Attached files
file | filename |
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EX-10.2 - EX-10.2 - CYPRESS BIOSCIENCE INC | a57779exv10w2.htm |
EX-31.2 - EX-31.2 - CYPRESS BIOSCIENCE INC | a57779exv31w2.htm |
EX-10.3 - EX-10.3 - CYPRESS BIOSCIENCE INC | a57779exv10w3.htm |
EX-10.1 - EX-10.1 - CYPRESS BIOSCIENCE INC | a57779exv10w1.htm |
EX-31.1 - EX-31.1 - CYPRESS BIOSCIENCE INC | a57779exv31w1.htm |
EX-32.1 - EX-32.1 - CYPRESS BIOSCIENCE INC | a57779exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
þ | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010,
or
o | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-34888
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
22-2389839 (I.R.S. Employer Identification No.) |
4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)
(Address of principal executive offices) (zip code)
(858) 452-2323
(Registrants telephone number including area code)
(Registrants telephone number including area code)
Indicate by check (ü) whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check (ü) whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check (ü) whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
At November 5, 2010, 38,588,190 shares of Common Stock, par value $.001, of the registrant
were issued and outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
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3 | ||||||||
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4 | ||||||||
5 | ||||||||
6 | ||||||||
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29 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
50 | ||||||||
50 | ||||||||
50 | ||||||||
50 | ||||||||
51 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
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Table of Contents
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Note) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 13,926,175 | $ | 38,617,954 | ||||
Short-term investments |
82,372,136 | 103,055,417 | ||||||
Receivable from Forest Laboratories |
4,776,057 | 5,611,476 | ||||||
Prepaid expenses and other current assets |
2,112,760 | 4,792,134 | ||||||
Assets held for sale |
475,822 | 471,602 | ||||||
Total current assets |
103,662,950 | 152,548,583 | ||||||
Property and equipment, net |
270,779 | 801,424 | ||||||
Goodwill |
21,928,598 | 21,928,598 | ||||||
Restricted cash |
487,111 | 487,111 | ||||||
Other assets |
43,994 | 298,994 | ||||||
Total assets |
$ | 126,393,432 | $ | 176,064,710 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 711,143 | $ | 1,172,916 | ||||
Accrued compensation |
467,713 | 4,640,265 | ||||||
Accrued restructuring charges |
237,080 | | ||||||
Accrued liabilities |
838,436 | 221,487 | ||||||
Payable to Forest Laboratories |
| 336,313 | ||||||
Current portion of deferred revenue |
5,202,056 | 5,202,056 | ||||||
Total current liabilities |
7,456,428 | 11,573,037 | ||||||
Deferred rent |
19,288 | 20,423 | ||||||
Deferred revenue, net of current portion |
19,498,594 | 23,400,136 | ||||||
Other liabilities |
487,111 | 487,111 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $.001 par value; 15,000,000
shares authorized;
no shares issued and outstanding |
| | ||||||
Common stock, $.001 par value; 90,000,000
shares of common stock authorized; 38,588,190
and 38,375,206 shares issued and outstanding
at September 30, 2010 (unaudited) and December
31, 2009, respectively |
38,588 | 38,375 | ||||||
Additional paid-in capital |
342,433,145 | 336,825,601 | ||||||
Accumulated other comprehensive income |
92,523 | 171,017 | ||||||
Accumulated deficit |
(243,632,245 | ) | (196,450,990 | ) | ||||
Total stockholders equity |
98,932,011 | 140,584,003 | ||||||
Total liabilities and stockholders equity |
$ | 126,393,432 | $ | 176,064,710 | ||||
See accompanying notes to consolidated financial statements.
Note: The balance sheet at December 31, 2009 has been derived from the audited financial
statements at that date but does not include all of the information and disclosures required by
U.S. generally accepted accounting principles.
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Table of Contents
CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Revenues under collaborative agreement |
$ | 838,063 | $ | 839,905 | $ | 2,532,014 | $ | 9,163,152 | ||||||||
Commercial revenues |
7,211,085 | 4,697,838 | 22,384,685 | 9,979,522 | ||||||||||||
Total revenues |
8,049,148 | 5,537,743 | 24,916,699 | 19,142,674 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
37,406,083 | 1,079,968 | 39,073,823 | 7,818,870 | ||||||||||||
Selling, general and administrative |
7,114,724 | 9,461,859 | 27,791,952 | 31,875,987 | ||||||||||||
Restructuring charges |
3,706,517 | | 3,706,517 | | ||||||||||||
Total operating expenses |
48,227,324 | 10,541,827 | 70,572,292 | 39,694,857 | ||||||||||||
Loss from operations |
(40,178,176 | ) | (5,004,084 | ) | (45,655,593 | ) | (20,552,183 | ) | ||||||||
Interest income |
86,110 | 254,335 | 408,756 | 1,379,480 | ||||||||||||
Net loss from continuing operations |
(40,092,066 | ) | (4,749,749 | ) | (45,246,837 | ) | (19,172,703 | ) | ||||||||
Net loss from discontinued operations |
(729,650 | ) | (719,618 | ) | (1,934,418 | ) | (4,066,071 | ) | ||||||||
Net loss |
$ | (40,821,716 | ) | $ | (5,469,367 | ) | $ | (47,181,255 | ) | $ | (23,238,774 | ) | ||||
Net loss per share basic and diluted |
||||||||||||||||
Continuing operations |
$ | (1.04 | ) | $ | (0.12 | ) | $ | (1.18 | ) | $ | (0.50 | ) | ||||
Discontinued operations |
$ | (0.02 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.11 | ) | ||||
Shares used in computing net loss per
share basic and diluted |
38,588,190 | 38,257,303 | 38,447,761 | 38,100,661 | ||||||||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net loss |
$ | (47,181,255 | ) | $ | (23,238,774 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities: |
||||||||
Depreciation and amortization |
364,193 | 357,021 | ||||||
Asset impairment charges in connection with restructuring |
571,107 | | ||||||
Amortization of premium/discount on short-term investments |
826,297 | 551,563 | ||||||
Share-based compensation for stock and options issued to
employees |
5,607,757 | 6,296,061 | ||||||
Non-cash portion of asset acquisition |
| 487,111 | ||||||
Changes in operating assets and liabilities |
(4,514,493 | ) | 15,864,903 | |||||
Net cash (used in) provided by operating activities |
(44,326,394 | ) | 317,885 | |||||
Investing Activities |
||||||||
Purchases of short-term investments |
(81,360,212 | ) | (78,330,811 | ) | ||||
Proceeds from sale of short-term investments |
101,138,702 | 74,337,938 | ||||||
Deposit of restricted cash |
(30,000,000 | ) | (487,111 | ) | ||||
Release of restricted cash |
30,000,000 | | ||||||
Purchases of property and equipment |
(143,875 | ) | (641,639 | ) | ||||
Net cash provided by (used in) investing activities |
19,634,615 | (5,121,623 | ) | |||||
Financing Activities |
||||||||
Proceeds from exercise of stock options |
| 851,139 | ||||||
Net cash provided by financing activities |
| 851,139 | ||||||
Decrease in cash and cash equivalents |
(24,691,779 | ) | (3,952,599 | ) | ||||
Cash and cash equivalents at beginning of period |
38,617,954 | 52,490,414 | ||||||
Cash and cash equivalents at end of period |
$ | 13,926,175 | $ | 48,537,815 | ||||
See accompanying notes to consolidated financial statements.
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Table of Contents
CYPRESS BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
We are a pharmaceutical company dedicated to the development of innovative drugs targeting
large unmet medical needs for patients suffering from a variety of disorders of the central nervous
system (CNS). We receive a 15% royalty on sales of Savella, a product we co-developed, but no
longer co-promote, with Forest Laboratories. Development-stage assets include CYP-1020 for
cognitive impairment in schizophrenia, Staccato® nicotine for smoking cessation and intranasal
carbetocin for autism.
2. Basis of Presentation
The accompanying financial statements have been prepared by our management without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S.
generally accepted accounting principles for interim financial statements. Certain information and
disclosures normally included in complete audited year end financial statements have been condensed
or omitted. In the opinion of our management, all adjustments necessary for a fair presentation of
the accompanying unaudited condensed consolidated financial statements are reflected herein. All
such adjustments are normal and recurring in nature. Interim results are not necessarily
indicative of results for the full year. For more information, these financial statements should
be read in conjunction with the audited financial statements and the related disclosures included
in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March
31, 2010.
Further, in connection with the preparation of the condensed consolidated financial statements
and in accordance with the applicable accounting standards for the disclosure of events that occur
after the balance sheet date but before the financial statements are issued, we evaluated all
events or transactions that occurred after the balance sheet date of September 30, 2010 and have
determined that no material subsequent events requiring recognition or disclosure in our financial
statements occurred during this time period other than as disclosed in Note 16.
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and the accompanying notes. Actual results could differ from those
estimates.
The condensed consolidated financial statements include the accounts of Cypress Bioscience,
Inc. and its wholly-owned subsidiary, Proprius Pharmaceuticals, Inc., collectively referred to as
Cypress Bioscience, Inc. All significant intercompany accounts and transactions have been
eliminated.
Segment Reporting
With the recent discontinuation and sale of our personalized medicine services business, we
currently operate in a single industry segment the development of innovative drugs for the
treatment of a variety of disorders of the central nervous system. Additionally, we have no
foreign operations.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to
the current period presentation. These reclassifications had no effect on reported losses.
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3. Recent Accounting Pronouncements
In March 2010, the Financial Accounting Standards Board (FASB) ratified the authoritative
guidance regarding the milestone method of revenue recognition. It was concluded that the
milestone method is a valid application of the proportional performance model when applied to
research or development arrangements. The guidance states than an entity can make an accounting
policy election to recognize a payment that is contingent upon the achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The guidance is
effective for fiscal years and interim periods beginning on or after June 15, 2010. The adoption
of this guidance did not have a material impact on our consolidated financial position and results
of operations.
In January 2010, the FASB issued updated authoritative guidance related to fair value
measurements which requires certain new disclosures including the following: 1) amounts transferred
in and out of Level 1 and Level 2 fair value measurements and the reasons for those transfers,
which is effective for interim and annual periods beginning after December 15, 2009; and 2)
activities in Level 3 fair value measurements including purchases, sales, issuances and
settlements, which is effective for annual periods beginning after December 15, 2010. During the
nine months ended September 30, 2010, we adopted accounting guidance requiring additional
disclosure of the fair value of financial instruments for interim and annual reporting periods. The
adoption did not have a material impact on the condensed consolidated financial statements. See
Note 13, Fair Value Disclosures. We are currently evaluating the effect that the remaining
guidance, not yet adopted, will have on our consolidated financial position and results of
operations.
In October 2009, the FASB amended its authoritative guidance regarding multiple-deliverable
revenue arrangements. This guidance addresses how to separate deliverables and how to measure and
allocate consideration to one or more units of accounting. Specifically, the guidance requires that
consideration be allocated among multiple deliverables based on relative selling prices. The
guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence,
(2) third-party evidence and (3) estimated selling price. We will be required to adopt this amended
guidance effective for the fiscal year beginning January 1, 2011, although earlier adoption is
permitted. We are currently evaluating the effect that this guidance will have on our consolidated
financial position and results of operations.
4. Short-Term Investments
Our short-term investments consist of securities of the U.S. government or its agencies and
corporate debt securities. We have classified our short-term investments as available-for-sale and
carry them at fair value with unrealized gains and losses, if any, reported as a separate component
of stockholders equity and included in comprehensive income or loss. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary, if any, on available-for-sale securities are
included in interest income. The cost of securities sold is based on the specific-identification
method. Interest on securities classified as available-for-sale is included in interest income.
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At September 30, 2010 and December 31, 2009, short-term investments consisted of the
following:
September 30, 2010 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 73,770,988 | $ | 57,843 | $ | (4,493 | ) | $ | 73,824,338 | |||||||
Corporate debt securities |
8,508,625 | 39,173 | | 8,547,798 | ||||||||||||
$ | 82,279,613 | $ | 97,016 | $ | (4,493 | ) | $ | 82,372,136 | ||||||||
December 31, 2009 | ||||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
U.S. government and agency debt |
$ | 93,037,626 | $ | 159,185 | $ | (28,944 | ) | $ | 93,167,867 | |||||||
Corporate debt securities |
9,846,774 | 45,410 | (4,634 | ) | 9,887,550 | |||||||||||
$ | 102,884,400 | $ | 204,595 | $ | (33,578 | ) | $ | 103,055,417 | ||||||||
Contractual maturities for short-term investments at September 30, 2010 were as follows:
Fair Value | ||||
Due within 1 year |
$ | 78,763,351 | ||
After 1 year but within 2 years |
3,608,785 | |||
Total |
$ | 82,372,136 | ||
5. Revenue Recognition
Revenue is recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price is fixed or
determinable; and collectability is reasonably assured. Some of our agreements contain multiple
elements and in accordance with these agreements, we may be eligible for upfront license fees,
sponsored development reimbursements, funding for certain of our employees, co-promotion
reimbursement, development and commercial milestones and royalties. Consideration received for
milestones under research and development arrangements will be recognized at the date of
achievement if the milestone is non-refundable, substantive in nature, and the achievement was not
reasonably assured at the inception of the agreement. Milestone payments are not considered
substantive if any portion of the associated milestone payment is determined to not relate solely
to past performance or if a portion of the consideration earned from achieving the milestone may be
refunded.
Revenues under our collaborative agreement include upfront license fees, sponsored development
reimbursements, funding for certain of our employees, and development milestones. Amounts received
for upfront license fees under multiple-element arrangements are deferred and recognized over the
period such arrangements require on-going services or performance. Amounts received for sponsored
development activities, including funding received for certain of our employees, are recognized as
research costs are incurred over the period specified in the related agreement or as the services
are performed. Amounts received for development milestones are recognized upon achievement if they
meet the research and development milestone recognition policy. Any amounts received prior to
satisfying revenue recognition criteria are recorded as deferred revenue.
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Commercial revenues include royalties on product sales of Savella, revenue from the New Drug
Application (NDA) approval milestone, sales-based milestones, and reimbursement for co-promotion
of Savella. Royalty revenue is recognized based on royalties reported by Forest Laboratories, Inc.
(Forest Laboratories) during the quarter with such payment due within 45 days after quarter end.
The royalty rate of 15.0% as stated in the agreement with Forest Laboratories is subject to
prospective adjustment based on Forest Laboratories total payment obligations to us and Pierre
Fabre Medicament (Pierre Fabre); however, the royalty rate cannot be reduced below the stipulated
floor. Revenue from the NDA approval milestone achieved in January 2009, net of sublicense fees, is
being recognized ratably over the period of 13 years from the date the milestone was achieved,
which corresponds with the obligation period (which is equivalent to the patent life). As we have
an obligation to reimburse Forest Laboratories for a portion of the cost for samples of Savella,
this milestone was not considered substantive and therefore, we determined that the consideration
received from Forest Laboratories was inseparable from the on-going obligation. We regularly
review the period of time that we expect to be satisfying these obligations, and if there are
changes in facts and circumstances, we reassess the period of time that revenue is being recognized
and adjust the period accordingly. Revenue related to sales-based milestones, net of sublicense
fees, is recognized upon the achievement of the specified milestones, where such milestones are
substantive, were not readily assured at the inception of the agreement and are non-refundable.
Co-promotion reimbursement revenue is recognized in the period in which the detailing calls
(measured on a per physician call basis) are performed using an estimated reimbursement rate based
on historical cost information provided to us by Forest Laboratories. We recognize this revenue as
services have been rendered, the reimbursement rate is determinable and collectability is
reasonably assured. The corresponding costs associated with the co-promotion reimbursement are
included as a component of selling, general and administrative expense on the Condensed
Consolidated Statement of Operations. We agreed with Forest Laboratories to discontinue our rights
to co-promote Savella on August 4, 2010.
In connection with our personalized medicine services, such services are performed based on a
written test requisition form. We generally bill third-party payers for these services upon
generation and delivery of a report to the ordering physician. As such, we take assignment of
benefits and the risk of collection with the third-party payer. We currently do not have any
contracts with private third-party payers. As relatively new tests, the personalized medicine
services offered by us may not be covered under third-party payer reimbursement policies.
Consequently, we pursue case-by-case reimbursement where policies are not in place or payment
history has not been established. We usually bill the patient directly for amounts owed after
multiple requests for payment have been denied or only partially paid by the insurance carrier as
allowed by law. As a result, at the time of delivery of the report to the ordering physician, and
in the absence of a reimbursement contract or sufficient payment history, collectibility cannot
reasonably be assured and revenues are therefore only recognized at the time cash is collected. We
announced on August 4, 2010 that we were discontinuing our active marketing of our personalized
medicine services, and on October 8, 2010 announced that we had entered into an asset purchase
agreement whereby Exagen Diagnostics, Inc. acquired our diagnostic business, which includes our
personalized medicine services (as disclosed in Note 16).
6. Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel expenses
for our research and development personnel, fees paid to external service providers to conduct
clinical trials, patient enrollment costs, fees and milestone payments under our license,
collaboration, development and asset purchase agreements (including one-time upfront payments
recognized as research and development expenses to acquire or in-license compounds for our drug
development activities), supplies, materials and equipment. All such costs are charged to research
and development expenses as incurred. Clinical trial costs are a significant component of our
research and development expenses and include costs associated with third-party contractors. We
accrue clinical trial expenses based on work performed, which relies on estimates of total costs
incurred based on patient enrollment, completion of
patient studies and other events. Actual clinical trial costs may differ from estimated
clinical trial costs and are adjusted during the period in which they become known. There were no
material adjustments for the three and nine months ended September 30, 2010 and 2009 for a change
in clinical trial cost estimates.
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7. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of common stock
outstanding and is presented for basic and diluted net loss per share. Basic net loss per share is
computed by dividing net loss by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period increased to include, if dilutive, the number
of additional common shares that would have been outstanding if the potential common shares had
been issued. The dilutive effect of outstanding stock options, restricted stock units and warrants
is reflected in diluted net loss per share by application of the treasury stock method. We have
excluded all outstanding stock options, restricted stock units and warrants from the calculation of
diluted loss per share for the three and nine months ended September 30, 2010 and 2009 because such
securities are antidilutive for these periods. The total number of potential common shares
excluded from the calculation of diluted loss per common share was 20,063 and 683,187 for the three
months ended September 30, 2010 and 2009, respectively, and 89,739 and 721,140 for the nine months
ended September 30, 2010 and 2009, respectively.
On January 4, 2010, we granted 100,000 restricted stock units to our chief executive officer.
The restricted stock units vest in full after three years subject to our chief executive officers
continuous service through such date. Such securities were not included in the computation of
basic earnings per share for the three and nine months ended September 30, 2010 as the effect would
be antidilutive.
8. Comprehensive Loss
The components of comprehensive loss are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (40,821,716 | ) | $ | (5,469,367 | ) | $ | (47,181,255 | ) | $ | (23,238,774 | ) | ||||
Unrealized gain (loss) on short-term
Investments |
6,975 | (20,956 | ) | (78,494 | ) | (169,823 | ) | |||||||||
Comprehensive loss |
$ | (40,814,741 | ) | $ | (5,490,323 | ) | $ | (47,259,749 | ) | $ | (23,408,597 | ) | ||||
9. Stock-Based Compensation
Total stock-based compensation expense, which relates to stock options granted to employees
and non-employee directors and restricted stock awards recognized for the three and nine months
ended September 30, 2010 and 2009, was comprised as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Discontinued operations |
$ | 38,721 | $ | 55,640 | $ | 134,631 | $ | 129,741 | ||||||||
Research and development expenses |
246,821 | 344,108 | 445,638 | 1,041,496 | ||||||||||||
Selling, general and
administrative expenses |
868,160 | 1,370,367 | 4,369,813 | 4,444,823 | ||||||||||||
Restructuring charges |
169,942 | | 169,942 | | ||||||||||||
$ | 1,323,644 | $ | 1,770,115 | $ | 5,120,024 | $ | 5,616,060 | |||||||||
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During March 2010, certain employees who were granted performance-based stock options
resigned from their employment with us and accordingly, the performance conditions for such stock
options will no longer be achieved. In accordance with the accounting treatment for stock-based
compensation, the stock-based compensation expense previously recognized was reversed in the period
of change by recording a cumulative adjustment. Accordingly, during the three months ended March
31, 2010, we recognized an adjustment related to such performance-based options in the amount of
$0.6 million, consisting of $0.3 million related to research and development expenses and $0.3
million related to selling, general and administrative expenses.
As of September 30, 2010, we had $8.0 million of unamortized compensation cost related to
unvested stock option awards, which is expected to be recognized over a remaining weighted average
vesting period of 2.1 years.
As of September 30, 2010, we had $0.5 million of unamortized compensation cost related to
unvested restricted stock awards, which is expected to be recognized over a remaining weighted
average vesting period of 2.3 years.
The matching contribution in common stock to our 401(k) Plan is included as a component of our
share-based compensation to employees. Such matching contribution is made on the last day of June
and the last day of December of each plan year. For the nine months ended September 30, 2010 and
2009, the charge for the matching contribution was $487,733 and $680,001, respectively.
10. Restructuring
During August 2010, we implemented a restructuring plan to reduce operating costs and focus
our resources on the development of recently licensed and acquired compounds, which target large
unmet medical needs for patients suffering from disorders of the CNS. In connection with this
restructuring, we discontinued our rights under our agreement with Forest Laboratories to
co-promote Savella and decided to discontinue or sell our personalized medicine services business.
The restructuring plan resulted in a reduction in force of 123 employees, or approximately 86% of
our workforce. Affected employees were provided with up to 60 days of leave of absence pay in
accordance with the Worker Adjustment and Retraining Notification Act, 60 days of employee benefits
and continued vesting of stock options. Certain employees also received severance payments and
continuation of medical insurance under COBRA.
As of a result of this restructuring, we recorded a restructuring charge of $4.2 million
during the three months ended September 30, 2010, consisting of $3.7 million included in continuing
operations and $0.5 million included in discontinued operations. We do not expect to incur
significant additional restructuring-related charges, and we expect to complete the cash payments
in connection with the restructuring in the fourth quarter of 2010. The current balance of the
liability is included in Accrued restructuring charges on the Condensed Consolidated Balance
Sheets, and the components are summarized in the following table:
Property | ||||||||||||||||||||
and | ||||||||||||||||||||
Paid Leave, | Equipment | |||||||||||||||||||
Severance | Non-Cash | and | Contract | |||||||||||||||||
and Other | Stock-Based | Intangible | Termination | |||||||||||||||||
Benefits | Compensation | Assets | Costs | Total | ||||||||||||||||
Restructuring charges |
$ | 2,703,426 | $ | 169,942 | $ | 323,607 | $ | 509,542 | $ | 3,706,517 | ||||||||||
Charges in discontinued operations |
184,650 | 25,814 | 247,500 | | 457,964 | |||||||||||||||
Cash payments |
(2,603,996 | ) | | | (556,542 | ) | (3,160,538 | ) | ||||||||||||
Non-cash charges |
| (195,756 | ) | (571,107 | ) | | (766,863 | ) | ||||||||||||
Ending liability balance at September 30, 2010 |
$ | 284,080 | $ | | $ | | $ | (47,000 | ) | $ | 237,080 | |||||||||
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11. Discontinued Operations
We announced on August 4, 2010 that we intended to either discontinue or sell our personalized
medicine services business by the end of the third quarter of 2010. This business primarily
develops and sells specialized diagnostic tests to provide physicians with actionable information
to help manage their patients care, including predicting the likelihood of developing disease or
optimizing therapy. During the third quarter of 2010, the personalized medicine services business
had met the criteria to be accounted for as discontinued operations. The operations and cash flows
from the personalized medicine services business will be eliminated from the ongoing operations of
the entity as a result of the disposal transaction, and we will not have any significant continuing
involvement in the operations of the personalized medicine services business after the disposal
transaction.
In connection with our annual assessment of goodwill impairment in 2009, the goodwill related
to our personalized medicine services business was determined to be fully impaired, resulting in a
$1.1 million impairment charge recorded during the fourth quarter of 2009. As of September 30,
2010, we had no goodwill remaining related to our personalized medicine services business.
The sale of the personalized medicine services business was consummated during October 2010 as
disclosed in Note 16. Future cash flows in connection with the sale of the personalized medicine
services business consist of up to $8.0 million in upfront and potential milestone payments, as
well as potential royalties based on product sales. The total upfront payment consists of an
immediate payment of $2.0 million, which was received in October 2010, with a second payment of
$2.0 million due in October 2012.
We have reflected the results of this business as discontinued operations in the Condensed
Consolidated Statements of Operations for all periods presented. The assets of this business are
reflected as assets held for sale.
The following summarized financial information related to our personalized medicine services
business is segregated from continuing operations and reported as discontinued operations.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues from personalized medicine services |
$ | 148,561 | $ | 74,586 | $ | 521,592 | $ | 133,485 | ||||||||
Expenses: |
||||||||||||||||
Cost of personalized medicine services |
281,158 | 562,831 | 1,370,284 | 1,421,026 | ||||||||||||
Research and development |
139,089 | 231,373 | 627,762 | 2,778,530 | ||||||||||||
Restructuring |
457,964 | | 457,964 | | ||||||||||||
Total expenses |
878,211 | 794,204 | 2,456,010 | 4,199,556 | ||||||||||||
Net loss from discontinued operations |
(729,650 | ) | (719,618 | ) | (1,934,418 | ) | (4,066,071 | ) | ||||||||
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12. Licensing Transactions and Asset Purchase Agreement
Alexza Pharmaceuticals License and Development Agreement
In August 2010, we entered into a license and development agreement (the License and
Development Agreement) with Alexza Pharmaceuticals, Inc. (Alexza) pursuant to which we obtained
an exclusive worldwide license from Alexza under certain patents and know-how to Alexzas Staccato
nicotine technology, a novel electronic multi-dose delivery technology designed to help people stop
smoking.
As consideration for the license, we paid Alexza an upfront payment of $5.0 million. In
addition, following the completion of certain clinical milestones relating to the Staccato nicotine
technology, we will be obligated to pay to Alexza an additional technology transfer payment of
$1.0 million (the Technology Transfer Payment) in consideration for the transfer to us by Alexza
of certain additional know-how and materials relating to the technology then in Alexzas
possession. We are obligated to reimburse Alexzas costs and expenses to conduct activities under a
development plan agreed upon by the parties and to use commercially reasonable efforts to research,
develop and commercialize the product. We may terminate development at any time, subject to our
obligation to reimburse certain costs and expenses of Alexza incurred under the development plan.
Under the terms of the License and Development Agreement, in the event that we sell or license
the Staccato nicotine technology, Alexza will be entitled to receive 10% of the net proceeds of
such sale or license (the Carried Interest) until such time as we invest $23.0 million in
development-related costs in the technology (including the payment of the Technology Transfer
Payment). If we elect to license or sell the Staccato nicotine technology prior to the time we have
paid the Technology Transfer Payment to Alexza, Alexzas carried interest will be adjusted upward
to 50% of the net proceeds. Once we invest in excess of $23.0 million for development of the
Staccato nicotine technology (including the payment of the Technology Transfer Payment), Alexza
will be offered the opportunity to fund an amount equal to 10% of such expenses. If Alexza chooses
not to fund its share of the development expenses, the 10% Carried Interest will be reduced.
We will have the right to buy out the Carried Interest (the Buy Out) upon the occurrence of
certain developmental milestones relating to the technology (the Company Buy-Out Option) at the
then fair market value. In addition, subject to certain conditions, Alexza will have the right to
cause us to effect the Buy Out in connection with certain transactions that result in a change in
control of the Company (the Alexza Buy-Out Option). If we exercise the Company Buy-Out Option or
if Alexza exercises the Alexza Buy-Out Option, we and Alexza will negotiate in good faith to
determine the price to be paid by
us to Alexza to effect the Buy Out. In the event that the parties are unable to agree upon the
price to be paid by us to Alexza to effect the Buy Out, a third party valuation expert shall be
engaged to determine the then fair market value of the Carried Interest and we and Alexza shall be
required to proceed with the Buy Out with us paying to Alexza the price determined by such
valuation expert.
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Upon the occurrence of certain events described in the License and Development Agreement,
including our failure to pay the Technology Transfer Payment, the discontinuation by us of our
development of products resulting from the Staccato nicotine technology other than as a result of a
breach by Alexza of certain obligations described in the License and Development Agreement, or
specified uncured breaches of the License and Development Agreement by us, we will be required to
use commercially reasonable efforts to sell or license the Staccato nicotine technology and to pay
to Alexza its applicable Carried Interest in the proceeds. If we are unable to sell or license the
technology within the period described in the License and Development Agreement then the License
and Development Agreement shall terminate in its entirety. In the event that such termination
occurs after the first anniversary of the date of the License and Development Agreement, then, in
the event that Alexza sells or licenses the Staccato nicotine technology following such termination
it will be required to reimburse us for a portion of the costs incurred prior to the date of
termination.
Pursuant to the accounting guidance for business combinations, we determined that the license
acquired from Alexza does not constitute a business and accordingly, the transaction has been
accounted for as an asset acquisition. The $5.0 million upfront payment was charged to research
and development expenses during the third quarter of 2010 as the ultimate commercialization of the
related product candidate is uncertain and the technology has no alternative uses.
Marina Biotech Asset Purchase Agreement
In August 2010, we entered into an asset purchase agreement with Marina Biotech, Inc.
(Marina), pursuant to which we purchased certain assets related to Marinas carbetocin
development program for the treatment of the core symptoms of autism.
We made an initial payment of $0.75 million to Marina as a portion of the purchase price.
Following successful completion of specified patent issuance and late-stage development and
commercial events relating to the carbetocin program, we will be obligated to pay to Marina
additional milestones of up to $27.0 million in the aggregate. In the event that we commercialize a
product containing carbetocin, Marina will be entitled to receive a percentage of net sales so long
as a valid claim of an issued patent within the purchased assets exists, which obligation will
terminate upon the entry of a generic product.
We are obligated to use commercially reasonable efforts to develop and market at least one
product relating to the carbetocin program in the United States, provided that we may determine in
our sole discretion to cease development or commercialization at any time. If we cease development
or commercialization, Marina can seek to reacquire the purchased assets from us on reasonable terms
to be negotiated by the parties in good faith.
Pursuant to the accounting guidance for business combinations, we determined that the assets
acquired from Marina do not constitute a business and accordingly, the transaction has been
accounted for as an asset acquisition. The $0.75 million upfront payment was charged to research
and development expenses during the third quarter of 2010 as the ultimate commercialization of the
related product candidate is uncertain and the technology has no alternative uses.
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BioLineRx License Agreement
In June 2010, we entered into a license agreement with BioLineRx Ltd. (BioLineRx) whereby we
acquired an exclusive North American license for the development and commercialization of
BioLineRxs novel antipsychotic for the treatment of schizophrenia (CYP-1020). The terms of the
agreement included an upfront payment of $30.0 million, with total potential clinical and
regulatory milestones of up to $160.0 million through to approval in the United States (the
majority of which are related to improvement in cognition), potential commercial milestones of
$85.0 million, and a potential additional $90.0 million associated with approval for additional
indications in the United States or for approval in other countries in North America. In addition,
we will fund all continuing development activities of CYP-1020 and are obligated to pay BioLineRx a
royalty based on net sales.
The effectiveness of the license agreement was subject to the consent of the Office of Chief
Scientist of the Ministry of Industry, Trade and Labor of the State of Israel (OCS). During
August 2010, we received written notice of consent and effectiveness from the OCS regarding our
license agreement. As a result of OCS approval, the upfront payment in the amount of $30.0
million, which had been placed in an escrow account pending receipt of a satisfactory OCS consent
and effectiveness of the license agreement, was released and paid to BioLineRx.
The term of the agreement generally extends until the cessation of all commercialization
activities for the product in North America. The term during which we are obligated to pay
BioLineRx royalties for the product generally expires on a country by country basis upon the
expiration of the later of (i) the expiration of the last-to-expire valid claim of a licensed
patent covering the use, import, manufacture or commercialization of the product in such country,
(ii) the expiration of regulatory exclusivity covering the product in such country, and (iii) the
date on which sales of generic forms of the product in such country are a specified percentage of
the aggregate sales of both product and such generic forms in such country.
Pursuant to the accounting guidance for business combinations, we determined that the license
acquired from BioLineRx does not constitute a business and accordingly, the transaction has been
accounted for as an asset acquisition. The $30.0 million upfront payment, which was released from
escrow and paid to BioLineRx during August 2010, was charged to research and development expenses
during the third quarter of 2010 as the ultimate commercialization of the related product candidate
is uncertain and the technology has no alternative uses.
13. Fair Value Disclosures
The following table presents information about our financial assets measured at fair value on
a recurring basis as of September 30, 2010, and indicates the fair value hierarchy of the valuation
techniques utilized by us to determine such fair value. In general, fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. We classify money market funds as Level 1 assets.
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in active markets, and inputs other than
quoted prices that are observable for the asset or liability, such as interest rates and yield
curves that are observable at commonly quoted intervals. We classify U. S. government and agency
debt and corporate debt securities as Level 2 assets. Level 3 inputs are unobservable inputs for
the asset or liability, and include situations where there is little, if any, market activity for
the asset or liability. At September 30, 2010, we did not hold any Level 3-classified financial
assets or liabilities. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy
within which the fair value measurement in its entirety has been determined based on the lowest
level input that is significant to the
fair value measurement. Our assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment, and considers factors specific to the asset or
liability.
Fair Value Measurements at September 30, 2010 | ||||||||||||||||
Balance as of | Quoted Prices in | Significant Other | Significant | |||||||||||||
September 30, | Active Markets | Observable Inputs | Unobservable | |||||||||||||
Description | 2010 | (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Financial instruments owned: |
||||||||||||||||
Money market funds |
$ | 14,430,931 | $ | 14,430,931 | $ | | $ | | ||||||||
U.S. government and agency debt |
73,824,338 | | 73,824,338 | | ||||||||||||
Corporate debt securities |
8,547,798 | | 8,547,798 | | ||||||||||||
Total financial instruments owned |
$ | 96,803,067 | $ | 14,430,931 | $ | 82,372,136 | $ | | ||||||||
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14. Shareholder Rights Plan
In September 2010, we entered into a Rights Agreement (the Rights
Agreement) with American Stock Transfer & Trust Company, LLC, as Rights Agent (the Rights
Agent). The Rights Agent currently serves as our transfer agent with respect to
our Common Stock and also has been appointed transfer agent with respect to the Series A
Junior Participating Preferred Stock, par value $0.001 per share, if any, that may be issued
pursuant to the exercise of rights under the Rights Agreement.
Pursuant to the Rights Agreement, our Board of Directors declared a dividend of one preferred
share purchase right (a Right) for each outstanding share of common stock, par value $0.001 per
share (the Common Shares), of the Company, payable to stockholders of record on October 8, 2010
(the Record Date) . The Rights will also attach to new Common Shares issued after the Record
Date. Each Right entitles the registered holder to purchase from us one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $0.001 per share (the Preferred Shares),
of the Company at a price of $15 per one one-hundredth of a Preferred Share (the Purchase Price),
subject to adjustment. Each Preferred Share is designed to be the economic equivalent of 100 Common
Shares. The Rights only become exercisable upon the occurrence of certain events set forth in the
Rights Agreement. The description and terms of the Rights are set forth in the Rights Agreement.
15. Commitments and Contingencies
Bonus Plan
Under our 2010 Bonus Plan, executive officers and certain employees are eligible for bonuses
ranging from 0% to 150% of their annual salary based on meeting the objectives as stipulated in the
plan. The total annual target bonus could range from $0 to $1.5 million. As of September 30,
2010, we have not accrued for a bonus under the 2010 Bonus Plan as the achievement of such bonuses
is uncertain and the amount cannot be reasonably estimated. Any bonuses earned under the 2010
Bonus Plan would be paid in 2011.
Offer by Ramius
On July 19, 2010, we received an unsolicited proposal from Ramius LLC (Ramius) to acquire
Cypress for $4.00 per share in cash. Our Board of Directors reviewed the Ramius proposal with our
financial and legal advisors, and on August 5, 2010, we wrote to Ramius advising them that our
Board of Directors had rejected the offer.
On September 15, 2010 Ramius commenced an unsolicited tender offer to acquire all of our
outstanding common shares at a price of $4.25 per share in cash. Our Board of Directors reviewed
the unsolicited tender offer and on September 28, 2010, we announced that our Board of Directors
had unanimously rejected the offer. The Ramius offer is scheduled to expire on December 10, 2010,
unless extended.
Litigation
In September 2010, a class-action complaint was filed in the Delaware Chancery Court by a
shareholder of the Company alleging that the Board of Directors breached their fiduciary duties by
failing to adequately consider the proposed transaction by Ramius. While we believe that the
plaintiffs allegations are without merit, the outcome of the litigation cannot be predicted at
this time and any outcome in favor of the plaintiff could have a significant adverse effect on our
financial condition and results of operations.
16. Subsequent Events
Sale of Personalized Medicine Services Business
During October 2010, we entered into an asset purchase agreement with Exagen Diagnostics, Inc.
(Exagen) pursuant to which Exagen acquired our personalized medicine services business for a
total of up to $8.0 million in upfront and potential milestone payments, as well as potential
royalties based on product sales. The total upfront payment of $4.0 million consists of an
immediate payment of $2.0 million with a second payment of $2.0 million due in October 2012. The
proceeds from the sale of the personalized medicine services business will be included as a
component of discontinued operations.
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the information contained herein
contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange
Act), including, in particular, statements about our product candidates, their potential benefits
and the timing for their clinical testing and further development, and about our plans, strategies
and prospects and the anticipated benefits associated with each. These statements, which may
include words such as may, will, expect, believe, intend, plan, anticipate,
estimate, should, or similar words, are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Although we believe that our
beliefs, expectations and assumptions reflected in these statements are reasonable, our actual
results and financial performance may prove to be very different from what we might have predicted
on the date of this Form 10-Q. Factors that could cause or contribute to differences include, but
are not specifically limited to, our shift in strategy to focus on research and development in the
area of the central nervous system, the risks that our product candidates may not demonstrate
adequate safety and/or efficacy in later clinical trials to continue with their development, may
not have adequate intellectual property right protection to support their continued development,
may be unable to obtain FDA or similar regulatory approval for commercialization for any of many
reasons relating to the regulatory approval process, or may address a commercial market that is
smaller than currently anticipated by us and that does not support their continued development, or
that we may otherwise fail to successfully develop and commercialize our product candidates, the
risks that our restructuring-related charges may be greater than expected or require more cash than
expected and that our anticipated reduction in operating costs from the restructuring may be less
than expected, risks relating to our corporate partners ability to sell Savella, risks relating to
our ability to acquire or in-license and develop any compounds or products to treat any other
indications that we may pursue in the area of the central nervous system or otherwise engage in
strategic acquisitions, in-licenses, collaborations or other transactions, risks relating to our
ongoing evaluation of strategic alternatives, including the possibility that such evaluation will
not result in any transaction, and our cash position and the period over which our existing cash
is expected to be sufficient to fund our operations, as well as the other risks detailed in this
Form 10-Q and in our other Securities and Exchange Commission (SEC) filings.
We undertake no obligation to publicly release revisions in such forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the occurrences of
unanticipated events or circumstances, except as required by securities and other applicable laws.
We own or have rights to various copyrights, trademarks and service marks used in our
business, including the following: Cypress Bioscience, Inc. SavellaTM is a trademark of
Forest Laboratories, Inc. This report also includes other trademarks, service marks, and trade
names of other companies.
Company Overview
We have undergone a recent shift in strategy, returning to our historical focus on research
and development in the area of the central nervous system, or CNS. Our current strategy is
dedicated to the development of innovative drugs targeting large unmet medical needs for patients
suffering from disorders of the CNS. Since 1999, we have received FDA approvals for the two
programs we took forward to the FDA, including approval for Savella® (milnacipran HCl)
for fibromyalgia and approval for Prosorba, a medical device for rheumatoid arthritis.
Development-stage assets include CYP-1020 for cognitive impairment in schizophrenia, an intranasal
formulation of carbetocin for the core symptoms of autism, and the Staccato nicotine technology,
which is a novel electronic multidose delivery technology
designed to help people stop smoking. We believe all of these assets meet four important
criteria we have established for acquisition and in-licenses of product candidates: 1) they seek to
address a large unmet clinical need and market opportunity, 2) they have well-characterized
pharmacology with the primary residual risk to their development being clinical / regulatory, 3)
they are innovative with the potential to be first in class, and 4) they may reach a significant
value creating milestone within approximately two years.
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In connection with our renew strategic focus on CNS drug development, on August 4, 2010, we
announced that we had discontinued our rights under our agreement with Forest Laboratories to
co-promote Savella, and that we would either sell or discontinue our diagnostics business by the
end of the third quarter of 2010. Forest paid us a one-time payment of $2.0 million to help
facilitate with this transition. We retained all other rights under our agreement with Forest
including our 15% royalty on Savella sales and may pursue the opportunity to re-activate the
co-promotion right through discussions with Forest in the future. Forest has indicated that it
will maintain promotional levels behind Savella. The winding down of the commercial organization
decreases our cost structure and we estimate will result in a decrease in annual operating costs of
approximately $10.0 million. Operating results for the third quarter of 2010 include
restructuring-related charges in the amount of $3.7 million in connection with the reduction in
force we announced in August 2010.
Consistent with our earlier announcement that we would sell or discontinue our diagnostics
business, on October 8, 2010 we announced that we had entered into an asset purchase agreement
under which Exagen Diagnostics, Inc. acquired our diagnostic business for a total of up to
$8.0 million in upfront and potential milestone payments (with $4.0 million being the upfront cash
payment, split into two payments, 24 months apart), with additional possible future payments in the
form of royalties on product sales. The sale of the diagnostics business followed a comprehensive,
formal process we initiated earlier this year related to the decision, described earlier, to sell
these assets or discontinue the diagnostics business by the end of the third quarter of this year.
Under the terms of the agreement, Exagen Diagnostics purchased substantially all of the assets of
the diagnostic business, including all testing services, intellectual property rights and
equipment, and assumed the lease for Cypress laboratory operations at the current San Diego,
California location and all of the Cypress laboratory employees were offered positions with Exagen.
With the sale of our personalized medicine services business, we currently operate in a single
industry segment.
Research and Development Strategy
CYP-1020
In June 2010, we announced our first transaction in line with our renewed strategy of focusing
on developing drugs targeting CNS by entering into an exclusive North American license for the
development and commercialization of BioLineRxs novel antipsychotic (CYP-1020), a promising
potential treatment for schizophrenia due to its potential ability to improve cognitive function.
The total upfront payment to BioLineRx was $30.0 million, with total potential clinical and
regulatory milestones of up to $160.0 million through to approval in the United States (the
majority of which are related to improvement in cognition), potential commercial milestones of
$85.0 million, and a potential additional $90.0 million associated with approval for additional
indications in the United States or for approval in other countries in North America. In addition,
we will fund all continuing development activities of CYP-1020 and pay BioLineRx a royalty based on
sales.
Results of the Phase 2b EAGLE (Effective Antipsychosis via GABA Level Enhancement) clinical
study conducted by BioLineRx demonstrated that CYP-1020 at the 20-30mg dose range exhibited
clinically relevant and statistically significant improvement on the cognition endpoint assessed
using the Brief Assessment of Cognition in Schizophrenia (BACS) neuropsychological test battery.
The 20-30mg
dose range of CYP-1020 was superior to both the active comparator (risperidone) and placebo at
endpoint on the BACS total score (p=0.027 for both), with positive trends in all subsets within the
BACS. CYP-1020 was also effective as a treatment for the other symptoms of acute schizophrenia
exacerbation, as measured by the Positive and Negative Symptom Scale (PANSS). The CYP-1020 high
dose group (20-30mg/day) experienced a statistically significant reduction in the PANSS from
baseline versus placebo (LS mean -23.6 vs. -14.4; p=0.002). The superiority of CYP-1020
(20-30mg/day) over placebo was also supported by additional secondary efficacy measures such as the
clinical global impression of severity (CGI-S) and change (CGI-C). Additionally, the incidence of
serious adverse events was low in the CYP-1020 (20-30mg/day) group (0%) compared to risperidone
(3.3%) and placebo (6.5%), and recent results from an extension trial showed that patients
receiving CYP-1020 (20-30mg/day) for six additional weeks maintained the improvements on the PANSS
and CGI that had been observed after the initial six weeks of treatment and, more importantly,
showed continuing improvement in cognitive function as assessed by the BACS. The 12-weeks of
treatment were not associated with any increased toxicities.
We intend to commence a Phase 2b clinical study for CYP-1020 in 2011 with top line data
expected in late 2012.
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Intranasal Carbetocin
In August 2010, we announced that we had acquired patent rights and technology related to a
novel, intranasal formulation of carbetocin, a potential breakthrough treatment for the core
symptoms of autism. Under the terms of the agreement, we made an upfront payment to Marina Biotech
of $750,000. Subject to certain late-stage clinical and regulatory milestones, including approval
in the United States, we may make up to $27.0 million in additional payments to Marina Biotech. We
will also fund all continuing development activities and pay single-digit royalties to Marina
Biotech based on commercial sales, if any.
Carbetocin is a long-acting analog of oxytocin, the latter a naturally produced hormone that
has been shown to have beneficial effects in treating the core symptoms of individuals with autism
in small pilot studies. Carbetocin was originally developed by Ferring Pharmaceuticals and is sold
in multiple countries outside of the U.S. solely in a parenteral form for the treatment of
postpartum hemorrhage. Marina Biotech developed an intranasal formulation of this agent with the
goal of assessing its efficacy for the treatment of autism. Phase 1 studies have been completed
with this novel formulation.
We intend to move straight into the clinic with carbetocin with the goal of having results
from the first proof of concept study within two years.
Staccato Nicotine
In August 2010, we announced that we had licensed Alexza Pharmaceuticals Staccato nicotine
technology a novel electronic multidose delivery technology designed to help people stop smoking.
The innovative Staccato nicotine technology is intended to improve on a well-validated smoking
cessation approach by delivering nicotine via inhalation, thus mimicking the actual nicotine
effects of smoking without the deleterious side effects associated with cigarettes. According to
the terms of the agreement, we paid Alexza an upfront payment of $5.0 million to acquire the
worldwide license for the Staccato nicotine technology. In addition, following the completion of
certain clinical milestones relating to the Staccato nicotine technology, we will be obligated to
pay to Alexza an additional technology transfer payment of $1.0 million. Alexza will have a carried
interest of 10% (subject to adjustment in certain circumstances) in the net proceeds of any sale or
license by Cypress of the Staccato nicotine assets and the carried interest will be subject to put
and call rights in certain circumstances.
Staccato nicotine is designed to help smokers quit by addressing both the chemical and
behavioral components of nicotine addiction by combining nicotine replacement via inhalation with a
user-friendly drug delivery device. The Staccato technology may be capable of mimicking the
pharmacokinetics of smoking cigarettes through the delivery of optimally-sized nicotine particles
to the deep lung. Staccato nicotine may also provide some of the psychological aspects of smoking
(e.g., hand-to-mouth movement, oral inhalation) and could allow smokers to self-administer and
possibly titrate to the dose to treat cravings. Importantly, the electronics embedded within the
Staccato delivery system could allow for the programmed, over-time reduction in the overall daily
dose of nicotine, and ultimately may lead to the better management of nicotine cravings and
eventual sustained smoking cessation.
We intend to commence a Phase 1 study for Staccato nicotine in 2011 and to commence a Phase 2
study as quickly as possible thereafter.
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Savella
In January 2009, we received approval from the U.S. Food and Drug Administration (FDA) to
market Savella (milnacipran HCl) for the management of fibromyalgia (FM). Milnacipran HCl has
been approved for a non-pain condition in over 50 countries, with commercial experience outside the
U.S. since 1997. We obtained an exclusive license in the U.S. and Canada to milnacipran from Pierre
Fabre Medicament (Pierre Fabre) in 2001. In January 2004, we entered into a collaboration
agreement with Forest Laboratories, Inc. (Forest Laboratories), a leading marketer of CNS drugs
with a strong franchise in the primary care and psychiatric markets. As part of this collaboration
with Forest Laboratories, we sublicensed our rights to milnacipran to Forest Laboratories for the
United States, with an option to extend the territory to include Canada, which was exercised in
July 2007. As part of our agreements with both Forest Laboratories and Pierre Fabre, we have
licensed any patents that may issue from our patent applications related to FM and milnacipran to
Forest Laboratories and Pierre Fabre. Additional information on our ongoing post approval clinical
development program for Savella can be found at www.clinicaltrials.gov.
Following the January 2009 FDA approval to market Savella for the management of FM, Savella
was shipped to wholesalers and became available at pharmacies at the end of April 2009. Savella is
a dual-reuptake inhibitor that preferentially blocks the reuptake of norepinephrine with higher
potency than serotonin (in vitro). These two neurotransmitters are thought to play a central role
in the symptoms for FM. We recently transitioned all obligations to promote Savella for FM to our
corporate partner, Forest Laboratories. We receive a 15% royalty on total net sales of Savella.
We were incorporated in Delaware in 1981.
Offer by Ramius
On July 19, 2010, we received an unsolicited proposal from Ramius LLC to acquire Cypress for
$4.00 per share in cash. Our Board of Directors reviewed the Ramius proposal with our financial and
legal advisors, and on August 5, 2010, we wrote to Ramius advising them that our Board of Directors
had unanimously concluded that the Ramius proposal grossly undervalues our current business and
future prospects and consequently is not in the best interest of our stockholders.
On September 15, 2010 Ramius commenced an unsolicited tender offer to acquire all of our
outstanding common shares at a price of $4.25 per share in cash. Our Board of Directors reviewed
the unsolicited tender offer and on September 28, 2010 we announced that our Board of Directors had
unanimously rejected the offer. Our Board of Directors reached its recommendation after careful
consideration, including a thorough review of the Ramius offer with our independent financial and
legal advisors, and unanimously determined that the Ramius offer grossly undervalues our current
business and
future prospects, is highly conditional rendering it illusory and is not in the best interests
of Cypress and our stockholders (other than Ramius and its affiliates). The Ramius offer is
scheduled to expire on December 10, 2010, unless extended.
Evaluation of Strategic Alternatives
In September 2010, we announced that our Board of Directors had determined to engage in a
broad evaluation of our strategic alternatives, with the assistance of our financial advisors, in
order to attempt to maximize value for all Cypress stockholders. The Boards commitment to explore
strategic alternatives may include but not be limited to monetization of certain Cypress assets or
other transactions that deliver value to Cypress stockholders and/or pursuit of Cypress current
CNS strategy, or a sale or strategic combination of Cypress with third parties. We will continue
to operate our business in the ordinary course, taking into account the exploration of alternatives
process. There can be no assurance that the evaluation of strategic alternatives will result in
any transaction and we do not intend to disclose developments regarding the evaluation of strategic
alternatives unless and until a final decision is made.
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Results of Operations
The following discussion should be read in conjunction with the consolidated financial
statements and the related notes contained elsewhere in this quarterly report.
Comparison of Three Months Ended September 30, 2010 and 2009
Revenues Under Collaborative Agreements
We recognized revenues under our collaborative agreement with Forest Laboratories of $0.8
million for the three months ended September 30, 2010 compared to $0.8 million for the three months
ended September 30, 2009. The revenues under collaborative agreements recorded during the three
months ended September 30, 2010 and 2009 consisted entirely of amounts earned or reimbursed to us
pursuant to our license and collaboration agreement with Forest Laboratories, entered into in
January 2004, for the development and marketing of Savella. Such revenues included the recognition
of the $25.0 million upfront payment received in January 2004 from Forest Laboratories on a
straight-line basis over a period of 8 years, an additional $1.0 million license payment received
from Forest Laboratories in July 2007 to extend the territory to include Canada recognized on a
straight-line basis over the remainder of the 8 year amortization period, sponsored development
reimbursements and funding received from Forest Laboratories for certain of our employees devoted
to the development of Savella. The amount of sponsored development reimbursements from Forest
Laboratories and funding received from Forest Laboratories for certain of our employees devoted to
the development of Savella changes periodically and may be eliminated based on the level of
development activity.
Commercial Revenues
We recognized commercial revenues of $7.2 million for the three months ended September 30,
2010 compared to $4.7 million for the three months ended September 30, 2009.
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The following table summarizes the components of commercial revenues for the three months
ended September 30, 2010 and 2009:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Royalty revenue |
$ | 3,214,356 | $ | 1,286,484 | ||||
Revenue from milestones |
382,660 | 9,660 | ||||||
Co-promotion reimbursement |
3,614,069 | 3,401,694 | ||||||
$ | 7,211,085 | $ | 4,697,838 | |||||
We recognized royalty revenue of $3.2 million for the three months ended September 30,
2010 based on net sales of Savella during the period as reported by Forest Laboratories compared to
$1.3 million for the three months ended September 30, 2009. The increase in royalty revenue is due
to increased sales during the three months ended September 30, 2010 compared to the three months
ended September 30, 2009 given the increased unit volume.
Revenue from milestones for the three months ended September 30, 2010 and 2009 consisted of
the recognition of $0.5 million related to the $25.0 million milestone payment, net of the $1.25
million sublicense payment to Pierre Fabre, received in January 2009 upon NDA approval, and less
sampling obligations of $0.1 million and $0.5 million for the three months ended September 30, 2010
and 2009, respectively. The milestone will be recognized on a straight-line basis, less sampling
obligations, over the ongoing commercial obligation period, which is estimated to be 13 years.
Co-promotion reimbursement revenue of $3.6 million and $3.4 million for the three months ended
September 30, 2010 and 2009, respectively, consisted of reimbursement from Forest Laboratories for
detail calls provided by our sales force during the period, as well as reimbursement for certain
marketing costs incurred by us. On August 3, 2010, we entered into an agreement with Forest
Laboratories to discontinue our rights to co-promote Savella effective as of that date. As part of
this agreement, Forest Laboratories paid us a one-time fee of $2.0 million in August 2010, which is
included in co-promotion reimbursement revenue for the three months ended September 30, 2010. As a
result of this agreement, we will no longer be recognizing co-promotion reimbursement revenue in
subsequent periods. We will retain all other rights under our agreement with Forest Laboratories
including our royalty on Savella sales.
The co-promotion reimbursement for detail calls is determined based on the number of detailing
calls made by our sales force (measured on a per physician call basis) during the period, each of
which is reimbursed at a rate equal to the cost of such effort to Forest Laboratories had it been
accomplished by the Forest Laboratories sales force. The corresponding costs associated with our
co-promotion reimbursement (incurred prior to the discontinuation of our rights to co-promote) are
included as a component of selling, general and administrative expense on the Consolidated
Statement of Operations.
Research and Development
Research and development expenses for the three months ended September 30, 2010 were $37.4
million compared to $1.1 million for the three months ended September 30, 2009. The increase in
research and development expenses is primarily attributable to one-time upfront payments recognized
as research and development expenses during the three months ended September 30, 2010, consisting
of $30.0 million to BioLineRx for the license of a novel antipsychotic for the treatment of
schizophrenia, $5.0 million to Alexza for the license of a novel electronic multi-dose technology
designed to help people stop smoking and $0.8 million to Marina for the purchase of certain assets
related to a development program for the treatment of the core symptoms of autism.
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Selling, General and Administrative
Selling, general and administrative expenses for the three months ended September 30, 2010 and
2009 is comprised of the following:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Sales and marketing |
$ | 1,949,350 | $ | 5,516,639 | ||||
General and administrative |
5,165,374 | 3,945,220 | ||||||
$ | 7,114,724 | $ | 9,461,859 | |||||
Sales and marketing expenses decreased to $1.9 million for the three months ended
September 30, 2010 from $5.5 million for the three months ended September 30, 2009. The decrease
in sales and marketing expenses is primarily due to our agreement with Forest Laboratories to
discontinue our rights to co-promote Savella effective August 3, 2010 and the resulting workforce
reduction impacting our entire sales and marketing organization. We expect further decreases in
sales and marketing expenses in future periods as result of the discontinuation of our rights to
co-promote Savella.
General and administrative expenses increased to $5.2 million for the three months ended
September 30, 2010 from $3.9 million for the three months ended September 30, 2009. The increase
in general and administrative expenses during the three months ended September 30, 2010 is
primarily due to significant legal and investment banking fees incurred in connection with the
unsolicited takeover offer received in July 2010. As a result of this takeover offer, we expect
increased general and administrative costs in future periods associated with our takeover defense.
Restructuring Charges
As a result of the implementation of our restructuring plan, we recorded a restructuring
charge of $3.7 million (included in continuing operations) in the three months ended September 30,
2010, consisting of $2.7 million of leave of absence pay, severance and healthcare benefits, $0.2
million of non-cash stock-based compensation, $0.3 million of property and equipment and intangible
asset write-offs and $0.5 million of contract termination costs. We do not expect to incur
significant additional restructuring-related charges, and we expect to complete the cash payments
in connection with the restructuring in the fourth quarter of 2010.
Interest Income
Interest income for the three months ended September 30, 2010 was $0.1 million compared to
$0.3 million for the three months ended September 30, 2009. The decrease in interest income for
the three months ended September 30, 2010 compared to the corresponding period in 2009 is primarily
due to a general decrease in interest rates and related yields experienced during the three months
ended September 30, 2010 compared to the three months ended September 30, 2009, as well as lower
average balances available for investment during the three months ended September 30, 2010.
Net Loss from Discontinued Operations
We announced on August 4, 2010 that we intended to either discontinue or sell our personalized
medicine services business by the end of the third quarter of 2010, with such sale taking place in
October 2010. The results of the personalized medicine services business are included in
discontinued operations for all periods presented. In connection with the sale of the personalized
medicine services business, we recognized an intangible write-off of $0.2 million during the three
months ended September 30, 2010.
Additionally, as part of our restructuring plan and the related reduction in force, employees
of the personalized medicine services business were provided paid leave, severance and other
benefits resulting in a charge of $0.2 million during the three months ended September 30, 2009.
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Comparison of Nine Months Ended September 30, 2010 and 2009
Revenues Under Collaborative Agreements
We recognized revenues under our collaborative agreement with Forest Laboratories of $2.5
million for the nine months ended September 30, 2010 compared to $9.2 million for the nine months
ended September 30, 2009. The revenues under collaborative agreements recorded during the nine
months ended September 30, 2010 and 2009 consisted entirely of amounts earned or reimbursed to us
pursuant to our license and collaboration agreement with Forest Laboratories, entered into in
January 2004, for the development and marketing of Savella. Such revenues included the recognition
of the $25.0 million upfront payment received in January 2004 from Forest Laboratories on a
straight-line basis over a period of 8 years, an additional $1.0 million license payment received
from Forest Laboratories in July 2007 to extend the territory to include Canada recognized on a
straight-line basis over the remainder of the 8 year amortization period, sponsored development
reimbursements and funding received from Forest Laboratories for certain of our employees devoted
to the development of Savella. The amount of sponsored development reimbursements from Forest
Laboratories and funding received from Forest Laboratories for certain of our employees devoted to
the development of Savella changes periodically and may be eliminated based on the level of
development activity. Revenues during the nine months ended September 30, 2009 also included a
$6.5 million reimbursement for the remaining two-thirds of the costs paid in advance by us in
connection with the second Phase III trial for Savella received from Forest Laboratories in January
2009 upon approval of our New Drug Application (NDA).
Commercial Revenues
We recognized commercial revenues of $22.4 million for the nine months ended September 30,
2010 compared to $10.0 million for the nine months ended September 30, 2009.
The following table summarizes the components of commercial revenues for the nine months ended
September 30, 2010 and 2009:
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Royalty revenue |
$ | 8,898,045 | $ | 2,727,837 | ||||
Revenue from milestones |
1,158,018 | 934,980 | ||||||
Co-promotion reimbursement |
12,328,622 | 6,316,705 | ||||||
$ | 22,384,685 | $ | 9,979,522 | |||||
We recognized royalty revenue of $8.9 million for the nine months ended September 30,
2010 based on net sales of Savella during the period as reported by Forest Laboratories compared to
$2.7 million for the nine months ended September 30, 2009. The increase in royalty revenue is
primarily due to increased sales during the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009 as Savella was launched during May 2009 resulting in a full
period of activity during the nine months ended September 30, 2010.
Revenue from milestones for the nine months ended September 30, 2010 and 2009 consisted of the
recognition of $1.4 million related to the $25.0 million milestone payment, net of the $1.25
million sublicense payment to Pierre Fabre, received in January 2009 upon NDA approval, and less
sampling
obligations of $0.2 million and $0.5 million for the nine months ended September 30, 2010 and
2009, respectively. The milestone will be recognized on a straight-line basis, less sampling
obligations, over the ongoing commercial obligation period, which is estimated to be 13 years.
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Co-promotion reimbursement revenue of $12.3 million and $6.3 million for the nine months ended
September 30, 2010 and 2009, respectively, consisted of reimbursement from Forest Laboratories for
detail calls provided by our sales force during the period, as well as reimbursement for certain
marketing costs incurred by us. The increase in co-promotion reimbursement revenue is due to
increased detail calls during the nine months ended September 30, 2010 compared to the nine months
ended September 30, 2009 as Savella was launched during May 2009 resulting in higher promotional
activity during the nine months ended September 30, 2010.
On August 3, 2010, we entered into an agreement with Forest Laboratories to discontinue our
rights to co-promote Savella effective as of that date. As part of this agreement, Forest
Laboratories paid us a one-time fee of $2.0 million in August 2010, which is included in
co-promotion reimbursement revenue for the nine months ended September 30, 2010. As a result of
this agreement, we will no longer be recognizing co-promotion reimbursement revenue in subsequent
periods. We will retain all other rights under our agreement with Forest Laboratories including
our royalty on Savella sales.
The co-promotion reimbursement for detail calls is determined based on the number of detailing
calls made by our sales force (measured on a per physician call basis) during the period, each of
which is reimbursed at a rate equal to the cost of such effort to Forest Laboratories had it been
accomplished by the Forest Laboratories sales force. The corresponding costs associated with our
co-promotion reimbursement (incurred prior to the discontinuation of our rights to co-promote) are
included as a component of selling, general and administrative expense on the Consolidated
Statement of Operations.
Research and Development
Research and development expenses for the nine months ended September 30, 2010 were $39.1
million compared to $7.8 million for the nine months ended September 30, 2009. The increase in
research and development expenses is primarily attributable to one-time upfront payments recognized
as research and development expenses during the nine months ended September 30, 2010, consisting of
$30.0 million to BioLineRx for the license of a novel antipsychotic for the treatment of
schizophrenia, $5.0 million to Alexza for the license of a novel electronic multi-dose technology
designed to help people stop smoking and $0.8 million to Marina for the purchase of certain assets
related to a development program for the treatment for the treatment of the core symptoms of
autism. The increase in research and development expenses was partially offset by a $3.0 million
milestone payment owed to Pierre Fabre upon NDA approval in January 2009 and a decrease in costs
incurred during the nine months ended September 30, 2010 in connection with our proof of concept
studies for new compounds.
Selling, General and Administrative
Selling, general and administrative expenses for the nine months ended September 30, 2010 and
2009 is comprised of the following:
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Sales and marketing |
$ | 13,202,413 | $ | 18,975,092 | ||||
General and administrative |
14,589,539 | 12,900,895 | ||||||
$ | 27,791,952 | $ | 31,875,987 | |||||
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Sales and marketing expenses decreased to $13.2 million for the nine months ended
September 30, 2010 from $19.0 million for the nine months ended September 30, 2009. The decrease
in sales and marketing expenses is primarily due to our agreement with Forest Laboratories to
discontinue our rights to co-promote Savella effective August 3, 2010 and the resulting workforce
reduction impacting our entire sales and marketing organization.
General and administrative expenses increased to $14.6 million for the nine months ended
September 30, 2010 from $12.9 million for the nine months ended September 30, 2009. The increase
in general and administrative expenses during the nine months ended September 30, 2010 is primarily
due to significant legal and investment banking fees incurred in connection with the unsolicited
takeover offer received in July 2010.
Restructuring Charges
As a result of the implementation of our restructuring plan, we recorded a restructuring
charge of $3.7 million (included in continuing operations) in the nine months ended September 30,
2010, consisting of $2.7 million of leave of absence pay, severance and healthcare benefits, $0.2
million of non-cash stock-based compensation, $0.3 million of property and equipment and intangible
asset write-offs and $0.5 million of contract termination costs. We do not expect to incur
significant additional restructuring-related charges, and we expect to complete the cash payments
in connection with the restructuring in the fourth quarter of 2010.
Interest Income
Interest income for the nine months ended September 30, 2010 was $0.4 million compared to $1.4
million for the nine months ended September 30, 2009. The decrease in interest income for the nine
months ended September 30, 2010 compared to the corresponding period in 2009 is primarily due to a
general decrease in interest rates and related yields experienced during the nine months ended
September 30, 2010 compared to the nine months ended September 30, 2009, as well as lower average
balances available for investment during the nine months ended September 30, 2010.
Net Loss from Discontinued Operations
We announced on August 4, 2010 that we intended to either discontinue or sell our personalized
medicine services business by the end of the third quarter of 2010, with such sale taking place in
October 2010. The results of the personalized medicine services business are included in
discontinued operations for all periods presented. In connection with the sale of the personalized
medicine services business, we recognized an intangible write-off of $0.2 million during the nine
months ended September 30, 2010. Additionally, as part of our restructuring plan and the related
reduction in force, employees of the personalized medicine services business were provided paid
leave, severance and other benefits resulting in a charge of $0.2 million during the nine months
ended September 30, 2009. In addition, the results for the nine months ended September 30, 2009
included a $2.0 million upfront payment paid during the first quarter of 2009 in connection with an
asset purchase agreement entered into in February 2009.
Liquidity and Capital Resources
At September 30, 2010, we had cash, cash equivalents and short-term investments of
$96.3 million compared to cash, cash equivalents and short-term investments of $141.7 million at
December 31, 2009. Working capital at September 30, 2010 totaled $96.2 million compared to
$140.5 million at December 31, 2009. We have invested a substantial portion of our available cash
in money market funds, marketable debt instruments of governmental agencies and corporate debt
securities. We have established guidelines relating to our investments to preserve principal and
maintain liquidity.
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Net cash used in operating activities as disclosed in our Condensed Consolidated Statement of
Cash Flows was $44.3 million for the nine months ended September 30, 2010 compared to net cash
provided by operating activities of $0.3 million for the nine months ended September 30, 2009. The
primary source of cash from operations during the nine months ended September 30, 2010 was
commercial revenues, including royalty revenue and the co-promotion reimbursement received from
Forest Laboratories, offset by cash used in operations including $4.5 million for changes in
operating assets and liabilities and non-cash charges of $7.4 million. The primary source of cash
from operations during the nine months ended September 30, 2009 was the $25.0 million milestone
payment and the $6.5 million reimbursement of expenses received from Forest Laboratories, offset by
cash used in operations including $7.9 million for changes in operating assets and liabilities
(excluding impact of initial deferred revenue amount from milestone payment) and non-cash charges
of $7.7 million.
Net cash provided by investing activities as disclosed in our Condensed Consolidated Statement
of Cash Flows was $19.6 million for the nine months ended September 30, 2010 compared to net cash
used in investing activities of $5.1 million for the nine months ended September 30, 2009. The
fluctuation in net cash from investing activities resulted primarily from timing differences in
investment purchases, sales and maturities and the fluctuations in our portfolio mix between cash
equivalents and short-term investment holdings. We expect similar fluctuations to continue in
future periods.
As disclosed in our Condensed Consolidated Statement of Cash Flows, we had no cash from
financing activities for the nine months ended September 30, 2010 compared to $0.9 million for the
nine months ended September 30, 2009. The decrease in net cash provided by financing activities
during the nine months ended September 30, 2010 compared to the corresponding prior year period was
primarily the result of no exercises of stock options during the nine months ended September 30,
2010 compared to proceeds of approximately $0.9 million from the exercise of stock options during
the nine months ended September 30, 2009.
The following table summarizes our long-term contractual obligations as of September 30, 2010:
Less than | ||||||||||||||||||||
1 year | 1 - 3 years | 3 5 years | More than 5 | |||||||||||||||||
Total | (2010) | (2011 2013) | (2014-2015) | years (2016 +) | ||||||||||||||||
Operating leases |
$ | 686,590 | $ | 127,325 | $ | 538,883 | $ | 20,382 | $ | | ||||||||||
Purchase obligations (1) |
4,193,750 | 1,231,250 | 2,962,500 | |||||||||||||||||
Total |
$ | 4,880,340 | $ | 1,358,575 | $ | 3,501,383 | $ | 20,382 | $ | | ||||||||||
(1) | Purchase obligations include agreements to purchase goods or services, including consulting services, that are enforceable and legally binding on us and that specify all significant terms. This includes contracts that are cancelable with notice and the payment of an early termination penalty. Purchase obligations exclude agreements that are cancelable without penalty and also exclude accrued liabilities to the extent presented on the balance sheet as of September 30, 2010. |
Other commercial and contractual commitments include potential milestone payments of up to
$0.5 million to Pierre Fabre and sublicense payments to Pierre Fabre based on 5% of any upfront and
milestone payments received from Forest Laboratories, milestone payments of up to $335.0 million to
BioLineRx in connection with potential clinical, regulatory and commercial milestones related to
the development of CYP-1020, milestone payments of up to $27.0 million to Marina in connection with
certain late-stage clinical and regulatory milestones, a potential technology transfer payment of
$1.0 million to Alexza in consideration for the transfer to us by Alexza of certain additional
know-how and materials and milestone payments up to approximately $37.0 million in connection with
license agreements related to our POC programs that are not currently in active development. In the
event we
move forward with development of a product or service under any of these arrangements, in most
instances, we would also be obligated to make royalty payments.
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Additionally, we are obligated to reimburse Forest Laboratories for a portion of the active
ingredient costs for samples of Savella. The amount of such obligation will vary depending on
Forest Laboratories annual marketing plan. We estimate our portion of sampling costs over the
term of the agreement could range from approximately 20% to 40% of the milestone payment received
upon NDA approval.
Unless and until we can consistently generate significant cash from our operations, we expect
to continue to fund our operations with existing cash resources that were primarily generated from
the proceeds of offerings of our equity securities and from revenue under our license and
collaboration agreement with Forest Laboratories and, if available to us, with cash from
financings.
Our current expected primary cash needs on both a short-term and long-term basis are for the
development of CYP-1020, the development of Staccato nicotine, the development of intranasal
carbetocin, the development of candidates under our POC trials, if any, and general research,
working capital and other general corporate purposes and the identification, acquisition or
license, and development of, potential future products and services. Excluding the amounts payable
under our agreements with Pierre Fabre, BioLineRx, Alexza, Marina and various licensors under our
POC trials, the costs of in-licensing or acquiring additional compounds or companies and funding
clinical development for any product (other than CYP-1020, Staccato nicotine, intranasal carbetocin
and our ongoing POC trials) that we may in-license or acquire, and costs associated with our
takeover defense, we estimate that based on our current business plan, net cash required to fund
operating expenses will approximate $45.0 million to $50.0 million for the year 2010. In the event we acquire, license or develop any new products or product candidates in
addition to CYP-1020, Staccato nicotine and intranasal carbetocin or begin any new POC, the amount
to fund our operations for 2010 would increase, possibly materially. We expect that our net losses
will continue for at least the next several years as we seek to acquire, license or develop
additional products and product candidates in addition to CYP-1020, Staccato nicotine and
intranasal carbetocin. Such losses may fluctuate, the fluctuations may be substantial, and we may
never become profitable.
Based on our current business plan, we believe our cash and cash equivalents and short-term
investments balances at September 30, 2010 are sufficient to fund operations through at least 2011.
However, we are actively continuing to evaluate various potential
strategic transactions, which may include
the potential acquisitions of products, product candidates and companies, and other alternatives,
in addition to CYP-1020, Staccato nicotine and intranasal carbetocin. In order to acquire or
develop additional products and product candidates in addition to CYP-1020, Staccato nicotine and
intranasal carbetocin, we will likely require additional capital. The amount of capital we require
is dependent upon many forward-looking factors that could significantly increase our capital
requirements, including the following:
| the costs and timing of development and regulatory approvals for all our products and product candidates; | ||
| the extent to which we acquire or invest in other products, product candidates and businesses; | ||
| the costs of in-licensing drug candidates; | ||
| the extent to which we achieve milestones under our license and collaboration agreements, including with BioLineRx, Alexza and Marina, and become obligated for milestone payments under those agreements; | ||
| the ability of Forest Laboratories to reach sales milestones and other events under our collaboration agreement; and | ||
| the costs of commercialization of any future products and product candidates. |
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Because we are unable to predict the outcome of the foregoing factors, some of which are
beyond our control, we are unable to estimate with certainty our mid to long-term capital needs.
Unless and until we can generate a sufficient amount of product revenue, if ever, we expect to
finance future capital needs through public or private equity or debt offerings or collaboration
and licensing arrangements, as well as interest income earned on cash balances. We do not currently
have any commitments or specific plans for future external funding. We may not be able to raise
additional capital and the funds we raise, if any, may not allow us to maintain our current and
planned operations. If we are unable to obtain additional capital, we may be required to delay,
scale back or eliminate some or all of our development of existing or future product candidates and
discontinue the evaluation or completion of any proposed acquisitions or strategic transactions.
To date, we have not had any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which
are established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Critical Accounting Policies
There were no significant changes in critical accounting policies or estimates from those at
December 31, 2009.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have invested our excess cash in U.S. government securities, corporate debt securities and
money market funds with strong credit ratings. As a result, our interest income is most sensitive
to changes in the general level of U.S. interest rates. We do not use derivative financial
instruments, derivative commodity instruments or other market risk sensitive instruments, positions
or transactions in any material fashion. Accordingly, we believe that, while the investment-grade
securities we hold are subject to changes in the financial standing of the issuer of such
securities, we are not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market changes that
affect market risk sensitive instruments. A hypothetical 1% adverse move in interest rates along
the entire interest rate yield curve over a three month period would not materially affect the fair
value of our financial instruments that are exposed to changes in interest rates.
ITEM 4 CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the timelines specified in the SECs rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can only provide reasonable
assurance of achieving the desired control objectives, and in reaching a reasonable level of
assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures as of
the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective at
the reasonable assurance level.
There has been no change in our internal controls over financial reporting during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
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PART II OTHER INFORMATION
Item 1 Legal Proceedings
On September 17, 2010, a Cypress shareholder, David Bates, on behalf of himself and
purportedly on behalf of a class of our stockholders, filed a lawsuit in Delaware Chancery Court,
captioned Bates v. Cypress Bioscience, Inc., et al., Case No. 5824. The complaint alleges that our
directors breached their fiduciary duties by failing to adequately consider the unsolicited
acquisition proposal we received from Ramius LLC on July 19, 2010, and by failing to apprise
themselves of the true value of Cypress. Bates seeks to enjoin the unsolicited acquisition
proposal we received from Ramius LLC on July 19, 2010, and also seeks unspecified monetary damages
and other relief.
In addition, from time to time, we may be involved in litigation relating to claims arising
out of our operations in the normal course of business.
Because of the uncertainties related to the incurrence, amount and range of loss on any
pending litigation, investigation, inquiry or claim, management is currently unable to predict the
ultimate outcome of any litigation, investigation, inquiry or claim, determine whether a liability
has been incurred or make an estimate of the reasonably possible liability that could result from
an unfavorable outcome. An adverse ruling or outcome in any lawsuit involving us could materially
affect our business, liquidity, consolidated financial position or results of operations ability to
sell one or more of our products or could result in additional competition. In view of the
unpredictable nature of such matters, we cannot provide any assurances regarding the outcome of any
litigation, investigation, inquiry or claim to which we are a party or the impact on us of an
adverse ruling of such matters.
Item 1A Risk Factors
We have marked with an asterisk those risk factors that reflect substantive changes from the
risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009.
Risks related to our business
*The public announcement and related consideration of the Ramius proposal and offer, including our
evaluation of strategic alternatives available to us, has created uncertainty that may be
disruptive to our business and could create volatility in our stock price.
On July 19, 2010, we received an unsolicited letter from Ramius LLC in which Ramius indicated
that it was prepared to acquire Cypress for $4.00 per share.
On September 15, 2010, Ramius V&O Acquisition LLC, an affiliate of Ramius, launched an
unsolicited tender offer, pursuant to which such entity currently is offering to acquire all of our
issued and outstanding shares of common stock for $4.25 per share, subject to certain conditions.
As described elsewhere in this report, our Board of Directors reviewed the unsolicited tender offer
and on September 28, 2010 we announced that our Board of Directors unanimously rejected the offer.
Our Board of Directors reached its recommendation after careful consideration, including a thorough
review of the Ramius offer with our independent financial and legal advisors, and unanimously
determined that the Ramius offer grossly undervalues our current business and future prospects, is
highly conditional rendering it illusory and is not in the best interests of us and our
stockholders (other than Ramius and its affiliates).
We believe that the public announcement and related consideration of the Ramius proposal and
offer (and any similar proposal or offer that Ramius or another party may make in the future), and
our evaluation of our strategic alternatives, has resulted, and may continue to result, in
uncertainty for our current and potential business partners, and may delay the execution of our CNS
business strategy. This uncertainty
may cause our current and potential business partners to change or terminate their business
relationship with us. In addition, we may not be able to attract and retain key management,
research and development, technical, financial and other personnel as a result of this uncertainty.
Moreover, the review and consideration of the Ramius proposal and offer (and any similar proposal
or offer that Ramius or another party may make in the future), including our evaluation of our
strategic alternatives has been, and may continue to be, a significant distraction for our
management and employees, and have required, and may continue to require, the expenditure of
significant time, costs and other resources by us. These activities, and developments relating to
them, could also cause our stock price to fluctuate significantly and could result in a significant
change in our business.
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*Our evaluation of strategic alternatives may not result in any transaction.
In September 2010 we announced that our Board of Directors has determined to engage in a broad
evaluation of our strategic alternatives, with the assistance of our financial advisors, in order
to attempt to maximize value for all our stockholders. Our commitment to explore strategic
alternatives may include but not be limited to monetization of certain assets or other transactions
that deliver value to our stockholders and/or pursuit of our current CNS strategy, or a sale or
strategic combination with third parties. There can be no assurance that the evaluation of
strategic alternatives will result in any transaction and we do not intend to disclose developments
regarding the evaluation of strategic alternatives unless and until a final decision is made.
*We may not be able to successfully develop and commercialize our product candidates.
As with any drug development, we must commit time, effort and resources to the development of
CYP-1020, our intranasal carbetocin compound and Staccato nicotine, and we may not be able to
successfully develop and commercialize these product candidates, or any future product candidates
we may seek to develop and commercialize, based on any of the many different risks that
characterize highly uncertain drug development research and development and commercialization
activities, either on the timelines and budgets we expect or at all. For example our product
candidates may not demonstrate adequate safety and/or efficacy in future preclinical studies or
clinical trials, as applicable, to continue with their development, may not have adequate
intellectual property right protection to support their continued development, may be unable to
obtain FDA or similar regulatory approval as a drug candidate for any of many reasons relating to
the regulatory approval process, may not offer therapeutic or other improvements over existing or
future drugs used to treat the same or similar conditions, may not be capable of being produced in
commercial quantities at acceptable costs or at all, may address a commercial market that is
smaller than currently anticipated by us and that does not support their continued development, and
may not be accepted by patients and the medical community, or we may otherwise fail to successfully
develop and commercialize our product candidates.
*We may not receive regulatory approval from the FDA or any other regulatory body required for the
commercial sale of our product candidates in the United States or elsewhere for any number of
reasons.
The regulatory approval of a new drug candidate typically takes many years and the outcome is
uncertain. We may not be able to repeat in future pre-clinical or clinical trials the results
achieved in earlier pre-clinical or clinical trials as we move through the regulatory process for
development and approval of CYP-1020, our intranasal carbetocin compound or Staccato nicotine,
which could cause us to cease further development of these product candidates. Further, it is
possible that CYP-1020 will prove to be effective for psychosis but not cognition. We consider
CYP-1020 to have considerable pro-cognitive potential and, to the extent CYP-1020 does not prove to
be effective for cognition, we may choose to discontinue development of CYP-1020. In addition, it
is possible that intranasal carbetocin, despite being a long-acting analog of the natural occurring
hormone oxytocin, may not demonstrate similar beneficial
effects in the core symptoms of individuals with autism, in which case we may choose to
discontinue development of intranasal carbetocin.
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As part of the regulatory approval process, we must conduct, at our own expense, additional
preclinical studies and clinical trials for CYP-1020, our intranasal carbetocin compound and
Staccato nicotine, as applicable, sufficient to demonstrate their safety and efficacy to the
satisfaction of the FDA and other regulatory agencies in the United States and other countries
where our product candidates will be marketed if approved. The number of preclinical studies and
clinical trials that will be required varies depending on a number of factors including, the type
of product, the disease or condition that the product is in development for, the regulations
applicable to any particular product, and the outcome of additional preclinical studies and
clinical trials. For example, the Staccato nicotine system creates condensation aerosol from a
nicotine salt, and there currently are no approved products that use a similar method of drug
delivery. Companies developing other inhalation products have not defined or successfully completed
the types of preclinical studies we believe will be required for submission to regulatory
authorities as we seek approval to conduct our clinical trials. We or our licensor may not have
conducted or may not conduct in the future the types of preclinical testing ultimately required by
regulatory authorities. In addition, future preclinical toxicology research could reveal
unfavorable pharmacology, toxicology, carcinogenicity or side effects that cause us to cease
development of Staccato nicotine.
The regulatory process typically also includes a review of the manufacturing process to ensure
compliance with applicable regulations and standards, including the cGMP (current good
manufacturing practice) requirements. The FDA can delay, limit or decline to grant approval for
many reasons, including:
| our product candidates may not be safe or effective; | ||
| we may not achieve statistical significance for the primary endpoint in clinical trials for our product candidates; | ||
| FDA officials may interpret data from preclinical testing, clinical trials and/or pharmacovigilance data from use of our product candidates outside of the United States in different ways than we interpret such data; | ||
| the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of any future collaborators or contract manufacturers we may engage; | ||
| the FDA may change its approval policies or adopt new regulations; and | ||
| the FDA may request additional data with respect to our product candidates. |
We may never receive regulatory approval from the FDA or any other regulatory body required
for the commercial sale of any future products in the United States or elsewhere.
*We may not be successful in implementing our Research and Development, or R&D, strategy.
Our focus for our recently renewed R&D strategy is pursuing in-licensing and collaboration
transactions for CNS drug development candidates that target large unmet medical needs covering a
variety of CNS disorders. The BioLineRx, Marina and Alexza transactions are examples of our
pursuing this strategy. The successful development of our product candidates that we may license
or acquire is uncertain. Factors, in addition to the above named regulatory factors, that could
adversely impact or cause us to cease our development efforts include:
| our product candidates may, even if approved, address smaller commercial markets than we anticipate; |
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| we may not have adequate intellectual property right protection to support continued development efforts with respect to our product candidates; | ||
| any termination or dispute involving any agreement pursuant to which we in-licensed or otherwise acquired rights to our product candidates; | ||
| we may not be able to license or acquire any other compounds for future R&D; | ||
| the competitive landscape may change, making products in development less competitive than alternative treatments, and therefore not commercially viable; | ||
| we may not be able to obtain a label that includes improvement of cognition during the approval process that would support commercialization of our product candidates; and | ||
| we may not be able to adequately fund development of one or multiple product candidates. |
*We rely on third parties for our sales activities.
We recently eliminated our sales force and marketing personnel. In connection with this plan,
we agreed with Forest Laboratories to discontinue our right to co-promote Savella. As a result, we
currently do not have the ability to directly sell, market or distribute any product we develop,
and are dependent on Forest for all sales and commercialization activities relating to Savella.
With respect to any product we develop, we may have to obtain the assistance of a pharmaceutical
company or other entity with a large distribution system and a large direct sales force, or build a
substantial marketing and sales force with appropriate technical expertise and supporting
distribution capabilities. We may not be able to enter into such arrangements with third parties in
a timely manner or on acceptable terms or to establish such sales, marketing and distribution
capabilities of our own. To the extent that we enter into co-promotion or other licensing
arrangements, our product revenues are likely to be lower than if we directly marketed and sold our
products, and any revenues we receive will depend upon the efforts of third parties, and these
efforts may not be successful.
*We rely on third parties to conduct our preclinical studies and our clinical trials. If these
third parties do not successfully carry out their contractual duties or meet expected deadlines, we
may not be able to obtain regulatory approval for any of our other future product candidates.
As we have in the past, we expect to continue to rely on third parties to conduct our
preclinical studies and clinical trials. Because we do not conduct our own preclinical studies or
clinical trials, we must rely on the efforts of others and cannot always control or predict
accurately the timing of such studies and trials, the costs associated with such studies and trials
or the procedures that are followed for such studies and trials. We expect to continue to rely on
third parties to conduct all of our future preclinical studies and clinical trials. If these third
parties do not successfully carry out their contractual duties or obligations or meet expected
deadlines, or if the quality or accuracy of the data they obtain is compromised due to their
failure to adhere to our protocols or for other reasons, or if they fail to maintain compliance
with applicable government regulations and standards, our preclinical studies or clinical trials
may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or
successfully commercialize any of our future product candidates.
*Recent healthcare legislation may have an extensive impact on our business.
The United States Congress recently enacted legislation to reform the healthcare system. A
major goal of the new healthcare reform law was to provide greater access to healthcare coverage
for more Americans. Accordingly, the new healthcare reform law requires individual U.S. citizens
and legal residents to maintain qualifying health coverage, imposes certain requirements on
employers with respect
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to offering health coverage to employees, amends insurance regulations regarding when coverage
can be provided and denied to individuals, and expands existing government healthcare coverage
programs to more individuals in more situations. Among other things, the new healthcare reform law
specifically:
| establishes annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs, beginning 2011; | ||
| increases minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, retroactive to January 1, 2010; | ||
| redefines a number of terms used to determine Medicaid drug rebate liability, including average manufacturer price and retail community pharmacy, effective October 2010; and | ||
| extends manufacturers Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, effective March 2010. |
This new legislation may have extensive impact on our business, including but not limited to
the royalty we may ultimately receive from Forest on sales of Savella, the type and costs of
providing health care for our employees, the expenses we may incur in connection with drugs we may
develop and reimbursement we may receive for certain drugs we may develop.
*Our business may be harmed if our restructuring plan does not achieve the anticipated results or
causes undesirable consequences.
We recently announced the restructuring of our business which resulted in our decreasing our
workforce by approximately 86%. This restructuring plan may yield unintended consequences, such as
attrition beyond our intended reduction in workforce and reduced employee morale, which may cause
our employees who were not affected by the reduction in workforce to seek alternate employment.
Additional attrition could impede our ability to meet our operational goals, which could have a
material adverse effect on our financial performance. In addition, as a result of the reductions in
our workforce, we face an increased risk of employment litigation. Furthermore, employees whose
positions were eliminated in connection with this restructuring plan may seek future employment
with our competitors. Although all our employees are required to sign a confidentiality agreement
with us at the time of hire, we cannot assure you that the confidential nature of our proprietary
information will be maintained in the course of such future employment. We cannot assure you that
we will not undertake additional restructuring activities in the future, that any of our
restructuring efforts will be successful, or that we will be able to realize the cost savings and
other anticipated benefits from our previous or any future restructuring plans.
*We are dependent on our collaboration with Forest Laboratories to commercialize Savella and to
obtain additional regulatory approvals.
Pursuant to the terms of our license and collaboration agreement with Forest Laboratories, we
granted Forest Laboratories an exclusive sublicense for the development and marketing of Savella,
for all indications in the United States. Forest Laboratories exercised its option to extend the
territory to include Canada. Forest Laboratories is responsible for funding the further development
of Savella, including further clinical trials and further regulatory approval. With the FDA
approval of Savella, and following our agreement with Forest Laboratories to discontinue our right
to co-promote Savella, Forest Laboratories has the sole responsibility for the marketing and sale
of the approved product and we will share responsibility for compliance with regulatory
requirements. We have limited control over the amount and timing of resources that Forest
Laboratories will dedicate to the further development and marketing of Savella. Our ability to
generate milestone and royalty payments from Forest Laboratories depends on Forest Laboratories
ability to achieve market acceptance of Savella for the management of FM.
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We are subject to a number of additional risks associated with our dependence on our
collaboration with Forest Laboratories, including:
| Forest Laboratories could fail to devote sufficient resources to the commercialization, marketing and distribution of Savella or any other products developed under our collaboration agreement, including by failing to develop or expand sales forces if such sales forces appear necessary for the most effective promotion of Savella or any other approved product; | ||
| We and Forest Laboratories could disagree as to post approval development plans, including the number and timing of clinical trials, or as to which additional indications for Savella should be pursued, if any, and therefore Savella may never be sold for any indications other than FM; | ||
| Forest Laboratories could fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing of Savella which could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production and refusal to approve any new drug applications; | ||
| Forest Laboratories could independently develop, develop with third parties or acquire products that could compete with Savella, including drugs approved for other indications used by physicians off-label for the treatment of FM; | ||
| Forest Laboratories could abandon or underfund the post approval development of Savella, repeat or conduct additional clinical trials or require a new formulation of milnacipran for further clinical testing, or delay the commencement of any post approval clinical trials for Savella for the management of FM; and | ||
| Disputes regarding the collaboration agreement that delay or terminate the post approval development or commercialization, may delay or prevent the achievement of clinical or regulatory objectives that would result in the payment of milestone payments or result in significant litigation or arbitration. |
Furthermore, Forest Laboratories may terminate our collaboration agreement upon our material
breach or our bankruptcy and may also terminate our agreement upon 120 days notice in the event
Forest Laboratories reasonably determines that the development program indicates issues of safety
or efficacy that are likely to prevent or significantly delay the filing or approval of any future
NDA or to result in labeling or indications that would significantly adversely affect the marketing
of any product developed under the agreement. If any of these events occur, we may not be able to
find another collaborator for further development or commercialization, and even if we elected to
pursue further development and continued commercialization of Savella, we might not be able to do
so successfully on a stand-alone basis and would experience substantially increased capital
requirements that we might not be able to fund.
*We rely upon an exclusive license from Pierre Fabre in order to develop and sell Savella, and our
ability to pursue the further development and commercialization of Savella for the management of FM
depends upon the continuation of our license from Pierre Fabre.
Our license agreement with Pierre Fabre provides us with an exclusive license to develop and
sell any products with the compound milnacipran as an active ingredient for any indication in the
United States and Canada, with a right to sublicense certain rights to Forest Laboratories under
our collaboration with Forest Laboratories. Either we or Pierre Fabre may terminate the license
agreement for cause upon 90 days prior written notice to the other party upon the bankruptcy or
dissolution of the other party, or upon a breach of any material provision of the agreement if the
breach is not cured within 90 days following the written notice. Furthermore, Pierre Fabre has the
right to terminate the agreement upon 90 days prior notice to us if
we and Forest Laboratories terminate our development and marketing activities with respect to
Savella, if we challenge certain patent rights of Pierre Fabre and under specified other
circumstances. If our license agreement with Pierre Fabre were terminated, we would lose our rights
to develop and commercialize products using the compound milnacipran as an active ingredient
(which, with respect to Savella in the United States, we sublicensed to Forest Laboratories), as
the compound is manufactured under Pierre Fabre patents and using Pierre Fabre know-how and trade
secrets, and it would be unlikely that we could obtain the active ingredient in milnacipran from
any other source.
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*We rely upon Pierre Fabre as our exclusive supplier of the active ingredient in Savella
and if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may
delay or prevent us from further commercializing Savella.
Pursuant to our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive
supplier to us and Forest Laboratories of the active pharmaceutical ingredient in Savella. Neither
we nor Forest Laboratories have facilities for the manufacture of the active pharmaceutical
ingredient in Savella. Currently, Pierre Fabre manufactures milnacipran in its facility in Gaillac,
France. Pierre Fabre is the only worldwide supplier of milnacipran, which is currently approved for
sale for a non-pain indication outside the United States. Pierre Fabres facility has been
initially inspected by the FDA for compliance with current good manufacturing practices (cGMP)
requirements and after this initial inspection, may be inspected from time to time. In addition,
Pierre Fabre has qualified an additional manufacturing facility, and the second manufacturing site
that has been identified by Pierre Fabre is also subject to inspection by the FDA for compliance
with cGMP. In the event an inspection results in written deficiencies, it may result in a
disruption or termination of the supply to us and Forest Laboratories of milnacipran. We do not
have control over Pierre Fabres or its sublicensees compliance with cGMP requirements. If Pierre
Fabre fails to timely and economically supply Forest Laboratories with sufficient quantities for
commercial sale of Savella, Forest Laboratories ability to successfully commercialize Savella, and
the royalty payments we derive from the sale and market acceptance of Savella, could be adversely
affected.
Furthermore, our purchase and supply agreement may be terminated for cause either by us or by
Pierre Fabre upon 90 days prior written notice to the other party upon a material breach of the
agreement if the breach is not cured within 90 days following the written notice. We have the right
to manufacture milnacipran if Pierre Fabre does not have a required buffer stock or in the event
that we terminate our license agreement with Pierre Fabre under certain circumstances. If our
purchase and supply agreement with Pierre Fabre is terminated, we are unlikely to be able to
qualify another supplier of the active ingredient within a reasonable time period, and our and
Forest Laboratories ability to further develop and commercialize Savella will be significantly
impaired.
*We rely upon Alexza to conduct device and process development work in order to deliver preclinical
and clinical trial materials for use by us in connection with preclinical toxicology studies and
clinical trials, and if Alexza fails to supply us with these materials it may delay or
prevent us from developing Staccato nicotine.
Pursuant to our license and development agreement with Alexza, Alexza is obligated to conduct
certain development activities and must supply us with certain clinical trial materials and other
test materials, which we require in order to conduct preclinical toxicology studies and clinical
trials. We do not have the resources or facilities necessary to conduct these activities or
manufacture these materials, nor do we control Alexza. If Alexza fails to conduct these activities
in a timely manner or at all or fails to supply us with these materials and other test materials in
a timely manner or at all, our ability to develop Staccato nicotine would be adversely affected.
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*Problems with the third parties that manufacture the active pharmaceutical ingredient in Staccato
nicotine or components of the Staccato nicotine system may delay our development of Staccato
nicotine and subject us to liability.
We do not currently own or operate manufacturing facilities for clinical or commercial
production of the active pharmaceutical ingredient to be used in Staccato nicotine. We have no
experience in drug manufacturing, and we lack the resources and the capability to manufacture the
active pharmaceutical ingredient used in Staccato nicotine, on either a clinical or commercial
scale. As a result, we will rely, and expect to continue to rely, on third parties to supply the
active pharmaceutical ingredient used in Staccato nicotine. Additionally, we will outsource the
manufacturing of the components of the Staccato nicotine system, including the electronics and
other physical components to be used in clinical proof of concept and eventual commercial device.
We have no experience in the manufacturing of components, and we currently lack the resources and
the capability to manufacture them, on either a clinical or commercial scale. As a result, we rely,
and expect to continue to rely, on third parties to supply these components.
Third party suppliers that we use must meet high precision and quality standards to meet
regulatory specifications and comply with regulatory requirements. A contract manufacturer is
subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign
authorities to ensure strict compliance with cGMP, the FDAs Quality System Regulation (QSR) and
other applicable government regulations and corresponding foreign standards. A contract
manufacturers failure to conform with cGMP or QSR could result in the FDAs refusal to approve or
a delay in the FDAs approval of a product candidate for marketing. We are ultimately responsible
for confirming that the active pharmaceutical ingredient and components used in the Staccato
nicotine system are manufactured in accordance with applicable regulations.
Our third party suppliers may not carry out their contractual obligations or meet our
deadlines. In addition, the active pharmaceutical ingredient and components they supply to us may
not meet our specifications and quality policies and procedures. If we need to find alternative
suppliers, we may not be able to contract for such supplies on acceptable terms, if at all. Any
such failure to supply or delay caused by such contract manufacturers would have an adverse effect
on our ability to continue clinical development of Staccato nicotine or commercialize Staccato
nicotine in the future.
If our third party suppliers fail to achieve and maintain high manufacturing standards in
compliance with applicable regulations, we could also be subject to certain product liability
claims in the event such failure to comply resulted in defective products that caused injury or
harm.
Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified
compounds, which limits how we can expand our product candidates.
Under our agreements with Pierre Fabre and Forest Laboratories, Forest Laboratories has agreed
to pay Pierre Fabre and us a royalty, in the event that Forest Laboratories sells a product other
than milnacipran for FM for a specified period of time, which shall not be less than three years.
We are, in turn, obligated to pay a portion of the royalty we receive from Forest Laboratories to
Pierre Fabre. In addition, each of us is subject to limitations related to each partys development
of any serotonin norephinephrine reuptake inhibitor (SNRI) products other than milnacipran. These
limitations include: (i) a prohibition on developing an SNRI product for specified indications for
which milnacipran is being developed; and (ii) a prohibition on developing an SNRI product for any
indication for a specified time period, and after such specified time period, a requirement that if
one of the parties launches and sells an SNRI product that is prescribed off-label for any
indication for which milnacipran is being developed, the selling party must reimburse the other
parties for lost sales due to the off-label use.
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*Provisions in our agreements with Forest Laboratories, Pierre Fabre and Alexza may prevent or
delay a change in control.
We lose our decision-making authority with respect to the development of Savella if we engage
in a merger, consolidation or sale of all or substantially all of our assets, or if another person
or entity acquires at least 50% of our voting capital stock. In addition, in the event that we have
a change of control that is not approved by our Board or in the event the surviving entity has an
FM product and does not divest such product within 12 months, Forest Laboratories may elect to
terminate our co-promotion rights for any product developed under the collaboration agreement
(other than with respect to Savella, which co-promotion rights we have already agreed to
discontinue). Our license agreement with Pierre Fabre provides that Pierre Fabre may elect to
terminate the agreement upon a change in control transaction in which a third party acquirer of us
controls an SNRI product, and the acquirer does not take certain actions (e.g., divestiture of such
SNRI product) within a specified time period to cure the breach of certain restrictions in the
agreement that results from such SNRI product. Our license and development agreement with Alexza
provides that, in connection with certain transactions that result in our change in control, Alexza
will have the right to cause us to buy out the royalties we would have otherwise owed to Alexza in
connection with the sale or license of Staccato nicotine. These provisions may have the effect of
delaying or preventing a change in control or a sale of all or substantially all of our assets, or
may reduce the number of companies interested in acquiring us.
*We are at an early stage of commercialization and we may never generate any significant revenues.
We are at an early stage of development as a biotechnology company and have only one
commercial product, Savella, that is currently marketed. We recently announced that we have agreed
with Forest Laboratories to discontinue our rights to co-promote Savella, and our revenue from
future sales of Savella will be solely derived from royalties on sales by Forest Laboratories.
Further, our current product candidates, as well as any future products that we may acquire or
develop, will require significant additional development, appropriate regulatory approval, and
additional investments before they can be commercialized, if ever. Our product development and
product acquisition efforts may not lead to any further commercial products, either because the
product candidates are not shown to be safe and effective, or because we have inadequate financial
or other resources to pursue clinical development of the product candidate or because the FDA or
state authorities do not grant or otherwise withdraw or revoke a regulatory approval.
If we are unable to develop on a timely basis or at all any additional products, we will be
unable to generate sufficient revenues (including revenues from royalties based on sales of Savella
by Forest Laboratories), may be unsuccessful in raising additional capital and may cease our
operations.
Our failure to comply with the HIPAA security and privacy regulations and other state regulations
may increase our operational costs.
The Health Insurance Portability and Accountability Act (HIPAA) privacy and security
regulations establish comprehensive federal standards with respect to the uses and disclosures of
personal health information (PHI) by health plans and healthcare providers, in addition to
setting standards to protect the confidentiality, integrity and availability of electronic PHI. The
regulations establish a complex regulatory framework on a variety of subjects, including:
| the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payments for services and healthcare operations activities; | ||
| a patients rights to access, amend and receive an accounting of certain disclosures of PHI; | ||
| the content of notices of privacy practices for PHI; and | ||
| administrative, technical and physical safeguards required of entities that use or receive PHI electronically. |
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We have implemented policies and procedures related to compliance with the HIPAA privacy and
security regulations, as required by law. The privacy regulations establish a uniform federal
floor and do not supersede state laws that are more stringent. Therefore, we are required to
comply with both federal privacy regulations and varying state privacy laws. The federal privacy
regulations restrict our ability to use or disclose patient identifiable laboratory data, without
patient authorization, for purposes other than payment, treatment or healthcare operations (as
defined by HIPAA), except for disclosures for various public policy purposes and other permitted
purposes outlined in the privacy regulations. The privacy and security regulations provide for
significant fines and other penalties for wrongful use or disclosure of PHI, including potential
civil and criminal fines and penalties. Although the HIPAA statute and regulations do not expressly
provide for a private right of damages, we also could incur damages under state laws to private
parties for the wrongful use or disclosure of confidential health information or other private
personal information.
*Our business presents the risk of product liability claims.
We may be subject to legal actions asserting product liability claims relating to the use of
Savella. Although we currently maintain $10.0 million in insurance for product liability claims,
litigation is inherently subject to uncertainties and we may be required to expend substantial
amounts in the defense or resolution of any product liability claims made relating to the use of
Savella, some or all of which may not be covered by insurance.
We also plan to continue conducting clinical trials on humans using milnacipran from time to
time, and to conduct pre-clinical and clinical trials using CYP-1020, our intranasal carbetocin
compound and Staccato nicotine, and the use of these product candidates may result in adverse
effects. Although we are aware that there are side effects associated with our product candidates,
we will never be able to predict all possible harm or side effects that may result from the
treatment of patients with our product candidates or any of our future product candidates, and the
amount of insurance coverage we currently hold may not be adequate to protect us from any
liabilities. We may not have sufficient resources to pay any liability resulting from such a claim
beyond our insurance coverage.
*In light of our regulatory approval for Savella and if we ever receive regulatory approval for any
other future product candidate, we will be subject to ongoing FDA regulatory obligations and
continuing regulatory review by applicable regulatory authorities.
Our regulatory approval for Savella has been and regulatory approval for any future product
candidates will be limited to the indications, dosages and restrictions on the product label. The
FDA has approved Savella for the management of fibromyalgia, and has imposed additional
limitations on the indicated uses, has required post-marketing surveillance and the performance of
potentially costly post-marketing studies. Even though we have received FDA approval for Savella,
as we have seen with other products on the market, Savella or any of our other future product
candidates may later exhibit adverse effects that limit or prevent their widespread use or that
force us to withdraw those product candidates from the market. We and Forest Laboratories continue
to be subject to strict FDA regulation after approval, including regulation of product labeling and
packaging, adverse event reporting, manufacture, storage, advertising, promotion and recordkeeping.
Any unforeseen problems with an approved product or any violation of regulations could result in
restrictions on the product, including its withdrawal from the market.
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*Even if our product candidates are approved, the market may not accept these products or our
existing products.
Savella, CYP-1020, our intranasal carbetocin compound, Staccato nicotine or any other future
product candidates that we may develop and for which we obtain the required regulatory approvals
may not gain market acceptance among physicians, patients, healthcare payers and the medical
community. A number of factors may limit the market acceptance of our products including the
following:
| timing of market entry relative to competitive products; | ||
| extent of marketing efforts by us and with respect to Savella, the marketing and promotion efforts of Forest Laboratories; | ||
| rate of adoption by healthcare practitioners; | ||
| rate of a products acceptance by the target community; | ||
| availability of alternative therapies; | ||
| price of our products relative to alternative therapies; | ||
| availability of third-party reimbursement; and | ||
| the prevalence or severity of side effects or unfavorable publicity concerning our products or similar products. |
If Savella, CYP-1020, our intranasal carbetocin compound, Staccato nicotine or any other
future product candidates that we may develop do not achieve market acceptance, we may lose our
investment in that product or product candidate, which may cause our stock price to decline, and
our financial condition and results of operations could also be harmed.
*If we do not produce Staccato nicotine cost effectively, it will never be profitable.
The Staccato nicotine system contains electronic and other components in addition to the
active pharmaceutical ingredient. As a result of the cost of developing and producing these
components, the cost to produce Staccato nicotine could be higher per dose than the cost to produce
competitive oral, transdermal or inhaled products. This increased cost of goods may prevent us from
ever selling Staccato nicotine at a profit. The development and production of Staccato nicotine
entails a number of technical challenges, including achieving adequate dependability, that may be
expensive or time consuming to solve. Any delay in or failure to develop and manufacture Staccato
nicotine in a cost effective way could prevent us from developing Staccato nicotine on a timely
basis or at all, or successfully commercializing Staccato nicotine.
*Our competitors may develop and market products that are less expensive, more effective or safer,
which may diminish or eliminate the commercial success of any products we may commercialize.
The pharmaceutical industry is highly competitive and requires an ongoing, extensive search
for technological innovation. It also requires, among other things, the ability to effectively
discover, develop, test, commercialize, market and promote products, including communicating the
effectiveness, safety and value of products to actual and prospective customers, including medical
professionals. Many of our competitors have greater resources than we have. This enables them,
among other things, to spread their marketing and promotion costs over a broader revenue base.
Other competitive factors in the pharmaceutical industry include quality and price, product
technology, reputation and access to technical information.
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It is possible that future developments by our competitors could make our products or
technologies less competitive or obsolete. Our future growth depends, in part, on our ability to
provide products which are more effective than those of our competitors and to keep pace with rapid
medical and scientific change. Sales of our products may decline rapidly if a new product is
introduced by a competitor, particularly if a new product represents a substantial improvement over
any of our existing products. In addition, the high level of competition in our industry could
force us to reduce the price at which we sell our products or require us to spend more to market
our products.
With respect to our pharmaceutical product for the management of FM, Savella (milnacipran
HC1), in June 2007, the FDA approved Pfizer Inc.s drug pregabalin (Lyrica®) for the
management of FM and in June 2008 approved Eli Lilly and Companys duloxetine
(Cymbalta®) for the management of FM. Duloxetine is a serotonin norepinephrine reuptake
inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology to Savella.
Tricyclic antidepressants (TCAs), which are available as inexpensive generic formulations, are
also used to treat FM and are less expensive than Savella, as are other generic antidepressants and
pain products commonly used to treat FM. Pfizer Inc.s drug pregabalin (Lyrica®) and Eli
Lilly and Companys duloxetine (Cymbalta®) are competitive with Savella and these
products and any other future products will affect Savellas sales and may cause sales to be lower
than anticipated, as can the numerous generic antidepressants and pain products commonly used
off-label to treat FM.
The market potential for FM is considerable and a number of pharmaceutical companies focused
on therapies for alleviating pain or antidepressant therapies could decide to evaluate their
current product candidates for the treatment of FM at any time. Due to the prevalence and incidence
of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have
significant research and product development programs in FM. We expect significant competition both
in the United States and in foreign markets for Savella and in each of the target markets for any
drugs that we seek to develop.
With respect to our product candidates currently being developed, it is likely that the market
for the conditions that they seek to address will continue to evolve during their development. If
and when any of our product candidates are approved for the treatment of the specified condition
they seek to address, their safety or efficacy may not be competitive with future therapies also
addressing such conditions and, as such, would fail to generate significant revenues.
Our competition for pharmaceutical products will be partially determined by the potential
indications that are ultimately cleared for marketing by regulatory authorities, the timing of any
clearances and market introductions and whether any currently available drugs, or drugs under
development by others, are effective in the same indications. Accordingly, the relative speed with
which we can develop, complete the clinical trials for, receive regulatory clearance for and supply
commercial quantities of products to the market is expected to be an important competitive factor.
We expect that competition among products approved for sale will be based, among other factors
described above, on product efficacy, safety, tolerability, cost, reliability, availability, payer
reimbursement policies and patent protection.
*We are subject to uncertainty relating to health care reform measures and reimbursement policies
which, if not favorable to our products or product candidates, could hinder or prevent the
commercial success of our product or product candidates.
The continuing efforts of the government, insurance and managed care organizations and other
health care payers to contain or reduce prescription drug costs may adversely affect:
| our ability to set a price we believe is fair for our products; | ||
| our ability to generate revenues and achieve or maintain profitability; | ||
| the future revenues and profitability of our potential customers, suppliers and collaborators; and | ||
| the availability of capital. |
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Successful commercialization of Savella in the United States will depend in part on the extent
to which government, insurance and managed care organizations and other health care payers
establish appropriate coverage for Savella and related treatments. Third-party payers are
increasingly challenging the prices charged for prescription drugs. Third-party payers are also
encouraging the use of generic drugs. These trends could influence health care coverage policies,
as well as legislative proposals to reform health care or reduce government insurance programs and
result in the exclusion of our products and product candidates from coverage and reimbursement
programs or lower the prices of our products and product candidates. Our revenues from royalties on
sales of Savella by Forest Laboratories and from the sale of any products we develop in the future
could be significantly reduced as a result of these cost containment measures and reforms.
*We rely on our employees and consultants for their scientific and technical expertise in
connection with our business operations.
We rely significantly on the scientific and technical expertise of our employees and
consultants to conduct our business. We recently decreased our workforce by approximately 86%,
reducing our number of full-time employees to approximately 23, and accordingly we will continue to
rely heavily on each of our employees. In addition, because we have a small number of employees, we
rely much more on consultants than do other companies. If any of our relationships with our
employees or consultants are terminated, we may lose access to scientific knowledge and expertise
necessary for the further development of Savella or further development and commercialization of
our product candidates. We expect to continue to rely on consultants and our current employees for
scientific and technical knowledge and expertise essential to our business. Additionally, our
employment agreement with our chief executive officer provides for at will employment, which
means that he may terminate his services to us at any time.
*We have a history of operating losses and we may never be profitable.
We have incurred substantial losses during our history. For the nine months ended September
30, 2010 and the years ended December 31, 2009 and 2008, we
incurred net losses of $47.2 million,
$28.3 million and $18.2 million, respectively. As of September 30, 2010, we had an accumulated
deficit of $243.6 million. We do not expect to be profitable in the near future, and our ability to
become profitable will depend largely upon our ability to develop, market and commercialize any
products we may develop, as well as on Forest Laboratories ability to further develop, market and
commercialize Savella. We may not become profitable in the foreseeable future and may never achieve
profitability.
*We will need substantial additional funding and may be unable to raise capital when needed, which
could force us to scale back or eliminate the development of our product candidates or to
discontinue pursuing any proposed acquisitions or in-licenses, or which could adversely affect our
ability to realize the expected benefits of any completed acquisitions or in-licenses.
Our acquisition of CYP-1020 required an upfront payment to BioLineRx of $30.0 million, with
total potential clinical and regulatory milestones of up to $160.0 million, potential commercial
milestones of $85.0 million, and a potential additional $90.0 million associated with approval for
additional indications in the United States or for approval in other countries in North America.
In addition, we will fund all continuing development activities. Our acquisition of our intranasal
carbetocin compound required an initial payment to Marina of $750,000, and following the successful
completion of specified patent issuance and late-stage development and commercial milestones, we
will be obligated to pay additional milestones of up to $27.0 million. In addition, we will fund
all continuing development activities. Our acquisition of Staccato nicotine required an upfront
payment to Alexza of $5.0 million, and following the completion of certain clinical milestones
relating to Staccato nicotine, we will be obligated to pay to Alexza an additional technology
transfer payment of $1.0 million. We are also obligated to reimburse
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Alexzas costs and expenses to conduct activities under a development plan agreed upon by the
parties related to Staccato nicotine. We are also incurring expenses in connection with the
continuing evaluation of potential acquisitions or other strategic transactions and will incur
additional expenses in the event we close any such transactions or enter into any co-promotion,
in-licensing or collaboration agreements in connection with any such transactions. We are also
incurring expenses for advisors and for other activities related to responding to the unsolicited
takeover offer by Ramius and in evaluating various strategic alternatives that we may consider
pursuing. We do not have any committed external sources of funding and although we expect to have
revenues, it is likely our revenues will be less than we expect to spend in the year 2010 and that
at some time in the future we will likely need to raise additional capital through the sale of
equity or debt. The amount of capital we will require will depend upon many factors, including but
not limited to, how much is ultimately required to develop the products that are in development and
the evaluation, pursuit and potential closing of any strategic transactions. If we are unable to
raise capital when we need it, we may have to scale back or eliminate some or all of our
development of existing or future product candidates and discontinue the evaluation, pursuit or
completion of any proposed acquisitions or strategic transactions, and we may be unable to realize
the expected benefits of any completed acquisitions or strategic transactions.
*Raising additional funds by issuing securities, or through collaboration and licensing
arrangements, may cause dilution to existing stockholders, restrict our operations, or require us
to relinquish propriety rights.
We may attempt to raise additional funds through public or private equity offerings or through
debt financings. However, the recent credit crisis and the current economic conditions may prevent
us from raising money through debt or equity financings. We may also issue equity or other
securities in connection with corporate collaborations and licensing arrangements, or raise funds
through arrangements like these. To the extent that we are able to raise additional capital by
issuing equity securities, or otherwise issue equity securities in connection with corporate
collaboration and licensing arrangements or otherwise, our existing stockholders ownership
percentage will be diluted to a greater extent than would have occurred in the past due to the
level of our stock price relative to earlier periods. Any financing or other transaction that
involves our issuing securities that we do engage in may also include provisions that restrict our
operations. In addition, if we raise additional funds through collaborations and licensing
arrangements, it may be necessary to relinquish potential valuable rights to our potential products
on terms that are not favorable to us.
*The investment of our cash balance and short-term investments are subject to risks which may cause
losses and affect the liquidity of these investments.
As of September 30, 2010, we had $13.9 million in cash and cash equivalents and $82.4 million
in short-term investments. We have historically invested these amounts in U.S. government
securities, corporate debt securities, commercial paper, certificates of deposit and money market
funds. Certain of these investments are subject to general credit, liquidity, market and interest
rate risks. During the nine months ended September 30, 2010, we determined that any declines in
the fair value of our investments were temporary. There may be further declines in the value of
these investments, which we may determine to be other-than-temporary. These market risks
associated with our investment portfolio may have a negative adverse effect on our results of
operations, liquidity and financial condition.
We may lose our net operating loss carryforwards, which could prevent us from offsetting future
taxable income.
We have incurred substantial losses during our history and do not expect to become profitable
in 2010 and may never achieve profitability. To the extent that we continue to generate taxable
losses, unused losses will carry forward to offset future taxable income, if any, until such unused
losses expire. All unused federal net operating losses will expire 15 or 20 years after any year in
which they were generated. The carryforward period is 15 years for losses incurred prior to 1996
and 20 years for losses incurred subsequent
to 1997. Our federal net operating losses will begin to expire in 2010, and our California tax
loss carryforwards will begin to expire in 2012. Additionally, the future utilization of our net
operating loss carryforwards to offset future taxable income is subject to annual limitations,
pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that have
occurred in prior years, which could prevent us from fully utilizing our net operating loss
carryforwards.
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*Our stock price has been very volatile and will likely continue to be volatile.
The market prices of the stock of technology companies, particularly biotechnology companies,
have been highly volatile. For the period from January 1, 2007 through December 31, 2009, the low
and high sales prices for our common stock ranged from $4.90 to $18.20. For the nine months ended
September 30, 2010, our low and high sales prices were $2.06 and $6.22, respectively. As of
September 30, 2010, the last reported sale price of our common stock was $3.85. Our stock price has
been and will likely continue to be affected by market volatility, as well as by our own
performance. Our stock has recently traded at prices that value our company below our actual
available cash, and we recently received an unsolicited takeover offer from Ramius, as described
above. We expect our stock price to be volatile in the near future, particularly in light of the
pending unsolicited takeover offer from Ramius. The following factors, among other risk factors,
may also have a significant effect on the market price of our common stock:
| entering into an agreement for the acquisition or licensing of any products, product candidates or companies, or an agreement with any corporate collaborator, as was the case when we recently announced our deals with BioLineRx, Marina and Alexza; | ||
| our entering into any strategic transaction in connection with our ongoing evaluation of strategic alternatives; | ||
| the commercial sales of Savella; | ||
| development of other product candidates; | ||
| developments in our relationship with Forest Laboratories, including the further amendment or termination of our agreement; | ||
| developments in our relationship with Pierre Fabre, including the termination of our agreement; | ||
| developments in our relationship with BioLineRx, including the termination of our agreement; | ||
| developments in our relationship with Alexza, including the termination of our agreement; | ||
| developments in connection with the unsolicited takeover offer by Ramius and other developments with third parties that may submit similar offers; | ||
| our available cash; | ||
| announcements of technological innovations or new products by us or our competitors; | ||
| developments in our patent or other proprietary rights; | ||
| fluctuations in our operating results; | ||
| our ability to successfully implement our restructuring plans; | ||
| litigation initiated by or against us; | ||
| developments in domestic and international governmental policy or regulation; and | ||
| economic and other external factors or other disaster or crisis. |
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*The concentration of ownership among our existing officers, directors and principal stockholders
may result in the entrenchment of management, prevent other stockholders from influencing
significant corporate decisions and depress our stock price.
As of September 30, 2010, our executive officers, directors and stockholders who hold at least
5% of our stock beneficially owned and controlled approximately 35% of our outstanding common
stock. If these officers, directors and principal stockholders act together, they will be able to
help entrench management and to significantly influence matters requiring approval by our
stockholders, including a financing in which we sell more than 20% of our voting stock at a
discount to the market price, the removal of any directors up for election, the election of the
members of our board of directors, mergers, a sale of all or substantially all of our assets, going
private transactions and other fundamental transactions. This concentration of ownership could also
depress our stock price.
*Our stockholder rights plan, anti-takeover provisions in our charter documents and Delaware law
could make an acquisition of us, which may be beneficial to our stockholders, more difficult and
may prevent attempts by our stockholders to replace or remove our current management.
We are a party to a stockholder rights plan, also referred to as a poison pill, which is
intended to deter a hostile takeover by making any proposed hostile acquisition of us more
expensive and less desirable to the potential acquirer. In addition, provisions in our second
amended and restated certificate of incorporation and our fourth amended and restated bylaws may
delay, impede or prevent an acquisition or change in control of us. These provisions may also
frustrate or prevent any attempts by our stockholders to replace or remove our current management
by making it more difficult for stockholders to replace members of our board of directors, who are
responsible for appointing the members of our management team. These provisions include, among
others, a requirement that our board of directors be divided into three classes with directors
serving three year terms and with only one class of directors being elected in any given year, a
requirement that special meetings of our stockholders may only be called by the chairman of the
board, our chief executive officer or a majority of our board of directors and a prohibition on
actions by our stockholders by written consent. In addition, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law,
which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding
voting stock from merging or combining with us. Our charter documents also establish advance
notice requirements for nominations for election to our board of directors and for proposing
matters that can be acted upon at stockholder meetings. Although we believe these provisions
together provide for an opportunity to receive higher bids by requiring potential acquirers to
negotiate with our board of directors, they would apply even if the offer may be considered
beneficial by some stockholders.
We expect to continue incurring significant costs as a result of enacted and proposed changes in
laws and regulations relating to corporate governance matters.
Changes in the laws and regulations affecting public companies, including the provisions of
the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and by The NASDAQ Stock Market LLC,
have resulted and we expect will continue to result in significant costs to us. In particular, our
efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations
regarding our required assessment of our internal controls over financial reporting and our
independent registered public accounting firms audit of internal control over financial reporting
has required the commitment of significant financial and managerial resources. We expect these
efforts to require the continued commitment of significant financial resources and management time
related to compliance activities. Additionally, these laws and regulations could make it more
difficult or costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board committees or as executive
officers.
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If we fail to maintain proper and effective internal controls, our ability to produce accurate
financial statements could be impaired, which could adversely affect our ability to operate our
business and investors view of us.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002,
including Section 404 related to internal controls, and the related rules and regulations of the
SEC, including expanded disclosures and accelerated reporting requirements and more complex
accounting rules. Compliance with Section 404 and other requirements will increase our costs and
will continue to require additional management resources. We may need to continue to implement
additional finance and accounting systems, procedures and controls to satisfy reporting
requirements. If we are unable to obtain future unqualified reports as to the effectiveness of our
internal control over financial reporting, investors could lose confidence in the reliability of
our internal control over financial reporting, which could adversely affect our ability to raise
financing and operate our business as well as our stock price.
Risks related to our intellectual property
*We rely primarily on method of use patents to protect our proprietary technology for Savella, and
our ability to compete may decrease or be eliminated if we are not able to protect our proprietary
technology.
Our ability to realize the full potential for royalties we are entitled to collect from Forest
Laboratories sale of Savella (milnacipran HCl), our only therapeutic product, may decrease or be
eliminated if we are not able to protect our proprietary technology. The composition of matter
patent for milnacipran (U.S. Patent 4,478,836) expired in June 2002, and a method of synthesis
patent (U.S. Patent 5,034,041) expired in December 2009. Accordingly, we rely on the patent for the
method of use of milnacipran to treat FM (U.S. patent 6,602,911), pain (U.S. Patent 6,992,110) and
the method of use of milnacipran to treat symptoms of chronic fatigue syndrome (U.S. Patent
6,635,675) issued to us, to protect our proprietary technology with respect to the development of
milnacipran. The method of use patent directly relevant to our current milnacipran product
candidate is the U.S. patent 6,602,911; the other two method of use patents may have future
applicability. We have also filed additional patent applications related to milnacipran and to the
use of milnacipran for FM (and other related pain syndromes and disorders), although no patents
have issued on these patent applications. Because there is no patent protection for the composition
of matter of milnacipran, other companies may be able to sell milnacipran in competition with
Forest Laboratories for indications for which we do not have use patent protection unless we and
Forest Laboratories are able to obtain additional protection through milnacipran-related patents or
additional use patents that may issue from our pending patent applications or from regulatory
exclusivity. It may be more difficult to establish infringement of methods of synthesis,
formulation or use patents as compared to a patent on a compound. If we or Forest Laboratories are
not able to obtain and enforce these patents, a competitor could use milnacipran for a treatment or
use not covered by any of our patents.
The validity of a United States patent depends, in part, on the novelty of the invention it
discloses. The pharmaceutical industry is characterized by constant investment in new drug
discovery and development, and this results in a steady stream of publications regarding the
product of this investment, any of which would act to defeat the novelty of later-discovered
inventions. Issued United States patents enjoy a presumption of validity that can only be overcome
by clear and convincing evidence. However, patents are nonetheless subject to challenge and can be
invalidated if a court determines, retrospectively, that despite the action of the U.S. Patent and
Trademark Office in issuing the patent, the corresponding patent application did not meet the
statutory requirements. If a competitor or other third party were to successfully
challenge our patents, and claims in these patents are narrowed or invalidated, our ability to
protect the related product from competition would be compromised.
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We also expect to rely on the United States Drug Price Competition and Patent Term Restoration
Act, commonly known as the Hatch-Waxman Amendments, for protection of Savella and our other future
products. The Hatch-Waxman Amendments provide data exclusivity for new molecular entities, such as
that in Savella. Once a drug containing a new molecule is approved by the FDA, the FDA cannot
accept an abbreviated NDA for a generic drug containing that molecule for five years, although the
FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by
independent clinical data. Amendments have been proposed that would narrow the scope of
Hatch-Waxman exclusivity and permit generic drugs to compete with our drug. After the Hatch-Waxman
exclusivity period expires, assuming our patents are valid, we still expect to rely on our method
of use patents to protect our proprietary technology with respect to the development of
milnacipran. The patent positions of pharmaceutical companies are uncertain and may involve complex
legal and factual questions. We may incur significant expense in protecting our intellectual
property and defending or assessing claims with respect to intellectual property owned by others.
Any patent or other infringement litigation by or against us is likely and could result in
significant expense to us, including diversion of the resources of management.
Others may file patent applications or obtain patents on similar technology or compounds that
compete with Savella for the treatment of FM, with CYP-1020, with our intranasal carbetocin
compound or with Staccato nicotine. We cannot predict the breadth of claims that will be allowed
and issued in patent applications. Once patents have issued, we cannot predict how the claims will
be construed or enforced. We may infringe on intellectual property rights of others without being
aware of the infringement. If another party claims we are infringing their technology, we could
have to defend an expensive and time consuming lawsuit, pay a large sum if we are found to be
infringing, or be prohibited from selling or licensing our products unless we obtain a license or
redesign our product, which may not be possible.
We also rely on trade secrets and proprietary know-how to develop and maintain our competitive
position. Some of our current or former employees, consultants or scientific advisors, or current
or prospective corporate collaborators, may unintentionally or willfully disclose our confidential
information to competitors or use our proprietary technology for their own benefit. Furthermore,
enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult
to prove, making the outcome uncertain. Our competitors may also independently develop similar
knowledge, methods and know-how or gain access to our proprietary information through some other
means.
*Our ability to compete may decline if we do not adequately protect our proprietary rights.
Our commercial success depends on obtaining and maintaining proprietary rights to our products
and product candidates and technologies and their uses as well as successfully defending these
rights against third party challenges. We will only be able to protect our products and product
candidates, proprietary technologies and their uses from unauthorized use by third parties to the
extent that valid and enforceable patents or effectively protected trade secrets cover them.
Our ability to obtain patent protection for our products and product candidates and
technologies is uncertain due to a number of factors, including:
| we may not have been the first to make the inventions covered by our pending patent applications or issued patents; | ||
| we may not have been the first to file patent applications for our products and product candidates or the technologies we rely upon; | ||
| others may independently develop similar or alternative technologies or duplicate any of our technologies; |
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| our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability; | ||
| any or all of our pending patent applications may not result in issued patents; | ||
| we may not seek or obtain patent protection in all countries that will eventually provide a significant business opportunity; | ||
| any patents issued to us or our collaborators may not provide a basis for commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties; | ||
| some of our technologies may not be patentable; | ||
| others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or | ||
| others may identify prior art which could invalidate our patents. |
Even if we obtain patents covering our product candidates or technologies, we may still be
barred from making, using and selling our product candidates or technologies because of the patent
rights of others. Others may have filed and in the future are likely to file patent applications
covering compounds, genes, or gene products or other materials that are similar or identical to
ours. Numerous U.S. and foreign issued patents and pending patent applications owned by others
exist in the area of the fields in which we have developed and are developing products. These could
materially affect our ability to develop our product candidates or sell our products. Because
patent applications can take many years to issue, there may be currently pending applications,
unknown to us, which may later result in issued patents that our products and product candidates or
technologies may infringe. These patent applications may have priority over patent applications
filed by us. Disputes may arise regarding the ownership or inventorship of our inventions. It is
difficult to determine how such disputes will be resolved. Others may challenge the validity of our
patents. If our patents are found to be invalid we will lose the ability to exclude others from
making, using or selling the inventions claimed therein.
Some of our research collaborators and scientific advisors have rights to publish data and
information to which we have rights. If we cannot maintain the confidentiality of our technology
and other confidential information in connection with our collaborations, then our ability to
receive patent protection or protect our proprietary information will be impaired. In addition,
in-licensed technology is important to our business. We generally will not control the patent
prosecution, maintenance or enforcement of in-licensed technology.
*A dispute concerning the infringement or misappropriation of our proprietary rights or the
proprietary rights of others could be time consuming and costly and an unfavorable outcome could
harm our business.
There is significant litigation in the industry regarding patent and other intellectual
property rights. We may be exposed to future litigation by third parties based on claims that our
products and product candidates, technologies or activities infringe the intellectual property
rights of others. If our drug development activities are found to infringe any such patents, we may
have to pay significant damages. There are many patents relating to chemical compounds and the uses
thereof. If our compounds are found to infringe any such patents, we may have to pay significant
damages. A patentee could prevent us from making, using or selling the patented compounds. We may
need to resort to litigation to enforce a patent issued to us, protect our trade secrets or
determine the scope and validity of third party proprietary rights.
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From time to time, we may hire scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities conducted by us. Either we or these
individuals may be subject to allegations of trade secret misappropriation or other similar claims
as a result of their prior affiliations. If we become involved in litigation, it could consume a
substantial portion of our managerial and financial resources, whether we win or lose. We may not
be able to afford the costs of litigation. Any legal action against our company or our
collaborators could lead to:
| payment of damages, potentially treble damages, if we are found to have willfully infringed such parties patent rights; | ||
| injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products and product candidates; or | ||
| we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all. |
As a result, we could be prevented from commercializing current or future products and product
candidates.
*The patent applications of pharmaceutical and biotechnology companies involve highly complex legal
and factual questions, which could negatively impact our patent position.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions. The U.S. Patent and Trademark Offices standards are
uncertain and could change in the future. Consequently, the issuance and scope of patents cannot be
predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S.
patents and patent applications may also be subject to interference proceedings and U.S. patents
may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign
patents may be subject to opposition or comparable proceedings in the corresponding foreign patent
office), which proceedings could result in either loss of the patent or denial of the patent
application or loss or reduction in the scope of one or more of the claims of the patent or patent
application. In addition, such interference, reexamination and opposition proceedings may be
costly. Accordingly, rights under any issued patents may not provide us with sufficient protection
against competitive products or processes.
In addition, changes in or different interpretations of patent laws in the United States and
foreign countries may permit others to use our discoveries or to develop and commercialize our
technology and products without providing any compensation to us. The laws of some countries do not
protect intellectual property rights to the same extent as United States laws and those countries
may lack adequate rules and procedures for defending our intellectual property rights. For example,
some countries, including many in Europe, do not grant patent claims directed to methods of
treating humans, and in these countries patent protection may not be available at all to protect
our product or product candidates.
If we fail to obtain and maintain patent protection and trade secret protection of our
products and product candidates, proprietary technologies and their uses, we could lose our
competitive advantage and competition we face would increase, reducing our potential revenues and
adversely affecting our ability to attain or maintain profitability.
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 5 Other Information
Not applicable
Item 6 Exhibits
3.1 | Second Amended and Restated Certificate of Incorporation. (1) | ||
3.2 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation. (2) | ||
3.3 | Fourth Amended and Restated By-Laws. (3) | ||
3.4 | Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (4) | ||
4.1 | Form of Stock Certificate. (5) | ||
4.2 | Rights Agreement dated as of September 27, 2010, by and between the Registrant and American Stock Transfer & Trust Company, LLC. (6) | ||
4.3 | Form of Right Certificate. (7) | ||
10.1 | Letter Agreement, dated August 3, 2010, by and between the Registrant and Forest Laboratories Holdings Limited (f/k/a Forest Laboratories Ireland Limited). | ||
10.2 | License and Development Agreement, dated August 25, 2010, by and between the Registrant and Alexza Pharmaceuticals, Inc. (**) | ||
10.3 | Asset Purchase Agreement, dated August 25, 2010, by and between the Registrant and Marina Biotech, Inc. (**) | ||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a 14(a) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as amended. | ||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a 14(a) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as amended. | ||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a 14(b) or Rule 15d 14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Incorporated by reference to Appendix C of our Definitive Proxy Statement filed with the SEC on August 11, 2003 | |
(2) | Incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 2009 filed with the SEC on November 9, 2009. | |
(3) | Incorporated by reference to Exhibit 3.1 to Form 8-K filed with the SEC on May 6, 2009. | |
(4) | Incorporated by reference to Exhibit 3.4 to Form 8-K filed with the SEC on September 28, 2010. | |
(5) | Incorporated by reference to Exhibit 4.1 to Form S-1 Registration Statement No. 33-41225. | |
(6) | Incorporated by reference to Exhibit 4.2 to Form 8-K filed with the SEC on September 28, 2010. | |
(7) | Incorporated by reference to Exhibit 4.3 to Form 8-K filed with the SEC on September 28, 2010. | |
(**) | Confidential treatment has been requested for certain portions of this exhibit. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned
thereunto duly authorized.
Cypress Bioscience, Inc. |
||||
Date: November 9, 2010 | By: | /s/ JAY D. KRANZLER | ||
Chief Executive Officer and Chairman of the Board | ||||
(Principal Executive Officer) | ||||
Date: November 9, 2010 | By: | /s/ SABRINA MARTUCCI JOHNSON | ||
Chief Financial Officer, Chief Operating | ||||
Officer and Executive Vice President (Principal Financial Officer) |
||||
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