e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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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 March 31, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-50633
CYTOKINETICS, INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
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94-3291317 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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280 East Grand Avenue
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94080 |
South San Francisco, California
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(Zip Code) |
(Address of principal executive offices) |
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Registrants telephone number, including area code: (650) 624-3000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).* Yes
o No o
* The registrant has not yet been phased into the interactive data requirements.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Number of shares of common stock, $0.001 par value, outstanding as of April 30, 2010:
64,389,446.
CYTOKINETICS, INCORPORATED
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
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Page |
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3 |
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3 |
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3 |
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4 |
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5 |
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6 |
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16 |
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32 |
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32 |
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33 |
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33 |
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33 |
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52 |
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52 |
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52 |
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52 |
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53 |
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54 |
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55 |
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2 of 55
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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March 31, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
20,715 |
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$ |
25,561 |
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Short-term investments |
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67,091 |
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71,266 |
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Investments in auction rate securities |
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15,311 |
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15,542 |
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Investment put option related to auction rate securities rights |
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2,339 |
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2,358 |
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Related party accounts receivable |
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11 |
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180 |
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Related party notes receivable |
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9 |
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9 |
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Prepaid and other current assets |
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1,613 |
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2,005 |
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Total current assets |
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107,089 |
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116,921 |
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Property and equipment, net |
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3,282 |
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3,713 |
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Restricted cash |
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1,233 |
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1,674 |
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Other assets |
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289 |
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291 |
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Total assets |
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$ |
111,893 |
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$ |
122,599 |
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LIABILITIES and STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,700 |
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$ |
1,683 |
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Accrued liabilities |
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4,281 |
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5,935 |
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Related party payables and accrued liabilities |
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10 |
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Short-term portion of equipment financing lines |
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1,453 |
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1,616 |
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Deferred revenue |
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217 |
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751 |
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Loan with UBS |
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9,873 |
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10,201 |
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Total current liabilities |
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17,534 |
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20,186 |
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Long-term portion of equipment financing lines |
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724 |
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985 |
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Total liabilities |
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18,258 |
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21,171 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, $0.001 par value: |
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Authorized: 170,000,000 shares; Issued and outstanding: 62,479,802
shares at March 31, 2010 and 61,275,036 shares at
December 31, 2009 |
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62 |
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61 |
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Additional paid-in capital |
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417,132 |
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412,729 |
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Accumulated other comprehensive income (loss) |
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(7 |
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1 |
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Deficit accumulated during the development stage |
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(323,552 |
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(311,363 |
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Total stockholders equity |
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93,635 |
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101,428 |
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Total liabilities and stockholders equity |
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$ |
111,893 |
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$ |
122,599 |
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The accompanying notes are an integral part of these financial statements.
3 of 55
CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Period from |
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August 5, 1997 |
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Three Months Ended |
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(Date of Inception) |
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March 31, |
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March 31, |
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to March 31, |
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2010 |
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2009 |
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2010 |
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Revenues: |
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Research and development revenues from related
parties |
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$ |
621 |
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$ |
20 |
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$ |
48,231 |
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Research and development, grant and other revenues |
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2,955 |
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License revenues from related parties |
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3,058 |
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112,935 |
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Total revenues |
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621 |
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3,078 |
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164,121 |
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Operating expenses: |
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Research and development |
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9,068 |
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9,959 |
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386,346 |
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General and administrative |
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3,836 |
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4,020 |
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119,999 |
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Restructuring charges (reversals) |
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(58 |
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2,450 |
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Total operating expenses |
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12,904 |
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13,921 |
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508,795 |
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Operating loss |
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(12,283 |
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(10,843 |
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(344,674 |
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Interest and other, net |
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94 |
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158 |
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21,272 |
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Loss before income taxes |
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(12,189 |
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(10,685 |
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(323,402 |
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Provision for income taxes |
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150 |
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Net loss |
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$ |
(12,189 |
) |
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$ |
(10,685 |
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$ |
(323,552 |
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Net loss per common share basic and diluted |
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$ |
(0.20 |
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$ |
(0.21 |
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Weighted-average number of shares used in computing
net loss per common share basic and diluted |
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61,995 |
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51,582 |
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The accompanying notes are an integral part of these financial statements.
4 of 55
CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Period from |
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August 5, 1997 |
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Three Months Ended |
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(Date of Inception) |
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March 31, |
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March 31, |
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to March 31, |
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2010 |
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2009 |
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2010 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(12,189 |
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$ |
(10,685 |
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$ |
(323,552 |
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Adjustments to reconcile net loss to net cash used in operating
activities: |
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Depreciation and amortization of property and equipment |
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489 |
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515 |
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25,955 |
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(Gain) loss on disposal of equipment |
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(32 |
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311 |
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Non-cash impairment charges |
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103 |
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Non-cash restructuring expenses, net of reversals |
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(37 |
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498 |
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Non-cash interest expense |
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504 |
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Non-cash forgiveness of loan to officer |
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425 |
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Stock-based compensation |
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994 |
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1,249 |
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26,253 |
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Tax benefit from stock-based compensation |
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(20 |
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Non-cash warrant expense |
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1,626 |
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Other non-cash expenses |
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141 |
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Changes in operating assets and liabilities: |
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Related party accounts receivable |
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169 |
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214 |
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(362 |
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Prepaid and other assets |
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394 |
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614 |
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(1,930 |
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Accounts payable |
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102 |
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8 |
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1,824 |
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Accrued liabilities |
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(1,643 |
) |
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(575 |
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4,156 |
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Related party payables and accrued liabilities |
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10 |
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15 |
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10 |
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Deferred revenue |
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(534 |
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(3,074 |
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217 |
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Net cash used in operating activities |
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(12,208 |
) |
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(11,788 |
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(263,841 |
) |
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Cash flows from investing activities: |
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Purchases of investments |
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(36,393 |
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(15,631 |
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(837,963 |
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Proceeds from sales and maturities of investments |
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40,810 |
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15,059 |
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753,298 |
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Purchases of property and equipment |
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(154 |
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(219 |
) |
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(30,254 |
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Proceeds from sale of property and equipment |
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24 |
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124 |
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(Increase) decrease in restricted cash |
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441 |
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518 |
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(1,233 |
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Issuance of related party notes receivable |
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(1,146 |
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Proceeds from repayments of notes receivable |
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859 |
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Net cash provided by (used in) investing activities |
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4,704 |
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(249 |
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(116,315 |
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Cash flows from financing activities: |
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Proceeds from initial public offering, sale of common stock to
related party, and public offerings, net of issuance costs |
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206,871 |
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Proceeds from draw down of committed equity financing facility,
net of issuance costs |
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3,370 |
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6,850 |
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42,266 |
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Proceeds from other issuances of common stock |
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40 |
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30 |
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7,034 |
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Proceeds from issuance of preferred stock, net of issuance costs |
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133,172 |
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Repurchase of common stock |
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(68 |
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Proceeds from loan with UBS |
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12,441 |
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12,441 |
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Repayment of loan with UBS |
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(328 |
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(86 |
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(2,568 |
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Proceeds from equipment financing lines |
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23,696 |
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Repayment of equipment financing lines |
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(424 |
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(528 |
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(21,993 |
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Tax benefit from stock-based compensation |
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20 |
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Net cash provided by financing activities |
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2,658 |
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18,707 |
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400,871 |
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Net increase (decrease) in cash and cash equivalents |
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(4,846 |
) |
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6,670 |
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20,715 |
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Cash and cash equivalents, beginning of period |
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25,561 |
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41,819 |
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Cash and cash equivalents, end of period |
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$ |
20,715 |
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$ |
48,489 |
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$ |
20,715 |
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The accompanying notes are an integral part of these financial statements.
5 of 55
CYTOKINETICS, INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Overview
Cytokinetics, Incorporated (the Company, we or our) was incorporated under the laws of
the state of Delaware on August 5, 1997. The Company is a clinical-stage biopharmaceutical company
focused on the discovery and development of novel small molecule therapeutics that modulate muscle
function for the potential treatment of serious diseases and medical conditions. The Company is a
development stage enterprise and has been primarily engaged in conducting research, developing drug
candidates and technologies, and raising capital.
The Companys registration statement for its initial public offering (IPO) was declared
effective by the Securities and Exchange Commission (SEC) on April 29, 2004. The Companys common
stock commenced trading on the NASDAQ National Market, now the NASDAQ Global Market, on April 29,
2004 under the trading symbol CYTK.
The Companys financial statements contemplate the conduct of the Companys operations in the
normal course of business. The Company has incurred an accumulated deficit since inception and
there can be no assurance that the Company will attain profitability. The Company had a net loss of
$12.2 million and net cash used in operations of $12.2 million for the three months ended March 31,
2010, and an accumulated deficit of approximately $323.6 million as of March 31, 2010. Cash, cash
equivalents and short-term investments (excluding investments in auction rate securities and the
investment put option related to the auction rate securities rights) decreased to $87.8 million at
March 31, 2010 from $96.8 million at December 31, 2009. The Company anticipates it will continue to
have operating losses and net cash outflows in future periods. If sufficient additional capital is
not available on terms acceptable to the Company, its liquidity will be impaired.
The Company has funded its operations primarily through sales of common stock and convertible
preferred stock, contract payments under its collaboration agreements, debt financing arrangements,
government grants and interest income. Until it achieves profitable operations, the Company intends
to continue to fund operations through payments from strategic relationships, additional sales of
equity securities and debt financings. Based on the current status of its development plans, the
Company believes that its existing cash, cash equivalents and short-term investments (excluding
investments in auction rate securities) at March 31, 2010 will be sufficient to fund its cash
requirements for at least the next 12 months. If, at any time, the Companys prospects for
financing its research and development programs decline, the Company may decide to reduce research
and development expenses by delaying, discontinuing or reducing its funding of one or more of its
research or development programs. Alternatively, the Company might raise funds through strategic
relationships, public or private financings or other arrangements. Such funding, if needed, may not
be available on favorable terms, or at all.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America (GAAP) for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial statements include
all adjustments (consisting only of normal recurring adjustments) that management believes are
necessary for the fair statement of the balances and results for the periods presented. These
interim financial statement results are not necessarily indicative of results to be expected for
the full fiscal year or any future interim period.
The balance sheet at December 31, 2009 has been derived from the audited financial statements
at that date. The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial statements have read or have access to the audited
financial statements for the preceding fiscal year. Accordingly, these financial statements should
be read in conjunction with the audited financial statements and notes thereto contained in the
Companys Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 11, 2010.
6 of 55
Comprehensive Income (Loss)
Comprehensive loss consists of the net loss and other comprehensive income (loss). Other
comprehensive income (loss) includes certain changes in stockholders equity that are excluded from
net loss. Comprehensive loss and its components for the three months ended March 31, 2010 and 2009
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Net loss |
|
$ |
(12,189 |
) |
|
$ |
(10,685 |
) |
Change in unrealized loss on investments |
|
|
(8 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(12,197 |
) |
|
$ |
(10,699 |
) |
|
|
|
|
|
|
|
Restricted Cash
In accordance with the terms of the Companys line of credit agreements with General Electric
Capital Corporation, the Company is obligated to maintain a certificate of deposit with the lender.
The balance of the certificate of deposit was $1.2 million at March 31, 2010 and $1.7 million at
December 31, 2009, and was classified as restricted cash.
Fair Value of Financial Instruments
The carrying amount of the Companys cash and cash equivalents, accounts receivable and
accounts payable and notes payable approximates fair value due to the short-term nature of these
instruments. The Company bases the fair value of short-term investments, other than its auction
rate securities (ARS) and the investment put option related to the Series C-2 Auction Rate
Securities Rights issued to the Company by UBS AG (the ARS Rights), on current market prices. The
Company determines the fair value of its ARS and the investment put option related to the ARS
Rights using discounted cash flow models (Note 5). In connection with the failed auctions of the
Companys ARS, which were marketed and sold by UBS AG and its affiliates, in October 2008, the
Company accepted a settlement with UBS AG pursuant to which UBS AG issued to the Company the ARS
Rights. The carrying value of the investment put option related to the ARS Rights (Note 5)
represents its fair value, based on the Black-Scholes option pricing model, which approximates the
difference in value between the par value and the fair value of the associated ARS. As permitted
under fair value accounting for financial instruments, the Company may elect fair value measurement
for certain financial assets on a case by case basis. The Company has elected to use fair value
measurement permitted under fair value accounting for the investment put option related to the ARS
Rights.
The fair value of the equipment financing line debt was $2.0 million as of March 31, 2010,
compared to the carrying value of $2.2 million. As of December 31, 2009, the fair value of the
equipment financing line debt was $2.4 million, compared to the carrying value of $2.6 million. The
Company determined the fair value of the equipment financing line using a discounted cash flow
(DCF) model. The major inputs to the model are the expected cash flows, which equal the
contractual payments, and borrowing rates available to the Company for similar debt as of the
applicable balance sheet dates.
The fair value of the loan with UBS Bank USA approximated the loans carrying value of $9.9
million as of March 31, 2010 and $10.2 million as of December 31, 2009, due to the short-term
nature of the loan. The Company determined the fair value of the loan with UBS Bank USA using a DCF
model. The major inputs to the model are the expected cash flows, borrowing rates available to the
Company for similar debt secured by the ARS as of the applicable balance sheet dates, and an
expected maturity date of June 30, 2010.
Stock-Based Compensation
The Company applies the accounting guidance for stock compensation, which establishes
accounting for share-based payment awards made to employees and directors, including employee stock
options and employee stock purchases. Under this guidance, stock-based compensation cost is
measured at the grant date based on the calculated fair value of the award, and is recognized as an
expense on a straight-line basis over the employees requisite service period, generally the
vesting period of the award.
The Company uses the Black-Scholes option pricing model to determine the fair value of stock
options and employee stock purchase plan (ESPP) shares. The key input assumptions used to
estimate the fair value of these awards include the exercise price of the award, the expected
option term, the expected volatility of the Companys stock over the options expected term, the
risk-free interest rate over the options expected term and the Companys expected dividend yield,
if any.
7 of 55
For employee stock options, the fair value of share-based payments was estimated on the date
of grant using the Black-Scholes option pricing model based on the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2010 |
|
2009 |
Risk-free interest rate |
|
|
2.88 |
% |
|
|
2.70 |
% |
Volatility |
|
|
73 |
% |
|
|
76 |
% |
Expected term (in years) |
|
|
6.12 |
|
|
|
6.07 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
For the ESPP, the fair value of share-based payments was estimated on the date of grant using
the Black-Scholes option pricing model based on the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2010 |
|
2009 |
Risk-free interest rate |
|
|
0.58 |
% |
|
|
2.15 |
% |
Volatility |
|
|
74 |
% |
|
|
68 |
% |
Expected term (in years) |
|
|
1.25 |
|
|
|
1.25 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
The risk-free interest rate that the Company uses in the option pricing model is based on the
U.S. Treasury zero-coupon issues with remaining terms similar to the expected terms of the options.
The Company does not anticipate paying dividends in the foreseeable future and therefore uses an
expected dividend yield of zero in the option pricing model. The Company is required to estimate
forfeitures at the time of grant and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. Historical data is used to estimate pre-vesting option
forfeitures and record stock-based compensation expense only on those awards that are expected to
vest.
Since January 1, 2008, the Company has used its own historical exercise activity and
extrapolates the life cycle of options outstanding to arrive at its estimated expected term for new
option grants. Also starting January 1, 2008, the Company has used its own volatility history based
on its stocks trading history for the period subsequent to the Companys IPO in April 2004.
Because its outstanding options have an expected term of approximately six years, the Company
supplements its own volatility history by using comparable companies volatility history for the
relevant period preceding the Companys IPO.
The Company measures compensation expense for restricted stock awards at fair value on the
date of grant and recognizes the expense over the expected vesting period. The fair value for
restricted stock awards is based on the closing price of the Companys common stock on the date of
grant.
Note 2. Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted-average
number of vested common shares outstanding during the period. Diluted net loss per common share is
computed by giving effect to all potentially dilutive common shares, including outstanding stock
options, unvested restricted stock, warrants and shares issuable under the ESPP by applying the
treasury stock method. The following is the calculation of basic and diluted net loss per common
share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Net loss |
|
$ |
(12,189 |
) |
|
$ |
(10,685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
62,184 |
|
|
|
51,976 |
|
Unvested restricted stock |
|
|
(189 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
Weighted-average shares used in computing
basic and diluted net loss per common share |
|
|
61,995 |
|
|
|
51,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted |
|
$ |
(0.20 |
) |
|
$ |
(0.21 |
) |
8 of 55
The following instruments were excluded from the computation of diluted net loss per common
share for the periods presented, because their effect would have been antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Options to purchase common stock |
|
|
8,361 |
|
|
|
7,544 |
|
Unvested restricted common stock |
|
|
183 |
|
|
|
394 |
|
Warrants to purchase common stock |
|
|
4,027 |
|
|
|
474 |
|
Shares issuable related to the ESPP |
|
|
123 |
|
|
|
103 |
|
|
|
|
|
|
|
|
Total shares |
|
|
12,694 |
|
|
|
8,515 |
|
|
|
|
|
|
|
|
Note 3. Supplemental Cash Flow Data
Supplemental cash flow data was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
|
August 5, 1997 |
|
|
Three Months Ended |
|
(date of inception) |
|
|
March 31, |
|
March 31, |
|
to March 31, |
|
|
2010 |
|
2009 |
|
2010 |
Significant non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,940 |
|
Purchases of property and equipment through accounts payable |
|
|
30 |
|
|
|
4 |
|
|
|
30 |
|
Purchases of property and equipment through trade in value
of disposed property and equipment |
|
|
|
|
|
|
8 |
|
|
|
258 |
|
Penalty on restructuring of equipment financing lines |
|
|
|
|
|
|
|
|
|
|
475 |
|
Conversion of convertible preferred stock to common stock |
|
|
|
|
|
|
|
|
|
|
133,172 |
|
Warrants issued in registered direct equity financing |
|
|
|
|
|
|
|
|
|
|
1,585 |
|
Note 4. Related Party Agreements
Research and Development Arrangements
Amgen Inc. (Amgen). Pursuant to its collaboration and option agreement with Amgen
(the Amgen Agreement), in the three months ended March 31, 2010, the Company recognized revenue
from Amgen of $0.6 million. The $0.6 million consisted of $0.4 million for reimbursements of its
costs of full time employee equivalents (FTEs) supporting the research and development program
for omecamtiv mecarbil and related compounds, and $0.2 million for reimbursements of other costs
related to that program. These reimbursements were recorded as research and development revenues
from related parties.
In the three months ended March 31, 2009, the Company recognized $16,000 of revenue from
Amgen, recorded as research and development revenues from related parties, and $3.1 million of
revenue related to Amgen, recorded as license revenues from related parties. The research and
development revenue from Amgen consisted of reimbursements of non-FTE costs. The license revenue
consisted of amortization of deferred revenue related to the Amgen 2006 non-exclusive license and
technology access fee and stock purchase premium.
Deferred revenue related to Amgen was $0.2 million at March 31, 2010 and $0.8 million at
December 31, 2009, and consisted of Amgens prepayment of FTE reimbursements. Related party
accounts receivable from Amgen were $10,000 at March 31, 2010 and $0.2 million at December 31,
2009.
GlaxoSmithKline (GSK). Pursuant to its collaboration and license agreement with GSK
(the GSK Agreement), the Company recognized revenue for patent expense reimbursements from GSK of
zero and $4,000 for the three months ended March 31, 2010 and 2009, respectively. These
reimbursements were recorded as research and development revenues from related parties. There was
no related party accounts receivable balance due from GSK at March 31, 2010 or December 31, 2009.
In December 2009, the Company and GSK agreed to terminate the GSK Agreement, effective
February 28, 2010. As a result, all rights for GSK-923295 reverted to the Company at that time,
subject to certain royalty obligations to GSK. GSK remains responsible for all activities and costs
associated with completing and reporting on the ongoing Phase I clinical trial of GSK-923295.
9 of 55
Board Members
James H. Sabry, M.D., Ph.D. resigned from the Board of Directors effective March 15, 2010 and
remains a consultant to the Company and a member of its Scientific Advisory Board. The Company
incurred consulting fees for services provided by Dr. Sabry of $15,000 for both of the three months
ended March 31, 2010 and 2009. The related party accounts payable due to Dr. Sabry were $5,000 at
March 31, 2010 and zero at December 31, 2009.
James Spudich, Ph.D. is a member of the Companys Board of Directors and a consultant to the
Company. The Company incurred consulting fees for services provided by Dr. Spudich of $5,000 and
$10,000 for the three months ended March 31, 2010 and 2009, respectively. The related party
accounts payable due to Dr. Spudich were $5,000 at March 31, 2010 and zero at December 31, 2009.
Note 5. Cash Equivalents, Investments and Fair Value Measurements
Cash Equivalents and Available for Sale Investments
The amortized cost and fair value of cash equivalents and available for sale investments at
March 31, 2010 and December 31, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Maturity |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Dates |
|
Cash equivalents money market funds |
|
$ |
12,039 |
|
|
|
|
|
|
|
|
|
|
$ |
12,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments U.S. Treasury securities |
|
$ |
67,098 |
|
|
$ |
1 |
|
|
$ |
(8 |
) |
|
$ |
67,091 |
|
|
|
4/201010/2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Maturity |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Dates |
|
Cash equivalents money market funds |
|
$ |
23,773 |
|
|
|
|
|
|
|
|
|
|
$ |
23,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments U.S. Treasury securities |
|
$ |
71,265 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
71,266 |
|
|
|
1/20106/2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the Companys cash equivalents had no unrealized losses, and its U.S.
Treasury securities classified as short-term investments had unrealized losses of $8,000. The
unrealized losses were primarily caused by rising interest rates. The Company collected the
contractual cash flows on its U.S. Treasury securities that matured in April 2010, and expects to
be able to collect all contractual cash flows on the remaining maturities of its U.S. Treasury
securities. As of December 31, 2009, the Companys cash equivalents and short-term investments had
no unrealized losses.
Interest income was $0.2 million and $0.3 million for the three months ended March 31, 2010
and 2009, respectively, and $28.2 million for the period August 5, 1997 (inception) through March
31, 2010.
Investments in Auction Rate Securities and Investment Put Option Related to Auction Rate Securities
Rights
The Companys short-term investments in ARS as of March 31, 2010 and December 31, 2009, refer
to securities that are structured with short-term interest reset dates every 28 days but with
maturities generally greater than 10 years. At the end of each reset period, investors can attempt
to sell the securities through an auction process or continue to hold the securities. The Company
has classified its ARS holdings as short-term investments as of March 31, 2010 and December 31,
2009, based on its intention to liquidate the investments on June 30, 2010, the earliest date it
can exercise the ARS Rights.
At March 31, 2010, the Company held approximately $17.6 million in par value, $15.3 million
carrying value, of ARS classified as short-term investments. The assets underlying these ARS are
student loans that are substantially backed by the federal government. In February 2008, auctions
began to fail for these securities and each auction since then has failed. Consequently, the ARS
are not currently liquid and the Company will not be able to access these funds until a future
auction of the ARS is successful, a buyer is found outside of the auction process, the ARS are
redeemed by the issuer or they mature. Historically, the fair value of the ARS approximated par
value due to the frequent interest rate resets associated with the auction process. However, there
is not a current active market for the ARS, and therefore they do not have a readily determinable
market value. Accordingly, the estimated fair value of the ARS no longer approximates par value.
The ARS continue to pay interest according to their stated terms.
The fair value of the Companys investments in its ARS as of March 31, 2010 and December 31,
2009 was determined to be $15.3 million and $15.5 million, respectively. Changes in the fair value
of the ARS are recognized in current period earnings in
10 of 55
Interest and Other, net. Therefore, in the first quarter of 2010, the Company recognized the sale of
$250,000 of its ARS at par value and unrealized gains of $19,000 on its ARS in the same period to
reflect the change in fair value. In the first quarter of 2009, the Company recognized unrealized
gains of $0.7 million on its ARS to reflect the change in fair value.
In connection with the failed auctions of the Companys ARS, which were marketed and sold by
UBS AG and its affiliates, in October 2008, the Company accepted a settlement with UBS AG pursuant
to which UBS AG issued to the Company the ARS Rights. The ARS Rights provide the Company the right
to receive the par value of its ARS, i.e., the liquidation preference of the ARS plus accrued but
unpaid interest. Pursuant to the ARS Rights, the Company may require UBS AG to purchase its ARS at
par value at any time between June 30, 2010 and July 2, 2012. In addition, UBS AGs affiliates may
sell or otherwise dispose of some or all of the ARS at their discretion at any time prior to
expiration of the ARS Rights, subject to the obligation to pay the Company the par value of such
ARS. The ARS Rights are not transferable, tradable or marginable, and will not be listed or quoted
on any securities exchange or any electronic communications network. As consideration for the ARS
Rights, the Company agreed to release UBS AG, UBS Securities LLC and UBS Financial Services, Inc.,
and/or their affiliates, directors, and officers from any claims directly or indirectly relating to
the marketing and sale of the ARS, other than for consequential damages. UBS AGs obligations in
connection with the ARS Rights are not secured by its assets and UBS is not required to obtain any
financing to support these obligations. UBS AG has disclaimed any assurance that it will have
sufficient financial resources to satisfy its obligations in connection with the ARS Rights. If UBS
AG has insufficient funding to buy back the ARS and the auction process continues to fail, the
Company may incur further losses on the carrying value of the ARS.
The ARS Rights represent a firm agreement in accordance with the accounting guidance for
derivatives and hedging, which defines a firm agreement as an agreement with an unrelated party,
binding on both parties and usually legally enforceable, with the following characteristics: a) the
agreement specifies all significant terms, including the quantity to be exchanged, the fixed price
and the timing of the transaction; and b) the agreement includes a disincentive for nonperformance
that is sufficiently large to make performance probable. The enforceability of the ARS Rights
results in an investment put option that is recognized as a separate freestanding instrument that
is accounted for separately from the ARS investments. As of March 31, 2010 and December 31, 2009,
the Company recorded $2.3 million and $2.4 million, respectively, as the fair value of the
investment put option related to the ARS Rights, classified as short-term assets on the balance
sheet. The investment put option related to the ARS Rights does not meet the definition of a
derivative instrument. Therefore, the Company elected to measure the investment put option related
to the ARS Rights at fair value, in accordance with the fair value option permitted under fair
value accounting guidance for financial instruments, to mitigate volatility in reported earnings
due to their linkage to the ARS. Changes in the fair value of the investment put option related to
the ARS Rights are recognized in current period earnings in Interest and Other, net. Accordingly,
the Company recognized an unrealized loss of $19,000 on the investment put option related to the
ARS Rights in the first quarter of 2010 and an unrealized loss of $0.7 million in the first quarter
of 2009. The Company anticipates that any future changes in the fair value of the investment put
option related to the ARS Rights will be offset by the changes in the fair value of the related ARS
with no material net impact to the statements of operations, subject to adjustment for changes in
UBSs credit profile. The investment put option related to the ARS Rights will continue to be
measured at fair value until the earlier of the Companys exercise of the ARS Rights, UBSs
purchase of the ARS in connection with the ARS Rights, or the maturity of the ARS underlying the
ARS Rights.
The Company valued the investment put option related to the ARS Rights using a Black-Scholes
option pricing model that included estimates of interest rates, based on data available, and was
adjusted for any bearer risk associated with UBSs financial ability to repurchase the ARS
beginning June 30, 2010. Any change in these assumptions and market conditions would affect the
value of the investment put option related to the ARS Rights.
The Company continues to monitor the market for ARS and consider its impact (if any) on the
fair market value of its investments. If the market conditions deteriorate further, the Company may
be required to record additional unrealized losses in earnings, offset by corresponding increases
in the investment put option related to the ARS Rights, assuming no deterioration of UBS AGs
credit rating.
Fair Value Measurements
The Company adopted the fair value accounting guidance to value its financial assets and
liabilities. Fair value is defined as the price that would be received for assets when sold or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date (exit price). The Company utilizes market data or assumptions that the Company believes market
participants would use in pricing the asset or liability, including assumptions about risk and the
risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated or generally unobservable.
11 of 55
The Company primarily applies the market approach for recurring fair value measurements and
endeavors to utilize the best information reasonably available. Accordingly, the Company utilizes
valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible, and considers the security issuers and the third-party
insurers credit risk in its assessment of fair value.
The Company classifies the determined fair value based on the observability of those inputs.
Fair value accounting guidance establishes a fair value hierarchy that prioritizes the inputs used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to
unobservable inputs (Level 3 measurement). The three defined levels of the fair value hierarchy are
as follows:
Level 1 Observable inputs, such as quoted prices in active markets for identical assets or
liabilities;
Level 2 Inputs, other than the quoted prices in active markets, that are observable either
directly or through corroboration with observable market data; and
Level 3 Unobservable inputs, for which there is little or no market data for the assets or
liabilities, such as internally-developed valuation models.
Financial assets measured at fair value on a recurring basis as of March 31, 2010 and December
31, 2009 are classified in the table below in one of the three categories described above (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Fair Value Measurements Using |
|
|
Assets |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
At Fair Value |
|
Money market funds |
|
$ |
12,039 |
|
|
|
|
|
|
$ |
|
|
|
$ |
12,039 |
|
U.S. Treasury securities |
|
|
67,091 |
|
|
|
|
|
|
|
|
|
|
|
67,091 |
|
Investments in ARS |
|
|
|
|
|
|
|
|
|
|
15,311 |
|
|
|
15,311 |
|
Investment put option related to ARS Rights |
|
|
|
|
|
|
|
|
|
|
2,339 |
|
|
|
2,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79,130 |
|
|
|
|
|
|
$ |
17,650 |
|
|
$ |
96,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,039 |
|
|
|
|
|
|
$ |
|
|
|
$ |
12,039 |
|
Short-term investments |
|
|
67,091 |
|
|
|
|
|
|
|
|
|
|
|
67,091 |
|
Investments in ARS |
|
|
|
|
|
|
|
|
|
|
15,311 |
|
|
|
15,311 |
|
Investment put option related to ARS Rights |
|
|
|
|
|
|
|
|
|
|
2,339 |
|
|
|
2,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79,130 |
|
|
|
|
|
|
$ |
17,650 |
|
|
$ |
96,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets measured at fair value on a recurring basis as of December 31, 2009 are
classified in the table below in one of the three categories described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Fair Value Measurements Using |
|
|
Assets |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
At Fair Value |
|
Money market funds |
|
$ |
23,773 |
|
|
|
|
|
|
$ |
|
|
|
$ |
23,773 |
|
U.S. Treasury securities |
|
|
71,266 |
|
|
|
|
|
|
|
|
|
|
|
71,266 |
|
Investments in ARS |
|
|
|
|
|
|
|
|
|
|
15,542 |
|
|
|
15,542 |
|
Investment put option related to ARS Rights |
|
|
|
|
|
|
|
|
|
|
2,358 |
|
|
|
2,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
95,039 |
|
|
|
|
|
|
$ |
17,900 |
|
|
$ |
112,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
23,773 |
|
|
|
|
|
|
$ |
|
|
|
$ |
23,773 |
|
Short-term investments |
|
|
71,266 |
|
|
|
|
|
|
|
|
|
|
|
71,266 |
|
Investments in ARS |
|
|
|
|
|
|
|
|
|
|
15,542 |
|
|
|
15,542 |
|
Investment put option related to ARS Rights |
|
|
|
|
|
|
|
|
|
|
2,358 |
|
|
|
2,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
95,039 |
|
|
|
|
|
|
$ |
17,900 |
|
|
$ |
112,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The valuation technique used to measure fair value for the Companys Level 1 assets is a
market approach, using prices and other relevant information generated by market transactions
involving identical assets. The valuation technique used to measure fair value for Level 3 assets
is an income approach, where, in most cases, the expected future cash flows are discounted back to
present value for each asset, except for the investment put option related to the ARS Rights, which
is based on the Black-Scholes option pricing model and approximates the difference in value between
the par value and the fair value of the associated ARS.
12 of 55
At March 31, 2010 and December 31, 2009, the Company held approximately $15.3 million and
$15.5 million, respectively, in fair value of ARS classified as short-term investments. The assets
underlying the ARS are student loans which are substantially backed by the federal government. The
fair values of these securities as of March 31, 2010 and December 31, 2009 were estimated using a
DCF model. In the first quarter of fiscal year 2008, the Company reclassified its ARS to the Level
3 category, as some of the inputs used in the DCF model are unobservable. The valuation of the
Companys ARS investment portfolio is subject to uncertainties that are difficult to predict. The
assumptions used in preparing the DCF model include estimates of interest rates, timing and amount
of cash flows, credit and liquidity premiums and expected holding periods of the ARS, based on data
available as of the applicable balance sheet date. These assumptions are volatile and subject to
change as the underlying sources of these assumptions and market conditions change, which could
result in significant changes to the fair value of the ARS. The significant assumptions of the DCF
model are discount margins that are based on industry recognized student loan sector indices, an
additional liquidity discount and an estimated term to liquidity. Other items that this analysis
considers are the collateralization underlying the security investments, the creditworthiness of
the counterparty and the timing of expected future cash flows. There were no significant changes to
the assumptions or inputs for the DCF model for ARS as of March 31, 2010 compared to December 31,
2009. The Companys ARS were also compared, when possible, to other observable market data for
securities with similar characteristics as the ARS.
Due to the change of the fair value of the Companys ARS and the investment put option related
to the ARS Rights, unrealized gains of $19,000 on the ARS and unrealized losses of $19,000 on the
investment put option related to the ARS Rights were included in Interest and Other, net in the
accompanying statement of operations for the three months ended March 31, 2010. The ARS investments
continue to pay interest according to their stated terms.
Changes to estimates and assumptions used in estimating the fair value of the ARS and the
investment put option related to the ARS Rights may result in materially different values. In
addition, actual market exchanges, if any, may occur at materially different amounts. Other factors
that may impact the valuation of the Companys ARS and investment put option related to the ARS
Rights include changes to credit ratings of the securities and to the underlying assets supporting
those securities, rates of default of the underlying assets, underlying collateral value, discount
rates, counterparty risk and ongoing strength and quality of market credit and liquidity.
As of March 31, 2010, the Companys financial assets measured at fair value on a recurring
basis using significant Level 3 inputs consisted solely of the ARS and the investment put option
related to the ARS Rights. The following table provides a reconciliation for all assets measured at
fair value using significant Level 3 inputs for the three months ended March 31, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Put Option |
|
|
|
ARS |
|
|
Related to ARS Rights |
|
Balance as of December 31, 2009 |
|
$ |
15,542 |
|
|
$ |
2,358 |
|
Unrealized gain on ARS, included in Interest and Other, net |
|
|
19 |
|
|
|
|
|
Unrealized loss on the investment put option related to
ARS Rights, included in Interest and Other, net |
|
|
|
|
|
|
(19 |
) |
Sale of ARS |
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010 |
|
$ |
15,311 |
|
|
$ |
2,339 |
|
|
|
|
|
|
|
|
The total amount of assets measured using valuation methodologies based on Level 3 inputs
represented approximately 18% of the Companys total assets that were measured at fair value as of
March 31, 2010.
Note 6. Loan with UBS
In connection with the settlement with UBS AG relating to the Companys ARS in October 2008,
the Company entered into a loan agreement with UBS Bank USA and UBS Financial Services Inc. On
January 5, 2009, the Company borrowed approximately $12.4 million under the loan agreement, with
its ARS held in accounts with UBS Financial Services Inc. as collateral. The loan amount was based
on 75% of the fair value of the ARS as assessed by UBS at the time of the loan. The Company has
drawn down the full amount available under the loan agreement. In general, the amount of interest
payable under the loan agreement is intended to equal the amount of interest the Company would
otherwise receive with respect to its ARS. During the first quarter of 2010, the interest rate due
on the UBS loan was lower than the interest rate earned from the ARS, and the principal balance of
the loan was lower than the par value of the ARS. During the first quarter of 2010, the Company
paid $29,000 of interest expense associated with the loan and received $107,000 in interest income
from the ARS. In accordance with the loan agreement, the Company applied the net interest received
and the proceeds of $0.2 million from sales of ARS to the principal of the loan.
13 of 55
The borrowings under the loan agreement are payable upon demand. However, upon such demand,
UBS Financial Services Inc. or its affiliates will be required to arrange alternative financing for
the Company on terms and conditions substantially the same as those under the loan agreement,
unless the demand right was exercised as a result of certain specified events or the customer
relationship between UBS Financial Services Inc. and the Company is terminated for cause by UBS
Financial Services Inc. If such alternative financing cannot be established, then a UBS affiliate
will purchase the pledged ARS at par value. Proceeds of sales of the ARS will first be applied to
repayment of the loan with the balance, if any, for the Companys account.
Note 7. Restructuring
In September 2008, the Company announced a restructuring plan to realign its workforce and
operations in line with a strategic reassessment of its research and development activities and
corporate objectives. As a result, at the time, the Company focused its research activities to its
muscle contractility programs while continuing to advance its then-ongoing clinical trials in heart
failure and cancer, and discontinued early research activities directed to oncology. The Company
communicated to affected employees a plan of organizational restructuring through involuntary
terminations. Pursuant to the accounting guidance for exit or disposal cost obligations, the
Company recorded a charge of approximately $2.5 million in 2008 consisting of $2.2 million for
employee severance and benefit related costs and $0.3 million related to the impairment of
laboratory equipment that was held-for-sale. To implement this plan, the Company reduced its
workforce at the time by approximately 29%, or 45 employees. The affected employees were provided
with severance and related benefits payments and outplacement assistance. All severance
payments were made as of December 31, 2008.
In the three months ended March 31, 2009, the Company recorded a decrease in restructuring
expenses of $0.1 million, which primarily consisted of the reduction of accrued employee benefit
related restructuring costs and gains on disposals of held-for-sale equipment. The Company did not
record any restructuring charges in the three months ended March 31, 2010 because the Company has
completed all restructuring activities and recognized all anticipated restructuring charges.
Note 8. Stockholders Equity
Common Stock
During the three months ended March 31, 2010, under the October 2007 committed equity
financing facility (the 2007 CEFF) with Kingsbridge Capital Limited (Kingsbridge), the Company
sold 1,187,198 shares of its common stock to Kingsbridge and received gross proceeds of $3.4
million, a price equal to 90% of the volume weighted average price of the Companys stock on each
trading day during an eight day pricing period prior to the sale. As of March 31, 2010, 4,995,485
shares remained available to the Company for sale under the 2007 CEFF.
Stock Option Plans
Stock option activity for the three months ended March 31, 2010 under the 2004 Equity
Incentive Plan, as amended, and the 1997 Stock Option/Stock Issuance Plan was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
Available for |
|
|
|
|
|
|
Weighted |
|
|
|
Grant of |
|
|
|
|
|
|
Average Exercise |
|
|
|
Options |
|
|
Stock Options |
|
|
Price per Share |
|
|
|
or Awards |
|
|
Outstanding |
|
|
Stock Options |
|
Balance at December 31, 2009 |
|
|
4,098,228 |
|
|
|
6,984,463 |
|
|
$ |
4.58 |
|
Options granted |
|
|
(1,666,537 |
) |
|
|
1,666,537 |
|
|
$ |
3.08 |
|
Options exercised |
|
|
|
|
|
|
(25,738 |
) |
|
$ |
1.55 |
|
Options cancelled |
|
|
263,937 |
|
|
|
(263,937 |
) |
|
$ |
3.12 |
|
Restricted stock awards forfeited |
|
|
8,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
|
2,703,798 |
|
|
|
8,361,325 |
|
|
$ |
4.34 |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted in the three months ended March 31, 2010
was $2.05 per share.
Restricted stock award activity for the three months ended March 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Award Date Fair |
|
|
|
Number of Shares |
|
|
Value per Share |
|
Unvested restricted stock awards outstanding at December 31, 2009 |
|
|
191,630 |
|
|
$ |
2.37 |
|
Awards forfeited |
|
|
(8,170 |
) |
|
$ |
2.37 |
|
|
|
|
|
|
|
|
|
Unvested restricted stock awards outstanding at March 31, 2010 |
|
|
183,460 |
|
|
$ |
2.37 |
|
|
|
|
|
|
|
|
|
14 of 55
Note 9. Interest and Other, net
Components of Interest and Other, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
|
|
August 5, 1997 |
|
|
|
Three Months Ended |
|
|
(date of inception) |
|
|
|
March 31, |
|
|
March 31, |
|
|
to March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Unrealized gain (loss) on ARS (Note 5) |
|
$ |
19 |
|
|
$ |
670 |
|
|
$ |
(2,339 |
) |
Unrealized gain (loss) on investment put
option related to ARS Rights (Note 5) |
|
|
(19 |
) |
|
|
(670 |
) |
|
|
2,339 |
|
Warrant expense |
|
|
|
|
|
|
|
|
|
|
(1,585 |
) |
Interest income and other income |
|
|
163 |
|
|
|
258 |
|
|
|
28,697 |
|
Interest expense and other expense |
|
|
(69 |
) |
|
|
(100 |
) |
|
|
(5,840 |
) |
|
|
|
|
|
|
|
|
|
|
Interest and Other, net |
|
$ |
94 |
|
|
$ |
158 |
|
|
$ |
21,272 |
|
|
|
|
|
|
|
|
|
|
|
Investments that the Company designates as trading securities are reported at fair value, with
gains or losses resulting from changes in fair value recognized in earnings and included in
Interest and Other, net. The Company classified its investments in ARS as trading securities in
short-term assets as of March 31, 2010 and December 31, 2009.
The Company elected to measure the investment put option related to the ARS Rights at fair
value to mitigate volatility in reported earnings due to its linkage to the ARS. The Company
recorded $2.3 million as the fair value of the investment put option related to the ARS Rights as
of March 31, 2010 and $2.4 million as the fair value of the investment put option related to the
ARS Rights as of December 31, 2009, classified as a short-term asset on the balance sheet with a
corresponding credit to Interest and Other, net. Changes in the fair value of the ARS are
recognized in current period earnings in Interest and Other, net.
Warrant expense of $1.6 million for the period from inception to March 31, 2010 related to the
change in the fair value of the warrant liability that was recorded in connection with the
Companys registered direct equity offering in May 2009.
Interest income and other income primarily consists of interest income generated from the
Companys cash, cash equivalents and investments. Interest expense and other expense primarily
consists of interest expense on borrowings under the Companys equipment financing lines and on its
loan agreement with UBS Bank USA and UBS Financial Services Inc.
Note 10. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
The Company has adopted new accounting guidance for improving disclosures about fair value
measurements. The new guidance adds a requirement to disclose transfers in and out of Level 3 and
fair value measurements, and clarifies existing guidance about the level of disaggregation of fair
value measurements and disclosures regarding inputs and valuation techniques. The Companys
adoption of the new guidance did not have a material impact on its financial position or results of
operations.
Accounting Pronouncements Not Yet Adopted
In October 2009, the Financial Accounting Standards Board (FASB) issued new accounting
guidance for recognizing revenue for a multiple-deliverable revenue arrangement. The new guidance
amends the existing guidance for separately accounting for individual deliverables in a revenue
arrangement with multiple deliverables, and removes the criterion that an entity must use objective
and reliable evidence of fair value to separately account for the deliverables. The new guidance
also establishes a hierarchy for determining the value of each deliverable and establishes the
relative selling price method for allocating consideration when vendor specific objective evidence
or third party evidence of value does not exist. The Company must adopt the new guidance
prospectively for new revenue arrangements entered into or materially modified beginning in the
first
quarter of 2011. Earlier adoption is permitted. The Company is currently evaluating the impact
that the new guidance will have on its financial statements and the timing of its adoption.
15 of 55
In January 2010, the FASB issued new accounting guidance for improving disclosures about
fair value measurements, which requires a gross presentation of Level 3 fair value rollforwards.
The guidance is effective for the Company beginning in the first quarter of 2011. The Company does
not expect that its adoption of the new fair value guidance will have a material impact on its
financial position or results of operations.
In April 2010, the FASB issued new accounting guidance on the milestone method of revenue
recognition. The new guidance codifies the milestone method as an acceptable revenue recognition
model when a milestone is deemed to be substantive. The guidance is effective for the Company
beginning in the first quarter of 2011, and is to be applied prospectively for milestones achieved
after the effective date, although early adoption is permitted. Retrospective adoption of the
guidance for all prior periods is also allowed. The Company is currently evaluating the timing of
its adoption of the new revenue recognition guidance, but does not expect that its adoption of the
guidance will have a material impact on its financial position or results of operations.
Note 11. Subsequent Events
In April 2010, the Company sold 1,898,119 shares of its common stock to Kingsbridge under the
2007 CEFF and received proceeds of $5.6 million. Kingsbridge is not obligated to purchase any
further shares under the 2007 CEFF unless certain conditions are met, including a minimum volume
weighted average price of $2.00 for the Companys common stock. The gross proceeds represent prices
equal to 90% of the volume weighted average price of the Companys stock on each trading day during
an eight day pricing period prior to each sale date.
On May 3, 2010, the Company issued 71,961 shares of common stock pursuant to the ESPP at an
average price of $1.71 per share.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with our financial statements and
accompanying notes included elsewhere in this report. Operating results are not necessarily
indicative of results that may occur in future periods.
This report contains forward-looking statements that are based upon current expectations
within the meaning of the Private Securities Litigation Reform Act of 1995. We intend that such
statements be protected by the safe harbor created thereby. Forward-looking statements involve
risks and uncertainties and our actual results and the timing of events may differ significantly
from the results discussed in the forward-looking statements. Examples of such forward-looking
statements include, but are not limited to, statements about or relating to:
|
|
|
guidance concerning revenues, research and development expenses and general and
administrative expenses for 2010; |
|
|
|
|
the sufficiency of existing resources to fund our operations for at least the next 12
months; |
|
|
|
|
our capital requirements and needs for additional financing; |
|
|
|
|
the initiation, design, progress, timing and scope of clinical trials and development
activities for our drug candidates and potential drug candidates conducted by ourselves or
our partners, such as Amgen, Inc. (Amgen), including the anticipated timing for initiation
of clinical trials and anticipated dates of data becoming available or being announced from
clinical trials; |
|
|
|
|
the results from the clinical trials and non-clinical studies of our drug candidates and
other compounds, and the significance and utility of such results; |
|
|
|
|
our and our partners, such as Amgens, plans or ability to conduct the continued
research and development of our drug candidates and other compounds; |
|
|
|
|
our expected roles in research, development or commercialization under our strategic
alliances, such as with Amgen; |
|
|
|
|
the properties and potential benefits of, and the potential market opportunities for, our
drug candidates and other compounds, including the potential indications for which they may
developed; |
|
|
|
|
the sufficiency of the clinical trials conducted with our drug candidates to demonstrate
that they are safe and efficacious; |
16 of 55
|
|
|
our receipt of milestone payments, royalties, reimbursements and other funds from current
or future partners under strategic alliances, such as with Amgen; |
|
|
|
|
our plans to seek strategic alternatives for our oncology program with third parties; |
|
|
|
|
our ability to continue to identify additional potential drug candidates that may be
suitable for clinical development; |
|
|
|
|
our plans or ability to commercialize drugs with or without a partner, including our
intention to develop sales and marketing capabilities; |
|
|
|
|
the focus, scope and size of our research and development activities and programs; |
|
|
|
|
the utility of our focus on the cytoskeleton and our ability to leverage our experience
in muscle contractility to other muscle functions; |
|
|
|
|
our plans and ability to liquidate our auction rate securities (ARS) investments; |
|
|
|
|
the issuance of shares of our common stock under our committed equity financing facility
entered into with Kingsbridge Capital Limited (Kingsbridge) in 2007; |
|
|
|
|
our ability to protect our intellectual property and to avoid infringing the intellectual
property rights of others; |
|
|
|
|
expected future sources of revenue and capital; |
|
|
|
|
losses, costs, expenses and expenditures; |
|
|
|
|
future payments under loan and lease obligations and equipment financing lines; |
|
|
|
|
potential competitors and competitive products; |
|
|
|
|
increasing the number of our employees, retaining key personnel and recruiting additional
key personnel; |
|
|
|
|
expected future amortization of employee stock-based compensation; and |
|
|
|
|
the potential impact of recent accounting pronouncements on our financial position or
results of operations. |
Such forward-looking statements involve risks and uncertainties, including, but not limited
to, those risks and uncertainties relating to:
|
|
|
Amgens decisions with respect to the timing, design and conduct of development
activities for omecamtiv mecarbil, including decisions to postpone or discontinue research
or development activities relating to omecamtiv mecarbil; |
|
|
|
|
our ability to obtain additional financing; |
|
|
|
|
our receipt of funds under our current or future strategic alliances; |
|
|
|
|
difficulties or delays in the development, testing, production or commercialization of
our drug candidates; |
|
|
|
|
difficulties or delays in or slower than anticipated patient enrollment in our or our
partners clinical trials; |
|
|
|
|
unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates
that could slow or prevent product approval (including the risk that current and past
results of preclinical studies or clinical trials may not be indicative of future clinical
trials results); |
|
|
|
|
results from non-clinical studies that may adversely impact the timing or the further
development of our drug candidates and potential drug candidates; |
17 of 55
|
|
|
the possibility that the U.S. Food and Drug Administration (FDA) or foreign regulatory
agencies may delay or limit our or our partners ability to conduct clinical trials or may
delay or withhold approvals for the manufacture and sale of our products; |
|
|
|
|
activities and decisions of, and market conditions affecting, current and future
strategic partners; |
|
|
|
|
our ability to enter into partnership agreements for any of our programs on acceptable
terms and conditions; |
|
|
|
|
UBSs ability to fulfill its obligations to purchase our ARS beginning on June 30, 2010
pursuant to our settlement agreement; |
|
|
|
|
the conditions in our 2007 committed equity financing facility with Kingsbridge that must
be fulfilled before we can require Kingsbridge to purchase our common stock, including the
minimum volume-weighted average share price; |
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our ability to maintain the effectiveness of our registration statement permitting resale
of securities to be issued to Kingsbridge by us in connection with our 2007 committed equity
financing facility; |
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changing standards of care and the introduction of products by competitors or alternative
therapies for the treatment of indications we target that may make our drug candidates
commercially unviable; |
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the uncertainty of protection for our intellectual property, whether in the form of
patents, trade secrets or otherwise; and |
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potential infringement or misuse by us of the intellectual property rights of third
parties. |
In addition such statements are subject to the risks and uncertainties discussed in the Risk
Factors section and elsewhere in this document. Operating results reported are not necessarily
indicative of results that may occur in future periods.
When used in this report, unless otherwise indicated, Cytokinetics, the Company, we,
our and us refers to Cytokinetics, Incorporated.
CYTOKINETICS, and our logo used alone and with the mark CYTOKINETICS, are registered service
marks and trademarks of Cytokinetics. Other service marks, trademarks and trade names referred to
in this report are the property of their respective owners.
Overview
We are a clinical-stage biopharmaceutical company focused on the discovery and development of
novel small molecule therapeutics that modulate muscle function for the potential treatment of
serious diseases and medical conditions. Our research and development activities relating to the
biology of muscle function have evolved from our knowledge and expertise regarding the
cytoskeleton, a complex biological infrastructure that plays a fundamental role within every human
cell. Our current research and development programs relating to the biology of muscle function are
directed to small molecule modulators of the contractility of cardiac, skeletal and smooth muscle.
We intend to leverage our experience in muscle contractility in order to expand our current
pipeline into new therapeutic areas, and expect to continue to be able to identify additional
potential drug candidates that may be suitable for clinical development.
We currently have five drug candidates that have progressed into clinical development:
omecamtiv mecarbil for the potential treatment of heart failure; CK-2017357 for the potential
treatment of diseases or medical conditions associated with muscle weakness or wasting; and
ispinesib, SB-743921, and GSK-923295 for potential treatment of cancer. We are also conducting
non-clinical development of a backup compound to CK-2017357 and of compounds that inhibit smooth
muscle contractility and which may be useful as potential treatments for diseases and conditions
such as systemic hypertension or bronchoconstriction.
Muscle Contractility Programs
Cardiac Muscle Contractility
Our lead drug candidate from this program is omecamtiv mecarbil, a novel cardiac muscle myosin
activator. In December 2006, we entered into a collaboration and option agreement with Amgen to
discover, develop and commercialize novel small molecule
18 of 55
therapeutics that activate cardiac muscle contractility for potential applications in the
treatment of heart failure, including omecamtiv mecarbil. The agreement provided Amgen with a
non-exclusive license and access to certain technology. The agreement also granted Amgen an option
to obtain an exclusive license worldwide, except Japan, to develop and commercialize omecamtiv
mecarbil and other drug candidates arising from the collaboration. In May 2009, Amgen exercised
this option and subsequently paid us an exercise fee of $50.0 million. As a result, Amgen is now
responsible for the development and commercialization of omecamtiv mecarbil and related compounds,
at its expense worldwide, except Japan, subject to our development and commercialization
participation rights. Under the agreement, Amgen will reimburse us for agreed research and
development activities we perform. The agreement provides for potential pre-commercialization and
commercialization milestone payments of up to $600.0 million in the aggregate on omecamtiv mecarbil
and other potential products arising from research under the collaboration, and royalties that
escalate based on increasing levels of annual net sales of products commercialized under the
agreement. The agreement also provides for us to receive increased royalties by co-funding Phase
III development costs of drug candidates under the collaboration. If we elect to co-fund such
costs, we would be entitled to co-promote omecamtiv mecarbil in North America and participate in
agreed commercialization activities in institutional care settings, at Amgens expense.
We have conducted a clinical trials program for omecamtiv mecarbil comprised of multiple Phase
I and Phase IIa clinical trials designed to evaluate the safety, tolerability, pharmacodynamics and
pharmacokinetic profiles of both intravenous and oral formulations in a diversity of patients,
including patients with stable heart failure and patients with ischemic cardiomyopathy. In these
trials, omecamtiv mecarbil exhibited generally linear, dose-proportional pharmacokinetics across
the dose ranges studied. The adverse effects observed in humans at doses that exceeded the maximum-tolerated dose appeared
similar to the adverse findings which occurred in preclinical safety studies at similar plasma
concentrations. These effects are believed to be related to the mechanism of action of this drug
candidate which, at doses that exceeded the maximum-tolerated dose, resulted in an excessive prolongation of the systolic
ejection time. However, these effects resolved promptly with discontinuation of the infusions of
omecamtiv mecarbil.
Amgen is now responsible for clinical development of omecamtiv mecarbil following its exercise
of its option. We anticipate that in mid-2010, Amgen will initiate a Phase IIa multi-center,
open-label, dose-escalating, sequential-cohort pharmacokinetic clinical trial of a modified-release
and an immediate-release oral formulation of omecamtiv mecarbil in stable heart failure patients.
The trial is anticipated to enroll up to 84 patients with the primary objective to evaluate the
pharmacokinetics of the two formulations of omecamtiv mecarbil following dosing twice or three
times a day for eight days. The secondary endpoint will be to evaluate the safety and tolerability
of the two formulations of omecamtiv mecarbil at steady state. We also anticipate that in mid-2010,
Amgen will initiate a Phase Ib, multi-center, open-label, single-dose, safety and pharmacokinetic
clinical study of a modified-release oral formulation of omecamtiv mecarbil in patients with renal
dysfunction.
We also anticipate that by year-end 2010, Amgen will initiate a randomized, double-blind,
placebo-controlled, Phase IIb clinical trial of an intravenous formulation of omecamtiv mecarbil in
hospitalized acute heart failure patients with left ventricular systolic dysfunction. The trial is
anticipated to examine clinical, echocardiographic and pharmacokinetic endpoints at three dose
levels of omecamtiv mecarbil and placebo. The primary and secondary endpoints to be assessed in
this trial are still under discussion. This development program is expected to proceed alongside
the previously announced plans to conduct additional pharmacokinetic studies of the oral
formulations of omecamtiv mecarbil.
The clinical trials program for omecamtiv mecarbil may proceed for several years, and we will
not be in a position to generate any revenues or material net cash flows from sales of this drug
candidate until the program is successfully completed, regulatory approval is achieved, and the
drug is commercialized. Omecamtiv mecarbil is at too early a stage of development for us to predict
when or if this may occur. We funded all research and development costs associated with this
program prior to Amgens option exercise in May 2009. We recorded research and development expenses
for activities relating to our cardiac muscle contractility program of approximately $0.5 million
and $3.8 million in the three months ended March 31, 2010 and 2009, respectively. We recognized
revenue of $0.6 million for expense and full-time employee equivalent (FTE) reimbursements and
$16,000 for expense reimbursements as research and development revenue from Amgen in the three
months ended March 31, 2010 and 2009, respectively.
We anticipate that our expenditures relating to the research and development of compounds in
our cardiac muscle contractility program will increase if we participate in the future advancement
of omecamtiv mecarbil through clinical development. Our expenditures will also increase if Amgen
terminates development of omecamtiv mecarbil or related compounds and we elect to develop them
independently or if we elect to co-fund later-stage development of omecamtiv mecarbil or other
compounds in our cardiac muscle contractility program under our collaboration and option agreement
with Amgen.
19 of 55
Skeletal Muscle Contractility
CK-2017357 is the lead potential drug candidate from this program. CK-2017357 and its backup
development compound are structurally distinct and selective small molecule activators of the fast
skeletal sarcomere. These compounds act on fast skeletal muscle troponin. Activation of troponin
increases its sensitivity to calcium, leading to an increase in skeletal muscle contractility. This
mechanism of action has demonstrated encouraging pharmacological activity in preclinical models. We
are evaluating the potential indications for which CK-2017357 may be useful. In March 2010,
CK-2017357 received an orphan drug designation from the FDA for the treatment of amyotrophic
lateral sclerosis, also known as ALS or Lou Gehrigs disease.
During the first quarter of 2010, we completed enrollment and treatment of healthy volunteers
in the first part, or Part A, of a two-part, Phase I, first-time-in-humans, ascending, single-dose,
double-blind, placebo-controlled clinical trial of CK-2017357. Part A of this trial was designed
to assess the safety, tolerability and pharmacokinetic profile of this drug candidate administered
orally in healthy male volunteers and to determine its maximum tolerated dose and plasma
concentration. The maximum-tolerated dose was determined to be 2000 mg. At this dose, the most
common adverse events were dizziness and euphoric mood; these events were deemed mild in severity.
At the single dose that exceeded the maximum-tolerated dose, 2500 mg, moderately severe dizziness
and an episode of syncope (a temporary loss of consciousness) were reported.
During the first quarter, we also announced positive data from the second part, or Part B, of
this clinical trial. Part B evaluated in healthy volunteers the pharmacodynamic effect of single
oral doses of CK-2017357 that had been tolerated in Part A. Results from Part B of the trial showed
that CK-2017357 produced concentration-dependent, statistically significant increases, versus
placebo, in the force developed by the tibialis anterior muscle, and that the doses administered
were well-tolerated.
In both Part A and Part B of this clinical trial, adverse events of dizziness and euphoric
mood appeared to increase in frequency with escalating doses of CK-357; however, at the maximum
tolerated dose and below, all these adverse events were characterized as mild in severity. No
serious adverse events were reported in either Part A or Part B of this clinical trial.
Also during the first quarter of 2010, we announced data from a second Phase I clinical trial
designed to investigate the safety, tolerability and pharmacokinetic profile of CK-2017357 after
multiple oral doses to steady state in healthy male volunteers. Results from this trial showed that
both the maximum CK-2017357 plasma concentration and the area under the CK-2017357 plasma
concentration versus time curve from dosing until 24 hours after dosing were generally
dose-proportional and exhibited only modest accumulation compared to the values measured after the
first dose. In general, systemic exposure to CK-2017357 in this trial was high and inter-subject
variability was low. In addition, these multiple dose regimens of CK-2017357 were well-tolerated,
and no serious adverse events were observed. Adverse events included dizziness, headache and
euphoric mood; all these events were judged to have been mild in severity except for one complaint
of dizziness that was classified as moderately severe.
In April 2010, we initiated dosing in a Phase IIa evidence of effect clinical trial of
CK-2017357 in patients with ALS. Our evidence of effect clinical trials are intended to translate
pharmacodynamic assessments demonstrated in healthy volunteers to impaired populations and
potentially to establish statistically significant and clinically relevant evidence of
pharmacodynamic effects. These trials may then form the basis for larger clinical trials designed
to demonstrate proof of concept in which improvements may be seen in the consequences of disease
over time. We anticipate initiating a Phase IIa evidence of effect clinical trial of CK-2017357
for patients with claudication associated with peripheral artery disease in the second quarter of
2010. We also anticipate continuing non-clinical development studies of the backup potential drug
candidate in our skeletal muscle contractility program throughout 2010.
CK-2017357 is at too early a stage of development for us to predict if or when we will be in a
position to generate any revenues or material net cash flows from its commercialization. We
currently fund all research and development costs associated with this program. We recorded
research and development expenses for activities relating to our skeletal muscle contractility
program of approximately $6.4 million and $2.6 million in the three months ended March 31, 2010 and
2009, respectively. We anticipate that our expenditures relating to the research and development of
compounds in our skeletal muscle contractility program will increase significantly if and as we
advance CK-2017357, its back-up compound or other compounds from this program into and through
development.
20 of 55
Smooth Muscle Contractility
Our smooth muscle contractility program is focused on the discovery and development of small
molecule smooth muscle myosin inhibitors, and leverages our expertise in muscle function and its
application to drug discovery. Our inhaled smooth muscle myosin inhibitors have demonstrated
pharmacological activity in preclinical models of bronchoconstriction and may have application for
indications such as asthma or chronic obstructive pulmonary disease. Our smooth muscle myosin
inhibitors, administered orally or intravenously, have demonstrated pharmacological activity in
preclinical models of vascular constriction. Smooth muscle myosin inhibitors administered orally
may have application in systemic hypertension. We anticipate continuing non-clinical development
studies of our smooth muscle myosin inhibitors throughout 2010.
This potential drug candidate is at too early a stage of development for us to predict if or
when we will be in a position to generate any revenues or material net cash flows from its
commercialization. We currently fund all research and development costs associated with this
program. We recorded research and development expenses for activities relating to our smooth muscle
contractility program of approximately $0.6 million and $1.7 million in the three months ended
March 31, 2010 and 2009, respectively. We anticipate that our expenditures relating to the research
and development of compounds in our smooth muscle contractility program will increase significantly
if and as we advance compounds from this program into and through development.
Oncology Program: Mitotic Kinesin Inhibitors
We currently have three drug candidates for the potential treatment of cancer: ispinesib,
SB-743921 and GSK-923295. All of these arose from our earlier research activities directed to the
role of the cytoskeleton in cell division and were progressed under our strategic alliance with
GSK. Under this strategic alliance, we focused primarily on two mitotic kinesins: kinesin spindle
protein (KSP) and centromere-associated protein E (CENP-E). Inhibition of KSP or CENP-E
interrupts cancer cell division, causing cell death. Ispinesib and SB-743921 are structurally
distinct small molecules that specifically inhibit KSP. GSK-923295 specifically inhibits CENP-E.
In November 2006, we amended our strategic alliance with GSK and assumed responsibility, at
our expense, for the continued research, development and commercialization of inhibitors of KSP,
including ispinesib and SB-743921, and other mitotic kinesins, other than CENP-E. GSK retained an
option to resume responsibility for the development and commercialization of either or both of
ispinesib and SB-743921. This option expired at the end of 2008. As a result, we have retained all
rights to develop and commercialize ispinesib and SB-743921, subject to certain royalty obligations
to GSK. In December 2009, we agreed with GSK to terminate this strategic alliance, effective
February 28, 2010. Accordingly, we have retained all rights to develop and commercialize
GSK-923295, subject to certain royalty obligations to GSK. We are evaluating strategic alternatives
for the future development and commercialization of ispinesib, SB-743921 and GSK-923295 with third
parties.
Ispinesib
We have completed patient treatment in the Phase I portion of our Phase I/II clinical trial
evaluating ispinesib as monotherapy administered as a first-line treatment in chemotherapy-naïve
patients with locally advanced or metastatic breast cancer and have closed this trial. As a result
of the expiration of GSKs option relating to ispinesib, we have retained all development and
commercialization rights to ispinesib, subject to certain royalty obligations to GSK. We are
evaluating strategic alternatives for the future development and commercialization of ispinesib
with third parties.
SB-743921
We have closed enrollment and intend to complete patient treatment in the Phase I portion of
our Phase I/II clinical trial of SB-743921 in patients with Hodgkin or non-Hodgkin lymphoma. As a
result of the expiration of GSKs option relating to SB-743921, we have retained all development
and commercialization rights to SB-743921, subject to certain royalty obligations to GSK. We are
evaluating strategic alternatives for the future development and commercialization of SB-743921
with third parties.
GSK-923295
GSK has closed enrollment and continues patient treatment in its Phase I clinical trial of
GSK-923295. GSK has agreed to complete this clinical trial at its cost. Following the agreed
termination of our strategic alliance with GSK in February 2010, we have retained all development
and commercialization rights to GSK-923295, subject to certain royalty obligations to GSK. We are
evaluating strategic alternatives for the future development and commercialization of GSK-923295
with third parties.
21 of 55
Each of ispinesib, SB-743921 and GSK-923295 is at too early a stage of development for us to
predict if or when we will be in a position to generate any revenues or material net cash flows
from its commercialization. We currently fund all research and development costs associated with
ispinesib and SB-743921. We recorded research and development expenses for activities relating to our mitotic kinesins
inhibitors
program of approximately $0.5 million and $1.2 million in the three months ended March 31, 2010 and
2009, respectively. We received and recognized as revenue reimbursements from GSK of patent
expenses related to our mitotic kinesin inhibitors program of zero and $4,000 for the three months
ended March 31, 2010 and 2009, respectively. We have completed the Phase I portion
of the Phase I/II clinical trial for ispinesib and intend to complete the Phase I portion of the Phase I/II clinical trial for SB-743921. GSK is completing the current Phase I
clinical trial of GSK-923295. We do not currently intend to conduct any further development of
these drug candidates ourselves. We are evaluating strategic alternatives to continue the
development of ispinesib, SB-743921 and GSK-923295 with third parties. We may not be able to enter
into an agreement regarding such an alternative on acceptable terms, if at all.
Development Risks
The successful development of any of our drug candidates is highly uncertain. We cannot
estimate with certainty or know the exact nature, timing and costs of the activities necessary to
complete the development of any of our drug candidates or the date of completion of these
development activities due to numerous risks and uncertainties, including, but not limited to:
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decisions made by Amgen with respect to the development of omecamtiv mecarbil; |
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the uncertainty of the timing of the initiation and completion of patient enrollment and
treatment in our clinical trials; |
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the possibility of delays in the collection of clinical trial data and the uncertainty of
the timing of the analyses of our clinical trial data after these trials have been initiated
and completed; |
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our potential inability to obtain additional funding and resources for our development
activities on acceptable terms, if at all, including, but not limited to, our potential
inability to obtain or retain partners to assist in the design, management, conduct and
funding of clinical trials; |
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delays or additional costs in manufacturing of our drug candidates for clinical trial
use, including developing appropriate formulations of our drug candidates; |
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the uncertainty of clinical trial results, including variability in patient response; |
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the uncertainty of obtaining FDA or other foreign regulatory agency approval required for
the clinical investigation of our drug candidates; |
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the uncertainty related to the development of commercial scale manufacturing processes
and qualification of a commercial scale manufacturing facility; and |
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possible delays in the characterization, formulation and manufacture of potential drug
candidates. |
If we fail to complete the development of any of our drug candidates in a timely manner, it
could have a material adverse effect on our operations, financial position and liquidity. In
addition, any failure by us or our partners to obtain, or any delay in obtaining, regulatory
approvals for our drug candidates could have a material adverse effect on our results of
operations. A further discussion of the risks and uncertainties associated with completing our
programs on schedule, or at all, and certain consequences of failing to do so are discussed further
in the risk factors entitled We have never generated, and may never generate, revenues from
commercial sales of our drugs and we may not have drugs to market for at least several years, if
ever, Clinical trials may fail to demonstrate the desired safety and efficacy of our drug
candidates, which could prevent or significantly delay completion of clinical development and
regulatory approval and Clinical trials are expensive, time-consuming and subject to delay, and
other risk factors.
22 of 55
Revenues
Our current revenue sources are limited, and we do not expect to generate any revenue from
product sales for several years, if at all. We have recognized revenues from our strategic
alliances with Amgen and GSK for license fees and agreed research and development activities.
In December 2006, we entered into our collaboration and option agreement with Amgen, under
which we received an upfront, non-refundable, non-exclusive license and technology access fee of
$42.0 million. In connection with entering into the agreement, we also entered into a common stock
purchase agreement with Amgen. In January 2007, we issued 3,484,806 shares of our common stock to
Amgen for net proceeds of $32.9 million, of which the $6.9 million purchase premium was recorded as
deferred revenue. Through May 2009, we amortized the upfront non-exclusive license and technology
access fee and stock purchase premium to license revenue ratably over the maximum term of the
non-exclusive license, which was four years. In June 2009, we recognized as revenue the remaining
balance of $21.4 million of the related deferred revenue when Amgen exercised its option,
triggering the end of the non-exclusive license period. In June 2009, we received a non-refundable
option exercise fee from Amgen of $50.0 million, which we recognized in revenue as license fees
from a related party. We may receive additional payments from Amgen upon achieving certain
precommercialization and commercialization milestones. Milestone payments are non-refundable and
are recognized as revenue when earned, as evidenced by the achievement of the specified milestones
and the absence of ongoing performance obligations.
We have received reimbursements from Amgen for agreed research and development activities,
which we recorded as revenue as the related expenses were incurred. We may be eligible to receive
further reimbursements from Amgen for agreed research and development activities, which we will
record as revenue if and when the related expenses are incurred. We record amounts received in
advance of performance as deferred revenue.
In 2007, we received a $1.0 million milestone payment from GSK relating to its initiation of a
Phase I clinical trial of GSK-923295. Milestone payments are non-refundable and are recognized as
revenue when earned, as evidenced by achievement of the specified milestones and the absence of
ongoing performance obligations. We record amounts received in advance of performance as deferred
revenue. The revenues recognized to date are non-refundable, even if the relevant research effort
is not successful. In December 2008, GSKs option to license ispinesib and SB-743291 expired and
all rights to these drug candidates remain with us under the collaboration and license agreement,
subject to certain royalty obligations to GSK. In December 2009, we agreed with GSK to terminate this
strategic alliance, effective February 28, 2010. Accordingly, we have retained all rights to
develop and commercialize GSK-923295, subject to certain royalty obligations to GSK.
Because a substantial portion of our revenues for the foreseeable future will depend on
achieving development and other precommercialization milestones under our strategic alliance with
Amgen, our results of operations may vary substantially from year to year.
If one or more of our drug candidates is approved for sale as a drug, we expect that our
future revenues will most likely be derived from royalties on sales from drugs licensed to Amgen
under our strategic alliance and from those licensed to future partners, and from direct sales of
our drugs. We retain a product-by-product option to co-fund certain later-stage development
activities under our strategic alliance with Amgen, thereby potentially increasing our royalties
and affording us co-promotion rights in North America. If we exercise our co-promotion rights under
this strategic alliance, we are entitled to receive reimbursement for certain sales force costs we
incur in support of our commercial activities.
Research and Development
We incur research and development expenses associated with both partnered and unpartnered
research activities. We expect to incur research and development expenses for omecamtiv mecarbil
for the potential treatment of heart failure in accordance with agreed upon research and
development plans with Amgen. We expect to incur research and development expenses for the
continued conduct of preclinical studies and non-clinical and clinical development for CK-2017357
and other skeletal sarcomere activators for the potential treatment of diseases and medical
conditions associated with muscle weakness or wasting, preclinical studies and non-clinical
development of our smooth muscle myosin inhibitor compounds for the potential treatment of diseases
and medical conditions associated with bronchoconstriction, vascular constriction, or both, and our
research programs in other disease areas.
Research and development expenses related to our strategic alliance with GSK consisted
primarily of costs related to research and screening, lead optimization and other activities
relating to the identification of compounds for development as mitotic kinesin inhibitors for the
treatment of cancer. Prior to June 2006, certain of these costs were reimbursed by GSK on an FTE
basis. From 2001
23 of 55
through November 2006, GSK funded the majority of the costs related to the clinical
development of ispinesib and SB-743921. Under our amended collaboration and license agreement with
GSK, we assumed responsibility for the continued research, development and commercialization of
inhibitors of KSP, including ispinesib and SB-743921, and other mitotic kinesins other than CENP-E,
at our sole expense. We expect to incur minimal research and development expenses relating to the
close-out of the clinical trials for ispinesib and SB-743921.
Research and development expenses related to any development and commercialization activities
we elect to fund consist primarily of employee compensation, supplies and materials, costs for
consultants and contract research and manufacturing, facilities costs and depreciation of
equipment. From our inception through March 31, 2010, we incurred costs of approximately $135.3
million for research and development activities relating to our cardiac muscle contractility
program, $42.4 million for our skeletal muscle contractility program, $27.0 million for our smooth
muscle contractility program, $71.3 million for our mitotic kinesin inhibitors program, $53.7
million for our proprietary technologies and $56.6 million for other research programs.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for employees in
executive and administrative functions, including, but not limited to, finance, human resources,
legal, business and commercial development and strategic planning. Other significant costs include
facilities costs and professional fees for accounting and legal services, including legal services
associated with obtaining and maintaining patents and regulatory compliance. We expect that general
and administrative expenses will increase in 2010 compared to 2009.
Stock Compensation
The following table summarizes stock-based compensation related to stock options, restricted
stock awards and employee stock purchases for the three months ended March 31, 2010 and March 31,
2009 (in thousands):
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Three Months Ended |
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March 31, |
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March 31, |
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2010 |
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2009 |
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Research and development |
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$ |
490 |
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$ |
613 |
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General and administrative |
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504 |
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|
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636 |
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Stock-based compensation included in operating expenses |
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$ |
994 |
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$ |
1,249 |
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As of March 31, 2010, there was $7.4 million of total unrecognized compensation cost related
to non-vested stock options granted under our stock option plans. We expect to recognize that cost
over a weighted-average period of 2.8 years. The total unrecognized compensation expense related to
restricted stock awards as of March 31, 2010 was $0.2 million and is expected to be recognized over
a weighted-average period of 0.4 years.
Income Taxes
We account for income taxes under the liability method. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce the deferred tax assets to the amounts expected to be realized. We did not
record an income tax provision in the quarters ended March 31, 2010 and 2009 because we had a net
taxable loss in both of those periods.
Based upon the weight of available evidence, which includes our historical operating
performance, reported cumulative net losses since inception and difficulty in accurately
forecasting our future results, we maintained a full valuation allowance on our net deferred tax
assets as of March 31, 2010 and December 31, 2009. The valuation allowance was determined pursuant
to the accounting guidance for income taxes, which requires an assessment of both positive and
negative evidence when determining whether it is more likely than not that deferred tax assets are
recoverable. We intend to maintain a full valuation allowance on our deferred tax assets until
sufficient positive evidence exists to support reversal of the valuation allowance.
24 of 55
Results of Operations
Revenues
We recorded total revenues of $0.6 million and $3.1 million for the first quarter of 2010 and
2009, respectively.
Research and development revenues from related parties refer to research and development
revenues from our strategic alliance with Amgen and, through 2009, our strategic alliance with GSK.
Research and development revenues from Amgen were $0.6 million and $16,000 in the first quarter of
2010 and 2009, respectively. Research and development revenues from Amgen for the first quarter of
2010 consisted of $0.4 million for reimbursements of FTE expenses and $0.2 million for
reimbursements of other research and development expenses. Research and development revenues from
Amgen of $16,000 for the first quarter of 2009 consisted of reimbursement for the transfer of
clinical materials to Amgen. Research and development revenues from GSK were zero and $4,000 in the
first quarter 2010 and 2009, respectively, and represented patent expense reimbursements.
License revenues from related parties refer to license revenues from our strategic alliance
with Amgen. License revenues were zero and $3.1 million for the first quarter of 2010 and 2009,
respectively. License revenues for first quarter of 2009 consisted of the recognition of deferred
revenue related to the 2006 upfront non-exclusive license and technology access fee and stock
purchase premium from Amgen.
The deferred revenue balance of $0.2 million at March 31, 2010 and $0.8 million at December
31, 2009 related to Amgens prepayment of FTE reimbursements.
Research and Development Expenses
Research and development expenses were $9.1 million in the first quarter of 2010, down from
$10.0 million in the first quarter of 2009. The $0.9 million decrease in research and development
expense in the first quarter of 2010, compared to the same period in 2009, was primarily due to
lower clinical and preclinical outsourcing costs of $0.8 million related to our muscle
contractility and mitotic kinesin inhibitors clinical trial programs.
From a program perspective, the decline in spending in the first quarter of 2010, compared to
the first quarter of 2009, was due to decreased spending of $3.3 million for our cardiac muscle
contractility program, $1.1 million for our smooth muscle contractility program, $0.7 million for
our mitotic kinesin inhibitors program and $0.1 million for our proprietary technologies, partially
offset by increases of $3.8 million for our skeletal muscle contractility program and $0.5 million
for our other research and preclinical programs.
Research and development expenses incurred related to the following programs (in millions):
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Three Months Ended |
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March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Cardiac muscle contractility |
|
$ |
0.5 |
|
|
$ |
3.8 |
|
Skeletal muscle contractility |
|
|
6.4 |
|
|
|
2.6 |
|
Smooth muscle contractility |
|
|
0.6 |
|
|
|
1.7 |
|
Mitotic kinesin inhibitors |
|
|
0.5 |
|
|
|
1.2 |
|
Proprietary technologies |
|
|
0.1 |
|
|
|
0.2 |
|
All other research programs |
|
|
1.0 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
9.1 |
|
|
$ |
10.0 |
|
|
|
|
|
|
|
|
We recognized revenue from Amgen for reimbursement of research and development costs of $0.6
million and $16,000 for the first quarter of 2010 and 2009, respectively. The research and
development revenue from Amgen in the first quarter of 2010 represented reimbursements of FTE and
other research and development expenses. The FTE reimbursements from Amgen are at negotiated rates
that approximate our costs, and which we believe approximate fair value. The research and
development revenues from Amgen in the first quarter of 2009 represented reimbursement for the
transfer of clinical material to Amgen.
We recognized revenue from GSK for reimbursement of patent costs related to our mitotic
kinesin inhibitors of zero and $4,000 for the first quarter of 2010 and 2009, respectively, and
recorded these reimbursements as research and development revenues from related parties.
25 of 55
Clinical development timelines, likelihood of success and total completion costs vary
significantly for each drug candidate and are difficult to estimate. We anticipate that we will
determine on an on-going basis which research and development programs to pursue and how much
funding to direct to each program, taking into account the scientific and clinical success of each
drug candidate. The lengthy process of seeking regulatory approvals and subsequent compliance with
applicable regulations requires the expenditure of substantial resources. Any failure by us to
obtain and maintain, or any delay in obtaining, regulatory approvals could cause our research and
development expenditures to increase and, in turn, could have a material adverse effect on our
results of operations.
We expect our research and development expenditures to increase in 2010 compared to 2009 for
the following reasons: As part of our strategic alliance with Amgen, we expect to continue
development of our drug candidate omecamtiv mecarbil for the potential treatment of heart failure.
We expect to continue development of our drug candidate CK-2017357 for the potential treatment of
diseases and medical conditions associated with muscle weakness or wasting, and of our smooth
muscle myosin inhibitor compounds for the potential treatment of systemic hypertension and diseases
and medical conditions associated with bronchoconstriction. We also expect to continue to incur
costs associated with the close-out of each of the clinical trials of our drug candidates ispinesib
and SB-743921. We anticipate research and development expenses for 2010 will be in the range of
$42.0 million to $46.0 million. Non-cash expenses such as stock-based compensation and depreciation
of approximately $3.6 million are included in our estimate of 2010 research and development
expenses.
General and Administrative Expenses
General and administrative expenses were $3.8 million and $4.0 million in the first quarter of
2010 and 2009, respectively. The decrease in the first quarter of 2010 was primarily due to
decreases of $0.1 million in legal expenses and $0.1 million in personnel expenses.
We expect that general and administrative expenses will increase in 2010 from 2009 levels. For
the year ending December 31, 2010, we anticipate general and administrative expenses will be in the
range of $16.0 million to $18.0 million. Non-cash expenses such as stock-based compensation and
depreciation of approximately $2.5 million are included in our estimate of 2010 general and
administrative expenses.
Interest and Other, net
Components of Interest and Other, net are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Unrealized gain on auction rate securities (ARS) |
|
$ |
|
|
|
$ |
0.7 |
|
Unrealized loss on investment put option related to
Series C-2 Auction Rate Securities Rights (the ARS
Rights) |
|
|
|
|
|
|
(0.7 |
) |
Interest income and other income |
|
|
0.2 |
|
|
|
0.3 |
|
Interest expense and other expense |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Interest and Other, net |
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
Interest income and other income decreased in the first quarter of 2010 compared to the first
quarter of 2009 due to lower market interest rates earned on our investments, partially offset by
higher average invested balances of cash, cash equivalents and investments.
Interest expense and other expense primarily consisted of interest expense on our equipment
financing line of credit and our loan with UBS Bank USA.
Critical Accounting Policies
The accounting policies that we consider to be our most critical (i.e., those that are most
important to the portrayal of our financial condition and results of operations and that require
our most difficult, subjective or complex judgments), the effects of those accounting policies
applied and the judgments made in their application are summarized in Item 7Managements
Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting
Policies and Estimates in our Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
26 of 55
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
We have adopted new accounting guidance for improving disclosures about fair value
measurements. The new guidance adds a requirement to disclose transfers in and out of Level 3 and
fair value measurements, and clarifies existing guidance about the level of disaggregation of fair
value measurements and disclosures regarding inputs and valuation techniques. Our adoption of the
new guidance did not have a material impact on our financial position or results of operations.
Accounting Pronouncements Not Yet Adopted
In October 2009, the Financial Accounting Standards Board (FASB) issued new accounting
guidance for recognizing revenue for multiple-deliverable revenue arrangements. The new guidance
amends the existing guidance for separately accounting for individual deliverables in a revenue
arrangement with multiple deliverables, and removes the criterion that an entity must use objective
and reliable evidence of fair value to separately account for the deliverables. The new guidance
also establishes a hierarchy for determining the value of each deliverable and establishes the
relative selling price method for allocating consideration when vendor specific objective evidence
or third party evidence of value does not exist. We must adopt the new guidance prospectively for
new revenue arrangements entered into or materially modified beginning in the first quarter of
2011. Earlier adoption is permitted. We are currently evaluating the impact that the new guidance
will have on our financial statements and the timing of its adoption.
In January 2010, the FASB issued new accounting guidance for improving disclosures about fair
value measurements, which requires a gross presentation of Level 3 fair value rollforwards. The
guidance is effective for us beginning in the first quarter of 2011. We do not expect that our
adoption of the new fair value guidance will have a material impact on our financial position or
results of operations.
In April 2010, the FASB issued new accounting guidance on the milestone method of revenue
recognition. The new guidance codifies the milestone method as an acceptable revenue recognition
model when a milestone is deemed to be substantive. The guidance is effective for us beginning in
the first quarter of 2011, and is to be applied prospectively for milestones achieved after the
effective date, although early adoption is permitted. Retrospective adoption of the guidance for
all prior periods is also allowed. We are currently evaluating the timing of our adoption of the
new revenue recognition guidance, but we do not expect that our adoption of the guidance will have
a material impact on our financial position or results of operations.
Liquidity and Capital Resources
From August 5, 1997, our date of inception, through March 31, 2010, we funded our operations
through the sale of equity securities, equipment financings, non-equity payments from
collaborators, government grants and interest income.
Our cash, cash equivalents and investments (including ARS), excluding restricted cash and the
investment put option related to the ARS Rights, totaled $103.1 million at March 31, 2010, down
from $112.4 million at December 31, 2009. The decrease of $9.3 million was primarily due to the use
of cash to fund operations.
We have received net proceeds from the sale of equity securities of $339.3 million from August
5, 1997, the date of our inception, through March 31, 2010, excluding sales of equity to GSK and
Amgen. Included in these proceeds are $94.0 million received upon closing of the initial public
offering of our common stock in May 2004. In connection with execution of our collaboration and
license agreement in 2001, GSK made a $14.0 million equity investment in Cytokinetics. GSK made
additional equity investments in Cytokinetics in 2003 and 2004 of $3.0 million and $7.0 million,
respectively.
In 2005, we entered into our first committed equity financing facility with Kingsbridge
pursuant to which Kingsbridge committed to finance up to $75.0 million of capital for a three-year
period. Subject to certain conditions and limitations, from time to time under this committed
equity financing facility, at our election, Kingsbridge purchased newly-issued shares of our common
stock at a price between 90% and 94% of the volume weighted average price on each trading day
during an eight-day, forward-looking pricing period.
We received gross proceeds from draw downs and sales of our common stock to Kingsbridge under
this facility as follows: 2005 gross proceeds of $5.7 million from the sale of 887,576 shares,
before offering costs of $178,000; 2006 gross proceeds of
27 of 55
$17.0 million from the sale of 2,740,735 shares; and 2007 gross proceeds of $9.5 million from the
sale of 2,075,177 shares. No further draw downs are available to us under the 2005 Kingsbridge
committed equity financing facility.
In October 2007, we entered into a new committed equity financing facility with Kingsbridge,
pursuant to which Kingsbridge committed to finance up to $75.0 million of capital for a three-year
period. Subject to certain conditions and limitations, which include a minimum volume-weighted
average price of $2.00 for our common stock, from time to time under this facility, at our
election, Kingsbridge is committed to purchase newly-issued shares of our common stock at a price
between 90% and 94% of the volume weighted average price on each trading day during an eight-day,
forward-looking pricing period. The maximum number of shares we may issue in any pricing period is
the lesser of 2.5% of our market capitalization immediately prior to the commencement of the
pricing period or $15.0 million. As part of this arrangement, we issued a warrant to Kingsbridge to
purchase 230,000 shares of our common stock at a price of $7.99 per share, which represents a
premium over the closing price of our common stock on the date we entered into this facility. This
warrant became exercisable beginning six months after the October 2007 issuance date and will
remain exercisable for a period of three years thereafter. We may sell a maximum of 9,779,411
shares under this facility (exclusive of the shares underlying the warrant). Under the rules of the
NASDAQ Stock Market LLC, this is approximately the maximum number of shares we may sell to
Kingsbridge without our stockholders approval. This restriction may further limit the amount of
proceeds we are able to obtain from this committed equity financing facility. We are not obligated
to sell any of the common stock available under this facility and there are no minimum commitments
or minimum use penalties. The committed equity financing facility does not contain any restrictions
on our operating activities, any automatic pricing resets or any minimum market volume
restrictions. We received gross proceeds from sales of our common stock to Kingsbridge under this
facility as follows: 2009 gross proceeds of $6.9 million from the sale of 3,596,728 shares,
before offering costs of $0.1 million; first quarter of 2010 gross proceeds of $3.4 million from
the sale of 1,187,198 shares; and the period from April 1, 2010 through May 7, 2010 gross
proceeds of $5.6 million from the sale of 1,898,119 shares. The gross proceeds represent prices
equal to 90% of the volume weighted average price of the Companys stock on each trading day during
an eight day pricing period prior to each sale date. As of May 7, 2010, 3,097,366 shares remain
available to the Company for sale under the 2007 CEFF.
In January 2006, we entered into a stock purchase agreement with certain institutional
investors relating to the issuance and sale of 5,000,000 shares of our common stock at a price of
$6.60 per share, for gross offering proceeds of $33.0 million. In connection with this offering, we
paid an advisory fee to a registered broker-dealer of $1.0 million. After deducting the advisory
fee and the offering costs, we received net proceeds of approximately $32.0 million from the
offering.
In December 2006, we entered into stock purchase agreements with selected institutional
investors relating to the issuance and sale of 5,285,715 shares of our common stock at a price of
$7.00 per share, for gross offering proceeds of $37.0 million. In connection with this offering, we
paid placement agent fees to three registered broker-dealers totaling $1.9 million. After deducting
the placement agent fees and the offering costs, we received net proceeds of approximately $34.9
million from the offering.
In January 2007, we received a $42.0 million upfront non-exclusive license and technology
access fee from Amgen in connection with our entry into our collaboration and option agreement in
December 2006. Contemporaneously with entering into this agreement, we entered into a common stock
purchase agreement with Amgen under which Amgen purchased 3,484,806 shares of our common stock at a
price per share of $9.47, including a premium of $1.99 per share, and an aggregate purchase price
of approximately $33.0 million. After deducting the offering costs, we received net proceeds of
approximately $32.9 million. These shares were issued, and the related proceeds received, in
January 2007. In June 2009, we received a $50.0 million option exercise fee from Amgen.
In May 2009, pursuant to a registered direct equity offering, we entered into subscription
agreements with selected institutional investors to sell an aggregate of 7,106,600 units for a
price of $1.97 per unit. Each unit consisted of one share of our common stock and one warrant to
purchase 0.50 shares of our common stock. Accordingly, a total of 7,106,600 shares of common stock
and warrants to purchase 3,553,300 shares of common stock were issued and sold in this offering.
The gross proceeds of the offering were $14.0 million. In connection with the offering, we paid
placement agent fees to two registered broker-dealers totaling $0.8 million. After deducting the
placement agent fees and the offering costs, we received net proceeds of approximately $12.9
million from the offering.
As of March 31, 2010, we have received $99.8 million in non-equity payments from Amgen and
$54.5 million in non-equity payments from GSK.
Under equipment financing arrangements, we received $23.7 million from August 5, 1997, the
date of our inception, through March 31, 2010. Interest earned on investments, excluding non-cash
amortization/accretion of purchase premiums/discounts, was $0.5 million in the first quarter of
2010, and $28.4 million from August 5, 1997, the date of our inception, through March 31, 2010.
28 of 55
Net cash used in operating activities was $12.2 million in the first quarter of 2010 and
primarily resulted from the net loss of $12.2 million. The balance of deferred revenue, consisting
of prepayments of FTE reimbursements, decreased to $0.2 million as of March 31, 2010 from $0.8
million at December 31, 2009. Net cash used in operating activities in the first quarter of 2009
was $11.8 million and primarily resulted from the net loss of $10.7 million.
Net cash provided by investing activities was $4.7 million in the first quarter of 2010 and
primarily consisted of proceeds from the maturity of investments, net of cash used to purchase
investments, of $4.4 million. Restricted cash totaled $1.2 million at March 31, 2010, down from
$1.7 million at December 31, 2009, with the decrease due to the contractual semi-annual reduction
in the amount of security deposit required by our lender. Net cash used in investing activities in
the first quarter of 2009 was $0.2 million and primarily represented cash used to purchase
investments, net of proceeds from the maturity of investments and ARS, of $0.6 million.
Net cash provided by financing activities was $2.7 million in the first quarter of 2010 and
primarily consisted of proceeds of $3.4 million from drawdowns under our 2007 committed equity
financing facility with Kingsbridge. Net cash provided by financing activities in the first quarter
of 2009 was $18.7 million and primarily represented proceeds of $12.4 million from our loan with
UBS Bank USA and drawdowns under our 2007 committed equity financing facility with Kingsbridge of
$6.9 million, net of issuance costs.
Auction Rate Securities (ARS). Our short-term investments at March 31, 2010 included (at par
value) $17.6 million of ARS. These ARS were intended to provide liquidity via an auction process
that resets the applicable interest rate at predetermined calendar intervals, allowing investors to
either roll over their holdings or gain immediate liquidity by selling such interests. With the
liquidity issues experienced in global credit and capital markets, these ARS have experienced
multiple failed auctions since February 2008, as the amount of securities submitted for sale has
exceeded the amount of purchase orders. As a result, the ARS are currently not liquid.
The assets underlying these ARS are student loans that are substantially backed by the federal
government. As of March 31, 2010, our ARS with par values totaling $13.3 million had a credit
rating of AAA, ARS with par values totaling $0.3 million had a credit rating of Aa1, and ARS with
par values totaling $4.0 million had a credit rating of A3. All of these securities continue to pay
interest according to their stated terms (generally 120 basis points over the ninety-one day U.S.
Treasury bill rate) with interest rates resetting every 28 days. These ARS are scheduled to
ultimately mature between 2036 and 2045, although we do not intend to hold them until maturity. We
intend to liquidate the ARS on June 30, 2010, the earliest date we can exercise the ARS Rights.
The valuation of our ARS investment portfolio is subject to uncertainties that are difficult
to predict. The fair values of these ARS as of March 31, 2010 were estimated utilizing a discounted
cash flow analysis. The assumptions used in preparing the discounted cash flow model include
estimates of interest rates, timing and amount of cash flows, credit and liquidity premiums and
expected holding periods of the ARS, based on data available. These assumptions are volatile and
subject to change as the underlying sources of these assumptions and market conditions change,
which could result in significant changes to the fair value of the ARS. The significant assumptions
of this discounted cash flow model are discount margins which are based on industry recognized
student loan sector indices, an additional liquidity discount and an estimated term to liquidity.
Other items this analysis considers are the collateralization underlying the ARS, the
creditworthiness of the counterparty and the timing of expected future cash flows. These ARS were
also compared, when possible, to other observable market data with similar characteristics as the
securities held by us. The fair value of our ARS as of March 31, 2010 and December 31, 2009 was
determined to be $15.3 million and $15.5 million, respectively. Changes in the fair value of the
ARS are recognized in current period earnings in Interest and Other, net. Accordingly, we
recognized $19,000 of unrealized gain in the first quarter of 2010. The fair value of the ARS also
decreased in the first quarter of 2010 due to the sale of $0.2 million of our ARS at par value.
In connection with the failed auctions of our ARS, which were marketed and sold by UBS AG and
its affiliates, in October 2008, we accepted a settlement with UBS AG pursuant to which UBS AG
issued to us the ARS Rights. The ARS Rights provide us the right to receive the par value of our
ARS, i.e., the liquidation preference of the ARS plus accrued but unpaid interest. Pursuant to the
ARS Rights, we may require UBS AG to purchase our ARS at par value at any time between June 30,
2010 and July 2, 2012. We intend to liquidate the ARS on June 30, 2010. In addition, UBS AGs
affiliates may sell or otherwise dispose of some or all of the ARS at their discretion at any time
prior to expiration of the ARS Rights, subject to the obligation to pay us the par value of such
ARS. The ARS Rights are not transferable, tradable or marginable, and will not be listed or quoted
on any securities exchange or any electronic communications network. As consideration for ARS
Rights, we agreed to release UBS AG, UBS Securities LLC and UBS Financial Services, Inc., and/or
their affiliates, directors, and officers from any claims directly or indirectly relating to the
marketing and sale of the ARS, other than for consequential damages. UBS AGs obligations in
connection with the ARS Rights are not secured by its assets and UBS AG is not required to obtain
any financing to support these obligations. UBS AG has disclaimed any assurance that it will
29 of 55
have sufficient financial resources to satisfy its obligations in connection with the ARS
Rights. If UBS AG has insufficient funding to purchase the ARS and the auction process continues to
fail, we may incur further losses on the carrying value of the ARS.
The ARS Rights represent a firm agreement in accordance with accounting guidance for
derivatives and hedging. The guidance defines a firm agreement as an agreement with an unrelated
party, binding on both parties and usually legally enforceable, with the following characteristics:
a) the agreement specifies all significant terms, including the quantity to be exchanged, the fixed
price and the timing of the transaction; and b) the agreement includes a disincentive for
nonperformance that is sufficiently large to make performance probable. The enforceability of the
ARS Rights results in an investment put option, which we recognized as a separate freestanding
instrument that is accounted for separately from the ARS. As of March 31, 2010, we recorded $2.3
million as the fair value of the investment put option related to the ARS Rights, classified as
short-term assets on the balance sheet. The investment put option related to the ARS Rights does
not meet the definition of a derivative instrument. Therefore, we elected to measure the investment
put option related to the ARS Rights at fair value, as permitted under accounting guidance for the
fair value option for financial assets and liabilities, to mitigate volatility in reported earnings
due to its linkage to the ARS. We valued the investment put option related to the ARS Rights using
a Black-Scholes option pricing model that included estimates of interest rates, based on data
available, and that was adjusted for any bearer risk associated with UBS AGs financial ability to
purchase the ARS beginning June 30, 2010. Any change in the assumptions on which these estimates
are based or market conditions would affect the fair value of the investment put option related to
the ARS Rights. We anticipate that any future changes in the fair value of the investment put
option related to the ARS Rights will be offset by the changes in the fair value of the related ARS
with no material net impact to the statements of operations, subject to changes in UBS AGs credit
risk rating and its ultimate ability to perform. We will continue to measure the investment put
option related to the ARS Rights at fair value until the earlier of our exercise of the ARS Rights,
UBS AGs purchase of the ARS in connection with the ARS Rights or the maturity of the ARS
underlying the ARS Rights.
In connection with the settlement with UBS AG relating to our ARS, we entered into a loan
agreement with UBS Bank USA and UBS Financial Services Inc. On January 5, 2009, we borrowed
approximately $12.4 million under the loan agreement, with our ARS held in accounts with UBS
Financial Services Inc. as collateral. The loan amount was based on 75% of the fair value as
assessed by UBS at the time of the loan. We have drawn down the full amount available under the
loan agreement. In general, the amount of interest payable under the loan agreement is intended to
equal the amount of interest we would otherwise receive with respect to our ARS. During the first
quarter of 2010, the interest rate due on the UBS loan was lower than the interest rate earned from
the ARS, and the principal balance of the loan was lower than the par value of the ARS. During the
first quarter of 2010, we paid $29,000 of interest expense associated with the loan and received
$107,000 in interest income from the ARS. In accordance with the loan agreement, we applied the net
interest received and the proceeds of $0.2 million from the sales of ARS to the principal of the
loan. The borrowings under the loan agreement are payable upon demand. However, UBS Financial
Services Inc. or its affiliates will be required to arrange alternative financing for us on terms
and conditions substantially the same as those under the loan agreement, unless the demand right
was exercised as a result of certain specified events or the customer relationship between UBS
Financial Services Inc. and us is terminated for cause by UBS Financial Services Inc. If such
alternative financing cannot be established, then a UBS affiliate will purchase the pledged ARS at
par value. Proceeds of sales of the ARS will first be applied to repayment of the loan with the
balance, if any, for our account.
We continue to monitor the market for ARS and consider its impact (if any) on the fair market
value of our ARS. If the market conditions deteriorate further, we may be required to record
additional unrealized losses in earnings, offset by corresponding increases in the investment put
option related to the ARS Rights, assuming no deterioration of UBS AGs credit rating. At present,
if we need to access the funds that are in an illiquid state, we may not be able to do so without
the possible loss of principal until a future auction for the ARS is successful, another secondary
market evolves for the ARS, they are redeemed by the issuer or they mature. If we are unable to
sell these securities in the market or they are not redeemed, we could be required to hold them to
maturity. We will continue to monitor and evaluate these investments for impairment on an ongoing
basis.
Shelf Registration Statement. In November 2008, we filed a shelf registration statement with
the SEC, which was declared effective in November 2008. The shelf registration statement allows us
to issue shares of our common stock from time to time for an aggregate initial offering price of up
to $100 million. As of May 7, 2010, $76.2 million remains available to us under this shelf
registration statement, assuming all outstanding warrants are exercised in cash. The specific terms
of offerings, if any, under the shelf registration statement would be established at the time of
such offerings.
30 of 55
As of March 31, 2010, future minimum payments under our loan and lease obligations were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
Two to |
|
|
Four to |
|
|
After |
|
|
|
|
|
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
Operating leases (1) |
|
$ |
3,036 |
|
|
$ |
4,335 |
|
|
$ |
822 |
|
|
$ |
|
|
|
$ |
8,193 |
|
Equipment financing line |
|
|
1,453 |
|
|
|
724 |
|
|
|
|
|
|
|
|
|
|
|
2,177 |
|
Loan with UBS (2) |
|
|
9,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,362 |
|
|
$ |
5,059 |
|
|
$ |
822 |
|
|
$ |
|
|
|
$ |
20,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our commitments under operating leases relate to payments under our two facility leases in
South San Francisco, California, which expire in 2011 and 2013. |
|
(2) |
|
The loan with UBS Bank USA is classified as short-term because we intend to repay it on June
30, 2010, the earliest date we may exercise our ARS Rights to require UBS AG to purchase the
ARS that collateralize the loan at par value. See Note 6 in the Notes to Unaudited Condensed
Financial Statements for further details regarding the maturity date of the loan with UBS Bank
USA. |
In future periods, we expect to incur substantial costs as we continue to expand our research
programs and related research and development activities. We plan to continue to support the
clinical development of our cardiac muscle myosin activator omecamtiv mecarbil for the potential
treatment of heart failure as part of our strategic alliance with Amgen. We plan to continue
clinical development of our fast skeletal sarcomere activator CK-2017357 for the potential
treatment of diseases and conditions related to muscle weakness or wasting and non-clinical
development of our back-up potential drug candidate from our skeletal sarcomere activator program.
We plan to progress one or more of our smooth muscle myosin inhibitor compounds through
non-clinical and clinical development. We expect to incur development expenses for the close-out of
the clinical trials for ispinesib for the potential treatment of breast cancer and SB-743921 for
the potential treatment of Hodgkin and non-Hodgkin lymphoma. We expect to incur significant
research and development expenses as we advance the research and development of our other muscle
contractility programs through research to candidate selection.
Our future capital uses and requirements depend on numerous factors. These factors include,
but are not limited to, the following:
|
|
|
the initiation, progress, timing, scope and completion of preclinical research,
non-clinical development and clinical trials for our drug candidates and potential drug
candidates; |
|
|
|
|
the time and costs involved in obtaining regulatory approvals; |
|
|
|
|
delays that may be caused by requirements of regulatory agencies; |
|
|
|
|
Amgens decisions with regard to funding of development and commercialization of
omecamtiv mecarbil or other compounds for the potential treatment of heart failure under our
collaboration; |
|
|
|
|
our level of funding for the development of current or future drug candidates; |
|
|
|
|
the number of drug candidates we pursue; |
|
|
|
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the costs involved in filing and prosecuting patent applications and enforcing or
defending patent claims; |
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our ability to establish and maintain selected strategic alliances required for the
development of drug candidates and commercialization of our potential drugs; |
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our plans or ability to expand our drug development capabilities, including our
capabilities to conduct clinical trials for our drug candidates; |
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our plans or ability to establish sales, marketing or manufacturing capabilities and to
achieve market acceptance for potential drugs; |
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the expansion and advancement of our research programs; |
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the hiring of additional employees and consultants; |
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the expansion of our facilities; |
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the acquisition of technologies, products and other business opportunities that require
financial commitments; and |
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our revenues, if any, from successful development of our drug candidates and
commercialization of potential drugs. |
We believe that our existing cash and cash equivalents, short-term investments, interest
earned on investments, proceeds from our loan with UBS Bank USA, and proceeds already received from
our equity financings will be sufficient to meet our projected operating requirements for at least
the next 12 months.
If, at any time, our prospects for internally financing our research and development programs
decline, we may decide to reduce research and development expenses by delaying, discontinuing or
reducing our funding of development of one or more of our drug candidates or potential drug
candidates or of other research and development programs. Alternatively, we might raise funds
through strategic relationships, public or private financings or other arrangements. There can be
no assurance that funding, if needed, will be available on attractive terms, or at all.
Furthermore, financing obtained through future strategic relationships may require us to forego
certain commercialization and other rights to our drug candidates. Similarly, any additional equity
financing may be dilutive to stockholders and debt financing, if available, may involve restrictive
covenants. Our failure to raise capital as and when needed could have a negative impact on our
financial condition and our ability to pursue our business strategy.
Off-balance Sheet Arrangements
As of March 31, 2010, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. In addition, we do not engage in
trading activities involving non-exchange traded contracts. Therefore, we are not materially
exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these
relationships. We do not have relationships or transactions with persons or entities that derive
benefits from their non-independent relationship with us or our related parties.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk has not changed materially subsequent to our disclosures in Item
7A, Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K
for the year ended December 31, 2009.
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ITEM 4. CONTROLS AND PROCEDURES |
(a) Evaluation of disclosure controls and procedures
Our management evaluated, with the participation and under the supervision of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded, subject to the limitations
described below, that our disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to management as appropriate to allow timely decisions regarding
required disclosures.
(b) Changes in internal control over financial reporting
There was no change in our internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
(c) Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the controls are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected. Accordingly, our disclosure
controls and procedures are designed to provide reasonable, not absolute, assurance that the
objectives of our disclosure control system are met.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS |
None.
In evaluating our business, you should carefully consider the following risks in addition to
the other information in this report. Any of the following risks could materially and adversely
affect our business, results of operations, financial condition or your investment in our
securities, and many are beyond our control. It is not possible to predict or identify all such
factors and, therefore, you should not consider any of these risk factors to be a complete
statement of all the potential risks or uncertainties that we face.
Risks Related To Our Business
We have a history of significant losses and may not achieve or sustain profitability and, as a
result, you may lose all or part of your investment.
We have generally incurred operating losses in each year since our inception in 1997, due to
costs incurred in connection with our research and development activities and general and
administrative costs associated with our operations. Our drug candidates are in the early stages of
clinical testing, and we and our partners must conduct significant additional clinical trials
before we and our partners can seek the regulatory approvals necessary to begin commercial sales of
our drugs. We expect to incur increasing losses for at least several more years, as we continue our
research activities and conduct development of, and seek regulatory approvals for, our drug
candidates, and commercialize any approved drugs. If our drug candidates fail or do not gain
regulatory approval, or if our drugs do not achieve market acceptance, we will not be profitable.
If we fail to become and remain profitable, or if we are unable to fund our continuing losses, you
could lose all or part of your investment.
We will need substantial additional capital in the future to sufficiently fund our operations.
We have consumed substantial amounts of capital to date, and our operating expenditures will
increase over the next several years if we expand our research and development activities. We have
funded all of our operations and capital expenditures with proceeds from private and public sales
of our equity securities, strategic alliances with Amgen, GSK and others, equipment financings,
interest on investments and government grants. We believe that our existing cash and cash
equivalents, short-term investments, interest earned on investments, proceeds from our loan with
UBS Bank USA and proceeds already received from our equity financings should be sufficient to meet
our projected operating requirements for at least the next 12 months. We have based this estimate
on assumptions that may prove to be wrong, and we could utilize our available capital resources
sooner than we currently expect. Because of the numerous risks and uncertainties associated with
the development of our drug candidates and other research and development activities, including
risks and uncertainties that could impact the rate of progress of our development activities, we
are unable to estimate with certainty the amounts of capital outlays and operating expenditures
associated with these activities.
For the foreseeable future, our operations will require significant additional funding, in
large part due to our research and development expenses and the absence of any revenues from
product sales. Until we can generate a sufficient amount of product revenue, we expect to raise
future capital through strategic alliance and licensing arrangements, public or private equity
offerings and debt financings. We do not currently have any commitments for future funding other
than milestone and royalty payments that we may receive under our collaboration and option
agreement with Amgen. We may not receive any further funds under this agreement. Our ability to
raise funds may be adversely impacted by current economic conditions, including the effects of the
recent disruptions to the credit and financial markets in the United States and worldwide. In
particular, the pool of third-party capital that in the past has been available to
development-stage companies such as ours has decreased significantly in recent years, and such
decreased availability may continue for a prolonged period. As a result of these and other factors,
we do not know whether additional financing will be available when needed, or that, if available,
such financing would be on terms favorable to our stockholders or us.
To the extent that we raise additional funds through strategic alliances or licensing and
other arrangements with third parties, we will likely have to relinquish valuable rights to our
technologies, research programs or drug candidates, or grant licenses on terms that may not be
favorable to us. To the extent that we raise additional funds by issuing equity securities, our
stockholders will experience additional dilution. To the extent that we raise additional funds
through debt financing, the financing may involve covenants that
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restrict our business activities. In addition, such funding, if needed, may not be available
to us on favorable terms, or at all.
If we can not raise the funds we need to operate our business, we will need to discontinue
certain research and development activities and our stock price likely would be negatively
affected.
We depend on Amgen for the conduct, completion and funding of the clinical development and
commercialization of omecamtiv mecarbil (formerly known as CK-1827452).
In May 2009, Amgen exercised its option to acquire an exclusive license to our drug candidate
omecamtiv mecarbil worldwide, except for Japan. As a result, Amgen now is responsible for the
clinical development and obtaining and maintaining regulatory approval of omecamtiv mecarbil for
the potential treatment of heart failure worldwide, except Japan.
We do not control the clinical development activities being conducted or that may be conducted
in the future by Amgen, including, but not limited to, the timing of initiation, termination or
completion of clinical trials, the analysis of data arising out of those clinical trials or the
timing of release of data concerning those clinical trials, which may impact our ability to report
on Amgens results. Amgen may conduct these activities more slowly or in a different manner than we
would if we controlled the clinical development of omecamtiv mecarbil. For example, following the
exercise of its option, Amgen informed us that it wishes to conduct additional pharmacokinetic
studies in heart failure patients receiving oral doses of omecamtiv mecarbil before commencing a
Phase IIb study with an oral formulation of omecamtiv mecarbil in this patient population. As a
result, the start of the first Phase IIb trial for an oral formulation of omecamtiv mecarbil is
currently anticipated to occur in 2011. Amgen is responsible for filing future applications with
the FDA or other regulatory authorities for approval of omecamtiv mecarbil and will be the owner of
any marketing approvals issued by the FDA or other regulatory authorities for omecamtiv mecarbil.
If the FDA or other regulatory authorities approve omecamtiv mecarbil, Amgen will also be
responsible for the marketing and sale of the resulting drug, subject to our right to co-promote
omecamtiv mecarbil in North America if we exercise our option to co-fund Phase III development
costs of omecamtiv mecarbil under the collaboration. However, we cannot control whether Amgen will
devote sufficient attention and resources to the clinical development of omecamtiv mecarbil or will
proceed in an expeditious manner, even if we do exercise our option to co-fund the development of
omecamtiv mecarbil. Even if the FDA or other regulatory agencies approve omecamtiv mecarbil, Amgen
may elect not to proceed with the commercialization of the resulting drug in one or more countries.
Amgen generally has discretion to elect whether to pursue or abandon the development of
omecamtiv mecarbil and may terminate our strategic alliance for any reason upon six months prior
notice. If the initial results of one or more clinical trials with omecamtiv mecarbil do not meet
Amgens expectations, Amgen may elect to terminate further development of omecamtiv mecarbil or
certain of the potential clinical trials for omecamtiv mecarbil, even if the actual number of
patients treated at that time is relatively small. If Amgen abandons omecamtiv mecarbil, it would
result in a delay in or could prevent us from commercializing omecamtiv mecarbil, and would delay
and could prevent us from obtaining revenues for this drug candidate. Disputes may arise between us
and Amgen, which may delay or cause the termination of any omecamtiv mecarbil clinical trials,
result in significant litigation or cause Amgen to act in a manner that is not in our best
interest. If development of omecamtiv mecarbil does not progress for these or any other reasons, we
would not receive further milestone payments or royalties on product sales from Amgen with respect
to omecamtiv mecarbil. If Amgen abandons development of omecamtiv mecarbil prior to regulatory
approval or if it elects not to proceed with commercialization of the resulting drug following
regulatory approval, we would have to seek a new partner for clinical development or
commercialization, curtail or abandon that clinical development or commercialization, or undertake
and fund the clinical development of omecamtiv mecarbil or commercialization of the resulting drug
ourselves. If we seek a new partner but are unable to do so on acceptable terms, or at all, or do
not have sufficient funds to conduct the development or commercialization of omecamtiv mecarbil
ourselves, we would have to curtail or abandon that development or commercialization, which could
harm our business.
We have never generated, and may never generate, revenues from commercial sales of our drugs and
we will not have drugs to market for at least several years, if ever.
We currently have no drugs for sale and we cannot guarantee that we will ever develop or
obtain approval to market any drugs. To receive marketing approval for any drug candidate, we must
demonstrate that the drug candidate satisfies rigorous standards of safety and efficacy to the FDA
in the United States and other regulatory authorities abroad. We and our partners will need to
conduct significant additional research and preclinical and clinical testing before we or our
partners can file applications with the FDA or other regulatory authorities for approval of any of
our drug candidates. In addition, to compete effectively, our drugs must be easy to use,
cost-effective and economical to manufacture on a commercial scale, compared to other therapies
available for the treatment of the same conditions. We may not achieve any of these objectives.
Currently, our only drug candidates that have progressed into clinical development are: omecamtiv
mecarbil, our drug candidate for the potential treatment of heart failure; CK-2017357, our drug
candidate
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for the potential treatment of diseases associated with aging, muscle wasting and
neuromuscular dysfunction; and ispinesib, SB-743921 and GSK-923295, our drug candidates for the
potential treatment of cancer. We cannot be certain that the clinical development of these or any
future drug candidates will be successful, that they will receive the regulatory approvals required
to commercialize them, or that any of our other research programs will yield a drug candidate
suitable for clinical testing or commercialization. Our commercial revenues, if any, will be
derived from sales of drugs that we do not expect to be commercially marketed for at least several
years, if at all. The development of any one or all of these drug candidates may be discontinued at
any stage of our clinical trials programs and we may not generate revenue from any of these drug
candidates.
Clinical trials may fail to demonstrate the desired safety and efficacy of our drug candidates,
which could prevent or significantly delay completion of clinical development and regulatory
approval.
Prior to receiving approval to commercialize any of our drug candidates, we must adequately
demonstrate to the FDA and foreign regulatory authorities that the drug candidate is sufficiently
safe and effective with substantial evidence from well-controlled clinical trials. In clinical
trials we will need to demonstrate efficacy for the treatment of specific indications and monitor
safety throughout the clinical development process and following approval. None of our drug
candidates have yet been demonstrated to be safe and effective in clinical trials and they may
never be. In addition, for each of our current preclinical compounds, we must adequately
demonstrate satisfactory chemistry, formulation, stability and toxicity in order to submit an
investigational new drug application (IND) to the FDA, or an equivalent application in foreign
jurisdictions, that would allow us to advance that compound into clinical trials. Furthermore, we
may need to submit separate INDs (or foreign equivalent) to different divisions within the FDA (or
foreign regulatory authorities) in order to pursue clinical trials in different therapeutic areas.
Each new IND (or foreign equivalent) must be reviewed by the new division before the clinical trial
under its jurisdiction can proceed, entailing all the risks of delay inherent to regulatory review.
If our current or future preclinical studies or clinical trials are unsuccessful, our business will
be significantly harmed and our stock price could be negatively affected.
All of our drug candidates are prone to the risks of failure inherent in drug development.
Preclinical studies may not yield results that would adequately support the filing of an IND (or a
foreign equivalent) with respect to our potential drug candidates. Even if these applications are
or have been filed with respect to our drug candidates, the results of preclinical studies do not
necessarily predict the results of clinical trials. For example, although preclinical testing
indicated that ispinesib causes tumor regression in a variety of tumor types, to date, Phase II
clinical trials of ispinesib have not shown clinical activity in all of these tumor types.
Similarly, for any of our drug candidates, the results from Phase I clinical trials in healthy
volunteers and clinical results from Phase I and II trials in patients are not necessarily
indicative of the results of larger Phase III clinical trials that are necessary to establish
whether the drug candidate is safe and effective for the applicable indication.
In addition, while the clinical trials of our drug candidates are designed based on the
available relevant information, in view of the uncertainties inherent in drug development, such
clinical trials may not be designed with focus on indications, patient populations, dosing
regimens, safety or efficacy parameters or other variables that will provide the necessary safety
or efficacy data to support regulatory approval to commercialize the resulting drugs. For example,
in a number of two-stage Phase II clinical trials designed to evaluate the safety and efficacy of
ispinesib as monotherapy in the first- or second-line treatment of patients with different forms of
cancer, ispinesib did not satisfy the criteria for advancement to Stage 2. In addition, individual
patient responses to the dose administered of a drug may vary in a manner that is difficult to
predict. Also, the methods we select to assess particular safety or efficacy parameters may not
yield the same statistical precision in estimating our drug candidates effects as may other
alternative methodologies. Even if we believe the data collected from clinical trials of our drug
candidates are promising, these data may not be sufficient to support approval by the FDA or
foreign regulatory authorities. Preclinical and clinical data can be interpreted in different ways.
Accordingly, the FDA or foreign regulatory authorities could interpret these data in different ways
than we or our partners do, which could delay, limit or prevent regulatory approval.
Administering any of our drug candidates or potential drug candidates may produce undesirable
side effects, also known as adverse effects. Toxicities and adverse effects observed in preclinical
studies for some compounds in a particular research and development program may also occur in
preclinical studies or clinical trials of other compounds from the same program. Potential toxicity
issues may arise from the effects of the active pharmaceutical ingredient itself or from impurities
or degradants that are present in the active pharmaceutical ingredient or could form over time in
the formulated drug candidate or the active pharmaceutical ingredient. These toxicities or adverse
effects could delay or prevent the filing of an IND (or a foreign equivalent) with respect to our
drug candidates or potential drug candidates or cause us to modify, suspend or terminate clinical
trials with respect to any drug candidate at any time during the development program. The FDA,
other regulatory authorities, our partners or we may modify, suspend or terminate clinical trials
with our drug candidates at any time. If these or other adverse effects are severe or frequent
enough to outweigh the potential efficacy of a drug candidate, the FDA or other regulatory
authorities could deny approval of that drug candidate for any or all targeted
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indications. Even if one or more of our drug candidates were approved for sale as drugs, the
occurrence of even a limited number of toxicities or adverse effects when used in large populations
may cause the FDA to impose restrictions on, or stop, the further marketing of those drugs.
Indications of potential adverse effects or toxicities which do not seem significant during the
course of clinical trials may later turn out to actually constitute serious adverse effects or
toxicities when a drug is used in large populations or for extended periods of time.
We have observed certain adverse effects in the clinical trials conducted with our drug
candidates. For example, in clinical trials of omecamtiv mecarbil, doses that exceeded the maximum-tolerated dose were
associated with complaints of chest discomfort, palpitations, dizziness and feeling hot, increases
in heart rate, declines in blood pressure, electrocardiographic changes consistent with acute
myocardial ischemia and transient rises in the MB fraction of creatine kinase and cardiac troponins
I and T, which are indicative of myocardial infarction. In clinical trials of ispinesib, the most
commonly observed dose-limiting toxicity was neutropenia, a decrease in the number of a certain
type of white blood cell that results in an increase in susceptibility to infection. In a Phase I
clinical trial of SB-743921, the dose-limiting toxicities observed were: prolonged neutropenia,
with or without fever and with or without infection; elevated transaminases and hyperbilirubinemia,
both of which are abnormalities of liver function; and hyponatremia, which is a low concentration
of sodium in the blood. In Phase I clinical trials of CK-2017357, adverse events of dizziness and
euphoric mood appeared to increase in frequency with increasing doses of CK-2017357. At a dose
that exceeded the maximum-tolerated dose of CK-2017357, moderate dizziness and an episode of
syncope (a temporary loss of consciousness) were observed.
In addition, clinical trials of omecamtiv mecarbil, CK-2017357 and our anti-cancer drug
candidates will enroll patients who typically suffer from serious diseases which put them at
increased risk of death, and they may die while receiving our drug candidates. In such
circumstances, it may not be possible to exclude with certainty a causal relationship to our drug
candidate, even though the responsible clinical investigator may view such an event as not study
drug-related. For example, in a Phase IIa clinical trial designed to evaluate and compare the oral
pharmacokinetics of both modified and immediate release formulations of omecamtiv mecarbil in
patients with stable heart failure, a patient died suddenly after receiving the immediate release
formulation of omecamtiv mecarbil, without having reported any preceding adverse events. The
clinical investigator assessed the patients death as not related to omecamtiv mecarbil. However,
the event was reported to the appropriate regulatory authorities as possibly related to omecamtiv
mecarbil because the immediate cause of the patients death could not be determined, and therefore,
a relationship to omecamtiv mecarbil could not be excluded definitively.
Any failure or significant delay in completing preclinical studies or clinical trials for our
drug candidates, or in receiving and maintaining regulatory approval for the sale of any resulting
drugs, may significantly harm our business and negatively affect our stock price.
Clinical trials are expensive, time-consuming and subject to delay.
Clinical trials are subject to rigorous regulatory requirements and are very expensive,
difficult and time-consuming to design and implement. The length of time and number of trial sites
and patients required for clinical trials vary substantially based on the type, complexity,
novelty, intended use of the drug candidate and safety concerns. We estimate that the clinical
trials of our current drug candidates will each continue for several more years. However, the
clinical trials for all or any of these drug candidates may take significantly longer to complete.
The commencement and completion of our clinical trials could be delayed or prevented by many
factors, including, but not limited to:
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delays in obtaining, or inability to obtain, regulatory or other approvals to commence
and conduct clinical trials in the manner we or our partners deem necessary for the
appropriate and timely development of our drug candidates and commercialization of any
resulting drugs; |
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delays in identifying and reaching agreement, or inability to identify and reach
agreement, on acceptable terms, with prospective clinical trial sites and other entities
involved in the conduct of our clinical trials; |
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delays or additional costs in developing, or inability to develop, appropriate
formulations of our drug candidates for clinical trial use, including an appropriate
modified release oral formulation for omecamtiv mecarbil; |
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slower than expected rates of patient recruitment and enrollment, including as a result
of competition for patients with other clinical trials; limited numbers of patients that
meet the enrollment criteria; patients, investigators or trial sites reluctance to agree
to the requirements of a protocol; or the introduction of alternative therapies or drugs by
others;
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for those drug candidates that are the subject of a strategic alliance, delays in
reaching agreement with our partner as to appropriate development strategies; |
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an IRB or its foreign equivalent may require changes to a protocol that then require
approval from regulatory agencies and other IRBs and their foreign equivalents, or
regulatory authorities may require changes to a protocol that then require approval from the
IRBs or their foreign equivalents; |
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for clinical trials conducted in foreign countries, the time and resources required to
identify, interpret and comply with foreign regulatory requirements or changes in those
requirements, and political instability or natural disasters occurring in those countries; |
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lack of effectiveness of our drug candidates during clinical trials; |
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unforeseen safety issues; |
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inadequate supply of clinical trial materials; |
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uncertain dosing issues; |
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failure by us, our partners, or clinical research organizations, investigators or site
personnel engaged by us or our partners to comply with good clinical practices and other
applicable laws and regulations; |
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inability or unwillingness of investigators or their staffs to follow clinical protocols; |
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inability to monitor patients adequately during or after treatment; |
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introduction of new therapies or changes in standards of practice or regulatory guidance
that render our drug candidates or their clinical trial endpoints obsolete; and |
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results from non-clinical studies that may adversely impact the timing or further
development of our drug candidates. |
We do not know whether planned clinical trials will begin on time, or whether planned or
currently ongoing clinical trials will need to be restructured or will be completed on schedule, if
at all. Significant delays in clinical trials will impede our ability to commercialize our drug
candidates and generate revenue and could significantly increase our development costs.
If we fail to enter into and maintain successful strategic alliances for our drug candidates,
potential drug candidates or research and development programs, we will have to reduce, delay or
discontinue our advancement of those drug candidates, potential drug candidates and programs or
expand our research and development capabilities and increase our expenditures.
Drug development is complicated and expensive. We currently have limited financial and
operational resources to carry out drug development. Our strategy for developing, manufacturing and
commercializing our drug candidates and potential drug candidates currently requires us to enter
into and successfully maintain strategic alliances with pharmaceutical companies or other industry
participants to advance our programs and reduce our expenditures on each program. Accordingly, the
success of our development activities depends in large part on our current and future strategic
partners performance, over which we have little or no control.
We have retained all rights to develop and commercialize CK-2017357, ispinesib, SB-743921 and
GSK-923295. We currently do not have a strategic partner for these drug candidates. We are relying
on GSK to complete its Phase I clinical trial for GSK-923295. We expect to rely on one or more strategic partners
or other arrangements with third parties to advance and develop each of CK-2017357 and other
compounds from our skeletal muscle contractility program, ispinesib, SB-743921, GSK-923295 and our
smooth muscle myosin inhibitors. However, we may not be able to negotiate and enter into such
strategic alliances or arrangements on acceptable terms, if at all.
We rely on Amgen to conduct preclinical and clinical development for omecamtiv mecarbil for
the potential treatment of heart failure. If Amgen elects to terminate its development activities
with respect to omecamtiv mecarbil, we currently do not have an alternative strategic partner for
this drug candidate.
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Our ability to commercialize drugs that we develop with our partners and that generate
royalties from product sales depends on our partners abilities to assist us in establishing the
safety and efficacy of our drug candidates, obtaining and maintaining regulatory approvals and
achieving market acceptance of the drugs once commercialized. Our partners may elect to delay or
terminate development of one or more drug candidates, independently develop drugs that could
compete with ours or fail to commit sufficient resources to the marketing and distribution of drugs
developed through their strategic alliances with us. Our partners may not proceed with the
development and commercialization of our drug candidates with the same degree of urgency as we
would because of other priorities they face.
If we are not able to successfully maintain our existing strategic alliances or establish and
successfully maintain additional strategic alliances, we will have to limit the size or scope of,
or delay or discontinue, one or more of our drug development programs or research programs, or
undertake and fund these programs ourselves. Alternatively, if we elect to continue to conduct any
of these drug development programs or research programs on our own, we will need to expand our
capability to conduct clinical development by bringing additional skills, technical expertise and
resources into our organization. This would require significant additional funding, which may not
be available to us on acceptable terms, or at all.
We depend on contract research organizations to conduct our clinical trials and have limited
control over their performance.
We utilize contract research organizations (CROs) for our clinical trials of CK-2017357,
ispinesib and SB-743921 within and outside of the United States. We do not have control over many
aspects of our CROs activities, and cannot fully control the amount, timing or quality of
resources that they devote to our programs. CROs may not assign as high a priority to our programs
or pursue them as diligently as we would if we were undertaking these programs ourselves. The
activities conducted by our CROs therefore may not be completed on schedule or in a satisfactory
manner. CROs may also give higher priority to relationships with our competitors and potential
competitors than to their relationships with us. Outside of the United States, we are particularly
dependent on our CROs expertise in communicating with clinical trial sites and regulatory
authorities and ensuring that our clinical trials and related activities and regulatory filings
comply with applicable laws. Our CROs failure to carry out development activities on our behalf
according to our and the FDAs or other regulatory agencies requirements and in accordance with
applicable U.S. and foreign laws, or our failure to properly coordinate and manage these
activities, could increase the cost of our operations and delay or prevent the development,
approval and commercialization of our drug candidates. In addition, if a CRO fails to perform as
agreed, our ability to collect damages may be contractually limited. If we fail to effectively
manage the CROs carrying out the development of our drug candidates or if our CROs fail to perform
as agreed, the commercialization of our drug candidates will be delayed or prevented.
We have no manufacturing capacity and depend on our strategic partners and contract manufacturers
to produce our clinical trial drug supplies for each of our drug candidates and potential drug
candidates, and anticipate continued reliance on contract manufacturers for the development and
commercialization of our potential drugs.
We do not currently operate manufacturing facilities for clinical or commercial production of
our drug candidates or potential drug candidates. We have limited experience in drug formulation
and manufacturing, and we lack the resources and the capabilities to manufacture any of our drug
candidates or potential drug candidates on a clinical or commercial scale. Amgen has assumed
responsibility to conduct these activities for the ongoing clinical development of omecamtiv
mecarbil worldwide, except Japan. We have relied on GSK to conduct these activities for the ongoing
clinical development of GSK-923295. For CK-2017357 and our other drug candidates and potential
drug candidates, we rely (and for omecamtiv mecarbil, ispinesib and SB-743921, we have relied) on a
limited number of contract manufacturers, and, in particular, we rely on single-source contract
manufacturers for the active pharmaceutical ingredient and the drug product supply for our clinical
trials. We expect to rely on contract manufacturers to supply all future drug candidates for which
we conduct clinical development. If any of our existing or future contract manufacturers fail to
perform satisfactorily, it could delay clinical development or regulatory approval of our drug
candidates or commercialization of our drugs, producing additional losses and depriving us of
potential product revenues. In addition, if a contract manufacturer fails to perform as agreed, our
ability to collect damages may be contractually limited.
Our drug candidates and potential drug candidates require precise high-quality manufacturing.
The failure to achieve and maintain high manufacturing standards, including failure to detect or
control anticipated or unanticipated manufacturing errors or the frequent occurrence of such
errors, could result in patient injury or death, discontinuance or delay of ongoing or planned
clinical trials, delays or failures in product testing or delivery, cost overruns, product recalls
or withdrawals and other problems that could seriously hurt our business. Contract drug
manufacturers often encounter difficulties involving production yields, quality control and quality
assurance and shortages of qualified personnel. These manufacturers are subject to stringent
regulatory requirements, including the FDAs current good manufacturing practices regulations and
similar foreign laws and standards. Each contract manufacturer must pass a pre-approval inspection
before we can obtain marketing approval for any of our drug candidates and following approval will
be subject to ongoing periodic unannounced inspections by the FDA, the U.S. Drug Enforcement Agency and
other regulatory agencies, to ensure
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strict compliance with current good manufacturing practices
and other applicable government regulations and corresponding foreign laws and standards. We seek
to ensure that our contract manufacturers comply fully with all applicable regulations, laws and
standards. However, we do not have control over our contract manufacturers compliance with these
regulations, laws and standards. If one of our contract manufacturers fails to pass its
pre-approval inspection or maintain ongoing compliance at any time, the production of our drug
candidates could be interrupted, resulting in delays or discontinuance of our clinical trials,
additional costs and potentially lost revenues. In addition, failure of any third party
manufacturers or us to comply with applicable regulations, including pre-or post-approval
inspections and the current good manufacturing practice requirements of the FDA or other comparable
regulatory agencies, could result in sanctions being imposed on us. These sanctions could include
fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval
of our products, delay, suspension or withdrawal of approvals, license revocation, product seizures
or recalls, operational restrictions and criminal prosecutions, any of which could significantly
and adversely affect our business.
In addition, our existing and future contract manufacturers may not perform as agreed or may
not remain in the contract manufacturing business for the time required to successfully produce,
store and distribute our drug candidates. If a natural disaster, business failure, strike or other
difficulty occurs, we may be unable to replace these contract manufacturers in a timely or
cost-effective manner and the production of our drug candidates would be interrupted, resulting in
delays and additional costs.
Switching manufacturers or manufacturing sites would be difficult and time-consuming because
the number of potential manufacturers is limited. In addition, before a drug from any replacement
manufacturer or manufacturing site can be commercialized, the FDA and, in some cases, foreign
regulatory agencies, must approve that site. These approvals would require regulatory testing and
compliance inspections. A new manufacturer or manufacturing site also would have to be educated in,
or develop substantially equivalent processes for, production of our drugs and drug candidates. It
may be difficult or impossible to transfer certain elements of a manufacturing process to a new
manufacturer or for us to find a replacement manufacturer on acceptable terms quickly, or at all,
either of which would delay or prevent our ability to develop drug candidates and commercialize any
resulting drugs.
We may not be able to successfully scale-up manufacturing of our drug candidates in sufficient
quality and quantity, which would delay or prevent us from developing our drug candidates and
commercializing resulting approved drugs, if any.
To date, our drug candidates have been manufactured in small quantities for preclinical
studies and early-stage clinical trials. In order to conduct larger scale or late-stage clinical
trials for a drug candidate and for commercialization of the resulting drug if that drug candidate
is approved for sale, we will need to manufacture it in larger quantities. We may not be able to
successfully increase the manufacturing capacity for any of our drug candidates, whether in
collaboration with third-party manufacturers or on our own, in a timely or cost-effective manner or
at all. If a contract manufacturer makes improvements in the manufacturing process for our drug
candidates, we may not own, or may have to share, the intellectual property rights to those
improvements. Significant scale-up of manufacturing may require additional validation studies,
which are costly and which the FDA must review and approve. In addition, quality issues may arise
during those scale-up activities because of the inherent properties of a drug candidate itself or
of a drug candidate in combination with other components added during the manufacturing and
packaging process, or during shipping and storage of the finished product or active pharmaceutical
ingredients. If we are unable to successfully scale-up manufacture of any of our drug candidates in
sufficient quality and quantity, the development of that drug candidate and regulatory approval or
commercial launch for any resulting drugs may be delayed or there may be a shortage in supply,
which could significantly harm our business.
The mechanisms of action of our drug candidates and potential drug candidates are unproven, and we
do not know whether we will be able to develop any drug of commercial value.
We have discovered and are currently developing drug candidates and potential drug candidates
that have what we believe are novel mechanisms of action directed against cytoskeletal targets, and
intend to continue to do so. Because no currently approved drugs appear to operate via the same
biochemical mechanisms as our compounds, we cannot be certain that our drug candidates and
potential drug candidates will result in commercially viable drugs that safely and effectively
treat the indications for which we intend to develop them. The results we have seen for our
compounds in preclinical models may not translate into similar results in humans, and results of
early clinical trials in humans may not be predictive of the results of larger clinical trials that
may later be conducted with our drug candidates. Even if we are successful in developing and
receiving regulatory approval for a drug candidate for the treatment of a particular disease, we
cannot be certain that we will also be able to develop and receive regulatory approval for that or
other drug candidates for the treatment of other diseases. If we or our partners are unable to
successfully develop and commercialize our drug candidates, our business will be materially harmed.
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Our success depends substantially upon our ability to obtain and maintain intellectual property
protection relating to our drug candidates and research technologies.
We own, or hold exclusive licenses to, a number of U.S. and foreign patents and patent
applications directed to our drug candidates and research technologies. Our success depends on our
ability to obtain patent protection both in the United States and in other countries for our drug
candidates, their methods of manufacture and use, and our technologies. Our ability to protect our
drug candidates and technologies from unauthorized or infringing use by third parties depends
substantially on our ability to obtain and enforce our patents. If our issued patents and patent
applications, if granted, do not adequately describe, enable or otherwise provide coverage of our
technologies and drug candidates, including omecamtiv mecarbil, CK-2017357, ispinesib, SB-743921
and GSK-923295, we or our licensees would not be able to exclude others from developing or
commercializing these drug candidates. Furthermore, the degree of future protection of our
proprietary rights is uncertain because legal means may not adequately protect our rights or permit
us to gain or keep our competitive advantage.
Due to evolving legal standards relating to the patentability, validity and enforceability of
patents covering pharmaceutical inventions and the claim scope of these patents, our ability to
enforce our existing patents and to obtain and enforce patents that may issue from any pending or
future patent applications is uncertain and involves complex legal, scientific and factual
questions. The standards which the U.S. Patent and Trademark Office and its foreign counterparts
use to grant patents are not always applied predictably or uniformly and are subject to change. To
date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology and
pharmaceutical patents. Thus, we cannot be sure that any patents will issue from any pending or
future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure
that the claims of these patents will be held valid or enforceable by a court of law, will provide
us with any significant protection against competitive products, or will afford us a commercial
advantage over competitive products. In particular:
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we or our licensors might not have been the first to make the inventions covered by each
of our pending patent applications and issued patents; |
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we or our licensors might not have been the first to file patent applications for the
inventions covered by our pending patent applications and issued patents; |
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others may independently develop similar or alternative technologies or duplicate any of
our technologies without infringing our intellectual property rights; |
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some or all of our or our licensors pending patent applications may not result in issued
patents or the claims that issue may be narrow in scope and not provide us with competitive
advantages; |
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our and our licensors issued patents may not provide a basis for commercially viable
drugs or therapies or may be challenged and invalidated by third parties; |
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our or our licensors patent applications or patents may be subject to interference,
opposition or similar administrative proceedings that may result in a reduction in their
scope or their loss altogether; |
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we may not develop additional proprietary technologies or drug candidates that are
patentable; or |
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the patents of others may prevent us or our partners from discovering, developing or
commercializing our drug candidates. |
Patent protection is afforded on a country-by-country basis. Some foreign jurisdictions do not
protect intellectual property rights to the same extent as in the United States. Many companies
have encountered significant difficulties in protecting and defending intellectual property rights
in foreign jurisdictions. Some of our development efforts are performed in countries outside of the
United States through third party contractors. We may not be able to effectively monitor and assess
intellectual property developed by these contractors. We therefore may not be able to effectively
protect this intellectual property and could lose potentially valuable intellectual property
rights. In addition, the legal protection afforded to inventors and owners of intellectual property
in countries outside of the United States may not be as protective of intellectual property rights
as in the United States. Therefore, we may be unable to acquire and protect intellectual property
developed by these contractors to the same extent as if these development activities were being
conducted in the United States. If we encounter difficulties in protecting our intellectual
property rights in foreign jurisdictions, our business prospects could be substantially harmed.
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Under our license agreement with the University of California and Stanford University, we have
obtained an exclusive license to certain issued U.S. and European patents relating to certain of
our research activities. Since we have not fully met certain of our obligations under this license
agreement, including certain diligence obligations, this agreement may be terminated, in which case
we would no longer have a license to these patents or to future patents that may issue from the
pending applications. This may impair our ability to continue to practice the research methods
covered by the issued patents. Alternatively, our license rights may become non-exclusive, which
would allow the University of California and Stanford University to grant third parties the right
to practice those patents. Our drug candidates and potential drug candidates in development are not
covered by the patents subject to this license agreement.
We rely on intellectual property assignment agreements with our corporate partners, employees,
consultants, scientific advisors and other collaborators to grant us ownership of new intellectual
property that is developed. These agreements may not result in the effective assignment to us of
that intellectual property. As a result, our ownership of key intellectual property could be
compromised.
Changes in either the patent laws or their interpretation in the United States or other
countries may diminish the value of our intellectual property or our ability to obtain patents. For
example, the U.S. Congress is currently considering bills that could change U.S. law regarding,
among other things, post-grant review of issued patents and the calculation of damages once patent
infringement has been determined by a court of law. If enacted into law, these provisions could
severely weaken patent protection in the United States.
If one or more products resulting from our drug candidates is approved for sale by the FDA and
we do not have adequate intellectual property protection for those products, competitors could
duplicate them for approval and sale in the United Sates without repeating the extensive testing
required of us or our partners to obtain FDA approval. Regardless of any patent protection, under
current law, an application for a generic version of a new chemical entity cannot be approved until
at least five years after the FDA has approved the original product. When that period expires, or
if that period is altered, the FDA could approve a generic version of our product regardless of our
patent protection. An applicant for a generic version of our product may only be required to
conduct a relatively inexpensive study to show that its product is bioequivalent to our product,
and may not have to repeat the lengthy and expensive clinical trials that we or our partners
conducted to demonstrate that the product is safe and effective. In the absence of adequate patent
protection for our products in other countries, competitors may similarly be able to obtain
regulatory approval in those countries of generic versions of our products.
We also rely on trade secrets to protect our technology, particularly where we believe patent
protection is not appropriate or obtainable. However, trade secrets are often difficult to protect,
especially outside of the United States. While we endeavor to use reasonable efforts to protect our
trade secrets, our or our partners employees, consultants, contractors or scientific and other
advisors may unintentionally or willfully disclose our information to competitors. In addition,
confidentiality agreements, if any, executed by those individuals may not be enforceable or provide
meaningful protection for our trade secrets or other proprietary information in the event of
unauthorized use or disclosure. Pursuing a claim that a third party had illegally obtained and was
using our trade secrets would be expensive and time-consuming, and the outcome would be
unpredictable. Even if we are able to maintain our trade secrets as confidential, if our
competitors independently develop information equivalent or similar to our trade secrets, our
business could be harmed.
If we are not able to defend the patent or trade secret protection position of our
technologies and drug candidates, then we will not be able to exclude competitors from developing
or marketing competing drugs, and we may not generate enough revenue from product sales to justify
the cost of development of our drugs or to achieve or maintain profitability.
If we are sued for infringing third party intellectual property rights, it will be costly and
time-consuming, and an unfavorable outcome would have a significant adverse effect on our
business.
Our ability to commercialize drugs depends on our ability to use, manufacture and sell those
drugs without infringing the patents or other proprietary rights of third parties. Numerous
U.S. and foreign issued patents and pending patent applications owned by third parties exist in the
therapeutic areas in which we are developing drug candidates and seeking new potential drug
candidates. In addition, because patent applications can take several years to issue, there may be
currently pending applications, unknown to us, which could later result in issued patents that our
activities with our drug candidates could infringe. There may also be existing patents, unknown to
us, that our activities with our drug candidates could infringe.
Currently, we are aware of an issued U.S. patent and at least one pending U.S. patent
application assigned to Curis, Inc., relating to certain compounds in the quinazolinone class. Ispinesib falls into this class of compounds.
The Curis U.S. patent claims a method of
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inhibiting signaling by what is called the hedgehog
pathway using certain quinazolinone compounds. Curis also has pending applications in Europe,
Japan, Australia and Canada with claims covering certain quinazolinone compounds, compositions
thereof and methods of their use. Two of the Australian applications have been allowed and two of
the European applications have been granted. We have opposed the granting of certain of these
patents to Curis in Europe and in Australia. Curis has withdrawn one of the Australian
applications. One of the European patents that we opposed was recently revoked and is no longer
valid in Europe. Curis has appealed this decision.
Curis or a third party may assert that the manufacture, use, importation or sale of ispinesib
may infringe one or more of its patents. We believe that we have valid defenses against the issued
U.S. patent owned by Curis if it were to be asserted against us. However, we cannot guarantee that
a court would find these defenses valid or that any additional defenses would be successful. We
have not attempted to obtain a license to these patents. If we decide to seek a license to these
patents, we cannot guarantee that such a license would be available on acceptable terms, if at all.
Other future products of ours may be impacted by patents of companies engaged in competitive
programs with significantly greater resources (such as Bayer AG, Merck & Co., Inc., Merck GmbH, Eli
Lilly and Company, Bristol-Myers Squibb Company and AstraZeneca AB). Further development of these
products could be impacted by these patents and result in significant legal fees.
If a third party claims that our actions infringe its patents or other proprietary rights, we
could face a number of issues that could seriously harm our competitive position, including, but
not limited to:
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infringement and other intellectual property claims that, even if meritless, can be
costly and time-consuming to litigate, delay the regulatory approval process and divert
managements attention from our core business operations; |
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substantial damages for past infringement which we may have to pay if a court determines
that our drugs or technologies infringe a third partys patent or other proprietary rights; |
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a court prohibiting us from selling or licensing our drugs or technologies unless the
holder licenses the patent or other proprietary rights to us, which it is not required to
do; and |
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if a license is available from a holder, we may have to pay substantial royalties or
grant cross-licenses to our patents or other proprietary rights. |
If any of these events occur, it could significantly harm our business and negatively affect
our stock price.
We may undertake infringement or other legal proceedings against third parties, causing us to
spend substantial resources on litigation and exposing our own intellectual property portfolio to
challenge.
Third parties may infringe our patents. To prevent infringement or unauthorized use, we may
need to file infringement suits, which are expensive and time-consuming. In an infringement
proceeding, a court may decide that one or more of our patents is invalid, unenforceable, or both.
In this case, third parties may be able to use our technology without paying licensing fees or
royalties. Even if the validity of our patents is upheld, a court may refuse to stop the other
party from using the technology at issue on the ground that the other partys activities are not
covered by our patents. Policing unauthorized use of our intellectual property is difficult, and we
may not be able to prevent misappropriation of our proprietary rights, particularly in countries
where the laws may not protect such rights as fully as in the United States. In addition, third
parties may affirmatively challenge our rights to, or the scope or validity of, our patent rights.
We may become involved in disputes with our strategic partners over intellectual property
ownership, and publications by our research collaborators and clinical investigators could impair
our ability to obtain patent protection or protect our proprietary information, either of which
would have a significant impact on our business.
Inventions discovered under our strategic alliance agreements may become jointly owned by our
strategic partners and us in some cases, and the exclusive property of one of us in other cases.
Under some circumstances, it may be difficult to determine who owns a particular invention or
whether it is jointly owned, and disputes could arise regarding ownership or use of those
inventions. These disputes could be costly and time-consuming, and an unfavorable outcome could
have a significant adverse effect on our business if we were not able to protect or license rights
to these inventions. In addition, our research collaborators and clinical investigators
generally have contractual rights to publish data arising from their work. Publications by our
research collaborators and clinical
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investigators relating to our research and development
programs, either with or without our consent, could benefit our current or potential competitors
and may impair our ability to obtain patent protection or protect our proprietary information,
which could significantly harm our business.
We may be subject to claims that we or our employees have wrongfully used or disclosed trade
secrets of their former employers.
Many of our employees were previously employed at universities or other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Although no claims
against us are currently pending, we may be subject to claims that these employees or we have
inadvertently or otherwise used or disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend against these claims. If we fail in
defending these claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights or personnel. A loss of key research personnel or their work product could hamper
or prevent our ability to commercialize certain potential drugs, which could significantly harm our
business. Even if we are successful in defending against these claims, litigation could result in
substantial costs and distract management.
Our competitors may develop drugs that are less expensive, safer or more effective than ours,
which may diminish or eliminate the commercial success of any drugs that we may commercialize.
We compete with companies that have developed drugs or are developing drug candidates for
cardiovascular diseases, cancer and other diseases for which our drug candidates may be useful
treatments. For example, if omecamtiv mecarbil is approved for marketing by the FDA for heart
failure, that drug candidate would compete against other drugs used for the treatment of heart
failure. These include generic drugs, such as milrinone, dobutamine or digoxin and newer marketed
drugs such as nesiritide. Omecamtiv mecarbil could also potentially compete against other novel
drug candidates in development, such as istaroxamine, which is being developed by Debiopharm Group;
bucindolol, which is being developed by ARCA biopharma, Inc.; relaxin, which is being developed by
Novartis; and CD-NP, which is being developed by Nile Therapeutics, Inc. In addition, there are a
number of medical devices being developed for the potential treatment of heart failure.
With respect to CK-2017357
and other compounds that may arise from our skeletal muscle
contractility program, potential competitors include Ligand Pharmaceuticals, Inc., which is developing LGD-4033, a
selective androgen receptor modulator, for muscle wasting; GTx, Inc., which is developing ostarine, a
selective androgen receptor modulator, for cancer cachexia; and Amgen, which is investigating AMG 745, a
myostatin inhibitor, for its utility in inhibiting muscle loss associated with a variety of
diseases and conditions. Acceleron Pharma, Inc. is conducting clinical development with ACE-031, a
myostatin inhibitor, and related compounds to evaluate their ability to treat diseases involving
the loss of muscle mass, strength and function. We are also aware that other companies are
developing potential new therapies for amyotrophic lateral sclerosis, such as Knopp Neurosciences,
Inc., Mitsubishi Tanabe Pharma Corporation, Eisai Inc., Trophos SA and Teva Pharmaceutical
Industries Ltd.
If approved for marketing by the FDA, depending on the approved clinical indication, our
anti-cancer drug candidates ispinesib, SB-743921 and GSK-923295 would compete against existing
cancer treatments such as paclitaxel (and its generic equivalents), docetaxel, vincristine,
vinorelbine, navelbine, ixabepilone and potentially against other novel anti-cancer drug candidates
that are currently in development. These include compounds that are reformulated taxanes, other
tubulin binding compounds or epothilones. We are also aware that Merck & Co., Inc., Eli Lilly and
Company, Bristol-Myers Squibb Company, AstraZeneca AB, Array Biopharma Inc., ArQule, Inc., Anylam,
Inc. and others are conducting research and development focused on KSP and other mitotic kinesins.
In addition, Bristol-Myers Squibb Company, Merck & Co., Inc., Novartis, Genentech, Hoffman-La Roche
Ltd., Eisai, Inc., Seattle Genetics, Inc. and other pharmaceutical and biopharmaceutical companies
are developing other approaches to treating cancer.
Our competitors may:
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develop drug candidates and market drugs that are less expensive or more effective than
our future drugs; |
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commercialize competing drugs before we or our partners can launch any drugs developed
from our drug candidates; |
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hold or obtain proprietary rights that could prevent us from commercializing our
products; |
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initiate or withstand substantial price competition more successfully than we can; |
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more successfully recruit skilled scientific workers and management from the limited pool
of available talent; |
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more effectively negotiate third-party licenses and strategic alliances; |
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take advantage of acquisition or other opportunities more readily than we can; |
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develop drug candidates and market drugs that increase the levels of safety or efficacy
that our drug candidates will need to show in order to obtain regulatory approval; or |
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introduce therapies or market drugs that render the market opportunity for our potential
drugs obsolete. |
We will compete for market share against large pharmaceutical and biotechnology companies and
smaller companies that are collaborating with larger pharmaceutical companies, new companies,
academic institutions, government agencies and other public and private research organizations.
Many of these competitors, either alone or together with their partners, may develop new drug
candidates that will compete with ours. These competitors may, and in certain cases do, operate
larger research and development programs or have substantially greater financial resources than we
do. Our competitors may also have significantly greater experience in:
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developing drug candidates; |
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undertaking preclinical testing and clinical trials; |
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building relationships with key customers and opinion-leading physicians; |
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obtaining and maintaining FDA and other regulatory approvals of drug candidates; |
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formulating and manufacturing drugs; and |
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launching, marketing and selling drugs. |
If our competitors market drugs that are less expensive, safer or more efficacious than our
potential drugs, or that reach the market sooner than our potential drugs, we may not achieve
commercial success. In addition, the life sciences industry is characterized by rapid technological
change. If we fail to stay at the forefront of technological change, we may be unable to compete
effectively. Our competitors may render our technologies obsolete by improving existing
technological approaches or developing new or different approaches, potentially eliminating the
advantages in our drug discovery process that we believe we derive from our research approach and
proprietary technologies.
We may expand our development and clinical research capabilities and, as a result, we may
encounter difficulties in managing our growth, which could disrupt our operations.
We may have growth in our expenditures, the number of our employees and the scope of our
operations, in particular with respect to those drug candidates that we elect to develop or
commercialize independently or together with a partner. To manage our anticipated future growth, we
must continue to implement and improve our managerial, operational and financial systems, expand
our facilities and continue to recruit and train additional qualified personnel. Due to our limited
resources, we may not be able to effectively manage the expansion of our operations or recruit and
train additional qualified personnel. The physical expansion of our operations may lead to
significant costs and may divert our management and business development resources. Any inability
to manage growth could delay the execution of our business plans or disrupt our operations.
Our failure to attract and retain skilled personnel could impair our drug development and
commercialization activities.
Our business depends on the performance of our senior management and key scientific and
technical personnel. The loss of the services of any member of our senior management or key
scientific or technical staff may significantly delay or prevent the achievement of drug
development and other business objectives by diverting managements attention to transition matters
and identifying suitable replacements. We also rely on consultants and advisors to assist us in
formulating our research and development strategy. All of our consultants and advisors are either
self-employed or employed by other organizations, and they may have conflicts of interest or other
commitments, such as consulting or advisory contracts with other organizations, that may affect
their ability to contribute to us. In addition, if and as our business grows, we will need to
recruit additional executive management and scientific and technical personnel. There is currently intense competition for skilled executives and
employees with relevant scientific and technical
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expertise, and this competition is likely to
continue. Our inability to attract and retain sufficient scientific, technical and managerial
personnel could limit or delay our product development activities, which would adversely affect the
development of our drug candidates and commercialization of our potential drugs and growth of our
business.
Any future workforce and expense reductions may have an adverse impact on our internal programs
and our ability to hire and retain skilled personnel.
In light of our continued need for funding and cost control, we may be required to implement
future workforce and expense reductions, which may negatively affect our productivity and limit our
research and development activities. For example, as part of our strategic restructuring and
workforce reduction in 2008, we discontinued our early research activities in oncology. Our future
success will depend in large part upon our ability to attract and retain highly skilled personnel.
We may have difficulty retaining and attracting such personnel as a result of a perceived risk of
future workforce reductions. In addition, the implementation of workforce or expense reduction
programs may divert the efforts of our management team and other key employees, which could
adversely affect our business.
We currently have no sales or marketing staff and, if we are unable to enter into or maintain
strategic alliances with marketing partners or to develop our own sales and marketing
capabilities, we may not be successful in commercializing our potential drugs.
We currently have no sales, marketing or distribution capabilities. We plan to commercialize
drugs that can be effectively marketed and sold in concentrated markets that do not require a large
sales force to be competitive. To achieve this goal, we will need to establish our own specialized
sales force and marketing organization with technical expertise and supporting distribution
capabilities. Developing such an organization is expensive and time-consuming and could delay a
product launch. In addition, we may not be able to develop this capacity efficiently,
cost-effectively or at all, which could make us unable to commercialize our drugs. If we determine
not to market on our drugs on our own, we will depend on strategic alliances with third parties,
such as Amgen, which have established distribution systems and direct sales forces to commercialize
them. If we are unable to enter into such arrangements on acceptable terms, we may not be able to
successfully commercialize these drugs. To the extent that we are not successful in commercializing
any drugs ourselves or through a strategic alliance, our product revenues and business will suffer
and our stock price would decrease.
Risks Related To Our Industry
The regulatory approval process is expensive, time-consuming and uncertain and may prevent our
partners or us from obtaining approvals to commercialize some or all of our drug candidates.
The research, testing, manufacturing, selling and marketing of drugs are subject to extensive
regulation by the FDA and other regulatory authorities in the United States and other countries,
which regulations differ from country to country. Neither we nor our partners are permitted to
market our potential drugs in the United States until we receive approval of a new drug application
(NDA) from the FDA. Neither we nor our partners have received marketing approval for any of
Cytokinetics drug candidates.
Obtaining NDA approval is a lengthy, expensive and uncertain process. In addition, failure to
comply with FDA and other applicable foreign and U.S. regulatory requirements may subject us to
administrative or judicially imposed sanctions. These include warning letters, civil and criminal
penalties, injunctions, product seizure or detention, product recalls, total or partial suspension
of production, and refusal to approve pending NDAs or supplements to approved NDAs.
Regulatory approval of an NDA or NDA supplement is never guaranteed, and the approval process
typically takes several years and is extremely expensive. The FDA and foreign regulatory agencies
also have substantial discretion in the drug approval process. Despite the time and efforts
exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon
clinical trials or to repeat or perform additional preclinical testing and clinical trials. The
number and focus of preclinical studies and clinical trials that will be required for approval by
the FDA and foreign regulatory agencies varies depending on the drug candidate, the disease or
condition that the drug candidate is designed to address, and the regulations applicable to any
particular drug candidate. The FDA and foreign regulatory agencies can delay, limit or deny
approval of a drug candidate for many reasons, including, but not limited to:
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they might determine that a drug candidate is not safe or effective; |
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they might not find the data from preclinical testing and clinical trials sufficient and
could request that additional trials be performed; |
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they might not approve our, our partners or the contract manufacturers processes or
facilities; or |
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they might change their approval policies or adopt new regulations. |
Even if we receive regulatory approval to manufacture and sell a drug in a particular
regulatory jurisdiction, other jurisdictions regulatory authorities may not approve that drug for
manufacture and sale. If we or our partners fail to receive and maintain regulatory approval for
the sale of any drugs resulting from our drug candidates, it would significantly harm our business
and negatively affect our stock price.
If we or our partners receive regulatory approval for our drug candidates, we or they will be
subject to ongoing obligations to and continued regulatory review by the FDA and foreign
regulatory agencies, and may be subject to additional post-marketing obligations, all of which may
result in significant expense and limit commercialization of our potential drugs.
Any regulatory approvals that we or our partners receive for our drug candidates may be
subject to limitations on the indicated uses for which the drug may be marketed or require
potentially costly post-marketing follow-up studies. In addition, if the FDA or foreign regulatory
agencies approves any of our drug candidates, the labeling, packaging, adverse event reporting,
storage, advertising, promotion and record-keeping for the drug will be subject to extensive
regulatory requirements. The subsequent discovery of previously unknown problems with the drug,
including adverse events of unanticipated severity or frequency, or the discovery that adverse
effects or toxicities observed in preclinical research or clinical trials that were believed to be
minor actually constitute much more serious problems, may result in restrictions on the marketing
of the drug or withdrawal of the drug from the market.
The FDA and foreign regulatory agencies may change their policies and additional government
regulations may be enacted that could prevent or delay regulatory approval of our drug candidates.
We cannot predict the likelihood, nature or extent of adverse government regulation that may arise
from future legislation or administrative action, either in the United States or abroad. If we are
not able to maintain regulatory compliance, we might not be permitted to market our drugs and our
business would suffer.
If physicians and patients do not accept our drugs, we may be unable to generate significant
revenue, if any.
Even if our drug candidates obtain regulatory approval, the resulting drugs, if any, may not
gain market acceptance among physicians, healthcare payors, patients and the medical community.
Even if the clinical safety and efficacy of drugs developed from our drug candidates are
established for purposes of approval, physicians may elect not to recommend these drugs for a
variety of reasons including, but not limited to:
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introduction of competitive drugs to the market; |
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clinical safety and efficacy of alternative drugs or treatments; |
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cost-effectiveness; |
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|
availability of coverage and reimbursement from health maintenance organizations and
other third-party payors; |
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convenience and ease of administration; |
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prevalence and severity of adverse side effects; |
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other potential disadvantages relative to alternative treatment methods; or |
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insufficient marketing and distribution support. |
If our drugs fail to achieve market acceptance, we may not be able to generate significant
revenue and our business would suffer.
The coverage and reimbursement status of newly approved drugs is uncertain and failure to obtain
adequate coverage and
reimbursement could limit our ability to market any drugs we may develop and decrease our ability
to generate revenue.
46 of 55
Even if one or more of our drugs is approved for sale, the commercial success of our drugs in
both domestic and international markets will be substantially dependent on whether third-party
coverage and reimbursement is available for our drugs by the medical profession for use by their
patients, which is highly uncertain. Medicare, Medicaid, health maintenance organizations and other
third-party payors are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement of new drugs. As a result, they may not cover or provide
adequate payment for our drugs. They may not view our drugs as cost-effective and reimbursement may
not be available to consumers or may be insufficient to allow our drugs to be marketed on a
competitive basis. If we are unable to obtain adequate coverage and reimbursement for our drugs,
our ability to generate revenue will be adversely affected. Likewise, current and future
legislative or regulatory efforts to control or reduce healthcare costs or reform government
healthcare programs could result in lower prices or rejection of coverage and reimbursement for our
potential drugs. Changes in coverage and reimbursement policies or healthcare cost containment
initiatives that limit or restrict reimbursement for our drugs would cause our revenue to decline.
We may be subject to costly product liability or other liability claims and may not be able to
obtain adequate insurance.
The use of our drug candidates in clinical trials may result in adverse effects. We cannot
predict all the possible harms or adverse effects that may result from our clinical trials. We
currently maintain limited product liability insurance. We may not have sufficient resources to pay
for any liabilities resulting from a personal injury or other claim excluded from, or beyond the
limit of, our insurance coverage. Our insurance does not cover third parties negligence or
malpractice, and our clinical investigators and sites may have inadequate insurance or none at all.
In addition, in order to conduct clinical trials or otherwise carry out our business, we may have
to contractually assume liabilities for which we may not be insured. If we are unable to look to
our own or a third partys insurance to pay claims against us, we may have to pay any arising costs
and damages ourselves, which may be substantial.
In addition, if we commercially launch drugs based on our drug candidates, we will face even
greater exposure to product liability claims. This risk exists even with respect to those drugs
that are approved for commercial sale by the FDA and foreign regulatory agencies and manufactured
in licensed and regulated facilities. We intend to secure additional limited product liability
insurance coverage for drugs that we commercialize, but may not be able to obtain such insurance on
acceptable terms with adequate coverage, or at reasonable costs. Even if we are ultimately
successful in product liability litigation, the litigation would consume substantial amounts of our
financial and managerial resources and may create adverse publicity, all of which would impair our
ability to generate sales of the affected product and our other potential drugs. Moreover, product
recalls may be issued at our discretion or at the direction of the FDA and foreign regulatory
agencies, other governmental agencies or other companies having regulatory control for drug sales.
Product recalls are generally expensive and often have an adverse effect on the reputation of the
drugs being recalled and of the drugs developer or manufacturer.
We may be required to indemnify third parties against damages and other liabilities arising
out of our development, commercialization and other business activities, which could be costly and
time-consuming and distract management. If third parties that have agreed to indemnify us against
damages and other liabilities arising from their activities do not fulfill their obligations, then
we may be held responsible for those damages and other liabilities.
To the extent we elect to fund the development of a drug candidate or the commercialization of a
drug at our expense, we will need substantial additional funding.
The discovery, development and commercialization of new drugs is costly. As a result, to the
extent we elect to fund the development of a drug candidate or the commercialization of a drug, we
will need to raise additional capital to:
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expand our research and development capabilities; |
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fund clinical trials and seek regulatory approvals; |
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build or access manufacturing and commercialization capabilities; |
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implement additional internal systems and infrastructure; |
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maintain, defend and expand the scope of our intellectual property; and |
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hire and support additional management and scientific personnel. |
47 of 55
Our future funding requirements will depend on many factors, including, but not limited to:
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the rate of progress and costs of our clinical trials and other research and development
activities; |
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the costs and timing of seeking and obtaining regulatory approvals; |
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the costs associated with establishing manufacturing and commercialization capabilities; |
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the costs of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; |
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the costs of acquiring or investing in businesses, products and technologies; |
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the effect of competing technological and market developments; and |
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the payment and other terms and timing of any strategic alliance, licensing or other
arrangements that we may establish. |
Until we can generate a sufficient amount of product revenue to finance our cash requirements,
which we may never do, we expect to continue to finance our future cash needs primarily through
strategic alliances, public or private equity offerings and debt financings. We cannot be certain
that additional funding will be available on acceptable terms, or at all. If we are not able to
secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one
or more of our clinical trials or research and development programs or future commercialization
initiatives.
Responding to any claims relating to improper handling, storage or disposal of the hazardous
chemicals and radioactive and biological materials we use in our business could be time-consuming
and costly.
Our research and development processes involve the controlled use of hazardous materials,
including chemicals and radioactive and biological materials. Our operations produce hazardous
waste products. We cannot eliminate the risk of accidental contamination or discharge and any
resultant injury from those materials. Federal, state and local laws and regulations govern the
use, manufacture, storage, handling and disposal of hazardous materials. We may be sued for any
injury or contamination that results from our or third parties use of these materials. Compliance
with environmental laws and regulations is expensive, and current or future environmental
regulations may impair our research, development and production activities.
Our facilities in California are located near an earthquake fault, and an earthquake or other
types of natural disasters, catastrophic events or resource shortages could disrupt our operations
and adversely affect our results.
All of our facilities and our important documents and records, such as hard copies of our
laboratory books and records for our drug candidates and compounds and our electronic business
records, are located in our corporate headquarters at a single location in South San Francisco,
California near active earthquake zones. If a natural disaster, such as an earthquake or flood, a
catastrophic event such as a disease pandemic or terrorist attack, or a localized extended outage
of critical utilities or transportation systems occurs, we could experience a significant business
interruption. Our partners and other third parties on which we rely may also be subject to business
interruptions from such events. In addition, California from time to time has experienced shortages
of water, electric power and natural gas. Future shortages and conservation measures could disrupt
our operations and cause expense, thus adversely affecting our business and financial results.
Risks Related To an Investment in Our Securities
We expect that our stock price will fluctuate significantly, and you may not be able to resell
your shares at or at or above your investment price.
The stock market, particularly in recent months and years, has experienced significant
volatility, particularly with respect to pharmaceutical, biotechnology and other life sciences
company stocks, which often does not relate to the operating performance of the companies
represented by the stock. Factors that could cause volatility in the market price of our common
stock include, but are not limited to:
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announcements concerning any of the clinical trials for our drug candidates, such as
omecamtiv mecarbil for heart failure; CK- |
48 of 55
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2017357 for the potential treatment of diseases
associated with aging, muscle wasting and neuromuscular dysfunction; and ispinesib,
SB-743921 or GSK-923295 for cancer (including, but not limited to, the timing of initiation
or completion of such trials and the results of such trials, and delays or discontinuations
of such trials, including delays resulting from slower than expected or suspended patient
enrollment or discontinuations resulting from a failure to meet pre-defined clinical
end-points); |
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announcements concerning our strategic alliances with Amgen or future strategic
alliances; |
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failure or delays in entering additional drug candidates into clinical trials; |
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failure or discontinuation of any of our research programs; |
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issuance of new or changed securities analysts reports or recommendations; |
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failure or delay in establishing new strategic alliances, or the terms of those
alliances; |
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market conditions in the pharmaceutical, biotechnology and other healthcare-related
sectors; |
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actual or anticipated fluctuations in our quarterly financial and operating results; |
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developments or disputes concerning our intellectual property or other proprietary
rights; |
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introduction of technological innovations or new products by us or our competitors; |
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issues in manufacturing our drug candidates or drugs; |
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market acceptance of our drugs; |
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third-party healthcare coverage and reimbursement policies; |
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FDA or other U.S. or foreign regulatory actions affecting us or our industry; |
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litigation or public concern about the safety of our drug candidates or drugs; |
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additions or departures of key personnel; or |
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volatility in the stock prices of other companies in our industry or in the stock market
generally. |
These and other external factors may cause the market price and demand for our common stock to
fluctuate substantially, which may limit or prevent investors from readily selling their shares of
common stock and may otherwise negatively affect the liquidity of our common stock. In addition,
when the market price of a stock has been volatile, holders of that stock have instituted
securities class action litigation against the company that issued the stock. If any of our
stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit.
Such a lawsuit could also divert our managements time and attention.
If the ownership of our common stock continues to be highly concentrated, it may prevent you and
other stockholders from influencing significant corporate decisions and may result in conflicts of
interest that could cause our stock price to decline.
As of April 30, 2010, our executive officers, directors and their affiliates beneficially
owned or controlled approximately 23.7% of the outstanding shares of our common stock (after giving
effect to the exercise of all outstanding vested and unvested options and warrants). Accordingly,
these executive officers, directors and their affiliates, acting as a group, will have substantial
influence over the outcome of corporate actions requiring stockholder approval, including the
election of directors, any merger, consolidation or sale of all or substantially all of our assets
or any other significant corporate transactions. These stockholders may also delay or prevent a
change of control of us, even if such a change of control would benefit our other stockholders. The
significant concentration of stock ownership may adversely affect the trading price of our common
stock due to investors perception that conflicts of interest may exist or arise.
49 of 55
Volatility in the stock prices of other companies may contribute to volatility in our stock price.
The stock market in general, and The NASDAQ Global Market (NASDAQ) and the market for
technology companies in particular, have experienced significant price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of those companies.
Further, there has been particular volatility in the market prices of securities of early stage and
development stage life sciences companies. These broad market and industry factors may seriously
harm the market price of our common stock, regardless of our operating performance. In the past,
following periods of volatility in the market price of a companys securities, securities class
action litigation has often been instituted. A securities class action suit against us could result
in substantial costs, potential liabilities and the diversion of managements attention and
resources, and could harm our reputation and business.
Our common stock is thinly traded and there may not be an active, liquid trading market for our
common stock.
There is no guarantee that an active trading market for our common stock will be maintained on
NASDAQ, or that the volume of trading will be sufficient to allow for timely trades. Investors may
not be able to sell their shares quickly or at the latest market price if trading in our stock is
not active or if trading volume is limited. In addition, if trading volume in our common stock is
limited, trades of relatively small numbers of shares may have a disproportionate effect on the
market price of our common stock.
Evolving regulation of corporate governance and public disclosure may result in additional
expenses, use of resources and continuing uncertainty.
Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission
(SEC) regulations and NASDAQ Stock Market LLC rules are creating uncertainty for public
companies. We are presently evaluating and monitoring developments with respect to new and proposed
rules and cannot predict or estimate the amount of the additional costs we may incur or the timing
of these costs. For example, compliance with the internal control requirements of Section 404 of
the Sarbanes-Oxley Act has to date required the commitment of significant resources to document and
test the adequacy of our internal control over financial reporting. Our assessment, testing and
evaluation of the design and operating effectiveness of our internal control over financial
reporting resulted in our conclusion that, as of December 31, 2009, our internal control over
financial reporting was effective to provide reasonable assurance that information we are required
to disclose in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to management as appropriate to allow timely decisions
regarding required disclosures. However, we can provide no assurance as to conclusions of
management or by our independent registered public accounting firm with respect to the
effectiveness of our internal control over financial reporting in the future. In addition, the SEC
has adopted regulations that will require us to file corporate financial statement information in a
new interactive data format known as XBRL beginning in 2011. We will incur significant costs and
need to invest considerable resources to implement and to remain in compliance with these new
requirements.
These new or changed laws, regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result, their application in practice may
evolve over time as new guidance is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing
revisions to disclosure and governance practices. We intend to maintain high standards of corporate
governance and public disclosure. As a result, we intend to invest the resources necessary to
comply with evolving laws, regulations and standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. If our efforts to comply with new or
changed laws, regulations and standards differ from the activities intended by regulatory or
governing bodies, due to ambiguities related to practice or otherwise, regulatory authorities may
initiate legal proceedings against us, which could be costly and time-consuming, and our reputation
and business may be harmed.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
We have paid no cash dividends on any of our classes of capital stock to date and we currently
intend to retain our future earnings, if any, to fund the development and growth of our businesses.
In addition, the terms of existing or any future debts may preclude us from paying these dividends.
Risks Related To Our Financing Vehicles and Investments
Our committed equity financing facility with Kingsbridge may not be available to us if we elect to
make a draw down, may
require us to make additional blackout or other payments to Kingsbridge, and may result in
dilution to our stockholders.
50 of 55
In October 2007, we entered into a committed equity financing facility with Kingsbridge. This
committed equity financing facility entitles us to sell and obligates Kingsbridge to purchase, from
time to time over a period of three years, shares of our common stock for cash consideration up to
an aggregate of $75.0 million, subject to certain conditions and restrictions. To date, we have
received $15.9 million in gross proceeds under this committed equity financing facility. Under
this committed equity financing facility, we have sold 6,682,045 shares and may sell up to a
maximum total of 9,779,411 shares. This is approximately the maximum number of shares we may sell
to Kingsbridge without our stockholders approval under the rules of the NASDAQ Stock Market LLC.
This limitation may further limit the amount of proceeds we are able to obtain from this committed
equity financing facility.
Kingsbridge will not be obligated to purchase shares under this committed equity financing
facility unless certain conditions are met, which include a minimum volume-weighted average price
of $2.00 for our common stock; the accuracy of representations and warranties made to Kingsbridge;
compliance with laws; effectiveness of the registration statement registering for resale the shares
of common stock to be issued in connection with this committed equity financing facility; and the
continued listing of our stock on NASDAQ. In addition, Kingsbridge may terminate this committed
equity financing facility if it determines that a material adverse event has occurred affecting our
business, operations, properties or financial condition and if such condition continues for a
period of 10 days from the date Kingsbridge provides us notice of such material adverse event. If
we are unable to access funds through this committed equity financing facility, we may be unable to
access additional capital on reasonable terms or at all.
We are entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to
suspend the use of the resale registration statement and prohibit Kingsbridge from selling shares
under the resale registration statement. If we deliver a blackout notice in the 15 trading days
following the settlement of a stock sale, or if the registration statement is not effective in
circumstances not permitted by the agreement, then we must make a payment to Kingsbridge, or issue
Kingsbridge additional shares in lieu of this payment. This payment or issuance of shares is
calculated based on the number of shares actually held by Kingsbridge pursuant to the most recent
sale of stock under the committed equity financing facility and the change in the market price of
our common stock during the period in which the use of the registration statement is suspended. If
the trading price of our common stock declines during a suspension of the registration statement,
the blackout payment or issuance of shares could be significant.
When we choose to sell shares to Kingsbridge under this committed equity financing facility,
or issue shares in lieu of a blackout payment, it will have a dilutive effect on our current
stockholders holdings, and may result in downward pressure on the price of our common stock. The
share price for sales of stock to Kingsbridge under this committed equity financing facility is
discounted by up to 10% from the volume weighted average price of our common stock. If we sell
stock under this committed equity financing facility when our share price is decreasing, we will
need to issue more shares to raise the same amount of cash than if our stock price was higher.
Issuances of stock in the face of a declining share price will have an even greater dilutive effect
than if our share price were stable or increasing, and may further decrease our share price.
We may be required to record impairment charges in future quarters as a result of the decline in
value of our investments in auction rate securities.
We hold interest-bearing student loan auction rate securities (ARS) that represent
investments in pools of assets. These ARS were intended to provide liquidity via an auction process
that resets the applicable interest rate at predetermined calendar intervals, allowing investors to
either roll over their holdings or gain immediate liquidity by selling such interests at par value.
The uncertainties in the credit markets have affected all of our holdings in ARS and auctions for
our ARS have failed to settle on their respective settlement dates. Consequently, these ARS are not
currently liquid and we will not be able to access these funds until a future auction of the ARS is
successful, the issuer redeems the outstanding ARS, the ARS mature or a buyer is found outside of
the auction process. Maturity dates for these ARS range from 2036 to 2045. As of March 31, 2010, we
have recorded $2.3 million of cumulative unrealized losses in the statements of operations related
to the ARS that we hold in our investment portfolio. If the current market conditions deteriorate
further, or the anticipated recovery in market values does not occur, we may be required to record
additional unrealized losses due to further declines in value in future quarters. This could
adversely impact our results of operations and financial condition. We have entered into a
settlement agreement with UBS AG relating to the failed auctions of our ARS through which UBS AG
and its affiliates may provide us with additional funds based on these ARS. However, if we are
unable to access the funds underlying or secured by these ARS in a timely manner, we may need to
find alternate sources of funding for certain of our operations, which may not be available on
favorable terms, or at all, and our business could be adversely affected.
We may not be able to recover the value of our ARS under our settlement agreement with UBS AG.
We have entered into a settlement agreement with UBS AG relating to the failed auctions of our
ARS through which UBS AG and
51 of 55
its affiliates may provide us with additional funds based on these
ARS. In accepting the settlement offer, we agreed to give up certain rights and accept certain
risks. Under this settlement, UBS AG has issued to us Series C-2 Auction Rate Securities Rights
(the ARS Rights). The ARS Rights entitle us to require UBS AG to purchase our ARS, through UBS
Securities LLC and UBS Financial Services Inc. (the UBS Entities) as agents for UBS AG, from
June 30, 2010 through July 2, 2012 at par value, i.e., at a price equal to the liquidation
preference of the ARS plus accrued but unpaid interest, if any. We intend to liquidate our ARS on
June 30, 2010, the earliest date we can exercise the ARS Rights.
In connection with the ARS Rights, we granted to the UBS Entities the right to sell or
otherwise dispose of, and/or enter orders in the auction process with respect to, our ARS on our
behalf at its discretion, so long as we receive a payment of par value upon any sale or
disposition. The ARS Rights are not transferable, tradable or marginable, and will not be listed or
quoted on any securities exchange or any electronic communications network. If our ARS are sold
through the UBS Entities, we will cease to receive interest on these ARS. We may not be able to
reinvest the cash proceeds of any sale of these ARS at the same interest rate currently being paid
to us with respect to our ARS.
In connection with the settlement, we entered into a loan agreement with UBS Bank USA and UBS
Financial Services Inc. On January 5, 2009, we borrowed approximately $12.4 million under the loan
agreement. We have drawn down the full amount available under the loan agreement. The borrowings
under the loan agreement are payable upon demand, subject to UBS Financial Services obligations to
arrange alternative financing for us under certain circumstances. As of March 31, 2010, the loan
balance was $9.9 million as a result of the sale of certain ARS at par value and the application of
interest income toward the loan balance.
While we entered into the settlement in expectation that UBS AG will fulfill its obligations
in connection with the ARS Rights, UBS AG may not have sufficient financial resources to satisfy
these obligations. The U.S. and worldwide financial markets have recently experienced unprecedented
volatility, particularly in the financial services sector. UBS AG may not be able to maintain the
financial resources necessary to satisfy its obligations with respect to the ARS Rights in a timely
manner or at all. UBS AGs obligations in connection with the ARS Rights are not secured by UBS
AGs assets or otherwise, nor guaranteed by any other entity. UBS AG is not required to obtain any
financing to support its obligations. If UBS AG is unable to perform its obligations in connection
with the ARS Rights, we will have no certainty as to the liquidity or value for our ARS. In
addition, UBS AG is a Swiss bank and all or a substantial portion of its assets are located outside
the United States. As a result, it may be difficult for us to serve legal process on UBS AG or its
management or cause any of them to appear in a U.S. court. Judgments based solely on
U.S. securities laws may not be enforceable in Switzerland. As a result, if UBS AG fails to fulfill
its obligations, we may not be able to effectively seek recourse against it.
In consideration for the ARS Rights, we agreed to release UBS AG, the UBS Entities, and/or
their affiliates, directors and officers from any claims directly or indirectly relating to the
marketing and sale of our ARS, other than consequential damages. Even if UBS AG fails to fulfill
its obligations in connection with ARS Rights, this release may still be held to be enforceable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
Cytokinetics Board of Directors elected L. Patrick Gage, Ph.D., as the Chairman of the Board
of Directors effective March 15, 2010, replacing James Sabry, M.D., Ph.D., who resigned from the
Board of Directors effective March 15, 2010. With the election of Dr. Gage, an independent
director, as Chairman, the Board of Directors approved the elimination of the Lead Outside Director
role, as the need for an independent lead outside director no longer exists.
52 of 55
ITEM 6. EXHIBITS
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Exhibit |
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Number |
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Exhibit Description |
3.1 (1)
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Amended and Restated Certificate of Incorporation. |
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3.2 (1)
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Amended and Restated Bylaws. |
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4.1 (2)
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Specimen Common Stock Certificate. |
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4.2 (3)
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Warrant for the purchase of shares of common stock, dated October 28, 2005, issued by the Company to
Kingsbridge Capital Limited. |
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|
|
4.3 (3)
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Registration Rights Agreement, dated October 28, 2005, by and between the Company and Kingsbridge
Capital Limited. |
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|
|
4.4 (4)
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|
Registration Rights Agreement, dated as of December 29, 2006, by and between the Company and Amgen Inc. |
|
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4.5 (5)
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Warrant for the purchase of shares of common stock, dated October 15, 2007, issued by the Company to
Kingsbridge Capital Limited. |
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|
|
4.6 (5)
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Registration Rights Agreement, dated October 15, 2007, by and between the Company and Kingsbridge
Capital Limited. |
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
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32.1
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|
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
|
|
|
(1) |
|
Incorporated by reference from our registration statement on Form S-1, registration number
333-112261, declared effective by the Securities and Exchange Commission on April 29, 2004. |
|
(2) |
|
Incorporated by reference from our Quarterly Report on Form 10-Q, filed with the Security and
Exchange Commission on May 9, 2007. |
|
(3) |
|
Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 20, 2006. |
|
(4) |
|
Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 3, 2007. |
|
(5) |
|
Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 15, 2007. |
53 of 55
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Dated: May 7, 2010 |
CYTOKINETICS, INCORPORATED
(Registrant)
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/s/ Robert I. Blum
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Robert I. Blum |
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President and Chief Executive Officer
(Principal Executive Officer) |
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/s/ Sharon A. Barbari
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|
|
Sharon A. Barbari |
|
|
Executive Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer) |
|
54 of 55
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
3.1 (1)
|
|
Amended and Restated Certificate of Incorporation. |
|
|
|
3.2 (1)
|
|
Amended and Restated Bylaws. |
|
|
|
4.1 (2)
|
|
Specimen Common Stock Certificate. |
|
|
|
4.2 (3)
|
|
Warrant for the purchase of shares of common stock, dated October 28, 2005, issued by the Company to
Kingsbridge Capital Limited. |
|
|
|
4.3 (3)
|
|
Registration Rights Agreement, dated October 28, 2005, by and between the Company and Kingsbridge
Capital Limited. |
|
|
|
4.4 (4)
|
|
Registration Rights Agreement, dated as of December 29, 2006, by and between the Company and Amgen Inc. |
|
|
|
4.5 (5)
|
|
Warrant for the purchase of shares of common stock, dated October 15, 2007, issued by the Company to
Kingsbridge Capital Limited. |
|
|
|
4.6 (5)
|
|
Registration Rights Agreement, dated October 15, 2007, by and between the Company and Kingsbridge
Capital Limited. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
|
|
|
(1) |
|
Incorporated by reference from our registration statement on Form S-1, registration number
333-112261, declared effective by the Securities and Exchange Commission on April 29, 2004. |
|
(2) |
|
Incorporated by reference from our Quarterly Report on Form 10-Q, filed with the Security and
Exchange Commission on May 9, 2007. |
|
(3) |
|
Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 20, 2006. |
|
(4) |
|
Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 3, 2007. |
|
(5) |
|
Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 15, 2007. |
55 of 55