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| ORXE > SEC Filings for ORXE > Form 10-Q on 31-Oct-2008 | All Recent SEC Filings |
31-Oct-2008
Quarterly Report
This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements regarding future events and the future results of Ore Pharmaceuticals Inc. ("Ore Pharmaceuticals") that are based on current expectations, estimates, forecasts and projections about the industries in which Ore Pharmaceuticals operates and the beliefs and assumptions of the management of Ore Pharmaceuticals. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include those discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2007 under the section entitled "Risk Factors" and in our subsequent filings with the United States Securities and Exchange Commission ("SEC"). Ore Pharmaceuticals undertakes no obligation to revise or update publicly any forward-looking statements to reflect any change in management's expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based.
Unless the context otherwise requires, references in this Form 10-Q to "Ore Pharmaceuticals," "DioGenix," the "Company," "we," "us," and "our" refer to Ore Pharmaceuticals Inc. and its formerly wholly owned subsidiary, DioGenix Inc.
Overview
We are a commercial drug development company focused on advancing a pipeline of compounds for uses identified by our proprietary indication seeking program. We currently have three compounds in our development pipeline: romazarit (beginning development for metabolic disorders), tiapamil (beginning development for treatment of diseases of the central nervous system) and GL1001 (in development for inflammatory bowel disease). We are also in the process of obtaining rights to several other compounds under our drug repositioning and development partnership agreements; however, there can be no assurances that we will be able to do so. Our pipeline is unique in that all of the compounds contained therein have been successfully tested for safety in humans. We believe that this gives our compounds a greater chance of success.
Over the past four years, we identified new therapeutic indications for a number of compounds using our indication seeking program, which systematically revealed a compound's biological activity. We believe that these compounds may be introduced into Phase Ib or IIa of human clinical trial testing because they have already been successfully tested for safety in human clinical trials. We are pursuing clinical development of our compounds in parallel with our efforts to establish out-licensing or partnering arrangements to advance those compounds.
In the second quarter of 2008, we realigned our corporate resources to invest in the clinical and business development of compounds in our pipeline. As we wind down our indication seeking program and eliminate certain administrative activities, we expect our workforce will be reduced from 71 employees as of December 31, 2007 to approximately 15 by December 31, 2008. As of September 30, 2008, we had 20 employees.
In June 2008, we filed with the U.S. Food and Drug Administration an Investigational New Drug Application ("IND") for GL1001, our lead drug development candidate, for the treatment of inflammatory bowel disease. In September 2008, we initiated a 14-day multiple ascending dose clinical trial while actively seeking to out-license or partner the further clinical development and commercialization of GL1001.
Previously, we had drug repositioning and development partnership agreements with pharmaceutical companies to find new therapeutic uses for compounds they had assessed as safe in human clinical trials, but for which development had been discontinued. These agreements with Pfizer, Inc., F. Hoffmann-La Roche Ltd, Eli Lilly and Co., NV Organon, Abbott Laboratories, H. Lundbeck, Merck-Serono and Solvay provided us with compounds that we analyzed using our indication seeking program to identify new therapeutic uses. We obtained or are in the process of obtaining most of our pipeline compounds under these agreements pursuant to options to obtain development rights to those compounds that our partners decided not to take back into development. Although we have on-going discussions with these partners as to the development rights for some of these compounds, our obligations to evaluate compounds under these agreements have now been substantially completed. For each compound we obtained from a partner, if we further develop it, alone or with others, we are obligated to pay to the partner from whom we obtained the compound success-based milestone payments and royalties on sales.
In December 2007, we completed the sale of the assets of our Genomics Division (the "Genomics Assets") to Ocimum Biosolutions Ltd. ("Ocimum") for a sales price of $10.0 million, of which $7.0 million was received at closing and the balance is payable pursuant to a $3.0 million non-interest bearing promissory note due 18 months from the date of closing. We agreed to indemnify Ocimum in the event of a breach of our representations and warranties to, and agreements with, Ocimum. Ocimum assumed certain liabilities relating to the Genomics Assets and the lease obligations of our former Genomics laboratory and office facility, subject to our agreement to reimburse Ocimum for 50% of the lease obligations for 2008. In the event of Ocimum's default under the lease, which expires in February 2011, we could be liable for the amounts due under the lease that could total $2.3 million at September 30, 2008 (not including our remaining lease obligations in 2008). At September 30, 2008, Ocimum had on deposit in escrow $0.7 million to partially secure both Ocimum's performance under the lease and payment of the $3.0 million promissory note.
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In September 2008, we sold to Nerveda Inc. our wholly owned subsidiary, DioGenix Inc., focused on molecular diagnostics for a sales price of $1.3 million, of which $0.5 million was received at closing and the balance is payable pursuant to a $0.8 million promissory note bearing interest at 2.38%, secured by the DioGenix assets, with two principal payments of $0.4 million plus interest due on December 31, 2009 and June 30, 2010, which are subject to acceleration in certain events. In addition, we may receive a small royalty on net sales if DioGenix commercializes a diagnostic product or service for multiple sclerosis. We agreed to indemnify each other for the breach by either of any representation, warranty, covenant or obligation made pursuant to the agreement. During the three months ended September 30, 2008, we recorded a gain on the sale of DioGenix Inc. of $0.1 million.
The sale of our Genomics Assets was part of our transformation into a commercial drug development company. We continue to consider other strategic opportunities and paths to enhance shareholder value, including but not limited to, additional sources of funding and new strategic relationships with pharmaceutical companies and other third parties.
On March 14, 2008, we entered into an agreement with a then member of our Board of Directors to purchase 920,426 shares (as adjusted for the reverse stock split) owned directly or indirectly by that Director for $3.3 million (the "Share Purchase"). In addition, we agreed to pay the director $0.1 million for certain fees and expenses. In connection with the Share Purchase, the director resigned from the Company's Board of Directors and surrendered stock options for 6,000 shares (as adjusted for the reverse stock split) of our Common Stock.
We have incurred net losses in each year since our inception, including losses of $34.7 million in 2007, $54.7 million in 2006 and $48.3 million in 2005. At September 30, 2008, we had an accumulated deficit of $369.4 million. Our losses have resulted principally from costs incurred from the businesses we sold and the development of our commercial drug development business. We expect to incur additional losses in the future.
Results of Continuing Operations
With the completion of the sale of our Genomics Assets in December 2007, the Genomics Division has been classified as a "Discontinued Operation" for historical financial statement purposes. Our remaining continuing operations consist of our commercial drug development business and, to a much lesser extent, our molecular diagnostics business. In addition, certain expenses previously allocated to the operations that were discontinued that we have subsequently determined would not be eliminated as a result of the sale, have been re-allocated to our commercial drug development business for all periods presented. Expenses for our molecular diagnostic business are also included in our operating expenses from continuing operations; however, these expenses are not considered material to Ore Pharmaceuticals. There was no revenue from our molecular diagnostics business.
Three Months Ended September 30, 2008 and 2007
Revenue. Revenue from continuing operations was $0.2 million for the three months ended September 30, 2008 and $0.8 million for the same period in 2007. The $0.2 million in 2008 was due to the achievement of a milestone under a drug repositioning and development partnership agreement; the $0.8 million in 2007 was primarily due to the licensing agreement with H. Lundbeck for certain technology unrelated to our core commercial drug development business. We expect future revenue to be derived primarily from the out-licensing or partnering of our lead drug candidate GL1001 (that would occur no sooner than 2010) and of other compounds in our pipeline.
Research and Development Expense. Research and development expenses, which now consist primarily of costs associated with the further development of our lead drug development candidate, GL1001, decreased to $2.3 million for the three months ended September 30, 2008 from $2.7 million for the same period in 2007. The decrease is primarily due to lower employee-related costs of $0.5 million and third-party costs for projects other than GL1001 of $0.2 million, partially offset by $0.4 million in increased third-party costs for further development of our lead drug development compound, GL1001. For 2008, we expect a slight increase in research and development expenses over 2007, primarily as a result of further development of GL1001.
Selling, General and Administrative Expense. Selling, general and administrative expenses from continuing operations, which consist primarily of sales, marketing, accounting, legal, human resources and other general corporate expenses, increased to $2.6 million for the three months ended September 30, 2008 from $2.5 million for the same period in 2007 as a result of $0.5 million in increased legal and advisory fees associated with our strategic planning, partially offset by lower employee-related expenses. For 2008, we expect selling, general and administrative expenses to be higher primarily due to our continuing strategic planning activities and initiatives.
Net Interest Income. Net interest income decreased to $0.1 million for the three months ended September 30, 2008 from $0.5 million for the same period in 2007, due to the decline in the balance of our cash and cash equivalents and marketable securities available-for-sale and a decrease in our rates of return on investments.
Write-down of Equity Investment. During the three months ended September 30, 2008, we recorded a $3.0 million write-down of the remaining book value of our investment in Xceed Molecular Inc. ("Xceed", formerly MetriGenix Corporation), due to an other-than-temporary decline in its estimated fair value. We do not expect this write-down will result in any future cash expenditures.
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Nine Months Ended September 30, 2008 and 2007
Revenue. Revenue from continuing operations was $2.0 million for the nine months ended September 30, 2008 and $0.9 million for the same period in 2007. The $2.0 million in 2008 was primarily due to $1.5 million from the licensing agreement with H. Lundbeck and $0.4 million from the achievement of milestones under a drug repositioning and development partnership agreement; the $0.9 million in 2007 was primarily due to the licensing agreement with H. Lundbeck.
Research and Development Expense. Research and development expenses increased to $8.5 million for the nine months ended September 30, 2008 from $7.8 million for the same period in 2007. The increase is primarily due to $1.0 million in increased third-party costs for further development of our lead drug development candidate, GL1001.
Selling, General and Administrative Expense. Selling, general and administrative expenses from continuing operations increased to $10.3 million for the nine months ended September 30, 2008 from $8.6 million for the same period in 2007. The increase is largely due to $1.4 million in increased legal and advisory fees associated with the Share Purchase, strategic planning and our reverse split of the Company's shares, $0.4 million of expense related to the Share Purchase and $0.2 million in accelerated lease costs resulting from the Company's relocation of its corporate headquarters. This increase was partially offset by lower employee-related expenses.
Net Interest Income. Net interest income decreased to $0.6 million for the nine months ended September 30, 2008 from $1.6 million for the same period in 2007, due to the decline in the balance of our cash and cash equivalents and marketable securities available-for-sale and a decrease in our rates of return on investments.
Write-down of Equity Investment. During the nine months ended September 30, 2008, we recorded a $3.0 million write-down of the remaining book value of our investment in Xceed, due to an other-than-temporary decline in its estimated fair value.
Liquidity and Capital Resources
From inception through September 30, 2008, we have financed our operations and acquisitions through the issuance and sale of equity securities and payments from customers. As of September 30, 2008, we had approximately $14.2 million in cash, cash equivalents and marketable securities available-for-sale, compared to $32.8 million as of December 31, 2007. Currently, we have no material commitments for capital expenditures.
Net cash from operating activities from continuing operations increased to a negative $16.0 million for the nine months ended September 30, 2008 from a negative $12.7 million for the same period in 2007, primarily due to timing of customer payments and our increased loss from continuing operations for the nine months ended September 30, 2008.
We expect our cash burn (decrease in cash, cash equivalents, and marketable securities available-for-sale) for the fourth quarter of 2008 to be higher than that of the third ($3.6 million), primarily due to amounts associated with the further development, including the initiation of our clinical trial, of our lead drug development candidate, GL1001.
Assuming we realize our objective as to expense control, as to which there can be no assurance, we believe that existing cash, cash equivalents and marketable securities available-for-sale, receipt in June 2009 of $3.0 million relating to the promissory note from Ocimum and receipt of $0.4 million relating to the promissory note from Nerveda will be sufficient to support our operations through December 31, 2009. We expect long-term support of our operations to come from additional out-licensing payments (including up-front payments, milestones and royalties) from our drug development pipeline. These estimates are forward-looking statements that involve risks and uncertainties. Our actual future capital requirements and the adequacy of our available funds will depend on many factors, including those discussed under "Risks Factors" in our Form 10-K for the year ended December 31, 2007 and our subsequent filings with the SEC.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB decided to issue a final Staff Position to allow a one-year deferral of adoption of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB also decided to amend SFAS 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions. We adopted SFAS 157 for financial assets and liabilities on January 1, 2008 and the adoption had no impact on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 Revised, "Business Combinations" ("SFAS 141R"). SFAS 141R revises SFAS 141, "Business Combinations". SFAS 141R requires an acquirer to determine the fair value of the consideration exchanged as of the acquisition date (i.e., the date the acquirer obtains control). Presently, an acquisition is valued as of the date the parties agree upon the terms of the transaction. SFAS 141R also modifies, among other things, the accounting for direct costs associated with an acquisition, contingencies acquired and contingent consideration. We will adopt SFAS 141R for business combinations for which the acquisition date occurs on or after January 1, 2009.
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In December 2007, the FASB ratified EITF No. 07-1, "Accounting for Collaborative Agreements" ("EITF 07-1"). EITF 07-1 provides guidance regarding financial statement presentation and disclosure of collaborative arrangements, as defined therein. EITF 07-1 is effective for us as of January 1, 2009. We are currently evaluating our drug repositioning and development partnership agreements and have not yet determined the effect, if any, the adoption of this statement may have on our financial position, results of operations and cash flows.
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