e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-49616
HALOZYME THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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88-0488686 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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11588 Sorrento Valley Road, Suite 17 |
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San Diego, CA
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92121 |
(Address of principal executive offices)
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(Zip Code) |
(858) 794-8889
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o Accelerated Filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of outstanding shares of the registrants common stock, par value $0.001 per share, as of October 31, 2006
was 64,449,455.
TABLE OF CONTENTS
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED
AS OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
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September 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
16,100,911 |
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$ |
19,132,194 |
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Receivables |
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384,206 |
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413,829 |
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Inventory |
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233,767 |
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278,958 |
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Prepaid expenses |
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613,150 |
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281,191 |
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Total current assets |
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17,332,034 |
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20,106,172 |
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Property and equipment, net |
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460,834 |
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381,248 |
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Other assets |
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18,835 |
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22,835 |
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Total assets |
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$ |
17,811,703 |
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$ |
20,510,255 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,428,044 |
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$ |
1,379,932 |
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Accrued expenses |
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1,206,630 |
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669,298 |
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Deferred revenue |
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122,365 |
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254,138 |
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Total current liabilities |
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2,757,039 |
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2,303,368 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, $0.001 par value; 100,000,000 shares authorized,
64,449,455 and 60,246,997 shares issued and outstanding as of
September 30, 2006 and December 31, 2005, respectively |
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64,449 |
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60,247 |
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Additional paid-in-capital |
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51,711,492 |
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44,493,894 |
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Accumulated deficit |
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(36,721,277 |
) |
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(26,347,254 |
) |
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Total stockholders equity |
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15,054,664 |
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18,206,887 |
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Total liabilities and stockholders equity |
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$ |
17,811,703 |
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$ |
20,510,255 |
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The accompanying notes are an integral part of these financial statements.
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
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Three Months Ended |
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Nine Months Ended |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues: |
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Product sales |
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$ |
362,477 |
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$ |
25,644 |
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$ |
555,420 |
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$ |
71,347 |
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Expenses: |
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Cost of sales |
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356,093 |
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10,091 |
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395,591 |
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31,115 |
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Research and development |
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2,429,016 |
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3,106,983 |
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6,536,011 |
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7,579,311 |
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Selling, general and administrative |
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1,403,405 |
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674,368 |
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4,537,869 |
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2,443,287 |
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Total expenses |
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4,188,514 |
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3,791,442 |
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11,469,471 |
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10,053,713 |
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Loss from operations |
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(3,826,037 |
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(3,765,798 |
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(10,914,051 |
) |
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(9,982,366 |
) |
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Other income, net |
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175,000 |
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65,322 |
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540,028 |
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220,480 |
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Net loss |
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$ |
(3,651,037 |
) |
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$ |
(3,700,476 |
) |
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$ |
(10,374,023 |
) |
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$ |
(9,761,886 |
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Net loss per share, basic and diluted |
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$ |
(0.06 |
) |
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$ |
(0.07 |
) |
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$ |
(0.17 |
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$ |
(0.20 |
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Shares used in computing net loss per share,
basic and diluted |
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62,731,254 |
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49,978,696 |
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61,669,201 |
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49,834,695 |
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The accompanying notes are an integral part of these financial statements.
HALOZYME THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(10,374,023 |
) |
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$ |
(9,761,886 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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172,702 |
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155,070 |
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Loss (gain) on disposal of equipment |
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3,168 |
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(1,200 |
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Share-based compensation expense |
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911,815 |
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Issuance of common stock and stock options for goods and services |
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9,322 |
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146,802 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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29,623 |
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(19,114 |
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Inventory |
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45,191 |
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6,468 |
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Prepaid expenses and other assets |
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(327,959 |
) |
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(151,366 |
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Accounts payable and accrued expenses |
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585,444 |
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232,096 |
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Deferred revenue |
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(131,773 |
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Net cash used in operating activities |
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(9,076,490 |
) |
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(9,393,130 |
) |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(255,456 |
) |
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(343,505 |
) |
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Net cash used in investing activities |
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(255,456 |
) |
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(343,505 |
) |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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137,258 |
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176,422 |
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Proceeds from exercise of warrants net |
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6,163,405 |
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188,122 |
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Net cash provided by financing activities |
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6,300,663 |
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364,544 |
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Net decrease in cash and cash equivalents |
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(3,031,283 |
) |
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(9,372,091 |
) |
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Cash and cash equivalents, beginning of period |
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19,132,194 |
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16,007,714 |
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Cash and cash equivalents, end of period |
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$ |
16,100,911 |
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$ |
6,635,623 |
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The accompanying notes are an integral part of these financial statements.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Halozyme Therapeutics, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Halozyme Therapeutics, Inc. (Halozyme or the Company) is a biopharmaceutical company dedicated
to the development and commercialization of recombinant human enzymes for the drug delivery,
palliative care, oncology, and infertility markets.
The Companys operations to date have been limited to organizing and staffing the Company,
acquiring, developing and securing its technology and undertaking product development for its
existing products and for a limited number of product candidates. In June 2005, the Company
launched its first product, Cumulase®, a product used for in vitro fertilization, and
transitioned from a development-stage organization to a commercial entity.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles (U.S. GAAP) and with the
rules and regulations of the Securities and Exchange Commission related to a quarterly report on
Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S.
GAAP for complete financial statements. The interim financial statements reflect all adjustments
which, in the opinion of management, are necessary for a fair presentation of the financial
condition and results of operations for the periods presented. Except as otherwise disclosed, all
such adjustments are of a normal recurring nature.
Operating results for the three and nine months ended September 30, 2006 are not necessarily
indicative of the results that may be expected for the fiscal year ending December 31, 2006 or for
any future period. For further information, see the financial statements and disclosures thereto
for the year ended December 31, 2005 included in our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 24, 2006 and other regulatory reports and filings made
with the Securities and Exchange Commission.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities as well as
disclosures of contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain amounts in the prior year financial
statements have been reclassified to conform to the current year presentation. The unaudited
condensed consolidated financial statements include the accounts of Halozyme Therapeutics, Inc. and
its wholly owned subsidiary, Halozyme, Inc. All intercompany accounts and transactions have been
eliminated.
3. Significant Accounting Policies
Change in Accounting Method for Share-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) revised Statement of Financial
Accounting Standards No. 123 (SFAS 123(R)), Share-Based Payment. On April 14, 2005, the U.S.
Securities and Exchange Commission adopted a new rule amending the effective dates for SFAS 123(R).
In accordance with the new rule, the accounting provisions of SFAS 123(R) became effective for us
beginning in the quarter ended March 31, 2006.
We adopted the provisions of SFAS 123(R) on January 1, 2006. Accordingly, compensation costs for
all share-based awards to employees are measured based on the grant date fair value of those awards
and recognized over the period during which the employee is required to perform service in exchange
for the award (generally over the vesting period of the award). We have no awards with market or
performance conditions. Excess tax benefits, as defined by SFAS 123(R), will be recognized as an
addition to additional paid-in-capital. Effective January 1, 2006 and for all periods subsequent to
that date, SFAS 123(R) supersedes our previous accounting under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25). In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R).
The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards (FAS 123(R)-3). The
alternative transition method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based
compensation, and to determine the subsequent impact on the APIC pool and consolidated statements
of cash flows of the tax effects of employee share-based compensation awards that are outstanding
upon adoption of SFAS 123(R). An entity may make a one-time election to adopt the transition method
described in this guidance. An entity may take up to one year from the later of its initial
adoption of SFAS 123(R) or the effective date of this guidance, which was November 11, 2005. We are
in the process of determining whether to adopt the alternative transition method provided in FAS
123(R)-3 for calculating the tax effects of share-based compensation pursuant to SFAS 123(R).
We adopted SFAS 123(R) using the modified prospective transition method, which provides for certain
changes to the method for valuing share-based compensation. The valuation provisions of SFAS 123(R)
apply to new awards and to awards that are outstanding at the effective date and subsequently
modified or cancelled. Estimated compensation expense for awards outstanding at the effective date
will be recognized over the remaining service period using the compensation cost calculated for pro
forma disclosure purposes under FASB Statement No. 123, Accounting for Stock-Based Compensation
(SFAS 123). Our condensed consolidated financial statements as of and for the three and nine
months ended September 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, our condensed consolidated financial statements for prior periods
were not restated to reflect, and do not include, the impact of SFAS 123(R).
Share-based compensation expense recognized during the period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the period. Share-based
compensation expense recognized in our condensed consolidated statement of operations for the three
and nine months ended September 30, 2006 included compensation expense for share-based payment
awards granted prior to, but not yet vested as of, December 31, 2005 based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS 123 and share-based payment
awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in
accordance with SFAS 123(R). For share awards granted during the three and nine months ended
September 30, 2006, expenses are amortized under the straight-line method. For share awards granted
prior to 2006, expenses are amortized under the straight-line method prescribed by SFAS 123. As
share-based compensation expense recognized in the condensed consolidated statement of operations
for the third quarter of fiscal 2006 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. Pre-vesting forfeitures were estimated to be approximately 10% for employees in the
third quarter of 2006 based on our historical experience and those of our peer group. In our pro
forma information required under SFAS 123 for the periods prior to 2006, we accounted for
forfeitures as they occurred.
The adoption of SFAS 123R resulted in incremental share-based compensation expense of $334,000 and
$912,000 in the three and nine months ended September 30, 2006, respectively. The incremental
share-based compensation caused our net loss to increase by the same amounts and basic and diluted
loss per share to increase by $0.01 per share and $0.01 per share in the three and nine months
ended September 30, 2006, respectively. Total compensation expense related to all of our
share-based awards, recognized under SFAS 123R, for the three and nine months ended September 30,
2006 was comprised of the following:
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Three Months Ended |
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Nine Months Ended |
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|
September 30, 2006 |
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September 30, 2006 |
|
Research and development |
|
$ |
107,379 |
|
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$ |
310,588 |
|
Selling, general and administrative |
|
|
226,454 |
|
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|
601,227 |
|
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|
|
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Share-based compensation expense before taxes |
|
|
333,833 |
|
|
|
911,815 |
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|
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|
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Related income tax benefits |
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|
|
|
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|
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Share-based compensation expense |
|
$ |
333,833 |
|
|
$ |
911,815 |
|
|
|
|
|
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|
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Net share-based compensation expense per basic and diluted share |
|
$ |
0.01 |
|
|
$ |
0.01 |
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Share-based compensation expense from: |
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Stock options |
|
|
278,047 |
|
|
|
826,286 |
|
Restricted stock awards |
|
|
55,786 |
|
|
|
85,529 |
|
|
|
|
|
|
|
|
Total |
|
$ |
333,833 |
|
|
$ |
911,815 |
|
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|
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|
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|
Since we have a net operating loss carryforward as of September 30, 2006, no excess tax benefits
for the tax deductions related to share-based awards were recognized in the condensed consolidated
statement of operations. Additionally, no incremental tax benefits were recognized from stock
options exercised in the nine months ended September 30, 2006 which would have resulted in a
reclassification to reduce net cash provided by operating activities with an offsetting increase in
net cash provided by financing activities. Share-based compensation expense was not recognized
during the three and nine months ended September 30, 2005.
Through 2005, we accounted for share-based awards to employees using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations and provided the required pro forma disclosures of SFAS 123.
Under the intrinsic value method, no share-based compensation expense had been recognized in our
condensed consolidated statement of operations for share-based awards to employees, because the
exercise price of our stock options granted to employees equaled the fair market value of the
underlying stock at the date of grant.
The following table summarizes the pro forma effect on our net loss and per share data if we had
applied the fair value recognition provisions of SFAS 123 to share-based employee compensation for
the three and nine months ended September 30, 2005.
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Three Months Ended |
|
|
Nine Months Ended |
|
In Thousands (except per share data) |
|
September 30,2005 |
|
|
September 30,2005 |
|
Net loss, as reported |
|
$ |
(3,700 |
) |
|
$ |
(9,762 |
) |
Add: Share-based employee compensation expense |
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|
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|
Deduct:
Total share-based employee compensation expense determined under fair value based method for all awards |
|
|
(288 |
) |
|
|
(936 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(3,988 |
) |
|
$ |
(10,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted, as reported |
|
$ |
(0.07 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
Pro forma net loss per share, basic and diluted |
|
$ |
(0.08 |
) |
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
For employee stock options granted during the three months ended September 30, 2005, we determined
pro forma compensation expense under the provisions of SFAS 123 using the Black-Scholes model and
the following assumptions: (1) an expected volatility of 76%, (2) an expected term of 4.0 years,
(3) a risk-free interest rate of 4.1% and (4) an expected dividend yield of 0%. The weighted
average fair value of options granted during the nine months ended September 30, 2005 was $1.16 per
share.
We account for stock options granted to non-employees in accordance with Emerging Issues Task Force
No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, (EITF 96-18). Under EITF 96-18, we
determine the fair value of the stock
options granted as either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
As of September 30, 2006, we had four equity incentive plans (the Plans): the 2001 Stock Plan,
the 2004 Stock Plan, the 2005 Outside Directors Stock Plan, and the 2006 Stock Plan. All of the
Plans were approved by the shareholders. Under the Plans we had an aggregate of 2,447,443 shares
of our common stock reserved for issuance as of September 30, 2006. Options are subject to terms
and conditions established by the Compensation Committee of our Board of Directors. Options have a
term of ten years and generally vest over three to four years. Certain option awards provide for
accelerated vesting if there is a change in control (as defined in the Plans). At the present
time, we intend to issue new common shares upon the exercise of stock options.
A summary of stock options outstanding and changes under the Plans during the nine months ended
September 30, 2006 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Weighted |
|
Weighted |
|
|
underlying |
|
average exercise |
|
average remaining |
|
|
stock options |
|
price per share |
|
contractual term (yrs) |
Outstanding at December 31, 2005 |
|
|
8,535,751 |
|
|
$ |
1.01 |
|
|
|
|
|
Granted |
|
|
409,432 |
|
|
$ |
2.62 |
|
|
|
|
|
Exercised |
|
|
(186,323 |
) |
|
$ |
0.74 |
|
|
|
|
|
Cancelled |
|
|
(240,592 |
) |
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
8,518,268 |
|
|
$ |
1.10 |
|
|
|
7.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
6,059,654 |
|
|
$ |
0.86 |
|
|
|
6.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value was $13.8 million on outstanding options and $11.2 million on
exercisable options at September 30, 2006. The weighted average grant-date fair values of options
granted during the nine months ended September 30, 2006 and 2005 were $1.56 per share and $1.16 per
share, respectively. Cash received from stock option exercises for the nine months ended September
30, 2006 and 2005 was $137,258 and $176,422, respectively. The intrinsic value of options
exercised during the nine months ended September 30, 2006 and 2005 was $331,997 and $721,076,
respectively. As of September 30, 2006, $2.3 million of total unrecognized compensation costs
related to non-vested stock option awards is expected to be recognized over a weighted average
period of 1.9 years.
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton
option pricing model (Black-Scholes model) that uses the assumptions noted in the following
table. Expected volatilities are based on historical volatility of our common stock and our peer
group. The expected term of options granted is based on analyses of historical employee termination
rates and option exercises. The risk-free interest rates are based on the U.S. Treasury yield for a
period consistent with the expected term of the option in effect at the time of the grant.
Assumptions used in the Black-Scholes model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2006 |
|
September 30, 2006 |
Expected volatility |
|
|
75.0 |
% |
|
|
75.0 |
% |
Average expected term in years |
|
|
4.0 |
|
|
|
4.0 |
|
Risk-free interest rate |
|
|
5.1 |
% |
|
|
4.6-5.1 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Restricted stock awards. Restricted stock awards are grants that entitle the holder to acquire
shares of restricted common stock at a fixed price, which is typically nominal. The shares of
restricted stock cannot be sold, pledged, or otherwise disposed of until the award vests and any
unvested shares may be reacquired by us for the original purchase price following the awardees
termination of service. During May 2006, we issued 75,000 restricted stock awards under our
Outside Directors Stock Plan. During July 2006, we issued 15,000 restricted stock awards under
our Outside Directors Stock Plan. Annual grants of restricted stock under the Outside Directors
Stock Plan typically vest in full the first day the awardee may trade Company stock in compliance
with the Companys insider
trading policy following the date immediately preceding the first annual meeting of stockholders
following the grant date. As of September 30, 2006, these 90,000 outstanding restricted stock
awards were nonvested.
The grant-date fair value of restricted stock awards granted during the nine months ended September
30, 2006 was $244,950. No restricted stock awards were granted in the nine months ended September
30, 2005. As of September 30, 2006, the total unrecognized compensation cost related to unvested
shares was $159,421, which is expected to be recognized over a weighted-average period of 0.7 year.
Revenue Recognition
We recognize revenue from product sales in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 48, Revenue Recognition When Right of Return Exists, when there is
persuasive evidence that an arrangement exists, when title has passed, the price is fixed or
determinable, and we are reasonably assured of collecting the resulting receivable. We recognize
product sales net of estimated allowances for product returns, managed care rebates, reimbursements
relating to Medicare, patient coupons, chargebacks from distributors, wholesaler fees and prompt
payment and other discounts. Such estimates require our most subjective and complex judgment due to
the need to make estimates about matters that are inherently uncertain. If actual future payments
for returns, rebates, coupons, chargebacks and discounts exceed the estimates we made at the time
of sale, our financial position, results of operations and cash flows would be negatively impacted.
Cumulase revenue is recognized when the transfer of ownership occurs, upon shipment to the
distributor. Accounts receivable is recorded net of an allowance for doubtful accounts.
Currently, the allowance for doubtful accounts is zero as the collectibility of accounts receivable
is reasonably assured. We are not obligated to accept from customers the return of any Cumulase
product that have reached their expiration date. Thus, no allowance for product returns has been
established.
Under the terms of our Baxter agreement, we will supply Baxter the active pharmaceutical ingredient
for Hylenex and Baxter will fill and finish Hylenex and hold it for subsequent distribution.
During the fourth quarter of 2005, and the first nine months of 2006, the Company transferred
$254,000 and $137,000, respectively, of the active pharmaceutical ingredient for Hylenex to Baxter
for filling and finishing. Because of our continued involvement in the development and production
process of Hylenex under the terms of the Development and Supply Agreement (the Supply
Agreement), the earnings process is not considered to be complete. Accordingly, the Company
defers revenue and the related product costs resulting from transfers of the active pharmaceutical
ingredient for Hylenex to Baxter until the product is ultimately sold to customers, or otherwise
disposed.
Research and Development Costs
Costs and expenses that can be clearly identified as research and development are charged to
expense as incurred in accordance with SFAS No. 2, Accounting for Research and Development Costs.
Our expenses related to clinical trials are based on estimates of the services received and
efforts expended pursuant to contracts with multiple research institutions, clinical research
organizations, and other vendors that conduct and manage clinical trials on our behalf. The
financial terms of these agreements are subject to negotiation and vary from contract to contract
and may result in uneven payment flows. Generally, these agreements set forth the scope of work to
be performed at a fixed fee or unit price. Payments under the contracts depend on factors such as
the successful enrollment of patients or the completion of clinical trial milestones. Expenses
related to clinical trials generally are accrued based on contracted amounts applied to the level
of patient enrollment and activity according to the protocol. If timelines or contracts are
modified based upon changes in the clinical trial protocol or scope of work to be performed, we
modify our estimates accordingly on a prospective basis. As a result of our agreement with Baxter,
both parties have agreed to share equally the cost of any Hylenex post-approval clinical trials and
related clinical organization costs.
4. Inventory
Inventories are used in the manufacture of the Companys Cumulase and Hylenex products and are
stated at the lower of cost or market.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
131,554 |
|
|
$ |
259,452 |
|
Work in process |
|
|
55,049 |
|
|
|
19,506 |
|
Finish goods |
|
|
47,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
233,767 |
|
|
$ |
278,958 |
|
|
|
|
|
|
|
|
Inventory includes $254,000 of costs associated with the transfer of the active pharmaceutical
ingredient (API) for Hylenex to Baxter in the fourth quarter of 2005 and $137,000 of API during
the first nine months of 2006 under the Supply Agreement. During the third quarter of 2006, the
Company recognized $319,000 in revenue and cost of goods sold related to the sale of the API for
Hylenex to Baxter. The Supply Agreement provides for Baxter to purchase the API and fill and finish
the product for subsequent distribution to customers. The transfer of the API to Baxter is
recorded as a deferred charge and is included in raw materials, work in process inventory, and
finished goods at September 30, 2006. Inventories are valued using an actual cost approach that
approximates the first-in, first-out method.
5. Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Research equipment |
|
$ |
737,144 |
|
|
$ |
615,455 |
|
Computer and office equipment |
|
|
203,041 |
|
|
|
149,320 |
|
Leasehold improvements |
|
|
155,285 |
|
|
|
148,486 |
|
|
|
|
|
|
|
|
|
|
|
1,095,470 |
|
|
|
913,261 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
(634,636 |
) |
|
|
(532,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
460,834 |
|
|
$ |
381,248 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled $63,062 and $43,933, for the three months ended
September 30, 2006 and 2005 and $172,702 and $155,070 for the nine months ended September 30, 2006
and 2005, respectively.
6. Deferred Revenue
During August 2004, the Company signed an Exclusive Distribution Agreement (the Distribution
Agreement) with Baxter Healthcare Corporation (Baxter) to market, distribute and sell Hylenex in
the United States and Puerto Rico. During March 2005, the Company entered into a Development and
Supply Agreement (the Supply Agreement) and a First Amendment to the existing Distribution
Agreement with Baxter. Under the terms of the agreements, Halozyme will supply Baxter the active
pharmaceutical ingredient, and Baxter will fill and finish Hylenex and hold it for subsequent
distribution. In December 2005, Hylenex received FDA approval for use in the United States.
During the fourth quarter of 2005 and the first nine months of 2006, the Company transferred
$254,000 and $137,000, respectively, of the active pharmaceutical ingredient for Hylenex to Baxter
for filling and finishing. Because of Halozymes continued involvement in the development and
production process of Hylenex under the
terms of the Supply Agreement, the earnings process is not
considered to be complete. Accordingly, the Company defers revenue and the related product costs
resulting from transfers of the active pharmaceutical ingredient for Hylenex to Baxter until the
product is ultimately sold to customers, or otherwise disposed. During the third quarter of 2006,
the Company recognized $319,000 in revenue related to the sale of the API for Hylenex to Baxter.
In addition, the company deferred $50,000 related to a research agreement entered into in September
2006, for which revenue has not yet been recognized. The revenue will be recognized over the
service period which is expected to be less than one year.
7. Net Loss Per Common Share
In accordance with SFAS No. 128, Earnings Per Share, and SAB No. 98, basic net loss per common
share is computed by dividing net loss for the period by the weighted average number of common
shares outstanding during the period. Under SFAS No. 128, diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted average number of common
and common equivalent shares, such as stock options and warrants, outstanding during the period.
Such common equivalent shares have not been included in the Companys computation of net loss per
share as their effect would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator Net loss |
|
$ |
(3,651,037 |
) |
|
$ |
(3,700,476 |
) |
|
$ |
(10,374,023 |
) |
|
$ |
(9,761,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Weighted average shares outstanding |
|
|
62,731,254 |
|
|
|
49,978,696 |
|
|
|
61,669,201 |
|
|
|
49,834,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental common shares (not included
because of their anti-dilutive nature) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and awards |
|
|
8,608,268 |
|
|
|
8,647,521 |
|
|
|
8,608,268 |
|
|
|
8,647,521 |
|
Stock warrants |
|
|
7,607,114 |
|
|
|
11,622,048 |
|
|
|
7,607,114 |
|
|
|
11,622,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common equivalents |
|
|
16,215,382 |
|
|
|
20,269,569 |
|
|
|
16,215,382 |
|
|
|
20,269,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Stockholders Equity
During February and March 2006, holders of the Companys various outstanding warrants exercised
rights to purchase 1,101,601 common shares for gross proceeds of approximately $1,279,302. During
April and May 2006, holders of the Companys various outstanding warrants exercised rights to
purchase 588,500 common shares for gross proceeds of approximately $1,029,875. During July, August
and September 2006, holders of the Companys various outstanding warrants exercised rights to
purchase 2,236,034 common shares for gross proceeds of approximately $3,893,829. Warrants to
purchase approximately 7.6 million shares of our common stock are outstanding as of September 30,
2006.
9. Commitments and Contingencies
Operating Leases On May 20, 2003, the Company signed a two-year lease for 5,728 square feet of
office and lab space in a building located at 11588 Sorrento Valley Road, San Diego, California,
commencing on June 1, 2003. On October 28, 2004, the Company signed an 18-month lease for an
additional 5,060 square feet of office and lab space in the same building, commencing on January 1,
2005. During August 2006, these leases were subsequently extended to December 31, 2007 and the
Company leased an additional 5,060 square feet of office space in the same building, commencing on
August 1, 2006 and expiring on December 31, 2007. Additionally the Company leases certain office
equipment under operating leases. Rent expense totaled $82,000 and $62,000 for the three months
ended September 30, 2006 and 2005 and $207,000 and $176,000 for the nine months ended September 30,
2006 and 2005.
Material Agreements During August 2004, we signed an Exclusive Distribution Agreement (the
Distribution Agreement) with Baxter Healthcare Corporation (Baxter) to market, distribute and
sell Hylenex in the United States and Puerto Rico. During March 2005, we entered into a
Development and Supply Agreement (the Supply Agreement) and a First Amendment to the existing
Distribution Agreement with Baxter. Under the terms of the agreements we will supply Baxter the
active pharmaceutical ingredient, and Baxter will fill and finish Hylenex and hold it for
subsequent distribution. The Supply Agreement provides for additional product development
opportunities that the parties may mutually decide to pursue. In addition, Baxter has a right of
first refusal on certain product line extensions and select new products. The First Amendment
provides for specific and consistent definitions among the Supply Agreement and Distribution
Agreement and modifies various covenants of Baxter relating to the definition of marketing and
incremental sales costs, including a $3 million annual cap on the amount of marketing and
incremental sales costs to be paid by Baxter. In the event that both parties agree in advance to
combined marketing and incremental sales costs in excess of the cap, such excess marketing and
incremental sales costs shall be shared equally. Currently, the parties anticipate that combined
marketing and incremental sales costs for 2006 will be in excess of the cap. As such, it is likely
that aggregate revenues from sales of Hylenex will be less than our portion of these shared
additional marketing and incremental sales costs.
Effective December 30, 2005, the Company entered into a First Amendment to a November 15, 2002
license agreement (the Agreement) with the University of Connecticut Health Center (UCHC). The
original license agreement provided for certain payments to be made to UCHC in connection with the
development and commercialization of certain products defined in the Agreement. The First
Amendment to the License Agreement (the First Amendment) calls for payments of a one time
Supplemental License Fee of $25,000, a $250,000 Technology Access Fee and a Technology Fee of
$2,500,000 to be paid to UCHC in annual installments of $250,000 payable in February each year
commencing with 2006 and ending 2015. The first two payments of $25,000 and $250,000 were paid in
accordance with the original Agreement in March and May 2005, respectively. The first $250,000
annual technology fee installment was paid in February 2006 in accordance with the First Amendment.
Other terms of the amendment include a termination clause which allows the Company to discontinue
commercialization of certain products covered under the Agreement and to cease making the annual
$250,000 payment with a one time termination fee of $250,000. Beginning in 2006, the annual
technology fee payments will be recognized to expense on a straight-line basis.
Legal Contingencies In the ordinary course of business, we may face various claims brought by
third parties, including claims relating to the safety or efficacy of our products. Any of these
claims could subject us to costly litigation and, while we generally believe that we have adequate
insurance to cover many different types of liabilities, our insurance carriers may deny coverage or
our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were
to happen, the payment of any such awards could have a material adverse
effect on our operations and financial position. Additionally, any such claims, whether or not
successful, could damage our reputation and business.
10. Segment Information
We operate in one segment, which is the research, development and commercialization of recombinant
human enzymes for the drug delivery, palliative care, oncology, and infertility markets. The chief
operating decision-makers review our operating results on an aggregate basis and manage our
operations as a single operating segment.
11. New Accounting Pronouncements
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. SFAS 154
establishes retrospective application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the newly adopted
accounting principle. SFAS 154 also provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS
154 did not have a material impact on our financial condition or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. This statement amends the guidance in ARB No. 43 Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). The provision of this statement will be effective for inventory costs
during the fiscal years beginning after June 15, 2005. As a result of our manufacturing process
being outsourced, the adoption of SFAS 151 did not have a material impact on our financial
condition or results of operations.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, the following discussion contains forward-looking statements
that are subject to risks and uncertainties. Actual results may differ substantially from those
referred to herein due to a number of factors, including but not limited to risks described in the
section entitled Risks Related to Our Business and elsewhere in this Quarterly Report.
Overview
We are a biopharmaceutical company dedicated to the development and commercialization of
recombinant human enzymes for the drug delivery, palliative care, oncology, and infertility
markets. Our existing products and our products under development are based on intellectual
property covering the family of human enzymes known as hyaluronidases. Hyaluronidases are enzymes
(proteins) that break down hyaluronic acid, which is a naturally occurring substance in the human
body. Our technology is based on recombinant human PH20 (rHuPH20), a human synthetic version of
hyaluronidase that degrades hyaluronic acid, a space-filling, gel-like substance that is a major
component of tissues throughout the body, such as skin and cartilage. The PH20 enzyme is a
naturally occurring enzyme that digests hyaluronic acid to temporarily break down the gel, thereby
facilitating the penetration and diffusion of other drugs and fluids that are injected under the
skin or in the muscle. It also degrades the cumulus matrix surrounding oocytes (eggs) facilitating
in vitro fertilization (IVF).
Currently, we have only limited revenue from Cumulase product sales and the sale of the API
for Hylenex. All of our potential products, with the exception of Cumulase and Hylenex, are either
in the research, pre-clinical, or clinical stage. It may be years, if ever, before we are able to
obtain the regulatory approvals necessary to generate meaningful revenue from the sale of these
product candidates. In addition, we have only generated minimal revenue from our biopharmaceutical
operations and we have had operating and net losses each year since inception, with an accumulated
deficit of $36,721,277 as of September 30, 2006.
Additionally, in December 2005, we issued 10,000,000 shares of common stock to certain
institutional and accredited investors for $17.5 million in gross proceeds, or $1.75 per share.
These shares were sold under our universal shelf registration statement in a registered direct
offering. We currently have $32.5 million remaining under our universal shelf registration
statement which will permit us, from time to time, to offer and sell up to $32.5 million of
additional equity or debt securities. Sales of substantial amounts of shares of our common stock,
or even the potential for such sales through the exercise of currently outstanding warrants, could
lower the market price of our common stock and impair the Companys ability to raise capital
through the sale of equity securities. In the future, we may issue additional options, warrants or
other derivative securities convertible into Halozyme common stock to fund the continued
development of our product candidates and general corporate purposes.
Current Products and Product Candidates
We currently have two FDA-approved products, Cumulase and Hylenex. We also have one product
candidate, Chemophase, which is currently in clinical development. All of our other product
candidates are in the research or pre-clinical stage of development. We received a CE (European
Conformity) Mark for Cumulase in December 2004 and FDA clearance in April 2005. We launched
Cumulase in the European Union and in the United States in June 2005.
During March 2005, we filed a new drug application (NDA) for the spreading agent Hylenex.
Other manufacturers have FDA approved products for use as spreading agents, including ISTA
Pharmaceuticals, Inc. (ISTA), with an ovine (ram) hyaluronidase, Vitrase®, Amphastar
Pharmaceuticals, Inc., with a bovine (bull) hyaluronidase, Amphadase, and Primapharm, Inc. also
with a bovine hyaluronidase, Hydase. The FDA has determined that Amphadase, Hydase, Hylenex and
Vitrase are distinct new chemical entities and hence afforded five years of market exclusivity.
The five year market exclusivity precludes identical new chemical entity products from being
marketed for a period of five years. As each of these products is established as distinctly
different new chemical entities, the marketing exclusivity granted does not prohibit the marketing
of the products. During December 2005, we received FDA approval for our Hylenex NDA.
During June 2005, we submitted an investigational new drug application (IND) in order to
begin clinical testing of our Chemophase® product candidate. We received authorization
to initiate clinical testing of Chemophase in August 2005, and we commenced patient enrollment in
our initial clinical protocol under this IND in October 2005. In March 2006, we completed
enrollment in our Chemophase Phase I clinical trial. In April 2006, we commenced patient
enrollment in our Chemophase Phase I/IIa clinical trial.
Baxter Agreement
During August 2004, we signed an Exclusive Distribution Agreement (the Distribution
Agreement) with Baxter Healthcare Corporation (Baxter) to market, distribute and sell Hylenex in
the United States and Puerto Rico.
During March 2005, we entered into a Development and Supply Agreement (the Supply Agreement)
and a First Amendment to the existing Distribution Agreement with Baxter. Under the terms of the
agreements, we will supply Baxter with the active pharmaceutical ingredient, and Baxter will fill
and finish Hylenex and hold it for subsequent distribution. The Supply Agreement provides for
additional product development opportunities that the parties may mutually decide to pursue. In
addition, Baxter has a right of first refusal on certain product line extensions and select new
products. The First Amendment provides for specific and consistent definitions among the Supply
Agreement and Distribution Agreement, modifies various covenants of Baxter relating to the
definition of marketing and incremental sales costs, including a $3 million annual cap on the
amount of marketing and incremental sales costs to be paid by Baxter. In the event that both
parties agree in advance to combined marketing and incremental sales costs in excess of the cap,
such excess marketing and incremental sales costs shall be shared equally. Currently, the parties
anticipate that combined marketing and incremental sales costs for 2006 will be in excess of the
cap. As such, it is likely that aggregate revenues from sales of Hylenex will be less than our
portion of these shared additional marketing and incremental sales costs.
Revenues
Product revenue will depend on our ability to develop, manufacture, obtain regulatory
approvals for and successfully commercialize our product candidates. We received a CE (European
Conformity) Mark for Cumulase in December 2004, which allows the Company to market Cumulase in the
European Union. In addition, we received FDA clearance for Cumulase in April 2005, which allows
the Company to market Cumulase in the United States. In June 2005, Cumulase was launched in the
European Union and United States.
Costs and Expenses
Cost of Sales. Cost of sales consists primarily of raw materials, third-party manufacturing
costs, fill and finish costs, and freight associated with the sales
of Cumulase and the API for Hylenex.
Research and Development. Our research and development expenses consist primarily of costs
associated with the development and manufacturing of our product candidates, compensation and other
expenses for research and development personnel, supplies and materials, costs for consultants and
related contract research, clinical trials, facility costs, amortization and depreciation. We
charge all research and development expenses to operations as they are incurred. Our research and
development activities are primarily focused on the development of our Chemophase and Hylenex
product candidates which are both based on our recombinant human PH20 (rHuPH20) enzyme, a human
synthetic version of hyaluronidase. We completed enrollment in our Chemophase Phase I clinical
trial in March 2006 and commenced patient enrollment in our Chemophase Phase I/IIa clinical trial
in April 2006.
Since our inception through September 30, 2006, we have incurred research and development
costs of $25.6 million. From January 1, 2002 through September 30, 2006, approximately 51% of our
research and development costs were associated with the research and development of our recombinant
human PH20 enzyme used in our Cumulase and Hylenex products. In addition, for the nine months
ended September 30, 2006, approximately 12% of our research and development costs were associated
with the development of our Chemophase product candidate. Due to the uncertainty in obtaining FDA
approval, our reliance on third parties, and competitive pressures, we are unable to estimate with
any certainty the additional costs we will incur in the continued development of our Hylenex
product and our Chemophase product candidate for commercialization. However, we expect our
research and development costs to increase substantially if we are able to advance our product
candidates into later stages of clinical development.
Clinical development timelines, likelihood of success, and total costs vary widely. Although
we are currently focused primarily on advancing Chemophase, we anticipate that we will make
determinations as to which research and development projects to pursue and how much funding to
direct to each project on an ongoing basis in response to the scientific and clinical progress of
each product candidate and other market and regulatory developments.
Product candidate completion dates and costs vary significantly for each product candidate and
are difficult to estimate. The lengthy process of seeking regulatory approvals, and the subsequent
compliance with applicable regulations, require the expenditure of substantial resources. Any
failure by us to obtain, or any delay in obtaining, regulatory approvals could cause our research
and development expenditures to increase and, in turn, have a material adverse effect on our
results of operations. We received FDA approval for our Hylenex product candidate in December
2005. We submitted an IND for our Chemophase product candidate in June 2005, and initiated Phase I
clinical trials in October 2005. In March 2006, we completed enrollment in our Chemophase Phase I
clinical trial. In April 2006, we commenced patient enrollment in our Chemophase Phase I/IIa
clinical trial. We cannot be certain when or if our Chemophase product candidate, or any of our
other product candidates, will receive regulatory approval or whether any net cash inflow from our
Chemophase product candidate, or any of our other product candidates, or development projects, will
commence.
Selling, General and Administrative. Selling, general and administrative expenses consist
primarily of compensation and other expenses related to our corporate operations and administrative
employees, accounting and
legal fees, other professional services expenses, marketing expenses, as well as other
expenses associated with operating as a publicly traded company. We anticipate continued increases
in selling, general and administrative expenses as our research and development activities continue
to expand.
Other Income, Net. Other income, net consists primarily of interest income earned on our cash
and cash equivalents.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. We review our estimates on an
ongoing basis. We base our estimates on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following accounting policies
to be critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We recognize revenue from product sales in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 48, Revenue Recognition When Right of Return Exists, when there is
persuasive evidence that an arrangement exists, when title has passed, the price is fixed or
determinable, and we are reasonably assured of collecting the resulting receivable. We recognize
product sales net of estimated allowances for product returns, managed care rebates, reimbursements
relating to Medicare, patient coupons, chargebacks from distributors, wholesaler fees and prompt
payment and other discounts. Such estimates require our most subjective and complex judgment due to
the need to make estimates about matters that are inherently uncertain. If actual future payments
for returns, rebates, coupons, chargebacks and discounts exceed the estimates we made at the time
of sale, our financial position, results of operations and cash flows would be negatively impacted.
Cumulase revenue is recognized when the transfer of ownership occurs, upon shipment to the
distributor. Accounts receivable is recorded net of an allowance for doubtful accounts.
Currently, the allowance for doubtful accounts is zero as the collectibility of accounts receivable
is reasonably assured. We are not obligated to accept returns for products that have reached their
expiration date. Thus, no allowance for product returns has been established.
Under the terms of our Baxter agreement, we will supply Baxter the active pharmaceutical
ingredient for Hylenex and Baxter will fill and finish Hylenex and hold it for subsequent
distribution. During the fourth quarter of 2005, we transferred $254,000 of the active
pharmaceutical ingredient for Hylenex to Baxter for filling and finishing. During the first nine
months of 2006, we transferred another $137,000 of the active pharmaceutical ingredient for Hylenex
to Baxter for filling and finishing. Because of our continued involvement in the development and
production process of Hylenex under the terms of the Supply Agreement, the earnings process is not
considered to be complete. Accordingly, the Company defers revenue and the related product costs
resulting from transfers of the active pharmaceutical ingredient for Hylenex to Baxter until the
product is ultimately sold to customers, or otherwise disposed.
Share-based compensation expense
We grant options to purchase our common stock to our employees, directors and consultants
under our stock option plans. The benefits provided under these plans are share-based payments
subject to the provisions of
revised Statement of Financial Accounting Standards No. 123, Share-Based Payment (SFAS
123(R)). Effective January 1, 2006, we adopted SFAS 123(R) and use the fair value method to
account for share-based payments with a modified prospective application which provides for certain
changes to the method for valuing share-based compensation. The valuation provisions of SFAS 123(R)
apply to new awards and to awards that are outstanding on the effective date and subsequently
modified or cancelled. Under the modified prospective application, prior periods are not revised
for comparative purposes. Total compensation cost for our share-based payments recognized in the
three and nine months ended September 30, 2006 was $334,000 and $912,000. Selling, general and
administrative expense and research and development expense in the third quarter of 2006 included
share-based compensation of $227,000 and $107,000, respectively. As of September 30, 2006, $2.4
million of total unrecognized compensation costs related to nonvested awards is expected to be
recognized over a weighted average period 1.9 years.
The fair value of each option award is estimated on the date of grant using a
Black-Scholes-Merton option pricing model (Black-Scholes model) that uses assumptions regarding a
number of complex and subjective variables. These variables include, but are not limited to, our
expected stock price volatility, actual and projected employee stock option exercise behaviors,
risk-free interest rate and expected dividends. Expected volatilities are based on historical
volatility of our common stock and our peer group. The expected term of options granted is based on
analyses of historical employee termination rates and option exercises. The risk-free interest
rates are based on the U.S. Treasury yield in effect at the time of the grant. Since we do not
expect to pay dividends on our common stock in the foreseeable future, we estimated the dividend
yield to be 0%. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate
pre-vesting forfeitures based on our historical experience and those of our peer group.
If factors change and we employ different assumptions in the application of SFAS 123(R) in
future periods, the compensation expense that we record under SFAS 123(R) may differ significantly
from what we have recorded in the current period. There is a high degree of subjectivity involved
when using option pricing models to estimate share-based compensation under SFAS 123(R). Because
changes in the subjective input assumptions can materially affect our estimates of fair values of
our share-based compensation, in our opinion, existing valuation models, including the
Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of
our share-based compensation. Consequently, there is a risk that our estimates of the fair values
of our share-based compensation awards on the grant dates may bear little resemblance to the actual
values realized upon the exercise, early termination or forfeiture of those share-based payments in
the future. Certain share-based payments, such as employee stock options, may expire worthless or
otherwise result in zero intrinsic value as compared to the fair values originally estimated on the
grant date and reported in our financial statements. Alternatively, values may be realized from
these instruments that are significantly in excess of the fair values originally estimated on the
grant date and reported in our financial statements. There is currently no market-based mechanism
or other practical application to verify the reliability and accuracy of the estimates stemming
from these valuation models, nor is there a means to compare and adjust the estimates to actual
values. Although the fair value of employee share-based awards is determined in accordance with
SFAS 123(R) and the SECs Staff Accounting Bulletin No. 107 (SAB 107) using an option-pricing
model, that value may not be indicative of the fair value observed in a willing buyer/willing
seller market transaction.
The guidance in SFAS 123(R) and SAB 107 is relatively new, and best practices are not well
established. The application of these principles may be subject to further interpretation and
refinement over time. There are significant differences among valuation models, and there is a
possibility that we will adopt different valuation models in the future. This may result in a lack
of consistency in future periods and materially affect the fair value estimate of share-based
payments. It may also result in a lack of comparability with other companies that use different
models, methods and assumptions.
Theoretical valuation models and market-based methods are evolving and may result in lower or
higher fair value estimates for share-based compensation. The timing, readiness, adoption, general
acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical
models may require voluminous historical information, modeling expertise, financial analyses,
correlation analyses, integrated software and databases, consulting fees, customization and testing
for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may
dilute our earnings per share and involve significant transaction fees and ongoing administrative
expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the
benefits to investors.
Clinical Trial and Contract Research Expenses
Research and development expenditures are charged to operations as incurred. Our expenses
related to clinical trials are based on estimates of the services received and efforts expended
pursuant to contracts with multiple research institutions, clinical research organizations, and
other vendors that conduct and manage clinical trials on our behalf. The financial terms of these
agreements are subject to negotiation and vary from contract to contract and may result in uneven
payment flows. Generally, these agreements set forth the scope of work to be
performed at a fixed fee or unit price. Payments under the contracts depend on factors such as the
successful enrollment of patients or the completion of clinical trial milestones. Expenses related
to clinical trials generally are accrued based on contracted amounts applied to the level of
patient enrollment and activity according to the protocol. If timelines or contracts are modified
based upon changes in the clinical trial protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.
In addition, we have several contracts that extend across multiple reporting periods,
including our largest contract representing a $218,000 clinical trial. We recognize expenses as
the services are provided pursuant to managements assessment of the progress that has been made to
date. Such contracts require an assessment of the work that has been completed during the period,
including measurement of progress, analysis of data that justifies the progress and managements
judgment. A 10% variance in our estimate of the work completed in our largest contract could
increase or decrease our operating expenses by $21,800.
Inventory
Inventory consists of our Cumulase product and our Hylenex API. Inventory primarily represents
raw materials used in production, work in process, and finished goods inventory on hand, valued at
actual cost. Inventories are reviewed periodically for slow-moving or obsolete status. If a launch
of a new product is delayed, inventory may not be fully utilized and could be subject to
impairment, at which point we would record a reserve to adjust inventory to its net realizable
value.
Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount that is more
likely than not to be realized. We have considered future taxable income and ongoing tax planning
strategies in assessing the need for the valuation allowance. In the event we were to determine
that we would be able to realize our deferred tax assets in the future in excess of their net
recorded amounts, an adjustment to the deferred tax assets would increase our income in the period
such determination was made. Likewise, should we determine that we would not be able to realize all
or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to income in the period such determination was made.
The above listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by U.S. GAAP. There are also areas in which our managements judgment in selecting any
available alternative would not produce a materially different result. Please see our audited
financial statements and notes thereto included elsewhere in our Annual Report on Form 10-KSB for
the year ended December 31, 2005, which contain accounting policies and other disclosures required
by U.S. GAAP.
Results of Operations Comparison of Three Months Ended September 30, 2006 and 2005
Revenues Product sales were $362,000 for the quarter ended September 30, 2006 compared to $26,000
for the quarter ended September 30, 2005. Cumulase product sales were $43,000 and $26,000 and
sales of the API for Hylenex were $319,000 and $0 for the three months ended September 30, 2006 and
2005, respectively.
Cost of Sales Cost of sales were $356,000 for the quarter ended September 30, 2006 compared to
$10,000 for the quarter ended September 30, 2005 and consisted of third-party manufacturing costs,
fill and finish costs and freight costs. Cumulase cost of sales was $22,000 which includes a
$16,000 expense for approximately half the costs related to a Cumulase batch which failed to meet
product release specifications. Cost of sales related to the sale of API for Hylenex was $334,000
which includes $319,000 related to transfers of API to Baxter and $15,000 for labels that did not
meet specifications for the three months ended September 30, 2006. Cost of sales for the three
months ended September 30, 2005 is comprised of $10,000 related to the Cumulase product.
Research and Development Research and development expenses were $2,429,000 for the quarter ended
September 30, 2006 compared to $3,107,000 for the quarter ended September 30, 2005. Our research
and development expenses consisted primarily of costs associated with the development and
manufacturing of our
product candidates, compensation and other expenses for research and
development personnel, supplies and materials, costs for consultants and related contract research,
facility costs, amortization and depreciation. Research and development expenses decreased by
$678,000 due primarily to decreased contract manufacturing, analytical, and stability costs related
to the development and production of our rHuPH20 enzyme of approximately $644,000 and decreased
Chemophase toxicology study costs of $719,000, partially offset by higher clinical trial costs of
approximately $551,000 and share-based compensation costs of approximately $107,000. We expect
research and development costs to increase in future periods as we increase our research efforts,
expand our clinical trials, and continue to develop and manufacture our product candidates.
Selling, General and Administrative Selling, general and administrative expenses were $1,403,000
for the quarter ended September 30, 2006 compared to $674,000 for the quarter ended September 30,
2005. General and administrative expenses increased by $729,000 due to increased share-based
compensation expenses of approximately $227,000, general and administrative personnel costs of approximately
$218,000, recruiting fees of approximately $163,000, and legal and accounting fees of approximately
$159,000. We anticipate that compliance with provisions of the Sarbanes-Oxley Act of 2002,
including Section 404 relating to audits of our internal controls, will increase our general and
administrative costs in future periods.
Share-Based Compensation Through 2005, we accounted for our stock plans using the intrinsic value
method and recorded no stock based compensation for options granted to employees. Effective at the
beginning of 2006, we adopted Statement of Financial Accounting Standards No. 123(R) (SFAS
123(R)), Share-Based Payment, and elected to adopt the modified prospective application method.
SFAS No. 123(R) requires us to use a fair-valued based method to account for share-based
compensation. Accordingly, share-based compensation cost is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the employees requisite service
period. Total compensation cost for our share-based payments in the third quarter of 2006 was
$334,000. Selling, general and administrative expense and research and development expense in the
third quarter of 2006 include share-based compensation of $227,000 and $107,000, respectively. As
of September 30, 2006, $2.4 million of total unrecognized compensation costs related to nonvested
awards is expected to be recognized over a weighted average period of 1.9 years. See Note 3,
Significant Accounting Policies Change in Accounting Method for Share-Based Compensation in the
Notes to Condensed Consolidated Financial Statements (unaudited) for further discussion.
Other Income and Expense Other income was $175,000 for the quarter ended September 30, 2006
compared to $65,000 for the quarter ended September 30, 2005. The increase in other income was due
to higher interest income as a result of maintaining higher average cash balances during 2006 and
higher interest rates.
Net Loss Net loss for the quarter ended September 30, 2006 was $3,651,000, or $0.06 per common
share, compared to $3,700,000, or $0.07 per common share for the quarter ended September 30, 2005.
Results of Operations Comparison of Nine Months Ended September 30, 2006 and 2005
Revenues Product sales were $555,000 for the nine months ended September 30, 2006 compared to
$71,000 for the nine months ended September 30, 2005. Cumulase product sales were $236,000 and
$71,000 and sales of the API for Hylenex were $319,000 and $0 for the nine months ended September
30, 2006 and 2005, respectively.
Cost of Sales Cost of sales were $396,000 for the nine months ended September 30, 2006 compared
to $31,000 for the nine months ended September 30, 2005 and consisted of third-party manufacturing
costs, fill and finish costs and freight costs. Cumulase cost of sales was $62,000 which includes
$28,000 in expense for approximately half the costs related to two Cumulase batches which failed to
meet product release specifications. Cost of sales related to the sale of API for Hylenex was
$334,000 which includes $319,000 related to transfers of API to Baxter and $15,000 for labels that
did not meet specifications for the nine months ended September 30, 2006. Cost of sales for the
nine months ended September 30, 2005 is comprised of $31,000 related to the Cumulase product.
Research and Development Research and development expenses were $6,536,000 for the nine months
ended September 30, 2006 compared to $7,579,000 for the nine months ended September 30, 2005. Our
research and development expenses consisted primarily of costs associated with the development and
manufacturing of our product candidates, compensation and other expenses for research and
development personnel, supplies and
materials, costs for consultants and related contract research,
facility costs, amortization and depreciation. Research and development expenses decreased by
$1,043,000 due primarily to lower contract manufacturing, analytical, and stability costs related
to the development and production of our rHuPH20 enzyme of approximately $1,282,000, decreased
Chemophase toxicology and other research study costs of approximately $1,335,000, partially offset
by higher clinical trial costs relating primarily to our Hylenex and Chemophase trials of
approximately $786,000, higher consulting and compensation costs of approximately $614,000 and
higher share-based compensation costs of approximately $311,000. We expect research and
development costs to increase in future periods as we increase our research efforts, expand our
clinical trials, and continue to develop and manufacture our product candidates.
Selling, General and Administrative Selling, general and administrative expenses were $4,538,000
for the nine months ended September 30, 2006 compared to $2,443,000 for the nine months ended
September 30, 2005. General and administrative expenses increased by $2,095,000 due to increased
share-based compensation expense of approximately $601,000, legal and accounting fees of
approximately $589,000, general and administrative personnel costs of approximately $399,000,
recruiting fees of approximately $255,000, and strategic consulting fees of approximately $124,000.
We anticipate that compliance with provisions of the Sarbanes-Oxley Act of 2002, including Section
404 relating to audits of our internal controls, will increase our general and administrative costs
in future periods.
Share-Based Compensation Through 2005, we accounted for our stock plans using the intrinsic value
method and recorded no stock based compensation for options granted to employees. Effective at the
beginning of 2006, we adopted Statement of Financial Accounting Standards No. 123(R) (SFAS
123(R)), Share-Based Payment, and elected to adopt the modified prospective application method.
SFAS No. 123(R) requires us to use a fair-valued based method to account for share-based
compensation. Accordingly, share-based compensation cost is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the employees requisite service
period. Total compensation cost for our share-based payments in the nine months ended September 30,
2006 was $912,000. Selling, general and administrative expense and research and development expense
in the nine months ended September 30, 2006 include share-based compensation of $601,000 and
$311,000, respectively. As of September 30, 2006, $2.4 million of total unrecognized compensation
costs related to nonvested awards is expected to be recognized over a weighted average period of
1.9 years. See Note 3, Significant Accounting Policies Change in Accounting Method for
Share-Based Compensation in the Notes to Condensed Consolidated Financial Statements (unaudited)
for further discussion.
Other Income and Expense Other income was $540,000 for the nine months ended September 30, 2006
compared to $220,000 for the nine months ended September 30, 2005. The increase in other income
was due to higher interest income as a result of maintaining higher average cash balances during
2006 and higher interest rates.
Net Loss Net loss for the nine months ended September 30, 2006 was $10,374,000, or $0.17 per
common share, compared to $9,762,000, or $0.20 per common share for the nine months ended September
30, 2005. The increase in net loss was due to an increase in operating expenses, primarily in
share based compensation, professional services and additional personnel costs.
Liquidity and Capital Resources As of September 30, 2006, cash and cash equivalents were
$16,101,000 versus $19,132,000 as of December 31, 2005, a decrease of $3,031,000. This decrease
resulted primarily from net cash
used in operations for the nine months ended September 30, 2006 partially offset by the exercise of
common stock warrants totaling $6,163,000.
Net cash used in operations was $9,076,000 during the nine months ended September 30, 2006
compared to $9,393,000 of cash used in operations during the nine months ended September 30, 2005.
This was due primarily to the increase in accounts payable and accrued expenses in 2006.
Net cash used in investing activities was $255,000 during the nine months ended September 30,
2006 compared to $344,000 during the nine months ended September 30, 2005. This change was due to
fewer purchases of property and equipment during 2006.
Net cash provided by financing activities was $6,301,000 during the nine months ended
September 30, 2006 versus $365,000 during the nine months ended September 30, 2005. During the
first nine months of 2006, we raised $137,000 through the exercise of stock options and $6,163,000
through the exercise of warrants. During the first nine months of 2005, we raised $176,000 through
the exercise of stock options and $188,000 through the exercise of warrants.
We expect our cash requirements to increase significantly as we continue to increase our
research and development for, seek regulatory approvals of, and develop and manufacture our current
product candidates. As we expand our research and development efforts and pursue additional
product opportunities, we anticipate significant cash requirements for hiring of personnel, capital
expenditures and investment in additional internal systems and infrastructure. The amount and
timing of cash requirements will depend on the research, development, manufacture, regulatory and
market acceptance of our product candidates, if any, and the resources we devote to researching,
developing, manufacturing, commercializing and supporting our product candidates.
We believe that our current cash and cash equivalents will be sufficient to fund our
operations for at least the next twelve months. Until we can 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 from our most recent private financing. We may finance
future cash needs through the sale of other equity securities, the exercise of our callable
warrants, strategic collaboration agreements, debt financing, or any combination of the foregoing.
There are 2.6 million callable warrants outstanding as of September 30, 2006. On June 10, 2005,
we filed a shelf registration statement on Form S-3 (Registration No. 333-125731), which was
declared effective on June 17, 2005, which will permit us, from time to time, to offer and sell up
to $50 million of equity or debt securities. We currently have the ability to issue debt and
equity securities for an aggregate of $32.5 million under our shelf registration statement. We
cannot be certain that our existing cash and cash equivalents will be adequate or that additional
financing will be available when needed or that, if available, financing will be obtained on terms
favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back
or eliminate some or all of our research and development programs or delay the launch of our
product candidates. If we raise additional funds by issuing equity securities, substantial
dilution to existing stockholders would likely result. If we raise additional funds by incurring
debt financing, the terms of the debt may involve significant cash payment obligations as well as
covenants and specific financial ratios that may restrict our ability to operate our business.
Off-Balance Sheet Arrangements As of September 30, 2006, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In
addition, we do not engage in trading activities involving non-exchange traded contracts. As such,
we are not materially exposed to any financing, liquidity, market or credit risk that could arise
if we had engaged in these relationships.
Risk Factors
The following information sets forth factors that could cause our actual results to differ
materially from those contained in forward-looking statements we have made in this quarterly report
and those we may make from time to time. For a more detailed discussion of the factors that could
cause actual results to differ, see the Risk Factors section in our Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission on March 24, 2006.
Risks Related To Our Business
We have generated only minimal revenue from product sales to date; we have a history of net losses
and negative cash flow, and we may never achieve or maintain profitability.
We have generated only minimal revenue from product sales to date and may never generate
significant revenues from future product sales. Even if we do achieve significant revenues from
product sales, we expect to incur significant operating losses over the next several years. We
have never been profitable, and we may never become profitable. Through September 30, 2006, we
have incurred aggregate net losses of $36,721,277.
We will need to raise funds in the next twelve months, and there can be no assurance that such
funds will be available.
During the next twelve months we will need to raise additional capital to complete the steps
required to continue development of our product candidates and to fund general operations. If we
engage in acquisitions of companies, products, or technology in order to execute our business
strategy, we may need to raise additional capital. We may be required to raise additional capital
in the future through the public offering of securities, collaborative agreements, private
financings and various other equity or debt financings, including calling outstanding warrants to
purchase our common stock.
Currently, warrants to purchase approximately 7.6 million shares of our common stock are
outstanding and this amount of outstanding warrants may make us a less desirable candidate for
investment for some potential investors. Approximately 2.6 million of our outstanding warrants
contain a call feature that, potentially, may allow us to raise funds from the holders of these
warrants. If our common stock closes at a price equal to or greater than $2.00 per share for
twenty consecutive trading days, we have the ability, at our sole discretion, to call warrants
exercisable for up to approximately 1.9 million shares of common stock, provided that we have not
exercised a call right in the preceding three months. Upon such a call, the holders of these
warrants have thirty days to decide whether to either exercise their warrants at a price of $1.75
per share or receive $0.01 from us for each share of common stock that is not exercised. If we
need to raise funds in the future and we wish to utilize this call right, we will not be able to
exercise the call right if we do not meet the minimum closing price condition and, even if we meet
this condition, we cannot be sure of the amounts that will be raised by such a call because some or
all warrant holders may decide not to exercise their warrants.
Considering our stage of development and the nature of our capital structure, when we are
required to raise additional capital in the future, the additional financing may not be available
on favorable terms, or at all. If we are successful in raising additional capital, a substantial
number of additional shares will be outstanding and would dilute the ownership interest of our
investors.
If we do not receive and maintain regulatory approvals for our product candidates, we will not be
able to commercialize our products, which would substantially impair our ability to generate
revenues.
With the exception of the December 2004 receipt of a CE (European Conformity) Mark and April
2005 FDA clearance for Cumulase, and the December 2005 FDA approval for Hylenex, none of our
product candidates have received regulatory approval from the FDA or from any similar national
regulatory agency or authority in any other country in which we intend to do business. Approval
from the FDA is necessary to manufacture and market pharmaceutical products in the United States.
Most other countries in which we may do business have similar requirements.
In December 2005, we received FDA approval for Hylenex. Other manufacturers have FDA approved
products for use as spreading agents, including ISTA Pharmaceuticals, Inc. (ISTA), with an
ovine-derived hyaluronidase, Vitrase®, Amphastar Pharmaceuticals, Inc. (Amphastar), with a
bovine-derived hyaluronidase, Amphadase, and Primapharm, Inc. also with a bovine-derived
hyaluronidase, Hydase. The FDA has determined that Amphadase, Hydase, Hylenex and Vitrase are
each distinct new chemical entities and hence
afforded five years of market exclusivity. The five year market exclusivity precludes identical
new chemical entity products from being marketed for a period of five years. For so long as each
of these products are established as distinctly different new chemical entities the marketing
exclusivity granted does not prohibit the marketing of any of these products, including Hylenex. If
the FDA changes its earlier determination that Hylenex is a distinct new chemical entity, our
ability to market Hylenex will be materially impaired.
The processes for obtaining FDA approval are extensive, time-consuming and costly, and there
is no guarantee that the FDA will approve any NDAs that we intend to file with respect to any of
our product candidates, or that the timing of any such approval will be appropriate for our product
launch schedule and other business priorities, which are subject to change. We have not currently
begun the NDA approval process for any of our other potential products, and we may not be
successful in obtaining such approvals for any of our potential products.
We may not receive regulatory approvals for our product candidates for a variety of reasons,
including unsuccessful clinical trials.
Clinical testing of pharmaceutical products is also a long, expensive and uncertain process.
Even if initial results of pre-clinical studies or clinical trial results are promising, we may
obtain different results that fail to show the desired levels of safety and efficacy, or we may not
obtain FDA approval for a variety of other reasons. The clinical trials of any of our product
candidates could be unsuccessful, which would prevent us from obtaining regulatory approval and
commercializing the product. FDA approval can be delayed, limited or not granted for many reasons,
including, among others:
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FDA officials may not find a product candidate safe or effective
enough to merit either continued testing or final approval; |
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FDA officials may not find that the data from pre-clinical testing and
clinical trials justify approval, or they may require additional
studies that would make it commercially unattractive to continue
pursuit of approval; |
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the FDA may not approve our manufacturing processes or facilities, or
the processes or facilities of our contract manufacturers or raw
material suppliers; |
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the FDA may change its formal or informal approval policies, act
contrary to previous guidance, or adopt new regulations; or |
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the FDA may approve a product candidate for indications that are
narrow or under conditions that place the product at a competitive
disadvantage, which may limit our sales and marketing activities or
otherwise adversely impact the commercial potential of a product. |
If the FDA does not approve our product candidates in a timely fashion on commercially viable
terms or we terminate development of any of our product candidates due to difficulties or delays
encountered in the regulatory approval process, it will have a material adverse impact on our
business and we will be dependent on the development of our other product candidates and/or our
ability to successfully acquire other products and technologies. We may not receive regulatory
approval of Chemophase, or any other product candidates, in a timely manner, or at all.
In addition, we intend to market certain of our products, and perhaps have certain of our
products manufactured, in foreign countries. The process of obtaining regulatory approvals in
foreign countries is subject to delay and failure for many of the same reasons set forth above as
well as for reasons that vary from jurisdiction to jurisdiction.
If our product candidates are approved by the FDA but do not gain market acceptance, our business
will suffer because we may not be able to fund future operations.
Assuming that we obtain the necessary regulatory approvals, a number of factors may affect the
market acceptance of any of our existing product candidates or any other products we develop or
acquire in the future, including, among others:
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the price of our products relative to other therapies for the same or similar treatments; |
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the perception by patients, physicians and other members of the health care community of the
effectiveness and safety of our products for their prescribed treatments; |
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our ability to fund our sales and marketing efforts; |
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the degree to which the use of our products is restricted by the product label approved by the FDA; |
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the effectiveness of our sales and marketing efforts; and |
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the introduction of generic competitors. |
If our products do not gain market acceptance, we may not be able to fund future operations,
including the development or acquisition of new product candidates and/or our sales and marketing
efforts for our approved products, which would cause our business to suffer.
In addition, our ability to market and promote our product candidates will be restricted to
the labels approved by the FDA. If the approved labels are restrictive, our sales and marketing
efforts may be negatively affected.
If we are unable to sufficiently develop our sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will not be able to
commercialize products.
We may not be successful in marketing and promoting our existing product candidates or any
other products we develop or acquire in the future. We are currently in the process of developing
our sales, marketing and distribution capabilities. However, our current capabilities in these
areas are very limited. In order to commercialize any products successfully, we must internally
develop substantial sales, marketing and distribution capabilities, or establish collaborations or
other arrangements with third parties to perform these services. We do not have extensive
experience in these areas, and we may not be able to establish adequate in-house sales, marketing
and distribution capabilities or engage and effectively manage relationships with third parties to
perform any or all of such services. 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,
whose efforts may not meet our expectations or be successful.
We have entered into non-exclusive distribution agreements with MediCult AS, a Denmark-based
distributor and MidAtlantic Diagnostics, Inc., a New Jersey-based distributor, to market and sell
our Cumulase
product. We have entered into an exclusive sales and marketing agreement with Baxter Healthcare
Corporation (Baxter) to market and sell our Hylenex product candidate in the United States and
Puerto Rico. Baxter may also market and sell Hylenex on an exclusive basis in the European Union,
if and when we seek and receive the applicable regulatory approvals in Europe.
We depend upon the efforts of these third parties to promote and sell our current products,
but there can be no assurance that the efforts of these third parties will meet our expectations or
result in any significant product sales.
If our sole contract manufacturer is unable to manufacture our products, our product development
and commercialization efforts could be delayed or stopped.
We have signed a commercial supply agreement with Avid Bioservices, Inc. (Avid), a contract
manufacturing organization, to produce bulk recombinant human hyaluronidase for clinical trials and
commercial use. Avid will produce the active pharmaceutical ingredient used in each of Cumulase,
Hylenex and Chemophase under current Good Manufacturing Practices for commercial scale production
and will provide support for the chemistry, manufacturing and controls sections for FDA regulatory
filings. Avid has only limited experience manufacturing our active pharmaceutical ingredient
batches and we rely on its ability to successfully manufacture these batches according to product
specifications. If Avid does not maintain its status as an FDA-approved manufacturing facility, or
is unable to manufacture the active pharmaceutical ingredient used in our products and product
candidates for any other reason, the commercialization of our products and the development of our
product candidates will be delayed and our business will be adversely affected. We have not
established and may not be able to establish arrangements with additional manufacturers for these
ingredients or products should the existing supplies become unavailable or in the event that our
sole contract manufacturer is unable to adequately perform its responsibilities. Any delays or
interruptions in the supply of materials by Avid could cause the delay of clinical trials and could
delay or prevent the commercialization of product candidates that may receive regulatory approval.
Such delays or interruptions would have a material adverse effect on our business and financial
condition.
If we have problems with the third parties that prepare, fill, finish, and package our product
candidates for distribution, our product development and commercialization efforts for these
candidates could be delayed or stopped.
In the event that any of our product candidates are used in clinical trials or receive the
necessary regulatory approval for commercialization, we rely on third parties to prepare, fill,
finish, and package the products prior to their distribution. If we are unable to locate third
parties to perform these functions on terms that are economically acceptable to us, the progress of
clinical trials could be delayed or even suspended and the commercialization of approved product
candidates could be delayed or prevented. We currently utilize a third-party to prepare, fill,
finish, and package Cumulase. This third party has only limited experience manufacturing Cumulase
batches and we rely on its ability to successfully manufacture Cumulase according to product
specifications. In addition, one of our distributors is experiencing technical challenges
integrating our product into their proprietary manufacturing process. If our third party
manufacturer is unable to successfully manufacture Cumulase, or if our distributor is unable to
resolve their technical issues, we may be unable to supply enough Cumulase product to meet demand.
In addition, we currently utilize a subsidiary of Baxter Healthcare Corporation (Baxter) to
prepare, fill, finish, and package Hylenex under a development and supply agreement. Baxter has
only limited experience manufacturing Hylenex batches and we rely on its ability to successfully
manufacture Hylenex batches according to product specifications. Any delays or interruptions in
Baxters ability to manufacture Hylenex batches could have a material adverse impact on our
business and financial condition.
Our inability to attract, hire and retain key management and scientific personnel, and to recruit
qualified independent directors, could negatively affect our business.
Our success depends on the performance of key management and scientific employees with
biotechnology experience. Given our small staff size and programs currently under development, we
depend substantially on our ability to hire, train, retain and motivate high quality personnel,
especially our scientists and management team in
this field. In addition, we rely on the expertise and guidance of independent directors to develop
business strategies and to guide our execution of these strategies. Due to changes in the
regulatory environment for public companies over the past few years, the demand for independent
directors has increased and it may be difficult for us, due to competition from both like-sized and
larger companies, to recruit qualified independent directors.
Furthermore, if we were to lose key management personnel, particularly Jonathan Lim, M.D., our
chief executive officer, or Gregory Frost, Ph.D., our chief scientific officer, then we would
likely lose some portion of our institutional knowledge and technical know-how, potentially causing
a substantial delay in one or more of our development programs until adequate replacement personnel
could be hired and trained. For example, Dr. Frost has been with us from soon after our inception,
and he possesses a substantial amount of knowledge about our development efforts. If we were to
lose his services, we would experience delays in meeting our product
development schedules. We
have not entered into any retention or other agreements specifically designed to motivate officers
or other employees to remain with Halozyme other than standard agreements relating to the vesting
of stock options that every optionee of Halozyme must enter into as a condition of receiving an
option grant.
We do not have key man life insurance policies on the lives of any of our employees, including
Dr. Lim and Dr. Frost.
If actual future payments for allowances, discounts, returns and rebates exceed the estimates we
made at the time of the sale of our products, our financial position, results of operations and
cash flows may be negatively impacted.
We recognize product revenue net of estimated allowances for discounts, returns and rebates.
Such estimates are inherently difficult because we have limited experience selling our products and
any judgments that we make relating to discounts, returns and rebates are subjective. We will
accept the return of our product that is damaged in accordance with our return goods policy and
procedures. We may also give credits for expired product. Actual results may differ significantly
from our estimated allowances for discounts, returns and rebates. Any changes in estimates and
assumptions based upon actual results may have an impact on our results of operations and/or
financial condition. In addition, our financial position, results of operations and cash flows may
be negatively impacted if actual future payments for discounts, returns and rebates exceed the
estimates we made at the time of the sale of our products.
Risks Related To Our Stock
Future sales of shares of our common stock upon the exercise of currently outstanding securities or
pursuant to our universal shelf registration statement may negatively affect our stock price.
As a result of our January 2004 private financing transaction, we issued warrants to private
investors for the purchase of 10,461,943 shares of common stock at purchase prices ranging from
$0.77 to $1.75 per share. Currently, approximately 4.3 million shares of common stock remain
issuable upon the exercise of these warrants. As a result of our October 2004 financing
transaction, we issued warrants for the purchase of 2,709,542 shares of common stock at a purchase
of $2.25 per share. The exercise of these warrants could result in significant dilution to
stockholders at the time of exercise which could negatively affect our stock price.
As a result of our December 2005 financing transaction, we issued 10,000,000 shares of common
stock to certain institutional and accredited investors for $17.5 million in gross proceeds, or
$1.75 per share. These shares were sold under our universal shelf registration statement in a
registered direct offering. We currently have the ability, from time to time, to offer and sell up
to $32.5 million of additional equity or debt securities under this universal shelf registration
statement. Sales of substantial amounts of shares of our common stock or other securities under
our universal shelf registration statement could lower the market price of our common stock and
impair the Companys ability to raise capital through the sale of equity securities. In the
future, we may issue additional options, warrants or other derivative securities convertible into
Halozyme common stock.
Our stock price is subject to significant volatility.
We participate in a highly dynamic industry, which often results in significant volatility in the
market price of common stock irrespective of company performance. As a result, our high and low
stock prices during the twelve months ended September 30, 2006 were $3.71 and $1.70, respectively.
We expect our stock price to continue to be subject to significant volatility and, in addition to
the other risks and uncertainties described elsewhere in this report, any of the following factors
may lead to a significant drop in our stock price:
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general negative conditions in the healthcare industry; |
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general negative conditions in the financial markets; |
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the failure, for any reason, to obtain FDA approval for any of our products; |
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for those products that are approved by the FDA, the failure of the FDA to approve such products in a
timely manner consistent with the FDAs historical approval process; |
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the suspension of our Chemophase clinical trial due to safety or patient tolerability issues; |
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our failure, or the failure of our third-party partners, to successfully commercialize products
approved by the FDA; |
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our failure, or the failure of our third-party partners, to generate product revenues anticipated by
investors; |
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problems with our sole API contract manufacturer or our sole fill and finish manufacturer for Hylenex; |
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the exercise of our right to redeem certain outstanding warrants to purchase our common stock; and |
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the sale of additional debt and/or equity securities by us. |
Trading in our stock has been limited, so investors may not be able to sell as much stock as they
want to at prevailing market prices.
During the ninety-day period ending September 30, 2006, our average daily trading volume was
approximately 61,000 shares. If limited trading in our stock continues, it may be difficult for
stockholders to sell their shares in the public market at any given time at prevailing prices.
Our decision to redeem outstanding warrants may drive down the market price of our stock.
We may have the ability to redeem certain outstanding warrants, under certain conditions, that
may be exercised for approximately 2.6 million shares of common stock. The redemption price for
these warrants is $0.01 per share, but the warrant holders have the opportunity to exercise their
warrants prior to redemption at the price of $1.75 per share. If we decide to redeem any portion
of our outstanding warrants in the future, some selling security holders may choose to sell
outstanding shares of common stock in order to finance the exercise of the warrants prior to their
redemption. This pattern of selling may result in a reduction of our common stocks market price.
Risks Related To Our Industry
Compliance with the extensive government regulations to which we are subject is expensive and time
consuming, and may result in the delay or cancellation of product sales, introductions or
modifications.
Extensive industry regulation has had, and will continue to have, a significant impact on our
business. All pharmaceutical companies, including Halozyme, are subject to extensive, complex,
costly and evolving regulation by the federal government, principally the FDA and, to a lesser
extent, the U.S. Drug Enforcement Administration (DEA) and foreign and state government agencies.
The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other domestic and
foreign statutes and regulations govern or influence the testing, manufacturing, packaging,
labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution
of our products. Under certain of these regulations, Halozyme and its contract suppliers and
manufacturers are subject to periodic inspection of its or their respective facilities, procedures
and operations and/or the testing of products by the FDA, the DEA and other authorities, which
conduct periodic inspections to confirm that Halozyme and its contract suppliers and manufacturers
are in compliance with all applicable regulations. The FDA also conducts pre-approval and
post-approval reviews and plant inspections to determine whether our systems, or our contract
suppliers and manufacturers processes, are in compliance with current good manufacturing
practices and other FDA regulations. If we, or our contract supplier, fail these inspections, we
may not be able to commercialize our product in a timely manner without incurring significant
additional costs, or at all.
In addition, the FDA imposes a number of complex regulatory requirements on entities that
advertise and promote pharmaceuticals, including, but not limited to, standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities, and promotional activities involving the Internet.
We are dependent on receiving FDA and other governmental approvals prior to manufacturing,
marketing and shipping our products. Consequently, there is always a risk that the FDA or other
applicable governmental authorities will not approve our products, or will take post-approval
action limiting or revoking our ability to sell our products, or that the rate, timing and cost of
such approvals will adversely affect our product introduction plans or results of operations.
Our suppliers and sole manufacturer are subject to regulation by the FDA and other agencies, and if
they do not meet their commitments, we would have to find substitute suppliers or manufacturers,
which could delay the supply of our products to market.
Regulatory requirements applicable to pharmaceutical products make the substitution of
suppliers and manufacturers costly and time consuming. We have no internal manufacturing
capabilities and are, and expect to be in the future, entirely dependent on contract manufacturers
and suppliers for the manufacture of our products and for their active and other ingredients. The
disqualification of these manufacturers and suppliers through their failure to comply with
regulatory requirements could negatively impact our business because the delays and costs in
obtaining and qualifying alternate suppliers (if such alternative suppliers are available, which we
cannot assure) could delay clinical trials or otherwise inhibit our ability to bring approved
products to market, which would have a material adverse effect on our business and financial
condition.
We may be required to initiate or defend against legal proceedings related to intellectual property
rights, which may result in substantial expense, delay and/or cessation of the development and
commercialization of our products.
We rely on patents to protect our intellectual property rights. The strength of this
protection, however, is uncertain. For example, it is not certain that:
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our patents and pending patent applications cover products and/or technology that we invented first; |
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we were the first to file patent applications for these inventions; |
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others will not independently develop similar or alternative technologies or duplicate our technologies; |
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any of our pending patent applications will result in issued patents; and |
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any of our issued patents, or patent pending applications that result in issued patents, will be held
valid and infringed in the event the patents are asserted against others. |
We currently own or license several U.S. patents and also have pending patent applications.
There can be no assurance that our existing patents, or any patents issued to us as a result of
such applications, will provide a basis for commercially viable products, will provide us with any
competitive advantages, or will not face third-party challenges or be the subject of further
proceedings limiting their scope or enforceability.
We may become involved in interference proceedings in the U.S. Patent and Trademark Office to
determine the priority of our inventions. In addition, costly litigation could be necessary to
protect our patent position. We also rely on trademarks to protect the names of our products.
These trademarks may be challenged by others. If we enforce our trademarks against third parties,
such enforcement proceedings may be expensive. We also rely on trade secrets, unpatented
proprietary know-how and continuing technological innovation that we seek to protect with
confidentiality agreements with employees, consultants and others with whom we discuss our
business. Disputes may arise concerning the ownership of intellectual property or the
applicability or enforceability of these agreements, and we might not be able to resolve these
disputes in our favor.
In addition to protecting our own intellectual property rights, third parties may assert
patent, trademark or copyright infringement or other intellectual property claims against us based
on what they believe are their own intellectual property rights. If we become involved in any
intellectual property litigation, we may be required to pay substantial damages, including but not
limited to treble damages, for past infringement if it is ultimately determined
that our products
infringe a third-partys intellectual property rights. Even if infringement claims against us are
without merit, defending a lawsuit takes significant time, may be expensive and may divert
managements attention from other business concerns. Further, we may be stopped from developing,
manufacturing or selling our products until we obtain a license from the owner of the relevant
technology or other intellectual property rights. If such a license is available at all, it may
require us to pay substantial royalties or other fees.
Future acquisitions could disrupt our business and harm our financial condition.
In order to remain competitive, we may decide to acquire additional businesses, products and
technologies. As we have limited experience in evaluating and completing acquisitions, our ability
as an organization to make such acquisitions is unproven. Acquisitions could require significant
capital infusions and could involve many risks, including, but not limited to, the following:
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we may have to issue convertible debt or equity securities to complete
an acquisition, which would dilute our stockholders and could
adversely affect the market price of our common stock; |
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an acquisition may negatively impact our results of operations because
it may require us to incur large one-time charges to earnings,
amortize or write down amounts related to goodwill and other
intangible assets, or incur or assume substantial debt or liabilities,
or it may cause adverse tax consequences, substantial depreciation or
deferred compensation charges; |
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we may encounter difficulties in assimilating and integrating the
business, technologies, products, personnel or operations of companies
that we acquire; |
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certain acquisitions may disrupt our relationship with existing
customers who are competitive with the acquired business; |
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acquisitions may require significant capital infusions and the
acquired businesses, products or technologies may not generate
sufficient revenue to offset acquisition costs; |
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an acquisition may disrupt our ongoing business, divert resources,
increase our expenses and distract our management; |
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acquisitions may involve the entry into a geographic or business
market in which we have little or no prior experience; and |
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key personnel of an acquired company may decide not to work for us. |
If any of these risks occurred, it could adversely affect our business, financial condition
and operating results. We cannot assure you that we will be able to identify or consummate any
future acquisitions on acceptable terms, or at all. If we do pursue any acquisitions, it is
possible that we may not realize the anticipated benefits from such acquisitions or that the market
will not view such acquisitions positively.
If third-party reimbursement and customer contracts are not available, our products may not be
accepted in the market.
Our ability to earn sufficient returns on our products will depend in part on the extent to
which reimbursement for our products and related treatments will be available from government
health administration authorities, private health insurers, managed care organizations and other
healthcare providers.
Third-party payers are increasingly attempting to limit both the coverage and the level of
reimbursement of new drug products to contain costs. Consequently, significant uncertainty exists
as to the reimbursement status of newly approved healthcare products. Third-party payers may not
establish adequate levels of reimbursement for the products that we commercialize, which could
limit their market acceptance and result in a material adverse effect on our financial condition.
Customer contracts, such as with group paying organizations and hospital formularies, will
often not offer contract or formulary status without either the lowest price or substantial proven
clinical differentiation. If our products are compared to animal-extracted hyaluronidases by these
entities, it is possible that neither of these conditions will be met, which could limit market
acceptance and result in a material adverse effect on our financial condition.
The rising cost of healthcare and related pharmaceutical product pricing has led to
cost-containment pressures that could cause us to sell our products at lower prices, resulting in
less revenue to us.
Any of our products that have been or in the future are approved by the FDA may be purchased
or reimbursed by state and federal government authorities, private health insurers and other
organizations, such as health maintenance organizations and managed care organizations. Such
third-party payors increasingly challenge pharmaceutical product pricing. The trend toward managed
healthcare in the United States, the growth of such organizations, and various legislative
proposals and enactments to reform healthcare and government insurance programs, including the
Medicare Prescription Drug Modernization Act of 2003, could significantly influence the manner in
which pharmaceutical products are prescribed and purchased, resulting in lower prices and/or a
reduction in demand. Such cost containment measures and healthcare reforms could adversely affect
our ability to sell our products. Furthermore, individual states have become increasingly
aggressive in passing legislation and implementing regulations designed to control pharmaceutical
product pricing, including price or patient reimbursement constraints, discounts, restrictions on
certain product access, importation from other countries and bulk purchasing. Legally mandated
price controls on payment amounts by third-party payors or other restrictions could negatively and
materially impact our revenues and financial condition. We anticipate that we will encounter
similar regulatory and legislative issues in most other countries outside the United States.
We face intense competition and rapid technological change that could result in the development of
products by others that are superior to the products we are developing.
We have numerous competitors in the United States and abroad, including, among others, major
pharmaceutical and specialized biotechnology firms, universities and other research institutions
that may be developing competing products. Such competitors include, but are not limited to,
Sigma-Aldrich Corporation, ISTA Pharmaceuticals, Inc. (ISTA), Amphastar Pharmaceuticals, Inc., and
Primapharm, Inc., among others. These competitors may develop technologies and products that are
more effective, safer, or less costly than our current or future product candidates or that could
render our technologies and product candidates obsolete or noncompetitive. Many of these
competitors have substantially more resources and product development, manufacturing and marketing
experience and capabilities than we do. In addition, many of our competitors have significantly
greater experience than we do in undertaking pre-clinical testing and clinical trials of
pharmaceutical product candidates and obtaining FDA and other regulatory approvals of products and
therapies for use in healthcare. Other manufacturers have FDA approved products for use as
spreading agents, including ISTA Pharmaceuticals, Inc. (ISTA), with an ovine-derived
hyaluronidase, Vitrase®, Amphastar Pharmaceuticals, Inc., with a bovine-derived
hyaluronidase, Amphadase, and Primapharm, Inc., also with a bovine-derived hyaluronidase, Hydase.
The FDA has determined that Amphadase, Hydase, Hylenex and Vitrase are distinct new chemical
entities and hence afforded five years of market exclusivity. The five year market exclusivity
precludes identical new chemical entity products from
being marketed for a period of five years. As each of these products is established as distinctly
different new chemical entities the marketing exclusivity granted does not prohibit the marketing
of the products.
We are exposed to product liability claims, and insurance against these claims may not be available
to us on reasonable terms or at all.
We might incur substantial liability in connection with clinical trials or the sale of our
products. Product liability insurance is expensive and in the future may not be available on
commercially acceptable terms, or at all. We currently carry a limited amount of product liability
insurance. A successful claim or claims brought against us in excess of our insurance coverage
could materially harm our business and financial condition.
We may have difficulty implementing in a timely manner the internal controls over financial
reporting necessary to allow our management to report on the effectiveness of our internal controls
over financial reporting, and we may incur substantial costs in order to comply with the
requirements of the Sarbanes-Oxley Act of 2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a
report of managements assessment of the effectiveness of our internal controls over financial
reporting as part of our Annual Report for the fiscal year ending December 31, 2006. Our
registered public accountant will then be required to attest to, and report on, our assessment. In
order to issue our report, our management must document both the design for our internal controls
over financial reporting and the testing processes that support managements evaluation and
conclusion. There can be no assurance that we will be able to complete the work necessary for our
management to issue its management report in a timely manner, or that management will be able to
report that our internal controls over financial reporting are effective.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is interest income sensitivity, which is affected by
changes in the general level of U.S. interest rates, particularly because the majority of our
investments are in short-term marketable securities. An immediate 10% change in interest rates
would not have a material effect on the fair market value of our portfolio; therefore, we believe
that we are not subject to any material market risk exposure. We do not have any foreign currency
or other derivative financial instruments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this Quarterly
Report.
Changes in Internal Controls Over Financial Reporting
There have been no significant changes in our internal controls over financial reporting that
occurred during the quarter ended September 30, 2006, that have materially affected, or are
reasonably likely to materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, Halozyme may be involved in litigation relating to claims arising out of
its operations in the normal course of business. Any of these claims could subject us to costly
litigation and, while we generally believe that we have adequate insurance to cover many different
types of liabilities, our insurance carriers may deny coverage or our policy limits may be
inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment
of any such awards could have a material adverse effect on our results of operations and financial
position. Additionally, any such claims, whether or not successful, could damage our reputation
and business. Halozyme currently is not a party to any legal proceedings, the adverse outcome of
which, in managements opinion, individually or in the aggregate, would have a material adverse
effect on our results of operations or financial position.
Item 1A. Risk Factors
A description of the risk factors associated with our business is included under Risk
Factors in Managements Discussion and Analysis of Financial Condition and Results of
Operations, contained in Item 2 of Part I of this report. This description includes any changes to
and supersedes the description of the risk factors associated with our business previously
disclosed in Item 1 of our 2005 Annual Report on Form 10-KSB and is incorporated herein by
reference. There are no material changes to the risk factors described in our Form 10-KSB.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During April and May 2006, holders of the Companys various outstanding warrants exercised
rights to purchase 588,500 common shares for gross proceeds of approximately $1,029,875. During
July, August, and September, holders of the Companys various outstanding warrants exercised rights
to purchase 2,236,034 common shares for gross proceeds of approximately $3,893,829. The shares and
underlying warrants were purchased for investment in a private placement exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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Exhibit |
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Title |
3.1
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Amended and Restated Articles of Incorporation, as filed with the Nevada Secretary of State
on May 4, 2006 (1) |
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3.2
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Certificate of Designation, Preferences and Rights of the terms of the Series A Preferred
Stock (1) |
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3.3
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Bylaws as Amended (2) |
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4.1
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Rights Agreement between Corporate Stock Transfer, as rights agent, and Registrant, dated May
4, 2006 (1) |
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10.1
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License Agreement between University of Connecticut and Registrant, dated November 15, 2002 (3) |
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10.2*
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Agreement for Services between Avid Bioservices, Inc. and Registrant, dated November 19, 2003 (3) |
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10.3*
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Distribution Agreement between MidAtlantic Diagnostics, Inc. and Registrant, dated January
30, 2004 (3) |
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10.4*
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Distribution Agreement between MediCult AS and Registrant, dated February 9, 2004 (3) |
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Exhibit |
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Title |
10.5
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2004 Stock Plan and Form of Option Agreement thereunder (4) |
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10.6
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Form of Indemnity Agreement for Directors and Executive Officers (4) |
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10.7*
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Exclusive Distribution Agreement between Baxter Healthcare and Registrant, dated August 13,
2004 (5) |
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10.8
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Form of Callable Stock Purchase Warrant (4) |
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10.9
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Securities Purchase Agreement between Registrant and the other signatories thereto, dated as
of October 12, 2004 (6) |
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10.10
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Form of Common Stock Purchase Warrant (6) |
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10.11
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Registration Rights Agreement between Registrant and the other signatories thereto, dated as
of October 12, 2004 (6) |
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10.12
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DeliaTroph Pharmaceuticals, Inc. 2001 Amended and Restated Stock Plan and form of Stock
Option Agreements for options assumed thereunder (7) |
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10.13
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Nonstatutory Stock Option Agreement With Andrew Kim (7) |
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10.14*
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Commercial Supply Agreement with Avid Bioservices, Inc. and Registrant, dated February 16, 2005 (8) |
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10.15*
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Development and Supply Agreement with Baxter Healthcare Corporation and Registrant, dated
March 24, 2005 (9) |
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10.16*
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First Amendment to the Exclusive Distribution Agreement between Baxter Healthcare
Corporation and Registrant, dated March 24, 2005 (9) |
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10.17
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Halozyme Therapeutics, Inc. 2005 Outside Directors Stock Plan (10) |
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10.18*
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Second Amendment to the Exclusive Distribution Agreement between Baxter Healthcare
Corporation and Registrant, dated December 8, 2005 (11) |
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10.19
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Placement Agent Agreement, dated as of December 12, 2005 between Halozyme, SG Cowen & Co.,
LLC, Rodman & Renshaw, LLC and Roth Capital Partners, LLC (12) |
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10.20
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Placement Agent Agreement, dated as of December 13, 2005 between Halozyme, SG Cowen & Co.,
LLC, Rodman & Renshaw, LLC and Roth Capital Partners, LLC (13) |
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10.21
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First Amendment to the License Agreement between University of Connecticut and Registrant,
dated January 9, 2006 (14) |
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10.22
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Halozyme Therapeutics, Inc. 2006 Stock Plan (16) |
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10.23
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First Amendment to Standard Industrial Net Lease between Registrant and Sorrento Square,
dated as of July 1, 2006 (17) |
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10.24
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Second Amendment to Standard Industrial Net Lease between Registrant and Sorrento Square,
dated as of July 1, 2006 (17) |
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10.25
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Form of Stock Option Agreement (2005 Outside Directors Stock Plan) (18) |
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10.26
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Form of Restricted Stock Agreement (2005 Outside Directors Stock Plan) (18) |
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10.27
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Form of Stock Option Agreement (2006 Stock Plan) (18) |
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10.28
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Form of Restricted Stock Agreement (2006 Stock Plan) (18) |
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21.1
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Subsidiaries of Registrant (15) |
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31.1
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Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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(1) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed May 8, 2006. |
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(2) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed December 14,
2004, and Exhibit 99.2 of Registrants Current Report on Form 8-K, filed July 6, 2005. |
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(3) |
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Incorporated by reference to the Registrants Registration Statement on Form SB-2 filed with
the Commission on April 23, 2004. |
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(4) |
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Incorporated by reference to the Registrants amendment number two to the Registration
Statement on Form SB-2 filed with the Commission on July 23, 2004. |
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(5) |
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Incorporated by reference to the Registrants Quarterly Report on Form 10-QSB, filed November
12, 2004. |
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(6) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed October 15,
2004. |
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(7) |
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Incorporated by reference to the Registrants Registration Statement on Form S-8 filed with
the Commission on October 26, 2004. |
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(8) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed February 22,
2005. |
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(9) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed March 30,
2005. |
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(10) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed July 6, 2005. |
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(11) |
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Incorporated by reference to the Registrants Annual Report on Form 10-KSB, filed March 24, 2006. |
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(12) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed December 13, 2005. |
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(13) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed December 14,
2005. |
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(14) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed January 12,
2006. |
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(15) |
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Incorporated by reference to the Registrants Annual Report on Form 10-KSB/A, filed March 29,
2005. |
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(16) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed March 24,
2006. |
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(17) |
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Incorporated by reference to the Registrants Current Report on Form 8-K, filed August 8,
2006. |
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(18) |
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Incorporated by reference to the Registrants Quarterly Report on Form 10-Q, filed August 8,
2006. |
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* |
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Confidential treatment has been requested for certain portions of this exhibit. These
portions have been omitted from this agreement and have been filed separately with the
Securities and Exchange Commission. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned in the City of San Diego, on November 9,
2006.
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Halozyme Therapeutics, Inc., |
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a Nevada corporation |
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Date: November 9, 2006
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By:
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/s/ Jonathan E. Lim |
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Jonathan E. Lim, MD |
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Its:
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President, Chief Executive Officer, |
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(Principal Executive Officer) |
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Date: November 9, 2006
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By:
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/s/ David A. Ramsay |
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David A. Ramsay |
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Its:
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Secretary, Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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