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| AVGN > SEC Filings for AVGN > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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 other future events and results. 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.
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 January 2009, we initiated an orderly and competitive process to review merger and acquisition opportunities. We believed that the strength of our financial position would allow us to enter into a favorable merger and acquisition transaction and lead to increased value for our stockholders. During the quarter ended March 31, 2009, our Board of Directors was engaged in a proxy fight initiated by our largest stockholder which resulted in a Special Meeting of Stockholders. On March 27, 2009, Avigen's stockholders rejected a proposal to remove the current members of the Board of Directors; however, Avigen's Board believed it was no longer prudent to continue its strategic review process and abandoned strategic merger discussions and announced its intention to develop a plan of dissolution that would maximize the liquidation value of the company. In connection with this action, our Board of Directors determined that the company no longer needed to retain the services of a majority of our employees that were supporting strategic discussions and we reduced our headcount accordingly, including three officers of the company. As a result, we incurred obligations to pay severance benefits to qualified employees under the Avigen, Inc. Management Transition Plan, including salary continuation payments and health benefits continuation. For the three months ended March 31, 2009, we recognized a severance expense of approximately $2.1 million. In addition, under the terms of the Management Transition Plan, outstanding unvested stock options held by terminated employees were subject to accelerated vesting conditions and an increase in the post termination exercise period and we recognized a non-cash, share-based compensation charge of approximately $0.2 million for the three months ended March 31, 2009. No expenses related to this plan were recorded during the three-month periods ended June 30, 2009 or September 30, 2009.
On August 20, 2009, we entered into a definitive agreement with MediciNova, Inc. pursuant to which, if approved by Avigen's stockholders, MediciNova's wholly-owned subsidiary will merge with and into Avigen. The completion of the transaction will permit the combination of the companies' broad neurological clinical development programs based on ibudilast (Avigen's AV411 and MediciNova's MN-166).
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. In September, a preliminary Form S-4 Registration Statement and joint proxy statement was filed by Avigen and MediciNova, which was subsequently amended in October 2009. The two companies are working expeditiously to present this transaction for stockholder approval before the end of 2009.
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.
Results of Operations
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 Nine Months Ended decrease
September 30, over prior September 30, over prior
2009 2008 year 2009 2008 year
Research and preclinical development $ 201 $ 2,309 (91 %) $ 1,604 $ 8,008 (80 %)
Clinical development 25 3,369 (99 %) 1,962 9,833 (80 %)
Total research and development expenses $ 226 $ 5,678 (96 %) $ 3,566 $ 17,841 (80 %)
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Research and preclinical development
Percentage Percentage
Three Months Ended decrease Nine Months Ended decrease
September 30, over prior September 30, over prior
2009 2008 year 2009 2008 year
(In thousands, except percentages)
Personnel-related $ 86 $ 493 (83 %) $ 414 $ 1,619 (74 %)
Non-recurring severance - - - 69 - n/a
Share-based compensation 46 132 (65 %) 177 417 (58 %)
External research and
development 58 1,072 (95 %) 582 3,416 (83 %)
Depreciation and amortization - 141 (100 %) - 762 (100 %)
Other expenses including facilities
overhead 11 471 (98 %) 362 1,794 (80 %)
Total research and preclinical
development expenses $ 201 $ 2,309 (91 %) $ 1,604 $ 8,008 (80 %)
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The decrease in our total research and preclinical development expenses for the three-month period ended September 30, 2009, compared to the same period in 2008, of $2.1 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 $1.0 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 $460,000, 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 $407,000, due to lower staff levels, as a result of the significant staff reduction in November 2008 and subsequent reductions in March 2009, and
º lower depreciation and amortization expenses of $141,0000, 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.
º lower expenditures for external research and development services from third-party service providers of $2.8 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 $1.4 million, 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 $1.2 million, due to lower staff levels, as a result of the significant staff reduction in November 2008 and subsequent reductions in March 2009, and
º lower depreciation and amortization expenses of $762,000, 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.
Clinical development
Percentage
Percentage increase
Three Months Ended decrease Nine Months Ended (decrease)
September 30, over prior September 30, over prior
2009 2008 Year 2009 2008 Year
(In thousands, except percentages)
Personnel-related $ - $ 393 (100 %) $ 217 $ 1,329 (84 %)
Non-recurring severance - -- - 443 - n/a
Share-based compensation 4 32 (88 %) 76 77 1 %
External clinical development 21 2,816 (99 %) 1,185 8,082 (85 %)
Other expenses including facilities
overhead - 128 (100 %) 41 345 (88 %)
Total clinical development
expenses $ 25 $ 3,369 (99 %) $ 1,962 $ 9,833 (80 %)
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The decrease in our total clinical development expenses for the three-month period ended September 30, 2009, compared to the same period in 2008, of $3.3 million, was primarily due to changes in costs for the following:
º lower expenditures for external clinical development services from third-party suppliers of $2.8 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 $393,000, due to lower staff levels, as a result of the significant staff reduction in November 2008 and subsequent reductions in March 2009.
The decrease in our total clinical development expenses for the nine-month period ended September 30, 2009, compared to the same period in 2008, of $7.9 million, was primarily due to changes in costs for the following:
º lower expenditures for external clinical development services from third-party suppliers of $6.9 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 $1.1 million, due to lower staff levels, as a result of the significant staff reduction in November 2008 and subsequent reductions in March 2009,
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 for the fourth-quarter of 2009 not to exceed the expense levels from the three months ended September 30, 2009 as we seek stockholder approval of the definitive agreement to merge Avigen with a wholly-owned subsidiary of MediciNova.
General and administrative expenses
Percentage Percentage
increase increase
Three Months Ended (decrease) Nine Months Ended (decrease)
September 30, over prior September 30, over prior
2009 2008 Year 2009 2008 Year
(In thousands, except percentages)
Personnel-related $ 85 $ 570 (85 %) $ 702 $ 2,134 (67 %)
Non-recurring severance - - - 1,631 - n/a
Share-based compensation 100 382 (74 %) 611 1,213 (50 %)
Legal and professional fees 871 263 231 % 2,970 946 214 %
Facilities, depreciation and
other allocated expenses 710 633 12 % 2,266 2,105 8 %
Total general and
administrative expenses $ 1,766 $ 1,848 (4 %) $ 8,180 $ 6,398 28 %
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The decrease in our total general and administrative expenses for the three-month period ended September 30, 2009, compared to the same period in 2008, of $82,000, was primarily due to changes in costs for the following:
º lower personnel-related expenses of $485,000, 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 $282,000 for recognition of share-based compensation in compliance with ASC 718,
partially offset by,
º higher legal and professional fees of $608,000, primarily due to higher legal and advisory expenses associated with our negotiations and entry into a definitive merger agreement with MediciNova, preparations of related SEC proxy filings, and defense against a class action lawsuit brought in connection with the proposed merger transaction.
The increase in our total general and administrative expenses for the nine-month period ended September 30, 2009, compared to the same period in 2008, of $1.8 million, was primarily due to changes in costs for the following:
º higher legal and professional fees of $2.0 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 and negotiations and entry into a definitive merger agreement with MediciNova, and defense against a class action lawsuit brought in connection with the proposed merger transaction in the third quarter of 2009, and
º non-recurring severance expenses of $1.6 million recorded in connection with staff reductions in March 2009,
partially offset by,
º lower personnel-related expenses of $1.4 million, 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 $602,000 for recognition of share-based compensation in compliance with ASC 718.
Total general and administrative expenses for the nine months ended September 30, 2009 exceeded management's 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 and completing negotiations and defending against the class action lawsuit in connection with the definitive merger agreement entered into with MediciNova during the third quarter of 2009. We expect to incur lower legal and professional fees for the remainder of the fiscal year while we seek stockholder approval of the definitive agreement to merge Avigen with a wholly-owned subsidiary of MediciNova.
Impairment loss related to long-lived assets
Percentage Percentage
Three Months Ended decrease Nine Months Ended decrease
September 30, over prior September 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 nine-month period ended September 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.
In-license fees
Percentage Percentage
Three Months Ended decrease Nine Months Ended decrease
September 30, over prior September 30, over prior
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In-license fees for the three and nine months ended September 30, 2008 represent amounts paid to Sanochemia Pharmazeutika AG (Sanochemia) upon the timely achievement of a development-based milestone for the development of a proprietary, purer form of AV650. There were no in-license fees incurred in 2009.
During the fourth quarter of 2008, we terminated our agreement with Sanochemia under which such in-license fees were incurred. As a result, we do not expect to incur any future in-license fees associated with this agreement.
Percentage Percentage
Three Months Ended decrease Nine Months Ended decrease
September 30, over prior September 30, over prior
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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 nine months ended September 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.
As of September 30, 2009, in order to increase the liquidity of our investment portfolio, we sold all of our outstanding available-for-sale marketable securities and invested all of our excess funds in money market funds or cash accounts. As a result, we expect our interest income for the fourth quarter of 2009 to be significantly below the amount earned for the three months ended September 30, 2009.
Sublease income
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