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| OSIR > SEC Filings for OSIR > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Risk Factors" included as Item 1A in this Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements included in this Annual Report on Form 10-K under Item 1 at the beginning of this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements n light of future developments.
The following is a discussion and analysis of our financial condition, results of operations, liquidity and capital resources for each of the three years in the period ended December 31, 2008 and significant factors that could affect our prospective financial condition and results of operations. You should read this discussion together with our financial statements and notes included in "Item 8. Financial Statements and Supplementary Data."
2008 Highlights
We believe cellular therapies have certain advantages over traditional medical approaches. For example, cell therapies can be targeted, avoiding many of the safety complications arising from systemic treatments. Cell therapies can also be responsive to their environment, turning on or off certain effects as conditions in the surrounding tissue change. Cell therapies can also be multifaceted. For example, the cells in Prochymal, our leading biologic drug candidate, have demonstrated the ability to not only down regulate inflammation, but also repair the damage caused by the inflammation.
We believe the combination of these unique properties will allow us to solve many of the more challenging questions facing medicine today. We have established ourselves as the leader in the emerging field of cell therapy. We are an industry leader in the field, having developed the only commercially available stem cell product on the market. We are continuing to make advances, with eight active clinical trials. Four of the trials have progressed to Phase III, each of which has been granted fast track status by the FDA.
º •
º Formed major strategic alliance with Genzyme Corporation pursuant to a
collaboration agreement worth up to $1.4 billion, for the development
and commercialization of Prochymal and Chondrogen in countries outside
the United States and Canada;
º •
º Utilized the first $75.0 million of the non-contingent, non-refundable
up front payment received under our collaboration agreement with
Genzyme to extinguish all of our outstanding debt and now report cash,
short-term investments and receivables of $123.5 million as of
December 31, 2008. We are scheduled to receive an additional
$55.0 million non-contingent payment under this agreement on July 1,
2009;
º •
º Sold our Osteocel business in a transaction worth up to $85.0 million.
To date, we have earned and received the $35.0 million of initial
purchase price and the first $5.0 million milestone under this
transaction;
º •
º Awarded a contract by the United States Department of Defense to
develop and stockpile Prochymal for acute radiation syndrome (ARS),
fully valued at up to $224.7 million;
º •
º Completed enrollment in first worldwide Phase III stem cell clinical
trial for the treatment of steroid-refractory acute Graft versus Host
Disease (GvHD);
º •
º Reached agreement with the FDA regarding the timing and content of the
submission of the first marketing application for a stem cell drug;
º •
º Received approval to treat pediatric patients suffering from GvHD with
Prochymal under the FDA's Expanded Access Program;
º •
º Received FDA clearance to broaden Prochymal Expanded Access Program to
adults with GvHD;
º •
º Received approval to initiate Prochymal Expanded Access Program in
Canada for pediatric patients suffering from life-threatening GvHD;
º •
º Completed enrollment of Phase II clinical trial evaluating Prochymal
in patients with chronic obstructive pulmonary disease (COPD); and
º •
º Reported positive two-year data from the Phase I clinical trial
evaluating Prochymal in heart attack patients.
Business Overview
We are a leading stem cell therapeutic company focused on developing and
marketing products to treat medical conditions in the inflammatory, orthopedic
and cardiovascular areas. Our biologic drug candidates utilize mesenchymal stem
cells, or MSCs. We launched the only commercially available stem cell product in
2005. We currently have eight clinical trials ongoing, including four Phase III
clinical trials. We are conducting Phase III trials for Prochymal, our lead
biologic drug candidate, for (1) the treatment of steroid refractory acute GvHD,
(2) first line treatment of acute GvHD, (3) biologics refractory Crohn's
disease, and (4) acute radiation syndrome, which is under the Animal Rule.
We have received Fast Track Status from the FDA for each of these pivotal Phase III trials for Prochymal. We have initiated Phase II clinical trials for Prochymal for both type 1 diabetes and acute myocardial infarction.
We are a fully integrated company, having developed capabilities in research, development, manufacturing, marketing and distribution of stem cell products. We have developed an extensive intellectual property portfolio to protect our technology in the United States and a number of foreign countries, including 48 U.S. and 284 foreign patents owned or licensed. We believe that our biologic drug candidates have advantages over other stem cell therapeutics in development for at least the following reasons:
º •
º Stem Cell Source. Our stem cells are obtained from adult bone marrow,
a readily available source. The cells are drawn from the hips of
volunteer donors between the ages of 18 and 30 years, using a simple
needle and syringe aspiration. Because the cells are obtained from
consenting adult donors, we are able to largely avoid the ethical
controversy surrounding embryonic and fetal stem cell research.
º •
º Ability to Mass Produce. Through our proprietary manufacturing
methods, we can grow mesenchymal stem cells ("MSC") in a controlled
fashion to produce up to 10,000 treatments of our biologic drug
candidates from a single bone marrow donation. Our ability to produce
a large quantity of treatments from one donation provides us with
manufacturing efficiencies and product consistency that are essential
to commercialization.
º •
º Universal Compatibility. Many stem cell therapies under development
can elicit a rejection response in the recipient and therefore require
donor-to-recipient matching or potentially harmful immunosuppression.
This greatly reduces manufacturing efficiencies and creates a risk of
mismatch which can result in an acute inflammatory response and,
potentially, in death.
Based on our clinical experience, we believe that our biologic drug candidates are not rejected by the patient's immune system and so, like type O negative blood, do not require donor-to-recipient matching. This universal compatibility allows us to produce a standardized product available to all patients in almost any medical setting.
º •
º Treatment on Demand. Our biologic drug candidates can be stored frozen
at end-user medical facilities until they are needed. We anticipate
that medical facilities will be able to prescribe and dispense these
products in much the same way as conventional drugs. In contrast,
other stem cell technologies under development require weeks to
prepare after a patient's need is identified. This is a key feature of
our technology, as many patients in the critical care setting require
prompt treatment.
On October 31, 2008, we entered into a Collaboration Agreement with Genzyme Corporation for the global development and commercialization of Prochymal and Chondrogen. Under the terms of the Collaboration Agreement, we retain the right to commercialize Prochymal and Chondrogen in the United States and Canada and Genzyme is granted the exclusive right and license to commercialize the products in all other countries (except with respect to GvHD in Japan where Prochymal has previously been licensed to another pharmaceutical company).
In July 2007, we separately partnered with Genzyme for the development of effective countermeasures to nuclear terrorism and other radiological emergencies. In January 2008, we were awarded a contract from the U.S. Department of Defense, pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from acute radiation exposure. Additionally, we have partnered with the JDRF for the development of Prochymal as a treatment for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus.
In April 2008, we committed to a plan to sell our assets related to Osteocel, a product that we have produced and marketed since July 2005, for regenerating bone in orthopedic indications. On May 8, 2008, we entered into an agreement to sell our entire Osteocel and Osteocel XO product line to NuVasive, Inc. The agreement provides for the sale to be effected at two closings-a "technology assets closing," at which technology and certain other business assets are transferred, and a "manufacturing assets closing," at which manufacturing assets and facilities are transferred. The technology assets closing, occurred on July 24, 2008, at which time we received an initial payment of $35.0 million and entered into a Manufacturing Agreement under which we will continue to manufacture Osteocel for up to eighteen months after the technology assets closing, and sell 100% of the product to NuVasive at specified prices. NuVasive has certain minimum purchase order obligations under the Manufacturing Agreement. The Asset Purchase Agreement provides that the manufacturing assets closing is to occur eighteen months after the technology assets closing, or upon earlier termination of the Manufacturing Agreement. As a result of these transactions, all of the activities related to our Osteocel product line have been reported as "discontinued operations" in the accompanying financial statements.
Financial Operations Overview
Revenue
In 2008, we entered into a Collaboration Agreement with Genzyme for the development and commercialization of Prochymal and Chondrogen that provides for non-contingent, non-refundable up front payments of $130.0 million and contingent milestone payments. This Collaboration Agreement has multiple deliverables, and consistent with our accounting policy for such transactions, we are amortizing these amounts into revenue on a straight-line basis over the estimated completion period of the deliverables, which extend through the first quarter of 2012. We recognized $6.7 million of revenue in 2008 related to this agreement. Contingent milestone payments earned and for which we have no
continuing performance obligations, will be recognized as revenue upon achievement of the related milestone, while milestone payments for which we have a continuing performance obligation will be deferred when received and amortized to revenue over the term of the related performance obligations.
In 2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies. In the first quarter of 2008, we were awarded a contract from the United States Department of Defense ("DoD") pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from acute radiation exposure. Under the terms of the contract, the DoD will provide funding to us, and if we are successful in obtaining FDA approval for acute radiation syndrome, the contract provides for the additional purchase of up to 20,000 doses of Prochymal, at $10,000 per dose. We recognized $2.5 million in revenue under the terms of this contract in 2008.
In prior years, we have entered into strategic agreements with other companies for the development and commercialization of select stem cell biologic drug candidates for specific indications and geographic markets. In 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation ("JDRF") to conduct a Phase II clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million of contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement are amortized into revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they are earned. We received $2.0 million in milestone payments from JDRF in 2008 and recognized $0.6 million in revenue during 2008 under this agreement.
In 2003, we entered into an agreement with a foreign pharmaceutical company granting it exclusive rights to Prochymal for the treatment of GvHD in Japan. We recognized $0.5 million of revenue during 2007 related to this agreement.
Also in 2003 we entered into an agreement with a major pharmaceutical company relating to the development of our cardiac biologic drug candidate, and we received a $5.0 million fee for licensing the use of our technology. This agreement was terminated in 2007 and as a result we regained the worldwide rights to Prochymal for cardiac indications. We recognized $1.4 million in license fee revenue in 2007 and $1.0 million in 2006 related to this agreement.
Research and Development Costs
Our research and development costs consist of expenses incurred in identifying, developing and testing biologic drug candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers for independent monitoring and analysis of our clinical trials, costs of contract research and manufacturing, costs of facilities, and the costs of manufacturing clinical batches of biologic drug candidates, quality control supplies and material to expand biologic drug candidates.
Consistent with our focus on the development of biologic drug candidates with potential uses in multiple indications, many of our costs are not attributable to a specifically identified product. We use our employee and infrastructure resources across several projects. Accordingly, we do not account for internal research and development costs on a project-by-project basis. From inception through December 31, 2008, we incurred aggregate research and development costs of approximately $304 million.
We expect our research and development expenses to continue to increase in the future, as we expand our clinical trial activity for our existing biologic drug candidates as they advance through the development cycle and as we invest in additional product opportunities and research programs. Clinical
trials and preclinical studies are time-consuming and expensive. Our expenditures on current and future preclinical and clinical development programs are subject to many uncertainties. We test our products in several preclinical studies, and we then conduct clinical trials for those biologic drug candidates that we determine to be the most promising. As we obtain results from clinical trials, we may elect to discontinue or delay trials for some biologic drug candidates in order to focus our resources on more promising biologic drug candidates. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, size of trial and intended use of a biologic drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:
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º the number of patients who participate in the trials;
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º the number of sites included in the trials;
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º the length of time required to enroll trial participants;
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º the duration of patient treatment and follow-up;
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º the costs of producing supplies of the biologic drug candidates needed
for clinical trials and regulatory submissions;
º •
º the efficacy and safety profile of the biologic drug candidate; and
º •
º the costs and timing of, and the ability to secure, regulatory
approvals.
As a result of these uncertainties, we are unable to determine with any significant degree of certainty the duration and completion costs of our research and development projects or when and to what extent we will generate revenues from the commercialization and sale of any of our biologic drug candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of the costs associated with our general management, including salaries, allocations of facilities and related costs, and professional fees such as legal and accounting expenses. We have increased our general and administrative expense for legal and accounting compliance costs, investor relations and other activities associated with operating as a publicly traded company and strengthened our administrative capabilities as we approach the commercial launch of Prochymal. Continued increases will also likely result from the hiring of additional operational, financial, accounting, facilities engineering and information systems personnel.
Interest Expense, Net
Interest income consists of interest earned on our cash and investments available for sale. Interest expense consists of interest incurred on capital leases and other debt financings. We pay interest on our promissory notes, capital leases and convertible long-term debt. We do not expect to incur material interest expense in the future as we have extinguished all of our outstanding debt as of December 31, 2008, and had invested the excess in investments available for sale.
Income Taxes
We have not recognized any deferred tax assets or liabilities in our financial statements since we cannot assure their future realization. Because realization of deferred tax assets is dependent upon future earnings, a full valuation allowance has been recorded on the net deferred tax assets, which relate primarily to net operating loss and research and development carry-forwards. In the event that we become profitable within the next several years, we have net deferred tax assets (before a 100% valuation allowance) of approximately $105.3 million that may be utilized prior to us having to
recognize any income tax expense or make payments to the taxing authorities. Utilization of our net operating loss carry-forwards in any one year may be limited under IRC Section 382, and we could be subject to the alternative minimum tax, thereby potentially diminishing the value to us of this tax asset.
Critical Accounting Policies
General
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. 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, including those related to revenue recognition, inventory valuation, deferred tax assets, share-based compensation, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. These results form the basis for making judgments about the carrying value 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 that the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We generate revenues from collaborative agreements, research licenses, and a government contract. Our revenue recognition policies are in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.
Revenues from collaboration agreements are evaluated under Emerging Issues Task Force ("EITF") Issue No. 07-01, Draft Abstract, Accounting for Collaboration Agreements. Management evaluates revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting as defined in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. To recognize a delivered item in a multiple element arrangement, EITF Issue No. 00-21 requires that the delivered items have value to the customer on a stand alone basis, that there is objective and reliable evidence of fair value of the undelivered items and that delivery or performance is probable and within our control for any delivered items that have a right of return. The determination whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgments.
Revenues from research licenses and government contracts are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performed are designated as deferred revenue. Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk, performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as it is earned and received.
In October 2008, we entered into a Collaboration Agreement with Genzyme Corporation for the development and commercialization of Prochymal and Chondrogen. Under the Agreement, Genzyme is obligated to pay to us non-contingent, non-refundable cash payments totaling $130.0 million, with $75.0 million paid during November 2008 and $55.0 million scheduled to be paid on July 1, 2009. The Agreement provides Genzyme with certain rights to intellectual property developed by us, and requires
that we continue to perform certain development work related to the subject products. Management has evaluated the deliverables related to these payments under EITF 00-21, and concluded that the various deliverables represent a single unit of accounting. Accordingly, we have deferred the recognition of revenue related to the upfront payments, and are amortizing these amounts to revenue on a straight-line basis over the estimated delivery period of the required development services, which extend through the first quarter of 2012. The Agreement also provides for contingent milestone payments of up to $1.25 billion in the aggregate, as well as royalties to be paid to us on any sales by Genzyme. Consistent with our revenue recognition policies, we will recognize revenue from these contingent milestone payments for which we have no continuing performance obligations upon achievement of the related milestone. For any milestone payments for which we have a continuing performance obligation, the milestone payments will be deferred and recognized as revenue over the term of the related performance obligations.
In 2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies. In January 2008, we were awarded a contract from the United States Department of Defense pursuant to which we, in partnership with Genzyme, are seeking to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from acute radiation exposure. We began recognizing revenue under this contract during the first quarter of 2008. Contract revenue is recognized as the related costs are incurred, in accordance with the terms of the contract.
In October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation ("JDRF") to conduct a Phase II clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million of contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement are amortized to revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they are earned.
In July 2005, we launched our first commercial product, Osteocel. Revenues on Osteocel sales are recognized when legal title to the product has passed to the customer. In April 2008, we committed to a plan to sell the Osteocel product line. Concurrent with the technology assets closing on July 24, 2008, we entered into a Manufacturing Agreement under which we will continue to manufacture Osteocel for up to 18-months and thereafter sell 100% of the product to NuVasive at specified prices. Osteocel operations are accounted for as discontinued operations in the accompanying financial statements, and the prior period financial statements have been restated for comparative purposes.
We have entered into several strategic agreements with other pharmaceutical companies focusing on the development and commercialization of its stem cell drug products. In 2003, we entered into such an agreement with Boston Scientific Corporation pertaining to our cardiac drug development and received a $5 million fee for licensing the use of our technology. We terminated the agreement with Boston Scientific Corporation in 2007 and recognized the remaining unamortized license fee. Also in 2003, we entered into a similar agreement with JCR Pharmaceuticals Co., Ltd. pertaining to our hematologic malignancies drugs for distribution in Japan, and recognize revenue upon the achievement of milestone events specified in the agreement.
We also earn royalties on the sale of human MSCs sold for research purposes and recognize the revenue on these sales as the sales are made.
Accounts Receivable
Accounts receivable are reported at their net realizable value. As of December 31, 2008 and 2007, there was no allowance for doubtful accounts related . . .
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