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EX-32 - EX-32 - CYPRESS BIOSCIENCE INC | a55504exv32.htm |
EX-31.1 - EX-31.1 - CYPRESS BIOSCIENCE INC | a55504exv31w1.htm |
EX-23.1 - EX-23.1 - CYPRESS BIOSCIENCE INC | a55504exv23w1.htm |
EX-31.2 - EX-31.2 - CYPRESS BIOSCIENCE INC | a55504exv31w2.htm |
EX-21.1 - EX-21.1 - CYPRESS BIOSCIENCE INC | a55504exv21w1.htm |
EX-10.21 - EX-10.21 - CYPRESS BIOSCIENCE INC | a55504exv10w21.htm |
EX-10.19 - EX-10.19 - CYPRESS BIOSCIENCE INC | a55504exv10w19.htm |
EX-10.18 - EX-10.18 - CYPRESS BIOSCIENCE INC | a55504exv10w18.htm |
EX-10.20 - EX-10.20 - CYPRESS BIOSCIENCE INC | a55504exv10w20.htm |
Table of Contents
United States
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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. 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact name of registrant as specified in its charter)
Delaware | 22-2389839 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
4350 Executive Drive, Suite 325 San Diego, California (Address of principal executive offices) |
92121 (Zip Code) |
Registrants telephone number, including area code: (858) 452-2323
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class: | Name of Exchange on which Registered | |
Common Stock $.001 Par Value | The NASDAQ Stock Market |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark 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 (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
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 a 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 aggregate market value of the voting stock held by non-affiliates of the Registrant as of
June 30, 2009 was approximately $277.4 million*
The number of shares outstanding of the Registrants common stock as of March 2, 2009 was
37,983,754.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement to be filed subsequent to the date hereof
with the Commission pursuant to Regulation 14A in connection with the Registrants 2010 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Report. Such Definitive
Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days
after the conclusion of the Registrants fiscal year ended December 31, 2009.
* | Calculated based on 29,451,276 shares of common stock held as of June 30, 2009 by non-affiliates and a per share market price of $9.42. Excludes 8,683,165 shares of common stock held by directors and executive officers and stockholders whose ownership exceeds ten percent of the common stock outstanding at June 30, 2009, who are deemed to be affiliates only for purposes of this calculation. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. |
CYPRESS BIOSCIENCE, INC.
FORM 10-K
INDEX
FORM 10-K
INDEX
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PART II |
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36 | ||||||||
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PART III |
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PART IV |
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EX-10.18 | ||||||||
EX-10.19 | ||||||||
EX-10.20 | ||||||||
EX-10.21 | ||||||||
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EX-23.1 | ||||||||
EX-31.1 | ||||||||
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EX-32 |
We own or have rights to various copyrights, trademarks and service marks used in our
business, including the following: Cypress Bioscience, Inc., Avise PGSM and Avise
MCVSM. SavellaTM is a trademark of Forest Laboratories, Inc.
This report also includes other trademarks, service marks, and trade names of other
companies.
i.
Table of Contents
PART I
Except for the historical information contained herein, the information contained herein
contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including, in
particular, statements about our plans, strategies and prospects. These statements, which may
include words such as may, will, expect, believe, intend, plan, anticipate,
estimate, should, or similar words, are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Although we believe that our
beliefs, expectations and assumptions reflected in these statements are reasonable, our actual
results and financial performance may prove to be very different from what we might have predicted
on the date of this Form 10-K. Factors that could cause or contribute to differences include, but
are not specifically limited to, our ability to market Savella, our ability to create a successful
commercial organization, our ability to market our personalized medicine services, our ability to
acquire and develop any compounds or products to treat any other indications we may pursue in a
timely manner, or at all, as well as the other risks detailed in this Form 10-K and in our other
SEC filings.
Item 1. Business
Company Overview
Cypress Bioscience, Inc., which was incorporated in Delaware in 1981, provides therapeutics
and personalized medicine services, facilitating improved and individualized patient care. Cypress
goal is to address the evolving needs of specialist physicians and their patients by identifying
unmet medical needs in the areas of pain, rheumatology, and physical medicine and rehabilitation,
including challenging disorders such as fibromyalgia and rheumatoid arthritis. We believe our
approach to improving patient care creates a unique partnership with physicians, and expect that
offering personalized medicine services and therapeutic products through the same sales
organization will provide Cypress a differentiated commercial strategy and sustainable competitive
advantage.
In January 2009, we received approval from the U.S. Food and Drug Administration (FDA) to
market Savella (milnacipran HCl) for the management of fibromyalgia (FM). Milnacipran HCl has
been approved for a non-pain condition in over 50 countries, with commercial experience outside the
U.S. since 1997. We obtained an exclusive license in the U.S. and Canada to milnacipran from Pierre
Fabre Medicament, or Pierre Fabre, in 2001. In January 2004, we entered into a collaboration
agreement with Forest Laboratories, a leading marketer of central nervous system, or CNS, drugs
with a strong franchise in the primary care and psychiatric markets. As part of this collaboration
with Forest Laboratories, we sublicensed our rights to milnacipran to Forest Laboratories for the
United States, with an option to extend the territory to include Canada, which was exercised in
July 2007. As part of our agreements with both Forest Laboratories and Pierre Fabre, we have
licensed any patents that may issue from our patent applications related to FM and milnacipran to
Forest Laboratories and Pierre Fabre. Additional information on our ongoing post approval clinical
development program for Savella can be found at www.clinicaltrials.gov.
Following the January 2009 FDA approval to market Savella for the management of FM, Savella
was shipped to wholesalers and became available at pharmacies at the end of April 2009. Savella is
a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher
potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role
in the symptoms for FM. We co-promote Savella for FM with our corporate partner, Forest
Laboratories, Inc., or Forest Laboratories, and by the beginning of 2009, we expanded our sales
force to 115 field based personnel in anticipation of the launch of Savella. At the beginning of
May 2009, we began detailing Savella to rheumatologists, pain centers, and physical medicine and
rehabilitation specialists in the U.S. Now that we are detailing Savella to physicians, in addition
to receiving a royalty on total net sales of Savella we will be reimbursed by Forest Laboratories
for the Savella sales calls that we make based on Forest Laboratories cost to conduct such sales
calls.
At the end of October 2008, with our initial 11 person sales force, we launched our first two
novel personalized medicine services, Avise PG and Avise MCV, which are detailed to
rheumatologists. Personalized medicine services are tests which are validated analytically and
clinically to provide physicians with actionable information to help manage their patients care,
including predicting the likelihood of developing disease or optimizing therapy. Avise
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PG is a test that supports dose optimization and therapeutic decision making for patients
taking methotrexate (MTX), a widely used first-line therapy for rheumatoid arthritis (RA).
Avise MCV is a test that aids in the diagnosis and prognosis of RA. We believe that offering
integrated personalized medicine services and pharmaceutical products through the same sales
organization will facilitate physician access and improve the quality of the sales call, as well as
help establish Cypress as a leader targeting these specific specialists. When we began promoting
Savella in May 2009 with our 115 field based personnel we called on the same rheumatologists that
we began calling upon in October 2008 for our first two personalized medicine services.
From time to time we have ongoing Proof of Concept (POC) stage therapeutic product
opportunities in development. At the present time, we are not funding any POC stage development
programs, including the two pharmaceutical candidates acquired in connection with our acquisition
in March 2008 of Proprius, Inc., or Proprius, although we continue to evaluate the merit of future
investment in POC stage development programs. We are also actively continuing to evaluate various
other potential strategic transactions for development stage and commercial product opportunities
where we can leverage our broad technical, clinical and regulatory expertise or our excess sales
force capacity, and are considering a variety of potential transaction structures.
In February 2009, we announced the closing of a transaction to acquire Cellatope Corporations
technology platform that uses cell-bound complement activation products (CB-CAP) to diagnose and
monitor debilitating autoimmune disorders, including systemic lupus erythematosus (SLE/Lupus).
We acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to
Cellatope for the diagnostic technology as well as an additional $3.0 million potential milestone
payment associated with the commercial development of the Lupus monitoring application.
In March 2008, we announced the closing of the acquisition of Proprius that included an
upfront payment of approximately $37.5 million in cash, as well as up to an additional $37.5
million in potential milestone related payments associated with the development of Proprius early
clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat
rheumatoid arthritis. We are not currently in active development with respect to either product
candidate.
Our operations of our personalized medicine services business, which we acquired as part of
the acquisition of Proprius, are heavily influenced by the amount and timing of reimbursement we
receive from third party payers. While the reimbursement has continued to improve for our Avise
products, collection cycles continue to be prolonged with the amount of cash collected
significantly less than the gross value of the testing services
performed. During the fourth quarter of 2009, the Company revised its projections for
the personalized medicine services business to reflect current
product demand and the cash collection
profile, which resulted in a $1.1 million non-cash goodwill impairment charge in the fourth quarter of
2009.
Savella (milnacipran HCl) for the Management of Fibromyalgia
Savella
We promote Savella for the management of FM with our partner, Forest Laboratories. Savella is
a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher
potency than serotonin (in vitro), two neurotransmitters thought to play a central role in the
symptoms of FM. Milnacipran is approved for the treatment of a non-pain condition in over 50
countries, with commercial experience outside the U.S. since 1997. Milnacipran had not previously
been approved in the United States for any indication, and we and Forest Laboratories are the first
companies to develop and commercialize Savella in the United States for FM.
Ongoing Phase IV Trials
We have ongoing Phase IV clinical studies of Savella that are routinely updated and posted on
www.clinicaltrials.gov.
2.
Table of Contents
Personalized Medicine Services
Avise MCV
Avise MCV is a personalized medicine service that we launched at the American College of
Rheumatology annual meeting in October 2008. Avise MCV is a specialized lab blood test that can
help accurately diagnose Rheumatoid Arthritis (RA). Avise MCV measures antibodies to mutated
citrullinated vimentin, or MCV, a protein found in the inflamed synovium of patients with RA.
Elevated levels of anti-MCV not only indicate an increased likelihood of having RA, but also
identify those who may develop more severe forms of RA. Avise MCV may be used for first-line
diagnostic testing of patients who present with symptoms of RA, offering prognostic insight while
improving diagnostic accuracy. We acquired this personalized medicine service as part of our
acquisition of Proprius.
Avise PG
Avise PG is a personalized medicine service that we also launched at the American College of
Rheumatology annual meeting in October 2008. Avise PG is a specialized blood test that helps
measure how well the body metabolizes methotrexate (MTX). MTX is a widely used medication for the
treatment of RA. Avise PG offers rheumatologists insight into a patients metabolism of MTX by
measuring levels of MTX polyglutamates, the active metabolites of MTX. Historically, physicians
have depended solely on a patients response, as gauged by clinical signs and symptoms, to
determine whether MTX therapy has been optimized. We acquired this personalized medicine service as
part of our acquisition of Proprius.
Other Personalized Medicine Services
In February 2009, we announced the closing of a transaction to acquire Cellatope Corporations
technology platform. This technology platform uses cell-bound complement activation products
(CB-CAP) to diagnose and monitor debilitating autoimmune disorders, including lupus. The earliest
any services using the CB-CAP technology would be available commercially is the fourth quarter of
2010.
We continue to explore opportunities to improve the revenue profile of the personalized
medicine services through strategic alliances.
Licenses, Collaborations and Acquisitions
Milnacipran Agreements
Pierre Fabre Agreements
In January 2004, we amended and restated our existing license agreement with Pierre Fabre. Our
license agreement with Pierre Fabre provides us with an exclusive license to develop and sell any
products with the compound milnacipran as an active ingredient for any indication in the United
States and Canada. We paid Pierre Fabre an upfront payment of $1.5 million in connection with the
execution of the original license agreement in 2001 and a $1.0 million milestone payment in
September 2003. We also issued Pierre Fabre 1,000,000 shares of common stock and warrants to
purchase 300,000 shares of common stock in connection with an amendment to the agreement with
Pierre Fabre. In February 2008, we paid Pierre Fabre $1.0 million upon the acceptance by the FDA of
the New Drug Application (NDA) for milnacipran. Additionally, we are obligated to pay Pierre
Fabre 5% of any upfront and milestone payments received from Forest Laboratories as a sublicense
fee. We have paid Pierre Fabre an aggregate of $3.6 million under our obligation to pay 5% of any
upfront and milestone payments received from Forest Laboratories and after a total of $7.5 million
has been paid, any additional sublicense fees are credited against any subsequent milestone and
royalty payments owed by us to Pierre Fabre. If not used, these credits are carried forward to
subsequent years. Additional payments of up to a total of $3.5 million (of which $3.0 million was
paid in January 2009 upon NDA approval) will be due to Pierre Fabre based on meeting certain
clinical and regulatory milestones. Forest Laboratories assumed our obligation to pay royalties to
Pierre Fabre and the transfer price for the active ingredient supplied by Pierre Fabre. Pierre
Fabre retains the right to sell products in indications developed by us outside the United States
and Canada, and will pay us a royalty based on net sales for such products. The license agreement
also provides Pierre Fabre with certain rights to obtain a license outside the United States and
Canada for new formulations and new salts developed by us.
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The agreement is effective until the later of the expiration of the last-to-expire of certain
patents held by Pierre Fabre relating to the development of milnacipran, or ten years after the
first commercial sale of a licensed product, unless terminated earlier. Each party has the right to
terminate the agreement upon 90 days prior written notice of the bankruptcy or dissolution of the
other party or a breach of any material provision of the agreement if such breach is not cured
within 90 days following such written notice. Additionally, Pierre Fabre has the right to terminate
the agreement upon 90 days written notice if (i) we terminate all development activities, unless
the termination of activities is subject to cure within 12 months and we are using commercially
reasonable efforts to cure the termination of activities, (ii) we challenge the Pierre Fabre
patents and (iii) we effect a change in control in which a third party acquirer controls a
serotonin norepinephrine reuptake inhibitor, or SNRI, product and certain provisions of the
agreement would be breached as a result of such SNRI product, and the breach is not cured within a
specified time period.
In addition, in January 2004, we entered into a supply agreement with Pierre Fabre. Pierre
Fabre has the exclusive right to manufacture the active ingredients used in the commercial product,
and we will pay Pierre Fabre a transfer price and royalties based on net sales. Forest Laboratories
has assumed both of these financial obligations. Our supply agreement with Pierre Fabre may be
terminated for cause either by us or by Pierre Fabre upon 90 days prior written notice to the
other party upon a material breach of the agreement if the breach is not cured within 90 days
following the written notice. In addition, Pierre Fabre may elect to terminate the agreement if we
effect a change in control under specified circumstances.
Forest Laboratories Agreement
In January 2004, we entered into a collaboration agreement with Forest Laboratories for the
development and marketing of milnacipran. We selected Forest Laboratories as our development and
marketing collaborator based in part on its strong franchise in central nervous system drugs and in
the primary care markets. Under our agreement with Forest Laboratories, we sublicensed our
exclusive rights to develop and commercialize milnacipran to Forest Laboratories for the United
States, with an option to extend the territory to include Canada, which was exercised in July 2007.
Additionally, Forest Laboratories assumed responsibility for funding all continuing development of
milnacipran, including the funding of clinical trials and regulatory approval, as well as a
specified number of our employees. However, we agreed upon an alternative cost sharing arrangement
with Forest Laboratories for the second Phase III trial only. In connection with this arrangement,
the amount of funding that we receive from Forest Laboratories for certain of our employees was
eliminated as of the fourth quarter in 2004 for the second Phase III trial only, and we paid for a
majority of the external costs of the second Phase III trial only, which were approximately $9.7
million. Forest reimbursed us for one-third of the costs, or $3.2 million in February 2008 in
connection with the NDA acceptance for Savella by the FDA and the remaining $6.5 million upon NDA
approval. Forest Laboratories is funding the Phase IV clinical trials. Forest Laboratories is also
responsible for sales and marketing activities related to any product developed under the
agreement, subject to our option under the co-promotion provisions to deliver up to 25% of the
total physician details using our own sales force, and we will be reimbursed by Forest Laboratories
in an amount equal to Forest Laboratories cost of providing the equivalent detailing calls. In
connection with exercising the option to co-promote Savella, we detail to rheumatologists, pain
centers, and physical and rehabilitation medicine specialists as well as select primary care
physicians. As of February 1, 2010, we had 111 field based sales personnel.
We share decision making authority with Forest Laboratories, through the joint development
committee, with respect to the research, development and marketing of milnacipran. In the event
that the joint development committee is unable to resolve any dispute, other than any marketing
related issue, Forest Laboratories and Cypress must jointly resolve such issue. With respect to any
marketing related issue, Forest Laboratories has the final decision making authority. Under our
agreement with Forest Laboratories and our agreement with Pierre Fabre, each party agreed to
certain limitations on the development of products for FM and on the development of SNRI products.
Under our agreement with Forest Laboratories, we received an upfront payment of $25.0 million
in January 2004, of which $1.25 million was paid to Pierre Fabre as a sublicense fee. Additionally,
we received the following payments from Forest: a $5.0 million milestone payment in June 2007 for
the successful second Phase III trial for Savella, of which $250,000 was paid to Pierre Fabre as a
sublicense fee; a $1.0 million license fee payment in July 2007 to extend the territory to Canada,
of which $50,000 was paid to Pierre Fabre as a sublicense fee; a $5.0 million milestone payment in
December 2007 upon the filing of the NDA for Savella, of which $250,000 was paid to Pierre
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Fabre as a sublicense fee; a $10.0 million milestone payment in February 2008 upon the
acceptance by the FDA of the NDA for Savella, of which $500,000 was paid to Pierre Fabre as a
sublicense fee; and a $25.0 million milestone payment in January 2009 for the NDA approval of
Savella, of which $1.25 million was paid to Pierre Fabre as a sublicense fee. The total upfront
and milestone payments to us under the agreement could total approximately $165.0 million, of which
$71.0 million has been received to date, related to the development and commercialization of
Savella for the treatment of FM, a large portion of which will depend upon achieving certain sales
of Savella. There was an additional $40.0 million in potential milestone payments related to new
formulations of milnacipran created on behalf of Cypress; however, alternative formulation
technology has been selected by Forest and Cypress and therefore Forest and Cypress have decided
not to move forward with any such formulations created by a third party on Cypress behalf and
therefore, such milestone events are no longer possible. In addition we will receive royalty
payments based on sales of licensed product under this agreement. We believe that milnacipran may
be effective in the treatment of other indications. With Forest Laboratories, we may in the future
investigate the use of milnacipran in the treatment of other disorders. Should we and Forest
Laboratories choose to pursue additional indications beyond FM and obtain FDA approval for such
indications, we could receive up to an additional $45.0 million in milestone payments. Since we are
entitled to royalty payments based on sales of any licensed product under the agreement with Forest
Laboratories, we would receive royalty payments for any additional indications. The decision
regarding which, if any, additional indications are pursued, is one that we make together with
Forest Laboratories, through the joint development committee. Such decisions relate to the research
and development of milnacipran, so in the event the joint development committee is unable to
resolve any dispute regarding potential indications, Forest Laboratories and we must jointly
resolve such issue.
Forest Laboratories assumed the royalty payments due to Pierre Fabre and the transfer price
for the active ingredient used in Savella, of which we are obligated to reimburse Forest Laboratories for a portion of the active ingredient costs of samples. The agreement with Forest Laboratories extends until the
later of (i) the expiration of the last to expire of the applicable patents, (ii) 10 years after
the first commercial sale of a product under the agreement in the applicable country or (iii) the
last commercial sale of a generic product in such country, unless terminated earlier. Each party
has the right to terminate the agreement upon prior written notice in the event of the bankruptcy
or dissolution of the other party, or a breach of any material provision of the agreement if the
breach has not been cured within the required time period following the written notice. Forest
Laboratories may also terminate our agreement upon an agreed notice period in the event Forest
Laboratories reasonably determines that the development program indicates issues of safety or
efficacy that are likely to prevent or significantly delay the filing or approval of an NDA or to
result in labeling or indications that would have a significant adverse affect on the marketing of
any product developed under the agreement.
Acquisition of Proprius
Merger Agreement
In March 2008, we acquired Proprius in a transaction involving an upfront payment of
approximately $37.5 million in cash and an additional $37.5 million in potential milestone-related
payments associated with the development of Proprius therapeutic candidates. We are evaluating
these product candidates but are not currently in active development with respect to either product
candidate. The milestone payments are payable, at the sole discretion of Cypress, in cash, or
subject to certain conditions, up to 50% in shares of Cypress common stock, or a combination of
both. We will only issue shares of our common stock in full or partial payment of any milestone
payment to accredited investors, within the meaning of Rule 501 of Regulation D of the Securities
Act of 1933, as amended, and the aggregate number of such shares issued to all accredited investors
will not exceed 19.9% of the issued and outstanding shares of Cypress common stock on the date of
the merger agreement. If we do issue shares of our common stock in full or partial payment of any
milestone payment, the shares will be valued using a trailing 10-trading day average closing price
over a period ending shortly before the relevant milestone payment to the Proprius stockholders is
due. We have also agreed to file a registration statement with the Securities and Exchange
Commission registering those shares for resale prior to their issuance.
Subject to the terms of the merger agreement, the milestone payments are payable as follows:
$20.0 million upon the dosing of the first subject in any human phase III clinical trial
involving PRO-406 (the topical non-steroidal anti-inflammatory drug [NSAID] therapy for the
symptomatic treatment of osteoarthritis), that could be used, or in the case of a Phase II/III
clinical trial that is used, as one of the pivotal trials required for
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filing a NDA. In the event that Cypress determines, in its sole discretion, to engage in a
transaction (other than a change of control transaction) pursuant to which a substantial portion of
the intellectual property rights owned by Cypress immediately after the effective time of the
Proprius acquisition and necessary for the production, development and sale of PRO-406 are sold or
licensed to or acquired by a third party prior to achievement of the $20.0 million milestone for
PRO-406, in lieu of the $20.0 million milestone payment, the Proprius stockholders will receive 50%
of the proceeds from such disposition after subtraction of Cypress development costs related to
PRO-406, but the amount Proprius stockholders will receive cannot exceed $20.0 million; and
$17.5 million upon the earlier of our Board of Directors formally approving the initiation of a
Phase III clinical trial for PRO-515 (the oral DMARD therapy for the treatment of RA), or the
dosing of the first subject in a Phase III clinical trial involving PRO-515 or certain other
product candidates.
The nearest-term commercial services we acquired are Avise MCV and the Avise PG, both of which
we are currently promoting. Both Avise MCV and Avise PG are licensed from third parties. Under the
terms of these agreements, we may be obligated to pay up to approximately $4.2 million in the
aggregate in sales milestones and a royalty based on net sales.
At the closing of the merger, 10% of the aggregate merger consideration otherwise payable at
closing was contributed to an escrow fund which was paid to the former Proprius stockholders in
June 2009, with minor deductions. In addition, in connection with the merger all four employees of
Proprius, including Michael Walsh, the former CEO of Proprius, entered into retention agreements
with Cypress dated February 23, 2008. Pursuant to the retention agreements, 25% of the aggregate
consideration each employee would have otherwise been entitled to receive upon closing of the
merger was subject to vesting restrictions until the second anniversary of the date of the
retention agreements, or March 4, 2010. Such amounts, less applicable withholdings, were paid to
the four former Proprius employees on March 4, 2010.
Agreement with AlphaRx
In connection with the acquisition of Proprius, we assumed Proprius license agreement with
AlphaRx, Inc. for the in-license of a topical NSAID therapy and other successor topical NSAID
therapies. Future consideration under the agreement includes up to $116.0 million for the
successful development and commercialization of a product and potential double-digit royalty
payments.
Patents, Trademarks and Proprietary Technology
We believe that patents, trademarks, copyrights and other proprietary rights are important to
our business. We also rely on trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain our competitive position. We seek to protect our
intellectual property rights by a variety of means, including patents, maintaining trade secrets
and proprietary know-how, and technological innovation to develop and maintain our competitive
position. We actively seek patent protection both in the United States and internationally and have
three issued patents and eight patent applications pending related to FM and milnacipran. It is
possible that a patent will not issue from any of our patent applications and the breadth or scope
of protection allowed under any issued patents may not provide adequate protection to protect any
of our future products. We intend to enforce our patents, trademarks and brand names. We have also
obtained a license from Pierre Fabre to certain patents and patent applications related to
milnacipran. Under the license, which we have sublicensed to Forest Laboratories, we have rights to
a method of synthesis patent for milnacipran in the United States and Canada. Both the United
States patent (U.S. Patent 5,034,541) and the Canadian patent (No. 2,006,464) terminated in
December 2009. The composition of matter patent for milnacipran expired in June 2002. Pursuant to
the terms of the license agreement, Pierre Fabre is responsible for the prosecution and maintenance
of the patents and patent applications licensed thereunder at its sole expense. In addition, Pierre
Fabre has the first right to take actions with respect to the infringement or potential
infringement of such patents and patent applications, except for any action in connection with an
abbreviated NDA filed by a third party, and provided that we may take appropriate actions with
respect to the infringement of such patents and patent applications in the United States and Canada
if Pierre Fabre fails to do so within a specified period of time. Cypress or Forest Laboratories
has the first right to take any action with respect to any proceeding in connection with an
abbreviated NDA filed by a third party. Although we have filed use patents on milnacipran, three of
which have issued (U.S. Patent 6,602,911, U.S. Patent 6,635,675, and U.S. Patent 6,992,110, all
expiring in 2021), we may not be able to secure any additional patent protection and the existing
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patents may not ensure exclusivity through the patent term. As a new chemical entity in the
United States, milnacipran also qualifies under the terms of the Hatch-Waxman Amendments to the
Federal Food, Drug and Cosmetic Act, or Hatch-Waxman Amendments, under which it receives five years
of marketing exclusivity upon marketing approval, during which time a generic milnacipran may not
be approved on the basis of Cypress NDA filing. Even so, recent amendments to the Hatch-Waxman
Amendments have been proposed and, therefore, it may not apply to us in the future.
In connection with our acquisition of Proprius, we acquired rights to an issued patent (U.S.
patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to
Avise PG and Avise MCV and a number of patents in prosecution on the other development stage
personalized medicine services. Although we have two issued patents covering Avise PG (in addition
to U.S. Patent 6,921,667, U.S. Patent 7,582,282 issued September 1, 2009), we may not be able to
secure any additional patent protection and the existing patent may not ensure exclusivity through
the patent term. In addition, as part of our acquisition of Proprius we have acquired a family of
pending U.S. and international patent applications directed to PRO-515 (the oral DMARD therapy for
the treatment of RA). We have also acquired rights to a patent family directed to PRO-406 (the
topical non-steroidal anti-inflammatory drug) NSAID therapy for the symptomatic treatment of
osteoarthritis) including one issued patent (U.S. patent No. 7,138,394, which expires in 2023) and
several pending U.S. and foreign patent applications. It is uncertain whether we will be able to
obtain any claim with reasonable coverage for PRO-406 or PRO-515. We are not currently in active
development with respect to either PRO-406 or PRO-515.
Although patents are enforceable from the date of issuance and presumed to be valid, future
litigation or reexamination proceedings regarding the enforcement or validity of our existing
patents or future patents, if issued, could result in a ruling adverse to us that could invalidate
such patents or substantially reduce the scope of protection afforded by such patents. Our patents
may not afford commercially significant protection of our proprietary technology or have commercial
application. There has been no judicial determination of the validity or scope of our proprietary
rights. Moreover, the patent laws in foreign countries may differ from those of the United States,
and the degree of protection afforded by foreign patents may be different.
Others have filed applications for, or have been issued, patents and may obtain additional
patents and other proprietary rights relating to products or processes competitive with us. The
scope and validity of such patents are presently unknown. If existing or future patents are upheld
as valid by courts, we may be required to obtain licenses to use technology covered by such
patents.
Competition
The pharmaceutical and personalized medicine services industries are highly competitive and
require an ongoing, extensive search for technological innovation. They also require, among other
things, the ability to effectively discover, develop, test, commercialize, market and promote
products, including communicating the effectiveness, safety and value of products to actual and
prospective customers, including medical professionals. Many of our competitors have greater
resources than we have. This enables them, among other things, to spread their marketing and
promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and
personalized medicine services industries include quality and price, product technology,
reputation, customer service and access to technical information.
It is possible that developments by our competitors could make our products, personalized
medicine services or technologies less competitive or obsolete. Our future growth depends, in part,
on our ability to provide products and services which are more effective than those of our
competitors and to keep pace with rapid medical and scientific change. Sales of services and
products may decline rapidly if a new service or product is introduced by a competitor,
particularly if a new service or product represents a substantial improvement over any of our
existing services or products. In addition, the high level of competition in our industry could
force us to reduce the price at which we sell our services or products or require us to spend more
to market our services or products.
With respect to our FM commercial product, Savella (milnacipran HCl), in June 2007, the FDA
approved Pfizer Inc.s drug pregabalin (Lyrica®) for the management of FM. In addition,
in June 2008, the FDA approved Eli Lilly and Companys drug duloxetine (Cymbalta®) for
the management of FM. Duloxetine is a serotonin norepinephrine reuptake inhibitor, and as a dual
reuptake inhibitor is therefore similar in pharmacology to Savella, which is a
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norepinephrine serotonin reuptake inhibitor. Tricyclic antidepressants, or TCAs, which are
available as inexpensive generic formulations, are also used to treat FM and are less expensive
than Savella, as are other generic antidepressants and pain drugs that are commonly used to treat
FM. Pfizer Inc.s drug pregabalin (Lyrica®) and Eli Lilly and Companys duloxetine
(Cymbalta®) are competitive with Savella and these products and any other future
products will affect Savellas sales and may cause sales to be lower than anticipated, as can the
numerous generic antidepressants and pain products commonly used off-label to treat FM.
The market potential for FM is considerable and a number of pharmaceutical companies focused
on therapies for alleviating pain or antidepressant therapies could decide to evaluate their
current product candidates for the treatment of FM at any time. Due to the high prevalence and
incidence of FM, we anticipate that most, if not all, of the major pharmaceutical companies will
have significant research and product development programs in FM. We expect to encounter
significant competition both in the United States and in foreign markets for Savella and each of
the drugs that we seek to develop.
With respect to our personalized medicine services, while no other laboratory currently
provides the services we offer, we will compete with several large, national laboratories including
Quest Diagnostics Incorporated, or Quest, and Laboratory Corporation of America Holdings and also
compete with regional and esoteric laboratories, to the degree they have similar offerings. The
larger competitors have substantially greater existing connections to the medical community,
financial and human resources, as well as a much larger infrastructure than we do. Other companies
may develop and commercialize personalized laboratory services that are more sensitive, specific,
easy to use, or cost-effective than our personalized medicine services, and we may therefore be
unable to compete with them in the marketplace.
Our competition for pharmaceutical products will be partially determined by the potential
indications that are ultimately cleared for marketing by regulatory authorities, the timing of any
clearances and market introductions and whether any currently available drugs, or drugs under
development by others, are effective in the same indications. Accordingly, the relative speed with
which we can develop, complete the clinical trials for, receive regulatory clearance for and supply
commercial quantities of products to the market is expected to be an important competitive factor.
We expect that competition among products approved for sale will be based, among other factors
described above, on product efficacy, safety, reliability, availability, payer reimbursement
policies and patent protection.
Manufacturing and Supply
Pursuant to the terms of our purchase and supply agreement with Pierre Fabre, Pierre Fabre is
the exclusive supplier to us and Forest Laboratories of the active pharmaceutical ingredient for
Savella in exchange for a transfer price. Forest Laboratories has assumed the obligation to pay the
transfer price directly to Pierre Fabre, of which we are obligated to reimburse Forest Laboratories for a portion of the active ingredient costs of samples. Currently, Pierre Fabre manufactures the active
pharmaceutical ingredient for Savella in its facility located in Gaillac, France. This facility has
been inspected by the FDA and is subject to continued inspections. Pierre Fabre has qualified an
additional manufacturing facility. In addition, because Pierre Fabre is our sole supplier of the
active pharmaceutical ingredient for Savella and is currently the only supplier of the active
pharmaceutical ingredient for Savella in the world, we have the right, but not the obligation, to
qualify us or Forest Laboratories as an additional manufacturing facility to manufacture the active
pharmaceutical ingredient for Savella. We do not currently have this capability. In addition, we
have the right to manufacture the active pharmaceutical ingredient for Savella if Pierre Fabre
does not have the required buffer stock or in the event that we terminate our license agreement
with Pierre Fabre under certain circumstances. Currently, Forest Laboratories is responsible for
encapsulating and packaging Savella.
We perform all our personalized medicine services in our laboratory located in San Diego,
California. Despite precautions taken by us, any future natural or man-made disaster at this
laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays in our
operations, damage or destroy our equipment and biological samples or cause us to incur additional
expenses. In the event of an extended shutdown of our laboratory, we may be unable to perform our
personalized medicine services in a timely manner or at all and therefore would be unable to
operate our business in a commercially competitive manner.
In order to rely on a third party to perform our personalized medicine services, we could only
use another facility with established state licensure and accreditation under The Clinical
Laboratory Improvement Amendments of 1988, or CLIA. Additionally, any new laboratory opened by us
would be subject to certification under CLIA and licensure
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by various states, which would take a significant amount of time and result in delays in our
ability to begin or continue commercial operations.
Government Regulation
Therapeutic Products
Our research, preclinical testing, clinical trials, manufacturing and marketing activities are
subject to extensive regulation by numerous governmental authorities in the United States and other
countries. In the United States, pharmaceutical drugs are subject to rigorous FDA regulation under
the Federal Food, Drug and Cosmetic Act and other federal and state statutes and regulations. These
laws and regulations govern, among other things, the preclinical and clinical testing, manufacture,
quality control, safety, efficacy, labeling, storage, record keeping, approval, marketing,
advertising and promotion of our drug products and drug product candidates. The product development
and regulatory approval process requires the commitment of substantial time, effort and financial
resources.
The steps required before a pharmaceutical agent may be marketed in the United States
generally include:
| completion of preclinical laboratory tests, animal pharmacology and toxicology studies and formulation studies performed in compliance with the FDAs Good Laboratory Practice, or GLP regulations; | ||
| the submission of an investigational new drug application, or IND, to the FDA for human clinical testing that must be accepted by the FDA before human clinical trials may commence; | ||
| performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for the proposed indication of use; | ||
| the submission of an NDA to the FDA; and | ||
| FDA approval of the NDA prior to any commercial sale or shipment of the drug. |
Preclinical studies include the laboratory evaluation of in vitro pharmacology, product
chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of
a product. Compounds must be formulated according to the FDAs current good manufacturing
practices, or cGMP, requirements and preclinical safety tests must be conducted by laboratories
that comply with good laboratory practices, or GLP, requirements. The results of the preclinical
tests, together with manufacturing information and analytical data, are submitted to the FDA as
part of an IND application and are reviewed by the FDA before human clinical trials may begin. The
IND must also contain protocols for any clinical trials that will be carried out. The IND
automatically becomes effective 30 days after receipt by the FDA unless the FDA raises concerns or
questions regarding the conduct of the proposed clinical trial during the 30-day waiting period. If
the FDA objects to an IND application during this 30-day waiting period or at any time thereafter,
the FDA may halt proposed or ongoing clinical trials or may authorize trials only under specified
terms. Such a halt, called a clinical hold, continues in effect until and unless the FDAs concerns
are adequately addressed. In some cases, clinical holds are never lifted. Imposition by the FDA of
a clinical hold can delay or preclude further product development. The IND process may be extremely
costly and may substantially delay product development.
Clinical trials must be sponsored and conducted in accordance with good clinical practice, or
GCP, requirements and under protocols and methodologies that, among other things:
| ensure receipt from participants of signed consents that inform them of risks; | ||
| detail the protocol and objectives of the study; | ||
| detail the parameters to be used to monitor safety; and | ||
| detail the safety and efficacy criteria to be evaluated. |
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Furthermore, each clinical study must be conducted under the supervision of a principal
investigator operating under the auspices of an institutional review board, or IRB, at the
institution where the study is conducted. The IRB must review and approve the plan for any clinical
trial before it commences at that institution and it must monitor the study until it is completed.
The IRB will consider, among other things, ethical factors, the safety of human subjects and the
possible liability of the institution. Sponsors, investigators and IRB members are obligated to
avoid conflicts of interests and ensure compliance with all legal requirements. The FDA, the IRB or
the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including
potential health risks to study subjects.
Clinical trials are conducted in accordance with protocols that detail the objectives of the
study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each
protocol is submitted to the FDA as part of the IND, and the FDA must grant permission before each
clinical trial may begin. Clinical trials typically are conducted in three sequential phases that
may overlap. In Phase I, the initial introduction of the drug into a small number of healthy
volunteers, the drug is evaluated for safety by assessing the adverse effects, dosage tolerance,
metabolism, distribution, excretion and clinical pharmacology. The Phase I trial must provide
pharmacological data that is sufficient to devise the Phase II trials.
Phase II trials involve a limited patient population in order to:
| obtain initial indications of the efficacy of the drug for specific, targeted indications; | ||
| determine dosage tolerance and optimal dosage; and | ||
| identify possible adverse affects and safety risks. |
When a compound is determined preliminarily to be effective and to have an acceptable safety
profile in Phase II evaluation, Phase III trialscommonly referred to as pivotal studiescan be
undertaken to evaluate safety and efficacy endpoints further in expanded and diverse patient
populations at geographically dispersed clinical trial sites. Positive results in Phase I or II are
not necessarily predictive of positive results in Phase III.
The results of the pharmaceutical development, preclinical studies and clinical trials,
together with detailed information on the manufacture and composition of the product, are submitted
to the FDA in the form of an NDA, which must be complete, accurate and in compliance with FDA
regulations. The FDA may take up to 60 days after submission of an NDA to accept it for filing,
indicating that the NDA is sufficiently complete to permit substantive review. Although the
Prescription Drug User Fee Act (PDUFA) sets goals for FDA to complete its standard review of NDAs
within 10 months, the review process is often significantly extended by FDA requests for additional
information or clarification. The FDA may convene an advisory committee of scientists, physicians
and patients to advise it on the approvability of a particular application. The FDA may issue a
complete response decision on an NDA filed by us or our collaborators if the applicable scientific
and regulatory criteria are not satisfied, or it may require additional clinical data and/or
additional pivotal trial or trials. Moreover, after approval, the FDA may require additional
post-approval testing, surveillance and safety reporting to monitor the products as part of a risk
management program. Thus, even if approval for a drug is granted, it can be limited or revoked if
evidence subsequently emerges casting doubt on the safety or efficacy of a product, as has happened
recently with respect to several high profile marketed drugs, or if the manufacturing facility,
processes or controls do not comply with regulatory requirements. Finally, an approval may entail
limitations on the uses, labeling, dosage forms, distribution and packaging of the product.
Among the conditions for new drug approval is the requirement that the prospective
manufacturers quality control, record keeping, notifications and reporting and manufacturing
systems conform to the FDAs cGMP regulations. To obtain approval, the drug manufacturing facility
must be registered with the FDA and must pass a pre-approval inspection demonstrating compliance
with cGMP requirements. Prior to FDA approval of the Savella NDA, Pierre Fabres facility was
inspected by the FDA for compliance with cGMP requirements. Manufacturing establishments also are
subject to periodic, ongoing compliance inspections. In complying with the standards contained in
these regulations, manufacturers must continue to expend time, money, resources and effort in order
to ensure compliance. Failure to comply with these requirements can result in legal or regulatory
action, including warning letters, suspension of manufacture, product seizure or recalls,
injunctive action or civil or criminal penalties.
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In addition, although we have received marketing approval from the FDA for Savella for the management of FM, the FDA closely regulates the post-approval marketing and promotion
of drugs, including standards and regulations for direct-to-consumer advertising, off-label
information dissemination promotion, industry sponsored scientific and educational activities and
promotional activities involving the Internet. Failure to comply with these requirements, either by
us or our collaborator for Savella, Forest Laboratories, can result in adverse publicity, warning
letters, corrective advertising and potential civil and criminal penalties. In addition, the Office
of the Inspector General of the Department of Health and Human Services, as well as state attorneys
general, enforce healthcare fraud and abuse laws that impose harsh financial penalties for the
provision of kickbacks to healthcare providers or the causation of submission of false claims for
federal healthcare system payment relating to unapproved uses of drug products. We are subject to
significant and burdensome regulation as we transition from a development stage company to a
company with a commercialized product.
Outside the United States, including Canada, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory authority. This foreign
regulatory approval process includes many of the same steps associated with FDA approval described
above.
In addition to regulations enforced by the FDA, we are and will be subject to regulation under
the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other present and future federal, state
or local regulations. Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although we believe that the
safety procedures used by third parties for handling and disposing of these materials comply with
the standards prescribed by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of an accident, we could
be liable for any damages that result.
The approval process for any of our future products is expensive, time consuming and
uncertain, and any applicable regulatory agency may not grant marketing approval. We may not have
sufficient resources to complete the required testing and regulatory review processes. Furthermore,
we are unable to predict the extent of adverse governmental regulation, which might arise from
future United States or foreign legislative or administrative action.
Personalized Medicine Services
Our personalized medicine services are tests that have been validated analytically and
clinically, and regulated under CLIA. CLIA, which is implemented and enforced by the Centers for
Medicare & Medicaid Services, or CMS, extends federal oversight to virtually all clinical
laboratories by requiring that they be certified by the federal government or by a
federally-approved accreditation agency. CLIA is intended to ensure the quality and reliability of
non-research laboratory testing performed on the patient samples collected in the United States and
its territories by mandating specific standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management, quality and
inspections. We believe we meet CLIA and state requirements for our commercially available
personalized medicine laboratory service offerings, as well as those in development, and we do not
anticipate that they will require FDA approval.
While CMS has had primary responsibility for regulating laboratory-developed tests, the FDA
has in the past also claimed regulatory authority over laboratory-developed tests, but had stated
that it was exercising enforcement discretion in not regulating laboratory-developed tests
performed by high complexity, CLIA-certified laboratories. In September 2006, the FDA published a
draft guidance document that described certain laboratory-developed tests that the FDA intends to
regulate as in vitro diagnostic test systems (i.e., as medical devices). The FDA calls this
category of laboratory-developed tests In Vitro Diagnostic Multivariate Index Assays, or IVDMIAs.
The FDA issued a revised draft guidance pertaining to IVDMIAs in July 2007. In the revised
guidance, the FDA defines an IVDMIA as a device that combines the values of multiple variables
using an interpretation function to yield a single, patient-specific result that is intended for
use in the diagnosis of a disease or other condition, or in the cure, mitigation, treatment, or
prevention of disease, and that provides a result that cannot be independently derived or verified
by the end user and whose derivation is non-transparent. The IVDMIA draft guidance, if adopted as
published, would extend FDA oversight over laboratories that offer laboratory-developed tests which
meet this definition. We do not believe that Avise MCV and Avise PG will be subject to the proposed
FDA regulatory guidance.
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State laws may require that laboratories and/or laboratory personnel meet certain
qualifications, may specify certain quality controls or may require maintenance of certain records.
For example, New York State requires us to obtain approval for any diagnostic test prior to
offering it for sale or soliciting patient samples from New York. Compliance with such standards is
verified by periodic inspections and requires participation in proficiency testing programs.
In 1996, Congress passed the Health Insurance Portability and Accountability Act, or HIPAA.
Among other things, HIPAA requires the U.S. Department of Heath and Human Services, or HHS, to
issue regulations designed to improve the efficiency and effectiveness of the healthcare system by
facilitating the transfer of health information along with protecting the confidentiality and
security of health information. Specifically, Title II of HIPAA, the Administrative Simplification
Act, contains four provisions that address the privacy of health data, the security of health data,
the standardization of identifying numbers used in the healthcare system and the standardization of
data content, codes and formats used in healthcare transactions. With the commercialization of our
personalized medicine services, we are subject to the HIPAA regulations and are undertaking and
implementing procedures and training to comply with such HIPAA regulations. Penalties for
non-compliance with HIPAA include both civil and criminal penalties. The privacy regulations
protect medical records and other personal health information by limiting its use and release,
giving patients the right to access their medical records (with certain limitations on CLIA
laboratory test results) and limiting most disclosures of health information to the minimum amount
necessary to accomplish an intended purpose. In addition to the federal privacy regulations, there
are a number of state laws regarding the confidentiality of health information that are applicable
to clinical laboratories. The penalties for violation of state privacy laws vary widely. We have
taken the necessary steps to comply with health information privacy and confidentiality statutes
and regulations. Our failure to achieve or maintain compliance with changes in state or federal
laws regarding privacy could result in civil or criminal penalties and could have a material
adverse effect on our business. In addition, HHS has security regulations which establish standards
for the security of electronic protected health information to be implemented by health plans,
healthcare clearinghouses and certain healthcare providers. Our failure to achieve or maintain
compliance with these regulations could result in civil or criminal penalties and could have a
material adverse effect on our business.
Billing and reimbursement for our personalized medicine services are subject to significant
and complex federal and state regulation. Penalties for violations of laws relating to billing
federal healthcare programs and for violations of federal fraud and abuse laws include:
| exclusion from participation in Medicare/Medicaid programs; | ||
| asset forfeitures; | ||
| civil and criminal fines and penalties; and | ||
| the loss of various licenses, certifications and authorizations necessary to operate our business. |
The federal Occupational Safety and Health Administration, or OSHA, has established extensive
requirements relating specifically to workplace safety for healthcare employers which also cover
our laboratory. This includes requirements to develop and implement multi-faceted programs to
protect workers from exposure to blood-borne pathogens, such as HIV and hepatitis B and C,
including preventing or minimizing any exposure through sharps or needle stick injuries. There are
similar state requirements with which we also must comply.
Employees
As of February 1, 2010, we employed 150 full-time employees. None of our employees are covered
by a collective bargaining agreement. We believe that our relationship with our employees is good.
Available Information
Our website address is www.cypressbio.com. We make available free of charge through our
website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to those
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reports as soon as reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission.
Item 1A. | Risk Factors |
This Form 10-K contains forward-looking information based on our current expectations. Because our
actual results may differ materially from any forward-looking statements that we make or that are
made on our behalf, this section includes a discussion of important factors that could affect our
actual future results, including, but not limited to, our product and service sales, royalties,
revenue, expenses, net income or loss, and earnings or loss per share.
Risks related to our business
We may not be successful in creating a successful commercial infrastructure.
In a period of a few months, we hired 115 field based sales employees to create a commercial
infrastructure in order to launch Savella along with our corporate partner, Forest Laboratories. We
initially began with an 11 person sales force which launched the first two of our personalized
medicine services in October 2008 and hired the remainder of our current sales field personnel by
January 2009. Our launch of Savella at the beginning of May 2009 is a result of us exercising our
co-promotion right which allows us to co-promote Savella under our agreement with Forest
Laboratories and be paid by Forest for the Savella portion of the sales details. While
Savella was approved by the U.S. Food and Drug Administration (FDA) on January 14, 2009, Cypress
and Forest did not commence product promotion until May 2009. The delay in launching Savella
delayed our ability to generate royalty revenues under our collaboration with Forest and prevented
us from being reimbursed for the portion of our sales force calls that would have been devoted to
the promotion of Savella, which caused the net cost of our sales force to be a larger portion of
our expenses for the year 2009.
The co-promotion right is subject to our maintaining our own sales capabilities, which
includes our sales force. In the event we are unable to maintain our sales force, we would lose
our co-promotion right with respect to Savella. In addition, although we now have the number of
required sales personnel, the performance of our sales personnel as measured by actual sales may be
disappointing. Many of our competitors have significantly greater experience than we do in
selling, marketing and distributing products and services, and we may not be able to compete
successfully with them with the sales force we have developed. Even though we intend to offer
integrated personalized medicine services and therapeutic products through the same sales
organization, this may not facilitate greater physician access or improve the quality of the sales
call, and it may not help establish Cypress as a leader targeting these specific specialists. In
addition, because our initial personalized medicine services are targeted only to rheumatologists,
the potential synergies from offering personalized medicine services and therapeutic products
together exist in only a small portion of our Savella sales calls at this time.
In the event that our agreement with Forest Laboratories is terminated, or with respect to any
other product we may develop which is not covered by our collaboration with Forest Laboratories or
is not sold to the specialists that we are currently calling upon, we may have to obtain the
assistance of a pharmaceutical company or other entity with a large distribution system and a large
direct sales force, or build a substantial marketing and sales force with appropriate technical
expertise and supporting distribution capabilities. We may not be able to enter into such
arrangements with third parties in a timely manner or on acceptable terms or to establish sales,
marketing and distribution capabilities of our own. To the extent that we enter into co-promotion
or other licensing arrangements, our product revenues are likely to be lower than if we directly
marketed and sold our products, and any revenues we receive will depend upon the efforts of third
parties, and these efforts may not be successful.
We may encounter challenges in our personalized medicine services.
We launched the first two of our personalized medicine services in October 2008. These
services were acquired in March 2008, when we acquired Proprius, a formerly private San Diego-based
personalized medicine services and specialty pharmaceutical company. We have limited experience in
the personalized medicine services space. The launch of our personalized medicine services has
exposed us to potential operational and financial risks, including:
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| we may be unable to drive awareness of, and to establish the clinical need for, these personalized medicine services, and therefore may be unable to successfully commercialize these products and services; | ||
| higher development or commercialization costs than we anticipate for the personalized medicine services; | ||
| challenges with running a service business; | ||
| higher than expected licensing and integration costs; | ||
| exposure to liabilities of licensed and acquired intellectual property, compounds, products and services; and | ||
| disruption of our business and diversion of our managements time and attention as part of integrating Proprius business with our operations. |
In addition, the launch of our personalized medicine services has exposed us to significant
impairment charges related to goodwill, and we incurred a $1.1 million non-cash goodwill impairment
charge related to our personalized medicine services business in the fourth quarter of 2009. We
will continue to devote significant resources to our new business and we may fail to realize the
anticipated benefit of this strategic transaction with Proprius and further, may decide to
terminate our personalized medicine services.
If third-party payers, including managed care organizations and Medicare, do not provide
reimbursement for Avise PG or Avise MCV, their commercial success could be compromised.
We began marketing our personalized medicine services in October 2008 and the cycle time for
payment is long and further, we might not ever receive payment. We have only received payment for
a small number of the tests that have been performed, and the value of the cash collected has been
significantly less than the gross value of the testing services performed.. Further, physicians and
patients may decide not to order our tests unless third-party payers, such as managed care
organizations as well as government payers such as Medicare and Medicaid, establish coverage
policies for the tests or pay a substantial portion of the test price. Reimbursement by a
third-party payer may depend on a number of factors, including a payers determination that tests
using our technologies are:
| not experimental or investigational; | ||
| medically necessary; | ||
| appropriate for the specific patient and diagnosis; | ||
| cost-effective; | ||
| supported by peer-reviewed publications; and | ||
| included in clinical practice guidelines. |
There is significant uncertainty concerning third-party reimbursement of any test
incorporating new technology, including our Avise PG and Avise MCV tests. Several entities conduct
technology assessments of new medical tests and devices and provide the results of their
assessments for informational purposes to other parties. These assessments may be used by
third-party payers and health care providers as grounds to deny coverage for a test or procedure.
Since each payer makes its own decision as to whether to establish a policy to reimburse our
test, seeking these approvals is a time-consuming and costly process. We do not yet have any
third-party payer reimbursement agreements.
Insurers, including managed care organizations as well as government payers such as Medicare,
have increased their efforts to control the cost, utilization and delivery of health care services.
From time to time, Congress has considered and implemented changes in the Medicare fee schedules in
conjunction with budgetary legislation.
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Further reductions of reimbursement for Medicare services may be implemented from time to
time. Reductions in the reimbursement rates of other third-party payers have occurred and may occur
in the future. These measures have resulted in reduced prices and decreased test utilization for
the clinical laboratory industry. If we are unable to obtain reimbursement approval from private
payers and Medicare and Medicaid programs for our Avise PG and Avise MCV tests, or if the amount
reimbursed is inadequate, our ability to generate revenues from these tests could be limited. Even
if we are being reimbursed, insurers may withdraw their coverage policies or cancel their contracts
with us at any time or stop paying for our test, which would reduce our revenue.
We have recently substantially increased the size of our organization and may need to continue to
increase the size of our organization, and we may experience difficulties in managing growth.
In a period of a few months in late 2008, we hired 115 field based sales employees and
management to create a commercial infrastructure in order to launch Savella along with our
corporate partner, Forest Laboratories, which contributed to an increase in our full-time employees
from 37 as of September 30, 2008 to 150 as of February 1, 2010. We may need to continue to expand
our managerial, operational and other resources in order to grow, manage and fund our existing
business, including the development activities relating to our personalized medicine services, and
in order to perform under our co-promotion arrangement for Savella we will need to manage
activities relating to the commercialization of Savella. Our management and personnel, systems and
facilities currently in place may not be adequate to support this recent and future growth. Our
need to effectively manage our operations, growth and various projects requires that we:
| manage our internal development and commercialization efforts for our personalized medicine services and Savella effectively while carrying out our contractual obligations to collaborators and other third parties and complying with all applicable laws, rules and regulations; | ||
| continue to improve our operational, financial and management controls, reporting systems and procedures; and | ||
| attract and retain sufficient numbers of talented employees. |
We may be unable to successfully implement these tasks on a larger scale and, accordingly, may
not achieve our development and commercialization goals.
We are dependent on our collaboration with Forest Laboratories to commercialize Savella and to
obtain additional regulatory approvals.
Pursuant to the terms of our collaboration agreement with Forest Laboratories, we granted
Forest Laboratories an exclusive sublicense for the development and marketing of Savella, for all
indications in the United States. Forest Laboratories exercised its option to extend the territory
to include Canada. Forest Laboratories is responsible for funding the further development of
Savella, including further clinical trials and further regulatory approval. With the FDA approval
of Savella, Forest Laboratories has primary responsibility for the marketing and sale of the
approved product and will share responsibility for compliance with regulatory requirements. We have
limited control over the amount and timing of resources that Forest Laboratories will dedicate to
the further development and marketing of Savella . Our ability to generate milestone and
royalty payments from Forest Laboratories depends on Forest Laboratories ability to achieve market
acceptance of Savella for the management of FM.
We are subject to a number of additional risks associated with our dependence on our
collaboration with Forest Laboratories, including:
| Forest Laboratories could fail to devote sufficient resources to the commercialization, marketing and distribution of Savella or any other products developed under our collaboration agreement, including by failing to develop or expand sales forces if such sales forces appear necessary for the most effective promotion of Savella or any other approved product; |
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| We and Forest Laboratories could disagree as to post approval development plans, including the number and timing of clinical trials, or as to which additional indications for Savella should be pursued, if any, and therefore Savella may never be sold for any indications other than FM; | ||
| Forest Laboratories could fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing of Savella which could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production and refusal to approve any new drug applications; | ||
| Forest Laboratories could independently develop, develop with third parties or acquire products that could compete with Savella, including drugs approved for other indications used by physicians off-label for the treatment of FM; | ||
| Forest Laboratories could abandon or underfund the post approval development of Savella, repeat or conduct additional clinical trials or require a new formulation of milnacipran for further clinical testing, or delay the commencement of any post approval clinical trials for Savella for the management of FM; and | ||
| Disputes regarding the collaboration agreement that delay or terminate the post approval development or commercialization, may delay or prevent the achievement of clinical or regulatory objectives that would result in the payment of milestone payments or result in significant litigation or arbitration. |
Furthermore, Forest Laboratories may terminate our collaboration agreement upon our material
breach or our bankruptcy and may also terminate our agreement upon 120 days notice in the event
Forest Laboratories reasonably determines that the development program indicates issues of safety
or efficacy that are likely to prevent or significantly delay the filing or approval of any future
NDA or to result in labeling or indications that would significantly adversely affect the marketing
of any product developed under the agreement. If any of these events occur, we may not be able to
find another collaborator for further development or commercialization, and even if we elected to
pursue further development and continued commercialization of Savella, we might not be able to do
so successfully on a stand-alone basis and would experience substantially increased capital
requirements that we might not be able to fund.
All of our personalized medicine services are performed at a single laboratory and, in the event
this facility was to be affected by man-made or natural disasters, our personalized medicine
services operations could be severely impaired.
We are performing all our personalized medicine testing services in our laboratory located in
San Diego, California. Despite precautions taken by us, any future natural or man-made disaster at
this laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays
in our personalized medicine services operations, damage or destroy our equipment and biological
samples or cause us to incur additional expenses. In addition, we are leasing the facilities where
our lab operates and anytime a lab is moved, it could also cause substantial delay in our
personalized medicine services operations, damage or destroy our equipment and biological samples
or cause us to incur additional expenses. In the event of an extended shutdown of our laboratory,
we may be unable to perform our personalized medicine testing services in a timely manner or at all
and therefore would be unable to operate our personalized medicine services in a commercially
competitive manner, which would also detract from our ability to offer integrated personalized
medicine services and therapeutic products through the same sales organization. We cannot assure
you that we could recover quickly from a serious natural or man-made disaster or that we would not
permanently lose customers as a result of any such business interruption. This could harm our
operating results and financial condition.
In order to rely on a third party to perform our personalized medicine testing services, we
could only use another facility with established state licensure and accreditation under Clinical
Laboratory Improvement Amendments (CLIA). We may not be able to find another CLIA-certified
facility and comply with applicable procedures, or find any such laboratory that would be willing
to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory
opened by us would be subject to certification under CLIA and licensure by various states, which
would take a significant amount of time and result in delays in our ability to continue our
personalized medicine services operations.
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Failure to timely or accurately bill for our personalized medicine services could have a material
adverse effect on our personalized medicine services net revenues and bad debt expense.
Billing for personalized medicine testing can be extremely complicated and we have very
limited experience performing such billing. Depending on the billing arrangement and applicable
law, we must bill various payers, such as insurance companies, Medicare, Medicaid, physicians,
hospitals, employer groups and patients, all of which have different billing requirements.
Additionally, compliance with applicable laws and regulations as well as internal compliance
policies and procedures adds further complexity to the billing process. Changes in laws and
regulations could negatively impact our ability to bill our clients or increase our costs. The
Centers for Medicare and Medicaid Services (CMS) also establishes procedures and continuously
evaluates and implements changes to the reimbursement process for billing government programs.
Missing or incorrect information on test requisitions adds complexity to and slows the billing
process, creates backlogs of unbilled tests, and generally increases the aging of accounts
receivable and bad debt expense. Our experience to date has been that our collection cycles
continue to be prolonged, with the amount of cash collected significantly less than the gross value
of testing services performed. Failure to timely or correctly bill may lead to our not being
reimbursed for our services or an increase in the aging of our accounts receivable, which could
adversely affect our results of operations and cash flows. Failure to comply with applicable laws
relating to billing federal healthcare programs could also lead to various penalties, including:
| exclusion from participation in Medicare/Medicaid programs; | ||
| asset forfeitures; | ||
| civil and criminal fines and penalties; and | ||
| the loss of various licenses, certificates and authorizations necessary to operate our business. |
Any of these penalties or sanctions could have a material adverse effect on our results of
operations or cash flows.
We have a financial risk related to collections for our personalized medicine services.
With respect to our personalized medicine services, we bill on a fee-for-service basis.
Billing for personalized medicine services is a complex process and we bill many different payers
such as insurance companies, governmental payer programs and patients, each of which has different
billing requirements. We have very limited experience in the collection of accounts receivable and
we face risks in our collection efforts, including potential write-offs of doubtful accounts and
long collection cycles for accounts receivable, including reimbursements by third party payers,
such as Medicare, Medicaid and other governmental payer programs, hospitals, private insurance
plans and managed care organizations. In addition, as a result of the current economic climate, we
may face increased risks in our collection efforts, which could adversely affect our business.
Also, large write-offs of doubtful accounts (particularly in response to a recent increase in
personal bankruptcies), delays in receiving payments or potential retroactive adjustments and
penalties resulting from audits by payers could adversely affect our business, results of
operations and financial condition. Our experience to date has been that our collection cycles
continue to be prolonged, with the amount of cash collected significantly less than the gross value
of testing services performed.
We rely upon an exclusive license from Pierre Fabre in order to develop and sell Savella, and our
ability to pursue the further development and commercialization of Savella for the management of FM
depends upon the continuation of our license from Pierre Fabre.
Our license agreement with Pierre Fabre provides us with an exclusive license to develop and
sell any products with the compound milnacipran as an active ingredient for any indication in the
United States and Canada, with a right to sublicense certain rights to Forest Laboratories under
our collaboration with Forest Laboratories. Either we or Pierre Fabre may terminate the license
agreement for cause upon 90 days prior written notice to the other party upon the bankruptcy or
dissolution of the other party, or upon a breach of any material provision of the agreement if the
breach is not cured within 90 days following the written notice. Furthermore, Pierre Fabre has the
right to terminate the
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agreement upon 90 days prior notice to us if we and Forest terminate our development and
marketing activities with respect to Savella, if we challenge certain patent rights of Pierre Fabre
and under specified other circumstances. If our license agreement with Pierre Fabre were
terminated, we would lose our rights to develop and commercialize products using the compound
milnacipran as an active ingredient, as the compound is manufactured under Pierre Fabre patents and
using Pierre Fabre know-how and trade secrets, and it would be unlikely that we could obtain the
active ingredient in milnacipran from any other source.
We rely upon Pierre Fabre as our exclusive supplier of the active ingredient in Savella and if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may
delay or prevent us from further commercializing Savella.
Pursuant to our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive
supplier to us and Forest Laboratories of the active pharmaceutical ingredient in Savella. Neither
we nor Forest Laboratories have facilities for the manufacture of the active pharmaceutical
ingredient in Savella. Currently, Pierre Fabre manufactures milnacipran in its facility in Gaillac,
France. Pierre Fabre is the only worldwide supplier of milnacipran, which is currently approved for
sale for a non-pain indication outside the United States. Pierre Fabres facility has been
initially inspected by the FDA for compliance with current good manufacturing practices, or cGMP,
requirements and after this initial inspection, may be inspected from time to time. In addition,
Pierre Fabre has qualified an additional manufacturing facility, and the second manufacturing site
that has been identified by Pierre Fabre is also subject to inspection by the FDA for compliance
with cGMP. In the event an inspection results in written deficiencies, it may result in a
disruption or termination of the supply to Forest Laboratories of milnacipran. We do not have
control over Pierre Fabres or its sublicensees compliance with cGMP requirements. If Pierre Fabre
fails to timely and economically supply us sufficient quantities for commercial sale of Savella,
our product sales and market acceptance of Savella could be adversely affected.
Furthermore, our purchase and supply agreement may be terminated for cause either by us or by
Pierre Fabre upon 90 days prior written notice to the other party upon a material breach of the
agreement if the breach is not cured within 90 days following the written notice. We have the right
to manufacture milnacipran if Pierre Fabre does not have a required buffer stock or in the event
that we terminate our license agreement with Pierre Fabre under certain circumstances. If our
purchase and supply agreement with Pierre Fabre is terminated, we are unlikely to be able to
qualify another supplier of the active ingredient within a reasonable time period, and our ability
to further develop and commercialize Savella will be significantly impaired.
Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified
compounds, which limits how we can expand our product candidates.
Under our agreements with Pierre Fabre and Forest Laboratories, Forest Laboratories has agreed
to pay Pierre Fabre and us a royalty, in the event that Forest Laboratories sells a product other
than milnacipran for FM for a specified period of time, which shall not be less than three years.
We are, in turn, obligated to pay a portion of the royalty we receive from Forest Laboratories to
Pierre Fabre. In addition, each of us is subject to limitations related to each partys development
of any serotonin norephinephrine reuptake inhibitor, or SNRI, products other than milnacipran.
These limitations include: (i) a prohibition on developing an SNRI product for specified
indications for which milnacipran is being developed; and (ii) a prohibition on developing an SNRI
product for any indication for a specified time period, and after such specified time period, a
requirement that if one of the parties launches and sells an SNRI product that is prescribed
off-label for any indication for which milnacipran is being developed, the selling party must
reimburse the other parties for lost sales due to the off-label use.
Provisions in our collaboration agreement with Forest Laboratories and our license agreement with
Pierre Fabre may prevent or delay a change in control.
We lose our decision-making authority with respect to the development of Savella if we engage
in a merger, consolidation or sale of all or substantially all of our assets, or if another person
or entity acquires at least 50% of our voting capital stock. In addition, in the event there is a
change of control of Cypress that is not approved by our Board or in the event the surviving entity
has an FM product and does not divest such product within 12 months, Forest Laboratories may elect
to terminate our co-promotion rights for Savella or any other product developed under the
collaboration agreement. Our license agreement with Pierre Fabre provides that Pierre Fabre may
elect to terminate the
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agreement upon a change in control transaction in which a third party acquirer of us controls
an SNRI product, and the acquirer does not take certain actions (e.g., divestiture of such SNRI
product) within a specified time period to cure the breach of certain restrictions in the agreement
that results from such SNRI product. These provisions may have the effect of delaying or preventing
a change in control or a sale of all or substantially all of our assets, or may reduce the number
of companies interested in acquiring us.
We are at an early stage of commercialization and we may never generate any significant revenues.
We are at an early stage of development as a biotechnology company and only recently launched
our personalized medicine services in October 2008 and only in May 2009 launched Savella. Without
a history of sales, we may not accurately predict future sales, and our sales may be much smaller
than we have forecasted, especially in light of the state of the economy. In addition, given our
increased costs associated with a laboratory and a sales force, and the fact that Forest only
reimburses for the portion of the sales calls that are made for Savella, it is likely that our
costs of running our business will exceed our sales on the personalized medicine services and the
royalty we will receive for sales of Savella in the initial years following launch. Further, our
current product and service candidates, as well as any future products and services that we may
acquire or develop, will require significant additional development, appropriate regulatory
approval, and additional investments before they can be commercialized, if ever. Our product
development and product acquisition efforts may not lead to any further commercial services or
drugs, either because the service and product candidates are not shown to be accurate and
clinically useful in the case of personalized medicine service product candidates, or safe and
effective in the case of drug product candidates, or because we have inadequate financial or other
resources to pursue clinical development of the service and product candidate or because the FDA,
CMS or state authorities do not grant or otherwise withdraw or revoke a regulatory approval.
Rheumatologists do not currently use personalized medicine services to determine the level of
methotrexate (MTX) polyglutamates among their patients on MTX. Therefore, Avise PG is not the
current standard of care. In addition, there are other tests for the diagnosis of RA that compete
with Avise MCV. We may be unable to drive awareness of, and to establish the clinical need for,
these personalized medicine services, and therefore may be unable to successfully commercialize
these products and services.
It is possible that we will never be able to realize material cash inflows from sales of our
personalized medicine services. Further, if we are unable to realize significant revenues in the
sale of any of our current personalized medicine services or if Forest Laboratories and Cypress are
unable to achieve significant sales of Savella, we will be unable to generate sufficient revenues
(including revenues from royalties), may be unsuccessful in raising additional capital and may
cease our operations.
Our failure to comply with the HIPAA security and privacy regulations and other state regulations
may increase our operational costs.
The HIPAA privacy and security regulations establish comprehensive federal standards with
respect to the uses and disclosures of personal health information, or PHI, by health plans and
healthcare providers, in addition to setting standards to protect the confidentiality, integrity
and availability of electronic PHI. The regulations establish a complex regulatory framework on a
variety of subjects, including:
the circumstances under which uses and disclosures of PHI are permitted or required
without a specific authorization by the patient, including but not limited to treatment purposes,
activities to obtain payments for services and healthcare operations activities;
a patients rights to access, amend and receive an accounting of certain disclosures of
PHI;
the content of notices of privacy practices for PHI; and
administrative, technical and physical safeguards required of entities that use or receive
PHI electronically.
We have implemented policies and procedures related to compliance with the HIPAA privacy and
security regulations, as required by law. The privacy regulations establish a uniform federal
floor and do not supersede state
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laws that are more stringent. Therefore, we are required to comply with both federal privacy
regulations and varying state privacy laws. The federal privacy regulations restrict our ability
to use or disclose patient identifiable laboratory data, without patient authorization, for
purposes other than payment, treatment or healthcare operations (as defined by HIPAA), except for
disclosures for various public policy purposes and other permitted purposes outlined in the privacy
regulations. The privacy and security regulations provide for significant fines and other penalties
for wrongful use or disclosure of PHI, including potential civil and criminal fines and penalties.
Although the HIPAA statute and regulations do not expressly provide for a private right of damages,
we also could incur damages under state laws to private parties for the wrongful use or disclosure
of confidential health information or other private personal information.
Our business presents the risk of product liability claims.
We may be subject to legal actions asserting product liability claims relating to the use of
Savella. In connection with exercising our co-promotion right, we agreed to indemnify Forest
Laboratories with respect to the promotion of Savella. Although we currently maintain $10.0
million in insurance for product liability claims, litigation is inherently subject to
uncertainties and we may be required to expend substantial amounts in the defense or resolution of
any product liability claims made relating to the use of Savella, some or all of which may not be
covered by insurance.
We also plan to continue conducting clinical trials on humans using milnacipran and from time
to time, and to conduct clinical trials on humans in Proof of Concept stage development candidates,
and the use of milnacipran and these other development candidates may result in adverse effects.
Although we are aware that there are side effects associated with milnacipran and other potential
development candidates, we will never be able to predict all possible harm or side effects that may
result from the treatment of patients with milnacipran or any of our future product candidates, and
the amount of insurance coverage we currently hold may not be adequate to protect us from any
liabilities. We may not have sufficient resources to pay any liability resulting from such a claim
beyond our insurance coverage.
The FDA approval of any future product candidate is uncertain and will involve the commitment of
substantial time and resources.
We may never receive regulatory approval from the FDA or any other regulatory body required
for the commercial sale of any future products in the United States for any number of reasons.
The regulatory approval of a new drug typically takes many years and the outcome is uncertain.
Despite the time and resources expended, regulatory approval is never guaranteed. If we fail to
obtain regulatory approval for any future therapeutic product candidates, we will be unable to
market and sell any future therapeutic products and therefore may never generate any revenues from
product sales for future therapeutic product candidates or become profitable. In addition, our
collaborators, or our third-party manufacturers failure to comply with the FDA and other
applicable United States or foreign regulations may subject us to administrative or judicially
imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product
seizure or detention, product recalls, total or partial suspension of production and refusal to
approve new drug approval applications.
As part of the regulatory approval process, we must conduct, at our own expense, preclinical
research and clinical trials for each product candidate sufficient to demonstrate its safety and
efficacy to the satisfaction of the FDA and other regulatory agencies in the United States and
other countries where the product candidate will be marketed if approved. The number of preclinical
studies and clinical trials that will be required varies depending on the product, the disease or
condition that the product is in development for and the regulations applicable to any particular
product. The regulatory process typically also includes a review of the manufacturing process to
ensure compliance with applicable regulations and standards, including the cGMP requirements. The
FDA can delay, limit or decline to grant approval for many reasons, including:
| a product candidate may not be safe or effective; | ||
| we may not achieve statistical significance for the primary endpoint; |
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| FDA officials may interpret data from preclinical testing, clinical trials, and/or pharmacovigilance data in different ways than we interpret such data; | ||
| the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of any future collaborators or contract manufacturers; | ||
| the FDA may change its approval policies or adopt new regulations; and | ||
| the FDA may request additional data. |
In light of our regulatory approval for Savella and if we ever receive regulatory approval for any
other future product candidate, and secure and maintain regulatory approvals related to our
personalized medicine services, we will be subject to ongoing FDA, CLIA and state regulatory
obligations and continuing regulatory review by applicable regulatory authorities.
Our regulatory approval for Savella has been and regulatory approval for any future product
candidates will be limited to the indications, dosages and restrictions on the product label. The
FDA has approved Savella for the management of fibromyalgia, and has imposed additional
limitations on the indicated uses, has required post-marketing surveillance and the performance of
potentially costly post-marketing studies. Even though we have received FDA approval for Savella,
as we have seen with other products on the market, Savella or any of our other future product
candidates may later exhibit adverse effects that limit or prevent their widespread use or that
force us to withdraw those product candidates from the market. We and Forest Laboratories continue
to be subject to strict FDA regulation after approval, including regulation of product labeling and
packaging, adverse event reporting, manufacture, storage, advertising, promotion and recordkeeping.
Any unforeseen problems with an approved product or any violation of regulations could result in
restrictions on the product, including its withdrawal from the market. Federal and state regulatory
approvals we have received related to our current personalized medicine services and may receive
related to planned or future personalized medicine services mandate specific clinical laboratory
approval standards in the areas of personnel qualifications, administration, participation in
proficiency testing, patient test management, quality and inspections, and our failure to meet and
maintain those approvals could adversely affect our ability to offer personalized medicine products
and services. In addition, the FDA has in the past and may in the future claim regulatory authority
over laboratory-developed tests, in which event our personalized medicine services may directly or
indirectly become subject to FDA approval.
If advances in technology allow others to perform and/or provide personalized medicine services
which are similar to or better than ours or to perform such services in a more efficient or
cost-effective manner than is currently possible, our personalized medicine services may not meet
with demand in the marketplace or the demand for these services may decrease.
The diagnostic industry is characterized by rapidly advancing technology that may enable
clinical laboratories, hospitals, physicians or other medical providers to perform and/or provide
personalized medicine services similar to or better than ours in a more efficient or cost-effective
manner than is currently possible. With respect to our personalized medicine services, other
advances in technology may result in a decreased demand for our personalized medicine services. In
addition, in order for our business to be successful, we may need to develop new personalized
medicine tests or improve existing personalized medicine tests. There is no assurance, however,
that we will be able to develop or improve these personalized medicine services in the future. Even
if we successfully develop such services in a timely manner, these new tests may not be utilized by
our customers. If we fail to develop new services or release new or improved tests on a timely
basis, or if such tests do not obtain market acceptance for any reason, our financial condition and
results of operations could be harmed.
The FDA may decide to exercise enforcement discretion and require FDA approval or clearance of our
personalized medicine services.
Laboratory-developed tests, like Avise MCV and Avise PG, are regulated by CLIA, as
administered by the Centers for Medicare and Medicaid Service, or CMS, as well as applicable state
laws. The FDA has in the past also claimed regulatory authority over laboratory-developed tests,
but has stated that it was exercising enforcement discretion in not regulating laboratory-developed
tests performed by high complexity, CLIA-certified laboratories. Our
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current personalized medicine services have not been cleared or approved by the FDA. Due to the
evolving regulatory environment, there is always the risk that the FDA could decide to exercise its
oversight with respect to any one of our tests and determine that FDA approval or clearance is
required. This would require additional time and money and could require us to cease offering our
personalized medicine services, which could have a material adverse effect on our business. If we
fail to properly develop our personalized medicine services or if we fail to validate them
accurately or inaccurately measure the performance specifications of the personalized medicine
services we develop due to human error, deficiencies in our quality control process or otherwise,
we may become subject to legal action as well as damage to our reputation with customers, which
could have a material adverse effect upon our business.
Further, in September 2006, the FDA published a draft guidance document that described certain
laboratory-developed tests that the FDA intends to regulate as in vitro diagnostic test systems
(i.e., as medical devices). The FDA calls this category of laboratory-developed tests In Vitro
Diagnostic Multivariate Index Assays, or IVDMIAs. The FDA issued a revised draft guidance
pertaining to IVDMIAs in July 2007. In the revised guidance, the FDA defines an IVDMIA as a device
that combines the values of multiple variables using an interpretation function to yield a single,
patient-specific result that is intended for use in the diagnosis of a disease or other condition,
or in the cure, mitigation, treatment, or prevention of disease, and that provides a result that
cannot be independently derived or verified by the end user and whose derivation is
non-transparent. The IVDMIA draft guidance, if adopted as published, would extend FDA oversight
over laboratories that offer laboratory-developed tests which meet this definition. It is possible
that Avise MCV and Avise PG will be subject to the proposed FDA regulatory guidance and
even if not covered by the IVDMIA draft, that new legislation will extend FDA oversight to our
laboratory-developed tests.
We rely on third parties to conduct all of our clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected deadlines, we may not be able to
obtain regulatory approval for any of our other future product candidates.
As of February 1, 2010, we had only 150 full-time employees. Although we have more employees
than we have had historically, 111 of these employees are devoted to our sales organization, and
therefore, as we have in the past, we expect to continue to rely on third parties to conduct all of
our clinical trials. Because we do not conduct our own clinical trials, we must rely on the efforts
of others and cannot always control or predict accurately the timing of such trials, the costs
associated with such trials or the procedures that are followed for such trials. We expect to
continue to rely on third parties to conduct all of our future clinical trials. If these third
parties do not successfully carry out their contractual duties or obligations or meet expected
deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to
their failure to adhere to our clinical protocols or for other reasons, or if they fail to maintain
compliance with applicable government regulations and standards, our clinical trials may be
extended, delayed or terminated, and we may not be able to obtain regulatory approval for or
successfully commercialize any of our future product candidates.
Even if our product candidates are approved, the market may not accept these products or services
or our existing products and services.
Avise PG, Avise MCV, Savella, or any future product candidates that we may develop and for
which we obtain the required regulatory approvals may not gain market acceptance among physicians,
patients, healthcare payers and the medical community. A number of factors may limit the market
acceptance of our services and products including the following:
| timing of market entry relative to competitive services and products; | ||
| extent of marketing efforts by us and with respect to Savella, the marketing efforts of Forest Laboratories; | ||
| rate of adoption by healthcare practitioners; | ||
| rate of a products acceptance by the target community; | ||
| availability of alternative therapies; | ||
| price of our services and products relative to alternative therapies; |
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| availability of third-party reimbursement; and | ||
| the prevalence or severity of side effects or unfavorable publicity concerning our products or similar products. |
If Avise PG, Avise MCV, Savella, or any future product candidates that we may develop do not
achieve market acceptance, we may lose our investment in that product candidate, which may cause
our stock price to decline, and our financial condition and results of operations could also be
harmed.
Our competitors may develop and market products and services that are less expensive, more
effective or safer, which may diminish or eliminate the commercial success of any products or
services we may commercialize.
The pharmaceutical and personalized medicine services industries are highly competitive and
require an ongoing, extensive search for technological innovation. They also require, among other
things, the ability to effectively discover, develop, test, commercialize, market and promote
products, including communicating the effectiveness, safety and value of products to actual and
prospective customers, including medical professionals. Many of our competitors have greater
resources than we have. This enables them, among other things, to spread their marketing and
promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and
personalized medicine services industries include quality and price, product technology,
reputation, customer service and access to technical information.
It is possible that future developments by our competitors could make our products,
personalized medicine services or technologies less competitive or obsolete. Our future growth
depends, in part, on our ability to provide products and services which are more effective than
those of our competitors and to keep pace with rapid medical and scientific change. Sales of our
services and products may decline rapidly if a new service or product is introduced by a
competitor, particularly if a new service or product represents a substantial improvement over any
of our existing services or products. In addition, the high level of competition in our industry
could force us to reduce the price at which we sell our services or products or require us to spend
more to market our services or products.
With respect to our pharmaceutical product for the management of FM, Savella (milnacipran
HC1), in June 2007, the FDA approved Pfizer Inc.s drug pregabalin (Lyrica®) for the
management of FM and in June 2008 approved Eli Lilly and Companys duloxetine
(Cymbalta®) for the management of FM. Duloxetine is a serotonin norepinephrine reuptake
inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology to Savella.
Tricyclic antidepressants, or TCAs, which are available as inexpensive generic formulations, are
also used to treat FM and are less expensive than Savella, as are other generic antidepressants and
pain products commonly used to treat FM. Pfizer Inc.s drug pregabalin (Lyrica®) and Eli
Lilly and Companys duloxetine (Cymbalta®) are competitive with Savella and these
products and any other future products will affect Savellas sales and may cause sales to be lower
than anticipated, as can the numerous generic antidepressants and pain products commonly used
off-label to treat FM.
The market potential for FM is considerable and a number of pharmaceutical companies focused
on therapies for alleviating pain or antidepressant therapies could decide to evaluate their
current product candidates for the treatment of FM at any time. Due to the prevalence and incidence
of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have
significant research and product development programs in FM. We expect to encounter significant
competition both in the United States and in foreign markets for Savella and each of the drugs that
we seek to develop.
With respect to our personalized medicine services, we compete with large, national
laboratories including Quest Diagnostics Incorporated, or Quest, and Laboratory Corporation of
America Holdings, and also compete with regional and esoteric laboratories. The larger competitors
have substantially greater financial and human resources, existing access to the medical community,
as well as a much larger infrastructure than we do. Other companies may develop personalized
medicine services that are more sensitive, specific, easy to use, or cost-effective than our
personalized medicine services, and we may therefore be unable to compete with them in the
marketplace.
Our competition for pharmaceutical products will be partially determined by the potential
indications that are ultimately cleared for marketing by regulatory authorities, the timing of any
clearances and market introductions and whether any currently available drugs, or drugs under
development by others, are effective in the same indications.
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Accordingly, the relative speed with which we can develop, complete the clinical trials for,
receive regulatory clearance for and supply commercial quantities of products to the market is
expected to be an important competitive factor. We expect that competition among products approved
for sale will be based, among other factors described above, on product efficacy, safety,
tolerability, cost, reliability, availability, payer reimbursement policies and patent protection.
We are subject to uncertainty relating to health care reform measures and reimbursement policies
which, if not favorable to our products or services or product candidates, could hinder or prevent
the commercial success of our products, services or product candidates.
The continuing efforts of the government, insurance and managed care organizations and other
health care payers to contain or reduce prescription drug costs may adversely affect:
| our ability to set a price we believe is fair for our products and services; | ||
| our ability to generate revenues and achieve or maintain profitability; | ||
| the future revenues and profitability of our potential customers, suppliers and collaborators; and | ||
| the availability of capital. |
Successful commercialization of Savella in the United States will depend in part on the extent
to which government, insurance and managed care organizations and other health care payers
establish appropriate coverage for Savella and related treatments. Third-party payers are
increasingly challenging the prices charged for prescription drugs. Third-party payers are also
encouraging the use of generic drugs. These trends could influence health care coverage policies,
as well as legislative proposals to reform health care or reduce government insurance programs and
result in the exclusion of our products, services and product candidates from coverage and
reimbursement programs or lower the prices of our products, services and product candidates. Our
revenues from the sale of our products and services could be significantly reduced as a result of
these cost containment measures and reforms.
Market acceptance of our personalized medicine services and the majority of our anticipated
sales from these services will likely depend, in large part, on the availability of adequate
payment or reimbursement from insurance plans, including government plans such as Medicare, managed
care organizations, private insurance plans and other third-party payers. Reimbursement by a
third-party payer may depend on a number of factors, including a payers determination that a
service is not experimental or investigational, and that it is medically necessary, appropriate for
a specific patient or diagnosis, cost effective or supported by peer-reviewed publications. Because
each third-party payer individually approves payment or reimbursement, obtaining these approvals
can be a time-consuming and costly process that requires us to provide scientific and clinical
support for the use of each of these services to each third-party payer separately with no
assurance that approval will be obtained. We do not yet have any third-party payer reimbursement
agreements. This individualized process or any action by the government negatively affecting
payment for or reimbursement of our services can delay the market acceptance of new services and
may have a negative effect on our revenues and operating results.
We believe third-party payers are increasingly limiting coverage for personalized medicine
services, and in many instances are exerting pressure on service suppliers to reduce their prices.
Consequently, third-party payment or reimbursement may not be consistently available or adequate to
cover the cost of our services. We do not yet have any third-party payer reimbursement agreements.
Additionally, third-party payers who have previously approved a specific level of payment or
reimbursement may reduce that level. Under prospective payment systems, in which healthcare
providers may be paid or reimbursed a set amount based on the type of personalized medicine service
procedure performed, such as those utilized by Medicare and in many private managed care systems,
the cost of our personalized medicine services may not be justified and reimbursed. Any limitations
on payment or reimbursement for our services could limit our ability to commercialize and sell new
services or to continue to sell our existing services, or may cause the selling prices of our
existing services to be reduced, which would adversely affect our revenues and operating results.
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We rely on our employees and consultants for their scientific and technical expertise in
connection with our business operations.
We rely significantly on the scientific and technical expertise of our employees and
consultants to conduct our business. As of February 1, 2010, we had only 150 full-time employees,
111 of which are sales field based and therefore, we rely heavily on each of our employees. In
addition, because we have a small number of employees, we rely much more on consultants than do
other companies. If any of our relationships with our employees or consultants are terminated, we
may lose access to scientific knowledge and expertise necessary for the further development and
commercialization of Savella, our personalized medicine services or any future product candidates.
We expect to continue to rely on consultants and our current employees for scientific and technical
knowledge and expertise essential to our business. Additionally, our employment agreement with our
chief executive officer provides for at will employment, which means that he may terminate his
services to us at any time.
We have a history of operating losses and we may never be profitable.
We have incurred substantial losses during our history. For the years ended December 31, 2009
and 2008, we incurred net losses of $28.3 million and $18.2 million, respectively. As of December
31, 2009, we had an accumulated deficit of $196.5 million. We do not expect to be profitable in the
near future, and our ability to become profitable will depend upon our and Forest Laboratories
ability to further develop, market and commercialize Savella, and our ability to further develop,
market and commercialize our personalized medicine services and any other products we may develop.
We may not become profitable in the foreseeable future and may never achieve profitability.
We will need substantial additional funding and may be unable to raise capital when needed, which
could force us to scale back or eliminate our sales efforts and the development of future product
candidates and personalized medicine services or to discontinue pursuing any proposed
acquisitions, or which could adversely affect our ability to realize the expected benefits of any
completed acquisitions.
We will incur certain non-reimbursable expenses in connection with the sales of Savella, and
will also incur costs in the development of additional personalized medicine services, such as our
CB-CAP technology. We are also incurring expenses in connection with the evaluation of potential
acquisitions or other strategic transactions and will incur additional expenses in the event we
close any such transactions or enter into any co-promotion, in-licensing or collaboration
agreements in connection with any such transactions, or invest in any Proof of Concept studies. We
may also be required to pay up to $37.5 million in potential milestone-related payments associated
with the development of certain therapeutic candidates acquired in our merger with Proprius and a
$3.0 million milestone payment in connection with our acquisition of Cellatope. We do not have any
committed external sources of funding and although we expect to have revenues, it is likely our
revenues will be less than we expect to spend in the year 2010 and that at some time in the future
we will likely need to raise additional capital through the sale of equity or debt. The amount of
capital we will require will depend upon many factors, including but not limited to, the amount we
spend on our sales force that is not reimbursed by Forest Laboratories, how much is ultimately
required to develop the products and personalized medicine services that are in development and the
evaluation, pursuit and potential closing of any strategic transactions. If we are unable to raise
capital when we need it, we may have to scale back or eliminate our sales force or some or all of
our development of existing or future product candidates and personalized medicine services and
discontinue the evaluation, pursuit or completion of any proposed acquisitions or strategic
transactions, and we may be unable to realize the expected benefits of any completed acquisitions
or strategic transactions.
Raising additional funds by issuing securities, or through collaboration and licensing
arrangements, may cause dilution to existing stockholders, restrict our operations, or require us
to relinquish propriety rights.
We may attempt to raise additional funds through public or private equity offerings, as we did
in June 2007 with a public equity offering, or through debt financings. However, the recent credit
crisis and the current economic conditions may prevent us from raising money through debt or equity
financings. We may also issue equity or other securities in connection with corporate
collaborations and licensing arrangements, or raise funds through arrangements like these. For
example, the potential milestone payments due to the stockholders of Proprius may be paid in up to
50% stock of Cypress, at our election. To the extent that we are able to raise additional capital
by issuing equity securities, or otherwise issue equity securities in connection with corporate
collaboration and licensing arrangements or otherwise, our existing stockholders ownership
percentage will be diluted. Any financing or other transaction that
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involves our issuing securities that we do engage in may also include provisions that restrict
our operations. In addition, if we raise additional funds through collaborations and licensing
arrangements, it may be necessary to relinquish potential valuable rights to our potential products
on terms that are not favorable to us.
The investment of our cash balance and short-term investments are subject to risks which may cause
losses and affect the liquidity of these investments.
As of December 31, 2009, we had $38.6 million in cash and cash equivalents and $103.1 million
in short-term investments. We have historically invested these amounts in United States government
securities, corporate debt securities, commercial paper, certificates of deposit and money market
funds. Certain of these investments are subject to general credit, liquidity, market and interest
rate risks. During the quarter ended December 31, 2009, we determined that any declines in the
fair value of our investments were temporary. There may be further declines in the value of these
investments, which we may determine to be other-than-temporary. These market risks associated with
our investment portfolio may have a negative adverse effect on our results of operations, liquidity
and financial condition.
We may lose our net operating loss carryforwards, which could prevent us from offsetting future
taxable income.
We have incurred substantial losses during our history and do not expect to become profitable
in 2010 and may never achieve profitability. To the extent that we continue to generate taxable
losses, unused losses will carry forward to offset future taxable income, if any, until such unused
losses expire. All unused federal net operating losses will expire 15 or 20 years after any year in
which they were generated. The carryforward period is 15 years for losses incurred prior to 1996
and 20 years for losses incurred subsequent to 1997. Our federal net operating losses wil begin to
expire in 2010, and our California tax loss carryforwards will begin to expire in 2012.
Additionally, the future utilization of our net operating loss carryforwards to offset future
taxable income is subject to annual limitations, pursuant to Internal Revenue Code Sections 382 and
383, as a result of ownership changes that have occurred in prior years, which could prevent us
from fully utilizing our net operating loss carryforwards.
Our stock price has been very volatile and will likely continue to be volatile.
The market prices of the stock of technology companies, particularly biotechnology companies,
have been highly volatile. For the period from January 1, 2007 through December 31, 2009, the low
and high sales prices for our common stock ranged from $4.90 to $18.20. For the year ended December
31, 2009, our low and high sales prices were $5.24 and $10.10, respectively. As of December 31,
2009, the last reported sale price of our common stock was $5.77. Our stock price has been and will
likely continue to be affected by market volatility, as well as by our own performance. We expect
our stock price to be volatile in the near future. The following factors, among other risk factors,
may have a significant effect on the market price of our common stock:
| the commercial sales of Savella and our personalized medicine services; | ||
| development of our personalized medicine services and other product candidates; | ||
| developments in our relationship with Forest Laboratories, including the termination of our agreement; | ||
| developments in our relationship with Pierre Fabre, including the termination of our agreement; | ||
| our entering into, or failing to enter into, an agreement for the acquisition of any products, product candidates or companies, or an agreement with any corporate collaborator; | ||
| our available cash; | ||
| announcements of technological innovations or new products by us or our competitors; | ||
| developments in our patent or other proprietary rights; | ||
| fluctuations in our operating results; |
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| litigation initiated by or against us; | ||
| developments in domestic and international governmental policy or regulation; and | ||
| economic and other external factors or other disaster or crisis. |
The concentration of ownership among our existing officers, directors and principal stockholders
may result in the entrenchment of management, prevent other stockholders from influencing
significant corporate decisions and depress our stock price.
As of December 31, 2009, our executive officers, directors and stockholders who hold at least
5% of our stock beneficially owned and controlled approximately 60% of our outstanding common
stock. If these officers, directors and principal stockholders act together, they will be able to
help entrench management and to control matters requiring approval by our stockholders, including a
financing in which we sell more than 20% of our voting stock at a discount to the market price, the
removal of any directors up for election, the election of the members of our board of directors,
mergers, a sale of all or substantially all of our assets, going private transactions and other
fundamental transactions. This concentration of ownership could also depress our stock price.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
Provisions in our second amended and restated certificate of incorporation and our third
amended and restated bylaws may delay, impede or prevent an acquisition or change in control of us.
In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace
or remove our current management by making it more difficult for stockholders to replace members of
our board of directors, who are responsible for appointing the members of our management team.
These provisions include, among others, a requirement that our board of directors be divided into
three classes with directors serving three year terms and with only one class of directors being
elected in any given year, a requirement that special meetings of our stockholders may only be
called by the chairman of the board, our chief executive officer or a majority of our board of
directors and a prohibition on actions by our stockholders by written consent. In addition, because
we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of
15% of our outstanding voting stock from merging or combining with us. Finally, our charter
documents establish advance notice requirements for nominations for election to our board of
directors and for proposing matters that can be acted upon at stockholder meetings. Although we
believe these provisions together provide for an opportunity to receive higher bids by requiring
potential acquirers to negotiate with our board of directors, they would apply even if the offer
may be considered beneficial by some stockholders.
We expect to continue incurring significant costs as a result of enacted and proposed changes in
laws and regulations relating to corporate governance matters.
Changes in the laws and regulations affecting public companies, including the provisions of
the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by
the NASDAQ Stock Market LLC, have resulted and we expect will continue to result in significant
costs to us. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding our required assessment of our internal controls over
financial reporting and our independent registered public accounting firms audit of internal
control over financial reporting has required the commitment of significant financial and
managerial resources. We expect these efforts to require the continued commitment of significant
financial resources and management time related to compliance activities. Additionally, these laws
and regulations could make it more difficult or costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The
impact of these events could also make it more difficult for us to attract and retain qualified
persons to serve on our board of directors, our board committees or as executive officers.
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If we fail to maintain proper and effective internal controls, our ability to produce accurate
financial statements could be impaired, which could adversely affect our ability to operate our
business and investors view of us.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002,
including Section 404 related to internal controls, and the related rules and regulations of the
Securities and Exchange Commission, including expanded disclosures and accelerated reporting
requirements and more complex accounting rules. Compliance with Section 404 and other requirements
will increase our costs and will continue to require additional management resources. We may need
to continue to implement additional finance and accounting systems, procedures and controls to
satisfy reporting requirements. If we are unable to obtain future unqualified reports as to the
effectiveness of our internal control over financial reporting, investors could lose confidence in
the reliability of our internal control over financial reporting, which could adversely affect our
ability to raise financing and operate our business as well as our stock price.
Risks related to our intellectual property
We rely primarily on method of use patents to protect our proprietary technology for the sales of
Savella, and our ability to compete may decrease or be eliminated if we are not able to protect our
proprietary technology.
Our ability to realize the full sales potential for Savella (milnacipran HCl), our only
therapeutic product, may decrease or be eliminated if we are not able to protect our proprietary
technology. The composition of matter patent for milnacipran (U.S. Patent 4,478,836) expired in
June 2002, and a method of synthesis patent (U.S. Patent 5,034,041) expired on December 27, 2009.
Accordingly, we rely on the patent for the method of use of milnacipran to treat fibromyalgia (U.S.
patent 6,602,911), pain (U.S. Patent 6,992,110) and the method of use of milnacipran to treat
symptoms of chronic fatigue syndrome (U.S. Patent 6,635,675) issued to us, to protect our
proprietary technology with respect to the development of milnacipran. The method of use patent
directly relevant to our current milnacipran product candidate is the 911 patent; the other two
method of use patents may have future applicability. We have also filed additional patent
applications related to milnacipran and to the use of milnacipran for FM (and other related pain
syndromes and disorders), although no patents have issued on these patent applications. Because
there is no patent protection for the composition of matter of milnacipran, other companies may be
able to sell milnacipran in competition with us and Forest Laboratories for indications for which
we do not have use patent protection unless we and Forest Laboratories are able to obtain
additional protection through milnacipran-related patents or additional use patents that may issue
from our pending patent applications or from regulatory exclusivity. It may be more difficult to
establish infringement of methods of synthesis, formulation or use patents as compared to a patent
on a compound. If we or Forest Laboratories are not able to obtain and enforce these patents, a
competitor could use milnacipran for a treatment or use not covered by any of our patents.
In connection with our acquisition of Proprius, we acquired rights to an issued patent (U.S.
patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to the
Avise PG test (U.S. Patent 7,582,282 issued September 1, 2009) and a number of patents in
prosecution on the Avise MCV. Although we have the right to two issued patents covering the Avise
PG test, we may not be able to secure any additional patent protection and the existing patent may
not ensure exclusivity through the patent term. In addition, as part of our acquisition of Proprius
we acquired rights to a patent family directed to PRO-406 (the topical NSAID therapy for the
symptomatic treatment of osteoarthritis) including one issued patent (U.S. patent No. 7,138,394,
which expires in 2023) and several pending U.S. and foreign patent applications. It is uncertain
whether we will be able to obtain any claim with reasonable coverage for PRO-406.
The validity of a United States patent depends, in part, on the novelty of the invention it
discloses. The pharmaceutical industry is characterized by constant investment in new drug
discovery and development, and this results in a steady stream of publications regarding the
product of this investment, any of which would act to defeat the novelty of later-discovered
inventions. Issued United States patents enjoy a presumption of validity that can only be overcome
by clear and convincing evidence. However, patents are nonetheless subject to challenge and can be
invalidated if a court determines, retrospectively, that despite the action of the Patent and
Trademark Office in issuing the patent, the corresponding patent application did not meet the
statutory requirements. If a competitor or other third party were to successfully challenge our
patents, and claims in these patents are narrowed or invalidated, our ability to protect the
related product from competition would be compromised.
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We also expect to rely on the United States Drug Price Competition and Patent Term Restoration
Act, commonly known as the Hatch-Waxman Amendments, for protection of Savella and our other future
products. The Hatch-Waxman Amendments provide data exclusivity for new molecular entities, such as
that in Savella. Once a drug containing a new molecule is approved by the FDA, the FDA cannot
accept an abbreviated NDA for a generic drug containing that molecule for five years, although the
FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by
independent clinical data. Amendments have been proposed that would narrow the scope of
Hatch-Waxman exclusivity and permit generic drugs to compete with our drug. After the Hatch-Waxman
exclusivity period expires, assuming our patents are valid, we still expect to rely on our method
of use patents to protect our proprietary technology with respect to the development of
milnacipran. The patent positions of pharmaceutical companies are uncertain and may involve complex
legal and factual questions. We may incur significant expense in protecting our intellectual
property and defending or assessing claims with respect to intellectual property owned by others.
Any patent or other infringement litigation by or against us is likely and could result in
significant expense to us, including diversion of the resources of management.
Others may file patent applications or obtain patents on similar technology or compounds that
compete with Savella for the treatment of FM, for any of our personalized medicine services or any
of the products that may be developed under any POC trials we conduct. We cannot predict the
breadth of claims that will be allowed and issued in patent applications. Once patents have issued,
we cannot predict how the claims will be construed or enforced. We may infringe on intellectual
property rights of others without being aware of the infringement. If another party claims we are
infringing their technology, we could have to defend an expensive and time consuming lawsuit, pay a
large sum if we are found to be infringing, or be prohibited from selling or licensing our products
unless we obtain a license or redesign our product, which may not be possible.
We also rely on trade secrets and proprietary know-how to develop and maintain our competitive
position. Some of our current or former employees, consultants or scientific advisors, or current
or prospective corporate collaborators, may unintentionally or willfully disclose our confidential
information to competitors or use our proprietary technology for their own benefit. Furthermore,
enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult
to prove, making the outcome uncertain. Our competitors may also independently develop similar
knowledge, methods and know-how or gain access to our proprietary information through some other
means.
Our ability to compete may decline if we do not adequately protect our proprietary rights.
Our commercial success depends on obtaining and maintaining proprietary rights to our products
and services and product candidates and technologies and their uses as well as successfully
defending these rights against third party challenges. We will only be able to protect our products
and services and product candidates, proprietary technologies and their uses from unauthorized use
by third parties to the extent that valid and enforceable patents or effectively-protected trade
secrets cover them.
Our ability to obtain patent protection for our products and services and product and service
candidates and technologies is uncertain due to a number of factors, including:
| we may not have been the first to make the inventions covered by our pending patent applications or issued patents; | ||
| we may not have been the first to file patent applications for our products and services and product and service candidates or the technologies we rely upon; | ||
| others may independently develop similar or alternative technologies or duplicate any of our technologies; | ||
| our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability; | ||
| any or all of our pending patent applications may not result in issued patents; |
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| we may not seek or obtain patent protection in all countries that will eventually provide a significant business opportunity; | ||
| any patents issued to us or our collaborators may not provide a basis for commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties; | ||
| some of our technologies may not be patentable; | ||
| others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or | ||
| others may identify prior art which could invalidate our patents. |
Even if we obtain patents covering our product and service candidates or technologies, we may
still be barred from making, using and selling our product candidates or technologies because of
the patent rights of others. Others may have filed and in the future are likely to file patent
applications covering compounds, assays, genes, gene products or therapeutic or personalized
medicine services that are similar or identical to ours. Numerous U.S. and foreign issued patents
and pending patent applications owned by others exist in the area of the fields in which we have
developed and are developing products and services. These could materially affect our ability to
develop our product and service candidates or sell our products and services. Because patent
applications can take many years to issue, there may be currently pending applications, unknown to
us, which may later result in issued patents that our products and services and product and service
candidates or technologies may infringe. These patent applications may have priority over patent
applications filed by us. Disputes may arise regarding the ownership or inventorship of our
inventions. It is difficult to determine how such disputes will be resolved. Others may challenge
the validity of our patents. If our patents are found to be invalid we will lose the ability to
exclude others from making, using or selling the inventions claimed therein.
Some of our research collaborators and scientific advisors have rights to publish data and
information to which we have rights. If we cannot maintain the confidentiality of our technology
and other confidential information in connection with our collaborations, then our ability to
receive patent protection or protect our proprietary information will be impaired. In addition,
in-licensed technology is important to our business. We generally will not control the patent
prosecution, maintenance or enforcement of in-licensed technology.
A dispute concerning the infringement or misappropriation of our proprietary rights or the
proprietary rights of others could be time consuming and costly and an unfavorable outcome could
harm our business.
There is significant litigation in the industry regarding patent and other intellectual
property rights. We may be exposed to future litigation by third parties based on claims that our
products and services and product and service candidates, technologies or activities infringe the
intellectual property rights of others. If our drug development or personalized medicine services
activities are found to infringe any such patents, we may have to pay significant damages. There
are many patents relating to chemical compounds and the uses thereof. If our compounds are found to
infringe any such patents, we may have to pay significant damages. A patentee could prevent us from
making, using or selling the patented compounds. We may need to resort to litigation to enforce a
patent issued to us, protect our trade secrets or determine the scope and validity of third party
proprietary rights. From time to time, we may hire scientific personnel formerly employed by other
companies involved in one or more areas similar to the activities conducted by us. Either we or
these individuals may be subject to allegations of trade secret misappropriation or other similar
claims as a result of their prior affiliations. If we become involved in litigation, it could
consume a substantial portion of our managerial and financial resources, whether we win or lose. We
may not be able to afford the costs of litigation. Any legal action against our company or our
collaborators could lead to:
| payment of damages, potentially treble damages, if we are found to have willfully infringed such parties patent rights; | ||
| injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products, services and product and service candidates; or |
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| we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all. As a result, we could be prevented from commercializing current or future products, services and product and service candidates. |
The patent applications of pharmaceutical, biotechnology and personalized medicine companies
involve highly complex legal and factual questions, which could negatively impact our patent
position.
The patent positions of pharmaceutical and biotechnology and personalized medicine services
companies can be highly uncertain and involve complex legal and factual questions. The United
States Patent and Trademark Offices standards are uncertain and could change in the future.
Consequently, the issuance and scope of patents cannot be predicted with certainty. Patents, if
issued, may be challenged, invalidated or circumvented. United States patents and patent
applications may also be subject to interference proceedings and United States patents may be
subject to reexamination proceedings in the United States Patent and Trademark Office (and foreign
patents may be subject to opposition or comparable proceedings in the corresponding foreign patent
office), which proceedings could result in either loss of the patent or denial of the patent
application or loss or reduction in the scope of one or more of the claims of the patent or patent
application. In addition, such interference, reexamination and opposition proceedings may be
costly. Accordingly, rights under any issued patents may not provide us with sufficient protection
against competitive products or processes.
In addition, changes in or different interpretations of patent laws in the United States and
foreign countries may permit others to use our discoveries or to develop and commercialize our
technology and products and services without providing any compensation to us. The laws of some
countries do not protect intellectual property rights to the same extent as United States laws and
those countries may lack adequate rules and procedures for defending our intellectual property
rights. For example, some countries, including many in Europe, do not grant patent claims directed
to methods of treating humans, and in these countries patent protection may not be available at all
to protect our product, services or product and service candidates.
If we fail to obtain and maintain patent protection and trade secret protection of our
products, services and product and service candidates, proprietary technologies and their uses, we
could lose our competitive advantage and competition we face would increase, reducing our potential
revenues and adversely affecting our ability to attain or maintain profitability.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently occupy a total of approximately 10,100 square feet of leased office space in San
Diego, California under three leases. The San Diego facilities house our executive and
administrative offices and laboratory space. The lease for our main corporate office occupying
approximately 5,700 square feet expires in July 2012 and contains monthly rental payments ranging
from $15,600 to $17,870 over the lease term. In July 2008, we leased an additional 1,900 square
feet of office space for our executive and administrative offices. The lease for this additional
space expires in December 2010 and contains monthly rental payments of $4,635. In May 2008, we
leased approximately 2,500 square feet of laboratory space. This lease expires in June 2010 and
contains monthly rental payments of $6,383.
Item 3. Legal Proceedings
From time to time, in the normal course of business, we are involved in litigation arising out
of our operations. We are not currently engaged in any legal proceedings that we expect would
materially harm our business or financial condition.
Item 4. (Removed and Reserved)
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PART II
Item 5. Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on the NASDAQ Global Stock Market under the symbol CYPB. Set
forth below are the high and low sales prices for our common stock for the periods indicated as
reported on the NASDAQ Global Stock Market.
Price Range of Common Stock | ||||||||
High | Low | |||||||
Year Ended December 31, 2009: |
||||||||
First Quarter |
$ | 10.10 | $ | 6.78 | ||||
Second Quarter |
9.68 | 6.70 | ||||||
Third Quarter |
9.95 | 6.85 | ||||||
Fourth Quarter |
8.37 | 5.24 | ||||||
Year Ended December 31, 2008: |
||||||||
First Quarter |
$ | 11.09 | $ | 6.66 | ||||
Second Quarter |
8.85 | 6.17 | ||||||
Third Quarter |
9.13 | 5.45 | ||||||
Fourth Quarter |
7.41 | 4.90 |
As of March 1, 2010, there were approximately 414 holders of record of our common stock. On
March 1, 2010, the last reported sale price of our common stock on the NASDAQ Global Stock Market
was $5.22 per share. We have never paid any cash dividends on our common stock, and we do not
anticipate paying any cash dividends in the foreseeable future as we intend to retain any earnings
for use in our business.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during fiscal 2009.
33.
Table of Contents
Stock Performance Graph and Cumulative Total Return
The graph below shows the cumulative total stockholder return assuming the investment of $100
on the date specified (and the reinvestment of dividends thereafter) in each of (i) Cypress
Bioscience, Inc.s common stock, (ii) the Nasdaq Composite Index and (iii) the Nasdaq
Pharmaceutical Index. The comparisons in the graph below are based upon historical data and are not
indicative of, or intended to forecast, future performance of our common stock or the indexes
presented.
NOTE: Data complete through last fiscal year.
NOTE: Corporate Performance Graph with peer group uses peer group only performance (excludes only company).
NOTE: Peer group indices use beginning of period market capitalization weighting.
NOTE: Corporate Performance Graph with peer group uses peer group only performance (excludes only company).
NOTE: Peer group indices use beginning of period market capitalization weighting.
34.
Table of Contents
Item 6. Selected Financial Data
The following table presents our selected financial data, which is derived from our audited
financial statements. The information set forth below is not necessarily indicative of the results
of future operations and should be read in conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 of this report and the financial
statements and the related notes thereto included in this Form 10-K.
Years Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Revenues under collaborative agreement |
$ | 10,026,307 | $ | 16,659,099 | $ | 13,440,603 | $ | 4,322,468 | $ | 8,384,636 | ||||||||||
Commercial revenues |
16,976,200 | | | | | |||||||||||||||
Revenues from personalized medicine services |
332,372 | | | | | |||||||||||||||
27,334,879 | 16,659,099 | 13,440,603 | 4,322,468 | 8,384,636 | ||||||||||||||||
Operating expenses: |
||||||||||||||||||||
Cost of personalized medicine testing services |
1,986,722 | 267,361 | | | | |||||||||||||||
Research and development |
11,996,169 | 9,171,076 | 7,210,684 | 9,184,404 | 15,839,737 | |||||||||||||||
Selling, general and administrative |
42,138,458 | 17,602,820 | 10,027,358 | 8,379,031 | 5,448,160 | |||||||||||||||
In-process research and development |
| 12,590,000 | | | | |||||||||||||||
Goodwill impairment |
1,100,000 | | | | | |||||||||||||||
Compensation expense (benefit) variable
stock options |
| | | | (1,749,135 | ) | ||||||||||||||
57,221,349 | 39,631,257 | 17,238,042 | 17,563,435 | 19,538,762 | ||||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
1,634,507 | 4,746,547 | 7,285,023 | 4,923,290 | 3,501,381 | |||||||||||||||
Interest expense |
| | | | (2,382 | ) | ||||||||||||||
Gain (loss) on disposal of assets |
| | | | 4,186 | |||||||||||||||
1,634,507 | 4,746,547 | 7,285,023 | 4,923,290 | 3,503,185 | ||||||||||||||||
Net income (loss) |
$ | (28,251,963 | ) | $ | (18,225,611 | ) | $ | 3,487,584 | $ | (8,317,677 | ) | $ | (7,650,941 | ) | ||||||
Net income (loss) per share basic |
$ | (0.74 | ) | $ | (0.48 | ) | $ | 0.10 | $ | (0.26 | ) | $ | (0.25 | ) | ||||||
Shares used in computing net income (loss) per
share basic |
38,150,054 | 37,733,737 | 35,205,783 | 32,094,785 | 31,105,271 | |||||||||||||||
Net income (loss) per share diluted |
$ | (0.74 | ) | $ | (0.48 | ) | $ | 0.10 | $ | (0.26 | ) | $ | (0.25 | ) | ||||||
Shares used in computing net income (loss) per
share diluted |
38,150,054 | 37,733,737 | 36,616,091 | 32,094,785 | 31,105,271 | |||||||||||||||
As of December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash, cash equivalents
and short-term
investments |
$ | 141,673,371 | $ | 145,494,605 | $ | 181,806,574 | $ | 102,778,328 | $ | 109,613,278 | ||||||||||
Total assets |
176,064,710 | 174,592,523 | 182,699,850 | 103,824,941 | 110,791,798 | |||||||||||||||
Total stockholders equity |
140,584,003 | 159,915,208 | 168,014,978 | 87,097,297 | 89,975,440 | |||||||||||||||
Working capital |
140,503,944 | 138,751,122 | 177,975,517 | 99,508,212 | 105,536,094 |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
overview
Cypress Bioscience, Inc. provides therapeutics and personalized medicine services,
facilitating improved and individualized patient care. Cypress goal is to address the evolving
needs of specialist physicians and their patients by identifying unmet medical needs in the areas
of pain, rheumatology, and physical medicine and rehabilitation, including challenging disorders
such as fibromyalgia and rheumatoid arthritis. We believe our approach to improving patient care
creates a unique partnership with physicians, and expect that offering personalized medicine
services and therapeutic products through the same sales organization will provide Cypress a
differentiated commercial strategy and sustainable competitive advantage.
In January 2009, we received approval from the U.S. Food and Drug Administration (FDA) to
market Savella (milnacipran HCl) for the management of fibromyalgia (FM). Milnacipran HCl has
been approved for a non-pain condition in over 50 countries, with commercial experience outside the
U.S. since 1997. We obtained an exclusive license in the U.S. and Canada to milnacipran from Pierre
Fabre Medicament, or Pierre Fabre, in 2001. In January 2004, we entered into a collaboration
agreement with Forest Laboratories, a leading marketer of central nervous system, or CNS, drugs
with a strong franchise in the primary care and psychiatric markets. As part of this collaboration
with Forest Laboratories, we sublicensed our rights to milnacipran to Forest Laboratories for the
United States, with an option to extend the territory to include Canada, which was exercised in
July 2007. As part of our agreements with both Forest Laboratories and Pierre Fabre, we have
licensed any patents that may issue from our patent applications related to FM and milnacipran to
Forest Laboratories and Pierre Fabre. Additional information on our ongoing post approval clinical
development program for Savella can be found at www.clinicaltrials.gov.
Following the January 2009 FDA approval to market Savella for the management of FM, Savella
was shipped to wholesalers and became available at pharmacies at the end of April 2009. Savella is
a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher
potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role
in the symptoms for FM. We co-promote Savella for FM with our corporate partner, Forest
Laboratories, Inc., or Forest Laboratories, and by the beginning of 2009, we expanded our sales
force to 115 field based personnel in anticipation of the launch of Savella. At the beginning of
May 2009, we began detailing Savella to rheumatologists, pain centers, and physical medicine and
rehabilitation specialists in the U.S. Now that we are detailing Savella to physicians, in addition
to receiving a royalty on total net sales of Savella we will be reimbursed by Forest Laboratories
for the Savella sales calls that we make based on Forest Laboratories cost to conduct such sales
calls.
At the end of October 2008, with our initial 11 person sales force, we launched our first two
novel personalized medicine services, Avise PG and Avise MCV, which are detailed to
rheumatologists. Personalized medicine services are tests which are validated analytically and
clinically to provide physicians with actionable information to help manage their patients care,
including predicting the likelihood of developing disease or optimizing therapy. Avise PG is a test
that supports dose optimization and therapeutic decision making for patients taking methotrexate
(MTX), a widely used first-line therapy for rheumatoid arthritis (RA). Avise MCV is a test that
aids in the diagnosis and prognosis of RA. We believe that offering integrated personalized
medicine services and pharmaceutical products through the same sales organization will facilitate
physician access and improve the quality of the sales call, as well as help establish Cypress as a
leader targeting these specific specialists. When we began promoting Savella in May 2009 with our
115 field based personnel we called on the same rheumatologists that we began calling upon in
October 2008 for our first two personalized medicine services.
From time to time we have ongoing Proof of Concept (POC) stage therapeutic product
opportunities in development. At the present time, we are not funding any POC stage development
programs, including the two pharmaceutical candidates acquired in connection with our acquisition
in March 2008 of Proprius, Inc., or Proprius, although we continue to evaluate the merit of future
investment in POC stage development programs. We are also actively continuing to evaluate various
other potential strategic transactions for development stage and commercial product opportunities
where we can leverage our broad technical, clinical and regulatory expertise or our excess sales
force capacity, and are considering a variety of potential transaction structures.
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In February 2009, we announced the closing of a transaction to acquire Cellatope Corporations
technology platform that uses cell-bound complement activation products (CB-CAP) to diagnose and
monitor debilitating autoimmune disorders, including systemic lupus erythematosus (SLE/Lupus).
We acquired the CB-CAP technology in a transaction that included a $2.0 million cash payment to
Cellatope for the diagnostic technology as well as an additional $3.0 million potential milestone
payment associated with the commercial development of the Lupus monitoring application.
In March 2008, we announced the closing of the acquisition of Proprius that included an
upfront payment of approximately $37.5 million in cash, as well as up to an additional $37.5
million in potential milestone related payments associated with the development of Proprius early
clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat
rheumatoid arthritis. We are not currently in active development with respect to either product
candidate.
Results of Operations
Comparison of Years Ended December 31, 2009 and 2008
Revenues Under Collaborative Agreement
We recognized revenues under our collaborative agreement with Forest Laboratories of $10.0
million for the year ended December 31, 2009 compared to $16.7 million for year ended December 31,
2008. Revenues during the year ended December 31, 2009 included a $6.5 million reimbursement for
the remaining two-thirds of the costs paid in advance by us in connection with the second Phase III
trial for Savella received from Forest Laboratories in January 2009 upon approval of our New Drug
Application (NDA). This compares to a $10.0 million milestone payment, net of a $0.5 million
sublicense fee to Pierre Fabre, and $3.2 million reimbursement for one-third of the costs paid in
connection with the second Phase III trial for Savella received from Forest Laboratories in
February 2008 upon acceptance of our NDA. The revenues under collaborative agreements recorded
during 2009 and 2008 consist entirely of amounts earned or reimbursed to us pursuant to our
collaboration agreement with Forest Laboratories, entered into in January 2004, for the development
and marketing of Savella. Such revenues include the recognition of the $25.0 million upfront
payment received in January 2004 from Forest Laboratories on a straight-line basis over a period of
8 years, an additional $1.0 million license payment received from Forest Laboratories in July 2007
to extend the territory to include Canada recognized on a straight-line basis over the remainder of
the 8 year amortization period, sponsored development reimbursements and funding received from
Forest Laboratories for certain of our employees devoted to the development of Savella. The amount
of sponsored development reimbursements from Forest Laboratories and funding received from Forest
Laboratories for certain of our employees devoted to the development of Savella changes
periodically and may be eliminated based on the level of development activity.
Commercial Revenues
We recognized commercial revenues of $17.0 million for the year ended December 31, 2009 in
connection with the launch of Savella during 2009.
The following table summarizes the components of commercial revenues for the years ended
December 31, 2009 and 2008:
Year Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Royalty revenue |
$ | 4,850,687 | $ | | ||||
Revenue from milestones |
1,254,640 | | ||||||
Co-promotion reimbursement |
10,870,873 | | ||||||
$ | 16,976,200 | $ | | |||||
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We recognized royalty revenue of $4.9 million for the year ended December 31, 2009 based on
net sales of Savella during the period as reported by Forest Laboratories, subject to an adjustment
by Forest Laboratories based on their total payment obligations to Cypress and Pierre Fabre.
Revenue from milestones for the year ended December 31, 2009 consists of the recognition of
$1.9 million related to the $25.0 million milestone payment, net of the $1.25 million sublicense
payment to Pierre Fabre, received in January 2009 upon NDA approval, and net of sampling
obligations of $0.6 million. The milestone will be recognized on a straight-line basis, net of
sampling obligations, over the ongoing commercial obligation period, which is estimated to be 13
years.
Co-promotion reimbursement revenue of $10.9 million for the year ended December 31, 2009
consists of reimbursement from Forest Laboratories for detail calls provided by our sales force
during the period, as well as reimbursement for certain marketing costs incurred by us.
The co-promotion reimbursement for detail calls is determined based on the number of detailing
calls made by our sales force (measured on a per physician call basis) during the period, each of
which is reimbursed at a rate equal to the cost of such effort to Forest Laboratories had it been
accomplished by the Forest Laboratories sales force. The corresponding costs associated with our
co-promotion reimbursement are included as a component of selling, general and administrative
expense on the Consolidated Statement of Operations.
Revenues From Personalized Medicine Services
Revenues from our personalized medicine services are recognized as cash payments for the
services are received. We recognized revenue of approximately $0.3 million during 2009 in
connection with personalized medicine services, which were launched during the fourth quarter of
2008.
Cost of Personalized Medicine Services
Cost of personalized medicine testing services primarily consists of the compensation and
benefits (including bonuses, if any, and stock-based compensation) of laboratory personnel,
laboratory supplies, outside laboratory costs, shipping and distribution costs and facility-related
expenses. We incurred costs of $2.0 million during the year ended December 31, 2009 compared to
$0.3 million during the year ended December 31, 2008 in connection with our personalized medicine
services. Our personalized medicine services were launched during the fourth quarter of 2008,
resulting in a full year of activity during 2009.
Research and Development
Research and development expenses for the year ended December 31, 2009 were $12.0 million
compared to $9.2 million for the year ended December 31, 2008. The increase in research and
development expenses is primarily attributable to a $3.0 million milestone payment owed to Pierre
Fabre upon NDA approval in connection with our collaboration agreement with Forest Laboratories and
a $2.0 million payment recognized as research and development expense during the first quarter of
2009 in connection with our asset purchase agreement with Cellatope. This increase in research and
development expenses was partially offset by a $1.0 million milestone payment owed to Pierre Fabre
upon NDA acceptance in the first quarter of 2008, as well as one-time costs owed to Forest
Laboratories during 2008 as agreed upon in the amendment to our agreement with Forest Laboratories.
Effective January 9, 2004, pursuant to our collaboration agreement with Forest Laboratories,
Forest Laboratories assumed responsibility for funding all continuing development of Savella,
including the funding of clinical trials and regulatory approvals. This funding received from
Forest Laboratories for sponsored development reimbursements is included as a component of our
revenue under collaborative agreement on the consolidated statement of operations. We agreed upon
an alternative cost sharing arrangement with Forest Laboratories for the second Phase III trial
only. In connection with this arrangement, we paid for a majority of the external costs of the
second Phase III trial only, which were $9.7 million. Forest repaid us $3.2 million in 2008 and
repaid the remaining $6.5 million in January 2009 upon NDA approval.
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Selling, General and Administrative
Selling, general and administrative expenses for the year ended December 31, 2009 and 2008 is
comprised of the following:
Year Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Sales and marketing |
$ | 25,139,875 | $ | 4,921,301 | ||||
General and administrative |
16,998,583 | 12,681,519 | ||||||
$ | 42,138,458 | $ | 17,602,820 | |||||
Sales and marketing expenses increased to $25.1 million for the year ended December 31, 2009
from $4.9 million for the year ended December 31, 2008. The increase is primarily due to the costs
associated with supporting our commercial organization, which expanded from 11 people for most of
2008 to 115 in 2009, including salary, commission and benefits, travel expenses, training costs and
automobile fleet costs, as well as marketing expenses incurred during 2009.
General and administrative expenses increased to $17.0 million for the year ended December 31,
2009 from $12.7 million for the year ended December 31, 2008. The increase is primarily due to
increased consulting costs incurred during 2009 in connection with business development activities,
increased legal fees incurred during 2009 in connection with patent filing activities and
compensation expense recognized for contingent payments in connection with our acquisition of
Proprius.
In-Process Research and Development
We incurred in-process research and development in 2008 but not in 2009. In-process research
and development represents the fair value of acquired, to-be-completed research projects, including
those related to personalized medicine services and therapeutic candidates, obtained in connection
with the Proprius acquisition in March 2008 that had not reached technological feasibility at the
acquisition date and are not expected to have an alternative future use. Accordingly, the $12.6
million of in-process research and development, consisting of $10.2 million related to personalized
medicine services and $2.4 million related to therapeutic candidates, was charged to our
consolidated statement of operations during the first quarter of 2008. The total estimated value
of approximately $12.6 million of the research projects was determined by estimating the costs to
develop the acquired technology into a commercially viable product, estimating the future net cash
flows from the project once commercially viable, and discounting the net cash flows to their
present value using a discount rate of 30%.
The personalized medicine services required certain validation work prior to the anticipated
launch in late 2008. The validation work was completed and our laboratory was certified prior to
the October 2008 launch. The personalized medicine services are being marketed to rheumatologists.
The therapeutic products acquired from Proprius consisted of early clinical-stage candidates,
which include a product to treat pain and a product to treat rheumatoid arthritis. Substantial
additional research and development will be required prior to any of our acquired therapeutic
programs reaching technological feasibility. In addition, once proof of concept studies are
completed, each product candidate acquired will need to complete a series of clinical trials and
receive FDA or other regulatory approvals prior to commercialization. Due to the early stage of
development for these therapeutic products, we are unable to estimate with certainty the time and
investment required to develop these products. These programs may never reach technological
feasibility or develop into products that can be marketed profitably. In addition, we cannot
guarantee that we will be able to develop and commercialize products before our competitors develop
and commercialize products for the same indications. The successful development of Proprius
therapeutic products could result in potential milestone payments of up to $37.5 million. At the
present time, we are not funding the development of these two products.
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Goodwill Impairment
We assess our goodwill for
impairment as of December 1 of each year, and whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. For 2009, our
annual impairment review coincided with a series of facts and circumstances indicating that our
goodwill might be impaired, including revised projections for our personalized medicine services
business reflecting current product demand and our cash collection profile.
We measure for potential impairment of goodwill associated with each of our reporting units
based on a projected discounted cash flow method using a discount rate that we believe is
commensurate with the risk inherent in our current business model and a market approach method
using market multiples of similar companies. The evaluation of asset impairment requires us to make
assumptions about future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed or estimated amounts.
Upon completion of our analysis, we concluded that the goodwill related to our personal
medicine services reporting unit was fully impaired, resulting in a $1.1 million impairment charge.
We also concluded that the goodwill related to our therapeutics reporting unit in the amount of
$21.9 million was not impaired. There were no such charges in 2008.
Interest Income
Interest income for the year ended December 31, 2009 was $1.6 million compared to $4.7 million
for the year ended December 31, 2008. The decrease in interest income for the year ended December
31, 2009 compared to the corresponding period in 2008 is primarily due to a general decrease in
interest rates and related yields experienced during 2009 compared to 2008, as well as maturing
securities being reinvested at lower rates.
Comparison of Years Ended December 31, 2008 and 2007
Revenues Under Collaborative Agreement
We recognized revenues under our collaborative agreement with Forest Laboratories of $16.7
million for the year ended December 31, 2008 compared to $13.4 million for the year ended December
31, 2007. The increase in revenues under our collaborative agreement is due to a $10.0 million
milestone payment, net of a $0.5 million sublicense fee to Pierre Fabre, and $3.2 million
reimbursement for one-third of the costs paid in connection with the second Phase III trial for
Savella received from Forest Laboratories in February 2008 upon acceptance of our NDA. This
compares to $10.0 million in milestone payments, net of $0.5 million in sublicense fees to Pierre
Fabre, received from Forest Laboratories during 2007. The revenues recorded during 2008 and 2007
consist solely of amounts earned or reimbursed to us pursuant to our collaboration agreement with
Forest Laboratories, entered into in January 2004, for the development and marketing of Savella.
Such revenues include the recognition of the upfront payment of $25.0 million from Forest
Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million license
payment received from Forest Laboratories in July 2007 to extend the territory to include Canada
recognized on a straight-line basis over the remainder of the 8 year amortization period, sponsored
development reimbursements, funding received from Forest Laboratories for certain of our employees
devoted to the development of Savella and the milestone payments and reimbursement payment
described above. The amount of sponsored development reimbursements from Forest Laboratories and
funding received from Forest Laboratories for certain of our employees devoted to the development
of Savella changes periodically and may be eliminated based on the level of development activity.
Revenue from our personalized medicine services will be recognized as cash payments for the
services are received. While we began offering these services in October 2008, no cash payments
were received and accordingly, no revenue was recognized during 2008.
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Cost of Personalized Medicine Testing Services
Cost of personalized medicine testing services primarily consists of the compensation and
benefits (including bonuses and stock-based compensation) of laboratory personnel, laboratory
supplies, outside laboratory costs, shipping and distribution costs and facility-related expenses.
Our costs of personalized medicine services of $0.3 million during 2008 are attributable to the
launch of our personalized medicine services during the fourth quarter of 2008.
Research and Development
Research and development expenses for the year ended December 31, 2008 were $9.2 million
compared to $7.2 million for the year ended December 31, 2007. The increase in research and
development expenses is primarily attributable to a $1.0 million milestone payment upon NDA
acceptance in connection with our collaboration agreement with Forest Laboratories, as well as
costs incurred during 2008 in connection with our proof of concept studies for new compounds,
development costs incurred during 2008 in connection with validation activities for our
personalized medicine services and increased stock-based compensation expense related to options
granted in 2008. This increase in research and development costs during 2008 was partially offset
by costs incurred during 2007 in connection with the second Phase III Savella trial, which was
completed during the second quarter of 2007. During the year ended December 31, 2008, we incurred
total costs of $1.1 million, excluding milestone payments, in connection with our Phase III Savella
programs compared to a total of $2.7 million during the year ended December 31, 2007.
Selling, General and Administrative
Selling, general and administrative expenses for the year ended December 31, 2008 were $17.6
million compared to $10.0 million for the year ended December 31, 2007. The increase in selling,
general and administrative expenses is primarily due to hiring and recruitment costs in connection
with the hiring of our sales force, including salary expense for the newly-hired sales team,
marketing expenses incurred in connection with the launch of our personalized medicine services,
higher legal fees due to increased patent filing activity and increased stock-based compensation
expense related to options granted during 2008.
In-Process Research and Development
In-process research and development represents the fair value of acquired, to-be-completed
research projects, including those related to personalized medicine services and therapeutic
candidates, obtained in connection with the Proprius acquisition in March 2008 that had not reached
technological feasibility at the acquisition date and are not expected to have an alternative
future use. Accordingly, the $12.6 million of in-process research and development, consisting of
$10.2 million related to personalized medicine services and $2.4 million related to therapeutic
candidates, was charged to our consolidated statement of operations during the first quarter of
2008.
Interest Income
Interest income for the year ended December 31, 2008 was $4.7 million compared to $7.3 million
for the year ended December 31, 2007. The decrease in interest income for the year ended December
31, 2008 compared to the corresponding period in 2007 is primarily due to a general decrease in
interest rates and related yields experienced during 2008 compared to 2007.
Liquidity and Capital Resources
At December 31, 2009, we had cash, cash equivalents and short-term investments of $141.7
million compared to cash, cash equivalents and short-term investments of $145.5 million at December
31, 2008. Working capital at December 31, 2009 totaled $140.5 million compared to $138.8 million at
December 31, 2008. We have invested a substantial portion of our available cash in AAA-rated
marketable debt instruments of governmental agencies and corporate debt securities. We have
established guidelines relating to our investments with a goal to preserve principal and maintain
liquidity.
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Net cash used in operating activities as disclosed in our Statement of Cash Flows was $2.4
million for the year ended December 31, 2009 compared to net cash provided by operating activities
of $0.2 million and $2.8 million for the years ended December 31, 2008 and 2007, respectively. The
primary source of cash from operations during the year ended December 31, 2009 was the $25.0
million milestone payment and the $6.5 million reimbursement of expenses received from Forest
Laboratories, offset by cash used in operations including $9.2 million for changes in operating
assets and liabilities (excluding impact of initial deferred revenue amount from commercial
milestone payment) and non-cash charges of $11.3 million. The primary source of cash from
operations during the year ended December 31, 2008 was the $10.0 million milestone payment and the
$3.2 million reimbursement of expenses received from Forest Laboratories, offset by cash used in
operations including $0.7 million for changes in operating assets and liabilities and non-cash
charges of $19.2 million that includes $12.6 million of the write-off of in-process research and
development related to the acquisition of Proprius. The primary source of cash from operations
during the year ended December 31, 2007 was the $10.0 million in aggregate milestone payments
received from Forest Laboratories and the $1.0 million license payment received from Forest
Laboratories to extend the territory to include Canada, offset by cash used in operations including
$1.9 million for changes in operating assets and liabilities and non-cash charges of $1.2 million.
Net cash used in investing activities as disclosed in our Statement of Cash Flows was $12.3
million for the year ended December 31, 2009 compared to $19.8 million and $37.4 million for the
years ended December 31, 2008 and 2007, respectively. These fluctuations resulted primarily from
timing differences in investment purchases, sales and maturities and the fluctuations in our
portfolio mix between cash equivalents and short-term investment holdings. We expect similar
fluctuations to continue in future periods. Additionally, the fluctuation during 2008 is impacted
by $39.1 million in cash paid for the acquisition of Proprius, which amount includes transaction
costs.
Net cash provided by financing activities as disclosed in our Statement of Cash Flows was $0.9
million for the year ended December 31, 2009 compared to $2.0 million and $72.0 million for the
years ended December 31, 2008 and 2007, respectively. The decrease in net cash provided by
financing activities during 2009 compared to 2008 and 2007 was primarily the result of proceeds of
approximately $0.9 million from the exercise of stock options during 2009 compared to proceeds of
approximately $2.0 million from the exercise of stock options and warrants during 2008 and net
proceeds of approximately $69.9 million from the completion of our secondary offering of common
stock during June 2007 and proceeds of approximately $2.1 million from the exercise of stock
options during 2007.
The following table summarizes our long-term contractual obligations at December 31, 2009:
Less than | ||||||||||||||||||||
1 year | 1 3 years | 4 5 years | More than 5 | |||||||||||||||||
Total | (2010) | (2011 2013) | (2014 2015) | years (2016 +) | ||||||||||||||||
Operating leases |
$ | 2,370,594 | $ | 903,062 | $ | 1,460,308 | $ | 7,224 | $ | | ||||||||||
Purchase obligations (1) |
| | | | | |||||||||||||||
Total |
$ | 2,370,594 | $ | 903,062 | $ | 1,460,308 | $ | 7,224 | $ | | ||||||||||
(1) | Purchase obligations include agreements to purchase goods or services, including consulting services, that are enforceable and legally binding on us and that specify all significant terms. This includes contracts that are cancelable with notice and the payment of an early termination penalty. Purchase obligations exclude agreements that are cancelable without penalty and also exclude accrued liabilities to the extent presented on the balance sheet as of December 31, 2009. |
Other commercial and contractual commitments include potential milestone payments of up to
$0.5 million to Pierre Fabre and sublicense payments to Pierre Fabre based on 5% of any upfront and
milestone payments received from Forest Laboratories, milestone payments up to $37.5 million
associated with the development of Proprius therapeutic candidates, which are not currently in
active development, milestone payments of up to $116.0 million to AlphaRx in connection with the
successful development and commercialization of a product associated with the in-license of a
topical NSAID therapy, which is not currently in active development, milestone payments up to
approximately $37.0 million in connection with license agreements related to our POC programs that
are not currently in active development, milestone payments up to $3.0 million to Cellatope in
connection with the commercial development of a Lupus monitoring application and milestone payments
up to $3.9 million in connection with license agreements related to certain personalized medicine
services. Additionally, the Company is obligated to reimburse Forest Laboratories for a portion of
the active ingredient costs for sampling. The amount of such obligation will vary depending on
Forests annual marketing plan. In the event we move forward with
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development of a product or service under any of these arrangements, in most instances, we
would also be obligated to make royalty payments.
Unless and until we can consistently generate significant cash from our operations, we expect
to continue to fund our operations with existing cash resources that were primarily generated from
the proceeds of offerings of our equity securities, from revenue under our collaboration agreement
with Forest and, if available to us, cash from financings.
Our current expected primary cash needs on both a short term and long-term basis are for
supporting a commercial infrastructure, the development of candidates under our POC trials, if any,
our personalized medicine services, and general research, working capital and other general
corporate purposes and the identification, acquisition or license, and development of, potential
future products and services. Excluding the amounts payable under our merger agreement with
Proprius and our agreements with Pierre Fabre, AlphaRx, Cellatope and various licensors under our
POC trials and personalized medicine services, and the costs of in-licensing or acquiring
additional compounds or companies and funding clinical development for any product (other than our
ongoing POC trials) that we may in-license or acquire, we estimate that based on our current
business plan, net cash required to fund operating expenses will approximate $15.0 million to $20.0
million for the year 2010. In addition, one of our ongoing goals is to continue to identify and
in-license new products and product candidates. In the event we acquire, license or develop any new
products or product candidates, or begin any new POC, the amount to fund our operations for 2010
would increase, possibly materially. We expect that our net losses will continue for at least the
next several years as we seek to acquire, license or develop additional products, product
candidates and services. Such losses may fluctuate, the fluctuations may be substantial, and we may
never become profitable.
Based on our current business plan, we believe our cash and cash equivalents and short-term
investments balances at December 31, 2009 are sufficient to fund operations through at least 2011.
However, we are actively continuing to evaluate various potential strategic transactions, including
the potential acquisitions of products, product candidates and companies, and other alternatives.
In order to acquire or develop additional products and product candidates, we will likely require
additional capital. The amount of capital we require is dependent upon many forward-looking factors
that could significantly increase our capital requirements, including the following:
| the costs of establishing a commercial infrastructure; | ||
| the costs and timing of development and regulatory approvals for all our products and services; | ||
| the costs associated with operating a clinical laboratory; | ||
| the extent to which we acquire or invest in other products, product candidates and businesses; | ||
| the costs of in-licensing drug candidates; | ||
| the ability of Forest Laboratories and us to reach sales milestones and other events under our collaboration agreement; and | ||
| the costs of commercialization of any future products and services. |
Because we are unable to predict the outcome of the foregoing factors, some of which are
beyond our control, we are unable to estimate with certainty our mid to long-term capital needs.
Unless and until we can generate a sufficient amount of product and service revenue, if ever, we
expect to finance future capital needs through public or private equity or debt offerings or
collaboration and licensing arrangements, as well as interest income earned on cash balances. We do
not currently have any commitments or specific plans for future external funding. We may not be
able to raise additional capital and the funds we raise, if any, may not allow us to maintain our
current and planned operations. If we are unable to obtain additional capital, we may be required
to delay, scale back or eliminate our sales force or some or all of our development of existing or
future product candidates and personalized medicine services and discontinue the evaluation or
completion of any proposed acquisitions or strategic transactions.
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Off-Balance Sheet Arrangements
To date, we have not had any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which
are established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures. On an ongoing basis, we evaluate our estimates, including those related to
revenue recognition, research and development expenses, stock-based compensation and goodwill. We
base our estimates on historical experience and on various other assumptions that are believed 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 are the critical accounting policies that affect the significant judgments
and estimates used in the preparation of our financial statements (see also the notes to our
financial statements).
Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectability is reasonably assured. Some of our agreements contain multiple
elements and in accordance with these agreements, we may be eligible for upfront license fees,
sponsored development reimbursements, funding for certain of our employees, co-promotion
reimbursement, development and commercial milestones and royalties. Consideration received for
research and development milestones will be recognized at the date of achievement if the milestone
is non-refundable, substantive in nature, and the achievement was not reasonably assured at the
inception of the agreement. Milestone payments are not considered substantive if any portion of the
associated milestone payment is determined to not relate solely to past performance or if a portion
of the consideration earned from achieving the milestone may be refunded.
Revenues under our collaborative agreement include upfront license fees, sponsored development
reimbursements, funding for certain of our employees, and development milestones. Amounts received
for upfront license fees under multiple-element arrangements are deferred and recognized over the
period such arrangements require on-going services or performance. Amounts received for sponsored
development activities, including funding received for certain of our employees, are recognized as
research costs are incurred over the period specified in the related agreement or as the services
are performed. Amounts received for development milestones are recognized upon achievement if they
meet the research and development milestone recognition policy. Any amounts received prior to
satisfying revenue recognition criteria are recorded as deferred revenue.
Commercial revenues include royalties on product sales of Savella, revenue from the New Drug
Application (NDA) approval milestone, sales-based milestones, and reimbursement for co-promotion
of Savella. Royalty revenue is recognized based on royalties reported by Forest Laboratories
during the quarter with such payment due within 45 days after quarter end. The royalty rate as
stated in the agreement with Forest Laboratories is subject to prospective adjustment based on Forests total
payment obligations to Cypress and Pierre Fabre; however, the royalty rate cannot be reduced below
the stipulated floor. Revenue from the NDA approval milestone achieved in January 2009, net of
sublicense fees, is being recognized ratably over the period of 13 years from the date the
milestone was achieved, which corresponds with the obligation period and patent life. As we have an obligation to
reimburse Forest for a portion of the cost for samples of Savella, this milestone was not
considered substantive and therefore, we determined that the consideration received from Forest was
inseparable from the on-going obligation. We regularly review the period of time that we expect to
be satisfying these obligations, and if there are changes in facts and circumstances, we reassess
the period of time that revenue is being recognized and adjust the period accordingly. Revenue
related to sales-based milestones, net of sublicense fees, is recognized upon the achievement of
the specified milestones, which is substantive, was not readily assured at the inception of the
agreement and is non-refundable. Co-promotion
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reimbursement revenue is recognized in the period in which the detailing calls (measured on a
per physician call basis) are performed using an estimated reimbursement rate based on historical
cost information provided to us by Forest. We recognize this revenue as services have been
rendered, the reimbursement rate is determinable and collectability is reasonably assured. The
corresponding costs associated with the co-promotion reimbursement are included as a component of
selling, general and administrative expense on the Consolidated Statement of Operations.
In connection with our personalized medicine services, such services are performed based on a
written test requisition form. We generally bill third-party payers for these services upon
generation and delivery of a report to the ordering physician. As such, we take assignment of
benefits and the risk of collection with the third-party payer. We currently do not have any
contracts with third-party payers. We usually bill the patient directly for amounts owed after
multiple requests for payment have been denied or only partially paid by the insurance carrier as
allowed by law. As relatively new tests, the personalized medicine services offered by us may not
be covered under their reimbursement policies. Consequently, we pursue case-by-case reimbursement
where policies are not in place or payment history has not been established. As a result, at the
time of delivery of the report to the ordering physician, and in the absence of a reimbursement
contract or sufficient payment history, collectibility cannot reasonably be assured and revenues
are therefore only recognized at the time cash is collected.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel expenses
for our research and development activities, fees paid to external service providers to conduct
clinical trials, patient enrollment costs, fees and milestone payments under our license and
development agreements and costs for facilities, supplies, materials and equipment. All such costs
are charged to research and development expenses as incurred. Clinical trial costs are a
significant component of research and development expenses and include costs associated with
third-party contractors. We accrue clinical trial expenses based on work performed, which relies on
estimates of total costs incurred based on completion of patient studies and other events. Actual
clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the
period in which they become known. Historically, adjustments have not resulted in material changes
to research and development expenses; however, a modification in the protocol of a clinical trial
or cancellation of a trial could result in a charge to our results of operations.
Stock-Based Compensation
We grant options to purchase our common stock to our employees and directors under our equity
incentive plan. The exercise price of stock options granted under our equity incentive plan shall
not be less than the fair market value of our common stock on the date of grant. Options granted
under our equity incentive plan have a term of up to ten years and generally vest over four years.
Stock-based compensation expense recognized for the years ended December 31, 2009, 2008 and 2007
was $7.2 million, $7.4 million and $4.9 million, respectively.
We estimate the fair value of options granted using the Black-Scholes option valuation model.
This estimate is affected by our stock price as well as assumptions regarding a number of complex
inputs that require us to make significant estimates and judgments. These inputs include the
expected term of employee stock options, the expected volatility of our stock price, the risk-free
interest rate and expected dividends.
We estimate the expected term of options granted based on the output derived under the
simplified method as given the level of outstanding stock options and as a result of stock price
volatility, we do not have sufficient historical exercise data to provide a more reasonable basis
upon which to estimate expected term. We estimate the volatility of our common stock at the date of
grant using our historical price volatility based on our assessment that this approach is the most
representative of future stock price trends. We base the risk-free interest rate that we use in the
Black-Scholes option valuation model on the implied yield in effect at the time of option grant on
U.S. Treasury zero-coupon issues with equivalent remaining terms. We have never paid any cash
dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option
valuation model.
Stock-based compensation accounting requires us to estimate forfeitures at the time of grant
and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.
Given the standard vesting provisions of our stock options and minimal historical turnover, we have
not estimated forfeitures and instead adjust
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our stock-based compensation expense as forfeitures occur. We believe that the impact on
stock-based compensation between estimating forfeitures and recording the impact as the forfeitures
occur would not be material.
As noted above, in order to calculate the compensation expense that we must recognize, we must
make a variety of assumptions, all of which are based on our beliefs, expectations and assumptions
at the time the assumptions are made. These beliefs, expectations and assumptions may vary over
time and we may elect to use different assumptions under the Black-Scholes option valuation model
in the future, which could materially affect our net income or loss and net income or loss per
share.
Goodwill
On March 4, 2008, we acquired all of the outstanding stock of Proprius, a privately-held
specialty pharmaceutical company. The acquisition of Proprius resulted in the recording
of goodwill, which represented the excess of the purchase price over the fair value of the net
assets acquired. We review goodwill for impairment on an annual basis as of December 1, as
well as when events or changes in circumstances indicate that the carrying value may not be
recoverable. The accounting guidance requires that we perform a two-step impairment test on
goodwill. In the first step of the impairment analysis, we compare the fair value of our reporting
units to which goodwill is assigned to their carrying value. In calculating fair value, we use a
combination of an income approach using a discounted cash flow method and a market approach using
comparable publicly traded companies. The income approach is a valuation technique under which we
estimate future cash flows using the reporting units financial forecasts. Future estimated cash
flows are discounted to their present value to calculate fair value. The market approach utilizes
market multiples of similar companies as the basis for the valuation. If the carrying value of the
long-term assets exceeds the fair value of the reporting unit, then we must perform the second step
of the impairment test, whereby the carrying value of the reporting units goodwill is compared to
its implied fair value. If the carrying value of the goodwill exceeds the implied fair value, an
impairment loss equal to the difference would be recorded.
For 2009, our annual impairment review during the fourth quarter coincided with a series of
facts and circumstances indicating that our goodwill might be impaired, including revised
projections for the personalized medicine services business reflecting current product demand and
our cash collection profile. No events or circumstances occurred indicating the potential for
impairment in prior quarters.
Based on the first step of the analysis, it was determined that the fair value of the
therapeutics business was in excess of its carrying value, including the goodwill assigned to this
reporting unit. However, the first step of the analysis with respect to the personalized medicine
services business indicated that its carrying value, including goodwill assigned to this reporting
unit, was in excess of its respective fair value. Therefore, the second step of the impairment
analysis was performed for the personalized medicine services reporting unit. As the implied fair
value of the personalized medicine services business was negative, we concluded that all of the
goodwill recorded at this reporting unit was impaired. As a result, we recorded a non-cash
goodwill impairment charge to operations during the fourth quarter of 2009 in the amount of $1.1
million. Our remaining goodwill at December 31, 2009 in the amount of $21.9 million relates to our
therapeutics reporting unit. Our recent analyses indicate that this goodwill is not impaired.
However, our conclusion could change in the future, if our assumptions about future economic
conditions, revenue growth or earnings change. Any resulting impairment charge could have a
material effect on our financial position and results of operations in the future.
New Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) amended its authoritative
guidance regarding multiple-deliverable revenue arrangements. This guidance addresses how to
separate deliverables and how to measure and allocate consideration to one or more units of
accounting. Specifically, the guidance requires that consideration be allocated among multiple
deliverables based on relative selling prices. The guidance establishes a selling price hierarchy
of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling
price. We will be required to adopt this amended guidance effective for the fiscal year beginning
January 1, 2011, although earlier adoption is permitted. We are currently evaluating the effect
that this guidance will have on our consolidated financial position and results of operations.
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Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We have invested our excess cash in United States government securities, corporate debt
securities and money market funds with strong credit ratings. As a result, our interest income is
most sensitive to changes in the general level of United States interest rates. We do not use
derivative financial instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions in any material fashion. Accordingly, we believe that, while
the investment-grade securities we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising from changes in
interest rates, foreign currency exchange rates, commodity prices, equity prices or other market
changes that affect market risk sensitive instruments. A hypothetical 1% adverse move in interest
rates along the entire interest rate yield curve over a three month period would not materially
affect the fair value of our financial instruments that are exposed to changes in interest rates.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and the reports of our independent registered public
accounting firm are included in this report on pages F-1 through F-22.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the timelines specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can only provide reasonable assurance of achieving the desired control objectives, and in reaching
a reasonable level of assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of December 31, 2009 at the reasonable assurance level.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2009. Ernst & Young, LLP, our
independent registered public accounting firm, has issued an attestation report on our internal
control over financial reporting, which is included herein.
There have been no changes in our internal control over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cypress Bioscience, Inc.
Cypress Bioscience, Inc.
We have audited Cypress Bioscience, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Cypress Bioscience, Inc.s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the
companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cypress Bioscience, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December 31, 2009 and 2008,
and the related consolidated statements of operations, stockholders equity and cash flows for each
of the three years in the period ended December 31, 2009 of Cypress Bioscience, Inc. and our report
dated March 30, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
March 30, 2010
March 30, 2010
48.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item will be contained in our Definitive Proxy Statement for our
2010 Annual Meeting of Stockholders under the headings Election of Directors and Executive
Officers. Such information is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics, which covers all employees, including
our principal executive, financial and accounting officers. A copy of our Code of Business Conduct
and Ethics is posted on our website, www.cypressbio.com. We also will post on our website any
waiver or amendment (other than technical, administrative and other non-substantive amendments) to
our Code of Business Conduct and Ethics that is granted to or affects the duties of any of our
directors or our principal executive, financial and accounting officers. Such posting will be made
within five business days after the date of the waiver or amendment and will remain on the website
for at least twelve months.
Item 11. Executive Compensation
Information required by this item will be contained in our Definitive Proxy Statement for our
2010 Annual Meeting of Stockholders under the heading Executive Compensation and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information required by this item will be contained in our Definitive Proxy Statement for our
2010 Annual Meeting of Stockholders under the headings Security Ownership of Certain Beneficial
Owners and Management and Equity Compensation Plan Information and is incorporated herein by
reference.
Item 13. Certain Relationships, Related Transactions and Director Independence
Information required by this item will be contained in our Definitive Proxy Statement for our
2010 Annual Meeting of Stockholders under the headings Certain Transactions and Independence of
the Board of Directors and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required by this item will be contained in our Definitive Proxy Statement for our
2010 Annual Meeting of Stockholders under the heading Principal Accountant Fees and Services and
is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements
Our financial statements are included herein as required under Item 8 of this Annual Report on Form
10-K. See Index on page F-1.
Financial statement schedules have been omitted since they are either not required, not applicable
or the information is otherwise included.
(b) Exhibits
Exhibit | ||||
No. | Description | Incorporated by Reference to | ||
2.1 |
Agreement and Plan of Merger dated February 23, 2008 by among the Registrant, Propel Acquisition Sub, Inc., Proprius, Inc. and Michael J. Walsh, as the Stockholders Representative(*) | Exhibit 2.1 to Form 8-K filed on March 5, 2008, File No. 000-12943 | ||
3.1 |
Second Amended and Restated Certificate of Incorporation | Appendix C to Definitive Proxy Statement filed with the Securities and Exchange Commission on August 11, 2003, File No. 000-12943 | ||
3.2 |
Certificate of Amendment of Second Amended and Restated Certificate of Incorporation | Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 2009, File No. 000-12943 | ||
3.3 |
Fourth Amended and Restated Bylaws | Exhibit 3.1 to Form 8-K filed on May 6, 2009, File No. 000-12943 | ||
4.1 |
Form of Stock Certificate | Exhibit 4.1 to Form S-1 Registration Statement No. 33-41225 | ||
10.1 |
2000 Equity Incentive Plan() | Exhibit 10.25 to Form 10-K for the year ended December 31, 2000, File No. 000-12943 | ||
10.2 |
Form of Stock Option Agreement for use with the 2000 Equity Incentive Plan() | Exhibit 10.26 to Form 10-K for the year ended December 31, 2000, File No. 000-12943 | ||
10.3 |
2009 Equity Incentive Plan() | Exhibit 99.1 to Form 8-K filed on June 17, 2009, File No. 000-12943 | ||
10.4 |
Equity Investment Agreement dated June 6, 2003 between the Registrant and Pierre Fabre Medicament | Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2003, File No. 000-12943 | ||
10.5 |
Warrant to purchase Common Stock of the Registrant issued to Pierre Fabre Medicament on June 6, 2003 | Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2003, File No. 000-12943 | ||
10.6 |
Third Restated License Agreement dated January 9, 2004 between the Registrant and Pierre Fabre Medicament(*) | Exhibit 10.23 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943 | ||
10.7 |
First Restated Trademark Agreement dated January 9, 2004 between the Registrant and Pierre Fabre Medicament(*) | Exhibit 10.24 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943 | ||
10.8 |
Purchase and Supply Agreement dated January 9, 2004 between the Registrant and Pierre Fabre Medicament(*) | Exhibit 10.25 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943 |
51.
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Exhibit | ||||
No. | Description | Incorporated by Reference to | ||
10.9
|
License and Collaboration Agreement dated January 9, 2004 between the Registrant and Forest Laboratories Ireland Limited(*) | Exhibit 10.26 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943 | ||
10.10
|
Side Letter dated January 9, 2004 among the Registrant, Forest Laboratories Ireland Limited and Pierre Fabre Medicament(*) | Exhibit 10.27 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943 | ||
10.11
|
Letter Agreement dated January 9, 2004 among the Registrant, Forest Laboratories Ireland Limited and Pierre Fabre Medicament(*) | Exhibit 10.28 to the Form 10-K for the year ended December 31, 2003, File No. 000-12943 | ||
10.12
|
License and Collaboration Agreement dated June 29, 2005 between the Registrant and Organon (Ireland) Ltd. (*) | Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2005, File No. 000-12943 | ||
10.13
|
First Amendment to Office Lease dated September 6, 2006 between the Registrant and CA-Park Plaza Limited Partnership | Exhibit 10.28 to Form 10-Q for the quarter ended September 30, 2006, File No. 000-12943 | ||
10.14
|
2009 Bonus Plan() | Exhibit 10.1 to the Form 8-K filed on April 14, 2009, File No. 000-12943 | ||
10.15
|
Non-Competition Agreement dated February 23, 2008 among the Registrant, Proprius, Inc. and Michael J. Walsh | Exhibit 10.3 to the Form 8-K filed on February 25, 2008, File No. 000-12943 | ||
10.16
|
Amended and Restated Employment Agreement dated December 31, 2008 between the Registrant and Dr. Jay Kranzler() | Exhibit 10.19 to the Form 10-K for the year ended December 31, 2008, File No. 000-12943 | ||
10.17
|
Amended and Restated Severance Benefits Plan adopted on December 31, 2008() | Exhibit 10.20 to the Form 10-K for the year ended December 31, 2008, File No. 000-12943 | ||
10.18
|
Form of Restricted Stock Unit Agreement for use with 2009 Equity Incentive Plan() | |||
10.19
|
Amendment to Amended and Restated Employment Agreement dated December 24, 2009 between Dr. Jay Kranzler and the Registrant() | |||
10.20
|
Second Amendment to Lease dated December 21, 2009, by and between ARE-SD REGION NO. 20, LLC and the Registrant | |||
10.21
|
Fourth Amendment to Lease dated December 29, 2009 between by and between UTC PROPERTIES LLC and the Registrant | |||
21.1
|
Subsidiaries of the registrant | |||
23.1
|
Consent of Independent Registered Public Accounting Firm | |||
24.1
|
Power of Attorney | Reference is made to the signature page of this report | ||
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted) | |||
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted) |
52.
Table of Contents
Exhibit | ||||
No. | Description | Incorporated by Reference to | ||
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted) |
* | Confidential Treatment has been granted to certain portions of this agreement. | |
| Indicates management contract or compensatory plan or arrangement. |
53.
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Cypress Bioscience, Inc. |
||||
Date: March 30, 2010 | By: | /s/ Jay D. Kranzler | ||
Chief Executive Officer | ||||
Date: March 30, 2010 | By: | /s/ Sabrina Martucci Johnson | ||
Chief Financial Officer, Chief | ||||
Operating Officer and Executive Vice President | ||||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Jay D. Kranzler, M.D., Ph.D. and Sabrina Martucci Johnson, and each of them, as his or
her true and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this Form 10-K, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith, as fully to intents
and purposes as he or she might or could do in person, hereby ratifying and confirming that all
said attorneys-in-fact and agents, or any of them or their substitute or resubstitute, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following person on behalf of the Registrant and in the capacities and
on the dates indicated.
Signature | Title | Date | ||
/s/ Jay D. Kranzler
|
Chief Executive Officer and Chairman of the Board | March 30, 2010 | ||
Jay D. Kranzler, M.D., Ph.D.
|
(Principal Executive Officer) | |||
/s/ Sabrina Martucci Johnson
|
Chief Financial Officer, | |||
Sabrina Martucci Johnson
|
Chief Operating Officer and Executive Vice President | March 30, 2010 | ||
(Principal Financial and Accounting Officer) | ||||
/s/ Roger Hawley
|
Director | March 30, 2010 | ||
Roger Hawley |
||||
/s/ Amir H. Kalali
|
Director | March 30, 2010 | ||
Amir H. Kalali |
||||
/s/ Jon W. McGarity
|
Director | March 30, 2010 | ||
Jon W. McGarity |
||||
/s/ Jean-Pierre Millon
|
Director | March 30, 2010 | ||
Jean-Pierre Millon |
||||
/s/ Perry B. Molinoff
|
Director | March 30, 2010 | ||
Perry B. Molinoff |
||||
/s/ Tina S. Nova
|
Director | March 30, 2010 | ||
Tina S. Nova |
||||
/s/ Daniel H. Petree
|
Director | March 30, 2010 | ||
Daniel H. Petree |
54.
Table of Contents
CYPRESS BIOSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cypress Bioscience, Inc.
Cypress Bioscience, Inc.
We have audited the accompanying consolidated balance sheets of Cypress Bioscience, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2009. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cypress Bioscience, Inc. at December 31,
2009 and 2008, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Cypress Bioscience, Inc.s internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 30, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
March 30, 2010
March 30, 2010
F-2
Table of Contents
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 38,617,954 | $ | 52,490,414 | ||||
Short-term investments |
103,055,417 | 93,004,191 | ||||||
Receivable from Forest Laboratories |
5,611,476 | 165,880 | ||||||
Prepaid expenses and other current assets |
4,792,134 | 1,048,668 | ||||||
Total current assets |
152,076,981 | 146,709,153 | ||||||
Property and equipment, net |
1,273,026 | 1,088,749 | ||||||
Goodwill |
21,928,598 | 26,465,627 | ||||||
Restricted cash |
487,111 | | ||||||
Other assets |
298,994 | 328,994 | ||||||
Total assets |
$ | 176,064,710 | $ | 174,592,523 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,172,916 | $ | 2,055,567 | ||||
Accrued compensation |
4,640,265 | 1,055,056 | ||||||
Accrued liabilities |
221,487 | 377,992 | ||||||
Payable to Forest Laboratories |
336,313 | 1,118,000 | ||||||
Current portion of deferred revenue |
5,202,056 | 3,351,416 | ||||||
Total current liabilities |
11,573,037 | 7,958,031 | ||||||
Deferred rent |
20,423 | 16,452 | ||||||
Deferred revenue, net of current portion |
23,400,136 | 6,702,832 | ||||||
Other liabilities |
487,111 | | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $.001 par value;
15,000,000 shares authorized; no shares
issued and outstanding |
| | ||||||
Common stock, $.001 par value;
90,000,000 shares authorized; 38,375,206
and 37,906,994 shares issued and
outstanding at December 31, 2009 and
2008, respectively |
38,375 | 37,907 | ||||||
Additional paid-in capital |
336,825,601 | 327,595,174 | ||||||
Accumulated other comprehensive income |
171,017 | 481,154 | ||||||
Accumulated deficit |
(196,450,990 | ) | (168,199,027 | ) | ||||
Total stockholders equity |
140,584,003 | 159,915,208 | ||||||
$ | 176,064,710 | $ | 174,592,523 | |||||
See accompanying notes to the consolidated financial statements.
F-3
Table of Contents
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues: |
||||||||||||
Revenues under collaborative agreement |
$ | 10,026,307 | $ | 16,659,099 | $ | 13,440,603 | ||||||
Commercial revenues |
16,976,200 | | | |||||||||
Revenues from personalized medicine services |
332,372 | | | |||||||||
Total revenues |
27,334,879 | 16,659,099 | 13,440,603 | |||||||||
Operating expenses: |
||||||||||||
Cost of personalized medicine services |
1,986,722 | 267,361 | | |||||||||
Research and development |
11,996,169 | 9,171,076 | 7,210,684 | |||||||||
Selling, general and administrative |
42,138,458 | 17,602,820 | 10,027,358 | |||||||||
In-process research and development |
| 12,590,000 | | |||||||||
Goodwill impairment |
1,100,000 | | | |||||||||
Total operating expenses |
57,221,349 | 39,631,257 | 17,238,042 | |||||||||
Loss from operations |
(29,886,470 | ) | (22,972,158 | ) | (3,797,439 | ) | ||||||
Interest income |
1,634,507 | 4,746,547 | 7,285,023 | |||||||||
Net income (loss) |
$ | (28,251,963 | ) | $ | (18,225,611 | ) | $ | 3,487,584 | ||||
Net income (loss) per share basic |
$ | (0.74 | ) | $ | (0.48 | ) | $ | 0.10 | ||||
Shares used in computing net income (loss) per share basic |
38,150,054 | 37,733,737 | 35,205,783 | |||||||||
Net income (loss) per share diluted |
$ | (0.74 | ) | $ | (0.48 | ) | $ | 0.10 | ||||
Shares used in computing net income (loss) per share diluted |
38,150,054 | 37,733,737 | 36,616,091 | |||||||||
See accompanying notes to the consolidated financial statements.
F-4
Table of Contents
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Common Stock | Additional | Comprehensive | Accumulated | |||||||||||||||||||||
Shares | Par Value | Paid-in Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||
Balance at December 31, 2006 |
32,169,380 | 32,169 | 240,594,665 | (68,537 | ) | (153,461,000 | ) | 87,097,297 | ||||||||||||||||
Issuance of stock in secondary offering,
net of offering costs |
4,700,000 | 4,700 | 69,871,454 | | | 69,876,154 | ||||||||||||||||||
Issuance of stock upon options exercised |
535,736 | 536 | 2,126,480 | | | 2,127,016 | ||||||||||||||||||
Issuance of stock upon warrants exercised |
3,729 | 4 | | | 4 | |||||||||||||||||||
Stock-based compensation for options
issued to non-employees |
| | 184,567 | | | 184,567 | ||||||||||||||||||
Stock-based compensation for options
issued to employees |
| | 4,935,160 | | | 4,935,160 | ||||||||||||||||||
Issuance of stock to match 401(k)
contributions |
14,739 | 15 | 178,811 | | | 178,826 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | | 3,487,584 | 3,487,584 | ||||||||||||||||||
Unrealized gain on short-term
investments |
| | | 128,370 | | 128,370 | ||||||||||||||||||
Comprehensive income |
| | | | | 3,615,954 | ||||||||||||||||||
Balance at December 31, 2007 |
37,423,584 | 37,424 | 317,891,137 | 59,833 | (149,973,416 | ) | 168,014,978 | |||||||||||||||||
Issuance of stock upon options exercised |
133,742 | 134 | 499,698 | | | 499,832 | ||||||||||||||||||
Issuance of stock upon warrants exercised |
300,000 | 300 | 1,472,400 | | | 1,472,700 | ||||||||||||||||||
Stock-based compensation for options
issued to non-employees |
| | 20,245 | | | 20,245 | ||||||||||||||||||
Stock-based compensation for options
issued to employees |
| | 7,356,623 | | | 7,356,623 | ||||||||||||||||||
Issuance of stock to match 401(k)
contributions |
49,668 | 49 | 355,071 | | | 355,120 | ||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
| | | | (18,225,611 | ) | (18,225,611 | ) | ||||||||||||||||
Unrealized gain on short-term
investments |
| | | 421,321 | | 421,321 | ||||||||||||||||||
Comprehensive loss |
| | | | | (17,804,290 | ) | |||||||||||||||||
Balance at December 31, 2008 |
37,906,994 | $ | 37,907 | $ | 327,595,174 | $ | 481,154 | $ | (168,199,027 | ) | $ | 159,915,208 | ||||||||||||
Issuance of stock upon options exercised |
316,580 | 316 | 850,823 | | | 851,139 | ||||||||||||||||||
Stock-based compensation for options
issued to employees |
| | 7,242,946 | | | 7,242,946 | ||||||||||||||||||
Issuance of stock to match 401(k)
contributions |
151,632 | 152 | 1,136,658 | | | 1,136,810 | ||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
| | | | (28,251,963 | ) | (28,251,963 | ) | ||||||||||||||||
Unrealized loss on short-term
investments |
| | | (310,137 | ) | | (310,137 | ) | ||||||||||||||||
Comprehensive loss |
| | | | | (28,562,100 | ) | |||||||||||||||||
Balance at December 31, 2009 |
38,375,206 | $ | 38,375 | $ | 336,825,601 | $ | 171,017 | $ | (196,450,990 | ) | $ | 140,584,003 | ||||||||||||
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Operating Activities |
||||||||||||
Net income (loss) |
$ | (28,251,963 | ) | $ | (18,225,611 | ) | $ | 3,487,584 | ||||
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities: |
||||||||||||
Depreciation and amortization |
497,897 | 99,895 | 37,990 | |||||||||
In-process research and development |
| 12,590,000 | | |||||||||
Amortization of premium/discount on short-term
investments |
847,386 | (1,236,996 | ) | (4,134,496 | ) | |||||||
Stock-based compensation for options issued to
non-employees |
| 20,245 | 184,567 | |||||||||
Stock-based compensation for stock and options
issued to employees |
8,379,756 | 7,711,743 | 5,113,986 | |||||||||
Non-cash portion of asset acquisition |
487,111 | | | |||||||||
Goodwill impairment |
1,100,000 | | | |||||||||
Changes in operating assets and liabilities, net of
effects from purchase of Proprius: |
||||||||||||
Prepaid expenses and other assets |
(306,437 | ) | (697,518 | ) | (40,683 | ) | ||||||
Receivable from Forest Laboratories |
(5,445,596 | ) | (23,130 | ) | 207,622 | |||||||
Accounts payable and other accrued liabilities |
2,546,053 | 2,215,080 | 709,048 | |||||||||
Payable to Forest Laboratories |
(781,687 | ) | 1,118,000 | (530,000 | ) | |||||||
Deferred rent |
3,971 | 10,779 | (2,484 | ) | ||||||||
Deferred revenue |
18,547,944 | (3,351,416 | ) | (2,219,336 | ) | |||||||
Net cash (used in) provided by operating activities |
(2,375,565 | ) | 231,071 | 2,813,798 | ||||||||
Investing Activities |
||||||||||||
Cash paid to acquire Proprius, net of cash acquired |
| (39,084,627 | ) | | ||||||||
Purchases of short-term investments |
(88,869,501 | ) | (124,117,596 | ) | (162,574,366 | ) | ||||||
Proceeds from sale of short-term investments |
77,660,752 | 144,484,871 | 125,210,000 | |||||||||
Purchase of property and equipment |
(652,174 | ) | (1,089,262 | ) | (51,592 | ) | ||||||
Deposit of restricted cash |
(487,111 | ) | | | ||||||||
Net cash used in investing activities |
(12,348,034 | ) | (19,806,614 | ) | (37,415,958 | ) | ||||||
Financing Activities |
||||||||||||
Proceeds from exercise of stock options and warrants |
851,139 | 1,972,532 | 2,127,020 | |||||||||
Proceeds from secondary offering of common stock, net |
| | 69,876,154 | |||||||||
Net cash provided by financing activities |
851,139 | 1,972,532 | 72,003,174 | |||||||||
(Decrease) increase in cash and cash equivalents |
(13,872,460 | ) | (17,603,011 | ) | 37,401,014 | |||||||
Cash and cash equivalents at beginning of the year |
52,490,414 | 70,093,425 | 32,692,411 | |||||||||
Cash and cash equivalents at end of the year |
$ | 38,617,954 | $ | 52,490,414 | $ | 70,093,425 | ||||||
See accompanying notes to the consolidated financial statements.
F-6
Table of Contents
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
Cypress Bioscience, Inc. (the Company) provides therapeutics and personalized medicine
services, facilitating improved and individualized patient care. The Companys goal is to address
the evolving needs of specialist physicians and their patients by identifying unmet medical needs
in the areas of pain, rheumatology, and physical medicine and rehabilitation, including challenging
disorders such as fibromyalgia and rheumatoid arthritis. The Company believes this approach to
improving patient care creates a unique partnership with physicians, and expects that offering
personalized medicine services and therapeutic products through the same sales organization will
provide the Company a differentiated commercial strategy and sustainable competitive advantage.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, Proprius Pharmaceuticals, Inc. (Proprius). All intercompany accounts and
transactions have been eliminated.
Accounting Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and the accompanying notes. Actual results could differ from those
estimates.
Subsequent Events
In accordance with the applicable accounting standards for the disclosure of events that occur
after the balance sheet date but before the financial statements are issued, the Company evaluated
all events or transactions that occurred after December 31, 2009 and through the date and time of
filing. Material subsequent events that would require recognition or additional disclosure in
these financial statements are disclosed in Note 15.
Cash and Cash Equivalents
The Company considers cash equivalents to be those investments which are highly liquid,
readily convertible into cash and which mature within three months from the date of purchase.
Short-Term Investments
The Companys short-term investments are classified as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses reported as a separate
component of stockholders equity and included in other comprehensive income (loss). The amortized
cost of debt securities in this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income. Realized gains and losses
and declines in value judged to be other-than-temporary, if any, on available-for-sale securities
are included in interest income. The cost of securities sold is based on the
specific-identification method. Interest on securities classified as available-for-sale is included
in interest income.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash, cash equivalents and short-term investments. The Company has established
guidelines to limit its exposure to credit risk by placing its investments in securities with
ratings of AAA, diversifying its investment portfolio and placing investments with maturities that
maintain safety and liquidity.
F-7
Table of Contents
Property and Equipment
Property and equipment are recorded at cost and depreciated over the estimated useful lives of
the assets (three to five years) using the straight-line method.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets
acquired. Goodwill has an indefinite useful life and is not amortized, but instead tested for
impairment annually, or more frequently if an event occurs indicating the potential for impairment.
Goodwill is tested by comparing the fair value of each reporting unit to the carrying value of
each reporting unit. As described in Note 4, the Company recorded an adjustment to goodwill during
the second quarter of 2009. As described in Note 5, the Company recorded an impairment charge
during the fourth quarter of 2009.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets when events or changes in
circumstances indicate that an assets carrying value may not be recoverable. An impairment loss is
recognized when the sum of the expected future undiscounted net cash flows is less than the
carrying value of the asset. The Company periodically assesses the potential impairment of its
intangible and other long-lived assets based on anticipated undiscounted cash flows.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash equivalents, prepaid
expenses, receivables, accounts payable, accrued compensation and accrued liabilities, approximate
fair value due to the nature of their short-term maturities. The fair value of short-term
investments is based upon market prices quoted on the last day of the fiscal period.
Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectability is reasonably assured. Some of the Companys agreements contain
multiple elements and in accordance with these agreements, the Company may be eligible for upfront
license fees, sponsored development reimbursements, funding for certain of its employees,
co-promotion reimbursement, development and commercial milestones and royalties. Consideration
received for research and development milestones will be recognized at the date of achievement if
the milestone is non-refundable, substantive in nature, and the achievement was not reasonably
assured at the inception of the agreement. Milestone payments are not considered substantive if any
portion of the associated milestone payment is determined to not relate solely to past performance
or if a portion of the consideration earned from achieving the milestone may be refunded.
Revenues under the Companys collaborative agreement include upfront license fees, sponsored
development reimbursements, funding for certain of its employees, and development milestones.
Amounts received for upfront license fees under multiple-element arrangements are deferred and
recognized over the period such arrangements require on-going services or performance. Amounts
received for sponsored development activities, including funding received for certain of its
employees, are recognized as research costs are incurred over the period specified in the related
agreement or as the services are performed. Amounts received for development milestones are
recognized upon achievement if they meet the research and development milestone recognition policy.
Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred
revenue.
Commercial revenues include royalties on product sales of Savella, revenue from the New Drug
Application (NDA) approval milestone, sales-based milestones, and reimbursement for co-promotion
of Savella. Royalty revenue is recognized based on royalties reported by Forest Laboratories
during the quarter with such payment due within 45 days after quarter end. The royalty rate as
stated in the agreement with Forest Laboratories is subject to prospective adjustment based on Forests total
payment obligations to Cypress and Pierre Fabre; however, the royalty rate
F-8
Table of Contents
cannot be reduced below the stipulated floor. Revenue
from the NDA approval milestone achieved
in January 2009, net of sublicense fees, is being recognized ratably over the period of 13 years
from the date the milestone was achieved, which corresponds with the obligation period and patent life. As the Company
has an obligation to reimburse Forest for a portion of the cost for samples of Savella, this
milestone was not considered substantive and therefore, the Company determined that the
consideration received from Forest was inseparable from the on-going obligation. The Company
regularly reviews the period of time that they expect to be satisfying these obligations, and if
there are changes in facts and circumstances, the Company reassesses the period of time that
revenue is being recognized and adjusts the period accordingly. Revenue related to sales-based
milestones, net of sublicense fees, is recognized upon the achievement of the specified milestones,
which is substantive, was not readily assured at the inception of the agreement and is
non-refundable. Co-promotion reimbursement revenue is recognized in the period in which the
detailing calls (measured on a per physician call basis) are performed using an estimated
reimbursement rate based on historical cost information provided to the Company by Forest. The
Company recognizes this revenue as services have been rendered, the reimbursement rate is
determinable and collectability is reasonably assured. The corresponding costs associated with the
co-promotion reimbursement are included as a component of selling, general and administrative
expense on the Consolidated Statement of Operations.
In connection with the Companys personalized medicine services, such services are performed
based on a written test requisition form. The Company generally bills third-party payers for these
services upon generation and delivery of a report to the ordering physician. As such, the Company
takes assignment of benefits and the risk of collection with the third-party payer. The Company
currently does not have any contracts with third-party payers. The Company usually bills the
patient directly for amounts owed after multiple requests for payment have been denied or only
partially paid by the insurance carrier as allowed by law. As relatively new tests, the
personalized medicine services offered by the Company may not be covered under their reimbursement
policies. Consequently, the Company pursues case-by-case reimbursement where policies are not in
place or payment history has not been established. As a result, at the time of delivery of the
report to the ordering physician, and in the absence of a reimbursement contract or sufficient
payment history, collectibility cannot reasonably be assured and revenues are therefore only
recognized at the time cash is collected.
Cost of Personalized Medicine Services
Cost of personalized medicine testing services primarily consists of the compensation and
benefits (including bonuses and stock-based compensation) of laboratory personnel, laboratory
supplies, outside laboratory costs, shipping and distribution costs and facility-related expenses.
Shipping and Handling Expenses
Shipping and handling expenses related to revenue from personalized medicine services are
included in costs of personalized medicine services.
Segment Reporting
The Financial Accounting Standards Board (FASB) guidance for Segment Reporting defines the
requirements for public enterprises to report financial and descriptive information about their
reportable operating segments. Operating segments, as defined, are components of an enterprise for
which separate financial information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance.
The Company has two reportable business segments: therapeutic products and personalized
medicine services. As both therapeutic products and personalized medicine services are sold through
the same sales force and managed by the same personnel, the Company reports, manages and evaluates
its business segment performance on net revenues, cost of personalized medicine services and
research and development expenses. The Company does not allocate selling, general and
administrative expenses to its business segments for performance assessment.
F-9
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Comprehensive Income (Loss)
Comprehensive income (loss) of the Company includes net income (loss) adjusted for the change
in net unrealized gain or loss on short-term investments. Comprehensive income (loss) for the years
ended December 31, 2009, 2008, and 2007 have been included in the Consolidated Statements of
Stockholders Equity.
Research and Development
Research and development expenses consist primarily of salaries and related personnel expenses
for the Companys research and development personnel, fees paid to external service providers to
conduct clinical trials, patient enrollment costs, fees and milestone payments under the Companys
license and development agreements, validation activities for the Companys personalized medicine
services and costs for facilities, supplies, materials and equipment. All such costs are charged to
research and development expenses as incurred. Clinical trial costs are a significant component of
research and development expenses and include costs associated with third-party contractors. The
Company accrues clinical trial expenses based on work performed, which relies on estimates of total
costs incurred based on patient enrollment, completion of patient studies and other events. Actual
clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the
period in which they become known. There were no material adjustments in any of the three years
ended December 31, 2009 for a change in estimate.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for grants of stock option awards to
employees and members of the Companys board of directors under our equity incentive plans based on
the grant-date fair value of those awards. The grant-date fair value of an award is generally
recognized as compensation expense over the awards requisite service period.
The Company uses the Black-Scholes model to compute the estimated fair value of stock option
awards. Using this model, fair value is calculated based on assumptions with respect to (i)
expected volatility of our common stock price, (ii) the periods of time over which employees and
members of our board of directors are expected to hold their options prior to exercise (expected
lives), (iii) expected dividend yield on our common stock, and (iv) risk-free interest rates.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of shares of common
stock outstanding and is presented for basic and diluted net income (loss) per share. Basic income
(loss) per share is computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during the period
increased to include, if dilutive, the number of additional common shares that would have been
outstanding if the potential common shares had been issued. The dilutive effect of outstanding
stock options and warrants is reflected in diluted income (loss) per share by application of the
treasury stock method. For the year ended December 31, 2007, the dilutive common share equivalents
for outstanding options and warrants included in diluted net income per share was 1,410,308. The
Company has excluded all outstanding stock options and warrants from the calculation of diluted
loss per share for the years ended December 31, 2009 and 2008 because such securities are
antidilutive for these periods. The total number of potential common shares excluded from the
calculation of diluted loss per common share for the years ended December 31, 2009 and 2008 was
661,637 and 687,817, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. The Company measures tax assets and
liabilities using the enacted tax rates expected to apply to taxable income in the years in which
the Company expects to recover or settle those temporary differences. The Company recognizes the
effect of a change in tax rates on deferred tax assets and liabilities in income in the period that
includes the enactment date. The Company provides a valuation allowance against net deferred tax
assets unless, based upon the available evidence, it is more likely than not that the deferred tax
assets will be realized.
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Uncertain tax positions are accounted for in accordance with FASB authoritative guidance,
which the Company adopted on January 1, 2007. Under this guidance, the impact of an uncertain
income tax position on the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain
income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Reclassification
Certain amounts in prior years financial statements have been reclassified to conform to the
current period presentation.
Impact of Recently Issued Accounting Standards
In October 2009, the FASB amended it authoritative guidance regarding multiple-deliverable
revenue arrangements. This guidance addresses how to separate deliverables and how to measure and
allocate consideration to one or more units of accounting. Specifically, the guidance requires that
consideration be allocated among multiple deliverables based on relative selling prices. The
guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2)
third-party evidence and (3) estimated selling price. The Company will be required to adopt this
amended guidance effective for the fiscal year beginning January 1, 2011, although earlier adoption
is permitted. The Company is currently evaluating the effect that this guidance will have on its
consolidated financial position and results of operations.
2. SHORT-TERM INVESTMENTS
At December 31, 2009 and 2008, short-term investments consisted of the following:
December 31, 2009 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 93,037,626 | $ | 159,185 | $ | (28,944 | ) | $ | 93,167,867 | |||||||
Corporate debt securities |
9,846,774 | 45,410 | (4,634 | ) | 9,887,550 | |||||||||||
$ | 102,884,400 | $ | 204,595 | $ | (33,578 | ) | $ | 103,055,417 | ||||||||
December 31, 2008 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 87,637,614 | $ | 468,401 | $ | (11,312 | ) | $ | 88,094,703 | |||||||
Corporate debt securities |
600,000 | 2,208 | | 602,208 | ||||||||||||
Commercial paper |
1,985,423 | 8,763 | | 1,994,186 | ||||||||||||
Certificates of deposit |
2,300,000 | 13,094 | | 2,313,094 | ||||||||||||
$ | 92,523,037 | $ | 492,466 | $ | (11,312 | ) | $ | 93,004,191 | ||||||||
The unrealized losses on investments were primarily caused by changes in interest rates. Based
on an evaluation of the credit standing of each issuer, management believes it is probable that the
Company will be able to collect all amounts due according to the contractual terms.
Realized gains or losses on available-for-sale securities were immaterial during the years
ended December 31, 2009, 2008 and 2007.
Contractual maturities for short-term investments at December 31, 2009 were as follows:
Fair Value | ||||
Due within 1 year |
$ | 90,257,632 | ||
After 1 year but within 2 years |
12,797,785 | |||
Total |
$ | 103,055,417 | ||
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3. FAIR VALUE DISCLOSURES
Effective January 1, 2008, the Company adopted the provisions for the guidance related to fair
value measurements for the Companys financial instruments. The guidance defines fair value,
establishes a fair value hierarchy for assets and liabilities measured at fair value and requires
expanded disclosures about fair value measurements.
The following table presents information about the Companys financial assets measured at fair
value on a recurring basis as of December 31, 2009, and indicates the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair value. In general, fair values
determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access. The Company classifies money
market funds and certificates of deposits as Level 1 assets. Fair values determined by Level 2
inputs utilize inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar
assets and liabilities in active markets, and inputs other than quoted prices that are observable
for the asset or liability, such as interest rates and yield curves that are observable at commonly
quoted intervals. The Company classifies U. S. government and agency debt, corporate debt
securities and commercial paper holdings as Level 2 assets. Level 3 inputs are unobservable inputs
for the asset or liability, and include situations where there is little, if any, market activity
for the asset or liability. At December 31, 2009, the Company did not hold any Level 3-classified
financial assets. In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within
which the fair value measurement in its entirety falls has been determined based on the lowest
level input that is significant to the fair value measurement in its entirety. The Companys
assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability.
Fair Value Measurements at December 31, 2009 | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Balance as of | Active Markets | Observable Inputs | Unobservable | |||||||||||||
Description | December 31, 2009 | (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Financial instruments owned: |
||||||||||||||||
Money market funds |
$ | 38,430,110 | $ | 38,430,110 | $ | | $ | | ||||||||
U.S. government and agency debt |
93,167,867 | | 93,167,867 | | ||||||||||||
Corporate debt securities |
9,887,550 | | 9,887,550 | | ||||||||||||
Total financial instruments owned |
$ | 141,485,527 | $ | 38,430,110 | $ | 103,055,417 | $ | | ||||||||
4. ACQUISITION OF PROPRIUS
On March 4, 2008, the Company acquired all of the outstanding stock of Proprius, a privately-held specialty pharmaceutical company. The Company acquired Proprius to expand its strategy to include providing personalized medicine services to rheumatologists, as well as to expand its product pipeline with the addition of two early clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat rheumatoid arthritis. The Company is not currently in active development with respect to either early clinical-stage therapeutic candidate. |
Pursuant to the terms of the agreement, the Company acquired all of Proprius outstanding
capital stock for $37.6 million in cash (including the payment and assumption of net indebtedness),
funded with existing cash resources, as well as up to an additional $37.5 million in potential
milestone-related payments associated with the development of Proprius therapeutic candidates.
The Company is not currently in active development with respect to Proprius therapeutic
candidates. Such payments, if any, would be paid in cash and, subject to the satisfaction of
certain conditions, up to 50% of such payments in shares of the Companys common stock or a
combination of both, as determined at the Companys sole discretion. In addition, in connection
with the acquisition of Proprius, the Company assumed certain agreements entered into by Proprius.
The Company assumed Proprius license agreement with AlphaRx, Inc. for the in-license of a topical
non-steroidal anti-inflammatory drug therapy and other successor
topical non-steroidal anti-inflammatory drug therapies. Future consideration under the AlphaRx
agreement includes
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up to $116.0 million potentially payable by the Company for the successful
development and commercialization of a product (which is not currently in active development) and
potential royalty payments. In addition, the Company assumed the licenses obtained from third
parties for certain personalized medicine services. Under the terms of these agreements, as of
December 31, 2009, the Company will be obligated to pay up to approximately $3.9 million in the
aggregate in sales milestones and a royalty based on net sales, if any.
The total purchase price of the acquisition was as follows:
Cash paid for Proprius business |
$ | 37,633,247 | ||
Estimated transaction costs |
1,451,380 | |||
Total estimated purchase price |
$ | 39,084,627 | ||
The total purchase price was allocated as follows:
As Originally | Adjusted | |||||||||||
Reported | Adjustments | Allocation | ||||||||||
Other assets |
$ | 29,000 | $ | | $ | 29,000 | ||||||
In-process research and development |
12,590,000 | | 12,590,000 | |||||||||
Contingent compensation |
| 3,437,029 | 3,437,029 | |||||||||
Goodwill |
26,465,627 | (3,437,029 | ) | 23,028,598 | ||||||||
Total purchase price |
$ | 39,084,627 | $ | | $ | 39,084,627 | ||||||
The amount allocated to in-process technology represents the fair value of acquired,
to-be-completed research projects, including $10.2 million related to personalized medicine
services and $2.4 million related to therapeutic candidates. The total estimated value of
approximately $12.6 million of the research projects was determined by estimating the costs to
develop the acquired technology into a commercially viable product, estimating the future net cash
flows from the project once commercially viable, and discounting the net cash flows to their
present value. As of the acquisition date, these projects were not expected to have reached
technological feasibility and will have no alternative future use. The personalized medicine
services required certain re-validation efforts, as well as The Clinical Laboratory Improvement
Amendments of 1988 (CLIA) certification of the new lab space, in order to establish technological
feasibility. Accordingly, the testing and planning activities necessary to establish technological
feasibility and ensure that the personalized medicine services met their required functions,
features and technical performance requirements had not been reached as of the acquisition date.
Therefore, the amount allocated to in-process technology was charged to the Companys consolidated
statement of operations during the first quarter of 2008.
During the second quarter of 2009, the Company determined that its accounting for contingent
payments made in conjunction with its March 2008 acquisition of Proprius to certain former Proprius
employees that were originally accounted for as additional purchase price of the acquired business
should have been accounted for as employee compensation for post-combination services provided to
the Company. The contingent payments, which totaled $3.4 million, were maintained in an escrow
account and were distributed to such employees in March 2010 upon fulfillment of their service
commitment to the Company.
The Company has performed an evaluation to determine if the financial statement impacts
resulting from this error in accounting were material, considering both quantitative and
qualitative factors. Based on this materiality analysis, the Company concluded that correcting the
cumulative error would be immaterial to the current year financial statements and a correction of
the error would not have a material impact to any individual prior period financial statements.
Accordingly, the Company has recorded an adjustment during the second quarter of 2009 to reduce
goodwill associated with the Proprius acquisition by $3.4 million and has recognized the related
entire cumulative compensation expense in the amount of $2.3 million ($0.5 million classified as
research and development expense and $1.8 million classified as selling, general and administrative
expense), including $1.4 million ($0.3 million classified as research and development expense and
$1.1 million classified as selling general
and administrative expense) related to the year ended December 31, 2008. During the year
ended December 31,
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2009, the Company recognized compensation expense in the amount of $3.1 million
($0.6 million classified as research and development expense and $2.5 million classified as
selling, general and administrative expense) related to such contingent payments. The remaining
$0.3 million of unearned compensation at December 31, 2009 will be recognized ratably through March
2010.
Additionally, as discussed in Note 5, the Company recorded a non-cash goodwill impairment
charge during the fourth quarter of 2009 in the amount of $1.1 million. At December 31, 2009, the
goodwill balance was $21.9 million.
5. GOODWILL
During the third quarter of 2009, the Company made the determination that its two product
lines, consisting of the personalized medicine services (Avise products) and therapeutic products
(Savella), met the criteria to be reported as separate operating segments. As required by the
accounting guidance for goodwill, when an entity has a change in its reporting structure in a
manner that changes the composition of one or more of its reporting units, goodwill is reassigned
to the affected reporting units using a relative fair value allocation approach. The fair value of
each segment (reporting unit) is compared to the fair value of the business immediately prior to
the change in reporting units. The fair value for the Companys reporting units was determined
based on a combination of an income approach, which estimates the fair value based on future
discounted cash flows (DCF), and a market approach, which estimates the fair value based on
market price prices of comparable companies. Fair values were established based on managements
assessment and is based in part by independent third party appraisals.
Using the relative fair value approach described above, as well as taking into account the
synergies in the time utilized by the Companys single sales force to promote the therapeutic
product and the personalized medicine services for each reporting unit, goodwill in the amount of
$21.9 million was assigned to the therapeutics business and $1.1 million to the personalized
medicine services business.
The Company assesses
its goodwill for impairment as of December 1 of each year, and
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. For 2009, the Companys annual impairment review coincided with a series of facts and
circumstances indicating that its goodwill might be impaired, including revised projections for the
personalized medicine services business reflecting current product demand and our cash collection
profile.
In evaluating whether goodwill at each of the reporting units was impaired, the Company
engaged independent valuation specialists to assist with this review. In the first step of the
impairment analysis, the Company compared the fair value of its two reporting units to which
goodwill is assigned to their carrying value. In calculating fair value, the Company used an income
approach using a DCF method and a market approach using comparable publicly traded companies. The
income approach is a valuation technique under which the Company estimates future cash flows using
the reporting units financial forecasts. Future estimated cash flows are discounted to their
present value to calculate fair value. The market approach utilizes similar companies as the basis
for the valuation.
Based on the first step of the analysis, it was determined that the fair value of the
therapeutics business was in excess of its carrying value, including the goodwill assigned to this
reporting unit. However, the first step of the analysis with respect to the personalized medicine
services business indicated that its carrying value, including goodwill assigned to this reporting
unit, was in excess of its respective fair value. Therefore, the second step of the impairment
analysis was performed for the personalized medicine services reporting unit. The measurement of
impairment for the second step is calculated by determining the implied fair value of the reporting
units goodwill. As the implied fair value of the personalized medicine services business was
negative, the Company concluded that all of the goodwill recorded at this reporting unit was
impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations
during the fourth quarter of 2009 in the amount of $1.1 million. Our remaining goodwill at
December 31, 2009 in the amount of $21.9 million relates to our therapeutics reporting unit. Our
recent analyses indicate that this goodwill is not impaired. However, our conclusion could change
in the future, if our assumptions about future economic conditions, revenue growth or earnings
change. Any resulting impairment charge could have a material effect on our financial position and
results of operations in the future.
The Company did not record any impairment charges in 2008 and did not have any goodwill in
2007.
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Changes to our goodwill balance include the following:
Personalized | ||||||||||||||||
Medicine | Corporate/ | |||||||||||||||
Therapeutics | Services | Unallocated | Total | |||||||||||||
Goodwill, December 31, 2008 (1) |
$ | | $ | | $ | 26,465,627 | $ | 26,465,627 | ||||||||
Adjustment |
| | (3,437,029 | ) | (3,437,029 | ) | ||||||||||
Assigned to reporting units |
21,928,598 | 1,100,000 | (23,028,598 | ) | | |||||||||||
Impairment |
| (1,100,000 | ) | | (1,100,000 | ) | ||||||||||
Goodwill, December 31, 2009 |
$ | 21,928,598 | $ | | $ | | $ | 21,928,598 | ||||||||
(1) | As of December 31, 2008, the Company operated as one segment with one reporting unit. During the third quarter of 2009, the Company made the determination that its two product lines, consisting of therapeutic products (Savella) and the personalized medicine services (Avise products), met the criteria to be reported as separate operating segments and separate reporting units. Goodwill was assigned to each of the reporting units as reflected in the table above. |
6. STOCKHOLDERS EQUITY
Public Offering of Shares of Common Stock
On June 5, 2007, the Company completed a public offering of 4,700,000 shares of common stock
at $15.50 per share resulting in proceeds of approximately $69.9 million, net of underwriting and
offering costs.
Warrants
In June 2005, upon execution of a license agreement, the Company issued warrants to a licensor
to purchase 62,656 shares of common stock as a license fee. These warrants, which have an exercise
price of $15.96 per share, expire in June 2010. As of December 31, 2009, all of these warrants
remain outstanding.
7. STOCK-BASED COMPENSATION
Stock-Based Compensation Plans
2009 EQUITY INCENTIVE PLAN
In June 2009, the Company adopted the 2009 Equity Incentive Plan (the 2009 Plan) providing
for the grant to employees, directors and consultants of the Company of incentive and non-qualified
options to purchase the Companys common stock, as well as the granting of stock appreciation
rights, restricted stock awards, performance stock awards and other stock awards. The exercise
price of stock options granted under the 2009 Plan shall not be less than the fair market value of
the Companys common stock on the date of grant. Options granted under the 2009 Plan have a term
of up to ten years and generally vest over four years. The total number of shares reserved for
issuance under the 2009 Plan is 8,000,000 shares. As of December 31, 2009, 7,780,593 shares of the
Companys common stock are available for future grant under the 2009 Plan.
2000 EQUITY INCENTIVE PLAN
In May 2000, the Company adopted the 2000 Equity Incentive Plan (the 2000 Plan) providing
for the grant to employees, directors and consultants of the Company of incentive and non-qualified
stock options to purchase the Companys common stock, as well as the granting of stock bonuses and
rights to purchase restricted stock. The exercise price of all incentive stock options granted
under the 2000 Plan shall not be less than the fair market value of the Companys common stock on
the date of grant. The exercise price of non-qualified stock options granted under the 2000 Plan
shall not be less than 85% of the fair market value of the Companys common stock on the date of
grant. Options granted under the 2000 Plan have a term of up to ten years and generally vest over
four years. Although options that were previously granted under the 2000 Plan remain outstanding at
December 31, 2009, the 2000 Plan was superseded by the 2009 Plan and accordingly, no shares are
available for future grant under this plan.
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1996 EQUITY INCENTIVE PLAN
In January 1996, the Company adopted the 1996 Equity Incentive Plan (the 1996 Plan)
providing for the grant to employees, directors and consultants of the Company of incentive and
non-qualified stock options to purchase the Companys common stock, as well as the granting of
stock bonuses and rights to purchase restricted stock. Options granted under the 1996 Plan have a
term of up to ten years and vest as determined by the Board but in no event less than twenty
percent per year. Although options that were previously granted under the 1996 Plan remain
outstanding at December 31, 2009, the 1996 Plan expired in 2006 and accordingly, no shares are
available for future grant under this plan.
Stock Options
The exercise price of all options granted during the years ended December 31, 2009, 2008 and
2007 was equal to the market value on the date of grant. The estimated fair value of each option
award granted was determined on the date of grant using the Black-Scholes option valuation model
with the following weighted-average assumptions for option grants during the years ended December
31, 2009, 2008 and 2007:
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Risk-free interest rate |
2.1 | % | 2.5 | % | 4.5 | % | ||||||
Expected volatility |
70 | % | 73 | % | 76 | % | ||||||
Expected option term (in years) |
5.9 | 6.0 | 5.9 | |||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % |
The risk-free interest rate assumption is based on the implied yield in effect at the time of
option grant on U.S. Treasury zero-coupon issues with terms commensurate with the expected term of
the Companys employee stock options. The expected volatility is estimated at the date of grant
using the historical volatility of the Companys stock based on the assessment that this approach
is most representative of future stock price trends. The expected term of the Companys options is
based on the output derived under the simplified method. The simplified method was used as given
the level of outstanding options and as a result of stock price volatility, the Company does not
have sufficient historical exercise data to provide a more reasonable basis upon which to estimate
expected term. The Company has never paid any cash dividends on its common stock and does not
anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an
expected dividend yield of zero in the Black-Scholes option valuation model. Stock-based
compensation accounting requires the Company to estimate forfeitures at the time of grant and
revise those estimates in subsequent periods if actual forfeitures differ from those estimates.
Given the standard vesting provisions for stock options and minimal historical turnover, the
Company has not estimated forfeitures and instead adjusts its stock-based compensation expense as
forfeitures occur. The impact on stock-based compensation between estimating forfeitures and
recording the impact as the forfeitures occur would not be material.
The Company amortizes the fair value of options granted on a straight-line basis. All options
are amortized over the requisite service periods of the awards, which are generally the vesting
periods. The weighted average fair values of options granted were $4.45, $5.26, and $6.04 for the
years ended December 31, 2009, 2008 and 2007, respectively.
The following table summarizes the activity of the Companys stock options for the periods
presented:
2009 | 2000 | 1996 | Weighted | |||||||||||||||||
Equity | Equity | Equity | Number of | Average | ||||||||||||||||
Incentive | Incentive | Incentive | Options Under | Exercise | ||||||||||||||||
Plan Options | Plan Options | Plan Options | All Plans | Prices | ||||||||||||||||
Balance December 31, 2006 |
| 3,715,436 | 71,887 | 3,787,323 | $ | 7.19 | ||||||||||||||
Granted |
| 1,187,249 | | 1,187,249 | 8.78 | |||||||||||||||
Exercised |
| (550,136 | ) | (19,585 | ) | (569,721 | ) | 4.23 | ||||||||||||
Canceled/Expired |
| (73,363 | ) | (3,333 | ) | (76,696 | ) | 13.69 | ||||||||||||
Balance December 31, 2007 |
| 4,279,186 | 48,969 | 4,328,155 | 7.91 | |||||||||||||||
Granted |
| 2,924,174 | | 2,924,174 | 8.00 | |||||||||||||||
Exercised |
| (109,251 | ) | (24,491 | ) | (133,742 | ) | 3.74 | ||||||||||||
Canceled/Expired |
| (144,064 | ) | (312 | ) | (144,376 | ) | 11.24 | ||||||||||||
Balance December 31, 2008 |
| 6,950,045 | 24,166 | 6,974,211 | 7.96 | |||||||||||||||
Granted |
222,407 | 1,009,411 | | 1,231,818 | 7.02 | |||||||||||||||
Exercised |
| (299,914 | ) | (16,666 | ) | (316,580 | ) | 2.69 | ||||||||||||
Canceled/Expired |
(3,000 | ) | (176,499 | ) | | (179,499 | ) | 6.41 | ||||||||||||
Balance December 31, 2009 |
219,407 | 7,483,043 | 7,500 | 7,709,950 | $ | 8.06 | ||||||||||||||
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Options outstanding at December 31, 2009 have a weighted average remaining contractual term of
7.0 years.
For the years ended December 31, 2009, 2008 and 2007, total stock-based compensation expense
related to employee stock options was $7,242,946, $7,356,623 and $4,935,160, respectively. The
breakdown of total employee stock-based compensation expense by operating statement classification
is presented below:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cost of personalized medicine services |
$ | 187,927 | $ | 34,525 | $ | | ||||||
Research and development expenses |
1,327,068 | 1,357,558 | 817,430 | |||||||||
Selling, general and administrative expenses |
5,727,951 | 5,964,540 | 4,117,730 | |||||||||
$ | 7,242,946 | $ | 7,356,623 | $ | 4,935,160 | |||||||
Stock-based compensation expense includes $0.4 million and $0.5 million during the years ended
December 31, 2009 and 2008, respectively, related to performance-based stock options. In 2008, the
Company granted 250,000 performance-based stock options to certain employees related to the
achievement of certain revenue milestones for the personalized medicine services business that were
deemed probable and therefore, the Company is recording stock-based compensation expense over the
estimated time to achieve the revenue milestones.
As of December 31, 2009, there was $13.2 million of unamortized compensation cost related to
unvested stock option awards, which is expected to be recognized over a remaining weighted average
vesting period of 2.4 years. As of December 31, 2009, there were 4,899,151 options exercisable with
a weighted average exercise price of $8.31 and a weighted average remaining contractual term of 6.1
years. The total intrinsic value of stock option exercises during the years ended December 31,
2009, 2008 and 2007 was $1.9 million, $0.8 million and $4.9 million, respectively. As of December
31, 2009, the total intrinsic value of options outstanding and exercisable was $1.8 million and
$1.6 million, respectively. As of December 31, 2009 and 2008, the weighted average fair value of
unvested options was $5.01 and $5.18, respectively.
For the years ended December 31, 2009, 2008 and 2007, stock-based compensation related to
options granted to non-employees was $0, $20,245 and $184,567, respectively.
8. SIGNIFICANT LICENSING AND COLLABORATION AGREEMENTS AND ASSET PURCHASE AGREEMENT
License and Collaboration Agreement with Forest Laboratories
In January 2004, the Company entered into a collaboration agreement with Forest Laboratories
for the development and marketing of milnacipran. Under the agreement with Forest Laboratories, the
Company sublicensed its exclusive rights to develop and commercialize milnacipran to Forest
Laboratories for the United States. In addition, Forest Laboratories exercised its option to extend
the territory to include Canada. In conjunction with the option exercise, Forest Laboratories paid
the Company a non-refundable $1.0 million license payment in July 2007. Forest Laboratories
assumed responsibility for funding all continuing development of milnacipran, including the funding
of clinical trials and regulatory approvals, as well as a certain number of the Companys
employees. However, the Company agreed upon an alternative cost sharing arrangement with Forest
Laboratories for the second Phase III trial only. In connection with this arrangement, the Company
paid for a majority of the external costs of the second Phase III trial only, which were $9.7
million. Forest Laboratories reimbursed the Company for one-third of the costs, or $3.2 million,
in February 2008 in connection with the NDA acceptance for Savella by the Food and Drug
Administration (FDA) and the remaining $6.5 million in January 2009 upon NDA approval. Forest
Laboratories is funding Phase IV clinical trials for Savella. Forest Laboratories is also
responsible
for sales and marketing activities related to any product developed under the agreement,
subject to our option to co-
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promote up to 25% of the total physician details using our own sales
force and the Company will be reimbursed by Forest Laboratories in an amount equal to Forest
Laboratories cost of providing the equivalent detailing calls. In connection with the Companys
exercising its option to co-promote Savella, the Company will detail to rheumatologists, pain
centers, and physical and rehabilitation medicine specialists in the U.S.
Under the agreement with Forest Laboratories, the Company received an upfront, non-refundable
payment of $25.0 million, of which $1.25 million was paid to Pierre Fabre as a sublicense fee.
Additionally, the Company received a $5.0 million milestone payment in June 2007 from Forest
Laboratories for the successful second Phase III trial for Savella, of which $250,000 was paid to
Pierre Fabre as a sublicense fee, a $1.0 million license payment in July 2007 to extend the
territory to include Canada, of which $50,000 was paid to Pierre Fabre as a sublicense fee, a $5.0
million milestone payment in December 2007 upon NDA filing, of which $250,000 was paid to Pierre
Fabre as a sublicense fee, a $10.0 million milestone payment in February 2008 upon NDA acceptance,
of which $500,000 was paid to Pierre Fabre as a sublicense fee, and a $25.0 million milestone
payment from Forest Laboratories upon NDA approval, of which $1.25 million was paid to Pierre Fabre
as a sublicense fee. The total upfront and milestone payments to the Company under the agreement
could total approximately $165.0 million, of which $71.0 million has been received to date, related
to the development and commercialization of Savella for the treatment of fibromyalgia, a large
portion of which will depend upon achieving certain sales of Savella and up to an additional $45.0
million in the event that the Company and Forest Laboratories develop milnacipran for other
indications. There was an additional $40.0 million in potential milestone payments related to new
formulations of milnacipran created on behalf of the Company; however, alternative formulation
technology has been selected by the Company and Forest Laboratories and therefore, the Company and
Forest Laboratories have decided not to move forward with any such formulations created by a third
party on behalf of the Company. Accordingly, such milestone events are no longer possible. In
addition, the Company will receive royalty payments based on sales of licensed product under this
agreement. Forest Laboratories also assumed the future royalty payments due to Pierre Fabre and the
transfer price for the active ingredient used in Savella, of which the Company is obligated to
reimburse Forest Laboratories for a portion of the active ingredient costs of the samples. The
amount of such obligation will vary depending on Forest Laboratories annual marketing plan. The
agreement with Forest Laboratories extends until the later of (i) the expiration of the last to
expire of the applicable patents, (ii) 10 years after the first commercial sale of a product under
the agreement in an applicable country or (iii) the last commercial sale of a generic product in
such country, unless terminated earlier. Each party has the right to terminate the agreement upon
prior written notice of the bankruptcy or dissolution of the other party, or a breach of any
material provision of the agreement if such breach has not been cured within the required time
period following such written notice. Forest Laboratories may also terminate the agreement upon an
agreed notice period in the event Forest Laboratories reasonably determines that the development
program indicates issues of safety or efficacy that are likely to prevent or significantly delay
the filing or approval of a new drug application or to result in labeling or indications that would
have a significant adverse affect on the marketing of any product developed under the agreement.
For the years ended December 31, 2009, 2008 and 2007, the Company recognized revenues of $10.0
million, $16.7 million and $13.4 million, respectively, under its collaboration agreement with
Forest Laboratories, consisting of the recognition of the upfront payment of $25.0 million from
Forest Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million
license payment received from Forest Laboratories in July 2007 to extend the territory to include
Canada recognized on a straight-line basis over the remainder of the 8 year amortization period,
sponsored development reimbursements, funding received from Forest Laboratories for certain of the
Companys employees devoted to the development of Savella and milestone payments received from
Forest Laboratories. The NDA approval milestone payment received in connection with the
collaboration agreement with Forest Laboratories was recorded as deferred revenue, net of the
sublicense fee to Pierre Fabre, at the time of achievement and will be recognized as commercial
revenue ratably over the period of on-going obligations and reduced by amounts reimbursed to Forest
Laboratories for active pharmaceutical ingredient costs for samples.
Licensing Agreement with Pierre Fabre
In August 2001, the Company entered into a license agreement and a trademark agreement with
Pierre Fabre. Pursuant to the terms of the license agreement, the Company paid Pierre Fabre $1.5
million upon execution of the agreement and a $1.0 million milestone payment in September 2003. In
February 2008, the Company paid Pierre Fabre a $1.0 million milestone payment upon acceptance by
the FDA of the NDA for milnacipran, and in January 2009, the Company paid Pierre Fabre a $3.0
million milestone payment upon the approval of the NDA. As of December 31, 2009, additional
payments of up to $0.5 million will be due to Pierre Fabre based on meeting certain regulatory
milestones.
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The license agreement was amended and restated in November 2001 and subsequently in May 2003.
In connection with the second amended and restated agreement in May 2003, the Company issued Pierre
Fabre 1,000,000 shares of common stock and warrants to purchase 300,000 shares of common stock, all
of which were exercised during 2008 resulting in proceeds to the Company of $1.5 million.
In January 2004, in connection with the Companys transaction with Forest Laboratories, the
Companys license agreement and trademark agreement with Pierre Fabre were further amended. The
third amended and restated license agreement with Pierre Fabre provides the Company with an
exclusive license to develop and sell any products with the compound milnacipran as an active
ingredient for any indication in the United States and Canada. Simultaneous to the third amended
and restated license agreement, the Company also entered into a purchase and supply agreement with
Pierre Fabre for the active pharmaceutical ingredient in milnacipran. Pierre Fabre has the
exclusive right to manufacture the active ingredients used in the commercial product for a
specified time period (subject to compliance with certain provisions in the agreement), and Pierre
Fabre will be paid a transfer price for each product manufactured and royalties based on net sales,
both of which obligations have been assumed by Forest Laboratories. Additionally, the Company is
obligated to pay Pierre Fabre a 5% sublicense fee on upfront and milestone payments received from
Forest Laboratories, of which $3.6 million has been paid to date. Once a total of $7.5 million has
been paid to Pierre Fabre, such additional sublicense payments due to Pierre Fabre shall be
credited against any royalties or milestones owed by the Company to Pierre Fabre, which shall be
carried forward to any subsequent years as applicable. Pierre Fabre also retains the right to sell
products in indications developed by the Company outside the United States and Canada and will pay
the Company a royalty based on net sales for such products. The license agreement also provides
Pierre Fabre with certain rights to obtain a license outside the United States and Canada for new
formulations and new salts developed by the Company or Forest Laboratories. The agreement is
effective until the later of the expiration of the last-to-expire of certain patents held by Pierre
Fabre relating to the development of milnacipran or ten years after the first commercial sale of a
licensed product, unless terminated earlier. Each party has the right to terminate the agreement
upon 90 days prior written notice of the bankruptcy or dissolution of the other party or a breach
of any material provision of the agreement if the breach is not cured within 90 days following the
written notice. Additionally, Pierre Fabre has the right to terminate the agreement upon 90 days
prior notice to the Company if the Company takes certain actions.
Cellatope Asset Purchase Agreement
In February 2009, the Company entered into an asset purchase agreement with Cellatope
Corporation (Cellatope) whereby the Company acquired Cellatopes technology platform that uses
cell-bound complement activation products (CB-CAP) to diagnose and monitor debilitating
autoimmune disorders, including systemic lupus erythematosus (SLE/Lupus). The Company acquired
the CB-CAP technology in a transaction that included a $2.0 million cash payment to Cellatope for
the diagnostic technology, as well as an additional $3.0 million potential milestone payment
associated with the commercial development of the Lupus monitoring application.
The acquisition price included $0.2 million which is held in an escrow account and will be
available to satisfy any claims for indemnification the Company may have until the escrow is
released, which will be 18 months following the closing of the transaction. In addition to the
escrow funds, $0.5 million was withheld from the closing consideration to be paid by July 2012,
subject to conditions in the asset purchase agreement, and is classified as restricted cash.
Pursuant to the accounting treatment prescribed for business combinations, the Company
determined that the assets acquired from Cellatope do not constitute a business and accordingly,
the transaction has been accounted for as an asset acquisition. The $2.0 million upfront payment
was charged to research and development expenses during the first quarter of 2009 as the ultimate
commercialization of the related product is uncertain and the technology has no alternative uses.
9. INCOME TAXES
In July 2006, the FASB issued authoritative guidance on accounting for uncertain tax
positions, which the Company adopted on January 1, 2007. Under this guidance, the impact of an
uncertain income tax position on the income tax return must be recognized at the largest amount
that is more-likely-than-not to be sustained upon audit
by the relevant taxing authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained. The total amount of unrecognized tax benefits
as of January 1, 2009 was $1.0 million.
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A rollforward of changes in the Companys unrecognized tax benefits is as follows:
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Unrecognized tax benefits as of the beginning of the year |
$ | 1,039,000 | $ | 913,000 | $ | 913,000 | ||||||
(Decreases) increases related to prior year tax positions |
(21,000 | ) | 17,000 | | ||||||||
Decreases related to expirations of prior year tax positions |
(47,000 | ) | (5,000 | ) | | |||||||
Increases related to current year tax positions |
| | | |||||||||
Settlements |
| | | |||||||||
Other |
| 114,000 | | |||||||||
Unrecognized tax benefits as of the end of the year |
$ | 971,000 | $ | 1,039,000 | $ | 913,000 | ||||||
Due to the existence of the valuation allowance, future changes in unrecognized tax benefits
will not impact the Companys effective tax rate.
The Company is subject to taxation in the United States and various state jurisdictions. The
Companys tax years for 1994 to 2009 are subject to examination by the United States and California
tax authorities due to the carry forward of unutilized net operating losses and research and
development credits.
The Companys practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. The Company had no accrual for interest or penalties on the Companys
balance sheets at December 31, 2009 or December 31, 2008, and has not recognized interest and/or
penalties in the statement of operations for the year ended December 31, 2009.
At December 31, 2009, the Company had net deferred tax assets of $58.8 million. Due to
uncertainties surrounding the Companys ability to generate future taxable income to realize these
assets, a full valuation has been established to offset the net deferred tax asset.
Additionally, pursuant to Internal Revenue Code Section 382 and 383, the annual use of the net
operating loss carryforwards and research and development tax credits could be limited by any
greater than 50% ownership change during any three-year testing period. As a result of any such
ownership change, portions of the Companys net operating loss carryforwards and research and
development tax credits are subject to annual limitations. The Company completed a Section 382/383
analysis regarding the limitation of the net operating losses and research and development credits.
Based upon the analysis, the Company determined that ownership changes occurred in prior years.
However, the annual limitations on net operating loss and research and development tax credit
carryforwards will not have a material impact on the future utilization of such carryforwards.
Significant components of the Companys deferred tax assets as of December 31, 2009 and 2008
are shown below. A valuation allowance has been established to offset the net deferred tax assets
as of December 31, 2009 and 2008 as realization of such assets is uncertain.
2009 | 2008 | |||||||
Net operating loss carryforwards |
$ | 22,719,000 | $ | 25,423,000 | ||||
Deferred revenue |
11,654,000 | 4,097,000 | ||||||
Capitalized research and development |
9,310,000 | 9,022,000 | ||||||
Capitalized intangibles |
5,137,000 | 3,785,000 | ||||||
Tax credits |
1,331,000 | 1,290,000 | ||||||
Stock-based compensation expense |
7,174,000 | 5,473,000 | ||||||
Other |
1,442,000 | 16,000 | ||||||
58,767,000 | 49,106,000 | |||||||
Valuation allowance |
(58,767,000 | ) | (49,106,000 | ) | ||||
$ | | $ | | |||||
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The provision (benefit) for income taxes reconciles to the amount computed by applying the
federal statutory rate to income before taxes as follows:
2009 | 2008 | 2007 | ||||||||||
Tax at federal statutory rate |
$ | (9,875,029 | ) | $ | (6,378,964 | ) | $ | 1,220,654 | ||||
State income tax, net of federal benefits |
(1,621,198 | ) | (1,047,243 | ) | 200,397 | |||||||
In-process research and development |
| 5,129,921 | | |||||||||
Stock-based compensation |
918,073 | 729,670 | 420,707 | |||||||||
Other |
651,504 | (44,282 | ) | 156,252 | ||||||||
Change in valuation allowance |
9,926,650 | 1,610,898 | (1,998,010 | ) | ||||||||
$ | | $ | | $ | | |||||||
At December 31, 2009, the Company had federal and California net operating loss carryforwards
of approximately $85.1 million and $38.2 million, respectively. The federal tax loss carryforwards
will begin to expire in 2010. The California tax loss carryforwards will begin to expire in 2012.
Additionally, the Company has federal and California research and development tax credit
carryforwards of approximately $1.7 million and $0.6 million, respectively. Approximately $15,000
of federal research and development tax credit carryforwards expired unused in 2009 and will
continue to expire in 2010. The California research and development credit carryforwards carry
forward indefinitely.
The Company recognizes excess tax benefits associated with the exercise of stock options
directly to stockholders equity only when realized. Accordingly, deferred tax assets are not
recognized for net operating loss carryforwards resulting from excess tax benefits. At December 31,
2009 and 2008, deferred tax assets do not include $9.3 million and $8.6 million, respectively, of
excess tax benefits from employee stock option exercises that are a component of the Companys net
operating loss carryovers. Stockholders equity will be increased by $9.3 million when such excess
tax benefits are realized.
10. RELATED PARTY TRANSACTIONS
The Company utilizes the services of a management consulting firm, in which one of the members
of the Companys board of directors was a consultant during 2009. During the year ended December
31, 2009, such consulting firm provided services to the Company in the amount of approximately
$263,000.
The Company employed the services of a consultant, whose husband is an officer of the Company.
Such consultant provided consulting services to the Company in the amount of approximately $177,000
and $225,000 for the years ended December 31, 2008 and 2007, respectively. In December 2008, this
consultant accepted a position with the Company.
11. RETIREMENT PLAN
The Company has a savings plan under Section 401(k) of the Internal Revenue Code under which
all employees over the age of twenty-one are eligible to participate on the first entry date
(January 1 and July 1) following their hire date. The plan allows for a matching contribution in
the Companys common stock (valued as of the contribution date) equal to 100% of the amount of the
salary contributed for the preceding six- month period. Employees vest in the matching contribution
made on the last day of June of the plan year provided they are employed on the last day of
December of the plan year and vest in the matching contribution made on the last day of December of
the plan year provided that they are employed on the last day of June of the following plan year.
After three years of vesting service, the matching contribution is 100% vested immediately. During
the years ended December 31, 2009, 2008 and 2007, the charge to operations for the matching
contribution was $1,136,810, $355,120, and $178,826, respectively. The increase in headcount
associated with the hiring of the Companys sales force in connection with the launch of Savella
contributed to the increased charge to operations during 2009. The matching contribution in common
stock to the 401(k) Plan is included as a component of stock-based compensation to employees.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company currently occupies a total of approximately 10,100 square feet of leased office
space in San Diego, California under three separate leases. The San Diego facilities house the
Companys executive and administrative
offices and laboratory space. The lease for the main corporate office expires in July 2012
with the lease for
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additional office space expiring in December 2010 and the lease for laboratory
space expiring in June 2010. Additionally, the Company has entered into an operating lease
agreement for an automobile fleet for the Companys sales representatives.
Future annual minimum lease payments due under noncancelable operating leases consists of the
following at December 31, 2009:
Operating | ||||
Years Ending December 31, | Leases | |||
2010 |
$ | 903,062 | ||
2011 |
815,951 | |||
2012 |
615,459 | |||
2013 |
28,898 | |||
2014 |
7,224 | |||
Total minimum lease payments |
$ | 2,370,594 | ||
Total rent expense was approximately $403,000, $334,000 and $202,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Licensing Agreements
The Company has entered into licensing agreements with various organizations. Under the terms
of these agreements, the Company has received licenses to know-how and technology claimed in
certain patents or patent applications. The Company is required to pay fees, milestones and/or
royalties on future sales of products employing the technology or falling under claims of a patent.
Some of the agreements also require the Company to pay expenses arising from the prosecution and
maintenance of the patents covering the licensed technology. If all of the licensed candidates are
successfully developed (excluding Savella), the Company may be required to pay milestone payments
up to approximately $37.0 million over the lives of these agreements, in addition to royalties on
sales of the affected products at various rates. Due to the uncertainties of the development
process, the timing and probability of the milestone and royalty payments cannot be accurately
estimated.
13. SEGMENT INFORMATION
During the third quarter of 2009, the Company made the determination that its two product
lines, consisting of therapeutic products (Savella) and the personalized medicine services (Avise
products), met the criteria to be reported as separate operating segments. Prior to 2009, the
Company operated in a single operating segment with revenues generated from its collaboration
agreement with Forest Laboratories and financial results prepared and reviewed by management as a
single operating segment.
As noted above, the Company has two reportable business segments: therapeutic products and
personalized medicine services. The therapeutic products segment includes Savella for the
management of fibromyalgia. The personalized medicine services segment includes specialized
diagnostic tests to provide physicians with actionable information to help manage their patients
care, including predicting the likelihood of developing disease or optimizing therapy.
The Company manages the commercial organization and related support organizations through a
centralized management team. The Companys business segment performance is managed and evaluated on
net revenues, cost of personalized medicine services and research and development expenses. The
Company does not allocate selling, general and administrative expenses to its business segments for
performance assessment.
The Company does not have international revenues. Therefore, the Company has determined it is
not useful to disclose revenues and the related segment expenses by geographic region. The Company
has no inter-segment revenues.
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The following table reports net revenues, cost of personalized medicine services and research
and development expenses for the Companys reportable segments for the years ended December 31,
2009 and 2008:
Personalized | ||||||||||||
Therapeutic | Medicine | |||||||||||
Products | Services | Total | ||||||||||
Year ended December 31, 2009: |
||||||||||||
Revenues |
$ | 27,002,507 | $ | 332,372 | $ | 27,334,879 | ||||||
Cost of personalized medicine services |
| 1,986,722 | 1,986,722 | |||||||||
Research and development |
8,981,337 | 3,014,832 | 11,996,169 | |||||||||
Segment operating income (loss) |
18,021,170 | (4,669,182 | ) | 13,351,988 | ||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative |
42,138,458 | |||||||||||
Goodwill impairment |
1,100,000 | |||||||||||
Loss from operations |
$ | (29,886,470 | ) | |||||||||
Year ended December 31, 2008(1): |
||||||||||||
Revenues |
$ | 16,659,099 | $ | | $ | 16,659,099 | ||||||
Cost of personalized medicine services |
| 267,361 | 267,361 | |||||||||
Research and development |
8,335,403 | 835,673 | 9,171,076 | |||||||||
Segment operating income (loss) |
8,323,696 | (1,103,034 | ) | 7,220,662 | ||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative |
17,602,820 | |||||||||||
In-process research and development |
12,590,000 | |||||||||||
Loss from operations |
$ | (22,972,158 | ) | |||||||||
The following table reports assets that are identifiable to the Companys therapeutic products
and personalized medicine services segments as of December 31, 2009 and 2008:
Personalized | ||||||||||||||||
Therapeutic | Medicine | Corporate and | ||||||||||||||
Products | Services | Unallocated | Total | |||||||||||||
As of December 31, 2009: |
||||||||||||||||
Receivable from Forest Laboratories |
$ | 5,611,476 | $ | | $ | | $ | 5,611,476 | ||||||||
Prepaid expenses and other current
assets |
| 7,242 | 4,784,892 | 4,792,134 | ||||||||||||
Property and equipment, net |
| 471,602 | 801,424 | 1,273,026 | ||||||||||||
Goodwill |
| | 21,928,598 | 21,928,598 | ||||||||||||
Other assets |
| 278,994 | 20,000 | 298,994 | ||||||||||||
As of December 31, 2008(1): |
||||||||||||||||
Receivable from Forest Laboratories |
$ | 165,880 | $ | | $ | | $ | 165,880 | ||||||||
Prepaid expenses and other current
assets |
| 6,997 | 1,041,671 | 1,048,668 | ||||||||||||
Property and equipment, net |
| 247,135 | 841,614 | 1,088,749 | ||||||||||||
Goodwill |
| | 26,465,627 | 26,465,627 | ||||||||||||
Other assets |
| 308,994 | 20,000 | 328,994 |
(1) | The Company determined in 2009 that they were no longer a single reportable segment. The Company became two reportable segments with the launch of Savella, receipt of Savella sales reports from Forest Laboratories and changes to the management structure for personalized medicine services. The Company has presented the 2008 reportable segment information consistent with its 2009 reportable segment disclosure. |
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14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which management considers
necessary for a fair statement of such information.
2009 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Revenues |
$ | 7,858,394 | $ | 5,805,436 | $ | 5,612,329 | $ | 8,058,720 | ||||||||
Total operating expenses |
$ | 17,654,035 | $ | 14,904,347 | $ | 11,336,031 | $ | 13,326,936 | ||||||||
Other income |
$ | 635,137 | $ | 490,008 | $ | 254,335 | $ | 255,027 | ||||||||
Net loss (1) |
$ | (9,160,504 | ) | $ | (8,608,903 | ) | $ | (5,469,367 | ) | $ | (5,013,189 | ) | ||||
Net loss per share basic and diluted (2) |
$ | (0.24 | ) | $ | (0.23 | ) | $ | (0.14 | ) | $ | (0.13 | ) | ||||
Shares used in calculating per share amounts
basic and diluted |
37,981,814 | 38,059,838 | 38,257,303 | 38,296,625 | ||||||||||||
2008 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Revenues (3) |
$ | 13,715,700 | $ | 1,014,794 | $ | 979,310 | $ | 949,295 | ||||||||
Total operating expenses (3) |
$ | 18,297,686 | $ | 6,175,141 | $ | 6,110,123 | $ | 9,048,307 | ||||||||
Other income |
$ | 1,701,005 | $ | 1,169,137 | $ | 1,018,590 | $ | 857,815 | ||||||||
Net loss (4) |
$ | (2,880,981 | ) | $ | (3,991,210 | ) | $ | (4,112,223 | ) | $ | (7,241,197 | ) | ||||
Net loss per share basic and diluted (2) |
$ | (0.08 | ) | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.19 | ) | ||||
Shares used in calculating per share amounts
basic and diluted |
37,523,645 | 37,641,610 | 37,883,074 | 37,883,334 |
(1) | During the first quarter of 2009, the Company paid a $3.0 million milestone payment to Pierre Fabre upon NDA approval and a $2.0 million payment recognized as research and development expense in connection with its asset purchase agreement with Cellatope. Additionally, during the fourth quarter of 2009, the Company recorded a $1.1 million impairment charge for goodwill related to its personalized medicine services business. | |
(2) | Net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net loss per share may not necessarily equal the total for the year. | |
(3) | The Company reclassified a $0.5 million sublicense fee paid to Pierre Fabre during the first quarter of 2008 to revenue (recognized on a net basis with the milestone payment received upon NDA acceptance) from research and development expenses. | |
(4) | During the first quarter of 2008, the Company recognized a milestone payment of $10.0 million upon NDA acceptance, net of a $0.5 million sublicense fee, and $3.2 million also upon NDA acceptance as reimbursement for one-third of the costs paid in connection with the second Phase III trial for Savella. Additionally, the Company recognized a charge in the amount of $12.6 million during the first quarter of 2008 for in-process research and development in connection with the Proprius acquisition. |
15. SUBSEQUENT EVENT
During March 2010, certain employees who were granted performance-based options resigned from
the Company and accordingly, such performance conditions will no longer be achieved. In accordance
with the accounting treatment for stock-based compensation, the stock-based compensation expense
previously recognized will be reversed in the period of change by recording a cumulative
adjustment. The Company will recognize an adjustment in the amount of $0.6 million during the
first quarter of 2010 related to such performance-based options.
F-24