As filed with the Securities and Exchange Commission on April 9, 2010.
Registration No. 333-164011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 6
THE SECURITIES ACT OF 1933
(Exact name of Registrant as specified in its charter)
2900 Potshop Lane, Suite 100
East Norriton, PA 19403
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Steven Nichtberger, MD
President and Chief Executive Officer
2900 Potshop Lane, Suite 100
East Norriton, PA 19403
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to such Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated April 9, 2010
$5.00 per share
This investment involves risk. See Risk Factors beginning on page 11.
Certain of our existing stockholders have indicated an interest in purchasing up to an aggregate of approximately $17.2 million in shares of common stock in this offering at the initial public offering price. The underwriters will receive an underwriting discount and commission of on the sale of shares of common stock to these existing stockholders.
The underwriters have a 30-day option to purchase up to 900,000 additional shares of common stock from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved of anyones investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2010
Unless otherwise stated, all references to us, our, Tengion, we, the Company and similar designations refer to Tengion, Inc. Tengion® and the Tengion logo® are our registered trademarks and Tengion Neo-Bladder Augment, Tengion Neo-Urinary Conduit, Tengion Neo-Bladder Replacement, Tengion Neo-Vessel and Tengion Neo-Kidney are our trademarks. Other names are for informational purposes only and may be trademarks of their respective owners.
You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not authorized anyone to provide you with additional or different information. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations.
We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of replacement organs and tissues, or neo-organs and neo-tissues. We currently create these functional neo-organs and neo-tissues using a patients own cells, or autologous cells, in conjunction with our Organ Regeneration Platform. We believe our proprietary product candidates harness the intrinsic regenerative pathways of the body to regenerate organs and tissues that are native-like, or substantially similar to native organs and tissues. We manufacture our product candidates in our scalable facilities using efficient and repeatable proprietary processes and we have implanted our neo-organs in clinical trials. We intend to develop our technology to address unmet medical needs in urologic, renal, gastrointestinal and vascular diseases.
Our lead product candidate, the Neo-Urinary Conduit, is an autologous implant that catalyzes regeneration of native-like bladder tissue for bladder cancer patients requiring a urinary diversion following bladder removal, or cystectomy. This tubular conduit passively transports urine from the ureters, through a hole in the abdomen, or stoma, into a removable, disposable bag, or ostomy bag. We have an effective investigational new drug application, or IND, and in March 2010 we commenced a Phase I clinical trial for this product candidate in bladder cancer patients. We have also applied our technology in two Phase II clinical trials for our Neo-Bladder Augment for the treatment of neurogenic bladder, or dysfunctional bladder due to some form of neurological disease or condition. Our Neo-Urinary Conduit leverages recent advances in our technology platform that enable us to produce this product candidate more quickly and efficiently, and less expensively, than our Neo-Bladder Augment, enabling us to address larger market opportunities. Our product pipeline includes several candidates in early stage development, such as our Neo-Kidney Augment for patients with advanced chronic kidney disease, or CKD.
Our Organ Regeneration Platform
Our Organ Regeneration Platform is based on extensive work that began in the early 1990s at Childrens Hospital Boston and Massachusetts Institute of Technology, and continued at the Wake Forest Institute for Regenerative Medicine and our company. This platform, which utilizes intellectual property developed and owned by us and intellectual property licensed from Childrens Medical Center Corporation and Wake Forest University Health Sciences, involves the following steps:
Our goal is to become the leading regenerative medicine company focused on the development and commercialization of neo-organs and neo-tissues for a variety of diseases. To achieve this objective, we intend to:
Initial Market Opportunities
Bladder Cancer. According to the National Cancer Institute, bladder cancer is the sixth most common form of cancer in the United States with approximately 10,000 cases per year of bladder cancer requiring bladder removal. Following bladder removal, patients require some form of urinary diversion. Most patients are currently treated by using a segment of bowel tissue to construct a conduit for urine to exit from the body into an ostomy bag. In its simplest form, the reconstruction involves creating a tubular structure out of bowel tissue and then connecting it to the ureters at one end and the skin at the other. The other diversionary option for patients is the creation of a continent reservoir out of bowel tissue.
Neurogenic Bladder. Current treatments for neurogenic bladder include medical management through a combination of medication and clean intermittent catheterization and, in advanced cases, surgery. Based upon our analysis of various hospital inpatient and discharge databases, we believe there are approximately 1,200 bladder augmentations using bowel tissue to augment the bladder, or enterocystoplasy, performed in the United States each year and approximately 1,100 in the European Union.
Limitations of Current Therapies
While there is variation across procedures and patient types, there are risks and complications common to all procedures that rely on harvesting bowel tissue and placing it in the urinary tract.
The Tengion Neo-Urinary Conduit
Our lead product candidate, the Neo-Urinary Conduit, is intended to replace the use of bowel tissue in bladder cancer patients requiring a non-continent urinary diversion after bladder removal. We expect that this product candidate will avoid complications such as urine absorption, infection and mucus secretion associated with the use of bowel tissue in the urinary tract, as well as the issues and complications that may arise from the surgical procedure involved in harvesting bowel tissue. Our Neo-Urinary Conduit is produced using smooth muscle cells from a routine fat biopsy and not cells from the diseased bladder, eliminating the risk of reintroducing cancerous cells from the bladder into the patient. We have an effective IND and in March 2010 we commenced a single-center Phase I clinical trial in bladder cancer patients. This trial is an open-label, single-arm study in up to five patients, which will allow optimization of the surgical procedure and post-surgical care in a controlled setting. While we have not explored later stage development with the Food and Drug Administration, or FDA, we believe that if this first study is successful, we may be able to move directly to a pivotal study as the next step in our regulatory pathway for our Neo-Urinary Conduit.
Principal observations of our Neo-Urinary Conduit in preclinical animal models have shown that:
These studies suggest that our Neo-Urinary Conduit may be safe and effective for treating patients who are undergoing cystectomy.
Development of our Neo-Urinary Conduit came as a natural extension of our clinical development experience with our Organ Regeneration Platform in two Phase II studies for our Neo-Bladder Augment. We believe important improvements in our Organ Regeneration Platform, made concurrently with the development of our Neo-Bladder Augment, will simplify the development of our Neo-Urinary Conduit and enhance its commercialization prospects. Only one cell type, smooth muscle cells, is needed for our Neo-Urinary Conduit, compared to two cell types used in our Neo-Bladder Augment, simplifying the procedure and reducing both cost and production time by approximately 50%. We can now produce our Neo-Urinary Conduit in four weeks or less, enabling us to meet the typical clinical timeline for bladder cancer patients undergoing cystectomy. Patients receiving a conduit represent a market approximately ten times larger than that for neurogenic bladder augmentation. As a result, we are devoting a significant portion of our resources to completing the development of our Neo-Urinary Conduit.
The Tengion Neo-Bladder Replacement
We believe that our Neo-Bladder Replacement, similar to our Neo-Urinary Conduit, will enable patients to avoid the complications associated with removal of bowel tissue and its subsequent use as a bladder replacement. Our Neo-Bladder Replacement, when implanted in the body, is intended to serve as a template that recruits other cells to develop a regenerated bladder. Principal observations of our Neo-Bladder Replacement in large animal models were consistent with those of our Neo-Urinary Conduit, and also showed:
Based upon these preclinical studies, we believe our Neo-Bladder Replacement may provide patients with a functioning replacement bladder, thus enabling them to void urine with no need for a stoma or ostomy bag. We believe we have completed all preclinical development necessary to prepare an IND for our Neo-Bladder Replacement.
The Tengion Neo-Bladder Augment
Our Neo-Bladder Augment is intended to supplement the patients existing bladder and promote regeneration of healthy bladder tissue in patients suffering from neurogenic bladder. Based upon the long-term data obtained as part of an academic clinical experience published in The Lancet, a leading medical journal, and the results of our Phase II clinical trials, we believe our Neo-Bladder Augment may provide the benefits of enterocystoplasty without many of the associated complications. We currently create our Neo-Bladder Augment by seeding a combination of urothelium and smooth muscle cells cultured by our scientists from the patients bladder onto our proprietary bioabsorbable scaffold.
We have conducted two open-label, multi-center Phase II clinical trials of our Neo-Bladder Augment for the treatment of neurogenic bladder in pediatric and adult patients. These trials confirmed that we can translate the academic experience underlying our platform technology into standardized and repeatable processes that we believe are scalable to commercial manufacturing
processes. Based upon our experience with our Neo-Urinary Conduit, we now have the ability to develop urologic neo-organs and neo-tissues using only smooth muscle cells. We intend to explore the application of this and other enhancements to our Neo-Bladder Augment.
In February 2009, the FDA placed our IND for our Neo-Bladder Augment on clinical hold as a result of certain serious adverse events. Two pediatric patients had experienced small bowel obstructions, one of whom had developed a bladder infection, and both of whom subsequently experienced a perforation of the bladder resulting in leakage of urine through the bladder wall. We submitted a complete response to the FDA in June 2009, noting among other things that these serious adverse events are known complications of enterocystoplasty, the current standard of care for these patients. The FDA released the clinical hold in July 2009 with no recommended changes to our protocol, product candidate or implantation procedure. A third serious adverse event, occurring in October 2009, involved an adult patient who experienced a bladder perforation resulting in leakage through the bladder wall during the insertion of a catheter into the bladder as part of an evaluation performed in our clinical study. We submitted a report of this event to the FDA in November 2009, noting that this serious adverse event is not an unexpected complication for these patients undergoing urodynamic procedures. The patients experiencing the first and third serious adverse events have fully recovered medically. The patient experiencing the bacterial infection continues, as of March 2010, to have an indwelling catheter, but has otherwise recovered medically.
Other Product Opportunities
We are leveraging our Organ Regeneration Platform to develop a range of additional neo-organs.
Selected Risk Factors
Investing in our common stock involves substantial risk. Before participating in this offering, you should carefully consider all of the information in this prospectus, including risks discussed in Risk Factors beginning on page 11. Some of our most significant risks are:
The number of shares of common stock to be outstanding after this offering is based on 6,353,536 shares outstanding as of December 31, 2009 and excludes:
Except as otherwise indicated, all information in this prospectus assumes:
Certain of our existing stockholders have indicated an interest in purchasing up to an aggregate of approximately $17.2 million in shares of common stock in this offering at the initial public offering price. Because indications of interest are not binding agreements or commitments to purchase, these stockholders may elect not to purchase any shares in this offering.
We were founded in July 2003 as a Delaware corporation. Our corporate offices are located at 2900 Potshop Lane, Suite 100, East Norriton, PA 19403, and our telephone number is (610) 292-8364. Our website address is www.tengion.com. Information on our website is not incorporated into this prospectus and should not be relied upon in determining whether to make an investment in our common stock.
The following summary financial data should be read in conjunction with Selected Financial Information and Other Data, Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes included elsewhere in this prospectus. Our summary statement of operations data for the years ended December 31, 2007, 2008 and 2009, and for the period from July 10, 2003 (inception) through December 31, 2009 have been derived from our audited financial statements included elsewhere in this prospectus. The pro forma balance sheet data reflect the automatic conversion of all outstanding shares of preferred stock into common stock and the reclassification of the preferred stock warrant liability to stockholders equity (deficit) upon the completion of this offering.
The pro forma as adjusted balance sheet data reflect the pro forma balance sheet data at December 31, 2009 adjusted for the sale of 6,000,000 shares of our common stock in this offering at the initial offering price of $5.00 per share, after deducting the estimated underwriting discounts, commissions and offering expenses payable by us.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Financial Position and Need for Additional Capital
Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.
Our recurring losses from operations raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2009 with respect to this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. We are a development stage company and have not generated revenues or been profitable since inception, and it is possible we will never achieve profitability. We have devoted our resources to developing our Organ Regeneration Platform and certain product candidates, but such product candidates cannot be marketed until governmental approvals have been obtained. Accordingly, there is no current source of revenues much less profits, to sustain our present activities, and no revenues will likely be available until, and unless, our product candidates are approved by the FDA or comparable regulatory agencies in other countries and successfully marketed, either by us or a partner, an outcome which may not occur. If we successfully complete this offering, based upon our currently expected level of operating expenditures, we expect to be able to fund our operations to March 2011. This period could be shortened if there are any significant increases in planned spending on development programs or more rapid progress of development programs than anticipated. There is no assurance that other financing will be available when needed to allow us to continue as a going concern. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.
We have a history of net losses and may not achieve or sustain profitability.
We have incurred losses in each year since our inception and expect to experience losses for the foreseeable future. As of December 31, 2009, we had an accumulated deficit of $181.6 million. We had net losses of $31.0 million, $42.4 million and $29.8 million in the years ended December 31, 2007, 2008 and 2009, respectively. These losses resulted principally from costs incurred in our clinical trials, research and development programs, construction of our research laboratories and commercial manufacturing facility and from our general and administrative expenses. These losses, among other things, have had and will continue to have an adverse effect on our stockholders equity, total assets and working capital.
We expect to continue to incur significant operating expenses and anticipate that our expenses and losses will increase in the foreseeable future as we seek to further develop our product candidates, technology and manufacturing capabilities. Our expenses are expected to relate to the following:
The extent of our future operating losses is highly uncertain, and we may never achieve or sustain profitability. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline and you could lose all or part of your investment.
In order to fund our operations, we will need to raise significant amounts of capital. We may not be able to raise additional capital when necessary or on acceptable terms to us, if at all.
Our future capital requirements will depend on many factors, including:
As a result of these factors, among others, we will need to seek additional funding prior to our being able to generate positive cash flow from operations. We would likely seek funding through public or private sales of our securities, commercial loan facilities, or some combination of both. We also might seek funding through collaborative arrangements. Additional funding may not be available to us on acceptable terms, or at all. If we obtain capital through collaborative arrangements, these arrangements could require us to relinquish some rights to our technologies or product candidates. If we raise capital through the sale of equity, or securities convertible into equity, dilution to our then-existing stockholders would result. If we obtain funding through the incurrence of debt, we would likely become subject to covenants restricting our business activities, and holders of debt instruments would have rights and privileges senior to those of our equity investors. In addition, servicing the interest and repayment
obligations under our current and future borrowings would divert funds that would otherwise be available to support research and development, clinical or commercialization activities.
If we are unable to obtain adequate financing on a timely basis, we may be required to delay, reduce the scope of or eliminate one or more of our development programs, and reduce our personnel, any of which could have a material adverse effect on our business, financial condition and results of operations.
We have a substantial amount of debt that exposes us to risks that could adversely affect our business, operating results and financial condition.
We have approximately $22.3 million of debt outstanding as of December 31, 2009 which is secured by liens on substantially all of our assets. We expect that the annual principal and interest payments on our outstanding debt will be approximately $15.4 million, $9.0 million and $0.2 million in 2010, 2011 and 2012, respectively. The level and nature of our indebtedness could, among other things:
Unless we raise substantial additional capital or generate substantial revenue from a license or strategic partnership involving one of our product candidates, we may not be able to service or repay our debt when it becomes due, in which case our lenders could seek to accelerate payment of all unpaid principal and foreclose on our assets. Any such event would have a material adverse effect on our business, operating results and financial condition.
Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
We are a development stage company. We commenced operations in July 2003. Our operations to date have been limited to organizing and staffing our company, acquiring and developing our technology and undertaking preclinical studies and clinical trials of our product candidates. We have not demonstrated an ability to successfully complete large-scale clinical trials, obtain marketing approvals for product registration, manufacture a commercial-scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. As a result, we have a limited operating history from which you can evaluate our business and prospects.
In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors. If we are successful in obtaining marketing approval for any of our product candidates, we will need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
If we fail to properly manage our growth, our business could be adversely affected.
We have substantially increased the scale of our operations since our inception in 2003. We anticipate further increasing the scale of our operations as we develop our product candidates. If we are unable to manage our growth effectively, our operations and financial condition could be adversely affected. The management of our growth will depend, among other things, upon our ability to improve our
operational, financial and management controls, reporting systems and procedures. Furthermore, we may have to make investments in and hire and train additional personnel for our operations and manufacturing, which would result in additional burdens on our systems and resources and require additional capital expenditures.
If we do not successfully develop our product candidates and obtain the necessary marketing approvals to commercialize them, we will not generate sufficient revenues to continue our business operations.
In order to obtain marketing approval of our product candidates so that we can generate revenues once they are commercialized, we must conduct extensive preclinical studies and clinical trials to demonstrate that our product candidates are safe and effective and obtain and maintain approval of our manufacturing facilities. Our early stage product candidates, including our Neo-Urinary Conduit, for which we have an effective IND and for which we have commenced a single-center Phase I clinical trial, may fail to perform as we expect. Moreover, our Neo-Urinary Conduit and our other product candidates may ultimately fail to demonstrate the necessary safety and efficacy for marketing approval. We will need to conduct additional research and development, and devote significant additional financial resources and personnel to develop commercially viable products and obtain the necessary marketing approvals, and if we fail to do successfully, we may cease operations altogether.
Risks Related to the Development of Our Product Candidates
Our product development programs are based on novel technologies and are inherently risky.
We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our Organ Regeneration Platform creates significant challenges with respect to product development and optimization, manufacturing, government regulation and approval, third-party reimbursement and market acceptance. For example, the FDA has relatively limited experience with the development and regulation of autologous neo-organs and neo-tissues and, therefore, the pathway to marketing approval for our product candidates may accordingly be more complex, lengthy and uncertain than for a more conventional new drug candidate. The FDA may not approve our product candidates or may approve them with certain restrictions that may limit our ability to market our product candidates, and our product candidates may not be successfully commercialized, if at all.
Our clinical trials may not be successful.
We will only obtain marketing approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA or the applicable non-United States regulatory authority, in clinical trials, that the product candidate is safe and effective, and otherwise meets the appropriate standards required for approval for a particular indication. Clinical trials are lengthy, complex and extremely expensive processes with uncertain results. A failure of one or more of our clinical trials may occur at any stage of testing. To date, we have conducted two Phase II clinical trials for our Neo-Bladder Augment, involving 16 pediatric and adult patients. During these trials, three patients experienced serious adverse events that at the time of their occurrence were deemed by the respective clinical investigator to be clinically significant and probably related to our product candidate or implantation procedure. Each of the serious adverse events involved perforation of the bladder, which is a known complication in patients undergoing enterocystoplasty, the
current standard of care for these patients. A bladder perforation results in urine leakage through the bladder wall. We believe the underlying cause of these bladder perforations varied from patient to patient, and may be related to complications that can occur in this patient population including abscesses, bacterial infections, small bowel obstructions or invasive urologic procedures. As a result of these serious adverse events, the FDA placed our IND related to these clinical trials on hold. We submitted a complete response in June 2009 and the FDA released the clinical hold in July 2009 with no recommended changes to our protocol, product candidate or implantation procedure. There can be no assurance, however, that we will not experience similar serious adverse events with other patients in our Neo-Bladder Augment clinical trials or in our Phase I clinical trial for our Neo-Urinary Conduit.
We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain marketing approvals necessary for marketing our product candidates, including approval by the FDA.
Our efforts to develop all of our product candidates are at an early stage. We may be unable to progress our product candidates that are undergoing preclinical testing into clinical trials. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and favorable initial results from a clinical trial do not necessarily predict final results. The indications of use for which we are pursuing development may have clinical effectiveness endpoints that have not previously been reviewed or validated by the FDA, which may complicate or delay our effort to ultimately obtain FDA approval. We cannot assure you that our clinical trials will ultimately be successful.
We have not obtained marketing approval or commercialized any of our product candidates. We may not successfully design or implement clinical trials required for marketing approval to market our product candidates. We might not be able to demonstrate that our product candidates meet the appropriate standards for marketing approval, particularly as our technology may be the first of its kind to be reviewed by the FDA. If we are not successful in conducting and managing our preclinical development activities or clinical trials or obtaining marketing approvals, we might not be able to commercialize our product candidates, or might be significantly delayed in doing so, which will materially harm our business.
We may find it difficult to enroll patients in our clinical trials.
Our initial product candidates are designed to treat diseases that affect relatively few patients. This could make it difficult for us to enroll the number of patients that may be required for the clinical trials we would be required to conduct in order to obtain marketing approval for our product candidates.
In addition, we may have difficulty finding eligible patients to participate in clinical trials because a patient may require a concomitant surgical procedure that would prevent them from receiving our product candidates, may be using alternative therapies, or the extent of a patients overall medical condition may render such patient ineligible to participate in our trials. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether.
If we are not able to retain qualified management and scientific personnel, we may fail to develop our technologies and product candidates.
Our future success depends to a significant extent on the skills, experience and efforts of the principal members of our scientific and management personnel. These members include Steven Nichtberger, MD, our President and CEO, and Timothy Bertram, DVM, PhD, our Senior Vice President, Science and Technology. The loss of either or both of these individuals could harm our business and might significantly delay or prevent the achievement of research, development or business objectives. Competition for personnel is intense. We may find it difficult to retain qualified management and scientific personnel. For example, two of our executive officers voluntarily left our company in 2009 to pursue other opportunities. We may be unable to retain our current personnel or attract or integrate other qualified management and scientific personnel in the future.
We rely on third parties to conduct certain preclinical development activities and our clinical trials, and those third parties may not perform satisfactorily.
We do not conduct in our facilities certain preclinical development activities of our product candidates, such as preclinical studies in animals, nor do we conduct clinical trials for our product candidates ourselves. We rely on, or work in conjunction with, third parties, such as contract research organizations, medical institutions and clinical investigators, to perform these functions. Our reliance on these third parties for preclinical and clinical development studies reduces our control over these activities. We are responsible for ensuring that each of our preclinical development activities and our clinical trials is conducted in accordance with the applicable U.S. federal and state laws and foreign regulations, general investigational plan and protocols. However, other than our contracts with these third parties, we have no direct control over these researchers or contractors, as they are not our employees. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, or GCP, for conducting, recording and reporting the results of our clinical trials to assure that data and reported results are credible and accurate and that the rights, safety and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties also may have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our preclinical development activities or our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. These third parties may be warned, suspended or otherwise sanctioned by the FDA or other government or regulatory authorities for failing to meet the applicable requirements imposed on such third parties. As a result, the third parties may not be able to fulfill their contractual obligations, and the results obtained from the preclinical and clinical research using their services may not be accepted by the FDA to support the marketing approval of our product candidates. If the third parties or their employees become debarred by the FDA, we cannot use the research data derived from their services to support the marketing approval of our product candidates. Finally, these third parties may be bought by other entities, change their business plans or strategies or they may go out of business, thereby preventing them from meeting their contractual obligations to us.
We may not be able to secure and maintain relationships with research institutions and clinical investigators that are capable of conducting and have access to necessary patient populations for the conduct our clinical trials.
We rely on research institutions and clinical investigators to conduct our clinical trials. Our reliance upon research institutions, including hospitals and clinics, provides us with less control over the timing and cost of clinical trials and the ability to recruit subjects. If we are unable to reach agreement with suitable research institutions and clinical investigators on acceptable terms, or if any resulting agreement is terminated because, for example, the research institution and/or clinical investigators lose their licenses or permits necessary to conduct our clinical trials, we may be unable to quickly replace the research institution and/or clinical investigator with another qualified research institution and/or clinical investigator on acceptable terms. We may not be able to secure and maintain agreement with suitable research institutions to conduct our clinical trials.
Compliance with governmental regulations regarding the treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of our technology.
The Animal Welfare Act, or AWA, is the federal law that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals, most notably relating to personnel, facilities, sanitation, cage size, feeding, watering and shipping conditions. Third parties with whom we contract are subject to registration, inspections and
reporting requirements. Furthermore, some states have their own regulations, including general anti- cruelty legislation, which establish certain standards in handling animals. If we or any of our contractors fail to comply with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity, and our operations could be adversely affected.
Public perception of ethical and social issues may limit or discourage the type of research we conduct.
Our clinical trials involve people, and we and third parties with whom we contract also do research involving animals. Governmental authorities could, for public health or other purposes, limit the use of human or animal research or prohibit the practice of our technology. Public attitudes may be influenced by claims that our technology or that regenerative medicine generally is unsafe for use in research or is unethical and akin to cloning. In addition, animal rights activists could protest or make threats against our facilities, which may result in property damage and subsequently delay our research. Ethical and other concerns about our methods, particularly our use of human subjects in clinical trials or the use of animal testing, could adversely affect our market acceptance.
Risks Related to the Manufacturing of Our Product Candidates
We have only limited experience manufacturing our product candidates. We may not be able to manufacture our product candidates in quantities sufficient for our clinical trials and/or any commercial launch of our product candidates.
We may encounter difficulties in the production of our product candidates. Construction of neo-organs and neo-tissues from autologous live human cells involves strict adherence to complex manufacturing and storage protocols and procedures. Early stage clinical manufacturing is conducted in our pilot facility and, while we have supported clinical manufacturing from this location, future difficulties may arise which limit our production capability and delay progress in our clinical trials. We have built a commercial-scale manufacturing facility, which is based on our pilot manufacturing facility and processes used in that facility, which we believe will support late phase clinical trials and the initial commercial launch of our product candidates. As a result of our business decision to focus our resources on our Neo-Urinary Conduit, activities that were under way to prepare this facility to commence manufacturing operations were temporarily halted in March 2009 and we are currently maintaining the facility in a condition that will enable us to complete these activities and commence manufacturing operations. We expect completion of these activities, including recertification and hiring additional staff, will cost approximately $1.0 million. Any unexpected difficulty in completing these activities would increase cost or delay late-stage clinical or commercial manufacturing.
We may encounter technical or logistical difficulties as we seek to commence, and subsequently increase, production at our commercial-scale manufacturing facility. These difficulties could increase our costs or cause delays in the production of our product candidates necessary for any Phase III clinical trial and/or any anticipated commercial launch of our product candidates, any of which could damage our reputation and harm our business. Moreover, we have limited experience in manufacturing our product candidates for human patients and we are not aware of any party that manufactures products similar to ours. As a result, if we are not able to successfully manufacture our product candidates, we may be unable to utilize the manufacturing services of a third-party manufacturer.
The current manufacture of our product candidates involves the use of regulated animal tissues, and future product candidates may also use animal-sourced materials.
We currently utilize several bovine-derived products, such as growth media, in the manufacture of our Neo-Urinary Conduit and Neo-Bladder Augment. Bovine-sourced materials are strictly regulated in the United States and other jurisdictions due to their capacity to transmit the prion disease Bovine Spongiform Encephalopathy, or BSE, which manifests itself in humans as Creutzfeldt-Jakob Disease. Although we obtain our supply of bovine-based materials from closed herds in jurisdictions that are not currently known to carry BSE, there can be no assurance that these herds will remain BSE-free or that a
future outbreak or presence of other unintended and potentially hazardous agents would not adversely affect our product candidates or patients that may receive them. Further, our future product candidates may involve the use of bovine-sourced or other animal-based materials, which could increase the risk of transmission of other diseases carried by such animals.
If a natural or man-made disaster strikes our manufacturing facility, we would be unable to manufacture our product candidates for a substantial amount of time, which would harm our business.
Our manufacturing facility and manufacturing equipment would be difficult to replace and could require substantial replacement lead-time and additional funds if we lost use of either the facility or equipment. Our facility may be affected by natural disasters, such as floods. We do not currently have commercial-scale back-up capacity, so in the event our facility or equipment was affected by man-made or natural disasters, we would be unable to manufacture any of our product candidates until such time as our facility could be repaired or rebuilt. Although we currently maintain global property insurance with property limits of $27.0 million and business interruption insurance coverage of $5.4 million for damage to our property and the disruption of our business from fire and other casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Our business involves the use of hazardous materials that could expose us to environmental and other liability.
Our research and development processes and our operations involve the controlled storage, use and disposal of hazardous materials including, but not limited to, biological hazardous materials. We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. Moreover, we may not be able to maintain insurance to cover these risks on acceptable terms, or at all. We could also be required to incur significant costs to comply with current or future laws and regulations relating to hazardous materials. We currently maintain insurance coverage that is consistent with similar companies in our stage of development. In addition to global property insurance, we maintain general liability insurance coverage of $2.0 million with an excess liability insurance of $4.0 million, and workers compensation coverage of $0.5 million per incident.
Risks Related to Marketing Approval and Other Government Regulations
We cannot market and sell our product candidates in the United States or in other countries if we fail to obtain the necessary marketing approvals or licensure.
We cannot sell our product candidates until regulatory agencies grant marketing approval, or licensure. The process of obtaining such marketing approval is lengthy, expensive and uncertain. It is likely to take many years to obtain the required marketing approvals for our product candidates or we may never gain the necessary approvals. Any difficulties that we encounter in obtaining marketing approval may have a substantial adverse impact on our operations and cause our stock price to decline significantly. Any adverse events in our clinical trials for one of our product candidates could negatively impact the clinical trials and approval process for our other product candidates.
To obtain marketing approvals in the United States for our product candidates, we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to demonstrate to the FDA that the product candidate is safe and effective for each indication for which we seek approval. Several factors could prevent completion or cause significant delay of these trials, including an inability to enroll the required number of patients or failure to obtain FDA approval to commence a clinical trial. Negative or inconclusive results from or adverse events during a preclinical safety study or clinical trial
could cause the preclinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful. The FDA can place a clinical trial on hold if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury. If safety concerns develop, we, an Institutional Review Board, or IRB, or the FDA could stop our trials before completion. The populations for which we are developing our product candidates may have other medical complications that would affect their experience in our trials and would affect their experience with our product candidates, if approved. A serious adverse event is an event that results in significant medical consequences, such as hospitalization or prolonged hospitalization, disability or death, and if unexpected must be reported to the FDA. We cannot assure you that other safety concerns regarding our product candidates will not develop. For example, in February 2009, the FDA placed our IND for our Neo-Bladder Augment on clinical hold following certain serious adverse events that occurred with respect to patients in our Phase II clinical trials. We submitted a complete response in June 2009 and the FDA released the clinical hold in July 2009, with no recommended changes to our protocol, product candidate or implantation procedure.
The pathway to marketing approval for our product candidates may be more complex and lengthy than for approval of a conventional new drug or biologic. Similarly, to obtain approval to market our product candidates outside of the United States, we will need to submit clinical data concerning our product candidates and receive marketing approval from governmental agencies, which in certain countries includes approval of the price we intend to charge for our product. We may encounter delays or rejections if changes occur in regulatory agency policies, or if reports from preclinical and clinical testing on similar technology or products raise safety and/or efficacy concerns, during the period in which we develop a product candidate or during the period required for review of any application for marketing approval. If we are not able to obtain marketing approvals for use of our product candidates under development, we will not be able to commercialize such products and, therefore, may not be able to generate sufficient revenues to support our business.
The FDA may impose requirements on our clinical trials that are difficult to comply with, which could harm our business.
The requirements the FDA may impose on clinical trials for our product candidates are uncertain. As a result, we cannot assure you that we will be able to comply with such requirements. For example, the FDA may require endpoints in our late-stage clinical trials that are different from or in addition to the endpoints in our early-stage clinical trials or the endpoints which we may propose. The endpoints or other study elements, including sample size, the FDA requires may make it less likely that our Phase III clinical trials are successful or may delay completion of the trials. If we are unable to comply with the FDAs requirements, we will not be able to get approval for our product candidates and our business will suffer.
If we are not able to conduct our clinical trials properly and on schedule, marketing approval by the FDA and other regulatory authorities may be delayed or denied.
Our clinical trials may be delayed or terminated for many reasons, including, but not limited to, if:
If we are unable to conduct our clinical trials properly and on schedule, the FDA may delay or deny marketing approval.
Final marketing approval of our product candidates by the FDA or other regulatory authorities for commercial use may be delayed, limited, or denied, any of which would adversely affect our ability to generate operating revenues.
Any of the following factors, if one or more were to occur, could cause final marketing approval for our product candidates to be delayed, limited or denied:
Our development costs will increase if we have material delays in our clinical trials, or if we are required to modify, suspend, terminate or repeat a clinical trial. If marketing approval for our product candidates is delayed, limited or denied, our ability to market products, and our ability to generate product sales, would be adversely affected.
Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities, including through periodic inspections. These requirements include, but are not limited to, submissions of safety and other post-marketing information and reports, registration requirements, cGMP and Quality System Regulation, or QSR, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. Even if marketing approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly and time consuming post-marketing testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with our product candidates or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:
In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the products approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions.
Current or future legislation may make it more difficult and costly for us to obtain marketing approval of our product candidates.
In 2007, the Food and Drug Administration Amendments Act of 2007, or the FDAAA, became law. This legislation grants significant new powers to the FDA, many of which are aimed at assuring the safety of drugs and biologics after approval. For example, FDAAA granted the FDA new authority to impose
post-approval clinical study requirements, require safety-related changes to product labeling and require the adoption of risk management plans, referred to as risk evaluation and mitigation strategies, or REMS. The REMS may include requirements for special labeling or medication guides for patients, special communication plans to health care professionals, and restrictions on distribution and use. Pursuant to FDAAA, if the FDA makes the requisite findings, it might require that a new product be used only by physicians with specified specialized training, only in specified designated health care settings, or only in conjunction with special patient testing and monitoring. The legislation also included requirements for disclosing clinical study results to the public through a clinical study registry, and renewed requirements for conducting clinical studies to generate information on the use of products in pediatric patients. Under the FDAAA, companies that violate the new law are subject to substantial civil monetary penalties. The requirements and changes imposed by the FDAAA may make it more difficult, and more costly, to obtain and maintain approval of new biological products.
In addition, the FDAs regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could prevent or delay marketing approval of our product candidates or further restrict or regulate post-approval activities. For example, proposals have been made to further expand post-approval requirements and restrict sales and promotional activities. It is impossible to predict whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes or the marketing approvals of our product candidates, if any, may be.
Risks Related to the Commercialization of Our Product Candidates
If we fail to educate and train physicians as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our product candidates, our sales will not grow.
Acceptance of our product candidates depends, in large part, on our ability to train physicians in the proper implantation of our neo-organs and neo-tissues, which will require significant expenditure of our resources. Convincing physicians to dedicate the time and energy necessary to properly train to use new products and techniques is challenging, and we may not be successful in these efforts. If physicians are not properly trained, they may ineffectively implant our product candidates. Such misuse or ineffective implantation may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly, even if our product candidates are superior to alternative treatments, our success will depend on our ability to gain and maintain market acceptance for our product candidates. If we fail to do so, our sales will not grow and our business, financial condition and results of operations will be adversely affected. We may not have adequate resources to effectively educate the medical community and/or our efforts may not be successful due to physician resistance or perceptions regarding our product candidates.
We face uncertainty related to pricing, reimbursement and health care reform, which could reduce our revenue.
Sales of our product candidates, if approved for commercialization, will depend in part on the availability of coverage and reimbursement from third-party payors such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. If our product candidates are approved for commercialization, pricing and reimbursement may be uncertain. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care. Further federal and state proposals and health care reforms are likely which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our products, if commercialized, and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.
Adoption of our product candidates by the medical community may be limited if doctors and hospitals do not receive full reimbursement for our products, if commercialized. Cost control initiatives may decrease coverage and payment levels for our product candidates and, in turn, the price that we will be able to charge for any product. We are impacted by efforts by public and private third-party payors to control costs. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payors to our product candidates. Any denial of private or government payor coverage or inadequate reimbursement for procedures performed using our products, if commercialized, could harm our business and reduce our revenue.
We could be adversely affected if healthcare reform measures substantially change the market for medical care or healthcare coverage in the United States.
The U.S. Congress recently adopted legislation regarding health insurance, which has been signed into law. As a result of this new legislation, substantial changes could be made to the current system for paying for healthcare in the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage. Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payors and government programs, such as Medicare, Medicaid and State Childrens Health Insurance Program, creation of a government-sponsored healthcare insurance source, or some combination of both, as well as other changes. Restructuring the coverage of medical care in the United States could impact the reimbursement for prescribed drugs, biopharmaceuticals, medical devices, or our product candidates. If reimbursement for our approved product candidates, if any, is substantially less that we expect in the future, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted.
Extending medical benefits to those who currently lack coverage will likely result in substantial cost to the U.S. federal government, which may force significant changes to the healthcare system in the United States. Much of the funding for expanded healthcare coverage may be sought through cost savings. While some of these savings may come from realizing greater efficiencies in delivering care, improving the effectiveness of preventive care and enhancing the overall quality of care, much of the cost savings may come from reducing the cost of care. Cost of care could be reduced by decreasing the level of reimbursement for medical services or products, or by restricting coverage and, thereby, utilization of medical services or products. In either case, a reduction in the utilization of, or reimbursement for, any product for which we receive marketing approval in the future could have a materially adverse impact on our financial performance.
There is substantial uncertainty regarding the exact provisions of healthcare reform that have been enacted. This uncertainty limits our ability to forecast changes that may occur in the future and to manage our business accordingly.
We may face competition from companies and institutions that may develop products that make ours less attractive or obsolete through both new technologies that may be similar to ours, or more traditional pharmaceutical or medical device treatments.
Many of our competitors have greater resources or capabilities than we have, or may already have or succeed in developing better products or in developing products more quickly than we do, and we may not compete successfully with them.
The medical device, pharmaceutical and biotechnology industries are highly competitive. We compete for funding. If our product candidates become available for commercial sale, we will compete in the marketplace. For funding, we compete primarily with other companies which, like us, are focused on discovering and developing novel products or therapies for the treatment of human disease based on regenerative medicine technologies or other novel scientific principles.
In the marketplace, we may eventually compete with other companies and organizations that are marketing or developing therapies for our targeted disease indications, based on traditional pharmaceutical, medical device or other, non-cellular therapies and technologies.
We also face competition in the cell therapy field from academic institutions and governmental agencies. Many of our current and potential competitors have greater financial and human resources than we have, including more experience in research and development and more established sales, marketing and distribution capabilities.
We anticipate that competition in our industry will increase. In addition, the health care industry is characterized by rapid technological change, resulting in new product introductions and other technological advancements. Our competitors may develop and market products that render our current product or any future product non-competitive or otherwise obsolete.
The use of our product candidates in human subjects may expose us to product liability claims, and we may not be able to obtain adequate insurance.
We face an inherent risk of product liability claims. Our Neo-Bladder Augment, which has undergone Phase II clinical trials, has not been used over an extended period of time in a large number of patients and, therefore, our long-term safety and efficacy data are limited. Patients in our Phase II clinical trials have experienced serious adverse events. Our current product liability coverage is $5.0 million per occurrence and in the aggregate. We will need to increase our insurance coverage if and when we begin commercializing any of our product candidates. We may not be able to obtain or maintain product liability insurance on acceptable terms with adequate coverage. If claims against us substantially exceed our coverage, then our business could be adversely impacted. Regardless of whether we are ultimately successful in any product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources and could result in among others:
Any of these results would substantially harm our business.
We have never marketed a product before, and if we are unable to establish an effective focused sales force and marketing infrastructure, we will not be able to commercialize our product candidates successfully.
We intend to explore building the necessary marketing and sales infrastructure to market and sell our current product candidates, if they receive marketing approval. We currently do not have internal sales, distribution and marketing capabilities. The development of a sales and marketing infrastructure for our domestic operations will require substantial resources, will be expensive and time consuming and could negatively impact our commercialization efforts, including delay of any product launch. These costs may be incurred in advance of any approval of our product candidates. In addition, we may not be able to hire a focused sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target, including surgery. If we are unable to establish our focused sales force and marketing capability for our product candidates, we may not be able to generate any product revenue, may generate increased expenses and may never become profitable.
If we are unable to establish development or marketing collaborations with third parties, we may not be able to develop, commercialize or distribute our products successfully.
We may need to establish development or marketing collaborations with third parties in order to complete development of our product candidates or for the commercialization or distribution of our product candidates. We expect to face competition in our efforts to identify appropriate collaborators or partners to help develop or commercialize our product candidates in our target commercial areas. If we are unable to establish adequate collaborations, our ability to develop or market our product candidates could be adversely affected. Further, to the extent third parties with whom we collaborate fail to perform, our ability to achieve our development or marketing goals may be adversely affected, and our business could suffer.
Risks Related to Intellectual Property
If we are unable to obtain and maintain protection for our intellectual property, the value of our technology and products will be adversely affected.
Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, or determined not to cover our product candidates or our competitors products, which could limit our ability to stop competitors from marketing identical or similar products or reduce the term of patent protection we may have for our product candidates. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
In addition, we cannot assure you that any of our pending patent applications will result in issued patents. If patents are not issued in respect of our pending patent applications, we may not be able to stop competitors from marketing products similar to ours.
Our patents also may not afford us protection against competitors with identical or similar technology.
Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind the actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a United States patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our United States patent position. If a third party believes we or our licensor were not entitled to the grant of one or more patents, such third party may challenge such patents in an interference or re-examination proceeding in the United States, or opposition or similar proceeding in another country.
If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.
We are a party to license agreements with Childrens Hospital Boston and Wake Forest University Health Sciences pursuant to which we license the key intellectual property relating to our product candidates. We may enter into additional licenses in the future. Our existing licenses impose, and we expect that future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.
If we are unable to protect the confidentiality of our proprietary information, trade secrets and know-how, the value of our technology and product candidates could be adversely affected.
Our proprietary information, trade secrets and know-how are important components of our intellectual property, particularly in connection with the manufacturing of our product candidates. We seek to protect our proprietary information, trade secrets, know-how and confidential information, in part, by confidentiality agreements with our employees, corporate partners, outside scientific collaborators, sponsored researchers, consultants and other advisors. We also have confidentiality and invention or patent assignment agreements with our employees and our consultants. If our employees or consultants breach these agreements, we may not have adequate remedies for any of these breaches. In addition, our proprietary information, trade secrets and know-how may otherwise become known to or be independently developed by others. Enforcing a claim that a party illegally obtained and is using our proprietary information, trade secrets and know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary information, trade secrets and know-how, and failure to obtain or maintain protection of proprietary information, trade secret and know-how could adversely affect our competitive business position.
If we infringe or are alleged to infringe the intellectual property rights of third parties, our business could suffer.
Our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may subsequently issue and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and abroad. These third parties could
bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering our product candidates, technology or methods.
In order to avoid or settle potential claims with respect to any of the patent rights described above or any other patent rights of third parties, we may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our future collaborators were able to obtain a license, the rights may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing one or more product candidates, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.
Others may sue us for infringing their patent or other intellectual property rights or file nullity, opposition, re-examination or interference proceedings against our patents, even if such claims or proceedings are without merit, which would similarly harm our business. Furthermore, during the course of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely affect our business.
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our product candidates and technology. Even if we prevail, the cost to us of any patent litigation or other proceeding could be substantial.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from any litigation could significantly limit our ability to continue our operations. Patent litigation and other proceedings may also absorb significant management time. Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We try to ensure that our employees do not use the proprietary information, trade secrets or know-how of others in their work for us. However, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets, know-how or other proprietary information of any such employees former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims, in addition to paying monetary damages, we may jeopardize valuable intellectual property rights, disclose confidential information or lose personnel.
Risks Related to this Offering
There has been no prior market for our common stock, and it may trade at prices below the initial public offering price.
Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which a trading market for our common stock will develop or be sustained after this offering.
The initial public offering price will be determined by negotiations between us and the representatives of the underwriters based on factors that may not be indicative of future performance, and may not bear any relationship to the price at which our common stock will trade upon completion of this offering. You may be unable to sell your shares of common stock at or above the initial public offering price.
The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:
In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert managements attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.
Purchasers in this offering will suffer immediate dilution and may experience additional dilution in the future.
If you purchase common stock in this offering, you may pay more for your shares than the amounts paid by existing stockholders for their shares. In addition, the net tangible book value of your shares based upon our actual book value will immediately be less than the offering price you paid. Therefore, if you purchase common stock in this offering, you will experience immediate and substantial dilution of approximately $2.08 per share in the price you pay for our common stock as compared to our pro forma net tangible book value as of December 31, 2009.
The future sale of our common stock could negatively affect our stock price.
If our existing stockholders sell a large number of shares of common stock, or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. These stockholders may sell their shares of our common stock starting at various times following this offering. We have agreed, under certain circumstances, to register the resale of shares held by our existing stockholders. In addition, we intend to register approximately 2,362,373 shares of common stock that are reserved for issuance under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to lock-up agreements and restrictions on our affiliates.
Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.
Upon completion of this offering, our executive officers, directors and beneficial owners of 5% or more of our common stock and their affiliates will, in the aggregate, beneficially own approximately 32.4% of our outstanding common stock, after giving effect to the conversion of all outstanding shares of our preferred stock into 5,651,955 shares of our common stock and the exercise of warrants for 106,562 shares of common stock, but assuming no exercise of the underwriters over-allotment option and excluding any shares of our common stock purchased in this offering by certain of our existing stockholders who own more than 5% of our common stock. These persons, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders. The above ownership percentages do not reflect potential purchases by existing stockholders in our initial public offering, if any.
Certain provisions of Delaware law and of our charter documents contain provisions that could delay and discourage takeover attempts and any attempts to replace our current management by stockholders.
Certain provisions of our certificate of incorporation and bylaws, and applicable provisions of Delaware corporate law, may make it more difficult for or prevent a third party from acquiring control of us or changing our board of directors and management. These provisions include:
We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless prior board or stockholder approval was obtained.
Any delay or prevention of a change of control transaction or changes in our board of directors or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
Our management has broad discretion over the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.
Our management will have broad discretion over the use of proceeds from this offering. You may not agree with managements decisions, and our use of the proceeds may not yield any return on your investment in us. The failure of our management to apply the net proceeds of this offering effectively could have a material adverse effect on our business, financial condition and results of operations.
We do not expect to pay cash dividends on our common stock in the foreseeable future. As a result, you must rely on stock appreciation for any return on your investment.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Currently, we are subject to contractual restrictions on the payment of dividends under certain of our debt instruments. Furthermore, we may become subject to additional contractual restrictions or prohibitions on the payment of dividends.
This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words anticipate, believe, estimate, expect, intend, may, plan, predict, project, target, potential, will, would, could, should, continue, contemplate, or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this prospectus include, among other things, statements about:
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the Risk Factors section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect.
The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.
We estimate that we will receive net proceeds of approximately $26.0 million from the sale of the shares of common stock offered in this offering, based on an assumed initial public offering price of $5.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $30.1 million.
We are undertaking this offering in order to access the public capital markets and to increase our liquidity. We expect to use the net proceeds of this offering for the following purposes:
Based on our current operating plans, we expect the proceeds of this offering, together with our existing resources, to be sufficient to fund our planned operations, including our continued product candidate development, to March 2011. We will need to raise more funds to complete our Phase I clinical trial for our Neo-Urinary Conduit and our preclinical research and development activities for our Neo-Kidney Augment. We will also need to raise more funds to maintain our research and manufacturing facilities beyond March 2011.
As of December 31, 2009, we had $22.3 million of debt outstanding, consisting of working capital notes totaling $17.3 million, with payments due through September 2011 and bearing an average interest rate of 12.26%, equipment and supplemental working capital notes totaling $4.0 million, with payments due through April 2012 and bearing an average interest rate of 11.68%, and a machinery and equipment note of $1.0 million, with payments due through January 2012 and bearing an interest rate of 5.0%. In March 2009, we incurred $0.5 million of this debt to fund equipment purchases and related maintenance costs.
The amounts and timing of our actual expenditures will depend on numerous factors, including the progress in, and costs of, our preclinical and clinical programs and the amount and timing of revenues, if any, from our collaborations. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. In addition, in certain circumstances, we are prohibited by various borrowing arrangements from paying cash dividends without the prior written consent of the lenders. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board.
The following table sets forth our cash, cash equivalents and short-term investments and our capitalization as of December 31, 2009:
The pro forma information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes appearing elsewhere in this prospectus.
The number of pro forma as adjusted common shares shown as issued and outstanding in the table is based on the number of shares of our common stock outstanding as of December 31, 2009, assumes the conversion of all outstanding shares of preferred stock into 5,651,955 shares of common stock, and excludes:
If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.
The historical net tangible book value of our common stock as of December 31, 2009 was $9.8 million, or $14.03 per share of common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the total number of shares of our common stock outstanding as of December 31, 2009. On a pro forma basis, after giving effect to the conversion of all outstanding shares of our preferred stock into 5,651,955 shares of common stock immediately upon completion of this offering, our pro forma net tangible book value as of December 31, 2009 was $10.2 million, or $1.60 per share of common stock.
After giving effect to our sale in this offering of 6,000,000 shares of our common stock at an assumed initial public offering price of $5.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2009 would have been $36.1 million, or $2.92 per share of our common stock. This represents an immediate increase of net tangible book value of $1.32 per share to our existing stockholders and an immediate dilution of $2.08 per share to investors purchasing shares in this offering.
The following table illustrates this per share dilution:
If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $3.04 per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering would be $1.96 per share.
The following table summarizes, as of December 31, 2009, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of our preferred stock into common stock, the total effective cash consideration paid, and the average price per share paid by our existing stockholders and by our new investors purchasing stock in this offering at an assumed initial public offering price of $5.00 per share before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:
The tables and calculations above are based on the number of shares of common stock outstanding after the completion of this offering. To the extent the options are exercised, there will be further dilution to new investors.
If the underwriters exercise their over-allotment option in full, our existing stockholders would own 47.9% and our new investors would own 52.1% of the total number of shares of our common stock outstanding after this offering.
The above information assumes no exercise of stock options or warrants outstanding as December 31, 2009. As of December 31, 2009, there were:
Certain of our existing stockholders have indicated an interest in purchasing up to an aggregate of approximately $17.2 million in shares of common stock in this offering at the initial public offering price. Because indications of interest are not binding agreements or commitments to purchase, these stockholders may elect not to purchase any shares in this offering. The foregoing discussion and tables do not reflect any potential purchases by these existing stockholders.
The selected financial data for the years ended December 31, 2007, 2008 and 2009 and as of December 31, 2008 and 2009, have been derived from our audited financial statements included elsewhere in this prospectus. The selected financial data for the years ended December 31, 2005 and 2006 and as of December 2005, 2006 and 2007 have been derived from our audited financial statements not included in this prospectus.
The information in the following table should be read together with Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes included elsewhere in this prospectus.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Financial Data and our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under Risk Factors and elsewhere in this prospectus.
We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of replacement neo-organs and neo-tissues. Our Organ Regeneration Platform enables us to create proprietary product candidates that are intended to harness the intrinsic regenerative pathways of the body to produce a range of native-like organs and tissues. Our product candidates eliminate the need to utilize other tissues of the body for a purpose to which they are poorly suited, procure donor organs or administer anti-rejection medications. We produce neo-organs and neo-tissues in our scalable manufacturing facilities using efficient and repeatable proprietary processes, and have implanted neo-organs in our clinical trials. We intend to develop our technology to address unmet medical needs in urologic, renal, gastrointestinal and vascular diseases and disorders.
To date, we have devoted substantially all of our resources to the development of our Organ Regeneration Platform and product candidates, as well as to our facilities that we employ to manufacture our neo-organs and neo-tissues. Since our inception in July 2003, we have had no revenue from product sales, and have funded our operations principally through the private placement of equity securities and debt financings. We have never been profitable and, as of December 31, 2009, we had an accumulated deficit of $181.6 million. We expect to continue to incur significant operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical studies and clinical trials and seek marketing approval and eventual commercialization.
Financial Operations Overview
Research and Development Expense
Our research and development expense consists of expenses incurred in developing and testing our product candidates and are expensed as incurred. Research and development expense consists of:
Preclinical study and clinical trial costs for our product candidates are a significant component of our current research and development expenses. We track and record information regarding external research and development expenses on a per study basis. Preclinical studies are currently coordinated with third-party contract research organizations and expense is recognized based on the percentage
completed by study at the end of each reporting period. Clinical trials are currently coordinated through a number of contracted sites and expense is recognized based on a number of factors including actual and estimated patient enrollment and visits, direct pass-through costs and other clinical site fees. We utilize internal employees, resources and facilities across multiple product candidates. We do not allocate internal research and development expenses among product candidates.
The following table summarizes our research and development expense for the years ended December 31, 2007, 2008 and 2009.
From our inception in July 2003 through December 31, 2009, we have incurred research and development expense of $91.7 million. We expect that a large percentage of our research and development expense in the future will be incurred in support of our current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. We expect to continue to test our product candidates in preclinical studies for toxicology, safety and efficacy, and to conduct additional clinical trials for each product candidate. If we are not able to engage a partner prior to the commencement of later stage clinical trials, we may fund these trials ourselves. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus our resources on more promising product candidates or programs. Completion of clinical trials by us or our future collaborators may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:
None of our product candidates has received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that clinical data establishes the safety and efficacy of our product candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of our product candidates. In the event that third parties have control over the clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plan or capital requirements.
As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will receive cash inflows from the commercialization and sale of an approved product candidate.
General and Administrative Expense
General and administrative expense consists primarily of salaries, benefits and other related costs, including stock-based compensation, for persons serving in our executive, finance, legal, marketing planning and human resource functions. Our general and administrative expense includes facility-related costs not otherwise included in research and development expense, professional fees for legal services, including patent-related expense, tax and accounting services and other consulting services and general corporate expenses. We expect that our general and administrative expenses will increase with the development and potential commercialization of our product candidates, and are subject to the reporting obligations applicable to public companies.
Depreciation expense is the amortization of capitalized property and equipment that is recognized over the estimated useful lives of the assets using the straight-line method. We use a life of three years for computer equipment; five years for laboratory, office and warehouse equipment; seven years for furniture and fixtures; and the lesser of the useful life of the asset or the remaining life of the underlying facility lease for leasehold improvements. Expenditures for maintenance, repairs, and betterments that do not prolong the useful life of the asset are charged to expense as incurred.
Interest Income, Interest Expense and Change in Fair Value of Preferred Stock Warrants
Interest income consists of interest earned on our cash and cash equivalents and short-term investments. Interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt, as well as amounts related to the change in the fair value of our preferred stock warrants.
Net Operating Losses and Tax Loss Carryforwards
As of December 31, 2009, we had net operating loss carryforwards available to offset future federal and state taxable income of $95.6 million and $102.7 million, respectively, as well as $4.1 million of research and development tax credits. The net operating loss carryforwards and credits expire at various dates through 2030. The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit our ability to utilize these carryforwards. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our formation, due to the significant costs and complexities associated with a study. We may have experienced various ownership changes, as defined by the Act, as a result of past financings. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage of these carryforwards for federal or state income tax purposes.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management bases these significant judgments and estimates on historical experience and other assumptions it believes to be reasonable based upon information presently available. Actual results could differ from those estimates under different assumptions, judgments or conditions.
All of our significant accounting policies are discussed in Note 3, Summary of Significant Accounting Policies, to our financial statements, included elsewhere in this prospectus. We have identified the following as our critical accounting polices and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions. Management has reviewed these critical accounting policies and estimates with the Audit Committee of our board of directors.
Impairment of Long-lived Assets
Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment include a significant change in the planned use of the acquired asset, a decline in the observable market value of an asset, or a significant adverse change in the business such as the occurrence of a negative clinical regulatory matter that would prohibit us from obtaining the approval for commercializing a product candidate. Upon identification of an indicator of impairment, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. As of December 31, 2008 and 2009, the carrying value of long lived assets was $21.0 million and $16.2 million, respectively. If an event were to occur as described above that would prevent us from obtaining the approval for commercializing a product candidate, we would anticipate an impairment charge of an amount up to a maximum of the carrying value of the long-lived assets at that time. The evaluation of the recoverability of long-lived assets, and the determination of their fair value should such fair values need to be estimated, requires us to make significant estimates and assumptions. These estimates and assumptions include, but are not limited to, the estimation of future cash flows, discount rates and costs to sell. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. Such a change in assumptions could have a significant impact on the conclusion that an assets carrying value is recoverable, or the determination of any impairment charge if it was determined that the asset values were indeed impaired. In 2007, 2008 and 2009, no impairment charges were recognized.
Preclinical and Clinical Trial Costs
A substantial portion of our ongoing research and development activities are performed under agreements we enter into with external service providers who conduct many of our research and development activities. Estimates of incurred costs are made to determine the accrued balance in any accounting period. The estimates incurred under the contracts are based on factors such as work performed, milestones achieved, patient enrollment and costs historically incurred for similar contracts. As actual costs become known, we adjust our estimates. To date, our estimates have been within managements expectations, and no material adjustments to research and development expense have been recognized. For the year ended December 31, 2009, a 10% increase or decrease in our estimate of research and development expense incurred under such contracts would result in an increase or decrease in research and development expense of approximately $370,000. We may expand the level of research and development activity to be performed by external service providers in which case our estimates would be more material to our future operations. Subsequent changes in estimates may result in a material change in our accruals, which could also materially affect our future results of operations.
Prior to January 1, 2006, we applied the intrinsic-value method of accounting prescribed in previous Financial Accounting Standards Board, or FASB, accounting guidance that was later superseded, and
related interpretations to account for the stock options issued to employees and directors. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.
On January 1, 2006, we adopted the revised accounting standards for stock-based compensation guidance which was adopted prospectively to new awards and to awards modified, repurchased, or canceled after December 31, 2005. This current guidance requires companies to measure and recognize compensation expense for all employee stock-based payments at fair value, net of estimated forfeitures, over the vesting period of the underlying share-based awards. In addition, we account for stock-based compensation to nonemployees in accordance with the FASB accounting guidance for equity instruments that are issued to other than employees.
We use the Black-Scholes option-pricing model to value our stock option awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Since we have been operating as a private company, we do not have sufficient historical volatility for the expected term of the options; therefore, we use comparable public companies as a basis for our expected volatility to calculate the fair value of option grants. We intend to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available. The expected term is based on the simplified method provided by SEC guidance. The risk-free interest rate is based on the U.S. Treasury yield curve with a remaining term equal to the expected life assumed at grant. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimate and involve inherent uncertainties and the application of managements judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different in the future.
The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class and an analysis of our historical and known forfeitures on existing awards. Under the true-up provisions of the FASB stock based compensation guidance, we record additional expense if the actual forfeiture rate is lower than estimated, and a recovery of expense if the actual forfeiture rate is higher than estimated, during the period in which the options vest.
The fair value of our common stock underlying stock options granted during 2007, 2008, and 2009 was determined by our compensation committee pursuant to authority delegated by our board of directors. In the absence of a public trading market for our common stock, our compensation committee was required to estimate the fair value of our common stock at each option grant date. Our compensation committee, in making its independent determination, utilized the assistance of an independent valuation firm. In each of the separate valuations performed by our compensation committee, our compensation committees determination of the fair market values was consistent with the results and conclusions of our independent third party valuation. We used methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, or the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, considering numerous objective and subjective factors to determine common stock fair market value at each option grant date, including but not limited to the following factors:
In considering the rights and preferences of our preferred stock relative to our common stock, our compensation committee considered the following rights and preferences of our Series A, Series B and Series C preferred stock:
As a result of these participation rights and preferences, the preferred stockholders would receive substantially more or all of our companys value in the event of the dissolution or liquidation of our company, such as in a buy-out or sale of our company, or on the payment of the dividends. For example, as of December 31, 2009 on a buy-out or sale of our company, the Series A, Series B and Series C preferred stockholders are each entitled to receive liquidation preferences of $35.24, $34.66 and $30.45 per share, respectively, for a total liquidation preference payment, including accumulated dividends, of $188.2 million before participating equally with the common stockholders in the remaining value of our company. All per share amounts in this paragraph assume the automatic conversion of all outstanding shares of preferred stock into 5,651,955 shares of common stock upon the completion of our initial public offering.
Beginning in January 2006, our compensation committee commenced periodic contemporaneous assessments of the valuation of our common stock. These valuations were performed concurrently with the achievement of significant milestones, major financing events or sizeable options grants as of January 31, 2006; June 23, 2006; December 31, 2006; September 24, 2007; February 1, 2008; July 31, 2008; October 15, 2008; January 15, 2009; February 13, 2009; July 31, 2009; and December 3, 2009.
In determining the fair value of our common stock, we considered several factors impacting the value of our common stock, including the following:
The following table represents a summary of the contemporaneous valuations performed by our compensation committee concurrently with the achievement or failure of significant milestones or with major financing events, where applicable. Listed are the related stock option grants and exercise prices that utilized these valuations from January 1, 2007 through December 31, 2009.
On August 26, 2009, we modified the exercise price for all options outstanding related to active employees to $0.44 resulting in an incremental value, defined as the excess of the fair value of the modified options over the fair value of the original options immediately before these terms were modified, which was partially recognized as compensation in the third quarter of 2009. The remaining charge will be recognized over the remaining vesting period of the options that were modified.
Our determination of the fair values of our common stock are described in detail below beginning with the December 31, 2006 valuation that was utilized by our compensation committee to determine the fair value of our common stock associated with options granted after December 31, 2006. All valuations were prepared consistent with the AICPA Practice Guide and used a combination of several valuation approaches: the market approach, which compares our company to similar publicly-traded companies or transactions, an income approach, which estimates the present value of cash flows that the business is expected to generate over a forecast period and an estimate of the present value of cash flows beyond that period, which is referred to terminal value, and an analysis of the implied value of the common stock given the price of the latest issuance of preferred stock. Many of these future value indications are converted to present value by means of discounting, using a rate of return that accounts for the time value of money and the appropriate degree of risks inherent in the business and excludes any factor for
lack of marketability. Given that we have several series of convertible preferred stock outstanding, it was also necessary to allocate our companys value to the various classes of stock, including the various series of preferred stock and common stock. As provided in the AICPA Practice Guide, there are several approaches for allocating equity value of a privately-held company among the securities in a complex capital structure. Aside from the two exceptions noted below, we used the probability weighted equity return method, or PWERM, to allocate our equity to our various classes of securities. The value of our common stock was then discounted for lack of marketability, or the inability to readily sell shares, which increases the owners exposure to changing market conditions and increases the risk of ownership. The discount for lack of marketability is derived using a protective put calculation using the Black- Scholes option pricing model.
Valuation December 31, 2006
For the December 31, 2006 valuation, we used a combination of the market approach and the income approach as well as the pricing indicated by our Series B Preferred round to estimate the equity value of our company. Specifically, a discounted cash flow model was utilized applying market multiples to determine the terminal value, an IPO based market model simulating a future IPO, and lastly the implied common stock value based on the sales of Series B preferred stock. The estimated equity values in the scenarios were discounted from the date of the anticipated event to the valuation date using a discount rate of 50%. The equity value was allocated among the various classes of our securities, including preferred stock, preferred warrants, common stock and options to purchase common stock using a combination of the option-pricing model and a current value method. At the time of this valuation, we were still at a very early stage of our development. A combination of the result of two allocation methods was used to capture both our early stage of development as well as the potential future value of our common stock. A discount of 18.5% was applied to account for the lack of marketability. Based on our best estimate of various exit scenarios, we assumed a 50% probability of an IPO, 20% probability of a stay-private scenario and attributed a 30% weighting to our common stock value resulting from the sale price of our Series B preferred stock. This analysis yielded a marketable, minority firm equity value of $120.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $99.0 million. The resulting estimated fair value of our common stock at December 31, 2006, was $17.11 per share.
Valuation September 24, 2007
At the time of the September 24, 2007 valuation, we had raised $33.2 million in net proceeds through the sale of our Series C preferred stock at a price per share of $26.39. This per share price assumes the automatic conversion of all of the outstanding shares of our preferred stock into 5,651,955 shares of common stock upon the completion of our initial public offering. In the September 24, 2007 valuation, our methodology focused on the implied pricing of our common stock based on the per share sale price of our Series C preferred stock as well as a selection of IPO scenarios. The use of IPO scenarios reflected our intent at the time to enter the public market in 2008. At the time of this valuation and as a result of the plans for an IPO, we changed the allocation method of the equity value of our company to a PWERM. In the IPO scenario we estimated our future equity value in an IPO by analyzing comparable IPOs in the life sciences industry. The estimated future equity values in the IPO scenarios were allocated to our equity securities assuming that all such securities would convert to common equity in the event of an IPO. Thereafter the common value indications from each IPO scenario were discounted from the date of the anticipated event to the valuation date using a discount rate of 50%. A lack of marketability adjustment of 15% was applied to the resulting present equity values.
Because of our plans at the time to effectuate an IPO in 2008, we placed an 89% weight on the indications from the various IPO scenarios and attributed an 11% weighting to our common stock value resulting from the sale price of the Series C preferred stock. This analysis yielded a marketable, minority firm equity value of $139.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $103.0 million. The resulting value, which represented the estimated fair value of our common stock at September 24, 2007, was $18.56 per share.
Valuation February 1, 2008
As of February 1, 2008, the valuation approaches and assumptions were similar to those used in our September 24, 2007 valuation, including the use of the PWERM allocation method for the equity value of our company. Methodology changes for this valuation date included a de-emphasis on the use of the last sale of preferred securities as a significant amount of time had elapsed since such financing event and an inclusion of a non-IPO alternative with a low probability as an alternative should we not effectuate a near-term IPO. Under the IPO scenarios, the future equity value or our common stock in an IPO was calculated using the estimated equity valuations derived from analyzing comparable IPOs in the life sciences industry and a risk-adjusted discount of 45%. The discount for lack of marketability ranged from 12% to 37%. Because of our plans at the time to effectuate an IPO in 2008 we placed a 90% weight on the indications from the various IPO scenarios and a 10% weight on a stay private scenario. This analysis yielded a marketable, minority firm equity value of $178.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $141.0 million. The resulting value, which represented the estimated fair value of our common stock at February 1, 2008, was $24.80 per share.
Valuation July 31, 2008
As of July 31, 2008, the valuation methodology, approaches and assumptions were substantially the same as those used in the February 1, 2008 valuation, including the use of the PWERM allocation method for the equity value of our company, except the timing of an assumed IPO event was delayed by three quarters due to a decline in market conditions. Under the IPO scenarios, the future value of our common stock in an IPO was calculated using the estimated equity valuations derived from analyzing comparable IPOs in the life sciences industry and a risk adjusted discount of 40%. The discount for lack of marketability used was in the range of 17% to 22% for the IPO scenarios and 35% for remaining a private company. Although we assumed a longer time to exit, the IPO was still the preferred and anticipated liquidity event and we continued to place the most weight on the indications from the various IPO scenarios at 90% and a stay private weighting of 10%. This analysis yielded a marketable, minority firm equity value of $174.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $146.0 million. The resulting value, which represented the estimated fair value of our common stock at July 31, 2008, was $20.16 per share.
Valuation October 15, 2008
As of October 15, 2008, the valuation methodology and approaches were substantially the same as those used in the July 31, 2008 valuation, including the use of the PWERM allocation method for the equity value of our company. At that time we had raised $21.4 million in net proceeds through the sale of additional shares of our Series C preferred stock and, due to continuing decline in market conditions, we decided to further postpone our intended public offering plans. Under the now delayed IPO scenarios, the future value of our common stock in an IPO was calculated using the estimated equity valuations derived from analyzing comparable IPOs in the life sciences industry and a risk-adjusted discount of 40%. The discount for lack of marketability used was in the range of 27% to 29% for IPO scenarios and 35% for remaining a private company. For the concluded common stock value we significantly delayed the proposed timing of an IPO scenario by three quarters relative to the previous valuation, which continued to be weighted at a probability of 90% and a stay private scenario probability of 10%. This analysis yielded a marketable, minority firm equity value of $141 million. At the time of the valuation, the aggregate preferred liquidation preference was $171 million. The resulting value, which represented the estimated fair value of our common stock at October 15, 2008, was $11.75 per share. The decrease in our estimated fair value of our common stock valuation was primarily related to the increase in the time to an expected liquidity event as well as the declining equity markets.
Valuation January 15, 2009
As of January 15, 2009, the valuation methodology and approaches were substantially the same as those used in the October 15, 2008 valuation, including the use of the PWERM allocation method for the
equity value of our company. However, due to the severe downturn in market conditions, we decided to postpone indefinitely our intended plans for an IPO. We continued to use a combination of an IPO and stay-private valuation model. In the IPO based scenario analysis we delayed the assumed exit timing by two additional quarters relative to the previous valuation. The future value of our common stock in an IPO was calculated using the estimated equity valuations derived from analyzing comparable IPOs in the life sciences industry and a risk-adjusted discount of 40%. The discount for lack of marketability was in the range of 35% to 36% for the IPO scenarios and 45% for the stay-private scenario. As a result of the negative market development and the related change in IPO plans, the probability of a stay-private scenario increased to 50% and the probability of an IPO scenario decreased to 50%. The lower probability of an IPO and the extension of the expected time to liquidity contributed to the decline in our common stock value. This analysis yielded a marketable, minority firm equity value of $180.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $174.0 million. The resulting value, which represented the estimated fair value of our common stock at January 15, 2009, was $10.01 per share.
Valuation February 13, 2009
Our February 13, 2009 valuation reflected that our IND for our Neo-Bladder Augment was placed on clinical hold by the FDA and the related uncertainty around the timing of the FDAs release of the clinical hold. As a result of the clinical hold, the prospects for a public liquidity event were significantly delayed further. At this time we were in the early stages of acquisition negotiations with a strategic buyer. The valuation methodology centered around a strategic acquisition, a significantly delayed IPO and a remaining private scenario. The merger and acquisition and IPO scenarios were market based approaches and the stay-private model was based on discounted cash flows and a market based terminal value. Due to the possibility of an acquisition, we continued to use the probability weighted equity allocation model (PWERM). Under the IPO scenarios, the future value of our common stock in an IPO was calculated using the estimated equity valuations derived from analyzing comparable IPOs in the life sciences industry and a risk-adjusted discount of 45% based on the estimated timing of a potential IPO. The discount for lack of marketability used was 26% for the merger and acquisition scenario, 42% for the IPO scenario and 45% for remaining a private company. We used a probability weight of 50% for the merger and acquisition scenario, 25% for the IPO scenarios and 25% for remaining a private company. This analysis yielded a marketable, minority firm equity value ranging from $127.0 million to $136.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $174.0 million. The resulting value, which represented the estimated fair value of our common stock at February 13, 2009, was $2.03 per share. The main reason for the decline in the value of our common stock from previous valuations was mainly due to an additional year delay in the IPO timing relative to the previous valuation and the greater weight being placed on merger and acquisition and stay-private outcomes with the associated impact of the aggregate liquidation preferences. This change was predominately due to the IND for Neo-Bladder Augment being placed on clinical hold.
Valuation July 31, 2009
Our July 31, 2009 valuation reflects our board of directors decision to amend the operating plan to shift resources from our Phase II completed Neo-Bladder Augment and focus on our preclinical, pre-IND stage Neo-Urinary Conduit program. With continued market uncertainties, the end of discussions with a strategic buyer for a near-term acquisition and the date of a potential product commercialization delayed, the methodologies for the independent valuation focused on longer term merger and acquisition opportunities, a delayed IPO event of over a year relative to the previous valuation and a long-term stay-private scenario. Due to the prolonged assumptions for a liquidity event, we changed the allocation method of the equity value of our company to the underlying common shares from a PWERM to the option-pricing model. In the merger and acquisition scenario, we used comparable merger and acquisitions transactions in the biotechnology and life science industries at different phases of
development to estimate equity values. Under the IPO scenario, the future value of our common stock in
an IPO was estimated using comparable IPOs in the biotechnology and life sciences. The estimated equity values in both the merger and acquisition scenario and the IPO scenario were then discounted from the date of the anticipated event to the valuation date using a discount rate of 45%. For the long term stay-private scenario, the valuation indication was derived from a discounted cash flow analysis using a discount rate of 45%. The discount for lack of marketability was in the range of 43% to 44%. To establish the marketable equity value to allocate to our common stock outstanding using the option pricing model, we used a probability weight of 50% for the merger and acquisition scenario, 25% for the IPO scenario and 25% for the long term stay-private scenario. This analysis yielded a marketable, minority firm equity value of $50.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $181.0 million. The application of the option pricing model to the marketable equity value resulted in an estimated fair value of our common stock at July 31, 2009 of $0.44 per share. The decrease in the value of our common stock from previous valuations was mainly due to the significant delay of an anticipated IPO event and our boards approval of an amended operating plan to focus on our Neo-Urinary Conduit. By focusing on our preclinical, pre-IND stage Neo-Urinary Conduit product candidate, the timeline and uncertainty to potential commercialization of our lead product candidate was extended.
Valuation December 3, 2009
On December 3, 2009, our board of directors decided to proceed with an IPO, attempting to take advantage of the recently improving public markets. Accordingly, our December 3, 2009 valuation refocused to near-term IPO scenarios as well as alternative near-term merger and acquisition scenarios. In addition, some probability was assigned to a failure scenario. Given the higher probability of a near term liquidity event, the method to allocate the equity value of our company changed from the option-pricing model to PWERM. Under the IPO scenario, the future value or our common stock in an IPO was calculated using the estimated equity valuation derived from analyzing comparable IPOs in the life sciences industry, reflecting lower IPO values related to our now earlier stage of clinical development. A risk-adjusted discount rate of 35% based on the estimated timing of a potential IPO was applied. The discount for lack of marketability used was 24% for the merger and acquisition scenario, 17% for the IPO scenario, and 32% for remaining a private company. We used a probability weight of 25% for the merger and acquisition scenario, 50% for the IPO scenarios and 25% for remaining a private company. This analysis yielded a marketable, minority firm equity value of $43.0 million. At the time of the valuation, the aggregate preferred liquidation preference was $184.0 million. The resulting value, which represented the estimated fair value of our common stock at December 3, 2009, was $2.90 per share. The increase over the July 31, 2009 independent valuation was mainly driven by the increased probability of an IPO liquidity event in the next six months.
Results of Operations
Year Ended December 31, 2008 compared to the Year Ended December 31, 2009
Research and Development Expense. Research and development expense for the year ended December 31, 2008 and 2009 were comprised of the following:
Research and development expense decreased primarily due to a decrease in external services related to direct third-party expense of $4.7 million for preclinical studies and $1.4 million for other costs in 2009 associated with our Phase II clinical trials for our Neo-Bladder Augment due to the cost per patient in the first year of enrollment, such as surgical procedures and related hospital stays as required under our clinical protocol, as compared to subsequent years where patient treatments under the protocol are reduced to twice a year. Compensation and related expense decreased primarily due to the reduction of headcount in our Pennsylvania manufacturing facility. The decrease in these programs led to a decrease in the demand for lab supplies and other services related to our product candidates.
General and Administrative Expense. General and administrative expense decreased by $2.0 million, or 26%, from $7.5 million for the year ended December 31, 2008 to $5.5 million for the year ended December 31, 2009. The decrease in general and administrative expense was due to a decrease in corporate personnel-related costs of $0.5 million primarily related to the reduction of headcount in our executive, finance, legal and human resource functions, as well as lower legal, audit and other external services of $1.4 million, primarily due to costs related to a previous potential capital raising transaction.
Depreciation Expense. Depreciation expense increased by $0.2 million, or 5%, from $4.7 million for the year ended December 31, 2008 to $4.9 million for the year ended December 31, 2009. The increase was primarily due to additional capital investments in lab equipment in our North Carolina facility.
Interest Income / Expense and Change in Fair Value of Preferred Stock Warrants. Interest income decreased $1.2 million, or 85%, from $1.4 million for the year ended December 31, 2008 to $0.2 million for the year ended December 31, 2009 due to lower investment balances and lower rates of return on our investments. Interest expense and change in fair value of preferred stock warrants decreased by $2.1 million, or 55%, from $3.7 million for the year ended December 31, 2008 to $1.6 million for the year ended December 31, 2009, primarily due to the decline in the estimated fair value of the preferred stock warrants.
Year Ended December 31, 2007 compared to Year Ended December 31, 2008
Research and Development Expense. Research and development expense for the years ended December 31, 2007 and 2008 was comprised of the following:
Research and development expense increased primarily due to an increase of $2.8 million in compensation and related expenses primarily due to personnel costs associated with increased headcount, which was due to the start of the clinical trials and other pipeline projects that were initiated in 2007. The increase in external services related to direct program costs primarily related to increased preclinical studies. Research materials and related expenses increased primarily due to increased demand for lab supplies and services for preclinical and clinical studies. We also incurred increased facility costs due to increased rent and non-capitalized maintenance costs associated with our Pennsylvania manufacturing facility.
General and Administrative Expense. General and administrative expense increased by $2.2 million, or 41%, from $5.3 million in 2007 to $7.5 million in 2008. The increase in general and administrative expense was primarily due to increased personnel related costs and outside professional services, totaling $1.4 million, and an increase of $0.8 million in legal costs associated with our patents.
Depreciation Expense. Depreciation expense increased by $1.0 million, or 28%, from $3.7 million in 2007 to $4.7 million in 2008. The increase was primarily due to additional purchases of lab equipment and a full year of depreciation expense recognized on our capital investments in leasehold improvements for our Pennsylvania manufacturing facility as compared to nine months in 2007.
Interest Income / Expense and Change in Fair Value of Preferred Stock Warrants. Interest income decreased $1.6 million, or 53%, from $3.0 million in 2007 to $1.4 million in 2008 due to lower investment balances as compared to 2007 and lower rates and returns. Interest expense and change in fair value of preferred stock warrants increased $1.0 million, or 37%, from $2.7 million in 2007 to $3.7 million in 2008 due to additional loans of $1.1 million and the 2007 extension of our refinancing of interest-only payments through the end of 2008 on our existing working capital and equipment notes.
Liquidity and Capital Resources
Source of Liquidity
We have incurred losses since our incorporation in 2003 as a result of our significant research and development expenditures and the lack of any approved products to generate product sales. We have a deficit accumulated during the development stage of $181.6 million as of December 31, 2009. We anticipate that we will continue to incur additional losses until such time that we can generate significant sales of our product candidates currently in development or we enter into cash flow positive business transactions. We have funded our operations principally with proceeds from redeemable convertible preferred stock offerings. The following table summarizes our funding sources as of December 31, 2009:
We have also funded our operations through the use of proceeds received from our long-term debt totaling $34.7 million through December 31, 2009. We currently have a working capital note with an outstanding principal of $17.3 million as of December 31, 2009, which borrowings were used for our general working capital needs. In addition, we have loans to fund equipment and other asset purchases with outstanding principal of $5.0 million as of December 31, 2009.
We do not believe we will be able to satisfy the closing conditions of our March 12, 2010 agreement with Compass Horizon Funding Company LLC to refinance our term loan, which currently has an outstanding principal balance of $14.3 million. Therefore, we are currently in discussions with them to refinance all or a portion of such term loan on different terms. If we are able to refinance our term loan, we believe we will reduce our principal and interest payments by up to $5.0 million in 2010 and 2011, however there can be no assurance that we can consummate a refinancing.
Cash, cash equivalents and short-term investments at December 31, 2009 were $19.3 million, representing 51.8% of total assets. Working capital as of December 31, 2009 was $2.8 million.
The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years ended:
Cash used in operating activities decreased $8.9 million in the year ended December 31, 2009, compared to the year ended December 31, 2008, primarily due to a decrease in our net loss of $12.5 million driven mainly by our decrease in research and development expense of $10.0 million associated with our preclinical and clinical studies and our decrease in general and administrative expense of $1.9 million related to personnel-related costs and legal, audit and other external services, and higher depreciation expense of $0.2 million, offset by an increase in operating assets and liabilities of $1.4 million, and lower stock-based compensation and noncash-interest expense of $2.5 million.
Cash used in operating activities increased $8.2 million in 2008, compared to 2007, primarily due to an increase in our net loss of $11.4 million, driven by an increase in research and development expense of $5.6 million associated with our preclinical and clinical studies, offset by a decrease in operating assets and liabilities of $0.8 million and higher stock-based compensation and noncash-interest expense of $1.1 million and higher depreciation expense of $1.0 million.
Cash provided by investing activities decreased $23.4 million in the year ended December 31, 2009, compared to cash provided by investing activities in the year ended December 31, 2008, primarily due to lower net sales and redemptions and purchases of short-term investments of $25.8 million, offset by a decrease of $2.4 million for cash paid for property and equipment.
Cash provided by investing activities increased $23.3 million in 2008, compared to 2007, primarily due to higher net sales and redemptions of short-term investments of $16.6 million and a decrease of $6.7 million for cash paid for property and equipment.
Cash used in financing activities was $5.0 million for the year ended December 31, 2009, compared to cash provided by financing activities of $21.8 million for the year ended December 31, 2008, due to an increase in payments of long-term debt of $5.2 million primarily resulting from the end of interest-only payments in December 2008 and decrease in proceeds from the issuance Series C redeemable convertible preferred stock, net of transaction costs, of $21.4 million and a decrease of $0.3 million in proceeds from debt financing in 2008.
Cash provided by financing activities decreased $13.5 million in 2008, compared to 2007, primarily due to the issuance of our Series C redeemable convertible preferred stock, net of transaction costs, of $21.4 million, a decrease of $11.8 million from 2007. In addition to the issuance of preferred stock, financing activities also decreased due to a decrease of $2.2 million in proceeds from debt financing of $1.1 million in 2008 as compared to $3.3 million in 2007, offset by a decrease in debt payments of $0.5 million in 2008.
If we are unable to complete this offering, our ability to meet our obligations in the normal course of business up through and beyond mid-June 2010 will be dependent on controlling our expenses and securing additional external financing. There can be no assurance that such financing will be available in amounts or terms acceptable to us, if at all. These conditions raise substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm has modified its audit report on our financial statements to include an explanatory paragraph regarding this uncertainty.
Based on our current operating plans, we expect the proceeds of this offering, together with our existing resources, to be sufficient to fund our planned operations, including our continued product candidate development, to March 2011 or to May 2011 if we are able to consummate our refinancing with Compass Horizon Funding Company LLC pursuant to our discussions with them. However, we may require significant additional funds earlier than we currently expect to conduct additional clinical trials and seek marketing approval of our product candidates, or in connection with future business development and/or licensing activities. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.
Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling debt securities, if convertible, further dilution to our existing stockholders may result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements.
If adequate funds are not available, we may be required to terminate, significantly modify or delay our development programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.
Potential Future Milestone Payments
In 2003, we executed a license agreement with Childrens Medical Center Corporation, or CMCC, whereby CMCC granted to us the utilization of certain patent rights. We are obligated to make payments to CMCC upon the occurrence of various clinical milestones. During the fourth quarter of 2006, we achieved two of our clinical milestones for the first licensed product launched, as defined in the agreement, and paid $350,000, which was recorded as research and development expense for the year ended December 31, 2006. No further milestones payments were made during 2007, 2008 or 2009. Upon the successful completion of certain milestones, we will be obligated, under our current agreement, to make future milestone payments for the first licensed product. As of December 31, 2009, we had no payment obligations to CMCC under this agreement. In addition, upon commercialization of the licensed product, we will pay CMCC royalties based on net sales of products covered by the license by us, our affiliates and our sublicensees in all countries, except for those for which there is no valid patent claim, until the later of the expiration, on a country-by-country basis, of the last patent right and October 2018.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
The following table summarizes our contractual obligations as of December 31, 2009:
In October 2008, we refinanced the terms of the working capital note with a then principal amount of $20 million, which was previously refinanced in 2006 and 2007 (see Note 8 in the notes to our financial statements). Under the refinancing, the repayment terms of $14.2 million principal amount of the working capital note were extended to add an additional six-month period of interest-only payments through July 2009 followed by 24 monthly payments of principal and accrued interest at an annual interest rate of 12.26%. The repayment of $5.8 million of the working capital note were extended to add a 14-month period of interest-only payments through January 2010 followed by 20 monthly payments of principal and accrued interest at an annual interest rate of 12.26%. The working capital note is secured by a blanket lien on all of our assets and a negative pledge on our licensed and owned intellectual property.
We also have an additional $9.8 million loan with another lender to fund equipment and other asset purchases. The loan consists of a $7.4 million note to purchase equipment, or the equipment note, and a $2.4 million note for other soft costs, or supplemental working capital note, for purchases from July 2005 through December 2009. In October 2007, we refinanced the equipment and supplemental working capital notes with a then carrying amount of $4.6 million. Under the terms of the refinanced equipment and supplemental working capital notes, we had a 12-month period of interest-only payments through October 2008 followed by 24 monthly payments of principal and accrued interest at an annual interest rate of 10.44%. In the fourth quarter of 2007, we executed an additional loan in the amount of $0.9 million on the equipment and supplemental working capital notes. During 2008, we executed an additional loan in the amount of $1.1 million on the equipment and supplemental working capital notes. During 2009, we executed an additional loan in the amount of $0.5 million on the equipment and supplemental working capital notes. The equipment note bears interest at an average rate of 11.69% and matures over 36 to 48 months. The supplemental working capital note bears interest at an average rate of 11.67% and matures over 36 months. The equipment note and the supplemental working capital note are secured by a first priority lien on equipment and assets purchased with the proceeds from the notes.
In December 2007, we executed a $1.65 million agreement with the Commonwealth of Pennsylvania to fund machinery and equipment and other asset purchases through December 31, 2009. On December 31, 2007 we borrowed $1.3 million under the loan to fund equipment purchases. In March 2009, we
borrowed an additional $0.3 million under the loan to fund equipment purchases. Under the terms of the loan, we have a four year period of payments of principal and accrued interest at an annual interest rate of 5%. The loan is secured by a first priority lien on equipment and assets purchased with the proceeds from the loan.
In June 2005, we entered into a six-year, non-cancelable lease agreement for laboratory space for our research and development projects in Winston-Salem, North Carolina. The lease agreement includes the right to lease additional space, which we executed in February 2007. The lease for both facilities will expire by its terms in September 2011.
In 2006, we entered into a ten-year, non-cancelable lease agreement for space for our corporate offices and full-scale manufacturing facility located in East Norriton, Pennsylvania. Under the lease agreement, we will lease an additional space in the same building in March 2011. The lease will expire by its terms in February 2016.
In January 2006, we entered into a research agreement with WFUHS, which was amended in September 2006.
Under the research agreement, WFUHS agreed to perform sponsored research in return for quarterly payments. As of December 31, 2009, under the terms of our license agreement with WFUHS we were obligated to make payments of $800,000 with respect to the 2010 research activities of WFUHS under the research agreement. The sponsored research involves the experiments and studies set out in annual research plans and milestones established under the agreement.
We have entered into agreements with consultants and clinical research organizations which are partially responsible for conducting and monitoring our clinical trials for our product candidates. We have also entered into agreements with consultants and clinical research organizations that are responsible for work in our preclinical studies, public relations and other areas in the ordinary course of our business. These contractual obligations have been excluded from the table above, because we may terminate these at any time without penalty.
Recent Accounting Pronouncements
We adopted new accounting guidance on fair value measurements effective January 1, 2008, for financial assets and liabilities. In addition, effective January 1, 2009, we adopted this guidance as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability, referred to as the exit price, in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. See additional disclosures in Note 4 to our financial statements related to the adoption of this fair value guidance.
In June 2008, the FASB issued new guidance related to assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entitys own stock for the purposes of determining whether such equity-linked financial instrument (or embedded feature) is subject to derivative accounting. We adopted this new guidance effective January 1, 2009. The adoption of this guidance did not have a material impact on our results of operations or financial condition.
In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on managements assessment of subsequent events and incorporates this guidance into accounting literature. The standard is effective prospectively for interim and annual periods ending after June 15, 2009 and we adopted this guidance commencing with the issuance of the September 30, 2009 financial statements. The implementation of this standard did not have a material impact on our financial position and results of operations. We have evaluated subsequent events through February 23, 2010, the date of issuance of our December 31, 2009 financial statements.
In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The guidance is effective for interim and annual periods ending after June 15, 2009, and we adopted this guidance commencing with the issuance of the September 30, 2009 financial statements. The implementation of this standard did not have a material impact on our balance sheet and results of operations.
In June 2009, FASB Accounting Standards Codification, or Codification, was issued, effective for financials statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes literature of the FASB, Emerging Issues Task Force and other sources. The Codification did not change U.S. generally accepted accounting principles. The implementation of this standard did not have a material impact on our balance sheet and results of operations.
Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. Due to the nature of these investments, we believe that we are not subject to any material market risk exposure. As of December 31, 2009, we had cash and cash equivalents and short term investments of $19.3 million.
We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of replacement neo-organs and neo-tissues. We currently create these functional neo-organs and neo-tissues using a patients own cells, or autologous cells, in conjunction with our Organ Regeneration Platform. We believe our proprietary product candidates harness the intrinsic regenerative pathways of the body to regenerate a range of native-like organs and tissues. Our neo-organs and neo-tissues are designed to avoid the need to substitute other tissues of the body for a purpose to which they are poorly suited. In addition, our product candidates eliminate the need for donor organs and the administration of anti-rejection medications. We produce neo-organs and neo-tissues in our scalable manufacturing facilities using efficient and repeatable proprietary processes, and have implanted neo-organs in our clinical trials. Building on our clinical and preclinical experience, we are initially leveraging our Organ Regeneration Platform to develop our Neo-Urinary Conduit for bladder cancer patients. We intend to develop our technology to address unmet medical needs in urologic, renal, gastrointestinal and vascular diseases and disorders.
Regenerative medicine is an interdisciplinary field combining expertise in developmental biology, medicine and engineering with the goal of restoring native-like organ and tissue function. The premise of regenerative medicine is that the body has the intrinsic capacity to heal and regenerate. Liver tissue, for example, will naturally regenerate following partial resection. In many situations, however, the appropriate conditions that facilitate the regenerative process in the body may not be present for reasons such as the absence of appropriate gene expression or the presence of an underlying disease process. Regenerative medicine seeks to provide the necessary stimulus, environment or foundation to promote the bodys innate regenerative capacity. While the FDA has approved regenerative medicine products for skin applications and repair of selected cartilage defects, we believe that we are the only company using regenerative medicine to harness the bodys ability to regenerate a range of functional, native-like organs and tissues.
Our Organ Regeneration Platform has enabled us to develop our product candidates from proof of concept to first-in-man clinical trials in as short as 24 months. Our technology has been applied in two Phase II clinical trials for our Neo-Bladder Augment. Recent advances in our platform technology have enabled us to significantly simplify our process of manufacturing neo-organs and neo-tissues, which we believe will allow us to address new and larger market opportunities. Our lead product candidate, our Neo-Urinary Conduit, is intended to replace the use of bowel tissue in bladder cancer patients requiring a non-continent urinary diversion after bladder removal surgery, or cystectomy. We are able to manufacture our Neo-Urinary Conduit in a proprietary process that takes four weeks or less and uses only smooth muscle cells derived from a routine fat biopsy. We have an effective IND and in March 2010 commenced a Phase I clinical trial for our Neo-Urinary Conduit in bladder cancer patients.
Our Organ Regeneration Platform
Our Organ Regeneration Platform is based on extensive work that began in the early 1990s at Childrens Hospital Boston and Massachusetts Institute of Technology, and continued at the Wake Forest Institute for Regenerative Medicine and our company. Our proprietary approach involves the use of a combinatorial method, testing different combinations of cell type and scaffold material. We believe this approach enables us to accurately identify the combination of various cell types and scaffold materials for a specific organ necessary to elicit a regenerative response and guides our decisions for subsequent rounds of testing. We own or license over 30 U.S. patents and patent applications and over 100 international patents and filings related to our Organ Regeneration Platform and product candidates.
The organ regeneration process enabled by our proprietary Organ Regeneration Platform involves the following steps:
We then place the bioabsorbable scaffold, seeded with the cell populations, in a bioreactor, or a closed container used for enhancing biological growth under controlled conditions. Further manipulation and handling of the neo-organ or neo-tissue is done without removal from the bioreactor, which greatly reduces the risk of contamination. The expanded cell populations attach to the biomaterials and begin to form appropriate cellular and tissue layers for the neo-organ or neo-tissue, until ready for implantation.
Our goal is to become the leading regenerative medicine company focused on the development and commercialization of neo-organs and neo-tissues for a variety of diseases and disorders. To achieve this objective, we intend to:
Leveraging our Organ Regeneration Platform, we are currently developing the following product candidates with potential applications in urologic, renal, gastrointestinal and vascular diseases:
Urologic Product Candidates
We believe that there will be numerous opportunities for our technology across a variety of medical conditions. We are currently focusing a substantial portion of our resources on the development of product candidates to target urologic applications where the current standard of care involves surgical procedures to replace or augment diseased bladder tissue through the use of bowel tissue harvested from the patient. According to the Agency for Healthcare Research and Quality in the United States and similar government data sources in Europe, we estimate that there is a total of approximately 28,000 such procedures performed every year in the United States and the European Union. We have developed a portfolio of product candidates in this area, with clinical experience in two Phase II clinical trials.
We currently have two product candidates for the treatment of patients who require removal of their bladder in connection with the treatment of bladder, abdominal or pelvic cancer, or other severe bladder disease. Our Neo-Urinary Conduit, for which we have an effective IND and commenced a Phase I clinical trial in March 2010, is a combination of bioabsorbable materials and autologous smooth muscle cells cultured by our scientists. Based on insights from our Phase II clinical trials for our Neo-Bladder Augment and preclinical data, we believe our Neo-Urinary Conduit, when clinically tested, will develop into physiologically functional tissue with a structure, diverting urine from the ureters to an ostomy bag. Similarly, our Neo-Bladder Replacement, for which we believe we have completed all preclinical development necessary to prepare an IND, is a combination of bioabsorbable materials and autologous smooth muscle cells cultured by our scientists that we believe will serve as a functioning bladder, eliminating the need for an ostomy bag, for patients who have their bladders removed due to cancer. We also have a product candidate, our Neo-Bladder Augment, for the treatment of neurogenic bladder, or
dysfunctional bladder due to some form of neurologic disease or condition, for which treatment often requires an augmentation of the bladder in order to relieve high bladder pressure and incontinence. Our Neo-Bladder Augment, which has completed two Phase II clinical trials, regenerates bladder tissue to supplement the patients existing bladder.
Based on insights from our Phase II clinical trials for our Neo-Bladder Augment and preclinical data, we believe that our urologic product candidates, which use autologous cells and develop into functional bladder tissue, will avoid many of the complications associated with using bowel tissue in urologic procedures.
The table below indicates the number of urologic surgical procedures performed per year in the United States and the European Union for our targeted indications.
(1) US: Agency for Healthcare Research and Quality.
(2) EU: Government data sources for the United Kingdom, France and Germany; other EU countries estimated from population census.
According to the National Cancer Institute, bladder cancer is the sixth most common form of cancer in the United States. The American Cancer Society estimates there were 71,000 new cases of bladder cancer diagnosed in the United States in 2009, and 14,000 deaths. The European Cancer Observatory estimates that there were over 100,000 new cases of bladder cancer in Europe in 2006. In the United States, there are approximately 10,000 cases per year of bladder cancer requiring bladder removal, according to data compiled from a 2005 National Inpatient Sample, or NIS, performed by the Healthcare Cost and Utilization Project, or HCUP, a family of healthcare databases and related software tools and projects developed through a federal-state-industry partnership and sponsored by the Agency for Healthcare Research and Quality.
Following removal of a bladder, patients require some form of urinary diversion. Most patients are currently treated by using a segment of bowel tissue to construct a conduit for urine to exit from the body. In its simplest form, the reconstruction involves creating a tubular structure out of bowel tissue and then connecting it to the ureters at one end and the skin at the other in a procedure that was pioneered in the 1930s. Urine output is not controlled and the patient wears a collection device at all times.
The other diversionary option for patients is the creation of a continent reservoir which is most commonly a bladder-shaped pouch fashioned from bowel tissue, to which the ureters and urethra are connected. We believe that less than 10% of the urinary diversions performed after bladder removal are bladder replacements and the remaining diversions are urinary conduits, based upon data compiled from
a 2005 NIS performed by HCUP. There are multiple factors that affect the decision concerning which form of post-bladder removal urinary diversion is optimal for a given patient, including stage of disease, health and mental status, manual dexterity, physique and, importantly, patient preference.
The graphic below illustrates two urinary diversion options for patients who require bladder removal.
Based upon our analysis of various hospital inpatient and discharge databases, we believe there are approximately 1,200 bladder augmentations performed in the United States each year, and approximately 1,100 in the European Union. Patients who have dysfunctional bladders due to some form of neurological disease or neurologic condition, such as spina bifida, or spinal cord injury are referred to as having neurogenic bladder. These patients often have a thickened bladder wall, which inhibits the bladders ability to expand properly to accommodate normal volumes of urine. Neurogenic bladder may lead to elevated bladder pressure, frequently leading to incontinence, urinary tract infections and, if proper medical intervention is not received, kidney failure.
Current treatments for neurogenic bladder include management through a combination of medication and clean intermittent catheterization and, in advanced cases, surgery. Medicating with anticholinergics, which are drugs that can help relax the bladder and limit unwanted contractions, is often insufficient to control the bladder in neurogenic bladder patients, and a range of side effects limit their use. Clean intermittent catheterization can help patients with neurogenic bladder by regularly allowing the bladder to empty. This can be an effective means of treatment for some patients, but requires the regular insertion and removal of a catheter through the urethra as frequently as every one to two hours and can increase the chance of urinary tract infections. Surgical bladder augmentation is often considered when other less-invasive treatments fail to adequately lower bladder pressure or reduce the frequency of incontinent episodes. This procedure, enterocystoplasty, involves removing a section of the patients bowel and using that tissue to enlarge the existing bladder seeking to increase compliance and capacity, which can also lead to less frequent catheterization.
Limitations of Current Therapies
There are many complications associated with bladder augmentation or removal surgery, such as adhesions and obstructions. In the case of traditional surgery to construct a conduit for urine to exit from the body into an ostomy bag, complications such as ureteral detachment and hydroureter / hydronephrosis, or swelling in the ureters or kidneys resulting from the backup of urine, are related to the attachment of the ureters to the conduit. Other complications involve the attachment of the conduit to the abdominal wall.
While there is variation across procedures and patient types, there are risks and complications common to all procedures that rely on harvesting bowel tissue and placing it in the urinary tract. These complications may include:
Patients requiring some form of urinary diversion or augmentation with todays standard of care are at risk of complications associated with the use of bowel tissue as well as those associated with the surgery to harvest the bowel tissue.
Our Neo-Urinary Conduit and Neo-Bladder Replacement are being developed to address unmet needs in patients who require removal of their bladder in connection with treatment for bladder, abdominal or pelvic cancer or other severe bladder diseases. Our Neo-Bladder Augment seeks to supplement the patients existing bladder and promote regeneration of healthy bladder tissue for the treatment of patients with neurogenic bladder. We believe our product candidates have the potential to be the clinical treatment of choice for the majority of these conditions.
The Tengion Neo-Urinary Conduit
Our Neo-Urinary Conduit is a combination of autologous cells and bioabsorbable scaffold that catalyzes regeneration of a native bladder tissue conduit, passively transporting urine from the ureters, through a stoma, or hole in the abdomen, into a standard ostomy bag. We expect that it will be a safe and effective
alternative to the creation of a urinary diversion from bowel tissue after bladder removal. Our Neo-Urinary Conduit is intended to avoid complications such as bowel obstruction, urine absorption, infection and mucus secretion associated with the use of bowel tissue in the urinary tract, as well as the potential surgical issues that arise from the procedure involved in harvesting bowel tissue. We produce our Neo-Urinary Conduit using smooth muscle cells from a routine fat biopsy and not cells from the diseased bladder, eliminating the risk of reintroducing cancerous cells from the bladder into the patient.
We intend to produce our Neo-Urinary Conduit at our cGMP qualified clinical production facility using our Organ Regeneration Platform. We expect that we will be able to deliver our Neo-Urinary Conduit in four weeks or less after we receive the patients fat biopsy. This timing is consistent with the clinical practice of bladder removal in these patients. To create our Neo-Urinary Conduit, we isolate the smooth muscle cells from the biopsy, expand the cells ex vivo and then seed them onto a bioabsorbable scaffold, which is composed of biomaterials similar to those used in bioabsorbable sutures. Each surgeon implanting one of our Neo-Urinary Conduits will be trained in and receive specific procedures and protocols based on routine surgical techniques to implant our Neo-Urinary Conduit in the patient. We have an effective IND and commenced a single-center Phase I clinical trial in March 2010 for the treatment of bladder cancer patients who require bladder removal.
Preclinical History and Background of the Tengion Neo-Urinary Conduit
Our preclinical studies utilized various large animal models for bladder removal and implantation of our product candidate. In these studies, animals receiving our product candidate underwent bladder removal and the animals ureters were attached to one end of our Neo-Urinary Conduit using bioabsorbable sutures and the other end was connected to the skin in the abdominal wall, providing an outlet for urine to flow out of the body.
Principal observations of our Neo-Urinary Conduit in preclinical animal models have shown that:
These studies suggest that by using current standards of clinical care and specific surgical and post-operative procedures associated with urinary conduits, our Neo-Urinary Conduit may be safe and effective for treating patients who have had their bladders removed.
While there are some notable differences between our Neo-Urinary Conduit and our Neo-Bladder Augment, which we have studied in two Phase II Clinical trials, the premise of the product candidate, autologous cells seeded onto a bioabsorbable scaffold, as well as the application of the technology in reconstructive urology and the regeneration of bladder tissue in the patient, are the same. Our development of our Neo-Urinary Conduit came as a natural extension of our clinical development experience with our Neo-Bladder Augment. Important improvements in our Organ Regeneration Platform allowed us to pursue development of our Neo-Urinary Conduit, a product that addresses the approximately 25,700 bladder removal procedures performed in connection with bladder cancer annually in the United States and European Union, compared to approximately 2,300 bladder augmentation procedures associated with neurogenic bladder.
Our Neo-Urinary Conduit has several advantages that enhance its commercialization prospects:
Clinical Development Plan
We have an effective IND for our Neo-Urinary Conduit and commenced a single center Phase I study in March 2010. The program is designed to provide data to support the use of our Neo-Urinary Conduit in patients undergoing bladder removal for treatment of bladder cancer.
This trial is an open-label, single-arm study in up to five patients, which will allow optimization of the surgical procedure and post-surgical care in a controlled setting. A single center will be utilized to minimize variations in surgical technique and provide the most controlled setting in which the surgical approach is optimized through working with a clinical investigator. We will work with a clinical investigator who has expertise in the surgical treatment of bladder cancer and significant experience performing bladder removals and urinary diversions. This study will not have a control group as the surgical procedure, post-operative care and other clinical parameters preclude the possibility of blinding treatment options.
There will be at least a four-week interval between procedures on each patient to allow for close observation and assessment of any treatment and/or procedure-related complications, post-operative recovery, tolerability and safety before proceeding to the next patient. The surgical procedure may be modified in subsequent patients based on the experience gained by the prior patient(s) enrolled.
The primary safety and efficacy assessment of our Neo-Urinary Conduit will be made at 12 months post-implantation and patients will be followed for an additional 48 months in order to assess long term safety and durability. During this first year, however, patients will be seen frequently by the study investigator and/or designated clinical team: every one to two weeks after hospital discharge through week eight, and then at month 3, 6, 9 and 12. Imaging, either CT scan or ultrasound, will be performed at three-month intervals for the first year to examine the neo-organs structure, patency and identify any obstructions or other abnormalities. This frequent evaluation and the open-label nature of this study will provide significant ongoing feedback throughout the study. While we have not explored later stage development with the FDA, we believe that if this first study is successful, we may be able to move directly to a pivotal study as the next step in our regulatory pathway for our Neo-Urinary Conduit.
The Tengion Neo-Bladder Replacement
Like our Neo-Urinary Conduit, we believe that our Neo-Bladder Replacement will enable patients to avoid the complications associated with removal of bowel tissue and its subsequent use as a bladder replacement. In todays practice, a continent reconstructed bladder, made from bowel tissue, is attempted in fewer than 10% of patients undergoing bladder removal, or cystectomy. The approach is limited by the various complications associated with using bowel tissue, as well as patient considerations, including the risk of requiring chronic catheterization, and the high frequency of urinary leakage and night time incontinence. Our Neo-Bladder Replacement, when implanted in the body, is intended to serve as a template that recruits other cells to develop a regenerated bladder.
Preclinical History and Background of the Tengion Neo-Bladder Replacement
We have conducted preclinical studies of our Neo-Bladder Replacement in large animals to serve as an autologous urinary reservoir. Animals receiving our product candidate underwent urethral-sparing bladder removal. The urethra and ureters were attached using bioabsorbable sutures to our Neo-Bladder Replacement. Principal observations of our Neo-Bladder Replacement in large animal models have shown that:
Based on the results of our preclinical studies, we believe that our Neo-Bladder Replacement may provide patients with a functional replacement bladder enabling them to void urine, with no need for a stoma or ostomy bag.
The Tengion Neo-Bladder Augment
Our Neo-Bladder Augment is intended to supplement the patients existing bladder and promote regeneration of healthy bladder tissue in patients suffering from neurogenic bladder. Based upon the long-term data obtained as part of an academic clinical experience, and published in The Lancet, a leading medical journal, and the results of our Phase II clinical trials, we believe our Neo-Bladder Augment may provide the benefits of enterocystoplasty without many of the associated complications. Our Neo-Bladder Augment is a combination of bioabsorbable materials used to form a scaffold shaped like a bladder, which is seeded with the requisite bladder cells cultured by our scientists from the patients bladder. When our Neo-Bladder Augment is implanted into the body, it serves as a template to regenerate native-like bladder tissue.
While our Neo-Bladder Augment does not cure the underlying condition that causes neurogenic bladder or create a normal, fully functional bladder, we believe it will provide a practical medical solution affording significant clinical benefits to patients while also serving to enhance overall quality of life. For example, if catheterization is required prior to implanting our Neo-Bladder Augment, it will still be necessary after implantation, but we believe that, as with enterocystoplasty, it will be needed less frequently. With the use of our Neo-Bladder Augment, we believe we can achieve the desired outcome of increased urine capacity without having to use bowel tissue. We believe that our Neo-Bladder Augment will provide an effective and safe solution for many patients requiring interventional therapy, as it does not possess the same level of risk as other invasive treatment alternatives such as enterocystoplasty.
Phase II Clinical Trials
We have conducted two open-label, multi-center Phase II clinical trials of our Neo-Bladder Augment for the treatment of neurogenic bladder resulting from spina bifida in pediatric patients and neurogenic bladder resulting from spinal cord injury in adult patients. The primary objective of each of these two Phase II clinical trials was to evaluate the safety and efficacy of our Neo-Bladder Augment.
We initiated our first Phase II clinical trial in December 2006 and implanted our Neo-Bladder Augment in 10 patients ranging in age from 3 to 16 years, who have neurogenic bladder resulting from spina bifida. The primary endpoint of this trial was the change in bladder compliance at maximum capacity at 12 months, compared to the baseline level established prior to implantation. Compliance was defined as the ratio of bladder volume in milliliters divided by bladder pressure in centimeters of water. In December 2009, we received final data from this trial. We obtained data at 12 months from all 10 patients implanted with our Neo-Bladder Augment, and these patients are being monitored as part of our long-term follow-up. The data demonstrate the following change in bladder compliance at maximum capacity at 12 months:
A p-value measures the probability that a difference between a patients result at 12 months and that patients baseline measurement is due to chance alone. A p-value of less than 0.05 is considered statistically significant since the possibility that the difference is due to random chance is less than 5%.
One of the criteria for inclusion into this clinical trial was the ability of patients to cycle, or fill, hold and evacuate urine in their bladder. Cycling is necessary to develop compliant bladder tissue and the process represents the natural series of events that, if interrupted, can lead to a hypertonic, or high tension, and shrunken bladder. In this trial, only 6 out of the 10 patients were able to cycle. All six of these patients had improved outcomes and were identified as responders by clinical investigators at the 12 month assessment; two of these six patients, however, subsequently experienced serious adverse events as described below. These serious adverse events adversely affected the clinical improvement of both of these patients. Four out of the 10 patients were determined, after inclusion into our trial, to be unable to cycle for reasons we have identified. All four of these patients were identified as non-responders by clinical investigators. Based on this experience, we believe we will be able to exclude those patients who are unable to cycle from future trials for our Neo-Bladder Augment.
While measurements such as compliance and pressure were chosen as the primary means of assessing efficacy in these trials, the primary endpoint did not correlate to clinical response as identified by the investigators. We designed these trials to be exploratory and, thus, we collected multiple additional parameters to evaluate the efficacy of our product candidates, including radiographic studies, and functional capacity and continence as reported by each patient in a voiding volume diary. The clinical investigators provided us with assessments of each patients functional bladder capacity in relation to his or her daily activities and their clinical assessment of the patient and the patients satisfaction after receiving our Neo-Bladder Augment. Based on this experience, we are considering the use of a more clinically meaningful endpoint than compliance at maximum capacity in future trials. We will be required to submit a study protocol to the FDA for its approval before beginning a Phase III trial.
We initiated our second Phase II clinical trial in November 2007 and implanted our Neo-Bladder Augment in six patients ranging in age from 17 to 42, who have neurogenic bladder resulting from spinal cord injury. The primary endpoint of this trial was a change in maximum bladder pressure, as assessed by standardized measurements, at 12 months. We have not yet received final data from this trial.
Principal observations from our Phase II clinical trials can be summarized as follows:
Three patients in our Phase II clinical trials experienced serious adverse events that, at the time of their occurrence, were deemed by the respective clinical investigator to be clinically relevant and probably related to our product candidate or the implantation procedure. In February 2009, the FDA placed our IND on clinical hold. In July 2009, the FDA released the clinical hold with no recommended changes to our protocol, product candidate or implantation procedure.
Two of the serious adverse events involved pediatric patients, both of whom experienced small bowel obstructions and one of whom also developed a bacterial infection in the wall of his bladder. Both of these patients experienced bladder perforation resulting in leakage through the bladder wall, following these initial complications. We conducted a thorough review of the safety events of these patients including the details of each event, the background medical history of these patients, the timing of the events relative to the implantation of our Neo-Bladder Augment and the background rate of bladder perforations in patients receiving the current standard of care, enterocystoplasty. We submitted a complete response to the clinical hold setting forth our analysis in June 2009 and the FDA released the clinical hold in July 2009. We also noted that bladder perforations, bowel obstructions and infections are known complications of enterocystoplasty, the current standard of care for patients with neurogenic bladder requiring bladder augmentation. The third serious adverse event, which occurred in October 2009, involved an adult patient who experienced a bladder perforation that occurred during a urodynamic evaluation being performed as part of our clinical study. A urodynamic evaluation involves the insertion of catheters into the bladder, which are then used to fill the bladder with fluid to assess its capacity. We have submitted a report of this serious adverse event to the FDA in November 2009, noting that this serious adverse event is not an unexpected complication for these patients undergoing urodynamic procedures.
The patients experiencing the first and third serious adverse events have fully recovered medically. The patient experiencing the bacterial infection and who had the second serious adverse event continues, as of March 2010, to have an indwelling catheter but has otherwise recovered medically.
Based on our experience in developing urologic neo-organs using only smooth muscle cells, we intend to apply this technological advancement to our Neo-Bladder Augment at the appropriate time. We believe using a single cell approach for our Neo-Bladder Augment will allow us to simplify the production and eliminate the need for a full-thickness bladder biopsy as was conducted in our Phase II studies. In addition, we have completed preclinical work delivering our Neo-Bladder Augment via laparoscopic surgery. We intend to explore this and other enhancements to our Neo-Bladder Augment.
Other Product Opportunities
The Tengion Neo-Kidney Augment
Our Neo-Kidney Augment is designed to prevent or delay dialysis by increasing renal function in patients with advanced CKD. Our Neo-Kidney Augment is based on our proprietary technology, which uses the patients cells, procured by a needle biopsy of the patients kidney, to create an implantable product candidate that can catalyze the regeneration of functional kidney tissue.
Market Overview and Limitations of Current Therapies
In 2009, there were over 20 million people in the United States with CKD. In 2007, there were over 500,000 with End Stage Renal Disease, or ESRD, according to the United States Renal Data System, or the USRDS, which is funded by the National Institutes of Health, or NIH. Patients with ESRD have CKD which has progressed to a point of little to no kidney function and these patients require dialysis or a kidney transplant to survive. According to the USRDS, over $22 billion in Medicare costs each year are attributable just to ESRD patients. ESRD is associated with an approximate 20% mortality rate per year, with the average life expectancy of a patient on dialysis in 2007 of approximately 5.9 years. In addition, bone loss and anemia is a common complication of advanced CKD, mainly due to an inability of the kidneys to produce enough Vitamin D and erythropoietin, a hormone that controls red blood cell production.
Dialysis extends the lives of patients with ESRD, but has many limitations, including infections, hernias and the need to undergo the procedure up to three times per week. Kidney transplantation remains the most desirable and cost-effective form of kidney therapy at this time; however, there is a chronic shortage of organs with only 18,000 kidneys available for transplant in 2008. In addition to the high cost of organ procurement and the subsequent surgery, kidney transplant patients also require a lifetime of drug therapy to prevent organ rejection. There is a clear need for a product that can prevent or delay the need for dialysis or kidney transplant in patients with advanced CKD.
Through our Organ Regeneration Platform, we have isolated and characterized the effects of different kidney cells and combinations of cells on various aspects of kidney function. We have optimized our Neo-Kidney Augment consisting of autologous cells and a bioabsorbable material. We obtain cells through a routine needle biopsy of the kidney and using our Organ Regeneration Platform, we are able to produce our Neo-Kidney Augment grown from these cells in as short as four weeks from biopsy receipt. This product candidate has been implanted in animals to date and we have also isolated and characterized the necessary cells from healthy and diseased human kidneys, which we believe supports translation of this approach to human patients.
Preclinical data demonstrate that our Neo-Kidney Augment promotes regeneration of glomeruli, the primary filtration unit of the kidney, and kidney tubules in vivo, which combine to form nephrons. Regeneration of nephrons prevents renal failure, excessive bone loss and anemia while increasing the survival time of the animal. We have isolated, propagated and characterized the key cellular components that catalyze regeneration in animal kidneys across multiple species, including humans. We have conducted preclinical studies of our Neo-Kidney Augment in a chronic disease model with small animals in which approximately 80% of their kidneys had been surgically removed, to assess its regenerative capabilities. These studies extend up to six months and have demonstrated that animals implanted with our Neo-Kidney Augment have extended survival and weight gain with no additional supportive care. Stabilization and improvement in renal function are evident within several weeks after implantation. In these studies, we have seen improvement or stabilization of various biomarkers including certain proteins, lipids, bone remodeling and vitamin levels. These benefits have extended to improvements in weight gain, blood pressure, exercise tolerance and survival.
In late 2009, we began a preclinical study in an animal model involving renal damage caused by diabetes and hypertension. We expect to begin a study of our Neo-Kidney Augment in large animals in early 2010 as a proof-of-concept study to demonstrate the feasibility of creating a human Neo-Kidney Augment to address the problem of CKD and anemia associated with reduced kidney function.
The Tengion Neo-GI Augment
Leveraging our cumulative learnings from producing tubular neo-organs, such as our Neo-Urinary Conduit, we have begun early development work on our Neo-GI Augment. This product candidate is composed of smooth muscle cells, obtained from a routine fat biopsy, seeded on one of our proprietary bioabsorbable scaffolds, that can be used as a tubular or patch implant to accommodate patient needs. Our objective is to demonstrate that our Neo-GI Augment regenerates esophageal and intestinal tissues.
Market Overview and Limitations of Current Therapies
In the United States, there are over 3,000 surgical procedures per year in which part or all of a patients esophagus is removed, or esophagectomy, due to esophageal cancer, according to data compiled from a 2006 NIS performed by HCUP. In the case of a small cancerous segment in the esophagus, cancer cells are typically removed and other tissue from the patient, either bowel or skin, is used to graft a replacement. As with certain urologic procedures involving the use of bowel tissue, todays standard of care for esophageal cancer introduces similar complications as tissues will be harvested for uses for which they were not intended. In more advanced cancers, the current standard of care involves a procedure in which all or most of the entire esophagus is removed and the stomach is pulled up into the chest and attached to what remains of the esophagus, or a piece of bowel tissue is formed into a tube to replace the esophagus. This procedure has multiple surgical complications, including infections and leaks which can be life-threatening because of the proximity to the heart and lungs and the fact that donor material may not be sterile and may contain stomach acid.
We have defined in-vitro testing models for our Neo-GI Augment, as well as the necessary cell function assays. Using our combinatorial approach we have also identified potential scaffold prototypes. We have observed extended survival times in animals with esophageal damage following implantation of our Neo-GI Augment. We believe our Neo-GI Augment may offer benefits in other gastrointestinal diseases and we expect to begin an intestinal proof-of-concept study in mid-2010 and a preclinical study in large animals in 2011.
The Tengion Neo-Vessel Replacement
We are developing our Neo-Vessel Replacement for various blood vessel applications including vascular access grafts, or arterio-venous, or AV, shunts, for patients with ESRD undergoing hemodialysis treatment, and for vessel replacement for patients undergoing coronary or peripheral artery bypass procedures. Our technology will use smooth muscle cells isolated from fat tissue and endothelial cells isolated from blood samples, which are expanded ex vivo and then seeded onto a bioabsorbable scaffold in the shape of a blood vessel.
Market Overview and Limitations of Current Therapies
Hemodialysis treatment for kidney failure requires repeated needle punctures for dialysis access, usually three times per week. There are three types of vascular access: AV fistula, AV graft and a venous catheter. Each of these can have complications that require further treatment or surgery. In patients with small veins that will not develop properly into an enlarged vein, or a fistula, that can withstand repeated needle punctures, a common option is to obtain a vascular access that connects an artery to a vein using a synthetic tube, or synthetic graft, implanted under the skin. The graft becomes an artificial vein that
can be used repeatedly for needle placement and blood access during hemodialysis. Compared with properly formed fistulas, grafts tend to have more problems with clotting and infection and need replacement sooner.
In the United States, approximately 340,000 patients with ESRD are treated with hemodialysis, according to a 2009 Annual Data Report prepared by the United States Renal Data System. Over half of these patients rely on synthetic grafts which are associated with complications such as thrombosis and stenosis, ultimately leading to graft failure. Approximately half of synthetic grafts are replaced within three years of implantation. Complications with vascular access are the leading cause of hospitalization for patients with ESRD. According to the same source, these complications account for approximately 17% to 25% of all dialysis patient hospitalizations.
Similarly, coronary bypass surgery is a relatively common procedure, with nearly 450,000 performed annually in the United States, according to data compiled by the U.S. Census Bureau and HCUP. This procedure requires harvesting healthy blood vessels from other parts of the patients body to bypass blocked coronary arteries. There are no other options currently used to replace the need for healthy blood vessels taken from other parts of the patients body. To bypass blocked arteries in other parts of the body, approximately 85,000 peripheral artery bypass procedures are performed each year in the United States, according to data compiled by the U.S. Census Bureau and HCUP.
We believe our Neo-Vessel Replacement may prove to be a better alternative to artificial AV grafts. In preclinical studies, our Neo-Vessel Replacement has shown similarities to natural blood vessels and does not become infected to the same extent as synthetic AV graft materials. Further, our Neo-Vessel Replacement may prove to be a superior treatment for patients undergoing a coronary or peripheral artery bypass. This product candidate may eliminate the need to harvest arteries or veins from elsewhere in the patients body which will simplify the surgical procedure and avoid potential complications arising from operating on healthy tissue.
In preclinical studies using our Neo-Vessel Replacement as an AV graft, the regenerated vessel has shown similarities to natural blood vessels and reduced rates of infections compared to synthetic AV graft materials. Our Neo-Vessel Replacement has been tested in large mammals as an AV graft for the purposes of renal dialysis access. In six-month studies using clinically relevant protocols, we have observed that our Neo-Vessel Replacement retained a native-like ability to remodel, maintained its structural integrity and did not become infected to the same extent as synthetic AV graft materials. In large animal studies, our Neo-Vessel Replacements have also been shown to remain open and resist blood clotting when used for carotid artery reconstruction. In addition, we have observed that this product candidate responds to pharmacologic stimuli and expands and contracts in a similar manner to normal blood vessels.
We believe our product manufacturing capability provides us with a competitive advantage. We manufacture our product candidates in facilities specifically designed for the production of patient-specific materials and have implemented quality control systems to ensure our manufacturing processes and facilities comply with applicable cGMP, current Good Tissue Practices, or cGTP, and medical device QSR standards. We have exercised these manufacturing and quality control processes while producing materials for preclinical and clinical studies and have established a significant knowledge base relating to the manufacture of our product candidates. This knowledge base is maintained in a set of standard operating procedures that detail the techniques and standards for manufacturing. All of our production technicians are trained and certified in these procedures to ensure consistency in manufacturing.
Manufacturing of product candidates for our existing preclinical and clinical studies is conducted in our pilot manufacturing facility in Winston-Salem, North Carolina. The pilot manufacturing facility contains approximately 38,400 square feet of laboratories, offices, and clean room manufacturing space. We expect to manufacture early stage product candidates through Phase II clinical trials at this facility. We have also designed and constructed a commercial manufacturing facility, which is located at our headquarters in East Norriton, Pennsylvania. This facility contains approximately 30,000 square feet of technical and manufacturing space and 15,000 square feet of office space. We expect to manufacture product candidates for Phase III clinical trials in this facility and to license this facility for commercial manufacturing of our product candidates. As a result of our business decision to focus our resources on our Neo-Urinary Conduit, activities that were under way to prepare this facility to commence manufacturing operations were temporarily halted in March 2009 and we are currently maintaining this facility in a condition that will enable us to complete these activities and commence manufacturing operations. We anticipate this commercial manufacturing facility can become fully operational following completion of these activities, including all necessary validation, certification and staffing requirements, which we believe can be accomplished in approximately 12 months. In March 2011, we will lease an additional 35,000 square feet of space for further expansion in the same building.
Both facilities are designed to segregate the manufacturing and laboratory areas from the administrative portions of the building. The facilities are also designed to prevent cross-contamination of patient specific materials and to provide physical segregation while processing these materials. Our products are manufactured as individual units using disposable processing materials for storage and containment of the product. We do not face many of the traditional challenges of biopharmaceutical companies in maintaining batch quality as manufacturing is scaled up to commercial quantities because our batch size remains consistent at one unit and because the core manufacturing processes remain consistent regardless of production volume. We believe our existing facility infrastructure is sufficient to meet the initial commercial demand for our products and we can increase production capacity by installing additional equipment into existing space and by constructing additional manufacturing space within our existing facilities.
Sales and Marketing
We believe the product candidates we are currently developing will be used primarily by a relatively small number of specialty surgeons at hospitals in North America and the European Union. We intend to explore building the necessary marketing and sales infrastructure necessary to market and sell our current product candidates, if approved by the FDA, as well as hire other personnel to train physicians on the surgical techniques used with our product candidates. We will also explore the possibility of entering into strategic partnerships for the development and marketing our product candidates.
We have established a patent position surrounding our product candidates in regenerative medicine. As of December 31, 2009, we owned or had licenses to 19 issued U.S. patents, 17 of which are exclusive and two of which are non-exclusive, 13 U.S. patent applications and over 100 international patents and patent applications. A core group of these patents and pending applications covers the composition, design and methods of manufacture of our Neo-Urinary Conduit, Neo-Bladder Replacement and Neo-Bladder Augment. Certain of these patents and applications relate to technological advances associated with our Neo-Vessel and Neo-Kidney Augment development programs. Also included within our portfolio are patents that address an array of regenerative medicine and tissue engineering technologies and product candidates outside the scope of our current product pipeline. In addition to our patent portfolio, we have developed proprietary information, trade secrets and know-how in the development and manufacture of neo-organs and neo-tissues. We are committed to protecting our intellectual property position and to aggressively pursue our patent portfolio as well as the protection of our proprietary information, know-how and trade secrets.
Our Patent Portfolio
Our urologic product candidates currently include our Neo-Urinary Conduit, our Neo-Bladder Replacement, and our Neo-Bladder Augment. Our urologic-related patent portfolio is currently composed of 12 issued U.S. patents; 4 granted European patents, which have been validated in 12 European countries; 11 issued patents in other foreign jurisdictions; 5 pending U.S. non-provisional patent applications; 2 pending U.S. provisional patent applications; 1 pending Patent Cooperation Treaty, or PCT, application; and 8 pending foreign patent applications, all of which relate to a PCT application. We have licensed all of the issued patents. We own 3 of the U.S. non-provisional patent applications, the PCT application, the U.S. provisional patent applications and 5 of the foreign patent applications. We have licensed all of the other pending applications.
The issued U.S. patents, which will expire between 2011 and 2020, contain claims directed to organ constructs, cell-matrix structures, organ scaffolds, and laminarly organized luminal organ or tissue structure constructs; methods of making the same, and methods of treatment using the same. If claims in the pending U.S. patent applications covering urinary conduit constructs, methods for producing the same, and methods of treatment using the same; methods of treatment using laminarly organized luminal organ or tissue structure constructs; and methods for correcting tissue defects in urological structures, are allowed, they would expire between 2014 and 2030. The granted European patents, which will expire between 2018 and 2020, contain claims directed to organ constructs, cell-matrix structures, organ scaffolds, and laminarly organized luminal organ or tissue structure constructs; and methods of making and using the same. The pending PCT, foreign and U.S. provisional applications contain claims directed to urinary conduit constructs, organ constructs, cell-matrix structures, organ scaffolds, and laminarly organized luminal organ or tissue structure constructs; methods of making and using the same; and rational design of regenerative medicine products. These patent applications, if issued, will expire between 2019 and 2030.
Our current renal product candidate is our Neo-Kidney Augment. Our renal-related patent portfolio is currently composed of 11 issued U.S. patents; 4 granted European patents, which have been validated in 12 European countries; 8 issued patents in other foreign jurisdictions; 3 pending U.S. non-provisional patent applications; 2 pending U.S. provisional patent applications; 1 pending PCT application; and 15 pending foreign patent applications, all of which relate to a PCT application. We have licensed all of the issued patents. We own 1 of the U.S. non-provisional patent applications, the PCT application and the U.S. provisional applications. We have licensed all of the other pending applications.
The issued U.S. patents, which will expire between 2011 and 2020, contain claims directed to prosthetic kidneys, organ constructs, cell-matrix structures, organ scaffolds; methods of making the same, and methods of treatment using the same. If claims in the pending U.S. patent applications covering renal cell preparations and augmentation constructs, methods for producing the same, and methods of treatment using the same, are allowed, they would expire between 2019 and 2030. The granted European patents, which will expire between 2017 and 2020, contain claims directed to prosthetic kidneys, organ constructs, cell-matrix structures, organ scaffolds; and methods of making and using the same. The pending PCT, foreign and U.S. provisional applications contain claims directed to renal cell preparations and augmentation constructs, methods for producing and using the same; and rational design of regenerative medicine products. These patent applications, if issued, will expire between 2019 and 2030.
Our current vascular product candidate is our Neo-Vessel. Our vessel-related patent portfolio is currently composed of 2 issued U.S. patents, 1 pending U.S. non-provisional patent application and 1 pending PCT application. We have licensed each of the issued patents. We own each of the pending applications. The issued U.S. patents, which will expire between 2015 and 2016, contain claims directed to cell-matrix constructs and methods of making the same. If claims in our pending U.S. and PCT patent applications covering tissue engineering scaffolds having a mechanical response to stress and strain substantially similar to that of a response by a native blood vessel, and methods of making the same, are allowed, they would expire in 2029.
Confidential Information and Inventions Assignment Agreements
We require our employees, consultants and members of our scientific advisory board to execute confidentiality agreements upon the commencement of employment, consulting or collaborative relationships with us. These agreements provide that all confidential information developed or made known during the course of the relationship with us be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed by the individual during employment shall be our exclusive property to the extent permitted by applicable law.
License Agreements and Research Agreements
Exclusive License Agreement with Childrens Medical Center Corporation
In October 2003, we entered into a license agreement with Childrens Medical Center Corporation, or CMCC, for the license of certain patent rights and intellectual property rights owned or controlled by CMCC related to tissue engineering technology. The CMCC patent rights include patent rights owned by CMCC, as well as CMCCs right to sublicense certain patent rights owned or controlled by Massachusetts Institute of Technology, or MIT. Under the terms of this license agreement, CMCC has granted us exclusive worldwide, sublicensable licenses under certain of CMCCs patent rights related to implantable matrices for the development and commercialization of tissue engineered products for human and animal therapeutics in the subfields of genitourinary, vascular tissue, nervous tissue, trachea and other subfields later agreed upon by us and CMCC. Our license from CMCC is exclusive in all subfields for patent rights related to organ constructs; cell matrix structures; laminarly organized luminal organ or tissue structure constructs; prosthetic kidneys; kidney augmenting constructs; stents; reproductive organs and tissue structure constructs; as well as methods for making and using the same. Our license to CMCCs patent rights related to implantable cartilaginous structures, implantable genitourinary cell-seeded matrices, and mammalian urothelial cell preparation is non-exclusive, except in the genitourinary subfield where the license is exclusive. Our license to CMCCs patent rights relating to organ decellularization is non-exclusive for all subfields covered by the license agreement. Under the license agreement, we were also granted a non-exclusive, non-sublicensable, non-transferable license to certain CMCC biological materials and know-how related to unpatented manufacturing and scientific information, except that such license may be sublicensed or transferred to our affiliates and contractors for purposes specified in the license agreement. CMCC has retained a royalty-free, non-exclusive right to practice, use and license to other academic and nonprofit research organizations to practice and/or use the patent rights and licensed products for research, educational, clinical and/or charitable purposes only.
We are required under the license agreement to use reasonably diligent efforts, as defined in the license agreement, to bring one or more licensed products to market as soon as practicable and to obtain all necessary government approvals for the manufacture, use, sale and distribution of licensed products. If we fail to meet the diligence requirements set forth in the license agreement, we may be required under certain circumstances to grant a sublicense to a third party chosen by CMCC relating to the licensed product or subfield for which we have failed to meet our diligence obligations.
Under the license agreement, we are required to make payments to CMCC for accrued and continuing patent prosecution costs and also upon the achievement of certain development and sales milestones as well as certain consideration received from a sublicensee. If we develop and obtain regulatory approval of a licensed product in each of the four subfields, we will be required to pay CMCC development milestones aggregating approximately $6.9 million. Also, if cumulative net sales of all licensed products reach a certain level, we will be required to make a one-time sales milestone payment of $2.0 million. We have previously paid a license issue fee of $175,000 and $350,000 of development milestones to CMCC and as of December 31, 2009, we did not owe any milestone payments to CMCC under the license
agreement. A portion of the milestone payments we make will be credited against our future royalty payments. We must pay CMCC royalties in the mid-single digit range based on net sales of licensed products as defined in the agreement by us, our affiliates and our sublicensees, which royalties will be reduced for certain amounts we are required to pay to license patents or intellectual property from third parties and under certain circumstances if there is a competing product. No royalties will be payable with respect to sales of licensed products in countries where there is no valid patent claim, unless we advised CMCC not to file for patent protection in that country and later choose to market and sell licensed products in such country. The license agreement, and our obligation to pay royalties terminates on the later of the expiration, on a country-by-country basis, of the last patent right and October 2018.
Either party may terminate the license agreement upon 90 days prior written notice upon a material, unremedied breach or default of the other party. CMCC may terminate the agreement immediately upon our insolvency or as otherwise provided in the agreement and also upon 45 days prior written notice for our failure to pay royalties due in a timely manner. We may terminate at any time, with or without cause, upon six months prior written notice and payment to CMCC of accrued amounts due and a $50,000 termination fee.
Wake Forest University Health Sciences License Agreement
In January 2006 we entered into a license agreement with Wake Forest University Health Sciences, or WFUHS, which was amended in May 2007, for the license of WFUHSs intellectual property (including know-how) related to research performed by WFUHS employee, Dr. Anthony Atala, a former employee of the Childrens Hospital Boston, an affiliate of CMCC, and the inventor or co-inventor on certain inventions and patents held by CMCC, which are licensed to us under our license agreement with CMCC.
Under the terms of this amended license agreement, WFUHS has granted us a worldwide, exclusive, sublicensable license to make, use and sell products covered by certain of WFUHSs patent rights that relate to improvements of the existing inventions and patents included in the patent rights licensed to us under our license agreement with CMCC, or the improvement patents, and to new development inventions and patents arising out of the performance of a separate agreement, the WFUHS Research Agreement, or the new development patents, in the fields of human and animal organs, tissues and tissue-engineered and regenerative medicine directed to their functions in the subfields of genitourinary tissue, kidney tissue, cardiovascular tissue and nervous tissue. This license agreement also granted us a non-exclusive, worldwide, sublicensable license to certain know-how related to unpatented manufacturing and scientific information provided by WFUHS. Our license to patents claiming inventions conceived after the expiration or other termination of the WFUHS Research Agreement may be terminated at any time by WFUHS following expiration or other termination of the WFUHS Research Agreement. Under the terms of the May 2007 amendment to the license agreement we may elect to provide funding for research activities under the WFUHS Research Agreement directed to products that would be covered by the new development patents. If we elect to provide such funding we are required to provide a minimum of $1 million in annual funding, provided that we may decide within our discretion to reduce the amount of such annual funding by increments of $200,000. If we reduce the annual funding we are required to give up our rights to a license under one subfield for each $200,000 incremental reduction in the annual funding. We reduced our annual funding commitment for 2010 to $800,000 and agreed to give up our rights to a license under the trachea tissue subfield pursuant to this provision.
We are obligated to use commercially reasonable efforts to bring licensed products to market. If WFUHS believes that we have failed to comply with this obligation and an arbitrator agrees with WFUHS, we will be required to enter into a sublicense for the relevant product or grant WFUHS the right to enter into a sublicense for the that product. We are not required to make any milestone payments to WFUHS related to the development or commercialization of the licensed products. In addition, we are required to
meet certain time deadlines with respect to initiating the first human clinical trial, filing for marketing approval with the FDA and achieving the first commercial sale in the United States with respect to the first product covered by the new development patents in each subfield. If we fail to meet any of these deadlines, WFUHS may, in its sole option, terminate our license with respect to such product covered by the new development patents.
Under the license agreement, we also issued WFUHS a warrant to purchase 3,200 shares of our common stock through January 1, 2016 at an exercise of $2.32 per share and are required to pay WFUHS a percentage of certain consideration received from a sublicensee. We are required to pay certain license maintenance fees with respect to each product covered by new development patents, commencing two years after we initiate the first animal study conducted under cGLP, with respect to such product. These license maintenance fees, which are in the low six figure range with respect to each product, will be creditable against royalties we are obligated to pay to WFUHS for such product. In addition, we are required to pay WFUHS royalties in the low- to mid-single digit range based on net sales of licensed products in all countries. With respect to any product covered by an improvement patent, our obligation to pay royalties to WFUHS terminates upon the later of the expiration, on a product-by-product basis, of the last to expire patent covering such product and the date that is 15 years from the first commercial sale of such product, provided that no such royalty is payable more than seven years after expiration of the last-to-expire patent covering such product.
With respect to any licensed product that is not covered by an improvement patent, our obligation to pay royalties to WFUHS terminates, on a product-by-product basis, on the date that is five years from the first commercial sale of such product, provided that the first commercial sale occurs prior to January 1, 2021 (for each day after January 1, 2021 that the first commercial sale does not occur, the five-year period is reduced by one day).
Pursuant to the terms of the amended license agreement, we have provided $2 million of funding for research activities under the WFUHS research agreement through December 31, 2009 and are obligated to provide $800,000 of funding for research activities in 2010. We have made no other payments under the license agreement with WFUHS.
The agreement continues in effect on a country-by-country basis until the later of the expiration of the last to expire new improvement patent and January 1, 2021, unless earlier terminated as provided in the agreement. We may terminate the license agreement at any time, with or without cause, upon 90 days prior written notice. WFUHS may terminate the license agreement upon our default in paying a license fee or providing a report required to be provided under the license agreement, our material breach or our making a knowingly false report, upon 45 days prior written notice, provided that we may cure such default or breach within the 45-day period.
Wake Forest University Health Sciences Research Agreement
In January 2006, we entered into a research agreement with WFUHS, which was amended in September 2006.
Under the research agreement, WFUHS agreed to perform sponsored research in return for quarterly payments. As of December 31, 2009, under the terms of our license agreement with WFUHS we were obligated to make payments of $800,000 with respect to the 2010 research activities of WFUHS under the research agreement. The sponsored research involves the experiments and studies set out in annual research plans and milestones established under the agreement.
The agreement expires December 31, 2010 but the agreement may be extended for up to an additional three-year period. Either party may terminate the agreement upon a material, uncured breach by the other party upon 30 days written notice. We may terminate the agreement at any time, with or without cause, upon 90 days prior written notice. If we terminate the agreement, we are required to pay to WFUHS all reasonable direct costs and all noncancelable obligations incurred by WFUHS, provided that such liability is limited to $625,000.
Our industry is subject to rapid and intense technological change. While we do not believe we currently have any commercial competitors who are developing autologous organs and tissues for the target populations that we are addressing, we face, and will continue to face, intense competition from medical device, pharmaceutical, biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and governmental agencies who are generally engaged in tissue engineering and regenerative medicine activities or funding, both in the United States and abroad. In addition, there are companies and academic institutions developing drugs, medical devices and surgical techniques to treat many of the medical conditions our product candidates are designed to treat.
While we are, to our knowledge, the only regenerative medicine company presently developing a range of neo-organs and neo-tissues for implant that regenerate into functional organs and tissues, there are some companies that are researching and developing regenerative cell-based products or therapies, which may seek to address the medical indications that our neo-organ and neo-tissue product candidates seek to address. The companies include Cytograft, Tissue Engineering, Inc., Osiris Therapeutics, Inc., Integra Life Sciences, Inc., Pervasis Therapeutics, Inc., LifeCell (a division of Kinetic Concepts, Inc.) and Genzyme. In addition, several large pharmaceutical companies with much greater resources have demonstrated a strategic interest in regenerative medicine, including Sanofi Aventis, Johnson & Johnson, Pfizer and Celgene.
We expect that our Neo-Urinary Conduit and Neo-Bladder Replacement will compete with the current standard of care, which is the use of bowel tissue to create a urinary diversion.
Companies that are researching, developing and marketing products to treat bladder dysfunction include Allergan, which is developing Botox for bladder dysfunction; Speywood Biopharma, which is developing Dysport for bladder dysfunction; and Medtronic, which is marketing Interstim for bladder dysfunction. Further, many large pharmaceutical companies market anticholinergenic medications, such as Detrol and Ditropan, which can be used to treat bladder dysfunction.
Many of the companies competing against us have financial and other resources substantially greater than our own. In addition, many of our competitors have significantly greater experience in testing therapeutic products, obtaining FDA and other marketing approvals of products, and marketing and selling those products. Accordingly, our competitors may succeed more rapidly than we will in obtaining FDA approval for products and achieving widespread market acceptance.
We expect to compete based upon, among other things, our intellectual property portfolio, substantial process know-how with respect to scalable manufacturing capabilities and the efficacy and safety profile of our product candidates. Our ability to compete successfully will depend, in part, on our continued ability to attract and retain skilled and experienced scientific, clinical development and executive personnel, to develop viable autologous neo-organs and neo-tissues.
Regulation by governmental authorities in the United States and other countries is a significant factor in the development, manufacture, commercialization and reimbursement of our neo-organs and neo-tissues. All of the products we are seeking to develop will require marketing approval, or licensure, by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing, approval and marketing regulations promulgated by the FDA and similar regulatory authorities in other countries. Various governmental statutes and regulations also govern or influence testing, manufacturing, quality control, safety, labeling, packaging, storage and
record keeping related to such products and their marketing. State, local and other authorities may also regulate manufacturing facilities used for our neo-organs and neo-tissues. The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time and money, and there can be no guarantee that approvals will be granted.
FDA Approval Process
Our neo-organs and neo-tissues will require approval from the FDA and corresponding agencies in other countries before they can be marketed. The FDA regulates human therapeutic products in one of three broad categories: biologics, drugs, or medical devices. Our product candidates that are currently under development are combination products having features of both a biologic and a medical device. The FDA has determined that the primary mode of action for our Neo-Bladder Augment is as a biological product and we currently believe other neo-organs and neo-tissues that we develop will also require approval of a Biologics License Application, or BLA. The FDA regulates biological products under both the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act, and implementing regulations for both statutes. The FDA generally requires the following steps for pre-market approval or licensure of a new biological product:
Once a biological product is identified for development, it enters the preclinical testing stage. An IND sponsor must submit the results of the preclinical tests together with manufacturing information, analytical data and any available clinical data or literature to the FDA as part of the IND. The sponsor also will include a protocol detailing, among other things, the objectives of the initial clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the initial clinical trial lends itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold within that 30-day time period. In such a case, the IND
sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during trials due to safety concerns or non-compliance with regulatory requirements.
All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP regulations. These regulations include the requirement that all research subjects provide informed consent. Further, an IRB must review and approve the plan for any clinical trial before it commences at any institution. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the information regarding the clinical trial and the consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completion.
Each new clinical protocol and any amendments to the protocol must be submitted to the IND for FDA review, and to the IRBs for approval. Protocols detail, among other things, the objectives of the clinical trial, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety.
Typically, clinical testing involves a three-phase process although the phases may overlap. Generally, Phase I clinical trials are conducted in a small number of healthy volunteers or patients and are designed to provide information about product safety. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine optimal dose, preliminary efficacy and expanded evidence of safety. Phase III clinical trials are generally large-scale, multi-center, comparative trials conducted with patients afflicted with a target disease in order to provide statistically valid proof of efficacy, as well as safety and potency. In some circumstances, the FDA may require Phase IV or post-marketing trials if it feels that additional information needs to be collected about the product after it is on the market, particularly for long term safety follow up. During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators. Progress reports detailing the results of clinical trials must be submitted at least annually to the FDA. The FDA may, at its discretion, re-evaluate, alter, suspend, or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. Monitoring all aspects of clinical trials to minimize risks is a continuing obligation and process. All serious and unexpected adverse events must be reported to the FDA in IND safety reports.
The results of the preclinical and clinical testing are submitted to the FDA along with descriptions of the manufacturing process. In the case of vaccines, gene and cell therapies and products such as our current product candidates, the results of clinical trials are submitted as a BLA. Under the Pediatric Research Equity Act of 2003, or PREA, which was reauthorized under the FDAAA, a BLA or a supplement to a BLA must contain data to assess the safety and effectiveness of the biological product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any biological product for an indication for which orphan designation has been granted.
The FDA reviews all BLAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept a BLA for filing. In this event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews a BLA to determine, among other things, whether the product is safe, has an acceptable purity profile and is adequately potent, and whether its manufacturing meets standards designed to assure the products continued identity, safety, purity, and potency.
The FDA may grant marketing approval, or the FDA may request additional clinical data or deny approval if the FDA determines that the application does not satisfy its marketing approval criteria. FDA
review of a BLA typically takes nine months, but may last longer, especially if the FDA asks for more information or clarification of information already provided. The FDA may refer the BLA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. An advisory committee is a panel of experts who provide advice and recommendations when requested by the FDA on matters of importance that come before the agency. The FDA is not bound by the recommendations of the advisory committee, but it generally follows such recommendations.
The process of obtaining marketing approval is lengthy, uncertain, and requires the expenditure of substantial resources. Each BLA must be accompanied by a user fee, pursuant to the requirements of the Prescription Drug User Fee Act, or PDUFA, and its amendments. The FDA adjusts the PDUFA user fees on an annual basis. According to the FDAs fee schedule, effective through September 30, 2010, the user fee for an application requiring clinical data, such as a BLA, is $1,405,500. PDUFA also imposes an annual product fee for biologics ($79,720), and an annual establishment fee ($457,200) on facilities used to manufacture prescription biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on BLAs for products designated as orphan drugs, unless the drug also includes a non-orphan indication. We expect to seek orphan designation for our Neo-Bladder Augment at the appropriate time.
Before approving a BLA, all facilities and manufacturing techniques used for the manufacture of products must comply with applicable FDA regulations governing cGMP. Among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. A local field division of the FDA is responsible for completing the pre-approval inspection and providing recommendation for or against approval. This effort is intended to assure appropriate facility and process design to avoid potentially lengthy delays in product approvals due to inspection deficiencies. Similarly, before approving a BLA, the FDA also may conduct pre-licensing inspections of a company, its contract research organizations and/or its clinical trial sites to ensure that clinical, safety, quality control and other regulated activities are compliant with GCP. To assure such cGMP and GCP compliance, the applicants must incur significant expenditure of time, money and effort in the area of training, record keeping, production, and quality control. Following approval, the manufacture, holding, and distribution of a product continues to require significant resources in order for the sponsor to maintain full compliance in these areas. For human cellular products, cGTP requirements apply. For a biologic/device combination product, the product must be manufactured also in compliance with QSR requirements for the device component.
After marketing approval has been obtained, the FDA will require post-marketing reporting to monitor the side effects of the product. Further studies may be required to provide additional data on the products risks, benefits, and optimal use, and further clinical trials will be required to gain approval for the use of the product as a treatment for clinical indications other than those for which the product was initially tested. Results of post-marketing programs may limit or expand the further marketing of the product. Further, if there are any modifications to the product, including changes in indication, labeling, or a change in the manufacturing process or manufacturing facility, a BLA supplement may be required to be submitted to the FDA.
Other FDA Regulatory Requirements
Maintaining substantial compliance with applicable federal, state and local statutes and regulations requires the expenditure of substantial time and financial resources. Any biological products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including:
In addition, the FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. There are numerous regulations and policies that govern various means for disseminating information to health-care professionals as well as consumers, including to industry sponsored scientific and educational activities, information provided to the media and information provided over the Internet. Prescription biologics may be promoted only for the approved indications and in accordance with the provisions of the approved label. Biological product manufacturers and other entities involved in the manufacturing and distribution of approved biological products are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws.
The FDA has very broad enforcement authority and the failure to comply with applicable regulatory requirements can result in administrative or judicial sanctions being imposed on us or on the manufacturers and distributors of our approved products, including, without limitation, warning or untitled letters, refusals of government contracts, clinical holds, civil penalties, injunctions, restitution, disgorgement of profits, recall or seizure of products, total or partial suspension of production or distribution, withdrawal of approvals, refusal to approve pending applications, and criminal prosecution resulting in fines and incarceration. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. In addition, even after marketing approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.
FDA Amendments Act
On September 27, 2007, the President signed into law the Food and Drug Administration Amendments Act of 2007, or the FDAAA. This new legislation grants significant new powers to the FDA, many of which are aimed at assuring the safety of drugs and biologics after approval. In particular, the new law authorizes the FDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug and biologic labeling to reflect new safety information, and require risk evaluation and mitigation strategies for certain drugs and biologics. In addition, the new law significantly expands the federal governments clinical trial registry and results databank and creates new restrictions on the advertising and promotion of drugs and biologics. Under the FDAAA, companies that violate these and other provisions of the new law are subject to substantial civil monetary penalties.
The requirements and changes imposed by the FDAAA may make it more difficult, and more costly, to obtain and maintain approval for new biologics, or to produce, market and distribute existing products. In addition, the FDAs regulations, policies and guidance are often revised or reinterpreted by the agency or the courts in ways that may significantly affect our business and our products. It is impossible to predict whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.
Follow-on Biologics, or Biosimilars
In the past few years, there have been a number of legislative initiatives that intended to create a regulatory pathway for approval of follow-on biologics, or biosimilars. The forms of the proposed legislation differed in several aspects, including the length and scope of intellectual property protection,
and the clinical testing standards. At this time it is not possible to predict whether any of the biosimilar proposals will be enacted and become law, and if so, which version of the proposals will be enacted. However, if a regulatory pathway is established for biosimilars in the future pursuant to the enactment of biosimilar legislation, our business may be adversely affected, although the extent of the impact will depend on the details of the biosimilar law.
Expedited Development and Review Programs
A Fast Track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the Fast Track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development of the product. This designation assures access to FDA personnel for consultation throughout the development process and provides an opportunity to request priority review of a marketing application providing a six-month review timeline for the designated product. If a preliminary review of the clinical data suggests that a Fast Track product may be effective, the FDA may initiate review of sections of a marketing application for a Fast Track product before the sponsor completes the application. This rolling review is available if the applicant provides a schedule for submission of remaining information and pays applicable user fees. However, the time periods specified under PDUFA concerning goals to which the FDA has committed to reviewing an application do not begin until the sponsor submits the complete application. Products that receive Fast Track designation may also be eligible for accelerated approval, or approval based on a clinical endpoint other than survival or irrevocable morbidity or on a surrogate endpoint that is reasonably likely to predict clinical benefit.
Orphan Drug Designations
The Orphan Drug Act provides incentives to manufacturers to develop and market drugs and biologics for rare diseases and conditions affecting fewer than 200,000 persons in the United States at the time of application for orphan drug designation, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug or biological product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan product designation must be requested before submitting a new drug application, or NDA, or BLA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. The first developer to receive FDA marketing approval for an orphan biologic is entitled to a seven year exclusive marketing period in the United States for that product as well as a waiver of the BLA user fee. The exclusivity prevents FDA approval of another application for the same product for the same indication for a period of seven years, except in limited circumstances where the second product has been shown to be clinically superior to the first.
Legislation similar to the Orphan Drug Act has been enacted in other jurisdictions, including the European Union. The orphan legislation in the European Union is available for therapies addressing conditions that affect five or fewer out of 10,000 persons. The marketing exclusivity period is for ten years, although that period can be reduced to six years if, at the end of the fifth year, available evidence establishes that the product is sufficiently profitable not to justify maintenance of market exclusivity. We have received orphan designation in the EU for our Neo-Bladder Augment for the treatment of spina bifida.
Human Cellular and Tissue-Based Products
Human cells or tissue intended for implantation, transplantation, infusion, or transfer into a human recipient is regulated by the FDA as human cells, tissues, and cellular and tissue-based product, or HCT/ Ps. Certain types of HCT/Ps are regulated differently from drug or biologic products because they are
minimally manipulated tissues intended for homologous use in the patients body, are not combined with a drug, device or biologic, and do not have systemic or metabolic effects on the body. The FDA does not require pre-market approval for these types of HCT/Ps, however, it does require strict adherence to federally mandated current Good Tissue Practice, or cGTP, regulations for all HCT/Ps. These regulations are analogous to the cGMP regulations described above in terms of manufacturing standards. In addition, the FDAs regulations include other requirements to prevent the introduction, transmission and spread of communicable disease. These requirements apply to all HCT/Ps, including those regulated as drugs, biologics or devices. Specifically, the FDAs regulations require tissue establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through screening and testing. We submit an annual registration and listing form to the FDA for our Winston-Salem facility as an HCT/Ps facility.
Federal and state laws govern our ability to obtain and, in some cases, to use and disclose data we need to conduct research activities. Through the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (as incorporated in the American Recovery and Reinvestment Act of 2009) Congress required the Department of Health and Human Services to issue a series of regulations establishing standards for the electronic transmission of certain health information. Among these regulations were standards for the privacy of individually identifiable health information. Most health care providers were required to comply with the Privacy Rule as of April 14, 2003.
HIPAA does not preempt, or override, state privacy laws that provide even more protection for individuals health information. These laws requirements could further complicate our ability to obtain necessary research data from our collaborators. In addition, certain state privacy and genetic testing laws may directly regulate our research activities, affecting the manner in which we use and disclose individuals health information, potentially increasing our cost of doing business, and exposing us to liability claims. In addition, patients and research collaborators may have contractual rights that further limit our ability to use and disclose individually identifiable health information. Claims that we have violated individuals privacy rights or breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.
In addition to privacy law requirements and regulations enforced by the FDA, we also are subject to various local, state and federal laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances. These laws include, but are not limited to, the Occupational Safety and Health Act, the Toxic Test Substances Control Act and the Resource Conservation and Recovery Act.
We will most likely have to obtain approval for the manufacturing and marketing of each of our products from regulatory authorities in foreign countries prior to the commencement of marketing of the product in those countries. The approval procedure varies among countries, may involve additional preclinical testing and clinical trials, and the time required may differ from that required for FDA approval or licensure. Although there is now a centralized European Union approval mechanism in place, this applies only to certain specific medicinal product categories. In respect of all other medicinal products each European country may impose certain of its own procedures and requirements in addition to those requirements set out in the appropriate legislation, many of which could be time-consuming and expensive.
As of March 31, 2010 we had 65 employees, including 63 full-time employees, of which 12 were engaged in manufacturing and operations, 40 were engaged in research and development and clinical trials and 13 were engaged in administration, facilities and finance. We currently employ two medical doctors and 18 individuals with PhDs. All of our employees have entered into non-disclosure agreements with us regarding our intellectual property, trade secrets and other confidential information. None of our employees are represented by a labor union or covered under a collective bargaining agreement, nor have we experienced any work stoppages.
Our corporate headquarters are located in East Norriton, Pennsylvania, where we currently occupy approximately 45,000 square feet of office, laboratory and manufacturing space. The term of our current lease expires in February 2011 and we also entered into a lease commencing in March 2011 to lease all 80,000 square feet of space. This lease expires in February 2016. We also occupy approximately 38,400 square feet of office, laboratory and manufacturing space in Winston-Salem, North Carolina. The term of the lease expires in September 2011. We believe that the facilities that we currently lease are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.
We are not a party to or engaged in any material legal proceedings.
Executive Officers, Key Employees and Directors
The following table sets forth certain information about our executive officers, key employees and directors as of the date of this prospectus.
Steven Nichtberger, MD, is one of our co-founders and has served as our President and Chief Executive Officer since May 2004. He has also served as one of our directors since May 2004. Dr. Nichtberger has over 15 years experience in the pharmaceutical and biotechnology industries. Prior to joining us, Dr. Nichtberger was at Merck & Co., Inc., or Merck, a large multi-national pharmaceutical company, from 1995 to 2004, holding a number of senior management positions including serving in the leadership of the global marketing organization with responsibility for developing marketing strategy for all Merck brands globally, leading marketing interactions with the research and manufacturing divisions, operational leadership and responsibility for profits and losses with regard to a U.S. product portfolio and leadership of the new product planning function. He was also involved in several corporate licensing, divestiture and product acquisition deals. Previously, Dr. Nichtberger founded and developed a privately-held company that licenses intellectual property in the field of internet-based paperless couponing. He is a board certified internist and cardiologist trained at Mount Sinai Medical Center. Dr. Nichtberger currently serves as a member of the board of overseers of the University of Pennsylvania School of Arts and Sciences, as the chairman of the board of directors of Pennsylvania Bio, as a member of the board of directors of BioAdvance, the external advisory board of the Center for Bioethics at the University of Pennsylvania and as a member of the board of directors of the Alliance for Regenerative Medicine. He received a BA in Biology from the University of Pennsylvania, a BS in Economics from the Wharton School and an MD from the School of Medicine and Biosciences, SUNY at Buffalo.
Linda Hearne has served as our Vice President, Finance and our Principal Financial Officer since June 2009 and prior to such time she served as our Controller from October 2004 to June 2009. Ms. Hearne
brings over 20 years of corporate finance, treasury and accounting experience. Since joining us in 2004 as Corporate Controller, she has developed processes for financial reporting, budgeting, payroll, fixed assets, procurement, accounts payable and stock option administration. Prior to joining us, Ms. Hearne was employed at Merck as Director, Vaccine Division Financial Evaluation and Analysis. During her 12-year career with Merck, she also served as Director of Merck Vaccine Planning and Reporting, Director of International Treasury Services Japan / Canada, and Senior Analyst of Foreign Exchange Hedging. Prior to her work at Merck, she held positions at Citicorp N.A. and Ernst & Young. Ms. Hearne received a BS from Miami University (Ohio) and an MBA from the Fuqua School of Business at Duke University. She is a Certified Public Accountant.
Timothy Bertram, DVM, PhD, has served as our Senior Vice President, Science and Technology since August 2004 and is responsible for leading our research and development efforts. Prior to joining us, Dr. Bertram served as a senior scientific executive at Pfizer, a large multi-national pharmaceutical company, from 1999 to 2004, and held a similar position at SmithKline Beecham Pharmaceuticals, a large multi-national pharmaceutical and healthcare company, from 1996 to 1999, and Procter & Gamble Co., a large multi-national company that manufactures consumer goods, from 1989 to 1996. He was a faculty member at the University of Illinois from 1984 to 1987 and was a visiting scientist to the National Institutes of Health from 1987 to 1989. Dr. Bertram received a DVM and PhD from Iowa State University and completed post-doctoral studies in cell signaling pathways.
Mark Stejbach has served as our Vice President and Chief Commercial Officer since June 2009 and prior to such time he served as our Vice President, Marketing and Commercial Planning from August 2008 to June 2009. His current responsibilities include business development, marketing, public affairs, human resources, legal and IT. Mr. Stejbach joined us from Merck where he served as Vice President of Managed Care Marketing in Mercks United States Pharmaceutical Division from 2005 until 2008 and was responsible for marketing across all public and private payor segments, including contracting strategy, program development and economic affairs. From 2004 to 2005, Mr. Stejbach served as a Vice President, Sales Services, at Merck and was responsible for sales information management and development, customer services, e-business strategy and field communications. Mr. Stejbach started his pharmaceutical career at Merck in 1987, where he went on to lead marketing campaigns for VASOTEC and PROSCAR. From 1994 to 1997, Mr. Stejbach worked for Biogen, Inc., a biotechnology company, and was responsible for the development and execution of the launch marketing plan for AVONEX, a product for multiple sclerosis. Mr. Stejbach then rejoined Merck in 1997 and over the following 11 years held numerous senior leadership positions including Senior Director roles in market development, specialty sales, marketing, and investor relations. Mr. Stejbach received his MBA from The Wharton School, University of Pennsylvania, and a BS in mathematics from Virginia Tech.
Frans Dubois has served as our Vice President, Quality since September 2009. Mr. Dubois brings over 25 years of experience in the industry, the last 10 of which he spent at Johnson & Johnson, a large multi-national pharmaceutical, medical devices and consumer packaged goods manufacturer, most recently from October 2008 until August 2009 as Vice President of Global External Manufacturing and Supplier Quality Operations. In this role at Johnson & Johnson, Mr. Dubois was responsible for quality operations at its external sites and established a global team that was responsible for the supply chain. From April 2006 until October 2008, Mr. Dubois served as the Vice President of Worldwide Quality, Centocor Inc., a biotechnology company and subsidiary of Johnson & Johnson, and was responsible for quality at all of its Global Biologics Supply Chain worldwide sites as well as its contract manufacturing operations. From 2002 until April 2006, Mr. Dubois served as Executive Director of Quality and Compliance for Centocor BV in Leiden, the Netherlands, a subsidiary of Johnson & Johnson, and was responsible for quality control quality assurance and batch release. Mr. Dubois received a Masters degree in pharmacy from Leiden University, the Netherlands.
Deepak Jain, PhD, has served as our Vice President, Bioprocess Research and Development since November 2004. Dr. Jain brings over 27 years of experience in biotechnology, tissue engineering and
regenerative medicine bioprocess research and development and cGMP manufacturing of biologics, devices and combination products. Prior to joining us, Dr. Jain served as a full-time consultant to Baxter, a healthcare company, and he was responsible for the design and start-up of a commercial manufacturing facility for manufacture of a recombinant protein from 2002 to 2004. Dr. Jain also held the position of Executive Director Process Development/Manufacturing Technical Support at Advanced Tissue Sciences, a leading tissue-engineering company engaged in the development of human-based tissue products, and developed commercial scale manufacturing bioprocesses for tissue engineered products from 1997 to 2002. Dr. Jain held positions of increasing technical and management responsibility at Johnson & Johnson from 1991 to 1997 and Merck from 1982 to 1991. Dr. Jain has served as Chairman of the American Society for Testing and Materials Task Group on Preservation of Cells and Tissue Engineered Medical Products with Cells, is the current Chairman the of USP Tissue and Tissue-based Products Ad hoc Advisory Panel and a member of the USP Biologics and Biotechnology Cell, Gene and Tissue Therapy Expert Committee. Dr. Jain received a M. Tech and PhD in Biochemical Engineering from the Indian Institute of Technology in Delhi, India.
Jason Krentz has served as our Executive Director, Technical Operations since July 2009 and prior to such time, he served as our Senior Director of Manufacturing from August 2008 to July 2009. Mr. Krentz brings over 15 years of operations leadership and process engineering experience to our company. Since joining us in 2007 as Director of Manufacturing, Mr. Krentz led completion of the commercial manufacturing center in East Norriton, PA and is responsible for operation and maintenance of all of our facilities. Prior to joining us, Mr. Krentz was employed at Johnson & Johnson, a large multi-national pharmaceutical, medical devices and consumer packaged goods manufacturer, within the Global Biologics Supply Chain organization as Associate Director of Cell Culture Operations from May 2005 to May 2007 and was responsible for upstream manufacturing of REMICADE, a monoclonal antibody indicated for treatment of numerous inflammatory disorders. From February 2004 to May 2005, Mr. Krentz served as an Operations Excellence (Lean Six Sigma) Specialist at Johnson & Johnson within the Global Biologics Supply Chain. While at Johnson & Johnson, Mr. Krentz worked throughout the supply chain organization on the REMICADE process and implemented process applications to increase production efficiency and reduce costs. He also completed certification as a Six Sigma Black Belt while leading and training process improvement teams within the manufacturing, logistics, and quality organizations. Prior to his work at Johnson & Johnson, Mr. Krentz held various engineering roles at Lucent Technologies, a technology company, and was a Submarine Officer in the U.S. Navy. Mr. Krentz received a BS in Materials Science and Engineering from the University of Michigan and an MBA from Saint Josephs University.
Joseph W. La Barge, Esq. has served as our Executive Director and Corporate Counsel since June 2009. Prior to such time, Mr. La Barge served as our Associate General Counsel from November 2006 to June 2009. Prior to joining our company, Mr. La Barge was Assistant Vice President, Assistant General Counsel and Assistant Secretary at PMA Capital Corporation, a holding company whose operating subsidiaries provide specialized risk management solutions and services to customers in the United States, from October 2004 to November 2006. Mr. La Barge was an associate at Ballard Spahr, LLP from 1999 to 2004. Mr. La Barge received a BA from Bucknell University and a JD from Temple University.
Sharon Presnell, PhD, has served as our Vice President, Regenerative Medicine and Biology since January 2007 and is responsible for the discovery and early development of our pipeline portfolio via internal efforts, the management of external sponsored research agreements, and technology transfer. Prior to joining us, Dr. Presnell served as a Director of Research and Development for Becton-Dickinson, a global medical device and tools company, from 2001 to 2007, leading product-focused research and early development of Becton-Dickinsons internal cell-based therapy venture as well as tools and applications for the stem cell and cell therapy markets, including Becton-Dickinsons Discovery Platform and BD FACS-CAP. Dr. Presnell was an Assistant Professor at the University of North Carolina at Chapel Hill, in the Department of Pathology and Laboratory Medicine, where she published 13 papers in the fields of
cell biology and carcinogenesis. Dr. Presnell received her PhD in Experimental & Molecular Pathology from the Medical College of Virginia and completed post-doctoral studies at the University of North Carolina at Chapel Hill.
Drew Sansone, MS, has served as our Executive Director, Regulatory Affairs since January 2006. Prior to joining us, from May 2002 to December 2005, Mr. Sansone led regulatory operations and regulatory affairs at Vicuron Pharmaceuticals, a biopharmaceutical company, until it was acquired by Pfizer, a large multi-national pharmaceutical company. Mr. Sansone eventually managed and led all of Vicurons FDA submissions and international regulatory submissions. From 1995 to 2002, Mr. Sansone held various roles in the Regulatory Affairs department at AstraZeneca, an international pharmaceutical company. Mr. Sansone received a BA from Siena College and an MS in Regulatory Affairs and Quality Assurance from the Temple University School of Pharmacy.
We have no formal policy regarding board diversity. Our nominating committee and board of directors may therefore consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not only limited to race, gender or national origin. Our nominating committees and board of directors priority in selecting board members is identification of persons who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, and professional and personal experiences and expertise relevant to our growth strategy. The following provides certain qualifications, attributes, skills and other biographical information with respect to the seven directors currently serving on the board of directors that caused our nominating and corporate governance committee and board of directors to determine that the person should serve as one of our directors:
David I. Scheer is one of our co-founders and has served as Chairman of our board of directors since July 2003. Since 1981, Mr. Scheer has served as President of Scheer & Company, Inc., a company that provides corporate strategic advisory services in the life sciences industry. Mr. Scheer had been involved in the founding, and served on the boards, of ViroPharma, Inc., OraPharma, Inc. (acquired by a unit of Johnson & Johnson) and Esperion Therapeutics (acquired by Pfizer). He serves as the Chairman of the boards of Aegerion, Inc., a biopharmaceutical company, and Optherion, Inc., a biotechnology company, and has served on the board of Achillion Pharmaceuticals, Inc., a publicly-held company, since its inception and was recently elected the non-executive Chairman of Achillion Pharmaceuticals board. Among his not-for-profit affiliations, he serves as Chair of the Executive Committee of the Unfinished Agenda in Infectious Diseases, a global health initiative at the Harvard School of Public Health. He has also been a member of the Advisory Board to the Harvard Malaria Initiative and the Leadership Council for the Harvard School of Public Health. For the past five years, he has also served on the board of Trustees of the Long Wharf Theatre of New Haven, most recently as Vice-Chair, and as a member of the Executive Committee of the board of Connecticut Union for Research Excellence (CURE). Mr. Scheer received an AB from Harvard College and an MS from Yale University. Because of his strong background of service on the boards of numerous life sciences industry companies and his involvement in capital raising and strategic transactions in our industry, we believe that Mr. Scheer provides a unique perspective and useful insight to our board as we review our growth strategy and strategic initiatives.
Carl-Johan Dalsgaard, MD, PhD, has served as a director of our company since August 2004. Dr. Dalsgaard has also been a member of HealthCap IV GP SA, L.L.C. (HCSA) and HealthCap IV GP AB, L.L.C. (HCAB and, collectively with HCSA, HealthCap), a venture capital fund that invests globally in pharmaceutical, biotechnology and medical technology companies from June 2000 to the present and serves as Chief Executive Officer of certain companies in which HealthCap has invested. He received an MD from the Karolinska Institute in Sweden, and a PhD in neurobiology and post-doctoral experience from Harvard Medical School. Dr. Dalsgaard has fulfilled specialist training for board certificate in plastic and reconstructive surgery at Karolinska Hospital. Dr. Dalsgaard brings to the board significant experience as an executive of a financial services company that focuses on our industry. Dr. Dalsgaard has substantial experience with complex capital structures and related issues and with assisting companies with strategic allocation of capital resources.
Brenda D. Gavin, DVM, has served as a director of our company since June 2006. She was a founding partner of Quaker BioVentures, a venture capital firm that invests in life science companies, and has been a partner at Quaker BioVentures from 2003 to the present. Dr. Gavin received her BS from Baylor University, DVM from the University of Missouri and an MBA from the University of Texas, San Antonio. Dr. Gavin brings to the board substantial experience in our industry having served on the board of directors of more than 20 biopharmaceutical and life sciences companies, including their audit, compensation and corporate governance committees. She is also familiar with and has designed complex capital structures.
Gary J. Kurtzman, MD, has served as a director of our company since October 2008. Since June 2006, Dr. Kurtzman has served as a Managing Director in the Life Sciences Group at Safeguard Scientifics, Inc., a provider of growth capital for entrepreneurial and innovative life sciences and technology companies that is publicly traded on the New York Stock Exchange, where he is responsible for identifying and partnering with companies focused on molecular diagnostics, medical devices, regenerative medicine and specialty pharmaceuticals services. As part of Safeguards Life Sciences Group, Dr. Kurtzman brings more than 18 years of experience in operations and investments. From July 2002 to June 2006, Dr. Kurtzman served as Managing Director and Chief Operating Officer of BioAdvance, a state initiative committed to funding early stage life science companies. Prior to July 2002, Dr. Kurtzman held various positions at Pluvita Corporation, Genovo, Inc., Avigen, Inc., and Gilead Sciences, Inc. Dr. Kurtzman currently serves on the board of directors for Safeguard Scientifics partner companies: Advanced BioHealing, Alverix, Avid Radiopharmaceutics, Garnet Biotherapeutics, Molecular Biometrics and NuPathe. Dr. Kurtzman is currently a lecturer in Health Care Management at The Wharton School of the University of Pennsylvania where he teaches bioentrepreneurship. Dr. Kurtzman received a BS from Stanford University and an MD from Washington University and completed post-doctoral training at the National Heart, Lung and Blood Institute and Stanford University. He is a board-certified internist with a hematology sub-specialty. We believe Dr. Kurtzmans strong background of service on the boards of numerous biomedical companies and his position as a managing director in an organization that provides capital to biomedical companies, including companies developing and selling regenerative medicine products, make him a valuable member of our board of directors who will assist in the development of our growth strategy and business plans.
James Nahirny has served as a director of our company since June 2006. Since December 2000, Mr. Nahirny has served as a managing director of Bain Capital Venture Investors, LLC, the venture capital arm of Bain Capital, which focuses its investments in business services, consumer, healthcare, internet, mobile and software companies. Prior to joining Bain Capital Venture Investors, LLC, Mr. Nahirny was a partner at McKinsey & Company, a global management consulting firm, where he worked with the senior management and boards of his clients on a broad range of strategic and operational issues. Before joining McKinsey, Mr. Nahirny was in the mergers and acquisitions group at the investment bank First Boston. Mr. Nahirny also serves on the boards of Nanosphere, Inc., Humedica, Inc., Quanterix Corporation, Ricera Biosciences, LLC, Ameritox, Ltd. and Servigistics, Inc. Mr. Nahirny received an MBA from Harvard Business School and a BA from Yale University. Mr. Nahirny has substantial experience in investment banking, management consulting and financial services, and has served as a director of numerous companies. He is familiar with and has designed complex capital structures.
Lorin J. Randall has served as a director of our company since February 2008. Mr. Randall, a financial consultant since May 2006, most recently served as Interim Chief Financial Officer at Adnexus Therapeutics, Inc., a developer of oncology biologics which was acquired by Bristol-Myers in 2007, from May 2007 to October 2007. Previously, Mr. Randall was Senior Vice President and Chief Financial Officer of Eximias Pharmaceutical Corporation, a development-stage drug development company, from December 2004 to May 2006, and from 2002 to 2004, Mr. Randall served as the Senior Vice President and Chief Financial Officer of i-STAT Corporation, a publicly-traded manufacturer of medical diagnostic
devices which was acquired by Abbott Laboratories in 2004. He currently serves on the boards of directors of Nanosphere, Inc., Athersys, Inc. and Acorda Therapeutics, Inc. Mr. Randall served on the board of directors of Opexa Therapeutics, Inc., a publicly-traded cellular therapy company, from 2007 to 2009. Mr. Randall received a BS in accounting from Pennsylvania State University and an MBA from Northeastern University. Because of his strong background in the life sciences industry and his prior experience as Chief Financial Officer of i-STAT Corporation and other positions we believe that Mr. Randall is able to provide valuable input into our strategic and financial affairs, as well as other matters. In addition, Mr. Randalls public company experience at Adnexus Therapeutics, Inc. and i-STAT Corporation will benefit our board as we begin operating as a publicly traded company after this offering.
Our board of directors may establish from time to time by resolution the authorized number of directors. Upon completion of this offering seven directors will be authorized. Six members are and will be independent directors and the other director serves as our chief executive officer. In accordance with our amended and restated certificate of incorporation to be in effect upon the closing of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. After the completion of this offering, our directors will be divided among the three classes as follows:
Our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consists of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change of control at our company.
Board Leadership Structure and Boards Role in Risk Oversight
The positions of chairman of the board and chief executive officer have been separated since our inception in July 2003 when David I. Scheer, a non-employee independent director and one of our co-founders, was elected as our chairman, and Steven Nichtberger, another of our co-founders, was elected as our president and chief executive officer. Separating these positions allows our chief executive officer to focus on our day-to-day business, while allowing the chairman of the board to lead the board of directors in its fundamental role of providing advice to and independent oversight of management. Our board of directors recognizes the time, effort, and energy that the chief executive officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our chairman, particularly as the board of directors oversight responsibilities continue to grow. Our board of directors also believes that this structure ensures a greater role for the independent directors in the oversight of our company and active participation of the independent directors in setting agendas and
establishing priorities and procedures for the work of our board of directors. This leadership structure also is preferred by a significant number of our stockholders. Our board of directors believes its administration of its risk oversight function has not affected its leadership structure.
While our bylaws and corporate governance guidelines do not require that our chairman and chief executive officer positions be separate, our board of directors believes that having separate positions and having an independent outside director serve as chairman is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including risks relating to product candidate development, technological uncertainty, dependence on collaborative partners, uncertainty regarding patents and proprietary rights, comprehensive government regulations, having no commercial manufacturing experience, marketing or sales capability or experience, and dependence on key personnel. Management is responsible for the day-to-day management of risks we face, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.
Our board of directors is actively involved in oversight of risks that could affect us. This oversight is conducted primarily through committees of the board of directors, as disclosed in the descriptions of each of the committees below and in the charters of each of the committees, but the full board of directors has retained responsibility for general oversight of risks. Our board of directors satisfies this responsibility through full reports by each committee chair regarding the committees considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within our company as our board of directors believes that full and open communication between management and the board of directors is essential for effective risk management and oversight.
Our board of directors has the following committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.
Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee evaluates the independent auditors qualifications, independence and performance; determines the engagement of the independent auditors; reviews and approves the scope of the annual audit and the audit fee; discusses with management and the independent auditors the results of the annual audit and the review of our quarterly financial statements; approves the retention of the independent auditors to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent auditors on our engagement team as required by law; reviews our critical accounting policies and estimates; oversees our internal audit function; and annually reviews the audit committee charter and the audit committees performance. The current members of our audit committee are Lorin J. Randall, who is the chair of the committee, Gary J. Kurtzman, MD and James Nahirny. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq Global Market. Our board has determined that Mr. Randall is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of Nasdaq Global Market. Messrs. Randall and Nahirny and Dr. Kurtzman are independent directors as defined under the applicable rules and regulations of the SEC and Nasdaq Global Market. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and Nasdaq Global Market.
Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and approves corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and sets the compensation of these officers based on such evaluations. The compensation committee also administers the issuance of stock options and other awards under our stock plans. The compensation committee reviews and evaluates, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. The current members of our compensation committee are Gary J. Kurtzman, MD, who is the chair of the committee, Lorin J. Randall and James Nahirny. Each of the members of our compensation committee are independent under the applicable rules and regulations of the SEC, Nasdaq Global Market and the Internal Revenue Service.
Nominating and Corporate Governance Committee
The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to our board concerning governance matters. The current members of our nominating and corporate governance committee are Brenda D. Gavin, DVM, who is the chair of the committee, Carl-Johan Dalsgaard, MD, PhD and David I. Scheer. Each of the members of our nominating and corporate governance committee are independent under the applicable rules and regulations of the SEC and Nasdaq Global Market.
There are no family relationships among any of our directors or executive officers.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has at any time during the prior three years been an officer or employee of ours. None of our executive officers currently serves or in the prior three years has served as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers serving on our board or compensation committee.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.tengion.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.
Prior to completion of this offering, each of our non-employee directors, other than those affiliated with a stockholder who holds more than 5% of our outstanding common stock, were entitled to receive an annual cash retainer of $25,000, except that a non-employee chairperson of the board was entitled to receive an annual cash retainer of $45,000. Non-employee chairpersons of the audit committee, the compensation committee and the nominating and corporate governance committee were each entitled to receive an additional annual retainer of $12,500, $10,000 and $10,000, respectively. Non-employee members of each of the audit committee, the compensation committee and the governance and nominating committee were entitled to receive an additional annual retainer of $5,000. We reimburse our non-employee directors for travel, lodging and other reasonable expenses incurred in attending board and committee meetings.
In addition, each non-employee director first appointed or elected on or after February 7, 2008, automatically received upon appointment, an option to purchase 2,759 shares of our common stock exercisable at the fair market value of our common stock on the date of grant. These options vested quarterly over a three-year period such that 50% of options were fully vested after one year and 25% of options vested, or will fully vest in each of the subsequent two years, subject to the non-employee directors continued service on the board through the vesting dates.
Our non-employee director compensation plan provided that, on the date of each annual stockholder meeting commencing in 2009, each continuing non-employee director would automatically receive an option to purchase 690 shares of our common stock exercisable at the fair market value of our common stock on the date of grant. The compensation committee determined not to award these options to our directors in 2009.
All option grants made prior to this offering are subject to the terms and conditions of our 2004 Stock Incentive Plan or other stockholder approved equity compensation plan in effect at the time of grant.
When board membership of a non-employee director terminates, all vested options will remain exercisable for three months (or such longer period as the board may determine in its discretion on or after the date of grant of such option, to the extent consistent with Section 409A of the Internal Revenue Code). If a non-employee director leaves the board before the end of a quarter, any unvested options will be vested through the quarter anniversary of the date of grant of such option following the date of termination of service. All unvested options shall be cancelled as of the last date of service on the board.
The following table sets forth information regarding compensation earned by our non-employee directors during the fiscal year ended December 31, 2009.
After completion of this offering, each of our non-employee directors will be entitled to receive an annual cash retainer of $35,000, except that a non-employee chairperson of the board will be entitled to receive an annual cash retainer of $55,000. Non-employee chairpersons of the audit committee, the compensation committee and the nominating and corporate governance committee will each be entitled to receive an additional annual retainer of $15,000, $10,000 and $6,000, respectively. Non-employee members of each of the audit committee, the compensation committee and the governance and nominating committee will be entitled to receive an additional annual retainer of $7,500, $5,000 and $3,000, respectively. We reimburse all directors for travel, lodging and other reasonable expenses incurred in attending board and committee meetings.
In addition, each non-employee director currently serving on our Board will receive upon consummation of this offering, an option to purchase 4,700 shares of our common stock. Additionally, upon the closing of our initial public offering, Mr. Randall will receive an option to purchase 11,700 shares of our common stock in recognition of his key leadership role in connection with this offering. All of these stock options will be exercisable at the initial public offering price. The options granted to all non-employee directors will vest quarterly over a two-year period. The additional option grant to Mr. Randall will vest quarterly over one year.
Thereafter, each non-employee director first appointed or elected after this offering, will automatically receive upon appointment or election, an option to purchase 7,000 shares of our common stock exercisable at the fair market value of our common stock on the date of grant. These options vest quarterly over a two-year period, subject to the non-employee directors continued service on the board through the vesting dates.
Our non-employee director compensation plan provides that, on the date of each annual stockholder meeting commencing in 2011, each continuing non-employee director will automatically receive an option to purchase 4,700 shares of our common stock exercisable at the fair market value of our common stock on the date of grant. When granted, these options vest quarterly over a one-year period, subject to the non-employee directors continued service on the board through the vesting dates.
All option grants are subject to the terms and conditions of our 2010 Stock Option and Incentive Plan or other stockholder approved equity compensation plan in effect at the time of grant.
When board membership of a non-employee director terminates, all vested options will remain exercisable for three months (or such longer period as the board may determine in its discretion on or after the date of grant of such option, to the extent consistent with Section 409A of the Internal Revenue Code). If a non-employee director leaves the board before the end of a quarter, any unvested options will be vested through the quarter anniversary of the date of grant of such option following the date of termination of service. All unvested options shall be cancelled as of the last date of service on the board.
Compensation Discussion and Analysis
Objectives and Philosophy of Executive Compensation
The primary objective of our executive compensation program, as established by the compensation committee of our board of directors, is to attract, retain and motivate individuals who possess knowledge, experience and skill that we believe are important to the advancement of our business of developing and commercializing neo-organs and neo-tissues. Our compensation programs also seek to create an environment that fosters and rewards executive officers who efficiently deliver consistent results to advance our business objectives, on time and on budget, while exhibiting the following behaviors: emulate our core values; strive for and achieve excellence in our pursuit of bringing innovative products to patients in need; and maintain the highest ethical standards.
The compensation committee of our board of directors oversees our compensation and benefit plans and policies, administers our equity incentive plans and reviews and approves annually all compensation decisions relating to all executive officers. Specifically, our compensation programs are designed to:
To achieve these objectives, we seek to provide a competitive compensation package that ties a substantial portion of the executives overall compensation to both our corporate objectives, including clinical, regulatory, commercial and operational performance, and the executives individual performance. Base salary increases and performance bonuses are primarily tied to these corporate and individual objectives, while equity awards are primarily tied to promoting long-term employee retention.
Corporate objectives for each fiscal year are established during the fourth quarter of the preceding year or the first quarter of the year and are the basis for determining corporate performance for the year. The key strategic corporate, financial and operational goals that are established by our compensation committee include:
Individual objectives also are established for each executive officer, other than the chief executive officer, by the chief executive officer at approximately the same time as the corporate objectives are established. The individual performance objectives of our chief executive officer, which are recommended by the compensation committee and approved by the board of directors (without Dr. Nichtbergers participation), are generally the same as the corporate objectives, with strong consideration given to how, within the compensation committees and boards opinion, Dr. Nichtbergers leadership impacted our ability to achieve our objectives. These objectives represent significant milestones to be met by each executive, along with, in certain circumstances, dates for achieving those milestones. Factors are identified and specified that will be used to measure success in reaching the goal or objective. Objectives are established based on the executives principal areas of responsibility. For example, our scientific executives will have measurable objectives established for areas such as key research or scientific milestones and our clinical executives will be measured by clinical trial progress. Our compensation committee also retains the discretion to consider an executives accomplishments other than enumerated objectives when evaluating an executives performance.
Toward the end of each fiscal year, the compensation committee assesses individual and corporate performance against stated goals for the year. When discussing performance evaluations and setting new compensation levels, the compensation committee considers recommendations from Dr. Nichtberger, our chief executive officer, regarding the compensation for executive officers other than himself. Dr. Nichtberger does not participate in determining the amount of his own compensation. With the exception of our chief executive officer, the compensation committee has the final authority regarding the overall compensation structure for the executive officers. In the case of Dr. Nichtberger, the compensation committee evaluates Dr. Nichtbergers performance, with significant input and recommendations from the chairman of the compensation committee and recommends compensation levels to the board of directors.
The compensation committee evaluates individual executive performance with the goal of setting target compensation at levels the committee believes are in approximately the mid-point of the range for companies of similar size and stage of development operating in the biotechnology industry, taking into account the executives prior experience, our relative performance and our own strategic goals. In order to ensure that we continue to remunerate our executives appropriately and consistently with market information, we will participate in, and review data from, certain compensation surveys, and may confer with outside compensation consultants.
Elements of Executive Compensation
Executive compensation consists of the following elements:
Base Salary. Base salaries for our executive officers are generally established based on the scope of their responsibilities and the amount and type of work experience prior to joining us, taking into account competitive market compensation paid by other companies for similar positions and recognizing cost of living considerations. As with total executive compensation, we believe that our executive officer base salaries should be targeted at approximately the mid-point of the range of salaries for executives in similar positions and with similar responsibilities in comparable biotechnology companies. In mid-2009, our compensation committee utilized benchmarking data from the Radford Global Life Sciences Pre IPO Report which was based upon 2008 compensation data to help determine the new 2009 base salaries of Linda Hearne and Mark Stejbach, each of whom received promotions at such time. Our compensation committee increased Ms. Hearnes salary from $171,000 to $210,000 on June 15, 2009 and Mr. Stejbachs salary from $250,000 to $275,000 on June 15, 2009. Radfords survey did not include the names of the companies included in the comparable biotechnology companies. Other than for help in the determination of new salaries for Ms. Hearne and Mr. Stejbach, the compensation committee did not utilize any other benchmarking data in establishing 2009 base salaries or other elements of executive compensation. Base salaries may be adjusted from time to time during the year in connection with promotions that may occur or in order to adjust a named executive officers salary in light of market conditions. In January 2010, we engaged Radford to conduct a competitive assessment of compensation for selected executive positions and key employees with respect to base salary, actual total cash compensation, target total cash compensation, and equity compensation. As part of this analysis, Radford, with input from us and our compensation committee, compiled what we consider to be our peer group for comparative purposes. Radford also compared our executive equity ownership to market data from the Radford Global Life Sciences Pre-IPO Report, the Dow Jones Venture Capital CompensationPro Database and the Radford Global Life Sciences Report, three confidential survey sources. Radfords assessment of executive compensation showed generally that total cash compensation of our named executive officers was between the 25th and 50th percentile of the market data, and that the equity holdings of our named executive officers was between the 50th and 75th percentile of the market data. The results of Radfords assessment were presented to the compensation committee in February 2010 and resulted in selected adjustments to certain named executive officers base salaries, target bonus levels and equity ownership. Additionally, the data from these analyses may be taken into consideration when making future compensation decisions but will not be used to mandate any specific actions.
Our peer group is composed of the U.S. based, publicly-traded companies in the pharmaceutical, biotechnology and life sciences industries listed below, which have little to no revenue, an average market capitalization of $100.7 million, less than 150 employees and product candidates in Phase I and/or Phase II clinical trials:
In general, base salaries are reviewed annually and adjusted to realign salaries with market levels and adjust for inflation, generally increasing between zero and seven percent each year. For the 2010 fiscal year, the compensation committee, based upon the above analysis, approved the base salary increases for our named executive officers as set forth in the table below. The compensation committee also delegated authority to our CEO to make, in his discretion, certain adjustments to base salaries after completion of this offering. These adjustments will be consistent with normal salary increases to adjust for inflation.
Annual Base Salary
Annual Performance Bonus. The compensation committee has the authority to award annual performance bonuses to our executive officers. Each of our executive officers is eligible to receive an annual
performance bonus based upon a targeted percentage of base salary. The targeted bonus level for a particular executive is determined by the executive officers title, with each level differentiated as follows:
Our executive officers annual performance bonus is generally determined based on our achievement of our company objectives and the executive officers achievement of individual objectives. If we and/or the executive officer exceeds the objectives established at the beginning of the year, or if our performance or the performance of the executive officer, whether through achievement of pre-established objectives or other significant accomplishments, is extraordinary, then the bonus payable to the executive officer could exceed the targeted percentages of base salary. Generally, if an executive officers performance does not meet objectives established for the year and the executive fails to achieve other significant accomplishments, then the bonus payable to the executive officer will not meet the targeted percentages. In addition, if the company objectives are not met, the amount of bonus paid to our executives can be substantially reduced or not paid at all.
The performance objectives are generally objectively determinable and measurable and their outcomes are substantially uncertain at the time established. When we set the 2009 goals, we considered them to be ambitious, but attainable and designed to cause bonus payments to reflect meaningful performance requirements. The compensation committee authorizes bonuses to the executive officers, other than the chief executive officer, in amounts that are commensurate with each executive officers target bonus and the result achieved by the end of the year. At the close of the performance period, our chief executive officer assesses the achievement of the objectively determinable targets of the executive officers (other than himself), reports his findings to the compensation committee and submits recommendations for bonus payouts for the approval of the compensation committee. The compensation committee reviews our chief executive officers analysis and in its sole discretion may accept or deny, in whole or in part, the recommendations of Dr. Nichtberger.
For our chief executive officer, our compensation committee assesses the achievement of the objectively determinable performance targets and reports its findings and bonus recommendations to our board of directors. In its sole discretion, the board of directors may accept or deny, in whole or in part, the bonus recommendations of our compensation committee. For 2009, our board of directors reviewed and accepted our compensation committees bonus recommendations with respect to Dr. Nichtberger.
The named executive officers each met their individual performance objectives, other than securing a partnership to provide non-dilutive financing. Following the March 2009 reduction in force our compensation committee approved in July 2009 the minimum funding of the 2009 company bonus pool at 70% because of the satisfaction of certain individual performance objectives and to promote employee retention. The final percentage funding of the pool was to be determined by the compensation committee at year-end based on the achievement of our objectives.
In 2009, the following company objectives were established:
In December 2009, the compensation committee approved the final funding of the 2009 bonus pool at 70%, with the company objective to secure a partnership to provide non-dilutive financing having not been met. Our compensation committee determined that the other company objectives were met.
In 2009, the business objectives, potential awards, results and actual payouts, which were paid in January 2010, were as follows:
The chief executive officer recommended to the compensation committee bonus payouts to executive officers commensurate with the 70% bonus funding and individual objectives achieved by the end of the year.
The compensation committee approved paying Ms. Hearne and Mr. Stejbach 70% of their respective target performance bonus, and paying Dr. Bertram 80% of his target performance in recognition of the achievement of the Neo-Urinary Conduit IND acceptance.
After reviewing Dr. Nichtbergers objectives, the compensation committee recommended, and the board of directors approved in its discretion, paying Dr. Nichtberger 70% of his target performance bonus.
In February 2010, the following company objectives were established:
In addition to the 2010 company objectives identified above, for which each of our named executive officers is directly responsible, the individual performance objectives for each of our named executive officers are as follows:
Long-Term Incentive Program. We believe that long-term performance will be enhanced through stock and equity awards that reward our executives for maximizing stockholder value over time and that align the interests of our employees and management with those of stockholders. The compensation committee believes that the use of equity awards offers the best approach to achieving our compensation goals because equity ownership ties a significant portion of an executives compensation to the performance of our stock. We have historically elected to use stock options and, to a more limited degree, restricted stock, as the primary long-term equity incentive vehicle.
We expect to continue to use stock options as a long-term incentive vehicle because we believe that:
Stock Options. Our Amended and Restated 2004 Stock Incentive Plan, or the 2004 Stock Incentive Plan, authorizes us to grant options to purchase shares of common stock to our employees, directors and consultants. Our board of directors has delegated oversight of the administration of our stock option plans to our compensation committee. The compensation committee has adopted policies and procedures regarding the granting of options and, subject to those policies and procedures, also has delegated to the president and chief executive officer the authority and power to grant stock options to non-executive officer employees and consultants.
Stock option grants are made at the commencement of employment and typically annually in connection with the achievement of corporate and personal objectives. Additionally, stock option grants may be made in connection with special recognition of a particularly important corporate accomplishment in which the executive played an important role and following a significant change in job responsibilities or to meet other special retention objectives. Our compensation committee considers and approves stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executives existing long-term incentives, and retention considerations.
The exercise price of options is the fair market value of our common stock as determined by our compensation committee on the date of grant. Our stock options typically vest over a four-year period with 25% vesting 12 months after the vesting commencement date and the remainder vesting ratably each quarter thereafter in equal installments over a three-year period subject to continued employment or association with us and generally expire ten years after the date of grant. Incentive stock options also include certain other terms necessary to assure compliance with the applicable provision of the Internal Revenue Code.
In August 2009, all active employee common stock options were repriced to $0.44 per share, the fair market value as determined by our compensation committee on such date. Our compensation committee decided to reprice such stock options due in part to the significant downturn in macroeconomic conditions in the United States that it believed negatively impacted our ability to raise non-dilutive financing and ultimately impacted the fair market value of our common stock. Such decrease in the value of our common stock made all of our previous stock option grants significantly out of the money, so our compensation committee decided it was in our best interest to retain and incentivize our employees by repricing all active employee stock options to the fair market value on the date of the repricing. All of the other terms of such options remained the same. Our compensation committee also issued certain options at such time in connection with the promotion of certain employees, including Linda Hearne, who was promoted to our Principal Financial Officer.
In February 2010, our compensation committee, based in part upon its review of the compensation analysis conducted at the time, awarded Dr. Bertram options to purchase 65,000 shares of our common stock to bring his overall equity holdings more in line with comparable benchmark data. These options, which are granted subject to completion of this offering, will have an exercise price equal to the initial public offering price.
Restricted Stock. Our 2004 Stock Incentive Plan authorizes us to grant restricted stock. Prior to 2004, we granted restricted stock pursuant to certain restricted stock purchase agreements between the named
executive officer receiving the restricted stock and us. To date, we have granted 127,629 shares of restricted stock to Dr. Nichtberger and 21,056 shares of restricted stock to Dr. Bertram. A majority of these shares of restricted stock were issued in connection with each executive officers commencement of employment. While we have no current plans to grant additional restricted stock under our 2004 Stock Incentive Plan, we may choose to do so in order to implement the long-term incentive goals of the compensation committee.
Severance and Change in Control Benefits. As more fully described in the sections entitled Potential Payments Upon Termination or Change in Control, below, we have entered into offer letters with our named executive officers that provide for certain payments and benefits upon a qualifying termination of employment or a change in control, including salary and benefits continuation, payment of pro-rata bonuses and acceleration of certain unvested equity awards.
Other Compensation. We maintain broad-based benefits and perquisites that are available to all eligible employees, including health insurance, life and disability insurance, dental insurance, vision insurance, flexible spending accounts and a 401(k) plan. Additionally, under certain circumstances, we will use cash sign-on bonuses as an incentive for individuals to join our team. These bonuses are awarded on a case-by-case basis and are typically offered to off-set compensation that was forfeited upon termination of prior employment, to assist with relocation expenses or to off-set a variance in total compensation from the individuals employment prior to joining us. Consistent with our compensation philosophy, we intend to continue to maintain these benefits for our executive officers; however, our compensation committee in its discretion may revise, amend or add to the officers benefits if it deems it advisable.
Relationship of Elements of Compensation. Our compensation structure is primarily weighted toward three of the elements discussed: base salary, annual performance bonus and stock options. We utilize stock options as a substantial component of compensation because we currently have no revenue or earnings and expect this to be the case for the foreseeable future. Our mix of cash and non-cash compensation balances our need to limit cash expenditures with the expectations of those we hope to recruit and retain as employees. In the future, we may adjust the mix of cash and non-cash compensation if required by competitive market conditions for attracting and retaining skilled personnel.
We manage the expected impact of salary increases and performance bonuses by requiring that the size of such salary increases and bonuses be tied to the attainment of corporate and individual objectives. For example, the size of each employees bonus is determined not only by individual performance, but also by whether we have met corporate objectives.
We view the award of stock options as a primary long-term retention benefit. We make the award of stock options a significant component of total compensation and also tie the earning of these awards to long-term vesting schedules, generally four years. If an employee leaves our employ before the completion of the vesting period, then that employee would not receive any benefit from the non-vested portion of his award. We believe this feature makes it more attractive to remain as our employee and these arrangements do not require substantial cash payments by us.
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our chief executive officer and our four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We generally intend to structure the performance-based portion of our executive compensation, when feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, our board of directors may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.
Summary Compensation Table
The following table summarizes the compensation that we paid to (i) our Principal Executive Officer, (ii) current Principal Financial Officer, (iii) our former Principal Financial Officer who served during our last fiscal year, (iv) our two other most highly compensated executive officers and (v) two additional individuals who, had they been serving as executive officers at the end of the year ended December 31, 2009, would have been required to be disclosed. We refer to these officers as our named executive officers in this prospectus.
Grants of Plan-Based Awards Table
All options granted to our named executive officers are incentive stock options, to the extent permissible under the Internal Revenue Code. The exercise price per share of each option granted to our named executive officers prior to this offering, was determined in good faith by our compensation committee, to be equal to the fair market value of our common stock on the date of the grant as determined by our
compensation committee. All options were granted under our 2004 Stock Incentive Plan, as described below in the section entitled Employee Benefit and Stock Plans 2004 Stock Incentive Plan.
The following table shows information regarding grants of compensation in the form of plan-based awards during the year ended December 31, 2009 to each of our named executive officers.
Outstanding Equity Awards at Fiscal Year-End
The following table shows grants of stock options and grants of unvested stock awards outstanding on December 31, 2009, the last day of our fiscal year to each of our named executive officers.