Cadence Pharmaceuticals, Inc.
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-33103
CADENCE PHARMACEUTICALS,
INC.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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41-2142317
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(State or Other Jurisdiction
of Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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12481 High Bluff Drive, Suite 200
San Diego, California 92130
(858) 436-1400
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Principal
Executive Offices)
Securities registered pursuant to Section 12(b) of the
Act:
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Common Stock, $0.0001 par value per share
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NASDAQ Global Market
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(Title of class)
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(Name of exchange on which registered)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting common stock held by
non-affiliates of the registrant, based upon the closing sale
price of the common stock on June 29, 2007, the last
business day of the Registrants second fiscal quarter,
reported on the Nasdaq Global Market, was approximately
$143,342,757. Shares of common stock held by each executive
officer and director and by each person who owns 5% or more of
the Registrants outstanding common stock have been
excluded from this computation. The determination of affiliate
status for this purpose is not necessarily a conclusive
determination for other purposes. The Registrant does not have
any non-voting common equity securities.
As of February 29, 2008, there were 38,353,062 shares
of the Registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from
the Registrants Definitive Proxy Statement to be filed
with the Commission pursuant to Regulation 14A in
connection with the Registrants 2008 Annual Meeting of
Stockholders, which is scheduled to be held on June 18,
2008. Such Definitive Proxy Statement will be filed with the
Commission not later than 120 days after the conclusion of
the Registrants fiscal year ended December 31, 2007.
CADENCE
PHARMACEUTICALS, INC.
ANNUAL REPORT ON
FORM 10-K
For the Fiscal Year Ended December 31, 2007
Table of
Contents
2
PART I
Forward-Looking
Statements
This Annual Report on
Form 10-K,
or Annual Report, includes forward-looking statements that are
subject to risks and uncertainties, many of which are beyond our
control. Our actual results will differ from those anticipated
in these forward looking statements as a result of various
factors, including those set forth below under the caption
Item 1A. Risk Factors and the
differences may be material. Forward-looking statements discuss
matters that are not historical facts. Forward-looking
statements include, but are not limited to, discussions
regarding our operating strategy, growth strategy, acquisition
strategy, cost savings initiatives, industry, economic
conditions, financial condition, liquidity and capital resources
and results of operations. In this Annual Report, for example,
we make forward-looking statements regarding the potential for
Acetavance and Omigard to receive regulatory approval for one or
more indications on a timely basis or at all; the progress and
results of pending clinical trials for Acetavance and Omigard,
including any delays in commencing or completing enrollment for
our ongoing or planned clinical trials; unexpected adverse side
effects or inadequate therapeutic efficacy of Acetavance or
Omigard that could delay or prevent regulatory approval or
commercialization, or that could result in recalls or product
liability claims; other difficulties or delays in development,
testing, manufacturing and marketing of and obtaining regulatory
approval for Acetavance or Omigard; the scope and validity of
patent protection for Acetavance or Omigard; the market
potential for pain, fever, local catheter site infections and
other target markets, and our ability to compete; the potential
to attract a strategic collaborator and terms of any related
transaction; intense competition if either of Acetavance or
Omigard is ever commercialized; and our ability to raise
sufficient capital when needed, or at all. Such statements
include, but are not limited to, statements preceded by,
followed by or that otherwise include the words
believes, expects,
anticipates, intends,
estimates, projects, can,
could, may, will,
would or similar expressions. For those statements,
we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Private
Securities Litigation Reform Act of 1995. You should not rely
unduly on these forward-looking statements, which speak only as
of the date on which they were made. We undertake no obligation
to update publicly or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise, unless required by law.
Company
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 May 2004, we have in-licensed rights to two product
candidates, both of which are currently being studied in
Phase III clinical trials. We have in-licensed the
exclusive U.S. and Canadian rights to
Acetavancetm,
formerly known as IV APAP, an intravenous formulation of
acetaminophen that is currently marketed in Europe and several
other markets by Bristol-Myers Squibb Company, or BMS, for the
treatment of acute pain and fever under the brand name
Perfalgan®.
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 U.S., or
approved in the U.S. but with significant commercial
potential for proprietary new uses or formulations.
We were incorporated under the laws of the State of Delaware in
May 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.
Information about the company is also available at our website
at www.cadencepharm.com, which includes links to reports we have
filed with the Securities and Exchange Commission, or SEC. The
contents of our website are not incorporated by reference in
this Annual Report on
Form 10-K.
The public may read and copy any materials that we file with the
SEC at the SECs Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. Information on the operation
of the Public Reference Room is available by calling the SEC at
1-800-SEC-0330.
These reports may also be accessed via the SEC website,
www.sec.gov.
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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,
and we have applied for U.S. trademark registration for
Omigardtm
and
Acetavancetm.
This report also contains trademarks of others, including
Bactroban®,
Betadine®,
BioPatch®,
DepoDur®,
Neosporin®,
Perfalgan®,
Pro-Dafalgan®,
Toradol®
and
Tylenol®.
Our
Product Candidates
Our current portfolio consists of the following product
candidates:
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Acetavance. We are developing Acetavance 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, 286 million units of injectable analgesics,
typically used to treat pain, were sold in the U.S. in
2007. 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 U.S. 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
intravenous acetaminophen in the U.S. and Canada from BMS.
Perfalgan has been marketed outside the U.S. for
approximately six years, and has been approved in over 60
countries. Since its introduction in Europe in mid-2002, nearly
300 million doses of Perfalgan have been distributed, and
it has become the market and unit share leader among injectable
analgesics with approximately 80 million units sold in 2007.
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In the fourth quarter of 2006 we initiated our Phase III
clinical program for Acetavance based on guidance obtained from
the FDA at an End-of Phase-II meeting held in August
2006. The clinical development program for this product
candidate currently comprises nine clinical trials, including
four pivotal, Phase III efficacy trials, two
pharmacokinetic studies and two safety studies. In January 2008,
we announced that our Phase III efficacy trial of
Acetavance for the treatment of pain in adults following
abdominal gynecological surgery did not meet its primary
endpoint of demonstrating a statistically significant reduction
in patients pain intensity scores over 48 hours
compared to placebo. We believe that the study missed its
primary endpoint due to the much higher than predicted
variability of the initial pain assessments, particularly in
subjects who were randomized closer to the end of their surgery.
This variability had a large, negative impact on the
baseline-dependent statistical measurements. However, this same
study successfully achieved several secondary endpoints, which
were not as dependent on a single baseline pain measurement,
including pain relief, global patient satisfaction and
time-to-rescue medication, and demonstrated a safety profile for
Acetavance that was no different than placebo, including the
evaluation of eight doses over a
48-hour
period. At the same time, we also announced that our
Phase III clinical trial of Acetavance in fever
successfully met the primary endpoint, demonstrating a
statistically significant reduction of fever over six hours
compared to placebo. We currently expect to announce the results
of a second, non-pivotal Phase III clinical trial of
Acetavance for the treatment of fever in adults in the second
quarter of 2008. This study is intended to assess the speed of
onset of fever reduction of Acetavance compared to
orally-administered acetaminophen.
Following our announcement of the results of our first
Phase III clinical trials of Acetavance, we initiated
communications with the FDA to seek additional guidance
regarding our clinical development program for this product
candidate. As a result of these communications, the FDA may
require or we may decide to conduct additional clinical trials
or to modify our ongoing clinical trials. Assuming successful
completion of all of our planned clinical trials for this
product candidate, we currently plan to submit a 505(b)(2) new
drug application, or NDA, for Acetavance to the FDA in the first
half of 2009.
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Omigard. We are developing Omigard for the
prevention of intravascular catheter-related infections in the
U.S. 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 U.S. in 2003, and unit sales are
projected to grow to 12 million by the end of 2008.
Although 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
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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 CDC, estimates that there are
325,000 CRBSIs each year in the U.S. 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 prevent catheter infections, and they are used to
cleanse the skin surface around the catheter insertion site
prior to insertion and at dressing changes. 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
clinical trial that demonstrated statistically significant
outcomes for two pre-specified secondary endpoints, the
prevention of LCSIs and the prevention of 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 through the special protocol
assessment, or SPA, process. In July 2007, prompted by our
planned re-analysis of data from the initial Phase III
clinical trial of Omigard, we announced that the FDA agreed with
our proposal to increase the number of patients to be enrolled
in our ongoing Phase III clinical trial of Omigard from
1,250 to 1,850 patients. We currently anticipate completing
enrollment in this trial in the second quarter of 2008 and, if
the results of the trial are positive, we expect to submit an
NDA for Omigard in the first half of 2009.
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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.
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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
U.S. or approved in the U.S. but with significant
commercial potential for proprietary new uses or formulations.
Specifically, we intend to:
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Obtain regulatory approval for our Phase III hospital
product candidates, Acetavance 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 and
continue to review our Phase III clinical programs as new
information is received in an effort to reduce clinical
development risk, facilitate regulatory approval and optimize
marketing claims. We currently expect to submit an NDA for
Acetavance in the first half of 2009 based on the trials
previously completed by BMS in the U.S. and Europe, our own
clinical trials of this product candidate in the U.S., and other
published studies of intravenous acetaminophen. 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 and, if the results of the
trial are positive, we anticipate submitting an NDA for Omigard
in the first half of 2009.
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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 U.S. We believe that both Acetavance and
Omigard can be effectively promoted by our own sales force
targeting key hospitals in the U.S. Importantly,
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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 U.S., we
intend to establish strategic partnerships for the
commercialization of our products where we have
commercialization rights.
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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 U.S. or approved in the U.S. but with
significant commercial potential for proprietary new uses or
formulations.
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Pursue additional indications and commercial opportunities
for our product candidates. We will seek to
maximize the value of Acetavance, 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 or treatment of
device-related, surgical wound-related and burn-related
infections.
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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 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 U.S. 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
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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 U.S. 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 U.S., 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, most states in the U.S. require
hospitals to publicly report their hospital-acquired infection
rates. Federal legislation, the Healthy Hospitals Act, is
pending which would amend the Social Security Act to require
public reporting of health care-associated infection data by
hospitals and ambulatory surgical centers; and it would also
establish programs to provide incentives to hospitals to
eliminate the rate of occurrence of such infections. In
addition, beginning in October 2008, the Centers for Medicare
and Medicaid Services, or CMS, will no longer provide
reimbursement above the typical Inpatient Prospective Payment
System rate for the treatment of several types of
healthcare-associated infections, including vascular
catheter-associated infections, representing a potentially
significant loss of revenue to hospitals. These types of
initiatives support our view that significant unmet medical
needs remain in hospitals today.
Our
Product Pipeline
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:
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Development
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Development
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Product
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Stage in the
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Stage in
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Cadence
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Candidate
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Indication
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United States
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Europe
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Commercial Rights
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Acetavance
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Treatment of acute pain adults
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Phase III
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Marketed by
BMS(1)
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United States, Canada
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Treatment of acute pain pediatrics
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Phase III
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Marketed by
BMS(1)
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United States, Canada
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Treatment of fever adults
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Phase III
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Marketed by
BMS(1)
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United States, Canada
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Treatment of
fever pediatrics
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Phase III
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Marketed by
BMS(1)
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United States, Canada
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Omigard
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Prevention of local catheter site infections
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Phase III
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Phase III
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North America, Europe
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In March 2006, we in-licensed the patents and the exclusive
development and commercialization rights for Acetavance in the
U.S. and Canada from BMS. BMS has completed Phase III
clinical trials with respect to the above indications, excluding
the treatment of fever in adults, for intravenous acetaminophen
in Europe and the U.S., which we intend to use in our NDA
filing, along with the results of our own clinical trials of
this product candidate. Because the Phase III clinical
trial requirements differ in the U.S. compared to Europe, we are
required to complete additional Phase III clinical 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. Assuming successful completion of all
of our planned clinical trials for Acetavance, we currently plan
to submit a 505(b)(2) NDA to the FDA in the first half of 2009. |
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Acetavance
for the Treatment of Acute Pain and Fever
Acute
Pain Background
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.
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, 286 million vials of injectable
analgesics were sold in the U.S. in 2007. Morphine is the
current market leader and accounted for more than
157 million vials in 2007. Other injectable opioids such as
meperidine, hydromorphone and fentanyl, which are all available
in generic forms, accounted for more than 92 million vials
in 2007. Ketorolac (Toradol), a genericized NSAID, is the only
non-opioid intravenous injectable analgesic available for
treating acute pain in the U.S. According to IMS,
injectable ketorolac sold more than 36 million vials in
2007.
According to Datamonitor, up to 53 million patients undergo
surgical procedures each year in the U.S. 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 U.S. for the treatment of
acute pain.
8
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 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 intravenous analgesic for acute pain
available in the U.S. 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 U.S., 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 Perfalgan in Europe, physicians are able to treat
post-operative pain with intravenous acetaminophen as baseline
therapy and use opioids in combination as needed for increasing
levels of pain.
Fever
Fever is an increase in internal body temperature above its
average normal value of 98.6± 0.7 degrees Fahrenheit
(37±0.4 degrees Centigrade). A significant fever is usually
defined as an oral temperature of greater than 101.5 degrees
Fahrenheit (38 degrees Centigrade). Fever is typically a sign of
the bodys response to an underlying infection, disease
process or allergic reaction. Very high fevers may cause
hallucinations, confusion, irritability, convulsions or death.
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
9
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 and nearly one in five children who were preterm at birth
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 U.S., 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
Acetavance in the U.S. would offer a significant new
treatment option for hospitalized patients with fever.
Acetavance
Perfalgan has been marketed by BMS in Europe since its launch in
France in mid-2002 and subsequent approval 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 its intravenous formulation of acetaminophen in
the U.S. 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
the rights to the intravenous formulation of acetaminophen from
BMS.
Acetaminophen is the most widely used drug for pain relief and
the reduction of fever in the U.S. 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 U.S. 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 Acetavance 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 Perfalgan 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
10
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.
Perfalgan 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 intravenous acetaminophen
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.
Perfalgan has now been approved in over 60 countries. In Europe,
Perfalgan 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, Perfalgan achieved a 45% dollar share (estimated 20%
vial share) in 2007 for the first three quarters of the year.
Total sales of Perfalgan by BMS in Europe is expected to exceed
70 million units in 2007.
We believe the U.S. represents a substantially larger
market opportunity for intravenous acetaminophen than Europe
with respect to the number of surgical procedures and potential
pricing. For example, the U.S. 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 U.S. 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 Perfalgan. In contrast, the price of Toradol (ketorolac) in
the U.S. 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. To date, approximately
1,800 subjects have received intravenous acetaminophen in
clinical trials that we or BMS have conducted, including
clinical trials that were completed by BMS to support the
Marketing Authorization Application, or MAA, that resulted in
European approval of intravenous acetaminophen. Overall, we
believe that the results of these studies demonstrate that
intravenous acetaminophen is safe and effective in the treatment
of post-operative pain in adults and children. A number of these
trials have also demonstrated that intravenous acetaminophen may
reduce the consumption of opioids when used in combination.
Clinical Studies for Post-Operative Pain in
Adults. One Phase III study evaluated 152
adult subjects with moderate-to-severe pain following total hip
and total knee replacements. Subjects were randomized to receive
intravenous acetaminophen, intravenous propacetamol or placebo.
We believe this study best demonstrates the efficacy of
intravenous acetaminophen 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 intravenous acetaminophen 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 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.
11
The following graph presents the mean pain relief results, based
on a five-point categorical scale with four representing
complete relief and zero representing no relief, at each time
point from 0.25 to 6 hours, reported by patients in this
Phase III study for post-operative pain in adults following
major orthopedic surgery:
This Phase III study also demonstrated a statistically
significant improvement in patient satisfaction with pain
treatment for intravenous acetaminophen compared to placebo
(with nearly twice as many subjects noting good or excellent
results at 24 hours compared with placebo despite using one
third less morphine). Drug-related adverse events in this trial
were similar to placebo.
Summary
of Analgesic Efficacy Scores over 6 Hours (Intent to Treat
Population)
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IV acetaminophen
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IV placebo
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p-value
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Weighted sums of pain relief over 6 hours using 5-point
categorical scale [TOTPAR6] *
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6.6
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2.2
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0.0001
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Weighted sums of pain intensity differences over 6 hours
using
5-point
categorical scale [SPID6] *
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2.3
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(0.6
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)
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0.0001
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Pain intensity differences over 6 Hours using 100mm visual
analog scale [SPAID6] *
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104.7
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(27.7
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)
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0.0001
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Good/excellent global evaluation at 24 hours
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41%
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23
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%
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<0.01
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Rescue medication (morphine) consumption over 24 hours (mg)
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38.3 (33% decrease)
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57.4
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<0.001
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Median time-to-rescue (hours)
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3.0
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0.8
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0.0001
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Safety
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IV acetaminophen not significantly different than placebo
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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 intravenous
acetaminophen, intravenous propacetamol or placebo.
Statistically significant effects versus placebo (
p-value< 0.01) were obtained with intravenous
acetaminophen 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 intravenous acetaminophen and placebo. Intravenous
acetaminophen 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 intravenous acetaminophen or
intravenous propacetamol. Intravenous
12
acetaminophen 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 intravenous acetaminophen over a
24-hour
period. This trial provided additional data regarding the
administration of multiple-doses of intravenous acetaminophen.
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 randomized to receive
intravenous acetaminophen or intravenous propacetamol.
Intravenous acetaminophen 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 intravenous acetaminophen or
intravenous propacetamol. Intravenous acetaminophen 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 a
well-understood and dose dependent, rarely occurring 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 Acetavance poses an
increased risk for hepatotoxicity or any other adverse event. In
fact, in the approximately 1,800 subjects receiving intravenous
acetaminophen in clinical trials conducted to date, the product
has exhibited a safety profile consistent with published data
for oral acetaminophen. While an increased incidence of
hepatotoxicity might be expected with intravenous acetaminophen,
in placebo-controlled trials, intravenous acetaminophen was
associated with fewer hepatic events than placebo, although this
difference was not statistically significant. There have been
rare, spontaneous reports of hepatotoxicity that may or may not
be associated with intravenous acetaminophen from the European
post-marketing safety database of intravenous acetaminophen
which covers a time period in which over 200 million doses
were administered to patients.
In pharmacokinetic trials, the peak plasma concentration of
acetaminophen ranged from 50% to 74% higher for intravenous
acetaminophen 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
intravenous acetaminophen compared to oral acetaminophen at 12
and 24 hour measurements. Therefore, the study concluded
that intravenous acetaminophen 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 intravenous
acetaminophen 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 Acetavance 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, intravenous
acetaminophen data and the data generated by clinical studies of
intravenous acetaminophen 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 Acetavance based on
these data sets as well as references to the extensive
literature which supports the safety and efficacy of
acetaminophen. 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.
13
In August 2006, we met with the FDA to discuss the clinical
trial requirements for submission of a 505(b)(2) NDA for
intravenous acetaminophen. Following our announcement of the
results of our first Phase III clinical trials of
Acetavance in January 2008, we initiated communications with the
FDA to seek additional guidance regarding our clinical
development program for this product candidate. As a result of
these communications, the FDA may require or we may decide to
conduct additional clinical trials or to modify our ongoing
clinical trials. The clinical development plan for Acetavance
currently comprises nine clinical trials, including four
pivotal, Phase III efficacy trials, two pharmacokinetic
studies and two safety studies. A description, and the current
status, of each of these trials are as follows:
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Pivotal, Phase III clinical trial in adults with
moderate-to-severe pain following total knee and hip replacement
surgery: This trial, which was completed by BMS, was a
randomized, placebo-controlled, double-blind, multi-center
Phase III study to assess the efficacy and safety of
multiple doses of intravenous acetaminophen versus intravenous
propacetamol or placebo. The primary efficacy endpoint of
time-specific pain relief scores from 0.25 to 6 hours was
statistically significant in favor of intravenous acetaminophen
over placebo at all time points. Key secondary endpoints of
time-specific pain intensity differences through 6 hours,
weighted sum of pain intensity differences over 6 hours,
weighted sum of pain relief differences over 6 hours, time
to first rescue, patient global evaluation at 24 hours, and
rescue medication consumption over 24 hours, were all
statistically significant in favor of intravenous acetaminophen
over placebo.
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Pivotal, Phase III clinical trial in female patients with
moderate-to-severe pain following gynecologic surgery: This
trial was a randomized, placebo-controlled, double-blind,
multi-center study to assess the efficacy and safety of single
and multiple doses of Acetavance. In January 2008, we announced
that the study did not meet its primary endpoint of
demonstrating a statistically significant reduction in
patients pain intensity scores over 48 hours compared
to placebo. We believe that the study missed its primary
endpoint due to the much higher than predicted variability of
the initial pain assessments, particularly in subjects who were
randomized closer to the end of their surgery. This variability
had a large, negative impact on the baseline-dependent
statistical measurements. However, several secondary endpoints,
which were not as dependent on a single baseline pain
measurement, were successfully achieved, including the sum of
pain relief scores over 24 and 48 hours, global patient
satisfaction at 24 and 48 hours and time to administration
of first rescue medication. The study also demonstrated a safety
profile for Acetavance that was no different than placebo,
including the evaluation of eight doses over a
48-hour
period.
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Pivotal, Phase III clinical trial in adult patients with
moderate pain following abdominal laparoscopic surgery: This
trial, which commenced enrollment in the fourth quarter of 2007,
is a randomized, placebo-controlled, double-blind, multi-center
study to assess the efficacy and safety of single and multiple
doses of Acetavance. We have recently implemented several design
modifications to this study, including tightening patient
eligibility criteria, performing more frequent pain assessments
and further standardizing opioid rescue medications prior to and
during the treatment period. We currently anticipate completing
enrollment in this clinical trial in the third quarter of 2008,
and announcing top-line data in the second half of 2008.
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Pivotal, Phase III clinical trial in adults with fever
versus placebo: This trial was a randomized, controlled,
double-blind, double-dummy study to assess the efficacy and
safety of a single dose of Acetavance compared to placebo. In
January 2008, we announced that this study successfully met the
primary endpoint, demonstrating a statistically significant
reduction of fever over six hours compared to placebo.
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Phase III clinical trial in adults with fever versus oral
acetaminophen: This trial was a randomized, controlled,
double-blind, double-dummy study to assess the onset of action
of a single dose of Acetavance vs. oral acetaminophen.
Enrollment was completed in October 2007, and we currently
anticipate announcing results of this study in the second
quarter of 2008.
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Pharmacokinetic study in adult subjects: This trial, which was a
randomized, single-center study to assess the pharmacokinetics
of single and multiple doses of Acetavance compared to oral
acetaminophen in adults, was completed in December 2006. The
results of this study were presented at the April 2007 meeting
of the American Society of Regional Anesthesia and Pain.
Consistent with data from prior pharmacokinetic trials with
intravenous acetaminophen and the medical literature,
intravenous acetaminophen produced a mean first dose maximum
plasma concentration approximately 70 to 75% higher than oral
acetaminophen
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14
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(p <0.0001). The time to maximum plasma concentration
for intravenous acetaminophen occurred near the end of the 15
minute infusion and was 30 minutes earlier than the observed
value for oral acetaminophen. The elimination half-life, area
under the curve, and volume of distribution values were
comparable and were not significantly different across treatment
groups. The oral acetaminophen area under the curve averaged
93.7% of that calculated for intravenous administration. Steady
state levels were achieved rapidly as no drug accumulation
occurred from 12 to 48 hours with repeated dosing. Neither
intravenous acetaminophen nor oral acetaminophen had a
significant effect on platelet aggregation when administered to
a maximum daily dose of 4 grams. There were no statistically
significant differences in any adverse event, including hepatic
events, observed between the treatment groups.
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Pharmacokinetic study in pediatric subjects: We have commenced
enrollment in this trial, which is a randomized, single-center
study to assess the population pharmacokinetics of single and
multiple doses of intravenous acetaminophen in children.
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Safety study in adult subjects: We have commenced enrollment in
this trial, which is an open-label, multi-center,
multi-day
study to assess the safety of repeated doses of intravenous
acetaminophen over at least five days in at least 50 adults.
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Safety study in pediatric subjects: We except that we will
commence enrollment in this trial, which is an open-label,
multi-center,
multi-day
study to assess the safety of repeated doses of intravenous
acetaminophen over at least five days in at least 50 children in
the second quarter of 2008.
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Assuming successful completion of all of our planned clinical
trials for this product candidate, we currently plan to submit a
505(b)(2) NDA for Acetavance to the FDA in the first half of
2009.
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 U.S. 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 325,000 CRBSIs among
hospitalized patients and more than 75,000 CRBSIs among
hemodialysis patients in the U.S. 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
15
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.
The CDC estimates that hospital-acquired bloodstream infections
are the eighth leading cause of death in the U.S. and that
intravascular catheters are the leading cause of
hospital-acquired bloodstream infections. Furthermore, a 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 a majority of U.S. states. In addition, federal
legislation, the Healthy Hospitals Act, is pending which would
amend the Social Security Act to require public reporting of
health care-associated infection data by hospitals and
ambulatory surgical centers and it would also establish programs
to provide incentives to hospitals to eliminate the rate of
occurrence of such infections. In addition, beginning in October
2008, the Centers for Medicare and Medicaid Services, or CMS,
will no longer provide reimbursement above the typical Inpatient
Prospective Payment System rate for the treatment of several
types of healthcare-associated infections, including vascular
catheter-associated infections, representing a potentially
significant loss of revenue to hospitals. These types of
initiatives support our view that significant unmet needs remain
in hospitals today.
Market
for Antimicrobials to Prevent Intravascular Catheter
Infections
Theta Reports estimated that over 500 million intravascular
catheters would be used in the U.S. in 2007, including
approximately 11 million CVCs. Unit sales of CVCs are
projected to grow at 9% per year. Outside the U.S., Theta
Reports estimates that approximately 13 million CVCs were
used in 2007. 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 antiseptic or
antimicrobial applications during a hospital stay. This
translates into more than an estimated 33 million
applications in the U.S. in 2007 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 antiseptic or antimicrobial applications
per week. This translates into more than an estimated
15 million applications in the U.S. in 2008.
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 two million peripherally inserted central
catheters inserted in the U.S. each year. We estimate there
are also approximately seven million arterials lines inserted in
the U.S. 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, particularly in the U.S. 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 CRBSIs. We believe that this change in
medical practice
16
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.
BioPatch is a chlorhexidine-impregnated sponge dressing that is
placed around the catheter at the insertion site. While this
product retains chlorhexidine at the catheter insertion site
over a period of days users may experience difficulty in
applying the dressing and the inability to visibly inspect the
insertion site through the dressing may be a disadvantage.
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
Omigard was discovered by researchers at Migenix, Inc., or
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 clinical 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:
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broad spectrum bactericidal and fungicidal activity;
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activity against resistant strains, including MRSA and
vancomycin resistant enterococci, or VRE;
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rapid and prolonged duration of effect;
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resistance to Omigard has not been induced in the laboratory;
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no demonstrated ability to generate cross-resistance to other
antimicrobials;
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excellent safety profile; and
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convenient application.
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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
17
microorganisms, including MRSA, and 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 antibiotics, 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 chiral
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 to
not be 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 and, 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 that treated 273 subjects. These trials demonstrated no
evidence of skin sensitization, clinically significant skin
irritation, or any measurable systemic absorption. In addition,
the Phase I clinical trial exhibited killing of greater than
99.9% of organisms on skin and maintained this level of
antimicrobial activity for at least three days.
Migenix (then known as Micrologix) and Fujisawa subsequently
completed a multi-center, randomized, evaluation
committee-blinded Phase III clinical 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 U.S. 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.
In April 2007, we completed a re-analysis of data from this
study, using a slightly different, stricter definition for LCSIs
than had been used previously. The results of this re-analysis
are reflected in the information provided below.
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.
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Treatment Arm
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Outcome
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10% povidone-iodine
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Omigard
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p-value
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Failure
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62/693 (8.9
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)%
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64/682 (9.4
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)%
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0.780
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Microbiologically proven CRBSI
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18/693 (2.6
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)%
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15/682 (2.2
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)%
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Success
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631/693 (91.1
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)%
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618/682 (90.6
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)%
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The definition of CRBSI required an organism isolated from a
peripheral blood draw to be microbiologically or genotypically
matched to an organism isolated from the catheter tip. In this
study, many catheters were lost and
18
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, a very
high rate of indeterminate CRBSI determinations was observed
(75%), 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 in the number of patients enrolled.
Treatment with Omigard also resulted in the statistically
significant prevention of LCSI (p-value=0.032). The table
below summarizes data for LCSI in the modified intent-to-treat
analysis set, which includes all treated patients who did not
have a bloodstream infection present at baseline. As shown in
the table, the Omigard group had approximately 42% fewer LCSIs
than the 10% povidone-iodine group (the initial analysis of this
data had indicated an approximately 49% reduction).
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Treatment Arm
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Endpoint
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10% povidone-iodine
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Omigard
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p-value
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LCSI present
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42/693 (6.1
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)%
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24/693 (3.5
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)%
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0.032
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Treatment with Omigard resulted in the statistically significant
prevention of 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.
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Treatment Arm
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Endpoint
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10% povidone-iodine
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Omigard
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p-value
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Catheter colonization present
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230/693 (40.1
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)%
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179/682 (31.7
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)%
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0.002
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Omigard had an excellent safety profile in this study. 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 clinical trial would
be required for approval of Omigard 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 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 clinical 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
19
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.
In April 2007, we completed a re-analysis of data from the
initial Phase III clinical trial conducted on Omigard as
part of our standard procedure for analyzing data to prepare a
final report of the study for a potential NDA or other
applications for marketing authorization. The re-analysis, which
used a slightly different, stricter definition of LCSI,
indicated a statistically significant reduction of LCSIs of
approximately 42% in the Omigard treatment arm as compared to
the povidone-iodine treatment arm (the previous analysis
indicated an approximately 49% reduction), as well as a
reduction in the overall LCSI infection rate. The catheter
colonization and catheter-related bloodstream infection results
from the initial Phase III study were not impacted by the
re-analysis. As a result, we decided to increase the number of
patients in the CLIRS trial from 1,250 to 1,850 in order to
maintain the statistical power of the trial. In July 2007, we
announced that the FDA had agreed with our proposal to make such
an increase.
We remain on track to complete enrollment of all
1,850 patients in the second quarter of 2008. If the
results of the trial are positive, we expect to submit an NDA
for Omigard in the first half of 2009.
We also intend to submit an MAA for Omigard to European
regulatory authorities following our NDA submission. 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.
Additional
Indications
We intend to pursue a pediatric indication for Omigard for the
prevention of catheter-related infections. As in the adult
population, CVCs and peripherally inserted central catheters, or
PICCs, 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 U.S. 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
U.S. every year.
Commercialization
Strategy
We intend to build a commercial organization in the
U.S. 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 U.S. 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 U.S., 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 our product candidates in the U.S., we intend
to build our own commercial organization and estimate that a
sales force of approximately
150-200 people
will reach the top 1,800 to 2,000 institutions, which we believe
represents more than 80% of the market opportunity for both
product candidates.
For Omigard, 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 be used as
an addition to current care. We intend to initially target
Omigard to high risk patients that we believe, based on market
research, comprise approximately 47% of patients with CVCs.
20
For Acetavance, 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
Acetavance
In March 2006, we in-licensed from BMS the patents and the
exclusive development and commercialization rights to Acetavance
in the U.S. and Canada. 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 $40.0 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 Acetavance 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 Acetavance
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
Acetavance agreement if we breach, in our capacity as a
sublicensee, any provision of the agreement between BMS and
Pharmatop. The Acetavance agreement will automatically terminate
in the event of a termination of the license agreement between
BMS and Pharmatop. We may terminate the Acetavance 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 Acetavance
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.
Omigard
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
21
proceedings involving the other party. We may terminate the
Omigard agreement upon written notice if we determine, prior to
regulatory approval in the U.S., 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
clinical trial for Omigard.
Intellectual
Property
Acetavance
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 Acetavance and expires in
August 2017. U.S. Patent No. 6,992,218 (Canadian
patent application 2,415,403) covers the process used to
manufacture Acetavance 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.
Omigard
We are the exclusive licensee of four U.S. patents, various
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 with omiganan pentahydrochloride.
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 where a medical device is inserted. U.S. Patent
No. 6,835,536 expires in November 2022.
Manufacturing
Acetavance
In July 2007, we entered into a development and supply agreement
with Baxter Healthcare Corporation, or Baxter, for the
completion of pre-commercialization manufacturing development
activities and the manufacture of commercial supplies of
Acetavance. Pursuant to the terms of the agreement with Baxter,
Baxter will receive development fees from us upon the completion
of specified development activities, which we will expense as
the costs are incurred. In addition, Baxter will receive a set
manufacturing fee based on the amount of the finished Acetavance
drug product produced, which prices may be adjusted by Baxter,
subject to specified limitations. We are also obligated to
purchase a minimum number of units each year following
regulatory approval, or pay Baxter an amount equal to the
per-unit
purchase price multiplied by the amount of the shortfall.
Further, we are obligated to reimburse Baxter for all reasonable
costs directly related to work performed by Baxter in support of
any change in the API source or API manufacturing process.
Omigard
We have purchased clinical supplies of the API omiganan
pentahydrochloride from UCB Bioproducts, which was subsequently
acquired by Lonza Group, Ltd., or Lonza. We have purchased
clinical supplies of the Omigard finished drug product from
Catalent Pharma Solutions, or Catalent, formerly Cardinal Health
Pharmaceutical Technologies and Services. Lonza and Catalent
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.
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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.
Acetavance
Our Acetavance product candidate is being developed for the
treatment of acute pain and fever, usually in the hospital
setting. A wide variety of competitive products already address
the market for treatment of pain and fever in hospitalized
patients, including:
Injectable
opioids
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Morphine is the leading product for the treatment of acute
post-operative pain, and is available generically from several
manufacturers;
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DepoDur, is an extended release injectable (epidural)
formulation of morphine; and
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other injectable opioids, including fentanyl, meperidine and
hydromorphone, each of which is available generically from
several manufacturers.
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Injectable
NSAIDs
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Ketorolac, an injectable NSAID, is available generically from
several manufacturers.
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Product
Candidates
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 Inc., Durect
Corporation, Javelin Pharmaceuticals, Inc., Pfizer Inc.,
SkyePharma Inc., St. Charles Pharmaceuticals, TheraQuest
Biosciences, LLC and Xsira Pharmaceuticals, Inc.
Omigard
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:
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topical antiseptics such as povidone-iodine and chlorhexidine,
each of which is available generically from several
manufacturers;
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Neosporin, a topical antibacterial ointment containing
polymyxin, neomycin and bacitracin, available generically from
several manufacturers;
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Bactroban, a topical antibacterial containing mupirocin,
available generically from several manufacturers; and
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BioPatch, a chlorhexidine-impregnated foam dressing, available
from Johnson & Johnson that is approved both for wound
dressing and the prevention of catheter-related infections.
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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 U.S. 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 U.S., 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.
FDA
Approval Process
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 U.S. 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 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
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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 clinical 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.
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
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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.
Fast
Track Designation
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 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.
The
Hatch-Waxman Act
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.
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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. 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 U.S., 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 U.S. 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 U.S., 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
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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 February 29, 2008, we had 47 full-time
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.
Certain factors may have a material adverse effect on our
business, financial condition and results of operations, and you
should carefully consider them. Accordingly, in evaluating our
business, we encourage you to consider the following discussion
of risk factors, in its entirety, in addition to other
information contained in this report as well as our other public
filings with the Securities and Exchange Commission.
In the near-term, the success of our business will depend on
many factors, including the following risks:
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we are largely dependent on the success of our only two
product candidates, Acetavance and Omigard, and we cannot be
certain that our ongoing and planned clinical development
programs will be successful, or sufficient to support new drug
applications, or NDAs, or that either product candidate will
receive regulatory approval or be successfully
commercialized;
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delays in the commencement, enrollment or completion of
clinical testing for either of our product candidates, or
significant issues regarding the adequacy of our clinical trial
designs or the execution or success of our clinical trials,
could result in increased costs to us and delay or limit our
ability to obtain regulatory approval;
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the outcome of final analyses of data from our clinical
trials of Acetavance or Omigard may vary from our initial
analyses, and the U.S. Food and Drug Administration, or
FDA, may not agree with our interpretation of these results;
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ongoing or planned clinical trials of Acetavance or Omigard
may produce negative or inconclusive results, or may be
inconsistent with previous clinical trial results, and we may
decide, or the FDA may require us, to conduct additional
clinical trials or to modify our ongoing clinical trials;
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even if our product candidates are approved by regulatory
authorities, the market potential for pain, fever, local
catheter site infections and other target markets may be less
than anticipated, and we expect intense competition in the
hospital marketplace for our targeted indications;
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unexpected adverse side effects or inadequate therapeutic
efficacy of Acetavance or Omigard could delay or prevent
regulatory approval or commercialization of our product
candidates, or result in recalls or product liability claims
against us;
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delays or quality issues with respect to the completion of
required pre-commercialization manufacturing development
activities for our product candidates, including the completion
of adequate stability data, could result in increased costs to
us and delay or limit our clinical trials and our ability to
obtain regulatory approval;
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the patent rights that we have in-licensed covering
Acetavance 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;
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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; and
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we may not be able to maintain patent protection for our
products and to commercialize our products without infringing
the patent rights of others.
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Each of these factors, as well as other factors that may
impact our business, are described in more detail in the
following discussion. Although the factors highlighted above are
among the most significant, any of the following factors could
materially adversely affect our business or cause our actual
results to differ materially from those contained in
forward-looking statements we have made in this report and those
we may make from time to time, and you should consider all of
the factors described when evaluating our business.
Risks
Related to Our Business and Industry
We are
largely dependent on the success of our two product candidates,
Acetavance 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 FDA, and other regulatory
authorities in the U.S. and other countries, which
regulations differ from country to country. We are not permitted
to market our product candidates in the U.S. 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. In March 2006, we in-licensed rights to
intravenous acetaminophen from Bristol-Myers Squibb Company, or
BMS, which currently markets this product in Europe for the
treatment of acute pain and fever. Our clinical development
program for this product candidate currently comprises nine
clinical trials, including four pivotal, Phase III efficacy
trials, two pharmacokinetic studies and two safety studies. In
January 2008, we announced that our Phase III efficacy
trial of Acetavance for the treatment of pain in adults
following abdominal gynecological surgery did not meet its
primary endpoint of demonstrating a statistically significant
reduction in patients pain intensity scores over
48 hours compared to placebo. We believe that the study
missed its primary endpoint due to the much higher than
predicted variability of the initial pain assessments,
particularly in subjects who were randomized closer to the end
of their surgery. This variability had a large, negative impact
on the baseline-dependent statistical measurements. As a result,
we are now engaged in communications with the FDA to obtain the
agencys advice regarding our development program for this
product candidate. Following these communications with the FDA,
we may decide or the FDA may require us to conduct additional
clinical trials of Acetavance, or to modify our ongoing clinical
trials of this product candidate, which would increase our costs
and may delay or limit our ability to obtain regulatory
approval. Depending upon the results of these communications
with the FDA and assuming successful completion of all of our
planned clinical trials for this product candidate, we currently
plan to submit a 505(b)(2) NDA to the FDA in the first half of
2009 requesting marketing approval of Acetavance for the
treatment of acute pain and fever in adults and children.
Additional clinical trials may be required to support the
approval of these indications and any additional indications or
dosages for Acetavance, which could delay, or limit the scope
of, any regulatory approvals for this product candidate. Our
failure to achieve our product development goals for Acetavance
in a timely manner or at all could adversely affect our business
and our stock price.
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. In
July 2007, we increased the number of patients to be enrolled in
our ongoing Phase III clinical trial of Omigard from 1,250
to 1,850 patients. Increasing the number of patients has
required greater financial resources than originally anticipated
and delayed the completion of enrollment in this trial to the
second quarter of 2008. Further, there can be no assurance that
we will not experience additional delays in the completion of
enrollment of this trial or incur additional expenses.
These clinical development programs for Acetavance and Omigard
may not lead to commercial products if our clinical trials fail
to demonstrate that our product candidates are safe and
effective and, as a result, we fail to obtain necessary
approvals from the FDA and similar foreign regulatory agencies.
We may also fail to obtain the necessary
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approvals if we have inadequate financial or other resources to
advance our product candidates through the clinical trial
process. Any failure to obtain approval of Acetavance or Omigard
would have a material and adverse effect on our business.
If
clinical trials of our current or future product candidates do
not produce results necessary to support regulatory approval in
the U.S. or elsewhere, we will be unable to commercialize these
products.
To receive regulatory approval for the commercial sale of
Acetavance, 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, the licensor for our Omigard product
candidate, together with its former collaborator, Fujisawa
Healthcare, Inc., or Fujisawa, completed enrollment in a
Phase III clinical 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 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 SPA process with the FDA concerning the
protocol for our own Phase III clinical trial of Omigard.
In connection with the SPA for Omigard, the FDA agreed that a
single confirmatory Phase III clinical trial will be
required for approval for Omigard and that the prevention of
LCSIs will be the sole primary efficacy endpoint, and we
initiated this clinical trial, which is called the CLIRS trial,
in August 2005. In July 2007, we increased the number of
patients to be enrolled in the CLIRS trial from 1,250 to
1,850 patients in order to increase the statistical power
of the study. This change was prompted by our planned
re-analysis of data from the initial Phase III clinical
trial of Omigard, which indicated a statistically significant
reduction in the number of LCSIs of 42% in the Omigard treatment
arm as compared to the povidone-iodine treatment arm, while the
original analysis of data from this trial indicated a
statistically significant reduction of LCSIs of approximately
49%. Increasing the number of patients enrolled in this clinical
trial has required greater financial resources than originally
anticipated and has delayed the completion of enrollment from
the second half of 2007 to the second quarter of 2008. We cannot
be certain that our ongoing Phase III clinical trial of
Omigard will be able to enroll an adequate number of patients,
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 advances in
the field or future public health concerns unrecognized at the
time of the FDAs protocol assessment, and any further
changes we may propose to the protocol will remain subject to
the FDAs approval.
Our clinical development programs are subject to the risk of
failure inherent in the development of new drugs, and our
clinical trials may not demonstrate the safety, tolerability and
effectiveness of our product candidates. For example, in January
2008, we announced that our Phase III efficacy trial of
Acetavance for the treatment of pain in adults following
abdominal gynecological surgery did not meet its primary
endpoint of demonstrating a statistically significant reduction
in patients pain intensity scores over 48 hours
compared to placebo. Delays in completing our clinical trials or
the rejection of data from a clinical trial by regulatory
authorities will result in increased development costs and could
have a material adverse effect on the development of our product
candidates. In addition, our failure to adequately demonstrate
the efficacy and safety of Acetavance, 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.
30
Because
the results of earlier clinical trials are not necessarily
predictive of future results, Acetavance, 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 than us, 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 Acetavance from BMS,
which is currently marketing intravenous acetaminophen in Europe
and other parts of the world under the brand name Perfalgan.
Nine post-operative pain clinical trials have been completed,
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 Acetavance in the U.S. 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 Acetavance, we must
conduct additional adequate and well controlled clinical trials
in the U.S. to demonstrate Acetavances safety and
efficacy in specific indications to gain regulatory approval in
the U.S.
In January 2008, we announced top-line results for our
Phase III efficacy trial of Acetavance for the treatment of
pain in adults following abdominal gynecological surgery. This
trial did not meet its primary endpoint of demonstrating a
statistically significant reduction in patients pain
intensity scores over 48 hours compared to placebo.
However, this same trial did meet several secondary endpoints,
including pain relief, global patient satisfaction and time to
rescue medication. We also announced the results of a
Phase III clinical trial of Acetavance for the treatment of
fever in adults, which successfully met its primary endpoint,
demonstrating a statistically significant reduction of
endotoxin-induced fever over six hours compared to placebo, and
key secondary endpoints. As a result of the outcome of these
clinical trials, we are now engaged in communications with the
FDA to obtain the agencys advice regarding our development
program for this product candidate. Following our communications
with the FDA, we may also decide or the FDA may require us to
conduct additional clinical trials to support the approval of
these indications and any additional indications or dosages for
Acetavance, which could delay, or limit the scope of, any
regulatory approvals for this product candidate, and we may not
be able to demonstrate the same safety and efficacy for
Acetavance in our planned and ongoing Phase III clinical
trials as was demonstrated previously by BMS. Further, if
subsequent trial results are unfavorable or insufficient, we may
be forced to further revise the development plan for this
product candidate, which could involve additional significant
expense and delay.
Our other product candidate, Omigard, 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. Similar to
Acetavance, we obtained electronic databases from the completed
Phase III clinical trials sponsored by Migenix and
Fujisawa. As a part of our standard procedure for analyzing data
to prepare a final report of the study for a potential New Drug
Application or other applications for marketing authorization,
we re-analyzed the data using a slightly different, stricter
definition of LCSIs. Our re-analysis indicated a statistically
significant reduction in the number of LCSIs of 42% in the
Omigard treatment arm as compared to the povidone-iodine
treatment arm, while the original analysis indicated a
statistically significant reduction of LCSIs of approximately
49%. Because the target sample size for our own Phase III
clinical trial of Omigard, called the CLIRS trial, is based, in
part, upon the LCSI rate and treatment effect of the original
Phase III clinical trial of this product candidate, we
determined that adding patients would be prudent in order to
maintain the statistical power of the study. In July 2007, we
increased the number of patients to be enrolled in the CLIRS
trial from 1,250 to 1,850 patients. Increasing the number
of patients in this study has required greater financial
resources than originally anticipated and delayed the completion
of enrollment from the second half of 2007 to the second quarter
of 2008. Our audit and verification of the accuracy of the
primary clinical
31
data provided by our licensor and its former collaborator are
continuing, and we cannot determine their applicability to our
regulatory filings. Although the Phase III clinical trial
of Omigard conducted by Migenix and Fujisawa demonstrated
favorable, statistically significant results for the prevention
of LCSIs and catheter colonization, secondary endpoints in their
trial, we may not observe similar results in the CLIRS 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 of 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 one or more
further successful Phase III clinical trials.
The data collected from our clinical trials may not be adequate
to support regulatory approval of Acetavance, 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. As a result of auditing the data
from these earlier clinical trials and completing the extensive
re-analyses that we will need to perform as part of our standard
procedures for preparing final reports of these studies, the
previously reported results may change, which may negatively
impact our ongoing Phase III clinical trials, or the
suitability of earlier clinical trials for inclusion in
applications for marketing authorization of our Acetavance and
Omigard product candidates. As a result, 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 that 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 trials, or
significant issues regarding the adequacy of our clinical trial
designs or the success or execution of our clinical trials,
could result in increased costs to us and delay or limit our
ability to obtain regulatory approval for our product
candidates.
If we experience delays in the commencement or completion of our
clinical trials, we could incur significantly higher product
development costs and our ability to obtain regulatory approvals
for our product candidates could be delayed. We may also fail to
obtain the necessary regulatory approvals if we have inadequate
financial or other resources to advance our product candidates
through the clinical trial process. We do not know whether
enrollment in our planned and ongoing clinical trials of
Acetavance will be completed on time, whether our additional
planned and ongoing clinical trials for Acetavance will be
completed on schedule, if at all, or whether we will decide, or
the FDA may require us, to increase the number of patients
enrolled in our ongoing clinical trials. Additional clinical
trials may be required to support regulatory approvals for the
treatment of acute pain and fever in adults and children and for
any additional indications or dosages for Acetavance, which
could delay or limit the scope of any regulatory approvals we
may receive for this product candidate. In July 2007, we
announced an estimated delay in the completion of enrollment for
our ongoing Phase III clinical trial of Omigard from the
second half of 2007 to the second quarter of 2008, because of
our decision to increase the number of patients to be enrolled
in this trial, and we do not know if this clinical trial will be
completed on schedule, or at all. As a result of the outcome of
our Phase III efficacy trial of Acetavance for the
treatment of pain in adults following abdominal gynecological
surgery, we are now engaged in communications with the FDA to
obtain the agencys advice regarding our development
program for this product candidate. We currently anticipate that
our submission of a 505(b)(2) NDA to the FDA for Acetavance may
be delayed from the second half of 2008 to the first half of
2009. Depending upon the results of our communications with the
FDA and the results of our other clinical trials for this
product candidate, we may decide or the FDA may require us to
conduct additional clinical trials of Acetavance, which would
increase our costs and may further delay this estimated
submission date.
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. For example, we believe that improvements to hospital
infection prevention practices since we commenced enrollment in
our Phase III clinical trial of Omigard may reduce
catheter-related infection rates, which may result in the
occurrence of an insufficient number of infections to
demonstrate statistical
32
significance in this clinical trial or require an even larger
number of patients to be enrolled in order to demonstrate a
statistically significant effect. Although the FDA agreed with
our proposal to increase the number of patients to be enrolled
in our ongoing Phase III clinical trial of Omigard, we may
be unable to enroll an adequate number of patients and, even if
we enroll our target number of additional patients, we may still
be unable to demonstrate statistical significance or otherwise
demonstrate sufficient efficacy and safety to support the filing
of an NDA for Omigard. The commencement and completion of
clinical trials can be delayed for a variety of other reasons,
including delays related to:
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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;
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obtaining regulatory approval to commence or amend a clinical
trial;
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obtaining institutional review board approval to commence or
amend a clinical trial at a prospective site;
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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
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retaining patients who have initiated a clinical trial but who
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.
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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:
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failure to conduct the clinical trial in accordance with
regulatory requirements or our clinical protocols;
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inspections of our own clinical trial operations, the operations
of our CROs, or our clinical trial sites by the FDA or other
regulatory authorities, which may result in the imposition of a
clinical hold or, potentially, prevent us from using some of the
data generated from our clinical trials to support requests for
regulatory approval of our product candidates;
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new information suggesting unacceptable risk to subjects, or
unforeseen safety issues or any determination that a trial
presents unacceptable health risks;
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new information suggesting that the target condition occurs too
infrequently for the product candidate to demonstrate
efficacy; or
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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.
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Additionally, changes in regulatory requirements and guidance
may occur, or new information concerning the product candidate
or the target medical condition may emerge, and we may need to
perform additional, unanticipated non-clinical testing of our
product candidates or amend clinical trial protocols to reflect
these developments. Additional non-clinical testing would add
costs and could delay or result in the denial of regulatory
approval for a product candidate. 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.
33
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 Acetavance for the treatment of acute pain
in the hospital setting, which will compete with
well-established products for this and similar indications,
including opioids such as morphine, fentanyl, meperidine and
hydromorphone, each of which is available generically from
several manufacturers, and several of which are available as
proprietary products using novel delivery systems, as well as an
extended release injectable (epidural) formulation of morphine,
DepoDur. Ketorolac, an injectable non-steroidal
anti-inflammatory drug, or NSAID, is also available generically
in the U.S. from several manufacturers and used to treat
acute pain. During the time that it will take us to obtain
regulatory approval for Acetavance, 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 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 also 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:
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capital resources;
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development resources, including personnel and technology;
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clinical trial experience;
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regulatory experience;
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expertise in prosecution of intellectual property
rights; and
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manufacturing, distribution and sales and marketing experience.
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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 U.S.
34
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:
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limitations or warnings contained in a products
FDA-approved labeling, including potential limitations or
warnings for Acetavance that may be more restrictive than oral
formulations of acetaminophen;
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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;
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limitations inherent in the approved indication for either of
our product candidates compared to more commonly-understood or
addressed conditions, including, in the case for 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
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potential advantages over, and availability of, alternative
treatments, including, in the case of Acetavance, a number of
products already used to treat acute pain in the hospital
setting, and in the case for 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.
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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.
The
decreasing use of the comparator product in our clinical trial
of Omigard and improvements in hospital infection control
practices that lower catheter infection rates may limit our
ability to complete the trial in a timely manner and hinder the
competitive profile of this product candidate.
Over the last several years, many hospitals, particularly in the
U.S., have increased the use of a particular antiseptic,
chlorhexidine, as their 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 of 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 of 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 for Omigard in combination
with
35
chlorhexidine antisepsis for the prevention of LCSIs.
Additionally, we believe that improvements to hospital infection
control practices since we commenced enrollment in our ongoing
Phase III clinical trial of Omigard may reduce
catheter-related infection rates, which may result in the
occurrence of an insufficient number of infections to
demonstrate statistical significance in this clinical trial or
require an even larger number of patients to be enrolled in
order to demonstrate a statistically significant effect. 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 Acetavance, 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:
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issue warning letters or untitled letters;
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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;
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impose other civil or criminal penalties;
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suspend regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to
approved applications filed by us;
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impose restrictions on operations, including costly new
manufacturing requirements; or
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seize or detain products or require a product recall.
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Even
if our product candidates receive regulatory approval in the
U.S., we may never receive approval or commercialize our
products outside of the U.S.
Our rights to Acetavance are limited to the U.S. and
Canada, and our rights to Omigard are limited to
North America and Europe. In order to market any products
outside of the U.S., we must comply with numerous and varying
regulatory requirements of other countries regarding
non-clinical testing, manufacturing, 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
U.S. 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
U.S. As described above, such effects include the risks
that our product candidates may not be
36
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 U.S., 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.
We
will need to obtain FDA approval of our proposed product names,
Acetavance and Omigard, and any failure or delay associated with
such approval may adversely impact our business.
Any name we intend to use for our product candidates will
require approval from the FDA regardless of whether we have
secured a formal trademark registration from the
U.S. Patent and Trademark Office. The FDA typically
conducts a rigorous review of proposed product names, including
an evaluation of the potential for confusion with other product
names. The FDA may also object to a product name if it believes
the name inappropriately implies medical claims. If the FDA
objects to either of the product names Acetavance or Omigard, we
may be required to adopt an alternative name for those product
candidates. If we adopt an alternative name, we would lose the
benefit of our existing trademark applications for Acetavance
and/or
Omigard and may be required to expend significant additional
resources in an effort to identify a suitable product name that
would qualify under applicable trademark laws, not infringe the
existing rights of third parties and be acceptable to the FDA.
We may be unable to build a successful brand identity for a new
trademark in a timely manner or at all, which would limit our
ability to commercialize our product candidates.
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 Acetavance observed in clinical trials
completed to date include transient liver enzyme elevations,
nausea or vomiting, allergic reactions, and pain or local skin
reactions at the injection site. When used in excess of the
current guidelines for administration, acetaminophen has an
increased potential to cause liver toxicity. While we do not
expect the administration of acetaminophen in intravenous form
will 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
primarily limited to local skin reactions, including redness,
swelling, bleeding, itching, bruising and pain. In addition,
while these drug-related adverse events have generally 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.
37
If either of our product candidates receives marketing approval
and we or others later identify undesirable side effects caused
by the product:
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regulatory authorities may require the addition of labeling
statements, specific warnings or a contraindication;
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regulatory authorities may suspend or withdraw their approval of
the product, or require it to be removed from the market;
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we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product; and
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our reputation may suffer.
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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,
Acetavance, 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.
Governments continue to propose and pass legislation designed to
reduce the cost of healthcare. In the U.S., 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 Acetavance product candidate for the
U.S. 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
38
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 Acetavance product candidate, we could lose the
ability to develop and commercialize Acetavance.
Our license for Acetavance 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 Acetavance. 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 Acetavance product candidate and may lead to a complete
termination of our product development and any commercialization
efforts for Acetavance.
We
rely on third parties to conduct our clinical trials, including
our ongoing Phase III clinical program for Acetavance and
our ongoing Phase III clinical trial of 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 rely primarily on third-party CROs to manage the execution of
our clinical trials for our Acetavance 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 manage the
execution of our clinical trials, we are responsible for
oversight and for ensuring that each of our clinical trials is
conducted in accordance with its investigational plan and
protocol. Moreover, the FDA requires us and our CROs to comply
with regulations and standards, commonly referred to as good
clinical practices, or GCPs, for conducting, monitoring,
recording 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 care, time and resources
to our drug development programs, if their performance is
substandard, or if they are inspected by the FDA and are found
not to be in compliance with GCPs, 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 Acetavance,
Omigard or future product candidates.
If the
manufacturers upon whom we rely fail to complete required
pre-commercialization manufacturing development activities on
time, we may face delays in the development of, or in obtaining
regulatory approvals for, our product candidates, which would
result in increased costs and the loss of potential
revenues.
We do not manufacture any of our product candidates, and we do
not currently plan to develop any capacity to do so. Instead, we
rely on third party manufacturers to perform
pre-commercialization manufacturing development activities for,
and manufacture, Acetavance, Omigard and, most likely, any other
product candidates that we may in-
39
license or acquire in the future. Any problems or delays we
experience in preparing for commercial-scale manufacturing of a
product candidate may cause us to experience increased costs,
result in delays in receiving FDA or other regulatory approvals,
or impair our ability to manufacture our product candidates,
which would adversely affect our business. For example, as a
part of our applications for regulatory approval, 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, as well as validate methods and manufacturing
processes, in order to receive regulatory approval to
commercialize our product candidates. Any delays in the
availability of this data may cause delays in receiving FDA or
other regulatory authority approvals. Additionally, the FDA is
likely to conduct inspections of our manufacturers
facilities from time to time, including as part of its review of
any marketing applications we may file. If our manufacturers are
not in compliance with cGMP requirements, this may delay the
approval by the FDA of these marketing applications, or result
in delays in the availability of our product candidates to
complete clinical trials or for commercial distribution.
If the
manufacturers upon whom we rely terminate our supply agreements
or fail to produce our product candidates in the volumes we
require on a timely basis, or to comply with stringent
regulations applicable to pharmaceutical manufacturers, we may
face delays in the development and commercialization of, or be
unable to meet demand for, our product candidates and may lose
potential revenues.
If the commercial manufacturers upon whom we rely to manufacture
our product candidates fail to deliver the required commercial
quantities of bulk drug substance or finished product on a
timely basis at commercially reasonable prices that meet all
applicable quality standards, we would likely be unable to meet
demand for our products and we would lose potential revenues. We
have entered into a development and supply agreement with Baxter
Healthcare Corporation, or Baxter, for the completion of
pre-commercialization manufacturing development activities and
the manufacture of commercial supplies of the finished
Acetavance. Any termination or disruption of our relationship
with Baxter may materially harm our business and financial
condition, and frustrate any commercialization efforts for
Acetavance. We do not yet have agreements established regarding
commercial supply of Omigard and may not be able to establish or
maintain commercial manufacturing arrangements on commercially
reasonable terms for Omigard, or any other product candidates
that we may in-license or acquire. We are currently negotiating
with suppliers for the commercial supply of the active
pharmaceutical ingredient, or API, for Acetavance and for the
commercial supply of API and finished drug product for Omigard.
We do not have any long-term commitments from our suppliers of
clinical trial material or guaranteed prices for our product
candidates or placebos, and we do not have alternate
manufacturing plans in place at this time. If we need to change
to other manufacturers or change the manufacturing processes for
our product candidates, the FDA and comparable international
regulatory authorities must approve these manufacturers
facilities and processes prior to our use, which would require
new testing and compliance inspections, and the new
manufacturers would have to be educated in, or independently
develop, the processes necessary for the production of our
products. If there are delays in obtaining approvals of any new
manufacturers, we could experience delays in the availability of
our product candidates to complete our clinical trials or for
commercial distribution.
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
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
40
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, Acetavance 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:
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exposure to unknown liabilities;
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disruption of our business and diversion of our
managements time and attention to develop acquired
products or technologies;
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incurrence of substantial debt or dilutive issuances of
securities to pay for acquisitions;
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higher than expected acquisition and integration costs;
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increased amortization expenses;
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difficulty and cost in combining the operations and personnel of
any acquired businesses with our operations and personnel;
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impairment of relationships with key suppliers or customers of
any acquired businesses due to changes in management and
ownership; and
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inability to retain key employees of any acquired businesses.
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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.
We
will need to increase the size of our organization, and we may
experience difficulties in managing growth.
As of February 29, 2008, we had 47 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.
Our management, personnel, systems and facilities currently in
place may not be adequate to support this future growth. Our
need to effectively manage our operations, growth and various
projects requires that we:
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manage our clinical trials effectively, including our ongoing
Phase III clinical program for Acetavance, which will be
conducted at numerous clinical trial sites in the U.S., and our
ongoing Phase III clinical trial of Omigard, which is being
conducted at numerous clinical sites in the U.S. and Europe;
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manage our internal development efforts effectively while
carrying out our contractual obligations to licensors and other
third parties; and
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continue to improve our operational, financial and management
controls, reporting systems and procedures.
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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 Assistant Secretary. If we lose
one or more of these key employees, our ability to successfully
implement our business strategy 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.
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:
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withdrawal of clinical trial participants;
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termination of clinical trial sites or entire trial programs;
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decreased demand for our product candidates;
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impairment of our business reputation;
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costs of related litigation;
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substantial monetary awards to patients or other claimants;
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loss of revenues; and
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the inability to commercialize our product candidates.
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We have obtained limited product liability insurance coverage
for our clinical trials with a $15.0 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
42
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 U.S., including foreign countries
where the drugs are sold at lower prices than in the U.S., 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 U.S., which may include
re-importation from foreign countries where the drugs are sold
at lower prices than in the U.S. 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 Acetavance in Europe and
other countries principally under the brand name Perfalgan.
Although Perfalgan is not labeled for sale in the U.S. and
we have an exclusive license from BMS and its licensor to
develop and sell Acetavance in the U.S., it is possible that
hospitals and other users may in the future seek to import
Perfalgan rather than purchase Acetavance in the U.S. for
cost-savings or other reasons. We would not receive any revenues
from the importation and sale of Perfalgan into the U.S.
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 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 Acetavance 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.
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Risks
Related to Intellectual Property
The
patent rights that we have in-licensed covering Acetavance 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 Acetavance is acetaminophen. Patent
protection for the acetaminophen molecule itself in the
territories licensed to us, which include the U.S. and
Canada, is not available. As a result, competitors who obtain
the requisite regulatory approval can offer products with the
same active ingredient as Acetavance 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 U.S. that
claim methods of making acetaminophen. If a supplier of the API
for our Acetavance 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. For
example, Injectapap, a liquid formulation of acetaminophen for
intramuscular injection was approved by the FDA for the
reduction of fever in adults in March 1986, although it was
subsequently withdrawn from the market by McNeil Pharmaceutical
in July 1986.
The number of patents and patent applications covering products
in the same field as Acetavance 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 Acetavance
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.
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 U.S. 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 U.S. 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 only covers the
use of Omigard and other formulations of omiganan for the
licensed field, which is the topical administration to a burn or
a surgical wound site for the treatment of burn-related,
surgical wound-related infections and the topical administration
to a device or the site around the device for the treatment of
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, SCR Pharmatop, and Migenix, to
protect the proprietary rights covering Acetavance and Omigard.
Regarding Acetavance, 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
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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 at our expense. 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 Acetavance patents, BMS has the first right to
prosecute a third-party infringement of the SCR Pharmatop
patents, 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. It is possible that SCR Pharmatop or
BMS could take some action or fail to take some action that
could harm 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 U.S. 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 Acetavance, we will have some ability to
participate in either SCR Pharmatops or BMS defense
thereof. In the case that neither party elects to defend the
third-party challenge, we may have the opportunity to defend it.
For a third-party challenge to the in-licensed BMS patents
relating to Acetavance, 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.
45
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
Acetavance, 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 U.S. The patent situation outside the
U.S. is even more uncertain. Changes in either the patent
laws or in interpretations of patent laws in the U.S. 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:
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our licensors might not have been the first to make the
inventions covered by each of our pending patent applications
and issued patents;
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our licensors might not have been the first to file patent
applications for these inventions;
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others may independently develop similar or alternative
technologies or duplicate any of our product candidates or
technologies;
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it is possible that none of the pending patent applications
licensed to us will result in issued patents;
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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;
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we may not develop additional proprietary technologies that are
patentable; or
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patents of others may have an adverse effect on our business.
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Patent applications in the U.S. 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 U.S. 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 product 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
46
unpredictable. In addition, courts outside the U.S. 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 Acetavance, 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 Acetavance,
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. Similarly, there is a patent application pending in the
U.S. 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 U.S. 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 Acetavance or Omigard may
infringe. There could also be existing patents of which we are
not aware that Acetavance 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:
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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;
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substantial damages for past infringement which we may have to
pay if a court decides that our product infringes on a
competitors patent;
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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;
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if a license is available from a patent holder, we may have to
pay substantial royalties or grant cross licenses to our
patents; and
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redesigning our processes so they do not infringe, which may not
be possible or could require substantial funds and time.
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47
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.
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, Acetavance and Omigard,
with the goal of supporting regulatory approval for these
product candidates. We have incurred losses in each year since
our inception in May 2004. Net losses were $51.7 million,
$52.2 million and $7.7 million for 2007, 2006 and
2005, respectively. As of December 31, 2007, we had an
accumulated deficit of $114.4 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 and any
additional clinical trials that we may be required to conduct in
order to support regulatory approvals, additional indications or
dosages for our product candidates. In addition, if we obtain
regulatory approval for Acetavance 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:
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successfully complete our ongoing and future clinical trials for
Acetavance and Omigard;
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obtain regulatory approval for either of our two product
candidates or any other product candidate that we may in-license
or acquire;
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assuming these regulatory approvals are received, manufacture
commercial quantities of our product candidates at acceptable
cost levels; and
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successfully market and sell any approved products.
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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 Acetavance 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 conducting product development activities, including
clinical trials and manufacturing development activities, for
our two product candidates. We have not yet demonstrated an
ability to obtain regulatory approval for or successfully
48
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.
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:
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fund our operations and continue to conduct adequate and
well-controlled clinical trials to provide clinical data to
support regulatory approval of marketing applications;
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continue our development activities;
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qualify and outsource the commercial-scale manufacturing of our
products under cGMP; and
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commercialize Acetavance, Omigard or any other product
candidates that we may in-license or acquire, if any of these
product candidates receive regulatory approval.
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We believe that our existing cash and cash equivalents,
including the net proceeds from our initial public offering
completed in the fourth quarter of 2006 and our registered
direct offering in the first quarter of 2008, will be sufficient
to meet our projected operating requirements, at a minimum,
through the next twelve months. We have based this estimate on
assumptions that may prove to be wrong and we could spend our
available financial resources faster than we currently expect.
Our future funding requirements will depend on many factors,
including, but not limited to:
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the rate of progress and cost of our clinical trials and other
product development programs for Acetavance, Omigard and any
other product candidates that we may in-license or acquire;
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the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights associated
with our product candidates;
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the cost and timing of completion of an outsourced commercial
manufacturing supply for each product candidate;
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the costs and timing of regulatory approval;
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the costs of establishing sales, marketing and distribution
capabilities;
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the effect of competing technological and market
developments; and
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the terms and timing of any collaborative, licensing,
co-promotion or other arrangements that we may establish.
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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 and investment 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.
49
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:
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the timing of milestone payments required under our license
agreements for Acetavance and Omigard;
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our execution of other collaborative, licensing or similar
arrangements, and the timing of payments we may make or receive
under these arrangements;
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our addition or termination of clinical trials or funding
support;
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variations in the level of expenses related to our two existing
product candidates or future development programs;
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any intellectual property infringement lawsuit in which we may
become involved;
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regulatory developments affecting our product candidates or
those of our competitors; and
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if either of our product candidates receives regulatory
approval, the level of underlying hospital demand for our
product candidates and wholesalers buying patterns.
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If our quarterly or annual operating results fall below the
expectations of investors or securities analysts, the price of
our common stock could decline substantially. Furthermore, any
quarterly or annual 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, and in December
2007, we amended this agreement and secured an additional
$15.0 million loan from the same parties and Merrill Lynch
Capital. These loan and security agreements contain 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 continue to 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 incur significant legal, accounting and
other expenses under the Sarbanes-Oxley Act of 2002, as well as
rules subsequently implemented by the SEC and The NASDAQ Stock
Market LLC. These rules impose various 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 have devoted and will continue to devote a substantial
amount of time to these compliance initiatives. Moreover, these
rules and regulations increase our legal and financial
compliance costs and make some activities more time-consuming
and costly. For example, these rules and regulations make it
more difficult and more
50
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 of 2002 requires, among other things,
that we maintain effective internal controls for financial
reporting and disclosure controls and procedures. As a result,
as of December 31, 2007, we were required to perform an
evaluation of our internal controls over financial reporting to
allow management to report on the effectiveness of those
controls, as required by Section 404 of the Sarbanes-Oxley
Act. Additionally, our independent auditors were required to
perform a similar evaluation and report on the effectiveness of
our internal controls over financial reporting. At
December 31, 2007, management and our independent auditors
did not identify any material weaknesses in our internal
controls over financial reporting. Our efforts to comply with
Section 404 and related regulations has required, and
continues to require, the commitment of significant financial
and managerial resources. While we anticipate maintaining the
integrity of our internal controls over financial reporting and
all other aspects of Section 404, we cannot be certain that
a material weakness will not be identified when we test the
effectiveness of our control systems in the future. If a
material weakness is identified, we could be subject to
sanctions or investigations by Nasdaq, the SEC or other
regulatory authorities, which would require additional financial
and management resources, costly litigation or a loss of public
confidence in our internal controls, which could have an adverse
effect on the market price of our stock.
Risks
Relating to Securities Markets and Investment in Our
Stock
There
may not be a viable public market for our common
stock.
Our common stock had not been publicly traded prior to our
initial public offering, which was completed in October 2006,
and an active trading market may not develop or be sustained. We
have never declared or paid any cash dividends on our capital
stock, and we currently intend to retain all available funds and
any future earnings to support operations and finance the growth
and development of our business and do not intend to pay cash
dividends on our common stock for the foreseeable future.
Furthermore, our amended loan and security agreement with
Silicon Valley Bank, Oxford Finance Corporation and Merrill
Lynch Capital restricts our ability to pay cash dividends.
Therefore, investors will have to rely on appreciation in our
stock price and a liquid trading market in order to achieve a
gain on their investment. The market prices for securities of
biotechnology and pharmaceutical companies have historically
been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies.
Since our initial public offering in October 2006 through
February 29, 2008, the trading prices for our common stock
ranged from a high of $18.55 to a low of $5.01.
Future
sales of our common stock may cause our stock price to
decline.
Persons who were our stockholders prior to the sale of shares in
our initial public offering continue to hold a substantial
number of shares of our common stock that they may now be able
to sell in the public market. Significant portions of these
shares are held by a small number of stockholders. Sales by our
current stockholders of a substantial number of shares, or the
expectation that such sales may occur, could significantly
reduce the market price of our common stock. Moreover, the
holders of a substantial number of shares of common stock may
have rights, subject to certain conditions, to require us to
file registration statements to permit the resale of their
shares in the public market or to include their shares in
registration statements that we may file for ourselves or other
stockholders.
We have also registered all common stock that we may issue under
our employee benefits plans. As a result, these shares can be
freely sold in the public market upon issuance, subject to
restrictions under the securities laws. In addition, our
directors and executive officers may in the future establish
programmed selling plans under
Rule 10b5-1
of the Securities Exchange Act of 1934, as amended, for the
purpose of effecting sales of our common stock. If any of these
events cause a large number of our shares to be sold in the
public market, the sales could reduce the trading price of our
common stock and impede our ability to raise future capital.
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We
expect that the price of our common stock will fluctuate
substantially.
The market price of our common stock is likely to be highly
volatile and may fluctuate substantially due to many factors,
including:
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the results from our clinical trial programs, including our
ongoing Phase III clinical program for Acetavance and our
ongoing Phase III clinical trial of Omigard;
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the results of clinical trial programs for Acetavance and
Omigard being performed by others;
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FDA or international regulatory actions, including failure to
receive regulatory approval for any of our product candidates;
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failure of any of our product candidates, if approved, to
achieve commercial success;
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announcements of the introduction of new products by us or our
competitors;
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market conditions in the pharmaceutical and biotechnology
sectors;
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developments concerning product development results or
intellectual property rights of others;
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litigation or public concern about the safety of our potential
products;
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actual and anticipated fluctuations in our quarterly operating
results;
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deviations in our operating results from the estimates of
securities analysts or other analyst comments;
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additions or departures of key personnel;
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third-party coverage and reimbursement policies;
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developments concerning current or future strategic
collaborations; and
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discussion of us or our stock price by the financial and
scientific press and in online investor communities.
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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
executive officers and directors and their affiliates may
exercise control over stockholder voting matters in a manner
that may not be in the best interests of all of our
stockholders.
As of December 31, 2007, our executive officers and
directors and their affiliates together controlled approximately
41% 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 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;
|
52
|
|
|
|
|
a prohibition on stockholder action through written consent;
|
|
|
|
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
|
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|
|
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 amended
loan and security agreement with Silicon Valley Bank, Oxford
Finance Corporation and Merrill Lynch Capital 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.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
We lease approximately 23,494 square feet of space in our
headquarters in San Diego, California under a sublease that
expires in 2012, of which we occupy approximately
16,600 square feet. We have subleased the remainder through
the third quarter of 2009. We have no laboratory, research or
manufacturing facilities; however we do own manufacturing
equipment which is located at our third-party contractors. We
currently do not plan to purchase or lease facilities for
manufacturing, packaging or warehousing, as such services are
provided to us by third-party contractors. 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.
53
|
|
Item 3.
|
Legal
Proceedings
|
We are not engaged in any legal proceedings.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock has been traded on the Nasdaq Global Market
since October 25, 2006 under the symbol CADX.
Prior to such time, there was no public market for our common
stock. As of February 29, 2008, there were
38,353,062 shares of common stock outstanding held by
approximately 50 stockholders of record. Many stockholders hold
their shares in street name. We believe that there are more than
2,000 beneficial owners of our common stock. The closing price
of our common stock on the Nasdaq Global Market on
December 31, 2007 was $14.86 per share. The following table
sets forth the high and low closing sales prices for our common
stock as reported on the Nasdaq Global Market for the periods
indicated.
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|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
Fourth Quarter (beginning October 25, 2006)
|
|
$
|
13.25
|
|
|
$
|
9.25
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
15.65
|
|
|
$
|
11.72
|
|
Second Quarter
|
|
$
|
17.32
|
|
|
$
|
12.01
|
|
Third Quarter
|
|
$
|
14.75
|
|
|
$
|
11.94
|
|
Fourth Quarter
|
|
$
|
14.86
|
|
|
$
|
11.97
|
|
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, Oxford
Finance Corporation and Merrill Lynch Capital. 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.
54
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table provides information as of December 31,
2007, about our common stock that may be issued upon the
exercise of stock options granted to employees, consultants and
members of our board of directors under all existing equity
compensation plans including our 2006 Equity Incentive Award
Plan and our 2004 Equity Incentive Award Plan. The 2006 Equity
Incentive Award Plan was adopted at the time of our initial
public offering in October 2006 which coincided with the
discontinuance of the 2004 Equity Incentive Award Plan. See
Note 9 to the Notes to Financial Statements in Item 8
of this Annual Report on
Form 10-K
for further discussion of our equity plans.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
to be Issued Upon
|
|
|
Weighted Average
|
|
|
Equity Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column (a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
2,466,825
|
(1)
|
|
$
|
6.51
|
|
|
|
1,391,104
|
(2)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,466,825
|
|
|
$
|
6.51
|
|
|
|
1,391,104
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of these shares of Common stock, 869,175 shares were
subject to outstanding options under the 2006 Equity Incentive
Award Plan and 1,597,650 shares were subject to outstanding
options under the 2004 Equity Incentive Award Plan. |
|
(2) |
|
The 2006 Equity Incentive Award Plan contains an
evergreen provision which allows for annual
increases in the number of shares available for future issuance
on January 1 of each year during the ten-year term of the plan,
beginning on January 1, 2008. The annual increase in the
number of shares shall be equal to the lesser of (i) 4% of
our outstanding common stock on the applicable January 1 or
(ii) such lesser amount determined by our board of
directors. |
55
Performance
Graph
The following stock performance graph illustrates a comparison
of the total cumulative stockholder return on our common stock
since October 25, 2006, which is the date our common stock
first began trading on the Nasdaq Global Market, to two indices:
the NASDAQ Composite Index and the NASDAQ Biotechnology Index.
The graph assumes an initial investment of $100 on
October 25, 2006, and that all dividends were reinvested.
Comparison
of Cumulative Return on Investment
Since October 25, 2006*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/25/2006
|
|
|
12/29/2006
|
|
|
12/31/2007
|
Cadence Pharmaceuticals, Inc
|
|
|
$
|
100
|
|
|
|
$
|
131
|
|
|
|
$
|
158
|
|
NASDAQ Composite Index
|
|
|
$
|
100
|
|
|
|
$
|
102
|
|
|
|
$
|
113
|
|
NASDAQ Biotechnology Index
|
|
|
$
|
100
|
|
|
|
$
|
100
|
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
No cash dividends have been declared or paid on our common
stock. Stockholder returns over the indicated period should not
be considered indicative of future stockholder returns. |
Use of
Proceeds
Our initial public offering of common stock was effected through
a Registration Statement on
Form S-1
(File
No. 333-135821)
that was declared effective by the Securities and Exchange
Commission on October 24, 2006, which registered an
aggregate of 6,900,000 shares of our common stock. On
October 24, 2006, 6,000,000 shares of common stock
were sold on our behalf at an initial public offering price of
$9.00 per share, for an aggregate gross offering price of
$54.0 million, managed by Merrill Lynch & Co.,
Deutsche Bank Securities, Pacific Growth Equities, LLC and JMP
Securities. On November 13, 2006, in connection with the
exercise of the underwriters over-allotment option,
900,000 additional shares of common stock were sold on our
behalf at the initial public offering price of $9.00 per share,
for an aggregate gross offering price of $8.1 million.
Following the sale of the 6,900,000 shares, the offering
terminated.
We paid to the underwriters underwriting discounts totaling
approximately $4.3 million in connection with the offering.
In addition, we incurred additional offering costs of
$1.9 million in connection with the offering, which when
added to the underwriting discounts paid by us, amounts to total
costs of $6.2 million. Thus, the net offering
56
proceeds to us, after deducting underwriting discounts and
offering costs, were $55.9 million. No offering expenses
were paid directly or indirectly to any of our directors or
officers (or their associates) or persons owning ten percent or
more of any class of our equity securities or to any other
affiliates.
As of December 31, 2007, we had used approximately
$46.1 million of the net proceeds we received from our
initial public offering to fund (i) clinical trials for
Acetavance and Omigard and other research and development
activities; (ii) capital expenditures, including equipment
associated with the manufacturing of Acetavance and Omigard; and
(iii) working capital 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
cannot specify with certainty all of the particular uses for the
net proceeds from our initial public offering. The amount and
timing of our expenditures will depend on several factors,
including the progress of our clinical trials and
commercialization efforts as well as the amount of cash used in
our operations. Accordingly, our management will have broad
discretion in the application of the net proceeds.
Issuer
Repurchases of Equity Securities
Not applicable.
|
|
Item 6.
|
Selected
Financial Data
|
The selected financial data set forth below is derived from our
audited financial statements and may not be indicative of future
operating results. Audited balance sheets at December 31,
2007 and 2006 and the related audited statements of operations
and of cash flows for each of the three years in the period
ended December 31, 2007 and notes thereto appear elsewhere
in this Annual Report on
Form 10-K.
Audited balance sheets at December 31, 2005 and 2004 and
the related audited consolidated statements of operations and of
cash flows for the period from May 26, 2004 (inception)
through December 31, 2004 are not included elsewhere in
this Annual Report on
Form 10-K.
The following selected financial data should be read in
conjunction with the financial statements, related notes and
other financial information appearing elsewhere in this Annual
Report on
Form 10-K.
Amounts are in thousands, except share and per share amounts.
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
May 26, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) through
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
41,781
|
|
|
$
|
47,827
|
|
|
$
|
6,126
|
|
|
$
|
1,883
|
|
Marketing
|
|
|
2,866
|
|
|
|
810
|
|
|
|
240
|
|
|
|
41
|
|
General and administrative
|
|
|
9,587
|
|
|
|
4,946
|
|
|
|
1,412
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(54,234
|
)
|
|
|
(53,583
|
)
|
|
|
(7,778
|
)
|
|
|
(2,801
|
)
|
Interest income
|
|
|
3,404
|
|
|
|
1,945
|
|
|
|
255
|
|
|
|
9
|
|
Interest expense
|
|
|
(867
|
)
|
|
|
(498
|
)
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(17
|
)
|
|
|
(37
|
)
|
|
|
(183
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,714
|
)
|
|
$
|
(52,173
|
)
|
|
$
|
(7,706
|
)
|
|
$
|
(2,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share(1)
|
|
$
|
(1.81
|
)
|
|
$
|
(10.07
|
)
|
|
$
|
(6.67
|
)
|
|
$
|
(3.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of the issuance of 6,900,000 shares of common
stock in the Companys initial public offering in the
fourth quarter of 2006 and the conversion of the Companys
preferred stock into 19,907,605 shares of common stock upon
completion of the Companys initial public offering, there
is a lack of comparability in the per share amounts between the
periods presented. Please see Note 2 to the Notes to
Financial Statements in Item 8 of this Annual Report on
Form 10-K
for further discussion. |
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
55,393
|
|
|
$
|
86,826
|
|
|
$
|
15,025
|
|
|
$
|
4,271
|
|
Working capital
|
|
|
36,839
|
|
|
|
76,203
|
|
|
|
14,405
|
|
|
|
4,161
|
|
Total assets
|
|
|
64,612
|
|
|
|
93,092
|
|
|
|
15,891
|
|
|
|
4,841
|
|
Long-term debt, less current portion and discount
|
|
|
13,412
|
|
|
|
4,433
|
|
|
|
|
|
|
|
|
|
Deficit accumulated during the development stage
|
|
|
(114,429
|
)
|
|
|
(62,716
|
)
|
|
|
(10,543
|
)
|
|
|
(2,837
|
)
|
Total stockholders equity
|
|
|
28,458
|
|
|
|
75,409
|
|
|
|
14,745
|
|
|
|
4,727
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion and analysis
together with Item 6 Selected Financial
Data and the financial statements and related notes
included in Item 8 Financial Statements
and Supplementary Data in this Annual Report on
Form 10-K.
This discussion may contain forward-looking statements that
involve risks and uncertainties. Our actual results could differ
materially from those anticipated in any forward-looking
statements as a result of many factors, including those set
forth in our filings with the Securities and Exchange
Commission.
Overview
Background
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 May 2004, we have in-licensed rights to two product
candidates, both of which are currently being studied in
Phase III clinical trials. We have in-licensed the
exclusive U.S. and Canadian rights to
Acetavancetm,
formerly known as IV APAP, an intravenous formulation of
acetaminophen that is currently marketed in Europe and several
other markets by Bristol-Myers Squibb Company, or BMS, for the
treatment of acute pain and fever under the brand name
Perfalgan®.
We believe that Acetavance 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
U.S., or approved in the U.S. 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 Acetavance from BMS. In October 2006, we initiated the
Phase III clinical development program for Acetavance.
We are a development stage company. We have incurred significant
net losses since our inception. As of December 31, 2007, we
had an accumulated deficit of $114.4 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.
In October 2006, we completed an initial public offering in
which we sold 6.0 million shares of our common stock at
$9.00 per share and received net proceeds of $48.4 million
(after underwriting discounts and offering costs).
58
In November 2006, following exercise of the underwriters
over-allotment option, we sold 0.9 million shares of our
common stock at $9.00 per share and received net proceeds of
$7.5 million (after underwriting discounts). In February
2008, we raised additional funds by issuing 9.2 million
shares of common stock for aggregate net proceeds to us of
approximately $49.0 million pursuant to an effective shelf
registration in a registered direct offering.
Revenues
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 with a third party.
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, costs associated with non-clinical
activities, such as regulatory expenses, and
pre-commercialization manufacturing development activities. Our
most significant costs are for clinical trials and license fees.
The clinical trial expenses include payments to vendors such as
CROs, investigators, clinical suppliers and related consultants.
License fees are paid to the patent holders of our product
candidates that give us the exclusive licenses to the patent
rights and
know-how for
selected indications and territories. We may be required to make
future milestone payments totaling up to $67.0 million for
our product candidates.
Our historical research and development expenses relate
predominantly to the in-licensing of Acetavance and Omigard and
the related clinical trials for these product candidates. We
expense all research and development charges as they are
incurred as 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. Our internal research and
development resources are used in several projects and may not
be attributable to a specific product candidate. For example, a
substantial portion of our internal costs, including personnel
and facility related costs, are not tracked on a project basis.
The following table summarizes our research and development
expenses for the periods indicated for each of our product
candidates. Costs that are not attributable to a specific
product candidate are included in the other supporting
costs category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
May 26, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) through
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Acetavance
|
|
$
|
14,107
|
|
|
$
|
28,052
|
|
|
$
|
|
|
|
$
|
42,159
|
|
Omigard
|
|
|
20,191
|
|
|
|
14,343
|
|
|
|
4,802
|
|
|
|
40,987
|
|
Other supporting costs
|
|
|
7,483
|
|
|
|
5,432
|
|
|
|
1,324
|
|
|
|
14,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,781
|
|
|
$
|
47,827
|
|
|
$
|
6,126
|
|
|
$
|
97,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
59
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 for Omigard in August 2005 and currently expect to
complete enrollment in the study by the second quarter of 2008.
The clinical development program for Acetavance currently
comprises nine clinical trials, including four pivotal,
Phase III efficacy trials, two pharmacokinetic studies and
two safety studies. In January 2008, we announced that our
Phase III efficacy trial of Acetavance for the treatment of
pain in adults following abdominal gynecological surgery did not
meet its primary endpoint of demonstrating a statistically
significant reduction in patients pain intensity scores
over 48 hours compared to placebo. Also in January 2008, we
announced that our Phase III clinical trial of Acetavance
in fever successfully met the primary endpoint, demonstrating a
statistically significant reduction of fever over six hours
compared to placebo. Following the announcement of these
results, we initiated communications with the FDA to seek
additional guidance from the agency regarding our development
program for this product candidate. As a result of our
communications with the FDA, the agency may require or we may
decide to conduct additional clinical trials or to modify our
ongoing clinical trials, which would increase our costs and may
delay, or limit the scope of, any regulatory approvals for this
product candidate. Assuming successful completion of all of our
planned clinical trials for this product candidate, we currently
plan to submit a 505(b)(2) new drug application, or NDA, for
Acetavance to the U.S. Food and Drug Administration in the
first half of 2009. Our failure to achieve our product
development goals for Acetavance in a timely manner or at all
could adversely affect our business and our stock price.
Marketing
Expenses
Our marketing expenses consist primarily of market research
studies, salaries, benefits and professional fees related to
building our marketing capabilities. We anticipate substantial
increases in marketing expenses as we continue to develop and
prepare for the potential commercialization of our product
candidates, including the addition of marketing and
hospital-focused sales personnel to market our products to
physicians, nurses, hospitals, group purchasing organizations
and third-party payors.
General
and Administrative Expenses
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 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 and Expense
Our interest income consists primarily of interest earned on our
cash, cash equivalents and short-term investments. Interest
expense is primarily the interest we have incurred under our
amended loan and security agreement. Other expense includes
charges we have incurred to recognize
other-than-temporary
declines in the market value of our
available-for-sale
securities, losses we have recognized on the disposal of
equipment and the gains or losses recognized on transactions
denominated in foreign currencies.
Income
Taxes
In July 2006, the Financial Accounting Standards Board, or FASB,
issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement
No. 109, or FIN No. 48. FIN No. 48
clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in
accordance with FASB Statement No. 109, Accounting for
Income Taxes, and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. Under
FIN No. 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally,
FIN No. 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
60
As of December 31, 2007, we had both federal and state net
operating loss carryforwards of approximately
$81.6 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, 2007, we
had both federal and state research and development tax credit
carryforwards of approximately $1.5 million and
$0.7 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. We have not
completed a Section 382 study at this time. 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
recognized any federal or state income tax benefit in our
statement of operations.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S., or GAAP,
requires us to make certain estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of expenses
during the reporting period. Some of our accounting policies
require us to make difficult and subjective judgments, often as
a result of the need to make estimates of matters that are
inherently uncertain. The following accounting policies involve
critical accounting estimates because they are particularly
dependent on estimates and assumptions made by management about
matters that are highly uncertain at the time the accounting
estimates are made. In addition, while we have used our best
estimates based on facts and circumstances available to us at
the time, different estimates reasonably could have been used.
Changes in the accounting estimates we use are reasonably likely
to occur from time to time, which may have a material impact on
the presentation of our financial condition and results of
operations.
Our most critical accounting estimates include our recognition
of research and development expenses, which impacts operating
expenses and accrued liabilities; and stock-based compensation
which impacts operating expenses. We also have other policies
that we consider to be key accounting policies, such as our
policies for the assessment of recoverability of long-lived
assets; deferred income tax assets and liabilities; and our
reserves for commitments and contingencies; however, these
policies either do not meet the definition of critical
accounting estimates described above or are not currently
material items in our financial statements. We review our
estimates, judgments, and assumptions periodically and reflect
the effects of revisions in the period in which they are deemed
to be necessary. We believe that these estimates are reasonable;
however, actual results could differ from these estimates.
Research
and Development Expenses
A substantial portion of our ongoing research and development
activities is performed under agreements we enter into with
external service providers, including CROs, which 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.
Subsequent changes in estimates may result in a change in our
accruals, which could also materially affect our results of
operations.
Stock-Based
Compensation
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,
61
2005. The adoption of SFAS No. 123(R) resulted in the
recognition of additional stock-based compensation expense of
$4.3 million and $2.1 million in 2007 and 2006,
respectively.
Under SFAS No. 123(R), we calculate the fair value of
our stock-based compensation awards to our employees and
directors using the Black-Scholes pricing model. This model
requires a number of estimates to be used in determining the
fair value, including the expected lives of awards, interest
rates, stock volatility and other assumptions. A change in any
of the estimates used in the model, or the selection of a
different option pricing model, could have a material impact on
our operations. 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. For further discussion regarding the
implementation of SFAS No. 123(R), see Note 2 of
the Notes to Financial Statements in Item 8 of this Annual
Report on
Form 10-K.
The table below summarizes the stock-based compensation expense
included in our condensed statements of operations in 2007 and
2006, and for the period from May 26, 2004 (inception)
through December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
May 26, 2004
|
|
|
|
|
|
|
|
|
|
(Inception) through
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Research and development
|
|
$
|
1,243
|
|
|
$
|
561
|
|
|
$
|
1,804
|
|
Marketing
|
|
|
33
|
|
|
|
1
|
|
|
|
34
|
|
General and administrative
|
|
|
3,064
|
|
|
|
1,573
|
|
|
|
4,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses
|
|
|
4,340
|
|
|
|
2,135
|
|
|
|
6,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense included in loss from
operations
|
|
$
|
4,340
|
|
|
$
|
2,135
|
|
|
$
|
6,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
Years
ended December 31, 2007 and 2006
Operating
Expenses
Research and Development Expenses. Research
and development expenses decreased $6.0 million in 2007 to
$41.8 million, compared to $47.8 million for 2006.
This decrease was primarily due to the $25.3 million
initial license fee and related costs for Acetavance, which we
incurred in March 2006, and was immediately expensed as
in-process research and development. Excluding this license fee,
our research and development expenses for 2007 increased
$19.3 million. This increase in 2007 as compared to 2006
was primarily due to the advancement of our clinical development
programs for Acetavance, which was initiated in October 2006,
and Omigard, which was initiated in August 2005. More
specifically, the increases were as follows:
|
|
|
|
|
an increase of $11.4 million in our Acetavance program,
primarily as a result of costs related to the progress of our
Phase III clinical trials and pre-commercialization
manufacturing development activities;
|
|
|
|
an increase of $5.8 million in our Omigard program as a
result of costs related to our Phase III clinical trial of
this product candidate due to higher enrollment rates and
pre-commercialization manufacturing development
activities; and
|
|
|
|
an increase of $2.1 million in other supporting costs as a
result of increased salaries and related personnel costs from
the addition of research and development staff hired to support
our clinical and regulatory efforts related to both Omigard and
Acetavance. This increase includes $0.7 million of
additional stock-based compensation charges in 2007 as compared
to 2006.
|
62
Marketing Expenses. Marketing expenses
increased $2.1 million in 2007 to $2.9 million,
compared to $0.8 million for 2006. This increase was
primarily due to increased market research and related costs for
Acetavance and Omigard and increased salaries and related
personnel costs from the addition of marketing staff in 2007 as
compared to 2006.
General and Administrative Expenses. General
and administrative expenses increased $4.7 million in 2007
to $9.6 million, compared to $4.9 million for 2006.
This increase was primarily due to increases in salaries and
related personnel costs (including an increase of
$1.5 million in stock-based compensation charges) from the
addition of general and administrative staff in 2007 as compared
to 2006, costs related to operating as a public company, fees
paid to our board of directors and depreciation expense,
partially offset by a decline in net rent expense.
Interest Income. Interest income increased
$1.5 million in 2007 to $3.4 million, compared to
$1.9 million for 2006. This increase was primarily due to
our increased average cash and cash equivalents balance in 2007
as a result of the proceeds we received from the completion of
our initial public offering in the fourth quarter of 2006.
Additionally, our investments benefited from higher average
interest rates in 2007 as compared to 2006.
Interest Expense. Interest expense increased
$0.4 million in 2007 to $0.9 million, compared to
$0.5 million for 2006. This increase was primarily due to
the additional interest we incurred during 2007 on the
outstanding balance of our $7.0 million loan and security
agreement with Silicon Valley Bank and Oxford Finance
Corporation, drawn down in June 2006, which accrues at a fixed
rate of 11.47%. In February 2007, we began making the first of
30 equal monthly principal and interest payments under the
$7.0 million loan and security agreement and as of
December 31, 2007, had reduced the outstanding principal
balance by $2.3 million, to $4.7 million.
Additionally, in December 2007 we secured an additional
$15.0 million under an amendment to the loan and security
agreement with the same parties and Merrill Lynch Capital. The
$15.0 million credit facility was made to us in two
separate draws of $5.0 million and $10.0 million, with
fixed interest rates of 7.83% and 7.74%, respectively. At the
time of the initial draw we received our funds net of loan fees
of less than $0.1 million. Additionally, we will be
required to pay $0.4 million at the termination of the
credit facility which, together with the loan fees, is being
amortized to interest expense throughout the life of the loan.
As of December 31, 2007, we had incurred less than
$0.1 million of interest expense on the $15.0 million
credit facility.
Years
ended December 31, 2006 and 2005
Operating
expenses
Research and Development Expenses. Research
and development expenses increased $41.7 million in 2006 to
$47.8 million, compared to $6.1 million in 2005. This
increase was primarily due to a $25.3 million initial
license fee and related costs for Acetavance, which we incurred
in March 2006, and was immediately expensed as
in-process
research and development. Excluding this license fee, our
research and development expense for 2006 increased
$16.4 million, which was primarily due to the following:
|
|
|
|
|
an increase of $9.5 million in our Omigard program as a
result of clinical trial and related costs for a Phase III
clinical trial initiated in August 2005;
|
|
|
|
an increase of $4.1 million in other supporting costs as a
result of increased salaries and related personnel costs
(including an increase of $0.6 million in stock-based
compensation expenses) from increased research and development
staff to support our clinical and regulatory efforts related to
both Omigard and Acetavance; and
|
|
|
|
an increase of $2.8 million from activities related to the
launch of our Acetavance program, which initiated a
Phase III clinical trial in the fourth quarter of 2006.
|
Marketing Expenses. Marketing expenses
increased $0.6 million in 2006 to $0.8 million,
compared to $0.2 million in 2005. This increase was due to
higher market research, branding and personnel costs in 2006,
partially from our increased portfolio in 2006 as compared to
2005.
General and Administrative Expenses. General
and administrative expenses increased $3.5 million in 2006
to $4.9 million, compared to $1.4 million in 2005.
This increase was primarily due to stock-based compensation
63
charges of $1.6 million and other personnel related
charges, our new facility lease and other professional and
consulting fees.
Interest Income. Interest income increased to
$1.9 million in 2006 from $0.3 million in 2005. This
increase of $1.6 million was primarily due to an increase
in the average cash and cash equivalent balances in 2006 as
compared to 2005, combined with higher interest rates earned on
our investments in 2006 as compared to 2005.
Interest Expense. Interest expense was
$0.5 million in 2006 due to interest we incurred on the
$7.0 million borrowed under our $7.0 million loan and
security agreement with Silicon Valley Bank and Oxford Finance
Corporation, which was drawn down in June 2006. We had no such
borrowings in 2005.
Other expense. Other expense decreased to less
than $0.1 million in 2006, as compared to $0.2 million
in 2005. The decrease is primarily due to impairment charges
incurred in 2005 due to declines in the market value of our
Migenix holdings that were determined to be
other-than-temporary.
Liquidity
and Capital Resources
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, Acetavance and Omigard. Pursuant to these
agreements, we obtained exclusive licenses to the patent rights
and know-how for selected indications and territories. Under the
Acetavance agreement, we paid to BMS a $25.0 million
up-front fee and may be required to make future milestone
payments totaling up to $40.0 million upon the achievement
of various milestones related to regulatory or commercial
events. Under the Omigard agreement, we paid to Migenix 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;
|
|
|
|
the potential need to conduct additional clinical trials of our
product candidates, or to increase the number of patients
enrolled in our ongoing clinical trials;
|
|
|
|
our ability to establish and maintain strategic collaborations,
including licensing and other arrangements;
|
|
|
|
the costs and timing of regulatory approvals;
|
|
|
|
the costs involved in enforcing or defending patent claims or
other intellectual property rights;
|
|
|
|
the costs of establishing manufacturing, sales or distribution
capabilities;
|
|
|
|
the success of the commercialization of our products; and
|
|
|
|
the extent to which we may in-license, acquire or invest in
other indications, products, technologies and businesses.
|
As of December 31, 2007, we had $55.4 million in cash
and cash equivalents, a decrease of $31.4 million from the
$86.8 million at December 31, 2006. This decrease was
primarily due to cash used in operations ($40.7 million),
the purchase of equipment ($2.1 million) and cash deemed to
be restricted ($1.3 million), partially offset by
borrowings under debt agreements, net of principal payments on
our debt obligations ($12.6 million).
The $40.7 million of cash used in operations during 2007 is
primarily a result of our net loss during the year, adjusted for
non-cash charges, and the increase in our net accounts payable
and accrued liabilities. In 2007, our net loss of
$51.7 million included non-cash of charges for stock-based
compensation ($4.3 million), depreciation expense
($0.5 million) and amortization expense
($0.1 million). Adjusting for these non-cash charges, our
net loss
64
for the year was $46.7 million. Partially offsetting this
negative effect on cash was a positive impact from the increase
in our net accounts payable and other liabilities of
$6.3 million during 2007. Our net loss for 2006, adjusted
for non-cash charges including stock-based compensation
($2.1 million), depreciation expense ($0.2 million)
and amortization expense ($0.1 million), was
$49.8 million and included a $25.3 million license fee
and related costs for Acetavance that was expensed and paid
during the first quarter of that year. Partially offsetting this
negative effect on cash in 2006 was a favorable impact of
$8.3 million from the increase in our accounts payable and
other liabilities during the year.
The increase in our accounts payable and accrued liabilities
balances at December 31, 2007 as compared to
December 31, 2006 was primarily due to increased clinical
trial activity and accrued manufacturing costs, including
equipment purchases. The increase in manufacturing costs was due
to costs incurred for the preparation of potential commercial
manufacturing of Acetavance and Omigard, including equipment
purchases and reimbursements to our contract manufacturers for
modifications and development of their facilities in which our
drug products, if and when approved, would be manufactured for
commercial distribution.
As of December 31, 2007, our net property and equipment
balance increased by $1.5 million to $5.1 million,
from $3.6 million at December 31, 2006. This increase
was primarily due to capital expenditures of equipment for the
preparation of potential commercial manufacturing of our
Acetavance and Omigard product candidates, as well as computer
software and equipment for our information technology
infrastructure. These increases in 2007 were partially offset by
the depreciation of our assets during 2007.
Sources
of Liquidity
Since inception, our operations have been financed primarily
through the issuance of equity securities, in both public and
private offerings. From our inception through December 31,
2007, we have received net proceeds of approximately
$135.6 million from the sale of shares of our preferred and
common stock. In February 2008, we raised additional funds
through a registered direct offering by issuing
9,240,307 shares of common stock for aggregate net proceeds
of approximately $49.0 million. Through December 31,
2007, the sale of shares of our preferred and common stock were
as follows:
|
|
|
|
|
from July 2004 to December 2007 (excluding our initial public
offering), we issued and sold a total of 2,305,150 shares
of common stock for aggregate net proceeds of $0.8 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 a total of
17,675,347 shares of
Series A-2
preferred stock for aggregate net proceeds of $17.6 million;
|
|
|
|
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; and
|
|
|
|
in the fourth quarter of 2006, we completed our initial public
offering in which we issued and sold a total of
6,900,000 shares of our common stock for aggregate net
proceeds of $55.9 million.
|
Additionally, 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 June 2006 at
the fixed rate of 11.47%. In November 2007, we amended the
$7.0 million loan and security agreement and entered into
the Second Amendment to Loan and Security Agreement with the
same parties and Merrill Lynch Capital, a Division of Merrill
Lynch Business Financial Services Inc., to secure an additional
$15.0 credit facility. In December 2007, we drew down
$15.0 million under the Second Amendment in two separate
draws of $5.0 million and $10.0 million with fixed
interest rates of 7.83% and 7.74%, respectively, net of a loan
fee of less than $0.1 million. In addition to the principal
and interest under the $15.0 million credit facility, we
are required to pay $0.4 million at the termination of the
credit facility. As of December 31, 2007, we had no further
credit available under the agreements.
In August 2006, we began making the first of six interest-only
payments on the $7.0 million loan and security agreement
and in February 2007, began making the first of 30 equal
principal and interest payments. Beginning in
65
January, 2008, we will make interest-only payments on the
$15.0 million credit facility for the first six months and
thereafter will make 30 equal monthly principal and interest
payments to fully amortize the balance. In connection with each
credit facility we issued warrants to the lenders to purchase
share of our stock. See Note 5 to the Notes to Financial
Statements in Item 8 of this Annual Report on
Form 10-K
for further discussion.
Capital
Resources
Our current cash and cash equivalent balances are currently our
principal sources of liquidity. In February 2008, we raised
additional net aggregate funds of approximately
$49.0 million through the issuance of 9,240,307 shares
of common stock and believe that with this financing and our
cash and cash equivalent balance at December 31, 2007, we
will satisfy our projected working capital, capital expenditure
and debt servicing, at a minimum, through the next twelve
months. We have based this estimate on assumptions that may
prove to be wrong, and we could spend our available financial
resources 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 Acetavance, Omigard
and any other product candidates that we may in-license or
acquire. 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
amended 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 amended 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. To the extent that we
raise additional capital by issuing equity securities, our
existing stockholders ownership will be diluted. 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 and have established
guidelines relating to diversification and maturities of our
securities
available-for-sale
to preserve principal and maintain liquidity. Also, 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.
66
Other
Significant Cash and Contractual Obligations
The following table summarizes our scheduled contractual
obligations and commitments that will affect our future
liquidity as of December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Long-term debt obligations, including interest
|
|
$
|
22,603
|
|
|
$
|
7,100
|
|
|
$
|
15,503
|
|
|
$
|
|
|
|
$
|
|
|
Operating
leases(1)
|
|
|
5,483
|
|
|
|
1,096
|
|
|
|
2,277
|
|
|
|
2,110
|
|
|
|
|
|
Process development and facility
upgrades(2)
|
|
|
3,575
|
|
|
|
3,075
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
License
obligations(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(4)
|
|
$
|
31,661
|
|
|
$
|
11,271
|
|
|
$
|
18,280
|
|
|
$
|
2,110
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts presented represent commitments for minimum lease
payments related to leases of office space and certain equipment
under non-cancelable operating leases. The amounts have not been
reduced by future commitments under sublease agreements. |
|
(2) |
|
The amounts presented represent our commitments for the
completion of pre-commercialization manufacturing development
activities related to our development and supply agreement for
Acetavance with Baxter Healthcare Corporation, or Baxter. Our
agreement with Baxter also requires that we purchase a minimum
number of units each year following regulatory approval of
Acetavance, or pay Baxter an amount equal to the
per-unit
purchase price multiplied by the amount of the shortfall.
However, as our purchase commitment under this agreement is
dependent upon the progress of our development program and the
timing of the potential regulatory approval of Acetavance, we
are unable to estimate with certainty the purchase obligations,
if any, we will incur under this agreement. |
|
(3) |
|
Under our license agreements, we may be required to make future
payments of up to $67.0 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 under those agreements. 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 at this time we cannot determine when, or if, the
related milestones will be achieved or the events triggering the
commencement of payment obligations will occur. |
|
(4) |
|
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 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. |
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our cash and cash equivalents as of December 31, 2007
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. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income
we receive without significantly increasing risk. Some of the
investment securities
available-for-sale
that we may invest in could be subject to market risk. This
means that a change in prevailing interest rates may cause the
value of the investment securities
available-for-sale
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 that security will probably
decline. To minimize this risk, we intend to maintain a
portfolio of cash equivalents and investment securities
available-for-sale
in a variety of securities which may include money market funds,
government and non-government debt securities and commercial
paper, all with various maturity dates. In general, money market
funds are not subject to market risk because the interest paid
on such funds fluctuates with the prevailing interest rate and
we do not believe that our results of operations would be
materially impacted by an immediate 10% change in interest rates.
67
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
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, 2007 and 2006, and the related statements of
operations, stockholders equity and cash flows for each of
the three years in the periods ended December 31, 2007 and
the period from May 26, 2004 (inception) through
December 31, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Cadence Pharmaceuticals, Inc. at December 31, 2007 and
2006, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2007 and the period from May 26, 2004 (inception) through
December 31, 2007 in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the Financial Statements,
effective January 1, 2006 Cadence Pharmaceuticals, Inc.
changed its method of accounting for share-based payments as
required by Statement of Financial Accounting Standards
No. 123 (revised 2004).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Cadence Pharmaceuticals, Inc.s internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 11, 2008
expressed an unqualified opinion thereon.
San Diego, California
March 11, 2008
68
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,392,921
|
|
|
$
|
86,825,526
|
|
Restricted cash
|
|
|
1,981,848
|
|
|
|
347,849
|
|
Prepaid expenses
|
|
|
751,046
|
|
|
|
424,551
|
|
Other current assets
|
|
|
208,275
|
|
|
|
395,760
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
58,334,090
|
|
|
|
87,993,686
|
|
Property and equipment, net
|
|
|
5,139,538
|
|
|
|
3,558,618
|
|
Restricted cash
|
|
|
885,434
|
|
|
|
1,233,281
|
|
Other non-current assets
|
|
|
252,963
|
|
|
|
306,598
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
64,612,025
|
|
|
$
|
93,092,183
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,974,991
|
|
|
$
|
2,073,726
|
|
Accrued liabilities
|
|
|
13,901,770
|
|
|
|
7,378,750
|
|
Current portion of long-term debt
|
|
|
5,617,928
|
|
|
|
2,338,010
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,494,689
|
|
|
|
11,790,486
|
|
Deferred rent
|
|
|
1,224,869
|
|
|
|
1,460,109
|
|
Long-term debt, less current portion and discount of $642,130
and $229,444 respectively
|
|
|
13,412,349
|
|
|
|
4,432,546
|
|
Other long-term liabilities
|
|
|
22,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,153,955
|
|
|
|
17,683,141
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity :
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 10,000,000 shares
authorized, no shares issued and outstanding at
December 31, 2007 and 2006, respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 29,112,755 shares and 29,092,720 shares issued
and outstanding at December 31, 2007 and 2006, respectively
|
|
|
2,911
|
|
|
|
2,909
|
|
Additional paid-in capital
|
|
|
142,879,979
|
|
|
|
138,057,890
|
|
Accumulated other comprehensive income
|
|
|
4,524
|
|
|
|
64,033
|
|
Deficit accumulated during the development stage
|
|
|
(114,429,344
|
)
|
|
|
(62,715,790
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
28,458,070
|
|
|
|
75,409,042
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
64,612,025
|
|
|
$
|
93,092,183
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from May 26,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 (Inception)
|
|
|
|
Years Ended December 31,
|
|
|
through December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
41,781,357
|
|
|
$
|
47,826,761
|
|
|
$
|
6,126,226
|
|
|
$
|
97,617,701
|
|
Marketing
|
|
|
2,865,804
|
|
|
|
810,315
|
|
|
|
240,361
|
|
|
|
3,957,594
|
|
General and administrative
|
|
|
9,586,705
|
|
|
|
4,946,121
|
|
|
|
1,411,810
|
|
|
|
16,821,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,233,866
|
|
|
|
53,583,197
|
|
|
|
7,778,397
|
|
|
|
118,397,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(54,233,866
|
)
|
|
|
(53,583,197
|
)
|
|
|
(7,778,397
|
)
|
|
|
(118,397,077
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,404,447
|
|
|
|
1,944,908
|
|
|
|
255,785
|
|
|
|
5,614,520
|
|
Interest expense
|
|
|
(867,524
|
)
|
|
|
(497,617
|
)
|
|
|
|
|
|
|
(1,365,141
|
)
|
Other expense
|
|
|
(16,611
|
)
|
|
|
(37,035
|
)
|
|
|
(183,000
|
)
|
|
|
(281,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
2,520,312
|
|
|
|
1,410,256
|
|
|
|
72,785
|
|
|
|
3,967,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(51,713,554
|
)
|
|
|
(52,172,941
|
)
|
|
|
(7,705,612
|
)
|
|
|
(114,429,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,713,554
|
)
|
|
$
|
(52,172,941
|
)
|
|
$
|
(7,705,612
|
)
|
|
$
|
(114,429,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share(1)
|
|
$
|
(1.81
|
)
|
|
$
|
(10.07
|
)
|
|
$
|
(6.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss per
share(1)
|
|
|
28,572,883
|
|
|
|
5,181,920
|
|
|
|
1,155,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of the issuance of 6,900,000 shares of common
stock in the Companys initial public offering in the
fourth quarter of 2006 and the conversion of the Companys
preferred stock into 19,907,605 shares of common stock upon
completion of the Companys initial public offering, there
is a lack of comparability in the per share amounts between the
2007, 2006 and 2005 periods presented. Please see Note 2 of
the Notes to Financial statements for further discussion. |
The accompanying notes are an integral part of these financial
statements.
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
Series A-1 to A-3
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
|
|
|
Convertible Preferred
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
During the
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Stage
|
|
|
Equity
|
|
|
Issuance of common stock to founders in July at $0.004 per share
|
|
|
|
|
|
$
|
|
|
|
|
1,125,000
|
|
|
$
|
112
|
|
|
$
|
4,388
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,500
|
|
Issuance of
Series A-1
preferred stock, net of $59,573 offering costs, in December at
$0.94 per share
|
|
|
8,085,108
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
7,539,620
|
|
|
|
|
|
|
|
|
|
|
|
7,540,429
|
|
Issuance of common stock from option exercises under equity
compensation plans
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
5
|
|
|
|
17,995
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
Issuance of common stock options for consulting services in
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
811
|
|
Net 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
|
|
Issuance of
Series A-2
preferred stock, net of $57,041 offering costs, in June and
September at $1.00 per share
|
|
|
17,675,347
|
|
|
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
17,616,539
|
|
|
|
|
|
|
|
|
|
|
|
17,618,306
|
|
Issuance of common stock from option exercises under equity
compensation plans
|
|
|
|
|
|
|
|
|
|
|
734,000
|
|
|
|
73
|
|
|
|
105,927
|
|
|
|
|
|
|
|
|
|
|
|
106,000
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,705,612
|
)
|
|
|
(7,705,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
25,760,455
|
|
|
|
2,576
|
|
|
|
1,904,000
|
|
|
|
190
|
|
|
|
25,285,280
|
|
|
|
|
|
|
|
(10,542,849
|
)
|
|
|
14,745,197
|
|
Issuance of
Series A-3
preferred stock, net of $94,987 offering costs, in March at
$1.00 per share
|
|
|
53,870,000
|
|
|
|
5,387
|
|
|
|
|
|
|
|
|
|
|
|
53,769,626
|
|
|
|
|
|
|
|
|
|
|
|
53,775,013
|
|
Conversion of preferred stock in connection with initial public
offering in October
|
|
|
(79,630,455
|
)
|
|
|
(7,963
|
)
|
|
|
19,907,605
|
|
|
|
1,990
|
|
|
|
5,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering of common stock, net of $6,204,852
offering costs, in October at $9.00 per share
|
|
|
|
|
|
|
|
|
|
|
6,900,000
|
|
|
|
690
|
|
|
|
55,894,458
|
|
|
|
|
|
|
|
|
|
|
|
55,895,148
|
|
Issuance of warrants in February to purchase 385,000 shares
of common stock at $1.00 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,572
|
|
|
|
|
|
|
|
|
|
|
|
313,572
|
|
Cashless warrant exercise in November at $9.45 per share
|
|
|
|
|
|
|
|
|
|
|
27,754
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from option exercises under equity
compensation plans
|
|
|
|
|
|
|
|
|
|
|
353,361
|
|
|
|
36
|
|
|
|
466,426
|
|
|
|
|
|
|
|
|
|
|
|
466,462
|
|
Collection of stock subscription receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,600
|
|
|
|
|
|
|
|
|
|
|
|
187,600
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,134,958
|
|
|
|
|
|
|
|
|
|
|
|
2,134,958
|
|
Unrealized gain on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,033
|
|
|
|
|
|
|
|
64,033
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,172,941
|
)
|
|
|
(52,172,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
29,092,720
|
|
|
|
2,909
|
|
|
|
138,057,890
|
|
|
|
64,033
|
|
|
|
(62,715,790
|
)
|
|
|
75,409,042
|
|
Issuance of warrants in November to purchase 50,331 shares
of common stock at $12.67 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473,876
|
|
|
|
|
|
|
|
|
|
|
|
473,876
|
|
Cashless warrant exercise in March at $15.04 per share
|
|
|
|
|
|
|
|
|
|
|
35,325
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repurchase of common stock from option repurchases under
equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
(15,290
|
)
|
|
|
(2
|
)
|
|
|
7,912
|
|
|
|
|
|
|
|
|
|
|
|
7,910
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,340,305
|
|
|
|
|
|
|
|
|
|
|
|
4,340,305
|
|
Unrealized gain on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,509
|
)
|
|
|
|
|
|
|
(59,509
|
)
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,713,554
|
)
|
|
|
(51,713,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
29,112,755
|
|
|
$
|
2,911
|
|
|
$
|
142,879,979
|
|
|
$
|
4,524
|
|
|
$
|
(114,429,344
|
)
|
|
$
|
28,458,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
May 26, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) through
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,713,554
|
)
|
|
$
|
(52,172,941
|
)
|
|
$
|
(7,705,612
|
)
|
|
$
|
(114,429,344
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
515,763
|
|
|
|
221,681
|
|
|
|
36,876
|
|
|
|
782,709
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
37,034
|
|
|
|
|
|
|
|
37,034
|
|
Stock-based compensation
|
|
|
4,340,305
|
|
|
|
2,134,958
|
|
|
|
|
|
|
|
6,476,074
|
|
Non-cash interest expense and impairment charges
|
|
|
8,622
|
|
|
|
7,535
|
|
|
|
183,000
|
|
|
|
244,158
|
|
Amortization of discount on note payable
|
|
|
106,190
|
|
|
|
84,128
|
|
|
|
|
|
|
|
190,317
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(153,505
|
)
|
|
|
(322,238
|
)
|
|
|
(470,160
|
)
|
|
|
(1,001,916
|
)
|
Accounts payable
|
|
|
(98,735
|
)
|
|
|
1,087,289
|
|
|
|
647,272
|
|
|
|
1,704,336
|
|
Accrued liabilities and other liabilities
|
|
|
6,320,244
|
|
|
|
7,210,292
|
|
|
|
384,255
|
|
|
|
13,960,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(40,674,670
|
)
|
|
|
(41,712,262
|
)
|
|
|
(6,924,369
|
)
|
|
|
(92,035,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
(7,000,000
|
)
|
|
|
(7,450,000
|
)
|
Maturities of
available-for-sale
securities
|
|
|
|
|
|
|
7,000,000
|
|
|
|
|
|
|
|
7,000,000
|
|
Restricted cash
|
|
|
(1,286,152
|
)
|
|
|
(1,581,130
|
)
|
|
|
|
|
|
|
(2,867,282
|
)
|
Purchases of property and equipment
|
|
|
(2,096,683
|
)
|
|
|
(2,509,063
|
)
|
|
|
(45,881
|
)
|
|
|
(4,768,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(3,382,835
|
)
|
|
|
2,909,807
|
|
|
|
(7,045,881
|
)
|
|
|
(8,086,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
7,910
|
|
|
|
56,827,683
|
|
|
|
106,000
|
|
|
|
56,964,093
|
|
Proceeds from sale of preferred stock, net
|
|
|
|
|
|
|
53,775,013
|
|
|
|
17,618,306
|
|
|
|
78,933,748
|
|
Borrowings under debt agreements
|
|
|
14,955,000
|
|
|
|
7,000,000
|
|
|
|
|
|
|
|
21,955,000
|
|
Payments under debt agreements
|
|
|
(2,338,010
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,338,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,624,900
|
|
|
|
117,602,696
|
|
|
|
17,724,306
|
|
|
|
155,514,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(31,432,605
|
)
|
|
|
78,800,241
|
|
|
|
3,754,056
|
|
|
|
55,392,921
|
|
Cash and cash equivalents at beginning of period
|
|
|
86,825,526
|
|
|
|
8,025,285
|
|
|
|
4,271,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
55,392,921
|
|
|
$
|
86,825,526
|
|
|
$
|
8,025,285
|
|
|
$
|
55,392,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in connection with loan and security
agreement
|
|
$
|
473,876
|
|
|
$
|
313,572
|
|
|
$
|
|
|
|
$
|
787,448
|
|
Assets acquired through lease concessions
|
|
$
|
|
|
|
$
|
1,190,530
|
|
|
$
|
|
|
|
$
|
1,190,530
|
|
Unrealized (loss) gain on investment securities
|
|
$
|
(59,509
|
)
|
|
$
|
64,033
|
|
|
$
|
|
|
|
$
|
4,524
|
|
Cash paid for interest and fees
|
|
$
|
693,288
|
|
|
$
|
339,002
|
|
|
$
|
|
|
|
$
|
1,032,290
|
|
The accompanying notes are an integral part of these financial
statements.
72
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 conducting
research and development activities, including clinical trials,
of its product portfolio; organizational activities, including
recruiting personnel, establishing office facilities; and
raising capital to fund these activities. To date, the Company
has in-licensed rights to
Acetavancetm,
formerly known as IV APAP, which is an intravenous
formulation of acetaminophen, and
Omigardtm,
an omiganan pentahydrochloride 1% aqueous gel, both of which are
product candidates currently being studied in Phase III
clinical trials. Since the Company has not begun principal
operations of commercializing either of its product candidates,
the Company is considered to be a development stage company as
defined in Statement of Financial Accounting Standards
(SFAS) No. 7, Accounting and Reporting by
Development Stage Enterprises.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Reclassifications
Certain amounts in the December 31, 2006 financial
statements have been reclassified to conform to the
December 31, 2007 presentation. These reclassifications had
no effect on net loss or stockholders equity as previously
reported.
Management
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of expenses during the reporting period. The Company bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. On a regular basis, the Company reviews its
estimates to ensure the estimates appropriately reflect changes
in its business or as new information becomes available.
Management believes that these estimates are reasonable;
however, actual results could materially differ from these
estimates.
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash and
cash equivalent, available-for-sale securities, accounts payable
and accrued liabilities. Fair value estimates of these
instruments are made at a specific point in time, based on
relevant market information. These estimates may be subjective
in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. The
carrying amount of cash and cash equivalents, accounts payable
and accrued liabilities are generally 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.
Cash
Equivalents
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents. These investments may include money market funds,
U.S. Government agencies, corporate debt securities and
commercial paper. As of December 31, 2007 and 2006, the
Companys cash equivalents were $54,301,722 and
$86,127,068, respectively.
73
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Marketable
Securities
The Company determines the appropriate classification of its
investments at the time of acquisition and reevaluates such
determination at each balance sheet date. The Companys
investment policy set minimum credit quality criteria and
maximum maturity limits on its investments to provide for safety
of principle, liquidity and a reasonable rate of return.
Investments for which maturity from the balance sheet date is
greater than one year are classified as long-term investments in
marketable securities. Available-for-sale securities are
recorded at fair value, based on current market valuations.
Unrealized holding gains and losses on available-for sale
securities are excluded from earnings and are reported as a
separate component of other comprehensive income until realized.
Realized gains and losses are included in earnings and are
derived using the specific identification method for determining
the cost of the securities sold.
In accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, the
Company has classified its investment holdings as
available-for-sale, as the sale of such securities may be
required prior to maturity to implement management strategies.
As of December 31, 2007 and 2006, the fair value of the
Companys sole investment security was in excess of its
carrying value. See Note 3 for further discussion.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist primarily of
cash, 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.
Segment
Information
Operating segments are identified as components of an enterprise
about which separate discrete financial information is available
for evaluation by the chief operating decision-maker, or
decision-making group, in making decisions regarding resource
allocation and assessing performance. To date, the Company has
viewed its operations and manages its business as principally
one segment.
Property
and Equipment
Property and equipment, including leasehold improvements, are
stated at cost. Rent expense for operating leases is recorded on
a straight-line basis over the life of the lease term. If a
lease has a fixed and determinable escalation clause, the
difference between the rent expense and rent paid is recorded as
deferred rent and is included in prepaid expenses on the balance
sheets. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets, which are
generally as follows: seven years for manufacturing equipment;
five years for furniture and equipment; and three years for
computer equipment and software. Leasehold improvements are
amortized over the shorter of their useful lives or the terms of
the related leases. Asset lives are reviewed periodically to
determine if appropriate and adjustments are made as necessary.
Depreciation begins at the time the asset is placed in service.
Maintenance and repairs are expensed as incurred.
For the years ended December 31, 2007, 2006 and 2005, the
Company recorded depreciation expense of $515,763, $221,681 and
$36,876, respectively. Since May 26, 2004 (inception)
through December 31, 2007, the Company has incurred
$782,709 of depreciation expense.
74
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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 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
December 31, 2007.
Research
and Development
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
(CROs), and costs associated with non-clinical
activities, such as regulatory and pre-commercialization
manufacturing 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 December 31, 2007, the Companys
research and development expenses relate predominantly to the
in-licensing and clinical trials of its Acetavance and Omigard
product candidates.
Income
Taxes
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.
On July 13, 2006, the Financial Accounting Standards Board
(FASB) issued Financial Interpretation
(FIN) No. 48, Accounting for Uncertainty in
Income Taxes An Interpretation of FASB Statement
No. 109. FIN No. 48 clarifies the accounting
for uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes, and prescribes a recognition
threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a
tax return. Under FIN No. 48, the impact of an
uncertain income tax position on the income tax return must be
recognized at the largest amount that is more-likely-than-not to
be sustained upon audit by the relevant taxing authority. An
uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being
75
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
sustained. Additionally, FIN No. 48 provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. See Note 10 for further
discussion.
Stock-Based
Compensation
The Company has stock-based compensation plans, which are
described in Note 9. The Company accounts for awards issued
from these plans under the provisions of
SFAS No. 123(R), Share-Based Payment, adopted
on January 1, 2006. SFAS No. 123(R) requires the
measurement and recognition of compensation expense for all
stock-based payment awards made to employees and directors based
on the estimated fair value of the award at the time of the
grant. SFAS No. 123(R) supersedes the Companys
previous accounting practice for stock-based compensation under
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. 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. Under the transition method, the
compensation cost related to all awards 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 awards granted after January 1, 2006
are recognized at the grant-date fair value of the award in
accordance with the provisions of SFAS No. 123(R).
Therefore, only the Companys financial statements for the
years ended December 31, 2007 and 2006 reflect the impact
of SFAS No. 123(R).
Consistent with SFAS No. 123,
SFAS No. 123(R) requires companies to estimate the
fair value of stock-based payment award on the date of grant
using an option pricing model. The Company currently uses the
Black-Scholes option pricing model to estimate the fair value of
its stock-based awards. This option pricing model involves a
number of estimates, including the expected lives of stock
options, the Companys anticipated stock volatility and
interest rates. Stock-based compensation expense recognized
during the period is based on the value of the portion of awards
that is ultimately expected to vest and thus the gross expense
is reduced for estimated forfeitures. Compensation expense for
all stock-based payment awards was recognized using the
straight-line method. The following table summarizes the average
estimates the Company used in the Black-Scholes option pricing
model for the years ended December 31, 2007 and 2006, to
determine the fair value of stock options granted during each
period:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Risk free interest rates
|
|
|
4.6
|
%
|
|
|
5.0
|
%
|
Expected life in years
|
|
|
6.0
|
|
|
|
6.1
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
66.2
|
%
|
|
|
70.0
|
%
|
The Company determines its risk-free interest rate assumption
based on the U.S. Treasury yield for obligations with
contractual lives similar to the expected lives of the
Companys share-based payment awards being valued. 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 due to the lack of relevant
historical exercise data. This method is allowed in developing
an estimate of expected term of plain vanilla share
options in accordance with SFAS No. 123 and was due to
expire on December 31, 2007. However, in December 2007, the
SEC issued SAB No. 110, which extends the opportunity
to use the simplified method beyond December 31, 2007 under
certain circumstances. The lack of relevant historical data is
an acceptable circumstance under SAB No. 110 and the
Company anticipates it will continue to use the simplified
method until such data is
76
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
available. In addition, due to the Companys limited
historical stock price volatility 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 assumed dividend
yield was based on the Companys expectation of not paying
dividends in the foreseeable future. Forfeitures are estimated
based upon the historical and anticipated future experience.
Based upon these assumptions, the Company has estimated the per
share weighted-average grant date fair value of its options
granted for the years ended December 31, 2007 and 2006 at
$9.53 and $5.98, respectively.
On June 14, 2006, the Company commenced the initial public
offering process, and based on the preliminary valuation
information presented by the underwriters for its initial public
offering, 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 and without the use of an unrelated
valuation specialist, who 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. In the
reassessment process, the Companys 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 (as
set forth on the red-herring prospectus), less a marketability
discount of 40% and 30%, respectively, which reflects the
estimated risk of not completing the initial public offering.
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.
Stock-based compensation expense recognized under
SFAS No. 123(R) for the years ended December 31,
2007 and 2006 was $4,340,305 and $2,134,958, respectively. Since
May 26, 2004 (inception), the Company has incurred
$6,476,074 of stock-based compensation expense. The table below
summarizes the stock-based compensation expense included in the
Companys statements of operations for the years ended
December 31, 2007 and 2006, and for the period from
May 26, 2004 (inception) through December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
May 26, 2004
|
|
|
|
|
|
|
|
|
|
(Inception) through
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Research and development
|
|
$
|
1,243,173
|
|
|
$
|
561,257
|
|
|
$
|
1,804,430
|
|
Marketing
|
|
|
32,808
|
|
|
|
1,171
|
|
|
|
33,979
|
|
General and administrative
|
|
|
3,064,324
|
|
|
|
1,572,530
|
|
|
|
4,637,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses
|
|
|
4,340,305
|
|
|
|
2,134,958
|
|
|
|
6,476,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense included in loss from
operations
|
|
$
|
4,340,305
|
|
|
$
|
2,134,958
|
|
|
$
|
6,476,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the total future compensation
expense related to unvested stock options, net of estimated
forfeitures, is expected to be approximately $12,118,023. This
expense is expected to be recognized over a weighted-average
period of approximately 17 months.
Prior to January 1, 2006, the Company applied the
intrinsic-value-based method of accounting prescribed by APB
No. 25, which required compensation expense to be recorded
on the date of the grant only if the current market price of the
underlying stock exceeded the exercise price 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
77
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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.
Comprehensive
Loss
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, are reported, net of
their related tax effect, to arrive at comprehensive income. The
components of other comprehensive loss for the periods presented
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
May 26, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) through
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Net loss
|
|
$
|
(51,713,554
|
)
|
|
$
|
(52,172,941
|
)
|
|
$
|
(7,705,612
|
)
|
|
$
|
(114,429,344
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on available for sale investments
|
|
|
(59,509
|
)
|
|
|
64,033
|
|
|
|
|
|
|
|
4,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(51,773,063
|
)
|
|
$
|
(52,108,908
|
)
|
|
$
|
(7,705,612
|
)
|
|
$
|
(114,424,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share
Net loss per share is presented as basic and diluted net loss
per share. 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 actual net loss per share amounts for the years ended
December 31, 2007, 2006 and 2005 were computed based on the
shares of common stock outstanding during the respective
periods. The net loss per share for the year ended
December 31, 2007 includes the full effect of the 6,900,000
common shares issued by the Company in the fourth quarter of
2006 and the conversion of the Companys preferred stock
into 19,907,605 common shares upon completion of the
Companys initial public offering. As a result of the
issuance of these common shares, there is a lack of
comparability in the basic and diluted net loss per share
amounts for the years ended December 31, 2007, 2006 and
2005.
78
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of the basic and diluted
shares for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Shares for basic and dilutive net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
29,107,093
|
|
|
|
5,958,035
|
|
|
|
1,319,367
|
|
Weighted average unvested common shares subject to repurchase
|
|
|
(534,210
|
)
|
|
|
(776,115
|
)
|
|
|
(163,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted earnings per share
|
|
|
28,572,883
|
|
|
|
5,181,920
|
|
|
|
1,155,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2006 and 2005,
options and other exercisable convertible securities totaling
1,404,744, 2,459,352 and 7,421,076 shares, respectively,
were excluded from the calculation as their effect would have
been antidilutive.
In February 2008, the Company issued 9,240,307 common shares
pursuant to an effective shelf registration. The effect of this
transaction is not reflected in the loss per share calculation
for the periods presented. See Note 13 for further
discussion.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations, which impacts the accounting for
business combinations. The statement requires changes in the
measurement of assets and liabilities acquired in favor of a
fair value method consistent with the guidance provided in
SFAS No. 157. Additionally, the statement requires a
change in accounting for certain acquisition related expenses
and business adjustments which no longer are considered part of
the purchase price. Adoption of this standard is required for
fiscal years beginning after December 15, 2008. Early
adoption of this standard is not permitted. The statement
requires prospective application for all acquisitions after the
date of adoption. The Company is currently accessing the effects
of SFAS No. 141R and it is not expected to have a
material impact on the Companys financial statements.
In June 2007, the Emerging Issues Task Force (EITF)
of the FASB reached consensus on Issue
No. 07-03,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities. EITF
No. 07-03
provides that nonrefundable advance payments for goods that will
be used or services that will be performed in future research
and development activities should be deferred and capitalized
until the goods have been delivered or the related services have
been rendered. EITF
No. 07-03
is effective for reporting periods ending after
December 15, 2007 and earlier application is not permitted.
The Company is currently accessing the effects of EITF
No. 07-03
and it is not expected to have a material impact on the
Companys financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, which allows entities to account for most
financial instruments at fair value rather than under other
applicable generally accepted accounting principles, such as
historical cost. The accounting results in the instrument being
marked to fair value every reporting period with the gain/loss
from a change in fair value recorded in the income statement.
SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity
makes that choice in the first 120 days of that fiscal year
and also elects to apply the provisions of FASB Statement
No. 157, Fair Value Measurements. The Company is
currently assessing the effects of SFAS No. 159 on its
financial statements and it is not expected to have a material
impact on the Companys financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about
79
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
fair value measurements but does not require any new fair value
measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is currently assessing
the effects of SFAS No. 157 on its financial
statements and it is not expected to have a material impact on
the Companys financial statements.
|
|
3.
|
Available-for-Sale
Securities
|
As partial consideration the Company received from its
acquisition of the development and commercialization rights to
the Migenix, Inc. (Migenix) omiganan
pentahydrochloride product candidate in July 2004, the Company
acquired 617,284 shares of Migenix common stock (see
Note 8 for further discussion of the acquisition of these
shares). The Company accounts for these shares as
available-for-sale securities and they are included as other
non-current assets in the balance sheet. At the time of
acquisition, the shares were recorded at an initial cost of
$450,000 and in 2005 and 2004, the Company recognized non-cash
impairment charges on the shares of $183,000 and $45,000,
respectively, related to decreases in the market value of the
Migenix stock that were considered to be other-than-temporary.
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. If 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. The Company recorded no similar charges for the years
ended December 31, 2007 and 2006.
The cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of the Companys
available-for-sale security at December 31, 2007 and 2006
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost Basis
|
|
|
Holding Gains
|
|
|
Holding Losses
|
|
|
Fair Value
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
222,000
|
|
|
$
|
4,524
|
|
|
$
|
|
|
|
$
|
226,524
|
|
At December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
222,000
|
|
|
$
|
64,033
|
|
|
$
|
|
|
|
$
|
286,033
|
|
During 2005, $7,000,000 of debt securities classified as
available-for-sale matured. No gain or loss was recognized on
the transaction as the carrying value of the securities
approximated the fair value.
80
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Selected
Financial Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
1,580,336
|
|
|
$
|
1,572,690
|
|
Computer equipment and software
|
|
|
544,273
|
|
|
|
373,502
|
|
Furniture and fixtures
|
|
|
421,178
|
|
|
|
399,480
|
|
Manufacturing equipment
|
|
|
123,303
|
|
|
|
122,500
|
|
Construction in-process
|
|
|
3,213,617
|
|
|
|
1,317,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,882,707
|
|
|
|
3,786,024
|
|
Accumulated depreciation
|
|
|
(743,169
|
)
|
|
|
(227,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,139,538
|
|
|
$
|
3,558,618
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued patient costs
|
|
$
|
4,284,550
|
|
|
$
|
3,794,763
|
|
Accrued clinical research costs
|
|
|
2,893,214
|
|
|
|
1,226,041
|
|
Accrued manufacturing costs and equipment purchases
|
|
|
4,323,539
|
|
|
|
925,803
|
|
Accrued personnel costs
|
|
|
1,127,582
|
|
|
|
889,391
|
|
Other accrued liabilities
|
|
|
1,272,885
|
|
|
|
542,752
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,901,770
|
|
|
$
|
7,378,750
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Loan and
Security Agreement
|
In February 2006, the Company entered into a $7,000,000 Loan and
Security Agreement (the 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 Agreement at a fixed interest rate of
11.47%. In November 2007, the Company amended the Agreement and
entered into the Second Amendment to Loan and Security Agreement
(the Second Amendment) with the same parties and
Merrill Lynch Capital, a Division of Merrill Lynch Business
Financial Services Inc., to secure an additional $15,000,000
credit facility. In December 2007, the Company drew down
$15,000,000 under the Second Amendment in two separate draws of
$5,000,000 and $10,000,000 with fixed interest rates of 7.83%
and 7.74%, respectively, net of a $45,000 loan fee (the
loan fee). In addition to the principal and
interest, the Company is required to pay $375,000 at the
termination of the credit facility (the term loan final
payment). The loan fee and the warrants issued in
connection with the loan (as described below), have been
recognized as a discount on the loan issuance and will be
amortized to interest expense throughout the life of the loan
using an effective interest rate of 9.56%. The term loan payment
is being accrued through interest expense over the life of the
loan. All interest payable under the Second Amendment and the
full amount of the term loan final payment must be paid upon any
prepayment of the loan.
The loans are collateralized by substantially all the assets of
the Company (excluding intellectual property). 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 and prepayment penalties.
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 under the
Agreement.
81
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
In August 2006, the Company began making the first of six
interest-only payments on the $7,000,000 balance of the
Agreement and in February 2007, began making the first of 30
equal principal and interest payments. Beginning in January
2008, the Company will make interest-only payments on the
$15,000,000 balance of the Second Amendment for the first six
months and thereafter will make 30 equal monthly principal and
interest payments to fully amortize the balance. As of
December 31, 2007 and 2006, the aggregate principal balance
of the loans, net of the loan discount, included on the
Companys balance sheets was $19,030,277 and $6,770,556
respectively.
Warrants
In connection with the Agreement with Silicon Valley Bank and
Oxford Finance Corporation, the Company issued two 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. These
warrants became exercisable for 96,250 shares of the
Companys common stock, at an exercise price of $4.00 per
share, upon the completion of the Companys initial public
offering in October 2006. The $313,572 fair value of the
warrants was determined using the Black-Scholes valuation model,
recorded as a discount to the note payable, 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 0.0%;
expected volatility of 70.0%; and a contractual term of
10 years. In November 2006, one warrant was exercised for
48,125 shares of the Companys common stock at a price
of $9.45, resulting in 27,754 shares issued on a net
exercise basis. In March 2007, the remaining warrant was
exercised for 48,125 shares of the Companys common
stock at a price of $15.04, resulting in 35,325 shares
issued on a net exercise basis. There were no further warrants
outstanding as of December 31, 2007 related to the
$7,000,000 draw on the Agreement.
In connection with the Second Amendment to the Agreement with
Silicon Valley Bank, Oxford Finance Corporation and Merrill
Lynch Capital, the Company issued six fully exercisable warrants
to the lenders to purchase an aggregate of 50,331 shares of
the Companys common stock at an exercise price of $12.67
per share. The Company determined the fair value of these
warrants to be $473,876, using the Black-Scholes valuation
model. The value of the warrants were recorded as a discount to
the note payable, and will be 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 3.64%; dividend yield of 0.0%; expected volatility of 70.0%;
and a contractual term of 7 years. As of December 31,
2007, all warrants related to Second Amendment were outstanding.
|
|
6.
|
Related
Party Transactions
|
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 8). The advance
was accounted for in accordance with the SEC SAB Topic 5T
(SAB No. 79), Accounting for Expenses or
Liabilities 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.
|
|
7.
|
Commitments
and Contingencies
|
Leases
In 2004, the Company subleased its corporate headquarters under
a non-cancelable operating lease that expired in September 2006.
In May 2006, the Company entered into a six-year operating lease
for 23,494 square feet of office space. The Company
received certain tenant improvement allowances and rent
abatement and has an
82
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
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 initial 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 balance sheet. The required amount subject to the letter
of credit and corresponding certificate of deposit may be
reduced by 22% on each of the first four anniversaries of the
commencement of the lease. During the fourth quarter of 2007,
the letter of credit was reduced by $347,848 in accordance with
the agreement and the related restricted cash was adjusted for a
like amount. In January 2007, the Company entered into a
sublease agreement for a portion of its unused office space,
through the third quarter of 2009.
The Company also leases certain office equipment under operating
leases with terms that range from one to four years and expire
in 2010. As of December 31, 2007, the total future minimum
payments under operating leases were as follows:
|
|
|
|
|
2008
|
|
$
|
1,096,294
|
|
2009
|
|
|
1,125,402
|
|
2010
|
|
|
1,151,829
|
|
2011
|
|
|
1,191,851
|
|
2012
|
|
|
917,676
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,483,052
|
|
|
|
|
|
|
Future minimum lease payments have not been reduced by future
minimum sublease rentals of $458,296. Rent expense, net of
sublease rent income, for the years ended December 31,
2007, 2006 and 2005 was $576,124, $772,646 and $159,374,
respectively. Since May 26, 2004 (inception) through
December 31, 2007, the Company has incurred net rent
expense of $1,553,106.
Supply
Agreement
On July 18, 2007, the Company entered into a development
and supply agreement with Baxter Healthcare Corporation
(Baxter) for the completion of pre-commercialization
manufacturing development activities and the manufacture of
commercial supplies of the finished drug product for Acetavance.
Pursuant to the terms of the agreement with Baxter, Baxter will
receive development fees from the Company upon the completion of
specified development activities, which the Company will expense
as the costs are incurred. In addition, Baxter will receive a
set manufacturing fee based on the amount of the finished
Acetavance drug product produced, which prices may be adjusted
by Baxter, subject to specified limitations. The Company is also
obligated to purchase a minimum number of units each year
following regulatory approval, or pay Baxter an amount equal to
the per-unit
purchase price multiplied by the amount of the shortfall.
Further, the Company is obligated to reimburse Baxter for all
reasonable costs directly related to work performed by Baxter in
support of any change in the active pharmaceutical ingredient
(API) source or API manufacturing process.
The agreement with Baxter also requires the Company to fund
specified improvements at Baxters manufacturing facility
and purchase certain equipment for use by Baxter in
manufacturing Acetavance. The Company will reimburse Baxter for
the facility improvements and expense these costs as incurred.
The equipment purchased for the manufacturing of Acetavance to
which the Company retains title will be capitalized and
amortized over the life of the equipment. At the time of
termination, the agreement requires the Company to reimburse
Baxter for all reasonable costs for de-installation of the
Companys equipment and the restoration of Baxters
manufacturing facility to its pre-installation condition. The
Company is not able to reasonably estimate the cost and the
timing of these expenses and therefore cannot reasonably
estimate the fair value of the retirement obligation.
83
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
In anticipation of the execution of the agreement with Baxter,
the Company entered into an irrevocable standby letter of credit
in favor of Baxter in January 2007. The letter of credit was for
an initial amount of $3,268,000 and was based on anticipated
costs to be incurred by Baxter for the improvements at
Baxters manufacturing facility and the purchase of
equipment to be used by Baxter in the manufacturing of the
finished drug product. Under the terms of the agreement, the
amount of the letter of credit may be reduced quarterly
following the execution of the agreement for the costs the
Company has reimbursed Baxter to fund the specified facility
improvements or equipment purchases. In December 2007, at the
request of the Company and based upon the costs reimbursed to
Baxter by the Company, the letter of credit was reduced $768,000
to $2,500,000. The letter of credit in favor of Baxter is
collateralized by a certificate of deposit in the amount of
$1,634,000 and may be drawn down in part or in whole by Baxter
in the event the Company fails to perform its obligations to
fund the specified facility improvements or equipment purchases.
|
|
8.
|
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. In
addition, the Company is 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 2008 but does not expect FDA
approval prior to 2010, if at all. Accordingly, all payments
related to the Migenix agreement (other than for the acquisition
of common stock) have been recognized as research and
development expense.
In March 2006, the Company in-licensed the technology and the
exclusive development and commercialization rights to its
Acetavance product candidate in the U.S. 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 $40,000,000 upon the
achievement of various milestones related to regulatory or
commercial events. In addition, the Company is obligated to pay
a royalty on net sales of the licensed products and has the
right to grant sublicenses to third parties. The Company began
Phase III clinical trials for the licensed product in the
fourth quarter of 2006 but does not expect FDA approval prior to
2010, if at all. Accordingly, all payments related to the BMS
agreement have been recognized as research and development
expense.
Stock
Split
In October 2006, the Companys board of directors and
stockholders approved a one-for-four reverse stock split of the
Companys outstanding common stock. These financial
statements and accompanying notes to the financial statements
give retroactive effect to the reverse stock split for all
periods presented.
Initial
Public Offering
In the fourth quarter of 2006, the Company completed an initial
public offering whereby the Company sold 6,900,000 shares
of common stock at $9.00 per share and received net proceeds of
$55,895,148 (after underwriting discounts and offering costs).
In connection with the Companys initial public offering,
the 79,630,455 outstanding shares of convertible preferred stock
converted into 19,907,605 shares of common stock.
84
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Concurrent with the closing of the Companys initial public
offering, the Company filed its amended and restated certificate
of incorporation, which authorized total capital stock of
110,000,000 shares, $0.0001 par value, of which
100,000,000 shares were designated Common Stock and
10,000,000 shares were designated Preferred Stock. The
holders of Common Stock are entitled to one vote for each share
of Common Stock for all matters submitted to a vote of the
Companys stockholders. Although no shares of Preferred
Stock are currently issued, if such shares were issued, the
designation, powers, preferences, and rights of any such series
would be determined by the Companys board of directors at
the time of issuance.
Stock
Options
In 2006, the Company adopted the 2006 Equity Incentive Award
Plan (the 2006 Plan) in connection with the
Companys initial public offering which became effective on
October 24, 2006. Upon adoption of the 2006 Plan, the
Company restricted future grants from its 2004 Equity Incentive
Award Plan (the 2004 Plan). The 2006 Plan initially
reserved 2,100,000 shares of common stock for future
issuance and allowed for the initial number of reserved shares
to be increased by (i) the 90,772 shares of common
stock that remained available for issuance under the 2004 Plan
as of the effective date of the 2006 Plan and (ii) the
number of shares under the 2004 Plan that are repurchased,
forfeited, expired or cancelled on or after the effective date
of the 2006 Plan. As of December 31, 2007, options to
purchase 69,507 shares issued under the 2004 Plan have been
repurchased, forfeited
and/or
cancelled since the effective date of the 2006 Plan, increasing
the number of shares reserved for issuance under the 2006 Plan
accordingly.
Beginning on January 1, 2008, the 2006 Plan allows for an
annual increase in the number of shares available for issuance
under the 2006 Plan by the lesser of (i) 4% of the
outstanding common stock on January 1 and (ii) a lesser
amount determined by the board of directors. An aggregate of
20,000,000 shares of common stock may be issued over the
10-year term
of the 2006 Plan.
The following table presents shares authorized, available for
future grant and outstanding under each of the Companys
plans at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized(1)
|
|
|
Available
|
|
|
Outstanding
|
|
|
2004 Equity Incentive Plan
|
|
|
2,714,721
|
|
|
|
|
|
|
|
1,597,650
|
|
2006 Equity Incentive Plan
|
|
|
2,260,279
|
|
|
|
1,391,104
|
|
|
|
869,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,975,000
|
|
|
|
1,391,104
|
|
|
|
2,466,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with the Companys initial public in the
fourth quarter of 2006, the 2004 Equity Incentive Plan was
discontinued and the 90,772 shares of common stock that
remained available for issuance under the 2004 Plan were
transferred to the 2006 Plan. Further, options to purchase
69,507 shares of common stock previously granted under the
2004 Plan that were either repurchased, forfeited or cancelled
subsequent to the discontinuance of the 2004 Plan have also been
transferred to the 2006 Plan. |
Options granted under the 2006 Plan expire no later than
10 years from the date of grant and generally vest over a
four-year period. Vesting generally occurs at the rate of 25% at
the end of the first year, and thereafter in 36 equal monthly
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 not be less
than 110% of the fair value of the Companys common stock
on the date of grant. The Company issues new shares of common
stock upon exercise of stock options.
85
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys stock option
activity for the years ended December 31, 2007, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Options outstanding at beginning of period
|
|
|
1,664,967
|
|
|
$
|
2.04
|
|
|
|
289,000
|
|
|
$
|
0.40
|
|
|
|
261,250
|
|
|
$
|
0.40
|
|
Granted
|
|
|
914,450
|
|
|
$
|
14.92
|
|
|
|
1,812,402
|
|
|
$
|
2.11
|
|
|
|
769,250
|
|
|
$
|
0.40
|
|
Exercised
|
|
|
(24,898
|
)
|
|
$
|
1.96
|
|
|
|
(353,361
|
)
|
|
$
|
0.96
|
|
|
|
(741,500
|
)
|
|
$
|
0.40
|
|
Cancelled
|
|
|
(87,694
|
)
|
|
$
|
10.67
|
|
|
|
(83,074
|
)
|
|
$
|
1.32
|
|
|
|
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of period
|
|
|
2,466,825
|
|
|
$
|
6.51
|
|
|
|
1,664,967
|
|
|
$
|
2.04
|
|
|
|
289,000
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,570,407
|
|
|
$
|
2.22
|
|
|
|
1,519,731
|
|
|
$
|
1.96
|
|
|
|
159,880
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate exercise date intrinsic value of options exercised
during 2007 and 2006 was $332,642 and $3,295,433, respectively.
Options exercised in 2005 had no intrinsic value on the exercise
date. Fully vested outstanding options at December 31, 2007
had an aggregate intrinsic value of $9,451,129, based upon the
Companys closing stock price on that date of $14.86 per
share. The aggregate intrinsic value of all outstanding options
at December 31, 2007 was $21,203,243. As of
December 31, 2007, 746,260 shares acquired through the
early exercise of options were subject to repurchase by the
Company until they vest in accordance with the vesting schedule
applicable to the underlying option.
The following table summarizes information concerning stock
options outstanding and exercisable at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Option Exercisable
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted-
|
|
|
|
Weighted-
|
Range of
|
|
Number
|
|
Contractual
|
|
Average
|
|
Number
|
|
Average
|
Exercise Price
|
|
Outstanding
|
|
Life - Years
|
|
Exercise Price
|
|
Exercisable
|
|
Exercise Price
|
|
$ 0.40 - $ 5.00
|
|
|
1,597,650
|
|
|
|
8.32
|
|
|
$
|
1.96
|
|
|
|
1,531,124
|
|
|
$
|
1.96
|
|
$ 5.01 - $10.00
|
|
|
8,100
|
|
|
|
8.88
|
|
|
$
|
9.45
|
|
|
|
2,287
|
|
|
$
|
9.45
|
|
$10.01 - $15.00
|
|
|
349,575
|
|
|
|
9.55
|
|
|
$
|
13.63
|
|
|
|
36,996
|
|
|
$
|
12.31
|
|
$15.01 - $17.32
|
|
|
511,500
|
|
|
|
9.27
|
|
|
$
|
15.83
|
|
|
|
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.40 - $17.32
|
|
|
2,466,825
|
|
|
|
8.69
|
|
|
$
|
6.51
|
|
|
|
1,570,407
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to taxation in the U.S. and various
state jurisdictions. The Companys tax years for 2004 and
forward are subject to examination by the Federal and California
tax authorities due to the carryforward of unutilized net
operating losses and research and development credits. The
Companys practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
The Company had no accrued interest
and/or
penalties related to income tax matters in the Companys
balance sheets at December 31, 2007 and 2006, and has
recognized no interest
and/or
penalties in the Companys statement of operations for the
years ended December 31, 2007, 2006 and 2005, respectively.
86
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
The Company adopted the provisions of FIN No. 48 on
January 1, 2007. On the date of adoption of
FIN No. 48, there were no unrecognized tax benefits
and thus the Company did not recognize an increase in the
liability for unrecognized tax benefits. Further, there are no
unrecognized tax benefits included in the Companys balance
sheet at December 31, 2007.
The Company has not completed a Section 382/383 analysis
regarding the limitation of net operating loss and research and
development credit carryforwards. Until this analysis has been
completed, the Company has removed the deferred tax assets for
net operating losses of approximately $33,267,000 and research
and development credits of approximately $1,989,000 generated
through 2007 from its deferred tax asset schedule, and has
recorded a corresponding decrease to its valuation allowance.
When this analysis is finalized, the Company plans to update its
unrecognized tax benefits under FIN No. 48. The
Company does not expect this analysis to be completed within the
next 12 months and, as a result, the Company does not
expect that the unrecognized tax benefits will change within
12 months of this reporting date. Due to the existence of
the valuation allowance, future changes in the Companys
unrecognized tax benefits will not impact the Companys
effective tax rate.
Significant components of the Companys deferred tax assets
for federal and state income taxes at December 31, 2007 and
2006 are shown below. A valuation allowance has been established
as realization of such deferred tax assets has not met the more
likely than not threshold requirement under
SFAS No. 109.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
|
|
|
$
|
13,089,000
|
|
Tax credit carryforwards
|
|
|
|
|
|
|
1,405,000
|
|
Capitalized research and development
|
|
|
9,514,000
|
|
|
|
10,269,000
|
|
Other, net
|
|
|
2,765,000
|
|
|
|
1,799,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,279,000
|
|
|
|
26,562,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(12,279,000
|
)
|
|
|
(26,562,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company had federal and state net
operating loss carryforwards of approximately $81,645,000 and
$81,648,000, 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 $1,515,000 which will begin expiring in 2024
unless previously utilized. The Company had state research and
development tax credit carryforwards of approximately $730,000
which carryforward indefinitely.
|
|
11.
|
Employee
Benefit Plan
|
The Company has a qualified retirement plan under the provisions
of Section 401(k) of the Internal Revenue Code covering
substantially all employees. Employees may contribute up to 100%
of their annual compensation up to the maximum annual amount
prescribed by the IRS. The Company may elect to make a
discretionary contribution or match a discretionary percentage
of employee contributions. During 2007, 2006 and 2005, the
Company elected not to make any contributions to the plan.
87
CADENCE
PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Summarized
Quarterly Data (Unaudited)
|
The following financial information reflects all normal
recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results of the interim
periods. Summarized quarterly data for the years ended
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007 Quarters
|
|
|
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Total
|
|
|
Total operating expenses
|
|
$
|
10,371,579
|
|
|
$
|
15,657,285
|
|
|
$
|
13,602,799
|
|
|
$
|
14,602,203
|
|
|
$
|
54,233,866
|
|
Net loss
|
|
|
(9,559,698
|
)
|
|
|
(14,934,589
|
)
|
|
|
(12,986,435
|
)
|
|
|
(14,232,832
|
)
|
|
$
|
(51,713,554
|
)
|
Basic and diluted net loss per
share(1)(3)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(1.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006 Quarters
|
|
|
|
|
|
|
1st(2)
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Total
|
|
|
Total operating expenses
|
|
$
|
29,368,353
|
|
|
$
|
6,580,138
|
|
|
$
|
7,994,458
|
|
|
$
|
9,640,248
|
|
|
$
|
53,583,197
|
|
Net loss
|
|
$
|
(29,241,080
|
)
|
|
$
|
(6,198,805
|
)
|
|
$
|
(7,782,841
|
)
|
|
$
|
(8,950,215
|
)
|
|
$
|
(52,172,941
|
)
|
Basic and diluted net loss per
share(1)(3)
|
|
$
|
(23.84
|
)
|
|
$
|
(4.92
|
)
|
|
$
|
(6.01
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(10.07
|
)
|
|
|
|
(1) |
|
Loss per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net loss
per share may not necessarily equal the total for the year. |
|
(2) |
|
In the first quarter of 2006, the Company acquired the
in-license rights to Acetavance. At this time the Company
expensed and paid an upfront fee and related costs of
approximately $25,300,000. |
|
(3) |
|
In the fourth quarter of 2006, the Company completed its initial
public offering whereby the Company sold 6,900,000 shares
of common stock at $9.00 per share and received net proceeds of
$55,895,148 (after underwriting discounts and offering costs).
As a result of the issuance of 6,900,000 shares of common
stock in the Companys initial public offering in the
fourth quarter of 2006 and the conversion of the Companys
preferred stock into 19,907,605 shares of common stock upon
completion of the Companys initial public offering, there
is a lack of comparability in the basic and diluted net loss per
share amounts for the periods presented. |
In February 2008, the Company issued 9,240,307 shares of
its common stock at a purchase price of $5.34 per share pursuant
to an effective shelf registration. The registered direct
offering raised proceeds, net of offering costs, of
approximately $49,000,000. The purchasers in the offering were
comprised of new investors and existing stockholders, including
executive officers of the Company.
88
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this Annual Report on
Form 10-K.
Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosures
controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934, as amended, (the
Exchange Act) is accumulated and communicated to our
management, including our principal executive and principal
financial officers, as appropriate to allow timely decisions
regarding required disclosure, and that such information is
recorded, processed, summarized and reported within the time
periods specified in Security and Exchange Commission rules and
forms. Management has determined that there were no significant
changes to our internal control over financial reporting during
the year or quarter ended December 31, 2007 that has
materially effected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
and as implemented in
Rule 13a-15(f)
under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles general accepted in the U.S. All
internal control systems, no matter how well designed, have
inherent limitations. Internal control over financial reporting
includes those policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
companys financial statements.
|
Management has adopted the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) framework to
evaluate the effectiveness of our internal control over
financial reporting. Managements evaluation of the results
of testing included consideration of susceptibility to loss or
fraud, subjectivity, complexity, the extent of judgment, the
amount and volume of the transactions exposed to the deficiency,
the existence of mitigating controls, the cause of detected
exceptions, how the exception was detected, the pervasiveness of
the exception, the significance of the deviation from policy and
the frequency of exceptions relative to the frequency of
operation.
Indicators of deficiencies that may be material weaknesses and
are at least significant include restatement, material
misstatement in the current period, ineffective Audit Committee
oversight, ineffective internal audit function, identification
of fraud of any magnitude by management, significant
deficiencies that remain uncorrected for some period of time,
ineffective control environment, and the aggregate effect of all
deficiencies.
As of December 31, 2007, management assessed the
effectiveness of our internal control over financial reporting,
and concluded that such control over financial reporting was
effective and there were no material weaknesses in our internal
control over financial reporting that have been identified by
management. Our independent registered public accounting firm,
Ernst & Young LLP, has issued an audit report on the
effectiveness of our internal control over financial reporting
as of December 31, 2007 and is included below.
89
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and
Stockholders of Cadence Pharmaceuticals, Inc.
We have audited Cadence Pharmaceuticals, Inc.s (a
development stage company) internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Cadence
Pharmaceuticals, Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Cadence Pharmaceuticals, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
balance sheets of Cadence Pharmaceuticals, Inc. as of
December 31, 2007 and 2006, and the related statements of
operations, stockholders equity and cash flows for each of
the three years in the period ended December 31, 2007 and
the period from May 26, 2004 (inception) through
December 31, 2007, of Cadence Pharmaceuticals, Inc. and our
report dated March 11, 2008 expressed an unqualified
opinion thereon.
San Diego, California
March 11, 2008
90
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Information required by this item will be included under the
captions Election of Directors, Executive Compensation and
Other Information, Section 16(a) Beneficial Ownership
Reporting Compliance, and Committees of the Board contained
in our definitive Proxy Statement to be filed with the
Commission within 120 days after the conclusion of our year
ended December 31, 2007 pursuant to Regulation 14A,
which information is incorporated herein by reference.
Information regarding our code of ethics is included in our Code
of Business Conduct and Ethics that applies to our officers,
directors and employees. This Code of Business Conduct and
Ethics contains general guidelines for conducting the business
of our company consistent with the highest standards of business
ethics, and is intended to qualify as a code of
ethics within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002 and Item 406 of
Regulation S-K.
The Code of Business Conduct and Ethics is available on our
website at www.cadencepharm.com by selecting the Investor
Relations tab followed by the Corporate
Governance tab, located under the title Essential
Corporate Documents, and is incorporated herein by
reference to this Annual Report on
Form 10-K.
|
|
Item 11.
|
Executive
Compensation
|
We maintain employee compensation programs and benefit plans in
which our executive officers are participants. Copies of these
plans and programs are set forth or incorporated by reference as
Exhibits to this report. The information required by this item
will be included in our definitive Proxy Statement under the
caption Executive Compensation and Other Information to
be filed with the Commission within 120 days after the
conclusion of our year ended December 31, 2007 pursuant to
Regulation 14A, which information is incorporated herein by
reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information required by this item will be included under the
caption Security Ownership of Certain Beneficial Owners and
Management contained in our definitive Proxy Statement to be
filed with the Commission within 120 days after the
conclusion of our year ended December 31, 2007 pursuant to
Regulation 14A, which information is incorporated herein by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information required by this item will be included under the
captions Certain Relationships and Related Transactions, and
Board Independence contained in our definitive Proxy
Statement to be filed with the Commission within 120 days
after the conclusion of our year ended December 31, 2007
pursuant to Regulation 14A, which information is
incorporated herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information required by this item will be included under the
caption Ratification of Selection of Independent Registered
Public Accounting Firm contained in our definitive Proxy
Statement to be filed with the Commission within 120 days
after the conclusion of our year ended December 31, 2007
pursuant to Regulation 14A, which information is
incorporated herein by reference.
91
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as part of this report:
(1) Financial Statements. The following financial
statements of Cadence Pharmaceuticals, Inc., together with the
report thereon of Ernst & Young LLP, required to be
filed pursuant to Part II, Item 8 of this Annual
Report on
Form 10-K,
are included on pages 68 through 88, as follows:
(2) Financial Statements Schedules. All
financial statement schedules have been omitted because they are
not applicable, not required or the information required is
shown in the financial statements or the notes thereto.
(3) Exhibits.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant, incorporated herein by reference to the
corresponding exhibit to the Registrants Quarterly Report
on
Form 10-Q
(File
No. 001-33103)
for the period ended September 30, 2006 as filed with the
SEC on November 30, 2006
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Registrant, incorporated
herein by reference to the corresponding exhibit to the
Registrants Quarterly Report on
Form 10-Q
(File
No. 001-33103)
for the period ended September 30, 2006 as filed with the
SEC on November 30, 2006
|
|
3
|
.2.1
|
|
Amendment of Amended and Restated Bylaws of the Registrant,
incorporated herein by reference to the corresponding exhibit to
the Registrants Current Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on December 17, 2007
|
|
4
|
.1
|
|
Form of the Registrants Common Stock Certificate,
incorporated herein by reference to the corresponding exhibit to
the Registrants Quarterly Report on
Form 10-Q
(File
No. 001-33103)
for the period ended September 30, 2006 as filed with the
SEC on November 30, 2006
|
|
4
|
.2
|
|
Amended and Restated Investor Rights Agreement dated
February 21, 2006, incorporated herein by reference to the
corresponding exhibit to the Registrants Registration
Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on July 17, 2006
|
|
4
|
.5
|
|
Registration Rights Waiver and Amendment dated November 29,
2007, incorporated herein by reference to the corresponding
exhibit to the Registrants Current Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on December 3, 2007
|
|
4
|
.6
|
|
Form of Warrant to Purchase Stock issued to Silicon Valley Bank
on November 30, 2007, incorporated herein by reference to
the corresponding exhibit to the Registrants Current
Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on December 3, 2007
|
|
4
|
.7
|
|
Form of Warrant to Purchase Stock issued to Oxford Finance
Corporation on November 30, 2007, incorporated herein by
reference to the corresponding exhibit to the Registrants
Current Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on December 3, 2007
|
92
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
4
|
.8
|
|
Form of Warrant to Purchase Stock issued to Merrill Lynch
Capital, a Division of Merrill Lynch Business Financial Services
Inc., on November 30, 2007, incorporated herein by
reference to the corresponding exhibit to the Registrants
Current Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on December 3, 2007
|
|
10
|
.1#
|
|
Form of Director and Executive Officer Indemnification
Agreement, incorporated herein by reference to the corresponding
exhibit to Amendment No. 1 of the Registrants
Registration Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on August 30, 2006
|
|
10
|
.3#
|
|
2004 Equity Incentive Award Plan and forms of option agreements
thereunder, incorporated herein by reference to the
corresponding exhibit to the Registrants Registration
Statement on
Form S-8
(File
No. 333-138226)
as filed with the SEC on October 26, 2006
|
|
10
|
.5#
|
|
2006 Equity Incentive Award Plan and forms of option and
restricted stock agreements thereunder, incorporated herein by
reference to the corresponding exhibit to the Registrants
Registration Statement on
Form S-8
(File
No. 333-138226)
as filed with the SEC on October 26, 2006
|
|
10
|
.6
|
|
Form of Amended and Restated Restricted Common Stock Purchase
Agreement, incorporated herein by reference to the corresponding
exhibit to Amendment No. 1 of the Registrants
Registration Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on August 30, 2006
|
|
10
|
.9
|
|
Lease dated May 12, 2006 by and between the Registrant and
Prentiss/Collins Del Mar Heights LLC, incorporated herein by
reference to the corresponding exhibit to the Registrants
Registration Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on July 17, 2006
|
|
10
|
.10
|
|
Collaboration and License Agreement dated July 30, 2004 by
and between the Registrant and Migenix Inc. (formerly Micrologix
Biotech Inc.) , incorporated herein by reference to the
corresponding exhibit to Amendment No. 2 of the
Registrants Registration Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on September 25, 2006
|
|
10
|
.11
|
|
IV APAP Agreement (U.S. and Canada) dated February 21, 2006
by and between the Registrant and Bristol-Myers Squibb Company,
incorporated herein by reference to the corresponding exhibit to
Amendment No. 2 of the Registrants Registration
Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on September 25, 2006
|
|
10
|
.12
|
|
License Agreement dated December 23, 2002 by and among SCR
Pharmatop and Bristol-Myers Squibb Company, incorporated herein
by reference to the corresponding exhibit to Amendment
No. 2 of the Registrants Registration Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on September 25, 2006
|
|
10
|
.13
|
|
Loan and Security Agreement dated February 17, 2006 by and
among the Registrant, Silicon Valley Bank and Oxford Finance
Corporation, incorporated herein by reference to the
corresponding exhibit to the Registrants Registration
Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on July 17, 2006
|
|
10
|
.15
|
|
Engagement Letter dated May 19, 2005 by and between the
Registrant and Clearview Projects, Inc., incorporated herein by
reference to the corresponding exhibit to Amendment No. 2
of the Registrants Registration Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on September 25, 2006
|
|
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.), incorporated herein by reference to the corresponding
exhibit to Amendment No. 3 of the Registrants
Registration Statement on
Form S-1
(File
No. 333-135821)
as filed with the SEC on October 10, 2006
|
|
10
|
.17
|
|
Development and Supply Agreement by and between Cadence
Pharmaceuticals, Inc. and Baxter Healthcare Corporation dated
July 18, 2007. incorporated herein by reference to the
corresponding exhibit to the Registrants Current Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on July 23, 2007
|
|
10
|
.18#
|
|
Form of Amended and Restated Employment Agreement, incorporated
herein by reference to the corresponding exhibit to the
Registrants Quarterly Report on
Form 10-Q
(File
No. 001-33103)
for the period ended September 30, 2007 as filed with the
SEC on November 17, 2007
|
93
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
10
|
.19#
|
|
Amended and Restated Director Compensation Policy, incorporated
herein by reference to the corresponding exhibit to the
Registrants Quarterly Report on
Form 10-Q
(File
No. 001-33103)
for the period ended September 30, 2007 as filed with the
SEC on November 17, 2007
|
|
10
|
.20
|
|
Second Amendment to Loan and Security Agreement dated
November 30, 2007 by and among the Company and Oxford
Finance Corporation, Silicon Valley Bank and Merrill Lynch
Capital, a Division of Merrill Lynch Business Financial Services
Inc., incorporated herein by reference to the corresponding
exhibit to the Registrants Current Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on December 3, 2007
|
|
10
|
.21
|
|
Common Stock Purchase Agreement dated February 14, 2008,
incorporated herein by reference to the corresponding exhibit to
the Registrants Current Report on
Form 8-K
(File
No. 001-33103)
as filed with the SEC on February 15, 2008
|
|
10
|
.22#±
|
|
2007 Corporate Bonus Plan
|
|
10
|
.23#±
|
|
2008 Corporate Bonus Plan
|
|
23
|
.1±
|
|
Report and Consent of Independent Registered Public Accounting
Firm
|
|
31
|
.1±
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a 14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2±
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a 14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1±
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18.U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002
|
|
|
|
± |
|
Included in this Report. |
|
# |
|
Indicates management contract or compensatory plan. |
|
|
|
Confidential treatment has been granted as to certain portions,
which portions have been omitted and filed separately with the
Securities and Exchange Commission. |
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
CADENCE PHARMACEUTICALS, INC.
|
|
|
|
By:
|
/s/ Theodore
R. Schroeder
|
Theodore R. Schroeder
President, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: March 13, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Theodore
R. Schroeder
Theodore
R. Schroeder
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ William
R. LaRue
William
R. LaRue
|
|
Senior Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary (Principal Financial and Accounting Officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Cam
L. Garner
Cam
L. Garner
|
|
Chairman of the Board of Directors
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Brian
G. Atwood
Brian
G. Atwood
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Samuel
L. Barker, Ph.D.
Samuel
L. Barker, Ph.D.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Michael
A. Berman, M.D.
Michael
A. Berman, M.D.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ James
C. Blair, Ph.D.
James
C. Blair, Ph.D.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Alan
D. Frazier
Alan
D. Frazier
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Christopher
J. Twomey
Christopher
J. Twomey
|
|
Director
|
|
March 13, 2008
|
95
exv10w22
Exhibit 10.22
CADENCE PHARMACEUTICALS, INC.
BONUS PLAN
Effective
January 1, 2007
INTRODUCTION AND PURPOSE
The Cadence Pharmaceuticals, Inc. (Cadence or the Company) Bonus Plan (the Plan) is designed
to reward eligible employees for the achievement of corporate objectives, as well as measured
individual objectives that are consistent with and support the overall corporate objectives. Since
cooperation between departments and employees will be required to achieve corporate objectives that
represent a significant portion of the Plan, the Plan should help foster teamwork and build a
cohesive management team.
The Plan is designed to:
|
|
Encourage high performance by providing an incentive program to achieve overall corporate
objectives and to enhance shareholder value. |
|
|
|
Reward those individuals who significantly impact corporate results. |
|
|
|
Encourage increased teamwork among all disciplines within Cadence. |
|
|
|
Incorporate an incentive program in the Cadence overall compensation program to help
attract and retain employees. |
|
|
|
Provide an incentive for eligible employees to remain employed by Cadence through and
beyond the payout of any earned bonus. |
ELIGIBILITY
All regular, exempt, full-time employees at the Associate Director level or higher are eligible to
participate in the Plan. Employees are not eligible if included in a separate formal incentive
plan provided by the Company. In order to be eligible, a participant must have been in an eligible
position for at least three (3) full consecutive months prior to the end of the Plan year, and the
participant must remain employed through the end of the Plan year and until awards are paid. If
the participant is not employed on the date awards are paid, the participant will not have earned
any bonus.
Change in Status During the Plan Period:
|
a. |
|
Participants hired during the Plan year: |
|
|
|
Participants hired during the Plan year are eligible for a prorated award based the
number of months employed in an eligible position. |
|
|
|
|
Participants hired after the end of the third quarter are not eligible to
participate for the plan year. |
1
|
b. |
|
Promotion/change in level: |
|
|
|
For promotions that occur after April 30th of the applicable Plan year
but prior to October 1st of the applicable Plan year, the calculation will
be prorated, based on the number of months at each bonus percentage level. |
|
|
|
|
If the promotion occurred on or after October 1st of the applicable Plan
year, the entire calculation will be based on the bonus percentage applicable prior to
the promotion. |
|
c. |
|
Transfer to a position that is included in a separate formal Incentive Plan: Awards
will be pro-rated using the same discipline as outlined for promotions above. |
|
|
d. |
|
Termination of employment: |
|
|
|
If a participants employment is terminated voluntarily prior to the date awards are
paid, the participant will not be eligible to receive an award. |
|
|
|
|
If a participants employment is terminated involuntarily prior to the date awards
are paid, it will be at the absolute discretion of the Company whether or not an award
payment is made. |
|
e. |
|
Leave of Absence: Employee may be considered for a prorated award. |
AWARD CALCULATION
Awards will be determined by applying a bonus percentage to the participants base salary in
effect at the end of the Plan year. While the Compensation Committee may change the bonus
percentage for any Plan year, the following bonus percentages will initially be used for this
purpose:
|
|
|
|
|
Position Title |
|
Bonus Percentage |
President/CEO
|
|
|
50 |
% |
EVP, SVP
|
|
|
30 |
% |
VP
|
|
|
25 |
% |
Senior Director
|
|
|
20 |
% |
Director, Associate Director, Controller
|
|
|
15 |
% |
Corporate and Individual Performance Factors
The President and / or CEO will present to the Compensation Committee a list of the overall
corporate objectives for the applicable Plan year, which are subject to approval by the
Compensation Committee. All participants in the Plan will then develop a list of key individual
objectives, which must be approved by the responsible Vice President or Senior Vice President and
by the President and / or CEO.
The relative weight between corporate and individual performance factors varies based on the
individuals assigned level within the organization. The weighting
2
may be reviewed periodically and may be adjusted for any Plan year. The weighting for the
performance factors will initially be as follows:
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
Individual |
President/CEO |
|
|
100 |
% |
|
|
|
|
SVP/VP |
|
|
60 |
% |
|
|
40 |
% |
All Other |
|
|
50 |
% |
|
|
50 |
% |
Performance Award Multiplier
Separate award multipliers will be established for both the corporate and the individual components
of each award. The award multiplier for the corporate component shall be determined by the
Compensation Committee each Plan year, in its sole discretion. The same award multiplier for the
corporate component of the award shall be used for all Plan participants. The award multiplier for
the individual component shall be determined by the responsible Vice President or Senior Vice
President and by the President and / or CEO.
While the Compensation Committee may change the award multipliers for any Plan year, the following
scale will initially be used to determine the actual performance award multiplier based upon the
measurement of corporate and individual performance objectives.
|
|
|
Performance Category |
|
Award Multiplier |
|
|
|
1. Performance for the year met or exceeded objectives or was excellent in view of prevailing conditions |
|
75% - 150% |
|
|
|
2. Performance generally met the years objectives or was very acceptable in view of prevailing conditions |
|
50% - 75% |
|
|
|
3. Performance for the year met some, but not all, objectives |
|
25% - 50% |
|
|
|
4. Performance for the year was not acceptable in view of prevailing conditions |
|
0% |
Example
The example below shows a sample cash bonus award calculation under the Plan, which is determined
after the end of the performance period.
Step #1: A potential base bonus award is calculated by multiplying the employees base
salary by their assigned level bonus percentage.
Step #2: The calculated potential base bonus amount is then split between the corporate
and individual performance factors by the employees assigned level (per the weighting above).
This calculation establishes specific potential dollar awards for the performance period based on
both the individual and corporate performance factor components.
Step #3: After the end of the performance period, corporate and individual award
multipliers will be established using the criteria described above. Awards are
3
determined by multiplying the potential bonus awards in Step #2 by the actual corporate and
individual award multipliers.
|
|
|
|
|
|
|
|
|
|
|
Example: |
|
Step # 1: Potential Base Bonus Award Calculation |
|
|
Position: |
|
Sr.Director |
|
|
|
|
|
|
Base salary: |
|
$ |
100,000 |
|
|
|
|
|
|
|
Bonus percentage: |
|
|
20 |
% |
|
|
|
|
|
|
Potential base bonus: |
|
$ |
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Step # 2: Split award amount based on weighting of Performance Factors |
|
|
Potential corporate performance bonus (50%): |
|
$ |
10,000 |
|
|
|
|
|
|
|
Potential individual performance bonus (50%): |
|
$ |
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Step # 3: Actual Cash Incentive Award Calculation |
|
|
Assumed payment multipliers based on assessment of corporate and individual performance: |
|
|
Corporate multiplier
75%-performance generally met objectives |
|
|
Individual multiplier
125%-performance generally exceeded objectives |
|
|
Cash Award: |
|
|
|
|
|
|
|
|
|
|
Corporate component |
|
$ |
7,500 |
|
|
|
($10,000 x 75 |
%) |
|
|
Individual component |
|
$ |
12,500 |
|
|
|
($10,000 x 125 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Award |
|
$ |
20,000 |
|
|
|
|
|
AWARD PAYMENTS
Bonus award payments may be made in cash, through the issuance of stock, stock options or another
form of equity award, or by a combination of cash, stock, stock options and/or another form of
equity award, at the discretion of the Compensation Committee. All bonus award payments are
subject to applicable tax withholdings. In the event that the Compensation Committee and / or the
Board of Directors elect to pay bonus awards in stock or stock options, the Compensation Committee,
in its sole discretion, will make a determination as to the number of shares of stock or stock
options to be issued to each Plan participant based, in part, upon the overall corporate
performance and each participants individual performance, as described. The issuance of stock and
stock options may also be subject to the approval of the Companys stockholders, and any stock
options issued will be subject to the terms and conditions of the Companys Equity Incentive Award
Plan, as amended from time to time by the Company.
Payment of bonus awards will be made as soon as practicable after the end of the Plan year but not
before the completion and issuance of the Companys year-end audited Financial Statements.
Payments will not be impacted by any benefits, with the exception of elected 401(k) contributions
which will be applied.
4
PLAN PROVISIONS
Governance
The Plan will be governed by the Compensation Committee of the Board of Directors (the
Compensation Committee). The President and / or CEO of Cadence will be responsible for the
administration of the Plan. The Compensation Committee will be responsible for approving any
compensation or incentive awards to officers of the Company. All determinations of the
Compensation Committee, under the Plan, shall be final and binding on all Plan participants.
Compensation Committees Absolute Right to Alter or Abolish the Plan
The Compensation Committee reserves the right in its absolute discretion to abolish the Plan at any
time or to alter the terms and conditions under which incentive compensation will be paid. Such
discretion may be exercised any time before, during, and after the Plan year is completed. No
participant shall have any vested right to receive any compensation hereunder until actual delivery
of such compensation. Participation in the Plan at any given time does not guarantee ongoing
participation.
Employment Duration/Employment Relationship
This Plan does not, and Cadences policies and practices in administering this Plan do not,
constitute an express or implied contract or other agreement concerning the duration of any
participants employment with the Company. The employment relationship of each participant is at
will and may be terminated at any time by Cadence or by the participant, with or without cause.
Any questions pertaining to this plan should be directed to the Human Resources Department.
5
Cadence Pharmaceuticals, Inc.
Bonus Plan
This is to acknowledge that I have received a copy of the Bonus Plan.
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
|
|
|
|
Date: |
|
|
|
|
|
|
(Print)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Signature) |
|
|
|
|
|
|
|
|
6
exv10w23
Exhibit 10.23
CADENCE PHARMACEUTICALS, INC.
BONUS PLAN
Effective January 1, 2008
INTRODUCTION AND PURPOSE
The Cadence Pharmaceuticals, Inc. (Cadence or the Company) Bonus Plan (the Plan) is designed
to reward eligible employees for the achievement of corporate objectives, as well as measured
individual objectives that are consistent with and support the overall corporate objectives. Since
cooperation between departments and employees will be required to achieve corporate objectives that
represent a significant portion of the Plan, the Plan should help foster teamwork and build a
cohesive management team.
The Plan is designed to:
|
|
Encourage high performance by providing an incentive program to achieve overall corporate
objectives and to enhance shareholder value. |
|
|
|
Reward those individuals who significantly impact corporate results. |
|
|
|
Encourage increased teamwork among all disciplines within Cadence. |
|
|
|
Incorporate an incentive program in the Cadence overall compensation program to help
attract and retain employees. |
|
|
|
Provide an incentive for eligible employees to remain employed by Cadence through and
beyond the payout of any earned bonus. |
ELIGIBILITY
All regular, exempt, full-time employees at the Senior Manager level or higher are eligible to
participate in the Plan. Employees are not eligible if included in a separate formal incentive
plan provided by the Company. In order to be eligible, a participant must have been in an eligible
position for at least three (3) full consecutive months prior to the end of the Plan year, and the
participant must remain employed through the end of the Plan year and until awards are paid. If
the participant is not employed on the date awards are paid, the participant will not have earned
any bonus. If the participant has been subject to a performance improvement plan or other
disciplinary procedure during the Plan year, any award to such individual will be at the discretion
of the President and CEO or the Compensation Committee.
Change in Status During the Plan Period:
|
a. |
|
Participants hired during the Plan year: |
|
|
|
Participants hired during the Plan year are eligible for a prorated award based the
number of months employed in an eligible position. |
|
|
|
|
Participants hired after the end of the third quarter are not eligible to
participate for the plan year. |
1
|
b. |
|
Promotion/change in level: |
|
|
|
For promotions that occur after April 30th of the applicable Plan year
but prior to October 1st of the applicable Plan year, the calculation will
be prorated, based on the number of months at each bonus percentage level. |
|
|
|
|
If the promotion occurred on or after October 1st of the applicable Plan
year, the entire calculation will be based on the bonus percentage applicable prior to
the promotion. |
|
c. |
|
Transfer to a position that is included in a separate formal Incentive Plan: Awards
will be pro-rated using the same discipline as outlined for promotions above. |
|
|
d. |
|
Termination of employment: |
|
|
|
If a participants employment is terminated voluntarily prior to the date awards are
paid, the participant will not be eligible to receive an award. |
|
|
|
|
If a participants employment is terminated involuntarily prior to the date awards
are paid, it will be at the absolute discretion of the Company whether or not an award
payment is made. |
|
e. |
|
Leave of Absence: Employee may be considered for a prorated award. |
AWARD CALCULATION
Awards will be determined by applying a bonus percentage to the participants base salary in
effect at the end of the Plan year. While the Compensation Committee may change the bonus
percentage for any Plan year, the following bonus percentages will initially be used for this
purpose:
|
|
|
|
|
Position Title |
|
Bonus Percentage |
|
President/CEO |
|
50% |
|
EVP, SVP |
|
30% |
|
VP |
|
25% |
|
Senior Director |
|
20% |
|
Director |
|
20% |
|
Associate Director, Senior Manager |
|
15% |
|
Corporate and Individual Performance Factors
The President and / or CEO will present to the Compensation Committee a list of the overall
corporate objectives for the applicable Plan year, which are subject to approval by the
Compensation Committee. All participants in the Plan will then develop a list of key individual
objectives, which must be approved by the responsible Vice President or Senior Vice President and
by the President and / or CEO.
The relative weight between corporate and individual performance factors varies based on the
individuals assigned level within the organization. The weighting
2
may be reviewed periodically and may be adjusted for any Plan year. The weighting for the
performance factors will initially be as follows:
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
Individual |
President/CEO |
|
|
100 |
% |
|
|
|
|
SVP/VP |
|
|
60 |
% |
|
|
40 |
% |
All Other |
|
|
50 |
% |
|
|
50 |
% |
Performance Award Multiplier
Separate award multipliers will be established for both the corporate and the individual components
of each award. The award multiplier for the corporate component shall be determined by the
Compensation Committee each Plan year, in its sole discretion. The same award multiplier for the
corporate component of the award shall be used for all Plan participants. The award multiplier for
the individual component shall be determined by the responsible Vice President or Senior Vice
President and by the President and / or CEO.
While the Compensation Committee may change the award multipliers for any Plan year, the following
scale will initially be used to determine the actual performance award multiplier based upon the
measurement of corporate and individual performance objectives.
|
|
|
Performance Category |
|
Award Multiplier |
|
|
|
1. Performance for the year met or exceeded objectives or was excellent in view of prevailing conditions |
|
75% - 150% |
|
|
|
2. Performance generally met the years objectives or was very acceptable in view of prevailing conditions |
|
50% - 75% |
|
|
|
3. Performance for the year met some, but not all, objectives |
|
25% - 50% |
|
|
|
4. Performance for the year was not acceptable in view of prevailing conditions |
|
0% |
Example
The example below shows a sample cash bonus award calculation under the Plan, which is determined
after the end of the performance period.
Step #1: A potential base bonus award is calculated by multiplying the employees base
salary by their assigned level bonus percentage.
Step #2: The calculated potential base bonus amount is then split between the corporate
and individual performance factors by the employees assigned level (per the weighting above).
This calculation establishes specific potential dollar awards for the performance period based on
both the individual and corporate performance factor components.
Step #3: After the end of the performance period, corporate and individual award
multipliers will be established using the criteria described above. Awards are
3
determined by multiplying the potential bonus awards in Step #2 by the actual corporate and
individual award multipliers.
|
|
|
|
|
|
|
|
|
|
|
Example: |
|
Step # 1: Potential Base Bonus Award Calculation |
|
|
Position: |
|
Sr.Director |
|
|
|
|
|
|
Base salary: |
|
$ |
100,000 |
|
|
|
|
|
|
|
Bonus percentage: |
|
|
20 |
% |
|
|
|
|
|
|
Potential base bonus: |
|
$ |
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Step # 2: Split award amount based on weighting of Performance Factors |
|
|
Potential corporate performance bonus (50%): |
|
$ |
10,000 |
|
|
|
|
|
|
|
Potential individual performance bonus (50%): |
|
$ |
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Step # 3: Actual Cash Incentive Award Calculation |
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Assumed payment multipliers based on assessment of corporate and individual performance: |
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Corporate multiplier
75%-performance generally met objectives |
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Individual multiplier
125%-performance generally exceeded objectives |
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Cash Award: |
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Corporate component |
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$ |
7,500 |
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($10,000 x 75 |
%) |
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Individual component |
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$ |
12,500 |
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($10,000 x 125 |
%) |
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Total Award |
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$ |
20,000 |
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AWARD PAYMENTS
Bonus award payments may be made in cash, through the issuance of stock, stock options or another
form of equity award, or by a combination of cash, stock, stock options and/or another form of
equity award, at the discretion of the Compensation Committee. All bonus award payments are
subject to applicable tax withholdings. In the event that the Compensation Committee and / or the
Board of Directors elect to pay bonus awards in stock or stock options, the Compensation Committee,
in its sole discretion, will make a determination as to the number of shares of stock or stock
options to be issued to each Plan participant based, in part, upon the overall corporate
performance and each participants individual performance, as described. The issuance of stock and
stock options may also be subject to the approval of the Companys stockholders, and any stock
options issued will be subject to the terms and conditions of the Companys Equity Incentive Award
Plan, as amended from time to time by the Company.
Payment of bonus awards will be made as soon as practicable after the end of the Plan year but not
before the completion and issuance of the Companys year-end audited Financial Statements.
Payments will not be impacted by any benefits, with the exception of elected 401(k) contributions
which will be applied.
4
PLAN PROVISIONS
Governance
The Plan will be governed by the Compensation Committee of the Board of Directors (the
Compensation Committee). The President and / or CEO of Cadence will be responsible for the
administration of the Plan. The Compensation Committee will be responsible for approving any
compensation or incentive awards to officers of the Company. All determinations of the
Compensation Committee, under the Plan, shall be final and binding on all Plan participants.
Compensation Committees Absolute Right to Alter or Abolish the Plan
The Compensation Committee reserves the right in its absolute discretion to abolish the Plan at any
time or to alter the terms and conditions under which incentive compensation will be paid. Such
discretion may be exercised any time before, during, and after the Plan year is completed. No
participant shall have any vested right to receive any compensation hereunder until actual delivery
of such compensation. Participation in the Plan at any given time does not guarantee ongoing
participation.
Employment Duration/Employment Relationship
This Plan does not, and Cadences policies and practices in administering this Plan do not,
constitute an express or implied contract or other agreement concerning the duration of any
participants employment with the Company. The employment relationship of each participant is at
will and may be terminated at any time by Cadence or by the participant, with or without cause.
Any questions pertaining to this plan should be directed to the Human Resources Department.
5
Cadence Pharmaceuticals, Inc.
Bonus Plan
Effective January 1, 2008
This is to acknowledge that I have received a copy of the Bonus Plan.
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Name:
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Date: |
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(Print)
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(Signature) |
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6
exv23w1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in Registration Statements
on Form S-8 (No. 333-138226) and Form S-3 (No.
333-147721) and the related Prospectus Supplement, of our reports dated March 11, 2008, with respect to
the financial statements of Cadence Pharmaceuticals, Inc. and the effectiveness of internal control
over financial reporting of Cadence Pharmaceuticals, Inc., included in this Annual Report on
Form 10-K for the year ended December 31, 2007.
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/s/ Ernst & Young LLP |
San Diego, California |
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March 11, 2008 |
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exv31w1
Exhibit 31.1
CERTIFICATION
I, Theodore R. Schroeder, certify that:
1. I have reviewed this annual report on Form 10-K of Cadence Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including any consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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/s/ Theodore R. Schroeder
Theodore R. Schroeder
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President, Chief Executive Officer and Director |
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(Principal Executive Officer) |
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Date: March 13, 2008
exv31w2
Exhibit 31.2
CERTIFICATION
I, William R. LaRue, certify that:
2. I
have reviewed this annual report on Form 10-K of Cadence Pharmaceuticals, Inc.;
3. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
4. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
5. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including any consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
6. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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/s/ William R. LaRue
William R. LaRue
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Senior Vice President, Chief Financial Officer, |
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Treasurer and Assistant Secretary |
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(Principal Financial and Accounting Officer) |
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Date: March 13, 2008
exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION
1350 OF CHAPTER 63 OF TITLE 18
OF THE UNITED STATES CODE AS
ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K of Cadence Pharmaceuticals,
Inc. (Cadence) for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission on the date hereof (the Report), each of the undersigned officers of Cadence, hereby
certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that,
to our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934, as amended, and
(2) The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of Cadence.
The undersigned have executed this Certification effective as of March 13, 2008.
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/s/ Theodore R. Schroeder
Theodore R. Schroeder
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President, Chief Executive Officer and Director |
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(Principal Executive Officer) |
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/s/ William R. LaRue
William R. LaRue
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Senior Vice President, Chief Financial Officer, |
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Treasurer and Assistant Secretary |
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(Principal Financial and Accounting Officer) |
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The foregoing certification is being furnished solely to accompany the Report pursuant to
18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of
Cadence, whether made before or after the date hereof, regardless of any general incorporation
language in such filing. A signed original of this written statement required by Section 906 has
been provided to Cadence and will be retained by Cadence and furnished to the Securities and
Exchange Commission or its staff upon request.