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| EPCT > SEC Filings for EPCT > Form 10-K on 5-Mar-2013 | All Recent SEC Filings |
5-Mar-2013
Annual Report
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, including those set forth under the section entitled "Risk Factors" and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a specialty pharmaceutical company focused on the clinical development and commercialization of pharmaceutical products for the treatment of pain and cancer. Our strategy is to focus on topically delivered analgesics targeting peripheral nerve receptors and on innovative cancer therapies. In November 2012, we entered into a definitive merger agreement with Immune Pharmaceuticals Ltd. The transaction is anticipated to close during the first half of 2013 and is subject to satisfaction of certain customary closing conditions, including the approval of a majority of our shareholders.
The combined entity, to be named Immune Pharmaceuticals, Inc., will be primarily focused on developing antibody therapeutics and other targeted drugs for the treatment of inflammatory diseases and cancer. Immune's lead product candidate, bertilimumab, is a fully human monoclonal antibody that targets eotaxin-1, a chemokine involved in eosinophilic inflammation, angiogenesis and neurogenesis. Immune is currently initiating a placebo-controlled, double-blind Phase II clinical trial with bertilimumab for the treatment of ulcerative colitis. Based on amendment no. 2 to the merger agreement with Immune dated February 11, 2013, the values for EpiCept and Immune are estimated to be $14 million and $61 million, respectively, for an assumed combined company valuation of approximately $75 million. The following results of operations and discussion of business is of EpiCept only and does not represent the combined entity.
In December 2011, we met with the Food and Drug Administration ("FDA") and were granted permission by the FDA to initiate immediately the Phase III clinical development of AmiKet™, a late-stage pain product candidate for the treatment of peripheral neuropathies. Fast Track designation was granted in April 2012. The FDA's Fast Track program is designed to facilitate the development and expedite the review of drugs intended to treat serious or life-threatening conditions and address unmet medical needs.
Our oncology compounds include crolibulinTM, a novel small molecule vascular disruption agent ("VDA") and apoptosis inducer for the treatment of patients with solid tumors that is currently in a Phase Ib/II clinical trial sponsored by the National Cancer Institute ("NCI") to assess the drug's efficacy and safety in combination with cisplatin in patients with anaplastic thyroid cancer ("ATC"). Azixa®, an apoptosis inducer with VDA activity licensed by us to Myrexis, Inc. ("Myrexis"), as part of an exclusive, worldwide development and commercialization agreement, is currently in Phase II development for the treatment of brain cancer. In August 2012, Myrexis elected to terminate the license agreement resulting in the reversion of all rights and licenses granted under the license agreement back to us. In January 2013, we negotiated with Myrexis to license the Myriad patents and know-how as set forth in the License Agreement. Under the agreement, we will be responsible for paying milestone payments and royalties to Myrexis if we decide to further develop Azixa® ourselves, or to share in milestones and royalties we receive from a partner in the event we out-license the drug candidate to a third party who successfully completes product development and obtains marketing approval. We have no plans to pursue further development of Azixa® on our own.
Ceplene®, when used concomitantly with low-dose interleukin-2, or IL-2, is intended as remission maintenance therapy in the treatment of acute myeloid leukemia, or AML, for adult patients who are in their first complete remission. We sold all of our rights to Ceplene® in Europe and certain Pacific Rim countries and a portion of our remaining Ceplene® inventory to Meda AB for approximately $2.6 million in June 2012. Ceplene® is licensed to MegaPharm Ltd. to market and sell in Israel, where it is currently available on a named-patient basis. Following Ministry of Health approval of labeling and other technical matters, Megapharm Ltd. is expected to commence the commercial launch of Ceplene® in Israel. We have retained our rights to Ceplene® in all other countries, including countries in North and South America, but at the current time have no plans to continue development.
We have prepared our consolidated financial statements under the assumption that we are a going concern. We have devoted substantially all of our cash resources to research and development programs and selling, general and administrative expenses, and to date we have not generated any significant revenues from the sale of products. Since inception, we have incurred significant net losses each year. As a result, we have an accumulated deficit of $268.8 million as of December 31, 2012. Our recurring losses from operations and the accumulated deficit raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our losses have resulted principally from costs incurred in connection with our development activities and from selling, general and administrative expenses.
Even if we succeed in developing and commercializing one or more of our product candidates, we may never become profitable. We expect to continue to incur significant expenses over the next several years.
We believe that our cash at December 31, 2012, plus $0.3 million of net cash received in February 2013 from Immune through the issuance of approximately 2.3 million shares of our common stock will be sufficient to fund our operations and meet our debt service requirements into the second quarter of 2013. The definitive merger with Immune is anticipated to close during the first half of 2013 and is subject to satisfaction of certain customary closing conditions. However, as the merger will not close before the need for additional funds, we will rely on Immune for such funding or seek other financing to obtain additional cash resources to fund operations. If such funding is insufficient or unavailable to us on a timely basis, we may be forced to further reduce expenses or curtail operations.
Common Stock Listing
We currently maintain our primary stock listing on the Nasdaq OMX Stockholm Exchange. We maintain a U.S. stock listing on the OTCQX® U.S. trading platform. Our ticker symbol is "EPCT". We continue to make quarterly and other regulatory filings with the Securities and Exchange Commission, or SEC.
Recent Events
All 1,065 shares of our Series B 0% convertible preferred stock were converted into approximately 13.3 million shares of our common stock in January 2013.
The remaining 236 shares of our Series A Preferred were converted into approximately 3.0 million shares of our common stock in February 2013.
We received $0.3 million cash in February 2013 from Immune through the issuance of approximately 2.3 million shares of our common stock.
License Agreements
Meda AB. We entered into an exclusive commercialization agreement for Ceplene® with Meda AB, a leading international specialty pharmaceutical company based in Stockholm, Sweden in January 2010. Under the terms of the agreement, we granted Meda the right to market Ceplene® in Europe and several other countries including Japan, China, and Australia. We received a $3 million fee on signing and received an additional $2 million upon the first commercial launch of Ceplene® in a major European market. We sold all of our rights to Ceplene® in Europe and certain Pacific Rim countries and a portion of our remaining Ceplene® inventory to Meda AB for approximately $2.6 million in June 2012. The Company has retained its rights to Ceplene® in all other countries, including countries in North and South America, but at the current time have no plans to continue development.
Myrexis Inc. In connection with our merger with Maxim Pharmaceuticals on January 4, 2006, we acquired a license agreement with Myrexis under which we licensed the MX90745 series of caspase-inducer anti-cancer compounds to Myrexis. Myrexis had initiated clinical trials for Azixa®, a MX90745 series compound, for the treatment of brain cancer. We received a milestone payment of $1.0 million following dosing of the first patient in a Phase II registration sized clinical trial in March 2008. In February 2012, Myrexis suspended development activities of all its preclinical and clinical programs in oncology and autoimmune diseases, and in May 2012 the company stated that it is focused on the identification, evaluation and acquisition of appropriate commercial-stage assets.
In August 2012, Myrexis elected to terminate its efforts to develop and commercialize any product under the license agreement. As a result of the termination of the license agreement, all rights and licenses granted under the license agreement by us to Myrexis have terminated and reverted to us. In January 2013, we negotiated with Myrexis to license the Myriad patents and know-how as set forth in the License Agreement. Under the agreement, we will be responsible for paying milestone payments and royalties to Myrexis if we decide to further develop Azixa® ourselves, or to share in milestones and royalties we receive from a partner in the event we out-license the drug candidate to a third party who successfully completes product development and obtains marketing approval. We have no plans to pursue further development of Azixa® on our own.
DURECT Corporation. We entered into a license agreement with DURECT in December 2006, pursuant to which we granted DURECT the exclusive worldwide rights to certain of our intellectual property for a transdermal patch containing bupivacaine for the treatment of back pain. Under the terms of the agreement, we received a $1.0 million payment. We amended our license agreement with DURECT in September 2008. Under the terms of the amended agreement, we granted DURECT royalty-free, fully paid up, perpetual and irrevocable rights to the intellectual property licensed as part of the original agreement in exchange for a cash
payment of $2.25 million from DURECT. We recorded revenue related to this license agreement of $0.3 million in each of the years 2012 and 2011.
Endo Pharmaceuticals Inc. We entered into a license agreement with Endo Pharmaceuticals Inc. ("Endo") in December 2003 under which we granted Endo (and its affiliates) the exclusive (including as to us and our affiliates) worldwide right to commercialize LidoPAIN BP. We also granted Endo worldwide rights to certain of our other patents used by Endo in the development of certain Endo products, including Lidoderm®, Endo's topical lidocaine-containing patch, for the treatment of chronic lower back pain. Upon the execution of the Endo agreement, we received a non-refundable payment of $7.5 million, which has been deferred and is being recognized as revenue on the proportional performance method. We may receive payments of up to $52.5 million upon the achievement of various milestones relating to product development and regulatory approval for both our LidoPAIN BP product candidate and licensed Endo product candidates, including Lidoderm®, so long as, in the case of Endo's product candidate, our patents provide protection thereof. We are also entitled to receive royalties from Endo based on the net sales of LidoPAIN BP. These royalties are payable until generic equivalents to the LidoPAIN BP product are available or until expiration of the patents covering LidoPAIN BP, whichever is sooner. We are also eligible to receive milestone payments from Endo of up to approximately $30.0 million upon the achievement of specified net sales milestones for licensed Endo products, including Lidoderm®, so long as our patents provide protection thereof. The future amount of milestone payments we are eligible to receive under the Endo agreement is $82.5 million. We recorded revenue related to this license agreement in the amount of $33,000 and $27,000 in 2012 and 2011, respectively.
Under the terms of the license agreement, we are responsible for continuing and completing the development of LidoPAIN BP, including the conduct of all clinical trials and the supply of the clinical products necessary for those trials and the preparation and submission of the NDA in order to obtain regulatory approval for LidoPAIN BP. Endo remains responsible for continuing and completing the development of Lidoderm® for the treatment of chronic lower back pain, including the conduct of all clinical trials and the supply of the clinical products necessary for those trials. No progress in the development of LidoPAIN BP or Lidoderm with respect to back pain has been reported. Accordingly, we do not expect to receive any further cash compensation pursuant to this license agreement.
Dalhousie University. We entered into a direct license with Dalhousie University in July 2007, under which we were granted an exclusive license to certain patents for the topical use of tricyclic anti-depressants and NMDA antagonists as topical analgesics for neuralgia. These, and other patents, cover the combination treatment consisting of amitriptyline and ketamine in AmiKetTM. This technology has been incorporated into AmiKetTM.
We have been granted worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection with passive dermal applications. We are obligated to make payments to Dalhousie upon achievement of specified milestones and to pay royalties based on annual net sales derived from the products incorporating the licensed technology. We are obligated to pay Dalhousie an annual maintenance fee until the license agreement expires or is terminated, or an NDA for AmiKetTM is filed with the FDA, or Dalhousie will have the option to terminate the contract. The license agreement with Dalhousie terminates upon the expiration of the last to expire licensed patent. We incurred a maintenance fee of $0.5 million with Dalhousie in each of the years 2012 and 2011. These payments were expensed to research and development in their respective years. We are currently negotiating certain amendments to the license agreement based on our pending merger with Immune Pharmaceuticals, Ltd.
Shire BioChem. We entered into a license agreement reacquiring the rights to the MX2105 series of apoptosis inducer anti-cancer compounds from Shire Biochem, Inc (formerly known as BioChem Pharma, Inc.) in March 2004 and as amended in January 2005, which had previously announced that oncology would no longer be a therapeutic focus of the company's research and development efforts. Under the agreement, all rights and obligations of the parties under the July 2000 agreement were terminated and Shire BioChem agreed to assign and/or license to us rights it owned under or shared under the prior research program. The agreement did not require any up-front payments, however, we are required to provide Shire Biochem a portion of any sublicensing payments we receive if we relicense the series of compounds or make milestone payments to Shire BioChem totaling up to $26.0 million, assuming the successful commercialization of the compounds by us for the treatment of a cancer indication, as well as pay a royalty on product sales. A license fee of $0.5 million that became payable to Shire BioChem as a result of the commencement of a Phase I clinical trial for crolibulinTM in December 2006, and approximately $0.2 million in accrued interest, was reversed to research and development expense in 2012 as we believe that this amount is not due at December 31, 2012.
Off Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise
if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and judgments affecting the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included in this annual report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Consolidation
The accompanying consolidated financial statements include the accounts of EpiCept Corporation and the Company's 100%-owned subsidiaries, Maxim Pharmaceuticals, Inc., Cytovia, Inc. and EpiCept GmbH.. All inter-company transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period, including stock-based compensation. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue relating to our collaboration agreements in accordance with
the SEC Staff Accounting Bulletin, or SAB 104, "Revenue Recognition", Financial
Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC,
605-25, "Revenue Recognition - Multiple Element Arrangements" ("ASC 605-25"),
and Accounting Standards Update, or ASU, 2009-13, "Multiple Revenue Arrangements
- a Consensus of the FASB Emerging Issues Task Force" ("ASU 2009-13"). ASU
2009-13 supersedes certain guidance in ASC 605-25, and requires an entity to
allocate arrangement consideration to all of its deliverables at the inception
of an arrangement based on their relative selling prices (i.e., the
relative-selling-price method). We adopted the provisions of ASU 2009-13
beginning on January 1, 2011. The adoption of ASU 2009-13 did not have a
material effect on our financial statements.
Revenue under collaborative arrangements may result from license fees, milestone
payments, research and development payments and royalties. Our application of
these standards involves subjective determinations and requires management to
make judgments about value of the individual elements and whether they are
separable from the other aspects of the contractual relationship. We evaluate
our collaboration agreements to determine units of accounting for revenue
recognition purposes. For collaborations containing a single unit of accounting,
we recognize revenue when the fee is fixed or determinable, collectibility is
assured and the contractual obligations have occurred or been rendered. For
collaborations involving multiple elements, our application requires management
to make judgments about value of the individual elements and whether they are
separable from the other aspects of the contractual relationship. To date, we
have determined that our upfront non-refundable license fees cannot be separated
from our ongoing collaborative research and development activities to the extent
such activities are required under the agreement and, accordingly, do not treat
them as a separate element. We recognize revenue from non-refundable, up-front
licenses and related payments, not specifically tied to a separate earnings
process, either on the proportional performance method with respect to our
license with Endo, or ratably over either the development period in which the
Company is obligated to participate on a continuing and substantial basis in the
research and development activities outlined in the contract or the later of
(1) the conclusion of the royalty term on a jurisdiction by jurisdiction basis;
and (2) the expiration of the last EpiCept licensed patent as we do with respect
to our license with DURECT, Myrexis and GNI, Ltd., or GNI.
Proportional performance is measured based on costs incurred compared to total estimated costs to be incurred over the development period which approximates the proportion of the value of the services provided compared to the total estimated value over the development period. The proportional performance method currently results in revenue recognition at a slower pace than the ratable method as many of our costs are incurred in the latter stages of the development period. We periodically review our estimates of cost and the length of the development period and, to the extent such estimates change, the impact of the change is
recorded at that time. We increased the estimated development period with respect to our license with Endo by an additional twelve months to reflect additional time required to obtain clinical data from our partner during each of the years 2012 and 2011.
We will recognize milestone payments as revenue upon achievement of the milestone only if (1) it represents a separate unit of accounting as defined in ASC 605-25; (2) the milestone payments are nonrefundable; (3) substantive effort is involved in achieving the milestone; and (4) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with the achievement of the milestone. If any of these conditions are not met, we will recognize milestones as revenue in accordance with our accounting policy in effect for the respective contract. For current agreements,, we will recognize revenue based upon the portion of the development services that are completed to date and defer the remaining portion and recognize it over the remainder of the development services on the proportional or ratable method, whichever is applicable. When payments are specifically tied to a separate earnings process, revenue will be recognized when the specific performance obligation associated with the payment has been satisfied. Deferred revenue represents the excess of cash received compared to revenue recognized to date under licensing agreements.
We chose early adoption of the milestone method of revenue recognition as defined in ASC 605-28, "Revenue Recognition - Milestone Method" on a prospective basis as of January 1, 2010. Under this method of revenue recognition, we will recognize into revenue research-related milestone payments for which there is substantial uncertainty at the date the arrangement is entered into that the event will be achieved, when that event can only be achieved based in whole or in part on our performance or a specific outcome resulting from our performance and, if achieved, would result in additional payments being due to us. This accounting was applicable to research milestones under the license agreement entered into with Meda AB in 2010.
Revenue from the sale of product is recognized when title and risk of loss of the product is transferred to the customer. Provisions for discounts, early payments, rebates, sales returns and distributor chargebacks under terms customary in the industry, if any, are provided for in the same period the related sales are recorded.
Royalty revenue is recognized in the period the sales occur, provided that the royalty amounts are fixed or determinable, collection of the related receivable is reasonably assured and we have no remaining performance obligations under the arrangement providing for the royalty. If royalties are received when we have remaining performance obligations, they would be attributed to the services being provided under the arrangement and, therefore, recognized as such obligations are performed under either the proportionate performance or straight-line methods, as applicable.
Foreign Currency
The financial statements of our foreign subsidiary are translated into U.S. dollars using the period-end exchange rate for all balance sheet accounts and the average exchange rates for all statements of operations and comprehensive loss accounts. Adjustments resulting from translation have been reported in other comprehensive loss.
Gains or losses from foreign currency transactions relating to inter-company debt are recorded in the consolidated statements of operations and comprehensive loss in other income (expense).
Share-Based Compensation
We record stock-based compensation expense at fair value in accordance with the FASB issued ASC 718-10, "Compensation - Stock Compensation" ("ASC 718-10"). We utilize the Black-Scholes valuation method to recognize compensation expense over the vesting period. Certain assumptions need to be made with respect to utilizing the Black-Scholes valuation model, including the expected life, volatility, risk-free interest rate and anticipated forfeiture of the stock options. The expected life of the stock options was calculated using the method allowed by the provisions of ASC 718-10. In accordance with ASC 718-10, the simplified method for "plain vanilla" options may be used where the expected term is equal to the vesting term plus the original contract term divided by two. The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term approximating the expected life of the options. Estimates of pre-vesting option forfeitures are based on our experience. We will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.
We account for stock-based transactions with non-employees in which services are received in exchange for the equity instruments based upon the fair value of the equity instruments issued, in accordance with ASC 718-10 and ASC 505-50, "Equity-Based Payments to Non-Employees." The two factors that most affect charges or credits to operations related to stock-based compensation are the estimated fair market value of the common stock underlying stock options for which stock-based compensation is recorded and the estimated volatility of such fair market value. The value of such options is periodically
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