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| SPEX > SEC Filings for SPEX > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, and presumes that readers have access to, and will have read, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Form 10-K.
Certain statements in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are identified by the use of forward-looking words or phrases such as "believes," "expects," is or are "expected," "anticipates," "anticipated," "should" and words of similar impact. These forward-looking statements are based on the Company's current expectations. Because forward-looking statements involve risks and uncertainties, the Company's actual results could differ materially. See the Company's Form 8-K filing dated October 10, 2007, for a more detailed statement concerning forward-looking statements.
Overview
The Company operates via two principal segments, Biospherics and Health Sciences. Biospherics seeks to develop proprietary products for commercial application. Health Sciences provides technical and regulatory consulting services to food, consumer products, biotechnology and pharmaceutical companies, as well as providing technical support to the Biospherics segment. The Health Sciences segment was started in July 2007.
Biospherics engages in product development of tagatose. The Company's focus is on the non-food uses of tagatose, marketed under the name "Naturlose". Our efforts have been to explore whether Naturlose is an effective treatment for Type 2 diabetes, as a prospective first-in-class drug candidate.
The Company is conducting two clinical trials, a Phase 3 clinical trial on the efficacy of Naturlose as a treatment for Type 2 diabetes under a Food and Drug Administration ("FDA") Investigational New Drug ("IND") application process, and a Phase 2 Dose Range trial to evaluate the effectiveness of lower doses of Naturlose in treating Type 2 diabetes. The primary endpoint in each study is a statistically significant decrease in hemoglobin A1c ("HbA1c") levels. The secondary endpoints are measured in fasting blood glucose, insulin, and lipid profiles, changes in body weight, and the proportion of subjects achieving HbA1c targets under 7% and/or under 6.5%. The Phase 3 trial is expected to be completed in mid- to late-2010 and the Dose Range trial is expected to be completed in mid-2010. Based on the
successful results from the first six-months of the Phase 2 trial, the Company anticipates conducting an interim analysis at the six-month point in the twelve-month Phase 3 trial. The Company expects to obtain interim analysis results from the Phase 3 trial on approximately 216 patients during the third quarter of 2009, which may provide the Company important preliminary insight into the efficacy of Naturlose as a treatment for Type 2 diabetes. The Phase 3 trial is being conducted at 21 active sites in the U.S. and 24 active sites in India; 451 patients have been randomized.
The Company is hopeful that as it proceeds with its developmental efforts, incremental successes may afford it the opportunity to raise additional capital and achieve a sale, license, partner, or other strategic alliance.
We believe tagatose depresses elevations of blood sugar levels by increasing glycogen synthesis while decreasing glycogen utilization resulting in an improvement of blood sugar control and modulation of HbA1c.
Preliminary data from the Dose Range study demonstrates reductions of HbA1c levels at doses lower than those used in the current Phase 3 trial. HbA1c is a key indicator of Type 2 diabetes that monitors glycated hemoglobin in the blood. The doses being tested are: 2.5, 5.0, and 7.5 g, which are administered orally with meals, three times daily. After 6 months on drug, patients in the 7.5 g group experienced an average reduction of 0.3% in HbA1c over those of the HbA1c of the 2.5 g group. Over the same period, the 5.0 g group averaged a reduction in HbA1c of 0.05% over those from the 2.5 g group. Naturlose appears to begin showing an effect on HbA1c within the range of doses selected for this minimum-dose study. The ongoing Phase 3 efficacy study is being conducted at a 15 g dose, and is powered to detect a 0.5% reduction in HbA1c.
Over the course of the Dose Range study, Naturlose also decreased the average serum triglycerides of the patients by -59 mg/dl by the end of the first month on therapy, a decrease from baseline that remained at -41 mg/dl by the end of the 6 months of the trial. Naturlose also decreased serum LDL by an average -13 mg/dl by the end of the first month on therapy, while serum HDL was essentially unchanged (+0.9 mg/dl). The LDL:HDL ratio was improved for two of the three dose groups by an average of 0.3.
Tagatose's safety in humans was established in 2001 when it received the designation as Generally Recognized As Safe ("GRAS") in foods by the FDA. The Phase 2 trial has provided further support that Naturlose is safe and well tolerated, with low rates of treatment-related adverse events noted at all doses. The most common adverse events reported in the Dose Range study were mild and gastrointestinal in nature. Previous studies have indicated that Naturlose does not stimulate insulin secretion.
Management believes the Dose Range interim data, combined with the fact that Naturlose is a naturally occurring compound with no known contraindications to current Type 2 diabetes treatments, provides a strong indication of Naturlose's potential as a treatment option for patients with Type 2 diabetes, as either a stand-alone or adjunct therapy.
In responding to the favorable Dose Range interim results, management is actively pursuing plans to accelerate and significantly increase its commercialization efforts for Naturlose. These plans include the formation of up to three regional Medical Advisory Boards, possibly as early as September 2009, as well as other commercialization and marketing efforts. The Company is also considering plans for a Pediatric Phase 2 clinical trial of Naturlose as a treatment for Type 1 diabetes to expand the potential market for the drug and extend marketing exclusivity protection six months at the end of the normal exclusivity period. In addition, an effective oral treatment for Type 1 diabetes would have a large market among Type 2 diabetic patients with high insulin resistance and beta cell exhaustion. Management believes that these actions will afford the Company a better opportunity to seek and obtain an appropriate strategic alliance.
The Company expects to incur substantial development costs in the next few years, without substantial corresponding revenue. The Company will continue to use the remaining net proceeds from the sale of InfoSpherix to continue the Phase 3 trial and the Dose Range trial. The Company is exploring issuing additional equity to provide funds for the additional commercialization/marketing described above and to provide any additional funds necessary to continue the development activities until one or more strategic alliances are in place.
Results of Operations for the Three and Six Months Ended June 30, 2009 and 2008
Revenue and Direct Costs
Revenue and direct contract costs for the three and six months ended June 30, 2009 are related to the Company's Health Sciences segment. Changes in revenue and direct costs between comparative periods reflect a combination of new contracts won and additional work on existing contracts. The effect, if any, that the current recession will have on future quarters is uncertain.
No substantial revenue from the Biospherics segment is expected until the Company is successful in selling or licensing its technology, which is unlikely to occur until the Company's Phase 3 trial is completed.
Research and Development
The clinical trials in the use of Naturlose for the treatment of Type 2 diabetes are the primary focus of the Biospherics segment. The R&D expenditures for 2009 and 2008 consisted of both the Phase 3 clinical trial and a related Dose Range study. The increase between years is related to the expansion of the Phase 3 trial to India and the related increase in the number of subjects participating in the trials. The Phase 3 trial is nearly fully enrolled with 451 patients randomized, with 21 active sites in the U.S. and 24 active sites in India. The Company expects to obtain interim analysis results from the Phase 3 trial during the third quarter of 2009, which may provide the Company important preliminary insight into the efficacy of Naturlose as a treatment for Type 2 diabetes. The Phase 3 trial will likely be completed in mid- to late-2010, based on current enrollment and retention numbers, and the New Drug Application ("NDA") could be filed as early as the end of 2010. The FDA review process typically takes between one and two years to complete. Approval of an NDA application is at the discretion of the FDA.
While the Company has primarily focused its efforts on developing Naturlose as a drug to treat Type 2 diabetes, the Company has also engaged in efforts to develop ancillary products. The Company's pipeline of compounds in preclinical research for use in conjunction with Naturlose for the treatment of the metabolic syndrome, atherosclerosis and obesity as well as diabetes includes:
†
† SPX 7233801 - an antioxidant that inhibits lipid peroxidation, COX-1 and COX-2, and stimulates insulin production
† SPX 8522876 - an antioxidant that inhibits COX-1 and COX-2.
† SPX 10624258, SPX 8818309, and SPX 8818440 - anti-oxidant and anti-inflammatory compounds
In June 2009, the Company received the first batch of FDA Current Good Manufacturing Practice ("cGMP") tagatose, U.S. Pharmacopeia ("USP") grade. The tagatose will be used to satisfy the Chemistry, Manufacturing and Control ("CMC") requirements of its NDA to the FDA. A Drug Master File ("DMF") has been submitted to FDA and Spherix has a Letter of Authorization to refer to the DMF in its NDA. This and subsequent batches will also be used in the on going clinical trials.
Selling, General and Administrative
The decrease in selling, general and administrative costs for the six months ended June 30, 2009 from those of the prior year are primarily the result of relocating the Company's Headquarters to a smaller facility in April 2008 and lower overhead costs.
In response to the favorable results obtained from the Dose Range trial, management is actively considering plans to accelerate and significantly increase its marketing and commercialization efforts of Naturlose as a treatment for Type 2 diabetes. These plans include the formation of up to three regional Advisory Boards, possibly as soon as September 2009.
Interest
Interest income between years has decreased with the decrease in funds available for investing and the lower rates of return available in the market.
Liquidity and Capital Resources, Consolidated
Working capital as of June 30, 2009, was $7.2 million, which represents a $3.6 million decrease from working capital at December 31, 2008. R&D and marketing activity related to the commercialization of Naturlose accounted for approximately $2.8 million of the decrease in working capital.
The Company is operating the Biospherics efforts solely from the net proceeds received from the 2007 sale of InfoSpherix. The Health Sciences segment is not expected to generate any substantial excess cash flow in the next twelve (12) months.
Spherix is looking to accelerate and significantly expand its marketing and commercialization activity related to Naturlose. If the Company is successful in securing sufficient financing, it expects to expend approximately $10 million over the next twelve months, including $7 million in costs on the clinical trials and marketing activity related to the commercialization of Naturlose. The Phase 3 clinical trial is expected to be completed in mid- to late-2010 and the Dose Range trial in mid-2010. The Company intends to finance the Biospherics activities through proceeds received from the 2007 sale of InfoSpherix, as well as funds it seeks to raise through the sale of stock. While the Company completes its Phase 3 trial, it is taking steps to prepare for commercialization of Naturlose as a treatment for Type 2 diabetes on the assumption that the trial will be successful. These steps include the Dose Range trial, exploring manufacturing alternatives and seeking marketing assistance. The Company is hopeful that as it proceeds with its developmental efforts, incremental successes may afford it the opportunity to raise additional capital and achieve a sale, license, partner, or other strategic alliance. Our preliminary marketing analysis suggests that we may increase our chances of success by engaging in directed marketing efforts as we proceed with the Phase 3 trial.
Continued progress on the clinical trial of Naturlose as a treatment of Type 2 diabetes and on the other initiatives described above is dependent upon many factors including, but not limited to, the Company having sufficient funds and resources. The Company has not had, and does not expect to have, any meaningful offers to buy or license the rights to use Naturlose as a treatment for Type 2 diabetes until the efficacy of Naturlose has been further established. To complete the Phase 3 trial, then prepare, submit and pursue the FDA NDA, and take the other steps necessary to bring Naturlose to market as a Type 2 diabetes drug, the Company will need to raise additional funds.
The total cost of completing the Phase 3 trial is difficult to determine and can be affected by any number of factors including, but not limited to, the time to complete the trial. No guarantee can be given that the Company will be successful in its efforts to raise additional funds and, as many of our costs are "fixed," any additional delays in the Phase 3 trial could cause us to expend all of our funds before the trial is complete.
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