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| AVGN > SEC Filings for AVGN > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
The following discussion may be understood more fully by reference to the financial statements, notes to the financial statements, and management's discussion and analysis of financial conditions and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 16, 2009.
This Quarterly Report on Form 10-Q contains forward-looking statements, which include, but are not limited to, statements of our expectations regarding our future financial results, and statements about future events and results regarding our drug development programs, clinical trials, sources of revenue, receipt of regulatory approvals, our expectations related to savings in facilities overhead attributable to scheduled lease expirations and subleasing of portions of our operating facilities, our expectations regarding future levels of research and development expenses and general and administrative expenses, our expectations related to our need to obtain additional funding to support the anticipated future needs of our research and development activities, and our estimates of the fair value of our securities portfolio at assumed market interest rates. In some cases, you can identify forward-looking statements by such terms as "may," "might," "can," "will," "should," "could," "would," "expect," "plan," "seek," "anticipate," "believe," "estimate," "project," "intend," "predict," "potential," "if" and similar expressions which imply that the statements relate to future events. These forward-looking statements are based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss the risks we believe are most important in greater detail under the heading "Risk Relating to our Business" below. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. We undertake no obligation to update any of the forward- looking statements contained in this report to reflect any future events or developments.
Overview
Avigen is a biopharmaceutical company that has focused on identifying and developing differentiated products to treat patients with serious disorders. Our strategy was to conceive or acquire and develop opportunities that represent a positive return to Avigen's stockholders. Our current potential product is AV411, a glial attenuator, for neuropathic pain and opioid withdrawal and methamphetamine addiction.
Prior to October 2008, we had been developing a product candidate, AV650, for the treatment of spasticity associated with multiple sclerosis. In that month, we announced that top-line data from a Phase 2b clinical trial of AV650 did not achieve statistical significance on its primary endpoint or most secondary endpoints. There were no safety issues. We believe that the trial was adequately powered and all statistical parameters were in line with expectations. Based on these results, we terminated the AV650 program and initiated a restructuring to immediately reduce our expenses and preserve our remaining financial resources in order to evaluate other strategic opportunities.
The restructuring included a significant staff reduction and closure of portions of our leased facilities in November 2008.
In December 2008, we completed a sale of our early-stage AV513 program for $7.2 million to Baxter Healthcare Corporation. We also expanded our efforts to monetize our AV411 program for neuropathic pain and addiction. While the ongoing NIDA-funded Phase 1b/2a trials for AV411 in opioid withdrawal and methamphetamine relapse will continue in 2009, we do not intend to initiate Phase 2 clinical trials for neuropathic pain or other indications.
In June 2009, we announced that we had reached an understanding with MediciNova, Inc. on key terms for a proposed acquisition of Avigen by MediciNova. As of August 7, 2009, we continue to be in negotiations with MediciNova.
We are a development stage company and have primarily supported the financial needs of our research and development activities since our inception through public offerings and private placements of our equity securities. We have not received any revenue from the commercial sale of our products in development, and we do not anticipate generating revenue from the commercialization of AV411 in the foreseeable future. Currently we have suspended development activities for AV411 for neuropathic pain but have continued our ongoing clinical development for AV411 for opioid addition and withdrawal which is being primarily funded by third-parties. We are developing a plan of dissolution that could include a sale of our AV411 development program or a sale of the entire company.
Critical Accounting Policies and Significant Judgments and Estimates
Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, valuation of investments in financial instruments, impairment of property and equipment, asset retirement obligations, recognition of research and development expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which 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 the accounting policies as disclosed in our Form 10-K are critical to the process of making significant judgments and estimates in the preparation of our financial statements. These policies have not changed from those presented in our Annual Report on Form 10-K for the period ended December 31, 2008, filed with the Securities and Exchange Commission on March 16, 2009.
Research and development expenses
Historically, we maintained a small staff level and subleased portions of our leased operating facilities to reduce our overhead costs. In November 2008, we completed a significant restructuring plan to further reduce infrastructure expenses including a reduction of our staff level by approximately 70 percent, and initiated a wind down of the remaining research and development activities associated with our potential products. This was intended to preserve our financial resources, minimize our exposure to fixed costs for staff and facilities and increase our control over the strategic timing and use of all of our resources. As a result of the staff reduction in March 2009, we only have one employee associated with overseeing research and development activities of AV411 and related compounds.
Prior to the restructuring in November 2008, our research and development expenses can be divided into two primary functions: (1) costs to support research and preclinical development, and (2) costs to support preparation for and implementation of human clinical trials. Research and preclinical development costs include activities associated with general research and exploration, animal studies, non-clinical studies to support the design of human clinical trials, and in-house and independent third-party validation testing of potential acquisition or in-license drug candidates. Clinical development costs include activities associated with preparing for regulatory approvals, maintaining regulated and controlled processes, purchasing manufactured drug substances for use in human clinical trials, and supporting subject enrollment and subject administration within clinical trials.
The costs associated with these two primary functions of our research and development activities approximate the following (in thousands, except percentages):
Percentage Percentage
Three Months Ended decrease Six Months Ended decrease
June 30, over prior June 30, over prior
2009 2008 year 2009 2008 year
Research and preclinical
development $ 292 $ 2,677 (89%) $ 1,402 $ 5,699 (75%)
Clinical development 270 3,224 (92%) 1,938 6,464 (70%)
Total research and
development expenses $ 562 $ 5,901 (90%) $ 3,340 $ 12,163 (73%)
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Because a significant percentage of our research and development resources contributed to multiple development programs, the majority of our costs were not directly attributed to individual development programs. We based decisions regarding our project management and resource allocation primarily on interpretations of scientific data, rather than cost allocations. Our estimates of costs between research and preclinical development and clinical development activities were primarily based on staffing roles within our research and development departments. As such, costs allocated to specific projects may not necessarily reflect the actual costs of those efforts and, therefore, we do not generally evaluate actual costs-incurred information on a project-by-project basis. In addition, we are unable to estimate the future costs to complete any specific projects.
Percentage Percentage
Three Months Ended decrease Six Months Ended decrease
June 30, over prior June 30, over prior
2009 2008 year 2009 2008 year
(In thousands, except percentages)
Personnel-related $ 103 $ 540 (81%) $ 328 $ 1,126 (71%)
Non-recurring severance - - - 69 - n/a
Share-based compensation 51 141 (64%) 131 284 (54%)
External research and
development 138 1,202 (89%) 521 2,344 (78%)
Depreciation and amortization - 277 (100%) - 623 (100%)
Other expenses including facilities
overhead - 517 (100%) 353 1,322 (73%)
Total research and preclinical
development expenses $ 292 $ 2,677 (89%) $ 1,402 $ 5,699 (75%)
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The decrease in our total research and preclinical development expenses for the three-month period ended June 30, 2009, compared to the same period in 2008, of $2.4 million, was primarily due to changes in costs for the following:
º lower expenditures for external research and development services from third-party service providers of $1.1 million, primarily reflecting the wind down of external animal studies and other research and development activities for our drug development programs,
º lower other expenses including facilities overhead allocations of $517,000, reflecting the wind down of the use of internal research and development facilities with the offset of costs from expanded sublease recoveries or a reallocation of expenses to general and administrative expenses,
º lower personnel-related expenses of $437,000, due to lower staff levels, as a result of a significant staff reduction in November 2008, and
º lower depreciation and amortization expenses of $277,0000, reflecting the end of the depreciable lives for equipment and leasehold improvements associated with our leased facility that expired in May 2008, and the impairment charges for leasehold improvements and equipment that we recognized in December 2008.
The decrease in our total research and preclinical development expenses for the six-month period ended June 30, 2009, compared to the same period in 2008, of $4.3 million, was primarily due to changes in costs for the following:
º lower expenditures for external research and development services from third-party service providers of $1.8 million, primarily reflecting the wind down of external animal studies and other research and development activities for our drug development programs,
º lower other expenses including facilities overhead allocations of $969,000, reflecting the wind down of the use of internal research and development facilities with the offset of costs from expanded sublease recoveries or a reallocation of expenses to general and administrative expenses,
º lower personnel-related expenses of $798,000, due to lower staff levels, as a result of a significant staff reduction in November 2008, and
º lower depreciation and amortization expenses of $623,000, reflecting the end of the depreciable lives for equipment and leasehold improvements associated with our leased facility that expired in May 2008, and the impairment charges for leasehold improvements and equipment that we recognized in December 2008.
Percentage
Percentage increase
Three Months Ended decrease Six Months Ended (decrease)
June 30, over prior June 30, over prior
2009 2008 Year 2009 2008 Year
(In thousands, except percentages)
Personnel-related $ 14 $ 447 (97%) $ 217 $ 937 (77%)
Non-recurring severance - - - 443 - n/a
Share-based compensation 4 35 (89%) 72 44 64%
External clinical development 250 2,637 (91%) 1,164 5,266 (78%)
Other expenses including facilities
overhead 2 105 (98%) 42 217 (81%)
Total clinical development
expenses $ 270 $ 3,224 (92%) $ 1,938 $ 6,464 (70%)
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The decrease in our total clinical development expenses for the three-month period ended June 30, 2009, compared to the same period in 2008, of $3.0 million, was primarily due to changes in costs for the following:
º lower expenditures for external clinical development services from third-party suppliers of $2.4 million, primarily reflecting the termination and wind down of most of our clinical trials and other clinical drug development activities, and
º lower personnel-related expenses of $433,000, due to lower staff levels, as a result of a significant staff reduction in November 2008.
The decrease in our total clinical development expenses for the six-month period ended June 30, 2009, compared to the same period in 2008, of $4.5 million, was primarily due to changes in costs for the following:
º lower expenditures for external clinical development services from third-party suppliers of $4.1 million, primarily reflecting the termination and wind down of most of our clinical trials and other clinical drug development activities, and
º lower personnel-related expenses of $720,000, due to lower staff levels, as a result of a significant staff reduction in November 2008,
partially offset by,
º non-recurring severance expenses of $443,000 recorded in connection with staff reductions in March 2009.
We expect our total research and development spending in future periods to decrease significantly while we pursue efforts to monetize our AV411 program and develop a plan of dissolution.
Percentage Percentage
increase increase
Three Months Ended (decrease) Six Months Ended (decrease)
June 30, over prior June 30, over prior
2009 2008 Year 2009 2008 Year
(In thousands, except percentages)
Personnel-related $ 152 $ 689 (78%) $ 617 $ 1,564 (61%)
Non-recurring severance - - - 1,631 - n/a
Share-based compensation 144 444 (68%) 511 831 (39%)
Legal and professional fees 350 412 (15%) 2,099 683 207%
Facilities, depreciation and
other allocated expenses 790 716 10% 1,556 1,472 6%
Total general and
administrative expenses $ 1,436 $ 2,261 (37%) $ 6,414 $ 4,550 41%
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The decrease in our total general and administrative expenses for the three-month period ended June 30, 2009, compared to the same period in 2008, of $825,000, was primarily due to changes in costs for the following:
º lower personnel-related expenses of $537,000, due to lower staff levels, as a result of significant staff reductions in November 2008 and March 2009, and
º lower non-cash expenses of $300,000 for recognition of share-based compensation in compliance with SFAS 123(R).
The increase in our total general and administrative expenses for the six-month period ended June 30, 2009, compared to the same period in 2008, of $1.9 million, was primarily due to changes in costs for the following:
º non-recurring severance expenses of $1.6 million recorded in connection with staff reductions in March 2009, and
º higher legal and professional fees of $1.4 million, primarily due to higher legal and advisory expenses associated with our response to a proxy fight and unsolicited tender offer and our review of strategic merger and acquisition opportunities in the first quarter of 2009,
partially offset by,
º lower personnel-related expenses of $947,000, due to lower staff levels, as a result of significant staff reductions in November 2008 and March 2009, and
º lower non-cash expenses of $320,000 for recognition of share-based compensation in compliance with SFAS 123(R).
Total general and administrative expenses for the six months ended June 30, 2009 exceeded managements original expectations due to the significant legal and other costs incurred in connection with responding to the proxy fight and hostile tender offer during the first quarter of 2009. We expect to incur lower legal and professional fees for the remainder of the fiscal year while we develop and execute a plan of dissolution or sale of the company.
Percentage Percentage
Three Months Ended decrease Six Months Ended decrease
June 30, over prior June 30, over prior
2009 2008 Year 2009 2008 year
(In thousands, except percentages)
Impairment loss related to
long-lived assets $ 0 $ 0 n/a $ 0 $ (274) n/a
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The credit recorded to impairment loss related to long-lived assets for the six-month period ended June 30, 2008, reflects the gain of $274,000 recorded in connection with the settlement of our asset retirement obligation related to our building lease for an amount below the carrying value of the accrued liability.
Interest income
Percentage Percentage
Three Months Ended decrease Six Months Ended decrease
June 30, over prior June 30, over prior
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Interest income $ 326 $ 764 (57%) $ 799 $ 1,695 (53%)
Almost all of our interest income is generated from our investments in high-grade marketable securities of government and corporate debt. The decrease in interest for the three and six months ended June 30, 2009, as compared to the same periods in 2008, were primarily due to the decrease in our outstanding interest-bearing cash and securities balances, due to the use of such resources to fund our on-going operations and repay $7.0 million of bank borrowings in March 2009, as well as a general decline in market interest rates.
Sublease income
Percentage Percentage
Three Months Ended decrease Six Months Ended decrease
June 30, over prior June 30, over prior
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Sublease income $ 224 $ 118 90% $ 362 $ 173 109%
During the fist quarter of 2009, we entered into an additional sublease agreement that increased the total amount of our leased facilities under sublease agreements to 30,950 square feet, or approximately 46%. Remaining contractual sublease income of $1.3 million is expected to be recognized ratably over the remaining terms of the sublease agreements, which expire in November 2010.
See Note 1, "Unaudited Interim Financial Statements - Recent Accounting Pronouncements," in the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on us, which discussion is incorporated by reference here.
Deferred Income Tax Assets
In accordance with FAS 109, Accounting for Income Taxes, we have calculated a
deferred tax asset based on the potential future tax benefit we may be able to
realize in future periods as a result of the significant tax losses experienced
since our inception. The value of such deferred tax asset must be calculated
using the tax rates expected to apply to the taxable income in the years in
which such income occurs. Since we have no history of earnings, and cannot
reliably predict when we might generate taxable income, if at all, we have
recorded a valuation allowance for the full amount of our deferred tax assets.
Federal and state laws limit the use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a company. In 2008 and 2007, we conducted an Internal Revenue Code (IRC)
Section 382 study and have reported our deferred tax assets related to net
operating loss and research credit carryforwards after recognizing change of
control limitations in 2008 and 2006. Utilization of our net operating loss and
research and development credit carryforwards may still be subject to
substantial annual limitations due to ownership change limitations after
December 31, 2008.
Liquidity and Capital Resources
Since our inception in 1992, cash expenditures have significantly exceeded our revenue. We have funded our operations primarily through public offerings . . .
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