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20070316060257
ACCESSION NUMBER: 0000950134-07-005882
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20061231
FILED AS OF DATE: 20070316
DATE AS OF CHANGE: 20070316
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ENCYSIVE PHARMACEUTICALS INC
CENTRAL INDEX KEY: 0000887023
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 133532643
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-20117
FILM NUMBER: 07697943
BUSINESS ADDRESS:
STREET 1: 4848 LOOP CENTRAL DRIVE
STREET 2: SUITE 700
CITY: HOUSTON
STATE: TX
ZIP: 77081
BUSINESS PHONE: 7137968822
MAIL ADDRESS:
STREET 1: 4848 LOOP CENTRAL DRIVE
STREET 2: SUITE 700
CITY: HOUSTON
STATE: TX
ZIP: 77081
FORMER COMPANY:
FORMER CONFORMED NAME: TEXAS BIOTECHNOLOGY CORP /DE/
DATE OF NAME CHANGE: 19930328
10-K
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h44503e10vk.htm
FORM 10-K
e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended December 31, 2006
OR
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 |
Commission File Number: 0-20117
Encysive Pharmaceuticals Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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13-3532643 |
(State of Incorporation)
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(I.R.S. Employer |
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Identification Number) |
4848 Loop Central Drive, Suite 700
Houston, Texas 77081
(713) 796-8822
(Address and telephone number of principal executive offices and zip code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which Registered |
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Common Stock, $.005 per share
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The NASDAQ Global Market |
Preferred Stock Purchase Rights
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The NASDAQ Global Market |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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 approximate aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was $249,431,000 as of June 30, 2006.
The number of shares outstanding of each of the registrants classes of common stock as of February
28, 2007:
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Title of Class
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Number of Shares |
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Common Stock, $.005 par value
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62,507,490 |
Documents incorporated by reference:
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Document
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Form 10-K Parts |
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Definitive Proxy Statement, to be filed within
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III |
120 days of December 31, 2006 |
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(specified portions) |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements represent our managements judgment regarding future events. In many cases, you can
identify forward-looking statements by terminology such as may, will, should, target,
seek, project, could, plan, expect, anticipate, estimate, believe,
predict, intend, potential, or continue or the negative of these terms or other
words of similar import, although some forward-looking statements are expressed differently. All
statements, other than statements of historical fact, included in and incorporated by reference
into this Form 10-K regarding our financial position, business strategy and plans or objectives for
future operations are forward-looking statements. Among the factors that could cause actual
results to differ materially from those indicated by such forward-looking statements are:
unexpected delays in regulatory approval of Thelin (sitaxsentan sodium) by the United States Food
and Drug Administration, or FDA, in the U.S. and our other products under development; the
unpredictability of the duration and results of regulatory review of new drug applications and
investigational new drug applications by the FDA and national
regulatory authorities in Canada; the high cost and uncertainty of the research,
clinical trials and other development activities involving our products and compounds; timing and
outcome of regulatory action on competing products; possible delays in the timelines for initiating
clinical trials and obtaining results of clinical trials with respect to our products under
development, including TBC3711; decisions by the FDA regarding whether and when to approve our New
Drug Application, or NDA, for Thelin; market acceptance of Thelin in the European Union, or EU,
and Australia, and the actual rate of acceptance; the availability of sufficient funds to continue
our research and development efforts and to repay our outstanding indebtedness; the availability of
sufficient funds to commercialize Thelin in the U.S. should it be approved by the FDA; reduced
estimates of patient populations and diagnosis rates of patients with pulmonary arterial
hypertension; the impact of reimbursement policies and governmental regulation of prices for
Thelin in the EU and Australia; our ability to predict revenues from Thelin and expense levels in
2007 and beyond; the impact of existing and future EU regulatory provisions on product exclusivity,
including orphan drug exclusivity for Thelin, the impact of legislation or regulations in
countries within the EU and in Australia affecting Thelins pricing, reimbursement or access; the
scope of our patents and challenges by others of the scope of our patents; our ability to attract
and retain qualified personnel; the impact of competitive products on Thelin and Argatroban sales;
the ability of our subsidiary to repay the notes secured by royalties on the sales of Argatroban;
the impact of strategic relationships among our competitors; the breadth of approved labeling for
approved products; the speed with which reimbursement and pricing approvals, and product launches
for Thelin may be achieved in the EU, Australia and in other countries where Thelin may be
approved; difficulties or delays in importing, manufacturing, packaging or distributing Thelin in
the EU, Australia and in other countries where Thelin may be approved; our ability to raise additional
capital to fund cash requirements for future operations; our ability to earn a profit from sales or
licenses of Thelin or other drug candidates; our ability to establish future collaborative
arrangements or licenses; and the availability of materials necessary for the manufacture of our
products; as well as more specific risks and uncertainties facing us such as those set forth in
Item 1A Risk Factors below.
You should read these forward-looking statements carefully because they discuss our
expectations about our future performance, contain projections of our future operating results or
our future financial condition, or state other forward-looking information. You should be aware
that the occurrence of any of the events described in Business, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this
Form 10-K could substantially harm our business, results of operations and financial condition and
that upon the occurrence of any of these events, the trading price of our common stock could
decline, and you could lose all or part of your investment.
All subsequent written and oral forward-looking statements attributable to us or to persons
acting on our behalf are expressly qualified in their entirety by the applicable cautionary
statements. We cannot guarantee any future results, levels of activity, performance or
achievements. Except as required by law, we undertake no obligation to update any of the
forward-looking statements in this Form 10-K after the date of this Form 10-K.
2
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS
Overview
Encysive Pharmaceuticals Inc. is a global biopharmaceutical company that engages in the
discovery, development and commercialization of novel, synthetic, small molecule compounds to
address unmet medical needs. We focus our research and development programs predominantly on the
treatment and prevention of interrelated diseases of the vascular endothelium and exploit our
expertise in the area of the intravascular inflammatory process, referred to as the inflammatory
cascade, and vascular diseases. We have successfully developed one FDA approved drug, Argatroban,
for the treatment of heparin-induced thrombocytopenia, or HIT, which is licensed to and marketed by
GlaxoSmithKline plc, or GSK in the U.S. and Canada. Our lead drug candidate, Thelin (sitaxsentan
sodium), is an endothelin receptor antagonist we developed for the treatment of pulmonary arterial
hypertension, or PAH. Thelin has received marketing authorization in the EU and Australia and is
under review by the FDA in the United States and by national regulatory authorities in Canada.
We have three additional compounds in clinical development: the next generation endothelin
receptor antagonist, TBC3711; TBC4746, a very late antigen-4, or VLA-4, antagonist licensed to
Schering Corporation and Schering-Plough Ltd., or collectively, Schering-Plough; and bimosiamose, a
selectin antagonist licensed to Revotar Biopharmaceuticals AG, or Revotar, our former
majority-owned German subsidiary.
Our executive offices are located at 4848 Loop Central Drive, Suite 700, Houston, Texas 77081.
Our telephone number is (713) 796-8822.
As used in this Form 10-K, the words we, our, us, Encysive, and the Company refer to
Encysive Pharmaceuticals Inc., its predecessors and subsidiaries, except as otherwise specified.
This Form 10-K may contain trademarks and service marks of other companies.
Marketed Products
Thelin
Pulmonary Arterial Hypertension
PAH is a chronic, life-threatening disease characterized by vasoconstriction (narrowing of
blood vessels) leading to the lungs, which results in very high blood pressure in the pulmonary
arteries as the heart struggles to pump blood to the lungs. PAH patients suffer from a variety of
symptoms, including shortness of breath and fatigue and, as the disease progresses, are less able
to perform simple activities of living such as walking short distances or up a flight of stairs.
In addition, the long-term chronic increase in pulmonary blood pressure often leads to an inability
of the heart to pump blood adequately throughout the lungs and body, frequently resulting in death.
PAH may be a primary condition, perhaps caused by genetic factors or unknown causes, or secondary
to other diseases like autoimmune diseases (such as scleroderma or lupus), congenital heart
disease, HIV infection or cirrhosis of the liver. Based on both industry research and our internal
market research, we estimate that PAH afflicts approximately 100,000 to 200,000 individuals, mostly
women, in the United States, Canada and Europe.
The Role of Endothelin Antagonists in PAH
Endothelin is a substance produced in humans that is believed to play a critical role in the
control of blood flow. The action of endothelin can be explained by its interactions on cell
surfaces with two distinct receptor subtypes, the endothelin-A, or ETA, and endothelin-B, or ETB,
receptors. In general, ETA receptors are associated with vasoconstriction, while ETB receptors are
primarily associated with vasodilation (widening of blood vessels). There is substantial evidence
that endothelin is involved in a variety of other diseases where blood flow is important. These
include diseases that result from severe vasoconstriction, congestive heart failure and certain
types of hypertension.
Our research program has developed small molecules that inhibit the binding of endothelin to
its cell surface receptors. Our scientists believe that agents which specifically block ETA
receptors may provide the best clinical utility and safety versus those non-specific agents which
block both ETA and ETB receptors.
Thelin (sitaxsentan sodium) is a highly-selective oral ETA receptor antagonist dosed once a
day for the treatment of PAH. In August 2006, Thelin was approved by the European Commission, or
EC, for use in patients with pulmonary arterial hypertension classified as World Health
Organization, or WHO, functional class III, to improve exercise capacity, as well as in primary
pulmonary hypertension and in pulmonary hypertension associated with connective tissue disease.
After the EC approved Thelin for marketing
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and sale in the EU, we started to build the necessary commercial infrastructure, including the
establishment of country sales organizations and the negotiation of third party distributor
relationships, to promote and sell Thelin in various countries of the EU. The centralized
licensing procedure of the European Agency for the Evaluation of Medicinal Products, or EMEA,
permits us to market Thelin in all 27 member states of the EU, however in most of the EU
countries we must negotiate pricing and reimbursement prior to commercial launch. In the fourth
quarter of 2006, we made Thelin commercially available in the United Kingdom, or U.K., and Germany. We
anticipate subsequent product launches of Thelin in other EU countries, including Ireland, the
Netherlands, Spain, France and Italy, as their respective national governments approve pricing and
reimbursement. On March 7, 2007, we announced that the Australian Therapeutic Goods
Administration, or TGA, had granted marketing approval for ThelinTM
100 mg tablets as a once daily oral treatment for patients with PAH.
Our next step will be to apply for reimbursement in Australia and make a final decision on whether
or not to add our own commercial infrastructure or commercialize through a third party.
Thelin is also under review by the FDA in the United States and by the Therapeutic Products
Directorate, or TPD, of Health Canada. In March 2006, we received an Approvable Letter from the
FDA, or the March Approvable Letter, pursuant to which the FDA identified several concerns and
observations that were required to be resolved before the drug could be approved, including the
option of conducting additional clinical trial work. In May 2006, the FDA accepted for review our
complete response to the concerns and observations noted in the March Approvable Letter, and
designated the submission as a Class 1 review. A new Prescription Drug User Fee Act, or PDUFA,
target action date of July 24, 2006, was established. On July 24, 2006, we received a second
Approvable Letter, or the July Approvable Letter, pursuant to which the FDA identified one of the
substantive items raised in the March Approvable Letter as remaining unresolved. The FDA again
offered the alternative of conducting additional clinical work. Following discussions with the
FDA, we submitted a complete response to the July Approvable Letter, which was accepted by the FDA
on December 28, 2006. Our resubmission was designated by the FDA as a Class 2 review, and assigned
a new PDUFA target action date of June 15, 2007. On October 10, 2005, we submitted an NDA for
Thelin in Canada that is currently under active review. We
cannot assure you that Thelin will be approved for marketing in
the U.S. or Canada.
During 2004, we obtained orphan drug designation for Thelin from both the FDA and the EC.
Orphan drug designation grants exclusivity to Thelin upon product approval for seven years in the
U.S. and ten years in the EU. We anticipate that patent protection for Thelin may extend beyond
expiration of orphan drug exclusivity in the U.S. and the EU. During 2006, the EMEA requested
additional information from us to support the orphan drug designation for Thelin and we have
responded to that request. At this time, we cannot assure you that Thelin will maintain orphan
drug designation and its associated exclusivity in the EU for the full 10 year period.
We have established central EU commercial operations near London, England, with regional sales
offices established in Germany, France and Italy. We will evaluate the need to add additional
infrastructure and commercial support as reimbursement is obtained in countries where Thelin is
approved. We will also evaluate the need for commercial infrastructure and support worldwide if
Thelin receives regulatory approval and reimbursement in other countries. In some markets, we
may choose to use third parties to distribute Thelin, or to provide other services such as
reimbursement and/or sales support.
In anticipation of approval of Thelin by the FDA, we have hired and trained a U.S. sales
force, formed a commercialization infrastructure and initiated other market launch preparation
activities in the U.S. If Thelin is approved in the U.S., we will rely on a network of third
party logistics providers and specialty pharmacies to distribute Thelin to patients. This network
will require significant coordination with our sales and marketing, third party reimbursement,
medical affairs and finance organizations, and will provide services such as reimbursement
assistance, patient education and counseling to monitor compliance. In anticipation of marketing
approval of Thelin by the Canadian TPD, we have started to build a commercial presence in Canada.
Argatroban
Argatroban, licensed from Mitsubishi Pharma Corporation, or Mitsubishi, and developed in North
America by us, is a synthetic direct thrombin inhibitor that was approved by the FDA in 2000. It
is indicated as an anticoagulant for prophylaxis or treatment of thrombosis in patients with HIT,
and as an anticoagulant in patients with or at risk for HIT undergoing percutaneous coronary
intervention, or PCI. Argatroban was approved in Canada in 2001 for use as an anticoagulant
therapy in patients with HIT syndrome. We have licenses to a formulation patent, which expires in
2014, and a manufacturing process patent that expires in 2017. The composition of matter patent
has expired. We are not aware of any regulatory submissions by other parties for generic compounds
that could compete with Argatroban. Argatroban is marketed and sold by GSK in the U.S. and Canada
under a license agreement whereby our subsidiary described below receives royalties on sales. In
2006, we earned royalties from the sales of Argatroban totaling $17.4 million. See Collaborations
and License Agreements GlaxoSmithKline.
On February 6, 2007, our wholly owned subsidiary, Argatroban Royalty Sub LLC, or Royalty Sub,
closed a private placement of $60 million in aggregate principal amount of promissory notes, or the
Argatroban Notes, to institutional investors. The Argatroban Notes are secured by royalties to be
paid from sales of Argatroban and by a pledge by us of the stock of Royalty Sub. All interest and
principal payments on the Argatroban Notes will be made solely from royalties and other payments
payable under the license agreement with GSK, all of which have been transferred to Royalty Sub.
The Argatroban Notes are non-recourse and non-convertible
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and have not been guaranteed by us. Royalty Sub will receive all royalties on the sales of
Argatroban until the Argatroban Notes have been repaid in full; therefore, future royalties will
not be available to fund our operations.
The Argatroban Notes bear interest at 12% per annum payable quarterly beginning March 30,
2007. If the Argatroban royalties received for any quarter exceed the interest payments and
expenses due for that quarter, the excess will be applied to the repayment of principal of the
Argatroban Notes until the Argatroban Notes have been paid in full. Any portion of the principal
amount of the Argatroban Notes not repaid on or before the legal final maturity date of September
30, 2014, will be payable on that date. In addition, the Argatroban Notes may be redeemed at our
option on any quarterly payment date, subject to the payment of a make-whole payment (if the
redemption occurs on or before December 30, 2007) or a redemption premium (if repaid after December
30, 2007, and before March 30, 2010). On and after March 30, 2010, the Argatroban Notes may be
redeemed without premium. Once the Argatroban Notes are repaid in full, Royalty Sub will retain
all royalty and other payments due under the license agreement with GSK.
Net proceeds to us from the financing were approximately $56 million after deducting
transaction costs, of which $10 million was withheld from us pending confirmation of treaty relief
from U.K. withholding tax obligations. Once tax treaty relief is confirmed, the amount withheld
will be released to us. If tax treaty relief is not received by March 23, 2008, the amount
withheld will be used to pay interest on and principal of the Argatroban Notes. See Note 2 to the
Consolidated Financial Statements included herein for a more complete description of the terms of
the Argatroban Notes.
Research and Development
Clinical Development Programs
To date, we have conducted clinical studies with Thelin in three diseases congestive heart
failure, essential hypertension and PAH. Our current clinical development programs for Thelin
include plans to develop oral Thelin more broadly in PAH and to explore other indications for both
intravenous and oral Thelin. We continue to study oral Thelin in PAH in the STRIDE-3
continuation trial, and in March 2006, we initiated a trial to study oral Thelin as a treatment
for diastolic heart failure. We will also be conducting additional clinical trials with oral
Thelin as part of our post approval commitments to the EMEA. These trials will include a study of
PAH combination therapy involving Thelin and sildenafil, and a pediatric clinical trial for
Thelin in PAH. In November 2006, we presented data for an intravenous formulation of Thelin
being studied in patients undergoing cardiac bypass procedures. The trial demonstrated that
intravenous Thelin prevented the post-operative increase in pulmonary arterial pressure that is
believed to be associated with increased morbidity and mortality in patients shortly after cardiac
bypass surgery.
TBC3711 is our second-generation endothelin antagonist and next clinical candidate. We
believe TBC3711 is more selective and more potent than Thelin, with the potential to treat PAH and
other diseases. TBC3711 has completed two Phase I clinical studies. In January 2006, we announced
the initiation of a 12-week, multi-center, randomized, double-blind, placebo controlled Phase II
dose ranging study to evaluate four once-daily, oral doses of TBC3711 in patients with diagnosed
resistant hypertension. On March 23, 2006, the FDA placed the study on clinical hold and all
clinical trials for TBC3711 were suspended. The clinical hold resulted from a finding in an
earlier animal study involving dosing with intravenous TBC3711. The finding occurred in a single
rat that displayed abnormalities at baseline. On December 7, 2006, we received clearance from the
FDA to resume clinical testing with TBC3711, including its oral and intravenous formulations. We
expect to resume Phase II clinical testing in the second quarter of 2007, and are evaluating the study of TBC3711 in
several potential indications.
In 2000, we entered into a worldwide research collaboration and license agreement with
Schering-Plough to discover, develop and commercialize VLA-4 antagonists. Schering-Plough has
completed pre-clinical development with TBC4746, an oral VLA-4 antagonist, and has informed us that
they have initiated studies in human volunteers. VLA-4 is a potential target in the inflammatory
cascade taking place within the vasculature. TBC4746 has the potential to address a number of
diseases, including asthma and multiple sclerosis. We could receive development milestone payments
if this compound progresses through the clinical trial phases and will receive royalties on product
sales should TBC4746 reach the market. In March 2005, the initiation of clinical studies of
TBC4746 by Schering-Plough triggered a milestone payment to us that together with previously
received upfront license fees and milestone payments aggregate to $6 million. See Collaborations
and License Agreements Schering-Plough.
We have licensed to Revotar all rights to bimosiamose, a selectin antagonist discovered by us.
Bimosiamose is designed to block inflammatory cells from leaving the vascular space to travel to
tissue sites of inflammation. In April 2005, the stockholders of Revotar agreed to restructure
Revotars capitalization in an arrangement referred to as the Restructuring. As a result, we are
no longer funding any drug development activities at Revotar. For additional information about the
Restructuring, see Note 14 to the Consolidated Financial Statements included herein.
Research Programs
Our research efforts are concentrated on targets within the vasculature, and the potential
indications of our drug candidates include cardiovascular diseases and a potentially wide variety
of inflammatory diseases involving two complementary sets of targets. The first set of targets
relate to G protein-coupled receptors, or GPCRs. Historically, GPCRs have been some of the most
amenable
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targets for developing commercially successful pharmaceuticals, such as beta-blockers,
antihistamines, and most anti-psychotics and anti-depressants. Endothelin receptors, targeted by
Thelin and TBC3711, are examples of GPCRs.
We have also developed expertise in pharmacologically intervening in the intravascular
inflammatory cascade, representing a second set of intravascular targets. Bimosiamose and TBC4746
are examples of drug candidates that we designed to target two distinct steps in this cascade, the
selectins and VLA-4, respectively. Some of the targets in this cascade are GPCRs. Thus, we
believe that our focus on endothelial cell and related vascular biology has opened up a broad range
of disease targets with high unmet medical need.
We are also studying three new compounds in oral microdosing studies in humans to assess
pharmacokinetics. An intravenous form of one of these compounds is expected to enter Phase I
trials in 2007. In addition, we are conducting final preclinical toxicology testing of our
Chemokine C-motif Receptor 9, or CCR9 receptor antagonist, and anticipate the submission of an
Investigational New Drug, or IND, application in 2007.
Collaborations and Licensing Agreements
We have established collaborations with a number of corporations, research institutions
and scientists to further our research and development objectives and expedite the
commercialization of our products. Our major licensing and collaboration agreements are summarized
below.
Mitsubishi Pharma Corporation
We entered into an agreement in 1993 to license Mitsubishis rights and technology relating to
Argatroban and to license Mitsubishis own proprietary technology developed with respect to
Argatroban. The agreement provides us an exclusive license to use and sell Argatroban in the U.S.
and Canada for all cardiovascular, renal, neurological and immunological purposes other than use
for the coating of stents. We are required to pay Mitsubishi specified royalties on net sales of
Argatroban by us and our sub licensees after its commercial introduction in the U.S. and Canada.
GSK is also obligated to pay Mitsubishi royalties on sales of Argatroban. As of December 31, 2006,
we had paid Mitsubishi approximately $2,385,000 in royalty payments under the agreement. We have
also paid Mitsubishi a $500,000 milestone payment in 1997 under the agreement and no additional
milestone payments are payable to Mitsubishi under the agreement. We have agreed to pay a
consultant involved in the negotiation of this agreement a royalty based on net sales of
Argatroban. During 1997, we signed an additional agreement with Mitsubishi that provides us with
royalties on sales of Argatroban in certain European countries and in 2006 we began receiving
royalties from Mitsubishi based on European sales. Either party may terminate the agreement if the
other party defaults in its material obligations under the agreement or becomes insolvent, or if a
substantial portion of its property is subject to levy, and such default or event of default is not
cured in 60 days. Unless terminated sooner, the agreement expires on the later of termination of
patent rights in a particular country or 20 years after first commercial sale of products in a
particular country. If our agreement with Mitsubishi is terminated, we and Royalty Sub would lose
all rights to Argatroban, including the right to receive revenues from the sale of Argatroban. The
Mitsubishi composition of matter patent on Argatroban has expired. Under the agreement, we have
access to a formulation patent granted in the U.S. in 1993, which has been extended and now expires
in 2014 and a process patent that expires in 2017. Argatroban received FDA approval on June 30,
2000, and enjoyed market exclusivity under the Hatch-Waxman Act until June 30, 2005. Since we no
longer have the protection of a composition of matter patent or Hatch-Waxman market exclusivity, it
is possible that generic manufacturers may be able to produce Argatroban without violating
Argatrobans formulation or process patents.
GlaxoSmithKline
In connection with our development and commercialization of Argatroban, in August 1997, we
entered into an agreement with GSK whereby GSK was granted an exclusive sublicense in the U.S. and
Canada for the indications of Argatroban that we have licensed from Mitsubishi. GSK paid $8.5
million in upfront license fees and $12.5 million in milestone payments, all of which were reported
as revenues in the years prior to and including 2000. No additional license fees or milestone
payments are payable to us by GSK under the agreement. As of December 31, 2006, we had received
approximately $48.2 million in royalty payments from GSK.
The agreement with GSK provides for the formation of a joint development committee to analyze
the development of additional Argatroban indications (such as PCI) covered by our license from
Mitsubishi. The joint development is to be funded 60% by GSK, except that costs of Phase IV trials
are paid 100% by GSK. Except as discussed below, GSK has the exclusive right to commercialize all
products arising out of the collaboration, subject to the obligation to pay royalties on net sales
to us and our rights to co-promote these products through our own sales force in certain
circumstances. We will retain the rights to any indications that GSK determines it does not wish
to pursue, provided that we do not grant marketing rights to any third parties, and that we use
our own sales force to commercialize any such indications. Any indications that GSK and Encysive
elect not to develop will be returned to Mitsubishi, subject to the rights of GSK and Encysive to
commercialize these indications at Encysives election, with GSK having the first opportunity to
commercialize. Mitsubishi may also request the joint development committee to develop new
indications inside or outside the licensed field of use and, if the joint development committee
determines that it does not want to proceed with any such
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indication, all rights under the agreement with Mitsubishi regarding such indication will
revert to Mitsubishi subject to our and GSKs right to commercialize the indication, with GSK
having the first opportunity to commercialize. We do not presently plan to develop Argatroban for
any additional indications. In connection with the issuance of the Argatroban Notes, we agreed not
to submit any proposals to the joint development committee or exercise any of our co-promotion
rights under the agreement with GSK.
The agreement with GSK generally terminates on a country-by-country basis upon the earlier of
the termination of our rights under the agreement with Mitsubishi, the expiration of applicable
patent rights, or in the case of certain royalty payments, the commencement of substantial
third-party competition. GSK also has the right to terminate the agreement on a country-by-country
basis by giving us at least three months written notice that the commercial profile of the product
in question would not justify continued development or marketing in that country. In addition,
either party may terminate the agreement on 60 days notice if the other party defaults in its
obligations under the agreement or becomes insolvent. If our agreement with GSK is terminated,
Royalty Sub would no longer receive royalties from GSKs sales of Argatroban and we may experience
delays and incur expenses in attempting to commercialize Argatroban.
At present, Mitsubishi is the only manufacturer of Argatrobans active pharmaceutical
ingredient, or API, and has entered into an agreement with GSK to supply Argatroban API in bulk to
meet GSKs needs in the production of the Argatroban finished product. GSK has informed us that
they have begun supplying Argatroban finished product from their manufacturing facility in the
United Kingdom. Should Mitsubishi fail during any consecutive nine-month period to supply GSK at
least 80% of its requirements, and such requirements cannot be satisfied by existing inventories,
the agreement provides for the nonexclusive transfer of the production technology for API to GSK.
Schering-Plough
In June 2000, we and Schering-Plough entered into a worldwide research collaboration and
license agreement to discover, develop and commercialize VLA-4 antagonists. In addition to funding
research costs, Schering-Plough paid us an aggregate of $6 million in upfront license fees and
milestone payments, and may pay us additional development milestones of $37 million for the
development of VLA-4 antagonists. Schering-Plough will also pay us royalties if product sales
result from the agreement. We have received approximately $13.3 million in research payments from
Schering-Plough under the agreement. Subsequently, during 2005, the research phase was completed
and a VLA-4 antagonist, TBC4746, moved into clinical development. See Note 13 to the Consolidated
Financial Statements included herein for a discussion of this transaction. Under the terms of the
agreement, Schering-Plough is responsible for further development of VLA-4 antagonists, and in 2005
initiated a study of TBC4746 in human volunteers, for which we received a milestone payment. If
this agreement is terminated, we will lose Schering-Ploughs funding for development milestones and
royalties on product sales resulting from the agreement.
Revotar Biopharmaceuticals, AG
During September 2000, Revotar was formed and we transferred to Revotar certain development
and commercialization rights to our bimosiamose selectin antagonist program as well as rights to
other proprietary technology. In April 2005, the stockholders of
Revotar agreed to the Restructuring. As a result, we are no longer funding any drug development activities at Revotar.
Revotar will likely need to obtain additional capital resources or enter into a collaboration to
complete development of bimosiamose. For additional information about the Restructuring, see Note
14 to the Consolidated Financial Statements included herein.
Patents and Proprietary Rights
Because of the substantial length of time and expense associated with developing new
pharmaceutical products, we place considerable importance on intellectual property protection for
new technologies, compounds, products and processes. Our policy is to actively seek patent
protection both in the United States and internationally and to file additional patent
applications, when appropriate, to cover improvements to our compounds, products and processes. We
also rely on trade secrets, internal know-how, technological innovations and agreements with third
parties to develop, maintain and protect our competitive position and to develop our business.
We in-licensed the U.S. and Canadian rights to Argatroban in 1993, which included a
formulation patent granted in 1993 that has been extended and now expires in 2014, and a process
patent that expires in 2017. The Mitsubishi composition of matter patent on Argatroban has
expired. Argatroban received FDA approval on June 30, 2000, and enjoyed market exclusivity under
the Hatch-Waxman Act until June 30, 2005. Since we no longer have the protection of a composition
of matter patent or Hatch-Waxman market exclusivity, it is possible that generic manufacturers may
be able to produce Argatroban without violating Argatrobans formulation or process patents.
We have a number of U.S. and foreign patent and patent applications related to our compounds,
products and technologies, but we cannot be certain that issued patents will be enforceable or
provide adequate protections or that pending patent applications will result in issued patents.
7
The following table shows the primary patents relevant to our products and programs:
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|
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|
Product |
|
Licensee |
|
US Patent No. |
|
Expiration |
|
Relevance |
Endothelin receptor antagonist*
|
|
None
|
|
US 5,594,021
|
|
November 5, 2013
|
|
Composition of
matter patent for
endothelin
antagonists |
|
|
|
|
|
|
|
|
|
Endothelin receptor antagonist*
|
|
None
|
|
US 6,248,767
|
|
April 28, 2017
|
|
Composition of
matter patent for
endothelin
antagonists |
|
|
|
|
|
|
|
|
|
Endothelin receptor
antagonist**
|
|
None
|
|
US 6,432,994
|
|
April 28, 2017
|
|
Composition of
matter patent for
endothelin
antagonists |
|
|
|
|
|
|
|
|
|
Integrin/VLA-4***
|
|
Schering-Plough
|
|
US 6,972,296
|
|
May 5, 2020
|
|
Composition of
matter patents for
integrin
antagonists |
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|
|
|
|
|
|
|
|
Bimosiamose (TBC1269)
|
|
Revotar
|
|
US 5,622,937
|
|
April 29, 2014
|
|
Composition of
matter patent for
TBC1269
(bimosiamose) |
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|
|
|
|
|
|
|
|
Bimosiamose (TBC1269)
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Revotar
|
|
US 5,712,387
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|
May 20, 2016
|
|
Process patent for
bimosiamose
synthesis |
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|
* |
|
Including Thelin |
|
** |
|
Including TBC3711 |
|
*** |
|
Including TBC4746 |
The patent positions of biopharmaceutical firms, including us, are uncertain and involve
complex legal and factual questions. Consequently, we do not know whether any of our applications
will result in the issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated or held unenforceable.
Since publication of discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we were the first creator of inventions covered by our
pending patent applications or that we were the first to file patent applications for such
inventions. Moreover, we may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office, or PTO, to determine priority of invention, which could result in
substantial cost to us, even if the eventual outcome is favorable to us, or in the loss of patent
rights. We cannot assure you that our patents, if issued, would be held valid by a court of
competent jurisdiction.
The development of therapeutic products for cardiovascular applications is intensely
competitive. Many pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in this field. Some of these
applications or patents may be competitive with our applications or conflict in certain respects
with claims made under our applications. Such conflict could result in a significant reduction of
the coverage of our patents, if issued. In addition, if patents are issued to other companies that
contain competitive or conflicting claims and such claims are ultimately determined to be valid, we
could be subject to significant liabilities to third parties, required to license disputed rights
from third parties or required to cease using such technology. We cannot assure you that we would
be able to obtain licenses to these patents at a reasonable cost, if at all, or develop or obtain
alternative technology.
It is also very important that we do not infringe patents or proprietary rights of others and
that we do not violate the agreements that grant proprietary rights to us. If we do infringe
patents or violate these agreements, we could be prevented from developing or commercializing
products or from using the processes covered by those patents or agreements, or we could be
required to obtain a license from the third party allowing us to use their technology. We cannot
be certain that, if required, we could obtain a license to any third-party technology or that we
could obtain one at a reasonable cost. If we were not able to obtain a required license, we could
be adversely affected. Because patent applications are confidential for at least some period of
time until a patent issues, we may not know if our competitors filed patent applications for
technology covered by our pending applications, or used by us in our commercialization efforts, or
if we were the first to invent the technology that is the subject of our patent applications.
Competitors may have filed patent applications or received patents and may obtain additional
patents and proprietary rights that block us from developing or commercializing our technology or
compete with our patents. If competitors file patent applications covering our technology, we may
have to participate in interference proceedings or litigation to determine the right to a patent.
Litigation and interference proceedings are expensive even if we are ultimately successful.
Patents relating to pharmaceutical, biopharmaceutical and biotechnology products, compounds
and processes such as those that cover our existing compounds, products and processes and those
that we will likely file in the future, do not always provide complete or adequate protection.
Litigation or opposition or reexamination proceedings regarding the enforcement or validity of our
existing patents or any future patents could invalidate our patents or substantially reduce their
protection. In addition, our pending patent applications and patent applications filed by our
collaborative partners may not result in the issuance of any patents or may result in patents that
do not provide adequate protection. As a result, we may not be able to prevent third parties from
developing the same compounds and products that we have developed or are developing.
We also rely upon unpatented trade secrets and improvements, internal know-how, technological
innovations and other confidential and proprietary information. We cannot assure you that others
will not independently develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully
protect our trade secrets.
8
We require our employees, consultants, members of our scientific advisory board, vendors,
outside scientific collaborators and sponsored researchers, advisors and other entities to enter
into confidentiality agreements. These agreements provide that all confidential information
developed or made known to the entity during the course of its relationship with us is to be kept
confidential and not used or disclosed to third parties, except in specific circumstances. In the
case of our employees, the agreements further provide that all inventions conceived by the employee
are our exclusive property. We cannot assure you, however, that these agreements will provide
meaningful protection or adequate remedies for our trade secrets and improvements, internal
know-how and other technologies in the event of unauthorized use or disclosure of such information.
Under some of our research and development agreements, inventions discovered in certain cases
become jointly owned by us and our collaboration partners, and in other cases, become the
exclusive property of one of us. It can be difficult to determine who owns a particular invention
and disputes could arise regarding those inventions.
Government Regulation
Domestic Regulation of Drug Companies
The research, testing, manufacture and marketing of pharmaceutical drug products are
extensively regulated by numerous governmental authorities in the United States and other
countries. In the United States, pharmaceutical drugs are subject to rigorous regulation by the
FDA. The Federal Food, Drug and Cosmetic Act, and other federal and state statutes and
regulations, govern, among other things, the research, development, testing, manufacture, storage,
record keeping, labeling, promotion and marketing and distribution of pharmaceutical products.
Failure to comply with applicable regulatory requirements may subject a company to administrative
or judicially imposed sanctions.
Clinical trials involve the administration of the investigational new drug to healthy
volunteers or patients under the supervision of a qualified principal investigator. Clinical
trials are conducted in accordance with Good Clinical Practice guidelines, and under protocols
detailing the objectives of the trial, the parameters to be used in monitoring safety and the
effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the
IND application. The study protocol and informed consent information
for patients in clinical trials must also be approved by the institutional review board at each
institution where the trials will be conducted.
Clinical trials to support NDAs are typically conducted in three sequential phases which may
overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients,
the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety,
including side effects associated with increasing doses. Phase II usually involves trials in a
limited patient population to:
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determine dosage tolerance and optimal dosage; |
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identify possible adverse effects and safety risks; and |
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preliminarily support the efficacy of the drug in specific, targeted indications. |
If a compound is found to be effective and to have an acceptable safety profile in Phase II
evaluation, Phase III trials are undertaken to further evaluate clinical efficacy and to further
test for safety within an expanded patient population at geographically dispersed clinical trial
sites. There can be no assurance that Phase I, Phase II or Phase III testing of our product
candidates will be completed successfully within any specified time period, if at all.
After completion of successful clinical testing, generally an NDA is prepared and submitted to
the FDA. FDA approval of the NDA is required before marketing may begin in the United States. The
NDA must include the results of extensive clinical and other testing and the compilation of data
relating to the products chemistry, pharmacology and manufacture. The cost of an NDA is
substantial.
We also rely on FDA regulated third parties to study, manufacture, package and test our
clinical and commercial products. If the FDA evaluation of our NDA submissions, including the
information provided by these other FDA regulated entities, is favorable, the FDA may issue either
an Approvable Letter or an Approval Letter. The Approvable Letter may contain a number of
conditions that must be met in order to secure final approval of the NDA. When and if those
conditions have been met to the FDAs satisfaction, the FDA will issue an Approval Letter. The
Approval Letter authorizes commercial marketing of the drug for specific labeled indications in the
U.S. As a condition of NDA approval, the FDA may require post-marketing testing and surveillance
to monitor the drugs safety or efficacy, or impose other conditions, commonly referred to as Phase
IV commitments.
If the FDAs evaluation of either the NDA submission or the facilities of the third parties we
use to study, manufacture, package and test our products is not favorable, the FDA may refuse to
approve the NDA and issue a Not Approvable Letter. The Not Approvable Letter outlines the
deficiencies in the submission and often requires additional testing or information.
Notwithstanding the submission of any requested additional data or information in response to an
Approvable or Not Approvable Letter, the FDA ultimately may decide that the application does not
satisfy the regulatory criteria for approval. Once granted, product approvals may
9
be withdrawn if compliance with regulatory standards is not maintained or problems occur
following the initial marketing of the pharmaceutical drug product.
As described above, the associated third parties must pass a pre-approval inspection of their
facilities by the FDA before obtaining marketing approval of any products. To supply products for
use in the United States, foreign establishments must comply with current Good Manufacturing
Practices, or cGMP, and are subject to periodic inspection by the FDA or corresponding regulatory
agencies in countries under reciprocal agreements with the FDA. We use and intend to use third
parties to produce and test our products in clinical and commercial quantities. There can be no
guarantee that future FDA inspections will proceed without any compliance issues requiring the
expenditure of money or other resources.
Foreign Regulation of Drug Compounds
The approval of foreign governments is necessary before pharmaceuticals products may be
marketed and sold in those countries, whether or not FDA approval has been obtained. The approval
procedures vary among countries and can involve the submission of information and the completion of
testing which are in addition to those required by the FDA. Therefore, there can be substantial
delays in obtaining required approvals from foreign regulatory authorities after the relevant
regulatory applications are filed. Also, if a product is approved for marketing in a foreign
country, it is possible that it may not be sold until the applicable regulatory body approves the
products pricing and reimbursement.
In Europe, an application for marketing authorization may be submitted as a centralized
procedure providing for the grant of a single marketing authorization, which is valid in all 27
member states of the European Union. A mutual recognition procedure is also available, at the
request of the applicant for all medicinal products, which are not subject to the centralized
procedure. Thelins Marketing Authorization Application, or MAA, was granted by the EC in August
2006 through the centralized procedure. The ECs approval for Thelin included a requirement that
we conduct certain additional clinical work post approval. These are typically called Phase IV
commitments. We are moving forward to complete the European Phase IV commitments, which include a
combination clinical trial involving Thelin and sildenafil, and a pediatric clinical trial with
Thelin. Failure to complete these European Phase IV commitments can lead to negative regulatory
action, which can include withdrawal of the approval of our MAA.
Hazardous Materials
Our research and development processes involve the controlled use of hazardous materials,
chemicals, radioactive materials and produce waste products. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and waste products. Although we have not had any claims to date on our general
liability insurance relative to hazardous materials and although we believe that our safety
procedures for handling and disposing of hazardous materials comply with the standards prescribed
by laws and regulations, the risk of accidental contamination or injury from these materials cannot
be eliminated completely. In the event of an accident, we could be held liable for any damages
that result. This liability could exceed our financial resources or not be covered by our general
liability insurance, which has a policy limit of $7 million. Although we believe that we are in
compliance in all material respects with applicable environmental laws and regulations, there can
be no assurance that we will not be required to incur significant costs to comply with
environmental laws and regulations in the future. There can also be no assurance that our
operations, business or assets will not be materially adversely affected by current or future
environmental laws or regulations.
Competition
The development and sale of new pharmaceutical drugs for the treatment of vascular and
inflammatory diseases is highly competitive and we will face intense competition from global
pharmaceutical companies and biotechnology companies. Competition is likely to increase as a
result of advances made in the commercial application of new therapy technologies and heightened
interest in the commercial potential of treating PAH and other diseases. Companies that
successfully complete clinical trials, obtain required regulatory approvals in a timely manner,
initiate commercial sales of their products before their competitors and can demonstrate
significant differentiation in terms of safety and efficacy may achieve a significant competitive
advantage. In addition, significant research in biotechnology and vascular medicine may occur in
universities and other nonprofit research institutions. These entities have become increasingly
active in seeking patent protection and licensing revenues for their research results. They also
compete with us in recruiting talented scientists and business professionals.
We believe that our ability to compete successfully will depend on our ability to create,
develop and commercialize scientifically advanced and differentiated medical products, attract and
retain qualified scientific, medical, operational and commercial talent, obtain patent or other
legal protection for our compounds, products and processes, obtain required regulatory approvals in
a timely manner and successfully commercialize our products. Many of our competitors have
substantially greater research, development, financial, marketing, sales and human resources than
we do. As such, we expect to encounter significant competition in commercializing our products.
See Item 1A Risk Factors We face substantial competition that may result in other companies
developing and commercializing products more successfully than we do.
10
Manufacturing
We rely on third-party manufacturers to produce drug compounds for preclinical and
clinical development, as well as for commercial sale. Currently, we have no internal manufacturing
facilities for either the production of compounds or the manufacture of final dosage forms. We
believe small molecule drugs are less expensive to manufacture than protein-based therapeutics and
that all of our existing compounds can be produced using established manufacturing methods,
including traditional pharmaceutical synthesis.
We have established supply arrangements with experienced third-party manufacturers for
producing drug compounds for clinical trials, and have established long-term manufacturing and
supply agreements for the commercial manufacture of Thelin. For the foreseeable future, we plan
to outsource all such manufacturing. The primary factors we considered in making this decision
were the availability and cost of third-party sources, the expertise required to manufacture the
product and the anticipated manufacturing volume.
We have contracted with a single supplier for the supply of Thelin API. Although the
supplier has two manufacturing sites (one in the U.S., one in Europe) capable of producing API for
Thelin, we cannot assure you that this will be adequate to insure uninterrupted supply to satisfy
our needs for commercialization. Any disruption in supply could adversely affect our ability to
meet the needs of our customers and achieve our financial goals. Additionally, we have contracted
with a single supplier for tableting and packaging Thelin, and although we have an alternate
supplier capable of these services, we cannot assure you that there will not be a disruption in
supply. Any disruption in supply could adversely affect our ability to conduct clinical trials or
meet commercialization needs.
Pursuant to our agreement with GSK, GSK entered into an agreement with Mitsubishi regarding
the manufacture and supply of Argatroban API, and we do not, therefore, have any direct
responsibility regarding the manufacture and supply of Argatroban API or Argatroban finished
product as it relates to the agreement with GSK.
Health Care Fraud and Abuse Laws
We are subject to various federal and state laws pertaining to health fraud and abuse,
including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a
prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for,
or to induce, the referral of business, including the purchase or prescription of a particular
drug. Due to the breadth of the statutory provisions and the increasing attention being given to
them by law enforcement agencies, it is possible that certain of our practices may be challenged
under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and
willingly presenting, or causing to be presented for payment to third party payers (including
Medicaid and Medicare), claims for reimbursed drugs or services that are false or fraudulent
claims for items or services not provided as claimed or claims for medically unnecessary items or
services.
Our sales and marketing activities may be subject to scrutiny under these laws. Violations of
fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and
civil monetary penalties, as well as the possibility of exclusion from federal health care programs
(including Medicaid and Medicare). If the government were to allege against or convict us of
violating these laws, there could be a material adverse effect on our results of operation.
Employees
As of December 31, 2006, we employed 282 individuals worldwide, including 25 in Europe
and two in Canada. A number of our executives and all of our employees in Europe and Canada are
covered by written employment contracts. We have experienced no work stoppages and believe that
relations with our employees are good.
Financial Information About Geographic Areas
A summary of our long-lived assets and revenues in different geographical locations and
our sources of revenues are described in Note 12 to our Consolidated Financial Statements, which is
incorporated herein by reference.
Available Information
Our Internet website can be found at www.encysive.com. We make available free of charge,
or through the Investor Relations section of our Internet website at www.encysive.com, access to
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after such material is filed with or
furnished to the Securities and Exchange Commission.
11
ITEM 1A RISK FACTORS
Stockholders and potential investors in shares of our stock should carefully consider the
following risk factors, in addition to other information in this Form 10-K. We are identifying
these risk factors as important factors that could cause our actual results to differ materially
from those contained in any written or oral forward-looking statements made by or on behalf of us.
We are relying upon the safe-harbor for forward-looking statements and any such statements made by
or on behalf of us are qualified by reference to the following cautionary statements, as well as to
those set forth elsewhere in this Form 10-K.
Risks Related to Our Business, Industry and Strategy
If we are unable to raise additional capital, we will not be able to continue to operate as a going
concern.
At
December 31, 2006, we had an accumulated deficit of
approximately $422.3 million, and for
the fiscal years ended December 31, 2006, 2005 and 2004, we have incurred net losses of
approximately $109.3 million, $74.9 million and $54.7 million, respectively. As a result, the
amount of our cash and cash equivalents was approximately $71.9 million at March 1, 2007. While
our Consolidated Financial Statements included herein have been prepared assuming that we will
continue as a going concern, because of our losses and need for additional financing to execute our
business strategy, our independent auditors report on the Consolidated Financial Statements
contains a statement relating to their substantial doubt about our ability to continue as a going
concern.
Although we have recently received additional funds from our equity financing line with an
institutional investor, Azimuth Opportunity Ltd., or Azimuth, and from the sale by Royalty Sub of
the Argatroban Notes, we will require additional funding to continue to operate as a going concern,
whether Thelin is approved by the FDA or not. Subject to certain conditions, we may issue and
sell up to 8,780,500 shares of our common stock to Azimuth under the equity financing line and may
receive $10 million upon the confirmation of treaty relief from U.K. withholding obligations
pursuant to the terms of the Argatroban Notes. We could also issue common stock, debt, or other
securities for gross aggregate proceeds of $95.5 million pursuant to our effective shelf
registration statement. We cannot assure you that such funding will be available under
commercially acceptable terms, if at all.
We have a history of losses and we may never become profitable.
We have been unprofitable to date and may continue to be unprofitable for the foreseeable
future. Until recently, the majority of our financial resources have been dedicated to the
research and development of Argatroban, Thelin and other drug compounds. Beginning in 2005, we
have spent an increasing percentage of our financial resources on preparations for the anticipated
commercial launch of Thelin in the U.S., and more recently, in building the commercial
infrastructure necessary to successfully launch Thelin in Europe. This trend is expected to
continue as we expand our commercial organization in Europe and continue to invest in U.S. launch
preparations for Thelin. While we continue to invest in developing several new drug compounds, we
currently do not have any drug candidates that are likely to be commercialized in the near future
other than Thelin.
We have just started to commercialize Thelin in Europe, and as such, cannot make any
projections or financial forecasts of sales or operating expenses. We believe, however, that the
commercial launch of Thelin in Europe and the anticipated launch of Thelin in the U.S. and other
countries will require additional funding due to higher levels of sales and marketing expenditures,
particularly in Europe, than in recent periods. As the outcomes of our regulatory filings with the
FDA and other regulatory authorities are uncertain, we are unable to project revenues for Thelin
in the U.S. and other countries. Even though we have received regulatory approval to market
Thelin in Europe, significant uncertainties make it difficult to forecast or predict future sales.
These uncertainties include the market acceptance of Thelin, the reimbursement policies of
third-party payors, the speed with which government or other third-party payors grant pricing and
reimbursement approvals, competitive activity, the timing of competitive product approvals, and
other factors impacting the timing and speed of our product launch, all of which could materially
affect any revenue projections.
Even if we receive regulatory approval for Thelin in the U.S., we may not be able to achieve
profitability for the foreseeable future. If we do not receive regulatory approval for Thelin in
the U.S., to achieve profitability, we will need to restructure the organization to reduce
expenses. The commercial launch of Thelin in Europe, the potential commercial launch of Thelin
in the U.S. and other countries, and the realization of our research and development pipeline of
potential new drug compounds, will require substantial incremental investment over the next several
years. This increased level of investment will include higher levels of spending in research,
development, preclinical and clinical testing and regulatory related activities, both foreign and domestic,
to advance our pipeline of new products, as well as higher levels of spending for sales and
marketing activities related to Thelin , the establishment of a commercial infrastructure in
Europe and the maintenance of our commercial infrastructure in the U.S.
We cannot assure you that we will be able to develop, produce at reasonable cost, obtain
regulatory approvals, or market successfully, any of our product candidates, including Thelin.
All of our products will require regulatory approval before they may be commercialized. Products,
if any, resulting from our research and development programs other than Argatroban and Thelin, or
the use of our products in new indications, may not be commercially available for a number of
years, if at all, and we cannot assure you that any successfully developed products will generate
substantial revenues or that we will ever be profitable.
12
If we are unable to raise additional capital, we will be unable to conduct our operations and
develop our potential products.
As of March 1, 2007, after our receipt of net proceeds from the sale by Royalty Sub of the
Argatroban Notes, we had cash and cash equivalents of approximately $71.9 million. We expect to
continue to incur substantial research and development expenditures as we design and develop new
drug candidates, and continue to invest in the development and commercialization of Thelin. We
also anticipate that our operating expenses will continue to increase due to the following factors:
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We have incurred and will continue to incur significant commercialization-related
expenses for Thelin. These costs include: |
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maintaining a commercial infrastructure in the U.S. and building a commercial
infrastructure in Europe and other key geographic areas; |
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investing in market launch and market development activities; |
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expenses related to reimbursement submissions and approvals; |
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market research; |
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building the necessary infrastructure in our support services functions, such as finance, human resources and legal; |
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building the depth and breadth of our management team; |
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preparing and producing educational and promotional materials; and |
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establishing additional contractual relationships with manufacturing,
distribution and specialty pharmacy providers to ensure the successful commercialization
of Thelin. |
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We expect to incur significant expenses in conjunction with additional clinical trial
costs for Thelin and are incurring costs for clinical trials related to additional drug
compounds. These costs include: |
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hiring personnel to direct and execute clinical trials; |
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costs incurred by clinical investigators; |
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services of contract research organizations; and |
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purchasing and formulating quantities of drug compound to be used in such clinical trials. |
Notwithstanding revenues that may be produced through potential sales of Thelin, we will need
to secure additional financing to continue our current operations, including the required levels of
research and development to reach our long-term goals. Estimates of our future cash requirements
will depend on many factors, including:
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the outcome and timing of regulatory approvals for Thelin, including breadth of approved product label; |
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our ability to secure necessary reimbursement approvals for Thelin; |
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competitive activity, including the timing of regulatory approvals for competitive products; |
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our success in commercializing Thelin; |
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continued scientific progress in our drug discovery programs; |
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the number and magnitude of these research and development programs; |
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progress with preclinical testing and clinical trials of new drug compounds; |
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the costs and our success in filing, prosecuting and enforcing patent claims; |
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competing technological and market developments and changes in our existing research relationships; |
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administrative costs and costs to commercialize our products as new
product compounds are further developed and marketed; |
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working capital requirements to support inventory and accounts receivable; |
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our ability to maintain and establish additional collaborative arrangements; and |
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effective and sustained commercialization activities and arrangements. |
To date, we have financed our research and development activities and other operations
primarily through public and private offerings of common stock, including an equity financing line
with Azimuth; proceeds from the issuance and sale in March 2005 of our 2.5% Convertible Senior
Notes due 2012, or the Convertible Notes; funds received through collaborations, research
agreements, licenses and partnerships; royalty revenue from sales of Argatroban; and the recent
sale by Royalty Sub of the Argatroban Notes. Subject to certain conditions, we may issue and sell
up to 8,780,500 shares of our common stock to Azimuth under the equity financing line and may
receive $10 million upon the confirmation of treaty relief from U.K. withholding obligations
pursuant to the terms of the Argatroban Notes. We may also issue common stock, debt, or other
securities for gross aggregate proceeds of $95.5 million pursuant to our effective shelf
registration statement. However, we cannot assure you that such funding will be available under
commercially acceptable terms.
13
Based upon our current cash position and expected future cash requirements, we will require
additional external funding in 2007 in order to continue our ongoing research and development
programs, and to fund the commercial launch of Thelin in Europe, whether Thelin is approved in
the U.S. by the FDA or not. Because the FDA has designed Thelin as a Class 2 resubmission and
assigned a new PDUFA action date of June 15, 2007, we believe that additional funding will be
significantly more difficult to obtain on commercially acceptable terms, if at all. We are
considering various alternatives to reduce our expenses in order to sustain our cash resources.
Those measures include scaling back personnel and expenses, delaying or terminating research and
development programs, curtailing capital expenditures, and reducing other operating expenses. We
may also consider relinquishing, licensing or otherwise disposing of rights to technologies or
product candidates that we could otherwise seek to develop or commercialize ourselves on terms that
are less favorable than might otherwise be available or at an earlier stage than would otherwise be
desirable, including the possibility of licensing rights to Thelin outside North America and
Europe. Even if Thelin is approved by the FDA, we believe that we will require additional funding
for increased spending required to commercially launch Thelin in the U.S.
If we receive approval by the FDA to market Thelin in the U.S., and if we are successful in
obtaining additional funding, we believe that our operating expenses will exceed those incurred in
2006. If we do not receive approval by the FDA, we may be required to restructure our operations
to significantly reduce our operating expenses. In any event, we anticipate that we will continue
to incur operating losses throughout 2007.
We may experience significant fluctuations in our operating results.
We have historically experienced, and expect to continue to experience for the foreseeable
future, significant fluctuations in our operating results. These fluctuations are due to a number
of factors, many of which are outside of our control, and may result in volatility of our stock
price. Future operating results will depend on many factors, including:
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demand for our products; |
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cost of product sales; |
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achievement and timing of research and development milestones; |
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cost and timing of clinical trials and regulatory approvals for our products; |
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marketing and other expenses; |
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manufacturing or supply disruptions; |
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the timing of the introduction and market acceptance of new products by us or competing companies; and |
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the timing and magnitude of certain research and development expenses. |
We face substantial competition that may result in other companies developing and commercializing
products more successfully than we do.
The biopharmaceutical industry is highly competitive. Our success will depend on our ability
to develop safe, efficacious and cost-effective products, apply technology, and establish and
maintain a market for our products. Our competitors may be either global or regional companies.
Potential competitors in the U.S. and other countries include major pharmaceutical and chemical
companies, specialized biotechnology firms, universities and other research institutions. Many of
our competitors have substantially greater research and development capabilities and experience,
and greater manufacturing, marketing and financial resources. Accordingly, our competitors may
develop products or other novel technologies that are more effective, safer or less costly than any
that have been or are being developed by us. In addition, our competitors may be successful in
obtaining FDA and other applicable regulatory approval for products more rapidly than we are able
to.
Our competition for Thelin includes prostacyclin analogues as well as other endothelin
antagonists. In earlier years, the standard treatment for PAH consisted of intravenous systemic
prostacyclin. Today prostacyclin can be administered intravenously, subcutaneously or via
inhalation. Epoprostenol, sold under the trade name Flolan® is marketed by Gilead in the U.S., and
GSK outside the U.S. Flolan® is administered intravenously via continuous infusion through a
central venous catheter and special infusion pump. As a competitive therapy, it is costly,
associated with significant adverse events including those related to its delivery and typically
reserved by clinicians for patients with the most severe symptoms, WHO or New York Heart
Association, or NYHA, functional class IV status. Treprostinil, sold under the trade name
Remodulin®, is marketed worldwide by Lung Rx, a division of United Therapeutics. Remodulin® is a
prostaglandin analog that is required to be administered subcutaneously or intravenously through an
infusion pump. It is also being studied for potential use through inhalation. Iloprost, sold
under the trade name Ventavis®, is marketed in the U.S. by Actelion. Ventavis® is a synthetic
analogue of prostacyclin and is delivered via inhalation for the treatment of PAH in patients
classified as WHO Group I with NYHA Class III or IV symptoms. During clinical trials, Ventavis®
was administered six to nine times a day.
In terms of endothelin antagonists, Bosentan, sold under the trade name Tracleer®, is marketed
worldwide by Actelion Ltd. Tracleer® is a twice daily, orally administered, non- selective ET-1
receptor antagonist. It was the first oral agent approved for the treatment of PAH and is
indicated in patients with moderate to severe NYHA/WHO functional class III and IV symptoms.
Tracleer® is also associated with significant potential for hepatotoxicity and teratogenicity.
Ambrisentan, which does not yet have a trade name,
14
will be distributed by Gilead Sciences in the U.S. and GSK in geographies outside the U.S.
Ambrisentan is a once daily orally administered endothelin antagonist being developed by Gilead for
the treatment of PAH. In December 2006, Gilead submitted an NDA to the FDA seeking approval for
ambrisentan as a treatment for PAH, and on February 16, 2007, Gilead announced that the FDA had
granted Priority Review status and was assigned a PDUFA date of June 18, 2007.
Another category of treatment options are Phosphodiesterase Type-5, or PDE5, inhibitors.
These include sildenafil citrate, sold under the trade name Revatio®, which is marketed worldwide
by Pfizer. Revatio® is a specific PDE5 inhibitor indicated for the treatment of PAH (WHO Group I).
Sildenafil is also the active ingredient in Viagra®, Pfizers erectile dysfunction medication.
Sildenafil is an oral agent that is administered three times daily in the treatment of PAH. We
believe that PDE5 inhibitors such as sildenafil may be used as first-line and as additive therapy
with endothelin antagonists. Tadalafil, sold under the trade name Cialis®, is marketed worldwide
by Lilly-ICOS. Cialis® is another PDE5 inhibitor approved for erectile dysfunction that is also
being studied in PAH. Its development status in PAH is unknown at this time.
We may have competition for TBC3711 in PAH as well as other indications. A number of
companies, including Abbott Laboratories, Gilead and Speedel, have ETA receptor antagonist
compounds that have begun clinical trials in areas other than PAH. Abbott is studying atrasentan
in studies of several types of prostate cancer. Gilead announced positive Phase IIb trial results
of darusentan in resistant hypertension patients and Speedel started Phase III clinical development
for SPP301 in diabetic nephropathy.
Our direct competition for Argatroban in the treatment of HIT is lepirudin, a recombinant
hirudin analog sold under the trade name Refludan® and is marketed by Berlex. Argatroban and
Refludan® are potent and selective inhibitors of thrombin with a predictable dose-response effect.
A third direct thrombin inhibitor, bivalirudin, which is sold under the trade name Angiomax® and is
marketed by Medicines Company, is currently approved in the U.S. and other countries for use in
patients undergoing PCI and in patients with or at risk for HIT and/or HITTS undergoing PCI.
We make business decisions based on forecasts of future sales of Thelin that may be inaccurate.
Our market estimates are based on many assumptions, including, but not limited to, reliance on
external primary and secondary market research, our own internal research, population estimates,
disease diagnostic rates, treatment trends, sales of similar products and market estimates by third
parties. Any of these assumptions can materially impact our forecasts and we cannot assure you
that the assumptions are accurate. In addition, our commercial forecasts include the transition of
our current clinical trial patients to Thelin commercial supply. We cannot assure you that
patients currently receiving Thelin in our clinical trials will be prescribed Thelin when the
clinical trials are terminated.
Historically, we have been dependent on third parties to fund, market and develop our products.
Historically, we relied on strategic relationships with our corporate partners to provide the
financing, marketing and technical support and, in certain cases, the technology necessary to
develop and commercialize certain of our product candidates. We have entered into an agreement
with Mitsubishi to license rights and technology relating to Argatroban in the U.S. and Canada for
specified therapeutic indications. Either party may terminate the Mitsubishi agreement on 60 days
notice if the other party defaults on its material obligations under the agreement or becomes
insolvent, or if a substantial portion of its property is subject to levy. Unless terminated
sooner due to the above-described termination provisions, the agreement with Mitsubishi expires on
the later of the termination of patent rights in a particular country or 20 years after the first
commercial sale of products in a particular country. If our agreement with Mitsubishi is
terminated, we and Royalty Sub will lose all rights to Argatroban, including the right to receive
revenues from the sale of Argatroban, which would have a material adverse effect on our business
and financial condition.
We also entered into an agreement with GSK in 1997 whereby we granted an exclusive sublicense
to GSK relating to the continued development and commercialization of Argatroban. This agreement
provides for the payment of royalties and certain milestone payments upon the completion of various
regulatory filings and receipt of regulatory approvals. The agreement generally terminates on a
country-by-country basis upon the earlier of the termination of our rights under the agreement with
Mitsubishi, the expiration of applicable patent rights, or in the case of certain royalty payments,
the introduction of a substantial competitor for Argatroban by another pharmaceutical company. GSK
also has the right to terminate the agreement on a country-by-country basis by giving us at least
three months written notice based on a reasonable determination by GSK that the commercial profile
of the therapeutic indication in question would not justify continued development or marketing in
that country. In addition, either we or GSK may terminate our agreement if the other party
defaults on its obligations under the agreement or becomes insolvent, and such default or event of
default is not cured in 60 days. If our agreement with GSK is terminated, Royalty Sub will no
longer receive royalties from GSKs sales of Argatroban and we may experience delays and incur
expenses in attempting to commercialize Argatroban.
In 2000, we entered into a worldwide research collaboration and license agreement to discover,
develop and commercialize VLA4 antagonists with Schering-Plough. Under the terms of the agreement,
Schering-Plough obtained the exclusive worldwide rights to develop, manufacture and market all
compounds from our library of VLA-4 antagonists, as well as the rights to a second integrin
antagonist. We were responsible for optimizing a lead compound and additional follow-on compounds.
Schering-Plough supported our research and reimburses us for costs associated with the worldwide
product development program and commercialization of the compound. On June 30, 2004, the research
program being conducted by us was completed and Schering-Plough ended their funding of our research
on a follow-on compound pursuant to the research agreement. Under the terms of the agreement,
Schering-Plough is
15
responsible for further development of VLA-4 antagonists, and in 2005 initiated a study of
TBC4746 in human volunteers. In addition to reimbursing research costs, Schering-Plough paid an
upfront license fee, paid us development milestones and could pay additional development milestones
and royalties on product sales resulting from the agreement. If this agreement is terminated, we
will lose Schering-Ploughs funding for development milestones and royalties on product sales
resulting from the agreement.
We cannot assure you that we will satisfy the conditions required to obtain additional
research or milestone payments under the existing agreements or that we can prevent the termination
of these agreements. We also cannot assure you that we will be able to enter into future strategic
alliances on acceptable terms, or that we will choose to do so.
Use of our net operating losses for reducing our income tax expenses may be limited.
At December 31, 2006, we had net operating loss carry forwards for federal income tax purposes
of approximately $405 million, all of which are currently subject to a valuation allowance such
that no deferred tax asset is reflected on our balance sheet with respect to such amounts. Such
net operating losses expire during the years 2007 through 2026, of
which approximately $4 million
will expire in 2007.
The use of such net operating loss carry forwards and other tax attributes can be subject to
an annual limitation if we experience an ownership change under Section 382 of the Internal
Revenue Code, which generally occurs if we have a more than 50 percentage point change in the
ownership of our stock in any rolling three-year period. The annual limitation is equal to our
market value at the time of any such ownership change multiplied by the applicable long-term,
tax-exempt rate which is published monthly by the Internal Revenue Service. Any such limitation
could materially limit the use of our net operating loss carry forwards and other tax attributes,
perhaps causing them to expire unused.
Based on our review, we do not believe that any of our net operating loss carry forwards or
other tax attributes are currently subject to this limitation or that the issuance or conversion of
our Convertible Notes will trigger such a limitation at this time. However, such a determination
is complex and we cannot assure you that the Internal Revenue Service could not successfully
challenge our conclusion. Future events including shifts in our stock ownership could trigger such
a limitation which could have the effect of materially increasing our income tax expense and cash
costs for income taxes.
We would expect that future operating profits earned on sales of Thelin in Europe, as well as
potential future profits realized on the sale of Thelin in the U.S., may allow us to utilize this
net operating loss carry forward in future periods.
Even if our net operating losses are not subject to the limitations discussed above, we may be
subject to the alternative minimum tax due to statutory limitations on the use of such net
operating losses in computing this tax.
We may not be able to pay principal or interest on our outstanding Convertible Notes.
As of December 31, 2006, we had $130 million of our Convertible Notes outstanding, with stated
conversion prices higher than our current stock price. The terms of our Convertible Notes do not
restrict our use of existing cash, cash equivalents or investments, however we cannot assure you
that funds will be available or sufficient in the future to allow payment of interest on our
Convertible Notes. Interest is payable on the Convertible Notes semi-annually totaling
approximately $3.2 million per year. Currently, our cash, cash equivalents and investments are not
sufficient to repay the principal amount of the debt. There are a number of factors that could
prevent us from making future interest payments or debt repayment obligations. Some of these
factors include, but are not limited to, the following:
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We may not be able to generate cash flow from operations or financing activities to meet
our future repayment obligations on the Convertible Notes. |
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The Convertible Notes might not be converted into common stock, which would require that
we repay the principal amount at the maturity date of the Convertible Notes, March 15,
2012. |
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Our financial condition and other factors in the financial markets may prevent us from
refinancing the Convertible Notes in the future, should we desire to do so. |
In certain circumstances, we may lose the potential to receive future royalty payments after the
Argatroban Notes are repaid in full or we may be required to pay liquidated damages equal to the
then outstanding balance of the Argatroban Notes plus accrued unpaid interest thereon.
In February 2007, Royalty Sub issued $60 million in aggregate principal amount of the
Argatroban Notes, which are secured by, among other things, royalty payments from future sales of
Argatroban and by a pledge by us of the equity interest of Royalty Sub. If the royalty payments
are insufficient to repay the Argatroban Notes and an event of default occurs under the indenture
governing the Argatroban Notes, in certain circumstances, the royalty payments and the equity
interest of Royalty Sub may be foreclosed upon and we could lose the potential to receive future
royalty payments after the Argatroban Notes are repaid in full. In addition, in connection with
the issuance of the Argatroban Notes, we have made certain covenants to Royalty Sub. If we breach
an applicable covenant, we have agreed to pay liquidated damages to the holders of the Argatroban
Notes equal to the then outstanding balance of the Argatroban Notes plus accrued unpaid interest
thereon. See Note 2 to the Consolidated Financial Statements included herein for a more complete
description of the terms of the Argatroban Notes.
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We are the subject of securities class action and shareholder derivative lawsuits that may result
in substantial expenditures, and divert managements attention.
On September 26, 2006, a purported class action complaint (the Massachusetts Laborers
complaint) was filed in the United States District Court for the Southern District of Texas by
Massachusetts Laborers Annuity Fund, on behalf of itself and all other similarly situated
investors against the Company, Bruce D. Given, M.D. (the Companys President and Chief Executive
Officer), Richard A.F. Dixon (the Companys Senior Vice President, Research and Chief Scientific
Officer) and Stephen L. Mueller (the Companys former Vice President, Finance and Administration,
Secretary and Treasurer). The complaint alleges violations of sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and focuses on
statements that are claimed to be false and misleading regarding our drug sitaxsentan sodium. The
plaintiffs seek unspecified damages on behalf of a purported class of purchasers of our securities
during the period from February 19, 2004 through March 24, 2006.
In addition, on October 10, 2006, a second purported class action complaint was filed in the
United States District Court for the Southern District of Texas by Gustav R. Bastian, on behalf of
himself and all other similarly situated investors against the Company, Dr. Given, Mr. Dixon and
Mr. Mueller. The complaint asserts substantially the same factual allegations and legal claims as
the Massachusetts Laborers complaint on behalf of the same putative class. A third substantially
similar purported class action complaint was filed on October 20, 2006 by Steven O. Scott, and a
fourth substantially similar purported class action complaint was filed on November 1, 2006 by Cami
Janzen-Guare. These complaints assert substantially the same factual allegations and legal claims
as the Massachusetts Laborers complaint and were filed in the same court on behalf of the same
putative class.
It is possible that additional complaints regarding the same subject matter may be filed in
the future. The Court has consolidated the four existing lawsuits into a single civil action, and
we expect that any future purported class action lawsuits involving the same subject matter as the
existing lawsuits, will likewise be consolidated into this action. Although we believe that the
allegations in these cases are without merit and intend to defend all such litigation vigorously,
litigation is subject to inherent uncertainties, and an adverse result in these or other matters
that may arise from time to time could have a material adverse effect on our business, results of
operations and financial condition.
On November 22, 2006, an individual claiming to be a shareholder of the Company filed a
purported shareholder derivative complaint in the United States District Court for the Southern
District of Texas. The complaint names the Company as a nominal defendant and certain of the
Companys current and former officers and all of the Companys current directors as defendants.
The suit asserts claims for breach of fiduciary duty, abuse of control, insider selling,
misappropriation of information, gross mismanagement, and waste of corporate assets, and seeks
contribution and indemnification against the individual defendants. The lawsuit seeks damages on
behalf of the Company against the individual defendants, as well as a constructive trust over the
individual defendants assets or trading activities; restitution and disgorgement of all profits,
benefits, and compensation obtained by the individual defendants and the costs of attorneys fees
expended by the plaintiff in litigating the derivative action.
We anticipate that additional shareholder derivative lawsuits regarding the same subject
matter may be filed in federal and/or state court during the upcoming weeks or months. Any
litigation to which we are subject may be costly and, further, could require significant
involvement of our senior management and may divert managements attention from our business and
operations.
If Revotar, our former majority-owned German subsidiary, is unable to obtain additional funding,
bimosiamose may not be commercialized.
Revotar is developing a selectin antagonist, bimosiamose, for the treatment of asthma and
psoriasis. In April 2005, we entered into an agreement with the other Revotar stockholders whereby
we would no longer be obligated to fund any drug development activities, in exchange for
eliminating our ownership interest and licensing our worldwide rights to bimosiamose and certain
follow-on compounds to Revotar. See Note 14 to the Consolidated Financial Statements included
herein. Revotar will likely need to obtain additional capital or resources, or enter into a
collaboration to complete development of bimosiamose. If Revotar is unable to obtain additional
funding or enter into a development collaboration, Revotar will no longer be able to continue its
operations and may have to consider various methods of maximizing shareholder value, including the
sale or liquidation of its assets to its stockholders or third parties.
Risks Relating To Clinical and Regulatory Matters
The regulatory approval process is costly and lengthy and we may not be able to successfully obtain
all required regulatory approvals.
The preclinical development, clinical trials, manufacturing, marketing and labeling of
pharmaceuticals are all subject to extensive regulation by numerous governmental authorities and
agencies in the U.S. and other countries. We must obtain regulatory approval for each of our
product candidates before marketing or selling any of them. The process of obtaining and
maintaining regulatory approvals is lengthy, expensive and uncertain. It can also vary
substantially, based on the type, complexity and novelty of the product. It is not possible to
predict how long the approval processes of the FDA or any other applicable federal, state or
foreign regulatory authority or agency for any of our products will take, or whether any such
approvals ultimately will be granted. Positive results in preclinical testing and/or early phases
of clinical studies offer no assurance of success in later phases of the approval process.
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Generally, preclinical and clinical testing of products can take many years, and require the
expenditure of substantial resources, and the data obtained from these tests and trials can be
susceptible to varying interpretation that could delay, limit or prevent regulatory approval. For
example, we licensed rights to Argatroban in 1993, and incurred costs, including preclinical
research studies and clinical trials costs of approximately $43 million prior to its approval by
the FDA in June 2000 for the treatment of thrombosis in patients with HIT. We are still incurring
costs for the development of Thelin, and our costs have already significantly exceeded the cost of
developing Argatroban. To obtain regulatory approvals, we must, among other requirements, complete
carefully controlled and well-designed clinical trials demonstrating that a particular product
candidate is safe and effective for the applicable disease. Several biotechnology companies have
failed to obtain regulatory approvals because regulatory agencies were not satisfied with the
structure or conduct of clinical trials or the ability to interpret the data from the trials.
Similar problems could delay or prevent us from obtaining approvals. Any delay in obtaining, or
failure to obtain, approvals could adversely affect the marketing of our products and our ability
to generate product revenue.
Delays or rejections in the regulatory approval process based on the failure of clinical or
other data to meet expectations, or the failure of the product to meet a regulatory agencys
requirements for safety, efficacy and quality may jeopardize the commercial launch of Thelin or
other future products of ours, which would have a materially adverse impact on our ability to
generate revenue and our ability to secure additional funding. Additionally, regulatory approval,
if obtained, may significantly limit the indicated uses for which a product may be marketed.
In addition, we, or the FDA or other applicable regulatory agencies, might delay or halt our
clinical trials for various reasons, including but not limited to:
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we may fail to comply with extensive FDA or other applicable regulatory agency regulations; |
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a product candidate may not appear to be more effective than current therapies; |
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a product candidate may have unforeseen or significant adverse side effects or other safety issues; |
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the time required to determine whether a product candidate is effective may be longer than expected; |
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we may be unable to adequately follow or evaluate patients after treatment with a product candidate; |
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patients may die or experience other significant adverse effects during a clinical trial
because their disease is too advanced or because they experience medical problems that may
not be related to the product candidate; |
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sufficient numbers of patients may not enroll in our clinical trials; or |
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we may be unable to produce sufficient quantities of a product candidate to complete the trial. |
Any delays or difficulties in obtaining regulatory approvals or clearances for our product candidates may:
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adversely affect the marketing of any products we develop; |
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impose significant additional costs on us; |
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diminish any competitive advantages that we may attain; and |
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limit our ability to receive royalties and generate revenue and profits. |
Legislative or regulatory changes could harm our business.
The FDA has designated ThelinTM as an orphan drug under the Orphan Drug Act. The
Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases,
generally by entitling the first developer that receives FDA marketing approval for an orphan drug
to at least a seven-year exclusive marketing period in the United States for that product. In
recent years, Congress has considered legislation to change the Orphan Drug Act to shorten the
period of automatic market exclusivity and to grant marketing rights to simultaneous developers of
a drug. If the Orphan Drug Act is amended in this manner, ThelinTM could face increased
competition, which may result in lower sales.
In addition, the United States government and other governments have shown significant
interest in pursuing healthcare reform. Any government-adopted reform measures could adversely
impact:
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the pricing of therapeutic products and medical devices in the United States or
internationally; |
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our ability to protect the United States market from the purchase by consumers of
therapeutic products and medical devices that have been imported from manufacturers and
distributors located outside of the United States; |
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the amount of reimbursement available from governmental agencies or other third-party payers; and |
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Medicare and Medicaid reimbursement of pharmaceutical products. |
New laws, regulations and judicial decisions, or new interpretations of existing laws,
regulations and decisions, which relate to health care availability, methods of delivery or payment
for products and services, or sales, marketing or pricing may cause our revenue to decline, and
necessitate revision of our research and development programs.
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Legislative changes or regulatory decisions in Europe may adversely impact our orphan drug status
which may result in loss of revenues in the European Union.
The EC has designated Thelin as an orphan drug. Orphan drug status precludes European
regulators from approving marketing applications in the EU for medicinal products that are
chemically similar to Thelin for a period of ten years. We have been requested to provide
information to support the designation of Thelin as an orphan drug in the EU and have responded to
this request. If the EC amends its decision designating Thelin as an orphan drug, or if the EC
decides not to renew the orphan drug designation of Thelin after the first five years following
marketing approval, Thelin will lose its orphan drug status and European regulators may approve
medicinal products that are chemically similar to Thelin. In such case, we would need to rely on
our existing patent protection to prevent the commercialization of competing products in the EU.
This protection presently extends to 2016, subject to any available extensions, and may be broader
or narrower than that offered by orphan drug status, depending on the scope of patent claims
applicable to Thelin. If Thelin loses its orphan drug status in the EU, and existing patent
claims applicable to Thelin cannot prevent commercialization of competing products, Thelin will
face increased competition, which may decrease the amount of revenue we receive from Thelin.
We depend on third parties in the conduct of our clinical trials for our product candidates and any
failure of those parties to fulfill their obligations could adversely affect our development plans.
We depend on independent clinical investigators, contract research organizations, hospitals
and other third party service providers and our collaborators in the conduct of our clinical trials
for our product candidates. We rely on these parties for successful execution of our clinical
trials but do not control many aspects of their activities. For example, the investigators are not
our employees. However, as the sponsor of these trials we are responsible for ensuring that each
of our clinical trials is conducted in accordance with the clinical investigational plan, protocols
for each clinical trial, good clinical practices and other regulatory requirements. Third parties
may not complete activities on schedule or may not conduct our clinical trials in accordance with
regulatory requirements or our stated protocols. The failure of these third parties to carry out
their obligations could delay or prevent the development, approval and commercialization of our
product candidates.
Our clinical trials could take longer to complete and cost more than we expect, which may result in
our development plans being significantly delayed.
We will need to conduct clinical studies of all of our product candidates; these studies are
costly, time consuming and unpredictable. Any unanticipated costs or delays in our clinical
studies could cause us to expend substantial additional funds or to delay or modify our plans
significantly, which would harm our business, financial condition and results of operations. The
factors that could contribute to such cost, delays or modifications include:
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the cost of conducting human clinical trials for any potential product. These costs can
vary dramatically based on a number of factors, including the order and timing of clinical
indications pursued and the development and financial support from corporate partners; and |
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intense competition in the pharmaceutical market, which may make it difficult for us to
obtain sufficient patient populations or clinician support to conduct our clinical trials
as planned. |
Many factors affect patient enrollment, including the size of the patient population, the
proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical
trials and new drugs approved for the conditions we are investigating. Other companies are
conducting clinical trials and have announced plans for future trials that are seeking or likely to
seek patients with the same diseases as those we are studying. Competition for patients in
cardiovascular disease trials is particularly intense because of the limited number of leading
cardiologists and the geographic concentration of major clinical centers. As a result of all of
these factors, our trials may take longer to enroll patients than we anticipate.
Even if we obtain marketing approval, our products will be subject to ongoing regulatory oversight,
which may affect the success of our products.
Any regulatory approvals that we receive for a product may be subject to limitations on the
indicated uses for which the product may be marketed, or may contain requirements for potentially
costly follow-up Phase IV clinical studies. Failure to complete Phase IV requirements can lead to
negative regulatory action which can include withdrawal of regulatory approval. After we obtain
marketing approval for any product, the manufacturer and the manufacturing and testing facilities
for that product will be subject to continual review and periodic inspections by the FDA and other
regulatory authorities. The subsequent discovery of previously unknown problems with the product
or with the manufacturer or facility may result in restrictions on the product or manufacturer,
including withdrawal of the product from the market. We have not incurred any material expenses
related to the post-marketing review of Argatroban; however, post-marketing review and surveillance
expenses for Thelin will be more significant than those incurred with Argatroban.
If we fail to comply with applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, withdrawal of product, product recalls, seizure
of products, operating restrictions and criminal prosecution.
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Risks Related To Ongoing Operations
We may not be able to retain our personnel.
Our success depends largely upon the continued service of our management and scientific staff
and our ability to attract, retain and motivate qualified scientific, management, sales and
marketing and professional support staff personnel. The loss of the services of the principal
members of our management and scientific staff may impede our ability to bring products to market.
Certain members of our management team and scientific staff, have employment agreements with us,
which provide for initial one-year terms that renew automatically for successive additional
one-year periods, unless either party provides notice at least 60 days before the scheduled
expiration. We do not maintain key person insurance on any members of our management team and
scientific staff. Our success is also dependent on our maintaining and expanding our personnel as
needs arise in the areas of research, clinical trial management, manufacturing, sales and
marketing, and professional support staff, in order to commercialize our products. In anticipation
of receiving regulatory approval to market Thelin in the U.S., we have hired marketing personnel,
a U.S. field sales force, and related management and conducted training in preparation to launch
Thelin in the U.S.
After we received marketing clearance for Thelin from the EC, we began to establish sales
operations and hire sales representatives in certain countries of the EU. We may also need to hire
and train other qualified personnel in order to successfully commercialize Thelin in the EU. We
face intense competition for such personnel from other companies, academic institutions, government
entities and other organizations. We cannot assure you that we will be successful in hiring or
retaining qualified personnel. Managing the integration of new personnel, and our growth in
general, could pose significant risks to our development and progress in achieving our goals.
We also rely on consultants and advisors to assist us in formulating our research and
development strategy. All our consultants and advisors are either self-employed or employed by
other organizations and they may have other commitments, such as consulting or advisory contracts
with other organizations that may affect their ability to contribute to us.
We may be sued for product liability, which may prevent or interfere with the development or
commercialization of our products.
Because our products and product candidates are new treatments, with limited, if any, past use
on humans, serious undesirable and unintended side effects, including death, may arise. We may be
subject to product liability claims that are inherent in the testing, manufacturing, marketing and
sale of pharmaceutical products. These claims could expose us to significant liabilities that
could prevent or interfere with the development or commercialization of our products and seriously
impair our financial position. Product liability insurance is generally expensive for
biopharmaceutical companies such as ours. Under the agreements with Mitsubishi and GSK, we also
maintain product liability insurance to cover claims that may arise from the sale of Argatroban.
Our existing coverage has policy limits of up to $15 million for claims arising from clinical
trials or from the sale of Argatroban or Thelin. However, we cannot provide any assurance that
this coverage will be sufficient to satisfy any liabilities that may arise. If we receive
regulatory approval to sell Thelin in the U.S. and other countries, we will need additional
product liability insurance coverage, which may not be available on commercially reasonable terms.
We cannot assure you that we will be able to maintain our existing insurance coverage or obtain
additional coverage on commercially reasonable terms for liability arising from the use or sale of
our other products, including Thelin, in the future. Also, this insurance coverage and our
resources may not be sufficient to satisfy any loss related to product liability claims.
Endothelin antagonists as a class may generate liver and fetal abnormalities.
Liver and fetal abnormalities have been recognized as complications related to the endothelin
antagonist class of drugs. In a follow-on extension of the Phase II study for Thelin, two
patients developed treatment-related hepatitis and one of these patients died. Fetal abnormalities
with respect to this class of drug have also been detected in animal studies. Thelin may produce
birth defects if used by pregnant women, as this effect has been seen when it is administered to
animals.
Because of potential liver injury and in an effort to minimize the possibility of fetal
exposure, the distribution of Thelin in the EU has been restricted, and it is likely that Thelin
distribution will be restricted elsewhere, if approved, to physicians, patients and caregivers who
have been provided education on these risks. If we are unable to clearly demonstrate that Thelin
provides an acceptable risk-benefit profile as compared to currently approved therapies, we are not
likely to receive regulatory approval to market Thelin, which would have a material adverse affect
on our ability to generate meaningful revenue or achieve profitability.
Tracleer® (bosentan), a product of Actelion, Inc., also belongs to the endothelin
antagonist class of drugs. The FDA, as a condition for the approval of Tracleer®,
required that Actelion distribute Tracleer® via a limited access program. A limited
access program is a distribution system that seeks to manage the post-marketing risk of an approved
medication through: (i) limited distribution of the medication through a number of specialty
pharmacy distributors; (ii) registration of all practitioners prescribing the medication; (iii)
registration of all patients receiving the medication; (iv) written certification by the
practitioner that the medication is being prescribed for a medically appropriate use; (v) review of
safety warnings with the patient by the practitioner; and (vi) an ongoing comprehensive program to
monitor, collect, track and report adverse event and other safety related information from patients
receiving the medication. We believe that since Thelin belongs to the same class of drug as
Tracleer®, the FDA will require that Thelin be distributed though a limited access
program that may make physician acceptance, patient access and product reimbursement more
difficult.
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As a condition for marketing Thelin in the EU, the EMEA imposed conditions regarding the
supply and the safe and effective use of Thelin in the EU. These conditions include:
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establishment of a surveillance program and safety database to collect information on
patient demographics, adverse reaction and treatment discontinuations; and |
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a controlled distribution system that ensures physicians are provided with information
stating that Thelin: (i) is teratogenic, therefore pregnancy should be avoided; (ii)
requires monitoring of liver function and other blood parameters, and (iii) interacts with
other medications, specifically vitamin K antagonists and cyclosporin A. |
Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable regulations.
The development, manufacturing, pricing, sales, and reimbursement of our products, together
with our general operations, are subject to extensive regulation by federal, state and other
authorities within the United States and numerous entities outside of the United States. As a
publicly traded company we are subject to significant regulations, some of which have either only
recently been adopted or are currently proposals subject to change. While we have developed and
instituted a corporate compliance program and continue to update the program in response to newly
implemented or changing regulatory requirements, we cannot assure that we are or will be in
compliance with all potentially applicable regulations. If we fail to comply with any of these
regulations, we could be subject to a range of regulatory actions, including suspension or
termination of clinical trials, the failure to approve a product candidate, restrictions on our
products or manufacturing processes, withdrawal of products from the market, significant fines, or
other sanctions or litigation
In connection with our managements assessment of the effectiveness of our internal control
over financial reporting as of the end of the fiscal year ended December 31, 2006, and the
corresponding audit of that assessment by KPMG LLP, our independent registered public accounting
firm, KPMG identified one significant deficiency in our internal control over financial
reporting. This deficiency was not determined to be a material weakness in our controls,
however. An internal control material weakness is defined as a significant deficiency, or
aggregation of deficiencies, that does not reduce to a relatively low level the risk that material
misstatements in financial statements will not be prevented or detected on a timely basis by employees
in the normal course of their work. An internal control significant deficiency, or aggregation of
deficiencies, is one that could result in a misstatement of the financial statements that is more
than inconsequential. We have taken what we believe to be the necessary steps to remedy such
deficiencies in our internal control over financial reporting within the required time periods and
our management and KPMG concluded that as of December 31, 2006, they believed that our internal
control over financial reporting was effective. However, we cannot assure you that these measures
or any future measures will enable us to avoid other significant deficiencies or material
weaknesses in the future.
Risks Relating to Product Manufacturing, Distribution and Sales
We have very limited manufacturing, marketing and sales experience.
We have very limited manufacturing, marketing and product sales experience. If we develop
commercially marketable products, and receive regulatory approval for those products, we cannot
assure you that contract manufacturing services will be available in sufficient capacity to supply
our product needs on a timely basis. If we decide to build or acquire commercial scale
manufacturing capabilities, we will require additional management and technical personnel, as well
as significant additional financial resources. The manufacture of pharmaceutical products, both
inside and outside the United States, is highly regulated and complex. We, and the third parties
we rely upon for the manufacture of our products, must comply with all applicable regulatory
requirements of the FDA and foreign authorities, including current Good Manufacturing Practice
regulations. The facilities used to manufacture, store and distribute our products also are
subject to inspection by regulatory authorities at any time to determine compliance with
regulations. These regulations are complex, and any failure to comply with them could lead to
remedial action, civil and criminal penalties and delays in production or distribution of material.
The process of changing or adding a manufacturer or changing a formulation requires prior approval
from regulatory authorities and is very time-consuming. If we are unable to manage this process
effectively or if an unforeseen event occurs at any facility, we could face supply disruptions that
would result in significant costs and delays, undermine goodwill established with physicians and
patients, damage commercial prospects for our products and adversely affect operating results.
We intend to commercialize Thelin in the EU and, upon receipt of FDA approval, in the U.S.
through our own specialty sales force. As a result, we would face a number of additional risks,
including:
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we may not be able to attract, and retain an experienced marketing or sales force; |
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the costs of establishing and maintaining a sales force, and the associated direct and
indirect commercial infrastructure costs, may not be justifiable in light of product
revenues; and |
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our direct sales and marketing efforts may not be successful. |
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We cannot assure you that the raw materials necessary for the manufacture of our products will be
available in sufficient quantities or at a reasonable cost.
Complications or delays in obtaining raw materials or in product manufacturing could delay the
submission of products for regulatory approval, the initiation of new development programs and the
availability of a sufficient commercial supply of our products to meet demand, each of which could
materially impair our competitive position and potential profitability. We cannot assure you that
we will be able to enter into any other supply arrangements on acceptable terms, if at all.
We are dependent on a single supplier of Argatroban.
At present, Mitsubishi is the only manufacturer of Argatroban API and has entered into an
agreement with GSK to supply Argatroban API in bulk to meet GSKs needs in the production of
Argatroban finished product. GSK has informed us that they have begun supplying Argatroban
finished product from their manufacturing facility in the United Kingdom. Should Mitsubishi fail
during any consecutive nine-month period to supply GSK at least 80% of its requirements, and such
requirements cannot be satisfied by existing inventories, the agreement provides for the
nonexclusive transfer of the production technology for API to GSK. However, in the event
Mitsubishi terminates supplying Argatroban API or defaults in its supply commitment, we cannot
assure you that GSK will be able to commence manufacturing of Argatroban API in a timely manner or
that alternate sources of Argatroban API will be available at reasonable cost, if at all.
We are dependent on a single supplier of Thelin.
At the present time, we have contracted with a single supplier for the supply of Thelin API.
Although the supplier has two manufacturing sites capable of producing Thelin API, we cannot
assure you that this will be adequate to insure uninterrupted supply to satisfy our needs for
clinical trials and commercialization. Any disruption in supply could adversely affect our ability
to conduct clinical trials or meet commercialization needs. Additionally, we have contracted with
a single supplier for tableting and packaging Thelin and although we have an alternate supplier
capable of these services, we cannot assure you that there will not be a disruption in supply.
We will be dependent on third parties to distribute Thelin.
In the EU markets where we intend to commercialize Thelin, we will rely on third parties for
importation, warehousing, distribution and other distribution related services. If Thelin is
approved in the U.S., we will rely on a network of third party specialty pharmacies to distribute
Thelin to patients. This network will require significant coordination with our sales and
marketing, medical affairs and finance organizations, and will provide services such as
reimbursement assistance, patient education and counseling to monitor compliance. We believe these
services will help patients successfully use Thelin. Failure to successfully establish and
maintain our contracts with these third parties, or the inability or failure of any of them to
adequately perform as agreed under their respective contracts with us could harm our business. We
do not have our own warehouse or distribution capabilities, and we lack the resources and
experience to establish any of these functions and do not intend to do so in the foreseeable
future. Any failure by these third parties to pay us for purchases of Thelin on a timely basis or
at all could have a material adverse effect on our financial position, results of operations and
cash flows. Our sales could fluctuate from quarter to quarter based on the buying patterns of
these third parties.
We would be unable to replace some or all of these third parties in a timely manner in the
event of a natural disaster, failure to meet regulatory requirements, business failure, strike or
other distribution failure. If any of these third parties did not perform for any reason under
their respective contracts with us, the distribution of Thelin could be interrupted, damaging our
results of operations and market position. Since we would be dependent on these third parties for
information regarding Thelin sales, shipments and inventory, failure of their financial systems
could also harm our ability to accurately report and forecast product sales and fulfill our
regulatory obligations.
Our products, even if approved by the FDA or foreign regulatory agencies, may not be accepted by
health care providers, insurers or patients.
If any of our products, including Thelin, after receiving FDA or other foreign regulatory
approval, fail to achieve or maintain market acceptance, our ability to become profitable or
maintain profitability in the future will be adversely affected. We believe that market acceptance
will depend on our ability to provide and maintain acceptable evidence of safety, efficacy and cost
effectiveness. In addition, market acceptance depends on the effectiveness of our marketing
strategy and the availability of reimbursement by government and private third-party payers for our
products.
The successful commercialization of our products is dependent on pharmaceutical pricing and
third-party reimbursement.
In recent years, there have been numerous proposals to change the health care system in the
United States. Some of these proposals have included measures that would limit or eliminate
payments for medical procedures and treatments or subject the pricing of pharmaceuticals to
government control. In addition, government and private third-party payers are increasingly
attempting to contain health care costs by limiting both the coverage and the level of
reimbursement of drug products. Consequently, the reimbursement status of newly approved health
care products is highly uncertain and we cannot assure you that third-party coverage will be
available, or that available third-party coverage will enable us to maintain price levels
sufficient to realize an appropriate return
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on our investment in product development. Our long-term ability to market products
successfully may depend in part on the extent to which reimbursement for the cost of such products
and related treatment will be available. Third-party payers are increasingly challenging the
prices of medical products and services. Furthermore, inadequate third-party coverage may reduce
market acceptance of our products. Significant changes in the health care system in the United
States or elsewhere could have a material adverse effect on our business and financial performance.
The hazardous material we use in our research and development could result in significant
liabilities, which may exceed our insurance coverage.
Our research and development activities involve the use of hazardous materials. While we
believe that we are currently in substantial compliance with federal, state, foreign and local laws
and regulations governing the use of these materials, accidental injury or contamination may occur.
Any such accident or contamination could result in substantial liabilities, which could exceed our
financial resources or not be covered by our general liability insurance, which has a policy limit
of $7 million. We do not carry specific insurance coverage for environmental contamination.
Additionally, the cost of compliance with environmental and safety laws and regulations may
increase in the future.
Risks Relating to Intellectual Property
We may not be able to protect proprietary information and obtain patent protection.
We actively seek patent protection for our proprietary technology, both in the U.S. and in
other areas of the world. However, the patent positions of pharmaceutical and biotechnology
companies, including us, are generally uncertain and involve complex legal, scientific and factual
issues. Intellectual property is an uncertain and developing area of the law that is potentially
subject to significant change. Our success will depend significantly on our ability to:
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obtain and maintain and enforce patent protection for our products and product
candidates and for those of our collaborative partners; |
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protect and enforce our trade secrets; |
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operate without infringing upon the proprietary rights of others; and |
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prevent others from infringing on our proprietary rights. |
We cannot assure you that patents issued to or licensed by us will not be challenged,
invalidated or circumvented, or that the rights granted will provide competitive advantages to us.
We cannot assure you that our patent applications or pending or future patent applications, if and
when issued, will be valid and enforceable and withstand litigation. We cannot assure you that
others will not independently develop substantially equivalent, generic equivalent or superseding
proprietary technology or that an equivalent or superior product will not be marketed in
competition with our products, thereby substantially reducing the value of our proprietary rights.
We may experience a significant delay in obtaining patent protection for our products as a result
of a substantial backlog of pharmaceutical and biotechnology patent applications at the U.S. Patent
and Trademark Office, or PTO. Other competitors may have filed or maintained patent applications
of which we may not be aware for technology used by us or covered by our pending applications. In
addition, patent protection, even if obtained, is affected by the limited period of time for which
a patent is effective.
Patent protection only provides rights of exclusivity for the term of the patent. We will be
able to protect our proprietary rights from unauthorized use by third parties only to the extent
that our proprietary rights are covered by valid and enforceable patents or are effectively
maintained as trade secrets, and then only to the extent that we are able, financially and
otherwise, to enforce such proprietary rights.
Argatroban is currently marketed in a formulation that is covered under a formulation patent
that was extended and now expires in 2014 and a process patent that expires in 2017. Hatch-Waxman
protection has expired and it is possible that generic manufacturers may be able to produce
Argatroban without violating the formulation or process patents. In addition, Thelin is covered
under a composition of matter patent that expires in 2013.
We could also incur substantial costs in filing and prosecuting patent claims, in defending
any patent infringement suits or in asserting any patent rights, including those granted by third
parties, in a suit with another party. The PTO could institute interference proceedings involving
us in connection with one or more of our patents or patent applications, and such proceedings could
result in an adverse decision resulting in loss of patent rights as to priority of invention. The
PTO or a comparable agency in a foreign jurisdiction could also institute re-examination or
opposition proceedings against us in connection with one or more of our patents or patent
applications and such proceedings could result in an adverse decision as to the validity or scope
of the patents. Further, third parties may obtain a declaratory judgment, or other opinion, from a
court of competent jurisdiction declaring one or more of our patents invalid, unenforceable, and/or
not infringed by competing products.
We may be required to obtain licenses to patents or other proprietary rights from third
parties. We cannot assure you that any licenses required under any patents or proprietary rights
would be made available on acceptable terms, if at all. If we are unable to
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obtain required licenses, we could encounter delays in product introductions while we attempt
to design around blocking patents, or we could find that the development, manufacture or sale of
products requiring such licenses could be foreclosed.
Termination of our license of Argatroban from Mitsubishi would result in the loss of significant
rights.
We entered into an agreement in 1993 to license Mitsubishis rights and technology relating to
Argatroban and to license Mitsubishis own proprietary technology developed with respect to
Argatroban. Under the agreement, Mitsubishi has the right to bring any suit or action for
infringement of the patent rights granted thereunder; provided, however, if Mitsubishi fails to
take action with respect to any infringement, we have the right the bring any appropriate suit or
action against the infringer based upon any patent with the patent rights granted thereunder that
has a claim that specifically covers a licensed product. The agreement provides us an exclusive
license to use and sell Argatroban in the U.S. and Canada for all cardiovascular, renal,
neurological and immunological purposes other than use for the coating of stents. We are required
to pay Mitsubishi specified royalties on net sales of Argatroban by us and our sublicensees after
its commercial introduction in the U.S. and Canada. During 2000, we signed an additional agreement
with Mitsubishi that provides us with royalties on sales of Argatroban in certain European
countries, up to a total of $5.0 million in milestones for the development of ischemic stroke and
certain other provisions. During 2001, we received $2.0 million of these milestones less certain
Japanese withholding taxes. Additional milestones are dependent on further development of
Argatroban in the indication of ischemic stroke. During 2002, we completed a Phase II human
clinical trial for Argatroban as a monotherapy treatment for acute ischemic stroke. The clinical
trial met the primary safety endpoint and showed positive results in the secondary safety endpoint.
In light of a lack of an overall efficacy trend and the high risk and high costs associated with
stroke trials, it is unlikely that we will proceed independently with a full Phase III program.
Either party may terminate the agreement with Mitsubishi on 60 days notice if the other party
defaults in its material obligations under the agreement, or becomes insolvent, or if a substantial
portion of its property is subject to levy. We are currently in compliance with respect to the
material obligations under the agreement. Unless terminated sooner, the agreement with Mitsubishi
expires on the later of termination of patent rights in a particular country or 20 years after
first commercial sale of products in a particular country. If our agreement with Mitsubishi is
terminated, we and Royalty Sub will lose the rights to Argatroban, including the right to receive
revenues from the sale of Argatroban, which would have a material adverse effect on our business
and financial condition.
If we are unable to keep our trade secrets confidential, our technology and information may be used
by others to compete against us.
We rely significantly on trade secrets, know-how and continuing technological advancement to
maintain our competitive position. We try to protect this information by entering into
confidentiality agreements with our employees and consultants, which contain assignment of
invention provisions. Notwithstanding these agreements, others may gain access to these trade
secrets, such agreements may not be honored and we may not be able to protect effectively our
rights to our unpatented trade secrets. Moreover, our trade secrets may otherwise become known or
independently developed by our competitors, thereby resulting in our loss of rights in the trade
secrets.
Failure to avoid infringement of others intellectual property rights could impair our ability to
manufacture and market our products.
We cannot guarantee that our products or product candidates will be free of claims by third
parties alleging that we have infringed their intellectual property rights. Any such claim could
be expensive and time-consuming to defend, and an adverse litigation result or a settlement of
litigation could require us to pay damages, obtain a license from the complaining party or a third
party, develop non-infringing alternatives or cease using the asserted intellectual property right.
Any such result could adversely affect our ability to operate profitably.
We cannot assure you that we would prevail in any intellectual property infringement action,
will be able to obtain a license to any third-party intellectual property on commercially
reasonable terms, if at all, successfully develop non-infringing alternatives on a timely basis, or
license non-infringing alternatives, if any exist, on commercially reasonable terms, if at all.
Any significant intellectual property impediment to our ability to develop or commercialize our
products could significantly harm our business and prospects.
Risks Related to Our Common Stock
Our stock price is volatile.
The stock market has from time to time experienced significant price and volume fluctuations
that may be unrelated to the operating performance of particular companies. In particular, the
market price of our common stock, like that of the securities of other biopharmaceutical companies,
has been and may be highly volatile. During the period from January 1, 2004, to December 31, 2006,
our stock price has ranged from a low of $3.29 per share (on May 19, 2006) to a high of $13.29 per
share (on September 7, 2005). Further information regarding the trading price of our common stock
is included herein in Item 5. The following factors, among others, may affect the price of the
common stock:
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governmental regulations and regulatory developments in both the U.S. and foreign
countries affecting us or our competitors; |
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fluctuations in our financial results; |
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announcements of technological innovations, clinical trial results, regulatory filings,
regulatory approvals, expanded product indications, or the launch of new commercial
products by us or our competitors; |
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announcements of actual or potential medical results or risks relating to products
either under development or being commercialized by us or our competitors; |
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disputes relating to patents or other proprietary rights affecting us or our competitors; |
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public concern as to the safety of products developed by us or other biotechnology and pharmaceutical companies; |
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general market conditions; |
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fluctuations in price and volume in the stock market in general, or in the trading of
the stock of biopharmaceutical and biotechnology companies in particular, that are
unrelated to our operating performance; |
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issuances of securities in equity, debt or other financings; |
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trading and possible arbitrage activity related to our outstanding Convertible Notes; |
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sales of common stock by existing stockholders; and |
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the perception that such issuances or sales could occur. |
Issuance of shares in connection with financing transactions or under stock plans will dilute
current stockholders.
We issued $130 million of our Convertible Notes, which are convertible into approximately 9.3
million shares of our common stock. We have also entered into an equity financing line with
Azimuth pursuant to which we may sell to Azimuth up to $75,000,000 of our common stock, or
11,866,851 shares of common stock, whichever occurs first, at a discount of 2.875% to 5.875% to be
determined based on our market capitalization at the start of each sale period. At our request and
upon the approval of our Board of Directors, Azimuth will purchase a certain dollar amount of
shares, with the exact number of shares to be determined based on the per share market price of our
common stock over the draw-down period for such purchase. To date, we have issued an aggregate of
3,086,351 shares of our common stock to Azimuth pursuant to two draw down requests. In addition,
pursuant to our stock plans, our management, upon approval by our Compensation and Corporate
Governance Committee, is authorized to grant stock awards to our employees, directors and
consultants. Stockholders will incur dilution upon the conversion of the Convertible Notes, the
sale of shares of our common stock to Azimuth or the exercise of any outstanding stock awards. In
addition, if we raise additional funds by issuing additional common stock, or securities
convertible into or exchangeable or exercisable for common stock, further dilution to our existing
stockholders will result and new investors could have rights superior to existing stockholders.
The number of shares of our common stock eligible for future sale could adversely affect the market
price of our stock.
As of February 2, 2007, we have reserved approximately 5.6 million shares of common stock for
issuance upon exercise of outstanding options issued under our stock option plans and approximately
9.3 million shares issuable upon conversion of our Convertible Notes. In addition, we may issue up
to a maximum 8,780,500 shares of common stock to Azimuth pursuant to our equity financing line.
All of these shares of common stock are registered or will be registered for sale or resale on
currently effective registration statements. The issuance of a significant number of shares of
common stock upon the exercise of stock options or the sale of a substantial number of shares of
common stock under Rule 144 or otherwise could adversely affect the market price of the common
stock.
We do not intend to pay cash dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividends on our common stock and we currently do not
anticipate paying any cash dividends in the foreseeable future. Because we do not anticipate
paying cash dividends for the foreseeable future, holders of shares of our common stock will not
realize a return on their investment unless the trading price of our common stock appreciates,
which we cannot assure.
Certain anti-takeover provisions in our certificate of incorporation and Delaware law, our rights
plan, and severance provisions of our employment agreements, may deter or prevent a change in
control of our company and result in the entrenchment of management, even if that change would be
beneficial to our stockholders.
Our certificate of incorporation and Section 203 of the Delaware General Corporation Law
contain certain provisions that may delay or prevent an attempt by a third party to acquire control
of us. These provisions in our certificate of incorporation include:
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authorizing the issuance of blank check preferred stock; |
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limiting the ability of stockholders to call a special meeting of stockholders by
requiring the written request of the holders of at least 51% of our outstanding common
stock; and |
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establishing advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted upon at stockholder meetings. |
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We are subject to Section 203 of the Delaware General Corporation Law which generally
prohibits a Delaware corporation from engaging in any of a broad range of business combinations
with an interested stockholder for a period of three years following the date on which the
stockholder became an interested stockholder.
In January 2002, we adopted a rights plan that may delay or prevent such attempt by a third
party to acquire control of us without obtaining our agreement to redeem the rights. If our
agreement to redeem the rights is not obtained, the third party would suffer substantial dilution.
In addition, the severance provisions of employment agreements with certain members of management
could impede an attempted change of control by a third party and result in the entrenchment of
management. These provisions include:
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the lump-sum payment to certain members of our management team of up to three years
annual base salary and a pro rata bonus in the event of a termination by us without cause
or by the management team member for good reason; |
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|
the continued vesting and exercisability of all stock options and restricted stock
during specified periods after the termination by us without cause or by the management
team member for good reason; |
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the lump-sum payment to certain members of our management team of up to three years
annual base salary and bonus in the event of a termination by us without cause or by the
management team member for good reason within two years of a change in control of us; |
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gross-up payments for certain income taxes on lump-sum payments; and |
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the continuation of certain other benefits for periods of up to three years. |
In the event of the termination by us without cause or by the management team member for
good reason of all of these members of management within two years of a change in control of
us, the base salary and annual bonus portions of these employment agreements would aggregate
approximately $10 million at the rate of compensation in effect at December 31, 2006.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
In November 2004, we leased 40,730 square feet of office space in Houston, Texas, for our
administrative, marketing, clinical development and regulatory departments. The lease expires on
December 31, 2008, and can be extended at our option to December 31, 2009. Our prior lease of
15,490 square feet of office space in Bellaire, Texas, which housed our administrative, marketing,
clinical development and regulatory departments, expired July 31, 2005.
We also lease 31,359 square feet of office and laboratory space in a building in Houston,
Texas, for our research department, including a 21,621 square foot laboratory facility The
remaining area is being used for clinical development, computer modeling, storage space and
additional offices for scientists. This lease expires in December 2008, and can be extended at our
option to December 31, 2009.
We lease office space for our European operations in Uxbridge, U.K., Munich, Germany, Milan,
Italy and Paris, France. The agreements are of varying term, and may be extended at our option
upon prior written notice.
We may require additional space to accommodate future research and laboratory needs as
necessary to bring products into development and clinical trials. In addition, we may require
additional office space to support the commercial launch of Thelin in Europe.
In general, our properties are well maintained, adequate and suitable to their purposes. See
Note 11 to our Consolidated Financial Statements, Equipment and Leasehold Improvements, which
discloses amounts invested in buildings and equipment, is incorporated by reference. See also the
discussion about lease agreements under Note 17 to our Consolidated Financial Statements,
Commitments and Contingencies, which also is incorporated herein by reference.
ITEM 3 LEGAL PROCEEDINGS
On September 26, 2006, a purported class action complaint (the Massachusetts Laborers
complaint) was filed in the United States District Court for the Southern District of Texas by
Massachusetts Laborers Annuity Fund, on behalf of itself and all other similarly situated
investors against the Company, Bruce D. Given, M.D. (the Companys President and Chief Executive
Officer), Richard A.F. Dixon (the Companys Senior Vice President, Research and Chief Scientific
Officer) and Stephen L. Mueller (the Companys former Vice President, Finance and Administration,
Secretary and Treasurer). The complaint alleges violations of sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and focuses on
statements that are claimed to be false and misleading regarding our drug sitaxsentan sodium. The
plaintiffs seek unspecified damages on behalf of a purported class of purchasers of our securities
during the period from February 19, 2004 through March 24, 2006.
In addition, on October 10, 2006, a second purported class action complaint was filed in the
United States District Court for the Southern District of Texas by Gustav R. Bastian, on behalf of
himself and all other similarly situated investors against the Company,
26
Dr. Given, Mr. Dixon and Mr. Mueller. The complaint asserts substantially the same factual
allegations and legal claims as the Massachusetts Laborers complaint on behalf of the same putative
class. A third substantially similar purported class action complaint was filed on October 20,
2006 by Steven O. Scott, and a fourth substantially similar purported class action complaint was
filed on November 1, 2006 by Cami Janzen-Guare. These complaints assert substantially the same
factual allegations and legal claims as the Massachusetts Laborers complaint and were filed in the
same court on behalf of the same putative class.
It is possible that additional complaints regarding the same subject matter may be filed in
the future. The Court has consolidated the four existing putative class action lawsuits into a
single civil action, and we expect that any future purported class action lawsuits involving the
same subject matter as the existing lawsuits will likewise be consolidated into this action.
Although we believe that the allegations in these cases are without merit and intend to defend all
such litigation vigorously, litigation is subject to inherent uncertainties, and an adverse result
in these or other matters that may arise from time to time could have a material adverse effect on
our business, results of operations and financial condition.
On November 22, 2006, John Jadelis, an individual claiming to be a shareholder of the Company,
filed a purported shareholder derivative complaint in the United States District Court for the
Southern District of Texas. The complaint names the Company as a nominal defendant Bruce D. Given,
the Companys President and CEO, Richard A.F. Dixon, the Companys Senior Vice President of
Research and Chief Scientific Officer, Stephen L. Mueller, the Companys former Vice President,
Finance and Administration, Secretary and Treasurer, Ron Anderson, Director, J. Kevin Buchi,
Director, John H. Dillon, II, Director, John M. Pietruski, Director, James A Thomson, Director,
Suzanne Oparil, Director, James T. Willerson, Director and Robert J. Cruikshank, Director, as
defendants. The suit asserts claims for breach of fiduciary duty, abuse of control, insider
selling, misappropriation of information, gross mismanagement, and waste of corporate assets, and
seeks contribution and indemnification against the individual defendants. The lawsuit seeks
damages on behalf of the Company against the individual defendants, as well as a constructive trust
over the individual defendants assets or trading activities; restitution and disgorgement of all
profits, benefits, and compensation obtained by the individual defendants; and the costs of
attorneys fees expended by the plaintiff in litigating the derivative action.
We anticipate that additional shareholder derivative lawsuits regarding the same subject
matter may be filed in federal and/or state court during the upcoming months.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth quarter of our
fiscal year ended December 31, 2006.
27
PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following is a line graph presentation comparing our common stocks cumulative
five-year return with various indices, including broad market indices. In May 2003, our name
changed from Texas Biotechnology Corporation to Encysive Pharmaceuticals Inc. As a result, our
common stock traded on The Nasdaq National Market System as TXBI until May 18, 2003, when it
began trading as ENCY.
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Year Ending |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
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Encysive Pharmaceuticals Inc. |
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100.00 |
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21.54 |
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137.69 |
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152.77 |
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121.38 |
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64.77 |
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NASDAQ Biotechnology Index |
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100.00 |
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62.21 |
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90.36 |
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99.39 |
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116.33 |
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115.35 |
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NASDAQ Market Index |
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100.00 |
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69.75 |
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104.88 |
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113.70 |
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116.19 |
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128.12 |
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Our common stock trades on The NASDAQ Global Market under the symbol ENCY. The following
table sets forth, for the periods indicated, the high and low sale prices for the common stock as
reported by the consolidated transaction reporting system.
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Common Stock |
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High |
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Low |
Year ended December 31, 2005 |
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First Quarter |
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$ |
12.45 |
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$ |
8.68 |
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Second Quarter |
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11.41 |
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9.20 |
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Third Quarter |
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13.29 |
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10.31 |
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Fourth Quarter |
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11.80 |
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6.85 |
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Year ended December 31, 2006 |
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First Quarter |
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10.00 |
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4.53 |
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Second Quarter |
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7.24 |
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3.29 |
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Third Quarter |
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7.21 |
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3.43 |
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Fourth Quarter |
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7.10 |
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4.12 |
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As of
February 23, 2007, there were approximately 608 holders of record of our common stock and
approximately 24,600 beneficial owners.
28
DIVIDEND POLICY
We have never declared or paid dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain any future earnings to
finance our growth strategy and ongoing business. Payment of future dividends, if any, will be at
the discretion of the Board of Directors after reviewing various factors, including our financial
condition and operating results, current and anticipated cash needs and restrictions which may be
in effect in any future financing agreement.
RECENT SALES OF UNREGISTERED SECURITIES
None.
REPURCHASES OF EQUITY SECURITIES
None.
29
ITEM 6 SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
The selected financial data set forth below for each of the years in the five-year period
ended December 31, 2006, are derived from our audited consolidated financial statements. The
selected financial data set forth below should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and our 2006, 2005 and 2004
financial statements and notes thereto included elsewhere in this Form 10-K.
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Year Ended December 31, |
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2006 |
|
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2005 |
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|
2004 |
|
|
2003 |
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2002 |
|
Consolidated Statement of Operations Data: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
18,995 |
|
|
$ |
14,006 |
|
|
$ |
12,830 |
|
|
$ |
10,951 |
|
|
$ |
10,433 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of sales |
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Research and development |
|
|
64,440 |
|
|
|
63,496 |
|
|
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56,449 |
|
|
|
26,975 |
|
|
|
18,077 |
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Sales and Marketing |
|
|
41,417 |
|
|
|
15,953 |
|
|
|
3,171 |
|
|
|
725 |
|
|
|
841 |
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General and administrative |
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|
22,325 |
|
|
|
12,341 |
|
|
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8,378 |
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7,542 |
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7,031 |
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Charge for purchase of in-process
research and development |
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|
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8,363 |
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|
|
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Equity in loss of affiliate |
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|
|
|
|
|
|
|
|
|
|
|
|
2,386 |
|
|
|
8,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total expenses |
|
|
128,276 |
|
|
|
91,790 |
|
|
|
67,998 |
|
|
|
45,991 |
|
|
|
34,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(109,281 |
) |
|
|
(77,784 |
) |
|
|
(55,168 |
) |
|
|
(35,040 |
) |
|
|
(24,073 |
) |
Investment income, net |
|
|
3,811 |
|
|
|
4,683 |
|
|
|
1,479 |
|
|
|
1,379 |
|
|
|
2,408 |
|
Interest expense |
|
|
3,920 |
|
|
|
3,111 |
|
|
|
40 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss from continuing operations |
|
|
(109,390 |
) |
|
|
(76,212 |
) |
|
|
(53,729 |
) |
|
|
(33,784 |
) |
|
|
(21,665 |
) |
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|
|
|
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|
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|
|
|
|
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Gain (loss) from discontinued operations |
|
|
|
|
|
|
1,335 |
|
|
|
(931 |
) |
|
|
(1,509 |
) |
|
|
(1,804 |
) |
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|
|
|
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|
|
|
|
|
|
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|
|
Loss before cumulative effect of change
in accounting principle |
|
|
(109,390 |
) |
|
|
(74,877 |
) |
|
|
(54,660 |
) |
|
|
(35,293 |
) |
|
|
(23,469 |
) |
Cumulative effect of change in
accounting principle |
|
|
107 |
|
|
|
|
|
|
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss applicable to common shares |
|
$ |
(109,283 |
) |
|
$ |
(74,877 |
) |
|
$ |
(54,660 |
) |
|
$ |
(35,293 |
) |
|
$ |
(23,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per share,
basic and diluted |
|
$ |
(1.86 |
) |
|
$ |
(1.31 |
) |
|
$ |
(1.00 |
) |
|
$ |
(0.77 |
) |
|
$ |
(0.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to
compute basic and diluted net loss per
share |
|
|
58,630 |
|
|
|
57,959 |
|
|
|
53,942 |
|
|
|
44,072 |
|
|
|
43,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short and
long-term investments |
|
$ |
43,798 |
|
|
$ |
127,913 |
|
|
$ |
69,101 |
|
|
$ |
85,488 |
|
|
$ |
68,005 |
|
Working capital |
|
|
26,565 |
|
|
|
111,098 |
|
|
|
59,356 |
|
|
|
71,935 |
|
|
|
44,965 |
|
Total assets |
|
|
63,137 |
|
|
|
146,702 |
|
|
|
80,772 |
|
|
|
94,398 |
|
|
|
77,792 |
|
Long-term obligations |
|
|
130,000 |
|
|
|
130,000 |
|
|
|
1,730 |
|
|
|
7,610 |
|
|
|
|
|
Stockholders equity (deficit) |
|
|
(93,717 |
) |
|
|
(10,735 |
) |
|
|
61,537 |
|
|
|
74,856 |
|
|
|
62,078 |
|
30
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be
read in conjunction with our consolidated financial statements and the related notes to the
financial statements included elsewhere in this Form 10-K. This discussion contains
forward-looking statements based on current expectations that are subject to risks and
uncertainties, such as statements of our plans, objectives, expectations and intentions. Our
actual results and the timing of events could differ materially from those anticipated or implied
by the forward-looking statements discussed here as a result of various factors, including, among
others, those set forth under the Cautionary Note Regarding Forward-Looking Statements herein.
You should not place undue reliance on these forward-looking statements, which speak only as of the
date of this report. You should also consider the items discussed in Item 1A Risk Factors,
included in this Form 10-K. Except as required by law, we undertake no obligation to update any of
the forward-looking statements in this discussion after the date of this report.
Encysive Pharmaceuticals Inc. is a biopharmaceutical company that engages in the discovery,
development and commercialization of novel, synthetic, small molecule compounds to address unmet
medical needs. We focus our research and development programs predominantly on the treatment and
prevention of interrelated diseases of the vascular endothelium and exploit our expertise in the
area of the intravascular inflammatory process, referred to as the inflammatory cascade, and
vascular diseases. We are a multinational company with revenues from an approved product in the
EU, and sales and marketing operations in several EU countries. We have successfully developed one
FDA, approved drug, Argatroban, for the treatment of HIT, which is licensed to and marketed by GSK.
Our lead drug candidate, Thelin (sitaxsentan sodium) is an endothelin receptor antagonist for
the treatment of PAH. Thelin has received marketing authorization in the EU and Australia, and is
under review by the FDA in the United States and by regulatory authorities in Canada.
Critical Accounting Policies
Revenue Recognition
We recognize royalty revenue as a licensee sells products and we have received sufficient
information to record a receivable. Our royalty revenue is based on net sales of product, that is,
sales net of discounts, returns and allowances. Argatroban is licensed to GSK, which distributes
and sells the product, and from which Royalty Sub receives a quarterly royalty payment. At the
time of each payment, GSK provides us with limited quarterly data related to the products gross
sales, sales returns, discounts and allowances. While we are informed of the amount of product
returns recorded each quarter, we do not have information necessary to identify the period or
periods to which such returns correspond. We believe that substantially all discounts and
allowances pertain to current period sales. We also believe that a portion of sales recorded in
each period will ultimately be returned, and therefore estimate future returns and their impact on
royalty revenues. In the pharmaceutical industry, product returns are primarily influenced by
remaining or expired shelf life, product withdrawals or recalls, significant price changes from
competitors or the introduction of generic products or other new competition. We are not aware of
any pending product recalls or withdrawals, significant price fluctuations or generic or new
competition. Accordingly, we have estimated only the impact of product dating on returns.
Since we do not manufacture, sell or distribute Argatroban, we do not have information related
to levels of inventory in the distribution channels. However, due to the cost of the drug and
pressures on hospitals to minimize operating expenditures, we believe inventory levels are
maintained at a minimally acceptable level. Inventory level is therefore not a part of our
estimate process.
We have estimated remaining shelf life, which is an important reason for product returns,
based upon the fact that Argatroban has an expiration date of two years from manufacture. Common
industry practice is that prescription drugs can be returned to the manufacturer at any time;
however, product is normally returned when the remaining shelf life is reduced to six months or
less. Our reserve is therefore based upon an estimate of the percentage of sales made in the
preceding 18-month period that may be returned in future periods. Initially, lacking any
historical sales data for Argatroban and based upon managements experience with other
pharmaceutical products in the industry, management estimated that four percent of gross sales of
Argatroban would be returned during future periods. Based upon subsequent analysis of historical
sales data, we believe that differences between estimated and actual future returns will not have a
material effect upon our results of operations or financial condition.
|
|
|
Revenue from collaborative research and development activities is recognized as services
are performed. |
|
|
|
|
We defer the recognition of milestone payments related to contractual agreements that
are still in the development stage. Such deferred revenues are amortized into income over
the estimated remaining development period. Milestone payments received under contractual
agreements which have completed the development stage are evaluated, and either recognized
into income when earned, or amortized over a future period, depending upon whether we
continue to have obligations under the terms of the arrangement. |
|
|
|
|
License fees received under the terms of licensing agreements for our intellectual
property are deferred and amortized into income over the estimated development period of
the licensed item or items. |
31
|
|
|
Revenue from grants is recognized as earned under the terms of the related grant
agreements, typically as expenses are incurred. |
|
|
|
|
Revenue from sales of Thelin is recognized when product is shipped and title transfers
to the customer. Sales revenue is reported net of discounts, allowances, and returns, but
included VAT charged to customers. |
Amounts received in advance of services being performed under contracts are recorded as
deferred revenue, and recognized as services are performed. We periodically evaluate our estimates
of remaining development periods, and adjust the recognition of remaining deferred revenues over
the adjusted development period remaining. At December 31, 2006, remaining deferred revenue was
approximately $1.3 million, which we expect to recognize over the next 12 months. A future change
in our estimate of development periods could accelerate or decelerate the timing of future
recognition of deferred revenue.
Cost of goods sold
We began pre-license sales of Thelin in the U.K. in July 2006 utilizing the services of a
third party. After receipt of marketing approval by EMEA in August 2006, Thelin became
commercially available through third party distributors in the U.K. and in Germany during late
2006. Cost of goods sold is comprised of the direct cost of inventory consumed, along with the
fees associated with the third party.
Share-Based Payments
At December 31, 2006, we had five stock-based compensation plans for employees and
non-employee directors. Prior to January 1, 2006, the Company accounted for those plans under the
recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations (APB25). Share-based employee
compensation expense related to stock options was not recognized in the Companys consolidated
statements of earnings prior to January 1, 2006, as all stock option awards granted under the plans
had an exercise price equal to the market value of the common stock on the date of the grant.
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment (FAS 123R) using the modified prospective transition method.
Under this transition method, compensation expense recognized during year 2006, included: (i)
compensation expense for all share-based awards granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance with the original provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(FAS 123), and (ii) compensation expense for all share-based awards granted subsequent to January
1, 2006, based on the grant date fair value estimated in accordance with FAS 123R. In accordance
with the modified prospective transition method, results for prior periods have not been restated.
The adoption of FAS 123R resulted in a reduction of net earnings of $5,294,000, or $0.09 per share
basic and diluted, in year 2006, arising from unvested stock options. See Note 9 to the
Consolidated Financial Statements included herein for further detail on the impact of FAS 123R on
the Companys Consolidated Financial Statements.
Drug Manufacturing and Packaging
Costs arising from the manufacturing and packaging of drug product, which is intended for use
in clinical trials, are recognized as incurred and included in research and development expenses.
We capitalize inventory costs associated with certain products prior to regulatory approval and
product launch, based on managements judgment of probable future commercial use and net realizable
value. We could be required to expense previously capitalized costs related to pre-approval or
pre-launch inventory upon a change in such judgment, due to a denial or additional delays of
approval by regulatory bodies, additional delays in commercialization, or other potential factors.
At December 31, 2006, we determined, based upon inventory production plans, expiration dates of
product on hand and projected future sales, that we should record a reserve for inventory
obsolescence of approximately $496,000. At December 31, 2006, we had $2.3 million of capitalized
inventory costs, net of the reserve for obsolescence.
Costs Related to Issue of Long-Term Debt
Costs incurred in the issuance of the Convertible Notes, primarily comprised of initial
purchasers discounts, legal and other professional fees have been deferred, and will be amortized
and reported as a component of interest expense during the periods beginning with the issuance date
of the Convertible Notes to the date that we have the ability to call the debt.
Results of Operations
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our operating results have fluctuated significantly during
each quarter and year, and we anticipate that such fluctuations, which are largely attributable to
increasing commercialization expenditures, will continue for the next several years. We have been
32
unprofitable to date and expect to make substantial expenditures during the next several years
as we invest in launching Thelin in Europe, and maintenance of the commercial infrastructure
necessary to launch Thelin in the U.S.
We have sustained net losses of approximately $422.3 million from the date of our inception to
December 31, 2006. We have primarily financed our operations to date through a series of private
placements and public offerings of our common stock and convertible debt, debt issued by our
subsidiary that is secured by royalties on Argatroban and from funds received through our
collaborations, research agreements and partnerships. See discussion of Liquidity and Capital
Resources below.
In April 2005, the stockholders of Revotar, our former majority-owned German subsidiary,
agreed to restructure Revotars capitalization. Following the completion of the Restructuring, our
Consolidated Financial Statements no longer include the results of Revotar. We recorded a gain of
approximately $1.7 million upon its disposal of Revotar, which is included in the amount reported
under the caption Gain (loss) from discontinued operations in our financial statements for year
2005. For additional information about Revotar, see Note 14 to the Consolidated Financial
Statements included herein. Results for years 2004 and 2003 have been restated to reflect the
classification of Revotar as a discontinued operation during 2005, with no change in reported net
loss.
Year ended December 31, 2006, Compared with Year ended December 31, 2005
Revenues
Revenues in year 2006 increased $5.0 million, to $19.0 million from $14.0 million in year
2005. The increase is primarily due to higher royalties earned on higher sales of Argatroban by
GSK in year 2006. Royalties increased to $17.4 million, from $12.9 million in 2005. As a result
of the recent sale of the Argatroban Notes by our subsidiary, future royalty revenues from sales of
Argatroban will be used to pay interest and to repay the Argatroban Notes, and will not be
available to fund our operations until the Argatroban Notes are repaid in full.
We began pre-license sales of Thelin in the U.K. in July 2006 utilizing the services of a
third party. After receipt of marketing approval by EMEA in August 2006, Thelin became
commercially available through third party distributors in the U.K. and in Germany during late
2006. We reported sales of Thelin of approximately $0.3 million in 2006.
We have just started to commercialize Thelin in Europe, and as such, cannot make any sales
projections or financial forecasts. As the outcome of our regulatory filings with the FDA and
other regulatory authorities is uncertain, we are unable to project revenues for Thelin in the
U.S. and other countries. Even though we have received regulatory approval to market Thelin in
Europe, and are hopeful that we may receive regulatory approval to market Thelin in the U.S.,
significant uncertainties make it difficult to forecast or predict future sales. These
uncertainties include the market acceptance of Thelin, reimbursement policies of third-party
payers and the speed with which government or other third-party payers grant pricing and
reimbursement approvals, competitive activity, the timing of competitive product approvals, and
other factors impacting the timing and speed of our product launch, could materially affect any
revenue projections
Cost of Goods Sold
Cost of goods sold in 2006 of approximately $0.1 million was primarily comprised of the cost
to manufacture, finish and package Thelin sold in Europe.
Research and Development Expenses
Research and development expense in 2006 was comparable to 2005, and was primarily comprised
of the costs of ongoing long-term safety studies of Thelin, and with expenses related to various
regulatory submissions for Thelin. As discussed below, we have restricted research and
development activities to those necessary to maintain our existing programs, and have deferred
additional projects until the second half of 2007. If we do not receive FDA approval to sell
Thelin in the U.S., we may be required to make further reductions in our research and development
activities. If we do receive FDA approval and are successful in obtaining additional funding,
research and development activities in 2007 would remain significant as we would expect to continue
to invest in our research pipeline.
Sales and Marketing Expenses
Sales and marketing expenses increased to $41.4 million in 2006 from $16.0 million in 2005.
The increase was primarily due to costs associated with preparation for the commercial launch in
the EU and the anticipated commercial launch of Thelin in the U.S. This included the addition of
a U.S. sales force and related sales launch preparation activities. We have made Thelin
commercially available in the U.K. and Germany, are actively preparing for the commercial launch of
Thelin throughout Europe, having added a vice president of European sales and marketing and a
European headquarters staff. We have hired a sales force in the U.K. and in Germany. We expect
sales and marketing expenses in 2007 to continue to increase over 2006, as we commercially launch
Thelin in Europe. As discussed in Liquidity and Capital Resources below, our current liquidity
position will limit our commercialization activities in the U.S. to those that we deem necessary to
maintain the ability to commercially launch Thelin in the U.S. if we receive FDA approval. If we
do receive FDA approval and are successful in obtaining additional funding, sales and marketing
expenses in
33
2007 would reflect additional expenditures necessary to commercially launch Thelin in the
U.S. If we do not receive FDA approval, we may be required to make significant reductions in our
commercial infrastructure in the U.S.
General and Administrative Expense
General and administrative expense increased to $22.3 million in 2006, from $12.3 million in
2005. The increase is primarily due to costs associated with the anticipated commercial launch of
Thelin, including increases in staff, in the U.S. and Europe, travel, consulting, legal and other
professional services. We expect general and administrative expenses in 2007 to increase over 2006
as we continue to build the infrastructure to commercially operate in Europe. As discussed in
Liquidity and Capital Resources below, we will restrict general and administrative activities in
the U.S. to those that we deem essential to maintain our operations. If we do not receive FDA
approval, however, we may be required to make significant reductions in our administrative
infrastructure in the U.S.
Total Operating Expenses
Total operating expenses increased $36.5 million in 2006, compared with 2005. The increase is
primarily due to preparations for the commercial launch of Thelin in Europe and in the U.S., if we
receive regulatory approval.
Operating loss
Operating loss increased by $31.5 million in 2006 compared with 2005, primarily due to
increased operating expenses in 2006.
Investment Income
Investment income in 2006 declined $0.9 million in 2006 compared with 2005, primarily due to
reduced levels of funds available for investment.
Interest Expense
Interest expense is primarily comprised of interest on the Convertible Notes. Interest
expense increased $0.8 million in 2006 compared with 2005, as the Convertible Notes were
outstanding for the entire year of 2006 and for nine months in 2005.
Loss from Continuing Operations
Loss from continuing operations increased $33.2 million in 2006 compared with 2005, primarily
due to expenses incurred in 2006 for the anticipated commercial launch of Thelin in Europe and in
the U.S., if we receive regulatory approval.
Gain from Discontinued Operations
We recorded a gain from discontinued operations in 2005 due to the Restructuring of Revotar.
For additional information on the Restructuring, see Note 14 to the Consolidated Financial
Statements included herein. In 2005 and 2004, Revotar lost, net of minority interest, $0.4 million
and $0.9 million, respectively.
Net Loss Before Cumulative Effect of Accounting Principle
Net loss
before cumulative effect of accounting principle increased $34.5 million compared
with 2005, primarily due to expenses incurred in 2006 for the anticipated commercial launch of
Thelin in Europe and the U.S., if we receive regulatory approval.
Cumulative effect of Change in Accounting Principle
Prior to
the Companys adoption of FAS 123R, if unvested shares of restricted common stock
were forfeited, the Company reversed any compensation expense that it had previously recorded on
those shares at the time of forfeiture. Upon the adoption of FAS 123R, the Company will adjust the
amount of expense recorded each period, based upon its estimate of future forfeitures. The
cumulative effect of estimating future forfeitures of unvested restricted common shares granted
before January 1, 2006, was $107,000, which is reported as a cumulative effect of change in
accounting principle during 2006.
Net Loss
Net loss
increased $34.4 million compared with 2005, primarily due to expenses incurred in
2006 for the anticipated commercial launch of Thelin in Europe and the U.S., if we receive
regulatory approval.
Year ended December 31, 2005, Compared with Year ended December 31, 2004
Revenues
Revenues in year 2005 increased $1.2 million, to $14.0 million from $12.8 million in year
2004. The increase is primarily due to higher royalties earned on higher sales of Argatroban by
GSK in year 2005. Royalties increased to $12.9 million, from $10.6 million in 2004. License fees,
milestones and grants increased $0.4 million in year 2005, due to receipt of an additional
milestone payment from Schering-Plough in March 2005. The increased royalties and license fees,
milestones and grants were partially offset by the end
34
of research support from Schering-Plough, which terminated June 30, 2004. In 2004, we
received $1.5 million in research support from Schering-Plough.
Research and Development Expenses
Research and development expenses increased $7.0 million, to $63.5 million in 2005 from $56.4
million in 2004. The increase is primarily related to Thelin clinical trials, and expenses
associated with regulatory submissions for Thelin.
Sales and Marketing Expenses
Sales and marketing expenses increased $12.8 million in 2005 to $16.0 million, compared with
$3.1 million in 2004. During 2005, we began building the commercial infrastructure to support the
commercial launch of Thelin in the U.S. Such costs include the addition of a vice president of
sales, a U.S. sales force, and support staff.
General and Administrative Expenses
General and administrative expenses increased to $12.3 million in 2005 from $8.4 million in
2004. The increased expense in year 2005 resulted from costs associated with building the
commercial infrastructure to support the anticipated commercial launch of Thelin in 2006. Such
costs include the addition of several key management appointments, including a chief financial
officer, chief operating officer, general counsel and additional support staff.
Operating Loss
Operating loss increased $22.6 million, to $77.8 million in 2005 from $55.2 million in 2004.
The increased operating loss is primarily due to costs associated with building the commercial
infrastructure to support the anticipated commercial launch of Thelin, and higher research and
development expenses discussed above, partially offset by higher revenues in 2005.
Investment Income
Investment income increased to $4.7 million in 2005, from $1.5 million in 2004, as we invested
proceeds from the sale of $130 million in Convertible Notes in March 2005.
Interest Expense
Interest
expense of $3.1 million in 2005 is comprised of interest and amortized debt issue
costs on the Convertible Notes. For additional information on the Convertible Notes, see Note 7
to the consolidated financial statements, included herein.
Loss from Continuing Operations
Loss from continuing operations of $76.2 million in 2005 and $53.7 million in 2004 is
comprised of the operating loss, discussed above, and interest expense, partially offset by
investment income.
Gain (Loss) from Discontinued Operations
We recorded a gain from discontinued operations in 2005 due to the Restructuring of Revotar.
For additional information on the Restructuring, see Note 14 to the consolidated financial
statements. In 2005 and 2004, Revotar lost, net of minority interest, $0.4 million and $0.9
million, respectively.
Net Loss
Net loss increased to $74.9 million in 2005, from $54.7 million in 2004, due to higher
interest and operating expenses in 2005, partially offset by higher revenues and a gain on the
disposition of Revotar.
Liquidity and Capital Resources
While the Consolidated Financial Statements included herein have been prepared assuming
that we will continue as a going concern, because of our losses and need for additional financing
to execute our business strategy, our independent auditors report on our Consolidated Financial
Statements contains a statement relating to their substantial doubt about our ability to continue
as a going concern. At December 31 2006, we had cash and investments of $43.8 million, and at
March 1, 2007, after the receipt of net proceeds from the sale by Royalty Sub of the Argatroban
Notes described below, we had cash and cash equivalents of approximately $71.9 million. To date,
we have financed our research and development activities and other operations primarily through
public and private offerings of common stock, including an equity financing line with Azimuth;
proceeds from the issuance and sale of our Convertible Notes; funds received through
collaborations, research agreements, licenses and partnerships; royalty revenue from sales of
Argatroban; and the recent sale by Royalty Sub of the Argatroban Notes. Although, we have recently
received additional funds from our equity financing line with Azimuth described below and from the
sale by Royalty Sub of the Argatroban Notes, we will require additional funding to continue to
operate as a going concern, whether or not Thelin is approved in the U.S. by the FDA, as described
35
in more detail below. Subject to certain conditions, we may issue and sell up to 8,780,500
shares of our common stock to Azimuth under the equity financing line and may receive $10 million
upon the confirmation of treaty relief from U.K. withholding obligations pursuant to the terms of
the Argatroban Notes. We may also issue common stock, debt, or other securities for gross
aggregate proceeds of $95.5 million pursuant to our effective shelf registration statement.
However, we cannot assure you that such funding will be available under commercially acceptable
terms.
Outlook for 2007
Until recently, the majority of our financial resources have been dedicated to the
research and development of Argatroban, Thelin and other drug compounds. Beginning in 2005, we
have spent an increasing percentage of our financial resources on preparations for the anticipated
commercial launch of Thelin in the U.S., and more recently, in building the commercial
infrastructure necessary to successfully launch Thelin in Europe. As described below, this trend
is expected to continue as we expand our commercial organization in Europe and continue to invest
in U.S. launch preparations for Thelin. While we continue to invest in developing several new
drug compounds, we currently do not have any drug candidates that are likely to be commercialized
in the near future other than Thelin.
We have just started to commercialize Thelin in Europe, and as such, cannot make any
projections or financial forecasts of sales or operating expenses. We believe, however, that the
commercial launch of Thelin in Europe and the anticipated launch of Thelin in the U.S. and other
countries will require additional funding due to higher levels of sales and marketing expenditures,
particularly in Europe, than in recent periods. As the outcomes of our regulatory filings with the
FDA and other regulatory authorities are uncertain, we are unable to project revenues for Thelin
in the U.S. and other countries. Even though we have received regulatory approval to market
Thelin in Europe, significant uncertainties make it difficult to forecast or predict future sales.
These uncertainties include the market acceptance of Thelin, the reimbursement policies of
third-party payors, the speed with which government or other third-party payors grant pricing and
reimbursement approvals, competitive activity, the timing of competitive product approvals, and
other factors impacting the timing and speed of our product launch, all of which could materially
affect any revenue projections.
Based upon our current cash position of $71.9 million as of March 1, 2007 and expected future
cash requirements, we will require additional funding in 2007 in order to continue our ongoing
research and development programs, and to fund the commercial launch of Thelin in Europe, whether
Thelin is approved in the U.S. by the FDA or not. Because the FDA has designed Thelin as a Class
2 resubmission and assigned a new PDUFA action date of June 15, 2007, we believe that additional
funding will be significantly more difficult to obtain on commercially acceptable terms, if at all.
We are considering various alternatives to reduce our expenses in order to sustain our cash
resources. Those measures include scaling back personnel and expenses, delaying or terminating
research and development programs, curtailing capital expenditures, and reducing other operating
expenses. We may also consider relinquishing, licensing or otherwise disposing of rights to
technologies or product candidates that we could otherwise seek to develop or commercialize
ourselves on terms that are less favorable than might otherwise be available or at an earlier stage
than would otherwise be desirable, including the possibility of licensing rights to Thelin outside
North America and Europe. Even if Thelin is approved by the FDA, we believe that we will require
additional funding for increased spending required to commercially launch Thelin in the U.S.
If we receive approval by the FDA to market Thelin in the U.S., and if we are successful in
obtaining additional funding, we believe that our operating expenses will exceed those incurred in
2006. If we do not receive approval by the FDA, we may be required to restructure our operations
to significantly reduce our operating expenses. In any event, we anticipate that we will continue
to incur operating losses throughout 2007.
Years 2006 and 2005
Cash Flows from Operating Activities
At December 31, 2006, we had cash, cash equivalents and investment securities of $43.8 million
compared with $127.9 million at December 31, 2005. We used $100.5 million in cash from operating
activities in year 2006 compared to cash used by operating activities of $66.1 million in 2005.
The primary operating uses of cash in 2006 were to fund the building of a corporate infrastructure
to support the anticipated commercial launch of Thelin, pay interest on to the Convertible Notes,
fund our general operating expenses and the ongoing research and development programs, reduced by
cash received from investment income.
Cash Flows from Investing Activities
Investing activities are primarily comprised of our investments in debt securities. Cash is
generated from investment activities when marketable securities mature, the resulting cash is
utilized primarily to fund operating activities. Investing activities in 2006 consisted of
purchases of equipment of $2.1 million. To maximize liquidity in 2006, we invested our available
funds in cash equivalent securities, having original maturities of less than 90 days. In 2005, we
generated $20.8 million in investing activities, reflecting the maturities of marketable debt
securities, partially offset by purchases of equipment and leasehold improvements of $2.1 million.
36
Cash Flows from Financing Activities
Cash provided by financing activities in year 2006 was $18.4 million, compared with $127.1
million in 2005. Financing activities in 2006 consisted of net proceeds from two draw-downs under
our equity financing line with Azimuth described below totaling $17.8 million, and $0.6 million
proceeds from the exercise of employee stock options. Financing activities in year 2005 primarily
consisted of net proceeds from the sale of the Convertible Notes, and proceeds from the exercise of
employee stock options of $1.7 million. See Note 7 to our Consolidated Financial Statements
included herein for additional information on the Convertible Notes.
On October 19, 2006, we entered into an equity financing line with Azimuth pursuant to which
Azimuth is committed to purchase up to $75 million shares of our common stock or 11,866,851 shares
of our common stock, whichever occurs first, over the 18-month term of the financing line, subject
to certain conditions. To date, we have closed two draw-down requests under the financing line
pursuant to which we received aggregate net proceeds of approximately $17.8 million, after
deducting estimated offering expenses, and issued an aggregate of 3,086,351 shares of our common
stock. We can sell and issue up to 8,780,500 additional shares to Azimuth prior to the expiration
of the financing line, subject to certain conditions.
On February 6, 2007, our wholly owned subsidiary, Royalty Sub, issued the Argatroban Notes,
for which we received approximately $56 million of net proceeds, after deducting transaction costs,
of which $10 million was withheld from us pending confirmation
of treaty relief from U.K. withholding tax obligations. Once tax treaty relief is confirmed, the amount withheld will be
released to us. If tax treaty relief is not received by March 23, 2008, the amount withheld will
be used to pay interest on and principal of the Argatroban Notes. See Note 2 to the Consolidated
Financial Statements included herein for a more complete description of the terms of the Argatroban
Notes.
We also have an effective shelf registration statement, under which we could be eligible to
issue common stock, debt, or other securities for gross aggregate proceeds of up to $95.5 million.
We cannot assure you whether any of these financing arrangements will be available under
commercially acceptable terms, if at all.
Contractual Obligations
At December 31, 2006, our material contractual obligations were comprised of (i) $130 million
in 2.5% Convertible Senior Notes, (ii) obligations under our operating lease agreements (see Note
17 to the Consolidated Financial Statements included herein), and (iii) under one research
agreement, we could be obligated to pay the other party a termination fee in the event that we
elect to terminate the project prior to completion (see Note 17 to the Consolidated Financial
Statements). In addition, we are obligated to make semi-annual interest payments on the
Convertible Notes of totaling approximately $3.2 million per year.
As of December 31, 2006, the Company had contractual obligations as follows (in thousands):.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
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1-3 |
|
|
3-5 |
|
|
After 5 |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
Long-term debt |
|
$ |
130,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
130,000 |
|
Operating leases |
|
|
4,732 |
|
|
|
1,983 |
|
|
|
2,587 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
134,732 |
|
|
$ |
1,983 |
|
|
$ |
2,587 |
|
|
$ |
162 |
|
|
$ |
130,000 |
|
In addition to the above, Royalty Sub is obligated to repay $60 million in Argatroban Notes,
which were issued in February 2007. See Note 2 to the Consolidated Financial Statements included
herein for a more complete description of the terms of the Argatroban Notes.
Off-Balance Sheet Arrangements
We do not engage in off-balance sheet financing arrangements.
Impact of Inflation and Changing Prices
The pharmaceutical research industry is labor intensive and wages and related expenses
increase in inflationary periods. The lease of space and related building services for the Houston
facility contains a clause that escalates rent and related services each year based on the increase
in building operating costs and the increase in the Houston Consumer Price Index, respectively. To
date, inflation has not had a significant impact on our operations.
37
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
We are exposed to market risk primarily from changes in foreign currency exchange rates.
We have contracts with entities in other areas outside the U.S. that are denominated in a foreign
currency. To date, these currencies have not fluctuated materially.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements we are required to include in this Item 8 are set forth in Item
15 of this Form 10-K and are incorporated by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A CONTROLS AND PROCEDURES
Controls and Procedures
As of the end of the period covered by this report, our management carried out an
evaluation, with the participation of our principal executive officer (the CEO) and our principal
financial officer (the CFO), of the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based on those evaluations, the
CEO and CFO believe:
(i) that our disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure; and
(ii) that our disclosure controls and procedures are effective.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934,
as amended). Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on the assessment, our management believes that as of December
31, 2006, our internal control over financial reporting is effective based on these criteria. Our
independent registered public accounting firm, KPMG LLP, has issued an audit report on our
assessment of our internal control over financial reporting that is
included herein at page F-2.
Our management, including our CEO and CFO, does not expect that our disclosure controls and
procedures or our internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints and the benefit of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any,
within Encysive have been detected. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended December 31, 2006, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B OTHER INFORMATION
None.
38
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated herein by reference to Encysives definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2007.
ITEM 11 EXECUTIVE COMPENSATION
Incorporated herein by reference to Encysives definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2007.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to Encysives definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2007.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference to Encysives definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2007.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference to Encysives definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2007.
39
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Index to Consolidated Financial Statements
Reference is made to the Consolidated Financial Statements, the reports thereon, and the
notes thereto commencing at Page F-1 of this Annual Report on Form 10-K. Set forth below is
an index to such Financial Statements.
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Page |
Reports of Independent Registered Public Accounting Firm |
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F-1 |
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Consolidated Balance Sheets |
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F-4 |
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Consolidated Statements of Operations and Comprehensive Loss |
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F-5 |
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Consolidated Statements of Stockholders Equity (Deficit) |
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F-6 |
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Consolidated Statements of Cash Flows |
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F-8 |
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Notes to Consolidated Financial Statements |
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F-9 |
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2. Financial Statement Schedules
All other schedules have been omitted since the information is not required or is not
material to require submission of the schedule, or because the information is included in the
financial statements or the notes thereto.
3. Index to Exhibits
Information with respect to this Item is contained in the attached Index to Exhibits
which is incorporated herein by reference.
The Company will furnish a copy of any one or more of these exhibits to a shareholder
who so requests upon receipt of payment for the costs of duplication and mailing the
requested item.
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
None.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston and State of Texas on the 15th day of March, 2007.
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ENCYSIVE PHARMACEUTICALS INC. |
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By:
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|
/s/
Gordon h. Busenbark |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gordon H. Busenbark
Chief Financial Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on behalf of the registrant and in the capacities indicated on the 15th day of March,
2007.
|
|
|
Signature |
|
Title |
|
/s/ John M. Pietruski
John M. Pietruski
|
|
Chairman of the Board of Directors |
|
|
|
/s/ Bruce D. Given
Bruce D. Given, M.D.
|
|
Director, President and Chief Executive Officer
(Principal
Executive Officer) |
|
|
|
/s/ Richard A.F. Dixon
Richard A.F. Dixon, Ph.D.
|
|
Director and Senior Vice President, Research and
Chief
Scientific Officer |
|
|
|
/s/ Gordon H. Busenbark
Gordon H. Busenbark
|
|
Chief Financial Officer
(Principal
Financial and Accounting Officer) |
|
|
|
/s/ Ron J. Anderson
Ron J. Anderson, M.D.
|
|
Director |
|
|
|
/s/ J. Kevin Buchi
J. Kevin Buchi
|
|
Director |
|
|
|
/s/ Robert J. Cruikshank
Robert J. Cruikshank
|
|
Director |
|
|
|
/s/ John H. Dillon II
John H. Dillon II
|
|
Director |
|
|
|
/s/ Suzanne Oparil, M.D.
Suzanne Oparil, M.D.
|
|
Director |
|
|
|
/s/ James A. Thomson
James A. Thomson, Ph.D.
|
|
Director |
|
|
|
/s/ James T. Willerson
James T. Willerson, M.D.
|
|
Director |
41
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Encysive Pharmaceuticals Inc.:
We have audited the accompanying consolidated balance sheets of Encysive Pharmaceuticals Inc. and
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated
statements of operations and comprehensive loss, stockholders equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Encysive Pharmaceuticals Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Encysive Pharmaceuticals Inc.s internal control over
financial reporting as of December 31, 2006, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial
reporting.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial statements, the Company
has suffered recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Managements plans in regard
to these matters are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Notes 3 and 9 to the consolidated financial
statements, effective January 1, 2006, the Company adopted the
fair value method of accounting for stock-based compensation as
required by Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment.
Houston, Texas
March 15, 2007
F-1
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Encysive Pharmaceuticals Inc.:
We have
audited managements assessment, included in the accompanying
Managements Report on Internal Control over Financial Reporting
appearing under Item 9A, that Encysive Pharmaceuticals Inc.
maintained effective internal control over financial reporting as of
December 31, 2006, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSCO). Encysive
Pharmaceuticals Inc.s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of
the Companys internal control over financial reporting based on
our audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A
companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of
the companys assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
F-2
In our
opinion, managements assessment that Encysive Pharmaceuticals
Inc. maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in
our opinion, Encysive Pharmaceuticals Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria established
in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also
have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance
sheets of Encysive Pharmaceuticals Inc. and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated statements
of operations and comprehensive loss, stockholders equity
(deficit), and cash flows for each of the years in the three-year
period ended December 31, 2006, and our report dated March 15, 2007
expressed an unqualified opinion on those consolidated financial
statements.
Houston, Texas
March 15, 2007
F-3
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
43,798 |
|
|
$ |
127,913 |
|
Accounts receivable |
|
|
5,211 |
|
|
|
5,337 |
|
Other current receivables |
|
|
141 |
|
|
|
139 |
|
Inventory, net of reserve of $496 and $-0- |
|
|
2,343 |
|
|
|
2,183 |
|
Prepaids |
|
|
1,926 |
|
|
|
1,677 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
53,419 |
|
|
|
137,249 |
|
Equipment and leasehold improvements, net |
|
|
5,976 |
|
|
|
4,942 |
|
Deferred debt origination costs, net of accumulated amortization of $1,202
and $538 |
|
|
3,461 |
|
|
|
4,125 |
|
Intangible and other assets, net of
accumulated amortization of $685 and $580 |
|
|
281 |
|
|
|
386 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
63,137 |
|
|
$ |
146,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,435 |
|
|
$ |
3,218 |
|
Accrued expenses |
|
|
22,133 |
|
|
|
21,645 |
|
Deferred revenue |
|
|
1,286 |
|
|
|
1,288 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
26,854 |
|
|
|
26,151 |
|
Deferred revenue |
|
|
|
|
|
|
1,286 |
|
Long-term debt |
|
|
130,000 |
|
|
|
130,000 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $.005 per share. 5,000,000 shares
authorized; none issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, par value $.005 per share. At December 31, 2006,
150,000,000 shares authorized; 62,660,802 shares issued, 62,447,802
outstanding. At December 31, 2005, 150,000,000 shares authorized,
58,869,398 shares issued, 58,656,398 outstanding |
|
|
313 |
|
|
|
294 |
|
Additional paid-in capital |
|
|
329,817 |
|
|
|
306,402 |
|
Deferred compensation expense |
|
|
|
|
|
|
(2,834 |
) |
Treasury stock, 213,000 shares at December 31, 2006 and 2005 |
|
|
(1,602 |
) |
|
|
(1,602 |
) |
Accumulated other comprehensive income |
|
|
33 |
|
|
|
|
|
Accumulated deficit |
|
|
(422,278 |
) |
|
|
(312,995 |
) |
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(93,717 |
) |
|
|
(10,735 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) equity |
|
$ |
63,137 |
|
|
$ |
146,702 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-4
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
($ in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income |
|
$ |
17,386 |
|
|
$ |
12,900 |
|
|
$ |
10,648 |
|
License fees, milestones and grants |
|
|
1,288 |
|
|
|
1,106 |
|
|
|
661 |
|
Research agreements |
|
|
|
|
|
|
|
|
|
|
1,521 |
|
Sales |
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
18,995 |
|
|
|
14,006 |
|
|
|
12,830 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
94 |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
64,440 |
|
|
|
63,496 |
|
|
|
56,449 |
|
Sales and marketing |
|
|
41,417 |
|
|
|
15,953 |
|
|
|
3,171 |
|
General and administrative |
|
|
22,325 |
|
|
|
12,341 |
|
|
|
8,378 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
128,276 |
|
|
|
91,790 |
|
|
|
67,998 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(109,281 |
) |
|
|
(77,784 |
) |
|
|
(55,168 |
) |
Investment income |
|
|
3,811 |
|
|
|
4,683 |
|
|
|
1,479 |
|
Interest expense |
|
|
(3,920 |
) |
|
|
(3,111 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(109,390 |
) |
|
|
(76,212 |
) |
|
|
(53,729 |
) |
Gain (loss) from discontinued operations |
|
|
|
|
|
|
1,335 |
|
|
|
(931 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle |
|
|
(109,390 |
) |
|
|
(74,877 |
) |
|
|
(54,660 |
) |
Cumulative effect of change in accounting principle |
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shares |
|
$ |
(109,283 |
) |
|
$ |
(74,877 |
) |
|
$ |
(54,660 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain |
|
|
33 |
|
|
|
|
|
|
|
111 |
|
Less: reclassification adjustment for gains included in net loss |
|
|
|
|
|
|
(189 |
) |
|
|
|
|
Comprehensive loss |
|
$ |
(109,250 |
) |
|
$ |
(75,066 |
) |
|
$ |
(54,549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations, basic and diluted |
|
$ |
(1.86 |
) |
|
$ |
(1.31 |
) |
|
$ |
(1.00 |
) |
Discontinued operations, basic and diluted |
|
|
|
|
|
|
0.02 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(1.86 |
) |
|
$ |
(1.29 |
) |
|
$ |
(1.01 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to compute net loss per share basic
and diluted |
|
|
58,630 |
|
|
|
57,959 |
|
|
|
53,942 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
For the years ended December 31, 2006, 2005 and 2004
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common stock |
|
|
Paid-in |
|
|
Compensation |
|
|
Treasury |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Expense |
|
|
Stock |
|
|
Income |
|
|
Deficit |
|
|
Deficit |
|
Balance at January 1, 2004 |
|
|
52,457,167 |
|
|
$ |
262 |
|
|
$ |
259,761 |
|
|
$ |
(185 |
) |
|
$ |
(1,602 |
) |
|
$ |
78 |
|
|
$ |
(183,458 |
) |
|
$ |
74,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
for stock option
exercises |
|
|
994,122 |
|
|
|
5 |
|
|
|
4,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,756 |
|
Issuance of common stock
in payment of expenses |
|
|
64,965 |
|
|
|
1 |
|
|
|
630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
631 |
|
Compensation expense
related to stock options |
|
|
|
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67 |
|
Amortization of deferred
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219 |
|
Deferred compensation
expense related to
issuance of stock |
|
|
15,000 |
|
|
|
|
|
|
|
163 |
|
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
in public offering |
|
|
4,600,000 |
|
|
|
23 |
|
|
|
35,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,557 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,660 |
) |
|
|
(54,660 |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111 |
|
|
|
|
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004 |
|
|
58,131,254 |
|
|
$ |
291 |
|
|
$ |
300,906 |
|
|
$ |
(129 |
) |
|
$ |
(1,602 |
) |
|
$ |
189 |
|
|
$ |
(238,118 |
) |
|
$ |
61,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
for stock option
exercises |
|
|
407,948 |
|
|
|
2 |
|
|
|
1,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,739 |
|
Issuance of common stock
in payment of expenses |
|
|
61,030 |
|
|
|
|
|
|
|
687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
687 |
|
Compensation expense
related to stock options |
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
Amortization of deferred
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322 |
|
Deferred compensation
expense related to stock
options |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
expense related to
issuance of stock |
|
|
269,166 |
|
|
|
1 |
|
|
|
3,000 |
|
|
|
(3,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,877 |
) |
|
|
(74,877 |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189 |
) |
|
|
|
|
|
|
(189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005 |
|
|
58,869,398 |
|
|
$ |
294 |
|
|
$ |
306,402 |
|
|
$ |
(2,834 |
) |
|
$ |
(1,602 |
) |
|
$ |
|
|
|
$ |
(312,995 |
) |
|
$ |
(10,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
For the years ended December 31, 2006, 2005 and 2004
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common stock |
|
|
Paid-in |
|
|
Compensation |
|
|
Treasury |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Expense |
|
|
Stock |
|
|
Income |
|
|
Deficit |
|
|
Deficit |
|
Balance at
January 1, 2006 |
|
|
58,869,398 |
|
|
$ |
294 |
|
|
$ |
306,402 |
|
|
$ |
(2,834 |
) |
|
$ |
(1,602 |
) |
|
$ |
|
|
|
$ |
(312,995 |
) |
|
$ |
(10,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of
deferred compensation |
|
|
|
|
|
|
|
|
|
|
(2,834 |
) |
|
|
2,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
for stock option
exercises |
|
|
149,946 |
|
|
|
1 |
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
597 |
|
Deferred compensation
expense related to
issuance of stock |
|
|
584,334 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
in payment of expenses |
|
|
27,490 |
|
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
|
Cancellation of
restricted shares |
|
|
(56,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
related to stock options |
|
|
|
|
|
|
|
|
|
|
5,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,295 |
|
Amortization of deferred
compensation expense |
|
|
|
|
|
|
|
|
|
|
2,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,435 |
|
Issuance of common stock
in a private offering |
|
|
3,086,351 |
|
|
|
15 |
|
|
|
17,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.797 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109,283 |
) |
|
|
(109,283 |
) |
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006 |
|
|
62,660,802 |
|
|
$ |
313 |
|
|
$ |
329,817 |
|
|
|
|
|
|
$ |
(1,602 |
) |
|
$ |
33 |
|
|
$ |
(422,278 |
) |
|
$ |
(93,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-7
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(109,283 |
) |
|
$ |
(74,877 |
) |
|
$ |
(54,660 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,121 |
|
|
|
1,218 |
|
|
|
730 |
|
Gain on disposition of discontinued operations |
|
|
|
|
|
|
(1,743 |
) |
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
408 |
|
|
|
931 |
|
Expenses paid with stock |
|
|
144 |
|
|
|
687 |
|
|
|
631 |
|
Stock-based compensation expense |
|
|
7,730 |
|
|
|
368 |
|
|
|
286 |
|
Loss on disposition of fixed assets and other assets |
|
|
37 |
|
|
|
118 |
|
|
|
3 |
|
Amortization of discount/premium on investments |
|
|
|
|
|
|
(14 |
) |
|
|
84 |
|
Amortization of debt issue costs |
|
|
664 |
|
|
|
538 |
|
|
|
|
|
Decrease in interest receivable included in
short-term and long-term investments |
|
|
|
|
|
|
73 |
|
|
|
146 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
127 |
|
|
|
(521 |
) |
|
|
(2,982 |
) |
Other current receivables |
|
|
|
|
|
|
45 |
|
|
|
457 |
|
Prepaids |
|
|
(243 |
) |
|
|
(841 |
) |
|
|
(129 |
) |
Inventory |
|
|
(160 |
) |
|
|
(2,183 |
) |
|
|
|
|
Accounts payable and accrued expenses |
|
|
695 |
|
|
|
10,352 |
|
|
|
7,072 |
|
Deferred revenue from unrelated party |
|
|
(1,288 |
) |
|
|
894 |
|
|
|
(561 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations |
|
|
(100,456 |
) |
|
|
(65,478 |
) |
|
|
(47,992 |
) |
Net cash used in discontinued operations |
|
|
|
|
|
|
(603 |
) |
|
|
(1,545 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(100,456 |
) |
|
|
(66,081 |
) |
|
|
(49,537 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of equipment and leasehold improvements |
|
|
(2,081 |
) |
|
|
(2,073 |
) |
|
|
(997 |
) |
Purchase of investments |
|
|
|
|
|
|
(83,187 |
) |
|
|
(49,848 |
) |
Maturity of investments |
|
|
|
|
|
|
106,100 |
|
|
|
46,833 |
|
Loan to discontinued operation |
|
|
|
|
|
|
|
|
|
|
(1,119 |
) |
Investing activities of discontinued operation |
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(2,081 |
) |
|
|
20,840 |
|
|
|
(5,181 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing (repayment) of long-term debt |
|
|
|
|
|
|
130,000 |
|
|
|
(6,000 |
) |
Proceeds from sale of common stock in public offering |
|
|
|
|
|
|
|
|
|
|
35,557 |
|
Proceeds from sale of common stock in private offerings |
|
|
17,797 |
|
|
|
|
|
|
|
|
|
Debt issue costs |
|
|
|
|
|
|
(4,663 |
) |
|
|
|
|
Proceeds from option exercises |
|
|
597 |
|
|
|
1,739 |
|
|
|
4,756 |
|
Financing activities of discontinued operation |
|
|
|
|
|
|
|
|
|
|
1,119 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
18,394 |
|
|
|
127,076 |
|
|
|
35,432 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
28 |
|
|
|
(52 |
) |
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(84,115 |
) |
|
|
81,783 |
|
|
|
(19,172 |
) |
Cash and cash equivalents at beginning of year |
|
|
127,913 |
|
|
|
46,130 |
|
|
|
65,302 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
43,798 |
|
|
$ |
127,913 |
|
|
$ |
46,130 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
|
3,256 |
|
|
|
1,626 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-8
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Liquidity and Managements Plans
The accompanying consolidated financial statements have been prepared assuming that Encysive
Pharmaceuticals Inc. (the Company or Encysive), a Delaware corporation, will continue to
operate as a going concern. The Company has sustained losses since its formation, and at December
31, 2006 had a stockholders deficit of $93,717,000. In order to continue as a going concern, the
Company will need to receive additional funding, whether Thelin is approved by the U.S. Food and
Drug Administration (FDA) or not. Management has entered into two financing arrangements,
discussed below, to providing additional liquidity, however the Company will require additional
funding, reduce its operating expenses, or both in order to continue to operate. There can be no
assurance that such additional funding will be available on commercially acceptable terms.
On October 19, 2006, the Company entered into a Common Stock Purchase Agreement, (the Azimuth
Agreement) with Azimuth Opportunity Ltd. (Azimuth), which provides that, upon the terms and
subject to the conditions set forth therein, Azimuth is committed to purchase up to $75,000,000 of
common stock, or 11,866,851 shares of the Companys common stock as of October 19, 2006, whichever
occurs first, over the 18-month term of the Azimuth Agreement. To date, the Company has closed two
draw down requests under the Azimuth Agreement and has received aggregate gross proceeds of
approximately $18 million and net proceeds of approximately $17.8 million after deducting estimated
offering expenses. The Company has issued an aggregate of 3,086,351 shares of the Companys common
stock to Azimuth from the two draw down requests, and could issue up
to an additional 8,780,500
shares under the terms of the Azimuth Agreement.
On February 6, 2007, the Companys wholly owned subsidiary, Argatroban Royalty Sub LLC,
closed a private placement of $60 million in aggregate principal amount of promissory notes, to
institutional investors. Net proceeds from the financing were approximately $56.6 million after
transaction costs, of which $10 million was withheld from pending confirmation of treaty relief
from U.K. withholding tax obligations. Once tax treaty relief is confirmed, the amount withheld
will be released to the Company. If tax treaty relief is not received by March 23, 2008, the
withheld amount will be used to pay interest on and principal of the promissory notes. For
additional information, refer to Note 2, below.
The Company has an effective shelf registration statement on Form S-3, under which it could
issue additional common stock, debt, or other securities for gross aggregate proceeds of up to
$95.5 million.
These matters raise substantial doubt about the Companys ability to continue as a going
concern. These consolidated financial statements do not include the adjustments that would be
necessary should the Company be unable to continue as a going concern.
(2) Subsequent Event
On February 6, 2007, the Company, pursuant to the terms of a purchase and sale agreement,
sold, assigned and contributed to Argatroban Royalty Sub LLC, a Delaware limited liability company
and newly formed, wholly owned subsidiary of the Company (Royalty Sub), the rights of the Company
to collect the Royalty Payments (defined below) payable to the Company under the Principal
Documents (defined below), in exchange for approximately $56.6 million in cash, of which $10.0
million was deposited into a Holdback Account pending receipt of the U.K. Tax Confirmation
(defined below), and a capital contribution by the Company to Royalty Sub in an amount equal to the
excess of the agreed fair market value of the Royalty Payments over the amount of the cash portion
of the purchase price. Also on February 6, 2007, Royalty Sub issued an aggregate principal amount
of $60.0 million of its Argatroban PhaRMASM Secured 12% Notes due 2014 (the
Argatroban Notes) to certain institutional investors in a private placement pursuant to Section
4(2) of the Securities Act of 1933, as amended (the Securities Act).
The Royalty Payments arise under the (i) Product Development, License and Copromotion
Agreement dated as of August 5, 1997, as amended (the GSK License Agreement), between
GlaxoSmithKline plc, a public limited company organized in England (GSK), and the Company, (ii)
Mitsubishi-TBC-SB Agreement dated as of August 5, 1997 (the Three-Party Agreement), among the
Company, Mitsubishi Pharma Corporation, a Japanese corporation, and GSK and (iii) other related
agreements (collectively with the GSK License Agreement and the Three-Party Agreement, the
Principal Documents), and include the right to receive royalties and certain other payments (the
Royalty Payments) from sales in the United States (including Puerto Rico and its other
territories and possessions) and Canada (collectively, the Territory) of Argatroban. Argatroban
is marketed and sold in the Territory by GSK. The purchase and sale agreement includes typical
provisions regarding representations and warranties, affirmative and negative covenants consistent
with the Companys obligations under the Principal Documents, indemnification and other matters
typically addressed in similar agreements.
The Argatroban Notes are subject to an Indenture, dated as of February 6, 2007 (the
Indenture), between Royalty Sub and U.S. Bank National Association, as Trustee (the Trustee).
The Indenture provides for $60 million in aggregate principal amount of the Argatroban Notes.
Except as described below, the Royalty Payments are the sole source of payment for the Argatroban
Notes, and the Company is not an obligor or guarantor of the Argatroban Notes. Principal on the
Argatroban Notes must be paid in full by the final legal maturity date of September 30, 2014,
unless redeemed earlier. The interest rate applicable to the Argatroban Notes is 12% per annum
(calculated on the basis of a 360-day year consisting of twelve 30-day months) and is payable
quarterly in arrears on March 30, June 30, September 30 and December 30 each year, beginning on
March 30, 2007 (each, a Payment Date). The calculation date for
F-9
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
each such Payment Date will be the fifth business day immediately preceding such Payment Date
(the Calculation Date). Non-payment of principal will not be an event of default prior to
September 30, 2014.
Funds in the Holdback Account will be used to pay interest on and principal of the Argatroban
Notes (without any premium or penalty) if (x) by March 23, 2008, Royalty Sub has not obtained a
confirmation from Her Majestys Revenue & Customs of the United Kingdom (HMRC) that, under the
income tax treaty presently in force between the United Kingdom and the United States, either (i)
no United Kingdom income tax is required to be withheld at source on the royalties in respect of
sales of Argatroban in the Territory or (ii) if United Kingdom income tax is required to be
withheld at source on such royalties, the Company or Royalty Sub is entitled to repayment from HMRC
of such tax (the U.K. Tax Confirmation), or (y) prior to March 23, 2008, the Company furnishes an
officers certificate to the Trustee evidencing that the HMRC has declined to furnish the U.K. Tax
Confirmation. If United Kingdom income tax is withheld on the royalties paid, neither the Company
nor Royalty Sub expects to recognize any reduction in U.S. income tax as a result of such United
Kingdom income tax. If the HMRC declines to furnish the U.K. Tax Confirmation, Royalty Sub expects
that GSK will withhold United Kingdom income tax on all Royalty Payments to Royalty Sub, including
recovery or offset for taxes that should have been withheld from prior payments to Royalty Sub.
The Royalty Payments, together with any funds made available from an account into which
capital contributions will be made by the Company, if any, to Royalty Sub (the Capital Account)
or the Holdback Account in limited circumstances, will be the sole source of payment of principal
of, and interest on, the Argatroban Notes.
The Argatroban Notes will be subject to redemption at the option of Royalty Sub on any Payment
Date specified by Royalty Sub as provided below, upon payment of the redemption price of the
Argatroban Notes to be redeemed (the Redemption Price), together with accrued and unpaid interest
through the redemption date. The Redemption Price will be calculated as follows. If the
applicable redemption of the Argatroban Notes occurs on or prior to December 30, 2007, the
Redemption Price will be equal to the greater of (x) the outstanding principal balance of the
Argatroban Notes being redeemed and (y) the present value, discounted at the rate on U.S. Treasury
obligations with a comparable maturity to the remaining weighted average life of the Argatroban
Notes plus 1.0%, of the principal payment amounts and interest at the rate applicable to the
Argatroban Notes on the outstanding principal balance of the Argatroban Notes. If the applicable
redemption of the Argatroban Notes occurs after December 30, 2007, the Redemption Price will be
equal to the percentage of the outstanding principal balance of the Argatroban Notes being redeemed
specified below for the period in which the redemption occurs:
|
|
|
|
|
Payment Dates (between indicated dates) |
|
Redemption Percentage |
From March 30, 2008 to and including December 30, 2008 |
|
|
106 |
% |
From March 30, 2009 to and including December 30, 2009 |
|
|
103 |
% |
From March 30, 2010 and thereafter |
|
|
100 |
% |
See Item 2.03 of the Companys Current Report on Form 8-K, the contents of which are
incorporated herein by reference, filed with the Securities and Exchange Commission on February 8,
2007 for a more complete description of the terms of the Indenture and the Argatroban Notes.
(3) Organization and Significant Accounting Policies
(a) Organization
The Company is a biopharmaceutical company focused on the discovery, development and
commercialization of novel synthetic small molecule compounds for the treatment of a variety of
cardiovascular, vascular and related inflammatory diseases. Since its formation in 1989, the
Company has been engaged principally in research and drug discovery programs and clinical
development of certain drug compounds. During the third quarter of 2000, Encysive formed
Revotar Biopharmaceuticals AG (Revotar), a German corporation, to conduct research and
development for novel small molecule compounds and to develop and commercialize Encysives
selectin antagonists. In May 2005, the Company and the other shareholders of Revotar
consummated a restructuring (the Restructuring) whereby the Companys ownership of Revotar was
initially reduced to approximately 14%. Subsequently, Revotars other stockholders purchased
the Companys remaining Revotar shares for nominal consideration. Financial statements included
in this annual report on Form 10-K for prior-year periods have been reclassified to reflect the
Restructuring, and report the results of Revotar under the caption Gain (loss) on discontinued
operations. For additional information about the Restructuring, see Note 14. In 2004, the
Company established Encysive (UK) Limited, a private company located in the United Kingdom (UK).
In 2006, the Company established Encysive Germany GmbH, a private company located in Germany,
Encysive Canada Inc., a private company formed in Canada, and Royalty Sub.
The Company is presently working on a number of long-term development projects that involve
experimental and unproven technology, which may require many years and substantial expenditures
to complete, and which may or may not be successful. Sales of the Companys first product,
Argatroban, for which royalty income now goes to Royalty Sub, began during November 2000. Sales
of Thelin (sitaxsentan sodium) in the U.K. and Germany began in the fourth quarter of 2006.
F-10
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Basis of Consolidation
The Companys consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, ImmunoPharmaceutics, Inc. (IPI), Encysive, L.P. (ELP), EP-ET,
LLC, Encysive (UK) Limited, Encysive Germany GmbH, Encysive Canada, Inc. and Royalty Sub. All
material intercompany balances and transactions have been eliminated.
(c) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities to prepare these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual results could
differ from these estimates.
(d) Cash, Cash Equivalents and Short-Term Investments
Cash equivalents are considered to be those securities or instruments with original
maturities, when purchased, of three months or less and are recorded at cost. Short-term
investments consist of debt securities with original maturities of less than one year and
greater than three months at the purchase date. The Company classifies all short-term
investments as held-to-maturity. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until maturity. Short-term investments
are stated at amortized cost plus accrued interest. Interest income is accrued as earned.
Investments made at a discount or premium from their stated par values are accreted or amortized
to their stated par values over the time remaining until maturity. The Company evaluates the
carrying value of its securities by comparing the carrying values of the securities to their
market values. In the event that the fair value of a security were to decline below its
carrying cost, and in the opinion of management such decline were other than temporary, the
Company would record a loss and reduce the carrying value of such instrument to its fair value.
Composition of cash and investments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Demand and money market accounts |
|
$ |
807 |
|
|
$ |
95 |
|
Corporate commercial paper |
|
|
42,991 |
|
|
|
127,818 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
43,798 |
|
|
$ |
127,913 |
|
|
|
|
|
|
|
|
(e) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated depreciation and
amortization. Depreciation of furniture and equipment is provided on the straight-line method
over the estimated useful lives of the respective assets (three to ten years). Amortization of
leasehold improvements is provided on the straight-line method over the remaining minimum lease
term.
(f) Inventory
The Company capitalizes inventory costs associated with certain products prior to
regulatory approval and product launch, based on managements judgment of probable future
commercial use and net realizable value. The Company could be required to expense previously
capitalized costs related to pre-approval or pre-launch inventory upon a change in such
judgment, due to a denial or delay of approval by regulatory bodies, a delay in
commercialization, or other potential factors. Inventory balances are
relieved by the First-in First-out method. At December 31, 2006, the Company had $2.3
million of capitalized inventory costs, net of a reserve for obsolescence of $0.5 million.
(g) Research and Development Costs
All research and development costs are expensed as incurred and include salaries of
research and development employees, certain rent and related building services, research
supplies and services, clinical trial expenses and other associated costs. Salaries and
benefits in the years ended December 31, 2006, 2005 and 2004, of approximately $20,977,000,
$12,723,000, and $9,457,000, respectively, were charged to research and development expenses.
Payments related to the acquisition of in-process research and development are expensed as
incurred.
F-11
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) Net Loss Per Common Share
Basic net loss per common share is calculated by dividing the net loss applicable to common shares by the weighted average number of common and common equivalent shares outstanding during
the period. For the years 2006, 2005 and 2004, there were no potential common equivalent shares
used in the calculation of weighted average common shares outstanding as the effect would be
antidilutive due to net losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Weighted average shares used to compute basic
and diluted net loss per common share |
|
|
58,629,871 |
|
|
|
57,959,275 |
|
|
|
53,941,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Securities convertible into common Stock,
not used because the effect would be
antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
5,614,455 |
|
|
|
5,340,142 |
|
|
|
4,585,799 |
|
Unvested restricted stock and phantom units |
|
|
948,357 |
|
|
|
441,923 |
|
|
|
341,571 |
|
Reserved for conversion of Convertible Notes |
|
|
9,322,001 |
|
|
|
9,322,001 |
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
15,884,813 |
|
|
|
15,104,066 |
|
|
|
4,927,370 |
|
|
|
|
|
|
|
|
|
|
|
(i) Revenue Recognition
Revenue from service contracts is recognized as services are performed. Royalty revenue is
recognized as products are sold by a licensee and the Company has received sufficient
information to record a receivable. The Company defers the recognition of milestone payments
related to contractual agreements that are still in the development stage. Such deferred
revenues are amortized into income over the estimated remaining development period. Milestone
payments received under contractual agreements which have completed the development stage are
evaluated, and either recognized into income when earned, or amortized over a future period,
depending upon whether the Company continues to have obligations under the terms of the
arrangement. License fees received under the terms of licensing agreements for the Companys
intellectual property are similarly deferred and amortized into income over the estimated
development period of the licensed item or items. The Company periodically evaluates its
estimates of remaining development periods and adjusts the recognition of remaining deferred
revenues over the adjusted development period remaining. Revenue from grants is recognized as
earned under the terms of the related grant agreements, typically as expenses are incurred.
Amounts received in advance of services being performed under contracts are recorded as deferred
revenue and recognized as services are performed. Revenue from sales of Thelin is recognized
when product is shipped and title transfers to the customer. Sales revenue is reported net of
discounts, allowances, and returns.
(j) Debt Issue Costs
The Company incurred costs, principally comprised of initial purchasers discounts and
various legal and professional fees, of approximately $4,663,000 related to the issue of its
2.50% Convertible Senior Notes due 2012 (the Convertible Notes) in March 2005. Debt issue
costs are deferred, and recognized from the issuance of the Convertible Notes through the date
that the Company has the ability to call the Convertible Notes, March 20, 2010. Interest
expense in the years ended December 31, 2006 and 2005, includes approximately $664,000 and
$538,000, respectively in amortized debt issue costs. Remaining unamortized debt issue costs
were approximately $3,461,000 at December 31, 2006. For additional information about the
Convertible Notes, see Note 7.
(k) Patent Application Costs
Costs incurred in filing for, defending and maintaining patents are expensed as incurred.
(l) Intangible and Other Assets
Intangible and other assets primarily consists of an amount paid for a product approved by
the United States Food and Drug Administration (FDA), which is being amortized on a
straight-line basis over its estimated useful life. The Company periodically reviews the useful
lives of its intangible and long-lived assets, which may result in future adjustments to the
amortization periods. Related amortization expense was approximately $106,000 in each of the
years ended December 31, 2006,
F-12
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2005 and 2004, and management expects it to be approximately $106,000 per year through
2009. Amortization of intangible assets is included in research and development expenses in the
consolidated statements of operations and comprehensive loss.
(m) Treasury Stock
Treasury stock is recorded at cost. On May 3, 2001, the Company announced a stock
repurchase program to buy up to 3 million shares, or approximately 7 percent of the Companys
outstanding Common Stock over an 18-month period. Pursuant to the stock repurchase program, the
Company repurchased 213,000 shares for net payments of approximately $1,602,000 during the year
ended December 31, 2001. No shares were repurchased during the years ended December 31, 2006,
2005 and 2004.
(n) Stock-based Compensation
At December 31, 2006, the Company had five stock-based compensation plans for employees and
non-employee directors. Prior to January 1, 2006, the Company accounted for those plans under
the recognition and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations (APB25). Share-based
employee compensation expense related to stock options was not recognized in the Companys
consolidated statements of earnings prior to January 1, 2006, as all stock option awards granted
under the plans had an exercise price equal to the market value of the common stock on the date
of the grant. Effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123R, Share-Based Payment (FAS 123R), using the modified
prospective transition method. Under this transition method, compensation expense recognized
during the year ended December 30, 2006 included: (i) compensation expense for all share-based
awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, (FAS 123), and (ii) compensation
expense for all share-based awards granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with FAS 123R. In accordance with the modified
prospective transition method, results for prior periods have not been restated. The adoption
of FAS 123R resulted in a reduction of net earnings of $5,294,000, or $ $0.09 per share basic
and diluted, for the year ended December 31, 2006. See Note 9 for further detail on the impact
of FAS 123R on the Companys condensed consolidated financial statements.
Prior to the Companys adoption of FAS 123R, if unvested shares of common stock were
forfeited, the Company reversed any compensation expense that it had previously recorded on
those shares at the time of forfeiture. Upon the adoption of FAS 123R, the Company will adjust
the amount of expense recorded each period, based upon its estimate of future forfeitures. The
cumulative effect of estimating future forfeitures of unvested common shares granted before
January 1, 2006, was $107,000, which is reported as a cumulative effect of change in accounting
principle during the year ended December 31, 2006.
The following table illustrates the effect on net loss and loss per share in 2005 and 2004
if the Company had applied the fair value recognition provisions of FASB Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, (FAS 123) to
stock-based employee compensation ($ in thousands, except for per share data).
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Net loss, as reported |
|
$ |
(74,877 |
) |
|
$ |
(54,660 |
) |
Add: Stock-based employee compensation
expense included in reported net loss |
|
|
46 |
|
|
|
67 |
|
Deduct: Total stock-based employee
compensation expense determined under fair
value method for all Awards |
|
|
(4,891 |
) |
|
|
(3,374 |
) |
Pro forma net loss |
|
|
(79,722 |
) |
|
|
(57,967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported, basic and diluted |
|
$ |
(1.29 |
) |
|
$ |
(1.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, basic and diluted |
|
$ |
(1.38 |
) |
|
$ |
(1.07 |
) |
|
|
|
|
|
|
|
(o) Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit
carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-13
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(p) Impairment of Long-lived Assets
As circumstances dictate, the Company evaluates the recoverability of its long-lived
tangible and intangible assets by comparing the projected undiscounted net cash flows associated
with such assets against their respective carrying values. Impairment, if any, is based on the
excess of the carrying value over the fair value.
(q) Leases
Certain
of the Companys lease agreements contain periods of rent
abatement. The Company amortizes the effect of any such rent
abatements over the term of the lease, using the straight-line method.
(r) New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a companys financial statements. FIN
48 requires companies to determine whether it is more likely than not that a tax position will
be sustained upon examination by the appropriate taxing authorities before any part of the
benefit can be recorded in the financial statements. It also provides guidance on the
recognition, measurement and classification of income tax uncertainties, along with any related
interest and penalties. Previously recorded income tax benefits that no longer meet this
standard are required to be charged to earnings in the period that such determination is made.
FIN 48 will also require significant additional disclosures. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company intends to adopt the new standard during
the first quarter of 2007 as required. The effect of adoption of FIN 48 is not currently
expected to be material.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 provides guidance on how prior year misstatements should be
considered when quantifying misstatements in current year financial statements for purposes of
assessing materiality. SAB 108 requires that registrants quantify errors using both a balance
sheet and income statement approach and evaluate whether either approach results in quantifying
a misstatement that, when relevant quantitative and qualitative factors are considered, are
material. SAB 108 is effective for fiscal years ending after November 15, 2006. SAB 108
permits companies to initially apply its provisions by either restating prior financial
statements or recording a cumulative effect adjustment to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment to retained earnings for errors
that were previously deemed immaterial but are material under the guidance of SAB 108. The
adoption of this bulletin did not have a material effect upon the Companys consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial Standards No. 157, Fair Value
Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring
fair value, and requires enhanced disclosures about fair value measurements. FAS 157 does not
require any new fair value measurements. FAS 157 is effective for fiscal years beginning after
November 15, 2007. The guidance in FAS 157 will be applied prospectively with the exception of
(i) block discounts of financial instruments; and (ii) certain financial and hybrid instruments
measured at initial recognition under FAS 133, which are to be applied retrospectively as of the
beginning of initial adoption (a limited form of retrospective adoption). The Company intends
to adopt the new standard during the first quarter of 2008. The Company is currently evaluating
the impact of FAS 157 and does not expect that the adoption of FAS 157 will have a material
impact on the Companys consolidated financial statements.
(4) Receivables
Accounts receivable at December 31, 2006 and 2005 primarily consisted of royalties receivable
from GSK on sales of Argatroban. Royalty receivables are recorded at the invoiced amount and do
not bear interest.
(5) Inventory
Based on managements judgment of probable future commercial use and net realizable value,
costs related to the production of work-in-process inventory of Thelin have been capitalized as
inventory. The Company could be required to expense these costs upon a change in such judgment,
due to a denial or delay of approval by regulatory bodies, a delay in commercialization, or other
potential factors.
F-14
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Accrued Expenses
At December 31, accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Accrued compensation and benefits |
|
$ |
4,498 |
|
|
$ |
2,794 |
|
Accrued research and development costs |
|
|
11,498 |
|
|
|
14,629 |
|
Accrued interest on long-term debt |
|
|
953 |
|
|
|
953 |
|
Accrued sales and marketing costs |
|
|
1,676 |
|
|
|
1,165 |
|
Reserve for future Argatroban returns |
|
|
1,149 |
|
|
|
900 |
|
Other accrued expenses |
|
|
2,359 |
|
|
|
1,204 |
|
|
|
|
|
|
|
|
|
|
$ |
22,133 |
|
|
$ |
21,645 |
|
|
|
|
|
|
|
|
(7) Long-Term Debt
In March 2005, the Company issued $130,000,000 in Convertible Notes. The Company will pay
2.50% interest per annum on the Convertible Notes on March 15 and September 15 of each year,
beginning September 15, 2005.
Holders of the Convertible Notes may convert the Convertible Notes into shares of common stock
at any time prior to the maturity date of the Convertible Notes at a conversion rate of 71.7077
shares of common stock per $1,000 principal amount of Convertible Notes, which is equal to an
initial conversion price of approximately $13.95 per share, subject to adjustment as set forth in
the indenture governing the Convertible Notes. In the event of certain types of fundamental
changes, the Company will increase the number of shares issuable upon conversion or, in lieu
thereof, the Company may in certain circumstances elect to adjust the conversion rate and related
conversion obligation so that the Convertible Notes are convertible into shares of the acquiring or
surviving company, or at the option of the Company, the Company may elect to pay the additional
value represented by an increase in the conversion rate in cash to holders electing to convert
their Convertible Notes. On or after March 20, 2010, the Company may redeem some or all of the
Convertible Notes for cash at 100% of the principal amount plus accrued interest, if the trading
price of the Companys common stock exceeds 140% of the conversion price of the Convertible Notes
then in effect for at least 20 trading days within a period of 30 consecutive trading days ending
on the trading day prior to the date on which the redemption notice is mailed. Upon the occurrence
of a fundamental change meeting certain conditions, holders of the Convertible Notes may require
the Company to repurchase for cash all or part of their Convertible Notes.
The Convertible Notes are senior unsecured obligations and rank equally in right of payment
with any senior unsecured indebtedness that the Company may incur in the future. The Convertible
Notes will be effectively subordinated to all future secured indebtedness and all existing and
future liabilities of the Companys subsidiaries, including trade payables and senior in right of
payment to any future subordinated indebtedness that the Company may incur.
(8) Capital Stock
On October 19, 2006, the Company entered into the Azimuth Agreement with Azimuth, which
provides that, upon the terms and subject to the conditions set forth therein, Azimuth is committed
to purchase up to $75,000,000 of the Companys common stock, or
11,866,851 shares of the Companys
common stock, whichever occurs first, over the 18-month term of the Azimuth Agreement. As of
December 19, 2006, the Company had closed two draw-down requests under the Azimuth Agreement and
had received aggregate gross proceeds of approximately $18,000,000, and net proceeds of
approximately $17,750,000 after deducting estimated offering expenses. The Company has issued an
aggregate of 3,086,351 shares of the Companys common stock to Azimuth pursuant to the two
draw-down requests.
In March 2005, the Company issued the Convertible Notes in the principal amount of
$130,000,000. As the Convertible Notes are convertible into the Companys common stock, the
Company has reserved 9,322,001 shares for issuance upon conversion, including 213,000 treasury
shares. For additional information about the Convertible Notes, see Note 7.
In September 2004, the Company sold 4,600,000 shares of common stock for $7.94 per share in an
underwritten public offering. The net proceeds to the Company from this offering were
approximately $35.6 million after deducting selling commissions and expenses of approximately $1.0
million related to the offering.
The Company has reserved common stock for issuance as of December 31, 2006, as follows:
|
|
|
|
|
Stock option plans |
|
|
7,714,051 |
|
2.50% Convertible Senior Notes due 2012 |
|
|
9,322,001 |
|
|
|
|
|
|
Total shares reserved |
|
|
17,036,052 |
|
F-15
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) Shareholders Rights Plan
In January 2002, the Company adopted a shareholder rights plan under which the Board of
Directors declared a dividend of one preferred stock purchase right (Right) for each
outstanding share of the Companys common stock held of record as of the close of business on
January 22, 2002. Each Right initially entitles a shareholder to purchase a one one-thousandth
fraction of a share of Preferred Stock Junior Participating Series A (the Preferred Stock)
for $55.00. Each such fraction of a share of Preferred Stock has terms designed to make it
essentially equivalent to one share of Common Stock. The Rights will become exercisable only in
the event a person or group acquires 15% or more of the Companys Common Stock or commences a
tender or exchange offer which, if consummated, would result in that person or group owning 15%
of the Common Stock. Prior to such an event, the Rights will be evidenced by and traded in
tandem with the Common Stock.
If a person or group acquires a 15% or larger position in the Company, each Right (except
those held by the acquiring party) will then entitle its holder to purchase, fractional shares
of Preferred Stock having twice the value of the $55 exercise price, with each fractional
Preferred Share valued at the market price of the Common Stock. Also, if following an
acquisition of 15% or more of the Companys Common Stock, the Company is acquired by that person
or group in a merger or other business combination transaction, each Right would then entitle
its holder to purchase Common Stock of the acquiring company having a value of twice the $55.00
exercise price. The effect would be to entitle the Companys shareholders to buy stock in the
acquiring company at 50% of its market price.
The Company may redeem the Rights at $.001 per Right at any time on or prior to the tenth
business day following the acquisition of 15% or more of its Common Stock by a person or group
or commencement of a tender offer for such 15% ownership. The Rights expire on January 2, 2012.
(9) Share-Based Payments
The Company has in effect the following stock option plans:
The Amended and Restated 1990 Incentive Stock Option Plan (1990 Plan) allows for the
issuance of incentive and non-qualified options to employees, directors, officers, non-employee
independent contractors and non-employee directors, pursuant to which 43,750 shares of Common Stock
are reserved for issuance out of authorized but unissued shares of the Company. No new issuances
are being made under the 1990 Plan.
The Amended and Restated 1992 Incentive Stock Option Plan (1992 Plan) allows for the
issuance of incentive and non-qualified options to employees, directors, officers, non-employee
independent contractors and non-employee directors, pursuant to which 115,133 shares of Common
Stock are reserved for issuance out of authorized but unissued shares of the Company. No new
issuances are being made under the 1992 Plan.
The Amended and Restated 1995 Stock Option Plan (1995 Plan) allows for the issuance of
incentive and non-qualified options, shares of restricted stock, phantom units and stock bonuses to
employees, officers, and non-employee independent contractors, pursuant to which 731,703 shares of
Common Stock are reserved for issuance out of authorized but unissued shares of the Company. No
new issuances are being made under the 1995 Plan.
The Amended and Restated 1995 Non-Employee Director Stock Option Plan (1995 Director Plan)
allows for the issuance of non-qualified options to non-employee directors, pursuant to which
382,500 shares of Common Stock are reserved for issuance out of authorized but unissued shares of
the Company. No new issuances are being made under the 1995 Director Plan.
The Amended and Restated 1999 Stock Incentive Plan (1999 Plan) allows for the issuance of
incentive and non-qualified options, shares of restricted stock and stock bonuses to directors,
employees, officers and non-employee independent contractors, pursuant to which 6,440,965 shares of
Common Stock are reserved for issuance out of authorized but unissued shares of the Company.
Prior to January 1, 2006, the Company accounted for those plans under the recognition and
measurement principles of APB25. Share-based employee compensation expense related to stock
options was not recognized in the Companys consolidated statements of earnings prior to January 1,
2006, as all stock option awards granted under the plans had an exercise price equal to the market
value of the common stock on the date of the grant. Effective January 1, 2006, the Company adopted
the provisions of FAS 123R using the modified prospective transition method. Under this transition
method, compensation expense recognized in 2006, included: (i) compensation expense for all
share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of FAS 123, and (ii)
compensation expense for all share-based awards granted subsequent to January 1, 2006, based on the
grant date fair value estimated in accordance with FAS 123R. In accordance with the modified
prospective transition method, results for prior periods have not been restated.
As a result of adopting FAS 123R, the charge to earnings from continuing operations and net
earnings related to stock option grants in 2006, was $5,294,000. The impact of adopting FAS 123R
on both basic and diluted earnings per share in 2006 was $0.09.
F-16
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes share-based compensation recorded in 2006, 2005 and 2004 ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Compensation expense recognized: |
|
|
|
|
|
|
|
|
|
|
|
|
From stock options |
|
$ |
5,294 |
|
|
$ |
|
|
|
$ |
|
|
From restricted stock and phantom units |
|
|
2,435 |
|
|
|
368 |
|
|
|
286 |
|
Cash received from stock options exercised |
|
|
597 |
|
|
|
1,739 |
|
|
|
4,756 |
|
The fair value of the Companys stock option awards is estimated on the date of grant using a
Black-Scholes option-pricing model that uses the assumptions in the table below. The fair value of
the Companys stock option awards, which are subject to graded vesting, is expensed over the
vesting life of the stock options using the straight-line method. Expected volatility is based on
an average of (i) historical volatility of the Companys stock, (ii) implied volatility from the
Companys convertible debt and (iii) implied volatility from traded options on the Companys stock.
The risk-free rate for periods within the contractual life of the stock option award is based on
the yield curve of a zero-coupon U.S. Treasury bond for the month during which the stock option
award is granted with a maturity equal to the expected term of the stock option award granted. The
Company uses historical data to estimate stock option exercises and forfeitures within its
valuation model. The expected term of stock option awards granted is derived from historical
exercise experience under the Companys share-based payment plans and represents the period of time
that stock option awards granted are expected to be outstanding. Share-based awards generally vest
over a three-year period, and stock options have a contractual life of ten years.
The per-share weighted average fair value of stock options granted during 2006, 2005 and 2004
was $4.34, $6.35 and $5.95, respectively, on the grant date using the Black-Scholes option pricing
model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free interest rate |
|
|
4.7 |
% |
|
|
4.1 |
% |
|
|
2.9 |
% |
Expected volatility |
|
|
64.8 |
% |
|
|
66.8 |
% |
|
|
73.6 |
% |
Expected life in years |
|
|
3.90 |
|
|
|
4.91 |
|
|
|
4.83 |
|
A summary of the Companys stock option activity for years 2006, 2005 and 2004, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
Stock |
|
|
Weighted Average |
|
|
Remaining |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
(in Thousands) |
|
Outstanding at January 1, 2004 |
|
|
4,609,992 |
|
|
$ |
6.09 |
|
|
|
|
|
|
|
|
|
Grants |
|
|
1,069,750 |
|
|
|
9.81 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(96,667 |
) |
|
|
13.53 |
|
|
|
|
|
|
|
|
|
Exercises |
|
|
(997,276 |
) |
|
|
4.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
4,585,799 |
|
|
|
7.09 |
|
|
|
6.49 |
|
|
$ |
16,503 |
|
Grants |
|
|
1,324,479 |
|
|
|
10.89 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(162,188 |
) |
|
|
13.02 |
|
|
|
|
|
|
|
|
|
Exercises |
|
|
(407,948 |
) |
|
|
4.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
5,340,142 |
|
|
|
8.07 |
|
|
|
6.63 |
|
|
$ |
8,235 |
|
Grants |
|
|
572,958 |
|
|
|
8.30 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(148,699 |
) |
|
|
10.02 |
|
|
|
|
|
|
|
|
|
Exercises |
|
|
(149,946 |
) |
|
|
3.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
5,614,455 |
|
|
$ |
8.14 |
|
|
|
5.70 |
|
|
$ |
1,496 |
|
Vested and expected to vest in the
future at December 31, 2006 |
|
|
5,591,837 |
|
|
$ |
8.13 |
|
|
|
0.24 |
|
|
$ |
1,495 |
|
Exercisable at December 31, 2006 |
|
|
3,986,511 |
|
|
$ |
7.43 |
|
|
|
4.82 |
|
|
$ |
1,470 |
|
Available for grant at December 31, 2006 |
|
|
2,099,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average grant date fair value of options granted and total intrinsic value of
options exercised during year 2006, 2005 and 2004, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Grant date fair value |
|
$ |
2,458 |
|
|
$ |
8,387 |
|
|
$ |
6,369 |
|
Total intrinsic value of options exercised |
|
|
519 |
|
|
|
2,874 |
|
|
|
4,950 |
|
The fair value of unvested shares of restricted common stock is determined based on the
closing trading price of the Companys common stock on the day before the grant date. A summary of
the Companys unvested restricted share activity for year 2006, 2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Restricted |
|
Grant Date |
|
|
Shares |
|
Fair Value |
Unvested at January 1, 2004 |
|
|
529,334 |
|
|
$ |
1.85 |
|
Grants |
|
|
79,965 |
|
|
|
9.00 |
|
Vested |
|
|
(267,728 |
) |
|
|
2.30 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2004 |
|
|
341,571 |
|
|
|
3.16 |
|
Grants |
|
|
340,523 |
|
|
|
11.08 |
|
Vested |
|
|
(229,844 |
) |
|
|
4.12 |
|
Forfeited |
|
|
(10,327 |
) |
|
|
6.21 |
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2005 |
|
|
441,923 |
|
|
|
8.60 |
|
Grants |
|
|
611,824 |
|
|
|
7.42 |
|
Vested |
|
|
(173,355 |
) |
|
|
3.49 |
|
Forfeited |
|
|
(56,717 |
) |
|
|
8.14 |
|
|
|
|
|
|
|
|
|
|
Unvested at December 30, 2006 |
|
|
823,675 |
|
|
$ |
8.83 |
|
The Company began granting phantom units in 2006 to certain of its non-U.S. employees. The
fair value of unvested phantom units is determined based on the closing trading price of the Common
Stock on the day before the grant date. A summary of the Companys unvested phantom unit activity
for the year ended December 31, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Restricted |
|
Grant Date |
|
|
Shares |
|
Fair Value |
Unvested at January 1, 2006 |
|
|
|
|
|
|
|
|
Grants |
|
|
133,654 |
|
|
$ |
4.10 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(8,972 |
) |
|
|
4.18 |
|
|
|
|
|
|
|
|
|
|
Unvested at December, 2006 |
|
|
124,682 |
|
|
$ |
4.10 |
|
At December 31, 2006, there was $9.4 million of unrecognized compensation expense related to
unvested share-based awards granted under the Companys share-based payment plans of which $5.0
million relates to stock options expected to be recognized over a
weighted-average period of 1.2 years, and $4.4 million relates to unvested restricted shares and phantom units expected to be
recognized over a weighted average period of 2.0 years.
(10) Income Taxes
The Company did not incur any tax expense in any year due to operating losses and the related
increase in the valuation allowance.
F-18
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of income taxes at the statutory rate of 35% applied to income before taxes
is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Computed expected tax expense |
|
$ |
(35,817 |
) |
|
$ |
(26,207 |
) |
|
$ |
(19,131 |
) |
Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences |
|
|
(1,052 |
) |
|
|
(385 |
) |
|
|
357 |
|
Expiration of loss carryforwards |
|
|
703 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in valuation allowance |
|
|
36,166 |
|
|
|
26,562 |
|
|
|
18,774 |
|
|
|
|
|
|
|
|
|
|
|
Tax expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of the temporary differences that give rise to significant portions of the
deferred tax assets as of December 31, 2006 and 2005, are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Loss carryforwards |
|
$ |
141,723 |
|
|
$ |
108,631 |
|
Deferred compensation |
|
|
2,958 |
|
|
|
228 |
|
Start-up costs |
|
|
27 |
|
|
|
|
|
Property, plant and equipment |
|
|
719 |
|
|
|
871 |
|
Deferred revenue |
|
|
450 |
|
|
|
901 |
|
Capital loss |
|
|
36 |
|
|
|
1,309 |
|
Accrued Liabilities |
|
|
1,298 |
|
|
|
|
|
Other |
|
|
2,606 |
|
|
|
1,712 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
149,817 |
|
|
|
113,652 |
|
Valuation allowance |
|
|
(149,817 |
) |
|
|
(113,652 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, the Company had net operating loss carryforwards of $404.9
million and $310.4 million, respectively. The Company has established a valuation allowance for the full amount of the
resulting deferred tax assets as management does not believe that it is more likely than not that the Company
will recover these assets. Utilization of the Company's net operating loss carryforwards is subject to certain
limitations due to specific stock ownership changes which have occurred or may occur. Approximately $2 million of our loss carryforwards
expired in 2006. To the extent not utilized, the carryforwards will expire during the years beginning 2007 through 2026,
of which approximately $4 million will expire in 2007.
The difference
between the increase in valuation allowance reported above, and the change in valuation allowance between December 31, 2006 and 2005, reflects the utilization of net operating losses from stock options.
Approximately $5.9 million and $5.8 million of the total valuation allowance for years 2006 and 2005, respectively, relate to stock option
compensation deductions. The tax benefits associated with stock option compensation deductions will be credited to equity when realized.
In 2005 the Company cancelled its loan to Revotar in the amount of approximately
$3.7 million, including accrued interest. This cancellation was treated as a capital loss in the 2005 provision resulting in a deferred tax asset of $1.9 million; however, when the tax return was filed, it was determined
that the cancellation of this loan, and accrued interest, was an ordinary loss. The remaining $.036 million
of capital loss resulted from the disposition of stock in subsidiaries.
The $2.73 million increase in the Deferred Compensation component of the Company's
deferred tax asset is a result of the Company's adoption of the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment
(FAS 123R).
The Accrued Liabilities component of the Company's Deferred Tax Asset includes an adjustment for accrued liabilities
relating to clinical trials for 2006 in the amount of approximately $3.7 million, resulting in a deferred tax asset of $1.3 million. There was not an adjustment in 2005 for clinical trials.
(11) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Furniture and equipment |
|
$ |
13,017 |
|
|
$ |
11,316 |
|
Leasehold improvements |
|
|
4,794 |
|
|
|
4,794 |
|
|
|
|
|
|
|
|
|
|
|
17,811 |
|
|
|
16,110 |
|
|
|
|
|
|
|
|
Less accumulated depreciation and
amortization |
|
|
11,835 |
|
|
|
11,168 |
|
|
|
|
|
|
|
|
|
|
$ |
5,976 |
|
|
$ |
4,942 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to equipment and leasehold improvements was
$1,015,000, $1,113,000, and $626,000 in years 2006, 2005 and 2004, respectively.
F-19
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Entity-Wide Geographic Data
The Company operates in a single business segment that includes research and development of
pharmaceutical products. As a result of the Restructuring, revenues from Germany have been
included in the gain or loss from discontinued operations on the Companys statements of
operations. The following table summarizes the Companys long-lived assets in different geographic
locations ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Long-lived assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
6,038 |
|
|
$ |
5,328 |
|
United Kingdom |
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,257 |
|
|
$ |
5,328 |
|
The following table summarizes the Companys revenues in different geographic locations ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
18,674 |
|
|
$ |
14,006 |
|
|
$ |
12,831 |
|
United Kingdom |
|
|
203 |
|
|
|
|
|
|
|
|
|
Germany |
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
18,995 |
|
|
|
14,006 |
|
|
|
12,831 |
|
|
|
|
|
|
|
|
|
|
|
Germany discontinued operations |
|
|
|
|
|
|
57 |
|
|
|
947 |
|
The Companys revenues are primarily derived from several customers, each of whom represents a
significant percentage of total revenues. The following table summarizes the Companys sources of
revenues from its principal customers ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
GSK |
|
$ |
17,386 |
|
|
$ |
12,900 |
|
|
$ |
10,679 |
|
Schering-Plough |
|
|
1,288 |
|
|
|
1,106 |
|
|
|
2,082 |
|
Other |
|
|
321 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,995 |
|
|
$ |
14,006 |
|
|
$ |
12,831 |
|
|
|
|
|
|
|
|
|
|
|
(13) Research and License Agreements
Under the terms of the Companys agreement with ELP prior to the Acquisition, the Company
provided, and was reimbursed for, research and development activities conducted on behalf of
Encysive, L.P.
The Company also received reimbursement for certain research costs pursuant to its agreements
with GlaxoSmithKline, plc (GSK) (Note 15), Schering-Plough Ltd. and Schering Corporation
(collectively Schering-Plough) and Revotar (Note 14).
(a) Mitsubishi-Pharma Agreement
Encysive has entered into an agreement with Mitsubishi Pharma Corporation, formerly
Mitsubishi-Tokyo Pharmaceuticals, Inc. (Mitsubishi), to license Mitsubishis rights and
technology relating to Argatroban and to license Mitsubishis own proprietary technology
developed with respect to Argatroban (the Mitsubishi Agreement). Under the Mitsubishi
Agreement, the Company has an exclusive license to use and sell Argatroban in the U.S. and
Canada for all specified indications. The Company is required to pay Mitsubishi specified
royalties on net sales of Argatroban by the Company and its sublicensees after its commercial
introduction in the U.S. and Canada. GSK is also obligated to pay Mitsubishi royalties on sales
of Argatroban. As of December 31, 2006, the Company had paid Mitsubishi approximately
$2,385,000 in royalty payments under the Mitsubishi Agreement. The Company has also paid
Mitsubishi a $500,000 milestone payment under the Mitsubishi Agreement. No additional milestone
payments are payable to Mitsubishi under the Mitsubishi Agreement.
Either party may terminate the Mitsubishi Agreement on 60 days notice if the other party
defaults in its material obligations under the agreement, or is insolvent, or if a substantial
portion of its property is subject to levy. Unless terminated sooner pursuant to the
above-described termination provisions, the Mitsubishi Agreement expires on the later of
termination of patent rights in a particular country or 20 years after first commercial sale of
products. If the Mitsubishi Agreement is terminated, the Company and Royalty Sub would lose all
rights to Argatroban, including the right to receive revenues from the sale of Argatroban.
Under the Mitsubishi Agreement, Encysive has access to a formulation patent granted in 1993,
which expires in 2014 and a process patent that expires in 2017. The Mitsubishi composition of
matter patent on Argatroban has expired.
F-20
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2000, Encysive signed an additional agreement with Mitsubishi that provides Encysive
with royalties on sales of Argatroban in certain European countries, up to a total of $5.0
million in milestones for the development of ischemic stroke and certain other provisions. The
Company began enrolling patients in a clinical trial for ischemic stroke in April 2001, and
received a $2.0 million milestone payment in May 2001, which was being recognized as revenues
over the expected development period and, accordingly, revenues in 2002 included approximately
$382,000 related to such milestone payment. In light of a lack of a positive overall efficacy
trend and the high risk and high costs associated with stroke trials, management determined that
it was unlikely that the Company would proceed independently with a full Phase III program and,
accordingly, recognized the remaining deferred revenue related to the milestone payment from
Mitsubishi during 2003. License fees, milestones and grants in 2003 includes $1,143,000 related
to the milestone payment from Mitsubishi. In conjunction with the Mitsubishi Agreement, a
consulting firm involved in negotiations related to the agreement will receive a percentage of
net sales received as a result of the agreement.
Mitsubishi further agreed to supply the Company with its requirements of Argatroban Active
Pharmaceutical Ingredient (API) throughout the term of the Mitsubishi Agreement for the
Companys clinical testing and commercial sales of Argatroban in the U.S. and Canada. In the
event Mitsubishi should discontinue the manufacture of Argatroban API, Mitsubishi and Encysive
have agreed to discuss in good faith the means by which, and the party to whom, Argatroban API
production technology will be transferred. The transferee may be a person or entity other than
the Company. At present, Mitsubishi is the only manufacturer of Argatroban API. See Note 15.
During the third quarter of 1997, the Company sublicensed certain rights to Argatroban to
GSK. In conjunction with this agreement, the Company agreed to make certain payments to
Mitsubishi, which are included in selling, general and administrative expenses, to pay an
additional royalty to Mitsubishi, beginning January 1, 2002, and to provide access to certain
Argatroban clinical data to Mitsubishi. In certain circumstances, Mitsubishi and Encysive will
share equally in all upfront payments and royalties should Mitsubishi use Encysives regulatory
documents and data for registration in certain territories. See Note 15.
(b) Schering-Plough Research Collaboration and License Agreement
On June 30, 2000, Encysive and Schering-Plough entered into a worldwide research
collaboration and license agreement to discover, develop and commercialize VLA-4 antagonists.
VLA-4 antagonists represent a new class of compounds that has shown promise in multiple
preclinical animal models of asthma. The primary focus of the collaboration will be to discover
orally available VLA-4 antagonists as treatments for asthma.
Under the terms of the agreement, Schering-Plough obtains the exclusive worldwide rights to
develop, manufacture and market all compounds from Encysives library of VLA-4 antagonists, as
well as the rights to a second integrin antagonist. Encysive will be responsible for optimizing
a lead compound and additional follow-on compounds. Schering-Plough supported research at
Encysive until June 30, 2004, and will be responsible for all costs associated with the
worldwide product development program and commercialization of the compound. In addition to
funding research costs, Schering-Plough paid Encysive an aggregate of $4 million in upfront
license fees and milestone payments, and will pay the Company additional development milestones
of $39 million regarding the development of VLA-4 antagonists, and $38 million regarding the
development of a second integrin antagonist. The Company is not currently developing the second
integrin antagonist. Schering-Plough will also pay the Company royalties on product sales
resulting from the agreement. The upfront license fee is being amortized into revenue over the
expected development period which is estimated to be through December 31, 2007, and the Company
recognized $382,000 of the license fee as revenues in each of the years 2006, 2005 and 2004,
respectively. On June 30, 2004 Schering-Plough ended their funding of our research on a
follow-on compound pursuant to the research agreement, prior to which the Company had received
approximately $13.3 million in research payments from Schering-Plough under the agreement.
Schering-Plough can terminate the agreement upon 180 days written notice to the Company. If the
agreement is terminated, Encysive will lose Schering-Ploughs funding for future development
milestones and royalties on product sales resulting from the agreement.
In June 2002, the Company achieved a milestone under the Schering-Plough agreement as a
result of the nomination of an initial candidate for Schering-Ploughs further development.
This milestone payment will be recognized into revenue over the expected development period, and
approximately $179,000 was recognized as revenue during each of 2006, 2005 and 2004.
In March 2005, the Company achieved a $2 million milestone under the Schering-Plough
agreement, which will be recognized into revenue over the expected development period, of which
approximately $727,000 and $545,000 was recognized during 2006 and 2005, respectively.
(14) Discontinued Foreign Subsidiary
Encysive formed Revotar in 2000 to conduct research and development of novel small molecule
compounds and to develop and commercialize selectin antagonists, including bimosiamose. In April
2005, the stockholders of Revotar agreed to restructure Revotars capitalization. Under the terms
of the Restructuring, Revotars stockholders other than the Company contributed additional funds to
Revotar, and the Companys ownership was reduced to approximately 14% of the outstanding common
stock of Revotar. Revotars other stockholders subsequently purchased the remaining shares of
Revotar common stock owned by the Company for
F-21
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
nominal consideration. Upon the funding of Revotar by the other stockholders, the Company
licensed its worldwide rights to bimosiamose and certain follow-on compounds to Revotar for which
it could receive substantial future royalty payments from Revotar in the event that these compounds
are subsequently approved and commercialized, or licensed to a third party. Further, the Company
agreed to cancel its outstanding loan, and accrued interest thereon, of approximately $3.7 million.
The transaction became effective in May 2005, upon contribution of the additional capital by
Revotars other stockholders. Following the completion of the Restructuring, the Companys
consolidated financial statements no longer include the results of Revotar. The Company recorded a
gain of approximately $1.7 million upon its disposal of Revotar, which is included in the amount
reported under the caption Gain (loss) from discontinued operations in the Companys financial
statements for 2005.
Prior to the Restructuring, Revotar had assets of approximately $1.0 million, and liabilities,
not including the note payable to Encysive, of approximately $2.5 million. Revotars revenues and
pretax losses (net of minority interest), reported in discontinued operations for years 2005, 2004
and 2003 were as follow ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Revenues |
|
$ |
57 |
|
|
$ |
947 |
|
|
$ |
605 |
|
Pretax loss (net of minority interest) |
|
|
(408 |
) |
|
|
(931 |
) |
|
|
(1,509 |
) |
Pretax gain on disposal |
|
|
1,743 |
|
|
|
|
|
|
|
|
|
(15) Commercialization Agreement
In connection with Encysives development and commercialization of Argatroban, in August 1997,
Encysive entered into a Product Development, License and CoPromotion Agreement with GSK (the GSK
Agreement) whereby GSK was granted exclusive rights to work with Encysive in the development and
commercialization of Argatroban in the U.S. and Canada for specified indications. GSK paid $8.5
million in upfront license fees during August 1997, a $5 million milestone payment in October 1997,
and a $7.5 million milestone payment in June 2000. Additional milestone payments may be earned
upon the clinical development and FDA approval for the acute myocardial infarction indication.
Future milestone payments for the acute myocardial infarction indication are subject to GSKs
agreement to market Argatroban for such indication. The parties have also formed a joint
development committee to analyze the development of additional Argatroban indications to be funded
60% by GSK except for certain Phase IV trials which shall be funded entirely by GSK. At this time,
GSK has no plans to conduct development work for the acute myocardial infarction and stroke
indications. GSK has the exclusive right to commercialize all products arising out of the
collaboration, subject to the obligation to pay royalties on net sales to Encysive and to the
rights of Encysive to co-promote these products through its own sales force in certain
circumstances. As of December 31, 2006, the Company had received approximately $48.2 million in
royalty payments from GSK under the GSK Agreement. Encysive will retain the rights to any
indications which GSK determines it does not wish to pursue (such as ischemic stroke), subject to
the requirement that Encysive must use its own sales force to commercialize any such indications.
Any indications which Encysive elects not to pursue will be returned to Mitsubishi. In conjunction
with the GSK Agreement, a consulting firm involved in negotiations related to the agreement will
receive a percentage of all consideration received by Encysive as a result of the agreement.
At present, Mitsubishi is the only manufacturer of Argatroban API, and has entered into the
Mitsubishi Supply Agreement with GSK to supply Argatroban API in order to meet GSK and Encysives
needs for the production of Argatroban finished product. GSK has informed the Company that they
have begun supplying Argatroban finished product from a manufacturing facility in the United
Kingdom. Should Mitsubishi fail during any consecutive nine-month period to supply GSK at least
80% of its requirements, and such requirements cannot be satisfied by existing inventories, the
Mitsubishi Supply Agreement provides for the nonexclusive transfer of the production technology for
API to GSK. If GSK cannot commence manufacturing of Argatroban API or alternate sources of supply
are unavailable or uneconomic, the Companys results of operations would be materially and
adversely affected.
The GSK Agreement generally terminates on a country-by-country basis upon the earlier of the
termination of Encysives rights under the Mitsubishi Agreement, the expiration of applicable
patent rights or, in the case of royalty payments, the commencement of substantial third-party
competition. GSK also has the right to terminate the agreement on a country-by-country basis by
giving Encysive at least three months written notice at any time before GSK first markets products
in that country based on a reasonable determination by GSK that the commercial profile of the
product in question would not justify continued development in that country. GSK has similar
rights to terminate the GSK Agreement on a country-by-country basis after marketing has commenced.
In addition, either party may terminate the GSK Agreement on 60 days notice if the other party
defaults in its obligations under the agreement or is insolvent. If the GSK Agreement is
terminated, Royalty Sub would no longer receive royalties from GSKs sales of Argatroban.
In December 2006, the Company sold its right to receive royalties on sales of Argatroban by
GSK to Royalty Sub. GSK will pay all future royalties to Royalty Sub until the Argatroban Notes
and accrued interest are repaid.
(16) 401(k) Plan
The Company adopted a 401(k) plan which became effective on September 1, 1993. Under the
plan, all employees with three months of service are eligible to participate in the plan and may
contribute up to 60% of their compensation, with a maximum of $15,000 per employee in 2006 The
Compensation Committee of the Board of Directors approved an employer matching contribution of
$0.50 for each dollar of employee contributions up to 6% of salaries and the 401(k) plan was
amended effective January 1, 2001.
F-22
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Compensation Committee approved matching contributions on the catch-up contribution made
by employees 50 years of age or older by the end of the plan year and the 401(k) plan was amended
effective January 1, 2002. Total cost of the employer match was $542,000 and $218,000 in 2006,
2005 and 2004, respectively.
(17) Commitments and Contingencies
(a) Employment agreements
The Company has entered into employment agreements with certain officers and key employees.
Additionally, the Company has signed agreements with 12 of its officers and key employees to
provide certain benefits in the event of a change of control as defined in these agreements
and the occurrence of certain other events. The agreements provide for a lump-sum payment in
cash equal to 12 months to three years of annual base salary and annual cash bonus, if any. The
base salary and annual bonus portion of the agreements would aggregate approximately $9.1
million at the rate of compensation in effect at December 31, 2006. In addition, the agreements
provide for gross-up for certain taxes on the lump-sum payment, continuation of certain
insurance and other benefits for periods of 12 months to three years and reimbursement of
certain legal expenses in conjunction with the agreements.
(b) Lease Agreements
In November 2004, the Company leased 40,730 square feet of office space in Houston, Texas,
for the Companys administrative, marketing, clinical development and regulatory departments.
The lease expires on December 31, 2008, and can be extended at the Companys option to December
31, 2009. The Companys prior lease of 15,490 square feet of office space in Bellaire, Texas,
which housed its administrative, marketing, clinical development and regulatory departments,
expired July 31, 2005.
The Company also leases 31,359 square feet of office and laboratory space in a building in
Houston, Texas, for its research department, including a 21,621 square foot laboratory facility.
The remaining area is being used for clinical development, computer modeling, storage space and
additional offices for scientists. This lease expires in December 2008, and can be extended at
the Companys option to December 31, 2009.
In 2006, the Company signed agreements to lease office space for its European operations in
Uxbridge, U.K. and Munich, Germany, and subsequently leased office space in Milan, Italy and
Paris, France. The agreements are of varying terms, and may be extended at the Companys option
upon prior written notice.
The Company may require additional space to accommodate future research and laboratory
needs as necessary to bring products into development and clinical trials. In addition, the
Company may require additional office space to support the commercial launch of Thelin in
Europe.
For the years ended December 31, 2006, 2005 and 2004, rent and related building services
totaled approximately $1,613,000, $1,686,000 and $1,310,000, respectively.
At December 31, 2006, the Companys minimum aggregate commitments under long-term,
non-cancelable operating leases are as follows ($ in thousands):
|
|
|
|
|
2007 |
|
$ |
1,983 |
|
2008 |
|
|
2,233 |
|
2009 |
|
|
177 |
|
2010 |
|
|
177 |
|
2011 |
|
|
162 |
|
|
|
|
|
|
|
$ |
4,732 |
|
|
|
|
|
(c) Litigation
On September 26, 2006, a purported class action complaint (the Massachusetts Laborers
action) was filed in the United States District Court for the Southern District of Texas by
Massachusetts Laborers Annuity Fund, on behalf of itself and all other similarly situated
investors against the Company, Bruce D. Given, M.D. (the Companys President and Chief Executive
Officer), Richard A.F. Dixon (the Companys Senior Vice President, Research and Chief Scientific
Officer) and Stephen L. Mueller (the Companys former Vice President, Finance and
Administration, Secretary and Treasurer). The complaint alleges violations of sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule
10b-5, and focuses on statements that are claimed to be false and misleading regarding the
Companys drug sitaxsentan sodium. The
F-23
ENCYSIVE PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plaintiffs seek unspecified damages on behalf of a purported class of purchasers of the
Companys securities during the period from February 19, 2004 through March 24, 2006. Three
additional substantially similar putative class action lawsuits were filed in the weeks
following September 26, 2006 and have since been consolidated with the Massachusetts Laborers
action. It is possible that additional class action complaints regarding the same subject
matter may be filed in the future. The Company expects that any future such complaints will be
consolidated with the Massachusetts Laborers action.
In addition, on November 22, 2006, a putative shareholder derivative action captioned
Jadelis v. Given et al., Case No. 2006-CV-3713 was filed in the United States District Court for
the Southern District of Texas, Houston Division (the Jadelis action). The Jadelis action
contains essentially the same factual allegations as in the Massachusetts Laborers action, but
purports to assert claims derivatively on behalf of the Company for breach of fiduciary duty,
corporate waste, gross mismanagement, abuse of control, insider selling, contribution, and
indemnification against Bruce D. Given, Richard A.F. Dixon, Stephen L. Mueller, John M.
Pietruski, James T. Willerson, Ron J. Anderson, J. Kevin Buchi, Robert J. Cruikshank, John H.
Dillon, II, Suzanne Oparil, and James A. Thompson. It is possible that additional shareholder
derivative complaints regarding the same subject matter may be filed in the future. While the
Jadelis action does not assert claims or seek damages against the Company itself, it does seek
recovery of the plaintiffs attorneys fees from the Company in the event the plaintiffs
lawsuit is successful.
These litigation matters are in their early stages, and discovery has not yet begun. While
we believe that the claims against the Company are without merit, litigation is subject to
inherent uncertainties, and an adverse result in these matters could have a material adverse
effect on our business, results of operations and financial condition. Any litigation to which
we are subject may be costly and, further, could require significant involvement of our senior
management and may divert managements attention from our business and operations. The Company
also has indemnification obligations to some or all of the individual defendants identified
above. The Company is currently unable to estimate the likelihood of an unfavorable result in
the above-mentioned litigation matters or the maximum potential amount of future payments under
the indemnifications or otherwise in connection with liability under the purported shareholder
class action lawsuits or shareholder derivative lawsuits due to the inherent uncertainties
involved in such litigation. The Company maintains insurance that may limit its financial
exposure for defense costs and liability for an unfavorable outcome in these matters, should it
not prevail, for claims covered by the insurance coverage.
The Company anticipates that additional shareholder derivative lawsuits regarding the same
subject matter may be filed in federal and/or state court during the upcoming months.
The Consolidated Financial Statements do not include a contingency related to the ongoing
litigation, as it is not possible to estimate the Companys damages, if it were to be found
liable.
(d) Foreign Currency Exchange Risk
The Company is exposed to market risk primarily from changes in foreign currency exchange
rates. We have contracts with entities in other areas outside the U.S. that are denominated in
a foreign currency. To date, these currencies have not fluctuated materially.
(e) Other Contingencies
Like other biopharmaceutical companies, the Company is subject to other contingencies,
including legal proceedings and claims arising out of its business that cover a wide range of
matters, including, among others, environmental matters, contract and employment claims, and
product liability. The Company may be involved in legal actions from time to time. The Company
has used various substances in its research and development which have been or may be deemed to
be hazardous or dangerous, and the extent of its potential liability, if any, under
environmental, product liability and workers compensation statutes, rules, regulations and case
law is unclear.
F-24
(18) Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited See accompanying Accountants Report |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
Total revenues |
|
$ |
3,561 |
|
|
$ |
3,662 |
|
|
$ |
6,332 |
|
|
$ |
5,440 |
|
Gross profit |
|
|
3,561 |
|
|
|
3,662 |
|
|
|
6,318 |
|
|
|
5,360 |
|
Operating loss |
|
|
(30,396 |
) |
|
|
(28,145 |
) |
|
|
(25,332 |
) |
|
|
(25,408 |
) |
Loss before cumulative effect of change
in Accounting principle |
|
|
(30,077 |
) |
|
|
(28,038 |
) |
|
|
(25,474 |
) |
|
|
(25,801 |
) |
Net loss |
|
|
(29,970 |
) |
|
|
(28,038 |
) |
|
|
(25,474 |
) |
|
|
(25,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.51 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.44 |
) |
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
Quarter ended |
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
Total revenues |
|
$ |
2,486 |
|
|
$ |
2,976 |
|
|
$ |
2,965 |
|
|
$ |
5,579 |
|
Operating loss |
|
|
(17,540 |
) |
|
|
(21,258 |
) |
|
|
(19,205 |
) |
|
|
(19,781 |
) |
Loss from continuing operations |
|
|
(17,117 |
) |
|
|
(20,895 |
) |
|
|
(18,829 |
) |
|
|
(19,371 |
) |
Gain (loss) from discontinued operations |
|
|
(326 |
) |
|
|
1,661 |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(17,443 |
) |
|
|
(19,234 |
) |
|
|
(18,829 |
) |
|
|
(19,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.30 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.33 |
) |
Because of the method used in calculating per share data, the quarterly per share data
will not necessarily total to the per share data as computed for the year. Periods prior to the
Restructuring have been restated to reflect the status of Revotar as a discontinued operation, with
no change in reported net loss.
F-25
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
3.1
|
|
-
|
|
Restated Certificate of Incorporation dated September 17, 2004 (incorporated by reference to Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q (Commission File No. /000-20117) for the quarter ended September 30, 2004,
filed with the Commission on November 5, 2004. |
|
|
|
|
|
3.2
|
|
-
|
|
Certificate of Amendment to Certificate of Incorporation of Encysive Pharmaceuticals Inc., dated May 11, 2005
(incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form S-3 (Registration No.
333-125154) filed May 23, 2005. |
|
|
|
|
|
3.3
|
|
-
|
|
Amended and Restated By-laws of Encysive Pharmaceuticals Inc. adopted September 6, 1996 (incorporated by reference to
Exhibit 3.7 to the Companys Form 10-Q (Commission File No. 000-20117) for the quarter ended September 30, 1996). |
|
|
|
|
|
3.4
|
|
-
|
|
Amendment to Article II of By-laws adopted June 29, 2000 (incorporated by reference to Exhibit 3.8 to the Companys
Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 2000, filed with the
Commission on August 14, 2000). |
|
|
|
|
|
4.1
|
|
-
|
|
Rights Agreement, dated as of January 2, 2002, between Encysive Pharmaceuticals Inc. and The Bank of New York, as
Rights Agent, including exhibits thereto. (incorporated by reference to Exhibit 1 to the Companys Form 8-A (Commission
File No. 000-20117) filed with the Commission on January 3, 2002). |
|
|
|
|
|
4.2
|
|
-
|
|
Form of Rights Certificate (incorporated by reference to Exhibit 3 to the Companys Form 8-A (Commission File No.
000-20117) filed with the Commission on January 3, 2002). |
|
|
|
|
|
4.3
|
|
-
|
|
Indenture (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K (Commission File No.
000-20117) filed with the Commission on March 17, 2005. |
|
|
|
|
|
4.4
|
|
-
|
|
Registration Rights Agreement (incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
(Commission File No. 000-20117) filed with the Commission on March 17, 2005. |
|
|
|
|
|
4.5
|
|
-
|
|
Indenture, dated as of February 6, 2007, between Royalty Sub and U.S. Bank National Association, as Trustee,
including the form of Argatroban PhaRMASM Secured 12% Notes due 2014 attached as Exhibit A thereto (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K (Commission File No. 000-20117) filed with the
Commission on February 8, 2007). |
|
|
|
|
|
10.1+
|
|
-
|
|
Consulting Agreement with John M. Pietruski dated January 1, 1992 (incorporated by reference to Exhibit 10.6 to the
Companys Form 10 (Commission File No. 000-20117) effective June 26, 1992 (as amended)). |
|
|
|
|
|
10.2+
|
|
-
|
|
Eighth amendment dated March 8, 2007 to Consulting Agreement with John M. Pietruski dated January 1, 1992. |
|
|
|
|
|
10.3+
|
|
-
|
|
Termination Agreement between Encysive Pharmaceuticals Inc. and Bruce D. Given, M.D. dated March 21, 2003
(incorporated by reference to Exhibit 10.5 to the Companys 10-K (Commission File No. 000-20117) for the year ended
December 31, 2002, filed with the Commission on March 28, 2003). |
|
|
|
|
|
10.4+
|
|
-
|
|
Termination Agreement between Encysive Pharmaceuticals Inc. and Richard A. F. Dixon dated March 17, 2003
(incorporated by reference to Exhibit 10.6 to the Companys 10-K (Commission File No. 000-20117) for the year ended
December 31, 2002, filed with the Commission on March 28, 2003). |
|
|
|
|
|
10.5+
|
|
-
|
|
Termination Agreement dated as of October 24, 2005 made by and between Encysive Pharmaceuticals Inc. and Gordon H.
Busenbark, incorporated by reference to exhibit 10.1 to the Companys Current Report on Form 8-K (Commission File no.
000-20117) filed November 1, 2005. |
|
|
|
|
|
10.6+
|
|
-
|
|
Termination Agreement dated as of October 25, 2005 made by and between Encysive Pharmaceuticals Inc. and George W.
Cole, incorporated by reference to exhibit 10.1 to the Companys Current Report on Form 8-K (Commission File no.
000-20117) filed November 14, 2005. |
|
|
|
|
|
10.7+
|
|
-
|
|
Termination Agreement between Encysive Pharmaceuticals Inc. and Stephen L. Mueller dated March 20, 2003 (incorporated
by reference to Exhibit 10.7 to the Companys 10-K (Commission File No. 000-20117) for the year ended December 31,
2002, filed with the Commission on March 28, 2003). |
|
|
|
|
|
10.8+
|
|
-
|
|
Transition Agreement dated March 30, 2006 between the Company and Stephen L. Mueller (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the quarter ended June
30, 2006, filed with the Commission on August 9, 2006). |
|
|
|
|
|
10.9+
|
|
-
|
|
Termination Agreement dated as of September 10, 2003 made by and between Encysive Pharmaceuticals Inc. and Terrance
C. Coyne, M.D. incorporated by reference to exhibit 99.2 to Report on Form 8-K (Commission File no. 000-20117) dated
September 11, 2003. |
|
|
|
|
|
10.10+
|
|
-
|
|
Separation Agreement and Release dated July 6, 2006 between the Company and Terrance C. Coyne, M.D. (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q (Commission File No. 000-20117) for the
quarter ended June 30, 2006, filed with the Commission on August 9, 2006). |
|
|
|
|
|
10.11+
|
|
-
|
|
Termination Agreement dated as of June 2, 2003 made by and between Encysive Pharmaceuticals Inc. and Derek J.
Maetzold, incorporated by reference to exhibit 99.3 to Report on Form 8-K (Commission File no. 000-20117) dated
September 11, 2003. |
|
|
|
|
|
10.12+
|
|
-
|
|
Form of Indemnification Agreement between Encysive Pharmaceuticals Inc. and its officers and directors dated March
12, 2002 (incorporated by reference to Exhibit 10.27 to the Companys Form 10-K (Commission File No. 000-20117) for the
year ended December 31, 2001, filed with the Commission on March 29, 2002). |
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
10.13+
|
|
-
|
|
Amended and Restated 1990 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.33 to the Companys
Form 10-K (Commission File No. 000-20117) for the year ended December 31, 1994). |
|
|
|
|
|
10.14+
|
|
-
|
|
Amended and Restated 1992 Incentive Stock Option Plan (as of March 3, 1995) (incorporated by reference to Exhibit
10.34 to the Companys Form 10-K (Commission File No. 000-20117) for the year ended December 31, 1994). |
|
|
|
|
|
10.15+
|
|
-
|
|
Amended and Restated Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.39 to the
Companys Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30, 1995). |
|
|
|
|
|
10.16+
|
|
-
|
|
1995 Stock Option Plan (incorporated by reference to Exhibit 10.40 to the Companys Form 10-Q (Commission File No.
000-20117) for the quarter ended June 30, 1995). |
|
|
|
|
|
10.17+
|
|
-
|
|
Amendment to the 1995 Stock Option Plan of Encysive Pharmaceuticals Inc. dated March 4, 1997 (incorporated by
reference to Exhibit 10.62 to the Companys Form 10-Q (Commission File No. 000-20117) for the quarter ended June 30,
1997, filed with the Commission on August 14, 1997). |
|
|
|
|
|
10.18+
|
|
-
|
|
Amended and Restated 1995 Non-Employee Director Stock Option Plan (as amended by the Board of Directors on June 30,
1996) (incorporated by reference to Exhibit 10.55 to the Companys Form 10-Q (Commission File No. 000-20117) for the
quarter ended June 30, 1996). |
|
|
|
|
|
10.19+
|
|
-
|
|
Amendment to the 1995 Non-Employee Director Stock Option Plan of Encysive Pharmaceuticals Inc. dated March 4, 1997
(incorporated by reference to Exhibit 10.63 to the Companys Form 10-Q (Commission File No. 000-20117) for the quarter
ended June 30, 1997, filed with the Commission on August 14, 1997). |
|
|
|
|
|
10.20+
|
|
-
|
|
Amendment to Amended and Restated 1995 Non-Employee Director Stock Option Plan, dated March 6, 2000 (incorporated by
reference to Exhibit 4.1 to the Companys Registration Statement on Form S-8 (Commission File No. 333-41864) filed with
the commission on July 20, 2000). |
|
|
|
|
|
10.21+
|
|
-
|
|
Amendment to the Encysive Pharmaceuticals Inc. Amended and Restated 1995 Non-Employee Director Stock Option Plan
(incorporated herein by reference to Appendix B of the Proxy Statement on Schedule 14A (Commission File No. 000-20117)
filed April 14, 2003). |
|
|
|
|
|
10.22+
|
|
-
|
|
Amended and Restated 1999 Stock Incentive Plan (incorporated herein by reference to Appendix B of the Proxy Statement
on Schedule 14A (Commission File No. 000-20117) filed April 7, 2004). |
|
|
|
|
|
10.23+
|
|
-
|
|
Form of Option Agreement for Incentive Stock Options Awarded to Directors and Executive Officers (incorporated by
reference to Exhibit 10.1 to the Companys Form 10-Q (Commission File No. 000-20117) for the quarter ended September
30, 2004, filed with the Commission on November 5, 2004). |
|
|
|
|
|
10.24+
|
|
-
|
|
Form of Option Agreement for Non-Qualified Stock Options Awarded to Directors and Executive Officers (incorporated by
reference to Exhibit 10.2 to the Companys Form 10-Q (Commission File No. 000-20117) for the quarter ended September
30, 2004, filed with the Commission on November 5, 2004). |
|
|
|
|
|
10.25+
|
|
-
|
|
Form of Restricted Stock Agreement under the Companys Amended and Restated 1999 Stock Incentive Plan for employees
without a Termination Agreement (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K
(Commission File No. 000-20117) filed December 12, 2005). |
|
|
|
|
|
10.26+
|
|
-
|
|
Form of Restricted Stock Agreement under the Companys Amended and Restated 1999 Stock Incentive Plan for employees
with a Termination Agreement (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K
(Commission File No. 000-20117) filed December 12, 2005). |
|
|
|
|
|
10.27+
|
|
-
|
|
Retirements Benefits Policy for Employees (incorporated by reference to Exhibit 10.1 of the Companys Current Report
on Form 8-K (Commission File No. 000-20117) filed January 31, 2006). |
|
|
|
|
|
10.28+
|
|
-
|
|
Retirements Benefits Policy for Non-Employee Directors (incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K (Commission File No. 000-20117) filed January 31, 2006). |
|
|
|
|
|
10.29
|
|
-
|
|
Lease Agreement dated, February 24, 1995, between Encysive Pharmaceuticals Inc. and Doctors Center, Inc.
(incorporated by reference to Exhibit 10.31 to the Companys Form 10-K (Commission File No. 000-20117) for the year
ended December 31, 1994). |
|
|
|
|
|
10.30
|
|
-
|
|
Third Amendment to Lease Agreement dated January 1, 2003, between Encysive Pharmaceuticals Inc. and the Board of
Regents of The University of Texas System (incorporated by reference to Exhibit 10.21 to the Companys 10-K (Commission
File No. 000-20117) for the year ended December 31, 2002, filed with the Commission on March 28, 2003). |
|
|
|
|
|
10.31
|
|
-
|
|
Lease Agreement dated February 20, 2002, between Encysive Pharmaceuticals Inc. and FRM West Loop Associates #6, LTD
(incorporated by reference to Exhibit 10.22 to the Companys 10-K (Commission File No. 000-20117) for the year ended
December 31, 2002, filed with the Commission on March 28, 2003). |
|
|
|
|
|
10.32
|
|
-
|
|
Lease Agreement dated November 18, 2004, between Encysive Pharmaceuticals Inc. and W9/LWS II Real Estate Limited
Partnership (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (Commission File
No. 000-20117) filed with the Commission on November 24, 2004. |
|
|
|
|
|
10.33
|
|
-
|
|
Fourth Amendment to Lease Agreement dated January 1, 2003, between Encysive Pharmaceuticals Inc. and the Board of
Regents of The University of Texas System (incorporated by reference to Exhibit 10.31 to the Companys Annual Report on
Form 10-K (Commission File No. 000-20117) for the year ended December 31, 2005, filed with the Commission on March 13,
2006). |
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
10.34*
|
|
-
|
|
Sublicense and License Agreement dated May 27, 1993, between Company and Genentech, Inc., together with exhibits
(incorporated by reference to Exhibit 10.17 to the Companys Form 10-Q (Commission File No. 000-20117) for the quarter
ended June 30, 1993, and incorporated by reference to Exhibit 10.17 to the Companys Form 10-Q/A-1 (Commission File No.
0-20117) for the quarter ended June 30, 1993). |
|
|
|
|
|
10.35
|
|
-
|
|
Agreement between Mitsubishi Chemical Corporation, Encysive Pharmaceuticals Inc. and SmithKline Beecham plc dated
August 5, 1997 (incorporated by reference to Exhibit 99.1 to the Companys Form 8-K (Commission File No. 000-20117)
filed with the Commission on August 25, 1997). |
|
|
|
|
|
10.36*
|
|
-
|
|
Product Development License and Co-Promotion Agreement between Encysive Pharmaceuticals Inc. and SmithKline Beecham
plc dated August 5, 1997 (incorporated by reference to Exhibit 99.2 to the Companys Form 8-K (Commission File No.
000-20117) filed with the Commission on August 25, 1997). |
|
|
|
|
|
10.37*
|
|
-
|
|
License Agreement between Encysive Pharmaceuticals Inc. and Revotar Biopharmaceuticals AG. (incorporated by reference
to Exhibit 99.1 to the Companys Current Report on Form 8-K (Commission File No. 000-20117) filed on June 27, 2005 |
|
|
|
|
|
10.38*
|
|
-
|
|
Research Collaboration and License Agreement by and between Encysive Pharmaceuticals Inc. and Schering-Plough LTD.
dated June 30, 2000 (incorporated by reference to Exhibit 99.8 to the Companys Quarterly Report on Form 10-Q
(Commission File No. 000-20117) for the quarter ended June 30, 2000, filed with the Commission on August 14, 2000). |
|
|
|
|
|
10.39
|
|
-
|
|
Research Collaboration and License Agreement by and between Encysive Pharmaceuticals Inc. and Schering Corporation
dated June 30, 2000 (incorporated by reference to Exhibit 99.9 to the Companys Quarterly Report on Form 10-Q
(Commission File No. 000-20117) for the quarter ended June 30, 2000, filed with the Commission on August 14, 2000). |
|
|
|
|
|
10.40
|
|
-
|
|
Common Stock Purchase Agreement between the Company and Azimuth Opportunity Ltd. dated October 19, 2006.
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (Commission File No. 000-20117)
filed with the Commission on October 20, 2006). |
|
|
|
|
|
14.1
|
|
-
|
|
Code of Ethics (incorporated by reference to Exhibit 14.1 to the Companys Annual Report on Form 10-K (Commission
File No. 000-20117) for the year ended December 31, 2005, filed with the Commission on March 13, 2006) |
|
|
|
|
|
21.1
|
|
-
|
|
Subsidiaries of the Registrant. |
|
|
|
|
|
23.1
|
|
-
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
|
|
31.1
|
|
-
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended. |
|
|
|
|
|
31.2
|
|
-
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended. |
|
|
|
|
|
32.1
|
|
-
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
32.2
|
|
-
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
* |
|
The Company has omitted certain portions of these agreements in reliance on Rule 24b-2
under the Securities Exchange Act of 1934, as amended. |
|
+ |
|
Management contract or compensatory plan or arrangement. |
|
|
|
Filed herewith. |
EX-10.2
2
h44503exv10w2.htm
EIGHTH AMENDMENT TO CONSULTING AGREEMENT
exv10w2
Exhibit 10.2
EIGHTH AMENDMENT TO CONSULTING AGREEMENT
This EIGHTH AMENDMENT TO CONSULTING AGREEMENT (the Amendment) is entered into on March
8, 2007, to be effective as of January 1, 2007 (the Effective Date), by and between JOHN M.
PIETRUSKI, an individual residing at 27 Paddock Lane, Colts Neck, New Jersey 07722 (Consultant),
and ENCYSIVE PHARMACEUTICALS INC., a Delaware corporation located at 4848 Loop Central Drive, Suite
700, Houston, Texas 77081 (the Corporation).
WHEREAS, the Corporation and Consultant have entered into that certain Consulting Agreement,
dated January 1, 1992, as the same has been amended from time to time (the Agreement), which is
herby incorporated herein by reference; and
WHEREAS, pursuant to the Agreement, the Corporation has retained Consultant to provide
consulting services to the Corporation with respect to corporate governance, business development
and other such matters; and
WHEREAS, the Corporation and Consultant desire to amend the Agreement as herein set forth.
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual covenants
contained herein, the parties hereto agree as follows:
1. Definitions. If not otherwise defined herein, all capitalized terms used herein
shall have their respective meaning assigned to them in the Agreement.
2. Amendment to Section 2. Effective as of the date hereof, Section 2 of the
Agreement is hereby amended by deleting paragraph (a) in its entirety and substituting the
following in lieu thereof:
(a) Consultants retention under this agreement shall commence on the date
hereof (the Commencement Date) and shall end on the earliest to occur of: (i)
the death or disability (as defined herein) of Consultant; (ii) the termination of
Consultants retention by the Corporation for cause (as defined herein); or (iii)
December 31, 2007. After December 31, 2007, this Agreement may be renewed for
additional periods on all the remaining terms and conditions set forth herein upon
mutual agreement of Consultant and the Corporation.
3. The terms and provisions set forth in this Amendment shall modify and supersede all
inconsistent terms and provisions set forth in the Agreement, as amended hereby, and except as
expressly modified and superseded by this Amendment, the terms and provisions of the Agreement, as
amended, are ratified and confirmed and shall continue in full force and effect. Corporation and
Consultant agree that the Agreement, as amended hereby, shall continue to be legal, valid, binding
and enforceable in accordance with its terms.
4. Except as expressly modified or amended hereby, the terms and provisions of the Agreement
shall remain in force and effect in accordance with the terms hereof; provided, however, that from
and after the Effective Date any reference to the Agreement shall be deemed and construed as
meaning the Agreement as amended and modified hereby.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first
written above.
|
|
|
|
|
|
CONSULTANT:
|
|
Date: March 8, 2007 |
/s/ John M. Pietruski
|
|
|
John M. Pietruski |
|
|
|
|
|
|
CORPORATION:
ENCYSIVE PHARMACEUTICALS INC.
|
|
Date: March 8, 2007 |
/s/ Bruce D. Given, M.D.
|
|
|
Bruce D. Given, M.D. |
|
|
President and Chief Executive Officer |
|
|
EX-21.1
3
h44503exv21w1.htm
SUBSIDIARIES OF THE REGISTRANT
exv21w1
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
|
|
|
1.
|
|
ImmunoPharmaceutics, Inc. |
|
|
100% Owned Subsidiary |
|
|
Incorporated in the State of California |
|
|
|
2.
|
|
EP-ET, LLC |
|
|
100% Owned Subsidiary |
|
|
A limited liability company formed in the State of Delaware |
|
|
|
3.
|
|
Encysive, L.P. |
|
|
100% Owned Subsidiary |
|
|
A limited partnership formed in the State of Delaware |
|
|
|
4.
|
|
Encysive (UK) Limited |
|
|
100% Owned Subsidiary of Encysive, L.P. |
|
|
A private company formed in the United Kingdom |
|
|
|
5.
|
|
Encysive Germany GmbH |
|
|
100% Owned Subsidiary of Encysive (UK) Limited |
|
|
A private company formed in Germany |
|
|
|
6.
|
|
Encysive Canada, Inc. |
|
|
100% Owned Subsidiary |
|
|
A private company formed in Canada |
|
|
|
7.
|
|
Argatroban Royalty Sub, LLC. |
|
|
100% Owned Subsidiary |
|
|
A limited liability company formed in the State of Delaware |
EX-23.1
4
h44503exv23w1.htm
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
exv23w1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Encysive Pharmaceuticals Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 33-79656,
33-79658, 33-79670, 33-93282, 33-93368, 333-27423, 333-27425, 333-79477, 333-72468, 333-41864,
333-107941, 333-107939, 333-116178 and 333-125137) on Form S-8 and (Nos. 333-116193 and
333-125154) on Form S-3 of Encysive Pharmaceuticals Inc. of our
reports dated March 15, 2007, with
respect to the consolidated balance sheets of Encysive Pharmaceuticals Inc. as of December 31, 2006
and 2005, and the related consolidated statements of operations and comprehensive loss,
stockholders equity (deficit), and cash flows for each of the years in the three-year period ended
December 31, 2006, and managements assessment of the effectiveness of internal control over
financial reporting as of December 31, 2006, and the effectiveness of internal control over
financial reporting as of December 31, 2006, which reports appear in the December 31, 2006, annual
report on Form 10-K of Encysive Pharmaceuticals Inc.
Our report
dated March 15, 2007 contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has
a net capital deficiency which raise substantial doubt about its
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the
outcome of that uncertainty.
In
addition, our report refers to the Companys adoption of the
fair value method of accounting for stock-based compensation as
required by Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment.
KPMG LLP
/s/ KPMG LLP
Houston, Texas
March 15, 2007
EX-31.1
5
h44503exv31w1.htm
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
exv31w1
Exhibit 31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / Rule 15d-14(a), promulgated
under the Securities Exchange Act of 1934, as amended.
I, Bruce D. Given, M.D., certify that:
|
1. |
|
I have reviewed this annual report on Form 10-K of Encysive Pharmaceuticals Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
|
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: March 15, 2007
/s/ Bruce D. Given, M.D.
Bruce D. Given, M.D.
President and Chief Executive Officer
EX-31.2
6
h44503exv31w2.htm
CERTIFICATION OF CHIEF FINANCIAL OFFICER
exv31w2
Exhibit 31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / Rule 15d-14(a), promulgated
under the Securities Exchange Act of 1934, as amended.
I, Gordon H. Busenbark, certify that:
1. |
|
I have reviewed this annual report on Form 10-K of Encysive Pharmaceuticals Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: March 15, 2007
/s/ Gordon H. Busenbark
Gordon H. Busenbark
Chief Financial Officer
EX-32.1
7
h44503exv32w1.htm
CERTIFICATION PURSUANT TO SECTION 906
exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Encysive Pharmaceuticals Inc. (the Company) on Form
10-K for the year ended December 31, 2006 (the Report), as filed with the Securities and Exchange
Commission on the date hereof, I, Bruce D. Given, M.D., President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Bruce D. Given, M.D.
Bruce D. Given, M.D.
President and Chief Executive Officer
March 15, 2007
A signed original of this written statement required by Section 906 has been provided to Encysive
Pharmaceuticals Inc. and will be retained by Encysive Pharmaceuticals Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
EX-32.2
8
h44503exv32w2.htm
CERTIFICATION PURSUANT TO SECTION 906
exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Encysive Pharmaceuticals Inc. (the Company) on Form
10-K for the year ended December 31, 2006 (the Report), as filed with the Securities and Exchange
Commission on the date hereof, I, Gordon H. Busenbark, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Gordon H. Busenbark
Gordon H. Busenbark
Chief Financial Officer
March 15, 2007
A signed original of this written statement required by Section 906 has been provided to Encysive
Pharmaceuticals Inc. and will be retained by Encysive Pharmaceuticals Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
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end
-----END PRIVACY-ENHANCED MESSAGE-----