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| NEOP.OB > SEC Filings for NEOP.OB > Form 10-K on 31-Mar-2008 | All Recent SEC Filings |
31-Mar-2008
Annual Report
to support our blood flow measurement business beyond that needed to support our
gamma device line, we believe we are operating at close to breakeven for our
device lines based on our current expectations. We will continue to monitor the
state of market development and success for our blood flow measurement business
and adjust our business plans accordingly. We may also incur some minor
development expenses in 2008 related to our RIGS radiopharmaceutical product
development although we intend to defer any major expenses until we identify a
funding source or a partner to assist us in the development and
commercialization of RIGScan CR. We expect to show a loss for fiscal year 2008
primarily due to our drug product development efforts.
As of December 31, 2007 our cash on hand totaled $1.5 million. We believe our
currently available capital resources and committed sources of financing will be
adequate to sustain our operations at planned levels for the foreseeable future.
The financing agreement with Montaur gives us access to an additional
$6.0 million beyond the $7.0 million already accessed. If we decide to seek
additional funding from other sources to support the development of our products
and additional financing is not available when required or is not available on
acceptable terms, or we are unable to arrange a suitable strategic opportunity,
we may need to modify our business plan. We cannot assure you that the
additional capital we require will be available on acceptable terms, if at all.
We cannot assure you that we will be able to successfully commercialize products
or that we will achieve significant product revenues from our current or
potential new products. In addition, we cannot assure you that we will achieve
or sustain profitability in the future.
Our Outlook for our Gamma Detection Device Products
We believe our core gamma detection device business line will continue to
achieve positive results. Our belief is based on continued interest in the
research community in lymphatic mapping. Although numerous studies have examined
the correlation between the sentinel node and the remaining axillary nodes, two
large randomized multi-center trials ended about three years ago that will
compare the long-term results of sentinel lymph node removal with full axillary
node dissection. While both of these trials are now closed, we expect data from
these studies will likely be presented sometime in 2009. We expect the results
from these clinical trials, when announced, will have a positive impact on
helping us to penetrate the remaining market for breast cancer and melanoma. We
also believe that the surgical community will continue to adopt the SLNB
application while a standard of care determination is still pending. We also
believe that Lymphoseek, our lymphatic targeting agent, should it become
commercially available, could significantly improve the adoption of sentinel
lymph node biopsy (SLNB) in future years in areas beyond melanoma and breast
cancer. To that end, we are supporting the clinical evaluation of Lymphoseek in
human patients a planned Phase 3 trial in head and neck squamous cell carcinoma
and in ongoing Phase 1 trials in patients with either prostate or colon cancers.
We believe that most of the leading cancer treatment institutions in the U.S.
and other major global markets have adopted SLNB and purchased gamma detection
systems such as the neo2000. As a result, we may be reaching saturation within
this segment of the market, except for a replacement sales market which we also
believe is developing as devices introduced during the early years of lymphatic
mapping begin to age over ten years. A decline in the adoption rate of SLNB or
the development of alternative technologies by competitors may negatively impact
our sales volumes, and therefore, revenues and net income in future years. In
order to address the issue of potential saturation as well as to continue to
provide our customers with the highest quality tools for performing SLNB, we
introduced a new wireless handheld gamma detection probe at the American College
of Surgeons 92nd Annual Clinical Congress meeting in Chicago in October 2006.
The new probe uses Bluetooth® wireless technology to communicate gamma radiation
counts to our neo2000 control unit. The wireless probe eliminates cumbersome
cables that can complicate the surgical field and provides the surgeon with
operative field flexibility. The new probe is compatible with all existing
models of our neo2000 system and is available with either a straight or angled
detection tip.
During March 2006, our primary gamma device marketing partner, Ethicon
Endo-Surgery, Inc. (EES), a Johnson & Johnson company, exercised the second of
its two options to extend the termination date of our distribution agreement
with them through the end of 2008. In December 2007, Neoprobe and EES
executed an amendment to the distribution agreement which extended the agreement
through the end of 2013. The amendment modified certain terms of the agreement
including increasing the percentage of EES' sales which Neoprobe receives by
15-20% and setting minimum performance requirements in order to maintain
exclusivity. As consideration for extending the distribution agreement through
the end of 2013, EES paid us $500,000 in December 2007, representing a
non-refundable license fee and reimbursement of past research and development
expenses. We believe that total quantities of neo2000 control units expected to
be purchased by EES during 2008 should be consistent with 2006 and 2007 purchase
levels. We cannot assure you, however, that EES' product purchases beyond those
firmly committed through mid-2008 will indeed occur or that the prices we
realize will not be affected by increased competition.
Under the terms of our distribution agreement with EES, the transfer prices we
receive on product sales to EES are based on a fixed percentage of their
end-customer sales price, subject to a floor transfer price. Throughout their
sales history, our products have generally commanded a price premium in most of
the markets in which they are sold, which we believe is due to their superior
performance and ease of use. The average end-customer sales prices received by
EES for our base gamma detection systems declined less than 1% in 2007 as
compared to 2006. While we continue to believe in the technical and
user-friendly superiority of our products, the competitive landscape continues
to evolve and we may lose market share or experience price erosion as a result.
A loss of market share or significant price erosion would have a direct negative
impact on net income. If price erosion occurs to a greater extent 2008, or if
the U.S. Dollar gains significantly against the Euro, there is a risk associated
with future sales prices of our gamma detection devices to EES that may erode
some or all of the premium we received in prior years in excess of the floor
price. We anticipate generating a net profit from the sale of our gamma
detection devices in 2008, excluding the allocation of any corporate general and
administrative costs. We also believe the anticipated volumes will result in
continued profitability for our gamma device business line for 2008, even at
floor prices. However, we cannot assure you that sales will occur at the
expected levels or prices or that such sales will ultimately result in
profitability of the product line.
Our Outlook for our Drugs and Therapeutics
The primary focus of our drug and therapeutic development efforts during 2007
centered on completing the Phase 2 clinical trial for Lymphoseek for patients
with breast cancer or melanoma and in preparation for the initiation of Phase 3
clinical trials of Lymphoseek in similar patient populations. Lymphoseek is
intended to be used in surgical procedures for the detection of cancer cells in
lymph nodes in a variety of tumor types including breast, melanoma, prostate,
gastric and colon cancers. If approved, Lymphoseek would be the first
radiopharmaceutical specifically designed to target lymphatic tissue that may be
predictive of the spread of cancer into the lymphatic system.
We held an end of Phase 2 and pre-Phase 3 meeting with FDA in the fourth quarter
of 2007 and we completed responses to questions raised by FDA regarding our
clinical and drug development program for Lymphoseek. All of our responses to
the questions and the final report for the Phase 2 study were filed with FDA in
January of 2008. After completion of the responses, we filed with the agency our
final version of the first of two pivotal studies to be conducted to support the
registration of Lymphoseek as a sentinel lymph node targeting agent. The first
Phase 3 study is proposed to be conducted in approximately 200 patients with
either breast cancer or melanoma. The trial design is similar to the
successfully conducted Phase 2 study, except that we will be monitoring the
concordance of Lymphoseek uptake in lymph nodes with the uptake of a vital blue
dye in the same lymph nodes. In addition, we have provided FDA with the outline
of a second Phase 3 study to be conducted in patients with head and neck
squamous cell carcinoma. This second Phase 3 study is designed to validate
Lymphoseek as a sentinel lymph node targeting agent. We currently project that
the first of the Phase 3 trials will commence during the second quarter of 2008.
We plan to have approximately 20 to 30 participating institutions in the trials,
which should enable us to enroll patients at a more rapid rate than we
experienced with the Phase 2 study. Our discussions with FDA have also suggested
that the Phase 3 trials will support a specific intended use of Lymphoseek in
SLNB procedures. We believe such an indication would be beneficial to the
marketing and commercial adoption of Lymphoseek. Our goal is to file the new
drug application for Lymphoseek in the first half of 2009, which will be
dependent upon our
ability to commence and successfully conclude the Phase 3 clinical studies in a
timely fashion. Depending on the timing and outcome of the FDA regulatory review
cycle, we believe that Lymphoseek can be commercialized in late 2009 or early
2010.
In early 2005, we formed a new subsidiary, Cira Bio, to explore the development
of ACT. Neoprobe owns approximately 90% of the outstanding shares of Cira Bio
with the remaining shares being held by the principals of a private holding
company, Cira LLC. In conjunction with the formation of Cira Bio, an amended
technology license agreement also was executed with The Ohio State University,
from whom both Neoprobe and Cira LLC had originally licensed or optioned the
various cellular therapy technologies. As a result of the cross-license
agreements, Cira Bio has the development and commercialization rights to three
issued U.S. patents that cover the oncology and autoimmune applications of its
technology. In addition, Cira Bio has licenses to several pending patent
applications covering oncology and viral disease applications of the ACT
technology.
Cira Bio intends to raise the necessary capital to move this technology platform
forward; however, Cira Bio has not yet identified a potential source of capital.
In August 2007 we entered into an option agreement whereby Neoprobe can purchase
the remaining 10% interest in Cira Bio from Cira LLC for $250,000 in connection
with the successful completion of a financing transaction by Cira Bio. The
option agreement expires June 30, 2008. In the first quarter of 2008, we entered
into discussions with an investment banking firm to help us gauge the interest
of potential investment in the ACT technology. Our intent in raising funds to
support the development of the ACT technology would likely be accomplished by an
investment directly into Cira Bio, so that the funds raised would not dilute
current Neoprobe shareholders. Obtaining this funding would likely dilute
Neoprobe's ownership interest in Cira Bio; however, we believe that moving
forward such a promising technology will only yield positive results for the
Neoprobe stockholders and the patients who could benefit from these treatments.
However, we do not know if we will be successful in obtaining funding on terms
acceptable to us, or at all. In the event the option agreement expires and we
fail to obtain financing for Cira Bio, the technology rights for the oncology
applications of ACT may revert back to Neoprobe and the technology rights for
the viral and autoimmune applications may revert back to Cira LLC upon notice by
either party.
Our Outlook for our Blood Flow Measurement Products
We currently are actively marketing a blood flow measurement device, the
Quantix/OR, that has regulatory clearance to market in the U.S. and European
Union (EU) as well as certain other foreign markets. The Quantix/OR is primarily
intended to measure blood flow in cardiac bypass graft and other similar
procedures. Currently, we have in place or have executed or reached agreement in
principle with distributors and/or master distributors for the Quantix/OR
covering the United States, all major market countries in the EU, and
substantially all countries that comprise the Pacific Rim of Asia. In addition,
we have distribution arrangements in place covering major portions of Central
and South America. Sales leads and closures in the cardiovascular market,
particularly in the U.S., continue to disappoint us. As a result, we intend to
modify our current distribution relationships and are investigating alternative
distribution channels for the Quantixdevices.
The commercialization efforts for our blood flow measurement devices continue to
be a challenge. While the Quantix system employs an innovative measurement
approach, the clinical setting of the cardiovascular procedure presented certain
clinical challenges. However, several development and evaluation activities that
were initiated in 2007 provide some basis for cautious optimism. During 2007, we
completed some minor measurement algorithm modifications and began evaluating
the technology in vascular assessments with very encouraging results. The
vascular applications address a growing problem with dialysis patients. We are
assessing the commercial opportunity that may be available with the vascular
access business.
We are continuing to evaluate our outlook for our blood flow measurement
business and believe the outcome of our work in the dialysis / vascular
assessment arena is critical in demonstrating the ultimate viability of this
product line. The sales cycle for medical devices such as our blood flow
products is typically a four- to six-month cycle. This sales cycle, coupled with
the timetable necessary to train the
new distributors we engaged during 2006 has resulted in disappointing sales
levels of our blood flow measurement equipment to date. We anticipate that the
product development and market support costs we will incur in 2008 will be
greater than the revenue we generate from the sales of blood flow devices. As a
result, we expect to show a loss for our blood flow measurement device product
line for 2008 due to ongoing development and marketing support that is required
to expand market acceptance for the product line. We are currently devoting
minimal incremental resources and funding to support our blood flow measurement
business and believe we are not far from a breakeven point for the blood flow
line based on the incremental investment anticipated in our current
expectations. We will continue to monitor the state of market development and
success for our blood flow measurement business and adjust our business plans
accordingly.
Summary
The strength of our oncology product (device and drug) portfolio should position
us to eventually achieve profitable operating performance for our device product
lines. However, overall profitable operational results will be significantly
affected by our decision to fund drug and therapeutic development activities
internally.
We anticipate generating a net profit from the sale of our gamma detection
devices in 2008, excluding the allocation of any corporate general and
administrative costs; however, we expect to show a loss for our blood flow
measurement device product line for 2008 due to ongoing research and development
and increased marketing and administrative support costs that may be required to
expand market acceptance for the product line. Our overall operating results for
2008 will also be greatly affected by the amount of development of our
radiopharmaceutical products.
Primarily as a result of the significant development costs we expect to incur
related to the continued clinical development of Lymphoseek, we do not expect to
achieve operating profit during 2008. In addition, our net loss and loss per
share will likely be significantly impacted by the non-cash interest expense we
expect to record related to the accounting treatment for the derivative
liabilities related to the convertible debt we issued in December 2007. We
cannot assure you that our current or potential new products will be
successfully commercialized, that we will achieve significant product revenues,
or that we will achieve or be able to sustain profitability in the future.
Results of Operations
Revenue for 2007 increased to $7.1 million from $6.1 million in the prior year.
The increase was primarily due to sales of our wireless probes which were
initially launched in December 2006, offset by decreases in unit sales and
pricing of our base gamma detection systems. In addition, sales of Quantix
products in 2007 decreased by $253,000 compared to 2006.
Gross margins for 2007 decreased to 55% as compared to 57% in 2006. The decrease
in gross margins on net product sales was primarily due to a combination of
factors including lower margins on sales of demonstration units during 2007 as
EES outfitted its entire U.S. sales force with both the angled and straight
versions of the wireless probes, higher than expected production costs on our
initial production runs of wireless probes, increased estimated warranty costs
following the commercial launch of the wireless probe products which we consider
normal for a new product, and a 1% price decline on base gamma detection systems
sold by EES. Gross margins in 2007 and 2006 were also adversely affected by
inventory impairments of $105,000 and $125,000, respectively, related to our
Quantix products.
Results for 2007 also reflect a decrease in research and development
expenditures of $938,000 to $2.9 million from $3.8 million in 2006. The decrease
was primarily due to lower Lymphoseekdevelopment expenses resulting from the
reduction in preclinical testing and drug development costs offset by the costs
associated with our Phase 2 clinical trials. Research and development costs were
further reduced by savings related to curtailing our activities associated with
the blood flow measurement and decreasing activities related to gamma detection
device lines after launching the wireless probes. Consolidated selling, general
and administrative expenses decreased to $2.8 million in 2007 from $3.1 million
in 2006.
Net Sales and Margins. Net sales, comprised primarily of our gamma detection
systems, increased $1.1 million, or 18%, to $7.1 million in 2007 from
$6.1 million in 2006. Gross margins on net sales decreased to 55% of net sales
for 2007 compared to 57% of net sales for 2006.
The increase in net sales was the result of increased gamma detection device
sales of $1.3 million and increased gamma detection device extended service
contract revenue of $68,000, offset by decreases of $253,000 in blood flow
measurement device sales and $9,000 in gamma detection device service-related
revenue. Revenue from our new wireless probes more than offset declines in unit
sales and pricing on our control units and corded probes. The price at which we
sell our gamma detection products to EES is based on a percentage of the global
average selling price received by EES on sales of Neoprobe products to end
customers, subject to a minimum floor price. The base system price at which we
sold neo2000 systems to EES decreased approximately 1% during 2007 compared to
2006.
The decrease in gross margins on net product sales was primarily due to a
combination of factors including lower margins on sales of wireless probe
demonstration units during 2007, higher than expected production costs on our
initial production runs of wireless probes, increased estimated warranty costs
following the commercial launch of our new wireless probe products, and a minor
price decline on control units and corded probes sold by EES. Gross margins in
2007 and 2006 were also adversely affected by inventory impairments of $105,000
and $125,000, respectively, related to our Quantix products.
Research and Development Expenses. Research and development expenses decreased
$938,000 or 25% to $2.9 million during 2007 from $3.8 million in 2006. Research
and development expenses in 2007 included approximately $1.8 million in drug and
therapy product development costs, $680,000 in gamma detection device
development costs and $359,000 in product design activities for the
Quantixproducts. This compares to expenses of $2.1 million, $952,000 and
$708,000 in these segment categories during 2006. The changes in each category
were primarily due to (i) lower costs related to the Phase 2 Lymphoseek clinical
activities in 2007 than the non-clinical expenses and trial preparation costs
incurred in 2006, (ii) decreased product development activities related to our
wireless gamma detection probes, and (iii) decreased product refinement
activities related to the Quantix/OR, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $239,000 or 8% to $2.8 million during 2007
from $3.1 million in 2006. The net difference was due primarily to decreases in
marketing, facilities expenses, insurance, and other personnel-related expenses
that were partially offset by increases in compensation and professional
services.
Other Income (Expenses). Other expenses, net increased $2.0 million to
$3.3 million during 2007 from $1.3 million in 2006. Interest expense related to
the convertible debt agreements we completed in December 2004, July 2007 and
December 2007 increased $788,000 to $2.3 million during 2007 from $1.5 million
in 2006. Of this interest expense, $1.4 million and $809,000 in 2007 and 2006,
respectively, was non-cash in nature related to the amortization of debt
issuance costs and discounts resulting from the warrants and beneficial
conversion features of the convertible debt. The increase in non-cash interest
was primarily due to the impact of the acceleration of principal repayments on
the effective interest method of calculating the discount amortization which the
company adjusted during the third quarter of 2007. During the fourth quarter of
2007, we also recorded debt extinguishment charges of $860,000 related to
modification of the terms of a convertible debt agreement with our CEO. In
addition, we recorded a $248,000 increase in derivative liabilities resulting
from the accounting treatment for the convertible note agreement we executed in
December 2007 and the related warrants to purchase our common stock, which
contained certain provisions that resulted in their being treated as derivative
instruments. We recorded a decrease of $154,000 in interest income related to
lower balances of cash and investments during 2007 compared to 2006.
Liquidity and Capital Resources
Cash balances decreased to $1.5 million at December 31, 2007 from $2.5 million
at December 31, 2006. The net decrease primarily resulted from cash used to
repay and service our outstanding debt, and to fund our operations, mainly for
research and development activities, but was substantially offset by
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