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| HNAB > SEC Filings for HNAB > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" in Item 1A of Part I of the 2007 Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements .
Overview
We are a biopharmaceutical company focused on acquiring, developing, and commercializing innovative products to strengthen the foundation of cancer care. The Company is committed to creating value by accelerating the development of its product candidates, including entering into strategic partnership agreements and expanding its product candidate pipeline by being an alliance partner of choice to universities, research centers and other biotechnology and pharmaceutical companies.
We currently have rights to the following product candidates in various stages of development:
· Marqibo ® (vincristine sulfate liposomes injection) - Marqibo has been evaluated in 15 clinical trials with over 600 patients, including Phase 2 clinical trials in patients with non-Hodgkin's lymphoma, or NHL, and acute lymphoblastic leukemia, or ALL. Based on the results from these studies, we are conducting a registration-enabling Phase 2 clinical trial, which we refer to as the rALLy study. The study population is adults with Philadelphia chromosome negative ALL in second relapse or those who failed 2 prior lines of therapy. The primary outcome measure is complete remission or CR, or complete remission without full hematologic recovery or CRi. The sample size is 56 evaluable subjects from up to 50 sites. We also plan to conduct a confirmatory, Phase 3 front-line trial of Marqibo in subjects (at least 60 years of age) with newly diagnosed Philadelphia chromosome negative ALL. The primary outcome measure will be event-free survival, death, failure to achieve CR/CRi, and relapse after CR/CRi are the defining events. In addition we are conducting a Phase 2 study to assess the efficacy of Marqibo in patients with metastatic malignant uveal melanoma as determined by Disease Control Rate (CR, partial response or durable stable disease). Secondary objectives are to assess the safety and antitumor activity of Marqibo as determined by response rate, progression free survival and overall survival. The patient population is defined as adults with uveal melanoma and confirmed metastatic disease that is untreated or that has progressed following one prior therapy. We expect to enroll approximately 30 subjects in this clinical trial. Marqibo received a U.S. orphan drug designation in January 2007 as well as a European Commission orphan drug designation in June 2008 for the ALL indication. Marqibo also received a U.S. orphan drug designation in July 2008 for metastatic uveal melanoma. Marqibo received a fast track designation in August 2007 for the treatment of adult ALL from the FDA.
· Alocrest™ (vinorelbine liposomes injection) - In February 2008, we completed enrollment in a Phase 1 study of Alocrest. The trial enrolled 30 adult subjects with confirmed solid tumors refractory to standard therapy or for which no standard therapy was known to exist. The objectives of the Phase 1 clinical trial were: (1) to assess the safety and tolerability of Alocrest; (2) to determine the maximum tolerated dose of Alocrest; (3) to characterize the pharmacokinetic profile of Alocrest; and (4) to explore preliminary efficacy of Alocrest. The study was conducted at the Cancer Therapy and Research Center and South Texas Accelerated Research Therapeutics (START), both located in San Antonio, Texas and at McGill University in Montreal. The majority of study subjects had heavily pretreated disease. Reversible neutropenia, a low white blood cell count, was the dose-limiting toxicity. The results of this study indicated promising anti-cancer activity and expected toxicity, and a 50% disease control rate was achieved across a broad range of doses.
· Brakiva™ (topotecan liposomes injection) - In November 2008, we initiated a Phase 1 dose-escalation clinical trial of Brakiva, which is primarily designed to assess the safety, tolerability and maximum tolerated dose.
· Menadione - We acquired the rights to Menadione in October 2006 pursuant to a license agreement with the Albert Einstein College of Medicine or AECOM. We have finalized an initial formulation of Menadione and completed essential IND-enabling studies. We initiated a Phase 1 clinical trial in cancer patients in April 2008 and another Phase 1 study in healthy volunteers in September 2008.
To date, we have not received regulatory approval and marketing authorization for any drug candidates in any market. However we have received revenues from a sublicense agreement entered into with Par Pharmaceuticals in July 2007 for Zensana. The successful development of our current product candidates is highly uncertain. Product development costs and timelines can vary significantly for each product candidate and are difficult to accurately predict. Various laws and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking these approvals and the subsequent compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially, adversely affect our business. Also, if we are unable to enter into strategic partnerships, we may not be able to develop or we may be forced to slow down development and commercialization of some or all our product candidates.
We will not generate any product commercial sales until we receive approval from the FDA or equivalent foreign regulatory bodies to begin marketing and selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. In addition, as we continue the development of our remaining product pipeline, our research and development expenses will further increase. To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance further research and development will continue increasing. Our successes depend not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of these product candidates or in some instances, enter into strategic partnerships. Our major sources of working capital have been proceeds from various private financings, primarily private sales of our common stock and other equity securities.
Revenues
We do not expect to generate any significant revenue from product sales or royalties in the foreseeable future. We anticipate that any revenues that we may recognize in the near future will be related to upfront, milestone development funding payments received pursuant to strategic license agreements or partnerships and that we may have large fluctuations of revenue recognized from quarter to quarter as a result of the timing and the amount of these payments. We may be unable to control the development of commercialization of these products and may be unable to estimate the timing and amount of revenue to be recognized pursuant to these agreements. Revenue from these agreements and partnerships help us fund our continuing operations. Our revenues may increase in the future if we are able to develop and commercialize our products, license our technology and/or enter into strategic partnerships. If we are unsuccessful, our future revenues may be insignificant compared to our costs, and we may be forced to limit our development of our product candidates.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, manufacturing, legal expenses resulting from intellectual property protection, business development and organizational affairs and other expenses relating to the acquiring, design, development, testing, and enhancement of our product candidates, including milestone payments for licensed technology. We expense our research and development costs as they are incurred.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including accounting and general legal activities.
Critical Accounting Policies and Estimates
The accompanying discussion and analysis of our financial condition and results of operations are based on our condensed unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe there are certain accounting policies that are critical to understanding our condensed unaudited financial statements, as these policies affect the reported amounts of expenses and involve management's judgment regarding significant estimates. We have reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures with our Audit Committee of the Board of Directors. Our critical accounting policies and estimates are described below.
Share Based Compensation
Effective January 1, 2006, we adopted the provisions of SFAS No. 123R requiring that compensation cost relating to all share-based employee payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the fair value of the award using the Black-Scholes-Merton option pricing model, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award).
In applying the modified prospective transition method of SFAS No. 123R, we estimated the fair value of each option award on the date of grant using the Black-Scholes-Merton option-pricing model. As allowed by SFAS No. 123R for companies with a short period of publicly traded stock history, our estimate of expected volatility is based on the average expected volatilities of a sampling of five companies with similar attributes to us, including industry, stage of life cycle, size and financial leverage. As we have so far only awarded "plain vanilla options" as described by the SEC's Staff Accounting Bulletin No. 107 (SAB 107), we used the "simplified method" for determining the expected life of the options granted. Originally, under SAB 107, this method was allowed until December 31, 2007. However, on December 21, 2007, the SEC issued SEC's Staff Accounting Bulletin No. 110 (SAB 110), which will allow a company to continue to use the "simplified method" under certain circumstances, which we will continue to use as we do not have sufficient historical data to estimate the expected term of share based award. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant valuation. SFAS No. 123R does not allow companies to account for option forfeitures as they occur. Instead, estimated option forfeitures must be calculated upfront to reduce the option expense to be recognized over the life of the award and updated upon the receipt of further information as to the amount of options expected to be forfeited. Based on our historical information, we currently estimate that 22% annually of our stock options awarded will be forfeited.
If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share.
The Black-Scholes-Merton option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable, characteristics not present in our option grants and
employee stock purchase plan shares. Existing valuation models, including the
Black-Scholes-Merton and lattice binomial models, may not provide reliable
measures of the fair values of our stock-based compensation. Consequently, there
is a risk that our estimates of the fair values of our stock-based compensation
awards on the grant dates may bear little resemblance to the actual values
realized upon the exercise, expiration, early termination or forfeiture of those
stock-based payments in the future. Certain stock-based payments, such as
employee stock options, may expire worthless or otherwise result in zero
intrinsic value as compared to the fair values originally estimated on the grant
date and reported in our financial statements. Alternatively, value may be
realized from these instruments that are significantly higher than the fair
values originally estimated on the grant date and reported in our financial
statements. There is not currently a market-based mechanism or other practical
application to verify the reliability and accuracy of the estimates stemming
from these valuation models, nor is there a means to compare and adjust the
estimates to actual values.
The guidance in SFAS No. 123R, SAB No. 107 and SAB No. 110 is relatively new.
The application of these principles may be subject to further interpretation and
refinement over time. There are significant differences among valuation models,
and there is a possibility that we will adopt different valuation models in the
future. This may result in a lack of consistency in future periods and
materially affect the fair value estimate of stock-based payments. It may also
result in a lack of comparability with other companies that use different
models, methods and assumptions. See Note 6 of our unaudited financial
statements included elsewhere in this Form 10-Q report for further information
regarding the SFAS No. 123R disclosures.
Warrant Liabilities
On October 30, 2007, we entered into a loan agreement with four investment funds
affiliated with Deerfield Management (collectively, "Deerfield"). Deerfield has
committed funds to assist with the development of our product candidates. Under
the agreement, we may borrow from Deerfield up to an aggregate of $30 million,
of which $20 million may be drawn down by us in as many as four installments
every six months commencing October 30, 2007. As additional consideration for
the loan, we also issued to Deerfield 6-year warrants to initially purchase an
aggregate of 5,225,433 shares of our common stock at an exercise price of $1.31
per share, of which warrants to initially purchase 4,825,433 shares include an
anti-dilution feature. This anti-dilution feature requires that, as we issue
additional shares of our common stock during the term of the warrant, the number
of shares purchasable under this series is automatically increased so that they
always represent 15% of our then outstanding common stock. As a result of
additional issuances of our common stock since October 30, 2007, as of September
30, 2008, these warrants represented the right to purchase an additional 32,486
shares of common stock, or 5,257,919 shares in the aggregate. Further, to the
extent we draw down the funds conditioned upon the achievement of clinical
development milestones relating to the Marqibo and Menadione programs, we will
be required to issue additional warrants to Deerfield to purchase up to an
additional 3.5% of our then outstanding shares of Common Stock, which warrants
will contain the same anti-dilution feature as those issued on October 30, 2007.
Pursuant to the loan agreement, we also entered into a registration rights
agreement, so that Deerfield may sell the shares issuable upon exercise of the
warrants. These financing transactions were recorded in accordance with
Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."
Because the warrants are redeemable in the event of, among other things, a
change in control or if our shares are no longer listed on a national securities
exchange, the fair value of the warrants based on the Black-Scholes-Merton
option pricing model is recorded as a liability. We update our estimate of the
fair value of the warrant liabilities in each reporting period as new
information becomes available and any gains or losses resulting from the changes
in fair value from period to period are included as an increase or decrease of
interest expense.
Licensed In-Process Research and Development Licensed in-process research and development relates primarily to technology, intellectual property and know-how acquired from another entity. We evaluate the stage of development as well as additional time, resources and risks related to development and eventual commercialization of the acquired technology. As we historically have acquired non-FDA approved technologies, the nature of the remaining efforts for completion and commercialization generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other regulatory bodies. The cost in resources, probability of success and length of time to commercialization are extremely difficult to determine. Numerous risks and uncertainties exist with respect to the timely completion of development projects, including clinical trial results, manufacturing process development results and ongoing feedback from regulatory authorities, including obtaining marketing approval. Additionally, there is no guarantee that the acquired technology will ever be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment or the introduction of new competitive products. Due to the risks and uncertainties noted above, we will expense such licensed in-process research and development projects when incurred. However, the cost of acquisition of technology is capitalized if there are alternative future uses in other research and development projects or otherwise based on internal review. All milestone payments will be expensed in the period the milestone is reached.
Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations
Much of our research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers, and adjustments are made accordingly.
Recent Accounting Pronouncements
On September 15, 2006, FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 references fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value in any new circumstances. Originally, SFAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Accordingly, we adopted SFAS No. 157 in the first quarter of fiscal year 2008. In February 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. See Note 7 Fair Value Measurements in the Notes to Unaudited Condensed Financial Statements herein.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" as an amendment to SFAS No. 133. SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring companies to enhance disclosure about how these instruments and activities affect their financial position, performance and cash flows. SFAS 161 also improves the transparency about the location and amounts of derivative instruments in a company's financial statements and how they are accounted for under SFAS 133. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 (the Company's 2009 fiscal year), and interim periods within beginning after that date. The Company is currently evaluating the impact this adoption will have on the Company's financial statements.
On May 5, 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the U.S. We are evaluating the impact, if any, this Standard will have on our financial statements.
In June 2008, the FASB ratified the consensus reached on EITF Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock. EITF Issue No. 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which would qualify as a scope exception under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF Issue No. 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption for an existing instrument is not permitted. The pending adoption of EITF Issue No. 07-05 will have no material impact on our Company's financial statements.
On October 10, 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active ("FSP No. 157-3"), to provide guidance on determining the fair value of financial instruments in inactive markets. FSP No. 157-3 became effective for the Company upon issuance, and had no material impact on the Company's financial position, results of operations or cash flows.
Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Revenue. For the three months ended September 30, 2007, we recognized $1.2 million in revenue compared to zero for the same period in 2008. This revenue consisted entirely of the recognition of the upfront payment received from Par as part of the sublicense agreement for Zensana.
General and administrative expenses. For the three months ended September 30, 2008, general and administrative, or G&A, expense was $1.0 million, as compared to $0.5 million for the three months ended September 30, 2007. The increase of approximately $0.5 million is due to:
· An increase in employee related expenses of $0.7 million; and
· A decrease in professional fees and outside services of $0.2 million.
The primary reason of the increase in employee related expenses of $0.7 million is due to an increase of $0.6 million in employee related share-based compensation expense due to a large credit to expense in 2007 from stock options forfeited by our former chief executive officer when he resigned in September 2007.
For the three months ended September 30, 2008, outside services and professional service fees decreased $0.2 million compared to the three months ended September 30, 2007, mainly due to decreased legal, consulting and accounting fees.
Research and development expense . For the three months ended September 30, 2008, research and development, or R&D, expense was $4.3 million, as compared to $5.7 million for three months ended September 30, 2007. The decrease of $1.4 million is due to:
· A decrease in direct drug development costs, professional fees and outside services of $1.3 million; and
· A decrease in rent, depreciation, insurance and other allocated expenses of $0.1 million.
The decrease of $1.3 million in expenses for the clinical development of our product pipeline includes a decrease of $0.4 million in professional and outside services, and a decrease in direct development costs for our product candidates of $0.9 million. These clinical costs included the physical manufacturing of drug compounds and payments to our contract research organizations. Also, we had a decrease in expenses related to product candidates that are no longer in our pipeline. A summary of the results of operations by drug candidate is as follows:
· Marqibo expenses increased by $0.5 million in the three months ended September 30, 2008, compared to the same period ended in 2007. In mid-2007, we initiated the rALLy study and the clinical development and manufacturing costs for this trial as well as the uveal melanoma trial accounted for the increase in expenses as we prepare to enter the second half of these trials and increase enrollment.
· Alocrest expenses decreased by $0.4 million in the three months ended September 30, 2008, compared to the same period ended in 2007. The majority of the decrease relates to a decrease of $0.5 million in manufacturing costs incurred in 2007 as part of the preparation for the Phase 1 trial for the Alocrest program initiated in 2007 and which completed enrollment in February 2008. Clinical costs increased slightly in the three months ended September 30, 2008 as we continue to process the data from the Phase 1 trial.
· Brakiva expenses decreased by $0.2 million in the three months ended September 30, 2008, compared to the same period ended in 2007. In October 2007, we activated an IND in the US and we were preparing for the initiation of a Phase 1 trial of Brakiva, which commenced in November 2008. Manufacturing costs decreased by $0.1 million. These costs decreased because we have completed most of the manufacturing work for this trial in 2007, prior to the IND activation with additional manufacturing production for clinical trials performed in early 2008. Additionally, pre-clinical costs decreased by $0.1 million the IND filing with the FDAwas completed in 2007.
· Menadione expenses decreased by $0.5 million in the three months ended September 30, 2008, compared to the same period ended in 2007. Menadione pre-clinical work decreased by $1.0 million as all pre-clinical work done before the initiation of in the Phase 1 trial in early 2008. These cost savings were partially off-set by increased clinical trial costs as we currently have two Phase 1 trials on going as of September 30 2008.
· Talvesta expenses decreased by $0.1 million in the three months ended September 30, 2008, compared to the same period ended in 2007. The costs associated with this program decreased after the program was put on . . .
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