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| IDMI > SEC Filings for IDMI > Form 10-Q on 13-May-2005 | All Recent SEC Filings |
13-May-2005
Quarterly Report
Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, without limitation, those discussed below and in the section entitled "Risk Factors."
Epimmune was incorporated in Delaware on July 10, 1987 as Cytel Corporation. On July 1, 1999, Cytel merged with its majority-owned subsidiary, Epimmune Inc., and changed its name from Cytel Corporation to Epimmune Inc. Epimmune(R) and PADRE(R) are our trademarks and EIS(R) and ImmunoSense(R) are our service marks.
Since 1997, we have devoted substantially all of our resources to the discovery and development of potential therapeutic and prophylactic products. To date, we have not received any revenues from the sale of products. We began a Phase I/II clinical trial targeting HIV in September 2002 and two Phase I/II clinical trials targeting lung cancer and colorectal cancer in February 2003. Based on the results we received from those clinical trials during the course of 2004, we began a Phase II clinical trial in late-stage lung cancer patients at the end of 2004 and expect to initiate a follow-on Phase I/II trial in HIV-infected patients in the fourth quarter of 2005 to evaluate alternative vaccine delivery options. We have funded our research and development primarily from equity-derived working capital and through strategic alliances and collaborations with other companies. We have not been profitable since our inception and expect to incur substantial operating losses for at least the next several years. As of March 31, 2005, our accumulated deficit was approximately $164.2 million.
In July 2001, we entered into a collaboration with Genencor International, Inc. to develop vaccines to treat or prevent hepatitis B virus, hepatitis C virus and human papilloma virus. In February 2004, we announced that we had earned a milestone payment from Genencor as a result of Genencor filing an Investigational New Drug Application, or IND, for a vaccine to treat hepatitis B, the lead program in the collaboration. In March 2004, Genencor assigned its rights under our collaboration agreement to Innogenetics NV. In connection with the assignment by Genencor, we extended the collaboration term with Innogenetics through September 2005. Innogenetics has the right to terminate the collaboration early, upon three months written notice.
In April 2004, we completed a private placement of 2,466,379 shares of common stock and warrants to purchase up to 1,233,188 shares of common stock to selected institutional and accredited investors, including current shareholders, for a total purchase price of $5.5 million. We received net proceeds of $5.0 million. The purchase price of each security, which is the combination of one share of common stock and, for each two shares of common stock purchased, a warrant to purchase one share of common stock, was priced at the market value of $2.2125, which was equal to or greater than the sum of the closing bid price of our common stock as quoted on the Nasdaq National Market on the date of execution of the purchase agreements, and $0.0625, the imputed value of a warrant to purchase one share of common stock. In addition, we issued warrants to purchase an aggregate of 250,000 shares of our common stock to a placement agent for services rendered in connection with the private placement. Each warrant, including the warrant issued to the placement agent, has a three-year term and an exercise price equal to 120% of $2.2125 or $2.655 per share.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles unless otherwise indicated. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates on an ongoing basis, including those related to revenue recognition, patents and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We recognize revenues pursuant to Staff Accounting Bulletin No. 101, Revenue Recognition. License fees are earned and recognized in accordance with the provisions of each agreement. Upfront license fees for perpetual licenses where we have no performance obligations are recognized when received. License fees under agreements in which we have ongoing involvement or performance obligations are recognized over the term of the agreement. Milestone payments are recognized as revenue upon the completion of the milestone as long as the milestone event was substantive, and its achievability was not reasonably assured at inception and our performance obligations after milestone achievement will continue to be funded at a comparable level before the milestone achievement. Contract research and development funding is recognized as revenue in the same period as reimbursable expenses under a contract are incurred and in an amount or at a rate billable under each contract's terms. Revenues from grants are recognized on a percentage-of-completion basis as related costs are incurred. We defer revenue recognition until performance obligations have been completed and collectibility is reasonably assured.
Patents
We capitalize the costs incurred to file patent applications when we believe there is a high likelihood that the patent will issue and there will be future economic benefit associated with the patent. These costs are amortized over a ten-year life from the date of patent filing. We expense all costs related to abandoned patent applications. In addition, we review the carrying value of patents for indicators of impairment on a periodic basis. If we elect to abandon any of our currently issued or unissued patents or we determine that the carrying value is impaired, the related expense could be material to our results of operations for the period of the abandonment.
Investment Policy
The primary objective of our investment activities is to preserve principal while at the same time achieving competitive yields, without significantly increasing risk. To achieve this objective, we primarily invest in cash and money market accounts as well as A1 or P1 or higher rated debt securities with maturities of less than two years, with the weighted average maturity not to exceed eighteen months. We also attempt to minimize our portfolio risk by placing constraints on how much of our portfolio may be held in a specific type of investment such as asset-backed securities or collateralized mortgage obligations as well as limiting our holdings in any one issuer. At March 31, 2005, our investment portfolio included only cash and money market accounts and had no fixed-income securities.
Results of Operations
Three months ended March 31, 2005, as compared with three months ended March 31, 2004.
In the three months ended March 31, 2005, we had total revenues of $1.8 million, as compared to $2.6 million in revenues in the three months ended March 31, 2004. The decrease in the three months ended March 31, 2005 resulted primarily from a $1.0 million decrease in related party revenue offset by a $0.3 million increase in research grant and contract revenue. Related party revenue includes milestone
payments, amortization of license fees and contract research and development funding, as a result of our previous collaboration with Genencor, which owns an equity position in Epimmune. In March 2004, Genencor assigned its rights under our collaboration agreement to Innogenetics. Innogenetics does not own an equity position in Epimmune and, therefore, is not a related party, and reimbursements under our collaboration agreement with them are now recorded as contract revenue. The decrease in related party revenue during the three months ended March 31, 2005, compared to the three months ended March 31, 2004, was a result of the assignment of the collaboration agreement. During the first quarter of 2004, we received a milestone payment from Genencor in connection with an Investigational New Drug (IND) application filed by Genencor for a Hepatitis B vaccine candidate on which we collaborated. In connection with the assignment by Genencor, we extended the collaboration term with Innogenetics through September 2005. Innogenetics has the right to terminate the collaboration early, upon three months written notice, if we breach our obligations under the collaboration agreement or upon certain force majeure events. The increase in research grant and contract revenue in the three months ended March 31, 2005 as compared to the three months ended March 31, 2004 was also a result of the assignment by Genencor to Innogenetics and the corresponding change in revenue accounts, offset by a decrease in reimbursements under grants and contracts from the National Institutes of Health (NIH) due to the timing of costs to be reimbursed. Licensing and milestone revenue was $0.1 million in the three months ended March 31, 2005 and in the three months ended March 31, 2004.
Research and development expenses increased to $2.7 million in the three months ended March 31, 2005 from $2.4 million in the three months ended March 31, 2004. The increase in the three months ended March 31, 2005 primarily relates to a $0.2 million increase in subcontract and other outside costs incurred under NIH grants and contracts, a $0.2 million increase in costs related to our ongoing Phase II clinical trial in non-small cell lung cancer (NSCLC) which began in late December 2004, and a $0.1 million expense associated with abandoned patents in certain geographic locations. These increases in research and development expenses were partially offset by a $0.2 million decrease in costs related to product formulation and manufacturing of product for use in our previous Phase I/II clinical trials in HIV and lung and colorectal cancer.
General and administrative costs were approximately $0.5 million in the three months ended March 31, 2005 and $0.7 million in the three months ended March 31, 2004. The decrease in the three months ended March 31, 2005 primarily relates to a decrease in non-cash, stock-based compensation charges related to a lower stock price during the 2005 period for variable stock equity instruments. We expect general and administrative expenses during 2005 to be relatively flat or slightly lower than corresponding 2004 levels.
In the three months ended March 31, 2005, we recorded $1.1 million in transaction costs associated with our proposed business combination with IDM. These transaction costs included investment banking advisory fees and accounting and legal fees. We expect to continue to incur transaction costs for the next two quarters in connection with our proposed combination with IDM.
Net interest income was negligible in both the three months ended March 31, 2005 and in the three months ended March 31, 2004.
We expect to incur significant operating losses over the next several years due to continuing expenses associated with our research and development programs, including clinical trials, preclinical testing and development activities, as well as transaction costs for our proposed combination with IDM as described above. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of revenues received and expenses incurred, and such fluctuations may be substantial.
Liquidity and Capital Resources
We have financed operations since our inception primarily through private placements of equity securities, two public common stock offerings, revenues under collaborative research and development
agreements, grant revenues, certain asset divestitures and interest income. Through March 31, 2005, we had raised approximately $170.1 million from the sale of equity securities. As of March 31, 2005, we had 17,811,358 shares outstanding on an as-converted to common stock basis, assuming conversion of all outstanding shares of our preferred stock.
As of March 31, 2005, our cash and cash equivalents were $5.7 million compared
to $7.0 million at December 31, 2004. The decrease in cash and cash equivalents
was due to cash used for operations, primarily to fund our ongoing Phase II
study in non-small cell lung cancer, or NSCLC, patients, activities related to
further clinical studies of our therapeutic HIV vaccine candidate, and
transaction related costs associated with our proposed business combination with
IDM. Our operating expenses were offset by license fees, milestone payments and
grant and contract revenues we received. We expect to continue to use our cash
and cash equivalents to fund our ongoing and future clinical trials, as well as
drug research and development programs.
Capital expenditures were negligible in the three months ended March 31, 2005 and in the three months ended March 31, 2004. In the past, we have financed our laboratory equipment and research and office facilities primarily through operating lease arrangements and a note payable. We fully paid off our note payable as of the end of the first quarter of 2003. During 2005, we anticipate that payments related to capital expenditures will continue to decrease compared to 2004 levels to approximately $0.1 million. We will also pay approximately $0.6 million in rent on our lease commitments during 2005. The future minimum rental commitment for the lease of our facility will range from approximately $0.6 million to $0.7 million each year over five years, based upon pre-established annual rent increases.
Payments related to capitalized patent expenses were $0.2 million in the three months ended March 31, 2005 and in the three months ended March 31, 2004. We expect payments related to patents to be relatively flat in 2005 compared to 2004 as we continue to pursue filings and claims in our intellectual property portfolio.
As funds are available, we expect our net cash burn to increase in 2005 compared to 2004 as we incur costs related to ongoing clinical trials in connection with our ongoing drug research and development programs, research and development activities on sponsored programs and contracts, preclinical testing of product candidates and manufacturing of clinical supplies. We intend to seek collaborative research and development relationships with suitable corporate partners and U.S. government agencies. We have in the past and may in the future also license to third parties some of our technology in markets that we are not pursuing ourselves or through our collaborations. Any agreements that may result from these discussions may not successfully reduce our funding requirements or, if entered into, may be terminated.
We will continue to spend substantial amounts on research and development,
including amounts spent for manufacturing clinical supplies, conducting clinical
trials for our product candidates and advancing development of certain sponsored
and partnered programs. Therefore, we will need to secure additional funding. If
we do not complete the proposed combination with IDM as planned, our cash
position will be further reduced, and it will likely be even more difficult to
raise additional funding on satisfactory terms, if at all. We do not have
committed external sources of funding and may not be able to obtain any
additional funding, especially if volatile market conditions persist for
biotechnology companies. If we are unable to obtain additional funding, we will
be required to delay, further reduce the scope of or eliminate one or more of
our research and development projects, sell Epimmune or certain of its assets or
technologies, or dissolve and liquidate all of its assets. As of March 31, 2005,
we had approximately $5.7 million in cash and cash equivalents. We have incurred
and will continue to incur investment banking advisory fees, legal, accounting
and other transaction costs in connection with our proposed combination with
IDM. Our future operational and capital requirements will depend on many
factors, including:
• whether our proposed transaction with IDM is successfully completed;
• whether we are able to secure additional financing on favorable terms, or at all;
• the costs associated with our ongoing Phase I/II clinical trial for our vaccine targeting HIV, which began in September 2002, including the status of our contract with the NIH;
• the costs associated with our Phase II clinical trial for our vaccine targeting lung cancer, which began in December 2004;
• progress with other preclinical testing and clinical trials in the future;
• our ability to establish and maintain collaboration and license agreements and any government contracts and grants;
• the actual revenue we receive under our collaboration and license agreements;
• the actual costs we incur under our research collaboration with Bavarian Nordic;
• the time and costs involved in obtaining regulatory approvals;
• the costs involved in filing, prosecuting, enforcing and defending patent claims and any other proprietary rights;
• competing technological and market developments;
• changes in our existing research relationships;
• continued scientific progress in our drug discovery programs; and
• the magnitude of our drug discovery and development programs.
As is typical in the biotechnology industry, our commercial success will depend in part on not infringing upon the patent or other proprietary rights of others and maintaining the technology licenses upon which our products might be based. Our business is also subject to other significant risks, including the uncertainties associated with our ability to enter into and maintain new collaborations, the lengthy regulatory approval process, and potential competition from other products. Even if our products appear promising at an early stage of development, they may not reach the market for a number of reasons. Such reasons include, but are not limited to, our inability to fund clinical development of such products, or the possibilities that the potential products will be found ineffective during clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale or be uneconomical to market.
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