e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended: June 30, 2006
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 000-51768
VALERA PHARMACEUTICALS, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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13-4119931
(I.R.S. Employer
Identification No.) |
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7 Clarke Drive
Cranbury, New Jersey
(Address of principal executive offices)
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08512
(Zip Code) |
(609) 235-3000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o Noþ
As of August 1, 2006, there were 14,887,880 shares of the registrants common stock, $0.001
par value outstanding.
TABLE OF CONTENTS
Index
2
Cautionary Statement Regarding Forward-Looking Statements
We have included, and from time to time may make in our public filings, press releases or
other public statements, certain statements, including (without limitation) those under
Managements Discussion and Analysis of Financial Condition and Results of Operations in Part
I, Item 2 (MD&A), and Quantitative and Qualitative Disclosures about Market Risk in Part I,
Item 3 that may constitute forward-looking statements. In addition, our management may make
forward-looking statements to analysts, investors, representatives of the media and others.
These forward-looking statements are not historical facts and represent only Valera
Pharmaceuticals beliefs regarding future events, many of which, by their nature, are
inherently uncertain and beyond our control.
The nature of Valera Pharmaceuticals business makes predicting the future trends of our
revenues, expenses and net income difficult. The risks and uncertainties involved in our
businesses could affect the matters referred to in such statements and it is possible that our
actual results may differ from the anticipated results indicated in these forward looking
statements. Important factors that could cause actual results to differ from those in the
forward-looking statements include (without limitation):
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changes in reimbursement policies and/or rates for Vantas and any future products; |
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the actions and initiatives of current and potential competitors; |
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the impact of current, pending and future legislation, regulation and legal actions
in the U.S. and worldwide affecting the pharmaceutical and healthcare industries; |
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our ability to manufacture our Vantas product; and |
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our ability to develop products, receive regulatory approvals, and market our products. |
Accordingly, you are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date on which they are made. Valera Pharmaceuticals undertakes no
obligation to update publicly or revise any forward-looking statements to reflect the impact of
circumstances or events that arise after the dates they are made, whether as a result of new
information, future events or otherwise except as required by applicable law. You should,
however, consult further disclosures Valera Pharmaceuticals may make in future filings of its
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
and any amendments thereto.
3
VALERA PHARMACEUTICALS, INC
BALANCE SHEETS
(in thousands, except par value)
|
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June 30, |
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December 31, |
|
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2006 |
|
|
2005 |
|
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|
(Unaudited) |
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|
|
|
ASSETS |
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|
|
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|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
18,149 |
|
|
$ |
2,340 |
|
Investments held-to-maturity |
|
|
5,925 |
|
|
|
|
|
Accounts receivable, net of allowances of $500 at June 30, 2006 and $385 at December 31,
2005 |
|
|
4,490 |
|
|
|
4,488 |
|
Inventories, net |
|
|
4,306 |
|
|
|
3,191 |
|
Prepaid expenses and other current assets |
|
|
1,172 |
|
|
|
726 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
34,042 |
|
|
|
10,745 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation of $1,640 at June 30, 2006 and
$1,374 at December 31, 2005 |
|
|
6,570 |
|
|
|
4,194 |
|
Deferred offering costs |
|
|
|
|
|
|
1,378 |
|
Deferred financing costs |
|
|
90 |
|
|
|
124 |
|
Security deposits |
|
|
91 |
|
|
|
91 |
|
Intangible assets, net of accumulated amortization of $26 at June 30, 2006 |
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
41,292 |
|
|
$ |
16,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
|
|
|
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|
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Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,399 |
|
|
$ |
1,421 |
|
Accrued liabilities |
|
|
3,286 |
|
|
|
4,607 |
|
Note payable |
|
|
|
|
|
|
1,525 |
|
Deferred revenue current |
|
|
|
|
|
|
329 |
|
Capital lease obligations current |
|
|
17 |
|
|
|
18 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,702 |
|
|
|
7,900 |
|
|
|
|
|
|
|
|
|
|
Other non current liabilities |
|
|
150 |
|
|
|
|
|
Capital lease obligations long term |
|
|
18 |
|
|
|
|
|
Deferred revenue long term |
|
|
300 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Series A 6% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 7,000 shares issued and
outstanding; liquidation preference $0 and $7,598 at June 30, 2006 and December 31, 2005,
respectively
|
|
|
|
|
|
|
13,604 |
|
Series B 10% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 22,069 shares issued
and outstanding; liquidation preference$0 and $20,221 at June 30, 2006 and December 31, 2005
respectively |
|
|
|
|
|
|
15,082 |
|
Series C 6% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 11,600 shares issued
and outstanding; liquidation preference $0 and $12,590 at June 30, 2006 and December 31, 2005,
respectively |
|
|
|
|
|
|
11,239 |
|
|
|
|
|
|
|
|
|
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Shareholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 30,000 authorized, 14,888 and 1,667 issued and outstanding at
June 30, 2006 and December 31, 2005, respectively |
|
|
15 |
|
|
|
2 |
|
Additional paid-in-capital |
|
|
78,622 |
|
|
|
8,696 |
|
Deferred stock-based compensation |
|
|
|
|
|
|
(630 |
) |
Accumulated deficit |
|
|
(44,515 |
) |
|
|
(39,661 |
) |
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
34,122 |
|
|
|
(31,593 |
) |
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit) |
|
$ |
41,292 |
|
|
$ |
16,532 |
|
|
|
|
|
|
|
|
The accompanying notes to the financial statements are an integral part of these statements.
4
VALERA PHARMACEUTICALS, INC
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
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Three months ended |
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Six months ended |
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|
June 30, |
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June 30, |
|
|
June 30, |
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June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net product
sales |
|
$ |
6,215 |
|
|
$ |
10,279 |
|
|
$ |
11,740 |
|
|
$ |
17,965 |
|
Licensing
revenue |
|
|
5 |
|
|
|
7 |
|
|
|
12 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net
revenue
|
|
|
6,220 |
|
|
|
10,286 |
|
|
|
11,752 |
|
|
|
17,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
sales |
|
|
1,653 |
|
|
|
2,951 |
|
|
|
3,114 |
|
|
|
3,974 |
|
Research and
development |
|
|
1,817 |
|
|
|
1,861 |
|
|
|
3,834 |
|
|
|
2,921 |
|
Selling and
marketing |
|
|
3,770 |
|
|
|
2,820 |
|
|
|
6,479 |
|
|
|
5,321 |
|
General and
administrative |
|
|
1,980 |
|
|
|
1,145 |
|
|
|
3,611 |
|
|
|
2,533 |
|
Amortization of
intangible
assets |
|
|
26 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and
expenses |
|
|
9,246 |
|
|
|
8,777 |
|
|
|
17,064 |
|
|
|
14,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
operations |
|
|
(3,026 |
) |
|
|
1,509 |
|
|
|
(5,312 |
) |
|
|
3,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
294 |
|
|
|
14 |
|
|
|
505 |
|
|
|
29 |
|
Interest
expense |
|
|
|
|
|
|
(1 |
) |
|
|
(27 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income
taxes |
|
|
(2,732 |
) |
|
|
1,522 |
|
|
|
(4,834 |
) |
|
|
3,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes |
|
|
10 |
|
|
|
140 |
|
|
|
20 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(2,742 |
) |
|
$ |
1,382 |
|
|
$ |
(4,854 |
) |
|
$ |
2,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per
share |
|
$ |
(0.18 |
) |
|
$ |
0.83 |
|
|
$ |
(0.39 |
) |
|
$ |
1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income
per
share |
|
$ |
(0.18 |
) |
|
$ |
0.12 |
|
|
$ |
(0.39 |
) |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average
number of shares
outstanding |
|
|
14,886 |
|
|
|
1,667 |
|
|
|
12,290 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
number of shares
outstanding |
|
|
14,886 |
|
|
|
11,366 |
|
|
|
12,290 |
|
|
|
11,192 |
|
The accompanying notes to the financial statements are an integral part of these statements.
5
VALERA PHARMACEUTICALS, INC
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
For the Six Months Ended June 30, 2006
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Deferred |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Compensation |
|
|
Deficit |
|
|
Equity (Deficit) |
|
Balances at December 31, 2005 |
|
|
1,667 |
|
|
$ |
2 |
|
|
$ |
8,696 |
|
|
$ |
(630 |
) |
|
$ |
(39,661 |
) |
|
$ |
(31,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,854 |
) |
|
|
(4,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from
initial public offering |
|
|
3,863 |
|
|
|
4 |
|
|
|
30,201 |
|
|
|
|
|
|
|
|
|
|
|
30,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock
into common stock |
|
|
9,356 |
|
|
|
9 |
|
|
|
39,916 |
|
|
|
|
|
|
|
|
|
|
|
39,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
2 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of deferred
compensation related to adoption
of FAS 123(R) |
|
|
|
|
|
|
|
|
|
|
(630 |
) |
|
|
630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense related to options
granted to non-employees |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to
employee stock options |
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006 |
|
|
14,888 |
|
|
$ |
15 |
|
|
$ |
78,622 |
|
|
$ |
|
|
|
$ |
(44,515 |
) |
|
$ |
34,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the financial statements are an integral part of these statements.
6
VALERA PHARMACEUTICALS, INC
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(4,854 |
) |
|
$ |
2,959 |
|
Adjustments to reconcile net (loss) income to net cash used in operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
292 |
|
|
|
199 |
|
Amortization of deferred financing fees |
|
|
34 |
|
|
|
|
|
Allowances for accounts receivable |
|
|
193 |
|
|
|
227 |
|
Expense related to options granted to non-employees |
|
|
5 |
|
|
|
58 |
|
Stock based compensation |
|
|
424 |
|
|
|
(182 |
) |
Changes in assets and liabilities which provided (used) cash |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(195 |
) |
|
|
(5,110 |
) |
Inventories |
|
|
(1,115 |
) |
|
|
(708 |
) |
Restricted cash |
|
|
|
|
|
|
100 |
|
Prepaid expenses and other current assets |
|
|
(446 |
) |
|
|
(403 |
) |
Security deposits |
|
|
|
|
|
|
(62 |
) |
Accounts payable |
|
|
1,978 |
|
|
|
(59 |
) |
Accrued liabilities |
|
|
(1,321 |
) |
|
|
2,893 |
|
Other non-current liabilities |
|
|
150 |
|
|
|
|
|
Deferred revenue |
|
|
(329 |
) |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(5,184 |
) |
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,614 |
) |
|
|
(1,471 |
) |
Purchase of product rights |
|
|
(525 |
) |
|
|
|
|
Purchase of investments held-to-maturity |
|
|
(5,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9,064 |
) |
|
|
(1,471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
31,593 |
|
|
|
|
|
Payment of capital lease obligations |
|
|
(11 |
) |
|
|
(11 |
) |
Payment of notes payable |
|
|
(1,525 |
) |
|
|
|
|
Deferred offering costs |
|
|
|
|
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
30,057 |
|
|
|
(1,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
15,809 |
|
|
|
(2,270 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
2,340 |
|
|
|
5,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
18,149 |
|
|
$ |
2,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Conversion of preferred stock into common stock |
|
$ |
39,925 |
|
|
$ |
|
|
Acquisition of an asset through a capital lease |
|
$ |
28 |
|
|
$ |
|
|
The accompanying notes to the financial statements are an integral part of these statements.
7
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED
Note 1. Organization and Description of Business
Valera Pharmaceuticals, Inc (Valera or the Company) is a specialty pharmaceutical company
concentrating on the development, acquisition and commercialization of products for the treatment
of urological and endocrine conditions, diseases and disorders, including products that utilize its
Hydron implant proprietary technology.
The Companys headquarters and manufacturing operations are located in Cranbury, New Jersey.
Valera was incorporated in the state of Delaware on May 30, 2000. Prior to November 2004, the
Company operated as a development-stage company and did not generate any substantial revenue. In
November 2004, the Company exited the development stage when it began selling its initial product
Vantas®.
Recent Developments
On May 17, 2006, the Company entered into a supply agreement with Plantex USA Inc. whereby
Plantex would supply the Company with the active pharmaceutical ingredient (API)
N-Trifluroacetyl-adriamycin-14 valerate, otherwise known as Valrubicin, in connection with the
Companys anticipated launch of the product Valstar for the treatment of bladder cancer. Under the
agreement, the Company will only source API from Plantex in connection with the development,
manufacture or sale of, and securing regulatory approval for, Valstar in the United States, its
territories and possessions, and Canada (the Territory). Plantex will manufacture and supply all
of the Companys requirements for API for commercial sale of Valstar in the Territory. Under the
terms of the agreement, beginning in the calendar year following the year in which the Company
receives regulatory approval for the Valstar product in the United States, the Company will be
required to purchase a minimum of $1,000,000 of Valrubicin each calendar year until the agreement
expires. The agreement will expire ten years after the date of the first commercial sale of
Valstar.
On May 23, 2006, the Companys Board of Directors approved a compensation plan for
non-employee directors. Effective February 2, 2006, the following compensation will be paid to
each non-employee director (paid quarterly in arrears):
Annual Retainer: Each non-employee director will receive an annual retainer of $16,000. The
Chairman of the Board will receive an annual retainer of $9,000 in addition to the non-employee
director annual retainer of $16,000 for a total of $25,000 annually. The Chairman of the Audit
Committee will receive an annual retainer of $7,500 in addition to the non-employee director
annual retainer of $16,000 for a total of $23,500 annually. The Chairman of the Compensation
Committee will receive an annual retainer of $6,000 in addition to the non-employee director
annual retainer of $16,000 for a total of $22,000 annually.
Board and Committee Meeting Attendance Fees: Each non-employee director will receive compensation
of $1,500 for each Board meeting attended in person and $500 for each Board meeting attended by
telephone and $500 for each committee meeting whether attended in person or via telephone.
In addition to the compensation plan described above, on May 23, 2006, the Board of Directors
granted options to purchase 7,500 shares of the Companys common stock, par value $0.001 per share,
to each of the Companys non-employee directors. These options were granted pursuant to the
Companys 2002 Equity Incentive Plan, have an exercise price of $8.85 per share, and completely
vest on May 23, 2007.
On June 27, 2006, the Company announced it submitted an Investigational New Drug Application
(IND) to the Food and Drug Administration (FDA) for VP004, a subdermal implant utilizing the
Companys Hydron technology to deliver naltrexone, over an extended period of time, for the
treatment of opioid addiction. The goal of such an implant would be to provide a controlled
release of naltrexone for three to six months.
On July 5, 2006, the Company entered into an Amended and Restated Executive Employment
Agreement (the Employee Agreement) with David S. Tierney, M.D., the Companys President and Chief
Executive Officer. Under the Employee Agreement, Dr. Tierney will continue to serve as the
President and Chief Executive Officer of the Company for the period commencing on July 5, 2006
through July 5, 2009, after which the Employee Agreement shall automatically renew for additional
one-year periods, unless sooner terminated. In addition, and for no additional consideration, Dr.
Tierney will serve as a member of the Companys Board of Directors to the extent elected by the
shareholders of the Company and consistent with the by-laws of the Company as they may be amended
from time-to-time.
8
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Dr. Tierney will be paid an annual base salary of $350,000 and will be eligible to participate
in any annual bonus program established by the Companys Board of Directors and benefit plans and
programs that are generally available to other employees of the Company. The Companys Board of
Directors (excluding Dr. Tierney if he is a Director) will review the performance of Dr. Tierney
annually and make appropriate adjustments to Dr. Tierneys base salary. The Employee Agreement
provides that Dr. Tierneys employment may be terminated by the Company with or without cause and
by Dr. Tierney with or without good reason. In the event Dr. Tierneys employment is terminated as
a result of his death or permanent disability, Dr. Tierney and/or his spouse or dependents, as
applicable, will receive 24 months in the case of death and 29 months in the case of permanent
disability, of healthcare and dental insurance continuation at the Companys expense. In the event
Dr. Tierneys employment is terminated by the Company without cause or by him for good reason, Dr.
Tierney will receive any earned and accrued but unpaid annual bonus and the continuation of his
then current base salary until the last day of the 12-month period following the date of such
termination; provided that if such termination occurs within 30 days prior to, or one year
following, a change in control, Dr. Tierney will continue to receive his then current base salary
for the 24-month period following the date of such termination and will receive a bonus equal to
two times the highest annual bonus received by him during the three most recently completed fiscal
years of the Company. In connection with the Employee Agreement, Dr. Tierney also entered into an
employee confidentiality and non-competition agreement with the Company, setting forth his
obligation not to compete with or disclose any confidential Company information.
In May 2006, the Company amended the change in control agreement with Andrew Drechsler, Chief
Financial Officer. The severance payment amount changed from a 12 month base salary and annual
bonus to a 24 month base salary and two times annual bonus. No other terms of the agreement were
changed.
On July 6, 2006, the Company announced it submitted a New Drug Application (NDA) to the FDA
for SUPPRELIN®-LA, a 12-month implant for central precocious puberty or the early onset of puberty
in children.
On July 17, 2006, the Company entered into an Investment and Shareholders Agreement ( the
Shareholders Agreement) in which the Company will receive a 19.9% ownership interest in a newly
created Dutch company called Spepharm Holding B.V. (Spepharm) for a nominal amount of
approximately EUR 3,675 (approximately $4,700) and product distribution rights. Spepharm and its
European specialty pharmaceutical group of companies are focusing on becoming one of the leading
suppliers of specialty urology and endocrinology products to the European market place. In
addition to the 19.9% ownership in Spepharm, the Company will enter into a License and Distribution
Agreement with Spepharm upon incorporation of Spepharm. Under the terms of the distribution
agreement, the Company will give Spepharm the exclusive licensing and distribution rights to its
products under the trademark Vantas® and Supprelin® in the European Union as well as Norway and
Switzerland for a period of ten years.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with
the Securities and Exchange Commissions regulations for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the information and notes
required by U.S. generally accepted accounting principles (GAAP) for complete financial statements.
The accounting policies the Company follows are set forth in Note 2, Summary of Significant
Accounting Policies, to the Companys financial statements in its Annual Report on Form 10-K for
the year ended December 31, 2005. The following notes should be read in conjunction with such
policies and other disclosures in the Form 10-K. Interim results are not necessarily indicative of
results for a full year.
In the opinion of management, the accompanying unaudited interim financial statements contain
all material adjustments (consisting of normal, recurring accruals) necessary to fairly present the
Companys financial position as of June 30, 2006, the results of the Companys operations for the
three and six months ended June 30, 2006 and 2005, and the Companys cash flows for the six months
ended June 30, 2006 and 2005.
Use of Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from
those estimates.
9
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months
or less to be cash and cash equivalents.
Investments
The Company has investments in certain debt securities that have been classified on the
balance sheet as investments held-to-maturity in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Investments held-to-maturity are recorded on
the balance sheet at cost. Realized gains and losses on sales of investments are determined using
the specific identification method.
Allowances for Accounts Receivable
The Company maintains allowances for accounts receivable, which include an allowance for
doubtful accounts related to the estimated losses that may result from the inability of its
customers to make required payments. This allowance is determined based upon historical experience
and any specific customer collection issues that have been identified. The Company began selling
its first product on November 8, 2004 and has not experienced significant credit losses related to
an individual customer or groups of customers in any particular industry or geographic area. Also
included in the allowances for accounts receivable is an allowance for early payment discounts.
Inventory
The Company values its inventory at the lower of cost (determined by the first-in, first-out
method) or market. The Company regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based primarily on estimated forecasts of product
demand and production requirements. The Companys estimate of future product demand may prove to
be inaccurate, in which case it may have understated or overstated the provision required for
excess and obsolete inventory. In the future, if the Companys inventory is determined to be
overvalued, the Company would be required to recognize such costs in costs of product sales at the
time of such determination. Likewise, if the inventory is determined to be undervalued, the
Company may have recognized excess cost of product sales in previous periods and would be required
to recognize such additional operating income at the time of sale.
In
November 2004, the FASB issued SFAS No. 151, Inventory Costsan Amendment of ARB No. 43,
Chapter 4. The standard requires abnormal amounts of idle facility and related expenses to be
recognized as current period charges and also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company adopted SFAS No 151 on January 1, 2006. The adoption of SFAS No. 151 did not
have a material impact on the Companys financial statements.
Property, Plant and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated useful lives of the
respective assets, generally three to seven years. Leasehold improvements and capitalized leases
are recorded at the fair market value at the inception of the leases and are amortized over the
shorter period of their estimated useful life or the lease ranging from five to ten years.
Amortization of assets recorded under capital leases is included in depreciation and amortization
expense.
Deferred Offering and Financing Costs
Costs incurred in relation to the Companys initial public offering were deferred as of
December 31, 2005 and have been subsequently netted against gross proceeds raised from the initial
public offering of the Companys common stock, which closed on February 7, 2006. Costs incurred in
relation to the Companys line of credit were deferred and are being amortized over the two-year
term of the loan.
10
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Net Product Sales
Net product sales are presented net of estimated returns and price adjustments, early payment
discounts, group purchasing fees and credit card fees.
Revenue Recognition
The Companys revenue recognition policies are in accordance with Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements
(SAB 104), and SFAS No. 48, Revenue Recognition When Right of Return Exists (SFAS 48), which
provides guidance on revenue recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and Exchange Commission. SFAS 48 and SAB
104 require that four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the sellers
price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on managements judgments regarding the fixed
nature of the fee charged for services rendered and products delivered and the collectibility of
those fees. Should changes in conditions cause management to determine that these criteria are not
met for certain future transactions, revenue recognition for those transactions will be delayed and
the Companys revenue could be adversely affected.
Allowances have been recorded for any potential returns or adjustments in accordance with the
Companys policy. Returns are allowed for damaged or outdated goods. As of June 30, 2006, the
Company had a reserve of approximately $275,000 for returns and adjustments, of which $13,000 related to sales made in 2005 and $262,000 related to sales made in
2006. As of June 30, 2006 and December 31, 2005, there was approximately $110,000 and $300,000 of
retail value of Vantas, respectively, at distributors.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2006 |
|
Distributors |
|
|
Physicians |
|
|
Total |
|
|
|
(In thousands) |
|
Allowance balance at December 31, 2005 |
|
$ |
19 |
|
|
$ |
320 |
|
|
$ |
339 |
|
Provision related to sales for Fiscal 2006 |
|
|
|
|
|
|
745 |
|
|
|
745 |
|
Returns and adjustments related sales in
Fiscal 2004 |
|
|
|
|
|
|
(19 |
) |
|
|
(19 |
) |
Returns and adjustments related sales in
Fiscal 2005 |
|
|
|
|
|
|
(349 |
) |
|
|
(349 |
) |
Returns and adjustments related sales in
Fiscal 2006 |
|
|
|
|
|
|
(441 |
) |
|
|
(441 |
) |
|
|
|
|
|
|
|
|
|
|
Allowance balance at June 30, 2006 |
|
$ |
19 |
|
|
$ |
256 |
|
|
$ |
275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2005 |
|
Distributors |
|
|
Physicians |
|
|
Total |
|
|
|
(In thousands) |
|
Allowance balance at December 31, 2004 |
|
$ |
28 |
|
|
$ |
316 |
|
|
$ |
344 |
|
Provision related to sales for Fiscal 2005 |
|
|
|
|
|
|
1,368 |
|
|
|
1,368 |
|
Returns and adjustments related sales in
Fiscal 2004 |
|
|
|
|
|
|
(207 |
) |
|
|
(207 |
) |
Returns and adjustments related sales in
Fiscal 2005 |
|
|
|
|
|
|
(688 |
) |
|
|
(688 |
) |
|
|
|
|
|
|
|
|
|
|
Allowance balance at June 30, 2005 |
|
$ |
28 |
|
|
$ |
789 |
|
|
$ |
817 |
|
|
|
|
|
|
|
|
|
|
|
Customer Sales Urologists
The Companys revenue from product sales is recognized when there is persuasive evidence an
arrangement exists, the price is fixed in accordance with the Companys Customer Price List and/or
approved exception pricing, or determinable from executed contracts, delivery to the customer has
occurred and collectibility is reasonably assured. The Company uses contracts, purchase orders,
sales orders directly taken by product specialists and sales order confirmations to determine the
existence of an arrangement. Title to the product is taken upon delivery of the product, at which
time risk of loss shifts to the customer. Billing does not take place until the day after shipment
has occurred. The Company uses shipping documents and is provided with third party proof of
delivery to verify delivery to its customers.
11
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Customer Sales Distributors Sales
With respect to sales to distributors, revenue is recognized upon shipment, as the title,
risks and rewards of ownership of the products pass to the distributors and the selling price of
the Companys product is fixed and determinable at that point, as long as the Company believes the
product will be sold by the distributor within one to three months from the shipment of the product
by the Company to the distributor. If the Company believes the product will not be resold within
three months, revenue will be deferred until the product is sold and the product held by the
distributor will be classified as an asset on the Companys financial statements until it is sold
by the distributor. As of June 30, 2006 and December 31, 2005, the Company deferred approximately
$0 and $329,000 of revenue and recorded $0 and $44,000 of inventory on consignment, respectively,
related to product sold to distributors in the fourth quarter of 2005 that were not resold by
distributors in accordance with the Companys policy. Payment is due based upon the terms of the
contract. The distributor is responsible for selling and distributing the product to its customer
base and the rights for return are restricted to the Companys published return policy in effect
for all customers.
Royalties
Licensing revenue from royalty arrangements are recorded on a cash basis due to the
uncertainties regarding calculations, timing and collections. Royalty expense is recorded as the
corresponding revenue is recognized. Royalty expense is included in cost of product sales in the
statement of operations.
Shipping and Handling Costs
Shipping and handling costs incurred for inventory purchases and product shipments are
included within cost of product sales in the statements of operations.
Research and Development
Costs incurred in connection with research and development activities are expensed as
incurred. These costs consist of direct and indirect costs associated with specific projects as
well as fees paid to various entities that perform research for the Company.
Pre-clinical Study and Clinical Trial Expenses
Research and development expenditures are charged to operations as incurred. Our expenses
related to clinical trials are based on actual and estimates of the services received and efforts
expended pursuant to contracts with multiple research institutions and clinical research
organizations that conduct and manage clinical trials on our behalf. The financial terms of these
agreements are subject to negotiation and vary from contract to contract and may result in uneven
payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed
fee or unit price. Payments under the contracts depend on factors such as the successful
enrollment of patients or the completion of clinical trial milestones. Expenses related to
clinical trials generally are accrued based on contracted amounts applied to the level of patient
enrollment and activity according to the protocol. If timelines or contracts are modified based
upon changes in the clinical trial protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.
Advertising Costs
The Company charges advertising costs to selling and marketing expense as incurred.
Intangible Assets
On March 31, 2006, the Company completed its acquisition of the product rights associated with
the product known as Valstar (valrubicin) in the United States and Valtaxin in Canada. As of June
30, 2006, the Company has an intangible asset of approximately $499,000 associated with such
product rights. The intangible asset was recorded at its original cost of $525,000, less
accumulated amortization of approximately $26,000. Intangible assets are stated at cost, less
accumulated amortization, and are amortized over their estimated useful lives using the
straight-line method. The Company estimates that the useful life of the Valstar product rights is
5 years. The Company periodically reviews the original estimated useful lives of long-lived assets
and makes adjustments when appropriate.
12
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Stock-Based Compensation
The Company adopted SFAS No. 123(R) on January 1, 2006. SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative. Under
SFAS 123(R), the options we granted in prior years as a non-public company (prior to the initial
filing of our Registration Statement in March 2005) that were valued using the minimum value
method, will not be expensed in 2006 or future periods. Options granted as a non-public company
and accounted for using the intrinsic value method (cheap stock), will continue to be expensed over
the vesting period. The Company adopted the prospective transition method for these options.
Options granted as a public company will be expensed under the modified prospective method.
SFAS No. 123(R) does not change the accounting guidance for how the Company accounts for
options issued to non employees. The Company accounts for options issued to non-employees under
SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. As such, the value of such options is periodically re-measured and income or
expense is recognized during their vesting terms.
Deferred Compensation
At December, 31 2005, the Company had deferred compensation of approximately $630,000. In
accordance with the adoption of FAS 123(R), all deferred compensation has been eliminated. As of
June 30, 2006, the deferred compensation balance was $0.
Income Taxes
The Company utilizes the asset and liability method specified by Statement of Financial
Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation allowance is provided when it is
more likely than not that some portion or all of a deferred tax asset will not be realized.
Long-lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), the Company assesses the recoverability of long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted future operating
cash flows. If impairment is indicated, the Company measures the amount of such impairment by
comparing the fair value to the carrying value. There have been no indicators of impairment
through June 30, 2006.
Concentration Risks
The financial instrument that potentially subjects the Company to concentration of credit risk
is cash. The Company places its cash with high-credit quality financial institutions.
Concentrations of credit risk, with respect to this financial instrument, exist to the extent of
amounts presented in the financial statements.
The Company generated all of its product sales for the six months ended June 30, 2006 and 2005
from its product Vantas. In addition, for the three months ended June 30, 2006 and 2005, one
customer accounted for 8.2% and 7.6%, respectively, of the Companys net unit sales. The same
customer accounted for 6.9% and 6.9% respectively, of the Companys net unit sales for the six
months ended June 30, 2006 and 2005 and 11.2% and 0% of its outstanding receivables at June 30,
2006 and December 31, 2005, respectively.
The Company is dependent on single suppliers for certain raw materials, including histrelin,
the active pharmaceutical ingredient in Vantas. The Company does not have an agreement with the
supplier of histrelin.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair
values.
13
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Note 3. Investments
The Company has investments in certain debt securities that have been classified on the
balance sheet as investments held-to-maturity in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Investments held-to-maturity have been
recorded on the balance sheet at cost. Realized gains and losses on sales of investments are
determined using the specific identification method. The Company did not have any investments as
of December 31, 2005.
The amortized cost, gross unrecognized gains and losses, and fair value of the Companys
held-to-maturity investments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
Held-to-Maturity |
|
|
(in thousands) |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrecognized |
|
Unrecognized |
|
Fair |
Description of Securities |
|
Cost |
|
Gains |
|
Losses |
|
Value |
U.S. government and agencies securities |
|
$ |
5,925 |
|
|
$ |
2 |
|
|
$ |
(2 |
) |
|
$ |
5,925 |
|
The fair value of the Companys held to maturity securities at June 30, 2006, by contractual
maturity, is shown below. Expected maturities may differ from contract maturities because
borrowers may have the right to prepay and creditors may have the right to call certain
obligations.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
Held-to-Maturity |
|
|
|
(in thousands) |
|
Maturity |
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
5,925 |
|
|
$ |
5,925 |
|
Due after one year through five years |
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
|
|
|
|
|
|
|
Due after ten years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,925 |
|
|
$ |
5,925 |
|
|
|
|
|
|
|
|
The table below indicates the length of time individual securities have been in a continuous
loss position as of June 30, 2006:
As of June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
of |
|
|
Fair |
|
|
Unrecognized |
|
|
Fair |
|
|
Unrecognized |
|
|
Fair |
|
|
Unrecognized |
|
of Securities |
|
Securities |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
U.S. government and agencies securities |
|
|
1 |
|
|
$ |
2,945 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,945 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired investments
securities |
|
|
1 |
|
|
$ |
2,945 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,945 |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment securities shown above currently have fair values less than amortized cost and
therefore contain unrecognized losses. The Company has evaluated these securities and has
determined that the decline in value is not related to any Company or industry specific event. At
June 30, 2006, there was one out of two investment securities with unrecognized losses. The
Company anticipates full recovery of amortized costs with respect to these securities at maturity.
14
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Note 4. Inventory
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
650 |
|
|
$ |
463 |
|
Work-in-process |
|
|
3,454 |
|
|
|
2,426 |
|
Finished goods |
|
|
202 |
|
|
|
302 |
|
|
|
|
|
|
|
|
|
|
$ |
4,306 |
|
|
$ |
3,191 |
|
|
|
|
|
|
|
|
The preceding amounts are net of inventory reserves of approximately $1.1 million and $1.2
million at June 30, 2006 and December 31, 2005, respectively, for certain raw materials and for
certain products that failed to meet the Companys quality control specifications.
Note 5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
Useful Lives |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Laboratory equipment |
|
5 years |
|
$ |
1,632 |
|
|
$ |
1,531 |
|
Furniture and Fixtures |
|
7 years |
|
|
160 |
|
|
|
161 |
|
Office equipment |
|
5 years |
|
|
136 |
|
|
|
108 |
|
Computer equipment |
|
3 years |
|
|
467 |
|
|
|
417 |
|
Computer software |
|
3 years |
|
|
291 |
|
|
|
200 |
|
Construction in process |
|
|
|
|
|
|
4,896 |
|
|
|
2,526 |
|
Leasehold improvements |
|
1-10 years |
|
|
628 |
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,210 |
|
|
|
5,568 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
(1,640 |
) |
|
|
(1,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
$ |
6,570 |
|
|
$ |
4,194 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense and amortization for the three months ended June 30, 2006 and 2005 was
approximately $134,000 and $104,000, respectively. Depreciation expense and amortization for the
six months ended June 30, 2006 and 2005 was approximately $266,000 and $199,000, respectively.
There were property, plant and equipment assets totaling approximately $95,000 at June 30, 2006 and
$68,000 at December 31, 2005, respectively, subject to capital lease obligations with accumulated
amortization of approximately $61,000 and $54,000 at June 30, 2006 and December 31, 2005,
respectively.
The Company is currently in the process of expanding its manufacturing facilities in order to
support current and future product candidates. The costs related to the expansion are captured in
the table above as Construction in process. The expansion is expected to be completed in the
second half of 2006.
Note 6. Deferred Offering and Financing Costs
The Company had deferred offering costs of $0 and approximately $1.4 million at June 30, 2006
and December 31, 2005, respectively. The Company netted its deferred offering costs against the
gross proceeds raised from the initial public offering which closed on February 7, 2006.
In connection with the Companys line of credit, the Company had deferred financing costs of
approximately $90,000 and $124,000 at June 30, 2006 and December 31, 2005, respectively. Deferred
financing costs are being amortized over the two year term of the loan.
15
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Note 7. Credit Line Agreement (Note Payable)
In October 2005, the Company entered into a two-year, $7,500,000 line of credit with Merrill
Lynch Capital. Under the line of credit, the amount the Company may borrow at any given time is
dependent upon its accounts receivable balance and related aging of such accounts. In June 2006,
the line of credit was amended for interest, covenant and operational terms. Borrowings under the
amended line of credit bear an initial interest rate at the sum of the one-month LIBOR rate plus
3.25% (8.60% at June 30, 2006). The Company is subject to certain covenants under the amended line
of credit. In connection with the amended line of credit, the Company pledged all of its assets,
with the exception of intellectual property, to Merrill Lynch. At June 30, 2006 and December 31,
2005, the Company had $0 and approximately $1.5 million outstanding under the amended line of
credit, respectively. In February 2006, the Company used a portion of the net proceeds from its
initial public offering to repay amounts outstanding under the line of credit.
Note 8. Capitalization
Common Stock
The Company had 14,887,880 and 1,667,082 shares of common stock, par value $0.001, outstanding
as of June 30, 2006 and at December 31, 2005, respectively. The Company is authorized to issue
30,000,000 shares of common stock with a par value of $0.001 per share. Each holder of common
stock is entitled to one vote of each share of common stock held of record on all matters on which
stockholders generally are entitled to vote.
In February 2006, the Company closed its IPO in which it issued 3,862,500 shares of its common
stock at $9.00 per share. In conjunction with this offering all of the Companys outstanding
preferred stock converted into 9,355,714 shares of common stock. As a result, the Company had
14,885,296 shares of common stock outstanding after closing its initial public offering. During
the six months ended June 30, 2006, 2,584 shares of common stock were issued as a result of stock
option exercises.
Convertible Preferred Stock
All of the Companys outstanding preferred stock was converted into common stock in
conjunction with the initial public offering. In February 2006, the Company filed an amended and
restated Certificate of Incorporation that removed the designations, rights and obligations of the
convertible preferred stock.
Note 9. Stock-Based Compensation
The Company adopted SFAS No. 123(R) on January 1, 2006. SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative. Under
SFAS 123(R), the options we granted in prior years as a non-public company (prior to the initial
filing of our Registration Statement in March 2005) that were valued using the minimum value
method, will not be expensed in 2006 or future periods. Options granted as a non-public company
and accounted for using the intrinsic value method (cheap stock), will continue to be expensed over
the vesting period. The Company adopted the prospective transition method for these options.
Options granted as a public company will be expensed under the modified prospective method.
SFAS No. 123(R) does not change the accounting guidance for how the Company accounts for
options issued to non employees. The Company accounts for options issued to non-employees under
SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As such, the
value of such options is periodically re-measured and income or expense is recognized during their
vesting terms.
Under the modified-prospective-transition method, under SFAS No. 123(R), the Company is
required to record compensation expense for all awards granted after the date of adoption and for
the unvested portion of previously granted awards that remain outstanding as of the beginning of
the period of adoption. The Company measured stock-based compensation using the Black Scholes
option pricing model.
16
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
The following ranges of assumptions were used to compute employee stock-based compensation:
|
|
|
|
|
Risk free interest rate |
|
|
3.90% 5.01 |
% |
Expected volatility |
|
|
61.1% 66.15 |
% |
Expected dividend yield |
|
|
0.0 |
% |
Expected life (in years) |
|
|
6.25 |
|
Forfeiture rate |
|
|
0% 4.0 |
% |
Weighted average fair value at date of grant |
|
$ |
6.22 |
|
Expected volatility is based upon an appropriate peer group within the Companys industry
sector. The expected life of the awards represents the period of time that options granted are
expected to be outstanding.
The Company used historical information to estimate forfeitures within the valuation model.
The risk-free rate for periods within the expected life of the option is based on implied yields on
U.S. Government Issues in effect at the time of grant. Compensation cost is recognized using a
straight-line method over the vesting or service period and net of estimated forfeitures.
The following table presents all employee stock based compensation costs recognized in the
Companys statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
(in thousands) |
|
(in thousands) |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Method used to
account for
employee
stock-based
compensation |
|
Fair Value |
|
Intrinsic |
|
Fair Value |
|
Intrinsic |
Employee
Stock-based
compensation under
SFAS No. 123
(R) |
|
$ |
250 |
|
|
$ |
(417 |
) |
|
$ |
424 |
|
|
$ |
(182 |
) |
In 2005, as a result of the Companys marked to market of previous repriced options, the
Company had to reverse previous recorded stock-based compensation.
The following table illustrates the pro-forma effect on net income per share if we recorded
compensation expense based on the fair value method for all employee stock-based compensation
awards:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months Ended |
|
|
|
Ended June 30, 2005 |
|
|
June 30, 2005 |
|
|
|
(in thousands, except per |
|
|
(in thousands, except per |
|
|
|
share amounts) |
|
|
except per share |
|
Net income to common stock holders as reported |
|
$ |
1,382 |
|
|
$ |
2,959 |
|
Add: non-cash employee compensation as reported |
|
|
(417 |
) |
|
|
(182 |
) |
Deduct: total employee stock-based compensation
expense determined under fair value based method for
all awards |
|
|
(158 |
) |
|
|
(309 |
) |
|
|
|
|
|
|
|
Net income to common stockholders pro-forma |
|
$ |
807 |
|
|
$ |
2,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share as reported |
|
$ |
0.83 |
|
|
$ |
1.78 |
|
Basic income per share pro-forma |
|
$ |
0.48 |
|
|
$ |
1.48 |
|
Diluted income per share as reported |
|
$ |
0.12 |
|
|
$ |
0.26 |
|
Diluted income per share pro-forma |
|
$ |
0.07 |
|
|
$ |
0.22 |
|
17
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
The following table is a summary of stock option activity under the Companys Equity Incentive
Plan (the Plan) for the Companys common stock at December 31, 2005, and changes during the six
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Common |
|
|
Average |
|
|
Aggregate |
|
|
Average |
|
|
|
Stock |
|
|
Exercise |
|
|
Intrinsic Value |
|
|
Contractual |
|
|
|
Options |
|
|
Price |
|
|
(in thousands) |
|
|
Life |
|
Outstanding at December 31, 2005 |
|
|
1,265,849 |
|
|
$ |
4.25 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
342,700 |
|
|
$ |
9.04 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,584 |
) |
|
$ |
4.02 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(26,918 |
) |
|
$ |
8.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
1,579,047 |
|
|
$ |
5.22 |
|
|
$ |
819 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
636,698 |
|
|
$ |
3.56 |
|
|
$ |
199 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of the options exercised during the six months ended June 30, 2006
was $15,727. As of June 30, 2006, there was approximately $3.1 million of total employee
unrecognized compensation cost related to non-vested stock-based compensation awards granted under
the Plan. That cost is expected to be recognized over a weighted average period of three years.
For the six months ended June 30, 2006 and 2005, the Company granted a total of 0 and 10,833
options, respectively, to certain consultants. The Company has accounted for non-employee options
in accordance with EITF 96-18 and, accordingly, recorded non-cash (income) expense of approximately
$(1,000) and $44,000 for the three months ended June 30, 2006 and 2005, respectively. The Company
recorded a non-cash expense of approximately $5,000 and $58,000 for the six months ended June 30,
2006 and 2005, respectively.
For the three months ended June 30, 2006 and 2005, the company granted stock options with
exercise prices as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of |
|
Weighted Average |
|
Weighted Average |
|
Intrinsic Value |
Grants Made During Quarter Ended |
|
Options Granted |
|
Exercise Price |
|
Fair Value per Share |
|
per Share |
June 30, 2006 |
|
|
122,100 |
|
|
$ |
8.96 |
|
|
$ |
5.87 |
|
|
|
|
|
|
June 30, 2005 |
|
|
143,594 |
|
|
$ |
12.00 |
|
|
$ |
12.00 |
|
|
|
|
|
Note 10. Income Taxes
The provision for federal, state and local income taxes for the three months ended June 30,
2006 and 2005 was $10,000 and $140,000, respectively, with effective tax rates of 0.4% and 9.2%,
respectively. The provision for federal, state and local income taxes for the six months ended
June 30, 2006 and 2005 was $20,000 and $300,000, respectively, with effective tax rates of 0.4% and
9.2%, respectively. Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting and the amount used
for income tax purposes. The Companys net deferred tax assets relate primarily to net operating
loss carry forwards, research and development tax credits, non-cash stock-based compensation, and
depreciation and amortization. As of June 30, 2006 and at December 31, 2005, a valuation allowance
was recorded to fully offset the net deferred tax asset.
Note 11. Net Income (Loss) Per Share
The Company computes its basic net income (loss) per share in accordance with SFAS No. 128,
Earnings per Share (SFAS 128). Under the provisions of SFAS 128, basic net income (loss) per
common share (Basic EPS) is computed by dividing net income (loss) by the weighted-average number
of shares of common stock outstanding. Diluted net income (loss) per share of common stock
(Diluted EPS) is computed by dividing net income (loss) by the weighted-average number of shares
of common stock and dilutive common equivalent shares then outstanding as long as such impact would
not be anti-dilutive. All of the common stock equivalent
18
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
shares for the three and six months ended June 30, 2006 have been excluded from the computation of
diluted net income (loss) per share as their effect would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Net (loss) |
|
|
Shares |
|
|
Net income |
|
|
Shares |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
Basic net (loss) income per share factors |
|
$ |
(2,742 |
) |
|
|
14,886 |
|
|
$ |
1,382 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of preferred stock conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,832 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share factors |
|
$ |
(2,742 |
) |
|
|
14,886 |
|
|
$ |
1,382 |
|
|
|
11,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share |
|
$ |
(0.18 |
) |
|
|
|
|
|
$ |
0.83 |
|
|
|
|
|
Diluted net (loss) income per share |
|
$ |
(0.18 |
) |
|
|
|
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Net (loss) |
|
|
Shares |
|
|
Net income |
|
|
Shares |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
Basic net (loss) income per share factors |
|
$ |
(4,854 |
) |
|
|
12,290 |
|
|
$ |
2,959 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of preferred stock conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,660 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share factors |
|
$ |
(4,854 |
) |
|
|
12,290 |
|
|
$ |
2,959 |
|
|
|
11,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share |
|
$ |
(0.39 |
) |
|
|
|
|
|
$ |
1.78 |
|
|
|
|
|
Diluted net (loss) income per share |
|
$ |
(0.39 |
) |
|
|
|
|
|
$ |
0.26 |
|
|
|
|
|
Note 12. Related Party Transactions
Sanders Morris Harris Inc. and its affiliates own approximately 40% of BioPro Pharmaceutical,
Inc. and over 90% of Alpex Pharma S.A., two companies with which the Company has agreements to
distribute, develop and market its Vantas product. The Company did not receive any payments during
the three months ended June 30, 2006 and 2005, respectively from BioPro. The Company received
payments of $0 and $300,000 during the six months ended June 30, 2006 and 2005, respectively from
BioPro. The Company made payments of $61,000 and $152,000 during the three months ended June 30,
2006 and 2005, respectively to Alpex. The Company made payments of $61,000 and $152,000 during the
six months ended June 30, 2006 and 2005, respectively to Alpex.
On July 17, 2006, the Company entered into the Shareholders Agreement discussed above in Note
1 in which the Company will receive a 19.9% ownership in a newly created Dutch company called
Spepharm Holding B.V. In accordance with the Shareholders Agreement, David S. Tierney, M.D.,
Valeras President and Chief Executive Officer and Mr. James Gale, Valeras Chairman of the Board
of Directors, will be appointed as members of Spepharms initial supervisory board. Additional
investors in Spepharm include, Life Sciences Opportunities Fund (Institutional) II, L.P and Life
Sciences Opportunities Fund II, L.P. Both funds are funds managed by, and affiliates of, Sanders
Morris Harris, Inc. (SMH), whose affiliates own approximately 36% of the outstanding common stock
of Valera. Mr. Gale is a Managing Director of SMH and the investment manager of such funds that
hold shares of Valera and has sole voting and dispositive power over such shares. SMH, along with
a third party unaffiliated with the Company, have committed EUR 20,000,000 to the Spepharm venture.
19
VALERA PHARMACEUTICALS, INC
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
Note 13. Acquisition of Product
In March 2006, the Company acquired certain assets of Anthra Pharmaceuticals associated with
its valrubicin business in the United States. and Canada. The Company will make: (i) installment
payments totaling approximately $0.5 million; (ii) additional payments of up to 13.5% of net sales
depending upon the products formulation, indication and market share; and (iii) certain milestone
payments based upon achieving certain sales levels. Anthras valrubicin business involved the
manufacture and sale of valrubicin for use in the treatment of bladder cancer. The product was
distributed in the U.S. and Canada by third party partners of Anthra. In the United States, the
product was distributed under the trademark Valstar. Product rights are stated at cost, less
accumulated amortization, and are amortized over their estimated useful lives using the
straight-line method. The Company estimates that the useful life of the Valstar product rights is
5 years. For the three months ended June 30, 2006, the Company recorded approximately $26,000 of
amortization expense associated with such product rights. The Company periodically reviews the
original estimated useful lives of long-lived assets and makes adjustments when appropriate.
Note 14. Purchase Commitments
On May 17, 2006, the Company entered into a supply agreement with Plantex USA Inc. whereby
Plantex would supply the Company with the active pharmaceutical ingredient (API)
N-Trifluroacetyl-adriamycin-14 valerate, otherwise known as Valrubicin, in connection with the
Companys anticipated launch of the product Valstar for the treatment of bladder cancer. Under the
agreement, the Company will only source API from Plantex in connection with the development,
manufacture or sale of, and securing regulatory approval for, Valstar in the United States, its
territories and possessions, and Canada (the Territory). Plantex will manufacture and supply all
of the Companys requirements for API for commercial sale of Valstar in the Territory. Under the
terms of the agreement, beginning in the calendar year following the year in which the Company
receives regulatory approval for the Valstar product in the United States, the Company will be
required to purchase a minimum of $1,000,000 of Valrubicin each calendar year until the agreement
expires. The agreement will expire ten years after the date of the first commercial sale of
Valstar.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Introduction
The following information should be read in conjunction with the financial statements and
related notes in Part I, Item 1 of this Quarterly Report and with Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2005. In addition to historical information,
this Form 10-Q contains forward-looking information. This forward-looking information is subject
to certain risks and uncertainties that could cause actual results to differ materially from those
projected in the forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in the following section entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect managements
analysis only as of the date of this Form 10-Q. The Company undertakes no obligation to publicly
revise or update these forward-looking statements to reflect events or circumstances which arise
later. Readers should carefully review the risk factors described in our Annual Report on Form
10-K filed with the SEC.
Overview
We are a specialty pharmaceutical company concentrating on the development, acquisition and
commercialization of products for the treatment of urological and endocrine conditions, diseases
and disorders, including products that utilize our proprietary technology. Our first product,
Vantas, was approved by the FDA in October 2004. Vantas is a 12-month hydrogel implant based on
our patented Hydron Technology indicated for the palliative treatment of advanced prostate cancer
that delivers histrelin, a luteinizing hormone-releasing hormone agonist, or LHRH agonist. We
began selling Vantas in November 2004 utilizing our sales force that is currently calling on
urologists in the United States that account for the majority of LHRH agonist product sales. Total
U.S. sales of LHRH agonist products for the palliative treatment of prostate cancer were
approximately $900 million in 2005 based on our estimates and IMS Health Incorporated data, with
the leading products being the three- and four-month injection formulations. We believe that total
U.S. sales of LHRH agonist products declined by 10% in 2005, primarily as a result of lower prices
due to changes in Medicare reimbursement rates. We expect future reimbursement levels to continue to decline,
which will have an adverse effect on
20
our net product sales. We believe that Vantas has a
competitive advantage over other LHRH agonist products because it delivers an even, controlled dose
of LHRH agonist over a 12-month period, and is the only product indicated for the palliative
treatment of advanced prostate cancer that delivers histrelin, the most potent LHRH agonist
available.
We plan to seek marketing approvals for Vantas in various countries throughout the world. As
of June 30, 2006, in conjunction with one of our marketing partners, Vantas has been submitted for
regulatory approval in Thailand, Singapore, Malaysia, Taiwan, Korea and Hong Kong. In November
2005, we announced that we received approval to market Vantas in Denmark. In March 2006, we
announced that Paladin Labs received approval from Health Canada to market our Vantas product in
Canada. In June 2006, we made our first shipment of Vantas to Paladin and we expect Paladin to
launch the product in Canada at the end of 2006. In July 2006, we submitted for regulatory
approval in Germany, Ireland, Italy, Spain and the United Kingdom. In July 2006, we announced a
partnership with Spepharm to market Vantas in Denmark and throughout Europe.
In June 2006 we submitted a New Drug Application (NDA) to the U.S. FDA for Supprelin-LA, a
twelve-month implant for the treatment of central precocious puberty. We also acquired Valstar in
March 2006 for the treatment of bladder cancer that is no longer responsive to conventional
treatment such as surgery or topical drug application. We expect to launch this product in the
first quarter of 2007. In addition to Supprelin-LA, Valstar and Vantas, we are developing a
pipeline of proprietary product candidates for indications that include acromegaly, opioid
addiction, interstitial cystitis and nocturnal enuresis. Several of our product candidates also
utilize our Hydron Technology delivery system. We intend to leverage our existing specialized
sales force to market certain of our product candidates, if approved, since the indications of
these product candidates are treated by many of the same physicians we are calling on for Vantas.
We expect to continue to spend significant amounts on the development of our product
candidates. We expect our costs to increase significantly as we continue to develop and ultimately
commercialize our product candidates. While we will be focusing on the clinical development of our
later stage product candidates in the near term, we expect to increase our spending on earlier
stage clinical candidates as well. We also aim to build our urological and endocrine product
portfolio and opportunistically acquire or in-license later-stage urological and endocrine products
that are currently on the market or require minimal development expenditures, or have some patent
protection or potential for market exclusivity or product differentiation. Further, we intend to
collaborate with major and specialty pharmaceutical companies to develop and commercialize products
that are outside of our core urology and endocrinology focus. Accordingly, we will need to
generate significant revenues to achieve and maintain profitability.
Drug development in the United States and most countries throughout the world is a multi-stage
process controlled by the FDA and similar regulatory authorities in foreign countries. In the
United States, the FDA approval process for a new drug involves completion of pre-clinical studies
and the submission of the results of these studies to the FDA, together with proposed clinical
protocols, manufacturing information, analytical data and other information in an investigational
new drug application, which must become effective before human clinical trials may begin. Clinical
development typically involves three phases of study: Phase I, II and III. The most significant
expenses associated with clinical development are the Phase III clinical trials as they tend to be
the longest and largest studies conducted during the drug development stage. In responding to a
new drug application, the FDA may refuse to accept the application, or if accepted for filing, the
FDA may grant marketing approval, request additional information or deny the application if it
determines that the application does not provide an adequate basis for approval. In order to
commence clinical trials or marketing of a product outside the United States, we must obtain
approval of the applicable foreign regulatory authorities. Although governed by the laws and
regulations of the applicable country, clinical trials conducted outside the United States
typically are administered in a similar three-phase sequential process.
The successful development of our product candidates is highly uncertain. We cannot reasonably
estimate or know the nature, timing and estimated expenses of the efforts necessary to complete the
development of, or the period in which material net cash inflows are expected to commence from any
of our product candidates due to the numerous risks and uncertainties associated with developing
drugs, including the uncertainty of:
|
|
|
the scope, rate of progress and expense of our clinical trials and other research and development activities; |
|
|
|
|
future clinical trial results; |
|
|
|
|
the expense of clinical trials for additional indications; |
|
|
|
|
the terms and timing of any collaborative, licensing and other arrangements that we may establish; |
|
|
|
|
the expense and timing of regulatory approvals; |
|
|
|
|
the expense of establishing clinical and commercial supplies of our product candidates and any
products that we may develop; |
|
|
|
|
the effect of competing technological and market developments; and |
|
|
|
|
the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. |
21
Research and development expenses consist primarily of costs incurred for clinical trials and
manufacturing development costs related to our clinical product candidates, personnel and related
costs related to our research and product development activities and outside professional fees
related to clinical development and regulatory matters. We do not disclose estimated research and
development costs for product candidates that are not yet in Phase III clinical trials.
Recent Events
On May 17, 2006, we entered into a supply agreement with Plantex USA Inc. whereby Plantex
would supply us with the active pharmaceutical ingredient (API) N-Trifluroacetyl-adriamycin-14
valerate, otherwise known as Valrubicin, in connection with our anticipated launch of the product
Valstar for the treatment of bladder cancer. Under the agreement, we will only source API from
Plantex in connection with the development, manufacture or sale of, and securing regulatory
approval for, Valstar in the United States, its territories and possessions, and Canada (the
Territory). Plantex will manufacture and supply all of our requirements for API for commercial
sale of Valstar in the Territory. Under the terms of the agreement, beginning in the calendar year
following the year in which we receive regulatory approval for the Valstar product in the United
States, we will be required to purchase a minimum of $1,000,000 of Valrubicin each calendar year
until the agreement expires. The agreement will expire ten years after the date of the first
commercial sale of Valstar.
On May 23, 2006, our Board of Directors approved a compensation plan for non-employee
directors. Effective February 2, 2006, the following compensation will be paid to each
non-employee director (paid quarterly in arrears):
Annual Retainer: Each non-employee director will receive an annual retainer of $16,000. The
Chairman of the Board will receive an annual retainer of $9,000 in addition to the non-employee
director annual retainer of $16,000 for a total of $25,000 annually. The Chairman of the Audit
Committee will receive an annual retainer of $7,500 in addition to the non-employee director
annual retainer of $16,000 for a total of $23,500 annually. The Chairman of the Compensation
Committee will receive an annual retainer of $6,000 in addition to the non-employee director
annual retainer of $16,000 for a total of $22,000 annually.
Board and Committee Meeting Attendance Fees: Each non-employee director will receive compensation
of $1,500 for each Board meeting attended in person and $500 for each Board meeting attended by
telephone and $500 for each committee meeting whether attended in person or via telephone
In addition to the compensation plan described above, on May 23, 2006, the Board of Directors
granted options to purchase 7,500 shares of our common stock, par value $0.001 per share, to each
of our non-employee directors. These options were granted pursuant to our 2002 Equity Incentive
Plan, have an exercise price of $8.85 per share, and completely vest on May 23, 2007.
On May 24, 2006, we announced the appointment of Jeremy D. Middleton to the newly created
position of Vice President, Business Development. This position will help us to continue to pursue
prospects to broaden our pipeline and product portfolios while exploring potential alliances,
including co-promotion deals in the our market space and the out-licensing of our drug delivery
technology for uses in markets where we do not currently have a presence.
On June 27, 2006, we announced that we submitted an Investigational New Drug Application (IND)
to the Food and Drug Administration (FDA) for VP004, a subdermal implant utilizing our Hydron
technology to deliver naltrexone, over an extended period of time, for the treatment of opioid
addiction. The goal of such an implant would be to provide a controlled release of naltrexone for
three to six months.
On July 5, 2006, we entered into an Amended and Restated Executive Employment Agreement (the
Employee Agreement) with David S. Tierney, M.D., our President and Chief Executive Officer.
Under the Employee Agreement, Dr. Tierney will continue to serve as our President and Chief
Executive Officer for the period commencing on July 5, 2006 through July 5, 2009, after which the
Employee Agreement shall automatically renew for additional one-year periods, unless sooner
terminated. In addition, and for no additional consideration, Dr. Tierney will serve as a member
of our Board of Directors to the extent elected by our shareholders and consistent with our by-laws
as they may be amended from time-to-time.
Dr. Tierney will be paid an annual base salary of $350,000 and will be eligible to participate
in any annual bonus program established by our Board of Directors and benefit plans and programs
that are generally available to other employees of ours. Our Board of Directors (excluding Dr.
Tierney if he is a Director) will review the performance of Dr. Tierney annually and make
appropriate adjustments to Dr. Tierneys base salary. The Employee Agreement provides that Dr.
Tierneys employment may be terminated by us with or without cause and by Dr. Tierney with or
without good reason. In the event Dr. Tierneys employment is terminated as a result of his death
or permanent disability, Dr. Tierney and/or his spouse or dependents, as applicable, will receive
24 months in the case of death and 29 months in the case of permanent disability, of healthcare and
dental insurance continuation at our expense. In the event Dr. Tierneys employment is terminated
by us without cause or by him for good reason, Dr. Tierney will receive any earned and accrued but
unpaid annual bonus and the continuation of his then current base salary until the last day of the
12-month
22
period following the date of such termination; provided that if such termination occurs within
30 days prior to, or one year following, a change in control, Dr. Tierney will continue to receive
his then current base salary for the 24-month period following the date of such termination and
will receive a bonus equal to two times the highest annual bonus received by him during our three
most recently completed fiscal years. In connection with the Employee Agreement, Dr. Tierney also
entered into an employee confidentiality and non-competition agreement with us, setting forth his
obligation not to compete with or disclose any of our confidential information.
In May 2006, we amended the change in control agreement with Andrew Drechsler, Chief Financial
Officer. The severance payment amount changed from a 12 month base salary and annual bonus to a 24
month base salary and two times annual bonus. No other terms of the agreement were changed.
On July 6, 2006, we announced that we submitted a New Drug Application (NDA) to the FDA for
SUPPRELIN®-LA, a 12-month implant for central precocious puberty or the early onset of puberty in
children.
On July 17, 2006, we entered into an Investment and Shareholders Agreement ( the
Shareholders Agreement) in which we will receive a 19.9% ownership interest in a newly created
Dutch company called Spepharm Holding B.V. (Spepharm) for a nominal amount of approximately EUR
3,675 (approximately $4,700) and product distribution rights. Spepharm and its European specialty
pharmaceutical group of companies are focusing on becoming one of the leading suppliers of
specialty urology and endocrinology products to the European market place. In addition to the
19.9% ownership in Spepharm, we will enter into a License and Distribution Agreement with Spepharm
upon incorporation of Spepharm. Under the terms of the distribution agreement, we will give
Spepharm the exclusive licensing and distribution rights to our products under the trademark
Vantas® and Supprelin® in the European Union as well as Norway and Switzerland for a period of ten
years.
Product Sales and Costs
We generate revenues from sales of Vantas, our lead product. We began commercial sales of
Vantas in November 2004. Prior to June 2006, all sales were in the United States. In June 2006,
we made our first international shipment of Vantas to Paladin Labs in Canada. In the United
States, we distribute Vantas directly to physicians, or through Besse Medical Distribution Company,
or Besse Medical, which is a subsidiary of AmerisourceBergen Corporation.
Our business may be affected by physician utilization, pricing pressure from our competition
and Medicare or third party reimbursement, as well as other factors which may cause variances in
our revenue. Our sales of Vantas from launch in November 2004 through June 30, 2005 were
supported, in part, by favorable reimbursement rates, which decreased beginning in the third
quarter of 2005. Our initial favorable reimbursement rates were due to the fact that Vantas was a
new product that did not yet have an established average selling price or ASP, in connection with
Medicare reimbursement. As a result, Vantas was reimbursed at wholesale acquisition price, which
is typically higher than ASP. Vantas received an established ASP effective July 2005, which
resulted in lower reimbursement rates and a corresponding lower sales price to our customers. Our
historical net average selling prices to our customers are:
|
|
|
|
|
For the three months ended: |
|
Net Average Selling Price |
December 31, 2004 |
|
$ |
2,520 |
|
March 31, 2005 |
|
$ |
2,628 |
|
June 30, 2005 |
|
$ |
2,586 |
|
September 30, 2005 |
|
$ |
2,099 |
|
December 31, 2005 |
|
$ |
1,801 |
|
March 31, 2006 |
|
$ |
1,620 |
|
June 30, 2006 |
|
$ |
1,562 |
|
We expect future Medicare reimbursement levels to continue to decline for Vantas, which will
have an adverse effect on our net product sales. Reimbursement levels are currently set by the
twenty three Medicare carriers in the United States which, in the aggregate, cover all fifty
states. Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas based
on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or
LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the
same reimbursement for drugs that have been determined by Medicare to be medically equivalent.
Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain
Medicare carriers have a policy which segregates twelve-month products from all other dosages,
including one, three, four and six month injectable products, and reimburses at different rates for
these two groups of products, or a split policy. Finally, there are some Medicare carriers which
state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make
payments based upon a split policy.
We are devoting internal and external resources to determine the impact and fairness of these
various policies. In the states where certain Medicare carriers have adopted a split policy, in
writing or in practice, we are at an economic disadvantage to the injectable
23
products which are reimbursed at higher annual rates. We are challenging the basis for these
reimbursement policies with the Medicare carriers. We will deploy our sales resources in markets
where we can sell our products on an even par with the other products in the class.
We are also pursuing a sales strategy in which we will attempt to sell a greater percentage of
Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas
than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers
may alleviate the downward pressure on our net average selling price from the Medicare customers.
Our cost of product sales are all related to the production of Vantas and represent the cost
of materials, overhead associated with the manufacture of Vantas, direct labor, distribution
charges and royalties. For a complete description of our royalty agreements please review the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Prior to
approval of Vantas in October 2004, we expensed all of our manufacturing costs as research and
development.
Research and Development Expenses
Our research and development expenses consist of costs incurred for company-sponsored and
collaborative research and development activities including clinical trials. These expenses consist
primarily of direct and research related allocated overhead expenses such as facilities costs,
salaries and benefits and material supply costs. We do not track or report our research and
development expenses on a project basis as we do not have the internal resources or systems to do
so. To date, the vast majority of our research and development resources have been devoted to the
development of Vantas.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of sales and marketing personnel
compensation, sales force incentive compensation, travel, tradeshows, promotional materials and
programs, advertising and healthcare provider education materials and events.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel expenses for
accounting, human resources, outside consulting, information technology and corporate
administration functions. Other costs include administrative facility costs, regulatory fees, and
professional fees for legal and accounting services.
Amortization of Intangible Assets
The amortization of intangible assets relates to acquisition of the product rights associated
with the product known as Valstar (valrubicin) in the United States and Valtaxin in Canada. The
Company is amortizing the product rights over 5 years using the straight-line method.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles, or GAAP. The preparation of these financial statements requires us to make
judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements as well
as the reported revenue and expenses during the reporting periods. We continually evaluate our
judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements,
the expected course of development, historical experience and other factors that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. The
list below is not intended to be a comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically dictated by GAAP.
There are also areas in which our managements judgment in selecting any available alternative
would not produce a materially different result.
Revenue Recognition
The Companys revenue recognition policies are in accordance with Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements
(SAB 104), and SFAS No. 48, Revenue Recognition When
24
Right of Return Exists (SFAS 48), which provides guidance on revenue recognition in
financial statements, and is based on the interpretations and practices developed by the Securities
and Exchange Commission. SFAS 48 and SAB 104 require that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the sellers price to the buyer is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on
managements judgments regarding the fixed nature of the fee charged for services rendered and
products delivered and the collectibility of those fees. Should changes in conditions cause
management to determine that these criteria are not met for certain future transactions, revenue
recognition for those transactions will be delayed and the Companys revenue could be adversely
affected.
Allowances have been recorded for any potential returns or adjustments in accordance with our
policies. We historically have recorded allowances based upon a percentage of gross sales. We
distribute our product directly to physicians or through our distributor, Besse Medical. The
majority of our sales are made directly to physicians by our product specialists. We believe that
physicians typically order product on an as needed basis, and, therefore, typically maintain
inventory of our product only to cover their immediate and short-term future requirements. In
addition, our product specialists routinely confirm product utilization and inventory levels, if
any, as part of their normal sales calls with physicians. We continue to monitor our distribution
channels in order to assess the adequacy of our allowances. We do not believe that it is
reasonably likely that a material change will occur in the allowance as of June 30, 2006.
Pre-clinical Study and Clinical Trial Expenses
Research and development expenditures are charged to operations as incurred. Our expenses
related to clinical trials are based on actual and estimates of the services received and efforts
expended pursuant to contracts with multiple research institutions and clinical research
organizations that conduct and manage clinical trials on our behalf. The financial terms of these
agreements are subject to negotiation and vary from contract to contract and may result in uneven
payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed
fee or unit price. Payments under the contracts depend on factors such as the successful
enrollment of patients or the completion of clinical trial milestones. Expenses related to
clinical trials generally are accrued based on contracted amounts applied to the level of patient
enrollment and activity according to the protocol. If timelines or contracts are modified based
upon changes in the clinical trial protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.
Stock-Based Compensation
The Company adopted SFAS No. 123(R) on January 1, 2006. SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative. Under
SFAS 123(R), the options we granted in prior years as a non-public company (prior to the initial
filing of our Registration Statement in March 2005) that were valued using the minimum value
method, will not be expensed in 2006 or future periods. Options granted as a non-public company
and accounted for using the intrinsic value method (cheap stock), will continue to be expensed over
the vesting period. The Company adopted the prospective transition method for these options.
Options granted as a public company will be expensed under the modified prospective method.
SFAS No. 123(R) does not change the accounting guidance for how the Company accounts for
options issued to non employees. The Company accounts for options issued to non-employees under
SFAS No. 123 and EITF Issue No. 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. As such, the value of such options is periodically re-measured and income or
expense is recognized during their vesting terms.
Results of Operations
Three months ended June 30, 2006 compared with three months ended June 30, 2005
Net Product Sales. Net product sales for the three months ended June 30, 2006 and 2005 were
approximately $6.2 and $10.3 million, respectively. The 40% decrease in net product sales was a
direct result of lower net average selling prices due to decreased Medicare reimbursement rates for
our Vantas product. For the three months ended June 30, 2006, we sold 3,959 units of Vantas in the
United States at a net average selling price of $1,562 per unit as compared to 3,974 units at a net
average selling price of $2,586 for the same period in 2005. As a result of our pre-launch
shipment of Vantas to Paladin Labs, we sold 115 units of Vantas in Canada. Thus, total worldwide
unit sales of Vantas in total increased by 3%, or 100 units, for the three months ended June 30,
2006, as compared to the same period in the prior year.
Vantas is currently eligible for insurance reimbursement coverage. Sales of Vantas in the
three months ended June 30, 2005 were supported, in part by favorable reimbursement rates, due to
the fact Vantas was a new product that did not yet have an established
25
average selling price, or ASP, it was reimbursed at wholesale acquisition price, which is
typically higher than ASP. Effective July 2005, Vantas received an established ASP, which resulted
in a lower reimbursement rate.
We expect future Medicare reimbursement levels to continue to decline for Vantas, which will
have an adverse effect on our net product sales. Reimbursement levels are currently set by the
twenty three Medicare carriers in the United States which, in the aggregate, cover all fifty
states. Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas based
on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or
LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the
same reimbursement for drugs that have been determined by Medicare to be medically equivalent.
Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain
Medicare carriers have a policy which segregates twelve-month products from all other dosages,
including one, three, four and six month injectable products, and reimburses at different rates for
these two groups of products, or a split policy. Finally, there are some Medicare carriers which
state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make
payments based upon a split policy.
We are devoting internal and external resources to determine the impact and fairness of these
various policies. In the states where certain Medicare carriers have adopted a split policy, in
writing or in practice, we are at an economic disadvantage to the injectable products which are
reimbursed at higher annual rates. We are challenging the basis for these reimbursement policies
with the Medicare carriers. We will deploy our sales resources in markets where we can sell our
products on an even par with the other products in the class.
We are also pursuing a sales strategy in which we will attempt to sell a greater percentage of
Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas
than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers
may alleviate the downward pressure on our net average selling price from the Medicare customers.
Licensing Revenue. For the three months ended June 30, 2006 and 2005, we recorded licensing
revenues of approximately $5,000 and $7,000, respectively, from Hydron Technologies under a
licensing arrangement.
Cost of Product Sales. Our cost of product sales for the three months ended June 30, 2006 and
2005 was approximately $1.7 million and $3.0 million, respectively. Gross margins as a percentage
of net product sales for the three months ended June 30, 2006 and 2005 were 73% and 71%,
respectively. Unit sales of Vantas for the comparable period increased by approximately 3% due to
the introduction of Vantas in Canada, while the cost of product sales decreased by approximately
43%. The 43% decrease in the cost of sales was primarily attributable to an inventory reserve
charge of approximately $1.0 million for certain products that failed to meet our quality control
specifications during the three months ended June 30, 2005 as well as favorable raw material
purchasing costs incurred during the three months ended June 30, 2006 as compared to the three
months ended June 30, 2005.
Research and Development Expense. Research and development expense for the three months ended
June 30, 2006 and 2005, was approximately $1.8 million and $1.9 million, respectively. Expenses
related to clinical trials and research projects pursuant to contracts with research institutions
and clinical research organizations represented 44% of our total research and development expense
for the three months ended June 30, 2006 compared to 36% of our research and development expense
for the three months ended June 30, 2005. Internal research and development expense was
approximately 56% and 64% of our total research and development expense for the three months ended
June 30, 2006 and 2005, respectively. We expect to continue to spend significant amounts, including
clinical trial costs, on the development for our product candidates. In fact, in the second half
of 2006 we expect to commence a Phase III trial for our Octreotide implant. This trial will last
approximately eighteen months and will cost approximately $6.0 million to $7.0 million.
Selling and Marketing Expense. Selling and marketing expense for the three months ended June
30, 2006 and 2005 was approximately $3.8 million and $2.8 million, respectively. The 36% increase
was attributable to an increase of approximately $0.4 million in salaries and the related expenses
of adding employees to our sales force and $0.6 million in increased marketing activities,
including research, advertising, product literature and trade shows. We expect our selling and
marketing expense to increase in future periods as we continue to grow our commercial organization
and marketing activities in support of our lead product Vantas, the recently acquired Valstar, as
well as future product candidates.
General Administrative Expense. General administrative expense for the three months ended
June 30, 2006 and 2005 was approximately $2.0 million and $1.1 million, respectively. The 82%
increase was primarily due to an increase in non-cash stock based compensation expense of
approximately $0.6 million, $0.2 million in directors and officers insurance expense, and $0.1
million in rent.
26
Amortization of Intangible Assets. Amortization expense for the three months ended June 30,
2006 was approximately $26,000. The amortization of intangible assets relates to product rights
associated with the product known as Valstar (valrubicin) in the United States and Valtaxin in
Canada, which the Company acquired in March of 2006.
Net Interest Income. Net interest income for the three months ended June 30, 2006 and 2005,
was approximately $294,000 and $13,000, respectively. The increase was primarily due to the
increased cash and investments balance resulting from the proceeds of the initial public offering
of our common stock in February 2006.
Income Taxes. Income tax expense for the three months ended June 30, 2006 and 2005 was
approximately $10,000 and $140,000, respectively. As a result of the loss of approximately $2.7
million for the three months ended June 30, 2006, as well as the previous net operating losses
since the our inception, we did not record any federal provision for income taxes during the period
ended June 30, 2006. We did record a provision of $10,000 during the period for state taxes
subject to alternative minimum tax. .The $140,000 provision for taxes at June 30, 2005 was a
result of the income before income taxes of approximately $1.5 million for the three months ended
June 30, 2005. Our deferred tax assets primarily consist of net operating loss carry forwards and
research and development tax credits. We have recorded a valuation allowance for the full amount
of our deferred tax asset, as the realization of the deferred tax asset is uncertain.
Six months ended June 30, 2006 compared with six months ended June 30, 2005
Net Product Sales. Net product sales for the six months ended June 30, 2006 and 2005 were
approximately $11.7 million and $17.9 million, respectively. The 35% decrease in net product sales
was a direct result of lower net average selling prices due to decreased Medicare reimbursement
rates for our Vantas product. For the six months ended June 30, 2006, we sold 7,371 units of
Vantas in the United States at a net average selling price of $1,589 per unit as compared to 6,899
units at a net average selling price of $2,604 for the same period in 2005. As a result of our
pre-launch shipment of Vantas to Paladin Labs, we sold 115 units of Vantas in Canada. Thus,
worldwide unit sales of Vantas increased by 9%, or 587 units, for the six months ended June 30,
2006, as compared to the same period in the prior year.
Vantas is currently eligible for insurance reimbursement coverage. Sales of Vantas in the six
months ended June 30, 2005 were supported, in part by favorable reimbursement rates, due to the
fact Vantas was a new product that did not yet have an established average selling price, or ASP,
it was reimbursed at wholesale acquisition price, which is typically higher than ASP. Effective
July 2005, Vantas received an established ASP, which resulted in a lower reimbursement rate.
We expect future Medicare reimbursement levels to continue to decline for Vantas, which will
have an adverse effect on our net product sales. Reimbursement levels are currently set by the
twenty three Medicare carriers in the United States which, in the aggregate, cover all fifty
states. Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas based
on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or
LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the
same reimbursement for drugs that have been determined by Medicare to be medically equivalent.
Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain
Medicare carriers have a policy which segregates twelve-month products from all other dosages,
including one, three, four and six month injectable products, and reimburses at different rates for
these two groups of products, or a split policy. Finally, there are some Medicare carriers which
state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make
payments based upon a split policy.
We are devoting internal and external resources to determine the impact and fairness of these
various policies. In the states where certain Medicare carriers have adopted a split policy, in
writing or in practice, we are at an economic disadvantage to the injectable products which are
reimbursed at higher annual rates. We are challenging the basis for these reimbursement policies
with the Medicare carriers. We will deploy our sales resources in markets where we can sell our
products on an even par with the other products in the class.
We are also pursuing a sales strategy in which we will attempt to sell a greater percentage of
Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas
than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers
may alleviate the downward pressure on our net average selling price from the Medicare customers.
Licensing Revenue. For the six months ended June 30, 2006 and 2005, we recorded licensing
revenues of approximately $12,000 and $16,000, respectively, from Hydron Technologies under a
licensing arrangement.
Cost of Product Sales. Our cost of product sales for the six months ended June 30, 2006 and
2005 was approximately $3.1 million and $4.0 million, respectively. Gross margins as a percentage
of net product sales for the six months ended June 30, 2006 and 2005 were 73% and 78%,
respectively. Unit sales of Vantas for the comparable period increased by approximately 9%, while
the cost of
27
product
sales decreased by approximately 23%. The 23% decrease in cost of sales was primarily
attributable to an inventory reserve charge of approximately $1.0 million for certain products that
failed to meet our quality control specifications during the six months ended June 30, 2005.
Research and Development Expense. Research and development expense for the six months ended
June 30, 2006 and 2005 was approximately $3.8 million and $2.9 million, respectively. Expenses
related to clinical trials and research projects pursuant to contracts with research institutions
and clinical research organizations represented 44% of our total research and development expense
for the six months ended June 30, 2006 compared to 40% of our research and development expense for
the six months ended June 30, 2005. Internal research and development expense was approximately
56% and 60% of our total research and development expense for the six months ended June 30, 2006
and 2005, respectively. We expect to continue to spend significant amounts, including clinical
trial costs, on the development for our product candidates. In fact, in the second half of 2006 we
expect to commence a Phase III trial for our Octreotide implant. This trial will last
approximately eighteen months and will cost approximately $6.0 million to $7.0 million.
Selling and Marketing Expense. Selling and marketing expense for the six months ended June
30, 2006 and 2005 was approximately $6.5 million and $5.3 million, respectively. The 23% increase
was attributable to an increase of approximately $0.9 million increase in selling expenses,
specifically salaries and the related expenses of adding employees to our sales force, and $0.3
million in market research and advertising. We expect our selling and marketing expense to
increase in future periods as we continue to grow our commercial organization and marketing
activities in support of our lead product Vantas, the recently acquired Valstar, as well as future
product candidates.
General Administrative Expense. General administrative expense for the six months ended June
30, 2006 and 2005 was approximately $3.6 million and $2.5 million, respectively. The increase was
primarily due to an increase in non-cash stock based compensation expense of approximately $0.5
million, $0.4 million in directors and officers insurance expense, $0.1 million in rent and an
increase of $0.1 million in professional service fees.
Amortization of Intangible Assets. Amortization expense for the six months ended June 30,
2006 was approximately $26,000. The amortization of intangible assets relates to product rights
associated with the product known as Valstar (valrubicin) in the United States and Valtaxin in
Canada, which the Company acquired in March of 2006.
Net Interest Income. Net interest income was approximately $478,000 and $27,000 for the six
months ended June 30, 2006 and 2005, respectively. The increase was primarily due to the increased
cash and investments balance resulting from the proceeds of the initial public offering of our
common stock in February 2006.
Income Taxes. Income tax expense was approximately $20,000 and $300,000 for the six months
ended June 30, 2006 and 2005, respectively. As a result of the loss of approximately $4.8 million
for the six months ended June 30, 2006, as well as the previous net operating losses since the our
inception, we did not record any federal provision for income taxes during the period ended June
30, 2006. We recorded a provision of $20,000 during the period for state taxes subject to
alternative minimum tax. The $300,000 provision for taxes at June 30, 2005 was a result of the
income before income taxes of approximately $3.2 million for the six months ended June 30, 2005.
Our deferred tax assets primarily consist of net operating loss carry forwards and research and
development tax credits. We have recorded a valuation allowance for the full amount of our
deferred tax asset, as the realization of the deferred tax asset is uncertain.
Liquidity and Capital Resources
As of June 30, 2006, cash and cash equivalents were approximately $18.1 million, as compared
to $2.3 million at December 31, 2005. Investments consisting of U.S government and agency
securities were approximately $5.9 million, as compared to $0 at December 31, 2005. These net
increases were primarily due to the proceeds we received from the initial public offering of our
common stock.
Net cash used in operating activities was approximately $5.2 million for the six months ended
June 30, 2006. The net cash used in operating activities was attributable to a net loss of
approximately $4.9 million, as adjusted for the effect of non-cash items of $0.9 million and
changes in operating assets and liabilities of approximately, $1.3 million. The changes in
operating assets and liabilities consisted of cash inflows from the increase in accounts payable,
which were more than offset by the building of inventory, increase in accounts receivable, increase
in prepaid expenses, and decreases in accrued expenses and deferred liabilities.
Net cash used in investing activities was approximately $9.1 million for the six months ended
June 30, 2006. The net cash used in investing was attributable to capital expenditures related to
the construction project to expand our manufacturing capabilities, plus equipment for the increase
in production demand. We expect to spend an additional $2.8 million in the next twelve months to
28
complete the expansion project. In addition, we purchased the product rights associated with
Valstar for $0.5 million. We invested approximately $5.9 million in investments consisting of U.S
government and agency securities.
Net cash provided by financing activities was approximately $30.1 million for the six months
ended June 30, 2006. As a result of our initial public offering in February 2006, we generated
approximately $31.6 million of proceeds net of underwriter fees from the issuance of our common
stock. The Company paid approximately $1.3 million in offering fees during 2005, resulting in
total net proceeds from the initial public offering of $30.3 million. Subsequent to the initial
public offering of our common stock, we repaid in full the approximately $1.5 million outstanding
amount under our line of credit with Merrill Lynch.
We anticipate that cash flows from sales of Vantas will reduce our need for additional
financing. However, we expect our cash requirements to continue to increase in the foreseeable
future as we continue to sponsor additional clinical trials, seek regulatory approvals, and
develop, manufacture and market our current product candidates. As we continue to expand our
commercial organization, expand our research and development efforts and pursue additional
opportunities, we anticipate significant cash requirements for the hiring of personnel, capital
expenditures and investment in additional internal systems and infrastructure. The amount and
timing of cash requirements will depend on market acceptance of our lead product, Vantas, as well
as regulatory approval and market acceptance of our product candidates, if any. The resources we
devote to researching, developing, formulating, manufacturing, commercializing and supporting our
product candidates, and our ability to enter into third-party collaborations will also affect our
cash requirements.
We believe that our existing cash, the cash generated from our initial public offering, cash
generated from future sales of Vantas, and our line of credit will be sufficient to fund our
operations for at least the next 12 months. Until we can generate significant cash from our
operations, we expect to continue to fund our operations with existing cash resources that were
primarily generated from the proceeds of offerings of our equity securities. In addition, we may
receive revenue from our sublicense agreement.
We may finance future cash needs through strategic collaboration agreements, the sale of
equity securities or additional debt financing. We may not be successful in obtaining
collaboration agreements, additional debt or equity financing or in receiving milestone or royalty
payments under those agreements. In addition, we cannot be sure that in the future our existing
cash resources will be adequate or that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to us or our stockholders. Insufficient
funds may require us to delay, scale back or eliminate some or all of our research or development
programs or delay the launch of our product candidates.
Contractual Obligations and Commitments
Purchase Commitments
On May 17, 2006, we entered into a supply agreement with Plantex USA Inc. whereby Plantex
would supply us with the active pharmaceutical ingredient (API) N-Trifluroacetyl-adriamycin-14
valerate, otherwise known as Valrubicin, in connection with our anticipated launch of the product
Valstar for the treatment of bladder cancer. Under the agreement, we will only source API from
Plantex in connection with the development, manufacturer or sale of, and securing regulatory
approval for, Valstar in the United States, its territories and possessions, and Canada (the
Territory). Plantex will manufacture and supply all of our requirements for API for commercial
sale of Valstar in the Territory. Under the terms of the agreement, beginning in the calendar year
following the year in which we receive regulatory approval for the Valstar product in the United
States, we will be required to purchase a minimum of $1,000,000 of Valrubicin each calendar year
until the agreement expires. The agreement will expire ten years after the date of the first
commercial sale of Valstar.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
To date, all of our sales have been denominated in U.S. dollars. Although we do conduct some
clinical and safety studies with vendors located outside the United States, all of these expenses
are paid in U.S. dollars. If the exchange rate undergoes a change of 10%, we do not believe that
it would have a material impact on our results of operations or cash flows. Accordingly, we
believe that there is no material exposure to risk from changes in foreign currency exchange rates.
We hold no derivative financial instruments and do not currently engage in hedging activities.
Our exposure to interest rate risk is related to the investment of our excess cash in highly
liquid financial investments with original maturities of three months or less. We invest in money
market funds in accordance with our investment policy, which is designed to preserve principal,
maintain proper liquidity to meet operating needs and maximize yields. Our investment policy also
specifies credit quality standards for our investments. Due to the short term nature of our
investments, we believe that there is no material exposure to interest rate risk arising from them.
29
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of June 30, 2006 and, based on
that evaluation, our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures are effective. Disclosure controls and procedures are
our controls and other procedures that 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, as
amended (the Securities Exchange Act), is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we file
under the Securities Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the quarter
ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 30, 2006, we were not subject to any pending or, to our knowledge, threatened
litigation.
Item 1A. Risk Factors
We have updated the risk factor as disclosed in our Form 10-K for the fiscal year ended
December 31, 2005, in relation to obtaining adequate reimbursement levels for our product Vantas.
The complete list of risk factors are disclosed in our Form 10-K for the fiscal year ended December
31, 2005.
The successful commercialization of Vantas and any other products we develop will depend on
obtaining reimbursement at adequate levels from private health insurers and Medicare/Medicaid for
patient use of these products. We expect the reimbursement levels for Vantas to decline, which
will have an adverse effect on our net product sales.
Sales of pharmaceutical products largely depend on the reimbursement of patients medical
expenses by government healthcare programs, such as Medicare and Medicaid, and private health
insurers. These third party payors control healthcare costs by limiting both coverage and the level
of reimbursement for healthcare products. Third party payors are increasingly challenging the price
and examining the cost effectiveness of medical products and services and altering reimbursement
levels. The levels at which government authorities and private health insurers reimburse physicians
or patients for the price they pay for Vantas and other products we may develop could affect the
extent to which we are able to commercialize these products.
Vantas is currently eligible for insurance reimbursement coverage. Sales of Vantas in the
first half of 2005 were supported, in part, by favorable reimbursement rates, which decreased at
the beginning of the third quarter of 2005. The favorable reimbursement rates we experienced in the
first half of 2005 were due to the fact that Vantas was a new product that did not yet have an
established average selling price, or ASP. As a result, Vantas was reimbursed at wholesale
acquisition price, which is typically higher than ASP. Vantas received an established ASP effective
July 2005, which has resulted in declining reimbursement rates for Vantas.
We expect future Medicare reimbursement levels to continue to decline for Vantas, which will
have an adverse effect on our net product sales. Reimbursement levels are currently set by the
twenty three Medicare carriers in the United States which, in the aggregate, cover all fifty
states. Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas based
on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or
LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the
same reimbursement for drugs that have been determined by Medicare to be medically equivalent.
Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain
Medicare carriers have a policy which segregates twelve-month products from all other dosages,
including one, three, four and six month injectable products, and reimburses at different rates for
these two groups of products, or a split policy. Finally, there are some Medicare carriers which
state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make
payments based upon a split policy.
30
We are devoting internal and external resources to determine the impact and fairness of these
various policies. In the states where certain Medicare carriers have adopted a split policy, in
writing or in practice, we are at an economic disadvantage to the injectable products which are
reimbursed at higher annual rates. While we are challenging the basis for these reimbursement policies
with the Medicare carriers, there is no guarantee that our challenge
will be successful.
Significant uncertainty generally exists as to the reimbursement status of newly approved
healthcare products. Our ability to achieve acceptable levels of reimbursement for product
candidates will affect our ability to successfully commercialize, and attract collaborative
partners to invest in the development of, our product candidates. Reimbursement may not be
available for Vantas or any other products that we develop and reimbursement or coverage levels may
reduce the demand for, or the price of, Vantas or any other products that we may develop. If we
cannot maintain coverage for Vantas and obtain adequate reimbursement for other products we
develop, the market for those products may be limited.
In both the U.S. and certain foreign jurisdictions, there have been a number of legislative
and regulatory proposals in recent years to change the healthcare system in ways that could impact
our ability to profitably sell Vantas and any other products that we develop. These proposals
include prescription drug benefit proposals for Medicare beneficiaries and measures that would
limit or prohibit payments for certain medical treatments or subject the pricing of drugs to
government control. Legislation creating a prescription drug benefit and making certain changes in
Medicaid reimbursement has been enacted by Congress and signed by the President. Additionally,
Medicare regulations implementing the prescription drug benefit became effective as of January 1,
2006. These and other regulatory and legislative changes or proposals may affect our ability to
raise capital, obtain additional collaborators and market Vantas and any other products that we may
develop. In addition, in many foreign countries, particularly the countries of the European Union,
the pricing of prescription drugs is subject to government control. If our products are or become
subject to government regulation that limits or prohibits payment for our products, or that subject
the price of our products to governmental control, our ability to sell Vantas and other products we
develop in commercially acceptable quantities at profitable prices may be harmed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith:
|
10.1 |
|
Supply Agreement by and between Valera Pharmaceuticals, Inc. and Plantex USA Inc.* |
33-51 |
|
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
52 |
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
53 |
|
|
32 |
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
54 |
|
|
|
* |
|
Portions omitted pursuant to a request for confidential treatment under Rule 24b-2 of the
Securities Exchange Act of 1934, as amended. |
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
VALERA PHARMACEUTICALS, INC
|
|
Dated: August 9, 2006 |
By: |
/s/ David S. Tierney, M.D.
|
|
|
|
David S. Tierney, M.D. |
|
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
|
|
|
|
|
Dated: August 9, 2006 |
By: |
/s/ Andrew T. Drechsler
|
|
|
|
Andrew T. Drechsler |
|
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
32