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| LJPC > SEC Filings for LJPC > Form 10-Q on 17-Aug-2009 | All Recent SEC Filings |
17-Aug-2009
Quarterly Report
Forward-Looking Statements
The forward-looking statements in this report involve significant risks,
assumptions and uncertainties, and a number of factors, both foreseen and
unforeseen, could cause actual results to differ materially from our current
expectations. Forward-looking statements include those that express a plan,
belief, expectation, estimation, anticipation, intent, contingency, future
development or similar expression. The analysis of the data from our Phase 3
ASPEN trial of Riquent showed that the trial did not reach statistical
significance with respect to its primary endpoint, delaying time to renal flare
or for either secondary endpoint, improvement in proteinuria or time to major
SLE flare and we decided to stop the study. Accordingly, you should not rely
upon forward-looking statements as predictions of future events. The outcome of
the events described in these forward-looking statements are subject to the
risks, uncertainties and other factors described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in the "Risk
Factors" contained in our Annual Report on Form 10-K for the year ended
December 31, 2008, and in other reports and registration statements that we file
with the Securities and Exchange Commission from time to time and as updated in
Part II, Item 1.A. "Risk Factors" contained in this Quarterly Report on Form
10-Q. We expressly disclaim any intent to update forward-looking statements.
Overview and Recent Developments
Since our inception in May 1989, we have devoted substantially all of our
resources to the research and development of technology and potential drugs to
treat antibody-mediated diseases. We have never generated any revenue from
product sales and have relied on public and private offerings of securities,
revenue from collaborative agreements, equipment financings and interest income
on invested cash balances for our working capital.
On January 4, 2009, we entered into a development and commercialization
agreement (the "Development Agreement") with BioMarin CF Limited ("BioMarin
CF"), a wholly-owned subsidiary of BioMarin Pharmaceutical Inc. ("BioMarin
Pharma"). Under the terms of the Development Agreement, BioMarin CF was granted
co-exclusive rights to develop and commercialize Riquent in the United States,
Europe and all other territories of the world, excluding the Asia Pacific
region, and the non-exclusive right to manufacture Riquent anywhere in the
world. In connection with the Development Agreement, we also entered into a
securities purchase agreement with BioMarin Pharma. In January 2009, BioMarin CF
paid us a non-refundable commencement payment of $7.5 million pursuant to the
Development Agreement and BioMarin Pharma paid us $7.5 million in exchange for a
newly designated series of our preferred stock pursuant to the securities
purchase agreement. As described below, the Development Agreement was terminated
on March 27, 2009.
In February 2009, we were informed by an Independent Monitoring Board for the
Riquent Phase 3 ASPEN study that the monitoring board completed its review of
the first interim efficacy analysis of Riquent and determined that continuing
the study was futile. We subsequently unblinded the data and found that there
was no statistical difference in the primary endpoint, delaying time to renal
flare, between the Riquent-treated group and the placebo-treated group, although
there was a significant difference in the reduction of antibodies to
double-stranded DNA.
Based on these results, we immediately discontinued the Riquent Phase 3 ASPEN
study and the further development of Riquent. We had previously devoted
substantially all of our research, development and clinical efforts and
financial resources toward the development of Riquent. In connection with the
termination of our clinical trials for Riquent, we subsequently initiated steps
to significantly reduce our operating costs, including a reduction in force,
which was effected in April 2009. We also ceased the manufacture of Riquent at
our former facility in San Diego, California, as well as all regulatory
activities associated with Riquent. Pursuant to SFAS No. 112, Employers'
Accounting for Postemployment Benefits and SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, we recorded a charge of
approximately $1.1 million in the quarter ended March 31, 2009, of which
$0.7 million was included in research and development and $0.4 million was
included in general and administrative expense. This amount was paid in
May 2009.
Following the futile results of the first interim efficacy analysis of Riquent,
BioMarin CF elected to not exercise its full license rights to the Riquent
program under the Development Agreement. Thus, the Development Agreement between
the parties terminated on March 27, 2009 in accordance with its terms. Pursuant
to the Securities Purchase Agreement between us and BioMarin Pharma, the
Company's Series B-1 preferred shares purchased by BioMarin Pharma were
automatically converted into 10,173,120 shares of common stock upon the
termination of the Development Agreement. Additionally, all rights to Riquent
were returned to us.
In January 2009, we sold all of our auction rate securities to our
broker-dealer, UBS A.G. ("UBS") at par value of $10.0 million. As of
December 31, 2008, we had previously recognized a total impairment charge of
$2.3 million as a result of the illiquidity of these securities, which was fully
offset by a realized gain of $2.3 million from UBS's repurchase agreement that
provided for a put option on these securities. Following the sale of these
investments, we no longer hold any auction-rate securities.
In July 2009, we announced that, in light of the current alternatives available
to us, a wind down of our business would be in the best interests of our
stockholders. Accordingly, we continue to work to settle remaining obligations
with our creditors and we are currently evaluating a dissolution and liquidation
plan. Should we approve a plan of dissolution and liquidation and should this
plan be approved by the Company's stockholders, the Company would then change
its basis of accounting from the going concern basis to the liquidation basis.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our unaudited condensed consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles. The preparation of these consolidated 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. We evaluate our estimates on an ongoing
basis, including those related to patent costs, clinical/regulatory expenses and
the fair value of our financial instruments. We base our estimates on historical
experience and on other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies involve significant
judgments and estimates used in the preparation of our condensed consolidated
financial statements (see also Note 1 to our unaudited condensed consolidated
financial statements included in Part I).
Revenue Recognition
The Development Agreement contained multiple potential revenue elements,
including non-refundable upfront fees. We apply the revenue recognition criteria
outlined in Staff Accounting Bulletin ("SAB"), No. 104, Revenue Recognition,
Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables ("EITF No. 00-21"), and EITF Issue No. 07-1, Accounting
for Collaborative Arrangements (EITF No. 07-1). In applying these revenue
recognition criteria, we consider a variety of factors in determining the
appropriate method of revenue recognition under these arrangements, such as
whether the elements are separable, whether there are determinable fair values
and whether there is a unique earnings process associated with each element of a
contract.
Impairment and useful lives of long-lived assets
We regularly review our long-lived assets for impairment. Our long-lived assets
include costs incurred to file our patent applications. We evaluate the
recoverability of long-lived assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their fair values. The
estimation of the undiscounted future cash flows associated with long-lived
assets requires judgment and assumptions that could differ materially from the
actual results.
Costs related to successful patent applications are amortized using the
straight-line method over the lesser of the remaining useful life of the related
technology or the remaining patent life, commencing on the date the patent is
issued. Legal costs and expenses incurred in connection with pending patent
applications have been capitalized. We expense all costs related to abandoned
patent applications. If we elect to abandon any of our currently issued or
unissued patents, the related expense could be material to our results of
operations for the period of abandonment. The estimation of useful lives for
long-lived assets requires judgment and assumptions that could differ materially
from the actual results.
For the year ended December 31, 2008, as a result of the futility determination
in the ASPEN trial, we recorded a non-cash charge for the impairment of
long-lived assets of $2.8 million to write down the value of our long-lived
assets to their estimated fair values. We disposed of or wrote off the majority
of our remaining long-lived assets during the quarter ended June 30, 2009 for a
gain of $0.3 million, and no significant long-lived assets remain as of June 30,
2009.
Accrued clinical/regulatory expenses
We review and accrue clinical trial and regulatory-related expenses based on
work performed, which relies on estimates of total costs incurred based on
patient enrollment, sites activated and other events. We follow this method
because reasonably dependable estimates of the costs applicable to various
stages of a clinical trial can be made. Accrued clinical/regulatory costs are
subject to revisions as actual costs are obtained. Revisions are charged to
expense in the period in which the facts that give rise to the revision become
known. Historically, revisions have not resulted in material changes to research
and development costs.
Share-Based Compensation
We adopted Statement of Financial Accounting Standard ("SFAS") No. 123R,
Share-Based Payment("SFAS 123R") using the modified prospective transition
method, which requires the application of the accounting standard as of
January 1, 2006. Share-based compensation expense recognized under SFAS 123R was
approximately $2.0 million and $2.3 million for the six months ended June 30,
2009 and 2008, respectively. As of June 30, 2009, there was approximately
$1.3 million of total unrecognized compensation cost related to non-vested
share-based payment awards granted under all equity compensation plans. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures. We currently expect to recognize the remaining unrecognized
compensation cost over a weighted-average period of 1.2 years.
Option-pricing models were developed for use in estimating the value of traded
options that have no vesting or hedging restrictions and are fully transferable.
Because the employee and director stock options granted by us have
characteristics that are significantly different from traded options, and
because changes in the subjective assumptions can materially affect the
estimated value, in our opinion the existing valuation models may not provide an
accurate measure of the fair value of the employee and director stock options
granted by us. Although the fair value of the employee and director stock
options granted by us is determined in accordance with SFAS 123R using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing-buyer/willing-seller market transaction.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) ratified the
consensus reached by the EITF on EITF No. 07-1. EITF No. 07-1 requires
collaborators to present the results of activities for which they act as the
principal on a gross basis and report any payments received from (made to) other
collaborators based on other applicable U.S. GAAP or, in the absence of other
applicable U.S. GAAP, based on analogy to authoritative accounting literature or
a reasonable, rational, and consistently applied accounting policy election.
Further, EITF No. 07-1 clarified that the determination of whether transactions
within a collaborative arrangement are part of a vendor-customer (or analogous)
relationship subject to EITF Issue No. 01-9, Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products). On
January 1, 2009, we adopted the provisions of EITF No. 07-1 which did not have a
material effect on our unaudited condensed consolidated financial statements for
the three or six months ended June 30, 2009.
Results of Operations
For the six months ended June 30, 2009, revenue increased to $8.1 million as a
result of the Development Agreement entered into with BioMarin CF in
January 2009. The Development Agreement was terminated in March 2009 following
the negative results from our Riquent Phase 3 ASPEN study. There were no
revenues for the three months ended June 30, 2009 and 2008.
During the three months ended June 30, 2009, we negotiated settlements related
to accounts payable obligations and accrued liabilities with a majority of our
vendors to preserve our remaining cash and other assets. These negotiations
resulted in a reduction of approximately $1.9 million to accounts payable
obligations and accrued liabilities from amounts originally invoiced and
accrued, which were recorded upon the execution of the settlement agreements. As
a result of these settlements, during the quarter ended June 30, 2009, there
were decreases of $1.8 million and $0.1 million to research and development and
general and administrative expenses, respectively.
For the three and six months ended June 30, 2009, research and development
expenses decreased to ($0.1) million and $9.8 million, respectively, from
$12.7 million and $24.1 million, respectively, for the same periods in 2008 as a
result of the discontinuation of the Riquent Phase 3 ASPEN study and the
accounts payable and accrued liabilities settlements noted above. For the six
months ended June 30, 2009, this decrease was partially offset by an increase in
termination expense, mainly relating to severance, of approximately $0.7 million
that was recorded as of March 31, 2009. During April 2009, 64 research and
development personnel were terminated. We expect minimal research and
development expenditures going forward as we wind down our operations.
General and administrative expense remained constant at $2.1 million for the
three months ended June 30, 2009 and 2008. For the six months ended June 30,
2009, general and administrative expense increased to $4.6 million from
$4.0 million for the same period in 2008. This increase is primarily the result
of an increase in stock-based compensation expense of approximately $0.4
million, primarily associated with the acceleration of stock options, as well as
an increase in insurance premiums and legal and consulting services. During
April 2009, 10 general and administrative personnel were terminated. We expect
decreased general and administrative expenditures going forward as we wind down
our operations.
Interest income, net, decreased to $0 and less than $0.1M for the three and six
months ended June 30, 2009, respectively, from $0.1 million and $0.4 million for
the same periods in 2008, respectively. These decreases are due to moving all
short-term investments to non-interest bearing cash accounts during the quarter
ended March 31, 2009.
Realized loss on investments, net, of $0.2 million and $1.0 million for the
three and six months ended June 30, 2008 primarily consisted of the
other-than-temporary impairment loss on our auction rate securities recorded in
the first and second quarters of 2008, in connection with the adoption of
Statement of Financial Accounting Standards No. 157, Fair Value Measurements.
These securities were sold to UBS at par value in January 2009 with no realized
loss on investments.
Liquidity and Capital Resources
From inception through June 30, 2009, we have incurred a cumulative net loss of
approximately $422.0 million and have financed our operations through public and
private offerings of securities, revenues from collaborative agreements,
equipment financings and interest income on invested cash balances. From
inception through June 30, 2009, we have raised approximately $410.8 million in
net proceeds from sales of equity securities.
At June 30, 2009, we had $8.5 million in cash and cash equivalents as compared
to $19.4 million of cash, cash equivalents and short-term investments at
December 31, 2008. Our working capital at June 30, 2009 was $5.9 million, as
compared to $3.0 million at December 31, 2008. The decrease in cash, cash
equivalents and short-term investments resulted from the use of our financial
resources to fund our clinical trial and manufacturing activities until their
termination in 2009 and for other general corporate purposes. This decrease was
partially offset by the non-refundable commencement payment of $7.5 million
received from BioMarin CF under the Development Agreement and the proceeds of
$7.5 million from the sale of 339,104 shares of our preferred stock to BioMarin
Pharma under the Securities Purchase Agreement in January 2009.
At June 30, 2009, all of our contractual obligations have been either paid in
full or settlement amounts have been accrued as of June 30, 2009. We expect to
pay all remaining outstanding obligations by September 30, 2009.
On July 31, 2009, our two building leases expired. Pursuant to the lease for one
of these buildings, we were responsible for completing modifications to the
leased building prior to lease expiration. In July 2009, approximately $315,000
was paid in accordance with the lease provisions, all of which was accrued at
June 30, 2009. We exited the buildings upon the expiration of the leases in
July 2009.
As discussed above, we expect to present a plan of dissolution and liquidation
to our stockholders in late 2009 and, following the implementation of the plan,
expect that there will be no significant assets remaining available for
distribution to our stockholders.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our consolidated financial condition, changes
in our consolidated financial condition, expenses, consolidated results of
operations, liquidity, capital expenditures or capital resources.
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