Attached files
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EX-31.2 - EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER - CLINICAL DATA INC | b79386exv31w2.htm |
EX-31.1 - EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - CLINICAL DATA INC | b79386exv31w1.htm |
EX-32.1 - EX-32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - CLINICAL DATA INC | b79386exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
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 No. 0-12716
CLINICAL DATA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
04-2573920 (I.R.S. Employer Identification No.) |
|
One Gateway Center, Suite 702, Newton, Massachusetts | 02458 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (617) 527-9933
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit ad post such files). YES
o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES o NO þ
The number
of shares outstanding of the registrants common stock as of February 5, 2010 was
26,513,563.
INDEX TO FORM 10-Q
PGxHealth®, StedivazeTM, FAMILION® and AvalonRx® are
either trademarks or registered trademarks, as the case may be, of Clinical Data, Inc. All other
trademarks used herein, if any, are the property of their respective owners.
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Satements
CLINICAL DATA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, | March 31, | |||||||
(In thousands, except share and per share amounts) | 2009 | 2009 | ||||||
ASSETS |
(Unaudited) | |||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 70,189 | $ | 55,180 | ||||
Marketable securities, at fair value |
| 1,175 | ||||||
Accounts receivable, net |
2,580 | 2,471 | ||||||
Prepaid expenses and other current assets |
2,076 | 1,240 | ||||||
Assets of discontinued operations |
| 18,541 | ||||||
Total current assets |
74,845 | 78,607 | ||||||
Property, plant and equipment, net |
2,759 | 2,942 | ||||||
Goodwill |
31,849 | 29,496 | ||||||
Intangible assets, net |
11,044 | 4,747 | ||||||
Other assets, net |
50 | 4,405 | ||||||
TOTAL ASSETS |
$ | 120,547 | $ | 120,197 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Current portion of long-term debt |
$ | 6,710 | $ | 6,337 | ||||
Current portion of capital leases |
115 | 730 | ||||||
Accounts payable |
4,711 | 5,562 | ||||||
Accrued expenses |
10,521 | 6,131 | ||||||
Liabilities of discontinued operations |
| 8,902 | ||||||
Total current liabilities |
22,057 | 27,662 | ||||||
Long-Term Liabilities: |
||||||||
Long-term debt, net of current portion |
42,578 | 46,832 | ||||||
Capital lease obligations, net of current portion |
139 | 226 | ||||||
Other long-term liabilities |
23 | 26 | ||||||
Contingent acquisition costs |
16,039 | 16,039 | ||||||
Total long-term liabilities |
58,779 | 63,123 | ||||||
Commitments
and contingencies (Note 8) |
||||||||
Stockholders Equity: |
||||||||
Preferred Stock, $.01 par value, 1,500,000 shares authorized; none issued and
outstanding |
| | ||||||
Common stock, $.01 par value, 60,000,000 shares authorized; 26,506,000 and 22,742,000 shares
issued and outstanding at December 31, 2009 and March 31, 2009, respectively |
265 | 227 | ||||||
Additional paid-in capital |
340,755 | 276,788 | ||||||
Accumulated deficit |
(301,309 | ) | (251,204 | ) | ||||
Accumulated other comprehensive income |
| 3,601 | ||||||
Total stockholders equity |
39,711 | 29,412 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 120,547 | $ | 120,197 | ||||
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Table of Contents
CLINICAL DATA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
(In thousands, except per share amounts) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Net revenues |
$ | 3,128 | $ | 2,781 | $ | 9,865 | $ | 7,218 | ||||||||
Cost of revenues |
1,478 | 1,817 | 4,756 | 4,834 | ||||||||||||
Gross profit |
1,650 | 964 | 5,109 | 2,384 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
9,710 | 15,133 | 30,132 | 31,342 | ||||||||||||
Sales and marketing |
1,889 | 2,000 | 6,007 | 5,654 | ||||||||||||
General and administrative |
4,381 | 5,034 | 14,892 | 14,735 | ||||||||||||
Restructuring and lease exiting costs |
| | 1,783 | | ||||||||||||
Purchased in-process research and development |
| 1,000 | | 53,100 | ||||||||||||
Transaction costs incurred in connection with the
Avalon acquisition |
| | 1,978 | | ||||||||||||
Total operating expenses |
15,980 | 23,167 | 54,792 | 104,831 | ||||||||||||
Loss from operations |
(14,330 | ) | (22,203 | ) | (49,683 | ) | (102,447 | ) | ||||||||
Interest expense |
(1,860 | ) | (346 | ) | (7,310 | ) | (482 | ) | ||||||||
Interest income |
16 | 159 | 70 | 721 | ||||||||||||
Other (expense) income, net |
(10 | ) | (13 | ) | 1,831 | 3 | ||||||||||
Loss from continuing operations |
(16,184 | ) | (22,403 | ) | (55,092 | ) | (102,205 | ) | ||||||||
Income (loss) from discontinued operations |
150 | (1,275 | ) | 4,987 | (6,347 | ) | ||||||||||
Net loss |
$ | (16,034 | ) | $ | (23,678 | ) | $ | (50,105 | ) | $ | (108,552 | ) | ||||
(Loss) income per basic and diluted share: |
||||||||||||||||
Continuing operations |
$ | (0.63 | ) | $ | (0.98 | ) | $ | (2.28 | ) | $ | (4.73 | ) | ||||
Discontinued operations |
| (0.06 | ) | 0.21 | (0.29 | ) | ||||||||||
Net loss |
$ | (0.63 | ) | $ | (1.04 | ) | $ | (2.07 | ) | $ | (5.02 | ) | ||||
Weighted average shares: |
||||||||||||||||
Basic and diluted |
25,642 | 22,742 | 24,158 | 21,629 |
See notes to unaudited condensed consolidated financial statements.
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CLINICAL DATA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended December 31, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (50,105 | ) | $ | (108,552 | ) | ||
(Income) loss from discontinued operations |
(4,987 | ) | 6,347 | |||||
Loss from continuing operations |
(55,092 | ) | (102,205 | ) | ||||
Adjustments to reconcile loss from continuing operations to net cash
used in operating activities: |
||||||||
Depreciation and amortization |
2,321 | 1,138 | ||||||
Stock-based compensation |
5,915 | 6,083 | ||||||
Provision for doubtful accounts |
1,421 | 730 | ||||||
Purchased in-process research and development |
| 53,100 | ||||||
Loss on sale/disposal of equipment |
| 88 | ||||||
Accretion of discount on convertible note |
934 | | ||||||
Gain on Avalon stock held by Clinical Data prior to the merger |
(1,773 | ) | | |||||
Restructuring and lease exiting costs |
1,783 | | ||||||
Changes in current assets and liabilities, net of acquired assets and liabilities: |
||||||||
Accounts receivable |
(1,488 | ) | (1,755 | ) | ||||
Prepaid expenses and other current assets |
(507 | ) | (337 | ) | ||||
Other assets |
1,796 | 690 | ||||||
Accounts payable and other liabilities |
403 | 3,158 | ||||||
Cash used in continuing operations |
(44,287 | ) | (39,310 | ) | ||||
Cash used in discontinued operations |
(885 | ) | (3,982 | ) | ||||
Net cash used in operating activities |
(45,172 | ) | (43,292 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of equipment |
(676 | ) | (1,218 | ) | ||||
Proceeds from sale of marketable securities |
1,175 | 10,500 | ||||||
Proceeds from sale of equipment, net of transaction costs |
1,244 | | ||||||
Cash payments for acquisitions, net of cash acquired |
| (15,337 | ) | |||||
Cash acquired in business combination, net of transaction costs |
4,187 | | ||||||
Cash provided by (used in) investing activities continuing operations |
5,930 | (6,055 | ) | |||||
Cash provided by (used in) investing activities discontinued operations |
13,243 | (85 | ) | |||||
Net cash provided by (used in) investing activities |
19,173 | (6,140 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Payment on debt and capital leases |
(5,517 | ) | (1,808 | ) | ||||
Proceeds from sale of common stock and warrants, net of transaction costs |
44,175 | 24,982 | ||||||
Exercise of stock options |
2,350 | 210 | ||||||
Cash provided by financing activities continuing operations |
41,008 | 23,384 | ||||||
Cash used in financing activities discontinued operations |
| (1,153 | ) | |||||
Net cash provided by financing activities |
41,008 | 22,231 | ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
| (1,831 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
15,009 | (29,032 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
55,180 | 54,755 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 70,189 | $ | 25,723 | ||||
See notes to unaudited condensed consolidated financial statements.
5
Table of Contents
CLINICAL DATA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED DECEMBER 31, 2009
(1) Operations and Basis of Presentation
Clinical Data, Inc. (the Company) is a Delaware corporation headquartered in Newton,
Massachusetts. The Companys sole operating business is PGxHealth.
The Company is a biotechnology company focused on the development of therapeutics. Its
late-stage drug candidates include: (i) vilazodone a
potential first-in-class drug for the
treatment of depression that has completed two successful Phase III clinical trials and a long-term
safety study for which the Company expects to submit a New Drug Application (NDA) with the U.S.
Food and Drug Administration (FDA) during the quarter ending March 31, 2010; and (ii) apadenoson,
trademarked under the name Stedivaze a potential best-in-class coronary vasodilator for use in
myocardial perfusion imaging, which is currently in its first Phase III clinical trial.
The Company also has early stage, preclinical compounds in development. Options to enter into
license agreements are outstanding for two of these compounds, one for its A2B
antagonist with likely indications in asthma and diabetes and one for its A2A agonist
compound for an ophthalmic indication. Further, the Company has partnered an A2A agonist
compound for the treatment of B-cell cancers, including multiple myeloma with CombinatoRx, Inc.
In addition, the Company provides genetic tests for inherited cardiac syndromes, including
cardiac channelopathies and cardiomyopathies. The Company is also combining its drug development
and biomarker expertise to develop products with enhanced efficacy and tolerability to improve
patient health and reduce costs.
As part of its decision to focus on therapeutics, the Company sold its Cogenics division,
which was comprised of Cogenics, Inc., Epidauros Biotechnologie AG and Cogenics Genome Express
S.A., in April 2009. Accordingly, this division has been presented in the consolidated financial
statements as discontinued operations.
Basis of Presentation
At December 31, 2009, the Company had cash and cash equivalents totaling $70.2 million. Based
on its projected uses of cash, the Company believes that its cash will be sufficient to fund its
operations, including continued research and product development, sales and marketing, capital
expenditures and existing debt service costs, through December 2010. This is based on managements
current operational plans and activities at normal levels and does not assume cash inflows from
partnerships, disposition of additional non-core assets or other dilutive or non-dilutive
financings.
The Company will need additional funds to continue operations, including the commercialization
of vilazodone, the development of Stedivaze and other products, beyond December 2010. Management is
always evaluating and prioritizing additional sources of financing including any of the following
options:
| partnering opportunities for the marketing of vilazodone; | ||
| partnering opportunities for the development and marketing of Stedivaze; | ||
| license, sublicense, or other relationships with third-parties relating to the development programs of our preclinical compounds and/or patents; | ||
| sale of non-core assets; and/or | ||
| sale of equity or debt securities. |
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The accompanying condensed consolidated financial statements of the Company and subsidiaries
have been prepared on a basis which assumes that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business, and pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States (U.S. GAAP) have been condensed or omitted pursuant to
such rules and regulations. These financial statements should be read in conjunction with the
financial statements and notes included in the Companys Annual Report on Form 10-K for the year
ended March 31, 2009.
The notes and accompanying condensed consolidated financial statements are unaudited. The
information furnished reflects all adjustments, which, in the opinion of management, are necessary
for a fair presentation of results for the interim periods. Such adjustments consisted only of
normal recurring items. The interim periods are not necessarily indicative of the results expected
for the full year or any future period.
The preparation of these condensed consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of net sales and expenses during the reporting
period. Actual results could differ from those estimates.
The Company considers events or transactions that occur after the balance sheet date but
before the financial statements are issued to provide additional evidence relative to certain
estimates or to identify matters that require additional disclosure. Subsequent events have been
evaluated through February 9, 2010, the date of issuance of these financial statements.
(2) Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The Companys financial instruments consist of cash equivalents, accounts receivable, accounts
payable and long-term debt. U.S. GAAP establishes a fair value hierarchy, which classifies fair
value measurements based on the inputs used in measuring fair value. These inputs include: Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs for which little or no market
data exists, therefore requiring an entity to develop its own assumptions.
The carrying amounts of accounts receivable and accounts payable are considered reasonable
estimates of their fair value, due to the short maturity of these instruments. Based on the
borrowing rates currently available to the Company for long-term debt with similar terms and
average maturities as the Companys instruments, the fair value of long-term debt was not
significantly different than the carrying value at December 31, 2009.
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The following table presents information about the financial instruments measured at fair
value on a recurring basis as of December 31, 2009:
(in thousands) | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 55,569 | $ | | $ | | $ | 55,569 |
Assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) are as follows:
Auction Rate Securities | ||||||||
Nine months ended December 31, | ||||||||
(in thousands) | 2009 | 2008 | ||||||
Beginning balance |
$ | 1,175 | $ | 12,725 | ||||
Redemptions at par |
(1,175 | ) | (10,500 | ) | ||||
Reversal of previously recognized |
||||||||
unrealized loss |
| 500 | ||||||
Ending balance |
$ | | $ | 2,725 | ||||
Loss per Share
Basic net loss per share is determined by dividing net loss applicable to common stockholders
by the weighted average shares of common stock outstanding during the period. Diluted net loss per
share is determined by dividing net loss applicable to common stockholders by diluted weighted
average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any,
of potentially dilutive common shares, such as common stock options and warrants calculated using
the treasury stock method and convertible notes using the if-converted method. The weighted
average number of shares of common stock outstanding during the three and nine months ended
December 31, 2009 includes contingent value rights, or CVRs, representing 163,602 shares of the
Companys common stock to be issued as consideration for the acquisition of Avalon Pharmaceuticals,
Inc. (Avalon) as if they were issued because the related milestones had been achieved.
The following dilutive securities were not included in the diluted earnings per share
calculations because the inclusion of these amounts would have been anti-dilutive because the
Company has a net loss.
As at December 31, | ||||||||
(in thousands) | 2009 | 2008 | ||||||
Common stock options |
3,991 | 3,636 | ||||||
Common stock warrants |
4,262 | 1,512 | ||||||
Convertible notes payable |
6,110 | | ||||||
Contingent value rights |
41 | | ||||||
Potentially dilutive securities outstanding |
14,404 | 5,148 | ||||||
Comprehensive Income
Comprehensive income includes charges and credits to equity that are not the result of
transactions with stockholders. Included in other comprehensive income for the Company are the
cumulative translation
8
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adjustments related to the net assets of the foreign operations and changes in unrealized gains and
losses on marketable securities. As of December 31, 2009, there were no amounts within the
stockholders equity section of the consolidated balance sheet under the caption accumulated other
comprehensive income.
Segment and Geographical Information
U.S. GAAP requires certain financial and supplementary information to be disclosed for each
reportable operating segment of an enterprise, as defined.
For the nine months ended December 31, 2009, the Company operated its business as a single
reporting segment.
(3) Discontinued Operations
During fiscal 2009, the Company determined that the Cogenics division did not fit with the
Companys strategic direction. Management believed that the Companys capital resources and the
cash derived from the sale of this division would be better allocated to investments and growth
opportunities to increase the Companys presence in the therapeutics markets.
In March 2009, the Company entered into a letter of intent to sell its Cogenics division,
which was comprised of Cogenics, Inc., Epidauros Biotechnologie AG and Cogenics Genome Express S.A.
The Cogenics division was sold on April 14, 2009 for net
proceeds of $13.2 million, as adjusted,
excluding $2.2 million, as adjusted, held in escrow for a period of up to eighteen months.
Accordingly, the Company has classified this business as discontinued operations and their results
of operations, financial position and cash flows are separately reported for all periods presented.
Summarized statements of operations data for discontinued operations for the three and nine
months ended December 31, 2009 and 2008 are as follows:
December 31, | December 31, | |||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Revenue |
$ | | $ | 7,349 | $ | 499 | $ | 20,933 | ||||||||
Loss from Operations Before Disposal: |
||||||||||||||||
Loss before taxes |
| (1,234 | ) | (485 | ) | (6,477 | ) | |||||||||
Income taxes |
| (41 | ) | (14 | ) | (158 | ) | |||||||||
Loss from discontinued operations, net of taxes |
| (1,275 | ) | (499 | ) | (6,635 | ) | |||||||||
Disposal: |
||||||||||||||||
Gain on disposal, net of taxes |
150 | | 5,486 | 288 | ||||||||||||
Income (loss) from discontinued operations, net of tax |
$ | 150 | $ | (1,275 | ) | $ | 4,987 | $ | (6,347 | ) | ||||||
The three and nine months ended December 31, 2009 includes $150,000 of income recognized as a
result of a purchase price adjustment realized in connection with the disposition of Cogenics. The
nine months ended December 31, 2008 includes $312,000 of income recognized as a result of a
purchase price adjustment realized in connection with the disposition of Vital Scientific BV
completed in October 2007.
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(4) Business Combinations
Avalon Pharmaceuticals, Inc.
On May 28, 2009 (the Acquisition Date), the Company acquired Avalon by issuing 800,847
shares of the Companys common stock in exchange for all of the issued and outstanding common stock
of Avalon. Additionally, as part of the merger, the Company issued CVRs to Avalon stockholders,
payable for up to 204,503 additional shares of Clinical Datas common stock, upon the receipt of
certain milestone payments that Avalon may receive under its collaboration agreements with Merck &
Co., Inc. and Novartis Institute for Biomedical Research, Inc. prior to June 30, 2010. As of the
Acquisition Date, Avalon had received $4.0 million of these milestones and accordingly, Clinical
Data will be obligated to issue 163,602 additional shares of the Companys common stock on June 30,
2010. The common stock and CVRs issued in connection with the merger were valued at fair value, or
$11.99 per share, the last reported sale price of the Companys common stock as reported on the
Nasdaq Global Market on the Acquisition Date. The Company does not expect the remaining milestones
to be achieved prior to June 30, 2010; accordingly, no value has been assigned to the remaining
CVRs. The Company has also included as consideration for the merger: (i) the fair value of the
Avalon common stock, which the Company acquired on October 27, 2008 and (ii) the $1.0 million paid
by the Company to Avalon on October 27, 2008 for an exclusive license to Avalons drug and
biomarker discovery platform (AvalonRx). As a result of remeasuring the fair value of the Avalon
stock immediately prior to the completion of the merger, the Company recorded a gain of $1.8
million which is included in other income on the accompanying statement of operations. The combined
company has an expanded oncology business with a pipeline of what it
believes to be promising
oncology biomarkers and compounds, and a biomarker discovery platform to identify additional
therapeutic and diagnostic candidates, which resulted in goodwill from this transaction.
The purchase price was allocated to the tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values at the date of acquisition. Allocation of
the purchase price for the acquisition was based on estimates of the fair value of the net assets
acquired and is subject to adjustment upon finalization of the purchase price allocation. The fair
values assigned to contingent consideration, tangible and intangible assets acquired and
liabilities assumed are based on managements estimates and assumptions, as well as other
information compiled by management. The excess purchase price over those assigned values was
recorded as goodwill. As of December 31, 2009, the purchase price and related allocation for the
Avalon acquisition was finalized.
The components of the purchase price and preliminary allocation are as follows:
(in thousands) | ||||
Clinical Data common stock issued |
$ | 9,602 | ||
Contingent value rights |
1,961 | |||
Acquisition date fair value of Avalon common stock held
by Clinical Data |
2,010 | |||
Cash paid in October 2008 for license to Avalon technology |
1,000 | |||
$ | 14,573 | |||
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Preliminary Purchase Price Allocation (in thousands) | ||||
Cash and cash equivalents |
$ | 4,187 | ||
Prepaid expenses and other current assests |
419 | |||
Property and equipment |
3,292 | |||
Purchased in-process research and development costs |
3,200 | |||
Intangible asset Completed technology (5 years) |
3,700 | |||
Intangible asset Tradename (5 years) |
600 | |||
Goodwill |
2,353 | |||
Accounts payable |
(1,851 | ) | ||
Accrued expenses and other current liabilities |
(1,327 | ) | ||
Total purchase price |
$ | 14,573 | ||
Goodwill arising from this acquisition is not deductible for tax purposes.
Of the total purchase price, $3.2 million was allocated to purchased in-process research and
development (IPRD) projects. Projects that qualify as IPRD represent those that have not yet
reached technological feasibility and have no alternative use. Technological feasibility is defined
as being equivalent to the approval by the FDA. IPRD is measured at fair value at acquisition date
and capitalized; it is subsequently accounted for as an indefinite-lived asset until completion or
abandonment of the associated research and development efforts.
IPRD relates to a structurally distinct chemical compound (internally referred to as AVN316)
that appears to affect the beta-catenin pathway. Avalon identified this compound using its AvalonRx
platform.
AVN316 was valued based on discounted future cash flows. The Company prepared revenue and
expense projections through 2031 for AVN316. The revenue for AVN316 was based on estimates of the
relevant market sizes and growth factors, expected trends in technology and the nature and expected
timing of the introduction of the new products. Projected revenues were adjusted for a probability
of 12% to reflect the probability of getting from Phase I to market. The estimated expenses were
based upon the expected remaining costs to complete AVN316.
The Company discounted the projected cash flows using a risk adjusted discount rate and
considered the probability of success, where appropriate. The rate utilized to discount the net
cash flows to their present values was the internal rate of return (IRR) based on the purchase
price paid. Management believed that the IRR reflected the difficulties and uncertainties in
completing the project and thereby achieving technological feasibility, the stage of completion of
the project, anticipated market acceptance and penetration, market growth rates and risks related
to the impact of potential changes in future target markets. Based on these considerations, the IRR
of 19% was deemed an appropriate discount for valuing the IPRD.
The estimates used in valuing IPRD were based upon assumptions believed to be reasonable. The
failure of AVN316 to reach commercial success could have an adverse impact on the Companys
expected results.
Upon the adoption of ASC 805 (formerly SFAS No. 141 (revised 2007), Business Combinations), on
April 1, 2009, the capitalized transaction costs of $719,000 that had been incurred through March
31, 2009 have been expensed and are included in transaction costs incurred in connection with the
Avalon acquisition on the accompanying statement of operations. Transaction costs incurred after
March 31, 2009 of $1.3 million have been recognized as an expense as incurred and are also included
in transaction costs incurred in connection with the Avalon acquisition on the accompanying
statements of operations.
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The results of operations of Avalon have been included in the accompanying financial
statements since the date of acquisition. Pro forma information related to this acquisition is not
presented, as the effect of the acquisition is not material.
On August 31, 2009, the Company sold to Intrexon Corporation (Intrexon) substantially all of
the equipment (the Assets) located at Avalons facility in Germantown, Maryland (the Facility).
Intrexon is majority-owned by certain affiliates of the Companys Chairman, Randal J. Kirk. In
exchange for the Assets, the Company received approximately $1.5 million (the Purchase Price) in
cash and Intrexon assumed certain liabilities associated with the Assets. The Company retained all
of the intellectual property rights of Avalon, which it acquired in May 2009. The carrying value of
the assets at the time of the sale was approximately $1.3 million. After deducting transaction
fees, including banker and legal fees, no gain was recognized in connection with the sale.
Restructuring of Avalon Operations
In an effort to reduce the Companys fixed overhead expenses, the Company assigned the lease
for the Facility to Intrexon. As a result of exiting the lease, the Company recorded a loss of $1.8
million related to writing off the unamortized acquired leasehold improvements. This loss is
included in restructuring and lease exiting costs on the statements of operations for the nine
months ended December 31, 2009. In connection with the lease assignment, the Company contributed
$300,000 of the Purchase Price to a new security deposit for the Facility, which is included in
other current assets on the accompanying balance sheet. On January 11, 2010, the security deposit
was refunded to the Company upon the achievement of certain milestones by Intrexon in accordance
with the lease assignment. In connection with the assignment of the lease, the Company terminated,
and Intrexon, hired 11 of the Companys employees located at the Facility. No termination costs or
benefit payments were made and none will be made in future periods in connection with the employee
terminations. Following the assignment of the lease, the Company retained all of the intellectual
property rights of Avalon, which it acquired in May 2009, and all of the employees who support the
Companys AVN316 program. All notifications and actions related to the restructuring were completed
as of December 31, 2009.
As part of the Companys ongoing prioritization of its early stage therapeutic assets and cost
containment strategies, on January 4, 2010, the Company consolidated certain of its research and
development activities from its Maryland facility to its laboratories in Virginia, where ongoing
development of AVN316 and other preclinical programs acquired from Avalon in May 2009 will
continue. As a result of these actions, the Company terminated the employment of its remaining
personnel in Maryland, which has obligated the Company to pay approximately $650,000 in severance
benefits and other termination costs that will be included in the results of operations for the
quarter ending March 31, 2010. The Company has engaged certain former senior employees from the
Maryland facility under consulting arrangements to ensure continuity of research and development
activities and to pursue certain business development opportunities.
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(5) Intangible Assets
The intangible asset balances are as follows:
December 31, | March 31, | |||||||
(in thousands) | 2009 | 2009 | ||||||
Completed technology |
$ | 9,655 | $ | 5,955 | ||||
Purchased in-process research and development |
3,200 | | ||||||
Customer relationships |
400 | 400 | ||||||
Other |
700 | 100 | ||||||
13,955 | 6,455 | |||||||
Less: accumulated amortization |
(2,911 | ) | (1,708 | ) | ||||
Intangible assets, net |
$ | 11,044 | $ | 4,747 | ||||
Amortization expense for the three and nine months ended December 31, 2009 was $325,000 and $1.2
million, respectively. Amortization expense for the three and nine months ended December 31, 2008
was $143,000 and $366,000, respectively. As of December 31, 2009, amortization expense is estimated
to be $437,000 for the remainder of fiscal 2010, $1.7 million in fiscal 2011, $1.7 million in
fiscal 2012, $1.6 million in fiscal 2013, $1.5 million in fiscal 2014 and $1.0 million thereafter.
(6) Debt
The Companys long-term debt obligations are as follows:
December 31, | March 31, | |||||||
(in thousands) | 2009 | 2009 | ||||||
Notes payable, bearing interest at 6.5%, with monthly pricipal payments due
through May 2011 and secured by certain of PGxHealths leasehold
improvements |
$ | 1,386 | $ | 2,001 | ||||
Note payable, bearing interest at 11% with monthly principal payments of $100
through April 1, 2011, secured by substantially all of the assets of the Company |
1,600 | 2,500 | ||||||
Note payable, bearing interest at 6% with quarterly principal payments of $1,100
through July 13, 2013, secured by substantially all of the assets of the Company |
16,500 | 19,800 | ||||||
Unsecured convertible notes payable, bearing interest at 9.72% and maturing
on February 25, 2017 |
50,000 | 50,000 | ||||||
69,486 | 74,301 | |||||||
Less: current portion |
(6,710 | ) | (6,337 | ) | ||||
unamortized discount |
(20,198 | ) | (21,132 | ) | ||||
$ | 42,578 | $ | 46,832 | |||||
(7) Equity
On the Acquisition Date, in connection with the merger with Avalon, the Company issued 800,847
shares of its common stock. The stock was valued at $11.99 per share, which equaled the last
reported sale price of the Companys common stock on the Nasdaq Global Market. Additionally, as
part of the merger, the Company issued CVRs to Avalon stockholders, payable for up to 204,503
additional shares of the Companys common stock, upon the receipt of certain milestone payments
that Avalon may receive under its collaboration agreements with Merck & Co., Inc. and Novartis
Institute for Biomedical Research, Inc.
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prior to June 30, 2010. As of the Acquisition Date, Avalon had received $4.0 million of these
milestones and accordingly, the Company will be obligated to issue 163,602 additional shares of the
Companys common stock on June 30, 2010. The CVRs issuable at the Acquisition Date were recorded at
fair value, or $11.99 per share.
On October 28, 2009, the Company entered into a purchase agreement (the Purchase Agreement)
with Piper Jaffray & Co., Wedbush Morgan Securities, Inc., BMO Capital Markets Corp. and Roth
Capital Partners LLC (the Underwriters), for the sale by the Company to the public (the
Offering) of 2,750,000 shares of the Companys common stock, par value $0.01 per share (the Firm
Shares). The Firm Shares were sold to the public at a price of $17.25 per share, and pursuant to
the Purchase Agreement, the Underwriters purchased the Firm Shares from the Company at a price of
$16.17 per share. The net proceeds to the Company were approximately $44.2 million after deducting
underwriting commissions and expenses payable by the Company associated with the Offering. The
Offering closed on November 2, 2009. The Company had granted the Underwriters a 30-day option to
purchase an additional 412,500 shares of common stock (the Option Shares). None of the Option
Shares were purchased.
(8) Commitments and Contingencies
Vilazodone Commitments
Under the terms of the Companys license agreement with Merck-Serono (Merck), if the Company
is successful in the development of vilazodone, the Company will be obligated to pay Merck certain
additional milestone payments, all of which are payable in the Companys common stock.
Specifically, a milestone payment of 12.5 million ($17.9 million at December 31, 2009) will be
payable to Merck within 30 days of acceptance of an NDA filing in the U.S. or a Marketing
Authorization Application (MAA) filing in the European Union (E.U.) for the first indication of
vilazodone. Additional payments of 9.5 million ($13.6 million at December 31, 2009) would be made
to Merck within 30 days of receipt of approval of the NDA or MAA, and also on the first sale of
vilazodone in the U.S. or the E.U. Merck will also be entitled to certain royalty payments if the
Company is successful in commercializing vilazodone. The Company may enter into sublicensing
transactions with third parties subject to Mercks right of first negotiation with respect to the
co-development and co-commercialization of vilazodone.
Adenosine Therapeutics Acquisition Commitments
In connection with the acquisition of Adenosine Therapeutics, for a period of ten years
following the closing, contingent consideration of up to $30.0 million (of which $16.0 million is
recorded in long-term liabilities as of December 31, 2009) in cash may be paid by the Company to
the sellers upon the achievement of certain regulatory and commercial milestones as follows: (i)
$5.0 million upon the approval by the FDA for sale in the U.S. of any product covered by any of
Adenosine Therapeutics patents (a Seller Compound); (ii) $10.0 million upon the initial
achievement of $100.0 million in aggregate gross sales of any Seller Compound in any fiscal year;
(iii) $15.0 million upon the initial achievement of $250.0 million in aggregate gross sales of any
Seller Compound; and (iv) one-third of all licensing and/or sublicensing revenue received by the
Company with respect to license and/or sublicense of any Seller Compound or any of Adenosine
Therapeutics patents, up to a maximum aggregate of $15.0 million payable to the Sellers; provided
however, (a) that all amounts up to the first $5.0 million paid to the Sellers under section
(iv) shall offset on a dollar-for-dollar basis the payment required by section (i) above and
(b) all amounts paid to the Sellers in excess of $5.0 million pursuant to section (iv) shall offset
on a dollar-for-dollar basis the payment required by section (ii) above. Along with these
acquisition costs, the Company has assumed all of Adenosine Therapeutics rights and obligations
under licensing agreements with the University of Virginia Patent Foundation, the Public Health
Service of the National Institutes of Health, the University of Massachusetts and the Penn State
Research Foundation.
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Avalon Acquisition Commitments
In connection with the merger of Avalon, the Company issued CVRs as part of the merger
consideration. The CVRs provide each holder entitled to receive them the right to receive a
proportionate share of an aggregate of up to 204,503 shares of the Companys common stock based on
milestone payments received on or prior to June 30, 2010. In particular, any payment received by
Avalon or its affiliates (including the Company following the closing of the merger) under either
Avalons License and Research Collaboration Agreement with Merck & Co., Inc. or Avalons Amended
Pilot Study Agreement with Novartis Institutes for Biomedical Research, Inc. at any time during the
period commencing on October 27, 2008 through and including June 30, 2010 (up to a maximum amount
of $5.0 million) constitutes a milestone payment. On May 7, 2009, Avalon received a $4.0 million
milestone payment and, as a result, is the Company will be obligated to issue 163,602 shares of its
common stock on June 30, 2010 as additional consideration (of which $2.0 million is recorded in
equity as of December 31, 2009). The Company does not expect the remaining milestones to be
achieved prior to June 30, 2010. However, the number of additional shares to be issued will be
dependent on the achievement of the remaining milestone.
(9) Related Party Transactions
In connection with the February 2009 financing transaction with accredited investors (the
Investors) affiliated with Randal J. Kirk, the Chairman of the Companys Board of Directors, the
Company also entered into a registration rights agreement (the Registration Rights Agreement)
with the Investors to register the resale of the shares of common stock issuable upon conversion of
the unsecured convertible notes of the Company or exercise of the warrants to purchase an aggregate
of 3,055,300 shares of the Companys common stock. Subject to the terms of the Registration Rights
Agreement, the Company was required to meet, among other things, certain deadlines and requirements
related to the registration of shares of common stock underlying the notes and the warrants. As a
result of not having the shares registered for resale until July 30, 2009, the Company was
obligated to and paid $1.6 million as liquidated damages, including interest of $15,000. This
amount was recorded as interest expense during the three months ended June 30, 2009.
On August 31, 2009, the Company sold to Intrexon, majority-owned by certain affiliates of the
Companys Chairman, Mr. Kirk, substantially all of the equipment located at the Facility and
assigned to Intrexon the Assets. The Company received the Purchase Price in cash and Intrexon
assumed certain liabilities associated with the Assets, including the Companys lease for the
Facility. In connection with the lease assignment, the Company contributed $300,000 of the Purchase
Price to a new security deposit for the Facility, which was refunded to the Company on January 11,
2010. The Company also terminated and Intrexon hired 11 of the Companys employees located at the
Facility. The Company retained all of the intellectual property rights of Avalon, which it acquired
in May 2009, and all of the employees who support the Companys AVN316 program. Under the terms of
the Purchase Agreement, Avalon and the Company agreed to indemnify Intrexon for, among other
things, breaches by the Companys affiliates of certain of their representations and warranties,
the Company Affiliates failure to carry out any of its obligations under the Purchase Agreement or
agreements relating to the Purchase Agreement, any fraud or intentionally misrepresentations
committed by the Company Affiliates and any liability associated with any unpaid taxes. In
addition, pursuant to the Purchase Agreement and certain other agreements relating to the sale of
the Assets, the Company has agreed to perform certain services to facilitate the transition of the
Assets to Intrexon and the Company sublet a portion of the laboratory space in the Facility to
support the Companys oncology program. As a result of exiting the lease, the Company recorded a
loss of $1.8 million largely related to writing off the unamortized acquired leasehold
improvements. This loss is included in restructuring and lease exiting costs on the statement of
operations for the nine months ended December 31, 2009.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward
Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended. The forward-looking statements reflect our plans,
estimates and beliefs. These statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be materially different
from any future results, performances or achievements expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking statements by terms such as
anticipates, believes, could, estimates, expects, intends, may, plans, potential,
predicts, projects, should, will, would and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect our current views with respect to
future events and are based on assumptions and subject to risks and uncertainties. Because of these
risks and uncertainties, the forward-looking events and circumstances discussed in this report may
not transpire. We discuss many of these risks in Item 1A under the heading Risk Factors of this
report and Item 1A under the heading Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended March 31, 2009 and filed with the SEC on June 15, 2009.
Given these uncertainties, you should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our estimates and assumptions only as of the
date of this document. You should read this document with the understanding that our actual future
results may be materially different from what we expect. Except as required by law, we do not
undertake any obligation to publicly update or revise any forward-looking statements contained in
this report, whether as a result of new information, future events or otherwise.
Overview
We are a biotechnology company focused on the development of therapeutics. Our late-stage drug
candidates include: (i) vilazodone a potential first-in-class drug candidate for the treatment of
depression that has completed two successful Phase III clinical trials and a long-term safety study
for which we expect to submit a New Drug Application (NDA) with the U.S. Food and Drug
Administration (FDA) during the quarter ending March 31, 2010 and (ii) apadenoson, trademarked
under the name Stedivaze a potential best-in-class coronary vasodilator for use in myocardial
perfusion imaging, which is currently in its first Phase III clinical trial.
We also have early stage, preclinical compounds in development. Options to enter into license
agreements are outstanding for two of these compounds, one for our A2B antagonist with
likely indications in asthma and diabetes and the other for our A2A agonist compounds
for an ophthalmic indication. Further, we have partnered an A2A agonist compound for the
treatment of B-cell cancers, including multiple myeloma with CombinatoRx, Inc.
In addition, we provide genetic tests for inherited cardiac syndromes, including cardiac
channelopathies and cardiomyopathies. We also are combining our drug development and biomarker
expertise to develop products with enhanced efficacy and tolerability to improve patient health and
reduce costs.
Our sources of liquidity as of December 31, 2009 include our cash and cash equivalents balance
of $70.2 million. Our projected uses of cash include cash used to fund the preparation of an NDA
for vilazodone for submission to the FDA, to fund the clinical development activities for
Stedivaze, including a Phase III clinical development program, to fund the continued development of
our other products and drug candidates and to fund our working capital and other general corporate
activities. We may also use our cash for the acquisition of businesses, technologies and products
that will complement our existing operations.
We believe that our cash will be sufficient to fund our operations through December 2010. We
will need additional capital to commercialize vilazodone and continue the development of Stedivaze
beyond December 2010.
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Therapeutics:
Vilazodone
Vilazodone is a novel dual-acting serotonergic agent in development for the treatment of
depression. Vilazodone is a potent and selective serotonin reuptake inhibitor, a mechanism of
action proven successful as a first-line therapy for major depressive disorder, and a partial
agonist of the 5-HT1A receptor, a mechanism of action shown to be effective in treating
antidepressant induced sexual dysfunction and important in the production of serotonin in the
brain.
In our two randomized, double-blind, placebo-controlled Phase III vilazodone clinical trials,
vilazodone achieved statistically significant results on the primary and secondary endpoints
related to major depressive disorder. Vilazodone was generally well-tolerated as supported by low
discontinuation rates due to adverse events. Study findings show that the impact on sexual function
is similar to placebo when measured by quantitative, validated scale. Patient-reported adverse
events related to sexual function, although infrequent, were more common on vilazodone than
placebo. A statistically significant improvement in symptoms of anxiety associated with major
depressive disorder, a secondary endpoint of the studies, was also observed. Based on the results
of these and additional activities, including the manufacture of registration batches of the active
pharmaceutical ingredient and the commercial product, we plan to submit an NDA for vilazodone with
the FDA during the quarter ending March 31, 2010.
Stedivaze
Stedivaze is a selective adenosine receptor 2A (A2A) agonist in development as
a coronary vasodilator for myocardial perfusion imaging. Phase II data showed potential
best-in-class attributes as it relates to the adverse event profile, pharmacokinetic and target
binding profiles and mode of administration potential. We launched our first Phase III clinical
trial for Stedivaze in November 2009 and expect to begin our second Phase III clinical trial in our
next fiscal year.
The first study will evaluate the safety and efficacy of Stedivaze for use as a pharmacologic
stress agent in nuclear myocardial perfusion imaging (MPI), a method for evaluating blood flow to
the heart. The Phase III trial will also compare the tolerability of Stedivaze to adenosine, a
standard pharmacologic stress agent used in MPI scans.
Other Therapeutic Products in Development
We are developing ATL844 as a therapeutic for the treatment of asthma and/or diabetes, both of
which are multi-billion dollar growing markets. Acting as an antagonist of the adenosine
A2B receptor sub-type, the compound has shown significant pharmacodynamic effects in
animal models of both asthma and diabetes. We are proceeding with a toxicology and chemistry
program and, with success, we may proceed to an investigational new
drug (IND) filing with the FDA. ATL844 is
the subject of an option agreement for an exclusive license by Novartis.
ATL313 is a selective agonist of the adenosine A2A receptor subtype that is
targeted as a treatment for an ophthalmologic disease. The compound has shown significant effect in
both small and large animal models of disease. ATL313 is the subject of a confidential
collaboration with a large pharmaceutical partner, who has an option to the ophthalmologic program.
ATL313 is also an A2A agonist in preclinical development that is the subject of a
licensing agreement with CombinatoRx, Inc. for development for the treatment of B-cell cancers,
including multiple myeloma. Under the collaboration, CombinatoRx, Inc. will be responsible for the
preclinical and clinical development.
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ATL1222 is a highly selective agonist of the adenosine A2A receptor subtype, in
development as an anti-inflammatory agent for the treatment of acute inflammatory conditions. The
compound has shown significant effects in animal models of a number of inflammatory mediated
diseases. ATL1222 is being evaluated in toxicology studies and, with
success, we may proceed to an
IND filing with the FDA.
In June 2008, Avalon Pharmaceuticals, Inc. (Avalon), which was acquired on May 28, 2009,
announced that it had identified a compound for clinical development, named AVN316. This compound
potently inhibits the beta-catenin pathway in a variety of model systems. We are currently
positioning AVN316 for toxicology evaluation and conducting lead optimization efforts around AVN316
and have synthesized compounds in this family that cause an expression profile characteristic of
inhibition of the beta-catenin pathway, induce cell cycle arrest in tumor xenograft models and
cause a dose dependent decrease in beta-catenin protein levels.
Genetic Tests
We currently provide the FAMILION genetic tests for inherited cardiac syndromes. The FAMILION
tests identify mutations in genes associated with inherited cardiac syndromes including cardiac
channelopathies such as Long-QT Syndrome (LQTS), Brugada Syndrome (BrS) and Catecholaminergic
Polymorphic Ventricular Tachycardia (CPVT), and in genes associated with cardiomyopathies
including Hypertrophic Cardiomyopathy (HCM), Arrhythymogenic Right Ventricular Cardiomyopathy
(ARVC) and Dilated Cardiomyopathy (DCM), which was launched in November 2009. Although we focus
the majority of our resources on developing our therapeutics, we continue to apply our efforts and
expertise to develop new genetic tests by leveraging our intellectual property and focusing on
related disease and therapeutic areas which include, but are not limited to oncology, inflammation,
cardiovascular and the central nervous system.
We continue to enhance our existing tests and are developing new tests for inherited cardiac
diseases and syndromes that will add to our FAMILION family of tests. We believe these activities
will improve the utility and marketability of our tests and, together with sales and marketing
efforts, drive further adoption and increased reimbursement.
We have made significant progress in our efforts to contract with private and government
health insurers for test coverage and reimbursement. Our work with private insurers resulted in the
FAMILION LQTS, BrS and associated family tests receiving S-codes effective October 2008 followed by
the FAMILION HCM and FAMILION HCM family tests receiving S-codes effective April 2009. We expect
that S-codes should simplify the billing and collection process and speed the adoption of these
tests by private insurers. In October 2008, we became an in-network provider with Aetna which now
covers our FAMILION LQTS, CPVT and associated family tests. We are utilizing our national
in-network contract with the Blue Cross and Blue Shield Association signed in December 2008 to work
with individual BCBS companies to provide their customers with access to our FAMILION family of
tests. In June 2009, we became an in-network provider for Humana for our FAMILION LQTS and
associated family test. In addition, we are an approved Medicare provider for our genetic testing
services, and a Medicaid provider in 41 states and the District of Columbia. These providers and
other private payors with positive coverage policies offer access to genetic testing for nearly 280
million patients.
Financial Operations Overview
Revenue. The majority of our revenue is from services related to genetic tests. We
maintain relationships with certain healthcare providers as well as healthcare insurance companies;
revenue from these arrangements is recognized net of contractual allowances.
Cost of Revenue. Cost of revenue consists primarily of salaries and related expenses
for personnel, including stock-based compensation expense, laboratory expenses, depreciation and
facility costs.
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Sales and Marketing Expense. Sales and marketing expense consists primarily of
salaries, commissions and other related personnel costs, including stock-based compensation
expense. Other costs primarily include advertising and promotion expenses, direct mailings, trade
shows and travel and related expenses.
Research and Development Expense. Research and development expense consists
primarily of fees paid to professional service providers in conjunction with independent monitoring
of our clinical trials and acquiring and evaluating data in conjunction with our clinical trials,
fees paid to independent researchers, costs of contract manufacturing, services expenses incurred
in developing and testing products and product candidates, salaries and related expenses for
personnel, including stock-based compensation expense, costs of materials, depreciation, rent,
utilities and other facilities costs. In addition, research and development expenses include the
cost to in-license technologies to support current development efforts. We expense research and
development costs as incurred.
General and Administrative Expense. General and administrative expense consists
primarily of salaries and other related costs for personnel, including stock-based compensation
expense, in our executive, finance, accounting, information technology and human resource
functions. Other costs primarily include facility costs and professional fees for accounting,
consulting and legal services, including patent-related expenses.
Interest and Other Income (Expense), Net. Interest expense consists of interest incurred under
notes payable and other debt financings and capital lease obligations and, in fiscal 2010,
liquidated damages including interest in connection with our failure to register certain securities
for resale in a timely manner. Interest income consists of interest earned on our cash, cash
equivalents and marketable securities. Other income (expense), net consists primarily of the
remeasurement of the fair value of the shares of Avalon stock held by us immediately prior to the
merger.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is based on
our condensed consolidated financial statements and notes, which have been prepared in accordance
with accounting principles generally accepted in the U.S. The preparation of these condensed
consolidated financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate
our estimates and judgments, including those related to revenue, allowances for doubtful accounts,
inventory, intangibles, goodwill, accrued expenses and income taxes. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our significant estimates and
assumptions used in the preparation of our condensed consolidated financial statements. A full
discussion of the following accounting policies is included in our 2009 Annual Report on Form 10-K
filed with the SEC on June 15, 2009.
| Revenue recognition | ||
| Allowance for doubtful accounts and contractual allowances | ||
| Valuation of intangibles and goodwill | ||
| Accrued expenses | ||
| Income taxes |
There have been no significant changes to our critical accounting policies since March 31,
2009. On April 1, 2009, we adopted authoritative guidance issued by the Financial Accounting
Standards Board on Business Combinations, which changed how in-process research and development is
accounted for in a business combination.
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In-Process Research and Development
In-process research and development represents the fair value assigned to incomplete
technologies that we acquire, which at the time of acquisition have not reached technological
feasibility and have no alternative future use. A technology is considered to have an alternative
future use if it is probable that the acquirer will use the asset in its incomplete state as it
exists at the acquisition date in another research and development project that has not yet
commenced and economic benefit is anticipated from that use.
Prior to April 1, 2009, in-process research and development acquired through a
business combination was expensed. Effective April 1, 2009, all in-process research and development
acquired through business combinations on or after April 1, 2009 will be capitalized as an
intangible asset on the balance sheet and periodically tested for impairment. Amortization of such
capitalized in-process research and development will commence upon the successful completion of the
program and continue for the then estimated useful life of the asset.
None of the incomplete technology programs we have acquired through our business
combinations prior to April 1, 2009 had reached technological feasibility nor had an alternative
future use and, therefore, the fair value of those programs was expensed on the acquisition date
and classified in our condensed consolidated statements of operations within the line item
Purchased in-process research and development. In May 2009, we acquired Avalon, which was accounted
for as a business combination. At the date of acquisition, AVN316 had not reached technological
feasibility nor had an alternative future use and is therefore considered to be in-process research
and development. Accordingly, we capitalized the $3.2 million fair value of the in-process research
and development for AVN316, which is included in intangible assets, net in our condensed
consolidated balance sheet as of December 31, 2009. Amortization of this capitalized in-process
research and development asset will commence upon our receipt of the necessary approvals to sell
AVN316. We will assess our capitalized in-process research and development assets periodically and
test its carrying value annually for potential impairment, or earlier if conditions warrant.
Results of Operations
Three Months Ended December 31, 2009 Compared to the Three Months Ended December 31, 2008
Revenue. Net revenue increased $347,000, or 12%, from $2.8 million for the three months
ended December 31, 2008 to $3.1 million for the three months ended December 31, 2009. This increase
was largely driven by the increase in gross sales of our genetic tests of $719,000, or 25%, from
the same period a year ago. The increased awareness of our product offerings and the increased
third-party payor coverage, from organizations such as Blue Cross and Blue Shield, Aetna and
Humana, has had an impact on our revenue. As of December 31, 2009, we are an approved Medicare
provider for our genetic testing services, and a Medicaid provider in 41 states and the District of
Columbia, compared with seven states in January 2008. These increases were partially offset by in
an increase in our contractual allowances of $323,000 from $215,000, or 8% of gross genetic testing
revenue, to $538,000, or 15% of gross genetic testing revenue. This increase in contractual
allowances as a percentage of gross revenue is due to increased coverage from third-party payors as
well as the mix of revenue from third-party payors. In addition, we have expanded our service
offerings by adding three new genetic tests in the past two years: DCM in November 2009, ARVC in
November 2008 and HCM in May 2008. We expect to continue to expand our third-party payor base and
our product offerings.
Gross Profit. Gross profit margins increased from 35% for the three months ended December 31,
2008 to 53% for the three months ended December 31, 2009. The improvement in gross profit from
fiscal 2009 to 2010 was due to the increase in revenue, as well as the realization of the
infrastructure improvements and lab efficiencies that were implemented in fiscal 2009. Gross profit
margins are expected to continue to improve as infrastructure improvements continue to drive
efficiencies. Our cost structure, which includes
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personnel, equipment and facilities, is largely fixed in nature; thus, as revenue increases our
gross margin should increase.
Research and Development Expense. Research and development expenses decreased $5.4 million to
$9.7 million for the three months ended December 31, 2009, or 36%, from $15.1 million for the three
months ended December 31, 2008. The decrease is primarily related to the completion of the
vilazodone safety and Phase III confirmatory trials during the quarter ended June 30, 2009. These
reductions were partially offset by costs incurred with initiating the first Stedivaze Phase III
clinical trial, advancing our preclinical programs and the preparation of the NDA for vilazodone,
which we plan to submit during the quarter ending March 31, 2010. We expect our ongoing research
and development costs to increase as we continue our Stedivaze Phase III clinical trials and
prepare for the commercialization of vilazodone.
Sales and Marketing Expense. Sales and marketing expenses remained relatively flat at $1.9
million for the three months ended December 31, 2009 compared to $2.0 million for the three months
ended December 31, 2008. We expect our sales and marketing expense to remain relatively flat during
the next several quarters as we leverage our established sales organization.
General and Administrative Expense. General and administrative expenses decreased $653,000 to
$4.4 million for the three months ended December 31, 2009, or 13%, from $5.0 million for the three
months ended December 31, 2008. The decrease was, in part, the result of a reduction in personnel
costs including stock-based compensation of $294,000. This decrease was partially offset by an
increase in our provision for uncollectible accounts of $115,000 for the three months ended
December 31, 2009 to $421,000 from $306,000 for the same period in fiscal 2009, which was
attributable to the increase in revenue during the same period as well as the current economic
conditions.
Interest and Other Income (Expense), Net. Interest expense increased $1.5 million from
$346,000 for the three months ended December 31, 2008 to $1.9 million for the three months ended
December 31, 2009. This increase was due to interest on the convertible notes issued in February
2009 of $1.5 million, which is comprised of $1.2 million coupon interest at 9.72% per annum and
$311,000 accretion of discount on the notes. Interest income decreased $143,000 from $159,000 for
the three months ended December 31, 2008 to $16,000 for the three months ended December 31, 2009.
Other expense, net was $10,000 for the three months ended December 31, 2009 compared to $13,000 for the three months ended December 31, 2008.
Nine Months Ended December 31, 2009 Compared to the Nine Months Ended December 31, 2008
Revenue. Revenue increased $2.6 million, or 37%, from $7.2 million for the nine months
ended December 31, 2008 to $9.9 million for the nine months ended December 31, 2009. This increase
was due to the increase in gross sales of our genetic tests of $3.7 million, or 51%, from the same
period a year ago. The continued expansion of our commercial sales and marketing team in fiscal
2009 and increased coverage from third-party payors, such as Blue Cross and Blue Shield, Aetna and
Humana, have had a significant impact on our revenue. As of December 31, 2009, we are an approved
Medicare provider for our genetic testing services, and a Medicaid provider in 41 states and the
District of Columbia, compared with seven states in January 2008. These increases were partially
offset by in an increase in our contractual allowances of $1.1 million from $489,000, or 7% of
gross genetic testing revenue, to $1.6 million, or 14% of gross genetic testing revenue. This
increase in contractual allowances as a percentage of gross revenue is due to increased coverage
from third-party payors as well as the mix of revenue from third-party payors. In addition, we have
expanded our service offerings by adding new genetic tests in fiscal 2010 and 2009. We expect to
continue to expand our third-party payor base and our product offerings.
Gross Profit. Gross profit margins increased from 33% for the nine months ended December 31,
2008 to 52% for the nine months ended December 31, 2009. The improvement in gross profit from
fiscal 2009 to 2010 was due to the increase in revenue as well as the realization of the
infrastructure improvements and lab efficiencies that were implemented in fiscal 2009. Gross profit
margins are expected to continue to improve as infrastructure improvements continue to drive
efficiencies. Our cost structure, which includes
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personnel, equipment and facilities, is largely fixed in nature; thus, as revenue increases our
gross margin should increase.
Research and Development Expense. Research and development expenses decreased $1.2 million to
$30.1 million for the nine months ended December 31, 2009, or 4%, from $31.3 million for the nine
months ended December 31, 2008. The decrease is primarily related to the completion of the
vilazodone safety and Phase III confirmatory trials during the quarter ended June 30, 2009. These
reductions were partially offset by costs incurred with initiating the first Stedivaze Phase III
clinical trial, advancing our preclinical programs and the preparation of the NDA for vilazodone,
which we plan to submit during the quarter ending March 31, 2010. We expect our ongoing research
and development costs to increase as we continue our Stedivaze Phase III clinical trials and
prepare for the commercialization of vilazodone.
Sales and Marketing Expense. Sales and marketing expenses increased $353,000 to $6.0 million
for the nine months ended December 31, 2009, or 6%, from $5.7 million for the nine months ended
December 31, 2008. The increase was principally due to three full quarters of expense relating to
our expanded sales force and marketing team in fiscal 2010 compared to approximately two and
one-half quarters in fiscal 2009. We expect our sales and marketing expense to remain relatively flat over
the next several quarters as we leverage our established sales organization.
General and Administrative Expense. General and administrative expenses increased $157,000 to
$14.9 million for the nine months ended December 31, 2009 compared to $14.7 million for the nine
months ended December 31, 2008. The increase was, in part, the result of an increase in our
provision for uncollectible accounts of $691,000 for the nine months ended December 31, 2009 to
$1.4 million from $730,000 for the same period in fiscal 2009, which was attributable to the
increase in revenue during the same period as well as the current economic conditions, and $329,000
of additional amortization on newly acquired intangible assets. These increases were partially
offset by reductions in stock-based compensation of $767,000.
Restructuring and Lease Exiting Costs. In an effort to reduce overhead expenses, on August 31,
2009, we exited our Germantown, Maryland lease. As a result of exiting the lease, we recorded a
loss of $1.8 million related to writing off the unamortized acquired leasehold improvements.
Purchased In-Process Research and Development Expense. Prior to April 1, 2009, in-process
research and development acquired through a business combination was expensed on the acquisition
date in our consolidated financial statements. Effective April 1, 2009, all in-process research and
development we acquire through business combinations on or after April 1, 2009 will be capitalized
as an intangible asset on our consolidated balance sheets and periodically tested for impairment.
At the time of our acquisition of Adenosine Therapeutics in August 2009, ATL844, ATL313 and ATL1222
had not reached technological feasibility nor had an alternative future use and were therefore
considered to be in-process research and development. We recorded the fair value of the purchase
price attributable to in-process research and development expense. At the time of our acquisition
of Avalon Pharmaceuticals in August 2009, AVN316 had not reached technological feasibility nor had
an alternative future use and is therefore considered to be in-process research and development. We
recorded the fair value of the purchase price attributable to in-process research and development
as an indefinite-lived intangible asset on our consolidated balance sheet. We will test these
assets annually for impairment, or earlier if conditions warrant. Amortization of these assets will
begin upon regulatory approval based on the then estimated useful life of the assets.
Transaction Costs Incurred in Connection with the Avalon Acquisition. Prior to April 1, 2009,
transaction costs of $719,000 incurred in connection with the Avalon acquisition were capitalized.
Effective April 1, 2009, the capitalized transaction costs of $719,000 that had been incurred prior
to April 1, 2009 have been expensed as well as, the costs incurred on or after April 1, 2009 of
$1.3 million in connection with the Avalon acquisition.
Interest and Other Income (Expense), Net. Interest expense increased $6.9 million from
$482,000 for the nine months ended December 31, 2008 to $7.3 million for the nine months ended
December 31, 2009.
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This increase was primarily due to the interest on the convertible notes issued in February
2009 of $6.2 million, of which $3.7 million is coupon interest, $934,000 is accretion of the
discount on the notes and $1.6 million is the liquidated damages resulting from our failure to
register for resale the underlying securities with the SEC before June 25, 2009, and to a lesser
extent, additional interest on the notes issued in connection with the Adenosine Therapeutics
acquisition in August 2009, as a result of having a full nine months of interest expense for the
nine months ended December 31, 2009. Interest income decreased $651,000 from $721,000 for the nine
months ended December 31, 2008 to $70,000 for the nine months ended December 31, 2009. Other
income, net increased to $1.8 million for the nine months ended December 31, 2009 from $3,000 for
the nine months ended December 31, 2008. The change is due to the remeasurement of the fair value
of the Avalon stock held by us immediately prior to the merger resulting in a $1.8 million gain.
Liquidity and Capital Resources
Our sources of liquidity as of December 31, 2009 include our cash and cash equivalents balance
of approximately $70.2 million. Our projected uses of cash include cash used to fund the
preparation of an NDA for vilazodone for submission to the FDA, to fund the clinical development
activities for Stedivaze, including a Phase III clinical development program, to fund the continued
development of our other products and drug candidates and to fund our working capital and other
general corporate activities. We may also use our cash for the acquisition of businesses,
technologies and products that will complement our existing operations.
We believe that our cash will be sufficient to fund our operations until December 2010. We
will need additional capital to commercialize vilazodone and continue the development of Stedivaze
beyond December 2010. The sale of any equity or debt securities may result in additional dilution
to our stockholders, and we cannot be certain that additional financing will be available in
amounts or on terms acceptable to us, if at all. If we are unable to obtain financing, we may be
required to reduce the scope and timing of the planned clinical and preclinical programs, which
could harm our financial condition and operating results.
Management is always evaluating and prioritizing additional sources of financing including any
of the following options:
| partnering opportunities for the marketing of vilazodone; | ||
| partnering opportunities for the development and marketing of Stedivaze; | ||
| license, sublicense, or other relationships with third-parties relating to the development programs of preclinical compounds and/or patents; | ||
| sale of non-core assets; and/or | ||
| sale of equity or debt securities. |
If we are unable to obtain financing, or enter into licensing, divestiture, or partnering
arrangements on acceptable terms, we will be required to implement aggressive cost reduction
strategies. A significant portion of the research and development expenses and some portion of
sales and marketing expenses are discretionary and are in anticipation of development and
commercial launch of vilazodone and the development of Stedivaze and other adenosine compounds.
These cost reduction strategies could reduce the scope of the activities related to these
development and commercialization programs, planned clinical and preclinical programs, development
of other compounds and commercialization and development of other marker and test programs, which
could harm our long-term financial condition and operating results. We are prioritizing the various
development projects that were acquired through the Adenosine Therapeutics and Avalon acquisitions
as well as the biomarker and test development programs to focus our critical resources on the most
valuable assets. Similar to the vilazodone development, these projects are discretionary. However,
the postponement or cancellation of any of these development efforts could have a material impact
on the future value of these assets for us, our shareholders and on our financial condition and
operating results.
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Our long-term debt obligations are as follows:
December 31, | March 31, | |||||||
(in thousands) | 2009 | 2009 | ||||||
Notes payable, bearing interest at 6.5%, with monthly principal payments
through May 2011 and secured by certain of PGxHealths leasehold
improvements |
$ | 1,386 | $ | 2,001 | ||||
Note payable, bearing interest at 11% with monthly principal payments of $100
through April 1, 2011, secured by substantially all of the assets of the Company |
1,600 | 2,500 | ||||||
Note payable, bearing interest at 6% with quarterly principal payments of $1,100
through July 13, 2013, secured by substantially all of the assets of the Company |
16,500 | 19,800 | ||||||
Unsecured convertible notes payable, bearing interest at 9.72% and maturing
on February 25, 2017 |
50,000 | 50,000 | ||||||
69,486 | 74,301 | |||||||
Less: current portion |
(6,710 | ) | (6,337 | ) | ||||
unamortized discount |
(20,198 | ) | (21,132 | ) | ||||
$ | 42,578 | $ | 46,832 | |||||
For the nine months ended December 31, 2009, we made capital expenditures of
approximately $676,000 primarily to replace outdated equipment. We have no significant capital
expenditures planned for the remainder of this fiscal year.
Off-Balance Sheet Arrangements
Currently, we do not enter into financial instruments for trading or speculative purposes. We
do not have any special purpose entities or other off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from those reported in the Companys Annual Report on Form
10-K for the year ended March 31, 2009.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer, or CEO, and Chief
Financial Officer, or CFO, evaluated as of December 31, 2009 the effectiveness of our disclosure
controls and procedures as such terms are defined in Rules 13a-15(b) under the Securities and
Exchange Act of 1934, as amended. Based on their evaluation, our CEO and CFO concluded that, as of
December 31, 2009, our disclosure controls and procedures were (1) designed to ensure that material
information relating to us is accumulated and communicated to our CEO and CFO and (2) effective, in
that they provide reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Securities and Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange Commissions rules
and forms.
Changes in Internal Controls
There have been no changes in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act) during the quarter ended
December 31, 2009 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1A. Risk Factors
Investment in our securities involves a high degree of risk. Our Annual Report on Form 10-K
for the year ended March 31, 2009, which was filed with the SEC on June 15, 2009, contains numerous
risk factors relating to our business and operations, our intellectual property, regulatory
matters, our industry and our common stock. We have updated our risk factors since June 15, 2009 to
include the following matters:
Risk factors relating to our Business and Operations
Given Our Current Product Development Efforts, Which Have Resulted in Significant Net Losses, We
Expect to Incur Net Losses for the Foreseeable Future.
We have incurred operating losses since the fiscal year ended March 31, 2006. At December 31,
2009, we had an accumulated deficit of approximately $301.3 million. We expect to incur substantial
additional operating losses over the next several years as our research, development, pre-clinical
testing and clinical trial activities increase, particularly with respect to vilazodone and
Stedivaze.
To become profitable, we, either alone or with collaborators, must successfully develop,
manufacture and market our current and future product candidates, including vilazodone and
Stedivaze, and other products and continue to leverage our existing technologies to generate
product and services revenue. It is possible that we will never have significant product sales
revenue to become or sustain profitability.
If Regulatory Authorities Fail to Timely Approve Vilazodone for Marketing, Our Results of
Operations Will Suffer.
In order to market our lead therapeutic candidate, vilazodone (as well as any other of our
therapeutic products that successfully complete clinical trials), in the U.S. and abroad, we will
need to obtain the approval of the FDA, via an NDA filing which is expected in the quarter ending
March 31, 2010, as well as the approval of European and other regulatory authorities in various
countries.
Regulatory authorities denying or delaying these approvals would adversely impact our business
and therefore our results of operations. A regulatory authority may deny or delay an approval
because it was not satisfied with the structure or conduct of clinical trials or due to its
assessment of the data we supply. A regulatory authority, for instance, may not believe that we
have adequately established a products risk-benefit profile or adequately addressed negative
safety signals. Clinical data are subject to varied interpretations, and regulatory authorities may
disagree with our assessments of our data. In any such case, a regulatory authority could insist
that we provide additional data, which could substantially delay or even prevent commercialization
efforts, particularly if we are required to conduct additional pre-approval clinical studies.
Because a Significant Portion of Our Total Assets are Represented by Goodwill and Indefinite-Lived
Intangible Assets That are Subject to Mandatory Annual Impairment Evaluations and Definite-Lived
Intangible Assets That are Reviewed for Impairment if Certain Conditions Exist, We Could be
Required to Write Off Some or All of This Goodwill and Intangible Assets, Which May Adversely
Affect Our Financial Condition and Results of Operations.
Approximately 36% of our total assets at December 31, 2009 are goodwill and intangibles, of
which approximately $31.8 million is goodwill. Under U.S. generally accepted accounting principles,
goodwill and indefinite-lived intangible assets are not amortized but are reviewed annually or more
frequently if impairment indicators arise. The unamortized values of definite-lived intangibles are
reviewed if certain conditions exist. There was no impairment charge during fiscal 2009 and none to
date in fiscal 2010. When we perform future impairment tests, the carrying value of goodwill or
intangible assets could exceed their
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implied fair value and therefore would require adjustment. Such an adjustment would result in
a charge to operating income in that period. Once adjusted, there can be no assurance that there
will not be further adjustments for impairment in future periods.
We Might Enter into Acquisitions that are Difficult to Integrate, Disrupt Our Business, Dilute
Stockholder Value or Divert Management Attention.
Our success will depend in part on our ability to continually enhance and broaden our product
offerings in response to changing technologies, customer demands and competitive pressures. We
expect to seek to acquire businesses, technologies or products that will complement or expand our
existing business, including acquisitions that could be material in size and scope. Any acquisition
we might make in the future might not provide us with the benefits we anticipated in entering into
the transaction. Any future acquisitions involve various risks, including:
| difficulties in integrating the operations, technologies, products and personnel of the acquired companies; | ||
| the risk of diverting managements attention from normal daily operations of the business; | ||
| potential difficulties in completing projects associated with in-process research and development; | ||
| risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; | ||
| initial dependence on unfamiliar supply chains or relatively small supply partners; | ||
| unexpected expenses resulting from the acquisition; | ||
| potential unknown liabilities associated with acquired businesses; | ||
| insufficient revenues to offset increased expenses associated with the acquisition; and | ||
| the potential loss of key employees of the acquired companies. |
An acquisition could result in the incurrence of debt, restructuring charges and large
one-time write-offs. Acquisitions also could result in goodwill and other intangible assets that
are subject to impairment tests, which might result in future impairment charges. Furthermore, if
we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders
will be diluted.
From time to time, we might enter into negotiations for acquisitions that are not ultimately
consummated. Those negotiations could result in diversion of management time and significant
out-of-pocket costs. If we fail to evaluate and execute acquisitions properly, we could fail to
achieve our anticipated level of growth and our business and operating results could be adversely
affected.
If We are Unable to Raise Capital when Needed in the Future, We might be Unable to Execute Our
Operating and Development Plan, and if We Succeed in Raising Capital, We might Dilute Your
Percentage Ownership of the Common Stock or Might Subject Our Company to Fixed Payment Obligations
and Restrictive Covenants.
Our projected uses of cash include cash to fund operations, including continued research and
product development, sales and marketing, capital expenditures and existing debt service costs. We
believe that our cash and cash availability will be sufficient to fund our operations through
December 2010. We will need additional funds to continue operations and the development of
vilazodone and Stedivaze and other products, including demonstrating the advantages and reliability
of AvalonRx, the proprietary drug discovery and development technology acquired from Avalon.
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Management regularly considers and evaluates sources of financing, including:
| partnering opportunities with pharmaceutical or biotechnology companies for development and marketing of our late-stage or pre-clinical compounds; | ||
| sale of non-core assets; and | ||
| sale of equity and debt securities. |
If we raise additional capital through the sale of equity, our existing stockholders will be
diluted and earnings per share could decrease. Capital raised through debt financing would require
us to make periodic payments of interest and principal and might impose restrictive covenants on
the conduct of our business. Furthermore, additional financings might not be available on terms
favorable to us, or at all. Moreover, the terms of our outstanding convertible notes restrict our
ability to finance our operations through the incurrence of additional debt or the issuance of
shares of common stock.
We cannot be certain that additional financing will be available in amounts or terms
acceptable to us, if at all. A failure to obtain additional funding could prevent us from making
expenditures that might be required to grow or maintain our operations. If we are unable to obtain
financing or partnering opportunities, we may be required to implement cost reduction strategies,
including decreasing our expenditures on research and development expenses and sales and marketing
expenses in anticipation of development and commercial launch of products. The postponement or
cancellation of any of these development and commercialization efforts could have a material
adverse impact on our planned operations and future operating results.
Conversion of Outstanding Convertible Notes and Exercise of Outstanding Warrants Could
Significantly Dilute the Ownership Interests of Existing Stockholders.
The conversion or exercise of some or all of our outstanding convertible notes and warrants
could significantly dilute the ownership interests of existing stockholders. As of December 31,
2009, there were 6,110,600 shares of our common stock issuable upon conversion of the convertible
notes, which have a conversion price of $8.18 per share, and 4,262,356 shares of our common stock
issuable upon the exercise of the warrants issued in connection with the convertible notes, which
have a weighted average exercise price of $17.08 per share. Any sales in the public market of the
common stock issuable upon such conversion or exercise could adversely affect prevailing market
prices of our common stock. Moreover, the existence of the convertible notes may encourage short
selling by market participants because the conversion of such convertible notes could be used to
satisfy short positions, or the anticipated conversion of such convertible notes into shares of our
common stock could depress the price of our common stock.
If the Investors in Our Private Placements Sell Their Shares, Which have been Registered Under the
Securities Act, the Market Price of Our Common Stock may Decline Significantly.
As of December 31, 2009, an aggregate of 15,955,761 shares of common stock have been
registered under the Securities Act for sale by stockholders in connection with certain
transactions completed by us. The registered shares consist of shares issued to investors in
private placements in September 2008, June 2006 and November 2005, shares issuable upon conversion
of outstanding convertible notes and shares issuable upon exercises of outstanding warrants assumed
in connection with various acquisitions. The registrations of those shares currently are effective,
and therefore the registered shares are freely transferable. If a large number of shares are sold
into the public market, the market price of our common stock may decline significantly. Moreover,
the perception in the public market that the stockholders might sell shares of common stock could
also depress the market price of our common stock.
Our Directors, Executive Officers and Their Affiliated Entities have Substantial Control Over Us
and Could Limit the Ability of Other Stockholders to Influence the Outcome of Key Transactions,
Including Changes of Control.
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As of December 31, 2009, our executive officers, directors and their affiliated entities, in
the aggregate, beneficially owned 59.6% of our outstanding common stock (which percentage reflects
the shares of common stock issuable upon conversion of certain convertible notes and exercise of
certain warrants issued to Randal J. Kirk and his affiliates). In particular, Mr. Kirk, our
Chairman, and his affiliated entities, in the aggregate, beneficially owned 57.4% of our
outstanding common stock. Mr. Kirk and his affiliated entities are able to control or significantly
influence all matters requiring approval by our stockholders, including the election of directors
and the approval of mergers or other significant corporate transactions. These stockholders might
have interests that differ from yours, and they might vote in a way with which you disagree and
that could be adverse to your interests. The concentration of common stock ownership could have the
effect of delaying, preventing, or deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their common stock as part of a sale of our
company, and could negatively affect the market price of our common stock.
Our Corporate Documents and Delaware Law Make a Takeover of Our Company More Difficult, Which
Could Prevent Certain Changes in Control and Limit the Market Price of the Common Stock.
Our charter and by-laws and Section 203 of the Delaware General Corporation Law contain
provisions that could enable our management to resist a takeover of our company. For example, our
board of directors has the authority, without further approval of our stockholders, to fix the
rights and preferences, and to cause our company to issue, up to 1.5 million shares of preferred
stock. These provisions could discourage, delay, or prevent a change in the control of our company
or a change in our management. They could also discourage proxy contests and make it more difficult
for you and other stockholders to elect directors and take other corporate actions. The existence
of these provisions could limit the price that investors are willing to pay in the future for
shares of the common stock. Some provisions in our charter and by-laws could deter third parties
from acquiring us, which could limit the market price of the common stock.
Future Equity Issuances or a Sale of a Substantial Number of Shares of Our Common Stock may Cause
the Price of Our Common Stock to Decline.
Because we may need to raise additional capital in the future to continue to expand our
business and our research and development activities, among other things, we may conduct additional
equity offerings. If we or our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of options and warrants) in the public market, the market price of
our common stock could fall. A decline in the market price of our common stock could make it more
difficult for us to sell equity or equity-related securities in the future at a time and price that
we deem appropriate.
Management Will Have Broad Discretion as to the Use of the Proceeds From Our Public Offering
Completed in November 2009 and We May Not Use the Proceeds Effectively.
Our management will have broad discretion in the application of the net proceeds from our
recently completed public offering and could spend the proceeds in ways that do not improve our
results of operations or enhance the value of our common stock. Our failure to apply these funds
effectively could have a material adverse effect on our business, delay the development of our
product candidates and cause the price of our common stock to decline.
If We are Unable to Protect Effectively Our Intellectual Property, We May Not be able to Operate
Our Business and Third Parties May use our Technology, Both of Which would Impair our Ability to
Compete in Our Markets.
Our success will depend in significant part on our ability to obtain and maintain meaningful
patent protection for certain of our technologies and products throughout the world. The patent
positions of pharmaceutical and diagnostic companies can be highly uncertain and involve complex
legal and factual questions for which important legal principles remain unresolved. Key questions
of patent law underlying pharmaceutical and diagnostic patents remain unresolved or in flux in the
U.S. and even more so outside the U.S. Changes in either the patent laws or in interpretations of
patent laws in the U.S. and other countries
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may diminish the value of our intellectual property. As a result, our patents may not afford
us substantial protection or commercial benefit.
We will rely on patents to protect a significant part of our intellectual property and to
enhance our competitive position. However, our presently pending or future patent applications may
not issue as patents, and any patent previously issued to us or our subsidiaries may be challenged,
invalidated, held unenforceable or circumvented. Furthermore, the claims in patents that have been
issued to us or our subsidiaries or that may be issued to us in the future may not be sufficiently
broad to prevent third parties from producing competing products similar to our products. In
addition, the laws of various foreign countries in which we plan to compete may not protect our
intellectual property to the same extent as do the laws of the United States. If we fail to obtain
adequate patent protection for our proprietary technology, our ability to be commercially
competitive will be materially impaired.
The patent positions of life science companies are generally uncertain and involve complex
legal and factual questions. Our business could be hurt by any of the following:
| pending patent applications may not result in issued patents; | |
| the claims of any issued patents may not provide meaningful protection; | |
| the claims of any issued patents may be invalidated or held unenforceable under current law or upon changes in patent law; | |
| we may be unsuccessful in developing additional proprietary technologies that are patentable; | |
| our patents may not provide a basis for commercially viable products or provide us with any competitive advantages and may be challenged by third parties; and | |
| others may have patents that relate to our technology or business. |
Third parties have filed, and in the future are likely to file, patent applications covering
biomarkers and related methods that we have developed or may develop technology upon which our
technology platform depends. If patent offices issue patents on these patent applications and we
wish to use those biomarkers or technology, we would need to obtain licenses from third parties.
However, we might not be able to obtain any such license on commercially favorable terms, if at
all, and if we do not obtain these licenses, we might be prevented from using certain technologies
or taking certain products to market.
In addition to patent protection, we also rely on protection of trade secrets, know-how and
confidential and proprietary information. To maintain the confidentiality of trade-secrets and
proprietary information, we generally seek to enter into confidentiality agreements with our
employees, consultants and strategic partners upon the commencement of a relationship. However, we
may not obtain these agreements in all circumstances. In the event of unauthorized use or
disclosure of this information, these agreements, even if obtained, may not provide meaningful
protection for our trade secrets or other confidential information. In addition, adequate remedies
may not exist in the event of unauthorized use or disclosure of this information. The loss or
exposure of our trade secrets and other proprietary information would impair its competitive
advantages and could have a material adverse effect on our operating results, financial condition
and future growth prospects.
Divestiture of Our Cogenics division May Materially Adversely Affect Our Business, Results of
Operations and Financial Condition.
On April 14, 2009, we closed the sale of our Cogenics division to Beckman Coulter, Inc. This
divestiture will result in significant reduction in our revenues which could have a material
adverse effect on our business, results of operations and financial condition. Significantly, our
Cogenics business segment accounted for approximately 72% and 85% of our revenues for the years
ended March 31, 2009 and 2008,
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respectively. This disposition could involve additional risks, including difficulties in the
separation of operations, services, products and personnel, the diversion of managements attention
from other business concerns, the disruption of our business and the potential loss of key
employees. We may not be successful in managing these or any other significant risks that we
encounter in divesting this business segment, which could harm our operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended December 31, 2009, we issued 51,922 shares of our common stock
in unregistered sales of our equity securities. The 51,922 shares were issued to two warrant
holders in connection with the exercise of outstanding common stock purchase warrants. We received
aggregate proceeds of approximately $0.9 million in connection with these exercises. The warrants
were issued by Genaissance Pharmaceuticals, Inc., which we acquired in 2005, in a private placement
on November 19, 2004 that was exempt from registration under the Securities Act of 1933 (the Act)
pursuant to Section 4(2) thereto. The issuance of the foregoing shares of our common stock upon
exercise of the warrants was exempt from the registration requirements of the Securities Act of
1933 pursuant to Section 4(2) thereof.
Item 6. Exhibits.
See Exhibit Index on the page immediately following the signature page for a list of the
exhibits filed as part of this quarterly report, which Exhibit Index is incorporated herein by
reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on February 9, 2010.
CLINICAL DATA, INC. |
||||
Dated: February 9, 2010 | /s/ C. Evan Ballantyne | |||
C. Evan Ballantyne | ||||
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
1.1
|
Purchase Agreement dated October 28, 2009 by and between the Company and Piper Jaffray & Co., Wedbush Morgan Securities, Inc., BMO Capital Markets Corp. and Roth Capital Partners LLC, filed with the Commission on October 28, 2009 as Exhibit 1.1 to the Companys Current Report on Form 8-K and incorporated herein by reference. | |
3.1
|
Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on June 11, 2008. Filed as Exhibit 3.2 to the Companys Annual Report on Form 10-K, filed with the Commission on June 16, 2008, and incorporated herein by reference. | |
3.2
|
Amended and Restated By-laws of the Company, as of June 20, 2005. Filed as Exhibit 3.1 to the Companys Current Report on Form 8-K, filed with the Commission on June 24, 2005, and incorporated herein by reference. | |
4.1
|
Specimen Common Stock Certificate. Filed as Exhibit 4.1 to the Companys Registration Statement on Form S-1 (File No. 2-82494), filed with the Commission on March 17, 1983, and incorporated herein by reference. | |
4.2
|
Specimen Certificate of Contingent Value Rights to receive common stock. Filed as Exhibit 4.2 to the Companys Annual Report on Form 10-K, filed with the Commission on June 15, 2009, and incorporated herein by reference. | |
31.1
|
Certification of Chief Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith. | |
31.2
|
Certification of Chief Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith. | |
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350. Filed herewith. |
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