
|
$ |
3.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,442,372 |
|
|
|
9.68 |
|
|
$ |
1.52 |
|
|
|
1,354,797 |
|
|
|
9.70 |
|
|
$ |
1.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the period from May 26, 2004 (inception) through
December 31, 2004 and the quarterly periods ended
March 31, 2005, June 30, 2005, September 30,
2005, December 31, 2005, March 31, 2006, and
June 30, 2006 the Company granted options to purchase
shares of the Companys common stock in the amount of
306,250, 162,500, 90,000, 47,750, 469,000, 3,750 and 1,383,557,
respectively. All such grants had both a fair value and exercise
price of $0.40 for periods through March 31, 2006. During
the quarterly period ended June 30, 2006, the exercise
price of 1,124,053 and 259,500 option grants was $1.36 per share
and $3.20 per share, respectively, and the fair value was $6.60
per share and $7.70 per share, respectively.
As of December 31, 2005 and June 30, 2006,
respectively, 46,703 and 85,445 of the outstanding options under
the 2004 plan were vested and 691,969 and 860,062 of the options
exercised were subject to repurchase by the Company since they
were unvested.
The aggregate fair value of options that vested during the six
months ended June 30, 2006 was approximately $79,000. The
aggregate intrinsic value of options exercised during the six
months ended June 30, 2006 was approximately $1,500,000.
The aggregate intrinsic value of options outstanding and options
exercisable as of June 30, 2006 was approximately
$13,700,000 and $12,800,000, respectively.
|
|
|
Shares Reserved For Future Issuance |
The following shares of common stock are reserved for future
issuance:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Conversion of preferred stock
|
|
|
6,440,107 |
|
|
|
19,907,605 |
|
Common stock options granted and outstanding
|
|
|
289,000 |
|
|
|
1,442,372 |
|
Preferred stock warrants outstanding
|
|
|
|
|
|
|
96,250 |
|
Common stock options reserved for future issuance
|
|
|
57,000 |
|
|
|
419,693 |
|
|
|
|
|
|
|
|
|
|
|
6,786,107 |
|
|
|
21,865,920 |
|
|
|
|
|
|
|
|
Significant components of the Companys deferred tax assets
for federal and state income taxes at December 31, 2004 and
2005 are shown below. A valuation allowance has been established
as realization
F-19
Cadence Pharmaceuticals, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2006 and thereafter and for
the six months ended
June 30, 2005 and 2006 and the period from May 26,
2004 (inception)
through June 30, 2006 is unaudited)
of such deferred tax assets has not met the more likely than not
threshold requirement under SFAS No. 109.
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
361,000 |
|
|
$ |
3,528,000 |
|
Tax credit carryforwards
|
|
|
29,000 |
|
|
|
359,000 |
|
Capitalized research and development
|
|
|
591,000 |
|
|
|
520,000 |
|
Other, net
|
|
|
157,000 |
|
|
|
111,000 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,138,000 |
|
|
|
4,518,000 |
|
Valuation allowance for deferred tax assets
|
|
|
(1,138,000 |
) |
|
|
(4,518,000 |
) |
|
|
|
|
|
|
|
Net deferred taxes
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had federal and state net
operating loss carryforwards of approximately $8,659,000 and
$8,663,000, respectively. The federal and state tax loss
carryforwards will begin to expire in 2024 and 2014,
respectively, unless previously utilized. The Company also had
federal research and development tax credit carryforwards of
approximately $283,000 which will begin expiring in 2024 unless
previously utilized. The Company had state research and
development tax credit carryforwards of approximately $116,000,
which carryforward indefinitely.
Utilization of the net operating loss carry forwards and credits
may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue
Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating
losses and credits before utilization.
Effective January 1, 2005, the Company established a 401(k)
plan covering substantially all employees. Employees may
contribute up to 100% of their compensation per year (subject to
a maximum limit prescribed by federal tax law). The Company may
elect to make a discretionary contribution or match a
discretionary percentage of employee contributions. As of
December 31, 2005 and June 30, 2006, the Company had
not elected to make any contributions to the plan.
Stock Split
On October 4, 2006, the Companys board of directors
approved a one-for-four reverse stock split of the
Companys outstanding common stock. The accompanying
financial statements and notes to the financial statements give
retroactive effect to the reverse stock split for all periods
presented.
Severance Obligations
In September 2006, Kenneth R. Heilbrunn, M.D., our former
Senior Vice President, Clinical Development, resigned. In
accordance with the terms of his employment agreement, the
Company is obligated to pay Dr. Heilbrunn a lump-sum cash
payment equal to his annual base salary and other benefits for
12 months following his date of termination. The employment
agreement also allows for the acceleration of vesting for those
options that would vest one year from the date of termination.
The Company will record a charge for the termination payments
and accelerated vesting of options which total approximately
$500,000.
F-20
Through and
including ,
2006 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
6,000,000 Shares
Common Stock
PROSPECTUS
Merrill Lynch & Co.
Deutsche Bank Securities
Pacific Growth Equities, LLC
JMP Securities
,
2006
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 13. |
Other Expenses of Issuance and Distribution |
The following table sets forth the fees and expenses, other than
underwriting discounts and commissions, payable by us in
connection with the registration of the common stock hereunder.
All amounts shown are estimates except for the SEC registration
fee, the NASD filing fee and the Nasdaq Global Market listing
fee.
|
|
|
|
|
|
|
|
Amount | |
Item |
|
to be Paid | |
|
|
| |
SEC Registration Fee
|
|
$ |
9,598 |
|
NASD Filing Fee
|
|
|
9,470 |
|
Nasdaq Global Market Listing Fee
|
|
|
100,000 |
|
Legal Fees and Expenses
|
|
|
750,000 |
|
Accounting Fees and Expenses
|
|
|
450,000 |
|
Printing and Engraving Expenses
|
|
|
200,000 |
|
Blue Sky, Qualification Fees and Expenses
|
|
|
20,000 |
|
Transfer Agent and Registrar Fees
|
|
|
30,000 |
|
Miscellaneous Expenses
|
|
|
190,932 |
|
|
|
|
|
|
Total
|
|
$ |
1,760,000 |
|
|
|
|
|
|
|
Item 14. |
Indemnification of Directors and Officers |
Section 145 of the Delaware General Corporation Law permits
a corporation to include in its charter documents, and in
agreements between the corporation and its directors and
officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Our amended and restated certificate of incorporation provides
for the indemnification of directors to the fullest extent
permissible under Delaware law.
Our amended and restated bylaws provide for the indemnification
of officers, directors and third parties acting on our behalf if
such persons act in good faith and in a manner reasonably
believed to be in and not opposed to our best interest, and,
with respect to any criminal action or proceeding, such
indemnified party had no reason to believe his or her conduct
was unlawful.
We are entering into indemnification agreements with each of our
directors and executive officers, in addition to the
indemnification provisions provided for in our charter
documents, and we intend to enter into indemnification
agreements with any new directors and executive officers in the
future.
The underwriting agreement (to be filed as Exhibit 1.1
hereto) will provide for indemnification by the underwriters of
us, our executive officers and directors, and indemnification of
the underwriters by us for certain liabilities, including
liabilities arising under the Securities Act of 1933, as
amended, in connection with matters specifically provided in
writing by the underwriters for inclusion in the registration
statement.
We intend to purchase and maintain insurance on behalf of any
person who is or was a director or officer against any loss
arising from any claim asserted against him or her and incurred
by him or her in that capacity, subject to certain exclusions
and limits of the amount of coverage.
II-1
|
|
Item 15. |
Recent Sales of Unregistered Securities |
Since inception, we have issued and sold the following
unregistered securities:
|
|
|
|
1. In July 2004, we issued 1,125,000 shares of common
stock to a limited liability company and individual investors
for aggregate consideration of $4,500. |
|
|
|
|
2. In July and August 2004, we issued and sold an aggregate
of 8,085,108 shares of
Series A-1
preferred stock to certain venture capital funds and individual
investors at a per share price of $0.94, for aggregate
consideration of $7,600,001.52. Upon completion of this
offering, these shares of
Series A-1
preferred stock will convert into 2,021,271 shares of our
common stock. |
|
|
|
|
3. In June and September 2005, we issued and sold an
aggregate of 17,675,347 shares of
Series A-2
preferred stock to certain existing and new investors at a per
share price of $1.00, for aggregate consideration of
$17,675,347. Upon completion of this offering, these shares of
Series A-2
preferred stock will convert into 4,418,836 shares of our
common stock. |
|
|
|
|
4. In February 2006, in connection with a loan and security
agreement, we issued two warrants to two lenders to purchase an
aggregate of 385,000 shares of
Series A-2
preferred stock, at an initial exercise price of $1.00 per
share, subject to adjustment. The warrants are exercisable
through the later of February 2016 or five years from the
closing of this offering. These warrants will be exercisable for
an aggregate of 96,250 shares of common stock at an
exercise price of $4.00 per share upon the completion of
this offering. |
|
|
|
|
5. In March 2006, we issued and sold an aggregate of
53,870,000 shares of
Series A-3
preferred stock to certain existing and new investors at a per
share price of $1.00, for aggregate consideration of
$53,870,000. Upon completion of this offering, these shares of
Series A-3
preferred stock will convert into 13,467,498 shares of our
common stock. |
|
|
|
|
6. Since our inception through June 30, 2006, we
granted stock options to purchase 2,462,807 shares of
our common stock at exercise prices from $0.40 to $3.20 per
share to our employees, consultants and directors under our 2004
equity incentive award plan. Since our inception through
June 30, 2006, we issued and sold an aggregate of
1,020,435 shares of our common stock to our employees,
consultants and directors at prices from $0.40 to $1.36 per
share pursuant to exercises of options granted under our 2004
equity incentive award plan. During this period, 7,500 unvested
shares were repurchased by us at $0.40 per share resulting in a
net of 1,012,935 shares issued and sold under our 2004
equity incentive award plan. |
|
The issuance of securities described above in
paragraphs (1) through (5) were exempt from
registration under the Securities Act of 1933, as amended, in
reliance on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder, as
transactions by an issuer not involving any public offering. The
purchasers of the securities in these transactions represented
that they were accredited investors or qualified institutional
buyers and they were acquiring the securities for investment
only and not with a view toward the public sale or distribution
thereof. Such purchasers received written disclosures that the
securities had not been registered under the Securities Act of
1933, as amended, and that any resale must be made pursuant to a
registration statement or an available exemption from
registration. All purchasers either received adequate financial
statement or non-financial statement information about the
registrant or had adequate access, through their relationship
with the registrant, to financial statement or non-financial
statement information about the registrant. The sale of these
securities was made without general solicitation or advertising.
The issuance of securities described above in
paragraph (6) was exempt from registration under the
Securities Act of 1933, as amended, in reliance on Rule 701
of the Securities Act of 1933, as amended, pursuant to
compensatory benefit plans approved by the registrants
board of directors.
All certificates representing the securities issued in these
transactions described in this Item 15 included appropriate
legends setting forth that the securities had not been offered
or sold pursuant to a
II-2
registration statement and describing the applicable
restrictions on transfer of the securities. There were no
underwriters employed in connection with any of the transactions
set forth in this Item 15.
|
|
Item 16. |
Exhibits and Financial Statement Schedules |
(a) Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
1.1 |
|
|
Form of Underwriting Agreement |
|
3.1(1) |
|
|
Restated Certificate of Incorporation of the Registrant, as
currently in effect |
|
3.2(2) |
|
|
Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, as currently in effect |
|
3.3 |
|
|
Form of Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, to effect a one-to-four reverse
stock split prior to the completion of the offering |
|
3.4(2) |
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon completion of the offering |
|
3.5(1) |
|
|
Amended and Restated Bylaws of the Registrant, as currently in
effect |
|
3.6(2) |
|
|
Form of Amended and Restated Bylaws of the Registrant, to be in
effect upon completion of the offering |
|
4.1 |
|
|
Form of the Registrants Common Stock Certificate |
|
4.2(1) |
|
|
Amended and Restated Investor Rights Agreement dated
February 21, 2006 |
|
4.3(1) |
|
|
Warrant issued by Registrant in February 2006 to Silicon Valley
Bank |
|
4.4(1) |
|
|
Warrant issued by Registrant in February 2006 to Oxford Finance
Corporation |
|
5.1 |
|
|
Opinion of Latham & Watkins LLP |
|
10.1(2) |
|
|
Form of Director and Executive Officer Indemnification Agreement |
|
10.2(2) |
|
|
Form of Executive Officer Employment Agreement |
|
10.3#(1) |
|
|
2004 Equity Incentive Award Plan and forms of option agreements
thereunder |
|
10.4#(2) |
|
|
Director Equity Compensation Policy |
|
10.5# |
|
|
2006 Equity Incentive Award Plan and forms of option and
restricted stock agreements thereunder |
|
10.6(2) |
|
|
Form of Amended and Restated Restricted Common Stock Purchase
Agreement |
|
10.7#(2) |
|
|
2006 Corporate Bonus Plan |
|
10.8(1) |
|
|
Sublease dated August 31, 2004 by and between the
Registrant and Townsend and Townsend and Crew, LLP |
|
10.9(1) |
|
|
Lease dated May 12, 2006 by and between the Registrant and
Prentiss/ Collins Del Mar Heights LLC |
|
10.10(3) |
|
|
Collaboration and License Agreement dated July 30, 2004 by
and between the Registrant and Migenix Inc. (formerly Micrologix
Biotech Inc.) |
|
10.11(3) |
|
|
IV APAP Agreement (US and Canada) dated February 21, 2006
by and between the Registrant and Bristol-Myers Squibb Company |
|
10.12(3) |
|
|
License Agreement dated December 23, 2002 by and among SCR
Pharmatop and Bristol-Myers Squibb Company |
|
10.13(1) |
|
|
Loan and Security Agreement dated February 17, 2006 by and
among the Registrant, Silicon Valley Bank and Oxford Finance
Corporation |
|
10.14(3) |
|
|
Clinical Supply Agreement dated February 21, 2006 by and
between the Registrant and Lawrence Laboratories |
|
10.15(3) |
|
|
Engagement Letter dated May 19, 2005 by and between the
Registrant and Clearview Projects, Inc. |
|
10.16 |
|
|
Amendment No. 1 dated October 6, 2006 to Collaboration
and License Agreement dated July 30, 2004 by and between
the Registrant and Migenix Inc. (formerly Micrologix Biotech
Inc.) |
II-3
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
23.1 |
|
|
Consent of Ernst & Young LLP, independent registered
public accounting firm |
|
23.2 |
|
|
Consent of Latham & Watkins LLP (included in
Exhibit 5.1) |
|
24.1(1) |
|
|
Power of Attorney |
|
24.2(2) |
|
|
Power of Attorney |
|
|
|
|
* |
To be filed by amendment. |
|
|
(1) |
Filed with the Registrants Registration Statement on Form
S-1 on July 17, 2006. |
|
(2) |
Filed with Amendment No. 1 to the Registrants
Registration Statement on Form S-1 on August 30, 2006. |
|
|
(3) |
Filed with Amendment No. 2 to the Registrants
Registration Statement on
Form S-1 on
September 25, 2006. |
|
|
|
|
|
|
Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and
Exchange Commission. |
|
|
# |
Indicates management contract or compensatory plan. |
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements or notes thereto.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to
directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act of 1933, as amended, and will be governed by
the final adjudication of such issue.
We hereby undertake that:
|
|
|
(a) We will provide to the underwriters at the closing as
specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser. |
|
|
(b) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from
a form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933, as amended, shall be deemed to be part of this
registration statement as of the time it was declared effective. |
|
|
(c) For the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof. |
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Cadence Pharmaceuticals, Inc. has duly caused this
Amendment No. 3 to Registration Statement on
Form S-1 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in San Diego, California on the 10th day of
October, 2006.
|
|
|
CADENCE PHARMACEUTICALS, INC. |
|
|
|
|
By: |
/s/ Theodore R. Schroeder
|
|
|
|
|
|
Theodore R. Schroeder |
|
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 3 to Registration Statement on
Form S-1 has been
signed by the following persons in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Theodore R.
Schroeder
Theodore
R. Schroeder |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
October 10, 2006 |
|
/s/ William R. LaRue
William
R. LaRue |
|
Senior Vice President, Chief Financial Officer, Treasurer and
Secretary (Principal Financial and Accounting Officer) |
|
October 10, 2006 |
|
*
Cam
L. Garner |
|
Chairman of the Board of Directors |
|
October 10, 2006 |
|
*
Brian
G. Atwood |
|
Director |
|
October 10, 2006 |
|
*
Samuel
L. Barker, Ph.D. |
|
Director |
|
October 10, 2006 |
|
*
Michael
A. Berman, M.D. |
|
Director |
|
October 10, 2006 |
|
*
James
C. Blair, Ph.D. |
|
Director |
|
October 10, 2006 |
|
*
Alan
D. Frazier |
|
Director |
|
October 10, 2006 |
II-5
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
*
Alain
B. Schreiber, M.D. |
|
Director |
|
October 10, 2006 |
|
*
Christopher
J. Twomey |
|
Director |
|
October 10, 2006 |
|
*By: |
|
/s/ Theodore R. Schroeder
Theodore
R. Schroeder
Attorney-in-Fact |
|
|
|
|
II-6
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
1.1 |
|
|
Form of Underwriting Agreement |
|
3.1(1) |
|
|
Restated Certificate of Incorporation of the Registrant, as
currently in effect |
|
3.2(2) |
|
|
Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, as currently in effect |
|
3.3 |
|
|
Form of Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, to effect a one-to-four reverse
stock split prior to the completion of the offering |
|
3.4(2) |
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon completion of the offering |
|
3.5(1) |
|
|
Amended and Restated Bylaws of the Registrant, as currently in
effect |
|
3.6(2) |
|
|
Form of Amended and Restated Bylaws of the Registrant, to be in
effect upon completion of the offering |
|
4.1 |
|
|
Form of the Registrants Common Stock Certificate |
|
4.2(1) |
|
|
Amended and Restated Investor Rights Agreement dated
February 21, 2006 |
|
4.3(1) |
|
|
Warrant issued by Registrant in February 2006 to Silicon Valley
Bank |
|
4.4(1) |
|
|
Warrant issued by Registrant in February 2006 to Oxford Finance
Corporation |
|
5.1 |
|
|
Opinion of Latham & Watkins LLP |
|
10.1(2) |
|
|
Form of Director and Executive Officer Indemnification Agreement |
|
10.2(2) |
|
|
Form of Executive Officer Employment Agreement |
|
10.3#(1) |
|
|
2004 Equity Incentive Award Plan and forms of option agreements
thereunder |
|
10.4#(2) |
|
|
Director Equity Compensation Policy |
|
10.5# |
|
|
2006 Equity Incentive Award Plan and forms of option and
restricted stock agreements thereunder |
|
10.6(2) |
|
|
Form of Amended and Restated Restricted Common Stock Purchase
Agreement |
|
10.7#(2) |
|
|
2006 Corporate Bonus Plan |
|
10.8(1) |
|
|
Sublease dated August 31, 2004 by and between the
Registrant and Townsend and Townsend and Crew, LLP |
|
10.9(1) |
|
|
Lease dated May 12, 2006 by and between the Registrant and
Prentiss/ Collins Del Mar Heights LLC |
|
10.10(3) |
|
|
Collaboration and License Agreement dated July 30, 2004 by
and between the Registrant and Migenix Inc. (formerly Micrologix
Biotech Inc.) |
|
10.11(3) |
|
|
IV APAP Agreement (US and Canada) dated February 21, 2006
by and between the Registrant and Bristol-Myers Squibb Company |
|
10.12(3) |
|
|
License Agreement dated December 23, 2002 by and among SCR
Pharmatop and Bristol-Myers Squibb Company |
|
10.13(1) |
|
|
Loan and Security Agreement dated February 17, 2006 by and
among the Registrant, Silicon Valley Bank and Oxford Finance
Corporation |
|
10.14(3) |
|
|
Clinical Supply Agreement dated February 21, 2006 by and
between the Registrant and Lawrence Laboratories |
|
10.15(3) |
|
|
Engagement Letter dated May 19, 2005 by and between the
Registrant and Clearview Projects, Inc. |
|
10.16 |
|
|
Amendment No. 1 dated October 6, 2006 to Collaboration
and License Agreement dated July 30, 2004 by and between
the Registrant and Migenix Inc. (formerly Micrologix Biotech
Inc.) |
|
23.1 |
|
|
Consent of Ernst & Young LLP, independent registered
public accounting firm |
|
23.2 |
|
|
Consent of Latham & Watkins LLP (included in
Exhibit 5.1) |
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
24.1(1) |
|
|
Power of Attorney |
|
24.2(2) |
|
|
Power of Attorney |
|
|
* |
To be filed by amendment. |
|
|
(1) |
Filed with the Registrants Registration Statement on Form
S-1 on July 17, 2006. |
|
(2) |
Filed with Amendment No. 1 to the Registrants
Registration Statement on Form S-1 on August 30, 2006. |
|
|
(3) |
Filed with Amendment No. 2 to the Registrants
Registration Statement on
Form S-1 on
September 25, 2006. |
|
|
|
|
Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and
Exchange Commission. |
|
# |
Indicates management contract or compensatory plan. |
exv1w1
EXHIBIT 1.1
CADENCE PHARMACEUTICALS, INC.
(a Delaware corporation)
[ ] Shares of Common Stock
PURCHASE AGREEMENT
Dated: l, 2006
CADENCE PHARMACEUTICALS, INC.
(a Delaware corporation)
[ ] Shares of Common Stock
(Par Value $0.0001 Per Share)
PURCHASE AGREEMENT
l, 2006
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
as Representative of the several Underwriters
4 World Financial Center
New York, New York 10080
Ladies and Gentlemen:
Cadence Pharmaceuticals, Inc., a Delaware corporation (the Company) confirms its agreement
with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and
each of the other Underwriters named in Schedule A hereto (collectively, the Underwriters, which
term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof),
for whom Merrill Lynch is acting as representative (in such capacity, the Representative), with
respect to (i) the sale by the Company and the purchase by the Underwriters, acting severally and
not jointly, of the respective numbers of shares of Common Stock, par value $0.0001 per share, of
the Company (Common Stock) set forth in Schedule A hereto and (ii) the grant by the Company to
the Underwriters of the option described in Section 2(b) hereof to purchase all or any part of [ ]
additional shares of Common Stock to cover overallotments, if any. The aforesaid [ ] shares of
Common Stock (the Initial Securities) to be purchased by the Underwriters and all or any part of
the [ ] shares of Common Stock subject to the option described in Section 2(b) hereof (the Option
Securities) are hereinafter called, collectively, the Securities.
The Company understands that the Underwriters propose to make a public offering of the
Securities as soon as the Representative deems advisable after this Agreement has been executed and
delivered.
The Company has filed with the Securities and Exchange Commission (the Commission) a
registration statement on Form S-1 (No. 333-l), including the related preliminary prospectus
or prospectuses, covering the registration of the Securities under the Securities Act of 1933, as
amended (the 1933 Act). Promptly after execution and delivery of this Agreement, the Company
will prepare and file a prospectus in accordance with the provisions of Rule 430A (Rule 430A) of
the rules and regulations of the Commission under the 1933 Act (the 1933 Act Regulations) and
paragraph (b) of Rule 424 (Rule 424(b)) of the 1933 Act Regulations. The information included in
such prospectus that was omitted from such registration statement at the time it became effective
but that is deemed to be part of such registration statement at the time it became effective
pursuant to paragraph (b) of Rule 430A is referred to as Rule 430A Information. Each prospectus
used before such registration statement became
effective, and any prospectus that omitted the Rule 430A Information, that was used after such
effectiveness and prior to the execution and delivery of this Agreement, is herein called a
preliminary prospectus. Such registration statement, including the amendments thereto, the
exhibits and any schedules thereto, at the time it became effective, and including the Rule 430A
Information, is herein called the Registration Statement. Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the Rule 462(b)
Registration Statement, and after such filing the term Registration Statement shall include the
Rule 462(b) Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein called the
Prospectus. For purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the Prospectus or any amendment or supplement to any of the foregoing shall
be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system (EDGAR).
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents and warrants to
each Underwriter as of the date hereof, the Applicable Time referred to in Section 1(a)(i) hereof,
as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the Registration
Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto
has become effective under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement, any Rule 462(b) Registration Statement or any post-effective
amendment thereto has been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of the Company, are contemplated by
the Commission, and any request on the part of the Commission for additional information has
been complied with.
At the respective times the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendments thereto became effective and at the Closing Time
(and, if any Option Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any amendments or supplements
thereto, at the time the Prospectus or any such amendment or supplement was issued and at
the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
As of the Applicable Time (as defined below), neither (x) the Issuer General Use Free
Writing Prospectus(es) (as defined below) issued at or prior to the Applicable Time and the
Statutory Prospectus (as defined below) as of the Applicable Time and the information
included on Schedule B hereto, all considered together (collectively, the General
Disclosure Package), nor (y) any individual Issuer Limited Use Free Writing Prospectus,
when considered together with the General Disclosure Package, included any untrue statement
of a material fact or omitted to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made, not
misleading.
2
As used in this subsection and elsewhere in this Agreement:
Applicable Time means l:00 [a/p]m (Eastern time) on [DATE] or such other time
as agreed upon in writing by the Company and Merrill Lynch.
Issuer Free Writing Prospectus means any issuer free writing prospectus, as defined
in Rule 433 of the 1933 Act Regulations (Rule 433), relating to the Securities that (i) is
required to be filed with the Commission by the Company, (ii) is a road show for an
offering that is a written communication within the meaning of Rule 433(d)(8)(i) whether or
not required to be filed with the Commission or (iii) is exempt from filing pursuant to Rule
433(d)(5)(i) because it contains a description of the Securities or of the offering that
does not reflect the final terms, in each case in the form filed or required to be filed
with the Commission or, if not required to be filed, in the form required to be retained in
the Companys records pursuant to Rule 433(g).
Issuer General Use Free Writing Prospectus means any Issuer Free Writing Prospectus
that is intended for general distribution to prospective investors (other than a Bona Fide
Electronic Road Show (as defined below)), as evidenced by its being specified in Schedule D
hereto.
Issuer Limited Use Free Writing Prospectus means any Issuer Free Writing Prospectus
that is not an Issuer General Use Free Writing Prospectus.
Statutory Prospectus as of any time means the prospectus relating to the Securities
that is included in the Registration Statement immediately prior to that time.
The Company has made available a bona fide electronic road show, as defined in Rule
433, in compliance with Rule 433(d)(8)(ii) (the Bona Fide Electronic Road Show) such that
no filing of any road show (as defined in Rule 433(h)) is required in connection with the
offering of the Securities.
Each Issuer Free Writing Prospectus, as of its issue date and at all subsequent times
through the completion of the public offer and sale of the Securities or until any earlier
date that the issuer notified or notifies Merrill Lynch as described in Section 3(e), did
not, does not and will not include any information that conflicted, conflicts or will
conflict with the information contained in the Registration Statement or the Prospectus, and
any preliminary or other prospectus deemed to be a part thereof that has not been superseded
or modified.
The representations and warranties in this subsection shall not apply to statements in
or omissions from the Registration Statement, the Prospectus or any Issuer Free Writing
Prospectus, or any amendment or supplement to the foregoing, made in reliance upon and in
conformity with written information furnished to the Company by any Underwriter through
Merrill Lynch expressly for use therein.
Each preliminary prospectus (including the prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto) complied when so filed in
all material respects with the 1933 Act Regulations and each preliminary prospectus and the
Prospectus delivered to the Underwriters for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
3
At the time of filing the Registration Statement, any 462(b) Registration Statement and
any post-effective amendments thereto and at the date hereof, the Company was not and is not
an ineligible issuer, as defined in Rule 405 of the 1933 Act Regulations.
(ii) Independent Accountants. The accountants who certified the financial
statements and supporting schedules included in the Registration Statement are independent
public accountants as required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement, the General Disclosure Package and the Prospectus, together with the
related schedules and notes, present fairly the financial position of the Company and its
Subsidiary (defined below) at the dates indicated and the statement of operations,
stockholders equity and cash flows of the Company and its Subsidiary for the periods
specified; said financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP) applied on a consistent basis throughout the periods
involved. The supporting schedules, if any, present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and the summary
financial information included in the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective dates as of
which information is given in the Registration Statement, the General Disclosure Package or
the Prospectus, except as otherwise stated therein, (A) there has been no material adverse
change in the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiary considered as one enterprise, whether
or not arising in the ordinary course of business (a Material Adverse Effect), (B) there
have been no transactions entered into by the Company or its Subsidiary, other than those in
the ordinary course of business, which are material with respect to the Company and its
Subsidiary considered as one enterprise, and (C) there has been no dividend or distribution
of any kind declared, paid or made by the Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State of Delaware
and has corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a foreign corporation
to transact business and is in good standing in each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiary. Cadence Pharma Limited, a corporation
organized under the laws of England and Wales (the Subsidiary) has been duly organized and
is validly existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and is duly qualified
as a foreign corporation to transact business and is in good standing in each jurisdiction
in which such qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; all of the issued and outstanding
capital stock of the Subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and is owned, except as otherwise disclosed in the Registration
Statement, by the Company, free and clear of any security interest, mortgage,
4
pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital
stock of the Subsidiary was issued in violation of the preemptive or similar rights of any
securityholder of the Subsidiary. The Subsidiary is the only subsidiary of the Company, and
the Subsidiary does not constitute a significant subsidiary of the Company (as such term
is defined in Rule 1-02 of Regulation S-X).
(vii) Capitalization. The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus in the column entitled Actual under the
caption Capitalization (except for subsequent issuances, if any, pursuant to this
Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or options referred to in
the Prospectus). The shares of issued and outstanding capital stock of the Company have
been duly authorized and validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock was issued in violation of the preemptive or other
similar rights of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been duly authorized,
executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities to be
purchased by the Underwriters from the Company have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the
Company pursuant to this Agreement against payment of the consideration set forth herein,
will be validly issued and fully paid and non-assessable; the Common Stock conforms in all
material respects to all statements relating thereto contained in the Prospectus and such
description conforms to the rights set forth in the instruments defining the same; no holder
of the Securities will be subject to personal liability by reason of being such a holder;
and the issuance of the Securities is not subject to the preemptive or other similar rights
of any securityholder of the Company, which have not been validly waived.
(x) Absence of Defaults and Conflicts. Neither the Company nor its Subsidiary
is in violation of its charter or by-laws or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or its Subsidiary is a party or by which it or any of them
may be bound, or to which any of the property or assets of the Company or its Subsidiary is
subject (collectively, Agreements and Instruments) except for such defaults that would not
result in a Material Adverse Effect; and the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein and in the
Registration Statement (including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus under the caption
Use of Proceeds) and compliance by the Company with its obligations hereunder have been
duly authorized by all necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of the Company
or its Subsidiary pursuant to, the Agreements and Instruments (except for such conflicts,
breaches, defaults or Repayment Events or liens, charges or encumbrances that would not
result in a Material Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or its Subsidiary or any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the Company or its
Subsidiary or any of their assets, properties or operations. As used herein, a Repayment
Event
5
means any event or condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holders behalf) the right to require
the repurchase, redemption or repayment of all or a portion of such indebtedness by the
Company or its Subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees of the
Company or its Subsidiary exists or, to the knowledge of the Company, is imminent, and the
Company is not aware of any existing or imminent labor disturbance by the employees of any
of its or any of its Subsidiarys principal suppliers, manufacturers, customers or
contractors, which, in either case, would result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or
investigation before or brought by any court or governmental agency or body, domestic or
foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting
the Company or its Subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which would result in a Material Adverse
Effect, or which would materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in this Agreement or the performance by
the Company of its obligations hereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or its Subsidiary is a party or of which any of their
respective property or assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the business, could not
result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents which are
required to be described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its Subsidiary own
or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures), trademarks,
service marks, trade names or other intellectual property (collectively, Intellectual
Property) necessary to carry on the business now operated by them, and neither the Company
nor its Subsidiary has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual Property or of any
facts or circumstances which would render any Intellectual Property invalid or inadequate to
protect the interest of the Company or its Subsidiary therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or authorization,
approval, consent, license, order, registration, qualification or decree of, any court or
governmental authority or agency is necessary or required for the performance by the Company
of its obligations hereunder, in connection with the offering, issuance or sale of the
Securities hereunder or the consummation of the transactions contemplated by this Agreement,
except such as have been already obtained or as may be required under the 1933 Act, the 1933
Act Regulations, state securities laws or the rules and regulations of the National
Association of Securities Dealers, Inc. (the NASD).
(xvi) Absence of Manipulation. Neither the Company nor, to the knowledge of
the Company, any affiliate of the Company has taken, nor will the Company or any affiliate
take,
6
directly or indirectly, any action which is designed to or which has constituted or
which would be expected to cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Securities.
(xvii) Possession of Licenses and Permits. The Company and its Subsidiary
possess such permits, licenses, approvals, consents and other authorizations (collectively,
Governmental Licenses) issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies necessary to conduct the business now operated by them, except
where the failure so to possess would not, singly or in the aggregate, result in a Material
Adverse Effect; the Company and its Subsidiary are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so to comply would
not, singly or in the aggregate, result in a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when the invalidity of
such Governmental Licenses or the failure of such Governmental Licenses to be in full force
and effect would not, singly or in the aggregate, result in a Material Adverse Effect; and
neither the Company nor its Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xviii) Title to Property. The Company and its Subsidiary have good and
marketable title to all real property owned by the Company and its Subsidiary and good title
to all other properties owned by them, in each case, free and clear of all mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances of any kind except
such as (a) are described in the Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company or its Subsidiary; and all of
the leases and subleases material to the business of the Company and its Subsidiary,
considered as one enterprise, and under which the Company or its Subsidiary holds properties
described in the Prospectus, are in full force and effect, and neither the Company nor its
Subsidiary has any notice of any material claim of any sort that has been asserted by anyone
adverse to the rights of the Company or its Subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or its Subsidiary to
the continued possession of the leased or subleased premises under any such lease or
sublease.
(xix) Investment Company Act. The Company is not required, and upon the
issuance and sale of the Securities as herein contemplated and the application of the net
proceeds therefrom as described in the Prospectus will not be required, to register as an
investment company under the Investment Company Act of 1940, as amended (the 1940 Act).
(xx) Environmental Laws. Except as described in the Registration Statement and
except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A)
neither the Company nor its Subsidiary is in violation of any federal, state, local or
foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any
judicial or administrative interpretation thereof, including any judicial or administrative
order, consent, decree or judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum
products, asbestos-containing materials or mold (collectively, Hazardous Materials) or to
the manufacture, processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials (collectively, Environmental Laws), (B) the Company and
its
7
Subsidiary have all permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C) there are no
pending or, to the knowledge of the Company, threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental Law against the
Company or its Subsidiary and (D) to the knowledge of the Company, there are no events or
circumstances that would reasonably be expected to form the basis of an order for clean-up
or remediation, or an action, suit or proceeding by any private party or governmental body
or agency, against or affecting the Company or its Subsidiary relating to Hazardous
Materials or any Environmental Laws.
(xxi) Registration Rights. There are no persons with registration rights or
other similar rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the 1933 Act.
(xxii) Accounting Controls. The Company and its Subsidiary
maintain a system of internal accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance with managements general or
specific authorization; (B) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain accountability for assets; (C)
access to assets is permitted only in accordance with managements general or specific
authorization; and (D) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to any
differences. Except as described in the Prospectus, since the end of the Companys most
recent audited fiscal year, there has been (1) no material weakness in the Companys
internal control over financial reporting (whether or not remediated) and (2) no change in
the Companys internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial
reporting.
(xxiii) Compliance with the Sarbanes-Oxley Act. The Company has taken all
necessary actions to ensure that, upon the effectiveness of the Registration Statement, it
will be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and all rules
and regulations promulgated thereunder or implementing the provisions thereof (the
Sarbanes-Oxley Act) that are then in effect and which the Company is required to comply
with as of the effectiveness of the Registration Statement, and is actively taking steps to
ensure that it will be in compliance with other provisions of the Sarbanes-Oxley Act not
currently in effect, upon the effectiveness of such provisions, or which will become
applicable to the Company at all times after the effectiveness of the Registration
Statement.
(xxiv) Payment of Taxes. All United States federal income tax returns of the
Company and its Subsidiary required by law to be filed have been filed and all taxes shown
by such returns or otherwise assessed, which are due and payable, have been paid, except
assessments against which appeals have been or will be promptly taken and as to which
adequate reserves have been provided. The United States federal income tax returns of the
Company through the fiscal year ended December 31, 2005 have been settled and no assessment
in connection therewith has been made against the Company. The Company and its Subsidiary
have filed all other tax returns that are required to have been filed by them pursuant to
applicable foreign, state, local or other law except insofar as the failure to file such
returns would not result in a Material Adverse Effect, and has paid all taxes due pursuant
to such returns or pursuant to any assessment received by the Company and its Subsidiary,
except for such taxes, if any, as are being contested in good faith and as to which adequate
reserves have been provided. The charges, accruals and reserves on the books of the Company
in respect of any income and corporation tax liability for any years not
8
finally determined are adequate to meet any assessments or re-assessments for
additional income tax for any years not finally determined, except to the extent of any
inadequacy that would not result in a Material Adverse Effect.
(xxv) Insurance. The Company and its Subsidiary carry or are entitled to the
benefits of insurance, with financially sound and reputable insurers, in such amounts and
covering such risks as is generally maintained by companies of established repute engaged in
the same or similar business and at the same or a similar stage of development and all such
insurance is in full force and effect. The Company has no reason to believe that it or its
Subsidiary will not be able (A) to renew its existing insurance coverage as and when such
policies expire or (B) to obtain comparable coverage from similar institutions as may be
necessary or appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor its Subsidiary has been
denied any insurance coverage which it has sought or for which it has applied.
(xxvi) Statistical and Market-Related Data. Any statistical and market-related
data included in the Registration Statement and the Prospectus are based on or derived from
sources that the Company believes to be reliable and accurate, and, to the extent required
by such sources, the Company has obtained the written consent to the use of such data from
such sources.
(xxvii) Foreign Corrupt Practices Act. Neither the Company nor, to the
knowledge of the Company, any director, officer, agent, employee, affiliate or other person
acting on behalf of the Company or its Subsidiary is aware of or has taken any action,
directly or indirectly, that would result in a violation by such persons of the Foreign
Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the
FCPA), including, without limitation, making use of the mails or any means or
instrumentality of interstate commerce corruptly in furtherance of an offer, payment,
promise to pay or authorization of the payment of any money, or other property, gift,
promise to give, or authorization of the giving of anything of value to any foreign
official (as such term is defined in the FCPA) or any foreign political party or official
thereof or any candidate for foreign political office, in contravention of the FCPA and the
Company and, to the knowledge of the Company, its affiliates have conducted their businesses
in compliance with the FCPA and have instituted and maintain policies and procedures
designed to ensure, and which are reasonably expected to continue to ensure, continued
compliance therewith.
(xxviii) Money Laundering Laws. The operations of the Company are and have
been conducted at all times in compliance with applicable financial recordkeeping and
reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as
amended, the money laundering statutes of all applicable jurisdictions, the rules and
regulations thereunder and any related or similar rules, regulations or guidelines, issued,
administered or enforced by any governmental agency (collectively, the Money Laundering
Laws) and no action, suit or proceeding by or before any court or governmental agency,
authority or body or any arbitrator involving the Company with respect to the Money
Laundering Laws is pending or, to the knowledge of the Company, threatened.
(xxix) OFAC. Neither the Company nor, to the knowledge of the Company, any
director, officer, agent, employee, affiliate or person acting on behalf of the Company is
currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control
of the U.S. Treasury Department (OFAC); and the Company will not directly or indirectly
use the proceeds of the offering, or lend, contribute or otherwise make available such
proceeds to any subsidiary,
9
joint venture partner or other person or entity, for the purpose of financing the
activities of any person currently subject to any U.S. sanctions administered by OFAC.
(b) Officers Certificates. Any certificate signed by any officer of the Company or its
Subsidiary delivered to the Representative or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Company agrees to sell to each
Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to
purchase from the Company, at the price per share set forth in Schedule B, the number of Initial
Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional
number of Initial Securities which such Underwriter may become obligated to purchase pursuant to
the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the Company hereby
grants an option to the Underwriters, severally and not jointly, to purchase up to an additional [
] shares of Common Stock, at the price per share set forth in Schedule B, less an amount per share
equal to any dividends or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities. The option hereby granted will expire 30 days
after the date hereof and may be exercised in whole or in part from time to time only for the
purpose of covering overallotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by Merrill Lynch to the Company setting forth
the number of Option Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any such time and date
of delivery (a Date of Delivery) shall be determined by Merrill Lynch, but shall not be later
than seven full business days after the exercise of said option, nor in any event prior to the
Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Securities then being purchased which the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total
number of Initial Securities, subject in each case to such adjustments as Merrill Lynch in its
discretion shall make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial
Securities shall be made at the offices of Latham & Watkins LLP, 12636 High Bluff Drive, Suite 400,
San Diego, California 92130-2071, or at such other place as shall be agreed upon by the
Representative and the Company, at 9:00 A.M. (Eastern time) on the fourth (third, if the pricing
occurs before 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time not later than ten
business days after such date as shall be agreed upon by the Representative and the Company (such
time and date of payment and delivery being herein called Closing Time).
In addition, in the event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates for, such Option
Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed
upon by the Representative and the Company, on each Date of Delivery as specified in the notice
from the Representative to the Company.
10
Payment shall be made to the Company by wire transfer of immediately available funds to a bank
account designated by the Company against delivery to the Representative for the respective
accounts of the Underwriters of certificates for the Securities to be purchased by them. It is
understood that each Underwriter has authorized the Representative, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and
the Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and
not as representative of the Underwriters, may (but shall not be obligated to) make payment of the
purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any
Underwriter whose funds have not been received by the Closing Time or the relevant Date of
Delivery, as the case may be, but such payment shall not relieve such Underwriter from its
obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities and the Option
Securities, if any, shall be in such denominations and registered in such names as the
Representative may request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and the
Option Securities, if any, will be made available for examination and packaging by the
Representative in The City of New York not later than 10:00 A.M. (Eastern time) on the business day
prior to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each Underwriter as
follows:
(a) Compliance with Securities Regulations and Commission Requests. The Company, subject to
Section 3(b), will comply with the requirements of Rule 430A, and will notify the Representative
immediately, and confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of
any request by the Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes or of any examination pursuant to Section
8(e) of the 1933 Act concerning the Registration Statement and (v) if the Company becomes the
subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the
Securities. The Company will effect the filings required under Rule 424(b), in the manner and
within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take
such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and, in the event that it
was not, it will promptly file such prospectus. The Company will make every reasonable effort to
prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting
thereof at the earliest possible moment.
(b) Filing of Amendments and Exchange Act Documents. The Company will give the Representative
notice of its intention to file or prepare any amendment to the Registration Statement (including
any filing under Rule 462(b)) or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or to the Prospectus, and
will furnish the Representative with copies of any such documents a reasonable amount of time prior
to such proposed filing or use, as the case may be, and will not file or use any such document to
which the Representative or counsel for the Underwriters shall object. The Company has given the
Representative notice of any filings made pursuant to the Securities Exchange Act of 1934 (the
1934 Act) or the rules and regulations of the Commission under the 1934 Act within 48 hours prior
to the Applicable Time; the
11
Company will give the Representative notice of its intention to make any such filing from the
Applicable Time to the Closing Time and will furnish the Representative with copies of any such
documents a reasonable amount of time prior to such proposed filing, as the case may be, and will
not file or use any such document to which the Representative or counsel for the Underwriters shall
object.
(c) Delivery of Registration Statements. The Company has furnished or will deliver to the
Representative and counsel for the Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including exhibits filed therewith)
and signed copies of all consents and certificates of experts, and will also deliver to the
Representative, without charge, a conformed copy of the Registration Statement as originally filed
and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the
Registration Statement and each amendment thereto furnished to the Underwriters will be identical
to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each Underwriter, without charge,
as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the
Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each Underwriter, without charge, during the period when the Prospectus is
required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and
the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as
contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur
or condition shall exist as a result of which it is necessary, in the opinion of counsel for the
Underwriters or for the Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statements of a material fact
or omit to state a material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend the Registration
Statement or amend or supplement the Prospectus in order to comply with the requirements of the
1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the
Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the Prospectus comply with such
requirements, and the Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request. If at any time following
issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a
result of which such Issuer Free Writing Prospectus conflicted or would conflict with the
information contained in the Registration Statement relating to the Securities or included or would
include an untrue statement of a material fact or omitted or would omit to state a material fact
necessary in order to make the statements therein, in the light of the circumstances, prevailing at
that subsequent time, not misleading, the Company will promptly notify Merrill Lynch and will
promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate
or correct such conflict, untrue statement or omission.
(f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the
Underwriters, to qualify the Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions (domestic or foreign) as the Representative may designate
and to maintain
12
such qualifications in effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Company shall not be obligated to file any general consent to service of process
or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject.
(g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are
necessary in order to make generally available to its securityholders as soon as practicable an
earnings statement for the purposes of, and to provide to the Underwriters the benefits
contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of
the Securities in the manner specified in the Prospectus under Use of Proceeds.
(i) Listing. The Company will use its best efforts to effect and maintain the quotation of
the Securities on the Nasdaq National Market.
(j) Restriction on Sale of Securities. During a period of 180 days from the date of the
Prospectus, the Company will not, without the prior written consent of Merrill Lynch, (i) directly
or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act
with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B)
any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to in the Prospectus,
including preferred stock and warrants, (C) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to employee and/or consultant benefit plans of the Company
referred to in the Prospectus, (D) any shares of Common Stock issued or options to purchase Common
Stock granted pursuant to any non-employee director stock plan or policy or dividend reinvestment
plan or (E) up to an aggregate of 1.5 million shares of Common Stock issued to licensors, licensees,
collaborators, vendors, manufacturers, distributors, customers, lenders or other similar parties at
a price greater than or equal to the then market price of the Common Stock issued or options to
purchase Common Stock granted pursuant to any non-employee director stock plan or policy or
dividend reinvestment plan; provided, however, that in the case of subclause (E) above, the
recipients of such Common Stock agree to execute a Lock Up Agreement in the form attached at
Exhibit D hereto for the remainder of the term of such Lock Up Agreement.
(k) Reporting Requirements. The Company, during the period when the Prospectus is required to
be delivered under the 1933 Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) Issuer Free Writing Prospectuses. The Company represents and agrees that, unless it
obtains the prior consent of the Representative, and each Underwriter represents and agrees that,
unless it obtains the prior consent of the Company and the Representative, it has not made and will
not make any offer relating to the Securities that would constitute an issuer free writing
prospectus, as defined in Rule 433, or that would otherwise constitute a free writing
prospectus, as defined in Rule 405, required to be
13
filed with the Commission. Any such free writing prospectus consented to by the
Representative or by the Company and the Representative, as the case may be, is hereinafter
referred to as a Permitted Free Writing Prospectus. The Company represents that it has treated
or agrees that it will treat each Permitted Free Writing Prospectus as an issuer free writing
prospectus, as defined in Rule 433, and has complied and will comply with the requirements of Rule
433 applicable to any Permitted Free Writing Prospectus, including timely filing with the
Commission where required, legending and record keeping.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay or cause to be paid all expenses incident to the
performance of its obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and exhibits) as originally
filed and of each amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery of the Securities,
(iii) the preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other duties payable
upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Companys counsel, accountants and other advisors, (v) the qualification of
the Securities under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Permitted Free Writing Prospectus and of the Prospectus and any
amendments or supplements thereto and any costs associated with electronic delivery of any of the
foregoing by the Underwriters to investors, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and
expenses of any transfer agent or registrar for the Securities, (ix) the costs and expenses of the
Company relating to investor presentations on any road show undertaken in connection with the
marketing of the Securities, including without limitation, expenses associated with the production
of road show slides and graphics, fees and expenses of any consultants engaged in connection with
the road show presentations, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of aircraft and other transportation chartered in
connection with the road show, (x) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by the NASD of the
terms of the sale of the Securities, (xi) the fees and expenses incurred in connection with
inclusion of the Securities in the Nasdaq National Market and (xii) the costs and expenses
(including without limitation any damages or other amounts payable in connection with legal or
contractual liability) associated with the reforming of any contracts for sale of the Securities
made by the Underwriter caused by a breach of the representation contained in the third paragraph
of Section 1(a)(i). It is understood that, subject to this section and Section 4(b) hereof, the
Underwriters will pay all of their costs and expenses, including fees and disbursements of their
counsel.
(b) Termination of Agreement. If this Agreement is terminated by the Representative in
accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse
the Underwriters for all of their actual accountable out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters Obligations. The obligations of the several
Underwriters hereunder are subject to the accuracy of the representations and warranties of the
Company contained in Section 1 hereof or in certificates of any officer of the Company or its
Subsidiary delivered pursuant to the provisions hereof, to the performance by the Company of its
covenants and other
14
obligations hereunder that are required to be performed or satisfied by it at or prior to the
Closing Time, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement, including any Rule
462(b) Registration Statement, has become effective and at Closing Time no stop order suspending
the effectiveness of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the reasonable satisfaction
of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in the manner and within the time frame required by Rule 424(b) without
reliance on Rule 424(b)(8) or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule 430A.
(b) Opinion of Counsel for the Company. At Closing Time, the Representative shall have
received the favorable opinion, dated as of Closing Time, of Latham & Watkins LLP, counsel for the
Company, in form and substance satisfactory to counsel for the Underwriters, together with signed
or reproduced copies of such letter for each of the other Underwriters to the effect set forth in
Exhibit A hereto and to such further effect as counsel to the Underwriters may reasonably request.
(c) Opinion of Intellectual Property Counsel for the Company. At Closing Time, the
Representative shall have received the favorable opinion, dated as of Closing Time, of Knobbe,
Martens, Olson & Bear LLP, special intellectual property counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies
of such letter for each of the other Underwriters to the effect set forth in Exhibit B hereto and
to such further effect as counsel to the Underwriters may reasonably request.
(d) Opinion of Regulatory Counsel for the Company. At Closing Time, the Representative shall
have received the favorable opinion, dated as of Closing Time, of Arnall Golden Gregory LLP,
special regulatory counsel for the Company, in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit C hereto and to such further effect as counsel to
the Underwriters may reasonably request.
(e) Opinion of Counsel for Underwriters. At Closing Time, the Representative shall have
received the favorable opinion, dated as of Closing Time, of Heller Ehrman LLP, counsel for the
Underwriters, together with signed or reproduced copies of such letter for each of the other
Underwriters with respect to such matters as the Representative may reasonably require.
(f) Officers Certificate. At Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the Prospectus or the General
Disclosure Package, any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its Subsidiary considered as
one enterprise, whether or not arising in the ordinary course of business, and the Representative
shall have received a certificate of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as though expressly made at
and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop
order suspending the effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or, to their knowledge, contemplated by the
Commission.
15
(g) Accountants Comfort Letter. At the time of the execution of this Agreement, the
Representative shall have received from Ernst & Young LLP a letter dated such date, in form and
substance satisfactory to the Representative, together with signed or reproduced copies of such
letter for each of the other Underwriters containing statements and information of the type
ordinarily included in accountants comfort letters to underwriters with respect to the financial
statements and certain financial information contained in the Registration Statement and the
Prospectus.
(h) Bring-down Comfort Letter. At Closing Time, the Representative shall have received from
Ernst & Young LLP a letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (g) of this Section, except that the
specified date referred to shall be a date not more than three business days prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have been approved for
inclusion in the Nasdaq National Market, subject only to official notice of issuance.
(j) No Objection. The NASD shall have confirmed that it has not raised any objection with
respect to the fairness and reasonableness of the underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the Representative shall have received
an agreement substantially in the form of Exhibit D hereto signed by the persons listed on Schedule
C hereto.
(l) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise
their option provided in Section 2(b) hereof to purchase all or any portion of the Option
Securities, the representations and warranties of the Company contained herein and the statements
in any certificates furnished by the Company and its Subsidiary hereunder shall be true and correct
as of each Date of Delivery and, at the relevant Date of Delivery, the Representative shall have
received:
(i) Officers Certificate. A certificate, dated such Date of Delivery, of the
President or a Vice President of the Company and of the chief financial or chief accounting
officer of the Company confirming that the certificate delivered at the Closing Time
pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of Latham & Watkins
LLP, counsel for the Company, together with the favorable opinion of Knobbe, Martens, Olson
& Bear LLP, special intellectual property counsel for the Company and Arnall Golden Gregory
LLP, special regulatory counsel for the Company, each in form and substance satisfactory to
counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities
to be purchased on such Date of Delivery and otherwise to the same effect as the opinion
required by Sections 5(b), (c) and (d) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable opinion of Heller
Ehrman LLP, counsel for the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and otherwise to the same effect
as the opinion required by Section 5(e) hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst & Young LLP, in form and
substance satisfactory to the Representative and dated such Date of Delivery, substantially
in the same form and substance as the letter furnished to the Representative pursuant to
Section 5(h) hereof, except that the specified date in the letter furnished pursuant to
this paragraph shall be a date not more than five days prior to such Date of Delivery.
16
(m) Additional Documents. At Closing Time and at each Date of Delivery counsel for the
Underwriters shall have been furnished with such documents and opinions as they may require for the
purpose of enabling them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Securities as herein contemplated shall be
satisfactory in form and substance to the Representative and counsel for the Underwriters.
(n) Termination of Agreement. If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to
the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option Securities, may be
terminated by the Representative by notice to the Company at any time at or prior to Closing Time
or such Date of Delivery, as the case may be, and such termination shall be without liability of
any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify and hold harmless each
Underwriter, its affiliates, as such term is defined in Rule 501(b) under the 1933 Act (each, an
Affiliate), its selling agents and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as
incurred, arising out of any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto), including the Rule 430A
Information or the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact included in any
preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as
incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or threatened, or
of any claim whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company;
(iii) against any and all expense whatsoever, as incurred (including the fees and
disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity with written
information furnished to the Company by
17
any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto), including the Rule 430A Information, or any preliminary prospectus, any Issuer
Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto).
(b) Indemnification of Company, Directors and Officers. Each Underwriter severally agrees to
indemnify and hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements
or omissions, made in the Registration Statement (or any amendment thereto), including the Rule
430A Information or any preliminary prospectus, any Issuer Free Writing Prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Merrill Lynch expressly for use
therein.
(c) Actions against Parties; Notification. Each indemnified party shall give notice as
promptly as reasonably practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party
shall not relieve such indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it from any liability
which it may have otherwise than on account of this indemnity agreement. In the case of parties
indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to
the indemnified parties shall be selected by the Company. An indemnifying party may participate at
its own expense in the defense of any such action; provided, however, that counsel
to the indemnifying party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general allegations or
circumstances. No indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or contribution could be
sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature
contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the aforesaid request,
(ii) such indemnifying party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying party shall not have
reimbursed such indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is
for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of
any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying
party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and
expenses incurred by such
18
indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters on the other hand
from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the relative fault of the
Company on the one hand and of the Underwriters on the other hand in connection with the statements
or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the Underwriters on the
other hand in connection with the offering of the Securities pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by the Company and the
total underwriting discount received by the Underwriters, in each case as set forth on the cover of
the Prospectus bear to the aggregate initial public offering price of the Securities as set forth
on the cover of the Prospectus.
The relative fault of the Company on the one hand and the Underwriters on the other hand shall
be determined by reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties relative intent,
knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7. The aggregate amount
of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred
to above in this Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged
omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Underwriters
Affiliates and selling agents shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The
Underwriters respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their respective names in
Schedule A hereto and not joint.
19
SECTION 8. Representations, Warranties and Agreements to Survive. All
representations, warranties and agreements contained in this Agreement or in certificates of
officers of the Company or its Subsidiary submitted pursuant hereto, shall remain operative and in
full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter
or its Affiliates or selling agents, any person controlling any Underwriter, its officers or
directors, any person controlling the Company and (ii) delivery of and payment for the Securities.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representative may terminate this Agreement, by notice to the
Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution
of this Agreement or since the respective dates as of which information is given in the Prospectus
or General Disclosure Package, any Material Adverse Effect, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or
any change or development involving a prospective change in national or international political,
financial or economic conditions, in each case the effect of which is such as to make it, in the
judgment of the Representative, impracticable or inadvisable to market the Securities or to enforce
contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has
been suspended or materially limited by the Commission or the Nasdaq National Market, or if trading
generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the NASD or any other governmental authority, or (iv) a material
disruption has occurred in commercial banking or securities settlement or clearance services in the
United States, or (v) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination
shall be without liability of any party to any other party except as provided in Section 4 hereof,
and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full
force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of the
Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it
or they are obligated to purchase under this Agreement (the Defaulted Securities), the
Representative shall have the right, within 24 hours thereafter, to make arrangements for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less
than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms
herein set forth; if, however, the Representative shall not have completed such arrangements within
such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the number of
Securities to be purchased on such date, each of the non-defaulting Underwriters shall be
obligated, severally and not jointly, to purchase the full amount thereof in the proportions
that their respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number of Securities to
be purchased on such date, this Agreement or, with respect to any Date of Delivery which
occurs after the Closing Time, the obligation of the Underwriters to purchase and of the
Company to sell the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting Underwriter.
20
No action taken pursuant to this Section shall relieve any defaulting Underwriter from
liability in respect of its default.
In the event of any such default which does not result in a termination of this Agreement or,
in the case of a Date of Delivery which is after the Closing Time, which does not result in a
termination of the obligation of the Underwriters to purchase and the Company to sell the relevant
Option Securities, as the case may be, either the (i) Representative or (ii) the Company shall have
the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a
period not exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. As used herein, the term
Underwriter includes any person substituted for an Underwriter under this Section 10.
SECTION 11. Tax Disclosure. Notwithstanding any other provision of this Agreement,
immediately upon commencement of discussions with respect to the transactions contemplated hereby,
the Company (and each employee, representative or other agent of the Company) may disclose to any
and all persons, without limitation of any kind, the tax treatment and tax structure of the
transactions contemplated by this Agreement and all materials of any kind (including opinions or
other tax analyses) that are provided to the Company relating to such tax treatment and tax
structure. For purposes of the foregoing, the term tax treatment is the purported or claimed
federal income tax treatment of the transactions contemplated hereby, and the term tax structure
includes any fact that may be relevant to understanding the purported or claimed federal income tax
treatment of the transactions contemplated hereby.
SECTION 12. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by any standard form
of telecommunication. Notices to the Underwriters shall be directed to the Representative at 4
World Financial Center, New York, New York 10080, attention of Mark Robinson; notices to the
Company shall be directed to it at 12730 High Bluff Drive, Suite 410, San Diego, California 92130,
attention of Chief Executive Officer with a copy to Latham & Watkins LLP at 12636 High Bluff Drive,
Suite 400, San Diego, California 92130, attention of Faye H. Russell, Esq.
SECTION 13. No Advisory or Fiduciary Relationship. The Company acknowledges and
agrees that (a) the purchase and sale of the Securities pursuant to this Agreement, including the
determination of the public offering price of the Securities and any related discounts and
commissions, is an arms-length commercial transaction between the Company, on the one hand, and
the several Underwriters, on the other hand, (b) in connection with the offering contemplated
hereby and the process leading to such transaction each Underwriter is and has been acting solely
as a principal and is not the agent or fiduciary of the Company, or its respective stockholders,
creditors, employees or any other party, (c) no Underwriter has assumed or will assume an advisory
or fiduciary responsibility in favor of the Company with respect to the offering contemplated
hereby or the process leading thereto (irrespective of whether such Underwriter has advised or is
currently advising the Company on other matters) and no Underwriter has any obligation to the
Company with respect to the offering contemplated hereby except the obligations expressly set forth
in this Agreement, (d) the Underwriters and their respective affiliates may be engaged in a broad
range of transactions that involve interests that differ from those of each of the Company, and (e)
the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to
the offering contemplated hereby and the Company has consulted its own respective legal,
accounting, regulatory and tax advisors to the extent it deemed appropriate.
SECTION 14. Parties. This Agreement shall each inure to the benefit of and be binding
upon the Underwriters, the Company and their respective successors. Nothing expressed or mentioned
in this Agreement is intended or shall be construed to give any person, firm or corporation, other
than the
21
Underwriters, the Company and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives,
any legal or equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Underwriters, the Company and their respective
successors, and said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation. No purchaser of
Securities from any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 16. TIME. TIME SHALL BE OF THE ESSENCE OF THIS AGREEMENT. EXCEPT AS OTHERWISE
SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such counterparts shall
together constitute one and the same Agreement.
SECTION 18. Effect of Headings. The Section headings herein are for convenience only
and shall not affect the construction hereof.
22
If the foregoing is in accordance with your understanding of our agreement, please sign and
return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts,
will become a binding agreement among the Underwriters and the Company in accordance with its
terms.
|
|
|
|
|
|
|
Very truly yours, |
|
|
|
|
|
|
|
CADENCE PHARMACEUTICALS, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
By |
|
|
|
|
|
|
|
|
|
|
Title: |
|
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
Authorized Signatory
For itself and as Representative of the other Underwriters named in Schedule A hereto.
23
SCHEDULE A
|
|
|
|
|
Number of |
Name of Underwriter |
|
Initial Securities |
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated |
|
|
Deutsche Bank Securities Inc. |
|
|
Pacific Growth Equities, LLC |
|
|
JMP Securities LLC |
|
|
|
|
|
|
|
|
|
|
Total |
|
[ ] |
|
|
Sch A-1
SCHEDULE B
CADENCE PHARMACEUTICALS, INC.
[ ] Shares of Common Stock
(Par Value $0.0001 Per Share)
1. The initial public offering price per share for the Securities, determined as provided in said
Section 2, shall be $l.
2. The purchase price per share for the Securities to be paid by the several Underwriters shall be
$l, being an amount equal to the initial public offering price set forth above less $l
per share; provided that the purchase price per share for any Option Securities purchased upon the
exercise of the overallotment option described in Section 2(b) shall be reduced by an amount per
share equal to any dividends or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities.
exv3w3
EXHIBIT
3.3
Certificate of Amendment
of
Restated Certificate of Incorporation
of
Cadence Pharmaceuticals, Inc.,
a Delaware corporation
Cadence Pharmaceuticals, Inc., a corporation organized and existing under the laws of the
State of Delaware (the Corporation), hereby certifies as follows:
1. That the Board of Directors of said Corporation duly adopted a resolution proposing and
declaring advisable the following amendment of the Restated Certificate of Incorporation (the
Certificate) of said Corporation. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate be amended by adding the following paragraphs after the third
paragraph of Article IV, prior to Section (1) of Article IV:
Effective upon the filing of this Certificate of Amendment with the Secretary of State of the
State of Delaware, a 1-for-4 reverse stock split for each share of Common Stock outstanding or held
in treasury immediately prior to such time shall automatically and without any action of the part
of the holders thereof occur (the Reverse Stock Split). The par value of the Common Stock shall
remain $0.0001 per share. This conversion shall apply to all shares of Common Stock. No
fractional shares of Common Stock shall be issued upon the Reverse Stock Split or otherwise. In
lieu of any fractional shares of Common Stock to which the stockholder would otherwise be entitled
upon the Reverse Stock Split, the Corporation shall pay cash equal to such fraction multiplied by
the then fair market value of the Common Stock as determined by the Board of Directors of the
Corporation.
All certificates representing shares of Common Stock outstanding immediately prior to the
filing of this Certificate of Amendment shall immediately after the filing of this Certificate of
Amendment represent instead the number of shares of Common Stock as provided above.
Notwithstanding the foregoing, any holder of Common Stock may (but shall not be required to)
surrender his, her or its stock certificate or certificates to the Corporation, and upon such
surrender the Corporation will issue a certificate for the correct number of shares of Common Stock
to which the holder is entitled under the provisions of this Certificate of Amendment. Shares of
Common Stock that were outstanding prior to the filing of this Certificate of Amendment, and that
are not outstanding after and as a result of the filing of this Certificate of Amendment, shall
resume the status of authorized but unissued shares of Common Stock.
2. That thereafter, pursuant to resolution of the Board of Directors and in lieu of a meeting
of stockholders, the stockholders gave their approval of said amendment by written consent in
accordance with the provisions of Section 228 of the General Corporation Law of the State of
Delaware.
3. That the aforesaid amendment was duly adopted in accordance with the provisions of Sections
242 and 228 of the General Corporation Law of the State of Delaware.
4. That said amendment shall be executed, filed and recorded in accordance with Section 103 of
the General Corporation Law of the State of Delaware.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
IN WITNESS WHEREOF, Cadence Pharmaceuticals, Inc. has caused this Certificate of Amendment to
be signed by an authorized officer thereof, this [___] day of October, 2006.
Cadence Pharmaceuticals, Inc.
Theodore R. Schroeder
President and Chief Executive Officer
exv4w1
EXHIBIT 4.1
[FACE OF CERTIFICATE]
Number
CP
COMMON STOCK
[LOGO]
CADENCE PHARMACEUTICALS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
Shares
SEE
REVERSE FOR STATEMENTS RELATING TO RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS, IF ANY
THIS CERTIFIES THAT
is the record holder of
FULLY PAID
AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.0001 PAR VALUE PER SHARE, OF
CADENCE PHARMACEUTICALS, INC.
transferable on the books of the Corporation by the holder hereof in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent
and Registrar.
WITNESS
the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/sig/
SENIOR VICE PRESIDENT & CFO
[SEAL]
/sig/
PRESIDENT & CEO
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
[REVERSE OF CERTIFICATE]
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM as tenants in common
TEN ENT as tenants by the entireties
JT TEN
as joint tenants with right of survivorship and not as tenants in common
UNIF GIFT
MIN ACT .....(Cust)..... Custodian .....(Minor)..... under Uniform Gifts to Minors Act .....(State) .....
UNIF TRF
MIN ACT .....(Cust)..... Custodian (until age .....) .....(Minor)..... under Uniform Transfers to Minors Act .....(State) .....
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
Shares of
the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
Attorney to transfer the said stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated
X
X
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
exv5w1
EXHIBIT 5.1
|
|
|
|
|
|
|
12636 High Bluff Drive, Suite 400 |
|
|
San Diego, California 92130-2071 |
|
|
Tel: (858) 523-5400 Fax: (858) 523-5450 |
|
|
www.lw.com
|
|
|
FIRM / AFFILIATE OFFICES |
|
|
Brussels
|
|
New York |
|
|
Chicago
|
|
Northern Virginia |
|
|
Frankfurt
|
|
Orange County |
|
|
Hamburg
|
|
Paris |
|
|
Hong Kong
|
|
San Diego |
|
|
London
|
|
San Francisco |
|
|
Los Angeles
|
|
Shanghai |
|
|
Milan
|
|
Silicon Valley |
|
|
Moscow
|
|
Singapore |
|
|
Munich
|
|
Tokyo |
|
|
New Jersey
|
|
Washington, D.C. |
October 9, 2006
Cadence Pharmaceuticals, Inc.
12481 High Bluff Drive, Suite 200
San Diego, California 92130
|
|
|
|
|
Re: Registration Statement No. 333-135821 6,900,000 shares of Common Stock, par value $0.0001 per share |
Ladies and Gentlemen:
We have acted as special counsel to Cadence Pharmaceuticals, Inc., a Delaware corporation (the
Company), in connection with the proposed issuance of up to 6,900,000 shares (including up to
900,000 shares subject to the underwriters over-allotment option) of common stock, $0.0001 par
value per share (the Shares), pursuant to a registration statement on Form S-1 under the
Securities Act of 1933, as amended (the Act), filed with the Securities and Exchange Commission
(the Commission) on July 17, 2006 (File No. 333-135821), as amended by Amendment No. 1 filed with
the Commission on August 30, 2006, Amendment No. 2 filed with the Commission on September 25, 2006
and Amendment No. 3 filed with the Commission on October 9, 2006 (collectively, the Registration
Statement). This opinion is being furnished in accordance with the requirements of Item 601(b)(5)
of Regulation S-K under the Act, and no opinion is expressed herein as to any matter pertaining to
the contents of the Registration Statement or Prospectus, other than as to the validity of the
Shares.
As such counsel, we have examined such matters of fact and questions of law as we have
considered appropriate for purposes of this letter. With your consent, we have relied upon the
foregoing and upon certificates and other assurances of officers of the Company and others as to
factual matters without having independently verified such factual matters.
We are opining herein only as to the General Corporation Law of the State of Delaware and we
express no opinion with respect to any other laws.
Subject to the foregoing, it is our opinion that, as of the date hereof, when certificates
representing the Shares in the form of the specimen certificate filed as an exhibit to the
Registration Statement have been manually signed by an authorized officer of the transfer agent and
registrar therefor, and have been delivered to and paid for by the underwriters in the
circumstances contemplated by the form of underwriting agreement filed as an exhibit to the
Registration Statement, the issuance and sale of the Shares will have been duly authorized by all
October 9, 2006
Page 2
|
|
necessary corporate action of the Company, and the Shares will be validly issued, fully paid
and nonassessable. |
This opinion is for your benefit in connection with the Registration Statement and may be
relied upon by you and by persons entitled to rely upon it pursuant to the applicable provisions of
federal securities laws. We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to our firm in the Prospectus under the heading Legal Matters. In
giving such consent, we do not thereby admit that we are in the category of persons whose consent
is required under Section 7 of the Act or the rules and regulations of the Commission thereunder.
|
|
|
|
|
|
Very truly yours,
|
|
|
/s/ Latham & Watkins LLP
|
|
|
|
|
|
|
|
|
exv10w5
EXHIBIT
10.5
CADENCE PHARMACEUTICALS, INC.
2006 EQUITY INCENTIVE AWARD PLAN
ARTICLE 1
PURPOSE
The purpose of the Cadence Pharmaceuticals, Inc. 2006 Equity Incentive Award Plan (the
Plan) is to promote the success and enhance the value of Cadence Pharmaceuticals, Inc.
(the Company) by linking the personal interests of the members of the Board, Employees,
and Consultants to those of Company stockholders and by providing such individuals with an
incentive for outstanding performance to generate superior returns to Company stockholders. The
Plan is further intended to provide flexibility to the Company in its ability to motivate, attract,
and retain the services of members of the Board, Employees, and Consultants upon whose judgment,
interest, and special effort the successful conduct of the Companys operation is largely
dependent.
All numbers of shares of Stock set forth in the Plan give effect to the reverse stock split to
be implemented by the Company in connection with its initial public offering.
ARTICLE 2
DEFINITIONS AND CONSTRUCTION
Wherever the following terms are used in the Plan they shall have the meanings specified
below, unless the context clearly indicates otherwise. The singular pronoun shall include the
plural where the context so indicates.
2.1 Award means an Option, a Restricted Stock award, a Stock Appreciation Right
award, a Performance Share award, a Performance Stock Unit award, a Dividend Equivalents award, a
Stock Payment award, a Deferred Stock award, a Restricted Stock Unit award, an Other Stock-Based
Award, a Performance Bonus Award, or a Performance-Based Award granted to a Participant pursuant to
the Plan.
2.2 Award Agreement means any written agreement, contract, or other instrument or
document evidencing an Award.
2.3 Board means the Board of Directors of the Company.
2.4 Change in Control means and includes each of the following:
(a) A transaction or series of transactions (other than an offering of Stock to the general
public through a registration statement filed with the Securities and Exchange Commission) whereby
any person or related group of persons (as such terms are used in Sections 13(d) and 14(d)(2)
of the Exchange Act) (other than the Company, any of its subsidiaries, an employee benefit plan
maintained by the Company or any of its subsidiaries or a
person that, prior to such transaction, directly or indirectly controls, is controlled by,
or is under common control with, the Company) directly or indirectly acquires beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing
more than 50% of the total combined voting power of the Companys securities outstanding
immediately after such acquisition; or
(b) During any period of two consecutive years, individuals who, at the beginning of such
period, constitute the Board together with any new director(s) (other than a director designated by
a person who shall have entered into an agreement with the Company to effect a transaction
described in Section 2.4(a) or Section 2.4(c)) whose election by the Board or nomination for
election by the Companys stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the two year period or
whose election or nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or
(c) The consummation by the Company (whether directly involving the Company or indirectly
involving the Company through one or more intermediaries) of (x) a merger, consolidation,
reorganization, or business combination or (y) a sale or other disposition of all or substantially
all of the Companys assets or (z) the acquisition of assets or stock of another entity, in each
case other than a transaction:
(i) Which results in the Companys voting securities outstanding immediately before the
transaction continuing to represent (either by remaining outstanding or by being converted into
voting securities of the Company or the person that, as a result of the transaction, controls,
directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of
the Companys assets or otherwise succeeds to the business of the Company (the Company or such
person, the Successor Entity)) directly or indirectly, at least a majority of the
combined voting power of the Successor Entitys outstanding voting securities immediately after the
transaction, and
(ii) After which no person or group beneficially owns voting securities representing 50% or
more of the combined voting power of the Successor Entity; provided, however, that no person or
group shall be treated for purposes of this Section 2.4(c)(ii) as beneficially owning 50% or more
of combined voting power of the Successor Entity solely as a result of the voting power held in the
Company prior to the consummation of the transaction.
2.5
Code means the Internal Revenue Code of 1986, as amended.
2.6
Committee means the committee of the Board described in Article 12.
2.7
Consultant means any consultant or adviser if:
(a) The consultant or adviser renders bona fide services to the Company or any Parent or
Subsidiary;
(b) The services rendered by the consultant or adviser are not in connection with the offer or
sale of securities in a capital-raising transaction and do not directly or indirectly promote or
maintain a market for the securities of the Company or of any Parent or Subsidiary; and
2
(c) The consultant or adviser is a natural person.
2.8 Covered Employee means an Employee who is, or could be, a covered employee
within the meaning of Section 162(m) of the Code.
2.9 Deferred Stock means a right to receive a specified number of shares of Stock
during specified time periods pursuant to Article 8.
2.10 Disability means disability, as such term is defined in Section 22(e)(3) of
the Code.
2.11 Dividend Equivalents means a right granted to a Participant pursuant to Article
8 to receive the equivalent value (in cash or Stock) of dividends paid on Stock.
2.12 Effective Date shall have the meaning set forth in Section 13.1.
2.13 Eligible Individual means any person who is an Employee, a Consultant or a
member of the Board, as determined by the Committee.
2.14 Employee means any officer or other employee (as defined in accordance with
Section 3401(c) of the Code) of the Company or of any Parent or Subsidiary.
2.15 Equity Restructuring means a non-reciprocal transaction, as determined by the
Committee, between the Company and its stockholders, such as a stock dividend, stock split,
spin-off or recapitalization through a large, nonrecurring cash dividend, that affects the shares
of Stock (or other securities of the Company) or the share price of Stock (or other securities) and
causes a change in the per share value of the Stock underlying outstanding Awards.
2.16 Exchange Act means the Securities Exchange Act of 1934, as amended.
2.17 Fair Market Value means, as of any given date, the fair market value of a share
of Stock on the date determined by such methods or procedures as may be established from time to
time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of a
share of Stock as of any date shall be the closing sales price for a share of Stock as reported on
the NASDAQ National Market (or on any national securities exchange on which the Stock is then
listed) for the date or, if no such prices are reported for that date, the average of the high and
low trading prices on the next preceding date for which such prices were reported.
2.18 Incentive Stock Option means an Option that is intended to meet the
requirements of Section 422 of the Code or any successor provision thereto.
2.19 Independent Director means a member of the Board who is not an Employee of the
Company or of any Parent or Subsidiary.
2.20 Non-Employee Director means a member of the Board who qualifies as a
Non-Employee Director as defined in Rule 16b-3(b)(3) of the Exchange Act, or any successor
definition adopted by the Board.
3
2.21 Non-Qualified Stock Option means an Option that is not intended to be an
Incentive Stock Option.
2.22 Option means a right granted to a Participant pursuant to Article 5 of the Plan
to purchase a specified number of shares of Stock at a specified price during specified time
periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
2.23 Other Stock-Based Award means an Award granted or denominated in Stock or units
of Stock pursuant to Section 8.7 of the Plan.
2.24 Parent means any parent corporation, as defined in Section 424(e) of the Code
and any applicable regulations promulgated thereunder, of the Company or any other entity which
beneficially owns, directly or indirectly, a majority of the outstanding voting stock or voting
power of the Company.
2.25 Participant means any Eligible Individual who, as a member of the Board,
Consultant or Employee, has been granted an Award pursuant to the Plan.
2.26 Performance-Based Award means an Award granted to selected Covered Employees
pursuant to Articles 6 and 8, but which is subject to the terms and conditions set forth in Article
9. All Performance-Based Awards are intended to qualify as Qualified Performance-Based
Compensation.
2.27 Performance Bonus Award has the meaning set forth in Section 8.8.
2.28 Performance Criteria means the criteria that the Committee selects for purposes
of establishing the Performance Goal or Performance Goals for a Participant for a Performance
Period. The Performance Criteria that will be used to establish Performance Goals are limited to
the following: net earnings (either before or after interest, taxes, depreciation and
amortization), economic value-added (as determined by the Committee), sales or revenue, net income
(either before or after taxes), operating earnings, cash flow (including, but not limited to,
operating cash flow and free cash flow), cash flow return on capital, return on net assets, return
on stockholders equity, return on assets, return on capital, stockholder returns, return on sales,
gross or net profit margin, productivity, expense, margins, operating efficiency, customer
satisfaction, working capital, earnings per share of Stock, price per share of Stock, and market
share, any of which may be measured either in absolute terms or as compared to any incremental
increase or as compared to results of a peer group. To the extent an Award is intended to be
Qualified Performance-Based Compensation, the Committee shall, within the time prescribed by
Section 162(m) of the Code, define in an objective fashion the manner of calculating the
Performance Criteria it selects to use for such Performance Period for such Participant.
2.29 Performance Goals means, for a Performance Period, the goals established in
writing by the Committee for the Performance Period based upon the Performance Criteria. Depending
on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be
expressed in terms of overall Company performance or the performance of a division, business unit,
or an individual. To the extent an Award is intended to be Qualified Performance-Based
Compensation, the Committee, in its discretion, may, within the time prescribed by Section 162(m)
of the Code, adjust or modify the calculation of Performance
4
Goals for such Performance Period in order to prevent the dilution or enlargement of the
rights of Participants (a) in the event of, or in anticipation of, any unusual or extraordinary
corporate item, transaction, event, or development, or (b) in recognition of, or in anticipation
of, any other unusual or nonrecurring events affecting the Company, or the financial statements of
the Company, or in response to, or in anticipation of, changes in applicable laws, regulations,
accounting principles, or business conditions.
2.30 Performance Period means the one or more periods of time, which may be of
varying and overlapping durations, as the Committee may select, over which the attainment of one or
more Performance Goals will be measured for the purpose of determining a Participants right to,
and the payment of, a Performance-Based Award.
2.31 Performance Share means a right granted to a Participant pursuant to Article 8,
to receive Stock, the payment of which is contingent upon achieving certain Performance Goals or
other performance-based targets established by the Committee.
2.32 Performance Stock Unit means a right granted to a Participant pursuant to
Article 8, to receive Stock, the payment of which is contingent upon achieving certain Performance
Goals or other performance-based targets established by the Committee.
2.33 Plan means this Cadence Pharmaceuticals, Inc. 2006 Incentive Award Plan, as it
may be amended from time to time.
2.34 Public Trading Date means the first date upon which Stock is listed (or
approved for listing) upon notice of issuance on any securities exchange or designated (or approved
for designation) upon notice of issuance as a national market security on an interdealer quotation
system.
2.35 Qualified Performance-Based Compensation means any compensation that is
intended to qualify as qualified performance-based compensation as described in Section
162(m)(4)(C) of the Code.
2.36 Restricted Stock means Stock awarded to a Participant pursuant to Article 6
that is subject to certain restrictions and may be subject to risk of forfeiture.
2.37 Restricted Stock Unit means an Award granted pursuant to Section 8.6.
2.38 Securities Act shall mean the Securities Act of 1933, as amended.
2.39 Stock means the common stock of the Company, par value $0.0001 per share, and
such other securities of the Company that may be substituted for Stock pursuant to Article 11.
2.40 Stock Appreciation Right or SAR means a right granted pursuant to
Article 7 to receive a payment equal to the excess of the Fair Market Value of a specified number
of shares of Stock on the date the SAR is exercised over the Fair Market Value on the date the SAR
was granted as set forth in the applicable Award Agreement.
5
2.41 Stock Payment means (a) a payment in the form of shares of Stock, or (b) an
option or other right to purchase shares of Stock, as part of any bonus, deferred compensation or
other arrangement, made in lieu of all or any portion of the compensation, granted pursuant to
Article 8.
2.42 Subsidiary means any subsidiary corporation as defined in Section 424(f) of
the Code and any applicable regulations promulgated thereunder or any other entity of which a
majority of the outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Company.
ARTICLE 3
SHARES SUBJECT TO THE PLAN
3.1 Number of Shares.
(a) Subject to Article 11 and Section 3.1(b), the aggregate number of shares of Stock which
may be issued or transferred pursuant to Awards under the Plan shall be the sum of: (i) 2,100,000
shares of Stock; plus (ii) the number of shares of Stock remaining available for issuance and not
subject to awards granted under the Cadence Pharmaceuticals, Inc. 2004 Equity Incentive Award Plan
(the Existing Plan) as of the Effective Date; plus (iii) with respect to awards granted
under the Existing Plan on or before the Effective Date that expire or are canceled without having
been exercised in full or shares of Stock that are forfeited or repurchased pursuant to the terms
of awards granted under the Existing Plan, the number of shares of Stock subject to each such award
as to which such award was not exercised prior to its expiration or cancellation or which are
forfeited or repurchased by the Company. The aggregate number of shares of Stock authorized for
issuance under the Existing Plan was [___] shares of Stock and, accordingly, the total number
of shares of Stock under clauses (ii) and (iii) in the preceding sentence shall not exceed
[___] shares of Stock. In addition, subject to Article 11, commencing on January 1, 2008, and
on each January 1 thereafter during the term of the Plan, the number of shares of Stock which shall
be made available for sale under the Plan shall be increased by that number of shares of Stock
equal to the least of: (i) 4% of the Companys outstanding shares of Stock on the applicable
January 1; and (ii) a lesser number of shares of Stock as determined by the Board. Accordingly,
the number of shares of Stock which shall be available for sale under the Plan shall be subject to
increase under the preceding sentence only on January 1, 2008 and on each subsequent January 1
through and including January 1, 2016. Notwithstanding anything in this Section 3.1(a) to the
contrary, the number of shares of Stock that may be issued or transferred pursuant to Awards under
the Plan shall not exceed an aggregate of 20,000,000 shares of Stock, subject to Article 11. In
order that the applicable regulations under the Code relating to Incentive Stock Options be
satisfied, the maximum number of shares of Stock that may be delivered upon exercise of Incentive
Stock Options shall be the number specified in the preceding sentence, and, if necessary to satisfy
such regulations, such maximum limit shall apply to the number of shares of Stock that may be
delivered in connection with each other type of Award under the Plan (applicable separately to each
type of Award).
(b) To the extent that an Award terminates, expires, or lapses for any reason, any shares of
Stock subject to the Award shall again be available for the grant of an Award
6
pursuant to the Plan. Additionally, any shares of Stock tendered or withheld to satisfy the
grant or exercise price or tax withholding obligation pursuant to any Award shall again be
available for the grant of an Award pursuant to the Plan. To the extent permitted by applicable
law or any exchange rule, shares of Stock issued in assumption of, or in substitution for, any
outstanding awards of any entity acquired in any form of combination by the Company or any Parent
or Subsidiary shall not be counted against shares of Stock available for grant pursuant to this
Plan. The payment of Dividend Equivalents in conjunction with any outstanding Awards shall not be
counted against the shares of Stock available for issuance under the Plan.
3.2 Stock Distributed. Any shares of Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased
on the open market.
3.3 Limitation on Number of Shares Subject to Awards. Notwithstanding any provision
in the Plan to the contrary, and subject to Article 11, the maximum number of shares of Stock with
respect to one or more Awards that may be granted to any one Participant during any fiscal year of
the Company (measured from the date of any grant) shall be 1,000,000; provided, however, that the
foregoing limitation shall not apply prior to the Public Trading Date and, following the Public
Trading Date, the foregoing limitation shall not apply until the earliest of: (a) the first
material modification of the Plan (including any increase in the number of shares of Stock reserved
for issuance under the Plan in accordance with Section 3.1); (b) the issuance of all of the shares
of Stock reserved for issuance under the Plan; (c) the expiration of the Plan; (d) the first
meeting of stockholders at which members of the Board are to be elected that occurs after the close
of the third calendar year following the calendar year in which occurred the first registration of
an equity security of the Company under Section 12 of the Exchange Act; or (e) such other date
required by Section 162(m) of the Code and the rules and regulations promulgated thereunder.
ARTICLE 4
ELIGIBILITY AND PARTICIPATION
4.1 Eligibility. Each Eligible Individual shall be eligible to be granted one or more
Awards pursuant to the Plan.
4.2 Participation. Subject to the provisions of the Plan, the Committee may, from
time to time, select from among all Eligible Individuals, those to whom Awards shall be granted and
shall determine the nature and amount of each Award. No Eligible Individual shall have any right
to be granted an Award pursuant to this Plan.
4.3 Foreign Participants. In order to assure the viability of Awards granted to
Participants employed in foreign countries, the Committee may provide for such special terms as it
may consider necessary or appropriate to accommodate differences in local law, tax policy, or
custom. Moreover, the Committee may approve such supplements to, or amendments, restatements, or
alternative versions of, the Plan as it may consider necessary or appropriate for such purposes
without thereby affecting the terms of the Plan as in effect for any other purpose; provided,
however, that no such supplements, amendments, restatements, or alternative versions shall increase
the limitations on the number of shares of Stock (a) issued or transferred pursuant
7
to Awards under the Plan, as detailed in Section 3.1, and (b) issued or transferred pursuant
to Awards granted to any one Participant during any fiscal year of the Company, as detailed in
Section 3.3 of the Plan.
ARTICLE 5
STOCK OPTIONS
5.1 General. The Committee is authorized to grant Options to Participants on the
following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock subject to an Option shall
be determined by the Committee and set forth in the Award Agreement; provided that the exercise
price for any Option shall not be less than par value of a share of Stock on the date of grant.
(b) Time and Conditions of Exercise. The Committee shall determine the time or times
at which an Option may be exercised in whole or in part. The Committee shall also determine the
performance or other conditions, if any, that must be satisfied before all or part of an Option may
be exercised.
(c) Payment. The Committee shall determine the methods by which the exercise price of
an Option may be paid, the form of payment, including, without limitation: (i) cash, (ii)
promissory note bearing interest at no less than such rate as shall then preclude the imputation of
interest under the Code, (iii) shares of Stock held for such period of time as may be required by
the Committee in order to avoid adverse accounting consequences and having a Fair Market Value on
the date of delivery equal to the aggregate exercise price of the Option or exercised portion
thereof, or (iv) other property acceptable to the Committee (including through the delivery of a
notice that the Participant has placed a market sell order with a broker with respect to shares of
Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a
sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option
exercise price; provided that payment of such proceeds is then made to the Company upon settlement
of such sale), and the methods by which shares of Stock shall be delivered or deemed to be
delivered to Participants. Notwithstanding any other provision of the Plan to the contrary, no
Participant who is a member of the Board or an executive officer of the Company within the
meaning of Section 13(k) of the Exchange Act shall be permitted to pay the exercise price of an
Option in any method which would violate Section 13(k) of the Exchange Act.
(d) Evidence of Grant. All Options shall be evidenced by a written Award Agreement
between the Company and the Participant. The Award Agreement shall include such additional
provisions as may be specified by the Committee.
5.2 Incentive Stock Options. The terms of any Incentive Stock Options granted
pursuant to the Plan must comply with the conditions and limitations contained in Section 13.2 and
this Section 5.2.
(a) Eligibility. Incentive Stock Options may be granted only to Employees.
8
(b) Exercise Price. The exercise price per share of Stock shall be set by the
Committee; provided that subject to Section 5.2(e) the exercise price for any Incentive Stock
Option shall not be less than 100% of the Fair Market Value on the date of grant.
(c) Expiration. Subject to Section 5.2(e), an Incentive Stock Option may not be
exercised to any extent by anyone after the tenth anniversary of the date it is granted, unless an
earlier time is set in the Award Agreement.
(d) Individual Dollar Limitation. The aggregate Fair Market Value (determined as of
the time the Option is granted) of all shares of Stock with respect to which Incentive Stock
Options are first exercisable by a Participant in any calendar year may not exceed $100,000 or such
other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the
extent that Incentive Stock Options are first exercisable by a Participant in excess of such
limitation, the excess shall be considered Non-Qualified Stock Options.
(e) Ten Percent Owners. An Incentive Stock Option shall be granted to any individual
who, at the date of grant, owns stock possessing more than ten percent of the total combined voting
power of all classes of Stock of the Company only if such Option is granted at a price that is not
less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more
than five years from the date of grant.
(f) Notice of Disposition. The Participant shall give the Company prompt notice of
any disposition of shares of Stock acquired by exercise of an Incentive Stock Option within (i) two
years from the date of grant of such Incentive Stock Option or (ii) one year after the transfer of
such shares of Stock to the Participant.
(g) Right to Exercise. During a Participants lifetime, an Incentive Stock Option may
be exercised only by the Participant.
5.3 Substitution of Stock Appreciation Rights. The Committee may provide in the Award
Agreement evidencing the grant of an Option that the Committee, in its sole discretion, shall have
to right to substitute a Stock Appreciation Right for such Option at any time prior to or upon
exercise of such Option, subject to the provisions of Section 7.2 hereof; provided that such Stock
Appreciation Right shall be exercisable with respect to the same number of shares of Stock for
which such substituted Option would have been exercisable.
5.4 Paperless Exercise. In the event that the Company establishes, for itself or
using the services of a third party, an automated system for the exercise of Options, such as a
system using an internet website or interactive voice response, then the paperless exercise of
options by a Participant may be permitted through the use of such an automated system.
ARTICLE 6
RESTRICTED STOCK AWARDS
6.1 Grant of Restricted Stock. The Committee is authorized to make Awards of
Restricted Stock to any Participant selected by the Committee in such amounts and subject to
9
such terms and conditions as determined by the Committee. All Awards of Restricted Stock
shall be evidenced by a written Restricted Stock Award Agreement.
6.2 Issuance and Restrictions. Restricted Stock shall be subject to such restrictions
on transferability and other restrictions as the Committee may impose (including, without
limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on
the Restricted Stock). These restrictions may lapse separately or in combination at such times,
pursuant to such circumstances, in such installments, or otherwise, as the Committee determines at
the time of the grant of the Award or thereafter.
6.3 Forfeiture. Except as otherwise determined by the Committee at the time of the
grant of the Award or thereafter, upon termination of employment or service during the applicable
restriction period, Restricted Stock that is at that time subject to restrictions shall be
forfeited; provided, however, that the Committee may (a) provide in any Restricted Stock Award
Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in
whole or in part in the event of terminations resulting from specified causes, and (b) in other
cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock.
6.4 Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan
may be evidenced in such manner as the Committee shall determine. If certificates representing
shares of Restricted Stock are registered in the name of the Participant, certificates must bear an
appropriate legend referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, and the Company may, at its discretion, retain physical possession of the
certificate until such time as all applicable restrictions lapse.
ARTICLE 7
STOCK APPRECIATION RIGHTS
7.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right may be granted to
any Participant selected by the Committee. A Stock Appreciation Right shall be subject to such
terms and conditions not inconsistent with the Plan as the Committee shall impose and shall be
evidenced by an Award Agreement.
7.2 Stock Appreciation Rights.
(a) A Stock Appreciation Right (SAR) shall have a term set by the Committee. A SAR
shall be exercisable in such installments as the Committee may determine. A SAR shall cover such
number of shares of Stock as the Committee may determine. The exercise price per share of Stock
subject to each SAR shall be set by the Committee; provided, however, that the Committee in its
sole and absolute discretion may provide that the SAR may be exercised subsequent to a termination
of employment or service, as applicable, or following a Change in Control of the Company, or
because of the Participants retirement, death or disability, or otherwise.
(b) A SAR shall entitle the Participant (or other person entitled to exercise the SAR pursuant
to the Plan) to exercise all or a specified portion of the SAR (to the extent then exercisable
pursuant to its terms) and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the SAR from
10
the Fair Market Value of a share of Stock on the date of exercise of the SAR by the number of
shares of Stock with respect to which the SAR shall have been exercised, subject to any limitations
the Committee may impose.
7.3 Payment and Limitations on Exercise.
(a) Payment of the amounts determined under Section 7.2(b) above shall be in cash, in Stock
(based on its Fair Market Value as of the date the SAR is exercised) or a combination of both, as
determined by the Committee.
(b) To the extent any payment under Section 7.2(b) is effected in Stock it shall be made
subject to satisfaction of all provisions of Article 5 above pertaining to Options.
ARTICLE 8
OTHER TYPES OF AWARDS
8.1 Performance Share Awards. Any Participant selected by the Committee may be
granted one or more Performance Share awards which shall be denominated in a number of shares of
Stock and which may be linked to any one or more of the Performance Criteria or other specific
performance criteria determined appropriate by the Committee, in each case on a specified date or
dates or over any period or periods determined by the Committee. In making such determinations,
the Committee shall consider (among such other factors as it deems relevant in light of the
specific type of award) the contributions, responsibilities and other compensation of the
particular Participant.
8.2 Performance Stock Units. Any Participant selected by the Committee may be granted
one or more Performance Stock Unit awards which shall be denominated in units of value including
dollar value of shares of Stock and which may be linked to any one or more of the Performance
Criteria or other specific performance criteria determined appropriate by the Committee, in each
case on a specified date or dates or over any period or periods determined by the Committee. In
making such determinations, the Committee shall consider (among such other factors as it deems
relevant in light of the specific type of award) the contributions, responsibilities and other
compensation of the particular Participant.
8.3 Dividend Equivalents.
(a) Any Participant selected by the Committee may be granted Dividend Equivalents based on the
dividends declared on the shares of Stock that are subject to any Award, to be credited as of
dividend payment dates, during the period between the date the Award is granted and the date the
Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents
shall be converted to cash or additional shares of Stock by such formula and at such time and
subject to such limitations as may be determined by the Committee.
(b) Dividend Equivalents granted with respect to Options or SARs that are
11
intended to be Qualified Performance-Based Compensation shall be payable, with respect to
pre-exercise periods, regardless of whether such Option or SAR is subsequently exercised.
8.4 Stock Payments. Any Participant selected by the Committee may receive Stock
Payments in the manner determined from time to time by the Committee. The number of shares of
Stock or the number of options or other rights to purchase shares of Stock subject to a Stock
Payment shall be determined by the Committee and may be based upon the Performance Criteria or
other specific performance criteria determined appropriate by the Committee, determined on the date
such Stock Payment is made or on any date thereafter.
8.5 Deferred Stock. Any Participant selected by the Committee may be granted an award
of Deferred Stock in the manner determined from time to time by the Committee. The number of
shares of Deferred Stock shall be determined by the Committee and may be linked to the Performance
Criteria or other specific performance criteria determined to be appropriate by the Committee, in
each case on a specified date or dates or over any period or periods determined by the Committee.
Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has
vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless
otherwise provided by the Committee, a Participant awarded Deferred Stock shall have no rights as a
Company stockholder with respect to such Deferred Stock until such time as the Deferred Stock Award
has vested and the Stock underlying the Deferred Stock Award has been issued.
8.6 Restricted Stock Units. The Committee is authorized to make Awards of Restricted
Stock Units to any Participant selected by the Committee in such amounts and subject to such terms
and conditions as determined by the Committee. At the time of grant, the Committee shall specify
the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable,
and may specify such conditions to vesting as it deems appropriate. At the time of grant, the
Committee shall specify the maturity date applicable to each grant of Restricted Stock Units which
shall be no earlier than the vesting date or dates of the Award and may be determined at the
election of the grantee. On the maturity date, the Company shall, subject to Section 10.5(b),
transfer to the Participant one unrestricted, fully transferable share of Stock for each Restricted
Stock Unit scheduled to be paid out on such date and not previously forfeited. The Committee shall
specify the purchase price, if any, to be paid by the grantee to the Company for such shares of
Stock.
8.7 Other Stock-Based Awards. Any Participant selected by the Committee may be
granted one or more Awards that provide Participants with shares of Stock or the right to purchase
shares of Stock or that have a value derived from the value of, or an exercise or conversion
privilege at a price related to, or that are otherwise payable in shares of Stock and which may be
linked to any one or more of the Performance Criteria or other specific performance criteria
determined appropriate by the Committee, in each case on a specified date or dates or over any
period or periods determined by the Committee. In making such determinations, the Committee shall
consider (among such other factors as it deems relevant in light of the specific type of Award) the
contributions, responsibilities and other compensation of the particular Participant.
8.8 Performance Bonus Awards. Any Participant selected by the Committee may be
granted one or more Performance-Based Awards in the form of a cash bonus (a Performance
12
Bonus Award) payable upon the attainment of Performance Goals that are established by
the Committee and relate to one or more of the Performance Criteria, in each case on a specified
date or dates or over any period or periods determined by the Committee. Any such Performance
Bonus Award paid to a Covered Employee shall be based upon objectively determinable bonus formulas
established in accordance with Article 9. The maximum amount of any Performance Bonus Award
payable to a Covered Employee with respect to any fiscal year of the Company shall not exceed
$1,000,000.
8.9 Term. Except as otherwise provided herein, the term of any Award of Performance
Shares, Performance Stock Units, Dividend Equivalents, Stock Payments, Deferred Stock, Restricted
Stock Units or Other Stock-Based Award shall be set by the Committee in its discretion.
8.10 Exercise or Purchase Price. The Committee may establish the exercise or purchase
price, if any, of any Award of Performance Shares, Performance Stock Units, Deferred Stock, Stock
Payments, Restricted Stock Units or Other Stock-Based Award; provided, however, that such price
shall not be less than the par value of a share of Stock on the date of grant, unless otherwise
permitted by applicable state law.
8.11 Exercise Upon Termination of Employment or Service. An Award of Performance
Shares, Performance Stock Units, Dividend Equivalents, Deferred Stock, Stock Payments, Restricted
Stock Units and Other Stock-Based Award shall only be exercisable or payable while the Participant
is an Employee, Consultant or a member of the Board, as applicable; provided, however, that the
Committee in its sole and absolute discretion may provide that an Award of Performance Shares,
Performance Stock Units, Dividend Equivalents, Stock Payments, Deferred Stock, Restricted Stock
Units or Other Stock-Based Award may be exercised or paid subsequent to a termination of employment
or service, as applicable, or following a Change in Control of the Company, or because of the
Participants retirement, death or disability, or otherwise; provided, however, that any such
provision with respect to Performance Shares or Performance Stock Units shall be subject to the
requirements of Section 162(m) of the Code that apply to Qualified Performance-Based Compensation.
8.12 Form of Payment. Payments with respect to any Awards granted under this Article
8 shall be made in cash, in Stock or a combination of both, as determined by the Committee.
8.13 Award Agreement. All Awards under this Article 8 shall be subject to such
additional terms and conditions as determined by the Committee and shall be evidenced by a written
Award Agreement.
ARTICLE 9
PERFORMANCE-BASED AWARDS
9.1 Purpose. The purpose of this Article 9 is to provide the Committee the ability to
qualify Awards other than Options and SARs and that are granted pursuant to Articles 6 and 8 as
Qualified Performance-Based Compensation. If the Committee, in its discretion, decides to grant a
Performance-Based Award to a Covered Employee, the provisions of this Article 9 shall
13
control over any contrary provision contained in Articles 6 or 8; provided, however, that the
Committee may in its discretion grant Awards to Covered Employees that are based on Performance
Criteria or Performance Goals but that do not satisfy the requirements of this Article 9.
9.2 Applicability. This Article 9 shall apply only to those Covered Employees
selected by the Committee to receive Performance-Based Awards. The designation of a Covered
Employee as a Participant for a Performance Period shall not in any manner entitle the Participant
to receive an Award for the period. Moreover, designation of a Covered Employee as a Participant
for a particular Performance Period shall not require designation of such Covered Employee as a
Participant in any subsequent Performance Period and designation of one Covered Employee as a
Participant shall not require designation of any other Covered Employees as a Participant in such
period or in any other period.
9.3 Procedures with Respect to Performance-Based Awards. To the extent necessary to
comply with the Qualified Performance-Based Compensation requirements of Section 162(m)(4)(C) of
the Code, with respect to any Award granted under Articles 6 and 8 which may be granted to one or
more Covered Employees, no later than ninety (90) days following the commencement of any fiscal
year in question or any other designated fiscal period or period of service (or such other time as
may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (a)
designate one or more Covered Employees, (b) select the Performance Criteria applicable to the
Performance Period, (c) establish the Performance Goals, and amounts of such Awards, as applicable,
which may be earned for such Performance Period, and (d) specify the relationship between
Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be
earned by each Covered Employee for such Performance Period. Following the completion of each
Performance Period, the Committee shall certify in writing whether the applicable Performance Goals
have been achieved for such Performance Period. In determining the amount earned by a Covered
Employee, the Committee shall have the right to reduce or eliminate (but not to increase) the
amount payable at a given level of performance to take into account additional factors that the
Committee may deem relevant to the assessment of individual or corporate performance for the
Performance Period.
9.4 Payment of Performance-Based Awards. Unless otherwise provided in the applicable
Award Agreement, a Participant must be employed by the Company or a Parent or Subsidiary on the day
a Performance-Based Award for such Performance Period is paid to the Participant. Furthermore, a
Participant shall be eligible to receive payment pursuant to a Performance-Based Award for a
Performance Period only if the Performance Goals for such period are achieved.
9.5 Additional Limitations. Notwithstanding any other provision of the Plan, any
Award which is granted to a Covered Employee and is intended to constitute Qualified
Performance-Based Compensation shall be subject to any additional limitations set forth in Section
162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or
rulings issued thereunder that are requirements for qualification as qualified performance-based
compensation as described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended
to the extent necessary to conform to such requirements.
14
ARTICLE 10
PROVISIONS APPLICABLE TO AWARDS
10.1 Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the
discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other
Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards
may be granted either at the same time as or at a different time from the grant of such other
Awards.
10.2 Award Agreement. Awards under the Plan shall be evidenced by Award Agreements
that set forth the terms, conditions and limitations for each Award which may include the term of
an Award, the provisions applicable in the event the Participants employment or service
terminates, and the Companys authority to unilaterally or bilaterally amend, modify, suspend,
cancel or rescind an Award.
10.3 Limits on Transfer. No right or interest of a Participant in any Award may be
pledged, encumbered, or hypothecated to or in favor of any party other than the Company, a Parent,
or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to
any other party other than the Company, a Parent, or a Subsidiary. Except as otherwise provided by
the Committee, no Award shall be assigned, transferred, or otherwise disposed of by a Participant
other than by will or the laws of descent and distribution. The Committee by express provision in
the Award or an amendment thereto may permit an Award (other than an Incentive Stock Option) to be
transferred to, exercised by and paid to certain persons or entities related to the Participant,
including but not limited to members of the Participants family, charitable institutions, or
trusts or other entities whose beneficiaries or beneficial owners are members of the Participants
family and/or charitable institutions, or to such other persons or entities as may be expressly
approved by the Committee, pursuant to such conditions and procedures as the Committee may
establish. Any permitted transfer shall be subject to the condition that the Committee receive
evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes
(or to a blind trust in connection with the Participants termination of employment or service
with the Company, a Parent, or a Subsidiary to assume a position with a governmental, charitable,
educational or similar non-profit institution) and on a basis consistent with the Companys lawful
issue of securities.
10.4 Beneficiaries. Notwithstanding Section 10.3, a Participant may, in the manner
determined by the Committee, designate a beneficiary to exercise the rights of the Participant and
to receive any distribution with respect to any Award upon the Participants death. A beneficiary,
legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is
subject to all terms and conditions of the Plan and any Award Agreement applicable to the
Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any
additional restrictions deemed necessary or appropriate by the Committee. If the Participant is
married and resides in a community property state, a designation of a person other than the
Participants spouse as his or her beneficiary with respect to more than 50% of the Participants
interest in the Award shall not be effective without the prior written consent of the Participants
spouse. If no beneficiary has been designated or survives the Participant, payment shall be made
to the person entitled thereto pursuant to the Participants will or the laws of descent and
distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.
15
10.5
Stock Certificates; Book Entry Procedures.
(a) Notwithstanding anything herein to the contrary, the Company shall not be required to
issue or deliver any certificates evidencing shares of Stock pursuant to the exercise of any Award,
unless and until the Board has determined, with advice of counsel, that the issuance and delivery
of such certificates is in compliance with all applicable laws, regulations of governmental
authorities and, if applicable, the requirements of any exchange on which the shares of Stock are
listed or traded. All Stock certificates delivered pursuant to the Plan are subject to any
stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply
with federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and
the rules of any national securities exchange or automated quotation system on which the Stock is
listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference
restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the
Board may require that a Participant make such reasonable covenants, agreements, and
representations as the Board, in its discretion, deems advisable in order to comply with any such
laws, regulations, or requirements. The Committee shall have the right to require any Participant
to comply with any timing or other restrictions with respect to the settlement or exercise of any
Award, including a window-period limitation, as may be imposed in the discretion of the Committee.
(b) Notwithstanding any other provision of the Plan, unless otherwise determined by the
Committee or required by any applicable law, rule or regulation, the Company shall not deliver to
any Participant certificates evidencing shares of Stock issued in connection with any Award and
instead such shares of Stock shall be recorded in the books of the Company (or, as applicable, its
transfer agent or stock plan administrator).
ARTICLE 11
CHANGES IN CAPITAL STRUCTURE
11.1 Adjustments.
(a) In the event of any stock dividend, stock split, combination or exchange of shares,
merger, consolidation, spin-off, recapitalization, distribution of Company assets to stockholders
(other than normal cash dividends), or any other corporate event affecting the Stock or the share
price of the Stock, other than an Equity Restructuring, the Committee may make such proportionate
adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such
changes with respect to (i) the aggregate number and type of shares that may be issued
under the Plan (including, but not limited to, adjustments of the limitations in Sections 3.1 and
3.3); (ii) the terms and conditions of any outstanding Awards (including, without limitation, any
applicable performance targets or criteria with respect thereto); and (iii) the grant or exercise
price per share for any outstanding Awards under the Plan. Any adjustment affecting an Award
intended as Qualified Performance-Based Compensation shall be made consistent with the requirements
of Section 162(m) of the Code.
16
(b) In the event of any transaction or event described in Section 11.1(a) or any unusual or
nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the
financial statements of the Company or any affiliate (including without limitation any Change in
Control), other than an Equity Restructuring, or of changes in applicable laws, regulations or
accounting principles, the Committee, in its sole discretion and on such terms and conditions as it
deems appropriate, either by amendment of the terms of any outstanding Awards or by action taken
prior to the occurrence of such transaction or event, is hereby authorized to take any one or more
of the following actions wherever the Committee determines that action is appropriate in order to
prevent the dilution or enlargement of the benefits or potential benefits intended to be made
available under the Plan or with respect to any Award under the Plan, to facilitate such
transactions or events or to give effect to such changes in laws, regulations or principles:
(i) To provide for either (A) termination of any such Award in exchange for an amount of cash
and/or other property, if any, equal to the amount that would have been attained upon the exercise
of such Award or realization of the Participants rights (and, for the avoidance of doubt, if as of
the date of the occurrence of the transaction or event described in this Section 11.1(b) the
Committee determines in good faith that no amount would have been attained upon the exercise of
such Award or realization of the Participants rights, then such Award may be terminated by the
Company without payment) or (B) the replacement of such Award with other rights or property
selected by the Committee in its sole discretion;
(ii) To provide that such Award be assumed by the successor or survivor corporation, or a
parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards
covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kind of shares and prices; and
(iii) To make adjustments in the number and type of shares of Stock (or other securities or
property) subject to outstanding Awards, and in the number and kind of outstanding Restricted Stock
or Deferred Stock and/or in the terms and conditions of (including the grant or exercise price),
and the criteria included in, outstanding options, rights and awards and options, rights and awards
which may be granted in the future;
(iv) To provide that such Award shall be exercisable or payable or fully vested with respect
to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the
applicable Award Agreement; and
(v) To provide that the Award cannot vest, be exercised or become payable after such event.
(c) In connection with the occurrence of any Equity Restructuring, and notwithstanding
anything to the contrary in Sections 11.1(a) and 11.1(b):
(i) The number and type of securities subject to each outstanding Award and the exercise price
or grant price thereof, if applicable, will be proportionately adjusted by the Committee as the
Committee deems appropriate to reflect such
17
Equity Restructuring. The adjustments provided under this Section 11(c)(i) shall be
nondiscretionary and shall be final and binding on the affected Participant and the Company.
(ii) The Committee shall make such proportionate adjustments, if any, as the Committee in its
discretion may deem appropriate to reflect such Equity Restructuring with respect to the aggregate
number and kind of shares that may be issued under the Plan (including, but not limited to,
adjustments of the limitations in Article 3).
11.2 Acceleration Upon a Change in Control. Notwithstanding Section 11.1, and except
as may otherwise be provided in any applicable Award Agreement or other written agreement entered
into between the Company, a Parent, a Subsidiary, or other Company affiliate and a Participant, if
a Change in Control occurs and a Participants Awards are not converted, assumed, or replaced by a
successor entity, then immediately prior to the Change in Control such Awards shall become fully
exercisable and all forfeiture restrictions on such Awards shall lapse. Upon, or in anticipation
of, a Change in Control, the Committee may cause any and all Awards outstanding hereunder to
terminate at a specific time in the future, including but not limited to the date of such Change in
Control, and shall give each Participant the right to exercise such Awards during a period of time
as the Committee, in its sole and absolute discretion, shall determine. In the event that the
terms of any agreement between the Company, a Parent, a Subsidiary, or other Company affiliate and
a Participant contains provisions that conflict with and are more restrictive than the provisions
of this Section 11.2, this Section 11.2 shall prevail and control and the more restrictive terms of
such agreement (and only such terms) shall be of no force or effect.
11.3 Outstanding Awards Other Changes. In the event of any other change in the
capitalization of the Company or corporate change other than those specifically referred to in this
Article 11, the Committee may, in its absolute discretion, make such adjustments in the number and
kind of shares or other securities subject to Awards outstanding on the date on which such change
occurs and in the per share grant or exercise price of each Award as the Committee may consider
appropriate to prevent dilution or enlargement of rights.
11.4 No Other Rights. Except as expressly provided in the Plan, no Participant shall
have any rights by reason of any subdivision or consolidation of shares of stock of any class, the
payment of any dividend, any increase or decrease in the number of shares of stock of any class or
any dissolution, liquidation, merger, or consolidation of the Company or any other corporation.
Except as expressly provided in the Plan or pursuant to action of the Committee under the Plan, no
issuance by the Company of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect
to, the number of shares of Stock subject to an Award or the grant or exercise price of any Award.
ARTICLE 12
ADMINISTRATION
12.1 Committee. Unless and until the Board delegates administration of the Plan to a
Committee as set forth below, the Plan shall be administered by the full Board, and for such
purposes the term Committee as used in this Plan shall be deemed to refer to the Board. The
18
Board, at its discretion or as otherwise necessary to comply with the requirements of Section
162(m) of the Code, Rule 16b-3 promulgated under the Exchange Act or to the extent required by any
other applicable rule or regulation, shall delegate administration of the Plan to a Committee. The
Committee shall consist solely of two or more members of the Board each of whom is a Non-Employee
Director, and with respect to awards that are intended to be Performance-Based Awards, an outside
director within the meaning of Section 162(m) of the Code. Notwithstanding the foregoing: (a) the
full Board, acting by a majority of its members in office, shall conduct the general administration
of the Plan with respect to all Awards granted to Independent Directors and for purposes of such
Awards the term Committee as used in this Plan shall be deemed to refer to the Board and (b) the
Committee may delegate its authority hereunder to the extent permitted by Section 12.5.
Appointment of Committee members shall be effective upon acceptance of appointment. The Board may
abolish the Committee at any time and revest in the Board the administration of the Plan.
Committee members may resign at any time by delivering written notice to the Board. Vacancies in
the Committee may only be filled by the Board.
12.2 Action by the Committee. A majority of the Committee shall constitute a quorum.
The acts of a majority of the members present at any meeting at which a quorum is present, and acts
approved in writing by a majority of the Committee in lieu of a meeting, shall be deemed the acts
of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any
report or other information furnished to that member by any officer or other employee of the
Company or of any Parent or Subsidiary, the Companys independent certified public accountants, or
any executive compensation consultant or other professional retained by the Company or any Parent
or Subsidiary to assist in the administration of the Plan.
12.3 Authority of Committee. Subject to any specific designation in the Plan, the
Committee has the exclusive power, authority and discretion to:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards to be granted to each Participant;
(c) Determine the number of Awards to be granted and the number of shares of Stock to which an
Award will relate;
(d) Determine the terms and conditions of any Award granted pursuant to the Plan, including,
but not limited to, the exercise price, grant price, or purchase price, any reload provision, any
restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or
restrictions on the exercisability of an Award, and accelerations or waivers thereof, any
provisions related to non-competition and recapture of gain on an Award, based in each case on such
considerations as the Committee in its sole discretion determines; provided, however, that the
Committee shall not have the authority to accelerate the vesting or waive the forfeiture of any
Performance-Based Awards;
(e) Determine whether, to what extent, and pursuant to what circumstances an Award may be
settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other
property, or an Award may be canceled, forfeited, or surrendered;
19
(f) Prescribe the form of each Award Agreement, which need not be identical for each
Participant;
(g) Decide all other matters that must be determined in connection with an Award;
(h) Establish, adopt, or revise any rules and regulations as it may deem necessary or
advisable to administer the Plan;
(i) Interpret the terms of, and any matter arising pursuant to, the Plan or any Award
Agreement; and
(j) Make all other decisions and determinations that may be required pursuant to the Plan or
as the Committee deems necessary or advisable to administer the Plan.
12.4 Decisions Binding. The Committees interpretation of the Plan, any Awards
granted pursuant to the Plan, any Award Agreement and all decisions and determinations by the
Committee with respect to the Plan are final, binding, and conclusive on all parties.
12.5 Delegation of Authority. To the extent permitted by applicable law, the
Committee may from time to time delegate to a committee of one or more members of the Board or one
or more officers of the Company the authority to grant or amend Awards to Participants other than
(a) senior executives of the Company who are subject to Section 16 of the Exchange Act, (b) Covered
Employees, or (c) officers of the Company (or members of the Board) to whom authority to grant or
amend Awards has been delegated hereunder. Any delegation hereunder shall be subject to the
restrictions and limits that the Committee specifies at the time of such delegation, and the
Committee may at any time rescind the authority so delegated or appoint a new delegatee. At all
times, the delegatee appointed under this Section 12.5 shall serve in such capacity at the pleasure
of the Committee.
12.6 Amendment or Exchange of Awards. The Committee may (i) amend any Award to reduce
the per share exercise price of such an Award below the per share exercise price as of the date the
Award is granted and (ii) grant an Award in exchange for, or in connection with, the cancellation
or surrender of an Award having a higher per share exercise price.
ARTICLE 13
EFFECTIVE AND EXPIRATION DATE
13.1 Effective Date. The Plan is effective as of the day prior to the Public Trading
Date (the Effective Date).
13.2 Expiration Date. The Plan will expire on, and no Incentive Stock Option or other
Award may be granted pursuant to the Plan after, the tenth anniversary of the date this Plan is
approved by the Board. Any Awards that are outstanding on the tenth anniversary of the Effective
Date shall remain in force according to the terms of the Plan and the applicable Award Agreement.
20
ARTICLE 14
AMENDMENT, MODIFICATION, AND TERMINATION
14.1 Amendment, Modification, And Termination. With the approval of the Board, at any
time and from time to time, the Committee may terminate, amend or modify the Plan; provided,
however, that (a) to the extent necessary and desirable to comply with any applicable law,
regulation, or stock exchange rule, the Company shall obtain stockholder approval of any Plan
amendment in such a manner and to such a degree as required, and (b) stockholder approval is
required for any amendment to the Plan that increases the number of shares of Stock available under
the Plan.
14.2 Awards Previously Granted. No termination, amendment, or modification of the
Plan shall adversely affect in any material way any Award previously granted pursuant to the Plan
without the prior written consent of the Participant.
ARTICLE 15
GENERAL PROVISIONS
15.1 No Rights to Awards. No Eligible Individual or other person shall have any claim
to be granted any Award pursuant to the Plan, and neither the Company nor the Committee is
obligated to treat Eligible Individuals, Participants or any other persons uniformly.
15.2 No Stockholders Rights. Except as otherwise provided herein, a Participant shall
have none of the rights of a stockholder with respect to shares of Stock covered by any Award until
the Participant becomes the record owner of such shares of Stock.
15.3 Withholding. The Company or any Parent or Subsidiary shall have the authority
and the right to deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, state, local and foreign taxes (including the Participants FICA
obligation) required by law to be withheld with respect to any taxable event concerning a
Participant arising as a result of this Plan. The Committee may in its discretion and in
satisfaction of the foregoing requirement allow a Participant to elect to have the Company withhold
shares of Stock otherwise issuable under an Award (or allow the return of shares of Stock) having a
Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision
of the Plan, the number of shares of Stock which may be withheld with respect to the issuance,
vesting, exercise or payment of any Award (or which may be repurchased from the Participant of such
Award within six months (or such other period as may be determined by the Committee) after such
shares of Stock were acquired by the Participant from the Company) in order to satisfy the
Participants federal, state, local and foreign income and payroll tax liabilities with respect to
the issuance, vesting, exercise or payment of the Award shall be limited to the number of shares of
Stock which have a Fair Market Value on the date of withholding or repurchase equal to the
aggregate amount of such liabilities based on the minimum statutory withholding rates for federal,
state, local and foreign income tax and payroll tax purposes that are applicable to such
supplemental taxable income.
15.4 No Right to Employment or Services. Nothing in the Plan or any Award
21
Agreement shall interfere with or limit in any way the right of the Company or any Parent or
Subsidiary to terminate any Participants employment or services at any time, nor confer upon any
Participant any right to continue in the employ or service of the Company or any Parent or
Subsidiary.
15.5 Unfunded Status of Awards. The Plan is intended to be an unfunded plan for
incentive compensation. With respect to any payments not yet made to a Participant pursuant to an
Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights
that are greater than those of a general creditor of the Company or any Parent or Subsidiary.
15.6 Indemnification. To the extent allowable pursuant to applicable law, each member
of the Committee or of the Board shall be indemnified and held harmless by the Company from any
loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in
connection with or resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action or failure to act pursuant to
the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in
such action, suit, or proceeding against him or her; provided he or she gives the Company an
opportunity, at its own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be entitled pursuant to
the Companys Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
15.7 Relationship to other Benefits. No payment pursuant to the Plan shall be taken
into account in determining any benefits pursuant to any pension, retirement, savings, profit
sharing, group insurance, welfare or other benefit plan of the Company or any Parent or Subsidiary
except to the extent otherwise expressly provided in writing in such other plan or an agreement
thereunder.
15.8 Expenses. The expenses of administering the Plan shall be borne by the Company
and its Subsidiaries.
15.9 Titles and Headings. The titles and headings of the Sections in the Plan are for
convenience of reference only and, in the event of any conflict, the text of the Plan, rather than
such titles or headings, shall control.
15.10 Fractional Shares. No fractional shares of Stock shall be issued and the
Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional
shares of Stock or whether such fractional shares of Stock shall be eliminated by rounding up or
down as appropriate.
15.11 Limitations Applicable to Section 16 Persons. Notwithstanding any other
provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then
subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth
in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of such
22
exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule.
15.12 Government and Other Regulations. The obligation of the Company to make payment
of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations,
and to such approvals by government agencies as may be required. The Company shall be under no
obligation to register pursuant to the Securities Act of 1933, as amended, any of the shares of
Stock paid pursuant to the Plan. If the shares of Stock paid pursuant to the Plan may in certain
circumstances be exempt from registration pursuant to the Securities Act of 1933, as amended, the
Company may restrict the transfer of such shares of Stock in such manner as it deems advisable to
ensure the availability of any such exemption.
15.13 Section 409A. To the extent that the Committee determines that any Award
granted under the Plan is subject to Section 409A of the Code, the Award Agreement evidencing such
Award shall incorporate the terms and conditions required by Section 409A of the Code. To the
extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section
409A of the Code and Department of Treasury regulations and other interpretive guidance issued
thereunder, including without limitation any such regulations or other guidance that may be issued
after the adoption of the Plan. Notwithstanding any provision of the Plan to the contrary, in the
event that following the adoption of the Plan the Committee determines that any Award may be
subject to Section 409A of the Code and related Department of Treasury guidance (including such
Department of Treasury guidance as may be issued after the adoption of the Plan), the Committee may
adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and
procedures (including amendments, policies and procedures with retroactive effect), or take any
other actions, that the Committee determines are necessary or appropriate to (a) exempt the Award
from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided
with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and
related Department of Treasury guidance.
15.14 Governing Law. The Plan and all Award Agreements shall be construed in
accordance with and governed by the laws of the State of Delaware.
23
CADENCE PHARMACEUTICALS, INC.
2006 EQUITY INCENTIVE AWARD PLAN
STOCK OPTION GRANT NOTICE AND
STOCK OPTION AGREEMENT
STOCK OPTION GRANT NOTICE
Cadence Pharmaceuticals, Inc., a Delaware corporation (the Company), pursuant to its 2006
Equity Incentive Award Plan (the Plan), hereby grants to the holder listed below (Participant),
an option to purchase the number of shares of the Companys common stock, par value $0.0001
(Stock), set forth below (the Option). This Option is subject to all of the terms and
conditions set forth herein and in the Stock Option Agreement attached hereto as Exhibit A
(the Stock Option Agreement) and the Plan, which are incorporated herein by reference. Unless
otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in
this Grant Notice and the Stock Option Agreement.
|
|
|
|
|
|
|
|
|
Participant: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price per Share:
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Exercise Price:
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
Subject to the Option:
|
|
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration Date: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Option:
|
|
o Incentive Stock Option
|
o |
Non-Qualified Stock Option |
|
|
|
|
|
Vesting Schedule:
|
|
[To be specified in individual agreements]
|
|
By his or her signature, the Participant agrees to be bound by the terms and conditions of the
Plan, the Stock Option Agreement and this Grant Notice. The Participant has reviewed the Stock
Option Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Grant Notice and fully understands all
provisions of this Grant Notice, the Stock Option Agreement and the Plan. Participant hereby
agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee
upon any questions arising under the Plan or relating to the Option.
|
|
|
|
|
|
|
|
|
|
|
|
|
CADENCE PHARMACEUTICALS, INC. |
|
|
|
PARTICIPANT |
|
|
|
|
|
By:
|
|
|
|
|
|
By: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print Name:
|
|
|
|
|
|
Print Name: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Address:
|
|
|
|
|
|
Address: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT A
TO STOCK OPTION GRANT NOTICE
STOCK OPTION AGREEMENT
Pursuant to the Stock Option Grant Notice (the Grant Notice) to which this Stock Option
Agreement (this Agreement) is attached, Cadence Pharmaceuticals, Inc., a Delaware corporation
(the Company), has granted to the Participant an Option under the Companys 2006 Equity Incentive
Award Plan (the Plan) to purchase the number of shares of Stock indicated in the Grant Notice.
ARTICLE I.
GENERAL
1.1 Defined Terms. Wherever the following terms are used in this Agreement they
shall have the meanings specified below, unless the context clearly indicates otherwise.
Capitalized terms not specifically defined herein shall have the meanings specified in the Plan and
the Grant Notice.
(a) Administrator shall mean the Committee responsible for conducting the general
administration of the Plan in accordance with Article 12 of the Plan; provided that if the
Participant is an Independent Director, Administrator shall mean the Board.
(b) Termination of Consultancy shall mean the time when the engagement of the Participant as
a Consultant to the Company or to a Parent or Subsidiary is terminated for any reason, with or
without cause, including, but not by way of limitation, by resignation, discharge, death or
retirement, but excluding: (a) terminations where there is a simultaneous employment or continuing
employment of the Participant by the Company or any Parent or Subsidiary, and (b) terminations
where there is a simultaneous reestablishment of a consulting relationship or continuing consulting
relationship between the Participant and the Company or any Parent or Subsidiary. The
Administrator, in its absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Consultancy, including, but not by way of limitation, the question of
whether a particular leave of absence constitutes a Termination of Consultancy. Notwithstanding
any other provision of the Plan, the Company or any Parent or Subsidiary has an absolute and
unrestricted right to terminate a Consultants service at any time for any reason whatsoever, with
or without cause, except to the extent expressly provided otherwise in writing.
(c) Termination of Directorship shall mean the time when the Participant, if he or she is or
becomes an Independent Director, ceases to be a Director for any reason, including, but not by way
of limitation, a termination by resignation, failure to be elected, death or retirement. The
Board, in its sole and absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
(d) Termination of Employment shall mean the time when the employee-employer relationship
between the Participant and the Company or any Parent or Subsidiary is terminated for any reason,
with or without cause, including, but not by way of limitation, a termination by resignation,
discharge, death, Disability or retirement; but excluding: (a) terminations where there is a
simultaneous reemployment or continuing employment of the Participant by the Company or any Parent
or Subsidiary, and (b) terminations where there is a simultaneous establishment of a consulting
relationship or continuing consulting relationship between the Participant and the Company or any
Parent or Subsidiary. The Administrator, in its absolute discretion, shall determine the effect of
all matters and questions relating to Termination of Employment, including, but not by way of
limitation, the question of
B-1
whether a particular leave of absence constitutes a Termination of Employment; provided,
however, that, if this Option is an Incentive Stock Option, unless otherwise determined by the
Administrator in its discretion, a leave of absence, change in status from an employee to an
independent contractor or other change in the employee-employer relationship shall constitute a
Termination of Employment if, and to the extent that, such leave of absence, change in status or
other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then
applicable regulations and revenue rulings under said Section.
(e) Termination of Services shall mean the Participants Termination of Consultancy,
Termination of Directorship or Termination of Employment, as applicable.
1.2 Incorporation of Terms of Plan. The Option is subject to the terms and conditions
of the Plan which are incorporated herein by reference. In the event of any inconsistency between
the Plan and this Agreement, the terms of the Plan shall control.
ARTICLE II.
GRANT OF OPTION
2.1 Grant of Option. In consideration of the Participants past and/or continued
employment with or service to the Company or a Parent or Subsidiary and for other good and valuable
consideration, effective as of the Grant Date set forth in the Grant Notice (the Grant Date), the
Company irrevocably grants to the Participant the Option to purchase any part or all of an
aggregate of the number of shares of Stock set forth in the Grant Notice, upon the terms and
conditions set forth in the Plan, the Grant Notice and this Agreement. Unless designated as a
Non-Qualified Stock Option in the Grant Notice, the Option shall be an Incentive Stock Option to
the maximum extent permitted by law.
2.2 Exercise Price. The exercise price of the shares of Stock subject to the Option
shall be as set forth in the Grant Notice, without commission or other charge; provided, however,
that the price per share of the shares of Stock subject to the Option shall not be less than 100%
of the Fair Market Value of a share of Stock on the Grant Date. Notwithstanding the foregoing, if
this Option is designated as an Incentive Stock Option and the Participant owns (within the meaning
of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary corporation of the Company or any parent corporation of
the Company (each within the meaning of Section 424 of the Code), the price per share of the shares
of Stock subject to the Option shall not be less than 110% of the Fair Market Value of a share of
Stock on the Grant Date.
2.3 Consideration to the Company. In consideration of the grant of the Option by the
Company, the Participant agrees to render faithful and efficient services to the Company or any
Parent or Subsidiary. Nothing in the Plan, the Grant Notice, or this Agreement shall confer upon
the Participant any right to continue in the employ or service of the Company or any Parent or
Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Parent
or Subsidiary, which rights are hereby expressly reserved, to discharge or terminate the services
of the Participant at any time for any reason whatsoever, with or without cause, except to the
extent expressly provided otherwise in a written agreement between the Company or a Parent or
Subsidiary and the Participant.
B-2
ARTICLE III.
PERIOD OF EXERCISABILITY
3.1 Commencement of Exercisability.
(a) Subject to Sections 3.2, 3.3, 5.8 and 5.10, the Option shall become vested and exercisable
in such amounts and at such times as are set forth in the Grant Notice.
(b) No portion of the Option which has not become vested and exercisable at the date of the
Participants Termination of Employment, Termination of Directorship or Termination of Consultancy
shall thereafter become vested and exercisable, except as may be otherwise provided by the
Administrator or as set forth in a written agreement between the Company and the Participant.
3.2 Duration of Exercisability. The installments provided for in the vesting schedule
set forth in the Grant Notice are cumulative. Each such installment which becomes vested and
exercisable pursuant to the vesting schedule set forth in the Grant Notice shall remain vested and
exercisable until it becomes unexercisable under Section 3.3.
3.3 Expiration of Option. The Option may not be exercised to any extent by anyone
after the first to occur of the following events:
(a) The expiration of [ten years] from the Grant Date;
(b) If this Option is designated as an Incentive Stock Option and the Participant owned
(within the meaning of Section 424(d) of the Code), at the time the Option was granted, more than
10% of the total combined voting power of all classes of stock of the Company or any subsidiary
corporation of the Company or any parent corporation of the Company (each within the meaning of
Section 424 of the Code), the expiration of five years from the Grant Date;
(c) The expiration of [three months] from the date of the Participants Termination of
Services, unless such termination occurs by reason of the Participants death or Disability; or
(d) The expiration of [one year] from the date of the Participants Termination of Services by
reason of the Participants death or Disability.
[The Participant acknowledges that an Incentive Stock Option exercised more that three months
after the Participants Termination of Employment, other than by reason of death or Disability,
will be taxed as a Non-Qualified Stock Option.]
3.4 Special Tax Consequences. The Participant acknowledges that, to the extent that
the aggregate Fair Market Value (determined as of the time the Option is granted) of all shares of
Stock with respect to which Incentive Stock Options, including the Option, are exercisable for the
first time by the Participant in any calendar year exceeds $100,000, the Option and such other
options shall be Non-Qualified Stock Options to the extent necessary to comply with the limitations
imposed by Section 422(d) of the Code. The Participant further acknowledges that the rule set
forth in the preceding sentence shall be applied by taking the Option and other incentive stock
options into account in the order in which they were granted, as determined under Section 422(d)
of the Code and the Treasury Regulations thereunder.
B-3
ARTICLE IV.
EXERCISE OF OPTION
4.1 Person Eligible to Exercise. Except as provided in Section 5.2(b), during
the lifetime of the Participant, only the Participant may exercise the Option or any portion
thereof. After the death of the Participant, any exercisable portion of the Option may, prior to
the time when the Option becomes unexercisable under Section 3.3, be exercised by the Participants
personal representative or by any person empowered to do so under the deceased the Participants
will or under the then applicable laws of descent and distribution.
4.2 Partial Exercise. Any exercisable portion of the Option or the entire Option, if
then wholly exercisable, may be exercised in whole or in part at any time prior to the time when
the Option or portion thereof becomes unexercisable under Section 3.3.
4.3 Manner of Exercise. The Option, or any exercisable portion thereof, may be
exercised solely by delivery to the Secretary of the Company (or any third party administrator or
other person or entity designated by the Company) of all of the following prior to the time when
the Option or such portion thereof becomes unexercisable under Section 3.3:
(a) An exercise notice in a form specified by the Administrator, stating that the Option or
portion thereof is thereby exercised, such notice complying with all applicable rules established
by the Administrator;
(b) The receipt by the Company of full payment for the shares of Stock with respect to which
the Option or portion thereof is exercised, including payment of any applicable withholding tax,
which may be in one or more of the forms of consideration permitted under Section 4.4;
(c) Any other written representations as may be required in the Administrators reasonable
discretion to evidence compliance with the Securities Act or any other applicable law, rule, or
regulation; and
(d) In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 by
any person or persons other than the Participant, appropriate proof of the right of such person or
persons to exercise the Option.
Notwithstanding any of the foregoing, the Company shall have the right to specify all conditions of
the manner of exercise, which conditions may vary by country and which may be subject to change
from time to time.
4.4 Method of Payment. Payment of the exercise price shall be by any of the
following, or a combination thereof, at the election of the Participant:
(a) Cash;
(b) Check;
(c) With the consent of the Administrator, delivery of a notice that the Participant has
placed a market sell order with a broker with respect to shares of Stock then issuable upon
exercise of the Option, and that the broker has been directed to pay a sufficient portion of the
net proceeds of the sale
B-4
to the Company in satisfaction of the aggregate exercise price; provided, that payment of such
proceeds is then made to the Company upon settlement of such sale;
(d) With the consent of the Administrator, surrender of other shares of Stock which (A) in the
case of shares of Stock acquired from the Company, have been owned by the Participant for more than
six (6) months on the date of surrender, and (B) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the shares of Stock with respect to which the Option or
portion thereof is being exercised;
(e) With the consent of the Administrator, surrendered shares of Stock issuable upon the
exercise of the Option having a Fair Market Value on the date of exercise equal to the aggregate
exercise price of the shares of Stock with respect to which the Option or portion thereof is being
exercised; or
(f) With the consent of the Administrator, property of any kind which constitutes good and
valuable consideration.
4.5 Conditions to Issuance of Stock Certificates. The shares of Stock deliverable
upon the exercise of the Option, or any portion thereof, may be either previously authorized but
unissued shares of Stock or issued shares of Stock which have then been reacquired by the Company.
Such shares of Stock shall be fully paid and nonassessable. The Company shall not be required to
issue or deliver any shares of Stock purchased upon the exercise of the Option or portion thereof
prior to fulfillment of all of the following conditions:
(a) The admission of such shares of Stock to listing on all stock exchanges on which such
Stock is then listed;
(b) The completion of any registration or other qualification of such shares of Stock under
any state or federal law or under rulings or regulations of the Securities and Exchange Commission
or of any other governmental regulatory body, which the Administrator shall, in its absolute
discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or federal governmental
agency which the Administrator shall, in its absolute discretion, determine to be necessary or
advisable;
(d) The receipt by the Company of full payment for such shares of Stock, including payment of
any applicable withholding tax, which may be in one or more of the forms of consideration permitted
under Section 4.4; and
(e) The lapse of such reasonable period of time following the exercise of the Option as the
Administrator may from time to time establish for reasons of administrative convenience.
4.6 Rights as Stockholder. The holder of the Option shall not be, nor have any of the
rights or privileges of, a stockholder of the Company in respect of any shares of Stock purchasable
upon the exercise of any part of the Option unless and until such shares of Stock shall have been
issued by the Company to such holder (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company). No adjustment will be made for a
dividend or other right for which the record date is prior to the date the shares of Stock are
issued, except as provided in Section 11.1 of the Plan.
B-5
ARTICLE V.
OTHER PROVISIONS
5.1 Administration. The Administrator shall have the power to interpret the
Plan, the Grant Notice and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith and to interpret, amend or
revoke any such rules. All actions taken and all interpretations and determinations made by the
Administrator in good faith shall be final and binding upon Participant, the Company and all other
interested persons. No member of the Committee or the Board shall be personally liable for any
action, determination or interpretation made in good faith with respect to the Plan, the Grant
Notice, this Agreement or the Option.
5.2 Option Not Transferable.
(a) Unless determined otherwise by the Administrator, the Option may not be sold, pledged,
assigned or transferred in any manner other than by will or the laws of descent and distribution,
unless and until the shares of Stock underlying the Option have been issued, and all restrictions
applicable to such shares of Stock have lapsed. Neither the Option nor any interest or right
therein shall be liable for the debts, contracts or engagements of Participant or his or her
successors in interest or shall be subject to disposition by transfer, alienation, anticipation,
pledge, encumbrance, assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or
equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null
and void and of no effect, except to the extent that such disposition is permitted by the preceding
sentence.
(b) Unless determined otherwise by the Administrator, during the lifetime of Participant, only
Participant may exercise the Option or any portion thereof. After the death of Participant, any
exercisable portion of the Option may, prior to the time when the Option becomes unexercisable
under Section 3.3, be exercised by Participants personal representative or by any person empowered
to do so under the deceased Participants will or under the then applicable laws of descent and
distribution.
5.3 Adjustments. The Participant acknowledges that the Option is subject to
modification and termination in certain events as provided in this Agreement and Article 11 of the
Plan.
5.4 Notices. Any notice to be given under the terms of this Agreement to the Company
shall be addressed to the Company in care of the Secretary of the Company at the address given
beneath the signature of the Companys authorized officer on the Grant Notice, and any notice to be
given to Participant shall be addressed to Participant at the address given beneath Participants
signature on the Grant Notice. By a notice given pursuant to this Section 5.4, either party may
hereafter designate a different address for notices to be given to that party. Any notice which is
required to be given to Participant shall, if Participant is then deceased, be given to the person
entitled to exercise his or her Option pursuant to Section 4.1 by written notice under this Section
5.4. Any notice shall be deemed duly given when sent via email or when sent by certified mail
(return receipt requested) and deposited (with postage prepaid) in a post office or branch post
office regularly maintained by the United States Postal Service.
5.5 Titles. Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.
B-6
5.6 Governing Law; Severability. The laws of the State of Delaware shall govern the
interpretation, validity, administration, enforcement and performance of the terms of this
Agreement regardless of the law that might be applied under principles of conflicts of laws.
5.7 Conformity to Securities Laws. The Participant acknowledges that the Plan, the
Grant Notice and this Agreement are intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the
Securities and Exchange Commission thereunder, and state securities laws and regulations.
Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Option is
granted and may be exercised, only in such a manner as to conform to such laws, rules and
regulations. To the extent permitted by applicable law, the Plan, the Grant Notice and this
Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and
regulations.
5.8 Amendments, Suspension and Termination. To the extent permitted by the Plan, this
Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any
time or from time to time by the Committee or the Board, provided, that, except as may otherwise be
provided by the Plan, no amendment, modification, suspension or termination of this Agreement shall
adversely effect the Option in any material way without the prior written consent of the
Participant.
5.9 Successors and Assigns. The Company may assign any of its rights under this
Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company. Subject to the restrictions on transfer herein set forth in
Section 5.2, this Agreement shall be binding upon Participant and his or her heirs, executors,
administrators, successors and assigns.
5.10 Notification of Disposition. If this Option is designated as an Incentive Stock
Option, Participant shall give prompt notice to the Company of any disposition or other transfer of
any shares of Stock acquired under this Agreement if such disposition or transfer is made (a)
within two years from the Grant Date with respect to such shares of Stock or (b) within one year
after the transfer of such shares of Stock to the Participant. Such notice shall specify the date
of such disposition or other transfer and the amount realized, in cash, other property, assumption
of indebtedness or other consideration, by Participant in such disposition or other transfer.
5.11 Limitations Applicable to Section 16 Persons. Notwithstanding any other
provision of the Plan or this Agreement, if Participant is subject to Section 16 of the Exchange
Act, the Plan, the Option and this Agreement shall be subject to any additional limitations set
forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such
exemptive rule. To the extent permitted by applicable law, this Agreement shall be deemed amended
to the extent necessary to conform to such applicable exemptive rule.
5.12 Not a Contract of Employment. Nothing in this Agreement, the Grant Notice, or
the Plan shall confer upon the Participant any right to continue to serve as an employee or other
service provider of the Company or any Parent or Subsidiary.
5.13 Entire Agreement. The Plan, the Grant Notice and this Agreement (including all
exhibits thereto) constitute the entire agreement of the parties and supersede in their entirety
all prior undertakings and agreements of the Company and Participant with respect to the subject
matter hereof.
5.14 Section 409A. Notwithstanding any other provision of the Plan, this Agreement or
the Grant Notice, the Plan, this Agreement and the Grant Notice shall be interpreted in accordance
with, and
B-7
incorporate the terms and conditions required by, Section 409A of the U.S. Internal Revenue
Code of 1986, as amended (together with any Department of Treasury regulations and other
interpretive guidance issued thereunder, including without limitation any such regulations or other
guidance that may be issued after the date hereof, Section 409A). The Committee may, in its
discretion, adopt such amendments to the Plan, this Agreement or the Grant Notice or adopt other
policies and procedures (including amendments, policies and procedures with retroactive effect), or
take any other actions, as the Committee determines are necessary or appropriate to comply with the
requirements of Section 409A.
B-8
CADENCE PHARMACEUTICALS, INC.
2006 EQUITY INCENTIVE AWARD PLAN
RESTRICTED STOCK AWARD GRANT NOTICE AND
RESTRICTED STOCK AWARD AGREEMENT
Cadence Pharmaceuticals, Inc., a Delaware corporation, (the Company), pursuant to its 2006
Equity Incentive Award Plan (the Plan), hereby grants to the individual listed below
(Participant), the number of shares of the Companys Common Stock set forth below (the Shares).
This Restricted Stock Award is subject to all of the terms and conditions as set forth herein and
in the Restricted Stock Award Agreement attached hereto as Exhibit A (the Restricted Stock
Agreement) (including without limitation the Restrictions on the Shares set forth in the
Restricted Stock Agreement) and the Plan, each of which are incorporated herein by reference.
Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings
in this Grant Notice and the Restricted Stock Agreement.
|
|
|
Participant:
|
|
|
|
|
|
|
|
|
Grant Date:
|
|
|
|
|
|
|
|
|
Total Number of
Shares of
Restricted Stock:
|
|
shares |
|
|
|
|
|
|
Purchase Price:
|
|
$ |
|
|
|
|
|
|
Vesting Schedule:
|
|
|
|
|
|
By his or her signature and the Companys signature below, Participant agrees to be bound by
the terms and conditions of the Plan, the Restricted Stock Agreement and this Grant Notice.
Participant has reviewed the Restricted Stock Agreement, the Plan and this Grant Notice in their
entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant
Notice and fully understands all provisions of this Grant Notice, the Restricted Stock Agreement
and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator of the Plan upon any questions arising under the Plan, this
Grant Notice or the Restricted Stock Agreement.
|
|
|
|
|
|
|
CADENCE PHARMACEUTICALS, INC.: |
|
PARTICIPANT: |
|
|
|
|
|
|
|
By:
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
Print Name:
|
|
|
|
Print Name:
|
|
|
|
|
|
|
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Address:
|
|
|
|
Address:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT A
TO RESTRICTED STOCK AWARD GRANT NOTICE
CADENCE PHARMACEUTICALS, INC. RESTRICTED STOCK AWARD AGREEMENT
Pursuant to the Restricted Stock Award Grant Notice (the Grant Notice) to which this
Restricted Stock Award Agreement (the Agreement) is attached, Cadence Pharmaceuticals, Inc., a
Delaware corporation (the Company) has granted to Participant the right to purchase the number of
shares of Restricted Stock under the 2006 Equity Incentive Award Plan, as amended from time to time
(the Plan), as set forth in the Grant Notice.
ARTICLE I.
GENERAL
1.1 Definitions. All capitalized terms used in this Agreement without definition
shall have the meanings ascribed in the Plan and the Grant Notice.
1.2 Incorporation of Terms of Plan. The Award is subject to the terms and conditions
of the Plan which are incorporated herein by reference. In the event of any inconsistency between
the Plan and this Agreement, the terms of the Plan shall control.
ARTICLE II.
AWARD OF RESTRICTED STOCK
2.1 Award of Restricted Stock.
(a) Award. In consideration of the Participants agreement to remain in the service
or employ of the Company or one of its Subsidiaries, and for other good and valuable consideration
which the Committee has determined exceeds the aggregate par value of the Stock subject to the
Award (as defined below), as of the Grant Date, the Company issues to the Participant the Award
described in this Agreement (the Award). The number of shares of Restricted Stock (the Shares)
subject to the Award is set forth in the Grant Notice. The Participant is an Employee, Director or
other Eligible Individual.
(b) Purchase Price; Book Entry Form. The purchase price of the Shares is set forth on
the Grant Notice. The Shares will be issued in uncertificated form. At the sole discretion of the
Committee, the Shares will be issued in either (i) uncertificated form, with the Shares recorded in
the name of the Participant in the books and records of the Companys transfer agent with
appropriate notations regarding the restrictions on transfer imposed pursuant to this Agreement,
and upon vesting and the satisfaction of all conditions set forth in Section 2.2(d), the Company
shall cause certificates representing the Shares to be issued to the Participant; or (ii)
certificate form pursuant to the terms of Sections 2.1(c) and (d).
(c) Legend. Certificates representing Shares issued pursuant to this Agreement shall,
until all restrictions on transfer imposed pursuant to this Agreement lapse or shall have been
removed and new certificates are issued, bear the following legend (or such other legend as shall
be determined by the Committee):
B-1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VESTING
REQUIREMENTS AND MAY BE SUBJECT TO FORFEITURE UNDER THE TERMS OF THAT CERTAIN
RESTRICTED STOCK AWARD AGREEMENT, DATED [___, 200_], BY AND BETWEEN
CADENCE PHARMACEUTICALS, INC. AND THE REGISTERED OWNER OF SUCH SHARES, AND SUCH
SHARES MAY NOT BE, DIRECTLY OR INDIRECTLY, OFFERED, TRANSFERRED, SOLD, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNDER ANY CIRCUMSTANCES, EXCEPT
PURSUANT TO THE PROVISIONS OF SUCH AGREEMENT.
(d) Escrow. The Secretary of the Company or such other escrow holder as the Committee
may appoint may retain physical custody of the certificates representing the Shares until all of
the restrictions on transfer imposed pursuant to this Agreement lapse or shall have been removed;
in such event the Participant shall not retain physical custody of any certificates representing
unvested Shares issued to him.
2.2 Restrictions.
(a) Forfeiture. Any Award which is not vested as of the date the Participant ceases
to be an employee of the Company or one of its Subsidiaries or other Eligible Individual shall
thereupon be forfeited immediately and without any further action by the Company. For purposes of
this Agreement, Restrictions shall mean the restrictions on sale or other transfer set forth in
Section 3.2 and the exposure to forfeiture set forth in this Section 2.2(a).
(b) Vesting and Lapse of Restrictions. Subject to Section 2.2(a), the Award shall
vest and Restrictions shall lapse in accordance with the vesting schedule set forth on the Grant
Notice.
(c) Tax Withholding; Conditions to Issuance of Certificates. Notwithstanding any
other provision of this Agreement (including without limitation Section 2.1(b)):
(i) No new certificate shall be delivered to the Participant or his legal representative
unless and until the Participant or his legal representative shall have paid to the Company the
full amount of all federal and state withholding or other taxes applicable to the taxable income of
Participant resulting from the grant of Shares or the lapse or removal of the Restrictions.
(ii) The Company shall not be required to issue or deliver any certificate or certificates for
any Shares prior to the fulfillment of all of the following conditions: (A) the admission of the
Shares to listing on all stock exchanges on which such Common Stock is then listed, (B) the
completion of any registration or other qualification of the Shares under any state or federal law
or under rulings or regulations of the Securities and Exchange Commission or other governmental
regulatory body, which the Committee shall, in its sole and absolute discretion, deem necessary and
advisable, (C) the obtaining of any approval or other clearance from any state or federal
governmental agency that the Committee shall, in its absolute discretion, determine to be necessary
or advisable and (D) the lapse of any such reasonable period of time following the date the
Restrictions lapse as the Committee may from time to time establish for reasons of administrative
convenience.
B-2
ARTICLE III.
OTHER PROVISIONS
3.1 Section 83(b) Election. Participant understands that Section 83(a) of the Code
taxes as ordinary income the difference between the amount, if any, paid for the shares of Common
Stock and the Fair Market Value of such shares at the time the Restrictions on such shares lapse.
Participant understands that, notwithstanding the preceding sentence, Participant may elect to be
taxed at the time of the Grant Date, rather that at the time the Restrictions lapse, by filing an
election under Section 83(b) of the Code (an 83(b) Election) with the Internal Revenue Service
within 30 days of the Grant Date. In the event Participant files an 83(b) Election, Participant
will recognize ordinary income in an amount equal to the difference between the amount, if any,
paid for the shares of Common Stock and the Fair Market Value of such shares as of the Grant Date.
Participant further understands that an additional copy of such 83(b) Election form should be filed
with his or her federal income tax return for the calendar year in which the date of this Agreement
falls. Participant acknowledges that the foregoing is only a summary of the effect of United
States federal income taxation with respect to the award of Restricted Stock hereunder, and does
not purport to be complete. PARTICIPANT FURTHER ACKNOWLEDGES THAT THE COMPANY IS NOT RESPONSIBLE
FOR FILING THE PARTICIPANTS 83(b) ELECTION, AND THE COMPANY HAS DIRECTED PARTICIPANT TO SEEK
INDEPENDENT ADVICE REGARDING THE APPLICABLE PROVISIONS OF THE INTERNAL REVENUE CODE, THE INCOME TAX
LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH PARTICIPANT MAY RESIDE, AND THE TAX
CONSEQUENCES OF PARTICIPANTS DEATH.
3.2 Restricted Stock Not Transferable. No Shares or any interest or right therein or
part thereof shall be liable for the debts, contracts or engagements of the Participant or his
successors in interest or shall be subject to disposition by transfer, alienation, anticipation,
pledge, encumbrance, assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or
equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null
and void and of no effect; provided, however, that this Section 3.2 notwithstanding, with the
consent of the Committee, the Shares may be transferred to certain persons or entities related to
Participant, including but not limited to members of Participants family, charitable institutions
or trusts or other entities whose beneficiaries or beneficial owners are members of Participants
family or to such other persons or entities as may be expressly approved by the Committee, pursuant
to any such conditions and procedures the Committee may require.
3.3 Rights as Stockholder. Except as otherwise provided herein, upon the Grant Date
the Participant shall have all the rights of a stockholder with respect to the Shares, subject to
the Restrictions herein, including the right to vote the Shares and the right to receive any cash
or stock dividends paid to or made with respect to the Shares; provided, however, that at the
discretion of the Company, and prior to the delivery of Shares, the Participant may be required to
execute a stockholders agreement in such form as shall be determined by the Company.
3.4 Not a Contract of Employment. Nothing in this Agreement or in the Plan shall
confer upon the Participant any right to continue to serve as an employee or other service provider
of the Company or any of its Subsidiaries.
3.5 Governing Law. The laws of the State of Delaware shall govern the
interpretation, validity, administration, enforcement and performance of the terms of this
Agreement regardless of the law that might be applied under principles of conflicts of laws.
B-3
3.6 Conformity to Securities Laws. The Participant acknowledges that the Plan and
this Agreement are intended to conform to the extent necessary with all provisions of the
Securities Act of 1933, as amended, and the Exchange Act, and any and all regulations and rules
promulgated thereunder by the Securities and Exchange Commission, including without limitation Rule
16b-3 under the Exchange Act. Notwithstanding anything herein to the contrary, the Plan shall be
administered, and the Awards are granted, only in such a manner as to conform to such laws, rules
and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be
deemed amended to the extent necessary to conform to such laws, rules and regulations.
3.7 Amendment, Suspension and Termination. To the extent permitted by the Plan, this
Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any
time or from time to time by the Committee or the Board, provided, that, except as may otherwise be
provided by the Plan, no amendment, modification, suspension or termination of this Agreement shall
adversely effect the Award in any material way without the prior written consent of the
Participant.
3.8 Notices. Notices required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the United States mail
by certified mail, with postage and fees prepaid, addressed to the Participant to his address shown
in the Company records, and to the Company at its principal executive office.
3.9 Successors and Assigns. The Company may assign any of its rights under this
Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the
successors and assigns of the Company. Subject to the restrictions on transfer herein set forth,
this Agreement shall be binding upon Participant and his or her heirs, executors, administrators,
successors and assigns.
B-4
exv10w16
Exhibit 10.16
CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
AMENDMENT NO. 1 TO LICENSE AND COLLABORATION AGREEMENT
Reference is made to that certain License and Collaboration Agreement (Agreement)
dated June 30, 2004 by and between Migenix, Inc., formerly known as Micrologix Biotech Inc.
(Migenix) and Cadence Pharmaceuticals, Inc., formerly known as Strata Pharmaceuticals,
Inc. (Cadence). All capitalized terms used herein and not otherwise defined shall have
the meanings assigned to such terms in the Agreement.
Whereas, the parties desire to amend the Agreement as of October 6, 2006 (the
Amendment Effective Date) in accordance with the terms of this Amendment No. 1 (this
Amendment).
Now Therefore, for good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by the parties, the parties hereto, intending to be legally bound,
agree as follows:
1. |
|
Section 1.13 of the Agreement is hereby amended and replaced in its entirety as follows: |
|
|
|
Compound means the compound C90H127N27O12:
L-Isoleucyl-L-leucyl-L-arginyl-L-trypto-phyl-L-prolyl-L-tryptophyl-L-tryptophyl-L-prolyl-L-tr
ypto-phyl-L-arginyl-L-arginyl-L-lysinamide, sometimes called omiganan, and any
pharmaceutically acceptable salt, solvate, or hydrate thereof. |
|
2. |
|
A new definition is hereby added as Section 1.13.1 as follows: |
|
|
|
"New Compound means any Compound other than the Original Compound. |
|
3. |
|
Section 1.46 is hereby amended and replaced in its entirety as follows: |
|
|
|
Micrologix Know-How means any and all Know-How related to the Compound or the Product,
including research and development and clinical studies hereunder and other obligations of
Micrologix hereunder, and which is under the Control of Micrologix as of the Amendment
Effective Date and any and all Improvements thereto, which is not covered by the Micrologix
Patent Rights, but is necessary or useful to the use, development, manufacture, marketing,
promotion, distribution, sale and/or commercialization of the Product in the Territory for
use in the Field. |
|
4. |
|
Section 1.47 is hereby amended and replaced in its entirety as follows: |
|
|
|
Micrologix Patent Rights or Micrologix Patent means any and all Patent Rights that claim
Micrologixs proprietary technology for the Product or the Compound which is under the
Control of Micrologix as of the Amendment Effective Date and any and all Patent Rights
covering Improvements thereto, which are necessary or useful to the use, development,
manufacture, marketing, promotion, distribution, sale and/or commercialization of the Product in the
Territory for use in the Field. The Micrologix Patent Rights as of the Amendment Effective
Date are set forth on Exhibit B. Any Micrologix Patent Rights issued after the Amendment
Effective Date shall be added to ExhibitB. |
2
5. |
|
A new definition is hereby added as Section 1.52.1 as follows: |
|
|
|
"Original Compound means omiganan pentahydrochloride as same is in clinical development by
Strata as of the Amendment Effective Date. |
|
6. |
|
A new Section 3.4(c) is hereby added to the Agreement: |
|
|
|
(c) to the extent of its legal right to do so, Strata shall, at Micrologixs request, grant
Micrologix a worldwide, exclusive, royalty-free, license under any Strata Work Product which
relates to: (1) any New Compound; and (2) any Product resulting from any New Compound; in
each case, to the extent necessary or useful to use, market, advertise, promote, distribute,
offer for sale, sell, make, manufacture, have manufactured, export and import, and develop
Products based on any New Compound (but not the Original Compound) with the right to
sublicense and assign the foregoing: |
(i) during the Royalty Term, outside the Territory and inside the Territory but
outside the Field; and
(ii) after the Royalty Term, outside the Territory and inside the Territory both
inside and outside the Field.
7. |
|
Section 13.5(b)(vi) is hereby amended and replaced in its entirety as follows: |
|
|
|
(vi) to the extent of its legal right to do so, Strata shall, at Micrologixs request, grant
Micrologix a worldwide, exclusive, royalty-bearing, license under any Strata Work Product
which relates to any Product resulting from the Original Compound to the extent necessary or
useful to use, market, advertise, promote, distribute, offer for sale, sell, make,
manufacture, have manufactured, export and import, and develop Products with the right to
sublicense and assign the foregoing, in consideration of such reasonable royalties on net
sales by Micrologix or Product to be negotiated in good faith between Micrologix and Strata
at such time, and if the Parties cannot agree on such license and royalties, either Party
may refer the matter to arbitration pursuant to Article 14. Nothing in this Section shall
cause a royalty to be payable in respect of rights obtained by Micrologix pursuant to
Section 5.3 or Section 6.2. |
|
8. |
|
A new Section 3.4(d) is hereby added to the Agreement: |
|
|
|
To the extent of its legal right to do so, Strata shall, upon Micrologixs request and at
Micrologixs expense, transfer to or make available to Micrologix the then most-current
version of all relevant Strata Work Product in Stratas possession or control necessary or
useful to enable Micrologixs reasonably capable personnel to understand such Strata Work
Product as reasonably necessary to exploit the license granted to Micrologix in Section
3.4(c) and the termination provisions of this Agreement, provided that this Section 3.4(d)
shall in no way create any obligation on Strata to document, summarize, translate, keep
records of or otherwise reduce to tangible form, any Strata Work Product. |
|
9. |
|
Cadence will make good faith efforts not to take any action to restrict its ability to: grant
the licenses contained in this Amendment, or transfer or make available the Strata Work
Product contemplated by this Amendment. |
3
10. |
|
Migenixs share of manufacturing development costs referred to in Section 4.7(k) and Section
5.3(f) shall apply only in respect of manufacturing development costs arising in respect of
the Original Compound, and not in respect of any other Compound. |
|
11. |
|
Exhibit B of the Agreement is hereby amended to add the following: |
|
|
|
Country |
|
Application or Patent No. |
USA |
|
[***] |
USA |
|
[***] |
Europe |
|
[***] |
Canada |
|
[***] |
12. |
|
Subject to the following sentence, Cadence shall indemnify, defend and hold harmless Migenix
and its Indemnitees from and against any Loss which would not have arisen under the Agreement
without this Amendment. Each party shall indemnify, defend and hold harmless the other party
and its Indemnitees from and against any Loss arising from the indemnifying partys
exploitation of any Compound, Products or Strata Work Product which would not have arisen
under the Agreement without this Amendment. |
|
13. |
|
EXCEPT AS MAY OTHERWISE BE SET FORTH IN THE AGREEMENT WITH RESPECT TO THE ORIGINAL COMPOUND,
NOTHING IN THIS AMENDMENT SHALL BE CONSTRUED AS A REPRESENTATION OR WARRANTY BY MIGENIX TO
CADENCE THAT THE SUBJECT MATTER OF THE LICENSES FROM MIGENIX TO CADENCE CONTAINED IN THIS
AMENDMENT ARE NOT INFRINGED BY ANY THIRD PARTY OR THE PRACTICE OF SUCH RIGHTS DOES NOT
INFRINGE ANY INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY. |
|
14. |
|
NOTHING IN THIS AMENDMENT SHALL BE CONSTRUED AS A REPRESENTATION OR WARRANTY BY CADENCE TO
MIGENIX THAT THE SUBJECT MATTER OF THE LICENSES FROM CADENCE TO MIGENIX CONTAINED IN THIS
AMENDMENT ARE NOT INFRINGED BY ANY THIRD PARTY OR THE PRACTICE OF SUCH RIGHTS DOES NOT
INFRINGE ANY INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY. |
|
15. |
|
EXCEPT AS MAY BE OTHERWISE SET FORTH IN THE AGREEMENT WITH RESPECT TO THE ORIGINAL COMPOUND,
NEITHER PARTY MAKES ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR
ANY OTHER WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE SUBJECT MATTER OF THIS AMENDMENT. |
|
16. |
|
EXCEPT AS MAY BE OTHERWISE SET FORTH IN THE AGREEMENT WITH RESPECT TO THE ORIGINAL COMPOUND,
NEITHER PARTY MAKES ANY OTHER WARRANTIES HEREUNDER, EXPRESS OR IMPLIED, INCLUDING WARRANTIES
|
|
|
|
*** |
|
Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the omitted portions. |
4
|
|
CONCERNING THE SUCCESS OF THE DEVELOPMENT PROGRAM, THE SUCCESS OF THE MARKETING OR
COMMERCIALIZATION OF THE PRODUCT OR THE COMMERCIAL UTILITY OF THE PRODUCT.
|
|
|
|
17. |
|
Cadence hereby agrees to pay all reasonable and documented out-of-pocket legal fees and
disbursements (e.g. faxes) incurred by Migenix in connection with the preparation, execution
and delivery of this Amendment and the diligence activities contemplated in support of same. |
|
18. |
|
Except for the matters set forth in this Amendment, all other terms of the Agreement shall
remain unchanged and in full force and effect. |
|
19. |
|
This Agreement shall be governed by, and construed and enforced in accordance with, the laws
of the State of Delaware, except that no conflict of laws provision shall be applied to make
the laws of any other jurisdiction applicable to this Agreement. |
|
20. |
|
This Amendment along with the Agreement (including the Exhibits attached thereto) sets forth
all of the covenants, promises, agreements, warranties, representations, conditions and
understandings between the parties hereto with respect to the subject matter hereof and
supersedes and terminates all prior agreements and understandings between the Parties. No
subsequent alteration, amendment, change or addition to this Agreement shall be binding upon
the Parties hereto unless reduced to writing and signed by the respective authorized officers
of the Parties. |
In Witness Whereof, the parties hereto have duly executed this Amendment as of the
Amendment Effective Date.
|
|
|
|
|
|
|
Migenix, Inc. |
|
Cadence Pharmaceuticals, Inc. |
|
|
|
|
|
|
|
By:
|
|
/s/ Art Ayres
|
|
By:
|
|
/s/ Theodore R. Schroeder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name: Art Ayres |
|
Name: Theodore R. Schroeder |
Title: Senior Vice-President Finance & CFO |
|
Title: President and Chief Executive Officer |
exv23w1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our
report dated April 21, 2006, except for Note 10, as to which the
date is October 4, 2006, in Amendment No. 3 to the Registration Statement (Form
S-1 No. 333-135821) and related
Prospectus of Cadence Pharmaceuticals, Inc. for the registration of
its shares of common stock.
San Diego, California
October 5, 2006
corresp
|
|
|
|
|
|
|
12636 High Bluff Drive, Suite 400 |
|
|
San Diego, California 92130-2071 |
|
|
Tel: (858) 523-5400 Fax: (858) 523-5450 |
|
|
www.lw.com |
|
|
FIRM / AFFILIATE OFFICES |
|
|
Brussels
|
|
New York |
|
|
Chicago
|
|
Northern Virginia |
|
|
Frankfurt
|
|
Orange County |
|
|
Hamburg
|
|
Paris |
|
|
Hong Kong
|
|
San Diego |
|
|
London
|
|
San Francisco |
|
|
Los Angeles
|
|
Shanghai |
|
|
Milan
|
|
Silicon Valley |
|
|
Moscow
|
|
Singapore |
|
|
Munich
|
|
Tokyo |
|
|
New Jersey
|
|
Washington, D.C. |
October 10, 2006
Jeffrey Riedler
Assistant Director
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Mail Stop 7010
Washington, D.C. 20549
|
|
|
Re:
|
|
Cadence Pharmaceuticals, Inc. |
|
|
Amendment No. 3 to Registration Statement on Form S-1 |
|
|
Filed October 10, 2006 |
|
|
SEC File No. 333-135821 |
Dear Mr. Riedler:
We are in receipt of the Staffs letter dated October 3, 2006 with respect to the
above-referenced Registration Statement. We are responding to the Staffs comments on behalf of
Cadence Pharmaceuticals, Inc. (Cadence or the Company) as set forth below. Simultaneously with
the filing of this letter, Cadence is submitting (by EDGAR) Amendment No. 3 to its Registration
Statement on Form S-1 (the Amendment), responding to the Staffs comments. Courtesy copies of
this letter and the Amendment (specifically marked to show the changes thereto) are being submitted
to the Staff by hand delivery.
Cadences responses set forth in this letter are numbered to correspond to the numbered
comments in the Staffs letter. All terms used but not defined herein have the meanings assigned
to such terms in the Amendment. For ease of reference, we have set forth the Staffs comments and
Cadences response for each item below.
Form S-1
Managements Discussion and Analysis of Financial Condition and Results..., page 42
Critical Accounting Policies and Estimates, page 44
Stock-Based Compensation, page 45
Jeffrey Riedler
October 10, 2006
Page 2
Cadences Response: On October 4, 2006, the Company contacted the Staff to discuss the comments
below. Based on the Companys discussions and tentative conclusions, we have provided below a
summary of the key points discussed with the Staff.
Company Background
The Company was incorporated on May 26, 2004. In the third quarter of 2004, the Company
completed the acquisition of rights to Omigard, its first product candidate. From the third quarter
of 2004 through the end of 2005, the Company raised $25 million of capital through the sale of
preferred stock in tranches of $7.5 million and $17.5 million. In August 2005, the Company
initiated the Phase III clinical trial required for potential FDA approval of Omigard. From May
2004 to December 2005, the Company filled various management positions to support its development
of Omigard and expand its business development efforts. In December 2005, the Company began
negotiations for its second product candidate, IV APAP. At December 31, 2005, the Company had 12
employees. Other significant milestones are as follows:
|
|
|
March 29, 2006
|
|
Acquired the rights to IV APAP and completed a $53.8 million
preferred stock sale to support the acquisition and development of IV APAP |
May 26, 2006
|
|
Cadences board of directors approved the engagement of investment
bankers |
May/June 2006
|
|
Hired VP Clinical Development of IV APAP and CFO |
June 14, 2006
|
|
Held IPO organization meeting |
Stages of Enterprise Development and Related Valuation Approach
Inception to March 2006 (just prior to closing of Series A-3 preferred stock sale and acquisition of IV APAP)
As noted above, during this period, the Company acquired rights to its first product
candidate, partially filled out its management team, initiated clinical trials and completed a
second round of financing. The Companys acquisition of Omigard represented a first step in its
overall product acquisition strategy; however, it realized that Omigard would not provide the basis
for a self-sustaining business and would not generate revenues in the near term. The Company also
recognized that additional financing rounds would be required to continue development of Omigard,
to build out its corporate infrastructure and to finance the acquisition of additional product
candidates. The Companys assessment of the stage of enterprise development was based on the above
factors in relation to guidance contained in the American Institute of Certified Public
Accountants, or AICPA, Audit and Accounting Practice Aid Series, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation (the AICPA Practice Aid). The
Company concluded that it began as a Stage 1 enterprise at its inception and moved into Stage 2
during this period.
Jeffrey Riedler
October 10, 2006
Page 3
Based on the Companys assessment that it was in Stage 1 and Stage 2 during this period, and a
review of paragraphs 76, 150 and 154 of the AICPA Practice Aid, it determined that use of the
asset-based approach was appropriate for early stage companies such as the Company and that such
value was allocable among common and preferred stockholders based on the current value method. The
key assumptions in the Companys use of the asset-based approach included the following:
|
|
|
|
|
|
|
As of |
|
|
|
12/31/05 |
|
|
|
(in millions) |
|
Total assets |
|
$ |
15.8 |
|
Total liabilities |
|
|
(1.1 |
) |
|
|
|
|
Net assets (1) |
|
|
16.9 |
|
R&D sunk costs in Omigard (2) |
|
|
8.3 |
|
|
|
|
|
Total net asset value/enterprise value |
|
|
25.2 |
|
Preferred stock liquidation value |
|
|
25.8 |
|
|
|
|
|
Valuation to common stock |
|
$ |
|
|
|
|
|
|
|
|
|
(1) |
|
Book value assumed to equal fair market value based
on the nature of the underlying assets and liabilities. |
|
(2) |
|
The Company has assumed that since it had started
its Phase III clinical trial for Omigard in August 2005, enrollment was
still in early stages, and it was still far from obtaining results, any
accretive value to the underlying intangible assets would be based on
costs incurred to date, and not some other measure of fair value. |
Since the Company believes the valuation of the common stock does not equal zero, it
assigned a nominal value of $0.10 from inception through December 31, 2005.
As part of the Companys reassessment of common stock valuations initiated upon the
commencement of its proposed initial public offering (IPO), the Company performed additional
analysis using a market-based approach based on the sale of its Series A-2 preferred stock to
venture capital investors at $1.00 per share. The Company utilized a 40% discount factor that
resulted in a common stock valuation of $0.60 per share. In addition, the Company compared this
valuation to the result of multiplying the discount factor utilized by its independent valuation
specialist based on the estimated number of days preceding an IPO times the estimated low-end of
the IPO price range. Both computations resulted in approximately $0.60 per common share. The
Option Activity table below assumes the use of this market-based approach and the Company has
determined that the additional stock-based compensation expense that would be recognized utilizing
this method would be immaterial to the Companys financial results considering both quantitative
and qualitative factors discussed in SAB 99.
Jeffrey Riedler
October 10, 2006
Page 4
March 2006 (as of the closing of the Series A-3 preferred stock sale and acquisition of IV APAP) to June 30, 2006.
As noted above, during this period, the Company acquired rights to IV APAP, its second product
candidate, substantially filled out its management team, continued clinical trials for Omigard and
completed a third round of financing. The Companys acquisition of IV APAP represented a
significant step in its overall product acquisition strategy and, at this time, the Company began
to contemplate that the combination of IV APAP and Omigard could provide a basis for a
self-sustaining business. The acquisition of rights to IV APAP was seen as a watershed event that
had the potential to make the Company more attractive to both strategic partners and the public
equity markets. However, it was also recognized that additional financing rounds will be required
to continue development of both product candidates, to complete the build out the Companys
corporate infrastructure and to finance the acquisition of additional product candidates. Although
the Company continued to fill out its management team and continued the clinical trials for Omigard
during this period, neither of these activities are considered materially accretive to the
Companys enterprise value. The primary driver of increased enterprise value was the acquisition of
rights to IV APAP. The Companys assessment of the stage of enterprise development was again based
on the above factors in relation to guidance contained in the AICPA Practice Aid. The Company
concluded that it had moved into Stage 3 based on the milestones noted above.
Based on the Companys assessment that it was in Stage 3 during this period, the Company
determined that use of the market-based approach was appropriate. The Company contemplated both the
use of an asset-based approach and an income-based approach. It determined that use of an
income-based approach would not yield the most accurate valuation due to the early stage of its
development cycle and inability to forecast with a high degree of certainty. The Company
determined that use of an asset-based approach was inconsistent with its progressions from a Stage
2 enterprise to a Stage 3 enterprise.
Initially, the Company allocated the market-based value among common and preferred
stockholders based on the option-pricing method; however, on June 14, 2006, the Company commenced
the IPO process, and based on the preliminary valuation information presented by the proposed
underwriters for the IPO, the Company reassessed the value of the common stock used to grant equity
awards back to June 30, 2005. The reassessment of fair value was completed by management, all of
whom are related parties, without the use of an unrelated valuation specialist. Management
concluded that the stock options granted to employees and directors in May and June of 2006 were at
prices that were below the reassessed values. The values of the common stock for May and June of
2006 were initially determined by the Companys board of directors, after reviewing valuations
prepared by an independent valuation specialist. In the reassessment process, the Companys
management concluded that the original valuations did not give enough consideration to the impact
of an IPO on the value of the common stock. The valuation ranges initially provided by the
Companys underwriters in June 2006 are consistent with the current estimates of value in the
Amendment filed with the Staff today.
Jeffrey Riedler
October 10, 2006
Page 5
The key assumptions in the Companys reassessment of the common stock valuation as of May 9,
2006 are as follows:
|
|
|
|
|
|
|
Value |
|
Enterprise value assuming an initial public offering (in millions) (1) |
|
$ |
264 |
|
Per share common stock value at low-end of IPO pricing range |
|
$ |
2.75 |
|
Marketability discount (2) |
|
|
40 |
% |
Common stock value per share |
|
$ |
1.65 |
|
|
|
|
(1) |
|
Based on the low-end of the valuation range provided by the underwriters. |
|
(2) |
|
Based on information contained in the Companys independent valuation report.
The report provided discount factors related to marketability and the risk of
completing an IPO based on the time between the valuation date and the expected
completion of the IPO. Source: Adapted from Brian K. Pearson, 1999 Marketability
Discounts Reflected in Initial Public Offerings, CPA Expert (Spring 2000): 3.
Presented in: Pratt, Shannon, Business Valuation Discounts and Premiums. John
Wiley and Sons, Inc. New York: 2001. |
The key assumptions in the Companys reassessment of the common stock valuation as of
June 12, 2006 are as follows:
|
|
|
|
|
|
|
Value |
|
Enterprise value assuming an initial public offering (in millions) (1) |
|
$ |
264 |
|
Per share common stock value at low-end of IPO pricing range |
|
$ |
2.75 |
|
Marketability discount (2) |
|
|
30 |
% |
Common stock value per share |
|
$ |
1.93 |
|
|
|
|
(1) |
|
Based on valuation ranges provided by the underwriters. |
|
(2) |
|
Based on information contained in the Companys independent valuation report.
The report provided discount factors related to marketability and the risk of
completing an IPO based on the time between the valuation date and the expected
completion of the IPO. Source: Adapted from Brian K. Pearson, 1999 Marketability
Discounts Reflected in Initial Public Offerings, CPA Expert (Spring 2000): 3.
Presented in: Pratt, Shannon, Business Valuation Discounts and Premiums. John
Wiley and Sons, Inc. New York: 2001. |
On June 14, 2006, the estimated low-end of the pricing range provided by the underwriters
at the organizational meeting was $2.75 per share (pre-split). The Company intends to maintain the
common stock fair value at $2.75 per share for purposes of computing stock-based compensation
until: (1) successful completion of the IPO; or (2) the underwriters revise their estimate of the
low-end of the price range.
Option Activity and Reassessed Values
Below is a summary of the option grants made by the Company from July 2005 through June 2006
and reassessed fair value per share for financial reporting purposes.
Jeffrey Riedler
October 10, 2006
Page 6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
|
|
|
|
|
|
|
|
Reassessed |
|
|
|
|
|
|
Unrecorded |
|
|
|
No. of Options |
|
|
|
|
|
|
Fair Value |
|
|
Intrinsic |
|
|
Expense for |
|
Grant Date |
|
Granted (1) |
|
|
Grant Price |
|
|
Per Share |
|
|
Value |
|
|
20062009 |
|
|
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July (7/1/05) |
|
|
2,000 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
|
|
|
$ |
|
|
September (various
dates) |
|
|
189,000 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
|
|
|
$ |
|
|
December (12/30/05) |
|
|
1,876,000 |
|
|
$ |
0.10 |
|
|
$ |
0.60 |
|
|
$ |
938,000 |
|
|
$ |
234,500 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Total |
|
|
2,067,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reassessed |
|
|
Original |
|
|
Revised |
|
|
|
No. of Options |
|
|
|
|
|
|
Fair Value |
|
|
Black-Scholes |
|
|
Black-Scholes |
|
Grant Date |
|
Granted (1) |
|
|
Grant Price |
|
|
Per Share |
|
|
Valuation |
|
|
Valuation (1) |
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
(1/6/06) |
|
|
15,000 |
|
|
$ |
0.10 |
|
|
$ |
0.60 |
|
|
$ |
0.07 |
|
|
$ |
0.54 |
(2) |
May (5/9/06) |
|
|
4,496,211 |
|
|
$ |
0.34 |
|
|
$ |
1.65 |
|
|
$ |
0.23 |
|
|
$ |
1.46 |
|
June (6/12/06) |
|
|
1,038,000 |
|
|
$ |
0.80 |
|
|
$ |
1.93 |
|
|
$ |
0.54 |
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Total |
|
|
5,549,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The options granted have a four year vesting period with no unusual terms that could
accelerate vesting. |
|
(2) |
|
The Company reported a $7.5 million loss for 2005 and expect to report an approximately $50
million loss in 2006 and 2007. The quantitative impact of the additional expense if the
revised fair value was used to compute stock-based compensation in 2005, 2006 and 2007 would
not be material to the financial statements. |
|
1. |
|
We have the following comments about the valuation of your common stock: |
|
a. |
|
As was requested in part e. of prior
comment nine, please disclose a qualitative and quantitative
description of how and why each significant factor, assumption, and
methodology changed between the valuations of $0.10, $0.34 and $0.80
per share. While we noted some additional disclosures on page 46
about each valuation, you did not appear to qualitatively address
each significant factor or assumption and you appeared to provide
almost no quantitative disclosures. |
Cadences Response: The Company has provided the additional disclosure requested by the Staff both
in the Critical Accounting Policies and Estimates section of Managements Discussion and
Analysis of Financial Condition and Results of Operations and in Note 7 to the financial
statements in the Amendment.
|
b. |
|
Please tell us how assuming that the fair
value of your common stock increased from $0.10 per share prior to
March 2006 to $0.80 per share since June 2006 is consistent with you
selling shares of preferred stock between $0.94 and $1.00 per share
since July 2004. Similarly, please tell us how assuming the fair
value of the common
|
Jeffrey Riedler
October 10, 2006
Page 7
|
|
|
stock increased since March 2006 is reasonable, as issuing 53,870,000
shares of Series A-3 convertible preferred stock in March 2006 would
presumably have significantly diluted the ownership represented by the
common stock. |
Cadences Response: The Company respectfully refers the Staff to the detailed discussion above as
well as the additional disclosures provided in both in the Critical Accounting Policies and
Estimates section of Managements Discussion and Analysis of Financial Condition and Results of
Operations and in Note 7 to the financial statements in the Amendment.
|
c. |
|
As was requested in part a. of prior
comment nine, please disclose a quantitative discussion of the
specific factors and assumptions utilized in your asset-based
approach and current value method in determining the $0.10 per share. |
Cadences Response: The Company has provided the additional disclosure requested by the Staff in
the Critical Accounting Policies and Estimates section of Managements Discussion and Analysis
of Financial Condition and Results of Operations.
|
d. |
|
Please elaborate for us why it was
appropriate to use an asset-based approach to determine the
enterprise value until March 2006. As this was only about four
months prior to you first filing the IPO, please address how you were
not already past the very early stages of development. In so doing,
please elaborate on whether you had virtually no financial history at
March 2006. In addition, as you initiated Phase III clinical trials
for Omigard in 2005, please address whether you had a developed
product by March 2006. Furthermore, as you received over $25,000,000
from the sale of preferred stock through 2005, please assess whether
a relatively small amount of cash had been invested through March,
2006. Finally please address whether you had generated any
significant intangible assets by March 2006, regardless of whether
these assets could be recognized under GAAP. |
Cadences Response: The Company respectfully refers the Staff to the detailed discussion above.
|
e. |
|
Please tell us why it was appropriate to
use the current value allocation method until March 2006. Because
the current value method assumes dissolution or sale, please address
whether a liquidity event was then imminent and the fact that your
auditors did not indicate that there was substantial doubt about your
ability to continue as a going concern. In addition, please address
that you did not appear to then be in your infancy and that you
appear to have received more than founders capital by that time. |
Jeffrey Riedler
October 10, 2006
Page 8
|
|
|
Furthermore, please address how assuming your liquidation in March
2006 is consistent with the going concern assumption inherent in you
first filing your IPO in July 2006. |
Cadences Response: The Company respectfully refers the Staff to the detailed discussion above.
|
f. |
|
As was requested by part b. of prior
comment nine, please qualitatively and quantitatively elaborate on
how the licensing of IV APAP and the advancement of your business
model primarily contributed to the difference between the $0.10 and
$0.34 per share. On page 46, all we noted was that this led to the
utilization of the market-based approach. At a minimum, please
address the relative impact each of these two events and changing to
a market-based approach had on the value. |
Cadences Response: The Company respectfully refers the Staff to the detailed discussion above.
|
g. |
|
As requested in part c. of prior comment
nine, please quantitatively discuss the significant factors and
assumptions used in the valuations of $0.34 and $0.80 per share,
including how the enterprise value was changed. As we have been
unable to obtain much quantitative information about the valuations,
please provide us the reports outlining the contemporaneous
independent valuations the unrelated valuation specialist performed.
Similarly, please provide us the calculations for the valuation you
provided prior to March 2006. For each valuation, please ensure that
the information you provide indicates the enterprise value and the
amount of that value assigned to the preferred stock versus common
stock. |
Cadences Response: The Company notes that in its discussion above, it has discussed in detail the
requested information regarding the enterprise value. The Company has provided above a detailed
quantitative as well as qualitative analysis, including the enterprise value assigned to the
preferred and common stock. The revised disclosure in the Amendment does not refer to the
valuation referenced in the Staffs comment. Furthermore, the valuation was prepared for purposes
of compliance with Section 409A of the Internal Revenue Code, as amended, and was not intended to
serve as a basis for the quantitative valuation of the Companys common stock for financial
reporting purposes. Therefore, based on our discussions and the revisions to the Companys
valuation discussion above and in the disclosure in the Amendment, it is our understanding that the
Staff no longer requires copies of the valuation report.
|
h. |
|
In the valuation performed subsequent to
the initiation of your IPO process, please tell us why it was
appropriate to give equal weight
|
Jeffrey Riedler
October 10, 2006
Page 9
|
|
|
to your Series A-3 preferred stock financing and the valuation ranges
provided by the underwriters for this offering. As was contemplated
by part d. of prior comment nine, please quantitatively disclose the
valuation ranges. Similarly, please disclose why the prospect of an
IPO alone primarily contributed to the difference between the $0.34
and the $0.80 per share. Finally, as was contemplated by part f. of
prior comment nine, please disclose, qualitatively and quantitatively,
how the valuation considered the probability of you ultimately
completing an IPO. |
Cadences Response: Please refer to the response to the Staffs comment 1.h. above and well as the
detailed qualitative and quantitative discussion and retrospective analysis provided above. The
Company has provided the additional disclosure requested by the Staff both in the Critical
Accounting Policies and Estimates section of Managements Discussion and Analysis of Financial
Condition and Results of Operations and in Note 7 to the financial statements in the Amendment.
|
i. |
|
In the valuation performed subsequent to
the initiation of your IPO process, please provide us sufficient
objective support for using 40% as the marketability discount. In so
doing, please tell us the factors considered in determining the size
of the discount and how you considered the examples in paragraph 57
of the AICPA Practice Aid. In addition, to the extent that the
factors or examples considered were qualitative in nature, please
describe how you ultimately quantified the discount. Finally, to the
extent the marketability discount was derived from what was believed
to be comparable companies, please tell us how you ensured the
discount only gave effect to the lack of liquidity of the stock of
these comparable companies and not to other factors specific to those
companies. |
Cadences Response: The Company respectfully refers the Staff to discussion above, in particular
the table listing the key assumptions in the Companys reassessment of the common stock valuation
as of May 9, 2006.
|
j. |
|
As you did not appear to provide the
written consent of the unrelated valuation specialist, please tell us
how you considered Securities Act Rule 436 and footnote 60 of the
AICPA Practice Aid. |
Cadences Response: As noted above, the Company has revised the disclosure to omit the specific
reference to the valuation report. The valuation referenced in the Staffs comment was prepared
for purposes of compliance with Section 409A of the Internal Revenue Code, as amended, and was not
intended to serve as a basis for the quantitative valuation of the Companys common stock for
financial reporting purposes. Based on the Companys
Jeffrey Riedler
October 10, 2006
Page 10
|
|
discussions with the Staff, and the omission of the reference to the valuation report, no consent
is required under Securities Act Rule 436 and footnote 60 of the AICPA Practice Aid. |
|
k. |
|
As we noted in part g. of prior comment
nine, once you can reasonably estimate the IPO price, please disclose
a qualitative and quantitative discussion of each significant factor
contributing to the difference between each valuation and the
estimated IPO price. |
Cadences Response: The Company respectfully refers the Staff to the discussion above as well as
the additional disclosure requested by the Staff both in the Critical Accounting Policies and
Estimates section of Managements Discussion and Analysis of Financial Condition and Results of
Operations and in Note 7 to the financial statements in the Amendment.
|
l. |
|
To the extent that you do not disclose the
information requested in prior comment nine, please provide it to us
so that we can begin making progress towards resolving this issue and
explain to us why you did not think it should be disclosed. |
Cadences Response: The Company believes that it has provided the information requested in prior
comment nine in all material respects. Please refer to the discussion above as well as the
additional disclosure requested by the Staff both in the Critical Accounting Policies and
Estimates section of Managements Discussion and Analysis of Financial Condition and Results of
Operations and in Note 7 to the financial statements in the Amendment.
Index to Financial Statements, page F-1
Notes to Financial Statements, page F-7
6. License Agreements and Acquired Development and Commercialization Rights, page F-14
|
|
|
Your response to prior comment 13 acknowledges that the Migenix shares would have met
the definition of an equity security under SFAS 115, had you acquired them as an
investment. The reasons for acquiring the shares would not appear relevant to
determining whether they were in the scope of SFAS 115, but instead may have only been
relevant in determining whether they were trading or available for sale. While you
noted that shares were not registered for re-sale, you did not address whether or how
that fact related to the definition of restricted stock for the purpose of SFAS 115. As
such, it appears that you should have applied the provisions of SFAS 115 to the Migenix
shares. |
|
|
|
|
Based on your response, not applying SFAS 115 resulted in a difference that does not
appear to be quantitatively small, especially to your results of operations for 2004.
Even if the difference was quantitatively small, the fact that the shares appear to have
been capable of precise measurement may have rendered the difference material. In
|
Jeffrey Riedler
October 10, 2006
Page 11
|
|
|
addition, your consideration of the users of your financial statements appears to be
focused only on your existing or previous investors, not on the investors that may
result from your IPO. As the difference appears to be material, please revise your
financial statements and related disclosures accordingly. |
Cadences Response: The Company has revised the financial statements in accordance with the
Staffs comment.
* * *
Any comments or questions regarding the foregoing should be directed to the undersigned at
(858) 523-5435. Thank you in advance for your cooperation in connection with this matter.
|
|
|
|
|
|
Very truly yours,
|
|
|
/s/ Cheston J. Larson
|
|
|
Cheston J. Larson |
|
|
of LATHAM & WATKINS LLP |
|
|
Enclosures
|
|
|
cc: |
|
Theodore R. Schroeder, Cadence Pharmaceuticals, Inc.
William R. LaRue, Cadence Pharmaceuticals, Inc.
David A. Socks, Cadence Pharmaceuticals, Inc.
Faye H. Russell, Latham & Watkins LLP
Mark B. Weeks, Heller Ehrman LLP
Ross L. Burningham, Heller Ehrman LLP
Richard Mejia, Jr., Ernst & Young LLP |