Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
|
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
|
SECURITIES EXCHANGE ACT OF 1934
|
|
For the quarterly period ended June 30, 2004
|
|
OR
|
|
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
|
SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from _________ to _________.
|
Commission File Number 000-30929
___________________
KERYX BIOPHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) |
13-4087132
(I.R.S. Employer Identification No.) |
|
|
750 Lexington Avenue
New York, New York 10022
(Address including zip code of principal executive offices)
(212) 531-5965
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No £
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes £ No x
There were 30,681,180 shares of the registrant’s common stock, $0.001 par value, outstanding as of August
10, 2004.
KERYX BIOPHARMACEUTICALS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
|
|
|
Page |
| |
|
|
|
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS |
2 |
|
|
|
|
|
PART I |
FINANCIAL INFORMATION |
|
|
|
|
|
|
Item 1 |
Financial Statements |
|
|
|
|
|
|
|
Interim Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003 (audited) |
|
|
|
|
|
|
|
Interim Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 (unaudited) |
|
|
|
|
|
|
|
Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited) |
|
|
|
|
|
|
|
Notes to Interim Consolidated Financial Statements of June 30, 2004 (unaudited) |
|
|
|
|
|
|
Item 2 |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
|
|
Item 3 |
Quantitative and Qualitative Disclosures About Market Risk |
|
|
|
|
|
|
Item 4 |
Controls and Procedures |
|
|
|
|
|
|
PART II |
OTHER INFORMATION |
|
|
|
|
|
|
Item 4 |
Submission of Matters to a Vote of Security Holders |
|
|
|
|
|
|
Item 6 |
Exhibits and Reports on Form 8-K |
|
|
|
|
|
|
SIGNATURES |
|
|
|
|
|
CERTIFICATIONS |
|
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and as such matters may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such
forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking
statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as factors which may be identified from time to time in our other filings with the Securities and Exchange Commission, or SEC, or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Such forward-looking statements include, but are not limited
to, those relating to:
-
our expectations for increases or decreases in expenses;
-
our expectations for the development, manufacturing, and approval of KRX-101, KRX-0401, KRX-0402, KRX-0403 or any other products we may acquire or in-license;
-
our expectations for incurring additional capital expenditures to expand our research and development capabilities;
-
our expectations for generating revenue or becoming profitable on a sustained basis;
-
our expectations or ability to enter into marketing and other partnership agreements;
-
our expectations or ability to enter into product acquisition and in-licensing transactions;
-
our estimates of the sufficiency of our existing cash and cash equivalents and investments to finance our operating and capital requirements;
-
our expected losses; and
-
our expectations for future capital requirements.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
ITEM 1. FINANCIAL STATEMENTS
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Consolidated Balance Sheets as of June 30, 2004, and December 31, 2003
(in thousands, except share and per share amounts)
|
|
|
|
June 30, 2004 |
|
|
December 31, 2003 |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
(Audited) |
|
| |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
38,446 |
|
$ |
21,672 |
|
|
Short-term investment securities, held-to-maturity |
|
|
10,415 |
|
|
9,631 |
|
|
Note and accrued interest receivable from related party |
|
|
-- |
|
|
352 |
|
|
Accrued interest receivable |
|
|
117 |
|
|
111 |
|
|
Other receivables and prepaid expenses |
|
|
488 |
|
|
213 |
|
| |
|
|
|
|
|
|
Total current assets |
|
|
49,466 |
|
|
31,979 |
|
|
Long-term investment securities, held-to-maturity |
|
|
5,044 |
|
|
-- |
|
|
Property, plant and equipment, net |
|
|
164 |
|
|
24 |
|
|
Other assets (primarily intangible assets), net |
|
|
253 |
|
|
220 |
|
| |
|
|
|
|
|
|
Total assets |
|
$ |
54,927 |
|
$ |
32,223 |
|
| |
|
|
|
|
|
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
2,031 |
|
$ |
894 |
|
|
Accrued compensation and related liabilities |
|
|
30 |
|
|
103 |
|
|
Deferred revenue |
|
|
478 |
|
|
-- |
|
| |
|
|
|
|
|
|
Total current liabilities |
|
|
2,539 |
|
|
997 |
|
|
Contingent equity rights |
|
|
4,003 |
|
|
-- |
|
|
Other liabilities |
|
|
126 |
|
|
-- |
|
| |
|
|
|
|
|
|
Total liabilities |
|
|
6,668 |
|
|
997 |
|
| |
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share (60,000,000 and 40,000,000 shares authorized, 30,595,364 and 25,016,873 shares issued, 30,539,264 and 24,960,773 shares outstanding at June 30, 2004, and December 31, 2003, respectively) |
|
|
31 |
|
|
25 |
|
|
Additional paid-in capital |
|
|
130,778 |
|
|
86,042 |
|
|
Treasury stock, at cost, 56,100 shares at June 30, 2004, and December 31, 2003, respectively |
|
|
(89 |
) |
|
(89 |
) |
|
Unearned compensation |
|
|
(2,769 |
) |
|
(142 |
) |
|
Deficit accumulated during the development stage |
|
|
(79,692 |
) |
|
(54,610 |
) |
| |
|
|
|
|
|
|
Total stockholders’ equity |
|
|
48,259 |
|
|
31,226 |
|
| |
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
54,927 |
|
$ |
32,223 |
|
| |
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Unaudited Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2004 and 2003
(in thousands, except share and per share amounts)
|
|
|
Three months ended
June 30, |
Six months ended
June 30, |
Amounts accumulated during the development
stage |
| |
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue |
|
$ |
150 |
|
$ |
-- |
|
$ |
245 |
|
$ |
-- |
|
$ |
245 |
|
|
Management fees from related party |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
300 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
150 |
|
|
-- |
|
|
245 |
|
|
-- |
|
|
545 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
123 |
|
|
-- |
|
|
203 |
|
|
-- |
|
|
203 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation |
|
|
23 |
|
|
(249 |
) |
|
225 |
|
|
(515 |
) |
|
6,952 |
|
|
Non-cash acquired in-process research and development |
|
|
-- |
|
|
-- |
|
|
18,800 |
|
|
-- |
|
|
18,800 |
|
|
Other research and development |
|
|
2,067 |
|
|
554 |
|
|
3,719 |
|
|
3,925 |
|
|
33,626 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
|
2,090 |
|
|
305 |
|
|
22,744 |
|
|
3,410 |
|
|
59,378 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation |
|
|
621 |
|
|
50 |
|
|
806 |
|
|
52 |
|
|
4,385 |
|
|
Other general and administrative |
|
|
745 |
|
|
1,205 |
|
|
1,838 |
|
|
1,869 |
|
|
19,927 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses |
|
|
1,366 |
|
|
1,255 |
|
|
2,644 |
|
|
1,921 |
|
|
24,312 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,579 |
|
|
1,560 |
|
|
25,591 |
|
|
5,331 |
|
|
83,893 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(3,429 |
) |
|
(1,560 |
) |
|
(25,346 |
) |
|
(5,331 |
) |
|
(83,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
170 |
|
|
65 |
|
|
265 |
|
|
150 |
|
|
4,147 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes |
|
|
(3,259 |
) |
|
(1,495 |
) |
|
(25,081 |
) |
|
(5,181 |
) |
|
(79,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
-- |
|
|
14 |
|
|
1 |
|
|
116 |
|
|
491 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,259 |
) |
$ |
(1,509 |
) |
$ |
(25,082 |
) |
$ |
(5,297 |
) |
$ |
(79,692 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share |
|
$ |
(0.11 |
) |
$ |
(0.07 |
) |
$ |
(0.86 |
) |
$ |
(0.26 |
) |
$ |
(5.30 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic and diluted net loss per common share |
|
|
30,466,902 |
|
|
20,739,770 |
|
|
29,147,498 |
|
|
20,377,416 |
|
|
15,035,699 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
(in thousands)
|
|
|
Six months ended
June 30, |
Amounts
accumulated
during the
development
stage |
| |
|
|
|
|
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(25,082 |
) |
$ |
(5,297 |
) |
$ |
(79,692 |
) |
|
Adjustments to reconcile cash flows used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development |
|
|
18,800 |
|
|
-- |
|
|
18,800 |
|
|
Stock compensation expense (negative expense) |
|
|
1,031 |
|
|
(463 |
) |
|
11,337 |
|
|
Issuance of common stock to technology licensor |
|
|
-- |
|
|
-- |
|
|
359 |
|
|
Interest on convertible notes settled through issuance of preferred shares |
|
|
-- |
|
|
-- |
|
|
253 |
|
|
Depreciation and amortization |
|
|
76 |
|
|
731 |
|
|
2,342 |
|
|
Loss on disposal of property, plant and equipment |
|
|
-- |
|
|
6 |
|
|
170 |
|
|
Impairment charges |
|
|
-- |
|
|
2,482 |
|
|
2,482 |
|
|
Exchange rate differences |
|
|
(--) |
* |
|
(9 |
) |
|
97 |
|
|
Changes in assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other receivables and prepaid expenses |
|
|
92 |
|
|
199 |
|
|
(116 |
) |
|
Decrease (increase) in accrued interest receivable |
|
|
(6 |
) |
|
115 |
|
|
(117 |
) |
|
Changes in deferred tax provisions and valuation allowance |
|
|
-- |
|
|
102 |
|
|
-- |
|
|
Increase (decrease) in accounts payable and accrued expenses |
|
|
(175 |
) |
|
(333 |
) |
|
717 |
|
|
Increase (decrease) in income taxes payable |
|
|
-- |
|
|
(47 |
) |
|
-- |
|
|
Increase (decrease) in accrued compensation and related liabilities |
|
|
(646 |
) |
|
(656 |
) |
|
(543 |
) |
|
Increase (decrease) in liability in respect of employee severance obligations |
|
|
-- |
|
|
(188 |
) |
|
-- |
|
|
Increase (decrease) in other liabilities |
|
|
(29 |
) |
|
-- |
|
|
(29 |
) |
|
Increase (decrease) in deferred revenue |
|
|
21 |
|
|
-- |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,918 |
) |
|
(3,358 |
) |
|
(43,919 |
) |
| |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(7 |
) |
|
-- |
|
|
(4,410 |
) |
|
Proceeds from disposals of property, plant and equipment |
|
|
-- |
|
|
40 |
|
|
424 |
|
|
Decrease (increase) in note and accrued interest receivable from related party |
|
|
(4 |
) |
|
-- |
|
|
(356 |
) |
|
Investment in other assets |
|
|
-- |
|
|
(64 |
) |
|
(1,188 |
) |
|
Proceeds from (additions to) deposits in respect of employee severance obligations |
|
|
-- |
|
|
207 |
|
|
-- |
|
|
Proceeds from maturity of (investment in) short-term securities |
|
|
(784 |
) |
|
4,507 |
|
|
(10,415 |
) |
|
Proceeds from maturity of (investment in) long-term securities |
|
|
(5,044 |
) |
|
-- |
|
|
(5,044 |
) |
| |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(5,839 |
) |
|
4,690 |
|
|
(20,989 |
) |
| |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
* Amount less than one thousand dollars.
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
(continued)
(in thousands)
|
|
|
Six months ended
June 30, |
Amounts
accumulated
during the
development
stage |
| |
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term loans |
|
$ |
-- |
|
$ |
-- |
|
$ |
500 |
|
|
Proceeds from long-term loans |
|
|
-- |
|
|
-- |
|
|
3,251 |
|
|
Payment of assumed notes payable and accrued interest |
|
|
(6,322 |
) |
|
-- |
|
|
(6,322 |
) |
|
Issuance of convertible note, net |
|
|
-- |
|
|
-- |
|
|
2,150 |
|
|
Issuance of preferred shares, net and contributed capital |
|
|
-- |
|
|
-- |
|
|
8,453 |
|
|
Receipts on account of shares previously issued |
|
|
-- |
|
|
-- |
|
|
7 |
|
|
Proceeds from initial public offering, net |
|
|
-- |
|
|
-- |
|
|
46,298 |
|
|
Proceeds from private placements, net |
|
|
31,707 |
|
|
-- |
|
|
45,840 |
|
|
Proceeds from exercise of options and warrants |
|
|
3,052 |
|
|
127 |
|
|
3,269 |
|
|
Purchase of treasury stock |
|
|
-- |
|
|
(12 |
) |
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
28,437 |
|
|
115 |
|
|
103,357 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired in acquisition |
|
|
94 |
|
|
-- |
|
|
94 |
|
|
Effect of exchange rate on cash |
|
|
-- |
* |
|
9 |
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
16,774 |
|
|
1,456 |
|
|
38,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
21,672 |
|
|
13,350 |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
38,446 |
|
$ |
14,806 |
|
$ |
38,446 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
* Amount less than one thousand dollars.
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Interim Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
(continued)
(in thousands)
|
|
|
Six months ended
June 30, |
Amounts
accumulated
during the
development
Stage |
| |
|
|
|
|
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
|
NON – CASH TRANSACTIONS |
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with acquisition |
|
$ |
6,325 |
|
$ |
-- |
|
$ |
6,325 |
|
|
Issuance of contingent equity rights in connection with acquisition |
|
|
4,003 |
|
|
-- |
|
|
4,003 |
|
|
Assumption of liabilities in connection with acquisition |
|
|
8,724 |
|
|
-- |
|
|
8,724 |
|
|
Conversion of short-term loans into contributed capital |
|
|
-- |
|
|
-- |
|
|
500 |
|
|
Conversion of long-term loans into contributed capital |
|
|
-- |
|
|
-- |
|
|
2,681 |
|
|
Conversion of long-term loans into convertible notes of Partec |
|
|
-- |
|
|
-- |
|
|
570 |
|
|
Conversion of convertible notes of Partec and accrued interest into stock in Keryx |
|
|
-- |
|
|
-- |
|
|
2,973 |
|
|
Issuance of warrants to related party as finder’s fee in private placement |
|
|
-- |
|
|
-- |
|
|
114 |
|
|
Declaration of stock dividend |
|
|
-- |
|
|
-- |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,026 |
|
$ |
-- |
* |
$ |
1,166 |
|
|
Cash paid for income taxes |
|
$ |
1 |
|
$ |
60 |
|
$ |
432 |
|
The accompanying notes are an integral part of the consolidated financial statements.
* Amount less than one thousand dollars.
Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Notes to Interim Consolidated Financial Statements of June 30, 2004 (unaudited)
BASIS OF PRESENTATION
Keryx Biopharmaceuticals, Inc. (“Keryx” or the “Company”) is a biopharmaceutical company focused on the acquisition, development and commercialization of novel pharmaceutical products for the treatment of life-threatening diseases, including diabetes and cancer. The Company was incorporated in Delaware in October 1998 (under the name Paramount Pharmaceuticals, Inc., which was later changed to Lakaro Biopharmaceuticals, Inc. in November 1999, and finally to Keryx Biopharmaceuticals, Inc. in January 2000). The Company commenced activities in November 1999, and since then has operated in one segment of operations, namely the development and commercialization of clinical compounds and core technologies for the life sciences.
Until November 1999, most of the Company’s activities were carried out by Partec Limited, an Israeli corporation formed in December 1996, and its subsidiaries SignalSite Inc. (85% owned), SignalSite Israel Ltd. (wholly-owned), Vectagen Inc. (87.25% owned), Vectagen Israel Ltd. (wholly-owned) (hereinafter collectively referred to as “Partec”). In November 1999, the Company acquired substantially all of the assets and liabilities of Partec and, as of that date, the activities formerly carried out by Partec were performed by the Company. On the date of the acquisition, Keryx and Partec were entities under common control (the controlling interest owned approximately 79.7% of Keryx and approximately 76% of Partec) and accordingly, the assets and liabilities were recorded at their historical cost basis by means of an “as if” pooling, with Partec being presented as a
predecessor company. Consequently, these financial statements include the activities performed in previous periods by Partec by aggregating the relevant historical financial information with the financial statements of the Company as if they had formed a discrete operation under common management for the entire development stage.
The Company owns a 100% interest in each of ACCESS Oncology, Inc., a U.S. corporation incorporated in the State of Delaware, Keryx (Israel) Ltd., organized in Israel, Keryx Biomedical Technologies Ltd., organized in Israel, and K.B.I. Biopharmaceuticals Ltd., organized in Israel. In 2003, the Company’s three subsidiaries in Israel ceased operations and are in the process of being closed down. Substantially all of the Company’s biopharmaceutical development and administrative activities during the six months ended June 30, 2004 and 2003, respectively, were conducted in the United States of America.
On February 5, 2004, the Company completed the acquisition of ACCESS Oncology, Inc. and its subsidiaries (“ACCESS Oncology”). The transaction was structured as a merger of AXO Acquisition Corp., a Delaware corporation and the Company’s wholly-owned subsidiary, with and into ACCESS Oncology, with ACCESS Oncology remaining as the surviving corporation and a wholly-owned subsidiary of the Company. The transaction was accounted for under the purchase method of accounting. See Note 4 - ACCESS Oncology Acquisition for additional information. The assets and liabilities of ACCESS Oncology that the Company acquired and assumed pursuant to the acquisition have been included in the Company’s consolidated financial statements effective February 5, 2004.
The accompanying unaudited interim consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. All adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim consolidated financial statements have been included. Nevertheless, these financial statements should be read in conjunction with the Company's audited consolidated financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months and six months ended June 30, 2004, are not necessarily indicative
of the results that may be expected for the entire fiscal year or any other interim period.
The Company has not generated any revenues from its planned principal operations and is dependent upon significant financing to provide the working capital necessary to execute its business plan. If the Company determines it is necessary to seek additional funding, there can be no assurance that the Company will be able to obtain any such funding on terms that are acceptable to it, if at all.
REVENUE RECOGNITION
Revenues consist of clinical trial management and site recruitment services. Revenues generated from providing clinical trial management and site recruitment services are recognized at the time such services are provided. Deferred revenue is incurred when the Company receives a deposit or prepayment for services to be performed at a later date.
COST OF SERVICES
Cost of services consist of all costs specifically associated with client programs such as salary, benefits paid to personnel, payments to third-party vendors and systems and other support facilities associated with delivering services to the Company's clients. Cost of services are recognized at the time such services are performed.
LONG-TERM INVESTMENT SECURITIES
Long-term investment securities consist of government debt securities with maturities of over one year. The Company classifies its long-term debt securities as held-to-maturity. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.
A decline that is deemed to be other than temporary in the market value of any held-to-maturity security below cost results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting prescribed by the Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, including FASB Interpretation 44, “Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB Opinion No. 25,” to account for its fixed-plan stock options for employees and directors. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) is applied to stock options and warrants granted to persons other than employees and directors. The Company
has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” (“SFAS No. 148”) for awards to its directors and employees.
The following is a pro forma
unaudited presentation of reported net loss and net loss per share, calculated to show adjusted values had the compensation expenses for stock options granted under the Company’s stock option plans been determined based on fair value at the grant dates consistent with the method of SFAS No. 123:
|
|
|
Three months ended
June 30, |
Six months ended
June 30, |
Amounts accumulated during the development
stage |
| |
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net loss, as reported |
|
$ |
(3,259 |
) |
$ |
(1,509 |
) |
$ |
(25,082 |
) |
$ |
(5,297 |
) |
$ |
(79,692 |
) |
|
Add: Stock-based compensation expense to employees and directors determined under the intrinsic value-based method, as included in reported net loss |
|
|
445 |
|
|
76 |
|
|
445 |
|
|
79 |
|
|
9,485 |
|
|
Deduct: Stock-based compensation expense to employees and directors determined under fair value based method |
|
|
(832 |
) |
|
(129 |
) |
|
(2,965 |
) |
|
(849 |
) |
|
(15,614 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(3,646 |
) |
$ |
(1,562 |
) |
$ |
(27,602 |
) |
$ |
(6,067 |
) |
$ |
(85,821 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.11
|
) |
$ |
(0.07
|
)
|
$ |
(0.86
|
)
|
$ |
(0.26
|
)
|
$ |
(5.30
|
)
|
|
Pro forma |
|
$ |
(0.12 |
) |
$ |
(0.08 |
) |
$ |
(0.95 |
) |
$ |
(0.30 |
) |
$ |
(5.71 |
) |
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the losses allocable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share does not reflect the effect of shares of common stock to be issued upon exercise of stock options and warrants, as their inclusion would be anti-dilutive. The common stock equivalent of anti-dilutive securities not included in the computation of net loss per share amounts was 4,788,851 and 3,801,016 for the three months and six months ended June 30, 2004 and 2003, respectively.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued a proposed statement, Share-Based Payment, that addresses the accounting for share-based awards to employees, including employee-stock-purchase-plans (ESPPs). The FASB formally proposed to require companies to recognize the fair value of stock options and other stock-based compensation to employees in its statement of operations. The proposed statement would eliminate the ability to account for share-based compensation transactions using APB 25 and generally would require instead that such transactions be accounted for using a fair-value-based method. The proposed requirements in the exposure draft would be effective for public companies as of the beginning of the first fiscal year beginning after December 15, 2004. The Company currently accounts for its stock-based compensation plans in accordance
with APB 25. Therefore, the eventual adoption of this proposed statement, if issued in final form by the FASB, could have a material effect on the Company's consolidated financial statements.
NOTE 3 – STOCKHOLDERS' EQUITY
During the six months ended June 30, 2004, the compensation committee of the Company’s board of directors granted options to purchase 1,567,500 shares of the Company’s common stock to the Company’s employees, directors and consultants (including an option to purchase 1,000,000 shares granted to I. Craig Henderson, M.D., the Company’s President, who joined the Company pursuant to the acquisition of ACCESS Oncology in February 2004). In addition, options to purchase 150,000 shares of our common stock that were contingently granted to two non-employee directors in June 2003 were issued under the 2004 Long-Term Incentive Plan which was approved, on June 10, 2004, at the recent 2004 annual meeting of stockholders. As a result of these grants, the Company recorded non-cash compensation expense of
approximately $583,000 during the six months ended June 30, 2004. The exercise price of
the options granted during the six months ended June 30, 2004, was between $4.59 and $11.85 per share. Options for the purchase of 9,000 shares of the Company’s common stock were forfeited during the six months ended June 30, 2004. In addition, options and warrants for the purchase of 1,755,346 shares of the Company’s common stock were exercised during the six months ended June 30, 2004.
On February 17, 2004, the Company completed a private placement of approximately 3.2 million shares of its common stock to institutional investors at $10.00 per share. Total net proceeds of this private placement were approximately $31.7 million. In connection with this private placement, the Company filed a Registration Statement on Form S-3 (File No. 333-113654) on March 16, 2004, and Amendment No. 1 to the Registration Statement on Form S-3/A (File No. 333-113654) on April 1, 2004, which was declared effective by the SEC on May 3, 2004.
On June 10, 2004, at the recent 2004 annual meeting of stockholders, the Company's
stockholders approved the following.
-
the issuance of up to 3,372,422 shares of the Company’s common stock as merger consideration, subject to the achievement of certain milestones, in connection with the recently completed acquisition of ACCESS Oncology, Inc. (see Note 4 below);
-
the Company’s 2004 long-term incentive plan, which provides for a maximum of four million shares of common stock reserved and available for issuance pursuant to awards granted under the plan;
-
the delisting of the Company’s common stock from the Alternative Investment Market of the London Stock Exchange, to become effective on August 10, 2004; and
-
an amendment to the Company’s amended and restated certificate of incorporation increasing by 20 million the number of shares of authorized common stock to 60 million shares.
NOTE 4 – ACCESS ONCOLOGY ACQUISITION
On February 5, 2004, the Company acquired ACCESS Oncology, a related party, for an estimated purchase price of approximately $19.5 million, which included the Company’s assumption of certain liabilities of ACCESS Oncology equal to approximately $8.7 million, the issuance of shares of the Company’s common stock valued at $6.3 million, contingent equity rights valued at $4.0 million and transaction costs of $0.5 million.
At the effective time of the merger, each share of ACCESS Oncology common stock, including shares issuable upon the exercise of options exercised before March 1, 2004, and upon the exercise of outstanding warrants, was converted into the right to share in the contingent equity rights pro rata with such other holders of ACCESS Oncology common stock. Pursuant to the merger agreement, 623,145 shares of the Company’s common stock valued at $6.3 million have been issued to the preferred stockholders of ACCESS Oncology. An additional 4,433 shares of the Company’s common stock are issuable to those preferred stockholders of ACCESS Oncology who have yet to provide the necessary documentation to receive shares of the Company’s common stock.
The contingent equity rights will be paid upon the achievement of the following milestones:
-
500,000 shares of the Company’s common stock upon enrollment of the first patient in a Keryx-sponsored Phase III (or other Pivotal) clinical trial for any of the acquired ACCESS Oncology drug candidates;
-
750,000 shares of the Company’s common stock upon the first new drug application acceptance by the Food and Drug Administration, or FDA, for any of the acquired ACCESS Oncology drug candidates;
-
1,750,000 shares of the Company’s common stock upon the first FDA approval of any of the acquired ACCESS Oncology drug candidates; and
-
372,422 shares of the Company’s common stock following the first 12-month period that sales of all of the acquired ACCESS Oncology drug candidates combined exceeds $100 million.
In no event will the Company issue more than 4,000,000 shares of its common stock pursuant to the merger agreement. These 4,000,000 shares include 627,578 shares issued or issuable to date and any contingent shares as described above. Accordingly, the amount of the Company’s common stock deliverable to the ACCESS Oncology stockholders as milestone consideration will be no more than 3,372,422 shares of the Company’s common stock, which is the portion of the common stock deliverable as contingent consideration pursuant to the merger agreement. The Company’s stockholders approved the issuance of shares of its common stock payable as contingent milestone consideration at the recent 2004 annual meeting of stockholders, which took place on June 10, 2004.
The ACCESS Oncology acquisition has been accounted for as a purchase by the Company under accounting principles generally accepted in the United States of America. Under the purchase method of accounting, the assets and liabilities assumed from ACCESS Oncology are recorded at the date of acquisition, at their respective fair values. The consolidated financial statements and reported results of operations of the Company issued after completion of the acquisition will reflect these values, but will not be restated retroactively to reflect the historical financial position or results of operations of ACCESS Oncology.
The following is an estimate of the purchase price for ACCESS Oncology:
|
Assumed liabilities |
|
|
|
|
$ |
8,724,000 |
|
|
Number of shares of Keryx common stock issued |
|
|
623,145 |
|
|
|
|
|
Multiplied by Keryx’s volume-adjusted weighted average closing price per share measured over the last seven trading days immediately preceding the closing |
|
$ |
10.15 |
|
|
6,325,000 |
|
|
|
|
|
|
|
|
|
|
Contingent equity rights |
|
|
|
|
|
4,003,000 |
|
|
Other transaction costs |
|
|
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
Total estimated purchase price |
|
|
|
|
$ |
19,502,000 |
|
|
|
|
|
|
|
|
|
The excess of the net assets acquired over the purchase price represented negative goodwill of approximately $4,003,000. Since the negative goodwill is a result of not recognizing contingent consideration (i.e., the contingent equity rights), the lesser of the negative goodwill ($4,003,000) and the maximum value of the contingent equity rights at the date of the acquisition ($34,275,000) has been recorded as a liability, thereby eliminating the negative goodwill to zero. The value of the contingent equity rights of $34,275,000 was based on the volume-adjusted weighted average closing price per share of the Company’s common stock measured over the last seven trading days immediately preceding the closing of the acquisition ($10.15 per share) multiplied by the unissued amount of the Company’s common stock deliverable to the ACCESS Oncology stockholders as milestone
consideration (3,376,855 shares).
The above estimated purchase price has been preliminarily allocated based on an estimate of the fair value of net assets acquired. The final valuation of net assets is expected to be completed as soon as possible but no later than one year from the acquisition date. To the extent that these estimated amounts need to be adjusted, the Company will do so.
|
Allocation of purchase price: |
|
|
|
|
|
Net assets acquired |
|
$ |
725,000 |
|
|
Adjusted for write-off of existing intangible assets |
|
|
23,000 |
|
| |
|
|
|
|
Net tangible assets acquired |
|
|
702,000 |
|
|
Acquired in-process research and development charge |
|
|
18,800,000 |
|
| |
|
|
|
|
Estimated purchase price |
|
$ |
19,502,000 |
|
| |
|
|
|
As required by Financial Accounting Standards Board Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method" ("FIN 4"), the Company recorded a charge in the first quarter of 2004 of $18,800,000 for the preliminary estimate of the portion of the purchase price allocated to acquired in-process research and development.
A project-by-project valuation using the guidance in Statement of Financial Accounting Standards No. 141, "Business Combinations" and the AICPA Practice Aid "Assets Acquired in a Business Combination to Be Used In Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries" is being performed with the assistance of independent valuation specialists to determine the fair value of research and development projects of ACCESS Oncology which were in-process, but not yet completed.
The fair value was determined using the income approach on a project-by-project basis. This method starts with a forecast of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the project’s stage of completion and other risk factors. These other risk factors can include the nature of the product, the scientific data associated with the technology, the current patent situation and market competition.
The forecast of future cash flows required the following assumptions to be made:
-
revenue that is likely to result from specific in-process research and development projects, including estimated patient populations, estimated selling prices, estimated market penetration and estimated market share and year-over-year growth rates over the product life cycles;
-
cost of sales related to the potential products using industry data or other sources of market data;
-
sales and marketing expense using industry data or other sources of market data;
-
general and administrative expenses; and
-
research and development expenses.
The final valuation is expected to be completed as soon as possible, but no later than one year from the acquisition date. To the extent that the Company's estimates need to be adjusted, the Company will do so.
The following unaudited pro forma financial information presents the combined results of operations of the Company and ACCESS Oncology as if the acquisition had occurred as of the beginning of the periods presented. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had it completed the acquisition at the dates indicated. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined company.
|
|
|
Three months ended
June 30, |
Six months ended
June 30, |
| |
|
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
150,000 |
|
$ |
92,000 |
|
$ |
347,000 |
|
$ |
97,000 |
|
|
Net loss |
|
$ |
(3,259,000 |
) |
$ |
(2,164,000 |
) |
$ |
(6,225,000 |
) |
$ |
(6,919,000 |
) |
|
Basic and diluted loss per common share |
|
$ |
(0.11 |
) |
$ |
(0.10 |
) |
$ |
(0.21 |
) |
$ |
(0.33 |
) |
The unaudited pro forma financial information above reflects the elimination of balances and transactions between the Company and ACCESS Oncology, which upon completion of the merger would be considered intercompany balances and transactions. The entries include the elimination of certain interest income and expense and the elimination of the reimbursement of salaries and related facility costs of two employees of ACCESS Oncology, both of which net to zero.
The unaudited pro forma financial information above excludes the non-recurring, non-cash charge of $18,800,000 related to acquired in-process research and development in the six months ended June 30, 2004.
NOTE 5 – BONUS TO OFFICER
Pursuant to an employment agreement, the Chief Executive Officer of the Company received a one-time, $1 million cash bonus, paid in the second quarter of 2004, due to the achievement of a certain milestone event that occurred
and was expensed in the first quarter of 2004. Of this amount, $500,000 was included in other research and development expenses and $500,000 was included in other general and administrative expenses for the six months ended June 30, 2004.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in “Risk Factors.” See also the “Special Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.
You should read the following discussion and analysis in conjunction with the unaudited, consolidated financial statements, and the related footnotes thereto, appearing elsewhere in this report.
OVERVIEW
We are a biopharmaceutical company focused on the acquisition, development and commercialization of novel pharmaceutical products for the treatment of life-threatening diseases, including diabetes and cancer. We have two product candidates in the later stages of clinical development: Sulodexide, or KRX-101, for the treatment of diabetic nephropathy, a life-threatening kidney disease caused by diabetes, and Perifosine, or KRX-0401, for the treatment of multiple forms of cancer.
Our lead compound under development is KRX-101, to which we have an exclusive license in North America, Japan and other markets. A randomized, double-blind, placebo-controlled, Phase II study of the use of Sulodexide for treatment of diabetic nephropathy in 223 patients was conducted in Europe and the results of this study were published in the June 2002 issue of the Journal of the American Society of Nephrology. The results of this Phase II study showed a dose-dependent reduction in proteinuria or pathological urinary albumin excretion rates. In 2001, KRX-101 was granted Fast-Track designation for the treatment of diabetic nephropathy and, in 2002, we announced that the FDA had agreed, in principle, to permit us to avail ourselves of the accelerated approval process under subpart H of the FDA’s regulations governing applications for the approval to market a new drug.
In the third quarter of 2003, we announced that the Collaborative Study Group, or CSG, the largest standing renal clinical trial group in the United States comprised of academic and tertiary nephrology care centers, will conduct the U.S.-based Phase II/III clinical program for KRX-101 for the treatment of diabetic nephropathy. The CSG has conducted multiple large-scale clinical trials resulting in over 40 publications in peer-reviewed journals. The CSG conducted the pivotal studies for two of the three drugs that are currently approved for treatment of diabetic nephropathy. In the fourth quarter of 2003, we initiated the Phase II portion of our Phase II/III clinical program for our diabetic nephropathy drug candidate, KRX-101.
In the first quarter of 2004, we announced that we had acquired ACCESS Oncology, a privately-held, cancer-focused biotechnology company. The acquired drug portfolio includes three clinical stage compounds, designated as KRX-0401, KRX-0402 and KRX-0403.
KRX-0401 is a novel, first-in-class, oral Akt-inhibitor that has demonstrated preliminary single agent anti-tumor activity in Phase I studies and is currently in a Phase II clinical program evaluating KRX-0401 as a single agent in the treatment of multiple forms of cancer. Currently, there are several Phase II clinical trials being conducted and funded by the National Cancer Institute, or NCI, a department of the National Institutes of Health, or NIH, under a Cooperative Research and Development Agreement, or CRADA, arrangement. During the second quarter of 2004, we announced the initiation of the Keryx-sponsored Phase II program for KRX-0401. In connection with this clinical program, we intend to initiate several single-agent and combination studies testing KRX-0401 as a treatment for various forms of cancer. To date we have initiated two trials under this program. The first
trial that has been initiated from the program is a multi-center study that will evaluate the safety and efficacy of KRX-0401 as a single agent in the treatment of patients with non-small cell lung cancer (NSCLC) who have progressed despite standard therapy. The second trial that has been initiated is a multi-center study that will evaluate KRX-0401 in combination with Gemcitabine (Gemzar®), a form of chemotherapy, in the treatment of several tumor types for which Gemcitabine is currently indicated, including non-small-cell lung cancer, breast cancer and pancreatic cancer.
The acquired cancer portfolio also includes KRX-0402, an inhibitor of DNA repair, which is also being studied by the NCI under a CRADA arrangement in multiple clinical trials. In addition, the portfolio includes KRX-0403, which is a novel spindle poison in the same general class as Navelbine®, Taxol® and Taxotere®. KRX-0403 has completed a Phase I study. In addition, as a part of the acquisition of ACCESS Oncology, we acquired the Online Collaborative Oncology Group, Inc., or OCOG, a subsidiary of ACCESS Oncology which provides clinical trial management and site recruitment services to biotechnology and pharmaceutical companies.
To date, we have not received approval for the sale of any of our drug candidates in any market and, therefore, have not generated any revenues from our drug candidates.
We were incorporated in Delaware in October 1998. We commenced operations in November 1999, following our acquisition of substantially all of the assets and certain of the liabilities of Partec Ltd., our predecessor company that began operations in January 1997. Since commencing operations, our activities have been primarily devoted to developing our technologies and drug candidates, acquiring clinical-stage compounds, raising capital, purchasing assets for our facilities, and recruiting personnel. We are a development stage company and have no product sales to date. Our major sources of working capital have been proceeds from various private placements of equity securities,
option and warrant exercises, and from our initial public offering.
We are a development stage company and have devoted substantially all of our efforts to the discovery, in-licensing and development of drug candidates. We have incurred negative cash flow from operations each year since our inception. We anticipate incurring negative cash flows from operating activities for the foreseeable future. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials and potential in-licensing opportunities.
Our revenues consist of clinical trial management and site recruitment services. Revenues from providing these services are recognized as the services are provided. Deferred revenue is incurred when we receive a deposit or prepayment for services to be performed at a later date.
Our cost of services consist of all costs specifically associated with client programs such as salary, benefits paid to personnel, payments to third-party vendors and systems and other support facilities associated with delivering services to our clients. Cost of services are recognized as services are performed.
Our research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for clinical and laboratory development, facilities-related and other expenses relating to the design, development, testing, and enhancement of our product candidates, as well as expenses related to in-licensing and acquisition of new product candidates. We expense our research and development costs as they are incurred.
Our general and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including business development, general legal activities and facilities related expenses. We anticipate that general and administrative expenses will increase for the foreseeable future as we expand our operating activities and as a result of increased costs associated with being a publicly-traded company.
Our results of operations include non-cash compensation expense as a result of the grants of stock, stock options and warrants. Compensation expense for options and warrants granted to employees and directors represents the intrinsic value (the difference between the stock price of the common stock and the exercise price of the options or warrants) of the options and warrants at the date of grant, as well as the difference between the stock price at reporting date and the exercise price, in the case where a measurement date has not been reached. The compensation cost is recorded over the respective vesting periods of the individual stock options and warrants. The expense is included in the respective categories of expense in the statement of operations. We expect to incur significant non-cash compensation expense in the future; however, because some of the options and warrants issued
to employees, consultants and other third-parties either do not vest immediately or vest upon the achievement of certain milestones, the total expense is uncertain.
Our ongoing clinical trials will be lengthy and expensive. Even if these trials show that our drug candidates are effective in treating certain indications, there is no guarantee that we will be able to record commercial sales of any of our product candidates in the near future. In addition, we expect losses to continue as we continue to fund in-licensing and development of new drug candidates. As we continue our development efforts, we may enter into additional third-party collaborative agreements and may incur additional expenses, such as licensing fees and milestone payments. As a result, our quarterly results may fluctuate and a quarter-by-quarter comparison of our operating results may not be a meaningful indication of our future performance.
RESULTS OF OPERATIONS
Three months ended June 30, 2004, and June 30, 2003
Revenue. Service revenue for the three months ended June 30, 2004, was $150,000 as compared to no revenue for the three months ended June 30, 2003. Service revenue for the three months ended June 30, 2004, was generated by OCOG, a subsidiary acquired through our acquisition of ACCESS Oncology in the first quarter of 2004. We do not expect our service revenues to have a material impact on our financial results during the remainder of 2004.
Cost of Services Expense. Cost of services expense for the three months ended June 30, 2004, was $123,000 as compared to no cost of services expenses for the three months ended June 30, 2003. Cost of services expense for the three months ended June 30, 2004, was generated by OCOG, a subsidiary acquired through our acquisition of ACCESS Oncology in the first quarter of 2004. We do not expect our cost of services expenses to have a material impact on our financial results during the remainder of 2004.
Non-Cash Compensation Expense (Research and Development). Non-cash compensation expense related to stock option grants and warrant issuances was $23,000 for the three months ended June 30, 2004, as compared to negative $249,000 for the three months ended June 30, 2003. This increase in non-cash compensation expense was primarily due to the issuance of additional options to consultants partially offset by the adjustment to fair market value of previously-issued options to consultants.
Non-Cash Acquired In-Process Research and Development Expense. As required by FIN 4, the Company recorded a charge of $18,800,000 in the first quarter of 2004 for the preliminary estimate of the portion of the purchase price of ACCESS Oncology allocated to acquired in-process research and development. We did not record a charge during the three months ended June 30, 2004; however, a valuation is being finalized with the assistance of independent valuation specialists to determine the fair value of research and development projects of ACCESS Oncology which were in-process, but not yet completed. The final valuation is expected to be completed as soon as possible but no later than one year from the acquisition date. To the extent that our estimates need to be adjusted, we will do so.
Other Research and Development Expenses. Other research and development expenses increased by $1,513,000 to $2,067,000 for the three months ended June 30, 2004, as compared to expenses of $554,000 for the three months ended June 30, 2003. The increase in other research and development expenses was due primarily to a $1,503,000 increase in expenses related to KRX-101, as well as a $313,000 increase in expenses related to our recently acquired drug portfolio from ACCESS Oncology, as described below. This increase was partially offset by the absence of a $63,000 non-cash impairment charge associated with our 2003 restructuring that was taken during the comparative period last year, as well as the absence of $112,000 in expenses related to early stage research and development which ceased in 2003.
We expect our other research and development costs to increase for the remainder of 2004 as a result of our U.S.-based clinical program for KRX-101 and the recently announced corporate clinical program for KRX-0401, including the planned commencement of additional single agent and combination trials, as well as the planned development programs for the other oncology drug candidates within our portfolio.
Non-Cash Compensation Expense (General and Administrative). Non-cash compensation expense related to stock option grants was $621,000 for the three months ended June 30, 2004, as compared to expenses of $50,000 for the three months ended June 30, 2003. This increase in non-cash compensation expense was primarily due to the issuance of previously granted options to purchase shares of our common stock to two non-employee directors at an exercise price less than market price at issue date (but equal to market price at grant date).
Other General and Administrative Expenses. Other general and administrative expenses decreased by $460,000 to $745,000 for the three months ended June 30, 2004, as compared to expenses of $1,205,000 for the three months ended June 30, 2003. The decrease in general and administrative expenses was due primarily to the absence of a $124,000 non-cash impairment charge as well as the absence of $420,000 in accelerated depreciation of leasehold improvements associated with our 2003 restructuring that was taken during the comparative period last year.
We expect our general and administrative costs to increase modestly over the remainder of 2004 primarily as a result of our increased general and administrative staffing and related overhead.
Interest Income (Expense), Net. Interest income, net, increased by $105,000 to $170,000 for the three months ended June 30, 2004, as compared to income of $65,000 for the three months ended June 30, 2003. The increase resulted from a higher level of invested funds due to the completion of two private placement transactions that closed in November 2003 and February 2004, respectively.
Income Taxes. For the three months ended June 30, 2004, no income tax expense was recorded. The $14,000 tax expense for the three months ended June 30, 2003, was primarily due to an adjustment of a prior-period's tax liability which was done upon the presentation of a tax assessment.
Six months ended June 30, 2004, and June 30, 2003
Revenue. Service revenue for the six months ended June 30, 2004, was $245,000 as compared to no revenue for the six months ended June 30, 2003. Service revenue for the six months ended June 30, 2004, was generated by OCOG, a subsidiary acquired through our acquisition of ACCESS Oncology in the first quarter of 2004. We do not expect our service revenues to have a material impact on our financial results during the remainder of 2004.
Cost of Services Expense. Cost of services expense for the six months ended June 30, 2004, was $203,000 as compared to no cost of services expenses for the six months ended June 30, 2003. Cost of services expense for the six months ended June 30, 2004, was generated by OCOG, a subsidiary acquired through our acquisition of ACCESS Oncology in the first quarter of 2004. We do not expect our cost of services expenses to have a material impact on our financial results during the remainder of 2004.
Non-Cash Compensation Expense (Research and Development). Non-cash compensation expense related to stock option grants and warrant issuances was $225,000 for the six months ended June 30, 2004, as compared to negative $515,000 for the six months ended June 30, 2003. This increase in non-cash compensation expense was primarily due to the issuance of options to consultants as well as due to the adjustment to fair market value of previously-issued options to consultants.
Non-Cash Acquired In-Process Research and Development Expense. As required by FIN 4, the Company recorded a charge of $18,800,000 in the six months ended June 30, 2004, for the preliminary estimate of the portion of the purchase price of ACCESS Oncology allocated to acquired in-process research and development. A project-by-project valuation is being performed with the assistance of independent valuation specialists to determine the fair value of research and development projects of ACCESS Oncology which were in-process, but not yet completed. The final valuation is expected to be completed as soon as possible but no later than one year from the acquisition date. To the extent that our estimates need to be adjusted, we will do so.
Other Research and Development Expenses. Other research and development expenses decreased by $206,000 to $3,719,000 for the six months ended June 30, 2004, as compared to expenses of $3,925,000 for the six months ended June 30, 2003. The decrease in other research and development expenses was due primarily to the absence of a $2,358,000 non-cash impairment charge associated with our 2003 restructuring that was taken during the comparative period last year, as well as the absence of $812,000 in expenses related to early stage research and development which ceased in 2003. This decrease was partially offset by a $2,577,000 increase in expenses related to KRX-101, which includes a one-time bonus to our Chief Executive Officer for the achievement of a certain milestone pursuant to his employment agreement, as well as a $581,000 increase in expenses related to our recently acquired
drug portfolio from ACCESS Oncology, as described below.
We expect our other research and development costs to increase for the remainder of 2004 as a result of our U.S.-based clinical program for KRX-101 and the recently announced corporate clinical program for KRX-0401, including the planned commencement of additional single agent and combination trials, as well as the planned commencement of our clinical programs for the other oncology drug candidates within our portfolio.
Non-Cash Compensation Expense (General and Administrative). Non-cash compensation expense related to stock option grants was $806,000 for the six months ended June 30, 2004, as compared to expenses of $52,000 for the six months ended June 30, 2003. This increase in non-cash compensation expense was primarily due to the issuance of previously granted options to purchase shares of our common stock to two non-employee directors at an exercise price less than market price at issue date (but equal to market price at grant date) and due to the issuance of options to consultants.
Other General and Administrative Expenses. Other general and administrative expenses decreased by $31,000 to $1,838,000 for the six months ended June 30, 2004, as compared to expenses of $1,869,000 for the six months ended June 30, 2003. The decrease in general and administrative expenses was due primarily to the absence of a $124,000 non-cash impairment charge as well as the absence of $420,000 in accelerated depreciation of leasehold improvements associated with our 2003 restructuring that was taken during the comparative period last year. The decrease was partially offset by increased payroll expenses relating to a one-time bonus to our Chief Executive Officer for the achievement of a certain milestone pursuant to his employment agreement.
We expect our general and administrative costs to increase modestly over the remainder of 2004 primarily as a result of our increased general and administrative staffing
and related overhead.
Interest Income (Expense), Net. Interest income, net, increased by $115,000 to $265,000 for the six months ended June 30, 2004, as compared to income of $150,000 for the six months ended June 30, 2003. The increase resulted from a higher level of invested funds due to the completion of two private placement transactions that closed in November 2003 and February 2004, respectively, partially offset by financing expenses related to notes payable assumed in the acquisition of ACCESS Oncology, which we repaid subsequent to closing the acquisition.
Income Taxes. Income tax expense decreased by $115,000 to $1,000 for the six months ended June 30, 2004, as compared to expenses of $116,000 for the six months ended June 30, 2003. Our income tax expense for the six months ended June 30, 2004, results from taxes imposed on our capital. The $116,000 tax expense for the six months ended June 30, 2003, was primarily due to the write-off of the deferred tax assets of our Israeli subsidiaries. Such write-off was a non-recurring item.
RECENT DEVELOPMENTS
Phase II Corporate Clinical Program for KRX-0401 (Perifosine)
During the second quarter of 2004, we announced the initiation of the Keryx-sponsored Phase II program for KRX-0401. In connection with this clinical program, we intend to initiate several single-agent and combination studies testing KRX-0401 as a treatment for various forms of cancer. To date we have initiated two trials under this program. The first trial that has been initiated in the program is a multi-center study that will evaluate the safety and efficacy of KRX-0401 as a single agent in the treatment of patients with non-small cell lung cancer (NSCLC) who have progressed despite standard therapy. The second trial that has been initiated is a multi-center study that will evaluate KRX-0401 in combination with Gemcitabine (Gemzar®), a form of chemotherapy, in the treatment of several tumor types for which Gemcitabine is currently indicated, including non-small-cell lung
cancer, breast cancer and pancreatic cancer.
ACCESS Oncology Acquisition
In February 2004, we completed the acquisition of ACCESS Oncology, a privately-held, cancer-focused biotechnology company. The acquired drug portfolio includes three clinical-stage compounds, designated as KRX-0401, KRX-0402 and KRX-0403. KRX-0401 is a novel, first-in-class, oral Akt-inhibitor that has demonstrated preliminary single agent anti-tumor activity in Phase I studies and is currently in
several Phase II clinical trials being conducted and funded by the NCI, a department of the NIH, under a CRADA arrangement, in addition to the Keryx-sponsored clinical program for the drug. The acquired cancer portfolio also includes KRX-0402, an inhibitor of DNA repair, which is also being studied by the NCI under a CRADA arrangement in multiple clinical trials. In addition, the portfolio includes KRX-0403, which is a novel spindle poison in the same general class as
Navelbine®, Taxol® and Taxotere®. KRX-0403 has completed a Phase I study. In addition, as a part of the acquisition of ACCESS Oncology, we acquired OCOG, a subsidiary of ACCESS Oncology, which provides clinical trial management and site recruitment services to biotechnology and pharmaceutical companies.
We acquired ACCESS Oncology for an estimated purchase price of approximately $19.5 million, which included our assumption of certain liabilities of ACCESS Oncology equal to approximately $8.7 million, the issuance of shares of our common stock valued at $6.3 million, contingent equity rights valued at $4.0 million and transaction costs of $0.5 million.
At the effective time of the merger, each share of ACCESS Oncology common stock, including shares issuable upon the exercise of options exercised before March 1, 2004, and upon the exercise of outstanding warrants, was converted into the right to share in the contingent equity rights pro rata with such other holders of ACCESS Oncology common stock. Pursuant to the merger agreement, 623,145 shares of our common stock valued at $6.3 million have been issued to the preferred stockholders of ACCESS Oncology. An additional 4,433 shares of our common stock are issuable to those preferred stockholders of ACCESS Oncology who have yet to provide the necessary documentation to receive shares of our common stock.
The contingent equity rights will be paid upon the achievement of the following milestones:
-
500,000 shares of our common stock upon enrollment of the first patient in a Keryx-sponsored Phase III (or other Pivotal) clinical trial for any of the acquired ACCESS Oncology drug candidates;
-
750,000 shares of our common stock upon the first new drug application acceptance by the FDA for any of the acquired ACCESS Oncology drug candidates;
-
1,750,000 shares of our common stock upon the first FDA approval of any of the acquired ACCESS Oncology drug candidates; and
-
372,422 shares of our common stock following the first 12-month period that sales of all of the acquired ACCESS Oncology drug candidates combined exceeds $100 million.
In no event will we issue more than 4,000,000 shares of our common stock pursuant to the merger agreement. These 4,000,000 shares include 627,578 shares issued or issuable to date and any contingent shares as described above. Accordingly, the amount of our common stock deliverable to the ACCESS Oncology stockholders as milestone consideration will be no more than 3,372,422 shares of our common stock, which is the portion of the common stock deliverable as contingent consideration pursuant to the merger agreement. Our stockholders approved the issuance of shares of our common stock payable as contingent milestone consideration at the recent 2004 annual meeting of stockholders, which took place on June 10, 2004.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through our initial
public offering, various private placement transactions, and option and
warrant exercises. As of June 30, 2004, we had received net proceeds of $46.3
million from our initial public offering, and proceeds of approximately $57.4
million from private placements of common and preferred stock, including $2.9
million raised through the contribution by holders of their notes issued by
our predecessor company, and proceeds of $3.3 million from the exercise of
options and warrants.
The funds raised not only have provided us with capital to support our current and planned clinical programs for KRX-101, KRX-0401 and the other oncology drug candidates within our portfolio for at least the next 36 months, but also have provided us with added flexibility in our in-licensing and product acquisition program to build out our pipeline with additional clinical-stage drug candidates.
As of June 30, 2004, we had $54.0 million in cash, cash equivalents, interest receivable, and short-term and long-term securities, an increase of $22.6 million from December 31, 2003. Cash used in operating activities for the six months ended June 30, 2004, was $5.9 million as compared to $3.4 million for the six months ended June 30, 2003. This increase in cash used in operating activities was due primarily to increased expenditures associated with the execution of our business plan as well as the payment of certain liabilities assumed in the acquisition of ACCESS Oncology. For the six months ended June 30, 2004, net cash used in investing activities of $5.8 million was primarily the result of the investment in long-term securities following the private placement transaction that closed in February 2004. For the six months ended June 30, 2004, net cash provided by financing
activities of $28.4 million was primarily the result of the net proceeds of $31.7 million and $3.1 million generated from our private placement transaction that closed in February 2004 and the exercise of options and warrants, respectively, offset by the payment of notes payable and accrued interest assumed in the acquisition of ACCESS Oncology.
We believe that our $54.0 million in cash, cash equivalents, interest receivable and short-term and long-term securities as of June 30, 2004, will be sufficient to enable us to meet our planned operating needs and capital expenditures for at least the next 36 months. Our cash and cash equivalents and short-term and long-term securities, as of June 30, 2004, are invested in highly liquid investments such as cash, money market accounts and short-term and long-term U.S. corporate and government debt securities. As of June 30, 2004, we are unaware of any known trends or any known demands, commitments, events, or uncertainties that will, or that are reasonably likely to, result in a material increase or decrease in our required liquidity. We expect that our liquidity needs throughout the remainder of 2004 will continue to be funded from existing cash, cash equivalents, and short-term
securities.
Our forecast of the period of time through which our cash, cash equivalents and short-term and long-term securities will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control.
These factors include the following:
-
the timing of expenses associated with product development of the proprietary drug candidates within our portfolio and those that may be in-licensed, partnered or acquired;
-
the timing of the in-licensing, partnering and acquisition of new product opportunities;
-
the progress of the development efforts of parties with whom we have entered, or may enter, into research and development agreements;
-
our ability to achieve our milestones under licensing arrangements;
-
the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and
-
the amount of any funds expended to repurchase our common stock.
We have based our estimate on assumptions that may prove to be inaccurate. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing may be obtained through strategic relationships, public or private sales of our equity or debt securities, and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of our common stock or other securities convertible into shares of our common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing
when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations, and our business, financial condition and results of operations would be materially harmed.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
OBLIGATIONS AND COMMITMENTS
As of June 30, 2004, we have known contractual obligations, commitments and contingencies of $1,818,000. Of this amount, $1,381,000 relates to research and development agreements (primarily relating to our U.S.-based clinical program for KRX-101), of which $1,299,000 is due within the next year, with the remaining $82,000 due within one to three years. The additional $437,000 relates to current operating lease obligations, of which $228,000 is due within the next year, with the remaining $209,000 due within one to three years.
|
|
|
Payment due by period |
| |
|
|
|
Contractual Obligations |
|
|
Total |
|
|
Less than
1 Year |
|
|
1-3
Years |
|
|
3-5
Years |
|
|
More than
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development Agreements |
|
$ |
1,381,000 |
|
$ |
1,299,000 |
|
$ |
82,000 |
|
|
-- |
|
|
-- |
|
|
Operating Leases |
|
|
437,000 |
|
|
228,000 |
|
|
209,000 |
|
|
-- |
|
|
-- |
|
|
Total |
|
$ |
1,818,000 |
|
$ |
1,527,000 |
|
$ |
291,000 |
|
|
-- |
|
|
-- |
|
Additionally, we have undertaken to make contingent milestone payments to certain of our licensors of up to approximately $41.9 million over the life of the licenses, of which $28.0 million will be due upon or following regulatory approval of the drugs. In certain cases, such payments will reduce any royalties due on sales of related products. In the event that the milestones are not achieved, we remain obligated to pay one licensor $50,000 annually until the license expires. We have also committed to pay to the former stockholders of ACCESS Oncology certain contingent equity rights if its drug candidates meet development milestones, as described in more detail above. In addition, pursuant to an employment agreement, our Chief Executive Officer is entitled to receive a one-time $2.0 million performance-based cash bonus upon the achievement of a certain milestone event. These
commitments are not included in the table above.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from these estimates under different assumptions or conditions.
We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include the following:
Accounting For Income Taxes. In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves management estimation of our actual current tax exposure and assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have fully offset our U.S. deferred tax assets with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate taxable income prior to the reversal or expiration of such deferred tax assets were the primary factors considered by management in establishing the valuation allowance. In prior periods, our wholly-owned Israeli subsidiaries had generated taxable income in respect of services provided within the group, and therefore we believed in the past that our deferred tax assets relating to the Israeli subsidiaries would be realized. With the cessation of operating activities in Israel during 2003 and the resulting absence of taxable income from the Israeli subsidiaries, the deferred tax asset was written off in 2003. Our current income tax expense results from taxes imposed on our capital.
Stock Compensation. We have granted options to employees, directors and consultants, as well as warrants to other third parties. In applying SFAS No. 123, “Accounting for Stock-Based Compensation,” or SFAS No. 123, we use the Black-Scholes pricing model to calculate the fair market value of our options and warrants. The Black-Scholes model takes into account volatility in the price of our stock, the risk-free interest rate, the estimated life of the option or warrant, the closing market price of our stock and the exercise price. We have assumed for the purposes of the Black-Scholes calculation that an option will be exercised one year after it fully vests. We base our estimates of our stock price volatility on the volatility during the period prior to the grant of the option or warrant; however, this estimate is neither predictive nor indicative of the future
performance of our stock. For purposes of the calculation, it was assumed that no dividends would be paid during the life of the options and warrants.
In accordance with EITF 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” total compensation expense for options issued to consultants is determined at the “measurement date.” The expense is recognized over the vesting period for the options. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record option compensation based on the fair value of the options at the reporting date. These options are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date. This results in a change to the amount previously recorded in respect of the option grant and additional expense or a negative expense may be recorded in subsequent periods based on changes in the
assumptions used to calculate fair value, such as changes in market price, until the measurement date is reached and the compensation expense is determined.
We account for stock-based employee and director compensation arrangements in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and the Financial Accounting Standards Board, or FASB, Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” or FIN 44, as allowed by SFAS No. 123. We also comply with the disclosure provisions of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” or SFAS No. 148.
Accounting Related to the Valuation of Acquired In-Process Research and Development. As required by Financial Accounting Standards Board Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method," or FIN 4, we recorded a charge of $18,800,000 for the preliminary estimate of the portion of the purchase price allocated to acquired in-process research and development.
A project-by-project valuation using the guidance in Statement of Financial Accounting Standards No. 141, “Business Combinations” and the AICPA Practice Aid “Assets Acquired in a Business Combination to Be Used In Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries” is being performed with the assistance of independent valuation specialists to determine the fair value of research and development projects of ACCESS Oncology which were in-process, but not yet completed.
The fair value was determined using the income approach on a project-by-project basis. This method starts with a forecast of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the project’s stage of completion and other risk factors. These other risk factors can include the nature of the product, the scientific data associated with the technology, the current patent situation and market competition.
The forecast of future cash flows required the following assumptions to be made:
-
revenue that is likely to result from specific in-process research and development projects, including estimated patient populations, estimated selling prices, estimated market penetration and estimated market share and year-over-year growth rates over the product life cycles;
-
cost of sales related to the potential products using industry data or other sources of market data;
-
sales and marketing expense using industry data or other market data;
-
general and administrative expenses; and
-
research and development expenses.
The final valuation is expected to be completed as soon as possible but not later than one year from the acquisition date. To the extent that our estimates need to be adjusted, we will do so.
RECENTLY ISSUED ACCOUNTING STANDARDS
On March 31, 2004, the FASB issued a proposed Statement, Share-Based Payment, that addresses the accounting for share-based awards to employees, including employee-stock-purchase-plans (ESPPs). The FASB formally proposed to require companies to recognize the fair value of stock options and other stock-based compensation to employees in its statement of operations. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB 25 and generally would require instead that such transactions be accounted for using a fair-value-based method. The proposed requirements in the exposure draft would be effective for public companies as of the beginning of the first fiscal year beginning after December 15, 2004. We currently account for our stock-based compensation plans in accordance with APB 25. Therefore, the eventual adoption of this proposed
statement, if issued in final form by the FASB, could have a material effect on our consolidated financial statements.
RISK FACTORS
You should carefully consider the following risks and uncertainties. If any of the following occurs, our business, financial condition or operating results could be materially harmed. These factors could cause the trading price of our common stock to decline, and you could lose all or part of your investment.
Risks Related to Our Business
We have a limited operating history and have incurred substantial operating losses since our inception. We expect to continue to incur losses in the future and may never become profitable.
We have a limited operating history. You should consider our prospects in light of the risks and difficulties frequently encountered by early stage companies. In addition, we have incurred operating losses since our inception, expect to continue to incur operating losses for the foreseeable future and may never become profitable. As of June 30, 2004, we had an accumulated deficit of approximately $79.7 million. As we expand our research and development efforts, we will incur increasing losses. We may continue to incur substantial operating losses even if we begin to generate revenues from our drug candidates or technologies.
We have not yet commercialized any products or technologies and cannot be sure we will ever be able to do so. Even if we commercialize one or more of our drug candidates or technologies, we may not become profitable. Our ability to achieve profitability depends on a number of factors, including our ability to complete our development efforts, obtain regulatory approval for our drug candidates and successfully commercialize our drug candidates and technologies.
If we are unable to successfully complete our clinical trial programs for KRX-101 or our recently acquired cancer compounds, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.
Whether or not and how quickly we complete clinical trials is dependent in part upon the rate at which we are able to engage clinical trial sites and, thereafter, the rate of enrollment of patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials. If we experience delays in identifying and contracting with sites and/or in patient enrollment in our clinical trial programs, we may incur additional costs and delays in our development programs, and may not be able to complete our clinical trials on a cost-effective basis.
Additionally, we have submitted a subpart H clinical development plan to the FDA for the clinical development of KRX-101 for diabetic nephropathy. A final agreement on the specifics of our clinical program for that development plan has not been agreed to with the FDA, and we cannot give any assurance that an acceptable final agreement on the specifics of such clinical program will ever be reached with the FDA. In fact, based on the FDA’s comments to our last submission, we believe that additional discussions with the FDA will be required prior to final agreement on the specifics of our subpart H accelerated approval clinical program. We cannot assure you as to when those discussions will take place or that the results of such discussions will be satisfactory to us. Additionally, the FDA has stated that, based on the novelty of the approach that we have discussed with them, they
may want to refer our proposed approach to the Cardio-Renal Advisory Committee.
Moreover, even if we are able to reach final agreement with the FDA regarding the specifics of an accelerated approval approach, no assurance can be given that we will be able to meet the requirements set forth in such agreement. The subpart H process is complex and requires flawless execution. Many companies who have been granted the right to utilize an accelerated approval approach have failed to obtain approval. The clinical timeline, scope and consequent cost for the development of KRX-101 will depend, in part, on the final outcome of our discussions with the FDA. Moreover, negative or inconclusive results from the clinical trials we hope to conduct or adverse medical events could cause us to have to repeat or terminate the clinical trials. Accordingly, we may not be able to complete the clinical trials within an acceptable time frame, if at all.
If our drug candidates do not receive the necessary regulatory approvals, we will be unable to commercialize our drug candidates.
We have not received, and may never receive, regulatory approval for commercial sale for any of our drug candidates. We will need to conduct significant additional research and human testing before we can apply for product approval with the FDA or with regulatory authorities of other countries. Pre-clinical testing and clinical development are long, expensive and uncertain processes. Satisfaction of regulatory requirements typically depends on the nature, complexity and novelty of the product and requires the expenditure of substantial resources. Data obtained from pre-clinical and clinical tests can be interpreted in different ways, which could delay, limit or prevent regulatory approval. It may take us many years to complete the testing of our drug candidates and failure can occur at any stage of this process. Negative or inconclusive results or medical events during a clinical
trial could cause us to delay or terminate our development efforts.
Clinical trials also have a high risk of failure. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier trials. If we experience delays in the testing or approval process or if we need to perform more or larger clinical trials than originally planned, our financial results and the commercial prospects for our drug candidates may be materially impaired. In addition, we have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval in the United States and abroad and, accordingly, may encounter unforeseen problems and delays in the approval process.
Because we license our proprietary technologies, termination of these agreements would prevent us from developing our drug candidates.
We do not own any of our drug candidates. We have licensed the patent rights to these drugs candidates from others. These license agreements require us to meet development or financing milestones and impose development and commercialization due diligence requirements on us. In addition, under these agreements, we must pay royalties on sales of products resulting from licensed technologies and pay the patent filing, prosecution and maintenance costs related to the licenses. If we do not meet our obligations in a timely manner or if we otherwise breach the terms of our agreements, our licensors could terminate the agreements, and we would lose the rights to our drug candidates.
Because our business model is based, in part, on the acquisition or in-licensing of additional clinical product candidates, if we fail to acquire or in-license such clinical product candidates, our future growth prospects may be substantially impaired.
As a major part of our business strategy, we plan to continue to acquire or in-license additional clinical stage product candidates. If we fail to acquire or in-license such product candidates, we may not achieve expectations of our future performance. Because we do not intend to engage in significant discovery research, we must rely on third parties to sell or license new product opportunities to us. Other companies, including some with substantially greater financial, development, marketing and sales resources, are competing with us to acquire or in-license such products or product candidates. We may not be able to acquire or in-license rights to additional products or product candidates on acceptable terms, if at all.
If we do not establish or maintain drug development and marketing arrangements with third parties, we may be unable to commercialize our technologies into products.
We are an emerging company and do not possess all of the capabilities to fully commercialize our product candidates on our own. From time to time, we may need to contract with third parties to:
-
assist us in developing, testing and obtaining regulatory approval for and commercializing some of our compounds and technologies; and
-
market and distribute our drug candidates.
We can provide no assurance that we will be able to successfully enter into agreements with such partners on terms that are acceptable to us. If we are unable to successfully contract with third parties for these services when needed, or if existing arrangements for these services are terminated, whether or not through our actions, or if such third parties do not fully perform under these arrangements, we may have to delay, scale back or end one or more of our drug development programs or seek to develop or commercialize our technologies independently, which could result in delays. Further, such failure could result in the termination of license rights to one or more of our technologies. Moreover, if these development or marketing agreements take the form of a partnership or strategic alliance, such arrangements may provide our collaborators with significant discretion in determining
the efforts and resources that they will apply to the development and commercialization of products based on our technologies. Accordingly, to the extent that we rely on third parties to research, develop or commercialize products based on our technologies, we are unable to control whether such products will be scientifically or commercially successful.
Even if we obtain FDA approval to market our product candidates, if our products fail to achieve market acceptance, we will never record meaningful revenues.
Even if our products are approved for sale, they may not be commercially successful in the marketplace. Market acceptance of our product candidates will depend on a number of factors, including:
-
perceptions by members of the health care community, including physicians, of the safety and efficacy of our product candidates;
-
the rates of adoption of our products by medical practitioners and the target populations for our products;
-
the potential advantages that our product candidates offer over existing treatment methods;
-
the cost-effectiveness of our product candidates relative to competing products;
-
the availability of government or third-party payor reimbursement for our product candidates;
-
the side effects or unfavorable publicity concerning our products or similar products; and
-
the effectiveness of our sales, marketing and distribution efforts.
Because we expect sales of our product candidates, if approved, to generate substantially all of our revenues in the long-term, the failure of our drugs to find market acceptance would harm our business and could require us to seek additional financing or other sources of revenue.
We rely on third parties to manufacture our products. If these third parties do not successfully manufacture our products, our business will be harmed.
We have no experience in manufacturing products for clinical or commercial purposes and do not have any manufacturing facilities. We intend to continue to use third parties to manufacture our products for use in clinical trials and for future sales. We may not be able to enter into future third-party contract manufacturing agreements on acceptable terms, if at all.
Contract manufacturers often encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance with FDA and foreign regulations, production costs and development of advanced manufacturing techniques and process controls. Our third-party manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required by us to successfully produce and market our drug candidates. In addition, our contract manufacturers will be subject to ongoing periodic, unannounced inspections by the FDA and corresponding foreign governmental agencies to ensure strict compliance with, among other things, current good manufacturing practices, in addition to other governmental regulations and corresponding foreign standards. We will not have control over, other
than by contract, third-party manufacturers’ compliance with these regulations and standards. Switching or engaging multiple manufacturers may be difficult because the number of potential manufacturers is limited and, particularly in the case of KRX-101, the process by which multiple manufacturers make the drug substance must be identical at each manufacturing facility. It may be difficult for us to find and engage replacement or multiple manufacturers quickly and on terms acceptable to us, if at all. Moreover, if we need to change manufacturers, the FDA and corresponding foreign regulatory agencies must approve these manufacturers in advance, which will involve testing and additional inspections to ensure compliance with FDA and foreign regulations and standards.
If third-party manufacturers fail to deliver the required quantities of our drug candidates on a timely basis and at commercially reasonable prices, and if we fail to find replacement or multiple manufacturers on acceptable terms, our ability to develop and deliver products on a timely and competitive basis may be adversely impacted and our business, financial condition or results of operations will be materially harmed.
In the event that we are unable to obtain or retain third-party manufacturers, we will not be able to commercialize our products as planned. The manufacture of our products for clinical trials and commercial purposes is subject to FDA and foreign regulations. No assurance can be given that our third-party manufacturers will comply with these regulations or other regulatory requirements now or in the future.
We have entered into a contract manufacturing relationship with a U.S.-based contract manufacturer for KRX-101 drug product which we believe will be adequate to satisfy our current clinical and commercial supply needs; however, as we seek to transition our manufacturing of KRX-101 to our U.S.-based contract manufacturer, we will need to create a reproducible manufacturing process that will ensure consistent manufacture of KRX-101 across multiple batches and sources. As with all heparin-like compounds, the end product is highly sensitive to the manufacturing process utilized. Accordingly, the creation of a reproducible process will be required for the successful commercialization of KRX-101. There can be no assurance that we will be successful in this endeavor.
If we are not able to obtain the raw material required for the manufacture of our lead product candidate, KRX-101, our ability to develop and market this product candidate will be substantially harmed.
Source materials for KRX-101, our lead product candidate, are derived from porcine intestines. Long-term supplies for KRX-101 could be affected by limitations in the supply of porcine intestines and the demand for other heparin products, over which we will have no control. Additionally, diseases affecting the world supply of pigs could have an actual or perceived negative impact on our ability, or the ability of our contract manufacturers, to source, make and/or sell KRX-101. Such negative impact could materially adversely affect the commercial success of KRX-101.
If our competitors develop and market products that are less expensive, more effective or safer than our product candidates, our commercial opportunity may be reduced or eliminated.
The pharmaceutical industry is highly competitive. Our commercial opportunity may be reduced or eliminated if our competitors develop and market products that are less expensive, more effective or safer than our drug candidates. Other companies have products or drug candidates in various stages of pre-clinical or clinical development to treat diseases for which we are also seeking to discover and develop drug candidates. Some of these potential competing drugs are further advanced in development than our drug candidates and may be commercialized earlier. Even if we are successful in developing effective drugs, our products may not compete successfully with products produced by our competitors.
Our competitors include pharmaceutical companies and biotechnology companies, as well as universities and public and private research institutions. In addition, companies that are active in different but related fields represent substantial competition for us. Many of our competitors have significantly greater capital resources, larger research and development staffs and facilities and greater experience in drug development, regulation, manufacturing and marketing than we do. These organizations also compete with us to recruit qualified personnel, attract partners for joint ventures or other collaborations, and license technologies that are competitive with ours. As a result, our competitors may be able to more easily develop technologies and products that could render our technologies or our drug candidates obsolete or noncompetitive.
If we lose our key personnel or are unable to attract and retain additional personnel, our operations could be disrupted and our business could be harmed.
We currently have 20 full and part-time employees. To successfully develop our drug candidates, we must be able to attract and retain highly skilled personnel. In addition, if we lose the services of our current personnel, in particular, Michael S. Weiss, our Chairman and Chief Executive Officer, our ability to continue to execute on our business plan could be materially impaired. In addition, while we have an employment agreement with Mr. Weiss, this agreement would not prevent him from terminating his employment with us.
Any acquisitions we make may dilute your equity or require a significant amount of our available cash and may not be scientifically or commercially successful.
As part of our business strategy, we may effect acquisitions to obtain additional businesses, products, technologies, capabilities and personnel. If we make one or more significant acquisitions in which the consideration includes stock or other securities, your equity in us may be significantly diluted. If we make one or more significant acquisitions in which the consideration includes cash, we may be required to use a substantial portion of our available cash.
Acquisitions involve a number of operational risks, including:
-
difficulty and expense of assimilating the operations, technology and personnel of the acquired business;
-
inability to retain the management, key personnel and other employees of the acquired business;
-
inability to maintain the acquired company’s relationship with key third parties, such as alliance partners;
-
exposure to legal claims for activities of the acquired business prior to acquisition;
-
diversion of management attention; and
-
potential impairment of substantial goodwill and write-off of in-process research and development costs, adversely affecting our reported results of operations.
We face product liability risks and may not be able to obtain adequate insurance.
The use of our drug candidates in clinical trials, and the sale of any approved products, exposes us to liability claims. Although we are not aware of any historical or anticipated product liability claims against us, if we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to cease clinical trials of our drug candidates or limit commercialization of any approved products.
We believe that we have obtained sufficient product liability insurance coverage for our clinical trials. We intend to expand our insurance coverage to include the commercial sale of any approved products if marketing approval is obtained; however, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. We may not be able to obtain additional insurance coverage that will be adequate to cover product liability risks that may arise. Regardless of merit or eventual outcome, product liability claims may result in:
Consequently, a product liability claim or product recall may result in losses that could be material.
In connection with providing our services, we may be exposed to liability that could have a material adverse effect on our financial condition and results of operations.
In conducting the activities of OCOG, any failure on our part to comply with applicable governmental regulations or contractual obligations could expose us to liability to our clients and could have a material adverse effect on us. We also could be held liable for errors or omissions in connection with the services we perform. In addition, the wrongful or erroneous delivery of health care information or services may expose us to liability. We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any such claims.
Risks Related to Our Financial Condition
If we are unable to obtain additional funds on terms favorable to us, or at all, our business would be harmed.
We expect to use, rather than generate, funds from operations for the foreseeable future. Based on our current plans, we believe our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital requirements for at least the next 36 months; however, the actual amount of funds that we will need prior to or after that date will be determined by many factors, some of which are beyond our control. As a result, we may need funds sooner or in different amounts than we currently anticipate. These factors include:
-
the progress of our development activities;
-
the progress of our research activities;
-
the number and scope of our development programs;
-
our ability to establish and maintain current and new licensing or acquisition arrangements;
-
our ability to achieve our milestones under our licensing arrangements;
-
the costs involved in enforcing patent claims and other intellectual property rights; and
-
the costs and timing of regulatory approvals.
If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds. If we are unable to obtain additional funds on terms favorable to us or at all, we may be required to cease or reduce our operating activities or sell or license to third parties some or all of our technology. If we raise additional funds by selling additional shares of our capital stock, the ownership interests of our stockholders will be diluted. If we raise additional funds through the sale or license of our technology, we may be unable to do so on terms favorable to us.
Our prior restructurings may result in additional Israeli-related liabilities.
In September 2001, one of our Israeli subsidiaries received the status of an “Approved Enterprise,” a status which grants certain tax benefits in Israel in accordance with the “Law for the Encouragement of Capital Investments, 1959.” Through December 31, 2003, our Israeli subsidiary, which ceased operations in 2003, has received tax benefits in the form of exemptions of approximately $744,000 as a result of our subsidiary’s status as an “Approved Enterprise.” As part of the restructuring implemented during 2003, we closed down our Jerusalem laboratory facility. In October 2003, the subsidiary received a letter from the Israeli Ministry of Industry and Trade that its Approved Enterprise status was cancelled as of July 2003 and that past benefits would not need to be repaid. The Israeli tax authorities have yet to confirm this position; however, we
believe that, based on the letter received from the Ministry of Industry and Trade, it is unlikely that past benefits will need to be repaid, and therefore, we have not recorded any charge with respect to this potential liability. There can be no assurances that the Israeli tax authorities will confirm this position. As a result, we may be liable to repay some or all of the tax benefits received to date, which could adversely affect our cash flow and results of operations.
In July 2003, our Israeli subsidiaries vacated their Jerusalem facility and relocated to smaller facilities. The landlord of the Jerusalem facility has alleged that we were immediately liable to pay the landlord a sum in excess of $1.1 million as a result of the alleged breach of the lease agreement for the Jerusalem facility. The amount being demanded by the landlord included rent for the entire remaining term of the lease (through 2005), as well as property taxes and other costs. In August 2003, the landlord claimed a bank guarantee, in the amount of $222,000, which was previously provided as security in connection with the lease agreement making the net amount potentially due to the landlord $776,000. To date, no litigation has been initiated, and, to our knowledge, the landlord has succeeded in leasing most if not all the space to one or more new tenants.
Risks Related to Our Intellectual Property
If we are unable to adequately protect our intellectual property, third parties may be able to use our technology, which could adversely affect our ability to compete in the market.
Our commercial success will depend in part on our ability and the ability of our licensors to obtain and maintain patent protection on our drug products and technologies and successfully defend these patents and technologies against third-party challenges. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, the patents we use may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. The patents we use may be challenged or invalidated or may fail to provide us with any competitive advantage.
Moreover, we rely on trade secrets to protect technology where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require our employees, collaborators and consultants to enter into confidentiality agreements, this may not be sufficient to adequately protect our trade secrets or other proprietary information. In addition, we share ownership and publication rights to data relating to some of our drug candidates with our research collaborators and scientific advisors. If we cannot maintain the confidentiality of this information, our ability to receive patent protection or protect our proprietary information will be at risk.
Litigation or third-party claims of intellectual property infringement could require us to spend substantial time and money defending such claims and adversely affect our ability to develop and commercialize our products.
Third parties may assert that we are using their proprietary technology without authorization. In addition, third parties may have or obtain patents in the future and claim that our technologies infringe their patents. If we are required to defend against patent suits brought by third parties, or if we sue third parties to protect our patent rights, we may be required to pay substantial litigation costs, and our management’s attention may be diverted from operating our business. In addition, any legal action against our licensors or us that seeks damages or an injunction of our commercial activities relating to the affected technologies could subject us to monetary liability and require our licensors or us to obtain a license to continue to use the affected technologies. We cannot predict whether our licensors or we would prevail in any of these types of actions or that any
required license would be made available on commercially acceptable terms, if at all.
Risks Related to Our Common Stock
Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.
As of June 30, 2004, our executive officers, directors and principal stockholders (including their affiliates) beneficially own, in the aggregate, approximately 28.24% of our outstanding common stock, including, for this purpose, currently exercisable options and warrants held by our executive officers, directors and principal stockholders. As a result, these persons, acting together, may have the ability to effectively determine the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, such persons, acting together, may have the ability to effectively control our management and affairs. Accordingly, this concentration of ownership may harm the market price of our common stock by discouraging a potential acquirer from at tempting to
acquire us.
Our stock price could be volatile which increases the risk of litigation, and may result in a significant decline in the value of your investment.
The trading price of our common stock is likely to be highly volatile and subject to wide fluctuations in price in response to various factors, many of which are beyond our control. These factors include:
-
developments concerning our drug candidates;
-
announcements of technological innovations by us or our competitors;
-
introductions or announcements of new products by us or our competitors;
-
announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
-
changes in financial estimates by securities analysts;
-
actual or anticipated variations in quarterly operating results;
-
expiration or termination of licenses, research contracts or other collaboration agreements;
-
conditions or trends in the regulatory climate and the biotechnology and pharmaceutical industries;
-
changes in the market valuations of similar companies; and
-
additions or departures of key personnel.
In addition, equity markets in general, and the market for biotechnology and life sciences companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in those markets. These broad market and industry factors may materially affect the market price of our common stock, regardless of our development and operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could cause us to incur substantial costs to defend such claims and divert management’s attention and resources, which could seriously harm our business.
Anti-takeover provisions in our charter documents and Delaware law could make a third-party acquisition of us difficult. This could limit the price investors might be willing to pay in the future for our common stock.
Provisions in our amended and restated certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, or control us. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Our amended and restated certificate of incorporation allows us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders and our amended and restated bylaws eliminate the right of stockholders to call a special meeting of stockholders, which could make it more difficult for stockholders to effect certain corporate actions. These provisions could also have the effect of delaying or preventing a change in control. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to the holders of our common stock or could adversely affect the rights and powers, including voting rights, of such holders. In certain circumstances, such issuance could have the effect of decreasing the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Interest Rate Risk. The primary objective of our investment activities is to preserve principal while maximizing our income from investments and minimizing our market risk. We invest in government and investment-grade corporate debt securities in accordance with our investment policy. Some of these securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. As of June 30, 2004, our portfolio of financial instruments consists of cash equivalents and short-term and long-term interest bearing securities, including corporate debt, money market funds and government
debt securities. The average duration of all of our investments held as of June 30, 2004 was less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as amended, as of the end of the period covered in this report. Based on their evaluations, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. We have reviewed our internal controls, and there have been no significant changes in our internal control over financial reporting or in other factors that could significantly affect our internal control over financial reporting subsequent to the date of the most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 2004, we held our annual meeting of stockholders. At the meeting, I. Craig Henderson, M.D. was elected and Malcolm Hoenlein, Peter M. Kash, Lawrence Jay Kessel, M.D., Lindsay A. Rosenwald, M.D., Peter Salomon, M.D., and Michael S. Weiss were re-elected to our board of directors. The vote with respect to each nominee is as set forth below:
|
Nominee |
|
Total Votes For |
Total Votes
Withheld |
|
I. Craig Henderson, M.D. |
|
|
20,562,441 |
|
|
329,937 |
|
|
Malcolm Hoenlein |
|
|
20,879,478 |
|
|
12,900 |
|
|
Peter M. Kash |
|
|
20,879,478 |
|
|
12,900 |
|
|
Lawrence Jay Kessel, M.D. |
|
|
20,879,478 |
|
|
12,900 |
|
|
Lindsay A. Rosenwald, M.D. |
|
|
20,879,478 |
|
|
12,900 |
|
|
Peter Salomon, M.D. |
|
|
20,879,478 |
|
|
12,900 |
|
|
Michael S. Weiss |
|
|
20,562,441 |
|
|
329,937 |
|
In addition, our stockholders approved the following.
-
the issuance of up to 3,372,422 shares of our common stock as merger consideration, subject to the achievement of certain milestones, in connection with the recently completed acquisition of ACCESS Oncology, Inc.;
|
For |
Against |
Abstain |
Broker Non-Votes |
|
10,011,034 |
207,161 |
11,403 |
10,662,780 |
|
For |
Against |
Abstain |
Broker Non-Votes |
|
6,498,227 |
3,720,421 |
10,950 |
10,662,780 |
|
For |
Against |
Abstain |
Broker Non-Votes |
|
9,876,606 |
336,692 |
16,300 |
10,662,780 |
|
For |
Against |
Abstain |
Broker Non-Votes |
|
9,681,687 |
540,511 |
7,400 |
10,662,780 |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are included with this report.
|
|
3.1 |
Amended and Restated Certificate of Incorporation of Keryx Biopharmaceuticals, Inc. |
|
|
|
|
|
|
3.2 |
Amended and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 filed on March 26, 2002 (File No. 000-30929), and incorporated herein by reference. |
|
|
|
|
|
|
10.1 |
Keryx Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan, filed as Annex C to the Registrant's Definitive Proxy Statement for its 2004 Annual Meeting of Stockholders filed on April 29, 2004, and incorporated herein by reference. |
|
|
|
|
|
|
31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
|
|
|
|
|
|
31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
|
|
|
|
|
|
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
|
|
|
|
|
|
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
(b) Reports on Form 8-K.
(1) Amended Current Report on Form 8-K/A, including financial statements of the businesses acquired and pro forma financial information, filed with the SEC on April 20, 2004.
(2) Current Report on Form 8-K, announcing the Company’s financial results for the first quarter ended Match 31, 2004, furnished to the SEC on May 7, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
KERYX BIOPHARMACEUTICALS, INC. |
|
|
|
|
|
Date: August
12, 2004 |
By: |
/s/ Ron Bentsur |
|
|
Ron Bentsur |
|
|
Vice President, Finance and Investor Relations
(Principal Financial and Accounting Officer) |
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
|
3.1 |
Amended and Restated Certificate of Incorporation of Keryx Biopharmaceuticals, Inc. |
|
|
|
|
31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
|
|
|
|
31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
|
|
|
|
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
|
|
|
|
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August
12, 2004. |
35